Marketing (I B.Com)

1. MARKETING
UNIT I
INTRODUCTION TO MARKETING
We use a large variety of goods and services in our daily life. These include items like
toothpaste, toothbrush, soap, oil, clothes, food items, telephone, electricity and
many more.
Meaning of marketing
We know that the businessman produces goods and services for our use. These are not
necessarily produced at the places where they are consumed or used. Even in villages,
now-a-days you find the products manufactured all over India and in other countries.This implies
that the manufacturers must be making efforts to ensure that their products are indemand and
reach the ultimate consumers all over the globe. So, when you go to the market to buy a
readymade shirt you find that there are several options available to you in terms of quality of
cloth used, design, colour, price etc. consumers or users to satisfy those needs. Basically,
.
The American Marketing Association defines marketing as an organisational function
and set of processes for creating, communicating and delivering value to customers and for
managing customer relationships in ways that benefit the organisation and its stakeholders.
Traditional concept of marketing
According to the traditional concept, marketing means selling goods and services that
have been produced. Thus, all those activities which are concerned with persuasion and
sale of goods and services, are called marketing. This concept of marketing emphasises
on promotion and sale of goods and services and little attention is paid to consumer
satisfaction.
This concept has the following implications:
(a) The main focus of this concept is on product, i.e., we have a product and it has to be
sold. So, we have to persuade the consumers to buy our product.
(b) All efforts of the marketing people are concentrated on selling the product. They
adopt all means like personal selling and sales promotion to boost the sales.
(c) The ultimate goal of all marketing activity is to earn profit through maximisation of
sales.
Modern concept of marketing
The modern concept of marketing considers the consumers’ wants and needs as the
guiding spirit and focuses on the delivery of such goods and services that can satisfy those needs
most effectively. Thus, marketing starts with identifying consumer needs, then plan the
production of goods and services accordingly to provide him the maximum satisfaction. In
other words, the products and services are planned according to the needs of the customers
rather than according to the availability of materials and machinery. Not only that, all
activities (manufacturing, research and development, quality control, distribution, selling
etc.) are directed to satisfy the consumers. Thus, the main implications of the modern
concepts are:
Difference between marketing and selling
The terms ‘marketing’ and ‘selling’ are related but not synonymous. ‘Marketing’ as
stated earlier, emphasises on earning profits through customer satisfaction. In marketing, the
focus is on the consumer’s needs and their satisfaction. ‘Selling’ on the other hand focuses
on product and emphasises on selling what has been produced. In fact it is a small part of

2. the wide process of marketing wherein emphasis is initially on promotion of goods and
services and eventually on increase in sales volume.
Marketing has long term perspective of winning over consumer loyalty to the product by
providing him maximum satisfaction. However, selling has short-term prospective of only
increasing the sales volume.
In marketing, the consumer is the on king whose needs must be satisfied. In selling, the
product is supreme and the entire focus is its sale. Marketing starts before production and
continues even after the exchange of goods and services has taken place. It is so because
provision of after sale service is an important component of marketing process. Selling
starts after the production and ends as soon as the exchange of goods and services has
taken place.
Importance of marketing
Marketing is important to the business, consumer as well as the society. This is evident
from the following points.
(a) Marketing helps business to keep pace with the changing tastes, fashions, preferences
of the customers. It works out primarily because ascertaining consumer needs and
wants is a regular phenomenon and improvement in existing products and introduction
of new product keeps on taking place. Marketing thus, contributes to providing better
products and services to the consumers and improve their standard of living.
(b) Marketing helps in making products available at all places and throughout the year.
We are able to get Kashmir shawls and Assam Tea all over India and get seasonal
fruits like apple and oranges round the year due to proper warehousing or proper
packaging. Thus, marketing creates time and place utilities.
(c) Marketing plays an important role in the development of the economy. Various
functions
and sub-functions of marketing like advertising, personal selling, packaging,
transportation, etc. generate employment for a large number of people, and accelerate
growth of business.
(d) Marketing helps the business in increasing its sales volume, generating revenue and
ensuring its success in the long run.
(e) Marketing also helps the business in meeting competition most effectively.
After knowing the points of importance of marketing let us discuss on the basic objectives
of marketing.
(a) Provide satisfaction to customers
All marketing activities are directed towards customer satisfaction. Marketing starts
with ascertaining consumer needs and produce goods that satisfy those needs most
effectively. Not only that the pricing and distribution functions of marketing are also
planned accordingly.
(b) Increase in demand
Through advertising and other sales promotional efforts, marketing aims at creating
additional demand for their products. Satisfied customers also help in creating new
customers. For example, if you buy a ‘gel pen’ and feel satisfied, next time also you
will buy the same pen and obviously when you tell others about it they will also feel
like giving it a try.

3. (c) Provide better quality product to the customers
This is a basic objective of marketing. The business houses try to update and upgrade
their knowledge and technology to continuously provide better products. If they do
not do so, they will be phased out through competition.
(d) Create goodwill for the organisation
Another objective of marketing is to build a good public image and create goodwill
for the organisation. This helps in maintaining loyalty to the product and accepting
new products of the same company.
(e) Generate profitable sales volume
The ultimate objective of all marketing efforts is to generate profitable sales volumes
for the business. Taking care of customer needs and wants by providing the required
goods and services at prices they can afford, and at places and timing that are convenient
to them ultimately lead to increased sales and profits.
Functions performed in marketing
1. Marketing Research
Marketing research involves collection and analysis of facts relevant to various aspects
of marketing. It is a process of collecting and analysing information regarding customer
needs and buying habits, the nature of competition in the market, prevailing prices,
distribution network, effectiveness of advertising media, etc. Marketing research
gathers, records and analyses facts for arriving at rational decisions and developing
suitable marketing strategies.
2. Product Planning and Development
As you know marketing starts much before the actual production. The marketeers
gather information regarding what are the needs of the consumers and then decide
upon what to produce. So, the task of marketing begins with planning and designing a
product for the consumers. It can also be done while modifying and improving an
already existing product. For example, now-a-days we find much better soaps and
detergent powders than we used to get earlier. Similarly, we have many new products
introduced almost on a regular basis.
3. Buying and Assembling
Buying and assembling activities as a part of marketing refer to buying and collection
of required goods for resale. This function of marketing is primarily relevant to those
business organisations that are engaged in trading activities. In the context of
manufacturing organisations, buying and assembling involves buying raw materials and
components required for production of finished goods.
4. Packaging
Packaging involves putting the goods in attractive packets according to the convenience
of consumers. Important considerations to be kept in view in this connection are the
size of the package and the type of packaging material used. Goods may be packaged
in bottles (plastic or glass), boxes (made of tin, glass, paper, plastic), cans or bags.
The size of the package generally varies from a few grams to a few kilograms, one
piece to a number of pieces of a product, or in any other suitable quantity in terms of
weight, count, length etc. Packaging is also used as a promotional tool as suitable and
attractive packages influences the demand of the products. It may be noted that
packaging is different from packing, which refers to putting goods in suitable containers

4. for transportation purposes.
5. Standardisation and Grading
Standardisation refers to development of standards for production of goods with respect
to shape, design, colour and other characteristics. If products are standardised,
customers are able to identify a product and its characteristics very well. So goods
can be sold by sample or description. Standardisation helps in promoting the sale of
the product by increasing consumers’ confidence in the product quality.
Grading involves separating products into different classes on the basis of certain
predetermined standards relating to size and quality. Grading is required in case of
agricultural, forest and mineral products such as cotton, sugar cane, iron ore, coal,
timber, etc.
6. Branding
Branding means giving an attractive name, symbol or identity mark to the product to
make a product different from others so that it is known by that name or symbol or
mark. For example, Surf is the brand name of a detergent powder produced by
Hindustan Unilever Limited (HUL). Similarly, you must be familiar with brands like
Colgate for toothpaste, Lux for soap and so on.
7. Pricing the Product
Pricing involves decisions regarding fixation of product prices, keeping in view the
product costs, the capacity of customers to pay, and the prices of the competitive
products. It is an important decision as it influences the sales and so also the profits.
So pricing has to be done very carefully.
8. Promotion of the Product
Promotional activities include advertising, personal selling, sales promotion and publicity.
All promotional activities involve communication with the existing and prospective
customers whereby they are made aware of the product, its distinctive features, price,
availability etc. The objective of promotional activities is to motivate the customers to
buy the product.
9. Distribution
Distribution refers to those activities that are undertaken for sale of products to the
customers and the physical transfer thereof. The first aspect i.e., sale of product involves
use of middlemen such as wholesalers and retailers whose services are used for making
the products available at convenient points and helping in their sale to the ultimate
consumers. The second aspect i.e., physical transfer involves warehousing and
transportation of goods from the point of production to the point of sale or the consumer.
10. Selling
Selling is an important function of marketing whereby the ownership of goods and
services is transferred from the seller to the buyer for a consideration known as price.
To initiate and complete the process of selling, the seller has to inform the prospective
buyer about availability of goods, the nature and uses of products, their prices and the
needs of the customers that may be effectively satisfied by the product. In the process,
he arouses customers’ interest in the product and persuades them to buy it.

