Brand and Branding Strategy 93 3. Brand Sponsorship There are four major types of brand sponsorship options. The product could be launched as a manufacturer’s brand. E.g.: Philips, IBM, Bajaj, Amul. The manufacturers may sell the product to resellers who give it a private brand name which is also known as store brand or distributor brand. E.g.: FabMall, Nilgiri’s. Some manufacturers market licensed brands. Sellers of children’s products use many licensed names. E.g.: Batman, Bugs Bunny, Mickey Mouse, Donald Duck. Coca Cola has many licencees all over the world. Sometimes two companies join together and use co-branding with two established brand names. E.g.: Maruti Suzuki, Toyota Kirloskar, ICICI Bank – Kingfisher, !dea – HDFC Bank. 4. Brand Development Development of brands can involve four different strategies. They are: (a) Brand Extensions: Brand extension means extending an established and successful brand name to more products, which may or may not be related to the core brand. This is a powerful tool in brand development and management. It helps the new products to acquire instant brand recognition, and faster acceptance. It enables the company to enter new product categories more easily. Brand extension costs much less than launching a new brand. Example: Maggie noodles, Maggie ketchup, Maggie soup, etc. Barbie Doll – Barbie books, Barbie cosmetics, Barbie furnishings. Lifebuoy Plus, Lifebuoy Gold, Lifebuoy Liquid (each positioned at different segments). Amul milk powder – Amul ghee, Amul butter, Amul cheese, Amul cheese spread, Amul ice-cream, Amul chocolates. (b) Line Extensions: Line extensions involve introduction of additional items in a given product category under the same brand name, such as new flavours, forms, colours, ingredients, package sizes, etc. Majority of new product launches by companies are line extensions. Examples: HLL’s Surf, Surf Ultra, Surf Excel, International Surf Excel. Colgate line extension includes Colgate Gel, Colgate Herbal, Colgate Calciguard, and Colgate Total. Line extensions are low-cost and low risk ways of launching a new product. But over extended brands often cause confusion to consumers. Also, if marketers are not cautious, sales of an extension may cut into the sales of other items in the line, which is called ‘brand cannibalism’. Cannibal is someone who eats human flesh; or an animal that eats CU IDOL SELF LEARNING MATERIAL (SLM)
94 Marketing Management others of its own kind. Similarly, one product or brand of a company could eat into the market share of one or more products or brands of the same company. To work best, the line extension should take away the sales from competitors’ brands. (c) Product Flanking: Product flanking refers to the introduction of different combinations of products at different prices, and package sizes to tap market opportunities. The idea behind this concept is to flank the core product by offering different variations of size and price so that the consumer finds some brand to choose from. The core product is flanked on both sides by bigger or smaller packs/costly or cheaper products. Examples: BRU instant coffee – original pack size was 200gms. Flanked by 1 kg, 500gms on one side and 100gms, 50gms on the other side. Clinic shampoo – original 200 ml pack flanked by 400ml pack on one side and 100 ml, 50 ml, and 10 ml sachets on the other side. Another alternative is to develop a flanker brand – a new brand of a company in a product category in which it currently has a brand offering. Proctor & Gamble’s primary detergent powder in India was Ariel. Later, it developed a flanker brand named Tide. This is done to appeal to target segments not reached by Ariel because of its high price. Similarly, HUL had Surf and introduced Wheel as a flanker brand. (d) Multi Brands: Sometimes companies launch additional brands in the same category. Multi branding facilitates product differentiation, i.e., to establish different features, attributes and appeal to different buying motives. It also helps to lock up shelf space in retail points. Examples: HLL’s soaps - Dove, Lux, Pears, Liril, Hamam. HLL’s toothpastes- Close up, PepsodentB. (e) New Brands: A new brand name is created by a company when it enters a new product category for which the present brand name is found not suitable. The company may also feel that the power of its existing brand name is waning and a new brand name is needed. Example: Honda created the Lexus brand for its luxury car to differentiate from the established line. Titan watches created a new brand name, ‘Fast Track’ for the watch aimed at teenagers. Brand Rejuvenation Brand rejuvenation is the act of adding value to an existing brand by improving product attributes and enhancing its overall appeal. The aim is to re-focus consumers’ attention on an existing brand. This is resorted to especially when the brand tends to show declining symptoms CU IDOL SELF LEARNING MATERIAL (SLM)
Brand and Branding Strategy 95 on its product life cycle. Brands are re-launched in new shapes, new packing sizes, new containers, new colours, as extra strong, as fresh, etc. Advertising appeals claim that the rejuvenated brand is ‘new’, ‘super’, ‘special’, ‘extra strong’, etc. The process is just an updation of existing brands. Example: HLL’s Surf became Surf Excel, Surf Ultra. Brand Relaunch Occasionally, some brands do not succeed in the market. Some brands reach declining stage after an initial success. Companies try to give the brand one more trial with some modified attributes or features and aggressive promotional campaigns. This process is called brand relaunch. Example: Santoor soap of Wipro failed in the market initially. New Santoor was launched, ably supported by a new promotion campaign. The relaunch was successful and New Santoor became an important brand in the premium soaps segment. Close-up toothpaste is another example of relaunch success. Sometimes relaunch is done for products in declining stage by repositioning. The best example is Cadbury’s chocolates. Changing from the traditional ‘sweet for children’ position, Cadbury’s is now positioned as a product meant for celebrations (Pappu pass ho gaya – ad on TV) and also as a snack-food meant for teenagers and adults. 6.8 MANAGING BRANDS Companies must carefully manage their brands. First, the brand’s positioning must be constantly communicated to consumers. Major marketers often spend huge amounts on advertising to create brand awareness and to build brand preference and brand loyalty. Expensive advertising campaigns can help to create name recognition, brand knowledge, and even some brand preference. The fact remains that brands are not maintained by advertising but by the brand experience. Today, customers come to know about a brand through a wide range of contacts and touch points. These include not only advertising, but also, personal experience with the brand, word of mouth, telephone interactions, company web pages, etc. Any of these experiences can have a positive or negative impact on brand perceptions and feelings. Most companies, all over the world, have come to realise that their principal and most valuable assets were in fact their brand names - brand equity or the financial value of their brands. CU IDOL SELF LEARNING MATERIAL (SLM)
96 Marketing Management Many companies are nowadays undertaking joint marketing projects. That is, two different companies pair their respective brands in a collaborative marketing effort, known as co-branding. Co-branding Co-branding involves combining two or more popular brands into a single product. Used properly, it is an effective way to leverage strong brands and has the potential to achieve 'best of all worlds' synergy that capitalises on the unique strengths of each contributing brand. \"A co-branded extension is a composite brand concept that contains the characteristics of two underlying concepts. Each of the two participating concepts is associated with a set of attributes that are combined according to a set of rules to form the composite concept. In other words, a co- branded extension does not involve the transfer of the entire brand concept from a parent category to an extension category. Rather, it merely involves the transfer of a set of attributes from the two parent brands, and their re-combination into a coherent composite concept that could become a member of the extension category to which the new brand belongs.\" (Park, Jun and Shocker). Marketers and especially brand managers were earlier just bothered about how to promote their brand and improve brand image, loyalty and brand equity. But, nowadays, they are looking at the possibility of defining their customers and providing combined benefits as a bundle, by forming an alliance with other brands which are complementary, through co-branding. This process will be of advantage to both the customers as well as the companies. The first step in a co-branding strategy is to prepare a profile of the target customers using demographics and psychographics. For example, assume that a marketer wants to target the youth - young, urban, educated and well-placed, with good pay packets. He can identify some products and services that this group will definitely be seeking – mobile handsets with many features, MP3/MP4 players, iPods and iPads, cars/two-wheelers, branded apparel, fashion accessories, personal grooming aids, restaurants, fast food, recreation, health equipments or gym and travel. Once this definition is ready, it becomes easy for the marketer to select products and services which can be combined through co-branding, to provide more advantage or benefits to the customers than both products or services put together. Examples of some co-branded products/services: Pizza Hut - Pizza and Pepsi Citibank - Citibank-Jet Airways card P&G - Ariel- Whirlpool (advertising) CU IDOL SELF LEARNING MATERIAL (SLM)
Brand and Branding Strategy 97 Nokia - Handsets with service providers Intel - With PC manufacturers 6.9 Product Differentiation In a competitive market, for gaining competitive advantage, companies have two alternative strategies – attractive pricing based on cost leadership and economies of scale, or product differentiation through which they can offer superior value to the consumer. Product differentiation allows a company to fight on the non-price plank, with all the benefits associated with it. Differentiation helps a company to move to a position where it can claim a premium for its product in the market. Product differentiation strategies can be based on many parameters, of which the most common ones are as below: Form: The shape, size or physical structure of a product can be used for differentiation. Features: Most products could be offered with varying features that supplement its basic function. Based on surveys of buyer behaviour and buyer’s requirements, companies can identify and select appropriate new features for products. Example: Close-up with gel, Promise with clove oil, Medimix with herbal medicines. Performance Quality: This refers to the level at which the product’s primary characteristics operate. The performance level must be designed appropriate to the target market and competitor’s performance levels. Performance quality should be managed by the company through time. Example: Godrej Storewell range of almirahs, Titan watches, Philips electronic goods. Conformance Quality: This is the degree to which all produced units are identical and meet the promised specifications. Buyers usually expect products to have very high conformance quality. Examples are the same as above. Durability: This is a measure of the product’s expected operating life under natural or stressful conditions. Buyers treat this as a valued attribute for many products. For example, buyers will pay more for vehicles or kitchen appliances that have a reputation for being long-lasting. Reliability: Normally, buyers are prepared to pay a premium for more reliable products. Reliability is a measure of the probability that a product will not malfunction or fail within a specified time period. Godrej steel products are example. CU IDOL SELF LEARNING MATERIAL (SLM)
98 Marketing Management Repairability: This refers to the case of fixing a product when it malfunctions or fails. Ideal repairability would exist if the users could fix the product themselves with little cost in money or time. Style: Style describes the product’s look and feel to the buyer. Aesthetics play a key role in some brands. Style has the advantage of creating distinctiveness that is difficult to copy. Design: Design is a potent way to differentiate and position products and services. Unique design will give a company’s products a competitive edge. Design is the totality of features that affect how a product looks and functions in terms of customer requirements. It is particularly important in marketing retail services, apparel, packaged goods, and durable equipment. To the company, a well-designed product is one that is easy to manufacture and distribute. To the customer, a well designed product is one that is pleasant to look at and easy to open, install, use, repair, and dispose of. Services: When the physical product cannot easily be differentiated, the key to competitive success will lie in adding valued services and improving their quality. The main service differentiators are: ordering ease, delivery, installation, customer training, customer consulting and maintenance and repair. Example: Microsoft and Ford excel in their offers through efficient service to customers. 6.10 Summary “A brand is a name, term, sign, symbol or design or a combination of these, that identifies the maker or seller of a product or service.” Consumers perceive brand as an important part of a product and branding adds value to a product.Brands vary in the amount of power and value they have in the market. A powerful brand has high brand equity. “Brand equity is the positive differential effect that knowing the brand name has on consumer response to the product or service. A measure of a brand’s equity is the extent to which customers are willing to pay more for the brand”. Brand equity is the result of factors like brand awareness, brand loyalty, brand image (perceived quality) and brand associations.Building brand equity requires careful consideration of the following: 1. Choice of brand elements that make up the brand. 2. Developing and implementing marketing support programmes. 3. Leveraging secondary associations by linking the brand to other entities. CU IDOL SELF LEARNING MATERIAL (SLM)
Brand and Branding Strategy 99 The important brand strategy decisions are:Brand positioning-Brand name selection-Brand sponsorship-Brand development. Product differentiation can be dbrand equity is the result of factors like brand awareness, brand loyalty, brand image (perceived quality) and brand associations.one based on many parameters such as:Form, Features, Performance quality, conformance quality, Durability, reliability, Design, Services. Companies must carefully manage their brands. First, the brand’s positioning must be constantly communicated to consumers. Major marketers often spend huge amounts on advertising to create brand awareness and to build brand preference and brand loyalty. Expensive advertising campaigns can help to create name recognition, brand knowledge, and even some brand preference. The fact remains that brands are not maintained by advertising but by the brand experience. 6.11 Key Words/Abbreviations Branding: Giving identity to products using name, logo, etc Brand equity: Notional financial value of a brand Brand awareness: People’s knowledge about a brand Brand associations: What comes to consumer’s mind when they hear a brand name Brand loyalty: Buying same brand always Product flanking: Introducing smaller or bigger packages of a product Multi brands: Having many brands Brand rejuvenation: Making a dormant brand active and strong Product differentiation: Different variants of a product for different customers Cobranding: Two companies coming out with a joint brand Brand positioning: Placing a brand in the mind of target consumers against competitors Brand sponsoring: Paying for events and causes to promote a brand Consumer perception: What consumers understand after buying and using a product Consistency: Same theme continued without change Customer loyalty: Always buying same brand Customer equity: Increasing number of loyal consumers Perceived quality: Consumers give more value to popular brands based on quality CU IDOL SELF LEARNING MATERIAL (SLM)
100 Marketing Management Brand personality: Giving human personality traits to brands Brand image: Image of a brand in consumer’s mind Brand elements: Name, logo, slogan, terms, package, label, colour, etc. Leveraging secondary associations: Using other entities to add value to brand Logos: Emblem or letter or character used to distinguish a brand Slogans/taglines: Short catchy quotes related to brand Jingles: Short musical pieces or songs promoting brands Brand ambassadors: Celebrities who endorse brands Flanker brand: A new brand extension to strengthen existing brand 6.12 Learning Activity 1. Take the example of 4 consumer goods companies and 4 industrial goods companies and identify how they do the product differentiation strategy for their brands. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Give 5 examples of brands which are positioned using different parameters. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 3. Take the example of any car manufacturer and explain how they position different models based on different norms. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 4. Identify 5 brands which succeeded in the Indian market and 5 brands which failed. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- CU IDOL SELF LEARNING MATERIAL (SLM)
Brand and Branding Strategy 101 6.13 Unit End Questions (MCQ and Descriptive) A. Descriptive Types Questions 1. Explain David Aaker’s model of brand equity using a diagram and identify the sources of brand equity. 2. Elaborate the advantages and disadvantages of branding using the example of mobile handsets. 3. Compare the benefits of branding to consumers and marketing companies using the examples of FMCG products. 4. Discuss the various product differentiation strategies used by companies using suitable examples for each strategy. 5. Explain the need and importance of brand positioning. Give examples of a few successful positioning. 6. Differentiate brand relaunch, brand rejuvenation and brand revitalisation using examples of FMCG products. 7. Differentiate co-branding, ingredient branding and brand sponsorship giving suitable examples. 8. Elaborate the important brand strategy decisions a company has to take. Give relevant examples for each strategy. 9. Why the concept of labeling is important in marketing? 10. Explain the various adopter categories. 11. What is Mass Marketing? Discuss its importance in today marketing changing environment B. Multiple Choice/Objective Type Questions 1. Branding involves activities like: (a) Name selection (b) Sponsorship (c) Logo selection (d) All of above 2. Brand name should be: (a) Easy to remember (b) Likable (c) Protectable (d) All of the above CU IDOL SELF LEARNING MATERIAL (SLM)
102 Marketing Management 3. Brand positioning can be done based on: (a) Attributes (b) Benefits All of the above (c) Beliefs and values (d) Lifebuoy 4. Examples of brand extension: All of the above (a) Barbie Doll (b) (c) Amul milk (d) Ans.: 1. (d), 2. (a), 3. (d), 4. (d). 6.14 References Text Books Dr. K.Karunakaran, Marketing Management, ed., HPH. Reference Books Philip Kotler, Marketing Management, ed. Pearson/PHI. Web Resources 1. www.coursehero.com. 2. Blog.hubspot.com/marketing. CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 7 PRODUCT DEVELOPMENT AND LIFE CYCLE STRATEGIES Structure: 7.0 Learning Objectives 7.1 Introduction 7.2 The Product Development Process 7.3 The Diffusion and Adoption Process 7.4 Adoption Categories 7.5 The Product Life Cycle 7.6 Stages in PLC and Marketing Strategies 7.7 Applications of the PLC Concept 7.8 Summary 7.9 Key Words/Abbreviations 7.10 Learning Activity 7.11 Unit End Questions (MCQ and Descriptive) 7.12 References 7.0 Learning Objectives After studying this unit you will be able to understand The need and types of new products The new product development process The concept of product life cycle and its applications Marketing strategies at different stages
104 Marketing Management 7.1 Introduction One of the major challenges in marketing planning is to develop ideas for new products and to launch them successfully. The company will have to find replacements for its products that have entered the declining stage. Because of changes in the customers’ tastes, technology and competition, there is a need for marketing companies to develop new products. For example, the old radio became obsolete and transistors were developed. Then came tape recorders, two in ones and walkman. When technology improved, CD players and Discman were launched. Also, many new products fail in the market for various reasons and need replacements. Customers always want new products, and competitors will do their best to supply them, unless the company acts fast. In this module, you will also learn about the concept of product life cycle, the different stages involved in PLC and the marketing strategies for each stage. 7.2 The Product Development Process New product development is a growth strategy, because of the heavy role that marketing plays in finding, developing and launching successful new products. New products can be original products, product improvements, product modifications, and new brands that the company develops through its own R&D efforts. A key factor in effective new product development process is to establish workable organizational structures. Companies handle this through the Product Managers, New-Product Managers, New Product Committees and New Product Departments. The product development process involves eight stages. They are: CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 105 1. Idea Generation: The new product development process starts with the search for ideas. Top management should define the products and markets to emphasise. It should state the new product objectives, whether it is high cash flow, market share domination, etc. It should state how much effort should be devoted to developing original products, modifying existing products, and imitating competitors’ products. New product ideas can be derived from many sources: customers, scientists, competitors, company sales people, dealers and top management. Idea generating techniques like Attribute Listing, Forced Relationships, Morphological Analysis, Problem Analysis, Brainstorming, and Synectics help generate better ideas. 2. Idea Screening: The second stage is idea pruning or reducing by screening. In this stage, the company must avoid the ‘Drop-error’, i.e., permitting a poor idea to move into development and commercialisation, or dropping a good idea. The purpose of screening is to spot and drop poor ideas as early as possible. ‘Idea rating’ is done by describing the product, the target market, and the competition, and making some rough guesses as to market size, product price, development time and costs, manufacturing costs and rate of return. Even if the idea looks good, the questions arise, ‘Is it appropriate for the particular company? Does it mesh well with the company’s objectives, strategies and resources?’ Ideas that do not satisfy one or more of these questions are dropped. 3. Concept Development and Testing: Surviving ideas must now be developed into product concepts. A ‘product idea’ is an idea for a possible product that the company can see itself offering to the market. A ‘product concept’ is an elaborated version of the idea expressed in meaningful consumer terms. For example, producing a powder to add to milk to increase its nutritional level and taste is a product idea. Who is to use the product? What primary benefit can be built into this product? What is the primary occasion for this drink? By asking such questions, the company can form several product concepts like an instant breakfast drink for adults, a tasty snack-drink for children, a health supplement for elders, etc. Each concept requires concept positioning so that its real competition would be understood, when compared to existing brands or substitutes. The concepts have to be tested with an appropriate group of target consumers. The concepts may be presented symbolically or physically. The consumers are asked to react to each concept with some standard questions. The consumers will help the company determine which concept has the strongest appeal. 4. Marketing Strategy Development: The new product manager will have to develop a preliminary marketing strategy statement for introducing this new product into the CU IDOL SELF LEARNING MATERIAL (SLM)
106 Marketing Management market. This will be refined in subsequent stages. The marketing strategy statement consists of three parts. The first part describes the size, structure and behaviour of the target market, the planned product positioning, the sales, market share and profit goals sought in the first few years. The second part outlines the product’s planned price, distribution strategy, and marketing budget for the first year. The third part describes the planned long-run sales and profit goals, and marketing mix strategy over time. 5. Business Analysis: The next stage is to evaluate the business attractiveness of the proposal. The management must review the sales, cost, and profit projections to determine whether they satisfy the company’s objectives. If they do, the product concept can move to the product development stage. As new information comes in, there will be further revision of the business analysis. The management needs to estimate whether sales will be high enough to return a satisfactory profit to the firm. This is done by estimating first time sales, replacement sales and repeat sales. After preparing the sales forecast, the management should estimate the expected costs and profits of this venture. This is done by the R&D, manufacturing, marketing and finance departments. 6. Product Development: If the product concept passes the business test, it moves to the R&D and/or the engineering department to be developed into a physical product. Up to now it has existed only as a word description, a drawing or a very crude model. This stage will answer whether the product idea can be translated into a technically and commercially feasible product. The R&D department will develop one or more physical versions of the product concept. It hopes to find a prototype that satisfies the following criteria: Consumers see it as embodying the key attributes described in the product concept statement. The prototype performs safely under normal use and conditions. The prototype can be produced for the budgeted manufacturing costs. When the prototypes are ready, they must be put through rigorous functional and consumer tests. The functional tests are conducted under laboratory and field conditions to make sure that the product performs safely and effectively. Consumer tests can take a variety of forms, from bringing consumers into a lab to test the product versions to giving them samples to use in their houses. 7. Test Marketing: After the management is satisfied with the product’s functional performance, the product is ready to be dressed up with a brand name, packing and a preliminary marketing programme, to be tested in more authentic consumer settings. The CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 107 purpose of test marketing is to learn how consumers and dealers react to handling, using and repurchasing the actual product and how large the market is. For test marketing consumer goods, the methodology involves sales-wave research, simulated store technique, controlled test marketing and test markets. New industrial products typically undergo extensive product testing in the labs to measure performance, reliability, design and operating cost. The next most common method is a product use test where the manufacturer selects some potential customers who agree to use the new product for a limited period. A second common market test is to introduce the new industrial product at trade shows. Testing can also be done in distribution and dealer display rooms. 8. Commercialisation: Test marketing presumably gives the management enough information to make a final decision about whether to launch the new product. In launching a new product, the company must make four decisions: When: The first decision is whether it is the right time to introduce the product. Where: Secondly, the company must decide whether to launch the new product in a single locality, a region, several regions, the national market or the international market. Normally, companies develop a market rollout over time. To whom: Within the rollout markets the company must target its distribution and promotion to the best prospect groups, like early adopters, heavy users, opinion leaders and so on. How: The company must develop an action plan for introducing the new product into the rollout markets. It must allocate the marketing budget among the marketing mix elements and sequence the various activities. 7.3 The Diffusion and Adoption Process The Diffusion Process The acceptance of new products and services by consumers is an important factor which determines their success or failure. The framework for exploring consumer acceptance of new products is drawn from the area of research known as the diffusion of innovations. This consists of two closely related processes – the diffusion process and adoption process. Diffusion is a process concerned with the spread of a new product (an innovation) from its source to consuming public. Adoption is a process that focuses on the stages through which an individual consumer passes when deciding to accept or reject a new product. The diffusion process is concerned with how innovations spread, i.e., how they are assimilated within a market. It is the process by which the acceptance of an innovation (a new product, new service, or new idea) is spread by communication (mass media, sales people, or word of mouth) to members of a social system (a target market) over a period of time. All products that are new do not have equal potential for CU IDOL SELF LEARNING MATERIAL (SLM)
108 Marketing Management consumer acceptance. Some products may catch on almost overnight (e.g., cordless phones and mobile phones), whereas, others take a very long time to gain acceptance or never seem to achieve widespread consumer acceptance (e.g., dishwashers). Five product characteristics have been noticed to influence consumer acceptance of new products, especially the rate or speed of adoption: 1. Relative advantage 2. Compatibility 3. Complexity 4. Triability and 5. Observability 1. Relative Advantage: The degree to which potential customers perceive a new product as superior to existing substitutes is its relative advantage. E.g.: mobile phones, fax machine. 2. Compatibility: The degree to which potential consumers feel a new product is consistent with their present needs, values, and practices is a measure of its compatibility. Example: mobile phones, laptops. 3. Complexity: The degree to which a new product is difficult to understand or use, affects product acceptance. The easier it is to understand and use a product, the more likely it is to be accepted. Example: iPod, camera phones. 4. Triability: This is the degree to which a new product is capable of being tried on a limited basis. The greater the opportunity to try a new product, the easier it is for consumers to evaluate it and ultimately adopt it. Sample ‘trial’ packets of FMCG are examples. 5. Observability: This is the ease with which a product’s benefits or attributes can be observed, imagined, or described to potential customers. Products that have a high degree of social visibility, such as fashion items like clothing, a car, watches, etc., are more easily diffused than products that are used in private, such as a new type of deodorant. Similarly, a tangible product is promoted much more easily than an intangible product such as a service. The Adoption Process This process involves the stages through which an individual consumer passes while arriving at a decision to try or not to try or to continue using or to discontinue using a new product. It is CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 109 assumed that the consumer moves through five stages in arriving at a decision to purchase or reject a new product: 1. Awareness 2. Interest 3. Evaluation 4. Trial and 5. Adoption (or rejection) 1. Awareness: The consumer is first exposed to the product innovation through print, audio-visual media or demonstration, and becomes aware of the existence of the new product. E.g.: Advertisement for Nokia N-Series, and VIAO laptop on TV. 2. Interest: The consumer becomes interested in the product and searches for additional information. E.g.: The customer going to the Nokia or VIAO showroom and a salesman showing and explaining about the product. 3. Evaluation: The consumer decides whether or not to believe that this product or service will satisfy the need – a kind of ‘mental trial’. E.g.: Based on evaluation of the features and benefits of Nokia N Series or VAIO laptop, the consumer feels it is worth buying. 4. Trial: The consumer uses the product on a limited basis, like trial or sample packs of FMCGs or a 30day trial offer with full refund guarantee if not satisfied for Nokia N series handset. 5. Adoption (or Rejection): If trial is favourable, the consumer decides to use the product on a fuller rather than limited basis, which is known as the adoption process. If unfavourable, the consumer decides to reject it. E.g.: The customer of Nokia N Series deciding to keep the handset, as it is easy to use, has many features and quality is excellent. 7.4 Adoption Categories Consumers vary in their behaviour, especially in terms of time for adopting a new product. The concept of adopter categories involves classification of consumers as innovators, early adopters, early majority, late majority, and laggards. Innovators: They are very eager to try new ideas and products, accept risks. Early Adopters: Respectable opinion leaders, or role models. Consumers check with these persons before adopting a new idea. CU IDOL SELF LEARNING MATERIAL (SLM)
110 Marketing Management Early majority: These consumers take time to adopt new ideas. They deliberate for some time before adopting. Late Majority: They are sceptical people who take a long time before adopting. They adopt due to economic necessity or a reaction to peer pressures. Laggards: They are diehard traditionists who are oriented to the past and suspicious of the new. They are the last people to adopt an innovation. The adoption of some products and services may have minimal consequences whereas the adoption of other innovations may lead to major behavioural and lifestyle changes. Examples of innovations with such major impact on society include the automobile, the telephone, the refrigerator, the television, the airplane, and the personal computer. The consumer adoption process is later followed by the consumer loyalty process, which is the concern of the established producer. 7.5 Product Life Cycle Most products follow a life cycle of birth, growth, maturity, decline and death. This is due to changes in technology, consumers’ preferences and advent of new needs and wants. Many products which were once popular among consumers have disappeared from the market today. Examples are the Ambassador and Fiat cars, Pagers, mopeds, tape recorders, VCRs, etc. A product’s sales potential and profitability change over time. The product life cycle (PLC) is the course of a product’s sales and profits over its life-time. It involves five distinct stages: 1. Product development 2. Introduction 3. Growth 4. Maturity 5. Decline Corresponding to these stages are distinct opportunities and problems with respect to marketing strategy and profit potential. By identifying the stage that a product is in, or may be headed toward, companies can formulate better marketing plans. CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 111 7.6 Stages in PLC and Marketing Strategies The PLC concept shows the sales history of a typical product as following a bell-shaped curve, depicting the five different stages. Fig. 7.1: Sales and Profits Over the Product’s Life 1. Product Development Stage Product development begins when the company finds and develops a new-product idea. The process involves idea generation, idea screening, concept development and testing, marketing strategy development, business analysis, product development, test marketing, and commercialization. 2. Introduction Stage The introduction stage starts when the new product is launched commercially and made available for purchase. It takes time to fill dealer pipelines and roll out the product in several markets. So the sales growth is bound to be low. In this stage, profits are negative or low because of the low sales and heavy distribution and promotion expenses. Much money is needed to attract distributors and fill the pipelines. Promotional expenditures are at their highest ratio to sales because of the need for a high level of promotional effort to (1) inform potential customers of the new and unknown product, (2) induce trial of the product, and (3) secure distribution in retail outlets. CU IDOL SELF LEARNING MATERIAL (SLM)
112 Marketing Management Marketing Strategies While launching a new product, marketing management can set a high or a low level for each marketing variable, such as price, promotion, distribution and product quality. Considering only price and promotion, marketing management can pursue one of the four strategies as below: (a) Rapid-skimming strategy: This consists of launching the new product at a high price and a high promotion level, to skim the market. (b) Slow-skimming strategy: This consists of launching the new product at a high price and low promotion. (c) Rapid-penetration strategy: Consists of launching the new product at a low price and spending heavily on promotion. (d) Slow-penetration strategy: Consists of launching the new product at a low price and low level of promotion. 3. Growth Stage The growth stage is marked by a rapid climb in sales. The early adopters like the product, and middle majority consumers start following the lead. New competitors enter the market, attracted by the opportunities for large scale production and profit. They introduce new product features, and this further expands the market. The increased number of competitors leads to an increase in the number of distribution outlets, and factory sales jump just to fill the distribution pipeline. Prices remain where they are or fall only slightly in so far as demand is increasing quite rapidly. Companies maintain their promotional expenditures at the same or at a slightly higher level to meet competition and continue to educate the market. Sales rise much faster, causing a decline in the promotion - sales ratio. Profits increase during this stage as promotion costs are spread over a larger volume, and unit manufacturing costs fall faster than price declines, owing to the ‘experience curve’ effect. Marketing Strategies During this stage, the firm uses several strategies to sustain market growth as long as possible. (a) The firm improves product quality and adds new product features and models. (b) It enters new market segments. (c) It enters new distribution channels. CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 113 (d) It shifts some advertising from building product awareness to bringing about product conviction and purchase. (e) It lowers prices at the right time to attract the next layer of price-sensitive buyers. The firm that pursues these market expanding strategies will increase its competitive position. 4. Maturity Stage At some point in its life cycle, a product’s rate of growth will slow down, and the product will enter a stage of relative maturity. This stage normally lasts longer than the previous stages, and it poses formidable challenges to marketing management. Most products are in the maturity stage of the life cycle, and therefore, most of marketing management deals with the mature market. The maturity stage can be divided into three phases: In the first phase, growth maturity, the sales growth rate starts to decline because of distribution saturation. In the second phase, stable maturity, sales become level on a per capita basis because of market saturation. In the third phase, decaying maturity, the absolute level of sales starts to decline, and customers start moving toward other products and substitutes. Marketing Strategies (a) Market Modification: The company should seek to expand the market for its brand by working with the two factors that make up sales volume. Volume = Number of brand users × Usage rate per user The company can try to expand the number of brand users by converting non-users, entering new market segments, and by winning competitors’ customers. Volume can also be increased by getting current brand users to increase their annual usage of the brand. The strategies are more frequent use, more usage per occasion, and new and more varied uses. (b) Product Modification: Managers also try to turn sales around by modifying the product’s characteristics in a way that will attract new users and/or more usage from current users. The product relaunch can take several forms like quality improvements, feature improvements, and style improvements. CU IDOL SELF LEARNING MATERIAL (SLM)
114 Marketing Management (c) Marketing Mix Modification: The product manager should also try to stimulate sales through modifying one or more marketing mix elements like price, distribution, advertising, sales promotion, personal selling and services. 5. Decline Stage The sales of most product forms and brands eventually decline. The sales decline may be slow or rapid. Sales may plunge to zero, or they may petrify at a low level and continue for many years at that level. Sales decline for a number of reasons, including technological advances, consumer shifts in tastes, and increased domestic and foreign competition. All of these lead to overcapacity, increased price cutting, and profit erosion. As sales and profits decline, some firms withdraw from the market. Those remaining may reduce the number of product offerings. They drop smaller market segments and marginal trade channels. They may cut the promotion budget and reduce their prices further. Unless strong reasons for retention exist, carrying a weak product is very costly to the firm. Marketing Strategies A company faces a number of tasks and decisions to handle its ageing products. Identifying the weak products is normally done by a product review committee. They must decide whether to ‘maintain’ the product without change, hoping that competitors will drop out of the market; ‘harvest’ the product, reducing costs and trying to maintain sales; or drop the product. If the decision is to continue, special marketing strategies are evolved. If the decision is to drop the product, the firm has to decide whether to sell or transfer the product to someone else or drop it completely. It must also decide whether to drop the product quickly or slowly, and the volume of spares inventory needed to service past customers of the product. 7.7 Applications of the PLC Concept The PLC concept is used by marketing managers to interpret product and market dynamics. As a planning tool, the PLC concept characterizes the main marketing challenges in each stage and suggests major alternative marketing strategies the company might pursue. As a control tool, the PLC concept allows the company to compare product performance against similar products in the past. As a forecasting tool, the PLC concept is less useful because sales histories exhibit diverse patterns and the stages are of varying duration. CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 115 7.8 Summary New product development is a growth strategy, because of the heavy role that marketing plays in finding, developing and launching successful new products. New products can be original products, product improvements, product modifications, and new brands that the company develops through its own R&D efforts. Every company will have to find replacements for its products that have entered the declining stage. Hence, new product development and launch should be an ongoing process. The new product development process goes through eight different stages: 1. Idea generation 2. Idea development 3. Concept development 4. Marketing strategies 5. Business analysis 6. Product development 7. Test marketing 8. Commercialisation New products become popular due to the diffusion of innovation and adoption process.Five product characteristics have been noticed to influence consumer acceptance of new products, especially the rate or speed of adoption: Relative advantage- Compatibility- Complexity - Triability and Observability. A product’s sales potential and profitability change over time. The product life cycle traces the course of a product’s sales and profits over time. It involves five different stages: (1) Product development (2) Introduction (3) Growth (4) Maturity (5) Decline. The marketing strategies also vary with different stages in the PLC. 7.9 Key Words/Abbreviations Product launch: Introducing new product Test marketing: Studying consumer acceptance for new product Business analysis: Cost-benefit analysis of new product Diffusion process: Process of new product awareness spreading CU IDOL SELF LEARNING MATERIAL (SLM)
116 Marketing Management Adoption process: Steps in product acceptance Innovators: Customers who try new products Laggards: Customers who delay trial PLC: Product Life Cycle Product development: Creating new products Introduction: Launching new products in market Growth: Sales and profit growth for product Maturity: Level of high sales and profit Decline: Sales and profit reduction for obsolete product Attribute listing: Listing strong points of a brand Brain storming: Serious discussion of experts to arrive at new ideas Synectics: A problem solving method Morphological analysis: Search for solutions Market share: Percentage of total market sales taken by a company Product concept: Focusing too much on products Prototypes: Models or samples 7.10 Learning Activity 1. Identify at least 5 products which were once popular in India but went out of the market later. Try to identify the reasons for their decline and death. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. List out at least 10 new products that have been introduced in India recently. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 3. Find out why the new product Daewoo Matiz car failed in India. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 117 4. Find out why Lux Chocolate soap failed soon after launch. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 5. Take 5 popular brands of consumer products and find out which stage in the product life cycle they are in at present. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 6. Identify at least 5 brands/products which have not faced declining stage for the last 50 years. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 7.11 Unit End Questions (MCQ and Descriptive) A. Descriptive Types Questions 1. New product development is a growth strategy. Discuss giving examples of some new products. 2. New product development process involves different stages. Elaborate. 3. Give a detailed description of two examples of new products launched recently in India. 4. Explain in detail the diffusion process and adoption process using relevant examples. 5. Every product goes through different stages in its product life cycle. Explain the stages using a diagram and the marketing strategies needed at each stage. 6. Write short notes on five products which have reached the declining stage in India. 7. What are the factors contributing to a product’s decline stage? What are the options available to the management at this stage? 8. “The consumer moves through five stages in arriving at a decision to purchase or reject a new product.” Discuss with suitable example. 9. Analyze the importance of segmentation when marketing a product like 'Life Insurance' 10. “All the organizations through which a product must pass between its point of production and consumption” Elaborate in relation to distribution channel CU IDOL SELF LEARNING MATERIAL (SLM)
118 Marketing Management B. Multiple Choice/Objective Type Questions 1. New products launched by a company could be: (a) New for mankind (b) New for the country (c) New for the company (d) All of the above 2. Idea generation techniques include: (a) Attribute listing (b) Brainstorming (c) Synectics (d) All of the above 3. Business analysis includes: (a) Marginal costing method (b) Feasibility and profitability (c) Budget preparation (d) None of above 4. Rate of adoption is influenced by: (a) Relative advantage (b) Brand name and image (c) Price of product (d) None of above 5. Sales of a product declines due to: (a) Technological advance (b) Consumer shifts in tastes (c) Increased competition (d) All of the above 6. Product relaunch can take several forms like: (a) Quality improvements (b) Feature improvements (c) Style/Design improvements (d) All of the above 7. At the maturity stage in PLC: (a) Rate of growth slows down (b) Profits are negative (c) Cost of marketing declines (d) None of above 8. Some firms withdraw products in the (a) Introduction stage (b) Declining stage (c) Growth stage (d) All of above Ans.: 1. (d), 2. (d), 3. (b), 4. (a), 5. (d), 6. (d), 7. (a), 8. (b). CU IDOL SELF LEARNING MATERIAL (SLM)
Product Development and Life Cycle Strategies 119 7.12 References Text Books Dr. K.Karunakaran, Marketing Management, 3rd ed. HPH. References 1. Philip Kotler, Marketing Management, ed. Pearson/PHI. 2. Chunnawalla , Product Management, HPH. Web Resources 1. www.productscholl.com 2. www.productplan.com 3. www.mindtheproduct.com CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 8 PRICING DECISIONS Structure: 8.0 Learning Objectives 8.1 Introduction 8.2 Importance of Pricing 8.3 Objectives of Pricing 8.4 Factors Determining Pricing Decisions 8.5 Pricing Strategies 8.6 Steps in Pricing Process 8.7 Price and Terms of Sale 8.8 Special Pricing Strategies 8.9 Summary 8.10 Key Words/Abbreviations 8.11 Learning Activity 8.12 Unit End Questions (MCQ and Descriptive) 8.13 References 8.0 Learning Objectives After studying this module, you will be able to understand The concept and role of pricing The pricing objectives The determinants of price Pricing strategies and methods The special pricing strategies
Pricing Decisions 121 8.1 Introduction In this unit you will be learning about the importance and objectives of pricing. You will also understand the determinants of price, i.e., what factors influence price. Next you will familiarize with the pricing process, policies and strategies. There are also some special pricing strategies used by marketers, which you will learn at the end of this unit. 8.2. Importance of Pricing Price is the amount of money charged for a product or service. It is the total value that customers exchange for the benefits of having or using products or services. Of all the elements in the marketing mix, price is the only one which generates revenue. All other elements generate only cost. Price is also the most important determinant of the profitability of any company or business. Price is also one of the most flexible elements of the marketing mix, and unlike others, can be changed quickly. Pricing decisions and price competition are a major problem faced by marketing people. It is a crucial decision area for any company. It is by manipulating the price that the company adjusts the level of cash flow and funds available for other elements of the marketing mix. Competition in the market contributes the maximum to the importance of pricing. