Product Planning and PricingPrinciples of Marketing Notes B.Com CBCS PatternPrinciples of Marketing Chapterwise Notes
Meaning and Definition of Product
In a narrow sense, a product is a set of
tangible physical attributes assembled in an identifiable form. Each product
carries a name, such as car, iron, building etc. But in marketing, a product is
anything which can satisfy a need, want or desire of consumers and can be
offered in an exchange process. Hence, a product can be commodity, service,
idea or a combination of all these.
When buyers purchase a product, they
decide to buy after considering both tangible and intangible attributes of the
product for example a car is a tangible product but its after sales service,
durability, colour, manufactures reputation etc. are intangible part of
product. Good products are key to market success and therefore products should
be produced as per the needs and wants of target market.
In the words of W. Anderson, “A product is
a set of tangible and intangible attributes including packaging, colour, price,
quality and brand plus the services and reputation of the seller. A product may
be a tangible goods, service, place, person or idea” “A product should be
considered as a bundle of utilities consisting of various product features and
accompanying services”.
In the words of Philip Kotler, “A product
is anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or need. It includes physical objectives,
services, person, places, organisation and ideas”.
Characteristics of a Product
The product concept is a management
orientation that assumes that consumer will favour those products that offer the
most quality and other features for the price and therefore producers should
efforts for continuous improvement of product quality and other features of
product.
From the above definitions, some of
essential features can be identified as given below :
(a) Tangibility: To be a product, it should have a tangibility
character such as it can be touched or seen, for example a car, building, cloth
etc.
(b) Intangible Attributes: The product may also be intangible in the form of
services for instance, banking, insurance, music composition, repairing,
nursing etc.
(c) Associated Attributes: A product may have number of features which
differentiate it from competitor’s products. Associated attributes usually
cover the colour, package, brand name, installation instruction etc
(d) Exchange Value: A product may be tangible or intangible but it must
have exchange value. It must be capable of being exchanged between seller and
buyer at mutual agreed price.
(e) Consumer satisfaction: A product should have the capacity to satisfy
consumer’s real or psychological needs and wants. At the same time, it must
have capacity to generate profit for the satisfaction of sellers.
Classification of Products
Broadly
products can be classified into following categories.
(A)
Products based on uses :
(i)
Consumer Products : These are the products or services that are
meant for final consumers for their personal, family or house hold use. These
products are used by buyer for their consumption or selling but not for further
processing. For example pen, watch, books, newspaper etc. Consumer products are
further classified as below:
(a) Convenience goods: These products or services are purchased
with minimum efforts. For example bread, newspaper etc.
(b) Emergency goods: Goods required meeting the urgent needs
and so the purchasers do not get time for selection. For example needs of
umbrella during raining season, repairing of T.V. during world cup cricket etc.
(c) Impulse goods: The consumer is not usually pre-planned or
predetermined to purchase such goods but during shopping all of a sudden he
decides to purchase this type of goods because of product exposure or
attraction. For example chocolate, balloon, a new type of ball pen etc.
(d) Shopping Goods: These goods are consumer durable item and so
he/she selects or purchases these goods only after making comparisons on such
bases as suitability, quality, price, style and durability. Examples: T.V.,
Furniture, mobile hand-set etc.
(e) Specialty Goods: These products are particular brands,
stores and persons to which consumers are loyal. For Example - Branded surgical
instruments for doctors, life saving drugs, Bhupen Hazarika as a singer, Peter
England dresses etc.
(f) Unsought Products: The buyers do not know about the
existence of product or they do not want to purchase. It may be regularly
unsought product such as service of life insurance company, a layer’s service,
safety alarm etc. or/and new unsought products which are completely new
products and unfamiliar to consumers.
(II)
Industrial Products: Goods which are used for commercial production
or in carrying of some business activities are known as industrial goods. It is
for commercial use not for personal use. The same product may be consumer
product as well as industrial product depending on its purpose of use. For
example: Rice when we cook and eat at home, it is consumer products and when
the same is sold in a restaurant or hotel, it is treated as industrial goods.
Industrial buyers are mostly rational buyer, i.e. they are cost, quality and
standard conscious. The various types of industrial goods are discussed below:
(a) Installations: These are capital goods which determine the
nature, scope, capacity and efficiency of production as well as company. These
are non portable and heavy goods. Examples are plants and machinery, major
equipments, building, assembly lines etc.
(b) Raw Materials: These are the main inputs to the final
products. These are the part of the final products. Some of the raw-materials
are required processing before incorporated in the final products and there
primary materials from extractive and agricultural industrials-minerals,
petroleum, iron ore etc do not require any process.
(c) Fabricated materials and parts: These are semi processed
goods but they may require further processing before being the part of final
products. For example pig iron for the production of steel.
