PRODUCT Marketing Management SYLLABUS Bcom Marketing Management Product

PRODUCT Marketing Management

SYLLABUS: Bcom (Marketing Management) Product: Meaning and Importance – Classification – Concept of Product Mix – Packaging – Brand Loyalty and Brand Equity – Labeling – Product Life Cycle – New Product development – Pricing – Factors Influencing Product Price – Pricing Policies and Strategies 2

SYLLABUS: BBA Marketing Management Product: Meaning and Importance – Concept of Product – Consumer and Industrial Products Product Planning and Development – Discounts and Rebate - Classification – Concept of Product Mix – Packaging – Brand Loyalty and Brand Equity – Labeling – Product Life Cycle – New Product Development – Pricing – Factors Influencing Product Price – Pricing Policies and Strategies 3

Product: Meaning and Definition w A product is anything that has the ability to satisfy a customer need. (Jobber, 2004) w A product is a bundle of satisfaction that a consumer buys. w Product is the reason for marketing and the object of advertisement. w A product is something that can be acquired through exchange to satisfy a need or a want. 4

Levels of Product w Core Product: The fundamental benefit that a product delivers. For ex: Rest and Sleep in hiring a room in a hotel w Basic Product: This is the actual product a consumer is buying. For ex: a hotel room includes basic products such as bed, bathroom, fan, table, chair, water etc. . w Expected Product: This is a set of attributes and conditions buyers normally expect when they purchase the product. Hotel guest expect neat and clean room. 5

Levels of Product w Augmented Product: This is what the customer gets more than his expectations in product. For ex: Free break fast, welcome drink etc. . in case of hotel room. w Potential Products: This is the evolutionary process through which the product may go in the future. The potential products incorporate all the possible benefits the product can provide today and tomorrow. 6

Product Concept w Product concept refers to the augmented product or the aggregate of satisfactions that a user obtains. w When buying an offset printing machine, the product may be augmented in the following ways: 1) Provide long term credit facility 2) Periodical servicing 3) Timely supply of spare parts etc… w It provides a reason for buying the product. 7

Classification of Products On the basis of durability…. w Non- durable goods: These goods are consumed fast and purchased frequently. Ex: Soap, Paste etc. . w Durable goods: These goods can be used for a long time. Not purchased frequently. Ex; refrigerator, furniture etc. . w Services: These are activities, benefits or satisfaction offered for sale. Ex: Hair cut, Train journey etc. Services are intangible, inseparable, variable and perishable. 8

Classification of Products On the basis of Consumption…. w Consumer goods: These are goods which are purchased for final consumption. These goods are purchased by ultimate consumers to satisfy their wants directly. Ex: Milk, books, shoe etc… w Industrial goods: These goods are meant for use in the production of other goods or for some business or institutional purposes. These goods are not directly used by consumers. They are four kinds: Production facilities and equipments, production materials, production supplies and management materials. 9

Characteristics of Consumer Goods w Final Consumption w Finished Products w Utility w Brand Name w Symbolism 10

Characteristics of Consumer Goods w Communication Packages w Numerous buyers w Small Quantity Purchases w Personal Considerations w Associated Services Delivery 11

Classification of Consumer Goods: On the basis of shopping habits w Convenience goods: Consumers usually purchase frequently or immediately with little effort from convenient location w Shopping Goods: Consumers buy after comparing the suitability, quality, price etc. . of different brands. More expensive than convenient goods. Ex: Clothes, Jewellery etc. . w Specialty Goods: Buyers make special efforts to buy. Reluctant to accept substitutes. Customer is willing to search the shops. w Unsought Goods: Consumer does not normally think of buying; Insurance policy 12

Classification of Consumer Goods: FMCG Fast Moving Consumer goods are non durable goods that are frequently purchased. Products that have a quick turnover and relatively low cost. Also known as Consumer Packaged Goods. They are further classified in to three: w Staple goods: These are purchased on regular basis. w Impulse goods: These are purchased without any thought or planning. These are purchased on sight. Usually, consumer is buying other products, he buys them spontaneously. w Emergency goods: These are purchased immediately to fill an urgent need. Sudden need for an umbrella. 13

Classification of Consumer Goods: Colour Classification w Brown goods: Electronic entertainment goods like TV, radio, CD players etc… w White goods: Refrigerators, Washing Machine, Air conditioners etc. . w Red goods: goods that are consumed and replaced at a rapid rate. Junk food. w Orange goods: things like clothes consumers change in a moderate. w Yellow goods: Goods purchased infrequently and expensive. 14

Product Line w It refers to a group of closely related products or product items that are physically similar or are intended for a similar market. w For example, a range of toilet soaps is a product line. w A product item refers to a particular version of a product that is distinct. 15

Factors affecting Product Line Decisions w Consumers’ Preferences w Strategies and tactics of Competitors w Firms’ cost structure w Change in demand w Buying habits and patterns 16

Factors affecting Product Line Decisions w Marketing influences w Product influences w Company objectives w Product specialization w Line modernization 17

Product Line Modification w Product Line Contraction w Product Line Expansion w Changing models or styles of the existing product w Quality variation a) Trading up: process of adding higher quality products to the line b) Trading down: introducing lower quality products 18

Product Simplification w It means limiting the number of products a dealer deals in. w the policy of product simplification may either be adopted right from the beginning or it may be adopted later on. w When a company manufactures all the products of a similar nature , it is called product simplification. 19

Product Diversification w Reverse of product simplification w It is a strategy for growth and survival in the highly complex marketing environment. w It is the management policy to earn business and profits from a number of sources. w It simply means expanding breadth and length of product mix by adding new items or product lines. 20

Product Differentiation w It involves developing and promoting an awareness in the minds of customers that the companys’ products differ from the products of competitors. w Differentiation is the act of designing a set of meanigful differences to distinguish the companys’ offer from competitors offer. w It is made by using trademarks, brand names, packaging, labeling etc… 21

Product Mix w It is the total list of products which a firm offers to its buyers. w A firm with several product lines has a product mix. w HUL has 12 different product lines. w A product mix has four features: 1) Length 2) Breadth 3) Depth and 4) Consistency 22

Factors Influencing Product Mix w Change in Demand: 1) Change in population 2) Change in consumers’ income 3) Change in consumer behavior w Marketing influences w Production efficiencies: can enjoy number of efficiencies. 23

Factors Influencing Product Mix w Financial Influences: financial expenses per unit will come down w Use of waste: may produce byproducts by utilizing residual materials. w Competitors Strategy: w Profitability: 24

Product Branding w Branding means naming a product for its identification and distinction. w The word brand is derived from the Norwegian word ‘brandr’. It means ‘to burn’. w A brand lives in the mind of a consumer. A brand is a living memory of a product. w Brand is a name, term, symbol, mark or design or a combination of them which is intended to identify goods or services of one seller or a group of sellers and to differentiate them from those of competitors. 25

Product Branding w Brand can be mathematically expressed: Brand = Quality + Image + Price w A brand is a symbol of trust, warmth, value and loyalty. It is a perpetual entity that in the consumers’ mind w A brand has two parts: 1) Brand Name + 2) Brand Mark Brand name refers to that part of a brand that can be spoken including letters , word and numbers etc… Brand mark is in the form of a symbol or design. Only be recognized by sight. Can not be spoken 26

Trade Mark w It is a legal term. w When a brand name or a brand mark is registered and legalized it becomes a trade mark. w Registered brands are trade marks. w Brand, brand name, brand mark, trade mark, copy right are collectively known as thee language of ‘Branding’. 27

Brand vs Trademark • Name , symbol or combination of these • Registered Brand • Can be copied • Can not be copies • Limited scope • Wide scope • All brands are not trademarks • All trademarks are brands • A symbol of its company • A symbol of the quality of a product 28

Product vs Brand w Products are created in the factory, but the brands are created in the mind. w A product can be easily copied by a competitor, but a brand is unique. w A product can be quickly outdated; a successful brand is timeless w Products exist in the physical world; brands exist in the consumer perception 29

Reasons/ Objectives/Functions of Branding w w w w Demand creation and pushing up sales Makes product attractive and popular Helps in identifying the product and distinguish it from others Helps in advertising and sales promotion programmes Ensures uniformity of quality and customer satisfaction Easy to introduce new products successfully in the market Helps the seller to earn goodwill or prestige Develops brand loyalty and consumer preference All brands have one goal: Enhance their perceived value 30

Top brands in India w Colgate w Dettol w Rin w Ponds w Bata w Horlicks 31

Characteristics of a Good brand w w w w w Words should be simple and easy to pronounce Should be memorable Attracting to the eyes and pleasing to ears Trade names must provide necessary suggestion about the products benefits Name should be appropriate and suitable to the product It should suggest some product quality Should be clearly distinctive from others Should not be outdated Should immediately come to the mind of a customer. 32

Types of Brands w Manufacturer brands: Developed and owned by producers. Help customers to identify products with their manufacturers. Ex: Apple w Private distributor brands: Brands developed by wholesalers and retailers w Generic brands: Indicate only the product category and do not include any company name or idetifying terms w Family Brand: A single brand name for the whole line of closely related items. Ex: Amul w Individual Brand: Chelpark ink w Co-brand: Uses two individual brands on a single product. w Licensed brand: A company grants licenses to approved manufactures to use its brand for a mutually agreed terms. 33

