Download MBA (Master of Business Administration) IB and Marketing 1st and 2nd Semester Marketing Management
CONTENTS
UNIT ? I
Lesson 1.1
Introduction to marketing
Lesson 1.2
Marketing concepts
Lesson 1.3
Marketing process
Lesson 1.4
Marketing environment
Lesson 1.5
Buyer Behaviour
Lesson 1.6
Market segmentation, targeting and positioning
Lesson 1.7
Introduction to marketing mix
Answer key
Glossary of terms
References
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Unit ? I
Lesson 1.1
Introduction to Marketing
Objectives
In this lesson, we will introduce you to the business function of marketing. After you
work out this lesson, you should be able to:
Define marketing and the utility (value) it creates for the customer
Trace the origin of marketing and explain how it has evolved
Describe the elements of a marketing strategy
Understand the scope of marketing
In this lesson, we will discuss the following:
What is marketing?
Evolution of marketing
Marketing framework
Extending the traditional boundaries of marketing
Functions of marketing
Introduction
Production and marketing of goods and services are the essence of economic life in any
society. All organizations perform these two basic functions to satisfy their commitments
to their stakeholders ? the owners, the customers and the society, at large. They create a
benefit that economists call utility which is the want-satisfying power of a good or
service. There are four basic kinds of utility ? form, time, place and ownership utility.
Form utility is created when the firm converts raw materials and component inputs into
finished goods and services. Although marketing provides important inputs that specify
consumer preference, the organization's production function is responsible for the actual
creation of form utility. Marketing function creates time, place and ownership utilities.
Time and place utility occur when consumers find goods and services available when and
where they want to purchase them. Online retailers with 24*7 format emphasize time
utility. Vending machines focus on providing place utility for people buying snacks and
soft drinks. The transfer of title to goods or services at the time of purchase creates
ownership utility.
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Type
Description
Examples
Responsible
function
Form
Conversion of raw
Pizza made from Production
materials and
several ingredients
components into finished
goods and services
Time
Availability of goods and Dial-a-pizza;
Marketing
services when consumers delivery guaranteed
want them
in 30 min.
Place
Availability of goods and Delivery at your
Marketing
services where
doorstep
consumers want them
Ownership
Ability to transfer title to
Pizza sales (in
Marketing
(possession) goods or services from
exchange for rupees
marketer to buyer
or credit card
payment)
To survive, all organizations must create utility. Designing and marketing want-
satisfying goods, services and ideas is the foundation for the creation of utility.
Management guru, Peter F.Drucker emphasized the importance of marketing in his
classic book, The Practice of Management as:
`If we want to know what a business is, we have start with its purpose.
And its purpose must lie outside the business itself. In fact, it must lie in
society since a business enterprise is an organ of society. There is one
valid definition of business purpose: to create a customer'.
How does an organization create a customer? Guiltinan and Paul explain it this
way:
Essentially, `creating' a customer means identifying needs in the
marketplace, finding out which needs the organization can profitably serve
and developing an offering to convert potential buyers into customers.
Marketing managers are responsible for most of the activities necessary to
create the customers the organization wants, These activities include:
Identifying customer needs
Designing goods and services that meet those needs
Communication information about those goods and services to
prospective buyers
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Making the goods and services available at times and places that
meet customers' needs
Pricing goods and services to reflect costs, competition and
customers' ability to buy
Providing for the necessary service and follow-up to ensure
customer satisfaction after the purchase
Activity 1.1.1
Think of a recent purchase you made. How did the company provide you with the
following utilities?
Form
_________________________
_________________________
Time
_________________________
_________________________
Place
_________________________
_________________________
Ownership
_________________________
_________________________
What is Marketing?
Continuous exposure to advertising and personal selling leads many people to link
marketing and selling, or to think that marketing activities start once goods and services
have been produced. While marketing certainly includes selling and advertising, it
encompasses much more. Marketing also involves analyzing consumer needs, securing
information needed to design and produce goods or services that match buyer
expectations and creating and maintaining relationships with customers and suppliers.
The following table summarizes the key differences between marketing and selling
concepts.
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Table 1.1.1 Selling Vs. Marketing
Point of difference
Selling
Marketing
Starting point
Factory
Marketplace
Focus
Existing products
Customer needs
Means
Selling and promoting
Integrated marketing
End
Profits through volume
Profits through satisfaction
The difference between selling and marketing can be best illustrated by this popular
customer quote: `Don't tell me how good your product is, but tell me how good it will
make me'.
The American Marketing Association, the official organization for academic and
professional marketers, defines marketing as:
Marketing is the process of planning and executing the conception,
pricing, promotion and distribution of ideas, goods and services to create
exchanges that satisfy individual and organizational objectives
Another definition goes as ` ... process by which individuals and groups obtain what they
need and want through creating and exchanging products and value with others'. Simply
put: Marketing is the delivery of customer satisfaction at a profit.
The notion of exchange as central to marketing is reinforced by many contemporary
definitions such as `marketing is the process of creating and resolving exchange
relationships' and `marketing is the process in which exchanges occur among persons and
social groups'. The essence of marketing is the exchange process, in which two or more
parties give something of value to each other to satisfy felt needs. In many exchanges,
people trade tangible goods for money. In others, they trade intangible services.
Exchanges in marketing are consummated not just between any two parties, but
almost always among two or more parties, of which one or more taken on the role of
buyer and one or more, the role of seller. A common set of conditions are present in the
marketplace, viz.,
1) Buyers outnumber sellers
2) Any individual buyer is weaker than any individual seller economically, but
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3) The total economic power of even a fraction of the buyers is enough to assure the
existence of, or to put out of business, most sellers or groups of sellers, and
4) Consequently, the sellers compete to sway the largest number of buyers they can
to their, rather than another seller's (competitor's) offerings. Finally and
intriguingly,
5) The sellers in their attempt to meet competition and attract the largest number of
buyers, are influenced as well, regularly modifying their behaviours so they will
have more success, with more buyers, over time.
The expanded concept of marketing activities permeates all organizational
functions. It assumes that the marketing effort will follow the overall corporate strategy
and will proceed in accordance with ethical practices and that it will effectively serve the
interests of both society and organization. The concept also identifies the marketing
variables ? product, price, promotion and distribution ? that combine to provide customer
satisfaction. In addition, it assumes that the organization begins by identifying and
analyzing the consumer segments that it will later satisfy through its production and
marketing activities. The concept's emphasis on creating and maintaining relationships is
consistent with the focus in business on long-term, mutually satisfying sales, purchases
and other interactions with customers and suppliers. Finally it recognizes that marketing
concepts and techniques apply to non-profit organizations as well as to profit-oriented
businesses, to product organization and to service organizations, to domestic and global
organizations, as well as to organizations targeting consumers and other businesses.
Activity 1.1.2
The following list consists of some MARKETING MYTHS. Tick the myths you thought
about marketing before reading this section? Add some new myths you might have
discovered.
Marketing and selling are synonymous
The job of marketing is to develop good advertisements
Marketing is pushing the product to the customers
Marketing is transaction-oriented than relationship-oriented
Marketing is a short-term business strategy
Marketing is an independent function of a business
Marketing is part of selling
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Evolution Of Marketing
As noted earlier, exchange is the origin of marketing activity. When people need
to exchange goods, they naturally begin a marketing effort. Wroe Alderson, a leading
marketing theorist has pointed out, `It seems altogether reasonable to describe the
development of exchange as a great invention which helped to start primitive man on the
road to civilization'. Production is not meaningful until a system of marketing has been
established. An adage goes as: Nothing happens until somebody sells something.
Although marketing has always been a part of business, its importance has varied
greatly over the years. The following table identifies five eras in the history of marketing:
the production era, the product era, the sales era, the marketing era and the relationship
marketing era.
Table 1.1.2 The Evolution Of Marketing
Era
Prevailing attitude and approach
Production
Consumers favor products that are available
and highly affordable
Improve production and distribution
`Availability and affordability is what the
customer wants'
Product
Consumers favor products that offer the most
quality, performance and innovative features
`A good product will sell itself'
Sales
Consumers will buy products only if the
company promotes/ sells these products
`Creative advertising and selling will overcome
consumers' resistance and convince them to
buy'
Marketing
Focuses on needs/ wants of target markets and
delivering satisfaction better than competitors
`The consumer is king! Find a need and fill it'
Relationship marketing
Focuses on needs/ wants of target markets and
delivering superior value
`Long-term relationships with customers and
other partners lead to success'
In the production era, the production orientation dominated business philosophy.
Indeed business success was often defined solely in terms of production victories. The
focus was on production and distribution efficiency. The drive to achieve economies of
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scale was dominant. The goal was to make the product affordable and available to the
buyers. In the product era, the goal was to build a better mouse trap and it was assumed
that buyers will flock the seller who does it. However, a better mousetrap is no guarantee
of success and marketing history is full of miserable failures despite better mousetrap
designs. Inventing the greatest new product is not enough. That product must also solve a
perceived marketplace need. Otherwise, even the best-engineered. Highest quality
product will fail. In the sales era, firms attempted to match their output to the potential
number of customers who would want it. Firms assumed that customers will resist
purchasing goods and services not deemed essential and that the task of selling and
advertising is to convince them to buy. But selling is only one component of marketing.
Next came the marketing era during which the company focus shifted from products and
sales to customers' needs. The marketing concept, a crucial change in management
philosophy, can be explained best by the shift from a seller's market ? one with a
shortage of goods and services ? to a buyer's market ? one with an abundance of goods
and services. The advent of a strong buyer's market created the need for a customer
orientation. Companies had to market goods and services, not just produce them. This
realization has been identified as the emergence of the marketing concept. The keyword
is customer orientation. All facets of the organization must contribute first to assessing
and then to satisfying customer needs and wants. The relationship marketing era is a
more recent one. Organization's carried the marketing era's customer orientation one step
further by focusing on establishing and maintaining relationships with both customers
and suppliers. This effort represented a major shift from the traditional concept of
marketing as a simple exchange between buyer and seller. Relationship marketing, by
contrast, involves long-term, value-added relationships developed over time with
customers and suppliers. The following table summarizes the differences between
transaction marketing (i.e. exchanges characterized by limited communications and little
or no on going relationship between the parties) and relationship marketing.
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Table 1.1.3 Comparing transaction-based marketing and relationship marketing
Characteristic
Transaction-Based
Relationship
Marketing
Marketing
Time orientation
Short term
Long term
Organizational goal
Make the sale
Emphasis on customer
retention
Customer service
Relatively low
Key component
priority
Customer contact
Low to moderate
Frequent
Degree of customer
Low
High
commitment
Basis for seller-
Conflict manipulation
Cooperation; trust
customer interactions
Source of quality
Primarily from
Companywide
production
commitment
Activity 1.1.3
Make a statement to describe each of the stages in the evolution of marketing. You may
consider the given examples before coming up with your own statements.
1. Production era
a. `Cut costs. Profits will take care of themselves'
2. Product era
a. `A good product will sell itself'
3. Sales era
a. `Selling is laying the bait for the customer'
4. Marketing era
a. `The customer is King!'
5. Relationship marketing era
a. `Relationship with customers determine our firm's future'
Marketing Framework
The basic elements of a marketing strategy consist of (1) the target market, and
(2) the marketing mix variables of product, price, place and promotion that combine to
satisfy the needs of the target market. The outer circle in Figure 1.1.1 lists environmental
characteristics that provide the framework within which marketing strategies are planned.
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Figure 1.1.1 Elements of a marketing strategy and its environmental framework
Marketing activities focus on the consumer. Therefore, a market-driven
organization begins its overall strategy with a detailed description of its target market: the
group of people toward whom the firm decides to direct its marketing efforts. After
marketers select a target market, they direct their activities towards profitably satisfying
that target segment. Although they must manipulate many variables to reach this goal,
marketing decision making can be divided into four areas: product, price, place
(distribution) and promotion (marketing communication). These 4 Ps of marketing are
referred to as the marketing mix. The 4 Ps blend to fit the needs and preferences of a
specific target market. These are the four variables that a marketer can use and control in
different combinations to create value for customers. Figure 1.1.1 illustrates the focus of
the marketing mix variables on the central choice of consumer or organizational target
markets. In addition, decisions about the 4 Ps are affected by the environmental factors in
the outer circle of that figure. Unlike the controllable marketing mix elements, the
environmental variables frequently lie outside the control of marketers.
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The product strategy involves deciding what goods and services the firm should
offer to a group of consumers and also making decisions about customer service, brand
name, packaging, labeling, product life cycles and new product development. The pricing
strategy deals with the methods of setting profitable and justifiable prices. Marketers
develop place (distribution) strategy to ensure that consumers find their products
available in the proper quantities at the right times and places. Place-related decisions
involve the distribution functions and marketing intermediaries (channel members). In
the promotional strategy, marketers blend together the various elements of promotion to
communicate most effectively with their target market. Many firms use an approach
called Integrate Marketing Communications (IMC) to coordinate all promotional
activities so that the consumer receives a unified, consistent and effective message.
Marketers do not make decisions about target markets and marketing mix
variables in a vacuum. They must take into account the dynamic nature of the five
marketing environmental dimensions as shown in Figure 1.1.1 ? competitive, political-
legal, economic, technological and social-cultural dimensions. Marketers compete for the
same consumers. So the developments in the competitive environment will have lot of
repercussions. The political-legal environment includes the governing and regulatory
bodies who impose guidelines to the marketers. Adherence to the law of the land is an
imperative for a marketer to be a good and responsible corporate citizen. The economic
environment dictates the mood in the target market who take decisions such as to buy or
save, to buy now or later. The technological environment can spell life or death for a
marketer with break-through technologies. Marketers often leap forward or get left
behind owing to the changes in the technological environment. The social-cultural
environment offers cues for the marketers to `connect' well with the target market.
Failure on part of the marketer to understand the social-cultural environment will have
serious consequences. A marketers can not afford to rub a society/culture on the wrong
side!
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Extending the Traditional Boundaries of Marketing
Until fairly recently, marketing focused primarily on exchanges of goods between
individuals (business-to-consumer (B2C) marketing) and businesses (business-to-
business (B2B) marketing). Industrial marketing deals with the organizational purchases
of goods to support production of other goods or daily operations or for resale. Table
1.1.2 highlights the differences between consumer marketing and industrial marketing.
Table 1.1.2 Differences between Industrial and Consumer Marketing
Areas of
Industrial Markets
Consumer Markets
Difference
(B2B)
(B2C)
Market
Geographically concentrated
Geographically dispersed
characteristics Relatively fewer buyers
Mass markets
Product
Technical complexity
Standardized products
characteristics Customized products
Service
Service, timely delivery and
Service, timely delivery
characteristics
availability are critical
and availability are
somewhat important
Buyer
Involvement of cross-
Involvement of family
behaviour
functional teams in both
members
buyer and supplier firms
Purchase decisions are
Purchase decisions are
mainly made on
mostly made on
rational/performance basis
physiological/social/
Technical expertise sought
psychological needs
Stable interpersonal
Less technical expertise
relationship between buyer
Non-personal relationship
and seller
Channel
More direct channels
Indirect channels
characteristics Fewer intermediaries/
Multiple layers of
middlemen
intermediaries
Promotional
Emphasis on personal selling Emphasis on advertising
characteristics
Price
Competitive bidding and
List prices or maximum
characteristics
negotiated prices
retail price (MRP)
List prices for standard
products
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With the growth of the services sector, marketers realized that services cannot be
marketed in the same way as the products. Certain characteristics of services posed
serious problems for marketers who realized that services marketing must be done
differently and not with the same marketing mix (4 Ps) variables. Service characteristics
like intangibility (service firms don't sell a tangible thing, but a promise) inseparability
(production and consumption of services take place at about the same time),
heterogeneity (the problem due to the fact that no two service providers are like, nor are
the service consumers) and perishability (service providers cannot maintain inventories of
their products). To cope with these challenges, service marketers suggest additional 3 Ps
? process, physical evidence and people. The process is aimed at solving the
heterogeneity or variability problem associated with the services by providing a service
blueprint. The physical evidence solves some of the problems associated with the
intangible nature of services. The physical evidence in terms of service environment,
equipment, personnel and so on attempts to tangibilize the intangible. The final P ?
People ? gives lot of attention to the service providers because they are, strictly speaking,
part of the service provided. They can influence the perceived service quality in a big
way.
With the world becoming a global village, marketers started targeting global
audience for their products and services. International marketers implement the basic
marketing framework discussed earlier. However transactions that cross national
boundaries encounter an additional set of environmental factors. For example, differences
in laws, economic conditions, cultural and business norms and consumer preferences
other demand variations in marketing strategies. The biggest challenge in international
marketing is managing the international business environment. With many
uncontrollable factors, sharing complex relationships among them, the international
marketer faces the dilemma of whether to standardize or differentiate his marketing mix.
Non-profit organizations encounter a special set of characteristics that influence
their marketing activities. Like for-profit firms, non-profit firms may market tangible
goods and/or intangible services and operate in B2C and B2B markets. An important
distinction is that profit-seeking businesses tend to focus their marketing on just one
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public ? their customers. Non-profit businesses however must often market to multiple
publics (say, their clients and sponsors), which complicates decision making regarding
the markets to target. Also a customer or service user may wield less control over the
organization's destiny than would be true for customers of a profit-seeking firm. As a
result, non-profit marketing must fine tune its marketing variables to adjust to these
conditions.
Activity 1.1.4
Match the following:
(1) Product marketing
-
(A) AIDS awareness campaign
(2) Service marketing
-
(B) Selling iron ore to a steel manufacturer
(3) Consumer marketing
-
(C) Selling ice creams to adults
(4) Industrial marketing
-
(D) Disney setting up a park in Hong Kong
(5) International marketing
-
(E) Setting up an ayurvedic massage center
(6) Non-profit marketing
-
(F) Selling electric bulbs
Functions of Marketing
Firms must spend money to create time, place and ownership utilities as discussed
earlier. Several studies have been made to measure marketing costs in relation to overall
product costs and service costs and most estimates have ranged between 40-60 percent.
These costs are not associated with raw materials or any of the other production functions
necessary for creating form utility. What then does the consumer receive in return for this
proportion of marketing cost? This question is answered by understanding the functions
performed by marketing.
In the following table, marketing is responsible for the performance of 8 universal
functions: buying, selling, transporting, storing, standardizing and grading, financing, risk
taking and securing marketing information. Some functions are performed by
manufacturers, others by marketing intermediaries like wholesalers and retailers. Buying
and selling, the first two functions represent exchange functions. Transporting and storing
are physical distribution functions. The final four marketing functions ? standardizing
and grading, financing, risk taking and securing market information ? are often called
facilitating functions because they assist the marketer in performing the exchange and
physical distribution functions.
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Table 1.1.3 Functions of Marketing
Marketing function
Description
A. Exchange functions
1. Buying
Ensuring that product offerings are
available in sufficient quantities to meet
customer demands
2. Selling
Using advertising, personal selling and sales
promotion to match goods and services to
customer needs
B. Physical distribution functions
3. Transporting
Moving products from their points of
production to locations convenient for
purchasers
4. Storing
Warehousing products until needed for sale
C. Facilitating functions
5. Standardizing and grading
Ensuring that product offerings meet
established quality and quantity control
standards of size, weight and so on
6. Financing
Providing credit for channel members or
consumers
7. Risk taking
Dealing with uncertainty about consumer
purchases resulting from creation and
marketing of goods and services that
consumers may purchase in the future
8. Securing marketing information
Collecting information about consumers,
competitors and channel members for use in
marketing decision making
Case Study: Master of the Online Supermall
(excerpt from Business Today, May 2004)
Amazon.com could well go down in history as a love child born of the heady fling
that the stockmarket had with dotcoms in the late 1990s. But the company, founded by
Jeff Bezos in July 1995 when the internet was still an untested business medium, is a
survivor-par-excellence. It floundered a bit in the swirl of the dotcom bust, but unlike
thousands that were swept away, Amazon.com reinvented itself and emerged stronger.
The 40-year old Bezos, a computer science grad from Princeton University, is the pioneer
of Internet Retailing. His compelling vision introduced a new paradigm for retail, the
click-and-buy model; buy goods from a website instead of a physical store, from
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wherever there is an internet connection: home, office or cyber-caf?. A model that gave
convenience to buyers, and mind-boggling market reach to sellers.
Named after the mighty Amazon river and its numerous tributaries that surge
through dense rain forests, Amazon.com was started with an initial investment of a few
thousand dollars. In less than three weeks after the website went live, Bezos and his wife
Mackenzie were pulling in sales of over $20,000 a week. And soon after going public in
1997, the company had a market capitalization higher than that of its brick-and-mortar
rivals. In 1999, Bezos was chosen as Time Magazine's `Person of the Year'. But things
changed soon after and the dotcom bust saw Amazon.com lose almost 90 percent of its
market cap in 2000.
Bezos didn't give up on his vision. He set about transforming Amazon.com from
a website selling books into something much bigger: the world's largest online retailing
platform. A series of tie-ups with companies like Toys R Us and Target helped give the
website the feel of an online supermall where a customer could buy almost anything.
Marketing initiatives followed ? from free shipping to highly discounted prices to very
customized offerings (based on customer profile) to wide distribution through sites which
can divert traffic to Amazon.com for a small commission. But the biggest move was
Bezos' decision to make the site `more global'.
The moves have paid off. The company announced its first full-year profit in
2003. It has been making money now for three straight quarters and revenues have
exceeded a billion dollars for the last six quarters. If proof was needed that there is
money to be made in online retailing, this is it. And Bezos has proved that the right idea,
coupled with perseverance, pays in the end.
Questions: How does Amazon.com bring utility or create value for its customers?
Explain the marketing framework of Amazon.com? What do you learn about marketing
from the Amazon story?
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Unit ? I
Lesson - 1.2
Marketing Concepts
Objectives
In this lesson, we will introduce you to the conceptual ideas that makeup the marketing
function of a business. After you work out this lesson, you should be able to:
List out the concepts of marketing
Understand how these concepts are interconnected
Explain how marketing is changing in a connected world
In this lesson, we will discuss the following:
Needs, wants and demands
Products
Value and satisfaction
Exchange, transactions and relationships
Markets
Marketing in a connected world
Introduction
Having defined marketing in the previous lesson as a social and managerial
process by which individuals and groups obtain what they need and want through
creating and exchanging products and value with others, this lesson examines the
important concepts that are included and implied in this definition. These concepts are
indicated in Figure 1.2.1 and it is important to note that they are linked, with each one
building on the one before it.
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Figure 1.2.1 Marketing concepts
Needs, Wants and Demands
The most basic concept underlying marketing is that of human needs. A need is a
state of felt deprivation. It is a part of the human makeup. Humans have many needs, viz.,
physical needs, social needs, spiritual needs and so on. Wants are the form taken by needs
as they are shaped by the one's culture and personality. Wants are thus shaped by both
the internal and external factors. Wants are described in terms of objects that will satisfy
needs. For example, thirst is a need. To quench this thirst, a person may consider a
number of options ? drink water or a soft drink or a fruit juice. These objects (which
represent the different choices for a person to fulfill his/her need) comprise the potential
want-list. As people are exposed to more objects that arouse their interest and desire,
marketers try to provide more choices, that is, more want-satisfying products. People
have almost unlimited wants but limited resources. Therefore, they want to choose
products that provide the most satisfaction for their money. When backed by buying
power (ability), a want becomes a demand.
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Products
A product is anything that can be offered to a market to satisfy a need or want.
People satisfy their needs and wants with products. Though the word suggests a physical
object, the concept of product is not limited to physical objects. Marketers often use the
expressions goods and services to distinguish between physical products and intangible
ones. These goods and services can represent cars, groceries, computers, places, persons
and even ideas. Customers decide which entertainers to watch on television, which places
to visit for a holiday, which ideas to adopt for their problems and so on. Thus the term
`product' covers physical goods, services and a variety of other vehicles that can satisfy
customers' needs and wants. If at times the term `product' does not seem to be
appropriate, other terms such as market offering, satisfier are used.
Value and Satisfaction
When the customers have so many choices to choose from to satisfy a particular
need, how do they choose from among these many products? They make their buying
choices based on their perceptions of a product's value. The guiding concept is customer
value. A customer will estimate the capacity of each product to satisfy his need. He/She
might rank the products from the most need-satisfying to the least need-satisfying. Of
course, the ideal product is the one which gives all the benefits at zero cost, but no such
product exists. Still, the customer will value each existing product according to how close
it comes to his/her ideal product and end up choosing the product that gives the most
benefit for the rupee ? the greatest value.
Exchange, Transactions and Relationships
Marketing occurs when people decide to satisfy needs and wants through
exchange. Exchange is the act of obtaining a desired object from someone by offering
something in return. Thought it is only one of the many ways people can obtain a desired
object, it allows a society to produce much more than it would with any alternative
system. For an exchange to take place, several conditions must be satisfied. Of course, at
least two parties must participate, and each must have something of value to the other.
Each party also must want to deal with the other party and each must be free to accept or
reject the other's offer. Finally, each party must be able to communicate and deliver.
These conditions simply make exchange possible. Whether the exchange actually takes
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place depends on the parties' coming to an agreement. If they agree, we must conclude
that the act of exchange has left both of them better off or at least not worse off. After all,
each was free to reject or accept the offer. In this sense, exchange creates value just as
production creates value. It gives customers more consumption possibilities.
A transaction is marketing's unit of measurement. It consists of a trade of values
between two parties. A monetary transaction involves trading goods and services in
return for money whereas a barter transaction involves trading goods and services for
other goods and services. Transaction marketing is part of the larger idea of relationship
marketing. Marketing is shifting from trying to maximize the profit on each individual
transaction to maximizing mutually beneficial relationships with consumers and other
parties. This is based on the assumption that if good relationships are built, profitable
transactions will simply follow.
Markets
The concept of transactions leads to the concept of a market. A market is the set
of actual and potential buyers of a product. It may exist in a physical environment as a
marketplace or in a virtual environment (on the internet platform) as a marketspace. To
understand the nature of a market, imagine a primitive economy consisting of only four
people ? a farmer, a fisherman, a potter and a hunter. Figure 1.2.2 shows the different
ways in which these traders could meet their needs. In the first case, self-sufficiency, they
gather the needed goods for themselves. In the second case, decentralized exchange, each
person sees the other three as potential buyers who make up a market. In the third case,
centralized exchange, a new person called a merchant appears and locates in a central
area called a marketplace. Each trader brings goods to the merchant and trades for other
needed goods. Merchants and central marketplaces greatly reduce the total number of
transactions needs to accomplish a given volume of exchange. As economies grow,
exchange becomes even more centralized, as seen in the growth of huge companies.
Large supermarkets now serve millions of people who formerly shopped in smaller
outlets.
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Figure 1.2.2 Moving towards centralized exchange
Fisherman Hunter
Fisherman Hunter
Fisherman Hunter
MERCHANT
Potter Farmer
Potter Farmer
Potter Farmer
Marketing in a connected world
The internet and the resultant connected world has posed some special challenges
and opportunities for marketers. Prof. Mohanbir Sawhney (Kellogg School of
Management) has used two interesting metaphors (hunting Vs. gardening) to describe
marketing hither-to and marketing hence-forth.
Marketing Hhither-to:
Marketing Hence-forth:
Marketing as hunting
Marketing as gardening
Market as a jungle
Customer relationships as garden to
Customers as targets
be tended
Marketers as hunters
Marketer as gardener
Segmentation as rifle Vs. shotgun
Partners as players in the ecosystem
approach
Customer loyalty as roots
Products as mousetraps
Lifetime profits as harvest
Salespeople as baiters-and-switchers
Marketing process as seed, feed and
Promotions as campaigns
yield
Relationships as conquests/acquisitions
Loyalty as lock-in and retention
Customer visits as eyeballs and traffic
The underlying reason for this shift is the rise of information democracy made
possible by the internet. For information symmetry (characterized by scarce information,
ill-informed customers, monologue kind-of exchanges and `command-and-control'
marketing) the society is moving towards information democracy (characterized by
ubiquitous information, well-informed customers, conversations kind-of exchanges and
`connect-and-collaborate' marketing). The Cluetrain Manifesto (www.cluetrain.org)
describes markets as conversations in the following manner: Markets are conversations.
21
Their members communicate in language that is natural, open, honest, direct, funny and
often shocking... Most corporations, on the other hand, only know how to talk in the
soothing, humorless monotone of the mission statement, marketing brochure, and your-
call-is-important-to-us busy signal. Same old tone, same old lies. No wonder networked
markets have no respect for companies unable or unwilling to speak as they do.
In the connected world, the empowered customers can: (1) Get objective
information for multiple suppliers without relying on the manufacturer or the retailer
(e.g., Edmunds.com); (2) Initiate requests for information and advertising from
manufacturers (e.g., DealTime.com); (3) Design and configure customized offerings
(e.g., Dell.com); (4) Use buying agents to pit sellers against each other (e.g., Freemarkets
Online); (5) Unbundle offerings and arbitrage across channels (e.g. Ritz Camera); (6) Pay
by the minute, by the month, by the mile (e.g., IBM e-business on demand) and (7)
Communicate with peers and experts for feedback on products and brands (e.g.
Amazon.com and Epinions.com)
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Unit ? I
Lesson 1.3
Marketing Process
Objectives
In this lesson, we will introduce you to the activities that makeup the marketing process.
After you work out this lesson, you should be able to:
Identify the parts of the marketing process
Understand the relationships among the parts of the marketing process
Explain how the marketing process creates, captures and sustains value for the
customer
In this lesson, we will discuss the following:
Formulation of marketing strategy
Marketing planning
Marketing programming, allocating and budgeting
Marketing implementation
Monitoring and auditing
Analysis and research
Schematic of marketing process
Introduction
While there is lot of focus on the substance of marketing, particularly the
marketing mix, an equally important aspect of marketing is the marketing process ? how
marketers do their job. The process is equal in importance to the substance because the
process determines the nature and quality of the decisions made. A good process is likely
to lead to a good decision. On the other hand, a faulty process will produce a good
decision only on a random or accidental basis.
The marketing process can be divided in several different ways. One popular
conceptualization of marketing tasks is:
1. Strategy formulation ? the development of the broadest marketing/business
strategies with the longest term impact
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2. Marketing planning ? the development of longer-term plans which have
generally stronger impact than the short-term programs
3. Marketing programming, allocating and budgeting ? the development of
short-term programs which generally focus on integrated approaches for a
given product and on the allocation of scarce resources such as sales effort or
product development time across various products and functions
4. Marketing implementation ? the actual task of getting the marketing job done
5. Monitoring and auditing ? the review and analysis of programs, plans and
strategies to assess their success and to determine what changes must be made
6. Analysis and research ? the deliberate and careful acquisition and examination
of qualitative and quantitative data to improve decision making
Though implied and considered as part of the overall corporate planning, the
importance of situation analysis can never be undermined during marketing strategy
formulation. Especially under product policies, but throughout the marketing mix
elements, the company, customer and competitive scanning is so essential to marketing
success. Situation analysis describes the process by which environmental assessment,
marketing research and market size/growth estimates get done. It pays particular attention
to environment scanning skills useful in forecasting and modeling consumer behaviour.
It is important to note that each part of the process is intimately related to the
other parts of the process. Figure 1.3.1 is an attempt to capture the more important
relationships. The dividing lines between any two parts of the process are vague and
unclear. This is particularly true of those elements of the processes which are clearly
connected. For example, the distinction between a marketing plan and a marketing
program is very unclear for many. But the precise boundaries are not as important as the
general concept. Each element can be divided into smaller subelements. For example,
marketing planning includes market assessment which is the evaluation and selection to
serve specific customer markets. Product line planning is another subelement of
marketing planning.
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Figure 1.3.1 Relationships among the six parts of the marketing process
Strategy
Formation
Marketing
Planning
Programming,
Allocating and
Budgeting
Implementation
Analysis
and
Research
Monitoring
and
Auditing
Formulation of marketing strategy
Strategy formulation is the broadest, longest-term marketing activity. At this
stage, complex and subtle integration with other corporate functions is required. All of
the functional strategies must fit together into a business strategy. Because marketing
deals with customers and the competitive environment, it is an early part of the total
strategy formulation process. When done well, it is impossible to separate the marketing
strategy from the corporate strategy. The two meld into a unified whole.
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The strategic process is one of working with market dynamics (a particular
segment or selection of the market) to achieve a solid positioning of the product/service
offering that contains a clear `benefit promise' to the consumer which is differentiable
from the offers of the competition and which thus positions the firm well for potential
competitive responses to its actions.
Marketing Planning
Marketing planning involves objectives and plans with a 2-5 year time horizon
and is thus further from day-to-day activity of implementation. Because of their broader
nature and longer-term impact, plans are typically developed by a combination of higher-
level line managers and staff specialists. If the specialists take over the process, it loses
the commitment and expertise of the line managers who are responsible for carrying out
the plan. The planning process is probably more important than the final planning
document. The process ensures that a realistic, sensible, consistent document is produced
and leads to important organizational learning and development in its own right.
Marketing Programming, Allocating and Budgeting
This part of the marketing process involves a good deal of detail and focuses
generally on the one-year time horizon.
Programs can be related to either one element of the marketing mix such as
distribution for one or more products or to all elements of the mix for a single product or
market. To some extent, the choice will be determined by the nature of the company's
organization. The more functional the organization (i.e. separation of marketing functions
such as advertising, sales, etc.), the more likely it is that the programs will focus on one
aspect of the mix across all products and markets. On the other hand, companies which
organize around products or markets tend to also develop programs for each of them.
Allocating is a necessary function because there is never enough of any scarce
resource such as advertising budget or distribution effort to meet the `needs' of all
products, markets and programs. In many ways, marketing is deciding what not to do:
which prospects not to sell to, which products not to produce to, etc. Allocation is the
formal process of choosing what to do and what not to do, as well as choosing how much
to do. Because marketers tend to be optimists, they often underestimate the amount of
26
effort which will be required to accomplish a goal. Allocation requires the stark realism
to separate the clearly feasible from the hopeful. It forces the marketer to set explicit
priorities and to make hard decisions.
Budgeting reflects the programs and allocations in a set of quantitative forecasts
or estimates which are important within and beyond the marketing function. The budgets
generally include financial pro formas which are used by the control and finance
functions to forecast cash flows and needs. They also generally include unit sales
forecasts which are used by production scheduling personnel to `load the factory' or
service operation. If the forecasts are too low, customer needs are unmet and sales are
lost. If the forecasts are too high, capacity sits idle and costs are much higher than they
should have been.
Marketing Implementation
Strategy formulation, marketing planning, and programming, allocating and
budgeting all lead to marketing implementation as shown in Figure 1.3.1. This is the
execution phase which, in part produces the actual results. Poor implementation can ruin
even the best strategies, plans and programs. The total purpose of all that goes before
implementation is to ensure excellent execution.
Implementation means different things to different people in the organization. To
the salesperson, it means going through all of the steps of the selling process, while to the
sales manager, it might mean reorganizing the whole sales force. Because of the
relatively short time frame involved in most implementation activities, monitoring and
auditing are generally easier than for the longer-term strategies and plans.
Implementation is very people-oriented. The results of implementation are manifested in
people doing things ? buying, selling, training, reorganizing, etc. Marketing
implementation is unique compared to implementation in most other functional areas
because the primary focus of marketing is outside the company. Thus marketing
implementation focuses on prospects, customers, distributors, retailers, centers of
influence (who are the influencers in a buying decision ? they specify but do not
purchase). But marketing implementation also includes dealing with other functional
areas to gain support and to develop coordination. For example, product managers must
27
implement their plans and programs through product development, production, service
and logistics personnel in other functional areas.
Marketing implementation involves a very interesting tension between the
structures the firm puts in place to guide marketing efforts and the skills of the managers
doing the marketing job. In most firms, what happens is that over time the structures
become rigid and dysfunctional to changing marketplace needs, which guides the firm to
destinations it does not want to reach! It is only by the timely intervention of the
marketers, using their personal skills to `subvert the organization toward quality' that
good marketing actions result.
Monitoring and Auditing
One reason to develop plans, programs and budgets is to have a set of goals or
standards against which to measure performance. Marketing audits usually include two
parts. The first is an assessment of performance against quantitative goals. The second
part of a comprehensive audit reviews the processes and other non-quantifiable aspects of
the marketing operation. Because marketing is a mixture of art and science, quantitative
and qualitative, and because it involves so many interactive variables, it is hard to audit.
Standards are few and comparisons are difficult.
The audit raises a variety of important topics:
1. Who should perform the audit? Can the planners, programmers and executors
audit their own performance without bias? If they cannot, who knows enough
about the operation to perform the audit? Should outsiders such as consultants be
involved and in what capacity?
2. How often should the audit be performed? Should it be on a regular basis or only
at certain important points?
3. How comprehensive should the audit be? Should it involve all aspects of
marketing or just some?
While auditing normally refers to an activity which is done only on certain occasions,
monitoring generally refers to a more day-to-day review activity. It also often refers more
to a review of external data than internal activities. It, too, is an important part of the total
marketing process because it provides a frequent check of progress against plans and
programs.
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Analysis and Research
All marketing decisions should be based upon careful analysis and research. The
analysis and research need not be quantitative, but it should be deliberate and should be
matched to the magnitude of the decision being made. While formal analysis and research
are important, nothing replaces common sense and good judgment. The marketer's kit
has some very powerful analytical tools and the rapid development of decision support
systems, mathematics including statistics, and other supporting disciplines such as
psychology and sociology insure that the diversity and power of the tools will continue to
increase. All of the tools must be applied carefully and intelligently to the decision at
hand. It is a fine line, indeed between healthy skepticism and arrogant neglect of useful
tools. The right analytical tool well applied can substantially improve marketing decision
making.
Table 1.3.1 has two dimensions. The first is temporal ? it shows the natural
development from strategy formulation through planning, programming, allocating and
budgeting on to implementation. This process is not nearly as `clean and separated' as the
table implies. The activities are interrelated and contemporaneous. The second dimension
is the lateral connection to other functional parts of the organization, such as production
and operations, finance, control and human resources management. Each step has a
company or business counterpart in the right-hand column. The marketing strategy thus
becomes part of the total corporate strategy, which includes all functional areas. The
marketing plan is often part of a broader corporate business plan. The marketing plan is
usually the `front end' of the corporate plan, because it spells out the operation, human
and financial resources needed to support the organization's approach to its markets.
Table 1.3.1 Activities and Lateral Connections
Time
Activities
Names of Activities
Lateral
Horizon
Connections
Long
1. set overall, long-term goals
1. formulation of
1. corporate
and basic approach to
marketing strategy
strategy
marketplace
Medium 2. set two- to five-year
2. marketing planning 2. business
objectives and plans with more
plan
detail for shorter time horizons
29
3. set one-year objectives and
3. marketing
detailed plans; allocate
programming,
3. operating
resources to achieve goals
allocating and
programs
specified in 3 and 4
budgeting
and budgets
Short
4. execute plans, programs and 4. marketing
budgets
implementation
4. operating
activities
5. evaluate results of execution 5. monitoring and
against goals set in steps 1, 3
auditing
5. business
and 4, above; specify
audits
corrective action where
necessary
6. gather and analyze
6. analysis and
quantitative and qualitative
research
6. business
data from within and outside
analysis and
the company
research
Marketing programs and budgets are usually part of the organization's
fundamental operating documents. For example, the sales forecasts in the programs and
budgets become the production schedule for the manufacturing function. Those, in turn,
become the staffing programs for the human resource function and indicate the working
capital needs to be supported by the financial function. If finance cannot support such a
high level of inventory and accounts receivable, the sales forecast, production schedule
and staffing program must be scaled down. In most organizations, great effort must be
devoted to such lateral connections. The coordination needs are very high and the amount
of conflict often great. Risk aversion and opportunity sensitivity differ among functions.
Varying reward systems sometimes encourage different types of behaviour. The
organization must develop formal and informal ways to foster good, open lateral
connections.
Schematic of Marketing Process
Figure 1.3.2 represents a schematic describing a general process of marketing
strategy development. As shown, five major areas of analysis (5 Cs) underlie marketing
decision making ? customers, company, competitors, collaborators and context. The
questions to raise in each of these areas are:
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Customer needs -
What needs do we seek to satisfy?
Company skills -
What special competencies do we possess to meet those
needs?
Competition -
Who competes with us in meeting these needs?
Collaborators -
Who should we enlist to help us and how do we motivate
them?
Context
-
What environmental (say, cultural, technological or legal)
factors limit what is possible?
This leads first to specification of a target market and desired positioning and then
to the marketing mix (4 Ps). This results in customer acquisition and retention strategies
driving the firm's profitability. In this schematic, value creation happens by identifying
target segment, establishing a product/service positioning and developing the suitable
product, place (distribution) and promotion for the chosen market segment. The pricing
decision helps to capture value ? for the company and for the customer. Value is
sustained by acquiring and retaining the customers at a profit for the firm.
Figure 1.3.2 Schematic of marketing process
Marketing Analysis (The 5 Cs)
Customers
Company
Competitors Collaborators Context
Market
Target Market
Product/Service
Segmentation
Selection
Positioning
Marketing Mix (The 4 Ps)
Product/Service
Place/Channel
Promotion
Pricing
2
Customer
Customer
acquisition
retention
Profits
Note: 1 ? Creating value; 2 ? Capturing value; 3 ? Sustaining value
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Unit ? I
Lesson 1.4
Marketing Environment
Objectives
In this lesson, we will introduce you to the forces that define marketing's external
environment. After you work out this lesson, you should be able to:
Identify, analyze and monitor external forces and assess their potential impacts on
the firm's goods and services
Understand how marketers formulate their strategy within the frame of reference
provided by the forces in the external environment
In this lesson, we will discuss the following:
Competitive environment
Political-legal environment
Economic environment
Technological environment
Social-cultural environment
Introduction
Industry competition, legal constraints, the impact of technology on product
design and social concerns are some of the many important conditions that shape the
business environment. This lesson examines the forces that define marketing's external
environment. Every organization needs to think seriously about the environments in
which it operates. All firms must identify, analyze and monitor external forces and assess
their potential impacts on the firm's goods and services. Although external forces
frequently operate outside the marketing manager's control, decision makers still must
consider those `uncontrollable' influences together with the variables of the marketing
mix in developing the firm's marketing plan and strategies.
Environmental Scanning and Environmental Management
Marketers must carefully and continually monitor crucial trends and
developments in the business environment. Environmental scanning is the process of
collecting information about the external marketing environment to identify and interpret
potential trends. This activity then seeks to analyze the collected information and
32
determine whether identified trends represent opportunities or threats to the company.
This judgment, in turn, allows a firm to determine the best response to a particular
environmental change.
Environmental scanning is a vital component of effective environmental
management. Environmental management is the effort to attain organizational objectives
by predicting and influencing the firm's competitive, political-legal, economic,
technological and social-cultural environments. The development of a global marketplace
has complicated environmental scanning and environmental management. These
processes may now need to track political developments, economic trends and cultural
influences anywhere in the world.
While the marketing environment may exceed the confines of the firm and its
marketing mix components, effective marketers continually seek to predict its impact on
marketing decisions and to modify its conditions whenever possible.
The Competitive Environment
The interactive exchange in the marketplace as organizations vie with one another
to satisfy customers creates the competitive environment. Marketing decisions by each
individual firm influence consumer responses in the marketplace. They also affect the
marketing strategies of competitors. As a consequence, decision makers must continually
monitor competitors' marketing activities ? their products, channels, prices and
promotions.
Few organizations enjoy monopoly positions in the marketplace. Utilities such as
electricity, water and cooking gas accept considerable regulation from local authorities.
Other firms, such as manufacturers of pharmaceutical products, sometimes achieve
temporary monopolies as a result of patents. Marketers actually face three types of
competition. Their most direct competition occurs among marketers of similar products,
as when an insurance firm competes with other insurance firms. The second type of
competition involves products that users can substitute for one another. In the
transportation industry, the no-frills, low-cost airliners compete with train and luxury bus
services. A change such as a price increase or an improvement in a product's capabilities
can directly affect demand for substitute products. The final type of competition occurs
among all other organizations that compete for consumers' purchases. Traditional
33
economic analysis views competition as a battle among companies in a single industry or
among firms that product substitute goods and services. Marketers must, however, accept
the argument that all firms compete for a limited pool of discretionary buying power.
Because the competitive environment often determines the success or failure of a
product, marketers must continually assess competitors' marketing strategies. A firm
must carefully monitor new product offerings with technological advances, price
reductions, special promotions or other competitive variations, and the firm's marketing
mix may require adjustments to counter these changes.
Every firm's marketers must develop an effective strategy for dealing with its
competitive environment. One company may compete in a broad range of markets in
many areas of the world. Another may specialize in particular market segments, such as
those determined by customers' geographic, age or income characteristics. Determining a
competitive strategy involves answering three questions:
(1) Should we compete?
The answer to this questions depends on the firm's resources, objectives and
expectations for the market's profit potential. A firm may decide not to pursue
or continue operating a potentially successful venture that does not mesh with
its resources, objectives or profit expectations.
(2) If so, in what markets should we compete?
The answer requires marketers to acknowledge their limited resources (sales
personnel, advertising budgets, product development capabilities and so on).
They must accept responsibility for allocating these resources to the areas of
greatest opportunity.
(3) How should we compete?
This requires marketers to make product, pricing, distribution and promotional
decisions that give their firm a competitive advantage in the marketplace.
Firms can compete on a wide variety of claims, including product quality,
price and customer service. For example, a retailer may gain competitive
advantage by providing superior customer service, while another retailer
competes by providing low prices.
With increased international competition and rapid changes in technology, many
firms are using time as a strategic competitive weapon. A time-based competition
strategy seeks to develop and distribute goods and services more quickly than
competitors. The flexibility and responsiveness of a time-based strategy enables the firm
34
to improve product quality, reduce costs, respond to competition and expand the variety
of its products to cover new market segments and enhance customer satisfaction.
The Political-Legal Environment
No one should start playing a new game without first understanding the rules, yet
some businesses exhibit remarkably limited knowledge about marketing's political-legal
environment ? the laws and their interpretations that require firms to operate under
certain competitive conditions and to protect consumer rights. Ignorance of laws,
ordinances and regulations or failure to comply with them can result in fines,
embarrassing negative publicity and possibly expensive civil damage suits.
Businesses need considerable diligence to understand the legal framework for
their marketing decisions. Numerous laws and regulations affect those decisions, many of
them vaguely stated and inconsistently enforced by a multitude of different authorities.
Regulations affect marketing practices, as do the actions of independent regulatory
agencies. These requirement and prohibitions touch on all aspects of marketing decision
making ? designing, labeling, packaging, distributing, advertising and promoting goods
and services. To cope with the vast, complex and changing political-legal environment,
many large firms have in-house legal department; small firms often seek professional
advice from legal experts. All marketers, however, should be aware of the major
regulations that affect their activities.
Some of potential issues from the political-legal environment to affect businesses
include:
The national foreign policy can dominate the international business decisions of
the local firms
The political ideology of the Government can affect the international brands
wanting to enter a market
The competitors who work closely with the government can help erect trade
barriers for a firm
Global trade organizations can enforce trade barriers when their regulations and
guidelines are not observed
A host nation may levy anti-dumping duties on a foreign firm and such a decision
may be dominated by the local businesses lobbying with the government
Copyright infringements, trademark and intellectual property rights violations
Direct comparative advertisements may not be allowed in few countries
35
Use of children is advertising and advertising to children are banned in certain
countries
Price regulations preempt any pricing strategy of a firm
A detailed displaying of the ingredients in product labels is mandatory in most
countries
The channel members are given the additional responsibility of verifying the
eligibility of the prospective buyers for certain products
Use of certain raw materials or methods of manufacturing are prohibited in certain
countries
Industry watch dogs and consumer groups are always on the prowl for any
unethical trade practices
Each one of the above issues has serious implications for the marketer in his
marketing decision making. Ignorance of the law is no excuse and breaking of the law is
an offence.