(d) Operating Supplies: These are not the part of final
products but these are required to continue the production process such as
light bulbs, pen, paper, computers etc.
(e) Accessory Equipment: These are portable goods which are
necessary to keep the capital goods fit for operation. These are relatively
less expensive. These neither become the part of final product nor change its
form. For example bearing of a plant, wheal of a machine etc.
B.
Products based on durability:
(I) Perishable products : These are the products which have
very short life and can not be stored for long time such as newspaper, a
particular service for one day or limited period.
(II) Non-durable products: When the consumers start consuming
or using the products, the products last for few uses and get depleted on
consumption are non durable goods. For example, tooth paste, powder etc.
(III) Durable products: These are products which have a long
life and consumers may use it for several years. For example - T.V., watch,
furniture, mobile hand-set etc. The consumers usually take long time to take
the decision of purchasing.
C.
Products based on Tangibility:
(I) Tangible products : It must be capable of being touched,
seen, verified its quality etc. For example pen, pencil, book.
(II) Intangible products: A product may be intangible also but
capable of providing satisfaction through its service. For example repairing,
consultancy service, nursing etc.
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👉👉Principles of Marketing Chapterwise Notes
Product Life Cycle
A product is like a human being. It is
born, grows up fast, matures and then finally passes away. Product life
cycle is the stages through which a product or its category bypass.
From its introduction to the marketing, growth, maturity to its decline or
reduce in demand in the market. Not
all products reach this final stage, some continue to grow and some rise and
fall. In short, The PLC discusses the stages which a product has to go
through since the day of its birth to the day it is taken away from the market.
However, the basic difference in case of
human beings and products is that a product has to be killed by someone. Either
the company (to bring better products) or by competition (too much external
competition). There are several products in the market which have lived on
since ages (Light Bulbs, Tubelights), whereas there are others which were
immediately taken off the shelf (HD DVD).
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Product Life Cycle
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Thus the Product life cycle deals with four stages of a
products life.
Stages of
Product life cycle:
A) Introduction: The stage 1 is where the product is launched. A
product launch is always risky. You never know how the market will receive the
product. There have been numerous failures in the past to make marketers
nervous during the launch of the product. The length of the introduction stage
varies according to the product.
If the product is technological and receives acceptance in the market, it
may come out of the introductory phase as soon as it is launched. Whereas if
the product is of a different category altogether and needs market awareness,
it may take time to launch.
Characteristics of Introductory stages of Product life cycle
Ø Higher
investment, lesser profits
Ø Minimal
Competition
Ø Company
tries to Induce acceptance and gain initial distribution
Ø Company
needs Promotions targeted towards customers to increase
awareness and demand for product
Ø Company
needs Promotions targeted towards channel to increase
confidence in the product
B) Growth: Once the introductory phases are over, the product
starts showing better returns on investment. Your customers and channels begin
responding. There is better demand in the market and slowly the product starts
showing profits.
This is a stage where competition may step in to squash the product
before it has completely launched. Any marketing mistakes done at this stage
affect the product considerably as the product is being exposed to the market
and bad news travels fast. Thus special care has to be taken in this stage to
ensure competition or bad decisions do not affect the growth stage of the
product.
Characteristics of Growth stage of Product life cycle
Ø Product
is successfully launched
Ø Demand
increases
Ø Distribution
increases
Ø Competition
intensifies
Ø Company
might introduce secondary products or support services.
Ø Better
revenue generation and ROI
C) Maturity stage: One of the problems associated with maturity
stages in a technologically advanced environment is the problem of duplication.
Not only is the product available in duplicate markets, but also there are
several competing products which arise with the same features and capabilities.
As a result, the USP’s of the product become less attractive.
Along with competition, Penetration pricing becomes a weapon for competitors.
Competitors sell products with the same features at lesser prices thereby
trying to penetrate in the market. Nonetheless, The sales of a product
(especially sales from return customers) is at its peak point during the
maturity stages. The growth of sales may be lesser, but the sales revenue of
the organization is maximum during the maturity stage of product life cycle.
Characteristics of Maturity stages of Product life cycle
Ø Competition
is high
Ø Product
is established and promotion expenditures are less
Ø Little
growth potential for the product
Ø Penetration
pricing, and lower profit margins
Ø The
major focus is towards extending the life cycle and maintaining market share
Ø Converting
customers product to your own is a major challenge in maturity stage
D) Decline: 1 product, 10 competitors, minimum profits, huge
amount of manpower and resources in use – A typical scenario which a product
might face in its last stage. In this stage the expenditures begin to equal the
profits or worse, expenses are more than profits.