5. 11. Storage and Warehousing
Storage refers to holding and preserving goods from the time of their procurement or
production till the time of their sale. In other words storage involves making suitable
arrangements for preserving the goods till they are bought by the consumers and
delivered to them. Warehousing is synonymous to storage but is normally used for
large-scale storage facility for goods and commodities. You must have seen cold storage
where vegetables like tomato, cabbage, potato etc. are stored to be consumed
throughout the year. In marketing it is essential to store raw material and finished
goods to be used later by the company for production or for resale.
12. Transportation
Transportation refers to the physical movement of goods from one place to another. In
marketing, transport as an activity refers to physical movement of raw materials as
well as finished goods from the place of production to place of consumption. Goods
are transported through various means like railways, roadways, waterways and
airways. For heavy and bulky goods, the railways and waterways are the best. For
other goods, it depends upon the demand, cost involved, urgency, nature of the goods
etc. to decide about a suitable means of transportation.

6. UNIT -II
Product
DEFINITION:
A product is the item offered for sale. A product can be a service or an item. It can be
physical or in virtual or cyber form. Every product is made at a cost and each is sold at a price.
The price that can be charged depends on the market, the quality, the marketing and the segment
that is targeted. Each product has a useful life after which it needs replacement, and a life cycle
after which it has to be re-invented. In FMCG parlance, a brand can be revamped, re-launched or
extended to make it more relevant to the segment and times, often keeping the product almost the
same.
PRODUCT CLASSIFICATION
Consumer Products
A consumer product is any tangible product meant for sale that is used
by a consumer or household for non-business purposes.
To determine whether an item is a consumer product or not requires an
accurate finding on a case by case basis. This will vary from one
jurisdiction to another.
the personal use, consumption or enjoyment of a consumer in or around
a permanent or temporary household or residence, a school, in
recreation, or otherwise; but such term does not include any article
which is not customarily produced or distributed for sale to, or use or
consumption by, or enjoyment of, a consumer". It then goes on to list
Examples of consumer products are DVD players, TVs, smart phones,
shoes, designer clothing, children's toys, and handbags, cosmetics
etc.
Shopping products
Goods that consumers will want to be able to compare and contrast with
others goods before they decide to purchase are shopping products.
Since little planning or effort goes into buying goods, marketers need to
establish a high level of brand awareness and recognition. Since
shopping goods are highly researched by buyers, a retailer’s ability to
differentiate themselves becomes important.
With shopping goods, retailers try to provide strong promotions to swing
the buyer. They also expect strong support from manufacturers.
Convenience products
A convenience good is one that requires a minimum amount of effort on
the part of the consumer. Widespread distribution is the primary
marketing strategy of convenience products. The product must be

7. available in every possible outlet and must be easily accessible in these
outlets. Vending machines typically distribute convenience goods.
These products are usually of low unit value, are highly standardized,
and are often nationally advertised. Yet, the key is to induce resellers,
i.e. wholesalers and retailers, to carry the product. If the product is not
available when, where, and in a form desirable by the consumer, the
convenience product will fail.
From the consumer's viewpoint, little time, planning, or effort go into
buying convenience goods. Consequently, marketers must establish a
high level of brand awareness and recognition.
Specialty Products
In the case of the convenience good, the pattern is that the most
accessible brand will be purchased. In the case of a specialty good, the
pattern is that only a specific brand will be purchased. For example, if
the customer utilizes an outlet as it is most accessible, it would be
considered, for that customer at least, a convenience store. If
consumers shop at a store even if they have to go considerably out of
their way to get there, it would be considered a specialty store that sells
specialty goods.
From the point of view of consumers, specialty goods are so unique that
they will go anywhere to seek out and purchase them. Almost without
exception, price is not a principle factor affecting the sales of specialty
goods. Although these products may be custom-made or one of a kind,
it is also possible that the marketer has been very successful in
differentiating the product in the mind of the consumer.
Examples of specialty goods include designer clothes, high-end cars,
exotic perfumes, famous paintings, fancy foods, hi-fi components,
sporting equipment, photographic equipment, men's suits etc.
Unsought Products
Unsought Goods are goods that the consumer does not know about or
does not normally think of buying. Purchasing of unsought goods may
arise due to danger or the fear of the danger. The classic examples of
known but unsought goods are funeral services, encyclopedias, fire
extinguishers etc. In some cases, even airplanes and helicopters can be
cited as examples of unsought goods.
The purchases of these goods may not be immediate and can be
deferred. Hence, unsought goods require advertising and personal
selling support and extensive marketing in other areas as well. In the
past, new products such as frozen food items were unsought—why buy
frozen when you can buy fresh?—until they were advertised
innovatively and broadly. Once the consumer is well-educated about the
product, the good goes on to become a sought good.

