1. Module 5: Product Related strategies
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Module 5: Product Related strategies
Product as anything that can be offered to a market for attention, acquisition, use, or consumption
that might satisfy a want or need. Ex: cars, computers, or cell phones
Services are a form of product that consists of activities, benefits, or satisfactions offered for sale
that are essentially intangible. Ex:- banking, hotel services, airline travel, retail, homerepair services
and wireless communication.
Levels of Product and Services
Product and services are shown in three levels. The most basic level is
the core customer value (Core Benefit), which addresses the core
requirement of user or problem-solving benefits or services that
Ex: tooth Paste, Magazines etc. The Customer frequently buy these
products with less involvement.
At the second level, product turns the core benefit into an actual
product. They need to develop product and service features,
design, a quality level, a brand name, and packaging. For example,
the TV is an actual product. Its name, parts, styling, features, packaging, and other attributes have all
been carefully combined to deliver the core customer value.
The third level is an augmented product around the core benefit and actual product by offering
additional consumer services and benefits. The BlackBerry is more than just a communications
device. It provides consumers with a complete solution to mobile connectivity problems. Thus, when
consumers buy a BlackBerry, the company and its dealers also might give buyers a warranty,
instructions on how to use the device, quick repair services when needed, and a toll-free telephone
number and Web site to use if they have problems or questions.
When developing products, marketers first must identify the core customer value that consumers
seek from the product. They must then design the actual product and find ways to augment it to
create this customer value and the most satisfying customer experience.
Product and Service Classifications
1. Consumer products are products and services bought by final consumers for personal
consumption. Consumer products include convenience products, shopping products, specialty
products, and unsought products. These products differ in the ways consumers buy them.
a) Convenience products are consumer products and services that customers usually buy frequently,
immediately, and with minimal comparison and buying effort. Ex: detergent, candy, magazines, and
fast food. Convenience products are usually low priced, and marketers place them in many locations
to make them readily available when customers need or want them.
b) Shopping products are less frequently purchased consumer products and services that customers
compare carefully on suitability, quality, price, and style. When buying shopping products and
services, consumers spend much time and effort in gathering information and making comparisons.
Ex : furniture, clothing, used cars, major appliances, and hotel and airline services. Shopping
products marketers usually distribute their products through fewer outlets.
c) Specialty products are consumer products and services with unique characteristics or brand
identification for which a significant group of buyers is willing to make a special purchase effort.
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Ex: specific brands of cars, high-priced photographic equipment, etc.
d) Unsought products are consumer products that the consumer either does not know about or
knows about but does not normally consider buying. Most major new innovations are unsought until
the consumer becomes aware of them through advertising. Ex: life insurance. By their very nature,
unsought products require a lot of advertising, personal selling, and other marketing efforts.
2) Industrial Products are those purchased for further processing or for use in conducting a
business. Ex: If a consumer buys a car use for his purpose then, the car is a consumer product. If the
same consumer buys the same car for making business, the car is an industrial product.
Product and Service Decisions
Marketers make product and service decisions at three levels: individual product decisions,
product line decisions, and product mix decisions.
A. Individual Product and Service Decisions
Figure shows the important decisions in the development & marketing of individual products &
1) Product and Service Attributes: Product attributes are quality, features, and style and design.
a) Product Quality. Product quality is one of the marketer’s major positioning tools. Quality has a
direct impact on product or service performance; thus, it is closely linked to customer value and
satisfaction. Quality defines as the characteristics of a product or service that bear on its ability to
satisfy stated or implied customer needs. Similarly, (Siemens defines quality as: “Quality is when our
customers come back and our products don’t.)
b) Product Features. A product can be offered with varying features. The company can create
higher-level models by adding more features. Features are a competitive tool for differentiating the
company’s product from competitors’ products.
c) Product Style and Design. Another way to add customer value is through distinctive product
style and design. Design is a larger concept than style. Style simply describes the appearance of a
product. Styles can be eye catching or yawn producing. A sensational style may grab attention and
produce pleasing aesthetics, but it does not necessarily make the product perform better. Unlike
style, design is more than skin deep—it goes to the very heart of a product. Good design contributes
to a product’s usefulness as well as to its looks. Design begins with observing customers and
developing a deep understanding of their needs.
A brand is a name, term, sign, symbol, or design, or a combination of these, that identifies the maker
or seller of a product or service. Consumers view a brand as an important part of a product, and
branding can add value to a product.
Branding has become so strong that today hardly anything goes unbranded. Salt is packaged in
branded containers, Even fruits, vegetables, dairy products, and poultry are branded. Brand names
help consumers identify products that might benefit them. Brands also say something about product
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quality and consistency. Building and managing brands are perhaps the marketer’s most important
Packaging involves designing and producing the container or wrapper for a product. The primary
function of the package was to hold and protect the product. Numerous factors have made packaging
an important marketing tool as well. In increased competition the packaging must perform many
sales tasks—from attracting attention, to describing the product, to making the sale and to create
immediate recognition of a brand. In this highly competitive environment, the package may be the
seller’s last and best chance to influence buyers. Thus, for many companies, the package itself has
become an important promotional medium. Poorly designed packages can cause sales for the
company. Innovative packaging can give a company an advantage over competitors and boost sales.