Advantages or Importance of Brands w A brand has personality, character, feelings and identity w Take the name MARUTI from the car. Cr has no identity, no name, no goodwill eetc. . w Jeff Bezos (Amazon founder): “A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well”. w “It is possible to have a brand without a business. It is almost impossible to have an enduring and profitable business with out a brand. ” (Vinita Bali, MD of Britannia) 34

Advantages or Importance of Brands/ Advantages to manufacturers w Helps in maintaining individuality for the product w Enables the producers to popularize the product w Creates goodwill for the product w Marketing expenses can be reduced w Widens the market for the product w Facilitates introduction of new products w Creates brand loyalty 35

Advantages or Importance of Brands/ Advantages to Consumers w Helps in evaluating the quality of the product w Helps in preventing adulteration of goods by middlemen w Branded products are sold in sealed packages. It gives protection w Consumers get products of uniform quality standards and design w Enables consumers to make easy buying w Assures fixed prices to consumers 36

Advantages or Importance of Brands/ Advantages to distributors w It reduces the selling efforts w Helps in advertising and sales promotion programmes w Stability in the prices of branded products. This reduces risks w Reduces cost of distribution w Helps to find out quick moving products easily 37

Limitations of Branding w Expensive w Not easy to build up brand reputation and loyalty w Discourages trying out other new products by the consumers w Creates Brand monopoly w Promotes unfair competition w Branded goods are priced higher than unbranded goods w Consumers get confused to select a product from numerous brands 38

Brand Loyalty w It means the loyalty of a buyer towards a particular brand w It is a consistent preference for one brand over all others w It is a favorable attitude and consistent purchase of a particular brand. w It is the strong attachment of a buyer towards a particular brand. Three levels for brand loyalty a) Brand recognition b) Brand preference c) Brand insistence 39

Brand Loyalty: Advantages w Building a relationship with the brand w Customers become advocates of the brand w Brings positive word-of – mouth advertisement w Loyal customers are most profitable customers w It creates customers willing to provide more premium for the companys’ product w Cost of reaching loyal customers is lower w Helps to reduce competition 40

Determinants of Brand Loyalty w People w Product and Service Delivery w Product Features w Price w Policies and Procedures w Promotion and Advertising w Plan of the company 41

How does Brand add value? w Brands facilitate purchasing w Brands establish loyalty w Brands protect a firm from competition and price competition w Brands reduce marketing costs w Brands are assets w Brands have market value 42

What is Brand Cohotrs? A brand Cohort is a segment of loyal customers whose usage of that particular brand can be used to understand their reactions to other brands 43

Brand Equity w Brands can be treated as assets along with physical assets like building, equipments etc. . w It is the added value with which a given brand endows a product w It is the value inherent in well known brand name w It is the marketing and financial value associated with a brand’s strength in a market w It is the set of assets and liabilities linked to a brands’ name and symbol that add to or subtract from the value of provided by a product or service to a firm and /or that firms’ customers 44

Brand Equity w Brand equity is the incremental amount the customer pays to obtain the brand rather than a physically comparable product without the brand name w Brand equity is an important intangible assets. w Its significance is noticed during mergers and acquisitions w P&G bought Gillette for $ 57 billion w Godrej bought Goodnight for Rs 131 Crores (No factory , no staff , no office were given) 45

Element of Brand Equity w Brand Awareness w Perceived Quality and Perceived Value w Brand Associations w Brand Loyalty 46

Branding vs Grading Branding Grading 1. It means giving a distinct name or mark to a product for easy identification 1. It is the physical process of dividing goods into uniform lot on the basis of standardisations 2. Usually done for manufactured products 2. Usually done for agricultural products 3. It can create special demand 3. It can widen the market 4. There is no need for standardisation 4. It follows standardisation 5. It is done using name, symbol or trade mark etc. . 5. It is done on the basis of size, shape, weight , colour etc. . 47

Product Life Cycle (PLC): w Everyone on this earth has a well defied life cycle. All human beings take birth, educate themselves, grow then become old and one day die. w The same way every product has a life cycle known as product life cycle. w Like humans, duration of cycle varies. w The concept is popularized by Theodore Levitt in 1965 w Like a man, the product also takes birth, rapid growth, attain maturity and then enters the declining stage. 48

Product Life Cycle (PLC): w Introduction ( A seed is planted) w Growth ( root takes place and leaves come out) w Maturity (Adulthood takes place) w Decline ( plant begins to shrink and finally die) 49

