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  1. 1. 1.1 Definition and Evolution of Markets.the term market refers to the group of consumers or organizations that is interested in the product, hasthe resources to purchase the product, and is permitted by law and other regulations to acquire development process: 1. Establish market development aims and targets. 2. Identify target market(s), sectors and niches. 3. Assess your existing sales organisation and develop it as necessary. 4. Source/utilise a suitable prospect database - ensure data is clean and up to date, and strategic decision-makers are identified. 5. Develop and agree your strategic proposition(s) - with reference to USPs, UPBs, competitors, positioning, product mix, margins, etc. 6. Design your communication(s) and method(s) to generate enquiries. 7. Design your response and sales processes and establish or provide required capabilities. 8. Design and provide your required monitoring, measurement and reporting systems. 9. Implement your sales development activity and reinforce it through coaching, training, meetings, executive endorsement, etc. 10. Follow-up the activity: coach as required, review, monitor, seek customer and prospect feedback (successful and unsuccessful) and report on performance. 11. Make changes and improvements and continue your activity at the appropriate stage.What is a MarketIn the words of Cournot, French Economist, ―Economists understand by the term market not anyparticular market place in which things are bought and sold but the whole of any region inwhich buyers and seller’s are in such free inter course with one another that the prices of samegoods & services tend to equality easily and quickly”. Thus Market is a real or imaginary placewhere goods and services are traded.Essentials of Market 1. Good or service to be traded. 2. Buyers and sellers 3. A place, be it with real boundaries or imaginary (like world market) 4. Contact between buyers and sellersMarkets, on the basis of goods or services traded between, can be classified as goods orcommodity market or it can be factor market for services. However, the popular basis of marketstructure is the factors that form the environment of market.Market Environment
  2. 2. The following are the main factors that form the environment of market and the markets areusually classified on the basis of these factors. 1. The number of buyers and sellers. 2. The nature of product produced. Whether it is homogenous or differentiated ? 3. Price elasticity of demand. 4. Ease of entry into an industry. 5. Degree of control over price (Regulated or deregulated).Classification of MarketOn the basis of the above, the markets are classified to be 1. Perfect Competition 2. Imperfect Competition1. Perfect Competition 1. Large no of sellers & buyers number 2. Homogeneous products perfectly 3. Free entry and exit. 4. Perfect knowledge of price cost (no control over price) 5. Perfectly price elastic demand imperfect competition.2. Imperfect Competition Monoplistic Competition Oligopoly Monoply Monopolistic Competition 1. Large no of sellers and buyers 2. Differentiated products which are close substitute. 3. Free entry but firms can produce only close substitutes. 4. Some control our price. 5. Less than perfectly price elastic demand. Oligopoly 1. Few producers 2. Homogenous (Pure Oligopoly) and differentiated but close substitutes (Differentiated Oligopoly) 3. Barriers to entry 4. Small control (Pure Oligopoly) large control (Differentiated Oligopoly) over price 5. P.E of D. small (Pure Oligopoly) large (Differentiated Oligopoly)
  3. 3. Monopoly 1. Single firm 2. Perfectly differentiated product without close substitute 3. Very strong barriers to entry 4. Extreme control over price 5. Near to in elastic price elasticity of demandWhat is Marketing Strategic PlanningMarketing Strategic Planning means to plan all the activities of a business to ensure competitiveadvantages and profitability. Marketing Strategic planning involves adapting the firm to takeadvantage of opportunities in its constantly changing marketing environment.Marketing Strategic planning engages a firm to take advantages from the available opportunitiesin frequently changing marketing environment.Steps in Marketing Strategic PlanningFollowing are the steps in marketing strategic planning 1. Defining The Company Mission 2. Setting Company Objective and Goals 3. Establishing Strategic Units (SBUs) 4. Performing Situational Analysis 5. Developing Marketing Strategy 6. Implementing Planning 7. Feed back1. Defining the Company Mission StatementFrist step in marketing strategic planning is defining the company mission statement. Missionstatement a statement of organization‘s purpose, what it wants to accomplish in the largerenvironment. The mission statement should be base on the following facts that it should be: Market oriented rather than product oriented Realistic Specific Fit the market environment Base on its distinctive competencies Motivating2. Company Objectives and GoalsAfter to define company‘s mission, the second step in marketing strategic planning is thecompany objectives and goals for each level of management, and the managers will responsible
  4. 4. to achieve them. Marketing strategies are necessary to support these marketing objectives. Ifincrease its market shares, the company should increase its products availability and promotion.To take place in new markets it should cut its prices. The company‘s mission is translated into aset of objectives for the current period.The objectives should be Specific and stated AchievableFor example ―To increase our market share to 10% in one year‖3. Establishing Strategic Business UnitsMost companies operate several businesses. A business must be viewed as a customer satisfyingprocess, not a goods producing process. A business can be defined in three dimensions CustomerGroup, Customer Needs & Technology. Large companies manage variety of businesses for eachbusiness a strategy is needed. For instance there are 49 Strategic Business Units of GeneralElectronic and there are three main characteristics of every SBU. It is single business or collection of related business that can be planned separately the rest of the company. It has it own set of competitors. It has a manager who is responsible for strategic planning and profit performance.4. Performing Situation AnalysisPerforming situation analysis is the fourth step of marketing strategic planning. In performingsituation analysis a business analyze both internal and external environment. Internal Environment Each Business needs to evaluate its internal environment (Strengths and weaknesses) periodically. A company management or consultant review marketing, financial, manufacturing and organizational competitors and evaluate each factor as a major or minor strength and major or minor weakness. External Environment In External Environment the company analysis (opportunities & Threats), once the company examine its opportunities & threats which facing a specific business unit, it characterized it business in four outcomes business overall attractiveness. 1. An ideal business is high in opportunities and low in threats. 2. A speculative business in both major opportunities and threats. 3. A mature business is low in major opportunities and low in threats.