In recent years, product safety has also become a major packaging concern. We have all learned to
deal with hard-to-open “childproof” packaging. Most drug producers and food makers now put their
products in tamper-resistant packages. In making packaging decisions, the company also must heed
growing environmental concerns. Fortunately, many companies have gone “green” by reducing their
packaging and using environmentally responsible packaging materials.
Labels range from simple tags attached to products to complex graphics that are part of the
packaging. The label identifies the product or brand. The label might also describe several things
about the product—who made it, where it was made, when it was made, its contents, how it is to be
used, and how to use it safely. Finally, the label might help to promote the brand, support its
positioning, and connect with customers. Labels and brand logos can support the brand’s positioning
and add personality to the brand.
5) Product Support Services
Customer service is another element of product strategy. Support services are an important part of
the customer’s overall brand experience. Keeping customers happy after the sale is the key to
building lasting relationships. “Take care of customers, no matter what it takes,” before, during, and
after the sale.
Product Line Decisions
A product line is a group of products that are closely related because they function in a similar
manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall
within given price ranges. For example, Nike produces several lines of athletic shoes and apparel.
Product line length—the number of items in the product line. One objective is to create a product
line to allow for upselling. Thus, Maruti would like to move customers up from Maruti 800 to Maruti
Zen. Another objective might be to allow cross-selling: HP sells printers as well as cartridges. A
company can expand its product line in two ways: by line filling or line stretching.
Product line filling involves adding more items within the present range of the line. There are
several reasons for product line filling: reaching for extra profits, satisfying dealers, using excess
capacity, being the leading full-line company, and plugging holes to keep out competitors. The
company should ensure that new items are noticeably different from existing ones.
Product line stretching occurs when a company lengthens its product line beyond its current range.
The company can stretch its line downward, upward, or both ways.
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Companies which are initially taken its position in the high price slot, stretches the line downwards
by offering products in the same line for the lower end markets. This is called Stretching down. Ex:
Kodak introduced Kodak fun time film to counter lower priced brands.
Companies which are initially positioned its product for lower end markets, decides to make higher
offers for the top slots. This is called stretching up. Sometimes, companies stretch upward to add
prestige to their current products. Ex: Japanese auto companies introduced an upmarket automobile:
Honda launched Acura
Companies in the middle range of the market may decide to stretch their lines in both directions.
This is called as Two Way Stretch. Ex: Marriott hotel group, along with regular Marriott hotels, it
added eight new branded hotel lines to serve both the upper and lower ends of the market.
Product Mix Decisions
Product mix (or product portfolio) consists of all the product lines and items that a particular seller
offers for sale. Colgate’s product mix consists of four major product lines: oral care, personal care,
home care, and pet nutrition. Each product line consists of several sublines. For example, the home
care line consists of dishwashing, fabric conditioning, and household cleaning products. Each line
and subline has many individual items. Altogether, Colgate’s product mix includes hundreds of
A company’s product mix has four important dimensions: width, length, depth, and consistency.
Product mix width refers to the number of different product lines the company carries. For
example, the “Colgate World of Care” includes a fairly contained product mix, consisting of personal
and home care products. By contrast, GE manufactures as many as 250,000 items across a broad
range of categories, from light bulbs to jet engines and diesel locomotives.
Product mix length refers to the total number of items a company carries within its product lines.
Colgate typically carries many brands within each line. Ex:its personal care line includes Softsoap
liquid soaps & body washes, Irish Spring bar soaps, Speed Stick deodorant, & Afta aftershaves.
Product mix depth refers to the number of versions offered for each product in the line. Colgate
toothpastes come in 16 varieties, ranging from Colgate Total, Colgate Max Fresh, Colgate Sensitive,
Colgate Cavity Protection, and Colgate Tartar Protection to Ultrabrite, Colgate Sparkling White,
Colgate Luminous, and Colgate Kids Toothpastes. Each variety comes in its own special forms and
formulations. For example, you can buy Colgate Total in regular, mint stripe gel, or whitening liquid.
The consistency of the product mix refers to how closely related the various product lines are in end
use, production requirements, distribution channels, or some other way. Colgate product lines are
consistent insofar as they are consumer products and go through the same distribution channels.
These product mix dimensions provide the handles for defining the company’s product strategy. The
company can increase its business in four ways.
(1) It can add new product lines, widening its product mix. In this way, its new lines build on the
company’s reputation in its other lines.
(2) The company can lengthen its existing product lines to become a more full-line company.
(3) It can add more versions of each product and thus deepen its product mix.
(4) The company can pursue more product line consistency or less depending on whether it wants to
have a strong reputation in a single field or in several fields.
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Services have grown dramatically in recent years. By 2014, it is estimated that nearly four out of five
jobs in the US will be in service industries. Services are growing even faster in the world economy,
making up 64 percent of the gross world product. Service industries vary greatly.