Product Life Cycle (PLC): 1) Introduction ( A seed is planted) w First stage in the life of a product w Product is first available in the market w During this stage sales are low. Two reasons for that. a) customers are unaware of the new product b) they are cautious of buying something new • Costs are high as thee company invest large amounts of money to develop and launch the product. Profits are low • Currently products like e-books is in this stage. 50

Product Life Cycle (PLC): 1) Introduction Stage: Major Characterisitcs w High promotional expenses w Generally High Price w Less competition w Low sales and low profits w Marketing objective is to create product awareness and trial 51

Product Life Cycle (PLC): 1) Introduction Stage: Major Characteristics w High promotional expenses w Generally High Price w Less competition w Low sales and low profits w Marketing objective is to create product awareness and trial 52

Product Life Cycle (PLC): 2) Growth ( root takes place and leaves come out) w Product expansion stage. More customers begin to buy the product. Customers who purchased the product in the introduction stage again purchasing the product. w Product is recommended to colleagues , friends and relatives w Sales will begin to grow and profits begin to come forr th company w Competitors enter the market w Sales reach the optimum level 53

Product Life Cycle (PLC): 2) Growth Stage: Major Characteristics w Rapidly rising sales w Expansion in the scale of production w Rising profits w Lower unit cost w Severe competition w Stable or slightly reduced prices w Marketing objective is to maximize market share 54

Product Life Cycle (PLC): 3) Maturity (Adulthood takes place) • This stage has longest duration w Demand for products reaches saturation w Increased competition w Buyers will continue to grow, but slower rates w Profits reach its maximum point and begins to slowly fall w Sales become stagnant and stocks pile up w Needs to take strategies like product modification, marketing mix modification, market modification etc… 55

Product Life Cycle (PLC): 3) Maturity : Major Characterisitcs • Sales grow at diminishing rates • Prices tend to fall • Profits start declining • Stiff competition • Product supply exceeds demand • Product modification and improvement • Marketing objective is to defend the market share by maintaining sales and profit levels 56

Product Life Cycle (PLC): 4) Decline (Plant begins to shrink and Die) w Sales began to fall w Production and inventory costs become larger w Death for the products since customers preferences and tastes significantly change. w More competition and customers move to other products with newer technological features. w Gradual phasing out of the product happens. Ex: B&W TV, fountain pen, typewriter, telegrams etc… 57

Product Life Cycle (PLC): 4) Decline Stage: Major Charactersitics w Rapid fall in sales w Fall in prices w No promotional expenses w Reduced distribution network w Product technology becomes obsolete w Marketing objective is to take revival plans to reintroduce the product in more refined and modified form. 58

Product life cycle (PLC): The course of a product’s sales and profits over its life 59

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Product Life Cycle (PLC): Assumptions w The products have limited life w Sales of products pass through distinct stages, each posing different challenges to the seller w Profits rise and fall at different stages w Products require different strategies in each stage of life cycle 61

Factors affecting Product Life Cycle (PLC) w Rate of technological change w Rate of market acceptance w Position of competitive entry w Patent protection w Economic forces w Risk bearing capacity w Customers’ attitude w Government policy 62

Advantages of Product Life Cycle (PLC) w It helps in planning new products w It enables a producer to estimate the profits in different stages of the PLC w It helps in determining the cost of product development w It helps in designing different strategies for different stges of the product life cycle w It helps in allocation of resources among different products w It helps in setting prices 63

Advantages of Product Life Cycle (PLC) w It helps to make necessary plans regarding improvement, modification and elimination of products at various stages of Product life cycle w It helps in product differentiation w It is helpful in sales promotion w It is helpful in marketing control w It helps to adapt the features of product according to the development of technology 64

Limitations of Product Life Cycle (PLC) w It is impossible to determine the particular stage in which a product is w The determination of the length of each stage in the life cycle is a complicated process. w it is not necessary that all stages can be applicable to every product w Product life cycle alone cannot be a device for marketing success w Some products remain in the market for 100 years or more without being outdated. These products never enter in to decline stage. (Ex: Whisky) w PLC does not consider the competitive position of the product w PLC is not a panacea to marketing thinking and decision making. 65

New Product Development w Product development includes a number of decisions, namely, what to manufacture, how to have its packaging, how to fix its price and how to sell it. w New product development is concerned with development and commercialization of new products according to product planning. w According to Stanton, product development encompasses the technical activities of product research, engineering and design. w A marketer must have a planned programme of introducing new products which will be tomorrows bread winners. 66

Stages in New Product Development 1. Generating Product Ideas 2. Screening of Ideas 3. Concept Development and Testing 4. Business Analysis 5. Product Development 6. Market Testing 7. Commercialization or Product Launch 67