  5. 5. 4. A troubled business is low in opportunities and high in threats.5. Marketing StrategyStrategy is the fifth setp of marketing strategic planning. Strategy is a game plan for getting theobjectives. Every business must plan a strategy and achieve its objectives. Consisting of allmarketing strategy and compatible technology strategy and sourcing strategy. Types of Marketing Strategy Overall Cost Leadership In this strategy the business work hard for low production and distribution cost. So it price lower and win market share. Differentiation The businesses try to achieve superior performance in an important customers benefits area valued by large part of market. Focus Here business focuses one or more narrow market segments. The firm gets to know these segments either cost leadership or differentiation within the target segment.6. Implementing PlanningA clear strategy may be useless if the firm fails to implement it carefully. In this stage managerswill work a lot and get work from their subordinates. Successful marketing implementationdepends on who well the company blends its people, organization structure, decision and rewardsystem, and company culture into a cohesive action program that supports its strategies. Thecompany‘s formal organization structure plays an important role in implementation marketingstrategy. The best example is Mckinesy 7s framework for successful implementation.7. Feedback of Marketing Strategic PlanningAfter implementing its strategy the firm needs to track the result and monitor new developmentsin external and internal environment.1.3 Functions of Marketing.Basic Functions of MarketingThe marketing process performs certain activities as the goods or services move from producerto consumer. Every firm does not perform all these activities or jobs. However, any company
  6. 6. that wants to operate its marketing system successfully must carry them out. The followingmarketing tasks have been recognized for a long time.1. SellingIt is core of marketing. It is concerned with the persuasion of prospective buyers to actuallycomplete the purchase of an article. Setting pays an important part in realizing the ultimate aimof earning profit. Selling is enhanced by means of personal selling, advertising, publicity andsales promotion.2. BuyingIt involves what to buy, what quality, how much, from whom, when and at, what price. People inbusiness buy to increase sales or to decrease costs. Purchasing agents are much influenced byquality, service and price. The products that the retailers buy for resale are determined by theneed and preferences of their customers.3. TransportationTransport is the physical means whereby goods are moved from the places where they areproduced to those they are needed for consumption. Transportation is essential from theprocurement of raw materials to the delivery of finished products to the customers places.Marketing relies mainly on railroads, tracks, waterways, pipelines and air transport. The type oftransportation is chosen on several consideration such as suitability, speed and cost.4. StorageIt involves the holding of goods in proper condition from the time they are produced until theyare needed by consumers (in case of finished products) or by the production department (in caseof raw materials and stores). Storing protects the goods from deterioration and helps in carryingover surplus for feature consumption or use in production. Goods may be stored in variouswarehouses situated at different places. Storing assumes greater importance when production isseasonal or consumption may be seasonal. Retail firms are called ―stores‖.5. Standardization and GradingThe other activities that facilitate marketing are standardization and grading. Standardizationmeans establishment of certain standards or specifications for products based on intrinsicphysical qualities of any commodity. This may involved quantity (weight or size) or it mayinvolve quality (colour, shape, appearance, material, taste, sweetness etc). Government may alsoset some standards e.g., in case of agricultural products. A standard conveys a uniformity of theproducts.―Grading means classification of standardized products into certain well-defined classes orgroups.‖ It involves the division of products into clauses made up of unit processing similarcharacteristics of size and quality. Grading is very important for ―raw material‖ (such as fruitsand cerials), mining products‖ (such as coal, iron-ore and mangenese) and ―forest products‖(such as timber). Branded consumer products may bear grade levels, – A B C.6. FinancingIt involves the use of capital to meet financial requirements of the agencies dealing with various
  7. 7. activities of marketing. The services of providing the credit and money needed to meet the costof getting merchandise into the hands of the final user is commonly referred to as finance,function in marketing. In marketing, finances are needed for working capital and fixed capital,which may be secured from three sources – onward capital, bank loans and advances, and tradecredit (provided by the manufactures to wholesaler and by the wholesaler to the retailers).7. Risk TakingRisk means lose due to some unforeseen circumstances in future. Risk-bearing in marketingrefers to the financial risk inherent in the ownership of goods held for an anticipated demand,including the possible losses due to a fall in price and the losses from spoilage, depreciation,obsolescence, fire and floods or any other loss that may occur with the passage of time. Fromproduction of goods to its selling stage, many risks are involved due to changes in markerconditions, natural causes and human factors. Changes in fashions or interventions also causerisks. Legislative measures of the government may also cause risks.8. Market InformationThe only sound foundation, on which marketing decisions may be based, is correct and timelymarket information. Right facts and information reduce the aforesaid risks and thereby result incost reduction. Business firms collect, analyze and interpret facts and information from internalsources, such as records, sales people and findings of the market research department. They alsoseek facts and information from external sources, such as business publications, governmentreports and commercial research firms. Retailers need to know about sources of supply and alsoabout customers buying motives and buying habits. Manufacturers need to know about retailersand about advertising media. Firms in both these groups need information about competitorsactivities and about their markets. Even ultimate consumers need market information aboutavailability of products, their quality standards, their prices, and also about the after-sale servicefacility Common sources for consumers are sales people, media advertisements, colleagues etc.It may be noted that in addition to the mentioned jobs, the marketing manager is also involved inproduct planning, pricing of products, selection of distribution channels, framing of marketingobjectives, environmental scanning, target market selection, market programming anddeveloping marketing strategy.Modern Concepts of Marketing. 1. Nature 2. Foundation 3. Importance 4. Limitation
  8. 8. 1. Naturecustomer orientationConsumer Orientation is the focus on meeting the needs of ones customers, internal or external. Thisservice establishes specific customer satisfaction standards and actively monitors client satisfaction,taking steps to clarify and meet customer needs and expectations (both expressed and unexpressed). Atlower levels the service involves courteous and timely responsiveness to the requests of customers,while at the higher levels, it involves developing the relationship of partner and trusted advisor.Marketing researchMarketing Research is a systematic method of collecting, recording and analysing of data which is usedto solve marketing problems.A company faces many marketing problems. It faces problems about consumers, product, marketcompetition, sales promotion, etc. Marketing research helps to solve these problems. Marketingresearch is a systematic process. It first collects data (Information) about the Marketing problem.Then it records this data. Then it analysis (studies) this data. Then it draws conclusions about thisdata. After that, it gives suggestions (advice) for solving the marketing problem. So, Marketingresearch helps to solve the marketing problems quickly, correctly and systematically.Marketing research collects full information about the consumers. It finds out the needs andexpectations of the consumers. So the company produces the goods according to the needs andexpectations of the consumers. Marketing research helps the company to make its production andmarketing policies. It helps the company to introduce new products in the market. It helps toidentify new markets. Marketing research also collects full information about the competitors.The company uses this information to fight competition. It also helps the marketing manager totake decisions.Marketing research is a special branch of Marketing Management. It is the soul of Marketingmanagement. It is of recent origin and widely used by manufacturers, exporters, distributors andservice organisations.Marketing research is very systematic, scientific, objective and organised. It has a wide scope. Itincludes product research, consumer research, packaging research, pricing research, etc.Marketing research is a continuous process. It has a few limitations. However, a company cannotsurvive and succeed without Marketing research.
  9. 9. Market planningMarketing is the process of developing and implementing a plan to identify, anticipate andsatisfy consumer demand, in such a way as to make a profit. The two main elements of this planare market research to identify and anticipate customer requirements and the planning of anappropriate marketing mix to meet these requirements. Market research involves gathering andrecording information about consumers, market, product, and the competition in an organisedway. The information is then analysed and used to inform marketing decisions. There are threemain ways of gathering information for market research:1.From internal information already held by an organisation, e.g. details of existing customersand their spending habits.2. External primary information - i.e. information collected at first hand by interviewingcustomers and potential customers to get their views about a company, products and services.3. External secondary information - using published sources of information e.g. those producedby marketing organisations about products, markets and brands.Marketing planning can then be used:1. To assess how well the organisation is doing in its markets.2. To identify current strengths and weaknesses in these markets.3. To establish marketing objectivesto be achieved in these markets.4. To establish a marketing mix for each market designed to achieve organisational objectives.Service organisations like the Inland Revenue and Abbey will carry out marketing to find outabout the sort of service that their customers and clients require in order to create an appropriatemarketing plan. Manufacturing organisations like Cadbury Schweppes, Corus, Audi and Nissanwill carry out product research in order to create an appropriate marketing plan for their products(as well as associated services).A simple definition of market research is keeping those who provide goods and services in touchwith the needs and wants of those who buy the goods and services.Integrated MarketingIntegrated marketing occurs when the marketer devises marketing activities and assembles marketingprograms to create, communicate, and deliver value for consumers such that the whole isgreater than the sum of its parts. Two key themes are that (1) many different marketing activitiescan create, communicate, and deliver value and (2) marketers should design and implement anyone marketing activity with all other activities in mind.When a hospital buys an MRI from GeneralElectric s Medical Systems division, for instance, it expects good installation, maintenance, andtraining services to go with the purchase.Service MarketingIntroduction
  10. 10. The world economy nowadays is increasingly characterized as a service economy. This isprimarily due to the increasing importance and share of the service sector in the economies ofmost developed and developing countries. In fact, the growth of the service sector has long beenconsidered as indicative of a country‘s economic progress.Economic history tells us that all developing nations have invariably experienced a shift fromagriculture to industry and then to the service sector as the main stay of the economy.This shift has also brought about a change in the definition of goods and services themselves.No longer are goods considered separate from services. Rather, services now increasinglyrepresent an integral part of the product and this interconnectedness of goods and services isrepresented on a goods-services continuum.Definition and characteristics of ServicesThe American Marketing Association defines services as - ―Activities, benefits and satisfactionswhich are offered for sale or are provided in connection with the sale of goods.‖The defining characteristics of a service are:Intangibility: Services are intangible and do not have a physical existence. Hence servicescannot be touched, held, tasted or smelt. This is most defining feature of a service and that whichprimarily differentiates it from a product. Also, it poses a unique challenge to those engaged inmarketing a service as they need to attach tangible attributes to an otherwise intangible offering. 1. Heterogeneity/Variability: Given the very nature of services, each service offering is unique and cannot be exactly repeated even by the same service provider. While products can be mass produced and be homogenous the same is not true of services. eg: All burgers of a particular flavor at McDonalds are almost identical. However, the same is not true of the service rendered by the same counter staff consecutively to two customers. 2. Perishability: Services cannot be stored, saved, returned or resold once they have been used. Once rendered to a customer the service is completely consumed and cannot be delivered to another customer. eg: A customer dissatisfied with the services of a barber cannot return the service of the haircut that was rendered to him. At the most he may decide not to visit that particular barber in the future. 3. Inseparability/Simultaneity of production and consumption: This refers to the fact that services are generated and consumed within the same time frame. Eg: a haircut is delivered to and consumed by a customer simultaneously unlike, say, a takeaway burger which the customer may consume even after a few hours of purchase. Moreover, it is very difficult to separate a service from the service provider. Eg: the barber is necessarily a part of the service of a haircut that he is delivering to his customer.Types of Services 1. Core Services: A service that is the primary purpose of the transaction. Eg: a haircut or the services of lawyer or teacher.
  11. 11. 2. Supplementary Services: Services that are rendered as a corollary to the sale of a tangible product. Eg: Home delivery options offered by restaurants above a minimum bill value.Difference between Goods and ServicesGiven below are the fundamental differences between physical goods and services: Goods Services A physical commodity A process or activity Tangible Intangible Homogenous Heterogeneous Production and distribution are separation from Production, distribution and consumption are their consumption simultaneous processes Can be stored Cannot be stored Transfer of ownership is possible Transfer of ownership is not possibleServices marketingServices marketing is a sub field of marketing, which can be split into the two main areas ofgoods marketing (which includes the marketing of fast moving consumer goods (FMCG) anddurables) and services marketing. Services marketing typically refers to both business toconsumer (B2C) and business to business (B2B) services, and includes marketing of services liketelecommunications services, financial services, all types of hospitality services, car rentalservices, air travel, health care services and professional services. The range of approaches andexpressions of a marketing idea developed with the hope that it be effective in conveying theideas to the diverse population of people who receive it.Services are economic activities offered by one party to another. Often time-based, performancesbring about desired results to recipients, objects, or other assets for which purchasers haveresponsibility. In exchange for money, time, and effort, service customers expect value from
  12. 12. access to goods, labor, professional skills, facilities, networks, and systems; but they do notnormally take ownership of any of the physical elements involved.[1]There has been a long academic debate on what makes services different from goods. Thehistorical perspective in the late-eighteen and early-nineteenth centuries focused on creation andpossession of wealth. Classical economists contended that goods were objects of value overwhich ownership rights could be established and exchanged. Ownership implied tangiblepossession of an object that had been acquired through purchase, barter or gift from the produceror previous owner and was legally identifiable as the property of the current owner.Adam Smith‘s famous book, The Wealth of Nations, published in Great Britain in 1776,distinguished between the outputs of what he termed ―productive‖ and ―unproductive‖ labor. Theformer, he stated, produced goods that could be stored after production and subsequentlyexchanged for money or other items of value. But unproductive labor, however‖honorable,...useful, or... necessary‖ created services that perished at the time of production andtherefore didn‘t contribute to wealth. Building on this theme, French economist Jean-BaptisteSay argued that production and consumption were inseparable in services, coining the term―immaterial products‖ to describe them.Characteristics of Services
  13. 13. Classification of Services It is required to design & apply marketing techniques tocompletely satisfy the customer & increase profits & identifynew emerging services.Classifications can be done on following basis: • Classification by Industry • Classification by Target Effect • Skill level of service provider (Professional/ Nonprofessional) • Labor intensiveness (People-based/Equipment-based) • Degree of customer contact (High / Low)Goal of the service provider (Profit /Nonprofit)Classification By Industry a. Entertainment industry b. Education c. Telecommunications d. Finance & Insurance e. Transportation
  14. 14. f. Public utilities g. Government services h. Health i. Hospitability Industry j. Business services k. Telecommunications l. TradingProblems in Service MarketingSometimes, service-oriented industries are easier to run than product-oriented industries. Forexample, a tennis coach might experience no expenses, while a seller of tennis rackets will atleast need to buy space to store and sell the tennis rackets. However, those in service industriesrun into a variety of problems inherent to services that can be difficult to overcome. 1. Simultaneous Production and Consumption o Services are different from products in that services are produced and consumed at the same time, while products are produced and then can be consumed at a later date. For example, dance shoes are made by manufacturers and can sit on a shelf and then sit in a closet for any length of time before they are finally put on. These dance shoes are products. However, if a professional dancer produces a dance for an audience, the dancer performs the dance and the audience consumes the dance at the same time. For the service, the producer must be present to provide the service. For the dance shoes, the producer could be somewhere else, but the consumer can still use the product, the dance shoes. Inconsistency o Those selling products can make sure that their products are consistent. For example, a restaurant can use the exact same process and ingredients to create a meal that has a consistent flavor. However, services are inconsistent. Those serving the food can have varying degrees of efficiency and friendliness, depending on the skills and personality of the servers. Therefore, both business owners and business customers cannot predict the quality of delivered services.