Governments offer services through courts, employment services, hospitals, military services, police
and fire departments, the postal service, and schools.
Private not-for-profit organizations offer services through museums, charities, churches, colleges,
foundations, and hospitals.
Alarge number of business organizations offer services airlines, banks, hotels, insurance companies,
consulting firms, medical and legal practices, entertainment and telecommunications companies,
real-estate firms, retailers, and others.
The Nature and Characteristics of a Service
1) Service intangibility means that services cannot be seen, tasted, felt, heard, or smelled before
they are bought. For example, people undergoing cosmetic surgery cannot see the result before the
purchase. Physical goods are produced, then stored, later sold, and still later consumed. In contrast,
services are first sold and then produced and consumed at the same time.
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2) Service inseparability means that services cannot be separated from their providers, whether the
providers are people or machines. As both service provider and service seeker are present during the
service is rendered, the interaction between these two is a special feature of services marketing.
3) Service variability means that the quality of services depends on who provides them as well as
when, where, and how they are provided. For example, some hotels say, Marriott have reputations
for providing better service than others. But one employee may be cheerful and efficient, whereas
another is unpleasant and slow.
4) Service perishability means that services cannot be stored for later sale or use.
Brand Equity is the positive differential effect that knowing the brand name has on customer
response to the product and its marketing. High brand equity provides a company with many
competitive advantages. A powerful brand enjoys a high level of consumer brand awareness and
Brand valuation is the process of estimating the total financial value of a brand. Measuring such
value is difficult. EX: the brand value of Google is a $100 billion, with Microsoft at $76 billion and
Coca-Cola at $67 billion.
Co-branding. Co-branding occurs when two established brand names of different companies are
used on the same product. Co-branding offers many advantages.
Brand Extensions. A brand extension extends a current brand name to new or modified products in
a new category. For example, Kellogg’s has extended its Special K cereal brand into a full line of
cereals plus lines of crackers, fruit crisps, snack and nutrition bars, breakfast shakes, protein waters,
and other health and nutrition products.
Multibrands. Companies often market many different brands in a given product category. For
example, in the United States, P&G sells six brands of laundry detergent (Tide, Cheer, Gain, Era,
Dreft, and Ivory), five brands of shampoo (Pantene, Head & Shoulders, Aussie, Herbal Essences, and
Infusium); and four brands of dishwashing detergent (Dawn, Ivory, Joy, and Cascade).
Multibranding offers a way to establish different features that appeal to different customer segments.
New-Product Development Strategy
New products are the lifeblood of a company. As old products mature and fade away, companies
must develop new ones to take their place. For example, 51 percent of Apple’s revenues come from
iPods, iPhones, and iTunes.
The New Product development is the development of original products, product improvements,
product modifications, and new brands through the firm’s own product development efforts.
The New-Product Development Process
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Figure: New Product Development Process
To create successful new products, a company must understand its consumers, markets, and
competitors and develop products that deliver superior value to customers.
1) Idea Generation
New-product development starts with idea generation the systematic search for newproduct ideas. A
company typically generates hundreds & thousands of ideas from the sources like internal sources
and external sources such as customers, competitors, distributors and suppliers, and others.
Internal Idea Sources
Using internal sources, the company can find new ideas through formal R&D. However, in one
survey, 750 global CEOs reported that only 14 percent of their innovation ideas came from
traditional R&D. Instead, 41 percent came from employees, and 36 percent came from customers.5
Thus, beyond its internal R&D process, companies can pick the brains of its employees from
executives to scientists, engineers, and manufacturing staff to salespeople. Many companies have
developed successful “intrapreneurial” programs that encourage employees to envision and develop
new-product ideas. For example, the Internet networking company Cisco has set up an Idea Zone,
through which any Cisco employee can propose an idea for a new product or comment on or modify
someone else’s proposed idea.
External Idea Sources
Companies can also obtain good new-product ideas from any of a number of external sources. For
example, distributors and suppliers can contribute ideas. Distributors are close to the market and can
pass along information about consumer problems and new-product possibilities. Suppliers can tell
the company about new concepts, techniques, and materials that can be used to develop new
products. Competitors are another important source. Companies watch competitors’ ads to get clues
about their new products. They buy competing new products, take them apart to see how they work,
analyze their sales, and decide whether they should bring out a new product of their own. Other idea
sources include trade magazines, shows, and seminars; government agencies; advertising agencies;
marketing research firms; university and commercial laboratories; and inventors. Another most
important source of new-product ideas are customers. The company can analyze customer questions
and complaints to find new products that better solve consumer problems. Or it can invite customers
to share suggestions and ideas.
Crowdsourcing :Many companies are now developing crowdsourcing or open-innovation
newproduct idea programs. Crowdsourcing throws the innovation doors wide open, inviting broad
communities of people customers, employees, independent scientists and researchers, and even the
public at large into the new-product innovation process.
2) Idea Screening
The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding
stages is to reduce that number. The first idea-reducing stage is idea screening, which helps spot
good ideas and drop poor ones as soon as possible. Product development costs rise greatly in later
stages, so the company wants to go ahead only with those product ideas that will turn into profitable
products. It makes some rough estimates of market size, product price, development time and costs,
manufacturing costs, and rate of return.