Thus it becomes a typical scenario for the product to exit the market. It
also becomes advantageous for the company as the company can use resources it
was spending on the declining product on an altogether different project. Characteristics
of Decline stages of Product life cycle
Ø Market
is saturated
Ø Sales
and profits decline
Ø Company
becomes cost conscious
Ø A
lot of resources are blocked in rejuvenating the dead product.
Strategies for the differing stages of the Product Life Cycle
A) Introduction: The need for immediate profit is not a pressure.
The product is promoted to create awareness. If the product has no or few
competitors, a skimming price strategy is employed. Limited numbers of product
are available in few channels of distribution.
B) Growth: Competitors are attracted into the market with very
similar offerings. Products become more profitable and companies form
alliances, joint ventures and take each other over. Advertising spend is high
and focuses upon building brand. Market share tends to stabilise.
C) Maturity: Those products that survive the earlier stages tend
to spend longest in this phase. Sales grow at a decreasing rate and then
stabilise. Producers attempt to differentiate products and brands are key to
this. Price wars and intense competition occur. At this point the market
reaches saturation. Producers begin to leave the market due to poor margins. Promotion
becomes more widespread and uses a greater variety of media.
D) Decline: At this point there is a downturn in the market. For example
more innovative products are introduced or consumer tastes have changed. There
is intense price-cutting and many more products are withdrawn from the market.
Profits can be improved by reducing marketing spend and cost cutting.
Product Planning and Development
Product planning is the initial step of the overall marketing programme.
In the competitive business world, producers try to produce products which can
be nearer to consumer expectation. The pressure of competition forces the
producers to replace the existing products by developing new consumers’
suitable and friendly products. Product planning covers all activities which
enable producers and middle men to determine what should constitute a company’s
line of products. Product development covers the technical activities of
product research, production and design. The well attempt effort of product
development increases the scope to satisfy the needs of the customers.
The product planning and development cover the following decision making
area:
(I) What products should be produced?
(II) Expansion of product line.
(III) Determine the new use of its products.
(IV) What brand, package and label are used for different products?
(V) What should be quantity of its production?
(VI) Pricing policy etc.
In short, product planning involves the innovation of new products and
improvement in the existing product. In the words of Karl.
H. Tietjen, “Product planning is the act of marketing and commercialization of
new products, the modification of existing lines and the discontinuance of
marginal or unprofitable items”. As per this definition product planning covers
these three considerations.
(I) The development and introduction of new products.
(II) The modification of existing lines to suit the changing consumer
needs and preferences and
(III) Elimination of unprofitable products.
Objectives of Product Planning
Product
planning is one of the most important functions of a marketing manager. The
following are its objectives:
Ø To offer
products based upon customer needs.
Ø To
diversify, to capitalize on the company’s strength.
Ø To utilize
the available resources more profitability.
Ø To decide on
the elimination of non-profitable products.
Ø To change
the features of the product as per the changes in the market.
Ø For long-term
survival.
Components of Product Planning
1. Product
Innovation
2. Product
Diversification
3. Product
Development
4. Product
Standardization
5. Product
Elimination
6. Product Mix
& Product Line
1. Product
Innovation: Innovation is a part of continuous improvement. In
the absence of innovation, products become stale & hence die in the market.
Innovation is required to keep up with the phase of changing market needs.
According to Drucker, “Innovation will change customer’s wants, create new
ones, extinguish old ones & create new ways of satisfying wants.”
2. Product
Diversification: When a manufacturer offers more products in
different areas, it is referred as product diversification. In fact, when a
manufacturer diversification. Diversification normally involves business in a new
area. E.g.: ITC entering into
hotel business, sony entering into film production business.
3. Product
Development: It involves introducing a new product either by
replacing the existing one or innovating a completely new product. It can
either be brand extension or line extension. Company must be careful while
developing new products because research shows that 92% of them fall in the
market. Another danger of product development is cannibalization.
4. Product
Standardization: It implies a limitation of types of products in a
given class. It gives uniformity in terms of quality, economy, convenience
& Value. E.g.: Each model of T.V. gives a different standard.
Standardization promises a minimum level of performance & hence is used as
a benchmark for quality.
5. Product
Elimination: This involves an emotional decision of withdrawing
the existing product line. Decision must be carefully taken based upon current
market share, future prospects etc. The product elimination involves reviewing
the present product portfolio, analyze their profitability & then decide on
discontinuance of a product.
6. Product Mix
& Product Line: Product line is defined as a group of products
offered by a company which belongs to same family of products or similar to
each other or substitutes. E.g.: Product line of ponds for personal care
products includes cold creams, talcum powders, etc. Product Mix is defined as
combination of product lines offered by a company. E.g.: Product mix of Bajaj
includes two wheelers, home appliances, electrical appliances, financial
products etc.
Stages in New Product Development Process
The introduction of new product
usually passes through various stages. In each stage, the management must
decide whether to move on to next stage with the product idea or not. Practically,
in this process some of the ideas will be eliminated at every step. There are
six stages involved in the new product development. The stages are given below:
(I) Idea generation: New products are produced on the basis of
new ideas. Ideas may be generated from various sources like customers, dealers,
distributors, salesman, top executive, consultancy organisation, Research and
Development Department etc. The first step is to collect ideas as many as
possible so that the company can find out one of the best idea out of those
ideas to convert the same in to actual product.
(II) Screening of Ideas: All new ideas cannot be converted into
products as it requires heavy capital investments. Those ideas should be
screened and all unworkable ideas should be dropped. Only most viable, feasible
and promising one should be selected for further processing. The company uses
the concept testing method. In this method, consumer response to a description
or picture or drawings is measured even before the product is actually
produced. The purpose is to find out few best ideas.
(III) Business Analysis: During this stage, an attempt is made to
predict the economic consequences of the product for the company. In these
stages, the management should perform the following:
(a) Identify product features.
(b) Estimate market demand and
product profitability.
(c) Establish a programme to
develop the product.
(d) Assign responsibility for
further study of the product feasibility.
(IV) Product Development or
Prototype testing: This step consists of the following:
(a) Prototype development giving
visual image of the product.
(b) Consumer testing of the
model or prototype product.
(c) Branding, packing and
labeling of the product.
The marketing people determine
an appropriate brand name, package and price and making sure that both tangible
and intangible features are considered and included. Focus groups, target
market surveys and other market research techniques with the physical product
give the marketer additional information.
(V) Market Testing: Test marketing involves placing a full
developed new product for sale in one or more selected areas and observing its
actual performance under a proposed marketing plan. In the words of P. Kotler-
“Test marketing is the stage at which the product and marketing programme are
introduced into more realistic market settings”. The basic purpose is to
evaluate the product performance and marketing programme in a real setting
prior to the commercialization. This step provides the scope of correction and
modification of the product as well as marketing programme. Many products fail
after commercialization because of lack of test marketing. In this process, the
marketers approach the trial purchasers and first repeat purchaser to know
their feelings and reaction about the product as well as marketing programme.
On the basis of their opinions the marketers make certain required modification
in the product as well as marketing programme. After the favourable result
usually, products are sent for commercialization.
(VI) Commercialization: After favourable response in test
marketing, full scale production and marketing programme are planned and then
the product is launched. It may be in phased manner or the product may be
introduced simultaneously depending on the company’s plan and resources
available. The phased manner introduction helps to avoid short supply of the
product due to initial gaps in production and distribution.
Meaning of 'Packaging'
In this age of competition, good and appropriate packaging occupies much significance. The policies pertaining
to the packaging are a part of
the product planning and product development program.
Some of the main definitions of 'packaging' are being given hereunder:
In the opinion of Prof.
Rustom S. Davar, Packaging is that art and/or science which is
related to the development and use of materials,
methods and equipment, for the packing of the goods in some containers, so that the product, while passing through
various stages of distribution,
could remain fully safe.
William Stanton has opined that the meaning of packaging is the total group of activities under
the product planning which are related
to the chalking out of a design of the outer cover of a product and the concerned production.
Importance (Functions) of Packaging
a) Safety
of the Products. The
main function of packaging is to protect the things from dust, water,
moisture, insects, etc. Good packing
saves the products against perishing, loss and other damages.
b) Facility
in Marketing Activities. Due to the
packing, the movement of
the products, shifting, preserving, opening, collecting and storage, become economical and easier for both the middlemen as well as the consumers.
c) Advertisement. One
of the functions of packing is advertisement
too. Till there exists any product packet, it keeps us aware of the same.
d) Facility
in Collecting. It is easier to store the packaged goods. Due to packing, the products
remain safe in the godowns.
e) Information
to the Customers. While making
the product attractive,
the packing could also make the product useful and
informative. It can extend necessary instructions and information
more effectively to the customer regarding the use of the product.
Characteristics of a Good Package
a) Could
attract one's attention.
b) Could
make the prompt recognition possible.
c) Could
create interest and maintain the same.
d) Could
create the desire for the procuring of the product.
e) Could
compel for purchasing the product.
f) Could
impress the heart of the consumer.
g) Could add to the work-suitability, characteristics
and total image of the
brand.
In the end, it might be said that a very well made packing, would
immediately attract the attention, would create interest, would develop desire
and would ultimately press the consumer either to investigate and make enquiries
into the product, or for purchasing the same.