  15. 15. Services Cant Be Stocked o Service industries have a much more difficult time managing supply and demand than product industries. If a mattress salesman cannot sell a mattress today, she can always sell it tomorrow. However, a hotel owner who doesnt book a hotel room today will forever lose the profit he would have earned from that hotel room today. Unpredictable Service Quality o Since customers cannot see the service ahead of time, they cannot always tell if they will like the service. For example, a customer will know that a wrench works after trying it out, but the customer wont know if the plumber will successfully fix the broken toilet until after the plumber arrives and tries to fix it. Professionalism Required o Customers have an easier time trusting businesses selling products than businesses selling services. If a business sells a hairbrush, customers can tell that theyre getting a hairbrush even if the vendor selling the hairbrush behaves unprofessionally. But a hairstylist must always appear professional or customers may not trust the hairstylists ability to cut hair well. Therefore, service providers must commit themselves toward behaving professionally on a much more consistent basis.Levels Of service World class service: - These are also called luxury hotels , they target top business executives, entertainment celebrities , high- ranking political figures, and wealthy clientele as their primary markets . They provide upscale restaurants and lounges , concierge services and also private dining facilities . Guestrooms are oversized , heated and plush bath towels , large soaps bars , shampoo , shower caps and all amenities . Housekeeping services are given two times a day including turn-down service . Above all luxury hotels give personalized service to the guest and have a relatively high ration of staff members to guests. Mid-Range Service: - Hotels offering mid-range service appeal ti the largest segment of the travelling public . This kind of hotels does not provide elaborate service and have a adequate staffing . They also provide uniformed service , food and beverage room service, in room entertainments and also Wi-Fi . Property may offer a speciality restaurant , coffee shop and lounge that cater to visitors as well as hotel guests . Type of guests who like to stay at these hotels are business people , individual travellers ,and families . Rates are lower than luxury hotels as they provide fewer services , smaller rooms and a smaller range of facilities and recreational activities .
  16. 16. Economy / Limited Service: These hotels provide clean , comfortable , safe , inexpensive rooms and meet the basic need of guests . Economy hotels appeal primarily to budget minded travellers who wants a room with minimum services and amenities required for comfortable stay, without unnecessary paying additional cost for costly services . The cliental of these hotels include families with children , travelling business people , backpackers , vacationers retirees etc. These type of hotels might not offer food and beverage facilities .FEATURES OF HOTEL INDUSTRYThe hospitality industry consists of companies within the food services,accommodations, recreation, and entertainment sectors.The hospitality industry is a several billion dollar industry that mostly depends onthe availability of leisure time and disposable income. A hospitality unit such as arestaurant, hotel, or even an amusement park consists of multiple groups such as facilitymaintenance, direct operations (servers, housekeepers, porters, kitchen workers,bartenders, etc.), management, marketing, and human resources.Usage rate is an important variable for the hospitality industry. Just as a factoryowner would wish to have his or her productive asset in use as much as possible (asopposed to having to pay fixed costs while the factory isnt producing), so do restaurants,hotels, and theme parks seek to maximize the number of customers they "process".In viewing various industries, "barriers to entry" by newcomers and competitiveadvantages between current players are very important. Among other things, hospitalityindustry players find advantage in old classics (location), initial and ongoing investmentsupport (reflected in the material upkeep of facilities and the luxuries located therein), andparticular themes adopted by the marketing arm of the organization in question (such as arestaurant called the 51st fighter group that has a WW2 theme in music and otherenvironmental aspects). Very important is also the characteristics of the personnel workingin direct contact with the customers. The authenticity, professionalism, and actual concernfor the happiness and well-being of the customers that is communicated by successfulorganizations is a clear competitive advantageThis significant growth of the tourism industry is the direct result of changes ininternational consumer behaviors as well as economic prosperity and political stabilitywithin the region. Historically, the supply of lodging facilities within the region has provedto be both inadequate in terms of product quality as well as insufficient in quantity formeeting the increasing levels of demand.These elements of supply and demand have created a favorable investment climatefor development within the region, resulting in a real estate boom in both tourism andresidential development. The growth in residential real estate development has beenprimarily driven by foreign demand for vacation and retirement homes in both urban andresort destinations within the region. Investment and development has been furthersupported by the variety of financial incentives for investment in tourism projects offeredby national governments as well as the availability of local capital for the financing oflarge projects.The first goal is to find ways to operate the hotel according to the idea of a ―triplebottom line,‖ which embodies profitable operation combined with attention to the people
  17. 17. who use and work in the hotel and a focus on careful stewardship of resources. While that goal is important, even more vital is to use the hotel‘s position as an industry leader in the nation‘s capital to demonstrate to the hotel industry, customers, and vendors that sustainable operation is the best strategy to ensure successful hotel operation. The sustainability initiative goes beyond such well-known ideas as reusing guest linens, recycling waste materials, and changing to compact fluorescent lamps.THREE LEVELS OF A PRODUCTIntroductionIn the book "Principle Of Marketing" Philip Kotler et al devised a very interesting concept ofbenefit building for products. Kotler suggested that if you view a product on three levels it willhelp you extract all the benefits that your product offers. This strategy has various namesincluding Total Product Concept, Augmented Product and Three Levels Of a Product.Level One: Core ProductLevel one is the most basic level and simply looks at what people set out to buy and whatbenefits the producer would like their product to offer buyers. For example a camera is expectedto take pictures but there may be other benefits that the producer wants the buyer to enjoy suchas a wide lens, face recognition and high definition videos. So prior to designing any productdesigners should list the core benefits the product needs to provide.
  18. 18. Level 2: Actual ProductLevel two is about translating the list of core product benefits into a product that people will buy.There may be competitor products offering the same benefits so the aim at this stage is to designa product that will persuade people to purchase your product. Kotler states that this can involvedeciding on the quality level, product and service features, styling, branding and packaging. Forexample Apples iPhone design has enabled it to become a smart phone market leader so that bySeptember 2012 it was able to launch the iPhone 5, the 5th version of this product. There areother smart phones on the market but Apple has managed to design a product which people pre-order and camp overnight outside Apples retail stores so that they can be the first ones to buy theproduct.Level 3: Augmented productLevel three involves deciding the additional non tangible benefits that a product can offer.Competition at this level is based around after sales service, help lines, warranties, free/cheapdelivery and so on. In other words it is things that the product does not do but customers mayfind them useful. Non tangible benefits such as product warranties offer customers peace of mindand demonstrate the manufacturer has faith in the quality of its product. In fact the ubiqtous useof some augmented benefits have turn some level three benefits into a customer expectation forexample customers expect cars to have manufacturer warranties.NEW PRODUCT DEVELOPMENT OR LAUNCHINTRODUCTIONMEANING OF NEW PRODUCT LAUNCHSTAGES IN NEW PRODUCT LAUNCHThe term product is used frequently in marketing. Consumerspurchase different products which are useful and agreeable to them. Aproduct can be defined as bundle of attributes that satisfies a consumerdemand.A product has utility. In addition , it has various features such asphysical attributes, brand, design, color, shape, size and so on. Manythings have to be considered before development or launch of a newproduct.A perfect product personality includes following components:Basic constituent. {Physical aspect of the product.}The associated feature. {Features, merits, uses etc.}The brand name given to the product.The package used for the product.The label attached to the product.New product launch means introducing a new product into themarket.In other words it is adding a new product in the existing product line ofthe company.
  19. 19. New product launch is an important aspect of product policy andproduct management. For expansion of business time to time launch ofnew product is very necessary.Generating new product ideas of product with promising marketingprospects.Idea Screening.Concept Testing.Business Analysis.Marketing Analysis.Actual development of a new productTest marketingCommercialization.NEW PRODUCT LAUNCHNATURE Plus Hair Shampoo will be launched in India. Under thebrand name of HLL( Hindustan Liver Limited). The main aim would be tomake it Indias largest selling shampoo, offering the five most importanthair health benefits: strengthens weak hair, prevents hair breakage,softens rough dry hair, shine for thick and healthy hair, and containsantidandruffingredient.We have to decide a product launch for this shampoo so followingmeasures have to be taken.The five most important hair health benefits: strengthens weakhair, prevents hair breakage, softens rough dry hair, shine for thick andhealthy hair, and contains anti-dandruff ingredient.The packaging of the product should be in such a way that it shouldbe very eye catching and attractivePlus here indicates that it contains scientific as well as ayurvedicvariant.After all new ideas and concept the product should be prepared byRND department and it should be tested. It should be carried out invarious tests whether the Shampoo is really effective or no. It shouldhave all the features mentioned. It does not has any side effects. Themost important is it should has a long .The total expenditure should be calculated. The market structure,the company’s market share, company’s goodwill and image plays vitalrole in such a plan of action. ( New Product Launch.)The total budget should be made and proper testing of the productshould be made. So being a branded company in this field they have agood image in the market and also a very vast product line in market.1. New ideas and a latest concept.2. Testing of the product.
  20. 20. 3. Business Analysisshelf- life.31 % of the shampoo sales of Hindustan Lever Limited1. P & Gs rejoice shampoo2. Cavin cares Chik shampooIn the Rs 1,000 crore shampoo market, HLL is a clear leaderhogging 65% of the market share with Nature plus contributing 31% .HLLenjoys a price advantage over its competitors. With low prices HLLbelieves that “it can neutralize significant part of cost of this initiativeovertime while fortifying our market position”.The average medium class person can be easily targeted by theproduct as the cost of the product is very low.The Product Life CycleA products life cycle (PLC) can be divided into several stages characterized by the revenuegenerated by the product. If a curve is drawn showing product revenue over time, it may take oneof many different shapes, an example of which is shown below: Product Life Cycle Curve
  21. 21. The life cycle concept may apply to a brand or to a category of product. Its duration may be asshort as a few months for a fad item or a century or more for product categories such as thegasoline-powered automobile.Product development is the incubation stage of the product life cycle. There are no sales and thefirm prepares to introduce the product. As the product progresses through its life cycle, changesin the marketing mix usually are required in order to adjust to the evolving challenges andopportunities.Introduction StageWhen the product is introduced, sales will be low until customers become aware of the productand its benefits. Some firms may announce their product before it is introduced, but suchannouncements also alert competitors and remove the element of surprise. Advertising coststypically are high during this stage in order to rapidly increase customer awareness of theproduct and to target the early adopters. During the introductory stage the firm is likely to incuradditional costs associated with the initial distribution of the product. These higher costs coupledwith a low sales volume usually make the introduction stage a period of negative profits.During the introduction stage, the primary goal is to establish a market and build primarydemand for the product class. The following are some of the marketing mix implications of theintroduction stage: Product - one or few products, relatively undifferentiated Price - Generally high, assuming a skim pricing strategy for a high profit margin as the early adopters buy the product and the firm seeks to recoup development costs quickly. In some cases a penetration pricing strategy is used and introductory prices are set low to gain market share rapidly. Distribution - Distribution is selective and scattered as the firm commences implementation of the distribution plan. Promotion - Promotion is aimed at building brand awareness. Samples or trial incentives may be directed toward early adopters. The introductory promotion also is intended to convince potential resellers to carry the product.Growth StageThe growth stage is a period of rapid revenue growth. Sales increase as more customers becomeaware of the product and its benefits and additional market segments are targeted. Once theproduct has been proven a success and customers begin asking for it, sales will increase furtheras more retailers become interested in carrying it. The marketing team may expand thedistribution at this point. When competitors enter the market, often during the later part of thegrowth stage, there may be price competition and/or increased promotional costs in order toconvince consumers that the firms product is better than that of the competition.During the growth stage, the goal is to gain consumer preference and increase sales. Themarketing mix may be modified as follows:
  22. 22. Product - New product features and packaging options; improvement of product quality. Price - Maintained at a high level if demand is high, or reduced to capture additional customers. Distribution - Distribution becomes more intensive. Trade discounts are minimal if resellers show a strong interest in the product. Promotion - Increased advertising to build brand preference.Maturity StageThe maturity stage is the most profitable. While sales continue to increase into this stage, they doso at a slower pace. Because brand awareness is strong, advertising expenditures will be reduced.Competition may result in decreased market share and/or prices. The competing products may bevery similar at this point, increasing the difficulty of differentiating the product. The firm placeseffort into encouraging competitors customers to switch, increasing usage per customer, andconverting non-users into customers. Sales promotions may be offered to encourage retailers togive the product more shelf space over competing products.During the maturity stage, the primary goal is to maintain market share and extend the productlife cycle. Marketing mix decisions may include: Product - Modifications are made and features are added in order to differentiate the product from competing products that may have been introduced. Price - Possible price reductions in response to competition while avoiding a price war. Distribution - New distribution channels and incentives to resellers in order to avoid losing shelf space. Promotion - Emphasis on differentiation and building of brand loyalty. Incentives to get competitors customers to switch.Decline StageEventually sales begin to decline as the market becomes saturated, the product becomestechnologically obsolete, or customer tastes change. If the product has developed brand loyalty,the profitability may be maintained longer. Unit costs may increase with the declining productionvolumes and eventually no more profit can be made.During the decline phase, the firm generally has three options: Maintain the product in hopes that competitors will exit. Reduce costs and find new uses for the product. Harvest it, reducing marketing support and coasting along until no more profit can be made. Discontinue the product when no more profit can be made or there is a successor product.The marketing mix may be modified as follows:
  23. 23. Product - The number of products in the product line may be reduced. Rejuvenate surviving products to make them look new again. Price - Prices may be lowered to liquidate inventory of discontinued products. Prices may be maintained for continued products serving a niche market. Distribution - Distribution becomes more selective. Channels that no longer are profitable are phased out. Promotion - Expenditures are lower and aimed at reinforcing the brand image for continued products.Limitations of the Product Life Cycle ConceptThe term "life cycle" implies a well-defined life cycle as observed in living organisms, butproducts do not have such a predictable life and the specific life cycle curves followed bydifferent products vary substantially. Consequently, the life cycle concept is not well-suited forthe forecasting of product sales. Furthermore, critics have argued that the product life cycle maybecome self-fulfilling. For example, if sales peak and then decline, managers may conclude thatthe product is in the decline phase and therefore cut the advertising budget, thus precipitating afurther decline.Nonetheless, the product life cycle concept helps marketing managers to plan alternate marketingstrategies to address the challenges that their products are likely to face. It also is useful formonitoring sales results over time and comparing them to those of products having a similar lifecycle.SETTING PRICESHaving decided what to be and offer and towhom, the next most important decision isprice. Pricing is a critical decision because itdetermines, first, whether or not the intendedcustomers will purchase, and second, whetherthey will be satisfied with the value offeredand, thus, be willing to return. Third, it determineswhether the hotel will be financiallyhealthy enough to maintain itself and rewardits employees so customers can once again besatisfied when they do return.Three factors must come into considerationin pricing—the Three Cs of pricing, if youwill: costs, competition, and customers‘ comfortzones. In F&B, costs drive pricing ofmenu items and beverages. Drucker (1999,115–6) says American industry has too muchcost-driven pricing, and that it needs moreprice-driven costing. Doesn‘t F&B have the opportunityto build and test menus to discoverwhere price points should be set, and is not thechef challenged to manage ingredients and portionsize to deliver the cost and margin structuredesired? Yet the cost-driven practice continues.
  24. 24. In rooms, competition is most often thedominant factor. Costs play a role, butchanges in variable cost of an occupied roomare generally small and rooms‘ contributionmargins are large, typically 65 percent or bet-310 Chapter 7 _ Marketing and Associated Activitiester. Moreover, hotel accounting does notmeasure discounts from a standard price, asdo almost all other industries. So there is novisible cost in reducing price to meet competitors.Remember: Any damn fool can cuthis price, and some damn fool always will.Must everyone follow? No. The key is to getin the head of the customer. The truly controllingfactor is customer comfort zones, andall too often hotel management leave moneyon the table because they don‘t know whatthose comfort zones are. At what price doesthe offer attract and deliver value? That is thekey question in setting prices.Price setting requires talent and skill indata gathering and analysis, accounting andbuilding pro formas, interpreting and drawinginferences, and decision making. Do not letsalespeople set prices; do not let controllersset prices. Only one person—the GM—canpull together the inputs of sales, control, operations,reservations, and the rest, and makethis crucial judgment call. Also, build at leastthree price scenarios and have the controllerand marketing director agree on occupancyimpacts. Then run a GOP pro forma on each.Out of that exercise will come a sense of thebest pricing approach to take. Setting prices isthe one task the GM cannot delegate, for heor she must live with and be accountable forall that results from this critical decision.PRICING TIPInclude staffers in contact with customersin pricing discussions. A ski resortowner-operator asked me to review his proposedprice schedules. I asked to have includedin our meeting a senior reservationagent, a bellman, a bartender, and a frontdesk agent. After probing them on what theyheard from customers about value, we increasedfour of the seven proposed room typeprices, to the owner-operator’s delight.HOTEL PRICING STRATEGY
  25. 25. Pricing is the tool that matches supply and demand. Price influences the demandfor a product, which in turn determines volume sales. Therefore, setting an appropriateprice is one of the most critical factors in demand management and in generatingrevenue. Price is the only element of the marketing mix that is not a cost,because price generates revenue. Pricing decisions contribute to product and brandimage, and product and pricing decisions are therefore inseparable.Stages in setting pricesKotler (2000) proposed a generic pricing model that recommends eight stages insetting prices:1 Select pricing objectives2 Assess the target market‘s ability to afford the purchase price and consumers‘perception of the price/product offer3 Determine the potential demand, including the price elasticity of demand4 Analyze the demand, cost, volume, price and profit relationships; businessesneed to understand their fixed and variable costs5 Research competitors‘ price/product offer6 Select a pricing strategy7 Select appropriate pricing methods8 Set specific prices for rooms, food, beverages, conference and leisure products,and for special product-price bundles.Pricing strategiesHaving established the price objectives, hospitality companies need to considerpricing strategies, which must be linked to the quality standards offered by theoperation. In hotels, consumers often associate star ratings with quality standards.Alternative pricing strategies include the market leader and market followeroptions but there are also unsustainable pricing strategies, which are ultimately selfdefeating.Market leader strategiesWell-established hotel companies, with a loyal customer base and a strong brandimage, can adopt market leader strategies where the prices are aligned with servicequality. These strategies are suitable for:_ The most exclusive, luxurious, 5-star hotels in the world; they deliver the highestquality customer experience, and can justify charging premium and prestige prices_ Traditional 3 star, well maintained hotels, in good locations and with a high levelof loyal customers and repeat business, offering appropriate value for money andcompeting effectively with a mid-market pricing strategy_ Budget hotels and motels charging relatively low prices for a product offeringfewer facilities and delivering value for money.Market follower strategiesNew entrants and less established hotel brands, seeking to build market share bypenetration pricing, adopt a market follower strategy. A market follower strategyoffers similar quality but pitches prices lower than the market leader in order to bemore competitive, attract customers and grow market share. These strategies aresuitable for:_ High quality 4/5 star properties, seeking to grow market share by exceptionalvalue pricing_ Mid-market hotels competing against more established properties; or aggressivechains, and individual properties, seeking to increase room occupancy and buildmarket share by offering exceptional value pricing.Unsustainable strategiesUnfortunately, some hotels implement over-priced strategies, which are unsustainable