Stages in New Product Development 1. Generating Product Ideas w Ideas may generate from various sources. This is the first step w Sources can be internal and external w Toyota claims that employees submit 2 million ideas annually and over 85% of them are implemented. w Akio Moritas’ (Sony) story about the development of Walkman is wellknown. 68

Stages in New Product Development 2. Screening of Ideas w The ideas collected are scrutinized and evaluated to eliminate unsuitable ideas. w Promising ideas are for further investigation w Screening ideas is the process of evaluating product ideas to judge whether they match companys’ objectives and policies w Most importantly, a company can not exploit all ideas at thee same times 69

Stages in New Product Development 3. Concept Development and Testing w Idea need to be converted in to product concept w A concept is a detailed overview of the idea it is the meaningful expression of the product in the light of consumers’ needs. w From one idea several concepts can be developed w Product testing is phase in which a small sample of potential buyers is presented with a product idea through a written and oral description to determine their attitudes and initial buying intentions regarding the product 70

Stages in New Product Development 4. Business Analysis w At this stage selected ideas are analyzed to determine the desirable market features of the product and it feasibility. w It is at this stage product ideas are evaluated to determine its potential contributions to firms’ sales, cost and profits. w It involves the projection of future demand, financial requirement, cost estimates etc… w It evaluates the total market potential. Marketing research is done at this stage. 71

Stages in New Product Development 6. Product Development w It involves four stages: a) developing models b) testing of consumers’ preferences c) taking decisions about brand d) deciding the packaging w Idea is converted to a product that is producible w First four steps may be treated as preparation steps. This is the stage where actual actions begin w It is during this stage that all developments of thee product from idea to physical form take place 72

Stages in New Product Development 6. Market Testing w After the product has been developed, marketer has test the reactions of dealers and customers in handling and using the product and size of the market. w Selected geographical areas are selected for market testing w Reactions of consumers are observed so that possible faults in the product could be identified. w It is only after this stage product is manufactured and marketed on large scale. Test market involves the mini launch of the new product. It has been estimated that 80% of new products fail to click in the market. This is the reason why product testing becomes essential. 73

Stages in New Product Development 7. Commercialization or Product Launch w Commercialization of product means large scale production and distribution of a product. w It this stage product is submitted to the market. w Marketing programmes begin to operate. Now the product starts its life cycle. w This stage is considered as crucial one. Thus, it is clear that a series of processes are to be undertaken by the management prior to the introduction of a product. 74

Packaging • It relates to the look or physical appearance of a product when it is presented or sold to customers. • It refers to the activities of wrapping or enclosing the product in a container like bottle, tin, jar bag etc. . to facilitate transportation storage sale or consumption. • It is the art science and technology of preparing goods for transport and sale. • Packaging is a silent sale s man • Packing is a sub function of packaging. It means putting articles in to small packets or bottles for sale to ultimate cusstomers 75

Functions of Packaging • Protection: it helps to keep contents of th product safe from weather, temperature, breakage, leakage etc… • Convenience: it facilitates easy transportation, storage , usage and display • Promotion: it facilitates advertising of products. Attracting designs will get the attention. • Identification: Helps to differentiates products from other products • Helps in Branding Process • Information: It conveys many meaningful information to customers 76

Advantages of Packaging 1. Advantages to Marketer • Protects the product from damages • Promotes product • Facilitates storage and transportation • Helps in branding • Enhances goodwill • Acts as a silent salesman 77

Advantages of Packaging 1. Advantages to Middlemen • Easy display • Keeps the products fresh and clean • Self advertising • Facilitates transportation and storage 78

Advantages of Packaging 1. Advantages to Consumer • Convenient handling • Less possibility of adulteration • Information regarding use and upkeep • Easy identification 79

Requisites for a Good Package • A package should suit to the product • It must protect the contents • It must meet the requirements of different segments of consumers who have different levels • It must be attractive • It must be durable • Its cost should be reasonable 80

Labelling • It gives verbal information about the product and the seller • It is the display of important information on a product package • It contains the name producer, expiry date, instructions for use and name of the product, qualities of the product, quantity off product, ingredients date of production expiry date etc… • The purpose of labeling is to give the consumer the information about the product he is buying and what it will and will not do for him. • “Label is a informative tag wrapper or seal attached to a product or products’ package” 81

Kinds of Labels • Brand Label: it gives the brand name or mark. • Grade Label: it gives the indication about the quality of the product by a number, letter or word. • Descriptive Label: It gives details of product, its functions, price, warnings, instructions etc… • Information Label: it provides maximum possible information about the product. It is different from descriptive label in the sense that it contains fuller instructions on thee use and care of the product. 82

Advantages or Functions of Labelling • It identifies the product easily • It announces the product description and useful information • It grades the product • It contains the prices of the product which can not be varies by the sellers • It helps for advertising 83

Disadvantages of Labelling • It is of no use to illiterate people • It increase the cost of the product • It is effective only where standardization is necessary • As it helps the customers to compare the merits and demerits of the product, thee lower quality products are sure to be discarded by the customers 84

Pricing of a Product • Price is the amount paid by a buyer too a seller for a product • It is the exchange value of a product or service in terms of money • Pricing is the only marketing mix element that produces revenue for the firm. • The other marketing mix elements create costs to the firm • The price must be fixed judiciously 85

Objectives of Pricing • To maximize profit • To maintain or improve the market • To achieve a desired rate of return on investment • To meet or prevent competition • To stabilize the product prizes • To mobilize resources for development and expansion • To build image and enhance goodwill 86

Factors influencing Pricing Decisions / Pricing Policies • INTERNAL FACTORS & • EXTERNAL FACTORS 87

Factors influencing Pricing Decisions / Pricing Policies INTERNAL FACTORS • Cost of the product • Objectives • Organizational Factors • Marketing Mix • Product Differentiation • Product Life Cycle 88

Factors influencing Pricing Decisions / Pricing Policies EXTERNAL FACTORS • Demand • Competition • Distribution Channels • General Economic Conditions • Government Policy 89

Steps in Formulating Pricing Policies • Studying the Target Market • Selecting the Pricing Objective • Determining Demand • Estimating Costs • Analyzing Prices of Competitors • Selecting the Pricing Methods • Setting the Final Price 90

Types of Pricing Policies/ Methods of Pricing • Cost – based Pricing Policies • Demand – based Pricing Policies • Competition – based Pricing Policies • Value – based Pricing Policies 91

Cost - Based Pricing Policies 1) Cost plus Pricing: • Under this method , the price is computed by adding a certain percentage of profit to the cost of the product per unit. • Cost includes production cost, administrative cost, selling and distribution cost etc… • This method is also known as Margin Pricing or Full Cost Pricing or Mark up Pricing • This method is popular in wholesale and retail trade 92

Cost - Based Pricing Policies 2) Target Pricing: • This is a variant of full cost pricing • Under this method the cost is added with a predeteermined target rate of return on capital invested. • In this case, the company estimates future sales, future cost and calculates a targeted rate of return on investment after tax • This method is also known as Rate of Return Pricing 93

Cost - Based Pricing Policies 3) Marginal Cost Pricing: • Under both full cost pricing and rate of return pricing thee prices are set on the basis of total cost (fixed + variable cost). • Under marginal cost pricing, the price determined on the basis of marginal cost or variable cost. • In this method, fixed costs are totally excluded • This method is also called variable cost pricing. 94

Cost - Based Pricing Policies 4) Break Even Pricing: • This is a form of target return pricing. It is a refinement of cost -oriented pricing. • Here, break even analysis is used for pricing • Under this method the firm determines the price at which it will break even. • The company determines the number of units that must be sold to generate revenue to cover total l cost. In other words, break even point is determined by the firm for pricing purpose. 95

Demand - Based Pricing Policies • Under this pricing policy, demand is the basic factor. • Price is fixed simply by adjusting it too the market conditions • The price is fixed on the basis of demand. Where there is more demand higher prices arr fixed. • There are two important pricing policies which fall under this category of pricing policy • Differential and Premium Pricing 96

Demand - Based Pricing Policies 1) Differential Pricing: • Under this method the same product is sold at different prices to different customers, in different places and at different periods. • For instance, a cinema house is charging different rates for different categories of seats. • This method is also called discriminatory pricing. 97

Demand - Based Pricing Policies 2) Premium Pricing: • It is based on the principle that the product or brand should be positioned at the top of the market • Must offer greater value in qualitative terms than similar brands in other price segments • It is called high pricing • The BPL group first invaded the market with this pricing during 1990 s. Titan, Sony, Dove etc follow the same policy. 98

Competition - Based Pricing Policies 1) Going Rate Pricing: • Charging the price which competitors are charging • This method is adopted by firms selling a homogenous product in a highly competitive market • Under this method, firm accepts the price prevailing in the industry to avoid a price war. • It is also called Acceptance Pricing or Market Equated Pricing or Parity Pricing • This is useful where cost ascertainment is difficult 99