The Economic Environment
The overall health of the economy influences how much consumers spend and
what they buy. This relationship also works the other way. Consumer buying plays an
important role in the economy's health. Indeed, consumer outlays perennially make up
around two-thirds of overall economic activity. Since all marketing activity is directed
toward satisfying consumer wants and needs, marketers must understand how economic
conditions influence consumer buying decisions.
Marketing's economic environment consists of forces that influence consumer
buying power and marketing strategies. They include the stage of the business cycle,
inflation, unemployment, resource availability and income.
Historically, a nation's economy tends to follow a cyclical pattern consisting of
four stages: prosperity, recession, depression and recovery. Consume buying differs in
each stage of the business cycle and marketers must adjust their strategies accordingly. In
times of prosperity, consumer spending maintains a brisk pace. Marketers respond by
expanding product lines, increasing promotional efforts and expanding distribution in
order to raise market share and raising prices to widen their profit margins. During
recessions, consumers frequently shift their buying patterns to emphasize basic,
functional products that carry low price tags. During such times, marketers should
consider lowering prices, eliminating marginal products, improving customer service, and
increasing promotional outlays to stimulate demand. Consumer spending sinks to its
36
lowest during a depression. In the recovery stage of the business cycle, the economy
emerges from recession and consumer purchasing power increases. While consumers'
ability to buy increases, caution often restrains their willingness to buy. They may prefer
to save than to spend or buy on credit. Business cycles, like other aspects of the economy,
are complex phenomena that seem to defy the control of marketers. Success depends on
flexible plans that can be adjusted to satisfy consumer demands during the various
business cycle stages.
Inflation devalues money by reducing the products it can buy through persistent
price increases. It would restrict purchases less severely if income were to keep pace with
rising prices, but often it does not. Inflation increases marketers' costs such as
expenditures for wages and raw materials and the resultant higher prices may therefore
negatively affect sales. Inflation makes consumers conscious of prices, especially during
periods of high inflation. This influence can lead to three possible outcomes, all of them
are important to marketers. (1) consumers can elect to buy now, in the belief that prices
will rise later, (2) they can decide to alter their purchasing patterns and (3) they can
postpone certain purchases.
Unemployment is defined as the proportion of people in the economy who do not
have jobs and are actively looking for work. It rises during recessions and declines in the
recovery and prosperity stages of the business cycle. Like inflation, unemployment
affects marketing by modifying consumer behaviour. Instead of buying, consumers may
choose to build their savings.
Income is another important determinant of marketing's economic environment,
because it influences consumer buying power. By studying income statistics and trends,
marketers can estimate market potential and develop plans for targeting specific market
segments. For marketers, a rise in income represents a potential for increasing overall
sales. But they are most interested in the disposable income, which is the amount of
money that people have to spend after they have paid for necessities. Consumers'
disposable income varies greatly by demographic variables such as age group and
educational levels.
37
Resources are not unlimited. Brisk demand may bring in orders that exceed
manufacturing capacity or outpace the response time required to gear up a production
line. A shortage may also reflect a lack of raw materials, component parts, energy or
labour. Regardless of the cause, shortages require marketers to reorient their thinking.
One reaction is demarketing, the process of reducing consumer demand for a product to a
level that the firm can reasonably supply. A resource shortage presents marketers with a
unique set of challenges. They may have to allocate limited supplies which is a sharply
different activity from marketing's traditional objective of expanding sales volume.
The Technological Environment
The technological environment represents the application to marketing of
discoveries in science, inventions and innovations. New technology results in new goods
and services for consumers; it also improves existing products, strengthens customer
service and often reduces prices through new, cost-efficient production and distribution
methods. Technology can quickly make products obsolete, but it can just as quickly open
up new marketing opportunities. Technology is revolutionizing the marketing
environment. Technological innovations not just create new products but also whole new
industries. Recently, the Internet has been transforming the way companies collaborate
with different stakeholders to create more value for the customers. Technology can
sometimes address social and environmental concerns by offering a cheap, non-polluting,
energy-conserving, safe product and also create parity among consumers by providing
equal access and opportunity.
Marketers must closely monitor the technological environment for a number of
reasons. Creative applications of new technologies give a firm a definite competitive
advantage. Marketers who monitor new technology and successfully apply it may also
enhance customer service.
The Social-Cultural Environment
The social-cultural environment of marketing describes the relationship between
marketing and society and its culture. Marketers must cultivate sensitivity to society's
changing values and to demographic shifts such as population growth and age
distribution changes. These changing variables affect consumers' reactions to different
products and marketing practices. The social-cultural context often exerts a more
38
pronounced influence on marketing decision making in the international arena than in the
domestic arena. Learning about cultural and social differences among countries prove a
paramount condition for a firm's success abroad. Marketing strategies that work in one
country often fail when directly applied in other countries. In many cases, marketers must
redesign packages and modify products and advertising messages to suit the tastes and
preferences of different cultures.
Changing social values have led to the consumerism movement which is a social
force within the environment designed to aid and protect buyers by exerting legal, moral
and economic pressures on business. Consumerism also advocates the rights of the
consumers such as:
1. The right to choose freely ? consumers should be able to choose among a range of
goods and services
2. The right to be informed ? consumers should have access to enough education
and product information to make responsible buying decisions
3. The right to be heard ? consumers should be able to express legitimate complaints
to appropriate parties ? be it manufacturers, sellers, consumer assistance groups
and consumer courts.
4. The right to be safe ? consumers should feel assured that the goods and services
they purchase will not cause injuries in normal use. Product designs should allow
average consumers to use them safely.
The social-cultural environment for marketing decisions at home and abroad is
expanding in scope and importance. Today no marketer can initiate a strategic decision
without taking into account the society's norms, values, culture and demographics.
Marketers must understand how these variables affect their decisions. The constant influx
of social input requires that marketing managers focus on addressing these questions
instead of concerning themselves only with the standard marketing tools.
Activity 1.4.1
Choose an industry. Search from recent business news to look for examples of influences
of competitors, economy, politics, law, technology, society and culture on marketing
decision making.
39
Competitive Environment
Economic Environment
Political-Legal Environment
Technological Environment
Social-Cultural Environment
Case study 1.4.1 EuroDisney ? managing the marketing environmental challenges
Michael Eisner joined the Walt Disney company as the chairman of the board in
1984, after his successes at the ABC television network and Paramount. The same year,
Tokyo Disney was completing its first year of operations after five years of planning and
construction, when the Walt Disney Co. entered into an agreement with Oriental Land
Company in Japan. More than 10 million people visited the park that year, spending $355
million. This was $155 million more than had been expected and was partially attributed
to the average expenditure per visitor being $35, rather than the estimated $21. The
timing of the Tokyo Disneyland opening coincided with a rise in income and leisure time
among the Japanese. Tokyo Disneyland thus became quickly profitable. Growth
continued, and by 1990 more than 14 million people visited the park, a figure slightly
higher than the attendance at Disneyland in California and about half the attendance at
Walt Disney World in Florida. Though, Disney was not a financial partner in the Tokyo
venture, it was reaping the profit from its franchise (10% royalty from admission and 5%
from merchandise and food sales).
The Tokyo park was in some ways a paradox. Tokyo Disneyland is nearly a
replica of the two parks in US. Signs are in English, and most food is American style.
The management of the Oriental Land Company demanded this because they wanted
visitors to feel they were getting the real thing and because they had noted that such
40
franchises as McDonald's have enormous success in Japan, as Japanese youth embraced
American-style culture. Yet, a few changes were necessary, such as the addition of a
Japanese restaurant. The product was readily accepted by the Japanese, an acceptance
attributed by some to the enthusiastic assimilation of the Japanese to Western ways. The
success of the Tokyo Disneyland led the company to consider expansion into Europe.
In 1984, a few months after his arrival at Disney, Eisner decided to create a
Disney resort in Europe. In 1985, Disney announced that it had narrowed its locational
choice to two countries, Spain and France. The park was scheduled to open in 1992 at
either location. Since the park was estimated to provide about 40,000 permanent jobs and
would draw large numbers of tourists, the two countries openly courted Disney. If Disney
opted for a Spanish location, the park would have to be like the ones in the U.S, where
the visitors are outside for almost all amusements. However, Disney had learnt from the
Tokyo experience that the cold weather does not necessarily impede attendance. But the
colder climate in Paris area would require more indoor shows. Furthermore, France
would require more focus on technology and historical themes.
After three years of discussions, the search culminated with the selection of a site
at the heart of Europe: Marna-la-Vallee, France. Euro Disney was officially born. The
total investment by 1992 was estimated at between $2.4 to 3 billion. Disney opted for a
49% stake. France was in full economic crisis and Disney was taking advantage of this
crisis. In a real estate coup, the French Government sold Disney some very expensive
land at a bargain price and. In spite of the economic benefits the park was expected to
bring, many people in France feared that the Park would be one more step toward the
replacement of the French culture with that of the US. Critics called EuroDisney "a
cultural Chernobyl".
Disney headed off the criticism by explaining in the French press that Walt
Disney was of French Huguenot descent, with an original name of D'Isigny rather than
Disney. Disney also agreed to make French the first language in the park, although
relying heavily on visual symbols. Disney would build an attraction, Discovery Land,
based on the science fiction of France's Jules Verne; and a movie theater featuring
European history. Many concessions were made to soothe the French resistance. Disney
admitted that it may have to alter its no-alcohol policy for this park, but it didn't. The
41
park also emphasized that Pinocchio was Italian, Cinderalla was French and Peter Pan
flew in London.
The marketing campaign began in October, 1991. The sales division began
ambitious programs to inspire European families to mark the Euro Disney resort on their
vacation agendas. The Sales division established a strong presence in all the major
markets through special partnerships with leading companies in the travel industry. On
April 12, 1992, Euro Disney hosted the biggest event in Disney history, the official
opening of the Euro Disney resort. Looking at the future, Euro Disney had two primary
objectives : to achieve profitability as quickly as possible and to better integrate Euro
Disney into its European environment while reinforcing its greatest asset ? Disney
heritage. Disney announced plans to add a second theme park, the Disney MGM Studios-
Europe and a water park. Disney was so optimistic that it was negotiating the possibility
of creation of creating a third theme park at the beginning of the new millennium.
The Park admission fee cost US $45 for an adult and $30 for a child under 11, a
price about 50% higher than the corresponding Disney World price. The US Disney
park's formula in terms of inelasticity of demand did not apply and the demand fell
sharply (a 15% decrease in attendance for a 10% increase in price.) Attendance figures
were kept secret, but this attitude reinforced the idea that even in terms of attendance, the
objectives were not reached. The financial results were not as strong as hoped and the
very difficult economic environment contributed to not meeting the ambitious objectives.
As Eisner started an interview with Larry King, he quipped, "Everybody is giving
us 42 reasons why we've made a mistake, because we have financial problems... We are
not either responsible for the real estate crisis nor the high French interest rate, which are
dreadfully penalizing us. Not a single manager, whomever he be, could manage so many
uncontrollable forces."
Questions: Describe the importance of environmental scanning for Disney in its
EuroDisney venture. How does the marketing environment affect Disney's marketing?
Single out each of these environmental variables and suggest ways for Disney to manage
them.
42
Unit ? I
Lesson 1.5
Buyer Behaviour
Objectives
In this lesson, we will introduce you to the process through which the ultimate buyer
makes purchase decisions. After you work out this lesson, you should be able to:
Identify what stimulates a consumer to consider buying
Describe the buyer's decision making process and the several factors which
influence this decision
Understand the response of the buyer to the marketing and other stimuli
In this lesson, we will discuss the following:
What is buyer behaviour?
Models of consumer/buyer behaviour
Determinants of consumer behaviour
The consumer decision process
Marketing implications of consumer behaviour
Introduction
Why do people buy one product and not another? Answering this question is the
basic task of every marketer. The answer directly affects every aspect of marketing
strategy, from product development to pricing and promotion. Discovering that answer
requires an understanding of buyer behaviour, the process by which consumers and
business-to-business buyers make purchase decisions. Buyer behaviour is a broad term
that covers both individual consumers who buy goods and services for their own use and
organizational buyers who purchase business products. A variety of influences affect both
individuals buying products for themselves and professional buyers purchasing products
for their firms. This lesson focuses predominantly on individual consumer behaviour.
What is Buyer Behaviour?
Consumer behaviour is the process through which the ultimate buyer makes
purchase decisions. Here is a sample of popular definitions for consumer behaviour:
43
`... the study of the buying units and the exchange processes involved in
acquiring, consuming, and disposing of goods, services, experiences, and
ideas' (Mowen)
`... the decision process and physical activity individuals engage in when
evaluating, acquiring, using or disposing of goods and services' (Loudon
and Della Bitta)
`... reflects the totality of consumers' decisions with respect to the
acquisition, usage and disposition of goods, services, time and ideas by
(human) decision making units (over time)' (Jacob Jacoby)
The definition by Jacoby can be further illustrated. The totality of consumers'
decisions include whether to buy or not, what to buy, why to buy, how to buy, when to
buy, where to buy and also how much/ how often/ how long. The idea of consumption
not only includes purchasing and using, but also disposing. The marketer's offering can
mean many things ? be it product, service, time, ideas, people and so on. The term
decision making units obviously refers to people involved. In a typical purchase, many
people may be involved and they play different roles such as information gatherer,
influencer, decider, purchaser and user. In a consumer buying context, it may mean a
family or group influence where as in the industrial buying context, it means a cross-
functional team with each member of the team performing a particular role in the buying
decision. The word `time' could mean different units of time like hours, days, weeks,
months and years.
Models of Consumer/Buyer Behaviour
Consumer behaviour is a dynamic, multi-disciplinary process. The study of
consumer behaviour builds upon an understanding of human behaviour in general. In an
effort to understand why and how consumers make buying decisions, marketers borrow
extensively from the sciences of psychology and sociology. The work of psychologist
Kurt Lewin provides a useful classification scheme for influences on buying behaviour.
Lewin's proposition is B = f(P,E) which means that behaviour (B) is a function (f) of the
interactions of personal influences (P) and pressures exerted by outside environmental
forces (E). This statement is rewritten to apply to consumer behaviour as B = f(I,P) (i.e.)
44
consumer behaviour (B) is a function (f) of the interactions of interpersonal influences (I)
such as culture, role models, friends and family ? and personal factors (P) such as
attitudes, learning and perception. Therefore inputs from others and an individual's
psychological makeup both affect a consumer's purchasing behaviour. This model is
further explained in the following sections of this lesson. There are many other models of
consumer behaviour. The most generic model of consumer behaviour suggests a
stimulus-response pattern of understanding the consumer's behaviour (Figure 1.5.1). The
stimulus can be marketing stimuli (which can be manipulated by the marketer) and other
external stimuli (like the economy, culture, technology and so on). The response includes
the decision to buy, product choice, dealer choice and choices regarding time, quantity,
etc. The consumer is at the center of this model. The stimulus is applied to this consumer
who in turn comes up with a response. The consumer has his/her own characteristics and
a multi-staged decision-making process. There are also several influencing factors acting
upon the consumer. The influencing factors may include personal and interpersonal
influences.
Figure 1.5.1 A generic model of consumer behaviour
Buyer's Response
Marketing Other
Buyer's Black Box
Stimuli Stimuli
Buyer's
Product choice
Economic
Buyer's
decision
Brand choice
4 Ps
Political
character
making
Dealer choice
Cultural
-istics
process
Purchase timing
Technolog
Purchase amount
Determinants of Consumer Behaviour
Consumers don't make purchase decisions in a vacuum; rather, they respond to a
number of external, interpersonal influences and internal, personal factors.
Consumer often decide to buy goods and services based on what they believe
others expect of them. They may want to project positive images to peers or satisfy the
45
unspoken desires of family members. Marketers recognize three broad categories of
interpersonal influences on consumer behaviour: cultural influences, group influences
and family influences.
Cultural influences: Culture can be defined as the values, beliefs, preferences and
tastes handed down from one generation to the next. Culture is the broadest
environmental determinant of consumer behaviour. Therefore, marketers need to
understand its role in customer decision making. They must also monitor trends to
spot changes in cultural values. Marketing strategies and business practices that
work in one country may be offensive or ineffective elsewhere because of cultural
variations. Hence cultural differences are particularly important and complex to
understand for international marketers. Cultures are not homogeneous entities
with universal values. Each culture includes numerous subcultures ? groups with
their own distinct modes of behaviour.
Group (Social) influences: Every consumer belongs to a number of social groups.
Group membership influences an individual's purchase decisions and behaviour
in both overt and subtle ways. The influences may be informational and/or
normative. Every group establishes certain norms of behaviour. Group members
are expected to comply with these norms. Difference in group status and roles can
also affect buying behaviour. The surprising impact of groups and group norms
on individual behaviour has been called the Asch phenomenon because it was first
documented by psychologist S.E.Asch. Discussions of the Asch phenomenon
raises the subject of reference groups ? groups whose value structures and
standards influence a person's behaviour. Consumers usually try to coordinate
their purchase behaviour with their perceptions of the values of their reference
groups. Children are especially vulnerable to the influence of reference groups.
They often base their buying decisions on outside forces ? what is popular with
their friends, what is fashionable and trendy, what is popular, what are their
heroes and role models (usually, celebrities) using. In nearly every reference
group, a few members act as opinion leaders. They are the trendsetters who are
likely to purchase new products before others in the group and they share their
experiences and opinions via word of mouth. Other members' purchase decisions
are affected by the reports of the opinion leaders. Closely related to reference
groups is the concept of social class. A social class is an identifiable group of
individuals who tend to share similar values and behavior patterns different from
those of other classes. These values and behaviour patterns affect the purchase
decisions.
Family influences: The family group is perhaps the most important determinant of
consumer behaviour because of the close, continuing interactions among family
members. Like other groups, each family typically has norms of expected
behaviour and different roles and status relationships for its members. The
traditional family structure consists of a husband and wife. Although these and
other members can play a variety of roles in household decision making,
46
marketers have created four categories to describe the role of each spouse: (1)
Autonomic, in which the partners independently make equal numbers of decisions
(e.g. personal-care items) (2) Husband-dominant, in which the husband makes
most of the decisions (e.g. insurance) (3) Wife-dominant, in which the wife makes
most of the decisions (e.g. children's clothing) and (4) Syncratic in which both
partners jointly make most decisions (e.g. vacation).
Consumer behaviour is affected by many internal, personal factors, as well as
interpersonal ones. Each individual brings unique needs, motives, perceptions, attitudes,
learning and self-concepts to buying decisions.
Needs and motives: Individual purchase behaviour is driven by the motivation to
fill a need. A need is an imbalance between the consumer's actual and desired
states. Someone who recognizes or feels a significant or urgent need then seeks to
correct the imbalance. Marketers attempt to arouse this sense of urgency by
making a need `felt' and then influence consumers' motivation to satisfy their
needs by purchasing specific products. Motives are inner states that direct a
person toward the goal of satisfying a felt need. The individual takes action to
reduce the state of tension and return to a condition of equilibrium.
Perceptions: Perception is the meaning that a person attributes to incoming stimuli
gathered through the five senses ? sight, hearing, touch, taste and smell. Certainly
a buyer's behaviour is influenced by his or her perceptions of a good or service.
Attitudes: Perception of incoming stimuli is greatly affected by attitudes. In fact,
the decision to purchase a product is strongly based on currently held attitudes
about the product brand, store or salesperson. Attitudes are a person's enduring
favourable or unfavourable evaluations, emotional feelings or action tendencies
toward some object. Because favourable attitudes likely affect brand preferences,
marketers are interested in determining consumer attitudes toward their products.
Learning: In a marketing context, refers to immediate or expected changes in
consumer behaviour as a result of experience (that of self or others'). Consumer
learning is the process by which individuals acquire the purchase and
consumption knowledge and experience that they apply to future related
behaviour. Marketers are interested in understanding how consumers learn so that
they can influence consumers' learning and subsequently, their buying behaviour.
Self-concept: The consumer's self-concept ? a person's multifaceted picture of
himself or herself ? plays an important role in consumer behaviour. The concept
of self emerges from an interaction of many of the influences ? both personal and
interpersonal ? that affect buying behaviour.
47
The Consumer Decision Process
Figure 1.5.2 An integrated model of the consumer decision process
Interpersonal
Determinants
Cultural influences
Social influences
Family influences
Personal
Determinants
Information
Needs and motives
Search
Perception
Attitudes
Evaluation of
Learning
Alternatives
Self-concept
Purchase
Decision and Action
Post-Purchase
Evaluation
Consumers complete a step-by-step process to make purchasing decisions. The
length of time and the amount of effort they devote to a particular purchasing decision
depends on the importance of the desired good or service to the consumer.
Purchases with high levels of potential social or economic consequences are said
to be high-involvement purchase decisions. Routine purchases that pose little risk to the
consumer are low-involvement decisions. Consumer generally invest more time and
effort to purchase decisions for high-involvement products than to those for low-
involvement products. For example, a car buyer will probably compare prices, spend time
visiting dealer showrooms, read auto reviews and ask for advice from friends before
making the final decision. Few buyers invest that much effort in choosing between two
brands of candies. They will still go through the steps of the consumer decision process
but on a more compressed scale. Purchase decisions can be thought-based (cognitive) or
48
feeling-based (emotive). While it is true that both cognition and emotion will be present
in every purchase decision, either one of them will dominate the decision. As a result, we
can construct a grid as follows to analyze different consumer purchase decisions.
Figure 1.5.3 Classification of consumer purchase decisions
Thought-based
Feeling-based
High Example:
Example:
effort Investment decisions
Jewellery
Example:
Example:
Low Home maintenance products Snacks
effort
Figure 1.5.2 shows the five steps in the consumer decision process. First, the
consumer recognizes a problem or an unmet need. Then he/she searches for goods or
services that will fill that need and evaluates the alternatives before making a purchase
decision (and the actual purchase). After completing the purchase, the consumer
evaluates whether he/she has made the right choice. Much of marketing involves steering
the consumers through the decision process in the direction of a specific item. Consumers
apply the decision process in solving problems and taking advantage of opportunities.
Such decisions permit them to correct differences between their actual and desired states.
Feedback from each decision serves as additional learning experience to help guide
subsequent decisions.
During the first stage in the consumer decision making process, the consumer
becomes aware of the discrepancy between the actual state (`where we are now' and the
ideal state (`where we want to be'). Problem recognition motivates the individual to
achieve the desired state of affairs. A marketer can stimulate problem recognition either
by creating a new ideal state or by creating dissatisfaction with the actual state. In the
second stage, the consumer gathers information related to his/her attainment of a desired
state of affairs. This search identifies alternative means of problem solution. High-
involvement purchases may elicit extensive information searches, while low-involvement
purchases require little search activity. The search may cover internal or external sources
49
of information. During internal search, stored information, feelings and experiences
relevant to the problem-solving situation are recalled from the consumer's memory. An
external search gathers information from outside sources, which may include family
members, associates, store displays, sales representatives, advertisements and product
reviews. The external search may be a general on-going search or a specific pre-purchase
search. The search identifies alternative brands for consideration and possible purchase.
The number of brands that a consumer actually considers in making a purchase decision
is known as the evoked set. Marketers try to influence consumer decisions during the
search process by providing persuasive information about their goods or services in a
format useful to consumers.
The third step in the consumer decision making process is to evaluate the evoked
set of options identified during the search step. The outcome of the evaluation stage is the
choice of a brand or product in the evoked set or possibly a decision to renew the search
for additional alternatives, should all those identified during the initial search prove
unsatisfactory. To complete this analysis, the consumers develop a set of evaluative
criteria to guide the selection. These criteria can either be objective facts or subjective
impressions. Marketers can attempt to influence the outcome from this stage in many
ways. First, they can try to educate consumers about attributes that they view as
important in evaluating a particular class of goods. They can also identify which
evaluative criteria are important to an individual and attempt to show why a specific
brand fulfills those criteria. They can try to induce a customer to expand his/her evoked
set to include the product they are marketing.
The search and alternative evaluation stages of the decision process result in the
eventual purchase decision and the act of making the purchase. At this stage, the
consumer has evaluated each alternative in the evoked set based on his/her personal set of
evaluative criteria and narrowed the alternatives down to one. Marketers can smooth the
purchase decision and action by helping consumers through financing, delivery,
installation and so on.
The purchase act produces one of two results. The buyer feels either satisfaction
at the removal of the discrepancy between the actual and the ideal states or dissatisfaction
with the purchase. Consumers are generally satisfied if purchases meet their expections.
50
Sometimes, however, consumers experience some post purchase anxieties, called
cognitive dissonance. It is a perception that one has not made the right decision. The
consumer attempts to reduce this dissonance by searching for additional information that
confirms his/her choice. The marketer can help by providing reassuring information to
the buyer and also by positive marketing communications.
Marketing Implications of Consumer Behaviour
Marketers study consumer behaviour because it has serious marketing
implications ? be it in marketing strategy (as defined by market segmentation, targeting
and positioning) formulation or in designing the marketing mix (defined by the 4 Ps of
marketing, viz., product, price, place and promotion). The following is a list of questions
related to marketing strategy and marketing mix. The answers obviously arise from
insights and findings from the study of consumer behaviour. Consider this.
Developing a Customer-Oriented Strategy
Market segmentation
How Is the Market Segmented?
How Profitable Is Each Segment?
What Are the Characteristics of Consumers in Each Segment?
Are Customers Satisfied with Existing Offerings?
Selecting the target market
Positioning
How Are Competitive Offerings Positioned?
How Should Our Offerings Be Positioned?
Should Our Offerings Be Repositioned?
Developing Products or Services
What Ideas Do Consumers Have for New Products?
What Attributes Can Be Added to or Changed in an Existing Offering?
What Should Our Offering Be Called?
What Should Our Package and Logo Look Like?
What About Guarantees?
Making Promotion (Marketing Communications) Decisions
What Are Our Advertising Objectives?
What Should Our Advertising Look Like?
51
Where Should Advertising Be Placed?
When Should We Advertise?
Has Our Advertising Been Effective
What About Sales Promotion Objectives and Tactics?
When Should Sales Promotions Happen?
Have Our Sales Promotions Been Effective?
How Many Salespeople Are Needed to Serve Customers?
How Can Salespeople Best Serve Customers?
Making Pricing Decisions
What Price Should Be Charged?
How Sensitive Are Consumers to Price and Prices Changes?
When Should Certain
Price Tactics Be Used?
Making Distribution Decisions
Where Are Target Consumers Likely to Shop?
How Should Stores Be Designed?
Here are some specific real-life examples to emphasize the marketing
implications that arise from the study of consumer behaviour. Product positioning and
competition: Remember the classic ad campaign for CoffeeBite. It talks about the
positioning identities - What am I and Who am I. The Axe Deo campaigns strongly bring
out the positioning identity of `For whom am I?'. Also the positioning of different
supermarkets like FoodWorld, Nilgris, ApnaBazar and Subiksha answer the question `For
whom am I?'. While designing the competitive marketing strategy, one question that
bothers marketers is `Who am I competing with?'. For instance, is Xerox competing with
other photocopier makers or computer printer makers or printers? With a positioning as
`the Document company' it protects itself from marketing myopia and positions itself to
take on competition even from the substitute products. If Style-Spa, the high-end home
furniture retailer considers itself as a home expressions company, it invites competition
from antique furniture shops. Similarly, Archies, a social expressions company selling
cards and gifts, in reality competes with florists! These insights emerge from an
understanding of the consumer needs and motives which is central to consumer
behaviour.
52
Marketers are concerned about how consumers perceive their products. For
example, brands like Strepsil (with all its colours and flavours), Crocin (with interesting
mass media campaigns) can possible confuse the consumers ? are they pharmaceutical
products? self-help relievers? Are they specialty or common-place products. Consumer
perception determines the evoked set for the problem. No brand wants to be categorized
with wrong competition in the evoked set! Itchguard represents a classic case of the
creation of a new product category. The consumer need was always there until this brand
arrived and addressed this need exquisitely and exclusively. In many markets, orange
juice enjoys different perceptions ? as a breakfast drink, as a refresher drink, as a health
drink and as a health recovery drink. Same product but different consumer perceptions!
This understanding is vital for a brand like Tropicana which sells orange juice in different
markets. Also the use of celebrity endorsements (as reference groups, opinion leaders) is
attributed to its role in consumer behaviour. The use of cricketers like Sachin Tendulkar
and Bollywood stars like Aishwarya Rai in advertisements attempts to shape and
influence consumer behaviour in favour of the brands they endorse. Another classic
example is the `Got milk?' campaign featuring several celebrities in support of milk as a
healthy drink and endorsing its consumption. Check out for more about this campaign at
www.whymilk.com. In Eastern cultures, group values are stressed over the individual's.
So the appeal to normative beliefs takes on greater significance while designing
marketing communications in the Eastern cultures.
A study of consumer learning reveals how consumers generalize related
marketing stimuli. Based on this, there are several marketing applications ? product-line
extension (Pepsi Lemon), product-form extension (Pepsi can), product-category
extension (Aquafina), Family branding (Nestle's Maggi, HP Pavillion), Licensing
(Tommy, CK, Disney ? in several product categories to several merchandisers), usage
situation generalization (an all-hair shampoo).
The study of consumer behaviour is a very exciting field of marketing. Marketing
begins and ends with consumers. As a result, the study of consumer behaviour permeates
all of marketing.
53
Case Study 1.5.1 Marketing Beyond the Veil
Many marketers think that marketing to Saudi Arabian women is a very difficult
task. Women in Saudi remain behind the purdah and it is difficult to talk to them.
Saudi Arabia is one of the largest markets in west Asia and is a homogenous
society. There exists a wrong notion among some marketers that Saudi women are
passive consumers. Many Saudi women are often highly educated. About 3,80,000
women work in Saudi Arabia and the number of female students in the colleges is set to
rise about 1,75,000 in the next two years. Most women work in the traditional fields of
health and education. Some are even employed in retailing, designing, publishing and
manufacturing.
They are exploring ways to sell products to Saudi women since Saudi Arabia is
considered a young market. Shopping malls are an utter flop as women find these out-of-
town malls inconvenient. MNCs have realized that Saudi women are brand conscious and
make the buying decision for household items. MNCs have been searching intensively
for women who can act as intermediaries between the company and the clients and those
who have links with colleges, women groups, etc.
Marketers should now stop underestimating the sophistication of Saudi women as
consumers. It is time they recognized that they are the emerging economic force. A
women emerging out of a car fully covered by the purdah, may hold a degree in finance
or law or medicine and so on, and she may be a potential consumer given her educational
background and culture.
Questions: List out the differences between Consumer Behaviour of Women in a closed
culture (as described by this case) in Saudi Arabia and in a open culture (say, in Western
Eupore). Highlight the cultural implications for a Woman consumer and also for a
marketer in the given context. Think of creative applications of `reference groups' to
market to the Saudi Arabian Women, say for a personal care product.
Case study 1.5.2 That CSR (Corporate Social Responsibility) thing!
[Source: Business Today, May 8, 2005]
It shouldn't surprise anyone that Indian companies have just discovered the
marketing pay-off of their corporate social responsibility (CSR) initiatives. They could
get by with focusing on real or perceived product attributes, and with profit-mindedness
54
being considered a coarse sentiment, any CSR programme they launched was far
removed from their core businesses, brands, even consumers.
There has been a spate of corporate CSR initiatives over the past few years.
Companies have been quick to respond to crises (such as the Gujarat earthquake or the
Tsunami that hit the southern part of the country) or shown inherent goodness in plugging
gaps in the government's efforts to provide healthcare and education to all ? in a country
as vast as India, there will always be gaps ? but there has been little effort to link such
work to things such as marketing, even corporate strategies. Most CSR activities are, at
best, charity, not very different from discrete acts of philanthropy and, at worst, a mere
humane fa?ade of a for-profit-only capitalist system.
This is why recent advertising campaigns by the country's two largest fast moving
consumer goods (FMCG) companies, Hindustan Lever Limited (HLL) and ITC are
significant. The first, a campaign for Surf Excel Quick Wash with the tagline Do bucket
paani ab rozana hai bachnai (I will save two buckets of water a day), has struck a chord
in a country where the shortage of water is an endemic phenomenon. "We decided it
would be of immense benefit to a household if a technology could be developed that
would reduce the water consumed in the washing of clothes and the amount of effort
required while rinsing while delivering superlative cleanliness", says an HLL
spokesperson. Surf's sales, say sources in the market, have gone up by as much as 15%
since the advertisement, starring actress-turned-social-activist and former Member of
Parliament, Shabana Azmi, went national (the company had tested the strategy in water-
starved Tamil Nadu last year with another actress-turned-social-activist Revathy Menon).
Then, there is ITC's Working for you, working for India campaign, one strand of
which focuses on the company's e-choupal initiative, an effort that seeks to enhance rural
incomes, then, sell a variety of products and services to rural customers (apart from
sourcing agricultural produce from them). The tagline itself smacks of old-style image-
led CSR activity, but given what the e-choupal does, it is actually an attempt to build and
position the company's brand around the idea of doing something for the country.
In some ways, ITC's e-choupal is a far stronger example of a CSR-brand linkage
than the Surf Excel campaign. It is a programme that is obviously advantageous to the
company, yet it is accomplished by enough socially relevant goodies to make it look the
55
way a government programme targeted at rural development ideally should. HLL,
coincidentally, has an initiative that fits the bill, its Project Shakthi that uses Women's
self help groups in rural areas to further its reach. "The problem with old-style CSR was
that the benefactors were not in control of what they would get", says Vivek Vaidya, a
brand consultant. With brand or corporate strategy driven CSR, they are.
Questions: Explain the success of Do bucket paani ab rozana hai bachnai (I will save
two buckets of water a day) campaign for Surf Excel. What consumer behaviour insights
can you draw from this case. Identify the personal and interpersonal factors that affect
consumer behaviour for the product/service described in the case.
56
Unit ? I
Lesson 1.6
Market Segmentation, Targeting and Positioning
Objectives
In this lesson, we will introduce you to the activities, viz., segmentation, targeting and
positioning, that are collectively referred to as marketing strategy. After you work out
this lesson, you should be able to:
Segment the markets based on several segmentation variables
Target a segment by identifying the fit between segment profitability and
organizational capability
Position your product/service so that it occupies a distinct and valued place in the
target customers' minds
In this lesson, we will discuss the following:
The logic of segmentation
Segmentation analysis
Segmentation variables for consumer markets and industrial markets
Targeting approaches
Positioning identities
Differentiation across the consumption chain
Introduction
Development of a successful marketing strategy begins with an understanding of
the market for the good or service. A market is composed of people or institutions with
need, sufficient purchasing power and willingness to buy. The market place is
heterogeneous with differing wants and varying purchase power. The heterogeneous
marketplace can be divided into many homogeneous customer segments along several
segmentation variable. The division of the total market into smaller relatively
homogeneous groups is called market segmentation. Products seldom succeed by
appealing to everybody. The reasons are simple: not every customer is profitable nor
worth retaining, not every product appeals to every customer. Hence the organizations
look for a fit between their competencies and the segments' profitability. The identified
segments are then targeted with clear marketing communications. Such communications
are referred to as positioning the product or service in the mind of the customer so as to
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occupy a unique place. This involves identifying different points of differentiation and
formulating a unique selling proposition (USP). In today's marketplace, differentiation
holds the key to marketing success. This lesson is about marketing strategy formulation
which consists of market segmentation, targeting and positioning.
The logic of Segmentation
The concept of market segmentation has helped marketing decision making since the
evolution of marketing. The goal of market segmentation is to partition the total market
for a product or service into smaller groups of customer segments based on their
characteristics, their potential as customers for the specific product or service in question
and their differential reactions to marketing programs. Because segmentation seeks to
isolate significant differences among groups of individuals in the market, it can aid
marketing decision making in at least four ways:
1. Segmentation helps the marketer by identifying groups of customers to whom he
could more effectively `target' marketing efforts for the product or service
2. Segmentation helps the marketer avoid `trial-and-error' methods of strategy
formulation by providing an understanding of these customers upon which he can
tailor the strategy
3. In helping the marketer to address and satisfy customer needs more effectively,
segmentation aids in the implementation of the marketing concept
4. On-going customer analysis and market segmentation provides important data on
which long-range planning (for market growth or product development) can be
based.
Although it is a very useful technique, segmentation is not appropriate in every
marketing situation. If, for instance, a marketer has evidence that all customers within a
market have similar needs to be fulfilled by the product or service in question (i.e. an
undifferentiated market), one `mass' marketing strategy would probably be appropriate
for the entire market. However, in today's market environment, it is unlikely that one
would find either an entirely homogeneous market,
Activity 1.6.1
Consider the toothpaste market. Nearly everyone uses it. Yet, the toothpaste
manufacturers have found that consumers have different ideas about what they would like
the product to do. Prepare a list of what consumers want their toothpastes to do to them.
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1.
2.
3.
4.
5.
6.
7.
8.
Criteria for Segmentation
If segmentation has to be useful in marketing decision making, then it must possess
the following characteristics:
1. Segments must be internally homogeneous --- consumers within the segment will
be more similar to each other in characteristics and behaviour than they are to
consumers in other segments.
2. Segments must be identifiable --- individuals can be `placed' within or outside
each segment based on a measurable and meaningful factor
3. Segments must be accessible --- can be reached by advertising media as well as
distribution channels. Only then, the segments can be acted upon.
4. Segments must have an effective demand --- the segment consists of a large group
of consumers and they have the necessary disposable income and ability to
purchase the good or service.
Segmentation Analysis
Here is a list of few general steps, referred to as segmentation analysis, that will
be most often followed after the decision to employ market segmentation has been made.
Examples of questions to be answered during each step are also given.
Step-1 Define the purpose and scope of the segmentation
What are our Marketing Objectives?
Are we looking for new segments or determining how to better satisfy existing
ones?
Will we use existing data or invest time and money in new research?
What level of detail will be needed in the segmentation analysis?
Step-2 Analyze total Market Data
What is the character of the total market? (e.g. size)
Are there basic differences between users and non-users of the product class?
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Are there any factors which clearly distinguish users from non-users or users of
different brands?
What is our competitive position in the market now?
Step-3 Develop segment profiles
What factor seems to differentiate groups of consumers most clearly?
Are the profiles of each segment internally consistent?
Step-4 Evaluate segmentation
What are the major similarities and differences among segments?
Should the number of segments described be reduced or increased?
How sensitive is this segmentation of the market to growth?
Step-5 Select target segment(s)
Which segment(s) represent our best market opportunity?
What further details do we know about the target segment's characteristics and
market behaviour?
If complete data on market behaviour for the target segment are not available, can
we make reasonable assumptions?
Are we alone in competing for this target segment?
Step-6 Designing the marketing strategy for the target segment
What type of product do these consumers want?
What kinds of price, promotion or distribution tactics will best suit their needs?
Would other segments react positively to a similar strategy? (if so, the segments
should probably be merged)
Step-7 Reappraisal of segmentation
Do we have the resources to carry out this strategy?
If we wish to broaden or change our target definition in the future, how flexible is
the strategy?
If we wish to change some element of the strategy in the future, how would that
change probably influence the target segment?
Does the target segment/strategic plan meet our objective? Does it fit our
corporate strengths?
Segmenting the Consumer Markets
Consumer markets are those where the products are purchased by ultimate
consumers for personal use. Industrial markets are those where the goods and services are
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purchased for use either directly or indirectly in the production of other goods and
services for resale. Market segmentation of these markets use different variables. The
consumer market segmentation variables appear to fall into two broad classes:
consumers' background characteristics and consumers' market history. The following
tables illustrate the most important factors and variables that have been found useful for
market segmentation.
Table 1.6.1 Segmentation using consumer background characteristics
Segmentation
Some examples of
Comments
variable
variables Measured
Geography
Region of product
Geographic segmentation is one of the
distribution
oldest and most basic of market
Cultural differences
descriptors. In most cases, it alone is note
Mobility of
sufficient for a meaningful consumer
consumers
segmentation
Demographic
Age
Also basic and included as a variable in
Sex
most segmentation analyses.
Income
Demographic profiles of segments are
Educational level
important especially when making later
Social status
advertising media decisions
Psychographic
Personality traits
Psychographic variables are more useful
Perceptual styles
because there is often no direct link
Attitudes
between demographic and market
Reference groups
behaviour variables. These consumer
Social roles
profiles are often tied more directly to
purchase motivation and product usage
General life-style
Correlation of
Provides a rich, multi-dimensional profile
demographic and
of consumers that integrates individual
psychographic
variables into clearer pattern that
variables
describes the consumer's routines and
Activities and
general `way of life'
interests
Table 1.6.2 Segmentation using consumers' market history
Segmentation
Some examples of
Comments
variable
variables measured
Product usage
Frequency of
Segmenting the market into heavy,
brand/product use
medium, light and non-users gives good
Brand loyalty
understanding of present situation in
Attitudes toward
market
product
Product benefit
Expectations of
Very useful if product can be positioned
product performance in a number of ways. Primary use of this
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Needs product must
variable segments the market into
fill
groups that look for different product
Perceptions of
benefits
brands
Satisfaction
(dissatisfaction
measures)
Decision-process
Shopping patterns
Use of this variable segments the market
Media-use patterns
into price/non-price sensitive,
Product information
shoppers/impulse buyers and other
searches
segments which characterize the market
Sensitivities to price, behaviour of each group. Must be used
to promotion and to
in conjunction with analysis of
place (channel)
consumer characteristics to allow
identification of the individuals involved
Activity 1.6.2
Refer to the activity 1.6.1. From what you had noted down as the `wants' of toothpaste
consumers, match each of those wants with the segmentation variables listed below
1. Consumer background characteristics
1.1 Geography
-
1.2 Demographic
-
1.3 Psychographic
-
1.4 General life-style -
2. Consumers' market history
2.1 Product usage
-
2.2 Product benefit
-
2.3 Decision-process -
Segmenting the Industrial Markets
Industrial marketing needs to consider two important sets of characteristics of the
business buyers: (1) the characteristics of the buyer as a consuming organization and (2)
the behavioural characteristics of the buyer. The first set includes such factors as the type
of the organization, the size, the product requirements, the end use of the product, the
organization capabilities and so on. The second set includes factors like the buying
decision making process and considers the fact that it is in effect people and the
organization, who take the decision. These characteristics have led to a two-stage
approach to industrial market segmentation starting with a macro segmentation and then
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going into a micro segmentation. Between the macro and micro bases of industrial market
segmentation, there lie some useful bases of segmentation, as suggested by Shapiro and
Bonoma in the Nested approach to segmenting the industrial markets. These intermediate
bases of segmentation, viz., demographics, operating variables, purchasing approaches,
situational factors and personal characteristics, are explained in Table 1.6.3. The table
lists major questions that business marketers should ask in determining which customers
they want to serve. By targeting these segments instead of the whole market, companies
have a much better chance to deliver value to customers and to receive maximum rewards
for close attention to their needs.
Table 1.6.3 Major Segmentation variables for Industrial Markets
Segmentation
Examples of
Comments
variable
variables measured
Demographics Industry
Which industries that buy this product
should we focus us?
Company size
What size companies should we focus on?
Location
What geographical areas should we focus
on?
Operating
Technology
What customer technologies should we
variables
focus on?
User/non-user
Should we focus on heavy, medium or
status
light users or non-users?
Customer
Should we focus on customers needing
capabilities
many or few services?
Purchasing
Organization
Should we focus on companies with
approaches
centralized or decentralized purchasing?
Power structure
Should we focus on engineering or
finance or marketing ?dominated
Nature of existing
companies?
relationship
Should we focus on companies with
General purchase
which we already have strong
policies
relationships or just go after the most
Purchasing criteria desirable companies?
Should we go after companies that prefer
leasing? Service contracts? Systems
purchases? Sealed bidding?
Should we focus on companies that are
seeking Quality? Service? Price?
Situational
Urgency
Should we focus on companies that need
factors
quick delivery or service?
Specific
Should we focus on certain applications of
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application
our product rather than all applications?
Size of order
Should we focus on small or large orders?
Personal
Buyer-seller
Should we focus on companies whose
characteristics
similarity
people and value are similar to ours?
Attitudes toward
Should we focus on risk-taking or risk-
risk
avoiding customers?
Loyalty
Should we focus on companies that show
high loyalty to their suppliers?
Targeting Approaches
Target market selection is the next logical step following segmentation. Once the
market-segment opportunities have been identified, the organization got to decide how
many and which ones to target. Lot of marketing effort is dedicated to developing
strategies that will best match the firm's product offerings to the needs of particular target
segments. The firm should look for a match between the value requirements of each
segment and its distinctive capabilities. Marketers have identified four basic approaches
to do this:
1. Undifferentiated Marketing
A firm may produce only one product or product line and offer it to all
customers with a single marketing mix. Such a firm is said to practice
undifferentiated marketing, also called mass marketing. It used to be much more
common in the past than it is today. A common example is the case of Model T
built by Henry Ford and sold for one price to everyone who wanted to buy. He
agreed to paint his cars any colour that consumers wanted, `as long as it is black'.
While undifferentiated marketing is efficient from a production viewpoint
(offering the benefits of economies of scale), it also brings in inherent dangers. A
firm that attempts to satisfy everyone in the market with one standard product
may suffer if competitors offer specialized units to smaller segments of the total
market and better satisfy individual segments.
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2. Differentiated Marketing
Firms that promote numerous products with different marketing mixes
designed to satisfy smaller segments are said to practice differentiated marketing.
It is still aimed at satisfying a large part of the total market. Instead of marketing
one product with a single marketing program, the firm markets a number of
products designed to appeal to individual parts of the total market. By providing
increased satisfaction for each of many target markets, a company can produce
more sales by following a differentiated marketing approach. In general, it also
raises production, inventory and promotional costs. Despite higher marketing
costs, a company may be forced to practice differentiated marketing in order to
remain competitive.
2. Concentrated Marketing
Rather than trying to market its products separately to several segments, a
firm may opt for a concentrated marketing approach. With concentrated
marketing (also known as niche marketing), a firm focuses its efforts on
profitably satisfying only one market segment. It may be a small segment, but a
profitable segment. This approach can appeal to a small firm that lacks the
financial resources of its competitors and to a company that offers highly
specialized good and services. Along with its benefits, concentrated marketing has
its dangers. Since this approach ties a firm's growth to a particular segment,
changes in the size of that segment or in customer buying patterns may result in
severe financial problems. Sales may also drop if new competitors appeal
successfully to the same segment. Niche marketing leaves the fortunes of a firm to
depend on one small target segment.
3. Micro Marketing
This approach is still more narrowly focused than concentrated marketing.
Micro marketing involves targeting potential customers at a very basic level, such
as by the postal code, specific occupation or lifestyle. Ultimately, micromarketing
may even target individuals themselves. It is referred to as marketing to segments
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of one. The internet allows marketers to boost the effectiveness of
micromarketing. With the ability to customize (individualization attempts by the
firm) and to personalize (individualization attempts by the customer), the internet
offers the benefit of mass customization ? by reaching the mass market with
individualized offers for the customers.
Figure 1.6.1 Market targeting approaches
Company
Marketing
Market
Mix
UNDIFFERENTIATED MARKETING
Company Marketing
Segment1
Mix 1
Company Marketing
Segment2
Mix 2
Company Marketing
Segment3
Mix 3
DIFFERENTIATED MARKETING
Segment1
Company
Marketing
Segment2
Mix
Segment3
CONCENTRATED MARKETING
Company Marketing
Customer 1
Mix 1
Company Marketing
Customer 2
Mix 2
Company Marketing
Customer 3
Mix 3
MICROMARKETING
Activity 1.6.3
Match the following real life marketing examples with the above mentioned targeting
approaches.
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1. Titan now selling fashion eyewear and watches apart from the regular watches
2. A promotional email from Amazon.com based on your previous purchases
3. Air Deccan with its no-frills, single-class airline model
4. The battery-operated, eco-friendly electric car, Reva
Positioning
Having chosen an approach for reaching the firm's target segment, marketers
must then decide how best to position the product in the market. The concept of
positioning seeks to place a product in a certain `position' in the minds of the prospective
buyers. Positioning is the act of designing the company's offer so that it occupies a
distinct and valued place in the target customers' minds. In a world that is getting more
and more homogenized, differentiation and positioning hold the key to marketing
success!
The positioning gurus, Al Ries and Jack Trout define positioning as: Positioning
is ... your product as the customer thinks of it. Positioning is not what you do to your
product, but what you do to the mind of your customer. Every product must have a
positioning statement. A general form of such a statement is given below:
Product X is positioned as offering (benefit) to (target market) with the competitive
advantage of (competitive advantage) based on (basis for competitive advantage)
For example, the positioning statement of toothpaste X may read as follows:
Toothpaste X is positioned as offering to kids a toothpaste made especially for those kids
who don't like to brush with the competitive advantage of a mild fruit taste and lower
foaming.
One way to think about positioning is to imagine a triangle, with the baseline
anchored by the organization and competitor concerns and the apex, the customers. The
marketer's job is to find a positioning of the product or service that is both possible and
compatible with organization constraints which uniquely places the product/service
among competitive offerings so as to be most suitable to one or a number of segments of
customers.
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Customer
Positioning =
Differentiation +
Segmentation
Competitors
Positioning can be done along different possibilities. Attribute positioning is when
the positioning is based on some attribute of the product. Benefit positioning is when a
derived benefit is highlighted as the unique selling propositioning. Competitor
positioning is when a comparison is drawn with the competitor and a differentiation from
the competitor is emphasized. Product category positioning is when a product is
positioned to belong to a particular category and not another category which probably is
crowded. Quality/price positioning is when the product is positioned as the best value for
money. For example, a Pizza may be positioned on its taste or it's natural contents or as
an easy meal or with a thicker topping or as the lowest priced offering the best value for
money. Each one of them offers a distinct positioning possibility for a pizza.
In the positioning decision, caution must be taken to avoid certain positioning
errors: Underpositioning is done when a unique, but not so important attribute is
highlighted. As a result, the customer does not see any value in such a position.
Overpositioning is done when the product performance does not justify the tall claims of
positioning. Confused positioning is when the customer fails to categorize the product
correctly and the product ends up being perceived differently from what was intended.
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Doubtful positioning is when the customer finds it difficult to believe the positioning
claims.
Positioning map is a valuable tool to help marketers position products by
graphically illustrating consumers' perceptions of competing products within an industry.
For instance, a positioning map might present two different characteristics, price and
quality, and show how consumers view a product and its major competitors based on
these traits. Marketers can create a competitive positioning map from information
solicited from consumers or from their accumulated knowledge about a market.
Activity 1.6.4
Draw a positioning map to describe the toothpaste market. Choose any two
characteristics to show how the different brands can be viewed based on these traits.
Sometimes, changes in the competitive environment or cultural environment force
marketers to reposition a product ? changing the position it holds in the minds of
prospective buyers relative to the positions of competing products. Nestle's Milkmaid
brand has undergone few repositionings in the last few decades. The original positioning
as `sweetened condensed milk as a milk substitute' became obsolete when India attained
self-sufficiency in milk production and milk products. So Milkmaid was repositioned as a
`ready ingredient' in preparing home-made sweets. Recipes started appearing on the
labels. It succeeded for a certain period of time. Soon the Indian households were no
longer making home-made sweets, but rather consuming ready-made, packaged sweets.
If it was an economic environment factor that necessitated a repositioning earlier, it was
now the changing demographic of the Indian homes. Milkmaid took another successful
attempt at repositioning. Milkmaid was then repositioned as a `central ingredient' in
making the deserts at home. The recipes naturally changed. Repositioning helps a firm to
tide over the environmental changes and the changes in consumers' preferences. It
extends the life of a brand.
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Positioning Identities
Positioning is creating an identity to your product. This identity is a cumulative of
the following four positioning identities.
1. Who am I?
It refers to the corporate credentials like the origin, family tree and the `stable'
from which it comes from. For instance, think of the mental associations when a
buyer buys a Japanese car and it is a Honda!
2. What am I?
It refers to the functional capabilities. The perceived brand differentiation is
formed using the brand's capabilities and benefits. For instance, the Japanese cars
are known for their fuel-efficiency, reasonable-price and utility-value.
3. For whom am I?
It refers to the target segment for the brand. It identifies the that market segment
for which his brand seems to be just right and has competitive advantage. For
instance, the Japanese car makers have traditionally focused on the quality-
conscious, value-seeking and rather-serious car buyer
4. Why me?
It highlights the differential advantage of the brand when compared to the
competing brands. It gives reasons as to why the customer should select this brand
in preference to any other brand. For instance, Japanese car makers have tried to
score a competitive advantage on the lines of quality and technology
Differentiation Across the Consumption Chain
A research finding suggests that there are one million branded products in the
world today. As a result, the market is increasingly competitive and confusingly crowded.
For the customers, it means more choices than they know how to handle and less time
than they need to decide. For the marketers, it is hyper-competition and continuous
struggle to win the attention and interest of choice-rich, price-prone customers. The
tyranny of choice for the buyers are represented by the following facts:
An average hypermarket stocks 40,000 brand items (SKUs)
An average family gets 80% of its needs met from only 150 SKUs
That means there's a good chance that the other 39,850 items in the store will be
ignored
The implication is that those that don't stand out will get lost in the pack! The average
customer makes decisions in more than 100 product/service categories in a given month.
He/she is exposed to more than 1600 commercials a day. Of this, 80 are consciously
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noticed and about 12 provoke some reaction. The challenge for marketers is: how to get
noticed (i.e. differentiation) and be preferred (i.e. positioning)?
Most profitable strategies are built on differentiation (i.e.) offering customers
something they value that competitors don't have. A close look at consumer behaviour
reveals that people buy on the differences. An ability to create compelling differences
remains at the heart of a firm's competitive advantage. The battle has always been (and
still is) about differentiation - create winning differences in customers' minds.
People pay attention to differences (though at different levels) and tend to ignore
undifferentiated products. Here is an example of how Nike (the top-dog sports shoe
brand) creates winning differences at cognitive, normative and wired-in levels in the
buyer.
1. Cognitive (conscious decisions) Level
`I buy Nike because it's made of engineered materials which enable higher
athletic performance'
2. Normative (semiconscious feelings) level
`I buy Nike because it's "in" with my crowd'
3. Wired-in (subconscious determinants) level
(`Nike appeals to my desire to be cool, fashionable, strong, aggressive ...')
Organizations use several differentiation dimensions. The most popular are
product differentiation, service differentiation, personnel differentiation, channel
differentiation and image differentiation.
Activity 1.6.5
Match the following brands with their chosen differentiation dimensions.
1. Apple's iMac (with an innovative product design)
2. Honda's bikes (In the US market, they did an image make-over for bike riders to
differentiate from the image created by Harley-Davidson bike riders)
3. Singapore airlines (highlighting the `Singapore airlines girl' is its campaign)
4. Dell computers (Dell becoming synonymous with Direct (channels) selling)
5. Cemex cement (using GPS to deliver ready-mix concrete just-in-time)
Most firms while seeking to differentiate themselves from the competition focus
their energy only on their products and services. In a Harvard Business Review article,
MacMillan and McGrath, advocate that a company has the opportunity to differentiate
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itself at every point where it comes in contact with its customers ? from the moment the
customers realize that they need a product or service to the time when they no longer
want it and decide to dispose of it ? that is, anywhere along the spectrum of the
Consumption chain ? from need recognition to product disposition. Based on this idea,
some avenues for differentiation are listed below:
How do people become aware of their need for your product/service?
? If you can make consumers aware of a need in a way that is unique and
subtle, that's a powerful source of differentiation!
How do customers find your offering?
? Opportunities for differentiating on the basis of the search process that is
made less complicated, more convenient, less expensive and more
habitual.
How do customers order and purchase your product/service?
? Differentiating by making the process of ordering and purchasing more
convenient
How is your product/service delivered?
? Delivery affords many hard-to-duplicate opportunities for differentiation
What happens when your product/service is delivered?
? An often overlooked opportunity between product/service delivery and
usage; opening, inspecting, assembling are real issues for customers
How is your product installed?
? Differentiation that is particularly relevant for companies with complex
products
What help do customers need when they use your product?
? Most helpful and fastest response gives a cut above the rest
How is your product moved around?
? Addressing the difficulties experienced in transporting a product from one
location to another
How is your product repaired or serviced or exchanged?
? Differentiating by being proactive and practicing acceptance
What happens when your product is disposed of or no longer used?
- Differentiation opportunities through Responsible marketing and
Green Marketing
Activity 1.6.6
Think of how the petrol bunks have evolved over the years ? starting from selling a
commodity to marketing a branded product in landscaped locations! Is there a way to
differentiate selling petrol?
Case study: HLL goes adult with its ice creams
(Excerpt from Business Today, May 8, 2005)
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The summer looks hot. That isn't the weatherman talking, but the ice cream
marketer, who seems to have abandoned an age-old positioning of the product (as a fun,
family treat) in favour of a new one: as an adult indulgence. Leading the new strategy is
HLL, which has reworked the marketing communication of its Kwality brand to
something more risqu?. Its TV and billboard ads show adults "pleasuring it up" quite
suggestively. What's up? According to an HLL spokesperson, the repositioning is "a bid
to reflect the sensorial awakening in society". "Evidence of which", the spokesperson
continues, "is to be found in the spending one sees at malls and multiplexes". At any rate,
says the spokesperson, given that half of the country's population is between 18 and 34,
its new communication better reflects its image as a youthful and indulgent brand. Rivals
haven't yet followed suit. On the contrary, ones like the Anand-based milk marketing
cooperative Amul, whose officials were not available for comment, are sticking to their
family-centric campaigns, Will HLL's new positioning put its Rs.89 crore (2004 revenue)
ice cream business on the boil? Hard to say. For, this is one category where availability
plays a bigger role than just branding.
Question: What are the market segmentation, targeting and positioning insights
that you draw from this case? Why is HLL repositioning its Kwality brand of ice
creams?
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Unit ? I
Lesson 1.7
Introduction to Marketing Mix
Objectives
In this lesson, we will introduce you to the activities that comprise a firm's marketing
program. These activities are popularly referred to as the 4 Ps ? product, price, place and
promotion. After you work out this lesson, you should be able to:
Understand the major product decisions in marketing planning
Know the pricing objectives and the factors that influence the pricing decisions
Appreciate the role of marketing channels and understand the important channel
decisions to be taken
Comprehend the Promotion Mix of marketing and the different elements in the
promotion mix
Learn how the 4 Ps combine to create effective marketing programs
In this lesson, we will discuss the following:
The sub-elements of each of the 4 Ps of marketing
Marketing programs
Product management decisions
Channel management
Marketing communications
Pricing basis, objectives and approaches
Introduction
After marketers select a target market, they direct their activities towards profitably
satisfying that segment. Although they must manipulate many variables to reach this
goal, marketing decision making can be divided into four areas: product, price, place
(distribution) and promotion (marketing communication). The total package forms the
marketing mix ? the blending of the four elements to fit the needs and preferences of a
specific target market. These are the four variables that a marketer can use in different
combinations to create value for customers. Several of the sub-elements in each of the
four Ps that constitute the marketing mix are listed in the following table.
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Elements of the Marketing Mix
Sub-Elements
Product
Product design
Product positioning
Product name and branding
Packaging and labeling
Breadth and depth of product line
Level and type of customer service
Product warranty
New product development process
Product life cycle strategies
Price
Manufacturer, wholesaler and retailer selling
prices
Terms and conditions
Bidding tactics
Discount policies
New product pricing (Skim Vs. Penetrating
pricing)
Promotion (marketing
Advertising
communications)
Sales force policies
Direct marketing (mail, catalog)
Public relations
Price promotions ? for the consumers and the
channel
Trade shows and special events
Place (distribution channels)
Direct Vs. Indirect channels
Channel length
Channel breadth (exclusive, selective or
intensive)
Franchising policies
Policies to ensure channel coordination and
control
Marketing Programs
A marketing program is made up of the various elements of the marketing mix
and the relationships among them. The concept of the marketing mix emphasizes the fit
of the various pieces and the quality and size of their interactions. There are three degrees
of interaction ? consistency, integration and leverage. Consistency is the lack of a poor fit
between two or more elements of the marketing mix. For example, to sell a high quality
product through a low quality retailer would seem inconsistent. While consistency is the
lack of a poor fit, integration is the presence of a positive, harmonious interaction among
the elements of the mix. For example, heavy advertising can sometimes be harmonious
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with a high price, because the added margin from the high price pays for the advertising
and the high advertising creates the brand differentiation that justifies the high price.
Leverage is the situation in which each individual element of the mix is used to the best
advantage in support of the total mix.
Once the elements of the marketing mix have met the internal tests of consistency,
integration and leverage, the next step is to check that the proposed program fits the
needs of the target customers, the core competencies of the company and the likely
responses of key competitors.
The concept of program/customer fit encompasses development of a marketing
program that fits the needs of the target-market segments. For that, the market must first
be carefully and explicitly delineated. If the target has not been defined, it cannot be
reached! The program must not only fit the market, but also fit the company. A marketing
program must match the core competencies of the company that is implementing it. For
example, an organization with extensive mass advertising experience and expertise is
more likely to be able to carry out a program that leans heavily on advertising than an
organization less strong in that particular area. An effective marketing program must not
only fit the company's own core competencies, it must also take account of competitors'
programs. Competitive/program fit can be defined as the characteristic of a marketing
program that, while building on a company's strengths and shielding its weaknesses,
protects it from competitors by capitalizing on their weaknesses, in the process creating a
unique market personality and position.
Like most concepts, the marketing mix is an abstraction and real marketing
programs do not always fit perfectly the product, price, place and promotion paradigm. In
fact, several parts of the mix fall at the interface of two elements. For example, brand,
which is often views as an aspect of product, is clearly also part of marketing
communications and can serve to help coordinate product policy and communication.
Product Management Decisions
Product decisions start with an understanding of what a product is, viz., the
product offering is not the thing itself, but rather the total package of benefits obtained by
the customer. This is called as the total product concept. For example, a watch from
Rediff.com is not just a watch but one shipped within 24 hours of order and
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unconditionally guaranteed. This broad conception of a `product' is key to seeing
possible points of differentiation from competitors. The following chart illustrates the
total product concept.
Augmented Product
Installation
Packaging
After-Sale
Brand
Features
Service
Name
Core Benefit
Delivery
or Service
& Credit
Quality
Design
Level
Warranty
Expected Product
Generic Product
The `generic' product is no longer sought (leave alone bought!) by the customers.
It merely represents customer need fulfillment. The expected product represents the
customers' minimal purchase conditions. When such customer expectations are met, it
leads to customer satisfaction. The augmented product represents the customers' wish-
list. It leads to customer delight. Beyond the augmented product, lies the potential
product which represents all that this product can become in the future. It represents the
customers' dream.
Activity 1.7.1
Illustrate the product hierarchy or `total product concept' with an example.
Core benefit
-
Basic product
-
Expected product
-
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Augmented product -
Potential product
-
A taxonomy of product line planning decisions can be developed by considering
some product planning decisions firms face. Product line breadth: How many different
lines will the company offer? A guiding principle in answering breadth questions is the
company's position on desired consistency or similarity between the lines it offers.
Product line length: How many items will be there in a line providing coverage of
different price points?
Product line depth: How many types of a given product?
Individual item decisions: decisions on individual items need to be considered within the
context of the firm's full product line due to item interrelationships. At the individual
item level, decisions to be made are whether to undertake efforts to delete an item from
the line (pruning), reposition an existing product within the line (balancing), improve the
performance of an existing product to strengthen its positioning (modernization),
introduce a new product within an existing line (filling) and introduce a product to
establish a new line (extension). The assortment of product lines and individual product
offerings is called as the product mix.
A proactive approach to new product development follows some form of a
sequential process, for example,
opportunity identification
design
testing
product introduction and
life cycle management.
In the opportunity identification stage, the firm identifies a customer problem that it
can solve. In addition it identifies the concept for a product through idea generation and
screening initiatives. The next two stages, design and testing are linked in an iterative
process. The firm must first embody the product idea in a concept statement which is
tested via presentation to potential customers. After the firm has settled on the product
and a supporting plan, it reaches product introduction. Decisions at this stage involve the
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geographic markets to which the product will be introduced and whether markets will be
approached at the same time or sequentially over time. After introduction, a process of
Product Life Cycle Management begins. The Life Cycle stages are introduction, growth,
maturity and decline. The marketing objectives vary across these stages ? so do the sales,
profits and costs. The marketing mix also changes from stage to stage.
The first P of marketing, namely, the product also looks at how firms build and
maintain identity and competitive advantage for their products through branding.
Functions like packaging and labeling also perform specific functions within the ambit of
product management.
Place (Channel Management)
The marketing channel is the set of mechanisms or network via which a firm
`goes to market' or is `in touch' with its customers for a variety of tasks ranging from
demand generation to physical delivery of the goods. The customer's requirements for
effective support determine the functions which the members of the channel must
collectively provide.
Eight generic channel functions can be identified, viz.,
1. Product information
2. Product customization
3. Product quality assurance
4. Lot size (e.g. the ability to buy in small quantities)
5. Product assortment (refers to breadth, length and width of product lines)
6. Availability
7. After-sale service
8. Logistics
Marketers develop channels and formulate distribution plans to ensure that
consumers find their products available in the proper quantities at the right times and
places. Distribution decisions involve transportation, warehousing, inventory control,
order processing and selection of marketing channels. Marketing channels are made up of
institutions such as wholesalers and retailers ? all those involved in a product's
movement from producer to final consumer. The two major decisions in channels are: (1)
Channel design ? which involves both a length and breadth issue, and (2) Channel
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management ? what policies and procedures will be used to have the necessary functions
performed by various parties
An important point with respect to channel design is that while there are options
about whether a particular institution (e.g. a distributor) is included in the channel or not,
the setting implicates specific tasks which need to be accomplished by someone in the
channel. One can eliminate a layer in the chain but not the tasks that layer performed.
Promotion (Marketing Communications)
The next element of the marketing mix is deciding the appropriate set of ways in
which to communicate with customers to foster their awareness of the product,
knowledge about its features, interest in purchasing, likelihood of trying the product
and/or repeat purchasing it. Effective marketing requires an integrated communications
plan combining both personal selling efforts and non-personal ones such as advertising,
sales promotion, direct marketing and public relations. Put together, they are referred to
as the promotion mix.
A useful mnemonic for the tasks in planning communications strategy is the 6 Ms
model:
1. Market
?
to whom is the communication to be addressed?
2. Mission
?
what is the objective of the communication?
3. Message
?
what are the specific points to be communicated?
4. Media
?
which vehicles will be used to convey the message?
5. Money
?
how much will be spent in the effort?
6. Measurement
?
how will impact be assessed after the campaign?
The marketing communications or promotions mix is potentially extensive ?
including non-personal elements as well as personal selling. The popular non-personal
vehicles are advertising, sales promotion and public relations. Advertising in media is
particularly effective in
Creating awareness of a new product
Describing features of the product
Suggesting usage situations
Distinguishing the product from competitors
Directing buyers to the point-of-purchase
Creating or enhancing a brand image
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Advertising is limited in its ability to actually close the sale and make a
transaction happen. Sales promotions may be an effective device to complement the
favourable attitude development for which advertising is appropriate. One trend in
advertising is the movement to more precisely targeted media vehicles. Direct marketing
to households or email marketing to individuals are just instances of this trend.
Sales promotion includes things such as samples, coupons and contests. These are
usually most effective when used as a short-term inducement to generate action. The
three major types of sales promotion are:
(1) consumer promotions ? used by a manufacturer and addressed to the end
consumer
(2) trade promotions ? used by the manufacturer and addressed to the trade partners
(3) retail promotions ? used by the trade partners and addressed to the end consumer
Public relations refers to non-paid communication efforts, such as press releases.
These efforts do entail a cost to the firm, but generally are distinguished from advertising
by virtue of the fact that the firm does not pay for space in the media vehicle itself.
Personal selling as the communication vehicle presents the advantage of
permitting an interaction to take place between the firm and a potential customer rather
than just the broadcast of information. The importance of personal selling in the
promotions mix typically increases with the complexity of the product and the need for
education of potential customers.
The proper allocation of budget across the various media vehicles varies greatly
depending upon the market situation. A fundamental decision is whether to focus on a
`push' or `pull' strategy. In a push strategy, focus is on inducing intermediaries, such as a
retailer, to sell the product at retail. Advertising's job may be to make the consumer
aware of the product, but the closing of the deal is left to the intermediary. Alternatively,
a pull strategy means the end consumer develops such an insistence on the product that
he or she `pulls' it through the channel of distribution, and the retailer's role is merely to
make the product conveniently available.
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Activity 1.7.2
Sort the following promotion mix elements in the order of importance for consumer
marketing (B2C) and industrial marketing (B2B)
1. Advertising
2. Personal selling
3. Public relations
4. Sales promotions
5. Direct marketing
Pricing Basis, Objectives and Approaches
One of the most difficult areas of marketing decision making, pricing, deals with
the methods of setting profitable and justifiable prices. It is closely regulated and subject
to considerable public scrutiny. In comparison to the other 3 Ps ? product, place and
promotion - of marketing mix, the price element is the only revenue element whereas the
others are cost elements. Also, this is the element which can be easily copied. To a large
extent, the combination of the 3 Ps determine the target customer's perception of the
value of the firm's product in a given competitive context. Conceptually, this perceived
value represents the maximum price which the customer is willing to pay. This should be
the primary guide to pricing the product. Once the firm has created value for customers, it
is entitled to capture some of that value for itself to fund future value-creation efforts.
This is the role of effective pricing.
Pricing Basis and Objective
In most situations, cost should act as a floor on pricing. In some circumstances, a
firm intentionally sells at a loss for a time to establish a position in the market, but it is
often difficult to increase prices later due to the customer's use of the introductory price
as a reference point. With perceived value in mind, the first question is what is the
marketing objective and how does the pricing objective derive from that? For example,
the price that would maximize short-term profit is typically higher than the one which
would maximize market penetration subject even to making some profit on each item. It
can be described as a choice between a `skim' and `penetration' pricing strategy. In a
skim strategy, the focus is on those consumers with high value. Starting with a high price
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and targeting a segment that is willing to pay this price, skimming happens. Later on,
prices are reduced to reach the segments below. In penetration pricing, the firm sets a
lower price to generate lots of sales quickly. It is designed to preempt competition and
gain a significant number of customers early on. The appeal of a penetration strategy
increases to the extent that (1) customers are sensitive to price, (2) economies of scale are
important, (3) adequate production capacity is available, and (4) there is a threat of
competition.
Since customers typically place different values on the product, the firm should
consider whether it is worth trying to capitalize on these value variations by charging
different customers different prices. In some cases, legal constraints and logistical
practicalities can make this infeasible. However many firms owe their economic well-
being to their ability to customize prices. In many cases, for example, prices are varied
depending on when the buyer is booking, for how long, for what days of week and so on.
These characteristics are used as indicators of the value the customer places on the
product. Price customization can be achieved by:
developing a product line ? e.g. developing `economy' versions of the product
controlling the availability of lower prices ? e.g. select availability in certain
stores
varying prices based on observable buyer characteristics ? e.g. new vs. existing
customers
varying prices based on observable characteristics of the transaction ? e.g.
purchase volume
Another pricing approach is product life cycle pricing in which different prices
are charged at different stages of the product's life cycle. Since the marketing objective
and the cost structure various across the stages, the pricing approach also varies.
While product marketing mix consists of the 4 Ps, services marketing brings in
additional 3 Ps into an extended marketing mix. The additional 3 Ps ? People, Process
and Physical evidence ? are necessitated by the characteristics of the services. While
products are tangible, services are intangible. While products can be manufactured and
inventoried, production and consumption take place at the same time and hence are
inseparable. While products can be standardized, services cannot be ? thanks to the
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human interaction in service delivery. The perceived quality of service depends on who
provides it, when and where it is provided and also to whom it is provided. Because of
this, the heterogeneity in services throws a quality challenge. Finally, the services are
perishable ? so managing the demand and supply is crucial. Because of these
characteristics of services, viz., intangibility, inseparability, heterogeneity and
perishability, there is a need for industrializing and standardizing the services (Process),
tangibilize the intangibles (through Physical evidence) and managing the service
personnel (People) who are part of the service. The sub-elements of these additional 3 Ps
are:
Additional 3 Ps in Services Marketing
Sub-Elements
Process
Flow of activities
Service script (number of steps)
Customer involvement
Physical evidence
Facility design
Service ambience
Equipment
Signage
Employee dress
Point-of-sale displays
Other tangibles (e.g. business cards)
People
Employees
Recruiting
Training
Motivation
Rewards
Teamwork
Customers
Education
Training
Answer key
Activity 1.1.1
An example purchase: Mobile phone
Form:
Conversion of raw materials (required to manufacture a watch) into a finished
product (a watch)
Time:
During the festival season. Though there was a heavy demand, the product was
readily available in many outlets
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Place:
An authorized dealer in the same locality making the product available
Ownership:
In exchange for the price of the mobile phone, the title (ownership) of the phone
is transferred to you.
Activity 1.1.2
MARKETING MYTHS
(The student may tick the myths that he/she thought about marketing from the following
list and also add to the list since the given list is not exhaustive)
Marketing and selling are synonymous
The job of marketing is to develop good advertisements
Marketing is pushing the product to the customers
Marketing is transaction-oriented than relationship-oriented
Marketing is a short-term business strategy
Marketing is an independent function of a business
Marketing is part of selling
Activity 1.1.3
(Students may coin their own statements to describe each era in the Evolution of
Marketing)
Activity 1.1.4
Match the following: 1-F, 2-E, 3-C, 4-B, 5-D, 6-A
Activity 1.4.1
Industry: Aviation industry
Competitive environment
The entry of several low-cost carriers and the subsequent pressure on the standard
carriers to come up with their own low-cost subsidiaries in the aviation industry
Economic environment.
The upbeat economy, booming businesses, growing leisure and tourism industry
all of them contributing to high growth in the civil aviation industry Political-legal
environment
The open-sky policy of the government and all-weather flying skills training
made mandatory for all domestic carriers
Technological environment
Advanced airplanes with increased carrying capacity and better fuel utilization
directly contributing to sales increase and cost decrease Social-cultural
environment
The growing concept of travel and vacation, desire to cut travel time and cost
resulting in a migration of many train travelers to low-cost carriers
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Activity 1.6.1
1. Preventing tooth decay
2. enhanced sex appeal
3. whiter teeth
4. removal of smoking stains
5. fluoride protection
6. appeal to kids
7. Natural (herbal) contents
8. Traditional (ayurvedic) contents
Activity 1.6.2
1. Consumer background characteristics
1.1 Geography
- traditional product (neem) domination
1.2 Demographic
- `appeal to kids'
1.3 Psychographic
- preferring ayurvedic contents
1.4 General life-style - enhanced sex appeal
2. Consumers' market history
2.1 Product usage
- twice a day usage
2.2 Product benefit
- whiter teeth
2.3 Decision-process - `buy 1 and get 1 free'
Activity 1.6.3
1 ? Differentiated marketing
2 ? Micromarketing
3 ? Undifferentiated marketing
4 ? Concentrated marketing (Niche marketing)
Activity 1.6.4
Positioning map for the toothpaste market can be drawn based on characteristics like
ingredients (herbal Vs. chemical), benefits (emotional Vs. functional utilities), age (kids
Vs. adults), usage (normal Vs. treatment), price (low Vs. high), attribute (taste Vs.
contents) and so on. Different brands of toothpastes can then be plotted on the map
depending on their positioning in the marketplace.
Activity 1.6.5
product differentiation
-
Apple's iMac
service differentiation
-
Cemex cement
personnel differentiation
-
Singapore airlines
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channel differentiation
-
Dell computers
image differentiation
-
Honda's bikes
Activity 1.6.6
How to differentiate selling petrol?
Clue: Consider the `purchase links' of the consumption chain for this product.
Activity 1.7.1
Product hierarchy ? an example
Core benefit
-
lodging/accommodation
Basic product
-
A room
Expected product
-
A clean room with bath attached
Augmented product -
Bed and breakfast; pick-up
Potential product
-
Customized room and menu (from your past preferences)
Actitivity 1.7.2
Promotions Mix elements (in the order of importance)
For consumer marketing (B2C)
-
1,4,2,5 and 3
For industrial marketing (B2B)
-
2,5,1,3 and 4
Glossary of Terms
Utility ? Want-satisfying power of a good or service
Marketing ? Process of planning and executing the conception, pricing, promotion and
distribution of ideas, goods and services to create and maintain relationships that satify
individual and organizational objectives
Marketing concept ? Organization-wide consumer orientation with the objective of
achieving long-run success
Relationship marketing ? Development and maintenance of long-term, cost-effective
exchange relationships with individual customers, suppliers, employees and other
partners for mutual benefit
Customer orientation ? Business philosophy incorporating the marketing concept that
emphasizes first determining unmet customer needs and then designing a product/service
for satisfying them
Market ? The set of all actual and potential buyers of a product or service
Demands ? Human wants that are backed by buying power
Buyer ? The person who makes an actual purchase
Exchange ? The act of obtaining a desired object from someone by offering something in
return
Product ? Anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need. It includes physical objects, services,
persons, places, organizations and ideas
Potential market ? The set of consumers who profess some level of interest in a particular
product or service
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Environmental scanning ? The process of collecting information about the external
marketing environment in order to identify and interpret potential trends
Environmental management ? An effort to attain organizational objectives by predicting
and influencing the firm's competitive, political-legal, economic, technological and
social-cultural environments
Time-based competition ? a strategy of developing and distributing goods and services
more quickly than competitors can achieve
Demarketing ? The process of reducing consumer demand for a good or service to a level
that the firm can supply
Marketing audit ? A thorough, objective evaluation of an organization's marketing
philosophy, strategies, plans, programs, practices and results
Consumerism ? A social force within the business environment designed to aid and
protect buyers by exerting legal, moral and economic pressures on businesses
Buyer behaviour ? Process by which consumers and business buyers make purchase
decisions
Consumer behaviour ? Buyer behaviour of ultimate consumers
Reference group ? Group with which an individual identifies strongly enough that it
dictates a standard of behavior
Opinion leader ? Trendsetter likely to purchase new products before others and then
share the resulting experiences and opinions via word of mouth
Evoked set ? Number of brands that a consumer considers buying before making a
purchasing decision
Cognitive dissonance ? Post-purchase anxiety that results from an imbalance among an
individual's knowledge, beliefs and attitude
Segmentation ? Dividing a consumer population into several homogeneous groups based
on characteristics like geography, demography, psychography and life style.
Target market ? A homogeneous group of people in a heterogeneous marketplace toward
whom a firm markets its goods and services with a strategy designed to satisfy their
specific needs and preferences
Positioning ? Consumers' perceptions of a product's attributes, uses, quality and
advantages and disadvantages in relation to those of competing brands
Repositioning ? Marketing strategy to change the position of a product in consumers'
minds relative to the positions of competing products
Undifferentiated marketing ? Marketing strategy to produce only one product and market
it to all customers using a single marketing mix
Differentiated marketing ? Marketing strategy to produce to produce numerous products
and promote them with different marketing mixes designed to satisfy smaller segments
Niche market - A firm targets its efforts on profitably satisfying only one market
segment. It may be a small but a profitable segment
Marketing mix ? blending the four elements of marketing decision making ? product,
price, distribution and promotion ? to satisfy chosen consumer segments
Product strategy ? element of marketing decision making involved in developing the right
good or service for the firm's customers, including package design, branding, trademarks,
warranties, product life cycles and new product development
Product mix ? A company's assortment of product lines and individual offerings
88
Product life cycle ? The four basic stages through which a successful product progresses
? introduction, growth, maturity and decline
Pricing strategy ? Element of marketing decision making dealing with methods of setting
profitable and justifiable prices
Distribution strategy ? Element of marketing decision making concerned with activities
and marketing intermediaries that get the right good or service to the firm's customers
Promotional strategy - Element of marketing decision making that involves appropriate
blending of promotional mix elements, namely, personal selling, advertising, sales
promotions, direct marketing and public relations ? to communicate with and seek to
persuade potential customers.
References
1. Peter F.Drucker, The Practice of Management, Harper and Row, 1954
2. Joseph P.Guiltinan and Gordan W.Paul, Marketing Management, McGraw-Hill, 1996
3. Theodre Levitt, Marketing Myopia, Harvard Business Review, Sep-Oct, 1975
4. Al Ries and Jack Trout, Positioning: The Battle for Your Mind, McGraw-Hill, 1981
5. Al Ries and Jack Trout, Marketing warfare, McGraw-Hill, 1986
6. Jack Trout with Steve Rivkin, Differentiate or Die, John Wiley and Sons, 2000
7. Ian C.MacMillan and Rita Gunther McGrath, `Discovering new points of
differentiation', Harvard Business Review, July-August 1997
8. V.K.Rangan, B.P.Shapiro and R.T.Moriarty, Business Marketing Strategy, Irwin,
1995
9. L.W.Stern, A.I.El-Answry and A.T.Coughlan, Marketing Channels, Prentice-Hall,
1996
10. Philip Kotler, Marketing Management: Analysis, Planning, Implementation and
Control, Prentice-Hall, 1997
11. Philip Kotler and Gary Armstrong, Principles of Marketing, Prentice-Hall, 1994
12. T.K.Kinnear, K.L.Bernhardt and K.A.Krentler, Principles of Marketing, Harper
Collins, 1995
13. Thomas V.Bonoma and Benson P.Shapiro, Segmenting the industrial markets,
Lexington books, MA 1983
14. www.mohansawhney.com
15. www.cluetrain.org/#manifesto
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UNIT-II
LESSON ? 2.1
PRODUCT DECISIONS
LESSON ? 2.2
CONCEPT OF A PRODUCT
LESSON - 2.3
PRODUCT MIX DECISIONS
LESSON ? 2.4
BRAND DECISION
LESSON ?2.5
NEW PRODUCT DEVELOPMENT STRATEGIES
LESSON - 2.6
PRODUCT LIFE CYCLE STRATEGIES
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2.1 PRODUCT DECISIONS
This unit on the first P of marketing, namely the Product, will help you answer the
following questions:
What product should the company make?
Where exactly are these products to be offered?
What should be the width of the product mix?
How many different product lines can the company accommodate?
How should the products be positioned in the market?
What should be the brand policy?
OVERVIEW
It is a fact that product/service is a `mixer of ingredients' where in the
manufacturer / service provider who blends various marketing activities in a manner that
strengthen the business the interests of the firm. As we seen in lesson 11, the crux of any
marketing strategy is to bring about the desired operation in the light of prevailing
circumstances. We also learned from the pervious lesson that the planned manipulated to
get optimum results in limiting environments. This lesson narrates the important concepts
like marketing mix, products, brand, trademark, packing and labeling with suitable
example from Indian marketing environmental.
SIGNIFICANT OF MARKETING MIX
The most popular 4 Ps' framework as suggested by McCarthy with the marketing mix
variables- products, place, promotion and price had origination from the study of the
manufacturers ? i.e. the organization engaged in production and marketing of goods ? it
is more oriented to deal with goods marketing situations. However service characteristics
are radically different fro goods; and so are the challenges in their marketing. It is wrong
to imply that services are just like products except for intangibility. But such wax-like
logic as "apples are just like oranges, except for their apple ness'' does not stand the heat
of nuts-and-bolts.
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Marketing Product / service characteristics and add new dimensions to a marketing
situation that is faced by the service manager. Given the product / service characteristics
and activities in product/service firms, eight Ps' framework for services has been
proposed. For the services, the additional prescribed Ps given below refer to activities
that are service marketing mix can be summarized as follows:
Product - service core, levels, additional services, branding.
Price - price, discounts, terms of payment.
Place - location, channels of distribution, coverage.
Promotion - Advertising, sales promotion, personal selling and publicity.
FOR SERVICE ADDITIONAL 4 Ps WERE ADDED FOR MARKETING
SERVICES. THEY ARE:
People - customer-provider relationship, training, culture, skills, and attitudes.
Physical- ambience, appearance, equipment, machines
Evidence ? Buildings, physical facilities
Process ? Activity sequence, quality management, customer participation and
delivery process
Productivity ? Efficiency of human and non-human capitals in the production
process. But our discussion limits only to the first four Ps.
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2.2 CONCEPT OF A PRODUCT
The term `product' is widely used to refer a market offering of any kind. In its broadest
sense this may be anything from the physical to the abstract ? an idea or a moral issue.
Generally, however, most products are made up of a combination of physical elements
and services. This is true in services marketing, where the service offering can include
tangible features, such as food in a restaurant, or be a `pure' service, intangible in
nature.
A service product refers to an activity or activities that a marketer offers to
perform, which results in satisfaction of a need or want of predetermined target
customers. It is the offering of a firm in the form of activities that satisfies needs such
as hair styling done by a barber.
Consumers will buy only what suits them. As customers, we buy different kinds
of products and services to satisfy our various needs. We buy toothpaste, butter,
shaving cream, pen, scooter, and ticket for the U.S.A and many other such items in our
daily life. As we understand, our decision to buy an item is based not only on its
tangible attributes but also on psychological attributes such as services, brand, package,
warranty, image, and etc. discussions about the marketing of goods apply to services as
well. Services have special characteristics that make them different than products.
According to Alderson, W., "Product is a bundle of utilities consisting of various
product features and accompanying services" according to Schwarte, D.J., "A product
is something a firm markets that ill satisfy a personal want or fill a business or
commercial need".
At the time of product planning, the marketer has to think about FIVE
types of benefits.
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From Generic to Potential product - Most of you would be aware that a product has a
personality of several components-like the physical products, the brand name, the
package, the label etc. all of us know that most of the products are undergoing a constant
change and the marketing man has been constantly engaged in enriching his product
offer. In his attempt to score over competition, he has been bringing about refinement on
his basic product offer, but managing the product was becoming more and more difficult.
Hence the product traveled various levels:
The Core Product
The Generic product
The branded Product
The Differentiated product
The customised product
The augmented product
The potential product
The Core benefits:
what does the product mean to the customer? For example, a car
offers generic benefits of convenience in traveling.
The Generic product Is the unbranded and undifferentiated commodity like rice, bread,
flour or cloth.
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The Branded Product The branded product gets an identity through a 'name'. Modern
bread, Harvest are branded products. We would study in detail about brand name in the
brand section.
The differentiated product The differentiated product enjoys a distinction from other
similar products/brands in the market. The differential claimed may be `real', with a real
distinction on ingredient, quality, utility, or service, or it may be `psychological' brought
about through subtle sales appeals.
The customised product - Customer specific requirements are taken into account while
developing the product. Commonly practised in the industrial product marketing, where
the manufacturer and the user are in direct contact and the product gets customised to the
requirements of the customer.
The augmented product
The augmented product is the result of voluntary improvements brought about by the
manufacturer in order to enhance the value of the product, which are neither suggested by
the customer nor expected by them. The marketer on his own augments the product, by
adding an extra facility or an extra feature to the product.
The potential product
The potential product is tomorrow's product carrying with it all the improvements and
finesse possible under the given technological, economic and competitive condition.
There are no limits to the `potential product'. Only the technological and economic
resources of the firm set the limit.
Product differentiation - Is the act of designing a set of meaningful differences to
distinguish the companies offering from competitor's offerings? The number of
differentiation opportunities varies with the type of industry. The Boston consulting
group has distinguished four types of industries based on the number of available
competitive advantages and their size.
1. Volume industry: One in which companies can gain only a few, but rather large,
competitive advantages.
2. Stalemated industry: One in which there are a few potential competitive advantages
and each is small.
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3. Fragmented industry: One in which companies face many opportunities for
differentiation, but each opportunity for competitive advantage
is small.
4. Specialised industry: One in which companies face many differentiation
opportunities, and each differentiation can have a high payoff.
Theodore Levitt in one of his books "Marketing Success, through differentiation of
anything" explains that in a market place, there is no such thing as commodity .All goods
and services are differentiable. In a market place differentiation is everywhere .All the
companies try to distinguish their offer from that of their competitor. This is true of even
those who produce and deal in primary metals, grains, chemicals, plastics and money.
Starting from technology to plant location to post sale service firms to the
personnel/procedures employed for various functions like sales, production etc.,
companies can differ their offers in many ways. Companies usually choose those
functions, which give them greatest relative advantage.
There are different strategy stances that firms can adopt
It is natural for different firms to take different strategy stances as the requirement;
situational design of each is different from the other. One firm might find it appropriate to
have direct confrontation with the market leader; another may find it appropriate to keep
aloof for some time from the competition; and the third might may find it relevant to
chalk out a strategy of sheer survival. No strategy stance is universally valid. Broadly
strategy stances can be classified under three heads-Offensive/ confrontation strategy,
Defensive and Niche strategy.
Offensive Strategy -Is the strategy of aggression usually employed by the firm that is not
presently the leader, but aspires to leadership position in the industry. It acts as a
challenger and the leader is mostly its target. It tries to expand its market share and
utilises all the elements of the marketing mix in attacking the leader.
Defensive Strategy -Is usually employed by the leader who has the compulsion to defend
his position against the confrontation of powerful existing competitors or strong new
entrants trying to remove the leader from the topmost position. The leader has to maintain
constant vigilance and defend its position against the attack of the challengers.
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Niche Strategy - Is usually employed by firms, which neither confronts nor defend it. It
cultivates a small market segment for itself with unique products/services; supported by a
unique marketing mix. Small firms with distinctive capabilities adopt this stance. A
market niche to be worthwhile must have characteristics such as reasonable size, profit
potential and growth potential.
PRODUCT CLASSIFICATION
The nature of product is found to have considerable impact on the method of product
positing. There are two classes of products consumer goods, and industrial goods, and
this classification is useful in product positioning. The table given below shows the
categories of consumer and industrial goods. Marketers have traditionally classified
products on the basis of there characteristics: durability, tangibility and use. The
following figure shows the products classification:
PRODUCTS CLASSIFICATION
1.
Durability
and 2. Consumer goods
3. Industrial goods
tangibility
a.
N on-durable goods
a. Convenience goods
a. Material and parts
b.
Durable goods
b. Shopping goods
b. Capital items
c.
Services
c. Speciality goods
c. Supplies and business
services
d. Unsought goods
0
Tangible / Intangible Attributes ? key points
Tangible
Touch
See
Taste
Smell
Intangible
Can't see
Can't touch
Can't smell
Can't taste
Exercise:
Think of examples of product/services possessing above tangible and
intangible attributes
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DURABILITY AND TANGIBILITY
(a) Non ? durable goods: non-durable goods are tangible goods normally consumed
In one or a few uses, for example, soap, salt and biscuits.
(B) Durable goods: for example, colour TV, Refrigerator, washing machine and
Vacuum cleaners.
(c) Services: services rate intangible, inseparable, variable and perishable products,
for example, airline and banking services
CONSUMER GOODS CLASSIFICATION
a. Convenience Goods: these are goods that the customer usually purchases frequently
immediately and with a minimum of efforts, example includes soaps and newspapers.
Convenience goods can be further classification into three categories:
i.
Stable goods: consumer purchase on regular basis.
ii.
Impulse goods: consumer purchase without any planning or search
efforts.
iii.
Emergency goods: consumer purchase on urgent need.
b. Shopping Goods: these are goods that the customer, in the process of selection and
purchase characteristically compare on such bases as suitability and quality. Example:
furniture, electrical appliances etc.
c. Specialty goods: these are goods with unique characteristic or brand identification for
which a sufficient number of buyers are willing to make a special purchasing effort. For
example, cars.
a. Unsought goods: these are goods the consumer does not know about or
does not normally think of buying. The classic example of known but
unsought goods is life insurance.
INDUSTRIAL GOODS CLASSIFICATION
a.
Material and Parts: these are goods that enter the manufacturer's product
completely. They fall into two classes. Raw material and manufactured material part
b. Capital Items: these are long lasting goods that facilitate developing or managing
the finished products. They include two groups: installation and equipments.
C. Supplies and Business Services: these are short-listing goods and services that
facilitate developing or managing the finished products.
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DECISIONS, WHICH ARE USEFUL FOR PRODUCTS MANAGEMENT
The search for competitive advantage ? and escape from price-based competition ? often
centers on the value ? creating supplementary services that surrounds this core and add
differentiation. Managers should be aware of the important of selecting the right mix of
supplementary service elements-no more and no less than needed ?and creating synergy
by ensuring that they are all internally consistent. Customer research, evaluation of
competitive offering and feedback from employees can all provide important inputs to the
decision making process. Three principal factors should be considered here are.
- The nature of the market and competition from the product
- The nature of assistance needed by the product regarding production,
engineering, financing, staffing and so on,
- Strategic requirement of a border nature, namely, those affecting the
product line, the business or the whole corporation.
FACTORS TO BE CONSIDERED IN ORGANIZING FOR PRODUCT
MANAGEMENT
- What do we want to out of product management
- What do we want our product manager to do?
- How do we want our product manager to do their jobs?
- What operational guidelines will we established?
- What expectation do we have for the specific contribution of product
manager and product management?
- What authorities will be assigned to product managers?
- What are the number and nature of products and managers?
- What are product objective?
- How will we measure the effectiveness of our product management?
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ROLE OF PRODUCTS MANAGER IN AN ORGANIZATION
In assessing the product manager's performance the following checklist can be used:
- Product line control
- Product life cycle, analysis and capitalization
- Product development and success of new products recommended
- Improved communication
- Improved supplies and sourcing
- More and better market information
- Wider and better market information
- Centralized products planning
- Coordination of activities
- Achievement of planned profits
- Cost and profit control
SUMMARY
What is a Product
What you but, that satisfied what you want to be able to do
It can be "good felling" causes you bought some cosmetic and someone said you
looked pretty
It could be a happy stomach cause you bought a meal that tasted great
It could be easier homework cause you bought new software for your company
Most customer think about product in terms of the total satisfaction
This can lead t statements such as "we don't sell cars, we sell safety!"
We don't sell houses, we sell homes
PRODUCT LINE
A series of related products
A group of products that are physically similar in performance, use or feature and
intended for a similar market
"... A set of products that are closely related."
Shoes Nike, Adidas, Rebook, file, new balance, British knight, books, converse,
vans, sic, puma notebooks, Toshiba, NEC, TI, compaq, IBM, DELL
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Apple, HP, Hitachi, mitsubishi, matsushita.
Cannibalization
Situation involving one products taking sales from another offering in a product
line
Cannibalization occurs when sales of a new product cut into (reduce)the sales of a
firm's existing products
2.3 Product Mix Decisions
What product should the company make?
Where exactly are these products to be offered?
What should be the width of the product mix?
How many different product lines can the company accommodate?
How should the products be positioned in the market?
What should be the brand policy?
Basically the answers to these will constitute the product policy of a firm .It constitutes
the following:
Appraisal of the product line and the individual products- No product line is perfect
and also does not run for all times to come. Changes happen in the business environment,
customer tastes and preferences, extent of competition that pressurise the product policy
of the firm. New, changed, advanced products are introduced or even old products are
withdrawn from the market by the companies to revive the lost market image, to
overcome the treat of functional obsolescence due to new improved /substitute products
introduced by competitors, to regain profitability or when the product has entered a stage
of decline. Firm needs to constantly monitor the company's product policy.
This topic of Product Mix & Product Line is very important so concentrate on it.
When we say a firm's product mix we are actually discussing about all product items it
offers.
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Hindustan Lever's product mix includes agro-chemical products, soaps, detergents,
toothpaste, shampoos, Talcum powders, cosmetics and now, frozen foods. Just suppose
any organization is marketing more than one product then it has a product mix.
Product item--a single product
Product line--all items of the same type
Product mix--total group of products that an organization markets
Now if I say a product line what do you understand from this?
It is basically a group of products that are related because of customer, marketing and
or production considerations. I hope all of you know that Rin, Wheel, Rin Solarox,
Rin detergent powder, Surf, and Surf Ultra are part of Lever's detergents line and Le
Sancy, Lux, Rexona, Lifebuoy, are part of its soaps line. When we are discussing about a
typical large multi-product firm's product mix includes new, growing, maturing and
declining products.
Reasons many firms do not want to limit themselves to one product.
1. To counteract the effects of the PLC on a one product firm.
2. To even out seasonal sales patterns.
3. To use company resources and capabilities more effectively.
4. To capitalize on middlemen and consumer acceptance of established products.
5. To spread production and marketing costs over a wider product mix.
6. To become better known and respected by middlemen and consumers.
Breadth & Depth
Now you have a fair idea on what is a product mix. In product you have to define the
structural dimensions of breadth (or width) and depth. Breadth refers to the number of
different product lines. Depth refers to the number of product items within each line.
A firm can expand its product mix by increasing the number of product lines or the depth
within one or more product lines. HLL expanded in breadth when it entered the agro-
chemical business. It expanded in depth when it bought TOMCO a soaps and detergents
company.
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Width of product mix
Lever's Product Mix and Product Lines (partial listing)
Detergent
Soap
Toothpaste
Talcum Powder
Cosmetic
Rin bar
Le sancy
Close up
Ponds
Fair & lovely
Wheel bar
Lux
Pepsodent
Liril
Lakme
Rin Powder
Rexona
Wheel Powder
Lifebuoy
Surf
Liril
Surf Ultra
You would have noticed that so many companies market just one or two product lines,
and hence their product mix is narrow. Do you know in which all areas General
Electric operates? It basically operates in diverse fields, and has broad product mix. You
can see in Fig that each product mix has a depth, which is given by models, colours,
sizes, available in each individual product lines.
As all of us know that pharmaceutical company has a product line of antibiotics. It has
several dosage forms like it can be in the form of capsules, dispersible tablets for
children, vaginal suppositories, injections, eardrops, eye drops and Syrups under the
dosage form and then the size of the package can be different. The company has several
brands of antibiotics, and each brand has several dosage forms and sizes. We can say, that
its product mix has depth. On the contrary, a few products, in one size only as one brand
is an example of a shallow product depth.
All the decisions related to product lines offers are from company's strategic plan and
marketing plan. It considers the segmentation of the market and targeting. Just suppose
an organization wishes to target young' children, it can add a whole new product line for
it. New product lines are either a matter internal development or can be acquire. Each
product line also can be expanded. The important idea is that the product line of a
company reflects the objectives of the organization, the targeting decided upon and the
buyer behaviour in a given market.
You can modify existing Product lines:
We have a number of reasons to alter either an existing product or a product line. The
reasons could be to support marketing strategy, to improve sales, to improve profits, to
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expand market share. We can also consider what the product as such contributes to the
product portfolio. We can modify a product line by altering either one or more than one
of the following attributes:
(1) Composition of the product line
(2) Expansion or contraction of product line
(3) Value addition process
(4) Brand
(5) Packaging
(6) Physical characteristics
(7) Positioning
The first two attributes are relevant to a set of products in the product line. The rest are
relevant to either individual products or product lines.
Expanding and Reducing the Product Line:
As you are aware that there are many models of TV available in the market. There is a
large variety of radio sets from Sony. Underlines bras are available in a number of styles.
Syrups and crushes are available in many flavours, e.g., Rasna concentrates and Mala's
crushes. There are technical products with higher and lesser sophistication. We find many
product categories where consumers prefer to have a great variety for their satisfaction.
Marketers are adopting strategies of adding new versions with new specifications, while
retaining the old versions for the less sophisticated consumers.
Sometimes this addition of new products to existing line is done to include
complementary products, e.g., a toothpaste marketer may add toothbrushes to the product
line. Camel may introduce paintbrushes, which go welt with its watercolours. Sometimes,
there are occasion to delete a product/products from the line. A product, which shows
decline in terms of sales, may be abandoned. Non-contributing products may be
eliminated. While doing so, it should be seen that other products in the product line are
not affected.
Product line length:
Now you should ask a question what is the optimum size of a product line?
A line is too long if after eliminating a product is results into increased profits. A line is
too short when any addition to it results into increased profits.
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One thing should be clear to you that the Company's overall objectives do affect the
length of its product line. For instance, a company may have the objective of expanding
its market share. It will then have a longer product line. Contribution of individual
products to profits may be ignored. However, a company whose objective is to have
larger profits will have a shorter product line consisting of those items, which contribute
to profits substantially Product lines have a tendency, to lengthen over a period of time.
Many a time, a firm may, have extra capacity, which is used for developing new items. .
Sales people and trade put pressure on management to keep on adding items to a product
line so as, to satisfy their customers.
Lengthening of the line shoot up costs. At some point, this must come to halt. Loss
making items are then eliminated. The contribution of items to profits is studied. Thus in
the life of an organization, there is a cycle of longer product line followed by a pruned
product line. This cycle is repeated again arid again.
Line stretching
Most of the companies have range of products in its existing product lines, like Videocon
has a range of TVs in its product line, right from budget TVs to premium TVs. Line
stretching occurs when this range is lengthened. This stretching could be upward,
downward or both ways.
Upward stretching:
Here a company operates in the lower end of the market. By upward stretch, it proposes
to enter the higher end. Perhaps, it is motivated by higher margin of profits, higher
growth rate or a position of a full-range marketer. This decision has its own risks. A well-
established high-end marketer might assault the stretcher by stretching downwards.
Besides, it is a question of credibility of a lower-end marketer -whether he will be able to
produce high quality products. There is one more risk. The existing infrastructure of a
low-end marketer may not be competent to deal with the high-end market.
Downward stretch:
Lets start with an example: like all of you know parker, parker started with pens only at
high price but if we look at parker today we can see products available in the range of 50
Rupees which no one could have though of in older times.
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Many companies start with high-end products, but later stretch downwards by adding
1ow-priced products. The down-end products are advertised heavily so as to pull
customers to the whole line on the basis of price. Videocon advertises its budget line 14"
inches TV at Rs. 8,000. Once the customer is pulled, he may decide to buy a higher
priced model- he trades up. This strategy needs careful handling. The budget brand being
promoted should not dilute the overall brand image. Besides, the budget brand must be
available. Consumers should not get a feeling that they were hooked to a bait, for
switching later. Downward stretch is practiced in the following situations:
A competitor stretches upward and challenges the marketer. He counter-attacks
him stretching downwards
Most companies start at the upper end, and then roll downwards.
The high-end market has a slow growth rate.
By filling the gap at the low-end, new competition is avoided.
Downward stretch has its own risks. The down-end item might cannibalize the high-end
items. Besides, our downward stretch might provoke a competitor to move upward.
Down-end product may not be managed properly as the company may not have that
capacity. It may dilute the brand image of the company's products. It is, however, needs
careful consideration - a product line should not have a gap at the lower-end. It exposes
the company to competition, e.g., American car companies faced the competition from
small-sized, Japanese cars at the lower-end of the market.
Two way stretch
Beside upward and downward stretch you can even stretch in two ways like several
companies serve the middle-end market. They can stretch their product line in both the
directions. A hotel company operating hotels in the comfort category where each room
has a tariff 2000-3000 a day might decide to have elite upper-end hotels with tariffs of
Rs. 5000-7000 a lower-end budget hotels with tariffs of Rs. 600-1500 a day. Ashoka
group of ITC has thus elite 5-Star hotels, at the upper-end comfort hotels at the middle-
end and budget hotels like Ashoka Yatri Niwas at lower end.
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Application exercise:
Go to the area of your town that has a number of restaurants. Compare the product mix of
one with the other. Are there any differences in width or depth? How could they stretch
their lines?
Another concept, which is very important and should be know to you, is
cannibalization:
When the sales of the firms new products are due mainly because of decreasing sales of
its existing and established product then we say that cannibalization has occurs in brief
we can say by this you are actually eating away your own market. A good example of it
would be Hyundai Santro they have introduced Santro Xing as a new product in the
market in other way they have cannibalized their own market, like a person who wanted
to buy Santro old model will buy Xing as it latest so they are not capturing new customer
but converting their own customers only if they are able to make a person buy their
product where he was planning to buy some product of Maruti then it is not
cannibalization.
If you want to avoid cannibalization, the new product should not be identified too closely
with established products. Instead it should be targeted with new appeals to different
market segments. Cannibalization is desirable when margins on new products are higher
than those on established Products. In highly competitive industries, it is often desirable
to induce target customers to trade up to the firm's newer products. This strategy is
adopted by Videocon International, Which entered the market with a low priced color TV
with basic features and then introduced more sophisticated models up the price scale in
order to ensure that customers in all segments would buy only Videocon products.
PRODUCT LINES AND BRANDS
Most service organization offers a line products rather than just a single product. Some of
these products are distinctly different from one another. Again in response to changing
market opportunities, companies may revise the mix of products that they offer.
Following example illustrate this concept.
British airways (BA), which explicitly reorganizes eight different air travel
products ? or brand ? under the British airways umbrella. (The company also has equity
shares in several other airlines). There are four intercontinental service brands ?
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Concorde (supersonic deluxe service), first class (deluxe subsonic service), club world
(business class) and world (business class), and world traveler (economy class) ; two intra
?European brands-club world (business class) and euro ? traveler (economy class) : and
within the united kingdom, the super shuttle brand, offering a graduated economy seat
and high ? frequency service. In additional, six commuter airlines, flying in British
airways colors, operate service in partnership with BA under the British airways express
brand. As described by Douglas each British airways brand has a key brand proposition
and a set of clearly stated product specifications for preflight, in-flight and on-arrival
service element. To provide additional focus on product, pricing and marketing
communications, responsibility for managing and developing each brand is assigned to a
brand management team. Through internal training and external communication, staff
and passengers alike are kept informed of the characteristic of each brand.
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2.4 BRAND DECISION
Many consumers products their basic feature, need attractive packing and a `brand name'.
A brand is a symbol or a mark that helps customers in instant recall, differentiating it
thereby roam the competing products of a similar nature.
What is the brand? too often even marketing professional don't have an answer
and to many have their `own' answer. Which makes life very confusing! We've trawled
though our resources to find some of the best definitions: the dictionary of business and
management defines a brand Asia name, sign or symbol used to identify items or services
of the seller(s) and to differentiate the from goods of competitors
Signs and symbols are parts of what a brand is, but to us this is a very incomplete
definition. Walter Land or one of the greats of the advertising industry, said: " simply put,
a brand is a promise. By identifying and authenticating a products or service it delivers a
pledge f satisfaction and quality. In his book, ` building strong brand' David Aaker
suggests the brand is a `mental box' and gives s definition of brand equity as : `a set of
assets (or liabilities) linked to a brand's name and symbol that adds to (or subtracts from)
the value provided by a product or service. According to the American marketing
association, "A brand name is a part consisting of a word, letter, groups of words or
letters to identify the goods or services of a seller or a group of seller and to differentiate
them from those of the competitors." David Ogilvy defined a brand are not necessarily
positive! Building from this idea of a `mental box' a more poetic definition might be :
these are all great definitions, but we believe the best is this : "a brand is a collection of
perceptions in the mind of the consumer. A brand is the most valuable real-state in the
world, a corner of the consumer's mind" . Why is the best? Well, first of all it is easy to
remember, which is always useful! But it is also best because it works to remind us of
some key point:
1. This definition make it absolutely clear that a brand is very different from a
product' or service. A brand is intangible and exists in the mind of the consumer.
This identification helps us understand the idea of brand loyalty and the `loyalty
ladder'. Different people have different perceptions of a product or service, which places
then at different point of loyalty ladder. A brand mark is a symbol or a design used for
the purpose of identification. For example: Air India's MAHARAJA. The legal version
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of a brand mark is the `trade mark' e.g., Ashok Masal and Good Health Atta. A brand is
given legal protection from being used by others because it is capable of exclusive
approbation. A brand distinguishes a product or service from similar offerings on the
basis of names are: LUX, LIRIL, REXONA, EVITA, PROTEX, HAMAM AND LE
SANSI in case of toilet soaps; SUR, ARIEL, and NIRMA in case of detergents and
NIVEA, FEM, OIL OF OLEY, CHARMIS AND VASELINE in case of vanishing
creams.
Building Brands in the new economy ?Heidi and Don Schultz urge companies to:
?Clarify the corporation's basic values and build the corporate brand.
?Use brand managers to carry out the tactical work.
?Develop a more comprehensive brand-building plan.
?Define the brand's basic essence to be delivered wherever it is sold.
?Use the brand-value proposition as the key driver of the company's strategy, operations,
services, and product development.
?Measure their brand-building effectiveness, not by the old measures of awareness,
recognition, and recall, but by a more comprehensive set of measures including customer-
perceived value, customer satisfaction, customer share of wallet, customer retention, and
customer advocacy
Brand preference
Aaker's five levels of customer attitude:
?The customer will change brands, especially for price reasons. No brand
loyalty.
?Customer is satisfied. No reason to change brands.
?Customer is satisfied and would incur cost by changing brand.
?Customer values the brand and sees it as a friend.
?Customer is devoted to the brand.
Branding Decision: To Brand or Not to Brand?
An Overview of Branding Decisions
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BRANDS ? VALUABLE TRADABLE ASSESTS
Brands provide a strong competitive advantage to the companies owning them and
hence they are increasingly becoming important tradable assests. In 1993, Coca-Cola
paid about Rs.175 crore to buy Thums-up, Limca, Citra and Gold Spot brands. In 1994
Godrej soaps paid Rs.12 crore to acquire the Rs.67 crore translectra.
In 1995, Smithkline Beecham paid Rs.42 crore to acquire the Crocin brand from
Duphar Interfan. In 1997, Knoll Pharma sold Coldarin and Burnol for Rs.34 crore
Ranbaxy paid Rs.80 crore to Gufic Labs for Mox, Zole Excel and Suprimox. In 1997,
Hindustan Lever paid Rs.110 crore for Lakme's basket of brands and only Rs.29 crore for
Lakme's two plants.
In 1999, Marico industries bought parachute and Suffola brands from Bombay oil
industries for Rs.30 crore. The Gramophone company of India acquired Sangeetha, a
leading audio producer of classical and devotional songs in the South. Acquiring a brand
is a better, superior option over purchasing the entire operations of the company owing
them for 3 months. The buyer buys only the brand name. The brand name could be used
to sell anything, which comes under the established brand personality. For example, the
Burnol brand name could be used to sell an antiseptic like Dettol. Buying a brand
provides a ready-made market. Apparently, Ranbaxy bought Mox because its own brand
in the name family, Amoxycillin was not doing too well. Buying a brand saves a lot of
brand building time and cost. Drug companies are known to recoup the cost of acquiring
a brand in less than four years.
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SUMMARY
1.What is a brand?
A name, term, sign, symbol, or design used to identify the products of one firm and to
differentiate them from competitive offerings.
Something used to show customers that one product is different then the products of
another manufacturer. Worlds, letters, or symbols that make up a name used to identify
and distinguish the firm's offerings from those of its competitors.
2. Generic Name Brand
A brand name over which the original owner has lost exclusive claim because all
offerings in the associated class of products have become generally known by the brand
name (usually that of the first or leading brand in that product class).
3. Trademark
Brand that has been given legal protection and has been granted solely to its owner
Originally helped trace the source of the guild producer
In modern era, makes it easier to identify all the products from a particular company.
Makes shopping easier
Helps the companies launching new products
Brand Recognition ? awareness, loyalty, quality, emotion "customers remember the
brand"
Brand Preference / Loyalty ? the degree to which customers are committed to further
purchases e.g. "choose the brand over other brands"
Brand Insistence ? "willing to search for it." and if they don't find the brand they want,
will not but a substitute
Brand Equity ? "... the values of a brand's overall strength in the market..."
Brand Awareness ? your product is the first that comes to mind in a certain product
category e.g. Snapple ice tea, jeans ? Levi's, Walkman ? SONY
Brand Awareness ? your product is the first that comes to mind in a certain product
category e.g., ice tea = Snapple, running shoes = Nike
Trademark
A brand that has been given exclusive legal protection ? name and the design
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PACKAGING
Earlier, packaging was considered a major expense in marketing. For some toiletries,
packaging costs actually exceeded the costs of contents. Today, it is however, fully
recognized that packaging helps in branding and promoting brand loyalty. It also enables
the buyers to handle and carry their products with case. Moreover, packaging may cut
marketing costs thus adding to profit.
QUALITIES OF GOOD PACKAGING
Attractive appearance
Convenient for storage and display
Shield against damage or spoiling
Product description shown on the package
FUNCTION OF PACKAGING ESPECIALLY FOR CONSUMER GOODS
i.
Protection and presentation are the basic functions of a packaging
ii.
Modern marketing methods demand that, package be convenient to handle
transport requirements.
iii.
A package must be made to consistent and rigid quality standards. The
consumer demands uniformity each time he purchases a product.
iv.
Transport economics
v.
Every package must be recognizable and
vi.
Every package must have eye appeal
Packing to be satisfactory should satisfy the following conditions:
i.
It should be capable of withstanding the hazards of handling and transport.
The cargo may be handled manually and mechanically. The handling
methods may differ between places. When manually handled, it may be
tilted, draped, thrown, pulled, pushed, rolled etc. further it may also be
subject to compression dude to stacking. The packing should, therefore, be
capable of withstanding such hazards of handling and transportation.
ii.
It should be easy to handle. To facilitate easy handling, bulk packs may be
provided with handling facilities like books, handles, gripper's etc. in case
of products which shall not be turned upside down, the position should be
clearly indicated like marking `this side up'. In case of fragile articles,
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which shall not be subject to rough handling, the size, shape and weight of
the pack should be amendable for smooth handling. Further, it should also
be indicated on the pack.
iii.
It should be amendable to quick examination of contents. It may be
remembered that the customs authorities of the exporting and importing
countries may want to examine the contents.
iv.
It should be easy to identify
v.
It should be adequately marked.
vi.
Unless it is necessary, the contents shall not be disclosed.
vii.
It should be easy to dispose of.
viii.
Packing must confirm to the buyer's specifications. If any and the
regulations in the exporting and importing countries, guidelines and
regulation by the shipping company, etc. care should be taken to observe the
established has prescribed packing standards for certain goods. The British
standard packing code, published by the British standards institution and
Exporters Encyclopedia, USA, give detailed packing instruction. Shipping
companies also given certain packing instructions especially for highly
dangerous products. According to the products he intends to export, the
exporter has to choose the right type of packing 1 to send the goods in good
condition to the destination. A right package always guarantees the right
quality of the product at the time of delivery.
LABELLING
Labeling is regarded as part of marketing because packaging decision making involves
the consideration of the labeling requirements. In international trade, many countries
insist that labeling should be done in the absence of such a statutory requirement.
Statutory obligations are important aspects of labeling. Many countries have laid down
labeling requirements in respect of a number for commodities. According to the
regulations labeling of food items should disclose information about a number of aspects
like date of manufacturing, expiry date or optimum storage period for good which do not
have an indefinite storage period, composition, storage conditions, necessary method of
use, if necessary etc.
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ROLE OF PACKAGING
1) It helps increase sales
2) It adds to the use of a product
3) It helps promote a product
4) It contributes to the safety of a product
5) It helps in storage
6) It helps in product differentiation
PACKAGING DECISIONS
Packaging Design
It is not easy to design a package for various items. For example, all shaving creams
come in tubes, but different brands of shaving cream have different packaging. Because
of the high cost of packaging some companies have resorted to refill packs.
Color
Color is an important factor for determining customer acceptance or rejection of a
product. The use of right colors in packaging may help marketers reap huge advantage.
Packaging color should be attractive so that it may help promote sales.
Packaging the Product Line
A company must decide whether to develop a family resemblence in the packaging of its
several products. Families packaging involves the use of identical packages for all
products or the use of packages with some common feature.
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CASE STUDY
In the processed meat industry, Sara Lee Meats (SLM) is a star. It owns and operates
meat-processing plants in 40 different nations. SLM's business strategy includes product
innovation, acquisitions and mergers, and market leadership in a number of different
categories. Its growth strategies support an annual 6 percent growth in sales. Important
U.S. brands in the Sara Lee product line are Kahn's, Jimmy Dean, Hillshire Farms,
Bryan, State Fair, Best's Kosher, and Tastefuls!. According to SLM executive George
Chivari, "We work very hard at Sara Lee on brand equity. . . . We have to make sure our
new ideas are not only profitable and achieve big volume for our [retail] customers, but
also that they are consistent with the quality of the brand and there is a good fit."
Tastefuls! is a product that SLM feels is a particularly good fit with the company's other
products. The lunch combination features two small sandwiches, chips, and dessert and
was developed and marketed by a subsidiary of SLM, Jimmy Dean foods. Up until the
development and marketing of Tastefuls!, Jimmy Dean has just made produced sausage.
QUESTIONS
1)
Given what you have read about Sara Lee Meats, you would think its executives
want you to classify the SLM products as
2)
One method SLM can use to maintain its brand equity would be to:
QUESTIONS
1)
Define a product
2)
What do mean by product line
3)
Explain the components of management
4)
Describe major options available for branding a consumer product
5)
How do you classify consumer product
6)
Discuss in detail how productization will help IT products manager in India
7)
Explain the significance of packing and labeling
8)
List major industrial products
9)
Explain the significance of product management. How branding packaging and
labelling help product manager in realising their business goals.
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10)
Classification products both industrial and consumer according to the type and
use of products
11)
What do you mean by productization? How do you position an IT product like
SPSS for Indian managers?
12)
Explain products positioning. Describe the importance of selecting a products line
for gaining competitive advantage in FMCG industry India
13)
Explain the concept of brand equity, brand awareness and trademark based on the
example taken from a software industry.
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2.5 NEW PRODUCTS DEVELOPMENT STRATEGIES
OVERVIEW
With advances in technology and intense competition, the creation of new products has
become a way of life in India. However, begin a developing country, India is yet to face a
situation of too many products chasing a handful of customers. Moreover, the sheer size
of the Indian market and the continuing economic development has opened up new vistas
for launching new products. This lesson discusses new products development process in
detail and also analyses the new product launches in India in the new millennium.
NEW PRODUCTS LAUNCHES
An analysis of new products development in the recent past shows that these products
have been either offshoots of technological development in the west or improvement over
the existing products in the areas of their, style, substance or packing. In the recent past,
new product launches in India have shown that these launches can be broadly classified
into three categories.
b.
Marketing Innovations
Companies have been improvement on existing products and have launched these as new
products in the market. For instance, magi noodles, soft drink in tetra pack, shrikh and
pan parag. Etc. are basically slightly alternated version of existing or old products. Here,
consumers did not require changing their consumption habits drastically to accommodate
these new products. These are example of improvement in the products whose success
was derived more from marketing innovation such as packing, branding and easy
availability, rather than any significant change in the substance of the product itself.
c.
Product Improvement
The launch of 100cc two-wheelers, radical types, instamatic cameras are basically slight
innovations on the technology / design of existing products, although the products
category as such already existed in its primitive form. Such new products are generally
targeted for a new class of buyers. The success of such ventures depends upon the ability
of the marketers to convince the consumer about the improvement in the performance
over traditional brands(s) as well as over similar new extract. For example, in the 100cc
two wheelers vehicle market, TVS Suzuki was the entrant and it had captured a sizable
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market. Subsequently, hero Honda became the market leader in this category of
motorcycle by virtue of better performance and marketing techniques.
d.
Technological Innovations
The Indian market has experienced a rapid induction of products like personal computers,
photocopiers and colour television. Generally these products require some kind of
assembling of improved kits. Although adaptation of such products calls for substantial
change in the consumption pattern, yet these products have succeeded in view of their
significant utility to the user. Such venture require an initial awareness building and
persuasion to install the product. Initial resistance to change may delay any adoption of
new technologies. However, a look at the track record of such new product shows that
early entrants have reaped the benefits of leadership. Subsequent entrants have faced
difficult in established themselves.
THE TECHNOLOGY / MARKET MATRIX
Another way to look at new products is through one of strategic planning's most useful
analytical devices ? an array of future options or alternative such as that shown in figure
1.1, A firm has roughly four way to gain new business ? see quadrants A, B, C and D in
the figure 13.1
Technological Newness
Present
Or
New Product Growth Opportunities
Improved
New Technologies
Technologies
Market Newness
Current Market
A
improved B Line Extension
products
New Markets
C new use and D Diversification
market extensions
The easiest strategy is quadrant A ? selling more of the product line to current
customers. This involves product improvement, smarter marketing and increasing market
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shares. New products management plays a minor role and the activity is often called
market, development, not product development.
Quadrant B and C involves capitalizing on the firm's current strengths. If the
strengths is franchise with a particular customer group, quadrant B's strategy is to
develop more product t sell to them. Such products don't have to be unique because the
franchise will help sell them. Quadrant C says the firm's strength is technology ?
something the firm known or does especially well. Example are coca-cola's bottling
system. Coming's glass skills and Hewlett packand's electronics capabilities. Such firms
try to develop new products that exploit their technology.
Quadrant D, commonly called diversification, involves leaving both the firm's
customer base and its technology base. This high-risk strategy should be used only under
special circumstances. The new products may come by acquisition rather than through
internal product development.
OVER VIEW OF NEW PRODUCTS DEVELOPMENT PROCESS
New products development consists of the certain of new ideas, their evaluation in terms
of sales potentials and profitability, production facilities, resource available, designs and
production testing and marketing of the products. The main task of the product planners
is to identify specific customer needs and expectations and align company's capabilities
with the changing market demands. In each of these stages, the management must decide
:(a) whether to move on to the next stage, (b) to abandon the product, or (c) to seek
additional informations.
ROUTES OF NEW PRODUCTS DEVELOPMENT
Transfer of Technology
New Products have often been launched, based on new technology, either acquired from
the parent company or with foreign collaboration. Launch of the personal computer or
photocopying machine is a move in this direction.
Diversification
Sometimes companies have entered into new lines of business and catered to altogether
new markets for the first time. DCM'S entry into the LCV market fits into this category.
Similarly, ITC's decision to enter into hotels, paperboards, edible oil, and tissue paper is
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a diversification strategy. Likewise, Shaw Wallace diversified to real estate business. In
general, diversification strategy tries to reduce the dependence of a company on a limited
line of products. At times, companies find the new business more profitable than their
former activities.
Additions to Existing Product Lines
New product lines and brand extensions have sometimes supplemented a company's
existing business. Videocon's entry in to washing machines and music systems form
color televisions is a case in point. Similarly, as a business group, Godrej's strategy to
expand its product range from consumer non-durables like toiletries to durable such as
refrigerators, cupboards and even office equipments is a classic example of product line
extension.
Improvements / Revisions in Existing Products
New products that offer superior performance and replace existing products are another
way of entering the market. For example, the launch of transistor sets and cassette
players, though primitive by today's standards, were at one time new to the market. They
eventually replaced radios and gramophones. More recently Bata has successfully
launched many sportswear, fashion jeans and apparels.
Cost Reductions
New products that provide similar performance at lower cost e.g., Nirma detergent, Tata
? 407 LCV.
Products Relaunch
Sometimes old products have been relaunched with minor improvements and targeted at
completely new markets or consumer segments, e.g., the launch of many food products
like Good day biscuits, Tata Tea, Pan Parag, et. Fall under this type of new product
launches.
SIGNIFICANCE OF NEW PRODUCT DEVELOPMENT
Whatever may be nature of operation of a concern, product planning and development is
necessary for its survival and growth in the long run. Every product has a life cycle and t
become obsolete after the completion of its life cycle. Therefore, it is essential to develop
new products and alter or improve the existing ones to meet the requirements of
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customers. One of the most common products ? planning problems relates to the addition
of new products to the existing product line. Addition of new products involves
generation of new product ideas, appraisal of various possibilities, economic analysis,
product development, product testing, test marketing and developing markets. Another
important problem of product planning is modification or elimination of existing
products. The need for continuous of the product is great because society's needs are
always changing and improved products must be introduced to fulfill them. All products
have certain deficiencies, as they are the result of great many compromises. The perfect
product has yet to be made. Research makes possible the reduction of these deficiencies
and brings about improved products.
NEW PRODUCT DEVELOPMENT PROCESS
The developers must be conscious of the probabilistic nature of their endeavors. New
product development endeavors are complex, strongly dependent on diversified human
resources and significantly affected by factors and events beyond the developers control.
Thus, the belief that the implementation of a mechanical methodology can assure success
is an illusion and at times a delusion.
SOURCES OF NEW PRODUCT IDEAS
Customers: Customers are sometimes able to discuss their requirements and offer ideas
that will meet those problems.
Competitors: Systematic comparison or bench marking with the competition may offer
good source of new product ideas.
Distributors: Suggestions from distributors and their problems in handling present
products often thrown up new ideas.
Creative techniques: Brainstorming, focused interviews and technological forecasting
enable one to find out the latent capabilities of innovations.
External world: The external world, especially the use of their technology, offers a
good source of ideas for implementation in the home market.
Research and development: Create new product ideas through R&D.
From initial generation of ideas to full commercialization and well into the mature age of
a product, the developers should strive to control what is in their power to control a do to
monitor what is beyond their control. No single facet of new product development can
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assure success. Few facets are so deter mental that they are cannot be at least alleviated.
Because of the probabilistic nature of new product development, planning and
assessments must consider long-term repercussions.
Organizational Structure and Staffing
Given a clear strategy it is necessary to build the organizational capability to meet the
challenge. At times this is simply appointing a committee. Other times it is creating an
entirely new team and physically separating it from the ongoing organization. Selecting
the right persons for such a team is difficult.
Concept Creation and Development
Once the enabling conditions of strategy and organization are identified, actual ideation
can begin. First, the team must focus on one area of interest or activity ? specifically, a
product category, a group of team may study floppy discs and try to improve them.
Another team may try to find better ways to solve the problems of teachers. Or they may
work to develop improved gold balls or golf balls or golf clubs. They may focus on their
design capability and find new applications. Or they may focus on combinations of two
or more of these areas.
CONCEPT DEVELOPMENT
Concept development involves asking question such as the following:
Need: Do customers find a strong perceived need for the benefit offered?
Trust: Do they believe that the new product has the benefits claimed?
Communicability: Do customers easily understand the key benefits being offered?
Usage: Does it offer easy adoption?
Perceived Value: Do Customers see it as offering value at the price being considered?
After the working area is defined, concept generation begins, often at a hectic
pace. Ideas flow fast and in most cases rejection is equality fast. The team looks for the
few fast and inmost cases rejection is equally fast. The team looks for the few concepts
the warrant concepts development ? the evolving of an original ideation attempt into a
specific statement of need, form and technology that can be evaluated.
Concept Evaluation
Often considered the heart of the new products process, the Evaluation State is long,
involved, and difficult. Evaluation actually begins when the strategist evaluates the
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organization's abilities. And it continues long after a product is marketed since a product
often needs revision to remain competitive. Concept testing and other prescreening
marketing research prepare the team for the actual screening evaluation. This evaluation
is a full, detailed analysis of the proposal. If the concept passes screening, technical
development begins. The technical work produces prototypes, which can then be
evaluated and if all goes well, the finished product can be prepared for use testing. Next,
the team joins the new product to its marketing plan for a test of them combined ? called
market testing. All of the above data combine to permit a full financial analysis near the
end of development.
Commercialization
Management's decision that the new item is worth marketing either in a test market
situation or in a full ? scale launch ? is called the point of commercialization. Pilot
processes are then converted to full-scale manufacturing. Final design specifications are
written. Marketing strategy is finalized, including actual brand, packaging, service
commitment etc. The team gradually moves the company from tentative exploration of a
concept into production and marketing of a new product.
Review and Evaluation
After launch the entire project must be reviewed to see how successful the team was,
those problems they faced and what they can learn to facilitate the next project.
ANALYSIS OF NEW PRODUCT LAUNCHES IN INDIA
Empirical data suggests that in highly competitive markets such as in the US, the success
rate of new launches, depending on the strictness of definition of success, varies from a
low of two per cent to a high of 10 per cent. Markets in India are not as competitive as in
the West and therefore, the success rate of new launches is likely to be healthier. A study
by Abraham Koshy, revealed the following facts
On an overall basis, out of all the new launches, 53 per cent were successes and
the remaining 47 per cent were failures. This implies that, cater is paribus, even at an
optimistic level, new launches are likely to have a probability of success of around 50 per
cent. In reality, this proportion may even at an optimistic level, new launches in the
country today, given the level competitiveness in the market and professionalism of
companies, is likely to be less than 30 per cent! This is worse than even the odds when an
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unbiased coin tosses; no company can invest huge resources for new launches if the
probability of success is so unfavorable. The message from this insight is clear when the
chances of survival are so low, the only way to beat the odds is through a systematic and
professional approach to managing new launches. Other wise it is 50 ? 50.
The mortality rates of new brands indeed tend to the high; only about 36 per cent
of new products launched in the market with new brand names survived, the remaining
64 per cent were failures. This is indeed more unfavorable than the overall situation
presented in the preceding paragraph it means that if you do not have a strong brand to
leverage and therefore, there is a need to build brand awareness and create brand
preferences afresh, then you should be even more thorough in your new launch efforts.
Life extensions and brand extensions were significantly more successful than the
launch of new brands. Thus, 71 per cent of new launches that were line extensions and 63
per cent of brand extensions were successful in the market place. From one perspective,
this suggests that your chances of success in a new launch are far greater if you leverage.
From a different perspective, it also means that a levering strategy will not automatically
guarantee you success; the results show that nearly a third of line extensions as well as
brand extensions were failure. These in other words imply that even if you have strong
brands, you need to be systematic in configuring your offer in tune with market needs.
Inappropriate leveraging of brand names, leveraging weak brands and improper
alignment of marketing mix elements are certified formulae for failures.
How can one Influence Success of New Launches?
A perplexing question that a practitioner is often confronted with is the reasons for
product failures. Marketing literature suggests several reasons for product failures. These
reasons are broadly classified under product (or offer) related factors, market by the
research team (or consumer) related factors, market by the research team related factors
and competition related factors. The latter two reasons, namely market related and
competition related factors provide the context of a firm's marketing operations and
hence these are factors on which the firms can exert little control. All that a firm can do is
to understand these given conditions and then align the total market offer based on these
realities. And this is given where many firms slip rather badly. Findings of the study
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conducted by IIM, Calcutta provided interesting insights into the ways in which firms
manage their new product activities.
Failure in Utilizing / Adopting Marketing Research Technique
The fundamental condition to succeed in any market is a deep understanding of
consumers and an excellent appreciation of competitors and their activities. This can
come about only if your company has strong systems and methods, not only to collect
and analyze market data, but also to disseminate the information thus obtained to relevant
decision makers within the organization. Studies revealed that nearly 67 per cent of the
executives noted that market research agencies are seldom utilized by their companies to
collect market data in a formal and structured manner; only the remaining 33 per cent of
companies either frequently or almost always used marketing research agencies. Granting
that it may be somewhat costly to use market research agencies on a regular basis, the
extent of utilization of internal mechanisms to collect market data also does not seem to
be very high. Nearly half the companies do not have strong formal mechanisms to collect
systematic data on a regular basis from their own sales people and about a third of the
companies rarely collect data from their retailers. If this is the general trend, then it is not
very surprising that the success of new brand launches is low. The message, therefore, is
that you need to review your internal systems and processes for gathering and utilizing
market data relating to your consumers and competitors to what your decisions become
sharper and data based. Success otherwise will be elusive.
Failure in Identifying Market Opportunities for New Brand Launches
One of the weakest links in many organizations is the absence of any systematic
approaches for identifying market opportunities, either for introducing new brands and
products, or for relaunching and\or repositioning of existing products. A glimpse at the
mindset of companies, obtained from the survey of executives suggests that in most
companies, the major source of new products ideas is the top management. These efforts
are supplemented with analysis of foreign technology/ products or competitors' products.
Seldom do companies obtain idea for new product launches from consumers. This is not
surprising since the extent of utilization of market research for new products
development. The picture then becomes clearer for new product opportunities; companies
depends either on the secondary technology available in some markets. There is hardly
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any serious and systematic effort to understand consumer's needs and requirement in the
context of competing offers and naturally the market opportunities thus imagined to have
existed turn out to be here mirages!
Failure in Integrating Customer's Choice / Ideas in New Product Offering
Consumers do not pay for mere ideas; they only buy tangible offers that satisfy their
needs. Companies, therefore, need to translate their brilliant ideas for new brand sand
products into tangible offers that spell out the specific benefits that the new offer will
provide, the needs that they will satisfy and the cost that the consumers will have to bear.
This phase of transforming new ideas into tangible and viable market offer is very critical
stage and is perhaps the stage where the firms commit major resource. But then can any
firm take such major decisions without an assessment of likely consumer acceptance of
the proposed new offer? In reality, unfortunately, many firms do not seem to be marking
sufficient efforts in assessing consumers' reaction abut the new proposal and thus
estimating the risks involved before investing huge resource to develop new offers.
Further findings of the study suggest that 44 per cent of the firms do not carry out a
formal concept testing and another 30 percent do it only occasionally. Data further
suggests that 53 percent of the companies never or seldom make a per assessment of the
financial viability of the proposed new products/brand before proceeding further with
introduction plans. These indications suggest that many a firms let pass occasion's access
consumer preference carefully and fine-tune their proposal to reflect the value
propositions of consumers. They slides over issues like leverage strengths of brands and
appropriateness of equity of the brand for the proposed new product. Many a times firms
even underplay the question as to whether or not the whole scheme makes the
commercial sense. Given such limited in sight in to the likely future potential of the new
venture, companies end up courting disaster. In fact, many sad endings could have been
averted if only companies showed little more diligence in assessing consumer reactions to
the new proposal and estimating commercial viability before making major resource
commitments.
Failure In Product Testing
If the core product that you are offering to consumers does not provide the functional
benefits that it is intended to provide, then no amount of advertisement and publicity can
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salvage the situation. Therefore, it is extremely important to ensure that the basic product
meets consumer requirement. Research data revealed that nearly 56 percent of companies
do test their products either frequently or almost always. Out of the remaining, 44 percent
either never or rarely test their products. In all probability, the proportion of your offer,
you do not have much to worry. However, even a good product will not survive if it
needs to be made either before the invest in manufacturing and/or later. Many new brand
failures in India today are more failures of concept rather than failures of basic product.
This observation suggests that you not only need to test the product to ensure that the
functional performance under the laboratory as well as field conditions is satisfactory, but
also it does address the felt needs of consumers better than competitors. This is also an
activity, which will provide valid inputs to assess the likely market acceptance of the
proposed new brand by way of volume prediction. This input certainly helps in assessing
commercial viability of the proposal. Research findings suggest that most of the firms
carry out some financial analysis at this stage.
CREATIVITY IN NEW PRODUCT DEVELOPMENT
Consider a recent transformation at Procter & Gamble. Once a hotbed of creativity, P &
G had in recent years seen the number of its product innovations decline significantly. In
response, the company established Corporate New Ventures, a small cross-functional
team that embodies creativity ? enhancing practices. In terms of challenge for instance,
members of the CNV team were allowed to elect themselves. How better to make sure
someone is intrinsically motivated for an assignment than to ask for volunteers? Building
a team from volunteers, it should be noted, was a major departure from standard P & G
procedures. Members of the CNV team also were given a clear, challenging strategic
goal: to invent radical news products that would build the company's future. Again
departing from typical P & G practices, the team was given enormous latitude around
how, when and where they approached their work.
In the three years since its inception. CNV has handed off II projects to the
business sectors for execution. And as of early 1998, those products were beginning to
flow out of the pipeline. The first product, design to provide portable heat for several
hours relief of minor pain, was already in test marketing. And six other products were
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slated to go to test market within a year. Not surprisingly, given CNV's success, P & G is
beginning to expand both the size and the scope of its CNV venture.
a. Flexible Product Design for New Product Development
Product design is fast emerging as a force in the new ICE ? age economy ? for Internet
devices, Websites, office equipment and even household gadgets. All these technological
changes are reducing the product life cycle and bringing in more and more design
innovation. The market that has taken most of the beating is an electronic gadget, be it
computers pocket devices or phones. Trendier, more vibrant than the earlier versions,
they are getting smaller too. The shift towards sleek devices has come from the need for
physical mobility, something that is crucial with almost all these gadgets. Studies indicate
that the shift has more to do with analysis on human interaction with the devices. Product
designs, today, focus on aspects of functionality, unlike the time when designs were
incorporated to have a product extension in the market. The best product example to
describe this is the hands- free option that most third generation cellular phones carry.
Whether it is as simple as a pen or as complicated as a keyboard that can be folded and
carried in the pocket, design is changing the way products are looked at. Another field
that is witnessing a lot of design change is pharmaceutical and medicine and medical
equipment. With new technological improvements and design innovations, one gets to
know his or her blood pressure with a guage attached to one's watch. The watch gives out
danger signals each time the pressure varies beyond the specified standards. It is amazing
how quickly designers are able to conceptualize designs that are then incorporated into
products. With designs playing such an important role in product differentiation, design
specifications will change beyond imagination ? soon.
Product design, the painstaking process by which prototypes are developed and
specifications are created and implemented in actual production, is an integral part of any
business strategy. For the process to work effectively, every aspect of each activity
related to the product and its life cycle must be taken into account. These include supplier
involvement, customer involvement, manufacturability, cost, time, management,
usability, marketability and disassembly or recyclability. With such wide-ranging
elements coming to play, a well ? thought out design can provide a company with the
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competitive edge needed for achieving greater profits and higher market share.
Organizations are always looking for better ways to design products. Intel, for example,
has emphasized design ethnography, which focuses on understanding the customer and
the culture in which a product is used. The world wide web is increasingly used for
product design activities such as finding information on parts and materials, sharing
designs among people, automating design sign-off's and linking geographically dispersed
designed teams.
Majority of Chief Executives believe that design issues will be of increasing
competitive importance in the coming years. Many product failures ? even those by
otherwise successful companies ? might have been avoided if better product design
methods were used. Author Tom Peters coined the phrase "design mindfulness" to refer
to the benefits of a committed creative, an energetic focus on great design.
b. Integrating Consumer and Designer Preferences
Improved product design can be achieved by taking the viewpoints of both designers and
consumers into account. In conventional product design, the marketing department sends
consumers preferences to the designer, who then creates a design to meet those
preferences. A delicate balance must be struck between the struck between the consumer
and the designer since plans based solely on consumer preferences may be unfeasible or
unrealistic. Designers acting alone, on the other hand, may come up with a product that is
a technological marvel, but that consumers see as silly and unusable. Consumer's
decision-making processes are not perfect and may given an inaccurate picture of
preferences. They often think in terms of abstract goals that are difficult to translate into
product features. A lack of expertise or incomplete consideration of alternatives can also
lead consumers to make choices based on vague preferences, rather than considering
ways to realize concrete operation benefits that would realized with greater experience
and exploration.
Designers can make up for some of the short-comings of consumer input, since
they usually understand more about future technologically possibilities and look at a
longer time line. They are also in a better position to know that competitors might offer.
For example, consumers may desire a "user ? friendly" personal computer that is easy to
get started with, but the designer realizes the computer should also meet longer ? term
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needs. Therefore, designers should have the freedom to create innovative product designs
that not only meet current user requirements but are also up to the demands of future
consumer expectations. This give and take requires a delicate balance between designers
and consumers since research has shown a high correlation between inadequate feedback
from users and the failure of a new product containing technical innovations.
c. Striking a Balance between Consumers and Designers
The way a consumer looks at product attributes is usually much different from the way a
designer looks at product "characteristics". For example, a consumer may want a boat to
be fast, but a designer looks at characteristics that affect the speed of the boar, such as
engine size and full shape. A distinction can be made between product characteristics and
attributes: Product characteristics physically define the product and influence the
formation of product attributes; product attributes define consumer perceptions and are
usually fewer in number and more abstract than product characteristics.
Past product design research has focused on optimization with respect to either
consumer attributes or designer characteristics. However, both the consumer and the
designer will benefit from a balanced design. Plans based solely on consumer attributes
ignore the relationship between attributes and characteristics; using only designer
characteristics inadequately accounts for the consumer's preferences. A better approach
to product design would account for the relationship between the two. In other words,
what design characteristics would bring about the desired consumer attributes? In short,
translating consumer attributes into the appropriate and corresponding design
characteristics can optimize product design. This is the great benefit of multi-source
product design: it optimizes both sides of the equation simultaneously.
13.5
THE FUTURE OF NEW PRODUCTS MANAGEMENT
In the new millennium, we are seeing more segmentation there will be even more
competition for almost everyone than there is today; and life cycles of products will
continue to get shorter or stay short. Similarly, most of the forces acting to increase the
costs of innovation will remain high or will increase. In most instances productivity will
increase as all producers focus so intently on it as the path to lower costs and higher-
quality product. On the positive side, three forces acting to at least partially forces acting
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to at least partially offset the negative forces described above. All three of these positive
forces will get stronger, not weaker. The first, technology, is the strongest of all it can and
that there is little left to invent, we know that this simply not so. Computerization,
automated manufacturing, molecular biology, fiber optics and surface ceramics are just a
few of many fields that offer what almost certainly will be more technological
opportunities in the next 25 years than in the past 50. Molecular biology has the potential
for outstripping anything else done so far in this century. Moreover, there is an amazing
move to invest large sums of money in older technologies, especially in the so-called
mature industries. And as a final plus international opportunity continues to grow and
contribute new markets, new skills and new concepts of management.
The second positive force is the general willingness of consumers to accept new
items ? otherwise there is absolutely no basis for forecasting. And third, management's
general capability has been growing almost exponentially, particularly by taking
advantage of the many MBAs entering the work force and the wide array of continuing
education opportunities for managers today. The combined results of these negative and
positive forces are mixed, of course, but the negatives had no perceived effect on the
development and marketing of home video systems or on the development of new drugs
in recent years.
SUMMARY
The general environment of social, economic and other forces seems to favor the
continued viability of new products activities. At present no environmental force on the
horizon has the power to blunt the force of product innovation. The leading on is the
attitude of firms and their managements toward new products. More companies will
eagerly seek such products and their searches will be more vigorous. Due primarily to (1)
the interest in strategic market planning, (2) the subsequent growth in portfolio analysis
and (3) marketing planning by individual business segments, more and more
managements have come to see the dangers. The second force that will act directly on the
motivation of new products managers is customer lifecycles ? both consumer and
industrial. In total, the above set of forecasts paints the following picture.
1.There are many basic new needs ? an ever-growing number of them, amid an ever-
growing population, with ever more money to spend.
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2. Technology is fully capable of meeting many of this needs-never have we had find had
the immediate technology potential that exists today?
3. And never have we had such knowledge and sophisticated new products profession
and such industrial capability. We do indeed know how to develop new products
successfully. Given trained individual as working in corporate environments that provide
the conditions known to be effective output, the only reason for a new product failure is
deliberate circumvention of correct procedure.
In summary regarding the new product process, we should expect that failure rates would
fall, that budgets will be up and that there will be better all-round performance as
expertise is build up both inside and outside the firm.
QUESTIONS
1. Define a new products
2. What do you mean by technology / market matrix?
3. Explain the source of new products idea
4. Describe major components of business creativity
5. What do you men by concept development
6. Discuss the detail business creativity will help IT products managers in India
7. Explain the significance of new products development in India
8. List major steps in new products developments
9. Explain the significance of new product management. Explain the reason for
failure and give your suggestion for improvement to India manager
10. Classify new products and explain how business creativity technology and
markets positioning will help the new products managers to click success in India
11. Want do you mean by concept testing? How do you test an IT products like
people soft for Indian managers
12. Explain products innovation. Describe the important of innovation for gaining
competitive advantage in FMCG ? consumer durable say, air conditioner in India.
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2.6 THE LIFE CYCLE OF THE LESSON
Overview
Many products generally have a characteristic known as perishable distinctiveness'. This
means that a products, which is distinct when new, degenerate over the year into a
common commodity. The process by which the distinctiveness gradually disappears as
the product merge with other competitive degeneration. The cycle begins with the
invention of a new product and is often followed by patent projection and further
development to make it salable. This is usually followed by a rapid expansion in its sales
as the products grains market acceptance. Then competitors enter the field with imitation
and rival product and the distinctiveness of the new products. While some products fail
immediately on birth or a little later, other may live long enough BPL's picture in
pictures TV was eliminated and the introduction stage itself. This lesson focuses
exclusively on the PLC of various products and its implications for managers in detail.
The Concept
The innovation of a new product and its degeneration into common products is termed as
the life cycle of products is termed as the life cycle of products. There are five distinct
stages in the life of products as shown below:
Y
Time
O
Qty
X
a. Introduction: Research or engineering skill leads to product development. The
product is put on the market; awareness and acceptance are minimal. There are high
promotional costs. Sometimes a product may generate a new demand, for example,
Maggi, Volume of sales is low and there may be heavy losses.
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b. Growth: The product begins to make rapid sales gains because of the cumulative
effects of begins to make rapid sales gains because of the cumulative effects of
introductory promotion, distribution, and word of mouth influence. High and sharply
rising profits may be witnessed. But to sustain growth, consumer satisfaction must be
ensured at this stage.
c. Maturity: Sales growth continues, but at a diminishing rate, because of the declining
number of potential customers who remain unaware of the product or who have taken no
action. Also, the last of the unsuccessful competing brands will probably withdraw from
the market. For this reason, sales are likely to continue to rise while the customers for the
withdrawn barads are mopped up by the survivors. There is no improvement in the
product but changes in selling effort are common. Profit margins slip despite rising sales.
The following table shows the product life cycle and its different stages and the
various characteristics, which they reflect, in the varying stages:
PCL Elements
Introduction
Growth
Maturity
Decline
CHARACTERISTICS
1. Sales
Low
Fast Growth
Slow Growth
Declining
2. Profits
Negligible
Peak Level
Declining
Low
3. Cash inflow
Negative
Moderate
High
Low
4. Competitors
Few
Growing
Many
Declining
5. Customers
Innovative
Mass Market
Mass Market
Laggards
Source: Peter Dayle, "The Realities of the product life cycle", Quarterly Review of
marketing, summer 1976
Pattern of Growth ? A Life Cycle Analysis for New Products
Even then the existence of initiative products/services and the emphasis of management
on such products cannot be ignored. This may be due to the recognized marketing gap
hitherto unfilled by the existing producers, product deficiencies and identified consumer
dissatisfaction with available products in the market.
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The super cautious attitude of management towards innovation, which may be due
to fear and high cost of product failures, may also be a reason for increased emphasis on
imitative new products. Just like a human being pass through different stages of the life
cycle, a product in the market should also different stages of the life cycle a product in
the market should also pass through different stages from introduction to decline and
possible abandonment.
The concept of the product lifecycle indiscriminately applies both to innovative
and imitative products. The noted stages of a product's life cycle include introduction,
growth, maturity and saturation, decline and possible abandonment. He challenges and
characteristics for innovative product imitative new product in their respective product
life cycle stages are analyzed here.
The strategies for meeting these challenges, at each stage of the life cycle for the
respective products are also discussed.
DIFFERENT STRATEGIES
Innovative and imitative products require different kinds of marketing strategies. Right
from the embryonic stage of product development, these differences in dealing with
innovative and imitative new products are noticeable. For instance, a new brand of soap,
toothpaste, scooter or car is an imitative new product; on the other hand, a flying car or
scooter is an innovative product. Imitative new products have to overcome the existing
competition to establish them in the market. But in the case of innovative products
prospective and not the present competition is a challenge.
a. Introduction and Growth Stage
The introduction stage of the product life cycle is the entry of the product in the market.
Generally, in the earlier days of introduction, because of the product is known and its
positive characteristics are less known to the consumer, sales or less. Even though there is
increase in sales, it is at a slow place. The ease of introducing a product depends on the
degree of its novelty, improvements over the existing products, distinctiveness and a host
of other factors. Innovative products can be introduced in the market with relative
competitive ease because there is no competition to be broken. This is much easier if the
product has with a highly technical or utilitarian aspect. But for imitative products it is
difficult even to enter the market under competitive conditions. No doubt, the degree of
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this difficulty is much influenced by the extent of market satisfaction number of existing
rival products and the marketing and product advantage they offer to the customer.
Generally, the prospective consumers for a newly introduced product is already
selective in his nature. Therefore new imitative products should have some step-up
features and marginal improvements so as to divert the attention, affiliation and loyalty of
the consumer from the already existing alternative brands in the market. But in the case
of innovative or really new products, convincing the consumer about the product's
marketing advantage or utility is enough to find a place in market. However, the initial
positioning of the products should be on sound lines with a long run competitive
perspective, so as to be less vulnerable to the competitor's strategies.
The introduction stage of any product is generally charactersied by low sales
volume, limited distribution and high costs of promotion. These may be common to a
great extent for innovative and imitative products. But with respect to promotion strategy,
for truly innovative products the main objective is primary demand creations, whereas it
is secondary demand for imitative products. In other words, due to the real newness of
the product appeal to the consumer rather than bran appeal as in the case of imitative
products .on the other hand, where the existing products dominate the market, imitative
products as new entrants should try to snatch away the market of other products and thus
establish their share of the market.
The success of innovative products in the introducing phase depends largely on the
promotional efforts and their positioning. But the success of imitative products is
conditioned by the extend of competition, the existing competitors, strength and quality
of their products, offered to the consumers through promotion and the life stage of the
exiting products. The duration of the introduction stage for innovation is generally less,
provided the products are effectively and extensively promoted.
Moreover, the number of possible product failures is also less with respect to an
innovative product. Because the direct competitive forces are absent the internal
marketing effort and efficiency is the major deciding factor for the product's success. On
the other hand, the imitative products often fail because of the competition and counter
market strategies by the existing competitors.
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Therefore, imitative products, which enter the growth stage should try to counter
the marketing efforts of the marketers and at the same time develop a good image and a
competitive edge by capitalizing the weakness of the existing products. The intensity of
competition will also differ in this stage for innovative and imitative products should plan
for product improvement or finding new uses for the product.
Thus the marketer can maintain his competitive edge and retain his distinction and
market market share. The duration of this stage of product life cycle may also vary in
both cases. Imitative products, unless they are highly distinctive, of better quality and
exceptionally appealing to the consumers, have a short span of growth stage. On the other
hand, ceteris paribus, innovative products are likely to stay in the growth stage for a
longer period because they take considerable time for the imitators to come up with their
own versions of innovative products.
b. Maturity and Saturation Stages
Once the product passes through the growth or market acceptance sage in due course, it
enters the maturity stage followed by saturation. The former is characterized by increase
in sales but at a low rate and the alter by stagnation in sales. The maturity stage in a
product's life cycle is characterized by increasing sales and profit, but the rate of increase
is less than that in the growth stage. This reduced growth rate is certainly due to
imminent competition in the market. Here one should not forget that innovative products
face competition from new and improved imitative market entrants from time to time,
whereas imitative products have to content with existing products. When the question of
guarding against the phenomena of maturity and saturation stages arises a clear forecast
of the setting in of these phases is essentially required. Otherwise, designing of effective
marketing strategies to prevent the early setting in of maturity and saturation is not
possible. Sometimes, if the products sales are close to the break-even levels, losses
become inevitable especially in the saturation stage.
Moreover, there may be a drop-out of the products at this stage if actual sales fall
below the break-even levels. In order to prevent such as eventuality, strategies such as
product improvements, price reductions, effective advertising and sales promotion
activities should be intensified. When compared to imitative products, innovative
products, generally experience a longer span of maturity and saturation stages. This may
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be due to the early life cycle or the introduction stage of competing products and
consequent less competition; or the competing and newly emerging imitations of the
innovative products may have a low level of consumer acceptance. Moreover, innovative
products may have a scope to adopt improvements through planned obsolescence when
their imitations try to emerge a strong product in the market.
The strategy of systematic and timely planned untouched, potential segments of
the markets and a number of other such strategies are quite significant to prevent the
early entry of the product in to the decline stage. Especially, innovative products should
not go for planned obsolescence before the entry of vital competitors with their own
imitative versions. And growth so as to reserve it for maturity and saturation to revitalize
the life cycle curve.
Just like any human being enters into the life cycle phase of inevitable physical
deterioration and death, products also do enter into the stage of decline and possible
abandonment. How fast a product approaches this stage is dependent on the marketing
environment, market forces, product characteristics, and competitive strengths of the
product and extent of product differentiation. As the new products enter the market, from
time to time, virtually all the products enter the market, from time to time, virtually all
the products are certainly caught in the clutches of obsolescence.
When the competing products establish their firm footing and consolidate their
position in the market, the earlier entrants to the market fall prey to the clutches of
decline. If a product, either innovative or imitative, stays in the saturation stage
competitors try to aggravate their promotional effort to establish their superiority and
push the innovative product to decline and consequently to the wall. How far a product
can withstand the threat of the decline and curse of obsolescence depends on the
managerial efficiency, efficiency of the marketing management and product strategies.
This stage of any product's life poses challenges to the management. In this stage,
the competitive strategies of promotion, re-pricing and repositioning are warranted to
inject a new lease of life to the product. No one should be left unturned to revitalize the
product lifecycle. For a successful revitalization, every effort to maintain the morale and
loyalty of middlemen to carry out the product on their shelves as against those
competitors is highly significant.
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Strategic Considerations in the PLC Concept
a.
Competition
At the introductory stage, competition is given no important the growth stage, it is given
a little important while at the maturity stage, there are many in the market slowly,
however, the number of competitors or rivals gets reduced with the declining srage.
b.
Over all Strategic Focus
At the first stage, emphasis is laid on market establishment. At the growth stage, market
penetration and persuasion of mass market are emphasis. Creation of brand loyally and
brand preferences is focused at the maturity stage. At the decline stage, the strategy aims
at overall preparation for renewal.
c.
Profit
At the introductory stage, profit are negligible but all the growth stage, they reach the
peak levels as a result of growing demand. At the maturity stage, they decline due to the
increasing competition. At the last stage, the declining volume pushes costs up and
eliminates profits.
d.
Distribution Strategies
At the introduction stage, distribution is selective. However growth and maturity stages,
it is intensive. At the decline stage, it becomes selective and hence low-end strategies are
used.
e.
Advertising Strategies
At the introduction stage, advertising strategies aim at the needs of early adopters; at the
growth stage. An attempt is made to make the mass market aware of brand benefits. At
maturity stage, advertising is used as a vehicle for differentiating among otherwise
similar brands. At the last stage, however it emphasizes, on low price of the product and
minimum advertising expenditure.
CASE STUDY
Kellogg's
Kellogg the $ 10 billion Michigan ? based food major, is knocking at corporate doors.
Retails strategy did encourage consumers to try cereal for breakfast, but it was painful
slow going. If what Kellogg's Indian subsidiary is doping in Delhi is any indication, the
company seems to have settled on an alternative route of the consumer's palate. It's
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abandoning its breakfast plank in favour of round the clock consumption and not just at
home either. As a part of its new strategy, k0lloss India recently installed cereal
dispensers in 120 odd officers in Delhi. The results have encourage the company to
contemplate similar efforts in other metros, even as it expand its chain of dispensers in
Delhi officers. At a details off-take of 4-5 kg per office per day (which amount to over
100 helpings a day) this could be just the tip of the iceberg for Kellogg's. the new
strategy is in line with current trends, with companies emphasizing health consciousness,
the time is right for Kellogg to perk up and get in on the action.
For years, Kellogg's been focusing on retail marketing and new products
launches, without any significant breakthrough. Its small sachet initiative early this year
didn't make a significant impact either. With no fresh infusion of investment from the
parent in sight, the Indian arm clearly had to manager on it own. This is one step in that
director. In marketing you've to do a 360-degree job, explain R.C.Venkateish managing
director. Kellogg India." You just can't afford to bombard the consumer with products
and communication and relax, hoping that she will lap them up", he says. For the last
eight years Kellogg had done just that. Now it wants a more calibrated approach to new
products a launches and consolidate gains it's made for. The key lies in expanding
penetration fro home to out-of-home situations, while increasing more occasions to eat
the products. And by targeting offices Kellogg is trying to do just that. Kellogg roped in
solutions, a Delhi based marketing consultancy, for the track. The mandate was to see
how best the consumption of Kellogg cereals could be perked up. Solutions, along with
Kellogg's three ? member marketing team, decided to test the concept of snack junction
Kellogg as a snack for office staff. "Snack because there are many more opportunities for
the consumer to pick up snacks through out the day", says Kanika Mathur COO and
director, solutions.
The `healthy breakfast' plank had restricted space for Kellogg to operate. With
the traditional 9to 5 officer culture going out of fashion corporates seemed to be the
obvious target to test the concept, especially as most companies are now willing to
provide employees as much facilities as possible within the office itself. Solution
shortlists around 1,000 large companies to start with and its 30-member team fanned out t
sell the idea. The customer includes MNCs like whirlpool, Electrolux, Coke, Samsung,
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Amex; call center like spectramind and consultancies like PWC and KPMG. According
to a KSA grow fast study, there are over one-lakh officers in Delhi with 50 or more
employees. And for 50 employees, an average company spends Rs.6, 000 - 8,000 per
month on test and coffee alone. At a cost of Rs.4,000 ? 5,000 per dispensing unit
(depreciable and to be written off), payback for the new approach seems pretty attractive.
It's created much needed awareness for a concept that's much in nature", says Mathur.
The company is capitalizing on this excitement by poster campaigns at the `snack
junction' within the site. The exercise has helped Kellogg increase visibility, generate
trails, which weren't quick in retaining alone and make it popular.
SUMMARY
Introduction
The seller tries to stimulate demand promotion campaigns to get increase public
awareness. Explain how the product is used.
Feature, Advantage, Benefits
You will lose money, but you expect to make profits in the future Sales are low, and
profits are below the line because your costs greater than the amount of money you make
You have "negative" profit Need to spend a lot of money on promotion
Growth
A lot is sold- the seller tries to sell as much as possible other competitor companies watch
and decide about joining in with a competitor product "success breeds imitation". Growth
will continue until too many competitors in the market ? and the market is saturated.
At the end of the growth stage, profits starts, profit start to decline when
competition means you have to spend more money on promotion to keep sales going.
Spending money on promotion cuts into your profit.
Maturity
Many competitors have joined-the market is saturated. The only way to sell is to begin to
lower the price ? and profits decreases. It is difficult to tell the different between products
since most have the same F.A.B. ? features & Benefits. Competitions can get "nasty" and
commercial are intense.
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Decline
Newer products are now more attractive ? even a low price does not make consumers
want to buy. Profit margin decline ? and so the only way to make money is to sell a high
volume. To increase volume you try to.
1. Increase the volume number of customers ? get new customers
2. Increase the amount each customer uses.
Speed of the PLC
Since the intro stage is getting shorter and something the growth stage doesn't last too
long (because competitors move in) companies must continually come up with new
products.
You can tell when they are in growth stage because this is when there introduce new
model variations and some improvement to the products.
Products Life Cycle Considerations In Marketing Strategy
Understanding that profits have a predictable pattern
In the early stages, focus is on products information
In the later stages, focus is on brand promotion
Use market segmentation in maturity stage to maintain strong core customer basis.
QUESTIONS
a. Define products life cycle of a ladies garment, say a royal jeans from
lifestyle
b. What do you mean by maturity stage in PLC?
c. Explain the PLC of new product.
d. Describe major strategic consideration in PLC.
e. Explain the significant of PLC for managers.
f. What do you mean by products life cycle? How do you develop PLC for
an IT product like SPSS?
g. Describe the important of PLC for gaining competitive advantage in
FMCG ? consumer durable say, personal computer in India.
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UNIT ? III
Lesson 3.1
Pricing Decisions
Objectives
In this lesson, we will introduce you to the 2nd P of marketing ? Price. While the other 3
Ps represent costs, this element in the marketing mix produces revenue. After you work
out this lesson, you should be able to:
Appreciate the importance of pricing decision
Identify the considerations that come to bear on pricing decisions
Understand why customers may be price sensitive
In this lesson, we will discuss the following:
Product costs
Customer value
Elements in the pricing decision
Introduction
A price is an expression of value. The value rests in the usefulness and quality of
the product itself, in the image that is conveyed through advertising and promotion, in the
availability of the product through wholesale and retail distribution systems, and in the
service that goes with it. A price is the seller's estimate of what all of this is worth to
potential buyers, recognizing the other options buyers will have for filling the need the
product is intended to satisfy. To the extent that the product or service finds markets and
is profitable at given price levels, it provides a viable economic base for building and
maintaining a business.
In the competitive marketplace, pricing is a game. The struggle for market share
focuses critically on price. Pricing strategies of competing firms, therefore, are highly
interdependent. The price one competitor sets is a function not only of what the market
will pay but also of what other firms charge. Prices set by individual firms respond to
those of competitors; they also are intended often to influence competitors' pricing
behaviour. All of marketing comes to focus in the pricing decision.
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A way to think about making a pricing decision is that price should be set
somewhere between what the product costs to make and sell and its value to the
customer. If price exceeds the perceived value of the product to potential purchasers, it
has no market. If the price is below what the product costs to produce, the business
cannot survive for very long. Where a price should be set between cost and customer
value is a strategic decision. Many factors can influence this decision, viz., competitors'
product/price strategies, governmentally imposed constraints and the seller's and the
buyer's sense of what is fair. Finally the most important determinant of price is the
marketer's objectives ? what is the firm trying to do. The discussion on pricing objectives
is taken up in the next lesson.
Product costs
Costs may be classified as variable, fixed and semi-fixed. Take the case of an airline. It
may consider the annual depreciation on an aircraft as a fixed cost. Taking the plane off
the ground to fly from one city to another incurs certain semi-fixed costs like the fuel, the
compensation of flight personnel, the airport fees and so on. These costs are
approximately the same for any given flight whether the plane is empty, half-loaded or
completely full of passengers. The variable costs of the flight would include primarily the
costs of food and beverage. They vary directly with the number of passengers.
If fixed and semi-fixed costs make up a larger portion of total costs, as in the
airline example, pricing to get maximum capacity utilization is crucial. Until the seller
covers fixed costs, money is lost. After fixed costs are covered, each incremental sale
contributes proportionally large amounts to profits. If variable costs are a relatively high
percentage of total costs (which is quite likely in many manufacturing firms), pricing to
maximize unit contribution (i.e. the difference between the unit variable cost and price)
will be critical to profitability. Under these cost conditions, the manufacturer would
naturally work to maximize unit prices and to reduce variable costs.
Above are two examples. In the first one, the objective of the airline's pricing
strategy will be to generate enough total revenue to cover its fixed costs and above that to
get maximum capacity utilization to make profits. In the second one, a manufacturer will
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price to cover its high variable costs per unit and get enough contribution to amortize
fixed costs and make a profit.
Under certain conditions, firms may elect to price at less than full cost. In
conditions of capacity underutilization, for instance, firms with high fixed costs may take
business at prices that cover variable costs and make some incremental contribution to
fixed costs (or overheads). The idea is to get through bad times, keep the factory running
and hold some critical team of managers, skilled technicians and labour.
Pricing temporarily at less than full cost may also be used as a strategy to get a
particularly large order. The expectation is that by taking the business, the firm may be
able to reduce its unit costs and/or later raise its prices so as to make a profit on
subsequent orders. Taking business below cost with the hope of offsetting near-term
losses with longer-term profits may be a risky tactic, since there is no assurance that the
losses can be made up.
Pricing near or below cost may also be done to gain a large market share.
Generally pricing low to preempt market share is predicted on the assumption that unit
costs will come down significantly as volume increases. This may happen through
gaining manufacturing experience. In fact, in many firms, a so-called experience or
learning curve is used to calculate what the effect will be of volume growth on unit costs.
To a large extent, learning curve experience reduces the variable cost component of unit
costs. Labour gains in efficiency and purchases of materials and parts in larger volumes
all result in lower prices and manufacturing process improvements produce cost savings.
Indeed, the fixed-cost component of unit costs may also come down with volume
increases. Larger plants may be more cost efficient. Large-scale selling and advertising
programs may also be more cost efficient. If product sales are particularly sensitive to
heavy advertising, or the product requires widespread distribution or extensive field
service support, fixed marketing expenditures for these purposes must usually be at a
high level.
These so-called scale economies come in certain cost categories depending on the
product, the processes used to manufacture it and the level of marketing spending
required to be competitive. If significant scale economies are achievable, some
competitors may be willing to price low enough to gain volume, thus preventing other
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competitors from going down the learning curve and hoping to emerge as low-cost
producers with dominant market shares.
Product cost, then, is not a simple `hard' number. How cost is calculated for
pricing purposes is a matter of managerial judgment. It may be construed as full cost or
as variable cost. It may be the cost levels being experienced or experience curve
estimates of future costs. The interpretation of cost factors for pricing will depend greatly
on product/market objectives.
Customer value
Some business managers set prices simply by adding a percentage over costs to provide
an acceptable profit. That approach has two advantages. Price is simple to calculate and if
a firm is a low-cost producer, relative to competitors, so-called `cost-plus' pricing may
seem to provide some protection from competitive attack. The trade-off for simplicity
and security may be lost profits. In theory, the amount of profit that is sacrificed is the
difference between what customers actually paid and what they would have been willing
to pay. Compared with cost-plus pricing, pricing according to the value of the product to
the customer is more difficult and speculative. The challenge is to determine what the
value of the product is in the customer's mind.
First, it is useful to distinguish between perceived value and potential value.
Perceived value is what the buyer now recognizes. Potential value is what the buyer can
be educated to see in the product. That is the task of marketing. It may be accomplished
through advertising, personal selling and getting the buyer to try the product.
Second, product value may be perceived differently by different customer groups
or market segments. Different segments may place different values on the several
elements that make up the set of product (which in the broadest sense, includes the
product or service itself, its brand image, its availability, and the service that the seller
provides) attributes. For example, a large firm may place little value on the technical
service a supplier offers it (the large firm) has comparable or superior technical resources
of its own. But a small company may be highly dependent on the supplier's technical
services and place high value on them in making purchasing decisions.
A third factor to consider in establishing customer value is the options that a
potential buyer may have. Clearly, if the buyer can purchase a product at a lower price
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from one source than another, the lower price sets the upper bound in the marketplace.
But for the buyer to have such effective options, he/she must have knowledge of them.
Another option the customer has may be not to buy the product at all but to make-
do with what one has. Given this choice, the buy-not buy decision may be made by
comparing the outcome of one course of action with the other.
These actions are quantifiable. One may calculate the operative savings in either
instance and relate this to the cost of buying new, as the case may be. The anticipated
savings may be expressed as a percentage return on investment (ROI). This, the amount
of realizable savings establishes the value of a product to the customer. Calculated for
each of several possible uses for available funds, ROI measures may serve to establish
the buyer's purchasing priorities. The choice between buy-not buy, of course, may not
always be easily quantified with reference to expected savings. Nevertheless, it is a real
and important consideration.
Finally, the price set by the seller is often taken by the potential customer as one
measure of the value of the product. It is often interpreted by buyers as the supplier's
estimate of the worth of the product it sells. If the seller does not value the product
highly, it is not likely that the buyer will. Therefore, pricing a product significantly below
what the buyer might pay for its functional equivalent can be self-defeating. The buyer
may infer that value is, in fact, connoted by price and choose the higher-priced option.
Value, then, for a given product tends to be a function of (1) the utility of its
several attributes to the prospective buyer, (2) the options the buyer has and is aware of
(i.e. the offerings of competing suppliers and the option of not buying at all), and (3) the
extent to which the buyer perceives price itself as a measure of product value.
If the seller truly value-prices, then different prices would be charged for the
product to different customer groups. It is referred as price discrimination. A relevant
consideration in thinking about price as an expression of product value is how sensitive is
the buyer to price. Price sensitivity will vary considerably among purchasers and, for the
same purchaser, it will vary from one time and one set of circumstances to another.
Buyers who can pass on the cost of the purchase are less sensitive to price than those who
cannot. Price sensitivity also relates to the performance standards by which the purchaser
measures. Viewed differently, performance measures effectively establish the relative
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worth of different product attributes for the manager who has to make the decision and be
judged for it. Another factor in price sensitivity is the uncertainty that attends switching
from one supplier to a lower-priced source. Modest price differences are often
insufficient to overcome the purchaser's uncertainties about an untried supplier's product
quality, reliability and service.
Factors affecting price decisions:
There are a number of factors which influence the pricing decisions of marketers. While
some of these are external or environmental factors (such as competition, demand
conditions and so on), others are internal factors (like marketing objectives, cost
conditions and so on). Figure 3.1.1 represents these factors. The important factors
affecting the pricing decision are the following.
External factors:
Nature of the market
and demand
Competition
Other environmental
factors (e.g.
economy, resellers
and the Govt.)
Problem/opportunity
Recognition
Figure 3.1.1 Factors affecting a firm's pricing decision
Internal factors: The internal factors, as the term implies, are mostly internal to the
organization and therefore, largely controllable by the organization. They also have a
direct bearing on the firm's pricing decision. The following are the important internal
factors that must considered in pricing a firm's product/service.
Marketing objectives ? Before setting price, the firm must decide on its strategy
for the product. This reiterates the idea that the corporate strategy must precede
the marketing strategy and then marketing strategy must precede the pricing
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strategy. If the firm has selected its target market and positioning carefully, then
its marketing-mix strategy (i.e. the 4 Ps) will be fairly straightforward. For
example, if the Coimbatore-based Paramount Airways decides to target the
corporate/business travelers with its single-class airplanes, this suggests charging
a high price. Whereas, a no-frills, low cost carrier would charge a low price, as
dictated by its targeting and positioning. Thus pricing strategy is largely
determined by past decisions on marketing strategy. At the same time, the firm
may seek additional objectives. The clearer a firm is about its marketing
objectives, the easier it is to set price. Some of the common objectives include
survival, current profit maximization, market-share leadership and product-quality
leadership.
Other objectives ? Sometimes a firm might set prices so low as to prevent
competition from entering the market as they might lead the competition to regard
the market as less attractive. Non-profit organizations may adopt a number of
other pricing objectives such as full cost recovery, partial cost recovery or set a
social price geared to the distributed income situations of different clients.
Marketing-mix strategy ? Price is only one of the marketing-mix elements that a
firm uses to achieve its marketing objectives. Therefore, logically pricing
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 elements may affect pricing decisions. For instance, the
decision to position the product on quality plank will imply that the seller must
charge a higher price to cover higher costs and/or to match the price-quality
perception in the mind of the customers. It is common for marketers to design a
price position wherein a target cost is set, then met and the target price is set.
However some marketers deemphasize price and use other marketing-mix
elements to create non-price positions. The marketer must consider the total
marketing mix when setting prices. If the product is positioned on non-price
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 others marketing-mix elements. In most cases, the
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company will consider all of the marketing-mix decisions together when
developing the marketing program.
Costs ? Though this topic was dealt with earlier in this lesson, some finer aspects
related to costs are described here. Costs set the floor for the price that the firm
can charge for its product. A firm's costs may be an important element in its
pricing strategy. The firm 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. The types of costs were explained earlier. To price wisely,
managers need to know how costs vary with different levels of production. The
concept of economies of scale comes into play here. Also, costs vary as a function
of production experience. There is a drop in the average cost with accumulated
production experience and this is attributed to the experience curve or the learning
curve. Consider the semiconductor industry as an example. It has a strong
experience curve effect. As a given chip is produced, manufacturing speeds go up,
defect rates drop and costs plummet. These effects are seen dramatically in the PC
market, where computing power increases and costs drop every year.
Organisation for pricing ? Management must decide who within the organization
should set prices. Firms handle pricing in a variety of ways. In small firms, prices
are often set by top management rather than by the marketing or sales
departments. In large firms, pricing typically is handled by 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 where pricing is a key factor, companies
will often have a pricing department to set the best prices or help others in setting
them. Others who have an influence on pricing decisions include sales managers,
production managers, finance managers and accountants.
External factors: The external factors, as the term implies, are external to the
organization and therefore, treated as uncontrollable by the organization. They have an
indirect, but definite bearing on the firm's pricing decision. The following are the
important external factors that must considered in pricing a firm's product/service.
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Nature of the market and demand ? While costs set the lower limit of prices, the
market and demand set the upper limit. Buyers balance the price of a product or
service against the benefits of owning it. Therefore, before setting prices, the
marketer must understand the relationship between price and demand for his
product. Price-demand relationship varies for different types of markets and how
buyer perceptions of price affect the pricing decision. Economists recognize four
types of markets, viz. pure competition, monopolistic competition, oligopolistic
competition and pure monopoly. Each presents a different pricing challenge and
pricing freedom.
Under pure competition, the market consists of many buyers and sellers
trading in a uniform commodity. A seller cannot charge more than the going
price because buyers can obtain as much as they need at the going price. Nor
would sellers charge less than the market price because they can sell all they
want at this price.
Under monopolistic competition, the market consists of many buyers and
sellers who trade over a range of prices rather than a single market price. A
range of prices occurs because sellers can differentiate their product/service
offering to buyers. Buyers see differences in sellers' offerings and will pay
different prices for them.
Under oligopolistic competition, the market consists of a few sellers who are
highly sensitive to each other's pricing and marketing strategies. The product
may be uniform (as a commodity) or non-uniform. Each seller is alert to
competitors' strategies and moves. An oligopolist is never sure that it will
gain anything permanent through a price cut or a price hike.
In a pure monopoly, the market consists of one seller. The seller may be a
government monopoly (the Indian Postal service), a private regulated
monopoly (a power company) or a private non-regulated monopoly (e.g. Sify,
when it introduced Virtual Private Networks for corporate users). Pricing is
handled differently in each case. A government monopoly can set the price
below cost to make the product/service affordable, or set price to recover costs
or set a high price to slow down consumption (an instance of demarketing). In
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a regulated monopoly, the government permits the firm to set rates that will
yield a fair return. Non-regulated monopolies are free to price at what the
market will bear. However, they will be careful not to attract competition nor
invite government regulation.
The price-demand relationship must also be studied before taking the price
decision. Each price the firm might charge will lead to a different level of
demand. The relation between the price charged and the resulting demand level is
described as the Demand curve. In the normal case, demand and price and
inversely related. For `prestige' goods, raising the price may result in more sales.
In measuring the price-demand relationship, the marketer must not allow other
factors affecting demand to vary. They also need to know price elasticity, that is,
how responsive demand will be to a change in price. If demand hardly changes
with a small change in price, the demand is said to be inelastic. If demand
changes greatly, it is said to be elastic. Price elasticity of demand is determined by
many situations. For example, buyers are less price sensitive when the product
they are buying in unique or when it is high in quality, prestige or exclusiveness.
They are also less price sensitive when substitute products are hard to find or
when they cannot easily compare the quality of substitute products. Buyers are
less price sensitive when the total expenditure for a product is low relative to their
income or when the cost is shared by another party.
Competition ? 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. For so-called commodities (i.e. virtually
undifferentiated products), all competitors generally charge identical prices. If one
goes above the market price, sales will drop off sharply; if one goes below, all
others are likely to follow or risk significant reductions in market share. How
much any individual firm is constrained by competitors' prices, therefore,
depends largely on how differentiated its product is. A product that is set apart
from other market offerings by its functional design, appearance, brand image and
the supplier's reputation for service and availability in ways that have value to
customers can command a price premium. There are circumstances, however, in
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which firms will price over competitive levels even though the price differences
are not really justified by superior product quality and service. A company may
consciously elect, for example, not to meet competitive prices in a strategy of
`milking' the business, that is, yielding market share and gradually withdrawing
from the market. It may continue to sell profitably for some time to its loyal
customers, in the mean time gradually cutting back on selling and promotional
expenses until it eventually phases out of the market. Some companies may
choose not to price competitively because to do so would mean selling below
cost. These so-called marginal firms eventually go out of business. Some large
companies may not elect to meet the low price of a smaller competitor because to
do so might mean giving up unit profits on a large sales base. It may be less costly
in the short run to hold prices and give up some small percentage of market share.
In the long run, the smaller competitor encroaches increasingly on the market
positions of its major competitors until it becomes, itself, a major factor. Under
shortage conditions, some firms may price opportunistically above prevailing
market levels, knowing that demand far exceeds available supply and that some
buyers will pay the high price. Finally, some firms may unknowingly be
underpriced by competitors on some of their products. These products may be
part of a broad line and the reporting system may not allow for monitoring the
sales-profit performance of each item on the list. Thus the company may be losing
sales and market position because of price and never realize, until too late, that the
business has gone to more aggressive competitors. Generally, pricing strategies
must inevitably be shaped with regard for present and future competition. In this
respect, there is significant pricing interdependency among firms in an industry
with each being heavily influenced by others' strategies and tactics. Some firms
follow price trends; others, the larger ones, seek to lead them. Accordingly, in
contemplating price changes, the marketing manager will often seek to anticipate
competitive responses.
Other environmental factors ? When setting prices, the firm 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 inflation, boom
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or recession, 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 firm also must consider what impact its prices will have on other
parties in its environment. How will resellers react to various prices? The firm
should set prices that give resellers a fair margin, encourage their support, and
help them to sell the product effectively. The government is another important
external influence on pricing decisions. In regulated industries such as utilities,
transport and so on, the government has the authority to approve or reject price
changes. Finally, social concerns may have to be taken into account. In setting
prices, a firm's short-term sales, market share and profit goals may have to be
tempered by broader societal considerations.
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Unit ? III
Lesson 3.2
Pricing Objectives and Approaches
Objectives
In this lesson, we will introduce you to the pricing objectives and highlight the reasons
because of which pricing has come to occupy center-stage in marketing rivalries. After
you work out this lesson, you should be able to:
Understand the different pricing objectives
Identify the developments that have added to the importance of the pricing
decision
Classify the different pricing approaches
In this lesson, we will discuss the following:
Situations that have pushed pricing to marketing center-stage
Pricing objectives
Cost-bases pricing approach
Buyer-based pricing approach
Competition-based pricing approach
Introduction
Ancient philosophers recognized the importance of price in an economic system. Some
early written accounts refer to attempts to determine fair and just prices. Price continues
to serve as a means of regulating economic activity. All the four factors of production,
viz. natural resources, capital, human resources and entrepreneurship, depends on the
prices that those factors receive. An individual firm's prices and the resulting purchases
by its customers determine how much revenue the firm receives. Prices, therefore,
influence a firm's profits as well as its employment of the factors of production.
Traditionally, price has operated as the major determinant of buyer choice. This is
still the case in the poorer economies and with commodity-type products. Although non-
price factors have become more important in recent decades, price still remains one of the
most important elements determining market share and profitability. Pricing has come to
occupy center-stage in many marketing rivalries. Many reasons can be attributed to this.
Some of them are outlined below:
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In some cases, product differentiation is getting blunted, thanks to the
homogenization of technology. This is more relevant in the context of global
business where the million dollar question is whether the firms should offer a
standardized offering or a differentiated offering.
There is intense inter-firm rivalry in some industries. It may be attributed to the
removal of entry/exit barriers. Also the cost of fighting these marketing wars must
be recovered and often, it is transferred to the customer.
In certain industries, the products and the markets are mature. The only way to
differentiate may be is through an augmented service or price cuts. Here again,
pricing decisions are crucial to the survival of the firm.
Customers' value perception correlates with the quoted price. To a customer,
price always represents product's value. The price-quality perception must be
taken into account during the product decision and the price decision.
Inflation in the economy may also contribute to the significance of pricing
decision in a marketing program. It lowers customer's purchasing power and
increases input costs. As a result, the marketer has to make the price decision after
careful evaluation.
Pricing objectives
Just as price is a component of the total marketing mix, pricing objectives also represent
components of the organization's overall objectives. The objectives of the firm and its
marketing organization guide the development of pricing objectives, which in turn lead to
development and implementation of more specific pricing policies and procedures. For
example, a firm might set a major overall objective of becoming the dominant producer
in its domestic market. It might then develop a marketing objective of achieving
maximum sales penetration in each region, followed by a related pricing objective to set
prices at levels that maximize sales. These objectives might lead to adoption of a low-
price policy implemented by offering substantial price discounts to channel members.
While pricing objectives vary from firm to firm, they can be classified into four
major groups:
(1) Profitability objectives
(2) Volume objectives
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(3) Meeting competition objectives, and
(4) Prestige objectives
Profitability objectives include profit maximization and target-return goals.
Volume objectives pursue either sales maximization or market-share goals.
Profitability objectives: Classical economic theory bases its conclusions on certain
assumptions. It presumes that firms will behave rationally. Theorists expect that rational
behaviour will result in an effort to maximize gains and minimize losses. Profits are a
function of revenue and expenses.
Profits = Revenue ? Expenses
Revenue is determined by the product's selling price and number of units sold:
Total revenue = Price Quantity sold
A profit maximizing price, therefore, rises to the point at which further increases will
cause disproportionate decreases in the number of units sold. A 10% price increase that
results in only an 8% cut in volume will add to the firm's revenue. However, a 10% price
hike that results in an 11% sales decline will reduce revenue. Profit maximization is
identified as the point at which the addition to total revenue is just balanced by the
increase in total cost. Consequently, marketers set target return objectives ? short-run or
long-run goals usually stated as percentages of sales or investments. Target return
objectives offer several benefits for marketers in addition to resolving pricing questions.
For example, they serve as tools for evaluating performance. They also satisfy desires to
generate `fair' profits as judged by management, stockholders and the public.
Volume objectives: Many marketers argue that pricing behaviour actually seeks to
maximize sales within a given profit constraint. They set a minimum acceptable profit
level and then seek to maximize sales in the belief that the increased sales are more
important than immediate high profits to the long-run competitive picture. Such a firm
continues to expand sales as long as its total profits do not drop below the minimum
return acceptable to management. Another volume-related pricing objective ? the market
share objective ? sets a goal to control a portion of the market for a firm's good or
service. The company's specific goal may target maintaining its present share of a
particular market or increasing its share. Volume-related goals such as sales
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maximization and market share objectives play important roles in most firms' pricing
decisions.
Meeting competition objectives: A third set of pricing objectives seeks simply to meet
competitor's prices. In many lines of business, firms set their own prices to match those
of established industry price leaders. These kinds of objectives de-emphasize the price
element of the marketing mix and focus competitive rivalries more strongly on non-price
variables. Pricing is a highly visible component of a firm's marketing mix and an easy
and effective tool for obtaining a differential advantage over competitors; still other firms
can easily duplicate a price reduction themselves. Because such price changes directly
affect overall profitability in an industry, many firms attempt to promote stable prices by
meeting competitors' prices and competing for market share by focusing on product
strategies, promotional decisions and distribution ? the non-price elements of the
marketing mix. When price discounts become normal elements of a competitive
marketplace, other marketing mix elements gain importance in purchase decisions. In
such instances, overall product value, not just price, determines product choice. Value
pricing emphasizes benefits a product provides in comparison to the price and quality
levels of competing offerings. This strategy typically works best for relatively low-priced
goods and services. Value-priced products generally cost less than premium brands, but
marketers point out that value does not necessarily mean cheap. Value is not just price,
but also is linked to the performance and meeting expectations and needs of consumers.
The challenge for those who compete on value is to convince customers that low-priced
brands offer quality comparable to that of a higher-priced product.
Prestige objectives: The final category of pricing objectives, unrelated to either
profitability or sales volume, encompasses prestige objectives. Prestige pricing
establishes a relatively high price to develop and maintain an image of quality and
exclusiveness that appeals to status-conscious consumers. Such objectives reflect
marketers' recognition of the role of price in creating an overall image for the firm and its
goods and services.
General pricing approaches
The price the firm charges will be somewhere between on that is too low to produce a
profit and one that is too high to produce any demand. Product costs set a floor to the
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price and consumer perceptions of the product's value set the ceiling. The firm must
consider competitors' prices and other external and internal factors to find the best price
between these two extremes. Firms set prices by selecting a general pricing approach that
includes one or more of these three sets of factors. Let us examine the following
approaches:
(1) Cost-based approach
(2) Buyer-based approach, and
(3) Competition-based approach
Cost-based approach
The simplest pricing method is cost-plus or markup pricing - adding a standard markup to
the cost of the product. Markups vary greatly among different goods. Some common
markups (on price, not cost) in supermarkets are 9% on baby foods, 14% on tobacco
products, 27% on dried foods and vegetables and 50% on greeting cards. Markups are
generally higher on seasonal items (to cover the risk of not selling) and on specialty
items, slower moving items, items with high storage and handling costs and items with
inelastic demand. It must be noted that any pricing method that ignores current demand
and competition is not likely to lead to the best price. Hence markup pricing only works
if that price actually brings in the expected level of sales.
Advantages:
(1) It covers all the costs
(2) It is designed to provide the target rate of margin
(3) It is generally a rational and widely accepted method
(4) It is an easy to comprehend and simple method
Disadvantages:
(1) The cost calculations are based on a predetermined level of activity. If the actual
level of activity varies from this estimated level, the costs may vary, rendering
this method unrealistic.
(2) If the costs of the firm are higher than its competitors, this method would render
the firm passive in relation to price.
(3) Another drawback is that sometimes the opportunity to charge a high price is
foregone.
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(4) It ignores the price elasticity of demand.
(5) The cost-based pricing would not be helpful for some of the objectives or tasks
like market penetration, fighting competition and so on.
(6) It imparts an in-built inflexibility to pricing decisions.
Another cost-based 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.
Buyer-based approach
An increasing number of firms are basing their prices on the product's perceived value.
Perceived-value pricing uses buyers' perceptions of value, not the seller's cost, as the key
to pricing. The company uses the non-price variables in the marketing mix to build up
perceived value in buyers' minds. Price is set to match the perceived value. A company
using perceived-value pricing must find out what value buyers assign to different
competitive offers. Sometimes consumers are asked how much they would pay for each
benefit added to the offer. If the seller charges more than the buyers' perceived value, the
firm's sales will suffer. Many firms overprice their products, and their products sell
poorly. Other firms underprice. Under-priced products sell very well, but they produce
less revenue than they would if prices were raised to the perceived-value level.
Competition-based pricing
Many firms follow the dominant competitors, particularly the price leader, in setting the
price. The main advantages of this method are:
(1) It is a very simple method
(2) It follows the main market trend
(3) It has relevance to the competitive standing of the firm
(4) Holding to the going price will prevent harmful price wars
The major disadvantages and limitations of following competitors are:
(1) If the competitors' price decisions are unrealistic, the follower will also be going
wrong on the price
(2) The cost factors of the follower may not be similar to that of the competitors'
(3) The pricing objective of the firm could be different from that of the competitors'
(4) Sometimes the competitor may initiate price change for wrong reasons
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Competition-based pricing approach may take the form of going-rate pricing or sealed-
bid pricing. In going-rate pricing, the firm bases its price largely on competitors' prices,
with less attention paid to its own cost or to demand. In oligopolistic industries that sell
commodities, firms normally charge the same price. It is a popular pricing method. When
demand elasticity is hard to measure, firms feel the going price represents the collective
wisdom of the industry concerning the price that will yield a fair return. Competition-
based pricing is also used when firms bid for jobs. 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 lower
than other firms. Yet, the firm cannot set its price below a certain level. It cannot price
below cost without hurting its position. In contrast, the higher the firm sets its price above
its costs, the less its chance of getting the contract.
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Unit ? III
Lesson 3.3
Pricing Policies and Constraints
Objectives
In this lesson, we will introduce you to Pricing policies and constraints. After you work
out this lesson, you should be able to:
Understand the procedure in formulating a pricing policy
Identify the constraints that come to bear on pricing decisions
Appreciate the nuances of pricing in industrial marketing
In this lesson, we will discuss the following:
Pricing policy ? as a 6-step procedure
Pricing and product life cycle
Pricing across the four product life cycle stages
Distinguishing characteristics of pricing the industrial products/services
Pricing on the Internet (Pricing in E-Commerce)
Introduction
Firms do their pricing in a variety of ways as discussed in the previous lesson. Executives
complain that pricing is a big headache and one is wary of committing a go/drop error in
the pricing decision. Pricing less than what the customer wants to pay and pricing more
than what the customer wants to pay are both costly errors. `There are two fools in every
market: one asks too little, one asks too much', says a Russian Proverb. Many companies
do not handle pricing well. Some common mistakes are:
Price is not revised often enough to capitalize on market changes
Price is set independently of the rest of the marketing mix rather than as an
intrinsic element of market-positioning strategy
Price is not varied enough for different product items, market segments,
distribution channels and purchase occasions
The importance of pricing for profitability was demonstrated in a 1992 study by
McKinsey & Company. Examining 2,400 companies, McKinsey concluded that a 1%
improvement in price created an improvement in operating profit of 11.1%. By contrast,
1% improvements in variable cost, volume and fixed cost product profit improvements of
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only 7.8%, 3.3% and 2.3% respectively. Effectively designing and implementing pricing
strategies requires a systematic approach to setting, adapting and changing prices.
Procedure for a pricing policy
A firm must set a price for the first time when it develops a new product, when it
introduces its regular product into a new distribution channel or geographical area, and
when it enters bids on new contract work. The firm has to consider several factors in
setting its pricing policy. A useful 6-step procedure to develop the pricing policy is
discussed below.
1) Selecting the pricing objective: The firm first decides where it wants to position
its market offering. The clearer a firm's objectives, the easier it is to set price. A
firm can pursue any of the objectives classified under four major groups, viz.
profitability objectives, volume objectives, meeting competition objectives and
prestige objectives. This was discussed in the previous lesson.
2) Determining demand: Each price will lead to a different level of demand and
therefore have a different impact on a firm's marketing objectives. The relation
between alternative prices and the resulting current demand is captured in a
demand curve. In the normal case, demand and price are inversely related: the
higher the price, the lower the demand. In the case of prestige goods, the demand
curve sometimes slopes upward. However, if the price is too high, the level of
demand may fall. The demand curve sums the reactions of many individuals who
have different price sensitivities. The first step is estimating demand is to
understand what affects price sensitivity. Generally speaking, customers are most
price sensitive to products that cost a lot or are bought frequently. They are less
price sensitive to low cost items or items they buy infrequently. They are also less
price sensitive when price is only a small part of the total cost of obtaining,
operating and servicing the product over its lifetime. Firms, of course, prefer
customers who are less price sensitive. The following is a list of factors leading to
less price sensitivity, as identified by Nagle and Holden.
The product is more distinctive
Buyers are less aware of substitutes
Buyers cannot easily compare the quality of substitutes
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The expenditure is a smaller part of the buyer's total income
The expenditure is small compared to the total cost of the end product
Part of the cost is borne by another party
The product is used in conjunction with assets previously bought
The product is assumed to have more quality, prestige or exclusiveness
Buyers cannot store the product
Most firms make some attempt to measure their demand curves using methods
like statistical analysis, price experiments and surveys. In measuring the price-
demand relationship, the marketer must control for various factors that will
influence demand. The competitor's response will make a difference. Also, if the
company changes other marketing mix factors besides price, the effect of the
price change itself will be hard to isolate and measure.
3) Estimating costs ? In the earlier discussion on costs, it was noted that demand sets
a ceiling on the price, whereas costs set the floor. Also, the types of costs and the
impact of economies of scale and learning curve on pricing was explained. To
price intelligently, management needs to know how its costs vary with different
levels of production. It is important to be aware of the risks presented by pricing
based on the experience/learning curve. It assumes that competitors are weak
followers. It leads the company into building more plants to meet the demand,
while a competitor may be innovating a lower-cost technology. Then the market
leader will be stuck with the old technology. Today's firms try to adapt their
offers and terms to different buyers. A manufacturer may negotiate different terms
with different retail chains. One retailer may want daily delivery (to keep
inventory lower) while another may accept twice-a-week delivery in order to get a
lower price. The manufacturer's cost will differ with each chain and so will its
profits. To estimate the real profitability of dealing with different customers with
differing requirements, the manufacturer needs to use activity-based cost (ABC)
accounting instead of standard cost accounting. ABC accounting tries to identify
the real costs associated with serving each customer. It allocates indirect costs like
clerical costs, office expenses, supplies and so on, to the activities that use them,
rather than in some proportion to direct costs. Both variable and overhead costs
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are tagged back to each customer. Another interesting costing concept is target
costing. Costs change with production scale and experience. They can also change
as a result of a concentrated effort by designers, engineers and purchasing agents
to reduce them through target costing. Market research is used to establish a new
product's desired functions and the price at which the product will sell, given its
appeal and competitors' prices. Deducting the desired profit margin from this
price leaves the target cost that must be achieved. Each cost element - design,
engineering, manufacturing, sales ? must be examined and different ways to bring
down costs must be considered. The objective is to bring the final cost projections
into the target cost range. If this is not possible, it may be necessary to stop
developing the product because it could not sell for the target price and make the
target profit.
4) Analysing competitors' costs, prices and offers ? Within the range of possible
prices determined by market demand and company costs, the firm must take
competitors' costs, prices and possible price reactions into account. The firm
should first consider the nearest competitor's price. If the firm's offer contains
features not offered by the nearest competitor, their worth to the customer should
be evaluated and added to the competitor's price. If the competitor's offer
contains some features not offered by the firm, their worth to the customer should
be evaluated and subtracted from the firm's price. Now the firm can decide
whether it can charge more, the same or less than the competitor. But competition
can change their prices in reaction to the price set by the firm.
5) Selecting a pricing approach ? Given the three Cs ? the Customer's demand
schedule, the cost function and the competitors' prices ? the firm is now ready to
select a price. Figure 3.3.1 summarizes the three major considerations in price
setting. Costs set a floor to the price. Competitors' price and the price of
substitutes provide an orienting point. Customers' assessment of unique features
establishes the price ceiling. Firms select a pricing approach that includes one or
more of these three considerations. The pricing approaches are cost-based or
buyer-based or competition-based. These approaches were discussed at length in
the previous lesson.
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High price
(No possible demand at this price)
Competitors ' prices and
prices of s
ubstitutes
Co
sts
Floor price
Low price
(No possible profit at this price)
Figure 3.3.1 The three Cs model for price setting
(Source: Marketing Management, 12e, Kotler and Keller)
6) Selecting the final price ? Pricing methods narrow the range from which the
company must select its final price. In selecting that price, the company must
consider additional factors, including the impact of other marketing activities,
company pricing guidelines, gain-and-risk-sharing pricing and the impact of price
on other parties. The final price must take into account the brand's quality and
advertising relative to the competition. The price must be consistent with the
firm's pricing guidelines. When a firm establishes pricing penalties, it must be
done judiciously so as not to unnecessarily alienate customers. Sometimes, buyers
may resist accepting a seller's proposal because of a high perceived level of risk.
The seller has the option of offering to absorb part or all of the risk if it does not
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deliver the full promised value. Management must also consider the reactions of
other parties to the contemplated price. For instance, the reaction of marketing
intermediaries must be thought about. The reaction of the sales force must be
taken note since they will be the ones to sell at that price in the marketplace. All
these reactions might hold clues to fine tune the final price.
Pricing and Product Life Cycle
From a strategic point of view, the product life cycle provides a framework for
thinking about pricing decisions. You may recall the discussion in Unit-2 about the
product life cycle (Figure 3.3.2). Four phases may be identified in the product life cycle:
introduction, growth, maturity and decline as shown in the figure below.
Sal
a es
e
s an
a d
Sales
Prof
o ifts
t
s (R
( s)
e
s)
Pro
r f
o its
Time
Prod
o uct
Intr
t od
o uct
c iton
o
Gr
G ow
o th
t
Mat
a u
t rity
Dec
De line
Dev
e e
v l
e op
o -
men
e t
Los
o s
s e
s s/
s
Inves
e t
s m
t ents
t
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Figure 3.3.2 The Product Life Cycle curve
Each phase presents different opportunities and constraints on price.
Introduction phase: During the introduction phase, pricing can be a quandary,
especially if you enjoy a temporary monopoly. In that situation, there may be no direct
competitor and thus no benchmark for what buyers will tolerate or for their sensitivity to
price differences. There may be indirect competitors (substitutes), however, and they can
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be used as starting points for the pricing decision. The total economic value equation
becomes relevant, wherein the price of the best alternative is known but the value of the
performance differential of the new product is unknown. Customers themselves may have
difficulty in sizing up the value of something that is new and different. They too lack
benchmarks of value. In such instances, any of the following strategies may be adopted:
Skimming: Some people will be happy to pay a high price for anything that is
new and unique. This strategy, of course, is short term and contains dangers like
attracting competition.
Penetration pricing: A low price may have the threefold benefits of (1) getting
established as the market share champion, (2) discouraging market entry by
competitors, and (3) creating broad-based demand for the product.
Cost-plus: In a monopoly, the producer can administer its own price and cost-plus
is one way of determining that price. However, product monopolies are short-
lived.
Pricing decisions in this introductory phase are not only difficult but also deadly
important. Putting too high a price on a newly introduced product may kill it in its
infancy, undoing the work of many employees over a long period of development.
Growth phase: The growth phase is characterized by increasing unit sales and
accelerating customer interest. If competitors have not yet surfaced (which is an unlikely
event), skimming may be appropriate. All the deep-pocketed buyers who simply had to
be the first in their neighbourhoods to own the product have already been skimmed in the
introduction phase. So now, the price must be reduced gradually, skimming other market
segments that are progressively more price sensitive.
A producer that enjoys prime position on the experience curve will also want to
progressively reduce prices during this phase. Doing so will maintain its margins even as
the strategy expands unit sales and punishes late-into-the-game rivals in the marketplace.
Some of these rivals will either take a loss on every sale or simply wind up.
Mature phase: By the time a product enters this phase, growth in unit sales is leveling
off and the remaining competitors are trying to find ways to differentiate their products.
During this phase, one may see sellers offer different versions of the product, each
version trying to colonize a targeted segment. Price is one of the factors used in this
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strategy (i.e. by developing and pricing good, better and best versions to expand the
product line).
Decline phase: Competition gets ugly in this phase. Total demand for the product
category is now visibly slipping, perhaps because of the appearance of superior
substitutes or because of market saturation. Whatever the case, unit sales will continue to
decline. Some companies will get out of the business entirely; those that remain will
aggressively try to take business away from the rivals. Every player in the market is
trying to harvest as much as possible from a contracting market. Price tactics include the
following:
Beat a retreat on price, but work overtime to reduce production costs. Success in
the latter will maintain a decent profit margin
Increase the price on the few remaining units in inventory. This is because there
may be a small number of customers who still rely on that particular product. This
is particularly true of replacement parts. Here the seller hopes that the higher price
will compensate for fewer sales. When the inventory is exhausted, the product
line is terminated.
Pricing is one of the linchpins of marketing strategy and success. How is the company
making its pricing decisions? Are these decisions appropriate for the current phase of the
product life cycle? The most reliable method of pricing is to get inside the heads of
customers, because how they value the firm's products relative to those of competitors
and substitutes matters more than anything else.
Pricing in industrial (business-to-business) markets
As Lesson 1.1 outlined the differences between consumer marketing and industrial
marketing, those differences can further be explained based on the distinguishing
characteristics of industrial pricing. Some of those characteristics are listed below:
The true price as industrial customer pays is often different from the list price
because of factors like delivery and installation costs, discounts, training costs,
trade-in allowance, financing costs and so on.
Pricing is not an independent variable. It is highly intertwined with product,
promotion and distribution strategies.
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Price for industrial products cannot be set out without considering other products
that are compliments or substitutes sold by the firm. Cross elasticities exist, where
the price of one item affects sales of other items.
Prices can be changed in numerous ways such as changing the quantity of goods
and services provided by the seller, changing the premiums and discounts that are
offered, changing the time and place of payment, and so on. This implies that
pricing is often a more flexible decision than product or distribution decisions.
Industrial prices are established, in many cases, by competitive bidding on a
project-by-project basis. In a number of cases, prices are resolved through
negotiation.
Industrial pricing is often characterized by an emphasis on fairness. Industrial
buyers, who are experienced and able to estimate the vendors' approximate
production costs expect the price increases to be justifiable on the basis of either
the cost increases or product improvements.
Industrial prices are affected by a host of economic factors such as inflation,
interest rate changes, exchange rate fluctuations and so on. This problem is
particularly critical for the marketer locked into a long term contract with no
escalation cause.
Pricing on the Internet
E-Commerce has been arguably the Web's hottest application. Yet the Internet is more
than simply a new `marketspace'. Internet-based technologies are actually changing the
rules of the market. Here is a short list of how the Internet allows sellers to discriminate
between buyers and buyers to discriminate between sellers.
Buyers can ...
o Get instant price comparisons from thousands of vendors ? Consumers
now regularly check online prices, compare them with those in their local
stores and may well take a peek at what customers in other
places/countries are paying and order from overseas. Consumers also may
unbundle product information from the transaction themselves. For
instance, someone might use the Internet to research on a holiday
destination, but visit a travel agency to get some procedural requirements
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done, go home to use a search engine to find the lowest airfare to that
destination. Sites like PriceScan.com lure thousands of visitors a day, most
of them corporate buyers. Intelligent shopping agents (known as `bots')
take price comparison a step further and seek out products, prices and
reviews from as many as 2,000 merchants.
o Name their price and have it met ? Taking the example of Priceline.com,
the customer states the price he wants to pay for an airline ticket, hotel or
car rental and Priceline checks whether any seller is willing to meet that
price. Consumers can fix their own prices, and sellers can use it too.
Airlines can fill in demand for empty seats and hotels welcome the chance
to sell vacant rooms at near zero marginal cost. Volume-aggregating sites
combine the orders of many customers and press the supplier for a deeper
discount.
o Get products free ? Open Source, the free software movement that started
with Linux, will erode margins for just about any company doing
software. Open Source software is popping up everywhere. The biggest
challenge confronting major software producers is now: how to compete
with programs that can be had free?
Sellers can ...
o Monitor customer behaviour and tailor offers to individuals ? Although
shopping agent software and price comparison web sites provide
published prices, consumers may be missing out on the special deals they
can get with the help of new technologies. GE Lighting, which gets 55,000
pricing requests a year, has Web programs that evaluate about 300 factors
that go into a pricing quote, such as past sales and discounts, so that it can
reduce processing time from up to 30 days to 6 hours.
o Give certain customers access to special prices ? CDNOW, an online
vendor of music albums, emails certain (loyal) buyers a special website
address with lower prices. Unless you know the secret address, you pay
full price. Business marketers are already using extranets to get a precise
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handle on inventory, costs and demand at any given moment in order to
dynamically adjust prices.
Bother buyers and sellers can ...
o Negotiate prices in online auctions and exchanges ? Want to sell hundreds
of excess and slightly worn widgets? Post a sale on ebay.co.in (formerly,
Bazee.com). Want to purchase air tickets at a bargain price? Go to air
ticket auctions at Rediff.com. Thanks to the Internet, pricing is no longer a
rigid entity of marketing. It is the era of dynamic pricing in many
categories.
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Unit ? III
Lesson 3.4
Pricing Methods
Objectives
In this lesson, we will introduce you to the Pricing dynamics. This lesson examines the
major dynamic pricing strategies available to the marketer. After you work out this
lesson, you should be able to understand:
The new product pricing strategies for products in the introductory stage of the
product life cycle
The product-mix pricing strategies for related products in the product mix
The price-adjustment strategies that account for customer differences and
changing situations.
In this lesson, we will discuss the following:
New Product pricing strategies
o Market Skimming pricing
o Market Penetration pricing
Product Mix pricing strategies
o Product-line pricing
o Optional-product pricing
o Captive-product pricing
o By product pricing
o Product-bundle pricing
Price Adjustment strategies
o Discount and allowance pricing
o Discriminatory pricing
o Psychological pricing
o Value pricing
o Promotional pricing
o Geographical pricing
o International pricing
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Introduction
Firms translate pricing objectives into pricing decisions in two major steps. First,
someone must accept responsibility for making pricing decisions and administering the
resulting pricing structure. Second, someone must set the overall pricing structure ? that
is, basic prices and appropriate discounts for channel members, quantity purchases, and
geographic and promotional considerations. Hence a firm 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 variation in
buyers and situations.
New Product Pricing Strategies
Pricing strategies usually change as the product passes through its life cycle as illustrated
in the previous lesson. The introductory stage is especially challenging. Firms bringing
out an innovative patent-protected product can choose between two options, viz. market-
skimming pricing and market-penetration pricing.
Market-skimming pricing: Many firms that invent new products initially set high prices
to `skim' revenues layer by layer from the market. At product introduction in the
marketplace, the firm may charge the highest price it could given the benefits of its new
product over competing products. The firm sets a price that made it just worthwhile for
some affordable segments of the market to adopt the new product. After the initial sales
slowdown, the firm may lower the price to draw in the next price sensitive layer of the
customers. In this way, a firm skims a maximum amount of revenue from the various
segments of the market. It is important to note that skimming works well only under
certain conditions. The quality and image must support its higher price and enough
buyers must want the product at that price. Also the cost of producing a small volume
cannot be so high that they cancel the advantage of charging more. In the mean time,
competitors should not be able to enter the market easily and undercut the price. A
skimming strategy offers several benefits to the markets, as listed below:
It allows a manufacturer to quickly recover its research and development costs.
It also allows a firm to maximize revenue from a new product before competitors
enter the field.
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A skimming strategy offers a useful tool for segmenting a product's overall
market on a price basis.
It permits marketers to control demand in the introductory stages of a product's
life cycle and then adjust productive capacity to match demand.
The chief disadvantage of skimming strategy is: it attracts competition. Potential
competitors see innovative firms reaping big financial gains and decide to enter the
market. This new supply forces the price even lower than its eventual level under a
sequential skimming procedure. However, if patent protection or other proprietary ability
allows a firm to exude competitors from its market, it may continue a skimming strategy
for a relatively long period.
Market-penetration pricing: Rather than setting a high initial price to skim off small
but profitable market segments, some firms 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. A penetration pricing strategy may also extend over several stages of the
product life cycle as the firm seeks to maintain a reputation as a low-price competitor.
Since many firms begin penetration pricing with the intention of increasing prices in the
future, success depends on generating many consumer trial purchases. Penetration pricing
works well under the following conditions:
A good or service experiences highly elastic demand
The market is highly price sensitive and a low price stimulates market growth
Production and distribution costs fall with accumulated production experience
A low price helps discourage actual and potential competition
Product-Mix pricing
The strategy for setting a product's price often has to be changed when the product is part
of a product mix. In this case, the firm looks for a set of prices that maximizes the profits
on the total product mix. This pricing is difficult because the various products have
related demand and costs and face different degrees of competition. The following
section outlines the five product-mix pricing situations depicted in Figure 3.4.1
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Ceiling price
Customers' assessment of
unique product features
Orienting point
OPTIONAL-PRODUCT
PRICING
Pricing optional or accessory
products sold with the main
product
PRODUCT-MIX
CAPTIVE-PRODUCT
PRICING
PRICING
STRATGIES
Pricing products that must be
used with the main product
BY-PRODUCT PRICING
Pricing low-value by-products
to get rid of them
PRODUCT-BUNDLE
PRICING
Pricing bundles of products
sold together
Figure 3.4.1 Product Mix pricing strategies
Product-line pricing: Since most firms market multiple product lines, an effective
pricing strategy must consider the relationships among all of these products instead of
viewing each is isolation. In product line pricing, management must decide on the price
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steps to set between the various products. The price steps should take into account cost
differences between the products, customer evaluations of their different features and
competitors' prices. In many industries, marketers use well-established price points for
the products in their line. The customer will probably associate low, average and high
quality with the price points. The marketers task is to establish perceived quality
differences that support the price differences.
Optional-product pricing: Many firms use this strategy by offering to sell optional or
accessory products along with their main product. These firms have to decide which
items to include in the base price and which to offer as options. Often the basic model
which is stripped of many comforts and conveniences sought by the customers gets
rejected.
Captive-product pricing: Firms that make products that must be used along with a main
product are using this pricing strategy. Producers of the main products often price them
low and set high markups of the supplies. For a competitor who does not sell these
supplies, he will have to price his product higher in order to make the same overall profit.
In case of services, this strategy is called two-part pricing where the price of the service is
broken into a fixed fee plus a variable usage rate. 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 and profit can be made on
the variable usage fees.
By-product pricing: In producing certain products, there are by-products. If these 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 marketer to reduce the main product's price to
make it more competitive.
Product-bundle pricing: Using this strategy, marketers combine several of their
products and offer the bundle at a reduced price. Price bundling can promote the sales of
products consumers might not buy otherwise, but the combined price must be low enough
to get them to buy the bundle.
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Price-adjustments
Discount and allowance pricing
Reducing
prices
to
reward
customer
responses such as paying early or promoting
the product
Discriminatory pricing
Adjusting prices to allow for differences in
customers, products and locations
Psychological pricing
Adjusting prices for psychological effect
PRICE
Value pricing
Adjusting
prices
to
offer
the
right
ADJUSTMENT
combination of quality and service at a fair
STRATEGIES
price
Promotional pricing
Temporarily reducing prices to increase
short-run sales
Geographical pricing
Adjusting prices to account for geographic
location of customers
International pricing
Adjusting prices in international markets
. Figure 3.4.2 Price adjustment strategies
Firms usually adjust their basic prices to account for various customer differences and
changing situations. Figure 3.4.2 summarizes seven price-adjustment strategies.
Discount and allowance pricing: Most firms adjust their basic price to reward customers
for certain responses, such as cash payment, early payment of bills, volume purchases
and off-season buying. Some of those adjustments are described below:
Cash discounts ? A cash discount is a price reduction to buyers who pay their bills
promptly. The discount must be granted to all buyers meeting these terms. Such
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discounts are customary in many industries and help to improve the sellers' cash
situation and reduce bad debts and credit collection costs.
Quantity discounts ? A quantity discount is a price reduction to buyers who buy
large volumes. It must be offered 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.
Functional discounts ? A functional discount (also called trade discount) is
offered by the seller to trade channel members 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.
Seasonal discounts ? A seasonal discount is a price reduction to buyers who buy
out of season. It allows the seller to keep productions steady during the entire
year.
Allowances ? They are another type of reductions from the list price. Trade-in
allowances are price reductions given for turning in an old item when buying a
new one. Promotional allowances are payments or price reductions to reward
dealers for participating in advertising and sales-support programs.
Discriminatory pricing: Firms will often adjust their basic prices to allow for
differences in customers, products and locations. In discriminatory pricing, the firm sells
a product or service at two or more prices, even though the difference in prices is not
based on differences in costs. Discriminatory pricing takes many forms as indicated
below:
Customer-segment pricing ? Different customers pay different prices for the same
product or service.
Product-form pricing - Different versions of the product are priced differently, but
not according to differences in their costs.
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Location pricing ? Different locations are priced differently, even though the cost
of offering in each location is the same.
Time pricing - Prices vary by the season, month, day and even hour.
Psychological pricing: It applies the belief that certain prices or price ranges make
products more appealing to buyers than others. In using psychological pricing, sellers
consider the psychology of prices and not simply the economics.
Pricing based on perceptions ? The relationship between price and quality
perceptions indicate that consumers perceive higher-priced products as having
higher quality. When consumers cannot judge quality because they lack the
information or skill, prices becomes an important quality signal.
Reference pricing ? Reference prices are those prices that buyers carry in their
minds and refer to when looking at a given product. It 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.
Odd pricing ? In odd pricing, marketers set prices at odd numbers just under
round numbers. An odd ending conveys the notion of a discount or bargain to the
customer.
Value pricing: During slow-growth times, many firms adjust their prices to bring them
into line with economic conditions and with the resulting fundamental shift in consumer
attitudes toward quality and value. Value pricing is offering just the right combination of
quality and good service at a fair price. In many cases, value pricing has involved
redesigning existing brands in order to offer more quality for a given price or the same
quality for less.
Promotional pricing: In promotional pricing, a lower-than-normal price is used as a
temporary ingredient in a firm's selling strategy. Some promotional pricing arrangements
form part of recurrent marketing initiatives. Some may be to introduce a promotional
model or brand with special pricing to begin competing in a new market. Promotional
pricing takes several forms and some of them are described below.
Loss-leader pricing ? It happens when retailers drop price on well-known brands
to stimulate store traffic in the hope that customers will buy other items also, at
normal mark-ups
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Special-event pricing ? Sellers use special-event pricing in certain seasons to
draw in more customers. The seasonal need of the customers is capitalized on by
the sellers using this pricing strategy.
Cash rebates ? Manufacturers will sometimes offer cash rebates to consumers
who buy the product from dealers within a specified time.
Low-interest financing, longer payment times, longer warranties ? all these
represent the promotional incentives offered by the sellers to the buyers. Since
they provide some flexibility and also bring down the perceived risks (in case of
longer warranties), buyers are motivated to make the buying decision.
Psychological discounting ? The seller may simply offer discounts from normal
prices to increase sales and reduce inventories. For the buyer, the motivation to
buy below normal prices may be compelling.
Geographical pricing: Geographical considerations strongly influence prices when costs
must cover shipping heavy, bulky, low-unit-cost materials. Buyers and sellers can
distribute transportation expenses in several ways: (1) The buyer pays all transportation
charges; (2) The seller pays all transportation charges; or (3) the buyer and the seller
share the charges. This choice has particularly important effects for a firm seeking to
expand its geographic coverage to distant markets. The seller's pricing can implement
several alternatives for handling transportation costs.
FOB-origin pricing ? It means that the goods are placed free on board (FOB) a
carrier, at which point the title and responsibility pass to the customer, who pays
the freight from the factory to the destination. Though it looks fair, the
disadvantage is that the firm will be a high-cost firm to distant customers.
Uniform delivered pricing ? It is the exact opposite of FOB pricing. The company
charges the same price plus freight to all customers, regardless of their location.
An advantage is that it is fairly easy to administer and it lets the firm advertise its
price nationally.
Zone pricing ? It 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.
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Basing-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 actually are shipped.
Freight-absorption pricing ? The seller who is anxious to do business with a
certain customer or geographical area might use freight-absorption pricing. This
strategy involves absorbing all or part of the actual freight charges in order to get
the desired business. It is used for market penetration and to hold on to
increasingly competitive markets.
International pricing: A wide variety of internal and external conditions can affect a
marketer's global pricing strategies. Internal influences include the firm's goals and
marketing strategies, the costs of developing, producing and marketing its products, the
nature of the products and the firm's competitive strengths. External influences include
general conditions in international markets, especially those in the firm's target markets,
regulatory limitations, trade restrictions, competitors' actions, economic events, customer
characteristics and the global status of the industry. In general, a firm can implement one
of three export pricing strategies, as described below.
Standard worldwide price ? Exporters often set standard worldwide prices,
regardless of their target markets. This strategy can succeed if foreign marketing
costs remain low enough that they do not impact overall costs, or if their prices
reflect average unit costs. A firm that implements a standard pricing program
must monitor the international marketplace carefully, however, to make sure that
domestic competitors do not undercut its prices.
Dual pricing ? It distinguishes prices for domestic and export sales. Some
exporters practice cost-plus pricing to establish dual prices that fully allocate their
true domestic and foreign costs to product sales in those markets. Others opt for
flexible cost-plus pricing schemes that allow marketers to grant discounts or
change prices according to shifts in the competitive environment or fluctuations in
the international exchange rate.
Market-differentiated pricing ? It makes even more flexible arrangements to set
prices according to local marketplace conditions. Effective market-differentiated
pricing depends on access to quick, accurate market information.
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Case study: Dynamic pricing ? smart pricing?
DHL used to have one-price-fits-all list prices for shipping packages in the United States
and around the world, and when potential customers called for rates DHL scared them off
by asking for more than FedEx or UPS. With Web pricing tools, DHL tested the market
by offering cold callers different prices to see how low prices could go and still make a
profit. In the end, DHL wound up changing hundreds of prices. There were plenty of
surprises. Most prices did go down, but the company did not have to match the
competition. In fact, by lowering prices a bit, DHL's "ad hoc" business not only
stabilized but it also grew. For instance, of people who called to get a quote, 17% actually
shipper prior to the pricing overhaul. The new prices have increased the ratio to nearly
25%.
Constant price revision, however, can be tricky where consumer relationships are
concerned. Research shows it tends to work best in situations where there is no bond
between the buyer and the seller. One way to make it work is to offer customers a unique
bundle of products and services to meet their needs precisely, making it harder for them
to make price comparisons. This tactic is being used to sell software, which is vulnerable
to price wars because the cost of producing more copies is near zero. Application service
providers are `renting' their software and support by the month instead of selling an
unlimited-use license.
The tactic most companies favour, however, is to market perfect pricing as a
reward for good behaviour rather than as a penalty. For instance, shipping company APL,
Inc., rewards customers who can better predict how much cargo space they will need with
cheaper rates for booking early. Customers are getting savvier about how to avoid
buyer's remorse. They are changing their buying behaviour to accommodate the new
realities of dynamic pricing ? where prices vary frequently by channels, products,
customers and time.
Questions
1. Under what conditions will dynamic pricing be smart and successful
pricing?
2. Explain the success of DHL's ad-hoc business from a pricing perspective.
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Activity
Read the Pricing lesson's learning goals that follow and consider the questions for each
goal. Answering these questions will reinforce your understanding of the key concepts in
this unit and allow you to check how well you have achieved these learning goals. Where
a blank appears before a question, answer with true or false; for multiple choice
questions, circle the letter of the correct answer.
Major categories of pricing objectives
1. _ _ _ _ Pricing objectives include all of the following except
a. profit maximization objectives
b. meeting competitors' prices
c. market-share objectives
d. quality performance objectives
e. prestige objectives
2. _ _ _ _ Profits are
a. the most important objective for a firm
b. the result of supply and demand
c. a function of revenue and expenses
d. depend primarily on the quantity of product sold
The concept of price elasticity and its determinants
3. _ _ _ _ Elasticity measures the responsiveness of manufacturers and
distributors to inventory levels
4. _ _ _ _ If customers can easily find close substitutes for a good or service,
producers tend to encounter elastic demand for it.
Major cost-plus approaches to price setting
5. _ _ _ _ Cost-plus pricing methods include incremental cost pricing and full
cost pricing
6. _ _ _ _ Full cost pricing bases decisions on competition and demand for
the product
Major issues related to price determination in international marketing
7. _ _ _ _ Global pricing strategies almost always depend on demand in the
domestic market
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8. _ _ _ _ A firm's global pricing strategy reflects its global marketing
strategy
Comparing alternative pricing strategies
9. _ _ _ _ Marketers often practice penetration pricing in industries with few
products and little competition
10. _ _ _ _ A skimming pricing strategy sets a high market-entry price for a
product with little or no initial competition
Pricing policy decisions that marketers must make
11. _ _ _ _ Marketers follow pricing policies in making long-term competing
pricing decisions
12. _ _ _ _ Pricing policy choices includes psychological pricing, price
flexibility, product line pricing and promotional pricing
Relating price to consumer perceptions of quality
13. _ _ _ _ In general, consumers perceive a high price as a symbol of high
quality
14. _ _ _ _ Price limits are directly associated with supply and demand
15. _ _ _ _ The concept of price limits suggests that unusually low prices may
indicate poor quality
Price negotiations
16. _ _ _ _ Buyers and sellers negotiate prices most often when
a. Multiple suppliers compete for an order
b. Only one available supplier can fill an order
c. Contracts over unchanging and routine purchases
d. Prices are set once and remain unchanged
Alternative strategies for pricing exports
17. _ _ _ _ Firms almost always implement the same pricing strategies for
domestic and export sales
18. _ _ _ _ Market-differentiated pricing allows a firm to price its products
according to local marketplace conditions
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Answer key
1. d
2. c
3. F
4. T
5. T
6. F
7. F
8. T
9. F
10. T
11. F
12. T
13. T
14. F
15. T
16. a
17. F
18. T
Glossary of terms
Price ? The exchange value of a good or service
Profit maximization ? The point at which the additional revenue gained by increasing
the price of a product equals the increase in total costs
Target return objective ? A short-run or long-run pricing practice intended to achieve a
specified return on either sales or investment
Value pricing ? A pricing strategy that emphasizes benefits a product provides in
comparison to the price and quality levels of competing offerings
Demand ? A schedule of the amounts of a firm's product that consumers will purchase at
different prices during a specified time period
Supply ? A schedule of the amounts of a good or service that a firm will offer for sale at
different prices during a specified time period
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Elasticity ? A measure of the responsiveness of buyers and suppliers to changes in price
Cost-plus pricing ? The practice of adding a percentage or specified amount (as markup)
to the base cost of a product to cover unassigned costs and provide a profit
Price skimming ? A pricing strategy involving the use of a high entry price relative to
competitive offerings
Penetration pricing ? A pricing strategy involving the use of a relatively low entry price
as compared with competitive offerings to help secure initial market acceptance
Psychological pricing ? A pricing policy based on the belief that certain prices or price
ranges make a good or service more appealing than others to buyers
Product line pricing ? The practice of setting a limited number of prices for a selection
of merchandise
Promotional pricing ? A technique that temporarily lowers prices below normal levels
in a temporary marketing campaign
By-product pricing ? Setting a price for by-products in order to make the main product's
price more competitive
Captive-product pricing ? Setting a price for products that must be used along with a
main product
FOB-origin pricing ? A geographic pricing strategy in which goods are placed free on
board a carrier; the customer pays the freight from the factory to the destination
Going-rate pricing ? Setting price based largely on following competitors' prices rather
than on firm's costs or demand
Mark-up ? The percentage of the cost or price of a product added to cost in order to
arrive at a selling price
Product-bundle pricing ? Combining several products and offering the bundle at a
reduced price
References
1. Francis Cherunilam, Industrial Marketing, Himalaya Publishing House, 2004
2. Joel Dean, Pricing policies for new products, Harvard Business Review, Nov-Dec
1976
3. Michael Morris, Industrial and Organizational Marketing, Macmillan Publishing,
NY, 1992
188
4. Philip Kotler and Kevin Lane Keller, Marketing Management, 12e, Prentice-Hall,
2005
5. Rajiv Lal and Miklos Sarvary, When and How is the Internet likely to decrease
price competition?, Marketing Science 18, No.4. 1999
6. Thomas T. Nagle and Reed K. Holden, The strategy and tactics of pricing,
Prentice-Hall, 2001
189
Unit ? IV
Place (Marketing Channels)
Lesson 4.1
Nature of marketing channels
Lesson 4.2
Structure and design of marketing channels
Lesson 4.3
Retailers and Wholesalers
190
Lesson 4.1
MARKETING CHANNELS
At the end of the chapter, you will be familiar with
What are marketing channels?
Types of channel flows
Functions of distribution channels
What's new in marketing channels in India?
Project Shakti: Among the new channels is Project Shakti, which is already operational in
11 states. The vision is to reach over 100,000 small villages, touching over 100 million
rural Indians. Project Shakti provides micro-enterprise opportunities for women from
Self-help Groups, making them direct-to-home distributors of HLL. The `Shaktiammas'
work as brand ambassadors for HLL and they sell its products directly to village
consumers at their homes.
Hindustan Lever Network: Hindustan Lever Network leverages the opportunity of
Direct Selling, and already presents customized offerings in 11 Home & Personal Care
and Foods categories. With a consultant base of over 250,000 entrepreneurs, it operates in
over
1,500 towns
and
cities,
covering
80%
of
the
urban
population.
Out-of-Home Opportunity: HLL is also aggressively responding to the rapidly growing
trend of out-of-home consumption. The company is already the largest in hot beverages
vending with over 15,000 tea and coffee vending points. This is being aggressively
expanded in offices, the burgeoning services sector and, through specially designed
kiosks,
in
the
education,
entertainment,
leisure
and
travel
segments.
Health & Beauty Services: To respond to the increasing consumer need for health and
beauty services and products, HLL has pioneered Lakme Salons and Ayush Therapy
Centres. Lakme already has 64 salons in 26 cities, servicing over 4 lakh consumers a
year. The Ayush Therapy Centres provide easy access to authentic Ayurvedic treatments
and products, addressing the ever-growing concern for health among consumers.
Mr. Banga of HLL concluded, "Our distribution initiatives create significant employment
191
and vocational opportunities. Our countrywide network of 7,000 Stockists and 6,000 sub-
stockists employs over 60,000 people. In our current channels, we work with the local
retail trade, which has dispersed ownership and already involves a large number of
people. Our new initiatives by themselves create large vocational opportunities for
people. Hindustan Lever Network aims to create over a million self-employed
entrepreneurs. Project Shakti aims to engage 25,000 underprivileged rural women, giving
them economic independence. Services, by their very nature, are employment intensive
and will also provide significant employment. All our channel initiatives are thus
completely aligned with the national interest and priority of employment generation."
One of the major purposes of marketing is to satisfy the human needs and wants
by delivering products to buyers when and where they want them at a reasonable cost.
One of the key aspects we find in this process is delivery. Over the past two decades,
economic clout has shifted from the producers of goods to distributors of goods. The shift
in economic power has been significant in the retail level of marketing channels, where
mass merchandisers like Wal-Mart, Big Bazaar have become dominant players. As a
strategic marketing tool, the distribution channels had for many years taken something of
a backseat to the other three strategic areas of the marketing mix namely the product,
price and promotion. Today there has been a shift in the emphasis and this has been
credited to four developments, viz.
Explosion of information technology and e-commerce
Greater difficulty of gaining a sustainable competitive advantage
Growing power of distributors especially retailers
The need to reduce distribution costs
DEFINING DISTRIBUTION CHANNELS
Different people perceive marketing channels in different ways, some see it as a route
taken by a product as it moves from the producer to the consumer, and others describe it
as a loose coalition of business firms that have come together for purpose of business.
Customers may view marketing channels as simply `a lot of middlemen' standing
between the producer and the product. Given all these different perspectives it is not
possible to have one single definition for marketing channels. Marketing channels can be
192
defined as the external contractual organization that management operates to achieve its
distribution objectives.
There are four terms in this definition that has to be given a special mention
namely external, contractual organization, operates and distribution objectives. The term
external means that the marketing channel exists outside the firm. Managing of the
marketing channel therefore involves the use of interorganizational management
(managing more than one firm) rather than intraorganizational management (managing
one firm). The term contractual organization refers to those firms who are involved in
the negotiatory function as the product moves from the producer to the end user. The
function of these firms involves buying, selling and transferring of goods and services.
Transportation companies, public warehouses, banks ad agencies do not come under
these and are referred to as facilitating agencies. The third term operates suggests the
involvement of management in the channels and this may range from the initial
development of the channel structure to the day-to-day management. Finally the
distribution objectives explain the distribution goals the organization has in mind. When
the objectives change, variations can be seen in the external contactual organizations and
the way in which the management operates. In simpler terms a channel then consists of
producer, consumer and any intermediary.
Marketing channel strategy is one of the major strategic areas of marketing. In
most cases eliminating middlemen will not reduce prices, because the amount that goes to
the intermediaries compensates them for the performance of tasks that must be
accomplished regardless of whether or not an intermediary is present. In simple terms, a
company can eliminate intermediaries but cannot eliminate the functions they perform.
FLOWS IN MARKETING CHANNELS
As discussed a conventional channel of distribution consist of a manufacturer, a
wholesaler, a retailer and the ultimate consumer. Not all the channels include all these
marketing institutions. At times the product passes directly from the manufacturer to
consumer. When a marketing channel has been developed a series of flows emerge.
These flows provide the links that tie channel members and other agencies together in the
distribution of goods and services. There are five most important flows namely
Product flow
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Negotiation flow
Ownership flow
Information flow
Promotion flow
4.1 Flows in the Marketing channel
Product Flow Negotiation Flow Ownership Flow Information Flow Promotion
Flow
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Transportation
Transportati
Advt agency
Company
on
Wholesaler
Wholesaler
Wholesaler
Wholesaler
Wholesaler
Retailers
Retailers
Retailers
Retailers
Retailers
Consumers
Consumers
Consumers
Consumers
Consumers
The orgin and concept of flows in marketing channels is generally attributed to
Ronald S. Valie, E.T Grether and Reavis Cox
The Product flow refers to actual physical movement of the product from the
manufacturers through all the parties who take physical possessions of the product from
the point of production to the final consumer.
In the negotiation flow, this represents the interplay of the buying and the selling
functions associated with the transfer of title. If you note the diagram you find the
transportation firm is not included in the flow because it does not participate in the
negotiation function, also you can find the arrows flow in both the directions, indicating
the negotiation is mutual at all levels of the channels. The ownership flow shows the
movement of the title to the product as it is passed along from the manufacturer to the
consumer, here as well we find the transportation function missing since the
194
transportation firm does not take title or is actively involved in the facilitating function. It
merely involves in transporting physical products
In case of the Information flow, we can see that the transportation function has
reappeared and all the arrows are two-directional. All the parties participate in the
exchange of information. For example Coke may obtain information from the
transportation company about its shipping schedules and the rates, while the
transportation firm may seek information regarding when and in what quantities it plans
to ship its products. Some times the information bypasses the transportation company
directly to the wholesaler or the retailer when the information does not concern the
transportation firm. If there is an offer, or a price reduction these information are not
needed by the transportation firms.
Finally the Promotion flow refers to the persuasive communication in the form of
advertising, personal selling, publicity. There is a new component that is added to the
flow and that is the advertising agency and this actively provides and maintains the
information flow. The organizations work closely with the promotional organizations so
we find a two-directional arrow.
From the management view, the concept of channel flows provides a useful
framework for understanding the scope and complexity of channel management.
Changing scenario does make the role of the firms' complex, as a result of which
innovative channel strategies and effective channel management are needed to make this
happen.
FUNCTIONS OF DISTRIBUTION CHANNELS
Some of the major functions performed by the intermediaries are mainly physical
distribution, communication and facilitating functions. When we talk about physical
functions, they include braking bulk, accumulating bulk, creating assortments, reducing
transactions and transporting and storing.
Breaking bulk: One of the important role intermediaries perform is bulk-breaking
function. Here these organizations buy in large quantities and break them into smaller
quantities and pass them to the retailers, wholesalers or even to the customers. By doing
so, the intermediaries reduce the cost of distribution for the manufacturers as well as the
195
consumers. This particular function is also termed as `resolution of economic
discrepancies'. Exhibit 4.2 gives a pictorial description of bulk breaking
4.2 Bulk-breaking function
Producer
Intermediary
Buyer A
Buyer B
Buyer C
Buyer D
Adapted from William Zikmund &Michael d'Amico,
Accumulating Bulk: At times the intermediaries also do the task of accumulating the
bulk. The intermediaries may buy bulk from different small producers accumulate them
and offer to those buyers who prefer large quantities. The intermediaries in accumulating
the bulk are mostly found in the agricultural businesses, whereby the intermediary will
procure vegetables from local farmers and assemble them and sell it to the wholesalers.
Exhibit 4.3 gives a clear picture on accumulating bulk. Once the marketers accumulate
bulk they start to sort the products identifying differences in the quality, grades and
classify them into different categories
4.3 Bulk-accumulating Function
Buyer A
Buyer B
Buyer C
Buyer D
Intermediary
Buyer
Adapted from William Zikmund &Michael d'Amico,
Marketing, Seventh Edition
196
Creating Assortments: The third important function of the intermediaries is creating
assortment. When we take the case of magazines, on an average there are around
thousands of magazines being published in a month and it is impossible for a particular
newsstand to get it going, here big distributors and agents work in creating assortments
and enable a speedy process. This needs a lot of teamwork and timing. Certain magazines
become outdated within certain period of time.
Reducing Transactions: One of the biggest reasons that keep the economy moving and
the customer smiling is the presence of intermediaries, they reduce the number of
transactions necessary to accomplish the exchange of goods. Exhibit 4.4 shows the
complicated nature of the transaction if an intermediary does not come in place
4.4 Transaction without an intermediary
Manufacturer 1
Manufacturer 2
Manufacturer 3
Manufacturer 4
Food World
Food Bazaar
Nilgiris
Fab Mall
In the above exhibit, we find that it becomes a complicated process for the manufacturers
to work on with different retailers, when a intermediary comes in the form of a
wholesaler we find the whole situation becomes different. Intermediaries do not only
reduce the number of transactions but also help in the reduction of the geographical
distances that both buyers and sellers have to cover. Channel intermediaries doing the
roles of a buying agent for their customer and selling agents for the manufacturers does
simplify the process of transaction considerably From exhibit 4.5, we find the reduction
in the number of transactions that happen between the manufacturer and the retailer.
197
4.5 Reduction of transactions by an intermediary
Manufacturer 1
Manufacturer 2
Manufacturer 3
Manufacturer 4
Wholesaler
Food World
Food Bazaar
Nilgiris
Fab Mall
Transporting and Storing: Apart from breaking, accumulating, creating assortments
and reducing transactions they also perform two key marketing functions namely
transporting and storing. The final product has to be moved from the point of production
to the point of consumption. This means it involves storing the product along the way till
it is delivered. Most of the big retailers hold enough of the product in order to cater to the
consumers
Credit Services: Apart from the function of physical distribution the intermediaries also
help in offering credit services. Even though there are firms like Metro, which are
predominantly cash and carry kind of intermediaries, most of the intermediaries provide
credit facility or even paying in parts. Many intermediaries offer about 30 to 45 days to
the retailers for paying back.
Risk Taking: one of the vital functions of the intermediaries is risk taking. Not every
product finds favor in the eyes of the customer, much fallout within few months, as a
result of which the intermediaries would be at risk. An uncontrollable factor like floods,
earthquakes or even contamination or fire could pose a serious threat. The intermediaries
have to bear these risks along with the market risks. These are some of the core functions
intermediaries perform enabling goods and services to reach consumers at the right time
198
Lesson 4.2
STRUCTURE AND DESIGN OF MARKETING CHANNELS
At the end of the chapter, you will be familiar with
Marketing channel structure and its levels
Channel structure in consumer and industrial markets
Designing distribution channels
Channel dynamics
Channel conflicts
CHANNEL STRUCTURE
Channel structure is distinguished on the basis of the number of intermediaries. There are
different levels in a channel structure. The common levels are zero-level, one-level, two-
level, three-level. Each level presents both opportunities and challenges for the marketer.
Exhibit 4.6 gives a picture of the different levels
4.6 Typical channel structure for Consumer Goods
Z
ero-level
One-level Two-level
Three-level
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Agent
Wholesaler
Wholesaler
Retailer
Retailer
Retailer
Consumer
Consumer
Consumer
Consumer
199
Zero-level structure is one of the simplest forms of the channel structure. Here
organizations like Avon, Eureka Forbes use direct selling mode to take the products from
their production houses to the consumers directly. A lot of money has to be spent in order
to make this channel structure effective, as there is no third party to take your product to
the consumer. Even a bakery can come as a firm, which bakes cakes and sells it directly
to the consumers. Marketers who use the mailing services, toll-free numbers are also
using this service.
One-level structure is one in which we have one intermediary acting as a link between
the manufacturer and the consumer. Here the retailers procure goods directly from the
manufacturer and supply it to the consumers. Retailers like Viveks, Wal-Mart deal
directly with the manufacturer. In some cases in order to retain profitable and reputed
retailers the manufacturers act as wholesalers. One of the advantages for the
intermediaries is the customization and the discounts they receive.
Two-level channel has two people interceding before the product reaches the consumer.
Here there would be a wholesaler and a retailer who takes the efforts for a speedy
delivery and this is one of the most commonly used structures for consumer goods. In the
case of Metro, most of the small retail and Kirana stores buy all the merchandise from
Metro and in urn sell them to the consumer. One of the advantages of the four-level
structure is the benefit of using the wholesaler in the distribution of services.
Three-level channel happens predominantly when the firms plans to go global. When a
manufacturer enters another country, it always holds good when he uses the help of
agents to operate in that environment. The agents are people who know the legal
procedures and who can negotiate with the host country in case of a problem. Most of the
airline firms that operate in different countries take the help of agents to penetrate the
market
200
4.7 Example for Consumer Markets
Avon
Onida
Parker Pens
National
Geographic
National Distributor
Metro
Local Agency
Viveks
Kirana store
Newspaper Mart
Consumer
Consumer
Consumer
Consumer
When it comes for Business-to-Business operations, the channels differ from the
consumer markets, in this structure, firms predominantly may use their existing sales
force to sell the products to the customers, they may even use industrial distributors to
take their products to the industrial customers. Exhibit 4.8 details the Business-to-
Business model of channel structure
4.8 B2B Marketing Channels
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Manufacturer's
Manufacturer's
Representative
sales branch
Distributor
Customer
Customer
Customer
Customer
Zero-level One-level Two-level Three-level
201
Mark Andy is one of the big names in the printing machines industry. In India
Mark Andy supplies its printing machines to the industrial customers through Heidelberg,
an industrial distributor. It also has its own representatives who pitch in when the
customer needs information. In case of Industrial Channel, the zero-level, one-level and
two-level are the most commonly used method. When it comes for Business-to-Business
channels agents become the integral point of the whole process, since the characteristic of
the business-to-business market is oligopolistic and are huge buyers.
In this digital economy, a shift has started in the channels on either side of the
markets i.e. in both the consumer marketing channels and the business-to-business
market channels. The web has created a platform whereby organizations can now directly
communicate with the customers, as a result of which many of the channels are being
disintermediated. This disintermediation does not necessarily mean that they completely
eliminate the intermediaries, but rather when it comes to shipping the products it may
outsource some of the distribution functions like the storage, transportation from third
party firms.
DESIGNING DISTRIBUTION CHANNELS
Channel design refers to those decisions that involve in the development of new
marketing channels or modifying the existent ones. The channel design decision can be
broken down into six steps namely:
1. Recognizing the need for channel design decision
2. Setting and coordinating distribution objectives
3. Specify the distribution tasks
4. Develop alternative channel structures
5. Evaluate relevant variables
6. Choose the best channel structure
1. Recognizing the need for a channel design decision
First and foremost task for the organization is to recognize the need for a channel design.
An organization would go in for a new channel design for the following reasons namely
-When a new product or product line is developed, mainly when the existing
channels are not suitable for the new line
202
-When the existing product is targeted to a different target market. This is
common when an organization is used to catering the B2B, plans
to enter the consumer market
-When there is a change in the marketing mix elements, when an
organization reduces its prices on certain offering the channel
worked out will be based on the price points, they may look in for
discounters
-When facing major environmental changes namely in economic or
technological or in legal spheres.
-Finally when the organization opens up new geographic marketing areas
The list by no means is comprehensive, but gives a picture about some of the most
common conditions when channel design decisions are worked out.
2. Setting and Coordinating Distribution Objectives
Once a need for a design is recognized the next task for the channel manager is to work
out to develop the channel structure, either form the scratch or by modifying the existing
one. It is necessary for the channel manager to carefully evaluate the firm's distribution
objectives. In order for the distribution objectives to be effective and well coordinated the
channel manager need to perform three tasks namely
Become familiar with the objectives and strategies in other
marketing mix areas and other relevant objectives and strategies of
the firm. In most cases the person or the group that sets the
objectives of the other marketing mix elements will also set the
objectives for distribution as well.
Set the objectives and state them explicitly. A good objective is
one, which is clear, and explicit, and has a greater role in achieving
the firm's overall objectives. Some examples of a good distribution
objectives are as follows, at the start of the new millennium, Apple
Computers set a distribution objective to reach more consumers with
what it refers to as the `Apple experience'. So, Apple reinvigorated
and reestablished relationships with large retail chains, which it had
neglected in recent years .In the same way Coca-Cola seeks to
203
broaden its penetration in schools and college markets, as a result of
which it has entered into contact with many schools and colleges,
whereby these institutions would sell only Coca-Cola products on
their campuses.
Check and see if the distribution objectives set are congruent with
marketing and other general objectives and strategies of the firm. This
involves verifying if the distribution objectives do not conflict with the
objectives in the other areas of marketing mix or even to the overall
objectives of the company. In order to cross check, it is essential to
examine the interrelationships and hierarchy of the objectives of the
firms. Exhibit 4.9 gives a clear picture of the same
Exhibit 4.9 Interrelationships & hierarchy of Objectives
Firm's Overall
Objectives &
Strategies
General
Marketing
Objectives &
Strategies
Product
Pricing
Promotion
Distribution
Objectives &
Objectives &
Objectives &
Objectives &
Strategies
Strategies
Strategies
Strategies
3. Specifying the Distribution Tasks
Once the objectives are formulated, a number of functions need to be performed in order
for the distribution objectives to be met. The manager therefore has to specify the nature
204
of the tasks that needs to be carried out in order to meet the objectives. The tasks need to
be precisely stated so that it meets the specified distribution objectives. For e.g. a
manufacturer of a consumer product, say a high quality cricket bats aimed at serious
amateur cricket players would need to specify distribution tasks such as gathering info on
target markets shopping patterns, promote product availability to the target, maintain
inventory, and timely availability, compile info about the product features, provide hands
on experience using the product, process and fill customers orders, transport the product,
arrange for credit provisions, provide warranty, provide repair and service, establish
product return to make the offering readily available. Sometimes these functions may
appear to be production oriented rather than distribution tasks, but when we talking about
meeting customers, they are indeed distribution tasks.
4. Developing Possible Alternative Channel Structures
Once the tasks have been specified by the channel manager he should find out alternate
ways of allocating these tasks. In most cases the channel manager chooses from more
than one channel to reach the consumer effectively. Britannia would sell their biscuits
thorough wholesale food distributor, departmental stores, convenience stores and even in
pharmacies. Whatever may be the channel structure, the allocation alternatives should be
in terms of (a) the number of levels in the channel (b) the intensity at various levels, and
(c) the types of intermediaries.
The number of levels can be from two level upto five levels. The channel
manager can think of going for a direct way of meeting the customers to using two
intermediaries as an appropriate way. Intensity refers to the number of intermediaries at
each level. Generally the intensities can be classified into three categories namely
intensive, selective and exclusive. Intensive saturation means as many outlets as possible
are used at each level of the channel. Selective means that not all possible intermediaries
at a particular level are used. Exclusive refers to a very selective pattern of distribution. A
firm like Parle may use intensive distribution channel structure, while Rolex may use
high degree of selectivity. The types of intermediaries, third component has to be
carefully dealt. The firms should not overlook new types of intermediaries that have
emerged in recent years particularly the auction firms such as baazee, bid or buy as
possible sales outlet for their products.
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4.1. (A) ACTIVITY
Would you use exclusive, selective or intensive distribution for the following products?
Maruthi Automobiles
MTR food products
Samsung Electronics
5. Evaluating the variables affecting Channel structure
Once the alternative structures have been outlined, each channel structure has to be
evaluated on a number of variables. There are five basic categories namely,
Market variables - marketing management is based on the philosophy of marketing
concept, which stresses on the consumers needs and wants, the managers have to take the
cues from the market. The subcategories that have a greater influence on the market
structure are market geography, market size, market density and market behavior
Product variables - some of the most important product variables are bulk and weight,
Perishability, unit value, degree of standardization, technical vs. non-technical and
newness. Heavy and bulky products have a high handling and shipping costs relative to
their value. The manufactures of such products have to keep in mind to ship in large lots
to a fewer possible points. It would always be better if the channel structure remains
short. Food products, flowers are considered to be highly perishable. When products are
highly perishable, the channel structure should be designed to provide rapid delivery
from producers to consumers. One important consideration is lower the unit value of a
product, the longer the channels should be as low unit value leaves small margins for
distribution costs. Exhibit 4.10 explains the relationship between the degree of
standardization and channel length. If the product flows directly from manufacturer or
producer to the user the degree of customization is more, but as the product becomes
more standardized it passes through many channels. Mostly the B2B machinery has a
great degree of customization as it passes from the manufacturer to the industrial user,
while many consumer market is predominantly a standardized one. When it comes for the
technical component, the industrial products are mostly distributed through direct
channels because of the technical expertise and service while many technical consumer
206
products do use shorter channel structure. When the product is new and is in the
introductory stage in order to capitalize on the aggressive promotion, a shorter channel is
preferred to gain awareness.
Exhibit 4.10 Relationship between degree of standardization and channel length
Channel length
Several
Intermediaries
No
Intermediaries
Custom made
Identical product
product
Degree of Standardization
Company Variables- the important variables that affect a good channel design are size,
financial capacity, managerial expertise and objectives and strategies. Larger the firms in
terms of size it enables them to exercise a substantial amount of power in the channel.
The size does give flexibility for the firm in picking the channel structures. The same
hold true when it comes for the financial capability. Greater capital available with a firm,
less dependency is seen on the intermediaries. When a firm is into industrial marketing, it
prefers to have its own sales force, warehousing, order processing capabilities and larger
firms with good financial backing are better able to bear the high cost of these facilities.
When a firm lacks quality managerial skills, a comprehensive channel structure ranging
from wholesalers to brokers are needed to perform the distribution activity, once the firm
gains experience it can change or reduce the number of intermediaries. The objectives
and strategies a firm has may limit the use of intermediaries. These strategies may
207
emphasis on aggressive promotion and may even alter the distribution tasks. Overall this
is one of the prime variables used for evaluating.
Intermediary Variables- the important intermediary variables are availability, costs and
services offered. The availability is one of the key variables as this influences the channel
structure. If we take the case of Dell Computers, due to lack of a proper channel structure
he designed a direct mail order channel, which provided a strong technical backup as
well. The cost is another variable a channel manager considers. If the cost of using a
particular intermediary is too high compared the services it offers the manager may
consider in minimizing the use of intermediaries. The services performed by the
intermediaries is another integral component, a good intermediary is one, which offers
efficient services at the lowest cost.
Environmental Variables- the uncontrollable or the macro environmental forces may
affect the different aspects of channel development and management. Forces like the
Sociocultural, economic, technological, legal forces have a significant impact on the
channel structure. The other variables are those the organization can work upon or change
to the situation but the environmental forces are those the organization has to cope up
with.
6. Choosing the `Best' Channel structure
In deciding the manager should choose an optimal channel structure that would offer
desired level of effectiveness at the lowest possible cost. Even though there is not one set
method to pick an optimal channel structure, it all depends on the orientation of the firm.
If the goal of the firm were profit maximization, the channel structure would be in line
with the goal. Most channel choices are still however made on the basis of managerial
judgment and the data that is available.
MANAGING CHANNEL MEMBERS AND THEIR CONFLICTS
After a particular channel is selected, the marketer must manage or administer the
channel members or intermediaries. Managing channel members include
a. selecting intermediaries
b. motivating channel members or middlemen
c. controlling or managing channel conflicts, and
d. evaluating performance of channel members
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Selecting intermediaries: Selection of intermediaries or middlemen is a continuous
process because some of them leave the channel or get terminated by the marketer. Hence
it is not part of channel design. It is necessary for the marketer to determine criteria or
factors for selection of intermediaries. These criteria differ depending on the type of
middlemen and the firm's particular product/market conditions. Some of the common
factors considered are financial standing, location, prior experience and type of customers
served.
Motivating middlemen: The marketer must continuously motivate his intermediaries to
achieve long-term success. Motivating the intermediaries to achieve top performance
should start with understanding the middlemen's needs, perceptions and outlook. The
quality of support from middlemen will depend on the motivational techniques used and
incentives offered.
Controlling channel conflicts:
Even though a manufacturer's channel design is well done, there will be some conflict
because of the differences in the objectives and perceptions of the channel members. The
conflicts or tensions between the channel members can damage channel performance.
Marketers should periodically undertake surveys of intermediaries or conduct
formal/informal discussions with them to assess the areas or sources of conflicts. Some of
the sources of conflict are indicated in Exhibit 4.11.
Sources of conflict
Examples
1.
Differences in
Manufacturers want long-term profitability
objectives
but middlemen prefer short-term
2.
Dealings with
Middlemen
feel
cheated
when
the
customers
manufacturer deals with large customers
and asks them to serve small customers
3.
Differences in
The manufacturer feels that the middlemen
interests
are not giving attention to the firm's
products. The middlemen are interested in
products that are fast moving or have higher
margins for them
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4.
Differences in
The manufacturer wants the middleman to
perceptions
carry a higher inventory due to the
perception of good market conditions. The
middleman does not share this optimism
5.
Compensation
Manufacturer's representatives (agents) feel
that the commission percentage offered by
the manufacturer is not adequate. The
manufacturer thinks otherwise
6.
Unclear territory
The
territory
boundaries
between
boundaries
middlemen are not clear, resulting in
competition
among
the
firm's
intermediaries to secure business from the
same customers
Exhibit 4.11 Sources of channel conflicts
The channel conflicts can be controlled or managed in several ways, including:
effective communication network
joint goal-setting
diplomacy
mediation
arbitration and
developing a vertical marketing system (which is described in the next section).
An effective communication network between the manufacturer and the
intermediaries can be developed through periodic formal and informal meetings and co-
optation of intermediaries in board of directors or advisory committees. In joint-goal
setting, the channel members come to an agreement on the super-ordinate (or
fundamental) goals they jointly seek. Such goals can be market share leadership,
customer satisfaction or product/service quality in a highly competitive market where
survival and success of channel members depend on their performance and cooperation.
The channel members may resort to diplomacy, mediation or arbitration, when conflicts
are sharp. Diplomacy is used when the conflict is resolved through discussions between
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the persons from both the parties. In mediation a neutral third party tries to conciliate the
interests of the two parties. In arbitration, both the parties present their arguments to a
third party (i.e. the arbitrator) and agree to accept the arbitration decision.
Evaluating channel members:
It is a good policy for the marketer to evaluate the performance of each channel member
periodically. An evaluation is useful to know which intermediaries are achieving
favourable results and which are not. The intermediaries not performing well need to be
counseled, re-trained, re-motivated or terminated. An evaluation data can also be used
while deciding which type of middlemen to be used. The factors or criteria to be used for
an evaluation of middlemen's performance can include sales achieved versus sales quota,
average inventory levels, customer delivery performance, customer complaints,
cooperation in market feedback, support for new products and new customers generated.
CHANNEL DYNAMICS
Like any other concept, channel systems do change according to the development and the
need of the hour. With consumers becoming conscious of where they buy and how they
want things to be delivered there has emerged different systems namely the vertical,
horizontal and multichannel marketing systems.
The conventional or the traditional marketing channel encompasses a producer,
one or few wholesalers and one or few retailers. The objective of theses different players
is to see that they make enough profits, they are highly independent and don't have
control over other channel members. In contrast, the Vertical Marketing System (VMS)
has the three members acting as one unified team, there is one channel member who
owns the other members or allows franchising but ensures a greater role in the execution.
Many organizations have started to operate in this format as strong channel members try
to dictate terms for the producer as well as when they found the objectives of different
channel members differ from that of the producer. There are three variants of vertical
marketing system namely corporate, administered and contractual vertical marketing
system. In case of corporate the organization combines the production and the
distribution under one roof. Organisations like Asian paints, Amul are not only involved
in the production of the products but they also own a considerable no of outlets. An
administered vertical marketing system coordinates the production and distribution
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efficiencies but use their size as a dominant influence. HLL commands a greater shelf
space or Samsung gets better displays in retail outlets purely because of their size and the
reputation they carry with them. The third variant namely contractual vertical marketing
system coordinates the activities of individual firms at different levels integrating their
programs at contractual levels. Firms like McDonalds, KFC use this type of vertical
marketing systems for the integration of their businesses.
The Horizontal marketing systems is one where two or more unrelated
businesses come together pull in resources to exploit the emerging opportunities. Many
private players especially banks have got into the act of tie-ups with retail stores or even
with fuel outlets in order to gain greater market. ICICI bank has got tied with Big Bazaar,
and this has greatly enhanced the reputation of both these firms as well as increasing the
customer base respectively.
The Multi-channel marketing systems as the term simplifies it is one in which a
firm uses multiple channels to reach different customer segments. In the present scenario
most organizations have started to use multiple channel method because it helps in the
expansion of the market coverage, it costs little when the target segment is small instead
of using a bigger channel and mainly helps in customizing the offering according the
need of the segments. Exhibit 4.12 gives an idea about the different products and AT & T
uses different channels to reach out to different segments.
Exhibit 4.12 AT&T different products and segments
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When distribution when goes overseas they are bound to face a lot of restraints
and problems like the host country laws, the laws of the country to which the goods are
shipped, the laws of the nations through which the goods pass must be abided by the
company. Apart from this, other environmental factors do play an active role when
considered from a macro-marketing perspective. In the next lesson, we deal with the role
of retailers, wholesalers and logistics in this value chain and how do they facilitate the
process of performing the channel function effectively
Key Terms
Contractual Organisation
Horizontal Marketing Systems
Retailers
Atmospherics
E-tailers
Vertical Marketing Systems
Multichannel Marketing Systems
Specialty store
Convenience Stores
Wholesalers
Glossary of terms
Horizontal Marketing System- Two or more unrelated businesses come together pull in
resources to exploit the emerging opportunities
Marketing channels - The external contactual organization that management operates to
achieve its distribution objectives
Multichannel Marketing System- A firm uses multiple channels to reach different
customer segments
One Level structure- one intermediary acting as a link between the manufacturer and
the consumer
Three Level structures- Firms when they go global they use the help of agents to take
their products to the wholesalers and then to the retailers before reaching the end
consumer
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Two level structure- two people interceding before the product reaches the consumer
Vertical Marketing System- members acting as one unified team, there is one channel
member who owns the other members or allows franchising but ensures a greater role
in the execution
Zero Level structure- the product is moves from the manufacturer directly to the
consumer without any intermediary
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Lesson 4.3
RETAILERS AND WHOLESALERS
The objectives of this lesson are:
To understand the concept of retailing
Different Theories in Retailing
Types of Retailers
Retail strategy
Wholesaling
Types of Wholesalers
INTRODUCTION
Retailing is one of the largest sectors in the global economy. It employees almost 23
million people in United States alone, generating about $3 trillion in sales annually.
About 50 organizations in the Fortune 500 are from the retail sector. Retail is one among
the fastest growing industry. Consider Wal-Mart, the biggest retailer in the world with
approximately $250 billion in sales was started in the early sixties, while Fortune came
with its annual ranking of top 500 organizations in 1952, a year when nobody would have
dreamt about Wal-Mart. In the early nineties for the first time Wal-Mart became the top
organization according to Fortune Magazine, which it still continues to hold.
Retail is the buzzword today and this lesson explores the emerging retail scenario
and the strategies available for different retail formats. Exhibit 4.2.1 shows that
distribution of the product begins from the producer or the manufacturer and ends with
the consumer, between them are the retailers who act as a link. The word `retail' is
derived from the French word retaillier, meaning `to cut a piece off' or `to break bulk'.
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Exhibit 4.2.1 Distribution Channel
Manufacturer
Wholesaler
Retailer
Consumer
Wholesalers buy products from manufacturers and sell them to retailers while
retailers take the product from wholesalers to the consumers. While the wholesalers try to
satisfy the retailers, the retailers make all the effort in satisfying the needs of the
consumers. Retailing has become an intrinsic part of our everyday lives that and this has
been evident with the nations that have enjoyed the greatest economic and social progress
have been those with a strong retail sector. Retailing encompasses selling through mail,
the internet, door-to-door visits apart from brick and motor stores.
INDIAN SCENARIO
Retailing is the second largest industry in India next only to agriculture and contributes to
about 11 percent of the GDP; it is likely that India will have about 220 shopping malls by
2006 up from 25 in 2003. The sector provides employment for 8% of the total workforce
of the country. The sector is highly fragmented and is dominated by large traditional
formats. Even though the total retail businesses are estimated at $180 billion only 2
percent comes from the organized sector. According to one of the sources, the size of the
organized retail was estimated at about Rs 16,000 crores in 2002-03. India has the largest
retail density in the world with 12 million retail outlets for a population of over 1000
million.
In the organized retail there are few big names like RPG's, viveks, Rahejas etc
who dominate the market to a greater extent. From what was once considered a
conservative and a traditional society India has emerged as the hot pot for every
organization that even firms like Reliance, Mahindra's are planning to foray into retail.
According to the study conducted by the Euroconsumer study there has been an increase
in the disposable income of the Indian middle class, apart from this the Indian middle and
high income group is increasing by 10% annually over the last decade. Moreover the
falling interest rates, easier consumer credits, varieties and different price points have all
been credited to the booming retail market. The Urban customers have started to
experience the western lifestyle, and they have become more demanding than ever
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before. Scenario has changed from what once was a forced way of buying has not led to
the age where shopping is considered as an experience. The consumers are becoming
highly knowledgeable and this in turn has had a positive effect on the consumers.
DRIVERS OF CHANGE
Changing Demographics- One of the biggest reasons for the growth of retail in
India is the changing demographics. The number of middle-income class and the
people in the age group 18-35 has been ever increasing and this has changed the
consumer's preference. According to a world study India is considered as one of
the youngest economies and this is helping in the growth of the sector.
Emphasis on Convenience ? With the ever-expanding cities and upcoming towns,
people are becoming choosier with the things they buy and the places they shop.
This has resulted in the emergence of new retail ventures trying to be niche in
some area.
Explosion of Knowledge and Technology- With the emergence of internet, people
have become aware of what's happening in the other part of the world and this
has led him in comparing the prices, assortment, ambience etc. To cope up with
this knowledge explosion different retail formats have emerged and this has made
shopping more of fun and a experiences.
Added Experimentation- Back in the 1980s, people were highly loyal to the
brands they bought and the outlets they shopped, but the present generation of
consumers like to experiment. Long back people never felt shopping for
vegetables and groceries at retail outlets were a good idea, but things have
changed and vegetable retailing has grown by 35 percent
FUNCTIONS OF RETAILING
Retailers perform four major activities in the value chain. They are:
1. Arranging assortment
2. Breaking bulk
3. Holding stock and,
4. Providing service
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Each of these activities holds significance when the product gets transferred from the
manufacturer or the wholesaler to the retailer. We will discuss about each of the activities
in detail and their contribution in the value addition to the offering.
Arranging Assortment- an assortment is a retailer's selection of merchandise and
this includes the length and breadth of the products. The assortment may include
substitutable items of the same brands with different price points. Making
decisions on the assortments is one of the crucial elements for a retailer; a small
retailer makes decisions based on the perceptions he holds for a particular product
and by past experiences. Those in the organized sector rely on future projections,
past sales record and on detailed study on various factors that may affect the sales.
Retailers need to consider other factors such as the store layout, the ambience, and
merchandise mix to create an urge. Subhiksha one of the leading grocery and
pharmaceutical chain in Tamil Nadu has an impressive assortment of only the fast
moving brands and stock keeping units (SKU's) rather than all that is available,
while Food World positions itself as a one stop shop as a result of which it holds
multiple brands. Subhiksha works on its layout, price (value for money) as it's
tool in reaching the consumer groups
In the News
Subiksha, the pharma and FMCG products retail chain in Chennai,
uses price discounting as a major unique selling proposition. Subiksha
offers a 10 per cent discount on the 'maximum retail price' of all
products it sells. Foodworld and Vitan, both South-based, have also
started offering sales promos and discounts on select products' MRPs
Source: www.etretailbiz.com
Breaking Bulk- another activity that retailers perform is breaking bulk. Breaking
bulk means physical repacking of the products by the retailers in small unit sizes
according to the customer's requirement and convenience. The retailers procure
goods from the wholesalers in large quantities in order to reduce transportation
costs and time. They further break the products or arrange them into convenient
units. The entire operation not only adds value to the end user but also send a
positive word of mouth about the manufacturer or the supplier. This particular
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function is losing its prominence due to the advent of the different categories like
the ready to wear segment.
In the News
With big brands from textile companies growing weary in adapting to the
fast-paced changing scenario in the ready-to-wear industry, it's the small
brands, including private labels that are completely transforming the way
men, women and children dress. A whole bunch of players have plunged
into this branded ready-to-wear business. According to current KSA
Technopak reports, the branded ready-to-wear segment contributes 21%
to the apparel sector. And the present total market size of the ready-to-
wear segment is pegged at around Rs 40,000 - 45,000 crore
Source:
Holding Stock- the third activity retailers perform is holding stock. Retailers
maintain appropriate levels of inventory. In the current scenario holding stock has
got its own positives and negatives. Retailers have to face a negative consequence
for holding unwanted stocks while at the same time keeping low stocks may
affect the business. Based on the size of the retailer inventory decisions are
worked. A large retailer uses specialized software's for maintaining inventory
levels while small retailers use day to day transactions as a yardstick in
maintaining the inventory
Extending Service- the service the retailer's offer is more than just the core
product. It may be an add-on to the core product itself. The add-ons may be the
credit facility they may provide, after sales service or even providing information
about the latest products to the customers. For the suppliers the retailers may
provide with information pertaining to the trends in the market, information about
a particular target group and even provide storing facility. Time zone, a part of the
Titan group were the one of the pioneers in organized sector to some up with
specialized people who were trained in handling any complexities in the
instrument.
Activity
Visit a near by Kirana store and a departmental store, try to find out
what different activities the retailers provide for the customers and
the suppliers. Discuss your findings in a group. Check if you can
find more activities that the retailers perform
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THEORIES IN RETAIL
Like every other industry new retail firms have brought innovative approaches in
retailing. Retail development can be looked at from different theoretical perspective, as
no one theory is universally acceptable. The reason for this unacceptability is mainly
because of different market conditions, different socio-economic conditions in the
market. This session deals with the following theories namely
Wheel of Retailing
Retail Accordian Theory
Theory of Natural Selection
Retail life cycle
Wheel of Retailing
Exhibit 4.2.2 Wheel of Retailing
This theory talks about the structural changes in retailing. The theory was
proposed by Malcomb McNair and according to this theory it describes how retail
institutions change during their life cycle. In the first stage when new retail institutions
start business they enter as low status, low price and low margin operations. As the retail
firms achieve success they look in for increasing their customer base. They begin to
upgrade their stores, add merchandise and new services are introduced. Prices are
increased and margins are raised to support the higher costs. New retailers enter the
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market place to fill the vacuum, while this continues to move ahead as a result of the
success. A new format emerges when the store reaches the final stage of the life cycle.
When the retail store started it started low but when markets grew their margins and price
changed. The theory has been criticized because they do not advocate all the changes that
happen in the retail sector and in the present scenario not all firms start low to enter the
market
Retail Accordian Theory
This theory describes how general stores move to specialized stores and then again
become more of a general store. Hollander borrowed the analogy `accordian' from the
orchestra. He suggested that players either have open accordion representing the general
stores or closed accordions representing narrow range of products focusing on specialized
products. This theory was also known as the general-specific-general theory. The wheel
of retailing and the accordion theory are known as the cyclical theories of retail
revolution
Theory of Natural selection
According to this theory retail stores evolve to meet change in the microenvironment.
The retailers that successfully adapt to the technological, economic, demographic and
political and legal changes are the ones who are more likely to grow and prosper. This
theory is considered as a better one to wheel of retailing because it talks about the macro
environmental variables as well, but the drawback of this theory is that if fails to address
the issues of customer taste, expectations and desires
Retail Life cycle
Like products, brands retail organizations pass through identifiable stages of innovation,
accelerated development, maturity and decline. This is commonly known as the retail life
cycle. Any organization when in the innovation stage is nascent and has few competitors.
They try to create a distinctive advantage to the final customers. Since the concepts are
new at this stage organizations try to grow rapidly and the management tries to
experiment. Profits will be moderate and the stage may last for a couple of years. When
we talk about our country e-buying or online shopping is in the innovation stage.
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Exhibit 4.2.3 Retail Life Cycle
In the accelerated growth phase the organizations face rapid increase in sales, competitors
begin to emerge and the organizations begin to use leadership and their presence as a tool
in stabilizing their position. The investment level will be high as there are others who will
be creating a lot of competition. This level may go up to eight years. Hypermarkets,
Dollar stores are in this stage. In the maturity stage as competition intensifies newer
forms of retailing begin to emerge, the growth rate starts to decline. At this stage firms
should start work on strategies and reposition techniques to be in the market place.
Supermarkets, cooperative stores are in this stage. In the final stage of the retail life cycle
is the declining phase where firms begin to loose their competitive advantage.
Profitability starts to decline further and the overheads starts to rise. Thus we see that
organizations needs to adopt different strategies at each level in order to sustain in the
marketplace
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CLASSIFICATION OF RETAIL FORMATS
Retailers have changed dramatically according to the changing trends and the evolving
needs of the consumers. Different retail format have emerged over the years and each
have been an improvisation over the earlier formats. Retail stores can be classified
broadly based on store based and non-store based, the store based is otherwise the brick
and the motor stores while the non-store based are those, which do not use the traditional
format. Ownership in store based is further divided based on ownership and merchandise.
This section discusses some of the prominent formats under each classification
Classification of Formats
Store Based Retailing
Non-store based Retailing
Based on ownership
Based on Merchandise
Direct Selling
Independent Retailer
Convenience Stores
Mail Order
Chain Retailer
Supermarkets
Telemarketing
Franchise
Hypermarkets
Automated
Leased Departments
Speciality Stores
Vending
Consumer
Department Stores
Cooperatives
Off price Retailers
Factory Outlets
Catalogue Showrooms
Exhibit 4.2.4 Classification of Retail Formats
Retail formats are broadly classified into store based and non-store based retail formats.
The store based formats are the traditional models where you have brick and motor stores
while a direct relationship with the customer is the trust area of the non-store based. The
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store based is further divided based on the ownership and the merchandise held by the
stores.
CLASSIFICATION BASED ON OWNERSHIP
An independent Retailer- these are retail stores which owns only one retail outlet.
Usually the format is passed from generation to generation and this is has a proprietor
who owns the store. 80 percent of the retail stores fall under this class in our country.
From the paan shops to the kirana stores we find this type of stores in our country.
Saravana stores is a good example.
A Chain Retailer- they are otherwise known as the corporate chain where we find two or
more outlets under a common ownership. These stores have commonality in
merchandise, store layout, ambience etc. The advantage of this particular type of format
is the economies of scale they enjoy. Here since they are scattered all over consumer
preference may not be given greater importance. Some of the chain retailers are Mega
mart and Nilgris.
Franchising- this is a contractual agreement between two parties where the franchiser
allows the franchisee to conduct the business under an established name in return for a
fee. Some of the well-known franchisers are Mc Donald's, Archie's stores, Pizza Hut etc
Leased Departments- These is otherwise known as shops in shops. In this particular
type a portion of a store is rented or leased to a third party. We see Coffee Day having
outlets in Crossword bookstores or Pizza Corners in multiplexes.
Consumer Cooperatives- these are retail institutions owned by consumers and this is
mainly because of dissatisfied customers whose needs were never fulfilled by the existing
retailers. Some of these are either owned by the government or backed by government.
This helps in price negotiations and is one of the prime players when price quality is
considered as an important parameter.
CLASSIFICATION BASED ON MERCHANDISE
Convenience Stores- these are relatively small stores near residential area and are open
for long hours. They carry limited line of high turnover products and have self-service
formats. This format is emerging in India and they work seven days a week. BP's
In&Out, HP Speed mart fall under this category.
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Supermarkets- These stores are relatively large and operate on low costs, low margins,
high volume and offering a self-service format. The store houses food, laundry, and
household maintenance products. Some examples for this format are Nilgiris and Food
World.
Hypermarkets- has it's origins in the US, these are stores that have a space of about
80,000 to 2,20,000 sq ft. the combine supermarket, discount stores and the warehouse
principles in setting up them. They are usually situated on the outskirts of big cities and
towns. In India the size is proportional and is not too big. Big bazaar is considered as a
hypermarket.
Specialty Stores- they are characterized by narrow line, with deep assortments in that
particular product line. For the speciality stores a well-defined target market is essential.
Personal attention, store ambience, customer service are important to the retailers. Music
World, Gautier Furniture's are examples of this type of retailers. A new form of
speciality stores have emerged and are called the category killers, who offer products
from a single product line at economical prices. This particular concept has found
tremendous appeal with the Indian market. Toys kemp in Bangalore is a classic example
of this type of stores
Departmental Stores-This format originated in the mid-nineteenth century and is
popular in many parts. They are large scaled retail outlets whose merchandise offer runs
across different product lines. Apparel and home furnishing are the most common
categories found in the departmental stores. The size of an average Indian departmental
store varies between 20,000-40,000 sq ft, while that of the western stores are around
75,000 + sq ft. Some of the big players in this format are Life style, Globus, Ebony and
so on.
Off-price Retailers- In this format, the merchandise is sold less than the MRP. The
retailers buy manufacturer's seconds or overruns as a result of which the merchandise
may be in odd sizes or may be minor defects. Some off-price retail stores are
manufacturer run and are called the factory outlets and sell the manufacturer's products at
lesser prices compared to other retailers. Mega Mart, Levi's factory outlets are some of
the examples of this format.
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Catalogue showrooms- they are retailers who specialize in goods like jewellery,
electronics. Customers have to check through a catalogue and then order the product they
need. This concept s still in the nascent stage in the Indian market
NON-STORE RETAILING
A form that is gaining ground in the non-store retailing, in this type of retailing the
customers have a direct relationship with the retailers. The non-store retailing is broadly
classified into direct selling and direct response marketing, which incorporates mail
orders, television shopping and electronic shopping
Direct selling- this form of retailing is common for products like cosmetics, food
products, educational materials and basic home appliances where the consumer will be in
his place while the marketer brings the products to his doorsteps. Over the last decade the
concept has grown leaps and bounds and according to the direct selling industry in India,
there has been a 60-65 percent growth in sales turnover from this industry alone every
year.
Telemarketing- Using the telephone to sell directly to consumers has become the major
direct marketing tool. Marketers use outbound telephone charges to help sell their
products and services. Some telemarketing systems are fully automated. Marketers also
use inbound toll-free numbers to receive orders arising from interactive marketing done
through television and radio ads, direct mail or catalogs. Telemarketing is used in
industrial as well as consumer marketing. The recent explosion in unsolicited telephone
marketing has annoyed many consumers who object to the almost daily junk phone calls
that pull them away from their normal routines.
Mail order Retailing- this form eliminates personal selling and the physical store
operations. This format is appropriate to speciality products or narrow product lines and
where the target market is well defined. The main advantage of this type of retailing is
the convenience they offer to the customers.
Television Shopping- the television based retailing has received fair amount of success
in India. With players like Asian Sky shop, TSN products are advertised on televisions
with features, warranties and prices discounts. Phone numbers are given for different
cities where the customers has to give a call to the nearest place and order the products.
The products are then home delivered.
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Electronic Shopping- the fastest growing medium to do retailing is electronic medium.
Every brick and motor retailers are looking for click only models whereby customers can
order products at the click of a button. This format virtually eliminates the physical
infrastructure needed and can help in reducing the cost of operations. An effective supply
chain is what these players need. It has been estimated that the Indian online shopping
market is worth Rs.150 crores with 25% growth in 2005-06. The industry is expected to
grow in the next 3-5 years. E-bay, rediff.com are some of the online shopping portals in
the country.
Pantaloon: Fashion by Pantaloon
Pantaloon is the company's departmental store and part of life style retail
format. In fact, PRIL took its very initial steps in the retail journey by setting
up the first Pantaloon store in Kolkata in 1997. In a short time Pantaloon has
been able to carve a special place for it self in the hearts and minds of the
aspirational Indian customers. The company has depth of offering for both
men and women at affordable prices. A striking characteristic of Pantaloon has
been the strength of its private label programme. John Miller, Ajile. Scottsvile,
Lombard, Annabelle are some of the successful brands created by the
company.
Big Bazaar: Is se sasta aur acha kahin nahin
Big bazaar is the company's foray into the world of hypermarket discount
stores, the first of its kind in India. Price and the wide array of products are the
USP's of Big Bazaar. Close to two lakhs products are available under one roof
at prices lower by 2 to 60 per cent over the corresponding market prices. The
high quality of service, good ambience, implicit guarantees and continuous
discount programmes have helped in changing the face of the Indian retailing
industry. A leading foreign broking house compared the rush at Big Bazaar to
that of a local suburban train
Food Bazaar ? Wholesale prices
Food Bazaar's core concept is to create a blend of a typical Indian Bazaar and
International supermarket atmosphere with the objective of giving the
customer all the advantages of Quality, Range and Price associated with large
format stores and also the comfort to See, Touch and Feel the products. The
company has recently launched an aggressive private label programme with its
own brands of tea, salt, spices, pulses, jams, ketchups etc. With unbeatable
prices and vast variety (there are 42 varieties of rice on sale), Food Bazaar has
proved to be a hit with customers all over the country
Courtesy: www.pantaloon.com
227
ELEMENTS OF RETAIL STRATEGY
The retail strategy is an overall plan and guidelines that guides a retailer. A retail strategy
is a clear and well-defined plan that the retail organizations outline to tap the market and
create a long-term relationship with the customers. The steps that are involved in strategy
formulation are the same in every industry. Exhibit 4.2.5 brings out the steps in retail
strategy.
Organization mission,
Situation Analysis
ownership & mgmt altn
Objective
Image, Profits,
Customer satisfaction
Identification
Segmentation, Mass
of Consumers
marketing, Positioning
Overall strategy
Controllable &
Uncontrollable factors
Specific Activities
Response to environments
Control
Evaluation, Adjustment
Exhibit 4.2.5 Steps in Retail Strategy
Situation Analysis- The first stage in retail strategy is establish the organizational
mission. A mission statement acts as a motivator for the organization. The mission
statement is one, which inspires the employees in the organization to stay focus on the
goals of the organization. Evaluating ownership and management options like whether to
go it alone or have a partnership or to buy an already existing organization has to be
228
clearly outlined. Apart from this the merchandise that would be sold should also be
evaluated.
Objectives- these are the long, short and the mid term goals the retailer hopes to attain.
The goals may be based on profits that may include ROI, sales which include market
share, and the customer and the stakeholders' satisfaction. Te objectives need to be well
defined keeping in mind the mission of the organization and should see that the strategies
get translated into results.
Identification of customers- Even though the strategy of a particular retailer may be
executable and the mission of the organization looks inspiring, but if a wrong target
market is chosen, it may prove a failure. It is essential for the retailer to understand the
needs of the customer. A retailer has three options which he may choose according to his
objective, he can try selling different product categories to a broad spectrum of customers
which is known as mass marketing or work on one particular segment which is market
segment or have two or more segments which is commonly called as selective segments.
Overall Strategy- The overall strategy is broadly classified into controllable and
uncontrollable factors. The location of the store, merchandise decision, communication,
objectives come under controllable factor since the firms has a element of autonomy n
deciding about them. In case of uncontrollable factors, the factors that a retailer must try
and adapt like the technological changes, legal imperatives, cultural factors, economic
situation get categorized. This step is one of the most essential steps in retail strategy
because this stage demonstrates the firm's ability to adapt to different changing
conditions.
Specific Activities- this deals with the tactical decisions and the day-to-day operations of
the firm. The firm's responsiveness to the environmental factors with the help of the
marketing mix elements is the actual functioning of the firm's activities.
Control- in the final phase of strategy formulation is the review of the firm's
performance of a period of time. The firm's strategies and the tactics have to be evaluated
to find the effectiveness and if it fall in place wit the organizational objectives and the
with the firm's mission. In case if the firm finds that some of the tactics are time
consuming and not much of benefit could be figured out the organization should ensure
229
that such tactics have to be modified or be dropped from the firm's future course of
action.
WHOLESALING
This includes all the activities involved in selling goods and services to those who buy for
resale purpose. In the case of wholesaling this excludes manufacturers or producers who
are involved directly in the production of the goods. They are the marketing
intermediaries that buy from one source and sell it to another. The main function of a
wholesaler is facilitating the transportation of the product and at times in the transfer of
the titles. The intermediaries' performing the wholesaling function is predominantly
divided into two types namely merchants and agents. The difference between the two
forms lies in if they take title to the goods they sell.
CLASSIFICATION OF WHOLESALERS
Wholesalers
Merchant Wholesalers
Agent Wholesalers
Full Service
Limited Service
Brokers
General merchandise
Cash & Carry
Commission merchants
wholesalers
Truck wholesalers
Auction Companies
General line
Direct Marketing
Manufacturers agents Selling
wholesalers
wholesalers
agents
Speciality wholesalers
Drop shippers
Rack jobbers
Exhibit 4.2.6 Classification of Wholesalers
230
The classification is based on whether the intermediaries take title to the goods they sell.
Taking title to the goods means the intermediaries own that merchandise and must be
prepared to handle the risk associated with the ownership, including getting stuck with
merchandise even if it turns out to be un-sellable
CLASSIFICATION OF MERCHANT WHOLESALERS
The merchant wholesalers are independently owned concerns that take title to the goods
they distribute. Some of the merchant wholesalers operate at the national level while
some of them are more into regional levels. The merchant wholesalers are classified in
terms of the number and the types of service they provide to the customer. The major
division of the merchant wholesalers is termed as the Full-service merchant wholesaler
and Limited ?service merchant wholesaler.
The Full-service merchant wholesaler provides customers with a complete array
of services in addition to the merchandise they offer. The service may include delivery,
credit facility, advice and even assistance as accountant aid. These people are also called
as full-function wholesalers. The full-service wholesalers are further classified into three
types by the line of the goods they offer.
General Merchandise Wholesalers are those who sell large number of
different product types or lines. It would be a one stop shop for the
retailers to procure things from them at a much bargainable prices
General Line Wholesalers are those who limit their offerings to one
particular product line. They may hold all the products and variants in one
particular product line
Speciality Wholesaler reduce the line further, they may hold only select
products in a particular product line. The traders of spices can be classified
under this category
The choice of being a more general merchant wholesaler or a much-specialized
wholesaler depends on the choice of the target customers, whether their customers are
speciality stores or a general stores
The Limited-Service Merchant Wholesaler is one who offers less than full
service and charges lower prices. These types of wholesalers are also known as limited-
function wholesalers. This model comes to prominence when some customers may not
231
want or may not be interested to pay for some of the services the Full-service merchant
wholesaler offers. They may prefer to sacrifice the services offered to get lower prices.
As a result of this particular category has emerged. This Limited-service merchant
wholesaler is further divided into five types based on the various services they try to
render and the on the basis of the payment for the goods they sell.
Exhibit 4.2.7 Metro Cash & Carry
Cash and Carry Wholesalers are buyers who do not want certain
specialized service such as delivery or credit. The wholesalers prefer the
buyers to come to their warehouses and buy the products and pay for them
at the same time. Metro, the German wholesaler refer exhibit 2.6.7 is a
classic example for this type for this category
Truck Wholesalers are otherwise called the truck jobbers sell limited line
of items. They operations are predominantly with the help of trucks and
this helps in the immediate delivery offers. Some of the items used to be
considered in this method are perishables and those which have great
232
demand. Although this method is a expensive form of distribution this
definitely a aggressive form of selling the offering
Drop Shippers are merchants who take title to the goods but not the
possession of the goods. These merchants take orders form the buyers pass
it to the manufacturers, which will, then ship the product directly to the
buyer. As the product goes directly to the buyer, it minimizes in the
loading and unloading of the product. This type is commonly used for
commodities like cement, coal etc. The drop shippers are also called as the
desk jobbers as they need minimum infrastructure. Since they do not
handle the shipping, there is even no need for a warehouse to keep the
products.
Rack Jobbers are another type of merchant wholesalers who contract with
the retailers to set up display racks in the store and stock them with
merchandise. This particular category of wholesalers gained prominence
after the emergence of departmental stores
CLASSIFICATION OF AGENT WHOLESALERS
The agents are the next category of wholesalers, they take possession of the goods but at
the same time they do not take title to them. The agents in no way provide warehouse
facility or credits but provide facilities like arranging credit or delivery as a part of their
service. The agents make business through commissions based on selling prices of the
product. The percentage of the commission varies based on the industry as well on the
perishable nature of the product. The agents can be classified as follows namely
Brokers who are intermediaries who bring the sellers in touch with the
buyers and also facilitate in the contractual negotiations and receive
commissions based on the work. Brokers are considered to be neutral and
are found in every field. The commissions they receive from both the
parties will be relatively less and this requires minimum investment. Most
organizations prefer brokers because they work on commissions and do
not have long-term relationships with one particular organization.
233
Commission Merchants are similar to brokers but are given certain powers
by the sellers of the product. They perform majorly the pricing function
and work closely with the producers of the products. The commission
merchants are most common in the agricultural products. The commission
merchants take possession of the goods so that the prospective buyers
have a chance to inspect the products; once the deal is finalized the
commission merchants deduct their commission past and return the
balance to the producer. Exhibit 4.2.8 shows the homepage of a
commission merchant
Manufacturer's Agents are those who are available for the producer who
are not interested in performing the sales activity or who lack the expertise
to have one. The manufacturer's agents work in limited geographical areas
and in low priority zones. If a producer of electronic goods feels having a
separate sales force for the rural areas is an expensive decision they may
go in for a merchant's agent to do the job of selling their offering. The
merchant's agents will be familiar with the area they operate and this is
one reason why producers opt for the merchant's agents. One another
benefit of these people is that they need not be paid till the deal is
finalized.
The Selling Agents are paid a commission and are expected to be familiar
with the products and the markets. Unlike the manufacturer's agents they
do not restrict themselves to one particular geographical area but rather to
all places where the product has got a market. Since they concentrate on a
much larger scale they are given more responsibility including the
elements of promotions and pricing of the products. The organizations
who utilize these people are otherwise called as external marketing
department
234
Exhibit 4.2.8 Commission Merchants
Key Terms
Accordian Theory
Wholesaler
Convenience Stores
Franchising
Full service merchant wholesaler
Hyper Markets
Leased Departments
Limited service merchant
wholesaler
Retail Life Cycle
Retailing
Speciality Stores
Theory of Natural Selection
Wheel of Retailing
235
UNIT-V
LESSON ? 5.1
PROMOTION DECISION
LESSON ? 5.2
PROMOTION MIX
LESSON - 5.3
ADVERTISING DECISION
LESSON ? 5.4
OBJECTIVE AND CAMPAIGN
LESSON ? 5.5
AD EFFECTIVENESS
LESSON - 5.6
SALES PROMOTION AND PUBLICITY
LESSON - 5.7
SALES FORCE DECISION
5.1 PROMOTION DECISION
Overview
Marketing communications is one of the four major elements of the company's marketing
mix. Marketers must know how to use advertising, sales promotion, direct marketing,
public relations, and personal selling to communicate the product's existence and value to
the target customers.
The communication process itself consists of nine elements: sender, receiver, encoding,
decoding, message, media, response, feedback, and noise. Marketers must know how to
get through to the target audience in the face of the audience's tendencies toward
selective attention, distortion, and recall.
Developing the promotion program involves eight steps. The communicator must first
identify the target audience and its characteristics, including the image it carries of the
product. Next the communicator has to define the communication objective, whether it is
to create awareness, knowledge, liking, preference, conviction, or purchase. A message
must be designed containing an effective content, structure, format, and source. Then
communication channels both personal and non-personal must be selected. Next, the total
promotion budget must be established. Four common methods are the affordable method,
the percentage-of-sales method, the competitive-parity method, and the objective-and-
task method.
236
The promotion budget should be divided among the main promotional tools, as affected
by such factors as push-versus-pull strategy, buyer readiness stage, product life-cycle
stage and company market rank. The marketer should then monitor to see how much of
the market becomes aware of the product, tries it, and is satisfied in the process. Finally,
all of the communications effort must be managed and coordinated for consistency, good
timing, and cost effectiveness.
Learning Objectives
The nine elements of the communication process
How to identify the target audience
How to determine the communication objectives
How the message should be designed
The selection of communication channels
How the promotion budget is determined
How the promotion mix is established
How to evaluate and manage the communication process
I.
Introduction--the five major modes of communication (advertising, sales
promotion, public relations, personal selling, and direct marketing)
II.
The communication process--communications as the management of customer
buying processes over time, the nine elements of the communications model,
reasons why message may not get through the receiver (selective attention,
selective distortion, and selective recall)
III.
Developing effective communications
A.
Identify the target audience
1.
Image analysis is a major part of audience analysis that entails
assessing the audience's current image of the company, its
products, and its competitors
a)
First step is to measure target audience's knowledge of the
subject using a familiarity scale
237
b)
Second step is to determine feelings toward the product
using a favorability scale
2.
Specific content of a product's image is best determined with use
of semantic differential (relevant dimensions, reducing set of
relevant dimensions, administering to a sample, averaging the
results, checking on the image variance)
B.
Determine the communication objectives
1.
Based on seeking of a cognitive, affective, or behavioral response
2.
Assuming the buyer has high involvement with the product
category and perceives high differentiation within the category,
base objectives on the hierarchy-of-effects model (hierarchy:
awareness, knowledge, liking, preference, conviction, purchase)
C.
Design the message (AIDA model)
1.
Message content--choosing an appeal (rational appeal to
audience's self interest, emotional appeal attempt to stir up either
positive or negative emotions, moral appeals are directed to the
audience's sense of what is right and proper)
2.
Message structure--one-sided presentation versus two-sided
argument
3.
Message format--must be strong, based on headline, copy,
"sound," nonverbal clues, color, expression, dress, etc.
4.
Message source --expertise, trustworthiness and liability
D.
Select the communication channels
1.
Personal communication channels--direct (advocate, expert and
social)
2.
Non-personal
communication
channels--indirect
(media,
atmospheres, events)
E.
Establish the total marketing communications budget
1.
Affordable method
2.
Percentage-of-sales method
3.
Competitive-parity method
238
4.
Objective-and-task method
IV.
Deciding on the marketing communications mix
A.
Promotional tools--benefits of each tool (advertising, sales promotion,
public relations and publicity, personal selling, direct marketing)
B.
Factors in setting the marketing communications mix (type of product
market, buyer-readiness stage, product-life-cycle stage)
C.
Measure the communications' results
V.
Managing the integrated marketing communications process
A.
A concept of marketing communications planning that recognizes the
added value of a comprehensive plan
1.
Evaluates the strategic roles of a variety of communications
disciplines
2.
Combines these disciplines to provide clarity, consistency and
maximum communications
impact through the seamless
integration of discrete messages
239
PROMOTION MIX
Advertising--the use of paid media by a seller to communicate persuasive information
about its products, services, or organization--is a potent promotional tool. Advertising
takes on many forms (national, regional, local, consumer, industrial, retail, product,
brand, institutional, etc.) designed to achieve a variety of objectives (awareness, interest,
preference, brand recognition, brand insistence).
Advertising decision-making consists of objectives setting, budget decision, message
decision, media decision, and ad effectiveness evaluation. Advertisers should establish
clear goals as to whether the advertising is supposed to inform, persuade, or remind
buyers.
The factors to consider when setting the advertising budget are: stage in the product life
cycle, market share, competition and clutter, needed frequency, and product
substitutability.
The advertising budget can be established based on what is affordable, as a percentage
budget of sales, based on competitors' expenditures, or based on objectives and tasks, and
based on more advanced decision models that are available.
The message decision calls for generating messages, evaluating and selecting between
them, and executing them effectively and responsibly.
The media decision calls for defining the reach, frequency, and impact goals; choosing
among major media types; selecting specific media vehicles; deciding on media timing;
geographical allocation of media. Finally, campaign evaluation calls for evaluating the
communication and sales effects of advertising, before, during, and after the advertising.
Sales promotion and public relations are two tools of growing importance in marketing
planning. Sales promotion covers a wide variety of short-term incentive tools designed to
stimulate consumer markets, the trade, and the organization's own sales force. Sales
promotion expenditures now exceed advertising expenditures and are growing at a faster
rate.
240
Consumer promotion tools include samples, coupons, cash refund offers, price packs,
premiums, prizes, patronage rewards, free trials, product warranties, tie-in promotions,
and point-of-purchase displays and demonstrations.
Trade promotion tools include price-off, advertising and display allowances, free goods,
push money, and specialty-advertising items. Business promotion tools include
conventions, trade shows, contests, sweepstakes, and games. Sales promotion planning
calls for establishing the sales promotion objectives, selecting the tools, developing,
pretesting, and implementing the sales promotion program, and evaluating the results.
Marketing public relations (MPR) is another important communication/promotion tool.
Traditionally, it has been the least utilized tool but is now recognized for its ability in
building awareness and preference in the marketplace, repositioning products, and
defending them. Broadly, MPR is those activities that support the ultimate sale of a
product or service. Some of the major marketing public relations tools are news,
speeches, events, public service activities, written material, audio-visual material,
corporate identity, and telephone information services. MPR planning involves
establishing the MPR objectives, choosing the appropriate messages and vehicles, and
evaluating the MPR results.
ADVERTISING DECISION
Modern marketing calls for more than developing a good product, pricing it attractively
and making it accessible to the target consumer. Companies must also communicate with
the present and potential customers. In this respect, advertising is a potent promotion tool
of marketing communication mix, while the rest four are :
Sales Promotion
Direct Marketing
Public Relations and Publicity
Personal Selling
241
WHAT IS ADVERTISING ?
Various marketing Gurus have defined advertising according to their own views:
" Advertising Consists of all the activities involved in presenting to a group a non
?personal, oral or visual openly ? sponsored, identified message regarding a product,
service or idea. This message, called an advertisement, is disseminated through one or
more media and paid for by the identified sponsor".
W.Z. Stanton
"To give public notice or to announce publicly".
"Advertising is mass communication of information intended to persuade buyers so as to
maximize profits".
J.E. Littlefield
To summarise, advertising means any paid form of non ? personal presentation and
promotion or ideas, goods or services by an identified sponsor.
IMPORTANCE OF ADVERTISING
It is just not enough to manufacture a product. People must be informed of its existence
and should be given good reasons to buy it. This is a job which is sought to be done by
advertising. Without advertising, people would not be aware of the attributes of the
product nor of its price. Let us now discuss the role and importance of advertising.
(i) Way of Informing
Advertising is a way of communicating information to the consumer ?information
which enables him to compare and choose from the products and services available.
Advertising enables consumbers to exercise their right of free choice1 " Encyclopedia
Bitannica" such diverse media as handbills, newspapers, magazines, billboards,
letters, radio and television broadcasts and motion pictures.
(ii) Manufacturer's concerns
Advertising is the most economical means by which a manufacturer or an institution
can communicate to an audience either to sell a product or to promote a cause of
social welfare, such as, civic drive, or an immunization programme. This includes
the process of mass communication which is different from ordinary communication.
Here a macro level mass communication is between manufacturer and his mass
242
audience. This is also connected through new sources. Mass audience gives various
reactions as responses. Here audience is interconnected as a group within groups.
The 5 elements of mass communication are shown in the above chart.
MODEL OF NEWS COMMUNCATION
Information
Encoding
Feed back
Clusters
Interpreting
and
sub clusters
New sources
Decoding
_________________________________
1. In India, an ordinary grocery store keeps as many as 20 brands of toilet soaps, 10
brands of toothpastes, 9 brands of cooking oils and over100 varieties of other
packaged goods. In such a situation, advertising helps consumers to make an
intelligent
and
well ? considered purchase. The Economic Times, December 21, 1989.
(iii)Fundamental Right of Freedom of Speech
Advertising being a necessary means of communication is an inseparable part of free
speech. Any restriction on the right to recommend legitimate services or ideas in
public will diminish the fundamental right of freedom of speech.
243
(iv) Improving productivity
Advertising can help in improving the economies of developed and developing
countries. There is ample evidence to support this view. Advertising stimulates
production and consequently generates more employment. It can help stabilize prices
and leads to wider distribution and greater availability of goods an services.
Product
Deamand
Production
Employee
(v) Economic Growth of Country
Advertising is an essential and integral part of the marketing system. It is sometimes
maintained that the marketing system is nothing but requirement of a country's social
and economic growth. Advertising stimulates sales and compels the firm to improve
its productivity and contributes substantially to the growth of the economy. Thus
marketing and advertising are key tools used to aid a country's growth.
Even though advertising costs a lot of money, and the costs are increasing day by
day, a skillfully used advertising campaign can be the cheapest means of reaching the
market and commutating with the consumers effectively. Advertising is wasteful if it
fails to produce sales.
Advertisement leads to an increase in sales and market share. Pepsi came to India
with a zero market share. By December, 1995, it had captured 40 per cent of Indian
market 1. Promise, a toothpaste manufactured by a small ?scale unit, was able to
snatch a 15 per cent share of the market by strong customer ?oriented advertisement.2
People feel safe in purchasing products they know of. Advertising makes them
aware of the products and their attributes. In promoting a product or a brand, the
244
manufacturer/ advertiser stakes his reputation. No manufacturer/ Advertiser would be
foolish enough to risk his reputation by making misleading claims in his
advertisements. Hence advertised goods are trusted the world over and India is no
exception.
ADVERTISEMENT AND SALES PROMOTION
Difference between Advertising and Sales Promotion
Advertising is a message which promotes ideas, good or services communicated through
one or more media by an identified sponsor while sales promotion consists of short ?
terms incentives provided by the identified sponsors to consumers and traders to persuade
them to purchase and stock his products. The major differences between Advertising and
Sales Promotion are :
Advertising
Sales Promotion
(i) A reason is offered to buy.
An incentive is offered to buy.
(ii)
Theme is to build up brand
Theme is to break down the loyalty to a
loyalty
competing brand.
(iii)
Aim is to attract the ultimate
Aim is to attract not only consumers
Consumers.
but retailers, wholesales and Sales force
also.
(iv) Effective in the long run.
Effective in the short run.
(v) Heavy advertising makes
Heavy Sales promotion leads to the
the brand image of the
product being perceived as having a
product and accords it the
brand image of cheaper and lower
perception of higher quality
quality product.
245
(vii)
Advertising includes
Various types of incentives are offered
messages delivered through
for
various types of Media.
-
Consumer promotion
-
Trade Promotion
-
Sales force
Promotion
DEVELOPING THE ADVERTISING PROGRAMME
It is difficult to make an all ? embracing generalization about distinctive qualities of
advertising mainly because of its many forms and uses. Various companies do their
advertising in different ways. In a small company advertising is handled by someone in
the sales or marketing department who coordinates with an advertising agency.
On the other side, large companies setup their own advertising departments,
where Marketing Manager reports to the Vice ?President, Marketing. The advertising
department's job is to develop the total budget, help and develop advertising strategy and
approach an advertising agency for advertising and designing a campaign. Most of the
companies use an outside agency to help them design an advertising campaign and to
select the media and decide about the timings and booking space.
In developing an advertising programme, marketing managers must always start by
identifying their target market and the buyers involved. Thereafter, they have to make
five major decisions in the programme development process known as the five
Ms which are explained in the following chart:
STEPS IN ADVERTISING PROGRAMME
Before Advertising
After Advertising
(i)
Market
246
- Define Market
- Measure the effect of advertising
to determine whether it would
- Select the target market
help achieve the target.
(ii)
Motive
- Identify what makes people
-
Compare
the
consumer
buying motive and the
buy
advertising appeal.
(iii)
Media
- Evaluate the effectiveness of
media
- Decide about the media mix
- Assess the effc, of the messge.
- Allocate budget among TV,
Radio, Press etc.,
(v)
Measurement
- Assesses effectiveness of
- Study sales graph
advertising
- Evaluate possible
- Take a decision about future
profile of advertising programme.
achievement.
247
Advertising Goals
If an organization is spending crores of rupees on advertisement, then as managers we
must attempt and be able to measure its effectiveness and delivery to find out whether we
are receiving the value for money. However, advertising is only one part of marketing
mix and the final delivery in rupees terms would involve the various marketing variables.
The tragedy of advertising is that if it does not lead to an increase in sales of the product,
the entire blame is put on advertising. Hence a clear definition of advertising goals in
required. A successful advertising campaign can be compared with a military compaign
where goal is set as " capture the army post No. 11" and the goal is achieved.
Advertising goal can be defined as a clear and concise description of exactly what
advertising is intended to accomplish, i.e.,
--
To increase sales,
--
To establish brand equity, and
--
To enter the target market.
Sometimes these objectives are considered as marketing objectives instead of
advertising objectives.
Need to set Advertising Objectives
Some of the possible objectives that are stressed are :
(i) Return on Investment ( R.O.I) Advertising involves an investment of funds.
Hence, it should produce a measurable return on the said investment in order to assess
the desirability and profitability of advertising.
(ii) Selection of media. The most effective advertising tool should be chosen in
order to get the most profitable result.
(iii) Coordination
An
appropriate
co-ordination
and
integration
of
marketing and advertising efforts is imperative. Otherwise objectives
of
advertising are superimposed on objectives of marketing.
248
VARIOUS APPROACHES FOR SETTING ADVERTISING OBJECTIVES
(I) DAGMAR Approach
This is the most popular method of setting advertising goals and was proposed by
Russel M. Colley. DAGMAR stands for - Defining advertising Goals for Measured
Advertising Results.
Colley outlined this method for turning advertising objectives into specific
measurable goals. He lists 52 possible advertising objectives under the same
approach. The theory is based on the following: " The consumer passes through a
hierarchy of stages between the time when the first ideas about the product comes to
his mind and when he actually buys it" For example, an advertisement of a Generator
should highlight fuel efficiency, easy start, after ?sales service and ready availability
of spares.
-- Initially it would inform us and we shall become aware of such a product. Then
through product endorsement and trial we shall develop a favourable attitude and
ultimately, we shall buy the product.
-- To set advertising objectives, we shall need to identify the stage in which the
product is available and then we can set the
objective.
Example :
A detergent manufacturing company wanted to position its product as the most
powerful cloth cleaner and as a low cost detergent.
-- They worked out a campaign targeted to 3 crore households who own automatic
washers.
-- Prior to the campaign release, they did an attitude survey on brand perception.
After the campaign was over, they repeated the attitude survey.
249
The questions were focused on three areas :
(i) Which brand is the most effective in removing the spots ?
(ii) Which brand will you buy when you go to the market next ?
SURVEY RESULT
After
Before
After
6
Campaign
1 year
months
Awareness
38
46
52
Image
9
17
24
Preference
13
15
21
Specific advertising objectives could have been :
Increase awareness from 38 per cent to 52 per cent
Top image ranking to 24 per cent than 9 per cent
Increase preference to 21 per cent.
(ii) Product Life Cycle Approach
Advertising effectiveness varies according to the different stages of product life cycle.
(iii)Primary and Selective Demand Theory
According to this approach the advertising objective is categorized into two ways
Informative Advertising and Persuasive Advertising.
(a) Informative Advertising. This advertising is important when the product is in
the pioneering stage and the objective is to build Primary demand. Primary demand
is sought to be created especially by concept selling for a category of products. Some
particular conditions are required necessarily to advertise for creating a primary
demand. The existence of a strong and basic consumer need is the most important
prerequisite as advertising cannot create demand for a new product. It can only
stimulate an existing demand. There must be strong buying motives in existence.
250
Besides this, social trends, design, price, etc. also play a crucial rate at this stage. For
example, the manufacturer of "VIM" initially had to inform potential consumers of
VIM Bar's economic benefits and many other advantages.
(b) Persuasive Advertising. This becomes important in the competitive stage,
where a company's objective is to build selective demand for a particular brand.
Most advertising falls in this category. Persuasive advertising is undertaken when a
strong primary demand is in existence. The product should be distinctive, its benefits
should be visible and also a strong brand consciousness must be generated.
MEDIA PROFILE FOR ADVERTISING
Role of Media. Media has a vital role in the process of advertising communication.
Effective advertising is possible only if suitable media are available.
The appropriateness of media used vis ? a ?vis the target audience and their reach are
also of crucial importance.
Advertising Message Media Mix
Target Audience
Result will reflect on the sales graph of the company Maximum Reach
A substantial portion of the advertising budget allocation to the mass media is
spent on buying space and time. Therefore media decisions assume a considerable
importance when financial implications come to the force.
Media Planning. Advertisement becomes effective only when it reaches the desired
audience. The value of the advertisement is determined by the number of persons
seeing it, reading it and thus becoming aware of the product or the service.
Media Selection. Each media has a specific function to perform and its selection
depends upon the requirements of the job. Media can be divided into two categories :
Main Media
--
also called "above the line" media, e.g., newspapers, T.V.
Radio, Magazines, etc.
251
Secondary Media- also called " below the line" media, e.g., hoarding, direct mail,
point of purchase, etc. These are also known as reminder media.
Media Planning Process. The steps involved in media planning are :
(i) Media planning and buying space is the financial side of advertising.
(ii) It interacts with the creative process to form an important part of the overall
marketing process.
(iii) Whereas the creative process is a descriptive process, the media process is one of
transforming their description to the public, i.e., a vehicle of communication.
(iv) The primary responsibility of media practitioners is to ensure that the advertising
message is seen, heard, read or recognized by the target audience. We believe this is
a crucial role as there is no point in having the best advertising if nobody sees the
advertisement.
ROLE OF MEDIA IN THE ADVERTISING PROCESS
Media Selection for Rural Marketing. The following points have in be considered
while selecting the media for the rural markets :
(i) The total number of literates in the rural market and their reading habits.
(ii) The extent and type of contribution of the product.
(iii)The number of cinemas and video parlours, panchayat viewing and listening
facilities and the type of audience.
(iv) The number of publications which are circulated in the area concerned, the
number of readers and their categories, whether casual, regular or headline
readers.
(v) Whether the publications circulated in the area concerned are issued locally
or are obtained fro the neighboring areas ?
MEDIA SELECTION DECISIONS
While selecting the advertising media the following factors should be borne in mind:
252
Cost of advertisement,
Nature of the product,
Comparison of the medium selected with other media,
Popularity of the media,
Characteristics of customers, and
Competition in the market.
TYPES OF MEDIA FOR ADVERTISING
Print Media
Electronic
Outdoor Media
Direct Mail
Media
- Newspapers
- TV
- Billboards
- Price Lists
- Direct Mail
- Video
- Hoardings
- Catalogues
-Folders
- Radio
- Balloons
- Personal letters
-
Product
- Voice mail
- Advertising on
- Circulars
Literature
transport means
- Journals
- Cinema
-
Electric
Display
STRENGTHS AND WEAKNESSES OF EACH TYPE OF MEDIA
A. Press
Advantages
Disadvantages
News value and immediacy
Casual readers not reading the whole
magazine or newspaper
Area and ethnic selectivity
High cost of brand usage
Wide market coverage
Little demographic selectivity
Advertisement flexibility
253
Allow long message
Short message life
Moderate cost
Suitable only for educated class
Publication with pictures possible
Poor quality of printing creating
readers' aversion
Continuous publication.
Lack of faith in what appears in the
Press.
B. Magazines
Strengths
Weaknesses
Long shelf life
Small reach
Durability of ad message
Slow exposure build up
Ad size flexibility
Less impact than T.V.
Quality reproduction
Lack of urgency
Demographic selectivity
May cater to special interest groups
More affluent audience
Increased response of the consumers in
response to the magazine ad.
Possibilities of reproducing full colour
effect.
C. Outdoor-Hoardings, etc.
Advantages
Disadvantages
Attractive
Limited scope
Long life
Lack of personal touch
Advertising at specific places
254
D. Direct Mail
Advantages
Disadvantages
Possibilities of covering a wide
Difficult to obtain the right mailing
audience
lists.
Economy
Possibility of misleading information
Flexibility
Frequent changes in mailing list
Easy to answer
Personal Touch
E. Radio
Advantages
Disadvantages
Low production cost
No visual information
Wide coverage
No visual impact
High frequency possible
Low recollection
Audience segmentation like `Mahila
Short message life
Jagat', `Krishi Darshan', etc.
Small audience per station
Flexibility of timing
Very often message not clear
Catching attention of listeners
Low attention value
Lack of detailed advertising
F. Television
Strengths
Weaknesses
Attractiveness
Relative high cost
Wide reach
Very brief, lacking details
Opportunity
for
high
frequency
Short message life
campaign
Production expensive and complicated
255
Demonstration "how it works"
Long production lead live
Prestige
Lack of TV ownership by all.
Emotionally involving
G.Cinema
Advantages
Disadvantages
Allow product demonstration
Short message life
Emotionally involving
Cinema losing popularity because of
cable operation.
Appropriate for products catering to
low income segments
Slow exposure build up
Long production lead time.
EFFECTIVENESS OF EACH MODE OF MEDIA
Mode
Verbality
Visual
Colour
Processing
Reach
Frequency
Time
Impact
TV
Low
High
High
Low
High
High
Radio
High
-
-
Low
Very
High
high
Newpapers
High
OK
-
High
Low
High
Magazines
High
High
High
High
Low
Low
Outdoor
Can
be
High
High
High
Low
high
Low
POP
High
High
High
Low
Can
be
Low
Direct
High
High
Very high
Very low
high
Depends
Very
High
256
ADVERTISING AGENCY
An advertising agency acts as a consultant to the client, the advertiser, in formulating the
advertising plans and translating them into an advertising campaign.
Another role of the agency is placing the advertisement in the media, since it has a
traditional association with the media. The placement aspect has assumed considerable
importance owing to media boom and the resultant complexities.
An advertising agency can be defined as an independent organisation of creative
business people who develop, prepare and release the advertisements for the sellers
seeking to find customers for their goods and services.
In India, there are about 7,000 advertising agencies out of which 700 ad agencies are
recognized by the Indian Newspapers Society (INS). INS is a regulatory organisation
regulating ad agencies for
- National Income Accounting
- Annual Billing
- Creditworthiness
The relationship between an advertiser and its advertising agency represents
professionalism to the core. At the same time, capability in terms in culture and style of
the two parties and the concerned persons is highly facilitatory for a fruitful relationship.
Courage and candidness on the part of the agency can contribute much towards getting
the client to appreciate the constructive use of a creative approach. It is in the interest of
the client to provide the required reassurance to the agency so that communication is
inhibited. The selection of an agency by a potential client has a degree of mutuality. A
well considered and wise selection can pave the way for a productive relationship.
Functions of Ad Agencies
Ad agency will be in a position to take an objective view of the advertiser's plan and
proposals and thus venture to put forward its opinions and comments.
257
Creativem qualified and trained personnel are required for an advertising agency. It may
not be worthwhile for an advertiser to have on its permanent staff all the variety of skill
required to produce appropriate advertisements.
An agency provides an opportunity as well as flexibility for various combinations of
agency personnel from different departments to form a team to work as per the specific
requirements of their varied clients.
Advertising agency has regular contacts with various support systems required for the
production of appropriate ad material. A major advantage of an agency is its regular
dealing with the media and the expertise in developing advertisements to suit the
requirements of its clients.
The ad agency's skills can also be useful in the preparation of campaigns where the risks
involved are high such as in the introduction of new products.
Clients' Expectations
Account Service: Responsive ? prompt - accessible ? listens ? economical.
Creativity Review: Provide innovative proposals ? ideas ? visuals.
Production Review: Quality ? timeliness ? accuracy ? economical.
Media Planning: Innovative media strategy ? capable of coping with the budget
changes ? provide media trends update.
Buying Media Space: Explore cost effective alternatives ? ability to negotiate
attractive terms.
Market Research: Relate existing studies to the specific situation of the client ?
organize timely and meaningful research.
Retail Advertising and Sales Promotion: Innovative ideas ? POP material, creative
events ? timeliness ? economical.
Financial Control: Detailed estimates ? accuracy in billing ? reasonable rates ?
mutual trust.
258
AGENCY EDUCATION PARAMETERS
Knowledge of Client's Business
Contribution to Market Planning
Responsiveness to brief
Listen, understand pro-act (be responsive)
Develop Strategies and Plan Creativity
Ability to involve Key Agency Resources
Readily Accessible
Cost Consciousness
Effective Event Planning
MEASURING ADVERTISING EFFECTIVENESS
Good planning and control of advertising depend critically on measurement of
advertising effectiveness. A lot of effort is, therefore, spent on fundamental research on
advertising effectiveness.
The most important measurement of advertising effectiveness is of an applied
nature, dealing with specific ads and campaigns. Most of the money is spent by ad
agencies on pre-testing ads, and much less is spent on post-evaluation of their effects.
Many companies develop an advertising campaign, put it on the national market and then
evaluate its effectiveness. It would be better for them to limit their campaign to one or a
few cities first and evaluate its impact before rolling the campaign throughout the country
with a very large budget.
Measuring advertising effectiveness could be of two types according to the objectives
of the advertisers:
Communication Effect Research,
Sales Effect Research.
259
Communication Effect Research
The study seeks to discover if advertising is achieving the intended communication
effect. This method is also known as "Copy Testing". The objective of this research is an
improvement in the present system.
The testing can be categorized into two types:
Pre-testing of advertising campaign, and
Post-testing of advertising campaign.
Three major methods of ad pre-testing are:
- Direct Rating
- Portfolio Test
- Laboratory Test
Direct Rating
In this type, respondents are asked questions to rate the alternative ads. These ratings are
used to evaluate an ad's attention, read through, cognitive, effective and behavioural
strengths.
The following steps can be adopted.
Evaluate ad's
- Attention strength
- Read through strength
- Cognitive strength
- Effective strength
- Behavioural strength
Method of evaluation through rating scale.
Primarily helps in screening out poor ads rather than identifying great ads.
260
Case Study
Volkswagen
Volkswagen, the fifth-largest automaker in the world, was founded in 1937. The first
prototype was actually built in 1935 by Ferdinand Porsche, founder of the car company
bearing his name, who had been commissioned by Hitler to build a "Peoples Car."
Volkswagen began selling its Beetles in North America in 1949, a year in which only two
of the vehicles sold in the United States for $995 each. By 1955, the company had sold
one million vehicles worldwide. Today, Volkswagen manufactures a number of other car
brands, including Audi, Lamborghini, Bugatti, Bentley, Rolls-Royce, Skoda, and Seat.
Growth Years
With the help of creative and effective marketing, Volkswagen became a household name
in America during the 1960s. The company's marketing program in the United States
during this decade was designed to make the brand's underdog status an advantage. This
was accomplished with self-deprecating advertising that made light of the Beetle's
shortcomings. Some memorable slogans for the Bug include "Think Small," "It's Ugly
But It Gets There," and "Nobody's Perfect." These self-effacing slogans ran counter to
the advertising tradition of U.S. automakers, which usually involved lofty descriptions of
a car's style, power, grace, and superior design. The classic Beetle rapidly became a cult
favorite, then a popular favorite, and eventually was to become the number-one selling
car in history with over 22 million units sold. Volkswagen was not afraid to use the
occasional hard sell. One particularly persuasive print ad paired a Volkswagen with a
snowplow and a heavy blanket of snow on the ground and asked, "What do you think the
snowplow driver drives to work?" Volkswagen also developed a stylish automobile
called the Karmann Ghia, which was humorously advertised as the car "for people who
can't stand the sight of a Volkswagen."
Decline and Recovery
After sales of VW cars in America peaked at 569,000 units in 1970, cutthroat competition
among compacts, especially from Japanese manufacturers, hurt Volkswagen's sales. The
company also made an unfortunate marketing move that compounded its problems. It
"Americanized" its image, by advertising the opening of an VW assembly line in
261
Pennsylvania--the first U.S. assembly line set up by a foreign auto maker--at a time
when imports were become popular. The 1980s were not much better for the company, as
sales continued to decline.
By 1990, Volkswagen was looking for ways to revitalize its business in the United States.
Sales had slipped to a mere 1.3 percent of the American market from a high of 7 percent
in 1970. The company developed an advertising campaign that centered on the word
Fahrvergnugen, German for "driving pleasure." This strategy was considered a risk at the
time because many assumed Americans would not adopt a German word as a slogan. The
hard-to-pronounce word nevertheless became an instant pop-culture buzzword, but U.S.
sales continued to drop to under 50,000 units. The company clarified its brand message
under the umbrella of the "Drivers Wanted" slogan in 1995, and U.S. sales rose 18
percent to 135,907 cars in 1996.
Classic Influences Tempt Consumers
In 1998, Volkswagen released a modernized version of its iconic Beetle to a car-buying
public nostalgic for the vintage style. Ads for the New Beetle echoed the irreverent
humor of the ads from the 1960s, with one ad reading "If you sold your soul in the `80s,
here's your chance to buy it back." Another ad emphasized the difference between the
modern engine and notoriously underpowered traditional Beetle with the slogan "Less
Flower, More Power." American buyers leapt at the chance to buy the classically
influenced--but clearly modern--cars, often at well above sticker price. Waiting lists for
the new cars, which sold more than 55,000 units in 1998, were common. The company
also experimented with the Internet as a marketing and sales medium, holding a special
Web-only launch of 2,000 New Beetles in two previously unavailable colors, Reflex
Yellow and Vapor Blue. Volkswagen sold out its inventory immediately. By drawing
consumers into Volkswagen showrooms, the New Beetle helped the company achieve 50
percent growth in sales volume between 1998 and 1999.
In 2001, the company unveiled its latest retro offering--the Microbus--as a concept car.
The car, not expected to be available to the American public until 2003, will likely set off
another wave of nostalgia and help the company achieve further sales growth. Other new
models slated for introduction include a sport utility vehicle and a luxury V-8 Passat
262
sedan designed to compete with BMW and Mercedes. Volkswagen's history of brilliant
marketing will likely lead to success for these new models.
Source: Marketing Management , Philip Kotler
Questions
1.
What are some of the ways in which Volkswagen epitomizes the meaning and
value of the marketing concepts in the text?
2.
Suggest creative extensions of VW's marketing tactics and strategies in
applications of advertising, promotion, public relations and other promotional
techniques?
Questions
1. "Money spent on advertisement is not wasteful." Critically examine this
statement.
2. What are the objectives of advertising? Discuss the major ones?
3. What are the uses of advertising to various parties? Discuss?
4. How are the advertising functions organized in an organization?
5. Differentiate between the Advertising and Salesmenship?
6. What is advertising? Discuss its objectives and point out the problems of
advertising in India?
7. Define Sales promotion? What are its objectives? Describe the various steps to be
taken for promoting the sales of a big concern?
8. What are the various steps to be followed in planning the sales promotion?
Sales Force Decision
Sales Force Decision is generally termed as the backbone of marketing. Brech defines it
as "overall management of sales and it refers to only a socialized application of the
process of Management as a whole." According to the American Marketing Association
the "planning, direction and control of the personal selling activities of a business unit
include recruiting, selecting, training, equipping, assigning, rating, supervising, paying
and motivating as these tasks apply to the personal sales force." The ultimate objective of
Sales Management is to influence the consumers of the target market to get sales orders.
A sales force serves as a company's personal link to customers.
263
Functions of A Sales organization
1. Analysing markets and sales policy.
2. Sales planning and sales forecasting
3. Deciding prices and terms of sales.
4. Selecting, training and controlling the sales force.
5. Deciding Sales programmes and sales promotion.
6. Advising about advertising and publicity.
7. Deciding and allocating territory and setting targets.
8. Preparing and maintaining customers' records, etc.
9. Preparing Sales Reports.
STEPS IN DESIGNING AND MANAGING A SALES FORCE
--
Setting of Objectives
--
Training for Sales Policies
--
Designing Sales Force Structure and Size
--
Deciding Sales Force Compensation
--
Recruiting and Motivating Sales Force
--
Guiding and Motivating Sales Force
--
Performance Rating of Sales Force
Organising and Managing a Sales Force
Sales force is regularly assigned particulars territories. Various factors are taken into
account in deciding on the physical size of a territory, transportation links within
territory, purchasing power of consumers and their educational and living standards.
Therefore, a sales force is deployed according to the geographical and product or
consumer requirements. A company should also devote considerable effort in training
and development of its sales force. There are two types of training which can be provided
264
to sales force : (a) In ?house training, and (b) on ?the-job training. It is also necessary
for a company to arrange periodic meetings and discussions with its Sales Force. Finally,
the performance can be evaluated on the basis of targets and actual.
Sales Manager's Duties and Responsibilities
The Sales Manager is the most important person in a Sales organization.
All Activities are based on his functions and responsibilities. The following are some of
the prime duties of a Sales Manager.
1. Organising sales research, product research, etc.
2. Getting the best output from the sales force under him.
3. Setting and controlling the targets, territories, sales expenses, distribution expenses etc.
4. Advising the company on various media, Sales promotion schemes, etc.
5. Monitoring the company's sales policies.
Reid gives the following chart of the steps necessary for getting success in selling :
To Yourself
To the Company
To our Customers
Increase basic selling Be proud of your association Work closely with decision takers and
skills.
with you company.
influencers in each account. Point out
the advantages of an association with
our company .
Keep accounts current
On all company advertising and
promotional activities.
Study
the
latest Ges and developments in Suggest ideas, methods, techniques
products,
promotion your territory. Be prompt in and tips that can stimulate sales.
policies
and handing
records,
reports, Inform the customers about the trends
procedures. Be alert correspondence,
etc.
Cut in their areas.
to
new
sales
and selling costs by economical
merchandising ideas.
routing, good use of time,
planning
and
greater
awareness of opportunity.
265
Grow so that you can
Handle complaints effectively and to
assume
greater
the complete satisfaction of the
responsibilities
as
complainants.
opportunities permit.
Suggest the best technique
Maintain
the Check
demand
and For selling our products to the
appearance
and movement of products in the customers.
deportment
expected territory.
of a Territory Sales
Organise presentations to inform and
Manger.
Report
activities
of
the save time.
Analyse your weak competitions
and strong points and
then think about them.
Strive to reach the best goals Make the customers aware of the
changes in the company's policies or
procedures.
Ask for help, when you Stimulate and maintain
need it.
enthusiasm for your products.
Co-operate
with
order Build and maintain good will.
departments of the company.
Source : Reid, A.L., Modern Applied Salesmanship 1971, p. 418
OUTLINE FOR COMPILING SALES JOB DESCRIPTIONS
Sales
--
Make regular visits
--
Market the full line
--
Handle questions and objections
--
Check finished goods stock
--
Interpret sales points of the line to the customer
--
Explain company policy on credit, merchandising, stock rotation, etc.
266
--
Get the order
--
Install product displays and other POP's
--
Report product weaknesses, complaints
--
Handle adjustments, returns, and allowances
--
Handle request for credit
--
Handle special orders for customers
--
Establish priorities, if any
Territory Management
--
Arrange route for best coverage
--
Balance effort with the customer against his potential volume
--
Maintain sales and important territory records.
Sales Promotion
--
Develop new prospects and accounts
--
Make calls with customer's salesmen in areas where " stockiest" are in force
--
Train the personnel of wholesalers, distributors, stockiest, etc.
whenever requested by them.
Sales Executives
--
Each right make a daily work plan for the next day.
--
Organise field activity for minimum travel and maximum calls
--
Prepare and submit special report on trends, competition
--
Prepare and submit daily reports to home office.
--
Collect and submit daily reports to home office.
--
Attend sales meetings
--
Collect overdue accounts
--
Collect credit information
Goodwill
--
Counsel customers on their problems
--
Maintain loyalty and respect for the company
267
Source: S. Ramachandran, Field Sales Management, pp. 10-11
Sales Supervision
Sales supervision consists of giving instructions to sales force and seeing that they are
carried out . Good supervision involves the development of skills in working with people
and influencing them to do what you want them to do, and do it well.
It is true that salesmen are made, they are not born because, they are trained by
their superiors. Personality, the ability to get along with people, was considered all-
important. There are three areas in which sales trainer can impart the training to the sales
force :
1. Product Training
It is most important that a salesmen must be thoroughly familiar with his product
as well as product ranges. Proper emphasis should be given to teach product information
in terms of the benefits which can be obtained by the customer. Salesmen must know the
following aspects of the products:
-- Technical features
-- Technology
-- Quality
-- Packaging
-- Grading
-- Branding
2. Selling areas
-- Product history for sales quota attainment in each territory.
-- Sales ratios
-- Workload per sales person
-- Bills receivable analysis
-- Sales analysis report
3. Selling Skills
The sales person should be good in human relations and should have the following
qualities :
-- Good Appearance
268
-- Good Communications
-- Self - Confidence
-- Creative
-- Proud of his association
-- Satisfy the curiosity of customers
-- Up ? to ?date knowledge of products
Takes of Sales organization
Organising the sales force is a typical sales management task, since its has direct impact
on the sales manager's job performance. The universal adoption of the marketing
concept has meant that most companies have reorganized their sales and marketing
activities to reflect the stronger commitment to their customers. This trend has enhanced
the importance of Sales force organization.
Developing a Sales Organisation
Developing a Sales organistion structure is not an easy task. The key to organizational
design are consistency and coherence. The importance is highlighted as :
"Spans of control, degrees of job enlargement, forms of decentralization, planning
systems and matrix structure should not be picked and chosen at random. Rather, they
should be selected according to internally consistent groupings, and these groupings
should be consistent with the situation of the organization ? its age and size, the
conditions of the industry in which it operates, and its production technology".
This means that sales managers must recognize, and then deal with, some basic
organizational issues when developing a sales organization. The five major issues are :
1.
Formal and informal organisations
Every organization has a formal organisation and an informal organisation. The formal
organisation is the creation of management, whereas the informal organisation is often
developed from the social organisation. Also called the grapevine, the informal
organization is basically a communication pattern that emerges to facilitate the operation
of the formal organisation.
269
Consider the case of a field salesperson who is responsible for collecting certain
competitive information, such as prices and trade discounts. If this information were
forwarded through the formal organization, the data would be outdated and would be
useless to management. The informal communication system, however, allows the
information to be transmitted directly to the director of marketing research. The figure
on page 490 shows an informal communication pattern that might exist in a marketing
organization.
The figure below shows a lengthy formal communication channel:
LENGTHY FORMAL COMMUNICATIONS CHANNEL
District Sales
General Sales
Marketing Vice
Director of
Manager
Manager
President
marketing
Sales Person
research
2.
Horizontal and Vertical Organisations
Sales force can have either horizontal or vertical organizational format.
The arrangement varies among companies, even within the same industry. The factor that
determines whether a vertical or horizontal organizational structure should be employed
is the effective span of control. The span of control refers to the number of employees
who report to the next higher level in the organization. The following figures shows the
formats of vertical sales organization and horizontal sales organistion.
VERTICAL SALES ORGANISATION
Top Sales executive
Regional or Zone Sales Manager
District Sales Manager
Sales supervisor
Sales person
270
HORIZONTAL SALES ORGANISATION
Top Sales Executive
Northern
Southern
Western
Foreign
District
District
district
sales
Sales
Sales
Sales
Manger
Manger
Manager
Manager
Eastern
Eastern
district
district
sales
sales
manager
manager
3. Contralised and decentralized organisation
In a decentralized organisation, responsibility and authority are delegated to lower levels
of sales management. In a centralised sales organization, the responsibility and authority
for decisions are concentrated at higher levels of management. A related concern is the
degree of centralization in the sales organization. This issue has to do with the
organizational location of the responsibility and authority for specific management tasks.
A decentralized organization structure is ineffective unless commensurate
responsibility and authority accompany the assignment of decision to a specific level of
sales management.
4.
Line and Staff components
Marketing organizations also feature line and staff components. A line function is a
primary activity and staff function is a supporting activity. In a marketing organization,
the selling function is the line component, whereas advertising, marketing research,
marketing planning, sales training and distributor relations are usually considered staff
roles.
The following figure and the figure on the next page show a' line marketing
organsation' and a `line and staff marketing organsation'.
271
A LINE MARKETING ORGANISTION
Vice President
For Sales
General Sales
Manager
Regional
Regional
Regional
Sales Manager
Sales Manager
Sales Manager
A
B
C
MOTIVATING AND LEADING THE SALES FORCE
There are several rules which help a sales manger in developing sales force through
motivation and leadership.
Rule 1
Work with sales team and not as members of groups. To achieve this, do the
following :
-- Know your sales force personally
-- Give extra time for discussion and personal problem solving.
-- Do proper home work on sales assignments, be clear to the point of a fault, avoiding
personal affront.
-- Explain your reason for change in territory and product likings. Change is always for
the better.
-- Learn from your sales force about their hopes, aspirations, abilities and self worth.
272
LINE AND STAFF MARKETING ORGANISATION
Vice President
Assistant to the
For Marketing
Vice President
for Marketing
Mar
keting
Research
Advertising
General Sales
Manager
Distributor
Sales
Sales
Sales
Relations
Planning
Analysis
Training
Regional Sales
Regional Sales
Regional Sales
Man ager A
Manager B
Manager C
273
Key ----- Line organization
_____ Staff Organization
-- Develop creative personality traits for example : Self esteem, self confidence, self
worth to become a self starter and freedom from fear of failures.
-- Assume responsibility for mistakes, that is, be pro-active.
-- Be internally motivated.
Rule 2
-- Set high standards but realistic ones for your sales force.
-- Set high personal examples and accept mistakes as errors of judgment.
-- Ensure frankness in criticism which is self rewarding and educating to others.
Rule 3
Ensure that sales force are collaborative among themselves, that is , they work as a team
and make full use of each other for collective goal achievement through.
-- Good means of communication, open and purposive.
-- Fostering full co-operation among seniors and juniors.
-- Developing individual capabilities, creative attitude and respect for each employee.
-- Encourage juniors to settle their own grievances themselves, rather than letting them
rush up to you.
Rule 4
Fight for your people and for your ideas :
-- You are responsible for people under you ; so protect and promote them.
-- Support the men in trouble, don't be afraid of telling the faults of superiors against the
juniors.
-- Help them in progress, get promotions, get noticed and remunerated.
Rule 5
-- Retain the principle of accountability as a check on exercise of delegated authority.
-- Promote the right `men', pay right salaries and perks and put them in positions as
deserved by them.
-- Pursue the policy of promotion from within as a win-win strategy.
274
-- Accept sales force feelings. Encourage them to open up, to address you as a friend
in reed.
PERSONAL SELLING
This is a promotional tool. It is the oldest and a very lucrative and effective tool of
promotion. Here the foot soldiers have the responsibility of promoting the product. Sales
people form the very important part of a marketing group. According to `AMA' :
Personal selling is oral presentation to a buyer for the purpose of making sales'.
Basically, it is an art to persuade the customer to buy the product. A sales person
should have the persuasive power. In addition a good sales person must have a detailed
knowledge about four things :
1.Company
2.Competitors
3.Consumer
4. Product
A sales person should have positive attitude. Personal selling involves personal
confrontation, i.e., presentation should be lively. We can make changes according to the
feed back and therefore it is a bit flexible tool as compared to advertisement.
In personal selling, some kind of a lasting and social relationship develops. This
personal touch can only come in personal selling. Another advantage in the personal
selling is that it can be used for consumer as well as for industrial goods.
When Personal selling is required
1. When the product requires some kind of demonstration.
2. When the market under consideration is comparatively smaller.
3. For the specific needs of the customer, i.e., in case industrial goods.
4. For selling a service, e.g., five star hotels, banking etc., sales people have got an edge.
5. When you have got an edge.
6. When you have got big orders.
7. When confidence is to be built up in the minds of customers.
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Objectives of Personal Selling
Personal selling has been defined as the oral presentation to prospective customers of
one's goods and services for the purpose of ultimately making a sale.
All selling processes contain the same basic steps, though the detail of each step and time
required to complete it, will vary according to the product that is being sold. For
example, a door ?to ? door sales representative may go through all the steps from
prospecting to closing of sale in a matter of ten to fifteen minutes ; in contrast, the selling
process for computer or electronic typewriter may take several visits, even years, for
getting an order. The selling process is shown below :
The Selling Process
Prospecting
Preparing
Identify and Potential
Pre ? approach
quality Customers
Call Planning
Presentation
Handling
Closing
Follow up
Objections
Approach
Demonstration
Source :
Sales Management Concepts, Practices and Cases by Eugene M. Johnson,
David L. Kurtz, Eberhard. E. Scheuing, McGrow- Hill Book Company.
Objectives of personal selling can be briefly stated as sales, profits and growth for the
organization in a continuum in order to ensure its survival. The following objectives are
achieved through personal selling :
1. To carry out the complete selling job when some elements of the promotion mix are
missing.
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2. To serve the existing customers efficiently and effectively.
3. To look for new perspective customers for new / more orders.
PERSONAL SELLING MANAGEMENT CHART
PROMOTIONAL PROGRAMME
Advertising Personal Selling
Sales Promotion Publicity
Set Personal Selling Objectives
Determine Sales Potential
Marketing Policies
Determine Kind of
Decide Sales Force Size
Sales Personnel
Formulate Personal Selling
Strategies
Determine Sales Budget
Manage the Sales Force
-- Recruiting and Selecting
-- Training and Development
-- Motivating
-- Compensation
-- Assigning to Territories
-- Routing and Scheduling
-- Evaluating and Supervising
Evaluation of Personal Selling
Programme
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4. To encourage the existing customers for their co-operation in the promotion of the
various products of the company.
5. To keep the consumers informed time after time about the various changes in aspects
of the marketing strategy and the product line of the company.
6. To provide complete assistance to the customers for selling the product line.
7. To provide proper assistance and advice to the customers regarding certain
complicated products and the products for specific uses.
8. To assist and advise regarding the training programmes for the sales personnel of the
middlemen / dealers.
9. To help the dealers in their management and related problems.
10. To collect recent information regarding the market and report this to the company
( Information of company's use)
The quantitative objectives are assigned for a short term and they keep on changing
depending upon the market situation from time to time. They are :
1. To retain the existing market share and try for increasing it.
2. To increase the sales volume and hence the profits. It also includes the striking of a
proper balance between the different elements of the marketing mix of the different
products of the company.
3. To make attempts to open new accounts and maintain the existing ones properly,
effective and efficiency.
4. To exercise expense management and to keep the expenses within limits.
5. To achieve the targets and try to exceed them.
THEORIES OF SELLING
Old Approach : Generally the selling theories emphasized `What to do' and `How to do'
rather than `Why to do'. The theories are based upon the practical and experimental
knowledge accumulated from the years of " living in the market", rather than on a
systematic, fundamental body of knowledge.
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The second or the new approach made use of the findings of the behavioural
sciences. Theories according to the new approach :
1. AIDAS theory of selling ? seller oriented
2. `Right set of the circumstances' Theory of Selling ? Seller ? oriented.
3. `Buying Formula' Theory of Selling ? Buyer -oriented
4. `Behavioural Equation' theory ? Buyers' decision process.
AIDAS Theory of Selling : In this theory AIDAS stands for
A - Attention
I - Interest
D - Desire
A - Action
S - Satisfaction
This theory tells about the consumer readiness stage. It is a psychological theory
of selling which tells us about the consumer mind ? the stages through which the mind
passes. These stages are attention, interest, desire, action and satisfaction. This theory
tells about the fact that the salesman should make the consumer pass through these five
stages so that the purchase should occur.
Phase ? I ? Securing Attention :
1. Get the appointment with the consumer
2. Salesperson must show mental alertness and be a skilled conversationalist.
3. He should establish a good rapport at once and should be a conversation opener.
4. He should do his homework properly.
5. Good conversation opener causes the prospect to relax and sets stage for the overall
presentation.
Phase ?II ? Gaining Interest : This deals with the evolvement of the strong interest of
the consumer in the product, to develop a contagious enthusiasm for the product and to
give facts and figures about the product. There should be a strong selling appeal to make
their interest in the product. There should be a strong selling appeal to make their interest
in the product very effective. Also the attitudes and the feelings toward the product
should be clarified. Sales ? person must take all these into account in selecting the appeal
to be emphasized.
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Phase III ? Kindling Desire : Here the interest of the consumer is to be converted into
the desire for buying the product. The ways should be found to face and dispose of the
sales obstacles, the consumer objections, external interruptions, digressive remarks, etc.
The consumer should be satisfied in all respects and all of his doubts should be cleared.
Phase IV ? Inducting Action : The perfect presentation results in the readiness of the
consumer to buy the product. All this requires experience of the sales personnel as the
buying is not automatic and it should not be closed until the sales persons are positive
that the right time has come. Most prospects find it easier to shy away from the hints
than from frank requests for an order.
Phase V ? Building Satisfaction : After the purchase generally the customer passes
through the state of mental cognitive dissonance in post ? purchase anxiety. Now this is
the job of the sales person to relieve him of this tension and convince him that him
decision was correct. Building satisfaction means thanking the customer for the order and
also to make the customer feel delighted and also to assure him of the promises made by
the salesman.
`Right set of circumstances' Theory of Selling : This theory is the `situation response'
theory which tells that everything was right for the sale. It also states that the skills of the
sales persons have a lot of effect on the sales to take place. Also, if the sales persons
have a lot of effect on the sales to take place. Also, if the sales person presents the proper
stimuli or appeals, the desired response will result. This theory tells about two types of
factors which constitute the set of circumstances. The factors are internal and external.
This theory stresses the external factors at the expenses of the internal factors. This is a
seller ? oriented theory and stresses the importance of the sales persons in the process of
selling of a product. The major drawbacks of this theory are : 1. It does not take care of
the internal factors. 2. It fails to attach appropriate weight to the response side of the
situation ? response interaction.
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`Buying Formula' Theory of Selling : This theory is buyer ?oriented theory. This is a
psychological theory and takes care of the buyer ? related problems and revolves round
the buyer. This theory explains the cognition process which goes on in the mind of the
buyer when he has to take the decision regarding to buy or not to buy. This theory has
come through various stages of its development and thus has taken its present picture.
Need or Problem
Product and / or
Trade name
Purchase
Satisfaction
Service
Pleasant Feelings
Pleasant Feelings
When a buying habit is being established, the buyer must know why the product
or service is an adequate solution to the need or problem, and why the trade name is the
best one to buy. This theory tells that :
1.The need should be created/ Emphasized.
2.The relation between the need and the product or service should be emphaised.
3.The brand image should be created.
4. The need, product/ service and the trade name / brand image should be associated with
each other.
5. The brand loyalty and the customer delight should be emphasized.
`Behavioural Equation' Theory : This theory takes care of the buyer's decision making
process and goes in the detail of the process at the micro / internal level. The buyer goes
through various stages of learning process. The essential elements of the learning process
are :
1. Drive ( Motivation )
2. Cue
3. Response
4. Reinforcement
Drives are strong internal stimuli which impel the buyers' response. These drives
are of two types. They are 1. Innate drives ? psychological or biogenic drives and 2.
Learned drives ? social drives.
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Cues are the weak stimuli that determine when the buyer will respond. There are
2 types of cues : 1. Triggering cues ? activate the decision process. 2. No triggering
cues- influence but does not activate the decision process.
Response is what the buyer does.
Reinforcement strengthens the buyer's tendencies to make a particular response.
Hence this theory takes care of the behavioral aspects of the buyer and how it
influences his decisions and his learning process. This also tells about the sales person's
role in all this to make it happen and at the same time it reduces buyer dissonance.
SALES STRATEGIES
Sales strategies are the policies which are made to provide the guidelines for taking key
decisions in personal selling. It includes the following :
1. Size of the sales force required
2. Kind of the sales force required
3. Roles of the sales person
4. Assigning of the sales territories.
The effectiveness and the efficiency with which these roles are played by the sales
force, determine the extent to which overall personal selling objectives are achieved. The
company's competitive posture is shaped by :
1. Product Market Analysis
2. Sales person's order securing analysis
3. Choice of the basic selling style :
(a) Trade Selling
(b) Missionary Selling
(c) Technical Selling
(d) New business selling
The size of the sales force can be determined by utilizing one or more of the following
methods in combination with each other :
1. Work Load Method
2. Sales Potential Method
3. Incremental Method
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Individualizing selling strategies to Customer
The acid test of the appropriateness of personal selling strategy comes when particulars
salespersons interact with particular customers. The Management makes its first key
decision on personal selling strategy. When it determines the size of the company's
sales force, each salesperson must individualise his own dealing with each customer. The
decisions of the above kind are implemented after the required kind and size of the sales
force has been recruited, trained and assigned their fields and territories. The strategies
should be such so as to benefit the customer and help the firm in achieving its objectives.
The strength of the sales force depends upon its communication and convincing power to
persuade the customer to buy the product. The approach of the sales person towards
different buyers is a matter of his selling skills. This skill is the function of the
preplanning and performance on the call of the sales person itself.
The individual members of the sales force determine the success and failure of the
company's overall personal selling strategy and sales management. The efficiency and
effectiveness of the sales management in the personal selling field. The sales persons
should combine their efforts in such a way so as to achieve their personal objectives
through the achievement of the firm's objectives.
Questions
1. What do you mean by personal selling? What is the importance of personal
selling?
2. What are the advantages and disadvantages of personal selling?
3. How is personal selling different from advertising?
4. Discuss the process of selling? Also discuss the AIDA concept of personal
selling?
5. What is sales management? What are the various functions of sales management?
6. Explain the basic theories of sales management?
7. What is meant by training of sales personnel? Discuss?
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This post was last modified on 14 March 2022