  26. 26. as a long-term proposition. These companies charge rates higher than the quality160 Hospitality Marketingcan justify. Some of these hotels might have myopic management who unknowinglyhave become over-priced. As customers recognize the poor value for money,the reputation of the business will rightly suffer. Either the company will have toadopt a more appropriate balanced strategy, or be forced in to either selling orliquidating the business._ Old-established, grand 3/4 star hotels, which are no longer as luxurious as theyused to be, and whose facilities no longer match the price charged; these propertiesare trading on an historic image as they gradually decline; they will eventuallyeither have to re-invest in their facilities or reduce their prices_ Once glorious, now shabby hotels, possibly in good locations, which only generatepassing trade and charging high prices; this rip-off value will lead to a poorreputation, and limited – if any – repeat and recommended business_ Mid-market hotels with falling standards but still maintaining a medium pricingstrategy, which does not represent value for money_ Budget operations, which have gradually increased prices to pay for ‗amenitycreep‘ items, and are no longer competitively priced.Finally, some hotels can adopt an unsustainable price/quality strategy, where theprice offered is too low to support the product/quality offer indefinitely._ High-quality 4/5 star properties charging unsustainable prices either because oflow season or due to a decline in the destination‘s popularity_ Mid-market hotels operating in highly competitive environments and offeringbudget hotel prices without reducing quality standards.Companies need to adopt a pricing strategy, which takes into account their relativequality compared to the competition. Table 7.1 provides several examples of hospitalityproducts combined with price objectives, strategies and tactics.Pricing objectives:It is necessary that the marketing manager decide the objective of pricing before actually settingprice. According to experts, pricing objectives are the overall goals that describe the role of pricein an organizationà ‚  ’ s long-range plans. The objectives help the marketing manageras guidelines to develop marketing strategies. The following are the important pricing objectives. Market penetration Market skimming Target rate of return Price stabilization Meet of follow competition Market share Profits maximization Cash flow Product line promotion SurvivalMarket penetration objective:In the initial stages of entering the market, the entrepreneurs may set a relatively low price. Thisis mainly to secure a large share of the market. In a highly price sensitive market, thebusinessman may continue to sell his products even without profit. He is interested in growth
  27. 27. rather than in making a profit. In the market penetration objective, the unit cost of production anddistribution will decrease when the volume of sales attain a particular target. In brief, marketpenetration objective is an attempt to secure a large share of the market by deliberately settingthe low prices.Market skimming objective:Market skimming means utilizing the opportunities in the market to reap the benefits of highsales, increased profits and low unit costs. Some of the entrepreneurs study the buyers needs andtry to provide the suitable goods, but charge them high prices. This objective is realized in thosemarkets where the magnitude of competition is very low. The entrepreneurs, in this situation,make profits over a short period. The market-skimming objective would not be meaningful,when the consumer refuses to purchase the goods at the prices fixed by the producers. Thispricing objective would be suitable in the markets where the consumers feel that costly goods areof the superior quality.Target rate of return objective:Rate of return is normally measured in relation to investment and sales. The producers enjoyingsome protection may prefer to earn a target rate on investment. This would be possible where theentrepreneur enjoys a franchise or a monopolistic situation. But in the long run, everybusinessman attempts to secure an adequate return on investment through price setting. Mostly,middleman like wholesalers, retailers will price their merchandise to earn a particular rate ofreturn on sales.Price stabilization objective:Frequent changes in the prices of product will harm the long-term interests of the companies.Hence, they aim at stabilization of prices. They do not exploit a short supply position to earn themaximum. During the periods of good business, they try to keep prices from rising and duringthe periods of depression, they keep prices from falling too low. Thus, they take a long-termview in achieving price stability.Meet or follow competition objective:Pricing is often done to meet or even prevent competition. If a company is a price leader, it isbetter to follow it to ward off the possibility of competition.Market share objective:A company may either have the objective of maintaining the present market share or increase itsshare depending upon its stature. Particularly, big business houses adopt such pricing that itenables them to retain their market share. If they raise their market share, they may draw theattention of the government and if they shed their share, they may lose revenues. Contrary tothis, small business houses are found interested in raising their share in the market so as to reapthe benefit of large-scale production. In few cases, firms may sell the products even at a lower
  28. 28. cost to capture the market. However, such practice may lead to financial crisis. As a matter offact, this is an objective to be adopted by new firms cautiously.Profit maximization objective:Profit maximization does not mean profiteering. There is nothing wrong in this policy ifpracticed over the long run. As a matter of fact, many of the enterprises strive to maximize theirprofits. Maximization of profits should be on the total output and not on a single item. In suchcase, consumers do not get dissatisfied since a particular group is not called for paying a highprice. While adopting this pricing objective, the marketers should attempt to project their imagein the market through sales promotion techniques. The marketers should watch the reactions ofthe consumers. Profit maximization through price hikes should be sparingly used.Cash flow objective:One of the important objectives of pricing is to recover invested funds within a stipulated period.Most of the time you will find different prices for the cash and credit transactions. Generally, youfind lower prices for the cash sales and high prices for the credit sales. But this pricing objectivecould be implemented with good results only when the firm has monopoly in the market.Product line promotion objective:Product line means a group of products that are related either because they satisfy similar needsof different market segments or because they satisfy different but related needs of a given marketsegment. While framing the product line, the marketer may also include such goods, which arenot popular. The intention of the marketer is to push through all the goods without anydiscrimination. Thus, the ultimate objective is to increase the overall demand of the goods. Inthis pricing objective, equal prices are adopted for the entire product line.Survival objective:Perpetual existence of the business over a period is the indication of the sound financial positionof the enterprise. All organizations will have to meet expected and unexpected, initial andexternal economic losses. These enterprises have to pool up the resources to meet all thecontingencies through appropriate pricing strategies. Price is use to increase sale volume to levelup the ups and downs that come to the organization.Pricing PolicyCHAPTER SUMMARYThe simplest way to set price is through uniform pricing. At the profit-maximizing uniform price, theincremental margin percentage equals the reciprocal of the absolute value of the price elasticity ofdemand. The most profitable pricing policy is complete price discrimination, where each unit is
  29. 29. priced at the benefit that the unit provides to its buyer. To implement this policy, however, the seller must know each potential buyer’s individual demand curve and be able to set different prices for every unit of the product. The next most profitable pricing policy is direct segment discrimination. For this policy, the seller must be able to directly identify the various segments. The third most profitable policy is indirect segment discrimination. This involves structuring a set of choices around some variable to which the various segments are differentially sensitive. Uniform pricing is the least profitable way to set a price. A commonly used basis for direct segment discrimination is location. This exploits a difference between free on board and cost including freight prices. A commonly used method of indirect segment discrimination is bundling. Sellers may apply either pure or mixed bundling. KEY CONCEPTSard (FOB)red pricingination cost including freight (CF) segment bundlingation cannibalization direct segment discrimination © 2001, I.P.L. Png & C.W.J. Cheng 1 Chapter 9: Pricing Policy
  30. 30. GENERAL CHAPTER OBJECTIVES1. Analyze uniform pricing and understand its limitations relative to price discrimination.2. Understand that cost-plus pricing fails to maximize profit.3. Analyze complete price discrimination and its informational requirements.4. Analyze direct segment discrimination and its implementation and informational requirements.5. Explain how location can be used as a basis for direct segment discrimination.6. Analyze indirect segment discrimination and its implementation and informational requirements.7. Explain how bundling serves to effect indirect segment discrimination.8. Explain how the discriminating variable should be set.9. Appreciate the hierarchy of pricing policies in terms of profitability and information requirement: (i) complete price discrimination; (ii) direct segment discrimination; (iii) indirect segment discrimination; and (iv) uniform pricing.NOTES1. Uniform pricing. (a) Uniform pricing: a pricing policy where a seller charges the same price for every unit of the product. (b) Profit maximizing price (incremental margin percentage rule): a price where the incremental margin percentage (i.e., price less marginal cost divided by the price) is equal to the reciprocal of the absolute value of the price elasticity of demand. This is the rule of marginal revenue equals the marginal cost. i. Price elasticity may very along a demand curve, marginal cost changes with scale of production. The above procedure typically involves a series of trials and errors with different prices. ii. Intuitive factors that underlie price elasticity: direct and indirect substitutes, buyers’ prior commitments, search cost. (c) Price adjustments following changes in demand and cost. i. To maximize profits, a seller should consider both demand and costs.
  31. 31. ii. A seller should adjust its price to changes in either the price elasticity or the marginal cost. iii. It must consider the effect of the price change on the quantity demanded. iv. If demand is more elastic (price elasticity will be a larger negative number), the seller should aim for a lower incremental margin percentage, and not necessarily a lower price, and likewise,© 2001, I.P.L. Png & C.W.J. Cheng 2 Chapter 9: Pricing Policy
  32. 32. v. If demand is less elastic, the seller should aim for a higher incremental margin percentage, and not necessarily a higher price. vi. A seller should not necessarily adjust the price by the same amount as a change in marginal cost. (d) Special notes. i. Only the incremental margin percentage (i.e., price less marginal cost divided by the price) is relevant to pricing. (1). Contribution margin percentage (i.e., price less average variable cost divided by the price) is not relevant to pricing. (2). Variable costs may increase or decrease with the scale of production, and hence, marginal cost will not be the same as average variable cost. ii. Setting price by simply marking up average cost will not maximize profit. Problems of cost plus pricing: (1). In businesses with economies of scale, average cost depends on scale, but scale depends on price. It is a circular exercise. (2). Cost plus pricing gives no guidance as to the markup on average cost. (e) Limitations of uniform pricing (incremental margin percentage rule). i. The inframarginal buyers do not pay as much as they will be willing to pay. A seller could increase its profit by taking some of the buyer surplus. ii. Economically inefficient quantity of sales. By providing the product to everyone whose marginal benefit exceeds marginal cost, the seller could earn more profit.2. Price discrimination. Pricing policy where a seller sets different incremental margins on various units of the same or similar product. (a) To earn a higher incremental margin from buyers with higher benefit, and a smaller margin from buyers with lower benefit.3. Complete price discrimination: the pricing policy where a seller prices each unit of output at the buyer’s benefit and sells a quantity where the marginal benefit equals the marginal cost. (a) All the buyer surplus is extracted. Every buyer is charged the maximum she is willing for pay for each unit.
  33. 33. (b) Economically efficient quantity: all the opportunity for additional profit through changes in sales is exploited. (c) Extracts a higher price for units that would be sold under uniform pricing and extends sales by selling additional units that would not be sold.© 2001, I.P.L. Png & C.W.J. Cheng 3 Chapter 9: Pricing Policy
  34. 34. (d) Requires information about each potential buyer’s entire individual demand curve.4. Direct segment discrimination: The pricing policy where a seller charges a different incremental margin to each identifiable segment (with uniform pricing within each segment). A segment is a significant group of buyers within a larger market. (a) Profit maximizing price: set prices so that the incremental margin percentage of each segment equals the reciprocal of the absolute value of that segment’s price elasticity of demand; i.e., applies the rule for uniform pricing to determine the profit maximizing prices for each segment. (b) When marginal cost is increasing, any change in price for one segment that affects sales will affect (a) marginal cost, and (b) the incremental margin percentage for the other segment. Accordingly, the seller must conduct the trial and errors search for the prices to both segments at the same time. (c) A seller can discriminate on the basis of a buyer’s location. i. Free on board (FOB) price is a price that does not include delivery. (1). FOB pricing ignores the differences between the price elasticities of demand in various markets. (2). The differences among prices at various locations equal the differences in costs of delivery. ii. Delivered pricing is the pricing policy where the seller’s price includes delivery. A cost including freight (CF) price is one that includes delivery. (1). The seller can implement direct segment discrimination, aim for different incremental margin percentages in each market, and obtain higher profit. (2). The differences among prices at various locations are the result of the different incremental margin percentages and the different marginal costs of supplying the various markets, and may be larger or smaller than the costs of delivery. (d) Requirements. i. Must directly identify the members of each segment. The identifiable buyer characteristic must be fixed. ii. Must prevent buyers from reselling the product among themselves.
  35. 35. (1). Generally, resale of services is more difficult than resale of goods, hence there is more price discrimination in services than goods.© 2001, I.P.L. Png & C.W.J. Cheng 4 Chapter 9: Pricing Policy
  36. 36. (2). Sellers can limit resale of goods by restricting warranty service to the location of purchase. (e) Limitations. For each segment, same limitations as uniform pricing.5. Indirect segment discrimination: Pricing policy where a seller (who cannot directly identify the customer segments) structures a choice for buyers so as to earn different incremental margins from each segment. (a) Profit maximizing price. i. There is no simple rule to find the profit maximizing prices. ii. Buyers might substitute among the various choices. Accordingly, the seller must analyze how changes in the price of one product affect the demand for other choices, and set the prices of all products at the same time. The seller must not price any product in isolation. (b) Requirements. i. Buyers must be differentially sensitive to some variable that the seller can control. The seller then uses this variable to structure a set of choices that will discriminate among the segments. ii. Buyers must not be able to circumvent the differentiating variable. The seller must strictly enforce all conditions of sale to prevent switching. iii. Cannibalization occurs when the sales of one product reduce the demand for another with a higher incremental margin. (1). Mitigate cannibalization by degrading the quality of the low margin product. (c) Less profitable than direct price discrimination. i. Products provide less benefit than those with direct discrimination. ii. Involves relatively higher costs. iii. Leakage: indirect discrimination relies on various segments to voluntarily identify themselves through the structured choice. But consumers in one segment may buy the item aimed at another segment