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3) Concept Development and Testing
An attractive idea must be developed into a product concept. It is important to distinguish between
a product idea, a product concept, and a product image. A product idea is an idea for a possible
product that the company can see itself offering to the market. A product concept is a detailed
version of the idea stated in meaningful consumer terms. A product image is the way consumers
perceive an actual or potential product.
In concept development different concepts about products will be developed, depending upon
different criterias. Ex: for developing of electric car, the different concepts are An affordably priced
midsize car as family car, A mid-priced sporty compact car for young singles and couples. A “green”
car appealing to environmentally consciousness i.e. low-polluting transportation. A high-end
midsize utility vehicle.
Concept Testing : Concept testing calls for testing new-product concepts with groups of target
consumers. The concepts may be presented to consumers symbolically or physically. Many firms
routinely test new-product concepts with consumers before attempting to turn them into actual new
4) Marketing Strategy Development
It is designing an initial marketing strategy for introducing the product into the market. The
marketing strategy statement consists of three parts. The first part describes the target market; the
planned value proposition; and the sales, market share, and profit goals for the first few years. For
example for above car concepts the marketing strategies are:
* The target market is younger, well-educated, moderate- to high-income individuals, couples, or
small families seeking practical, environmentally responsible transportation.
* The car will be positioned as more fun to drive and less polluting than today’s internal combustion
engine or hybrid cars.
* The company will aim to sell 50,000 cars in the first year, at a loss of not more than $15 million. In
* The second part of the marketing strategy statement outlines the product’s planned price,
distribution, and marketing budget for the first year:
5) Business Analysis
Business analysis involves a review of the sales, costs, and profit projections for a new product to
find out whether they satisfy the company’s objectives. If they do, the product can move to the
product development stage.
To estimate sales, the company might look at the sales history of similar products and conduct
market surveys. It can then estimate minimum and maximum sales to assess the range of risk. After
preparing the sales forecast, management can estimate the expected costs and profits for the product,
including marketing, R&D, operations, accounting, and finance costs. The company then uses the
sales and costs figures to analyze the new product’s financial attractiveness.
6) Product Development
Here, R&D or engineering develops the product concept into a physical product. This step, require
huge investment. It will show whether the product idea can be turned into a workable product. The
R&D department a prototype which may take days, weeks, months, or even years depending on the
product and prototype methods. Often, products undergo rigorous tests to make sure that they
perform safely and effectively. Marketers often involve actual customers in product testing.
7) Test Marketing : Test marketing is the stage at which the product and its proposed marketing
program are introduced into realistic market settings. It is actually launched and marketed in few
selected cities, towns and territories. Test marketing gives the marketer experience with marketing a
product before going to the great expense of full introduction. It lets the company test the product
and its entire marketing program, targeting and positioning strategy, advertising, distribution,
pricing, branding and packaging, and budget levels. Test marketing is time consuming and costs
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high. However, when introducing a new product requires a big investment, when the risks are high,
or when management is not sure of the product or its marketing program, a company may do a lot of
test marketing. Ex: KFC conducted more than three years of product and market testing before
rolling out its major new Kentucky Grilled Chicken product.
As an alternative to extensive and costly standard test markets, companies can use controlled test
markets or simulated test markets. In controlled test markets, such newproducts and tactics are tested
among controlled groups of customers and stores. In each Behavior Scan market, maintains a panel
of shoppers who report all of their purchases by showing an identification card at checkout in
participating stores. By combining information on each consumer’s purchases with consumer
demographic and TV viewing information, BehaviorScan can provide store-by-store, week-by-week
reports on the sales of tested products. Such controlled test markets usually cost much less than
standard test markets and can provide accurate forecasts in as little as 12 to 24 weeks.
Test marketing gives management the information needed to make a final decision about whether to
launch the new product. If the company goes ahead with commercialization i.e. introducing the new
product into the market. The company mayspend hundreds of millions of dollars for advertising,
sales promotion, and other marketing efforts in the first year.
The company launching a new product must first decide on introduction timing. If the economy is
down, the company may wait until. Next, the company must decide where to launch the new product,
in a single location, a region, the national market, or the international market.
Figure shows a typical product life cycle (PLC), the course
that a product’s sales and profits take over its lifetime. The
PLC has five distinct stages:
1. Product development begins when the company finds and
develops a new-product idea. During product development,
sales are zero, and the company’s investment costs mount.
2. Introduction is a period of slow sales growth as the
product is introduced in the market. Profits are nonexistent in this stage because of the heavy
expenses of product introduction. The introduction stage starts when a new product is first launched.
Introduction takes time, and sales growth is apt to be slow. In this stage, as compared to other stages,
profits are negative or low because of the low sales and high distribution and promotion expenses.
Much money is needed to attract distributors and build their inventories. Promotion spending is
relatively high to inform consumers of the new product and get them to try it. These firms focus their
selling on those buyers who are the most ready to buy.
3. Growth is a period of rapid market acceptance and increasing profits. If the new product satisfies
the market, it will enter a growth stage, in which sales will start climbing quickly. Companies have
opportunities to make profit but, new competitors will enter the market. The increase in competitors
leads to profit slow down. So companies keep their promotion spending at the same or a slightly
higher level. Educating the market remains a goal, but now the company must also meet the
competition. Profits increase during the growth stage as promotion costs are spread over a large
volume and as unit manufacturing costs decrease.
4. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by
most potential buyers. Profits level off or decline because of increased marketing outlays to defend
the product against competition. The slowdown in sales results in many producers with many
products to sell, greater competition. Competitors begin marking down prices, increasing their
advertising & sales promotions, & upping their product development budgets to find better versions
of the product. Some of the weaker competitors start dropping out, & only well-established
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competitors remain in the industry. Companies should consider modifying the market, product, &
5. Decline is the period when sales fall off and profits drop. In decline stage sales may plunge to
zero, or they may drop to a low level where they continue for many years. Sales decline for many
reasons, including technological advances, shifts in consumer tastes, and increased competition. As
sales and profits decline, some firms withdraw from the market. Carrying a weak product can be very
costly, take up too much of management’s time, requires advertising and sales force attention, lead to
failing reputation and weakens the company’s foothold on the future. For these reasons, companies
need to pay more attention to their aging products. Then management must decide whether to
maintain, harvest, or drop each of these declining products.
Not all products follow all five stages of the PLC. Some products are introduced and die quickly;
others stay in the mature stage for a long, long time. Some enter the decline stage. A company’s
products are born, grow, mature, and then decline, just as living things do. To remain vital, the firm
must continually develop new products and manage them effectively through their life cycles.
The PLC concept also can be applied to what are known as styles, fashions, and fads. Their special
life cycles are shown in Figure
Style is a basic and distinctive mode of expression. For example, styles appear in homes, clothing
(formal, casual), and art. Once a style is invented, it may last for generations, passing in and out of
vogue. A style has a cycle showing several periods of renewed interest.
A fashion is a currently accepted or popular style in a given field. Fashions tend to grow slowly,
remain popular for a while, and then decline slowly.
Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate
product or brand popularity. The fad may comprise a brand’s or products entire life cycle.
Price is the amount of money charged for a product or a service; the sum of the values that
customers exchange for the benefits of having or using the product or service. Price has been the
major factor affecting buyer choice. Price is the only element in the marketing mix that produces
revenue; all other elements represent costs. Price is also one of the most flexible marketing mix
elements. Unlike product features and channel commitments, prices can be changed quickly. At the
same time, pricing is the number-one problem facing many marketing executives, and many
companies do not handle pricing well.
Major Pricing Strategies: Customer perceptions of the product’s value set the ceiling for prices. If
customers perceive that the product’s price is greater than its value, they will not buy the product.
Product costs set the floor for prices. If the company prices the product below its costs, the
company’s profits will suffer. In setting its price between these two extremes(ceiling and floor), the
company must consider several internal and external factors, including competitors’ strategies and
prices, the overall marketing strategy and mix, and the nature of the market and demand.
Customer Value-Based Pricing: It uses buyers’ perceptions of value, not the seller’s cost, as the
key to pricing. Value-based pricing means that the marketer cannot design a product and marketing
program & then set the price. Price is considered along with all other marketing mix variables before
the marketing program is set.
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Good-Value Pricing: Marketers have adopted this strategies offering the right combination of
quality and good service at a fair price.
Value-Added Pricing: Attaching value-added features and services to differentiate company’s
offers and to support charging higher prices.
Cost-based pricing involves setting prices based on the costs for producing, distributing, and selling
the product plus a fair rate of return for its effort and risk.
Cost-Plus Pricing : it is simplest pricing method(markup pricing)—adding a standard markup to
the cost of the product.
Competition-Based Pricing : It involves setting prices based on competitors’ strategies, costs,
prices, and market offerings.
New-Product Pricing Strategies
Pricing strategies usually change as the product passes through its life cycle. The introductory stage
is especially challenging. Companies bringing out a new product face the challenge of setting prices
for the first time. They can choose between two broad strategies: market-skimming pricing and
Market-Skimming Pricing : Many companies that invent new products set high initial prices to
“skim” revenues layer by layer from the market. Apple frequently uses this strategy, called market-
skimming pricing (or price skimming). When Apple first introduced the iPhone, its initial price
was as much as $599 per phone. The phones were purchased only by customers who really could
afford to pay a high price for it. Six months later, Apple dropped the price to $399 for an 8GB model
and $499 for the 16GB model to attract new buyers. Within a year, it dropped prices again to $199
and $299, respectively, and you
can now buy an 8GB model for $99. In this way, Apple skimmed the maximum amount of revenue
from the various segments of the market. Market skimming makes sense only under certain
conditions. First, the product’s quality and image must support its higher price, and enough buyers
must want the product at that price. Second, the costs of producing a smaller volume cannot be so
high that they cancel the advantage of charging more. Finally, competitors should not be able to enter
the market easily and undercut the high price.