Competition - Based Pricing Policies 2) Customary or Conventional Pricing: • In case of some commodities the prices get fixed because they have prevailed over a long period of time. Ex: the price of a cup of a tea • These prices are fixed by custom or tradition. . • The price will change only when the cost changes significantly • Before changing the customary pricing, it is essential t study the competitors prices 100

Competition - Based Pricing Policies 3) Sealed Bid Pricing: • In this method, costs and demand are not considered at all • The firm fixes its prices on how the competitors price their products • It means that if a firm is to win a contract job, it should quote less than the competitors. 101

Value - Based Pricing Policies 1) Perceived Value Pricing: • This method is concerned with setting the price on thee basis of value perceived by the buyer of thee product rather than sellers’ cost • When a company develops a new product it anticipates a particular position for it in the market in respect of price, uality and service • Company judges the perception of consumers and price th product accordingly 102

Value - Based Pricing Policies 2) Value for Money Pricing: • It is used as a competitive marketing sstrategy • Under this method thee price is based on the value which the consumers get from the product they buy • Videocon did t when they launched 63 cm flat screen Bazooka TV. Thee price was driven by value for money strategy 103

Methods or Strategies of Pricing New Products 1) Skimming Price Policy • This is done with the basic idea of gaining a premium from those buyers who always ready to pay a much higher price than others • A product is priced at a very high level due to incurring large promotional expenses in the early stages • Thus, skimming price refers to the high initial price charged when a new product is introduced in the market. • For example, when mobile phones introduced, firms charged a very high prices fr it. Over the time prices become cheap. 104

Methods or Strategies of Pricing New Products 1) Skimming Price Policy: Reasons for adopting this strategy • • • In the initial stage of the introduction of a product , demand is relatively inelastic To recover heavy expenditure incurred on research, development, advertisement and sales promotion of new product When there are no close substitutes Elasticity of demand is not known Buyers have no measuring rod for comparing value and utility To attract the consumers of high income group 105

Methods or Strategies of Pricing New Products 2) Penetration Price Policy • This is the practice of charging a low price right from the beginning to stimulate the growth of the market and to capture a large share of it • since the price is lower, the product quickly penetrates the market, and consumers with low income are able to purchase it. • Nestle first launched its wafer chocolate brand Munch for Rs. 2: once a market was established for the product, it launched a new pack for Rs. 5 106

Methods or Strategies of Pricing New Products 2) Penetration Price Policy is succeful under following conditions: • Product has high price elasticity in the initial stage • The product is accepted by large number of customers • Economies of large scale production are available to a firm • The potential market for the prodduct is fairly large and has a good deal of future prospects • When the cost of the production is low • To introduce product in the market • To discourage new competitors at the market • When most of the consumers are from low income group 107

Methods or Strategies of Pricing New Products 3) Competitive Pricing • The producer of a new product may decide to fix the price at the competitive level • This method is used when the market is highly competitive and the product is not differentiated significantly from competitive products • Price is not fixed above the market price because of fear of nonacceptability of the product in the market • Price below the market price is avoided where the customers might perceive the product to be of inferior quality as in case of ready made clothings. 108

Methods or Strategies of Pricing New Products 4) Predatory Pricing • When a firm sets a very low price for one or more of its products with the intention of driving its competitors out of business, it is called predatory pricing. • Here a firm cuts its price to a loss making level. The objective is to bring competitors in to a troubled situation even at the cost huge loss. 109

Difference between Pricing Policy and Pricing Strategy • • • Pricing policies provide the general set of rules for making pricing decision. Pricing strategies are adaptations of pricing policies individualized tailoring of pricing decision to fit particular competitive situation encountered by specific products. Pricing policy is general while pricing strategy is specific Pricing strategy is applied to achieve a selected objective, while pricing policy is a guide to the management Pricing policy is for the longer period while pricing strategy is a temporary measure Pricing strategy defines how a firm going to achieve its pricing objectives 110

Steps in Pricing Strategy • Mandell and Rosenberg (1981) have suggested thee following steps in building pricing strategies: 1) Selecting Target Markets 2) Studying Consumer Behavior 3) Identifying Competition 4) Assigning Price a Role in Marketing Mix 5) Relating Costs and Demands 6) Determining Strategic Prices 111

Important Pricing Strategies 1) Psychological Pricing: Some manufacturers fix the prices of their products in the manner that it may create an impression in the minds of consumers that the prices are low. Ex: Bata Shoes (Rs. 99. 90) 2) Geographical Pricing: It is the practice of charging different prices for the same product to consumers in different geographical locations. The firm may charge a higher price to distant customers to cover a higher transportation cost. For ex: Petroleum products. 3) Base Point Pricing: Under this method , the seller designates a city as a base point and charges all customers the freight cost from that base point to the place of consumers, regardless of the city from which the goods are actually shipped. 112