8. Business Products
Business products are sold to other businesses, as opposed to
convenience, shopping, and specialty products, which are sold to
consumers. Business products are marketed differently than
convenience, shopping and specialty products, due to their different
nature as well as the different nature of the prospective buyers. A useful
way to divide business products is into farm products and manufactured
products, as they are marketed differently.
There are different types of manufactured products such as semimanufactured
products, parts, raw materials and machinery. Business
products can be as different as crude oil, wood, machinery,
photocopiers, and paper.
Consumer durables
Consumer durables involve any type of products purchased by
consumers that are manufactured for long-term use. As opposed to
many goods that are intended for consumption in the short term,
consumer durables are intended to endure regular usage for several
years or longer before replacement of the consumer product are
required. Just about every household will contain at least a few items of
this nature.
One of the most common of all consumer durables would be the
furniture found in the home. This would include items such as sofas,
chairs, tables, bed frames, and storage pieces such as chests of
drawers and bookshelf units. While once thought to be limited to only
items made of sturdy metal or wood, any type of furniture today that is
intended for use over the period of at least a few years can rightly be
classified as durable.
Another common example of durables in the possession of most
households is appliances. These items may include microwave ovens,
refrigerators, toasters, air conditioners, washing machines and gas or
electric water heaters. These are intended for use on a continuing
basis, and often are sold with some type of warranty or service contract
that helps to ensure the appliance will continue working for a substantial
period of time.
Consumer durables selected for the present study includes
Refrigerator
Microwave oven
Washing machine
Air conditioner
Company Profile of selected brands
Company profile of LG
Home Entertainment division
The Home Entertainment division offers Plasma TVs, LCD TVs, PDP
Modules, OLED Panels, USB Memory, Flat Panel Computer Monitors,
home theater systems, blu ray disc players, DVD Recorders, super multi

9. DVD rewriters, CD±RW, Notebook PCs, Desktop PCs, MP3 Players.
The Home Entertainment division got combined with the Business
Solutions Division in October 2010.
Mobile Communications division
The Mobile Communications division provides mobile communication
terminals, personal computers and communication devices.
LG mobile devices are made of CDMA networks worldwide and LG
phones are available also in unlocked versions that can be used on any
GSM network worldwide.
Home Appliances division
LG manufactures and sells home appliance products such as washing
machines, refrigerators, vacuum cleaners, kitchen appliances and air
conditioners. In June 2014, LG Electronics also announced the launch
of its smart appliances with Home Chat messaging service in South
Korea. Home Chat employs LINE, the mobile messenger app from
Korean company 'Naver' to let homeowners communicate, control,
monitor and share content with LG’s smart appliances.
Air Conditioning & Energy Solutions division
The Air Conditioning & Energy Solutions division makes air conditioners
and LED lighting.
Products
LG Electronics products include televisions, phones, home appliances,
computers, and semi conductors (DRAM, SDRAM and flash memory).
Smart TVs and apps
LG Electronics launched an OLED TV in 2013 and 65-inch and 77-inch
sizes in 2014. LG Electronics introduced their first Internet TV in 2007,
Product Planning
Product Planning is the continuing process of identifying and
asserting market demands and requirements that characterize a
product’s feature set. Product planning serves as the basis for
decisions about promotion, price and distribution. It is the process of
developing a product idea and sticking on it until the product is
completely developed and later introduced to the market.
Additionally, a company must form an exit strategy for its product in
case the product have not been able to generate demand and does
not attract higher sales figure. Product planning necessitates the
whole process of product development by using various marketing
strategies, including price changes and promotions, increased
distribution channels and product extensions or improvements.
Objectives Of Product Planning:
To fulfil the customer needs: Product planning identifies
customer needs, requirements, specifications, aspirations,
liking & preferences and also guides the firm’s resources &
efforts towards the accomplishment of them.