Companies set a low initial price to penetrate the market quickly and deeply to attract a large number
of buyers quickly and win a large market share. The high sales volume results in falling costs,
allowing companies to cut their prices even further. For example, the giant Swedish retailer IKEA
used penetration pricing to boost its success in the Chinese market.
FACTORS AFFECTING PRICING
Unlike other elements of the marketing mix, price is the only one, which generates revenue. It is,
therefore, very important to set appropriate export prices based on:
• Company internal factors
• Market factors
• Environmental factors. Nevertheless, the traditional approach has often been to: "Take the
domestic product price, add insurance and freight, put in a hefty cushion for contingencies
Company & Product Factors:
•Corporate and marketing objectives
• Firm and product positioning
• Product range, life cycle, substitutes, product differentiation and unique selling propositions
• Cost structures, manufacturing, experience effect and economies of scale
• Marketing, product development
• Available resources
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• Shipping costs
• Consumers perceptions, expectations and ability to pay
• Need for product adaptation, market servicing
• Market structure, distribution channels discounting pressures
• Market growth, demand elasticities
• Need for credit
• Competition objectives, strategies and strengths
• Government influences and constraints
• Currency fluctuations
• Business cycle stage, level of inflation
• Use of non-money payment and leasing
 Product Line Pricing: Setting the price steps between various products in a product line based
on cost differences between the products, customer evaluations of different features and
 Optional Product Pricing: Optional product pricing is offering to sell optional or accessory
products along with the main product. For example, a car buyer may choose Bluetooth wireless
communication. And when you order a new PC, you can select hard drives, docking systems,
software options, and service plans.
 Captive Product Pricing: Setting a price for products that must be used along with a main
product. Ex: of captive products are razor blade cartridges,videogames, and printer cartridges.
Producers of the main products often price them low and set high markups on the supplies.
 By-Product Pricing : Setting price for by-products in order to make the main product’s price
 Product Bundle Pricing : Combining several products and offer the bundle at a reduced price.
For example, fast-food restaurants bundle a burger, fries, and a soft drink at a “combo” price.
Price bundling can promote the sales of products consumers might not otherwise buy, but the
combined price must be low enough to get them to buy the bundle.
 Discount and Allowance Pricing : Discount is a straight reduction in price on purchase during a
stated period of time. The many forms of discounts include a cash discount, a price reduction to
buyers who pay their bills promptly. A quantity discount is a price reduction to buyers who buy
large volumes. A seasonal discount is a price reduction to buyers who buy merchandise or
services out of season.
 Segmented Pricing : Companies will often adjust their basic prices to allow for differences in
customers, products, and locations. In segmented pricing, the company sells a product or service
at two or more prices, even though the difference in prices is not based on differences in costs.
Ex: In Museums & theaters, may charge a lower admission for students and senior citizens.
 Psychological Pricing : In using psychological pricing, sellers consider the psychology of
prices, not simply the economics. For example, consumers usually perceive higher-priced
products as having higher quality. When they can judge the quality of a product by examining it
or by calling on past experience with it, they use price less to judge quality.
 Promotional Pricing: With promotional pricing, companies will temporarily price their
products below list price and sometimes even below cost to create buying excitement and
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urgency. Promotional pricing takes several forms. A seller may simply offer discounts from
normal prices to increase sales and reduce inventories. Manufacturers sometimes offer cash
rebates to consumers who buy the product from dealers within a specified time; the manufacturer
sends the rebate directly to the customer. Rebates have been popular with automakers and
producers of cell phones and small appliances, but they are also used with consumer packaged
goods. Some manufacturers offer lowinterest financing, longer warranties, or free maintenance
to reduce the consumer’s “price.”
 Geographical Pricing : Acompany also must decide how to price its products for customers
located in different parts of the country or the world. Should the company risk losing the business
of more-distant customers by charging them higher prices to cover the higher shipping costs? Or
should the company charge all customers the same prices regardless of location? Different
Geographical pricing strategies are given below
 FOB-origin pricing, this practice means that the goods are placed free on board (hence, FOB) a
carrier. At that point the title and responsibility pass to the customer, who pays the freight from
the factory to the destination. Ex: For a company with 3 customers Customer A (Atlanta),
Customer B (Bloomington, Indiana), and Customer C (Compton, California). All three customers
would pay the same factory price of $10,000, with Customer A paying, say, $100 for shipping;
Customer B, $150; and Customer C, $250.
 Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same
price plus freight to all customers, regardless of their location.
 Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets
up two or more zones. All customers within a given zone pay a single total price; the more
distant the zone, the higher the price.
 Dynamic Pricing : Dynamic pricing is adjusting prices continually to meet the characteristics
and needs of individual customers and situations.
 International Pricing :Companies that market their products internationally must decide what
prices to charge in the different countries in which they operate.
Producing a product or service and making it available to buyers requires building relationships not
only with customers but also with key suppliers and resellers in the company’s supply chain. This
supply chain consists of upstream and downstream partners. Upstream from the company is the set of
firms that supply the raw materials, components, parts, information, finances, and expertise needed
to create a product or service. Downstream marketing channel partners, such as wholesalers and
retailers, form a vital connection between the firm and its customers.
The Nature and Importance of Marketing Channels
Marketing channel (or distribution channel) is a set of interdependent organizations that help to
make a product or service available for use or consumption by the consumer or business user.
A company’s sales force and communications decisions depend on how much persuasion, training,
motivation, and support its channel partners need.
Distribution channel decisions often involve long-term commitments to other firms. For example,
companies such as Ford, McDonald’s, or HP can easily change their advertising, pricing, or
promotion programs. They can scrap old products and introduce new ones as market tastes demand.
But when they set up distribution channels through contracts with franchisees, independent dealers,
or large retailers, they cannot readily replace these channels with company-owned stores orWeb sites
if the conditions change. Therefore, management must design its channels carefully, with an eye on
both tomorrow’s likely selling environment and today’s.
How Channel Members Add Value
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Producers use intermediaries because they create greater efficiency in making goods available to
target markets. Through their contacts, experience, specialization, and scale of operation,
intermediaries usually offer the firm more than it can achieve on its own.
Figure shows how using intermediaries can provide economies. Figure A shows three
manufacturers, each using direct marketing to reach three customers. This system requires nine
different contacts. Figure B shows the three manufacturers working through one distributor, which
contacts the three customers. This system requires only six contacts. In this way, intermediaries
reduce the amount of work that must be done by both producers and consumers.
The role of marketing intermediaries is to transform the assortments of products made by producers
into the assortments wanted by consumers. Producers make narrow assortments of products in large
quantities, but consumers want broad assortments of products in small quantities. Marketing channel
members buy large quantities from many producers and break them down into the smaller quantities
and broader assortments desired by consumers. Thus, intermediaries play an important role in
matching supply and demand. In making products & services available to consumers, channel
members add value by bridging the major time, place, & possession gaps that separate goods and
services from those who use them. Members of the marketing channel perform many key
functions. Which are given below
• Information: Gathering and distributing marketing research and intelligence information about
actors and forces in the marketing environment needed for planning and aiding exchange.
• Promotion: Developing and spreading persuasive communications about an offer.
• Contact: Finding and communicating with prospective buyers.
• Matching: Shaping and fitting the offer to the buyer’s needs, including activities such as
manufacturing, grading, assembling, and packaging.
Negotiation: Reaching an agreement on price and other terms of the offer so that ownership or
possession can be transferred.
• Physical distribution: Transporting and storing goods.
• Financing: Acquiring and using funds to cover the costs of the channel work.
• Risk taking: Assuming the risks of carrying out the channel work.
Number of Channel Levels
Companies can design their distribution channels to make products and services available to
customers in different ways. Channel level is a layer of intermediaries that performs some work in
bringing the product and its ownership closer to the final buyer. The number of intermediary levels
indicates the length of a channel.
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Figure A shows several consumer distribution channels of different lengths. Channel 1, called a
direct marketing channel, has no intermediary levels; the company sells directly to consumers.
For example, Mary Kay Cosmetics and Amway sell their products door-to-door, through home and
office sales parties, and on the Internet; GEICO sells insurance direct via the telephone and the
Internet. The remaining channels in Figure are indirect marketing channels, containing one or
Figure B shows some common business distribution channels. The business marketer can use its own
sales force to sell directly to business customers. Or it can sell to various types of intermediaries,
who in turn sell to these customers. Consumer and business marketing channels with even more
levels can sometimes be found, but these are less common. From the producer’s point of view, a
greater number of levels means less control and greater channel complexity. Moreover, all the
institutions in the channel are connected by several types of flows. These include the physical flow of
products, the flow of ownership, the payment flow, the information flow, and the promotion flow.
These flows can make even channels with only one or a few levels very complex.
Channel Behavior and Organization
Channel Behavior : Each channel member depends on the others. For example, a Ford dealer
depends on Ford to design cars that meet customer needs. In turn, Ford depends on the dealer to
attract customers, persuade them to buy Ford cars, and service the cars after the sale. Each Ford
dealer also depends on other dealers to provide good sales and service that will uphold the brand’s
reputation. In fact, the success of individual Ford dealers depends on how well the entire Ford
marketing channel competes with the channels of other auto manufacturers. Each channel member
plays a specialized role in the channel. Ideally, because the success of individual channel members
depends on overall channel success, all channel firms should work together smoothly. They should
understand and accept their roles, coordinate their activities, and cooperate to attain overall channel
goals. However, individual channel members rarely take such a broad view. Cooperating to achieve
overall channel goals sometimes means giving up individual company goals. Although channel
members depend on one another, they often act alone in their own shortrun best interests. They often
disagree on who should do what and for what rewards. Such disagreements over goals, roles, and
rewards generate channel conflict. Channel conflict is disagreement among marketing channel
members on goals, roles, and rewards who should do what and for what rewards.
Vertical Marketing Systems
For the channel as a whole to perform well, each channel member’s role must be specified, and
channel conflict must be managed. The channel will perform better if it includes a firm, agency, or
mechanism that provides leadership and has the power to assign roles and manage conflict.
Historically, conventional distribution channels have lacked such leadership and power, often
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resulting in damaging conflict and poor performance. One of the biggest channel developments over
the years has been the emergence of vertical marketing systems that provide channel leadership.
Figure contrasts the two types of channel arrangements. A conventional distribution channel
consists of one or more independent producers, wholesalers, and retailers. Each is a separate business
seeking to maximize its own profits, perhaps even at the expense of the system as a whole. No
channel member has much control over the other members, and no formal means exists for assigning
roles and resolving channel conflict. In contrast, a vertical marketing system (VMS) consists of
producers, wholesalers, and retailers acting as a unified system. One channel member owns the
others, has contracts with them, or wields so much power that they must all cooperate. The VMS can
be dominated by the producer, the wholesaler, or the retailer.
Horizontal Marketing Systems
It is in which two or more companies at one level join together to follow a new marketing
opportunity. By working together, companies can combine their financial, production, or marketing
resources to accomplish more than any one company could alone. Companies might join forces with
competitors or noncompetitors. They might work with each other on a temporary or permanent basis,
or they may create a separate company. For example, McDonald’s places “express” versions of its
restaurants in Walmart stores. McDonald’s benefits from Walmart’s heavy store traffic, and Walmart
keeps hungry shoppers from needing to go elsewhere to eat.
Multichannel Distribution Systems
Multichannel marketing occurs when a single firm sets up two or more marketing channels to reach
one or more customer segments. The use of multichannel systems has increased greatly in recent
Figure shows a
system. In the figure, the
producer sells directly to
consumer segment 1
telemarketing, and the
Internet and reaches
consumer and segment 2
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It sells indirectly to business segment 1 through distributors and dealers and to business segment 2
through its own sales force.
These days, almost every large company and many small ones distribute through multiple channels.
Multichannel distribution systems offer many advantages to companies facing large and complex
markets. With each new channel, the company expands its sales and market coverage and
gainsopportunities to tailor its products and services to the specific needs of diverse customer
segments. But such multichannel systems are harder to control, and they generate conflict as more
channels compete for customers and sales.
Number of Marketing Intermediaries
Companies must also determine the number of channel members to use at each level. Three
strategies are available: intensive distribution, exclusive distribution, and selective distribution.
Producers of convenience products and common raw materials typically seek intensive distribution.
It is a strategy in which they stock their products in as many outlets as possible. These products must
be available where and when consumers want them. For example, toothpaste, candy, and other
similar items are sold in millions of outlets to provide maximum brand exposure and consumer
Some producers purposely limit the number of intermediaries handling their products. The extreme
form of this practice is exclusive distribution, in which the producer gives only a limited number of
dealers the exclusive right to distribute its products in their territories. Exclusive distribution is often
found in the distribution of luxury brands. For example, exclusive Bentley automobiles are typically
sold by only a handful of authorized dealers in any given market area. By granting exclusive
distribution, Bentley gains stronger dealer selling support and more control over dealer prices,
promotion, and services. Exclusive distribution also enhances the brand’s image and allows for
In selective distribution, the use of more than one but fewer than all the intermediaries who are
willing to carry a company’s products. Most television, furniture, and home appliance brands are
distributed in this manner. For example, Whirlpool and GE sell their major appliances through dealer
networks and selected large retailers. By using selective distribution, they can develop good working
relationships with selected channel members and expect a better-than-average selling effort.
Selective distribution gives producers good market coverage with more control and less cost than
does intensive distribution.
Retailing : Retailing includes all the activities involved in selling products or services directly to
final consumers for their personal, nonbusiness use.
Wholesaling : Wholesaling includes all the activities involved in selling goods and services to those
buying for resale or business use. Firms engaged primarily in wholesaling activities are called
The Promotion Mix
A company’s total promotion mix also called its marketing communications mix consists of the
specific blend of advertising, public relations, personal selling, sales promotion, and direct-marketing
tools that the company uses to persuasively communicate customer value and build customer
relationships. The five major promotion tools are defined as follows:
• Advertising: Any paid form of nonpersonal presentation and promotion of ideas, goods, or services
by an identified sponsor. It includes broadcast, print, Internet, outdoor, and other
• Sales promotion: Short-term incentives to encourage the purchase or sale of a product or service.
It includes discounts, coupons, displays, and demonstrations.
• Personal selling: Personal presentation by the firm’s sales force for the purpose of making sales
and building customer relationships.It includes sales presentations, trade shows, and incentive
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• Public relations: Building good relations with the company’s various publics by obtaining
favorable publicity, building up a good corporate image, and handling or heading off unfavorable
rumors, stories, and events. It includes press releases, sponsorships, special events, and Web pages
• Direct marketing: Direct connections with carefully targeted individual consumers to both obtain
an immediate response and cultivate lasting customer relationships. It includes catalogs, telephone
marketing, kiosks, the Internet, mobile marketing, and more.