Important Pricing Strategies 4) Zone Pricing: Under this method, company sets up two or more zones. The company charges the same price for all customers with in a zone. The price is higher in the more distant zones. 5) Dual Pricing: when a manufacturer sells the same at two different prices it is dual pricing. It is the strategy of selling the same product for two different prices at the same place. 6) Administered Pricing: Under this method , the pricing is done on the basis of managerial decisions and not on the basis of cost, demand , competition etc… 113

Important Pricing Strategies 7) Mark-Up Pricing: This method of pricing is followed by wholesalers and retailers. When the goods are received , the retailer adds a certain percentage of wholesalers price. Some retailers mark up goods 100% over goods. This tactic is called Key Stoning 8) Product Line Pricing: A product line refers to a group of products which have similar physical features and functions. With in a particular product line there may a exist a number of varieties which differ in size, color etc. product line pricing is the determination of prices of individual products and finding the proper relationship among these prices of members of a product group. 114

Important Pricing Strategies 9) Captive Product Pricing: this method is adopted by those companies which make products that must be used along with the main product. These are ancillary or captive products. The producer fixes low price for main product and higher price for captive products. 10) Price Bundling: A group of products is sold as a bundle at a price lower than the total of the individual price. 11) Prestige Pricing: A high price is fixed for the product with a view to establish an image of high quality. This is 115 used in the case of clothes, cars, jewellery etc…

Important Pricing Strategies 12) Loss Leader Pricing: under this method a firm cuts prices of some products in order to attract customers. The products which are sold at very low prices or even at losses are termed as loss leaders. This method is usually used by retail shops like super markets and department stores 13) Expected Pricing: it refers to fixing of price on the basis of the expectations of consumers. The price acceptable to consumers is found out through consumer surveys. 14) Product Bundling Pricing: It refers to setting price for a bundle of products. Few products are offered as a bundle 116 for a price lesss than the total of the individual prices.

Important Price Adjustment Strategies The basic price fixed is often changed to suit different situations and different types of customers. Usually a price different from the basic price is charged from the customers due to several adjustments made: There are two categories of adjustment strategies: 1) Discounts and Allowances 1) Promotional Pricing 117

Important Price Adjustment Strategies 1) Discounts and Allowances: Sellers generally allow some discount to the buyers as a percentage of the sales price. Such discounts are given for several purposes like encouraging large scale buying, Timely settlement of bills etc… a) Trade Discount: it is a discount given by manufacturers to the trade channel members. i. e wholesalers and retailers for their services. b) Quantity Discount: it is a deduction from the list price given to buyers for purchases in large quantities 118

Important Price Adjustment Strategies c) Cash Discount: it is a reduction allowed to the buyer on or before a particular date d) Seasonal Discount: it is a price deduction allowed to buyers who buy goods or services during the periods of slack season. e) Allowances: It is given by manufactures to wholesalers or retailers for meeting promotional expenses. Ex: Advertising allowance, window display allowance etc… 119

Important Price Adjustment Strategies 2) Promotional Pricing: It refers to offering of goods at a price less than the list price. The price reduction is given under special circumstances with an idea to promote the sales. Big retail shops may offer some products at very low price to attract customers to the shop. The method is used in certain seasons to attract more customers. Psychological discounting is one popular for of promotional pricing where an artificially high price is fixed on a product and then offered at a substantial discount. 120

Pricing over the Product Life Cycle 1) Introduction Stage: A high price is normally fixed. Products are offered to the high income group at a high price. Such a strategy is called the skimming the cream pricing. following four strategies adopted at this stage: Rapid Skimming Strategy: High price with high promotional expenses. Slow Skimming Strategy: High price with low promotional expenses. Rapid Penetration Strategy: Low price with high promotional expenses Slow Penetration Strategy: Low price with low promotional expenses. 121

Pricing over the Product Life Cycle 2) Growth Stage: During the growth stage, sales and production increases and cost of production decreases considerably. Competitors enter in to the market with similar type of products. If firm has started with a high price, it tries to reduce it step by step with increase in competition. An initial low price may be raises slightly as the product might have established in the market by this time. 122

Pricing over the Product Life Cycle 3) Maturity and Saturation Stage: The price is normally kept stable. Additional quantity may be offered at the same price or gifts may be offered to prolong this stage. However, price may be lowered if competitors lower their prices. 4) Decline and Abandonment Stage: During decline and abandonment stage the firm resorts to price cuts. Promotional expenses are reduced considerably. The firm may adopt break even pricing so as to continue in the market until the product is completely withdrawn. 123