10. To spotlight firms strengths and weaknesses: Each firm has
its own strengths and weaknesses. The future plan, the
blueprint of action is founded in product planning on the set of
given strengths & weaknesses. By pinpointing strengths and
weaknesses the product can be devised so as to minimize the
weakness and maximize the strength.
To fortify better resource utilization: The minimum cost
level of production is possible only when the company
resources are geared to its production plan. As product
planning is related with developments of better quality
products, improvement of existing ones to changing consumer
tastes & needs, the limited and costly resources are so
employed as to the greatest ,better & cheaper production.
To guarantee firm’s survival: Products are the hope for firm’s
survival. The product that fulfils the ever changing need and
taste of consumer enables the firm to survive successfully.
Product renovation and innovation are the two key strategies
which are considered to be quite important for those firms who
want to survive for many years to come.
To increase firm’s sale: Every firm depends on sales as the
only source of income to meet the outgoings & retain a decent
margin to justify its hard work of putting resources & taking
risks. Every firm wants to milk maximum sales by targeting
right customer class at the right time.
Stages of New Product Development:
(1) Idea Generation
Ideas for new products can be generated from the company’s own
research and development department, sales people, customers,
employees, Independent inventors, competition and top
management. The aim for conducting focus groups with customers is
to explore their problems and get ideas for new product. Companies
conduct brainstorming sessions for top managers in order to come
up with various innovative ideas for new products. The whole
process of new product development begins with idea generation it is
therefore quite necessary to teach managers to become creative
thinkers.
(2) Screening
In this stage, ideas which are not economically feasible or
technologically feasible are eliminated. Some ideas are abolished
because they don’t match with company’s objectives or mission.
(3) Business Analysis
Various financial techniques such as the breakeven analyses and Net
Present Value (NPV) method are implemented to decide whether the
idea has the potential of getting return on investment. Companies

11. have to consider the amount of investment to be made in the idea to
turn it into a viable product, the size of the potential market, and
level of cash inflows which can be expected from the product.
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(4) Concept Testing
A concept test is applied to test the idea of the product. Various
information are shared with prospects i.e. drawing of the proposed
product with detailed description which includes the
advantages/disadvantages and even price of the proposed product.
Prospects are interviewed to explore curiosity to buy the product.
Some firms use virtual reality for testing during the concept testing
stage.
(5) Product Test
The product is consumed by a sample of consumers in their homes
for several weeks and later asked whether they are satisfied with the
product, its price and other components of the product and they
further buy it or want to replace it. Ideally, the sample should be a
representative sample but usually companies don’t find it. A firm
might use an existing panel of consumers. There are a number of
companies that recruit consumers to join panels with the surety that
the new product will be used by the panel of consumers and they will
rate the product accordingly.
(6) Market Test. The test markets are categorized into 2 parts:
Conventional (traditional) test market – The purpose of the test
market is to test various marketing strategies (e.g., different ways of
positioning a product). The most important thing company want to
observe is the trial rate (the percentage of people trying the new
product) and other is the repurchase rate (what percentage of people
buys it a second time). The demerit of a test market is that the ideas
can be stolen by the competitors by observing the results of the test
market. There are marketing research firms that conducts
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researched for monitoring sales in the major test market cities; the
data they collect can be purchased or latterly used by any company.
The major drawback is that no company can patent any idea for a
product. Thus, if a company introduces a new variant of soap e.g.
antiseptic, and it does extremely well in the test market, the
competition is permitted to introduce the same variant of soap. The
patent can only cover the exact formula used to make the soap, not
the concept of making the antiseptic soap.
Simulated test market (STM) – An STM is conducted by a research
firm and there is total confidentiality. Sometimes, STMs are
organized in shopping malls. Consumers are invited for evaluating
new television programs. Of course, the television programs include
commercials; at least one of the commercials is for the product being
test marketed. Then, consumers are invited to "shop" in a room

12. which has set up just similar to a supermarket. Those consumers who
purchased and consumed the product would be invited several days
later and asked whether they would purchase the product again. The
major drawback with a STM is that it cannot be used to predict the
reaction of wholesalers and retailers to the new product. A simulated
test market is far less expensive than a conventional test market.
(7) Review and Revision
A marketing strategy is determined by management after reviewing
the results of above phases.
(8) Commercialization
The new product is launched. (3)
It is quite necessary to understand the product portfolio which
includes complete product line and width of the company before they
plan to develop a new product. A new product is designed, developed
according to the needs of market and the same is marketed with the
objective of gaining higher profitability. The whole process is a part
of product policy which can be termed as long-term planning and
management of its product-mix by a marketing company in order to
achieve maximum consumer satisfaction. Product policies are broad
guidelines formulated by the top management of the company with
regard to product planning and development.
for criteria B), no transactions (E item c), before delivery starts (D item b). Of course, this .pure
approach. has several major disavantages: we monitor the evolution of list prices and not
market prices
and we don.t respect the accrual principal. But at least we consider the product (although
virtual).The
1) An important aspect of model pricing is on the one hand to focus attention on current
products and on
the other hand to keep the products constant over time for price comparisons. This is a crucial
difference with hourly charge-out rates.
2) If we consider a .pure model pricing approach., it would be impossible to estimate the
evolution of
market prices. If the first aim were the evolution of market prices, it would be impossible to keep
the
product strictly constant. Alternatively, we can consider a .class of homogenous products..
Perhaps
this can be regarded as other criteria (criteria F): the homogeneity of the object of the
measurement.
For example, a pricing method would score as .heterogeneous data. if the average margin ratio of
all
contracts signed during the survey period is used to update the margin ratio in a model.
3) It is crucial to keep in mind that with model pricing, we aim to measure the evolution of the
price (in
most cases) when the contract is signed. The short-term analyst would be happy but not the
national

13. accountants. The mark-up during delivery of product is one of the key indicators for the firms
but this
indicator mixes several aspects. It is difficult with this kind of indicator to approximate a price
paid
by the client.