Brand Name
A brand is define as a name, term, sign, symbol or special design or some
combinations of these elements that is intended to identify the goods or
services of one seller or a group of sellers. A brand differentiates these
products from those of competitors. A brand in short is an identifier of the
seller or the maker. A brand name consists of words, letters and / or numbers
that can be vocalized. A brand mark is the visual representation of the brand
like a symbol, design, distinctive colouring or lettering.
In the opinion of American
Marketing Association, Brand is a name,
position, symbol or design or their combination by which the products
and services of a seller or different sellers are recognized and are differentiated from the
products and services of competition.
In the views of Lapland, The
'brand' can be defined as any indication,
symbol, letter or letters which indicate the origin or the ownership
of any product and differentiate the product from its variety,
and don't grant the same right to others for using them for the
similar object.
Characteristic of a good brand name
A good brand name should possess as many of the following characteristics
as possible.
a) It
should be distinctive. A unique and distinctive symbol is not only easy to
remember but also a distinguish feature.
b) It
should be suggestive. A well-chosen name or symbol should be suggestive of
quality, or may be associated with superiority or a great personality. The name
VIP Classic for travel wares is suggestive of a superior quality for a distinct
class of people. Promise is suggestive of an assurance of tooth health.
c) It
should be appropriate.
d) It
should be easy to read, pronounce and spell.
e) It
should be adoptable to new products.
f) It
should be registrable under the Indian laws of Trade Marks and copyrights.
Elements of a Good Brand
It is generally a difficult decision to select any brand, for the producer-firm,
for its produced goods. Although no legal restriction is
there regarding the selection of a brand, yet the marketing managers are required to keep enough
of care and precaution in selecting the brand. While selecting the brand, the
following qualities must
be essentially borne into consideration:
a)
Indicative
of the Qualities or Merits of the Product. The brand which is
selected must be capable of expressing the maximum
qualities of the products.
b)
No
Confusion about the Product. It must not be leading to confusion to the consumers.
c)
Simple and Brief. The brand must be
brief so that the people could
easily remember it, e.g. Murphy,
Bush, Amul, Cibaca, Dalda, etc.
d)
Simple to Pronounce. It must be capable
of being easily spoken or
pronounced.
e)
Facility
in Advertising. The brand must be such that by means of any
advertising medium, it could be used to publicize the same.
f)
Attractive. The brand should be such
that it could be melodious in
hearing and could attract consumers.
g)
Not Vulgar. From social point of view,
the brand should not be vulgar or obscene.
h)
Facility in Registration. The brand
should be such that there is not much problem in getting it registered.
i)
Specific. It must be specific and it
must contain some differentiating characteristics, compared to other products.
j)
Economical. There must not be much
expenditure to be incurred in getting the brand printed on the label or packet
during the advertising campaign.
Trade Mark
In General, a trade mark is defined as any sign, as any combination of
sign, inherently capable of distinguish the goods or service of one
undertaking. Trade marks may be a combination of words, letters, and numerals.
They may consist of drawings, symbols, colours used as distinguish features.
The owner of the mark may not be involved in the relevant trade and acts purely
as a certification authority. The internationally accepted ―ISO 9000 quantity
standards are examples of such widely recognized certifications.
Distinction between Brand and Trade-Mark
The following are the distinctions between the brand and trade-mark:
a) Registration. Brand is merely a
word, symbol or a design. If it is got registered under law, it becomes a
trade-mark. But the brand is not required to be legally registered.
b) Action
against Imitating. If the brand has been copied out by some other
concern competing the business, no legal proceedings against it could be
undertaken for the same. As against it, if someone imitates the `trade-mark',
the body might be legally sued for.
c) Scope. The
scope for brand is limited while the trademark is quite extensive in its
sphere.
d) Use
or Utilization. When the brand has been got registered, it
becomes the trade-mark and its use could be permissible to the same body or
undertaking only. Against it, one and the same brand might be used by various
manufacturers, producers or sellers.
e) All
the Brands are not the Trade-Marks. All the trade-marks have to be
brands, but all the brands are not the trade-marks.
After Sales Service
Customers are the assets of every business. Sales professionals must try
their level best to satisfy customers for them to come back again to their
organization. After sales service refers to various processes which make sure
customers are satisfied with the products and services of the organization. The
needs and demands of the customers must be fulfilled for them to spread a
positive word of mouth. In the current scenario, positive word of mouth plays
an important role in promoting brands and products.
After sales service makes sure that products and services meet or surpass
the expectations of the customers. After sales service includes various
activities to find out whether the customer is happy with the products or not?
After sales service is a crucial aspect of sales management and must not be
ignored.
Importance of after sale service
After sales service plays an important role in customer satisfaction
and customer retention. It generates loyal customers. Customers start believing
in the brand and get associated with the organization for a longer duration.
They speak well about the organization and its products. A satisfied and happy
customer brings more individuals and eventually more revenues for the
organization. After sales service plays a pivotal role in strengthening
the bond between the organization and customers.
After Sales Service Techniques
Ø Sales
Professionals need to stay in touch with the customers even after the deal.
Never ignore their calls. Call them once in a while to exchange pleasantries.
Ø Give
them the necessary support. Help them install, maintain or operate a particular
product.
Ø Any
product found broken or in a damaged condition must be exchanged immediately by
the sales professional. Don’t harass the customers.
Ø Create
a section in organization’s website where the customers can register their
complaints. Every organization should have a toll free number where the
customers can call and discuss their queries.
Ø Feedback of
the products and services from the customers. Feedback helps the organization
to know the customers better and incorporate the necessary changes for better
customer satisfaction.
Ø Ask
the customers to sign Annual Maintenance Contract (AMC) with your organization.
AMC is an agreement signed between the organization and the customer where the
organization promises to provide after sales services to the second party for
certain duration at nominal costs.
Price and Pricing
Price is defined as the amount we pay for
goods or a service or an idea. Price is the only element in the marketing mix
of a firm that generates revenue. All other elements generates only cost. Price
is a matter of importance to both seller & buyer in the market place. Only
when a buyer & a seller agree on price, we can have exchange of goods and
services leading to transfer of ownership.
The term ― Price need not be confused with
the term ― Pricing. Price is the value that is put to a product or service and
is the result of a complex set of calculations, research and understanding and
risk taking ability. A pricing strategy takes into account segments, ability to
pay, market conditions, competitor actions, trade margins and input costs,
amongst others. It is targeted at the defined customers and against
competitors.
Objectives of Pricing
A business firm will have a number of
objectives in the area of pricing. These objectives can be short term or long
term or primary objectives:-
(i) Profit maximization in the short term.
(ii) Profit optimization in the long term.
(iii) A minimum return on investment
(iv) A minimum return on sales turnover.
(v) Achieving a particular sales volume.
(vi) Achieving a particular market share.
(vii) Deeper penetration of the market.
(viii) Entering new markets.
(ix) Target project on the entire product
line.
(x) Keeping competition out, or keeping it
under check.
(xi) Keeping parity with competition.
(xii) Fast turnaround & early cash
recovery.
(xiii) Stabilizing price & margins in
the market.
(xiv) Providing the commodities at prices
affordable by weaker section.
(xv) Providing the commodities at prices
that will stimulate economic development.
Importance of Pricing
Importance of pricing is spelled out by
the following points.
1. Price is the pivot for an economy: Price is the prime mover of the wheels of
the economy namely, production, consumption, distribution & exchange price
influences consumer purchase decision. It reflects purchasing power of
currency. It can determine the general living standards of people. In essence,
by and large every facet of our economy life is directly or indirectly governed
by pricing.
2. Price Regulates Demand: Price increase or decrease the demand for
the product de- marketing strategy can be easily implemented to meet the rising
demand for goods & service.
3. Price is the competitive weapon: The
marketers have to perform in a highly competitive environment. Price is a very
important instrument to fight competition. It is the competition that
contributes maximum to the importance of pricing. Pricing is a highly dynamic
function. Because of the immense competition and in meeting competition,
pricing decisions acquire their real importance.
4. Price is the Determinants of profitability: Price determines the profitability of
firm by influencing the sales revenue. Low price is not always necessary to
increase profit. A right price can increase the sales volume and there by
profit. The impact of price rise of fall is reflected instantly in the rise or
fall of the product profitability.
5. Price is a Decision Input: Pricing is highly risky decision area
& mistakes in pricing might reasonably affect the firm, its profits, growth
and future.
6. Marketing Communication: Price plays an important role in marketing
communication. High price may indicate higher quality. Price communicates value
to the consumer. Customers are basically value-maximizes. They want to have the
maximum value from a given purchase. They form an expectation of value and act
on it. A buyer’s satisfaction is a function of the product’s perceived
performance and the buyer’s expectations. So, if the product meets the
expectations of consumers and their value definitions at the given price point,
price is seen as acceptable. Otherwise consumers tend to be dissatisfied. They
may say that the product is overpriced and they may reject the offer.
The above discussion indicates that
pricing is a critical element in any company’s marketing plan, because it
directly affects revenue and profit goals. Effective pricing strategies must
consider costs as well as customer perceptions and competitor reactions,
especially in highly competitive markets. Today, many firms are trying to
follow the low-price trend. At the same time, many marketers have been
successful in selling more expensive products and services by combining unique
product formulations with engaging marketing campaigns.
Pricing Methods
There are several methods of pricing & they can be grouped into few
broad categories:-
(1) Cost Based Pricing
(2) Demand Based Pricing
(3) Competition Oriented Pricing
(4) Value Pricing
(5) Product Line Oriented Pricing
(6) Tender Pricing
(7) Affordability Based Pricing
(8) Differentiated Pricing.
(1)
Cost Based Pricing: Under the cost based pricing, different
methods used are:-
Ø Mark
Up Pricing
Ø Absorption
Cost Pricing
Ø Target
Rate of Return Pricing
Ø Marginal
Cost Pricing
Mark Up Pricing: It refers to the pricing methods in which the
selling price of the product is fixed by adding a margin to its cost price. The
mark ups may vary depending on the nature of the product & the market.
Usually, the higher the value of the product, the larger is the mark up.
Absorption Cost Pricing: ACP rests on the estimated unit cost
of the product at the normal level of production & sales. The method uses
standard costing techniques & works out the variable & fixed costs
involved in manufacturing, selling & administering the product. By adding
the costs of operations, we get the total costs. The selling price of the
product is arrived by adding the required margin towards profit to such total
costs.
Target Rate of Return Pricing: It is similar to absorption cost
pricing. The rate of return pricing uses a rational approach to arrive at the
mark up. It is arrived in such a way that the ROI criteria of the firm are met
in the process. But this process amounts to an improvement over absorption
costing since it uses a rational basis for arriving at the mark up.
Marginal Cost Pricing: It aims at maximizing the contribution
towards fixed costs. Marginal costs include all the direct variable costs of
the product. In marginal cost pricing, these direct variable costs are fully
realized. In addition, a portion of the fixed costs is also realized under
competitive market conditions marginal cost pricing is more useful.
(2) Demand Based Pricing: The
following methods belong to the category of demand / market based pricing:-
Ø What
the Traffic can Bear’ Pricing
Ø Skimming
Pricing
Ø Penetration
Pricing
What the Traffic can Bear’ Pricing: The seller takes the
maximum price that the customers are willing to pay for the product under the
given circumstances. This method is used more by retail traders than by
manufacturing firms. This method brings high profits in the short term. But in
the long run it is not a safe concept, chances of errors in judgment are very
high.
Skimming Pricing : This method aims at high price & high
profits in the early stage of marketing the product. It profitably taps the
opportunity for selling at high prices to those segments of the market, which
do not bother much about the price. This method is very useful in the pricing
of new products, especially those that have a luxury or specialty elements.
Penetration Pricing : Penetration pricing seeks to achieve
greater market penetration through relatively low price. This method is also
useful in pricing of new products under certain circumstances. For e.g. when
the new product is capable of bringing in large volume of sales, but it is not
a luxury item & there is no affluent / price insensitive segment, the firm
can choose the penetration pricing & make large size sales at a reasonable
price before competitors enter the market with a similar product. Penetration
pricing in such cases will help the firm have a good coverage of the market
& keep competition out for some time.
In all demand based pricing methods, the price elasticity of demand is
taken into account directly or indirectly.
(3)
Competition Oriented Pricing : In a competitive economy,
competitive oriented pricing methods are common. The methods in this category
rest on the principle of competitive parity in the matter of pricing. Three
policy options are available to the firm under this pricing method :
Ø Premium
Pricing
Ø Discount
Pricing
Ø Parity
Pricing
Premium pricing means pricing above the level adopted by competitors.
Discount pricing means pricing below such level & parity pricing means
matching competitors pricing.
(4)
Value Pricing : Value pricing is a modern innovative &
distinctive method of pricing. Value pricing rests on the premise that the
purpose of pricing is not to recover costs, but to capture the value of the
product perceived by the customer. Analysis will readily show that the
following scenarios are possible with the cost value price chain:
Ø Value
> Price > Costs
Ø Price
> Value > Costs
Ø Price
> Costs > Value
Ø Price
> Value > Costs
(5)
Product Line Pricing : When a firm markets a variety of products
grouped into suitable product lines, a special possibility in pricing arises.
As the product in a given product line are related to each other, sales of one
influence that of the others. They also have interrelated costs of
manufacturing & distribution. It can fix the prices of the different
product in such a manner that the product line as a whole is priced optimally,
resulting in optimal sales of all the products put together & optimal total
profits from the line.
(6)
Tender Pricing : Business firms are often required to fix the
prices of their products on a tender basis. It is more applicable to industrial
products & products purchased by Institutional customers. Such customers
usually go by competitive bidding through sealed tenders. They seek the best
price consistent with the minimum quality specification & thus bag the
order.
(7)
Affordability Based Pricing : The affordability based pricing is
relevant in respect of essential commodities, which meet the basic needs of all
sections of people. Idea here is to set prices in such a way that all sections
of the population are in a position to buy & consume the products to the
required extent.
(8)
Differentiated pricing : Some firms charge different prices for
the same product in different zones/ areas of the market. Sometimes, the
differentiation in pricing is made on the basis of customer class rather than
marketing territory.
Factors Affecting Pricing
Factors affecting pricing may be
categorized into two categories- internal factors and external factors. In each
of these categories some may be economic factors and some may be psychological
factors. Some factors may be quantitative and some others may be qualitative.
Some of the important factors affecting pricing are given below:
A. Internal Factors:
As regards pricing, the firm has certain
objectives -long term as well as immediate. For example, the firm has certain
costs of manufacturing and marketing; and it seeks to recover these costs
through the price and thereby earning a profit. In respect of all the products,
the firm may have a basic philosophy on pricing. The pricing decisions of the
firm have to be consistent with this philosophy. Pricing also has to be
consistent with the overall objectives of the firm. These objectives could be
achieving market share, short term or long term profit. The firm may be
interested in seeking a particular public image through its pricing policies.
All these constitute the internal factors that influence pricing. From the
above, it appears that pricing is influenced by objectives and marketing
strategy of the enterprise, pricing philosophy, pricing objectives and policy.
More specifically, the internal factors are:
1. Corporate and marketing objectives of
the firm: All pricing objectives
emanate from the corporate and marketing objectives of the firm. A business
firm will have a number of objectives in the area of pricing. Some of these
objectives are long-term, while others are short-term. Profit is one of the
major objectives in pricing. Firms may not be interested in profit maximization
as such, they may be more interested in long term survival and growth.
2. The image sought by the firm through
pricing: If a firm offers high
quality goods at high prices, the firm will develop a premium image.
3.The characteristics of the product: Sophisticated, complex and new to the world products
normally carry high prices. Products having more features carry higher prices.
4. Price elasticity of demand of the
product: If price increases,
demand decreases and if price decreases demand increases. Marketers may decide
on pricing based on ‘what the traffic can bear’. The marketer takes the maximum
price which the customers are willing to pay for the product under the given
circumstances.
5. The stage of the product on the
product life cycle: When a
product is introduced for the first time it carries a higher price. Gradually
with increasing consumer acceptance and competition price decreases.
6. Use pattern and turn around rate of
the product: Price of newspaper
and magazines may be different for the immediacy factor, permanence and the
pass along readership. Newspapers are having a short life, while magazines
enjoy a pass along readership.
7. Costs of manufacturing and marketing: Costs determine price to a great extent. Marketers
will have to cover the cost and earn a profit.
8. Extent of distinctiveness of the
product and extent of product differentiation practised by the firm: Products having uniform size, shape and compositions
can be manufactured at a lesser cost compared to products having
differentiation.
9. Other elements of the marketing mix
of the firm and their interaction with pricing: Amount spent on product research, advertising,
dealer development etc. are some factors which influence price of a product.
10. Composition of the product line of
the firm: A firm may sell a
number of products in the same product line. In that
case , the products are likely to be sold under different prices depending on
their quality, features etc.
B. External Factors:
In addition to the internal
factors mentioned above, any business firm has to encounter a set of external
factors while formulating its pricing decisions. An enterprise exists in an
environment and is influenced by environmental factors. The external factors
are:
1. Market characteristics: Some markets are having very stiff competition and
some are having less. The number of players in a market could be more or less.
Market leadership factors also may be different. Different characteristics of
the market have a bearing on price.
2. Buyer behaviour in respect of the
given product: Value conscious
buyers are likely to be interested in low prices. Image conscious buyers may be
more attracted by product image rather than low price of the product.
3. Bargaining power of major customers: In industrial buying situations major buyers have a
bargaining power. They are in a better position to negotiate prices.
4. Bargaining power of major suppliers: Similar is the case with major suppliers. They are
in a better position to supply bulk quantities. They are also in a better
position to negotiate terms.
5. Competitors’ pricing policy: Firm’s decision to set a price is heavily influenced
by the price set by the competitors. In case of highly unique product having a
niche market, a firm can have its own price. In most of the cases, competitive
reactions to the price set by the firm have to be seriously studied for future
programmes.
6. Government controls/regulations on
pricing: As stated earlier the
Governmental measures like import duties, excise, subsidy, sales tax etc.
influence pricing decisions.
7. Social considerations: Firms have a responsibility to society and to its
customers. Firms are not expected to exploit consumers by unnecessarily
charging high prices.
As discussed above pricing
decisions are complex. For pricing an individual product the firm has to
consider its overall objective, prices set for other products, costs etc. These
are internal factors. In addition, the pricing decisions are influenced heavily
by the external factors as stated above.
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