14. Unit -3
Pricing
After a good or service has been developed, identified, and packaged, it must be priced. This is the
second aspect of the marketing mix. As noted earlier, price is the exchange value of a good or
service. Pricing strategy has become one of the most important features of modern marketing.
All goods and services offer some utility, or want-satisfying power. Individual preferences determine
how much utility a consumer will associate with a particular good

15. or service. One person may value leisure-time pursuits while another assigns a higher priority to
acquiring property, automobiles, and household furnishings.
Consumers face an allocation problem: Their scarce resource of a limited amount of money and a
variety of possible uses for it. The price system helps them make allocation decisions. A person may
prefer a new personal computer to a vacation, but if the price of the computer rises, they may
reconsider and allocate funds to the vacation instead. The emphasis on low prices in the Los Angeles
Zoo advertisement in Figure 12.8 may influence how a family decides to allocate leisure funds. Low
admission prices make a day at the zoo a bargain compared to the higher cost of an amusement park
outing.
Prices help direct the overall economic system. A firm uses various factors of production, such as
natural resources, labor, and capital, based on their relative prices. High wage rates may cause a firm
to install labor-saving machinery. Similarly, high interest rates may lead management to decide
against a new capital expenditure. Prices and volume sold determine the revenue received by the firm
and influence its profits.
Pricing Objectives - Marketing attempts to accomplish certain objectives through its pricing
decisions. Research has shown that multiple pricing objectives are common among many firms.
Pricing objectives vary from firm to firm. Some companies try to
maximize their profits by pricing their offerings very high. Others use low prices to attract new
business. The three basic categories of pricing objectives are:
1) profitability objectives
2) volume objectives
3) other objectives, including social and ethical considerations, status quo objectives, and image
goals.
Profitability Objectives - Most firms have some type of profitability objective for their pricing
strategy. Management knows that Profit = Revenue — Expenses and that revenue is a result of the
selling price times the quantity sold: Total Revenue = Price x Quantity Sold. Some firms try to
maximize profits by increasing their prices to the point where a disproportionate decrease appears in
the number of units sold. A 10 percent price hike that results in only an 8 percent volume decline
increases profitability. But a 5
percent price increase that reduces the number of units sold by 6 percent is unprofitable.
Profit maximization is the basis of much of economic theory. However, it is often difficult to apply
in practice, and many firms have turned to a simpler profitability

16. objective—the target return goal. For example, a firm might specify the goal of a 9 percent return
on sales or a 20 percent return on investment. Most target return pricing goals state the desired
profitability in terms of a return on either sales or investment.
Volume Objectives - Another example of pricing strategy is sales maximization, under which
management sets an acceptable minimum level of profitability and then tries to maximize sales. Sales
expansion is viewed as being more important than shortrun profits to the firm's long-term
competitive position.
A second volume objective is market share—the percentage of a market controlled by a certain
company, product, or service. One firm may seek to achieve a 25 percent market share in a certain
industry. Another may want to maintain or expand its market share for particular products or product
lines.
In an attempt to gain a larger share of the $51 billion-a-year lodging industry market, national hotel
and motel firms that previously concentrated on moderate and high-priced lodging are now
developing products that appeal to budget-conscious business and pleasure travelers, a segment with
significant growth potential. Marriott Corporation, a market leader in the quality, full-service lodging
segment, entered the low-priced market by offering Fairfield Inns, with room rates under $40. By
moving into the economy segment, Marriott hopes to increase its overall share of the lodging market.
Market share objectives have become popular for several reasons. One of the most important is the
ease with which market share statistics can be used as a yardstick for measuring managerial and
corporate performance. Another is that increased sales may lead to lower production costs and higher
profits. On a per-unit basis, it is cheaper to produce 100,000 pens than it is to manufacture just a few
dozen.
Other Objectives - Objectives not related to profitability or sales volume—social and ethical
considerations, status quo objectives, and image goals—are often used in pricing decisions. Social
and ethical considerations play an important role in some pricing situations. For example, the price of
some goods and services is based on the
intended consumer's ability to pay. For example, some union dues are related to the
income of the members.
Many firms have status quo pricing objectives: That is, they are inclined to follow the leader. These
companies seek stable prices that will allow them to put their competitive efforts into other areas
such as product design or promotion. This situation is most common in oligopolistic markets.
Image goals are often used in pricing strategy. The price structures of major department stores, for
example, are set to reflect the high quality of the merchandise.

17. houses, however, may seek an image of good value at low prices. So a firm's pricing strategy may be
an integral part of the overall image it wishes to convey.
Price Determination - While pricing is usually regarded as a function of marketing, it also requires
considerable inputs from other areas in the company. Accounting and financial managers have
always played a major role in the pricing task by providing the sales and cost data necessary for good
decision making. Production and industrial
engineering personnel play similarly important roles. Computer analysts, for example, are in charge
of the firm's computer-based marketing information system, which provides up-to-date information
needed in pricing. It is essential for managers at all levels to realize the importance of pricing and the
contribution that can be made to correct pricing by various areas in the organization. Price
determination can be viewed from two perspectives. Economic theory provides an overall viewpoint,
while cost-based pricing looks at it from a practical, "hands-on" approach.
Economic Theory - Economic theory assumes a profit maximization objective. It says market price
will be set at the point at which the amount of a product desired at a given price is equal to the
amount suppliers will provide at that equilibrium price: where the
amount demanded and the amount supplied are in equilibrium. In other words, the demand curve is a
schedule of amounts that will be demanded at different price levels.
At $3 per pound, 5,000 pounds of fertilizer might be sold. A price increase to $4 per pound might
reduce sales to 3,200 pounds, and a $5 per pound price might result in sales of only 2,000 pounds, as
some would-be customers decide to accept less expensive substitutes or to wait for the price to be
reduced. Correspondingly, the supply curve is a schedule that shows the amounts that will be offered
in the market at certain prices. The intersection of these schedules is the equilibrium price that will
exist in the marketplace for a particular good or service.
Cost-Based Pricing - Although this economic analysis is correct in regard to the overall market for a
product, managers face the problem of setting the price of individual brands based on limited
information. Anticipating the amount of a product that will be bought at a certain price is difficult, so
businesses tend to adopt cost-based pricing formulas.
Although these are simpler and easier to use, executives have to be flexible in applying them to each
situation. Marketers begin the process of cost-based pricing by totaling all costs associated with
offering an item in the market, including production, transportation, distribution, and marketing
expenses. They then add an amount to cover profit and expenses not previously considered. The total
becomes the price. Many smaller firms calculate the markup as a percentage of their total cost.
Suppose, for

18. example, that the total cost of manufacturing and marketing 1,000 portable stereos is $100,000, or
$100 per unit. If the manufacturer wants a selling price that is 25 percent above its costs, the selling
price will be $100 plus 25 percent of $100, or $125 per unit.
There are actually two calculations for cost-based prising; mark-up and profit margin. mark-up
pricing is based on the cost of the item and profit margin is based on the sales price. To illustrate; our
$100 unit to have a 20% mark-up, the sales price is calculated by using the formula: Cost /(100% -
mark-up %).
Markup pricing is easy to apply, and it is used by many businesses (mostly retailers and wholesalers).
However, it has two major flaws. The first is the difficulty of determining an effective markup
percentage. If this percentage is too high, the product may be overpriced for its market; then too few
units may be sold to return the total cost of producing and marketing the product. On the other hand,
if the markup percentage is too low, the seller is "giving away" profit that it could have earned
simply by assigning a higher price. In other words, the markup percentage needs to be set to account
for the workings of the market, and that is very difficult to do.
The second problem with markup pricing is that it separates pricing from other business functions.
The product is priced after production quantities are decided on, after costs are incurred, and almost
without regard for the market or the marketing mix. To be most effective, the various business
functions should be integrated. Each should have an impact on all marketing decisions.
9.6 Breakeven Analysis: A Tool in Cost-Based Pricing
Marketers often use breakeven analysis as a method of determining the minimum sales volume
needed at a certain price level to cover all costs. It involves a consideration of various costs and total
revenue.
Total cost (TC) is composed of total variable costs (TVC) and total fixed costs (TFC). Variable costs
are those that change with the level of production (such as labor and raw materials costs), while fixed
costs are those that remain stable regardless of the production level achieved (such as the firm's
insurance costs). Total revenue is determined by multiplying price by the number of units sold.
Marketers can use breakeven analysis to determine the profits or losses that
would result from several different proposed prices. Since different prices will
produce different breakeven points, the calculations of sales necessary to break even
could be compared with estimated sales obtained from marketing research studies. This comparison
can then be used to identify the most appropriate price, one that would attract sufficient customers to
exceed the breakeven point and earn profits for the firm.

19. Skimming Pricing involves setting the price of the product relatively high compared to similar
goods and then gradually lowering it. This strategy is used when the market is segmented on a price
basis, that is, where some people may buy the product if it is priced at $10, a larger group may buy it
at $7.50, and a still larger group may buy it at $6. It is effective in situations where a firm has a
substantial lead on competition with a new product. The skimming strategy has been used effectively
on such products as color televisions, pocket calculators, personal computers, and VCRs.
A skimming strategy allows the firm to recover its cost rapidly by maximizing the revenue it
receives. But the disadvantage is that early profits tend to attract competition, thus putting eventual
pressure on prices. For example, most ball-point pens now sell for less than $1, but when the product
was first introduced after World War II, it sold for about $20. Some firms continue to use skimming
pricing throughout the product's life cycle. For example, Bausch & Lomb's Ray-Ban sunglasses
range in price from $50 to $140.
The company plans to continue the high-price strategy, even though "knock-off" imitations of Ray-
Ban products sell for as low as $12. Lower-priced products do not
pose a threat to Ray-Ban because Ray-Ban customers are brand loyal. The firm's marketing research
indicates 90 percent of Ray-Ban customers would buy the brand
again.
Penetration Pricing - The second strategy, penetration pricing, involves pricing the product
relatively low compared to similar goods in the hope that it will secure wide market acceptance that
will allow the company to raise its price. Soaps and toothpastes are often introduced this way.
Penetration pricing discourages competition because of
its low profits. It is often used when the firm expects competition with similar products within a short
time and when large-scale production and marketing will produce substantial reductions in overall
costs.
Product Line Pricing - Under product line pricing, a seller offers merchandise at a limited number
of prices rather than having individual prices for each item. For instance, a boutique might offer lines
of women's sportswear priced at $120, $150, and $200. Product line pricing is a common marketing
practice among retailers. The original five-and ten-cent stores are an example of its early use.
Today’s 99¢ Stores are an recent
example.
As a pricing strategy, product line pricing prevents the confusion common in situations where all
items are priced individually. It makes the pricing function easier. But marketers must clearly
identify the market segments to which they are appealing. Three

20. high-priced lines might not be appropriate for a store located in a low-to-middle-income area.
A disadvantage of product line pricing is that it is sometimes difficult to alter the price ranges once
they have been set. If costs go up, the firm must either raise the price of the line or reduce its quality.
Consumers may resist these alternatives. While product line pricing can be useful, its implementation
must be considered carefully.
Consumer Perception of Prices - Marketers must be concerned with the way consumers perceive
prices. If a buyer views a price as too high or too low, the marketer must correct the situation. Price
quality relationships and psychological pricing are important in this regard.
The Price-Quality Relationship - Research shows that the consumer's perception of product quality
is related closely to the item's price. The higher the price of the product, he better its perceived
quality. Most marketers believe the perceived price-quality relationship exists over a relatively wide
range of prices, although extreme prices may be viewed as either too expensive or too cheap.
Marketing managers need to study and experiment with prices because the price-quality relationship
can be of key importance to a firm's pricing strategy.
Jerome Rowitch, a California restaurateur, conducted an interesting experiment that substantiates the
price-quality relationship. When Rowitch opened his Sculpture Gardens restaurant in an
unfashionable section of Venice, he devised a promotion designed to attract the affluent residents of
nearby suburbs. He mailed a promotional
flier to households with incomes of $50,000 or more, a segment that would appreciate the restaurant's
fare, which includes black spaghetti in roasted red pepper and New Zealand cockles in white wine.
The flier made this offer: Patrons could pay whatever price they thought their meal was worth. On
average, those who took advantage of the promotion paid about $7.50 more for their meal than the
price listed on the standard menu.
Psychological Pricing - Psychological pricing is used throughout the world. Many marketers believe
certain prices are more appealing than others to buyers. The image pricing goals mentioned earlier
are an example of psychological pricing. Have you ever wondered why retailers use prices like
$39.95, $19.98, or $9.99 instead of $40, $20, or $10? Before the age of cash registers and sales taxes,
this practice of odd pricing was employed to force clerks to make the correct change, thereby
serving as a cash-control technique for retailers. It is now a common practice in retail pricing because
many retailers believe that consumers are more attracted to odd prices than to ordinary ones. In fact,
some stores use prices ending in 1, 2, 3, 4, 6, or 7 to avoid the look of ordinary .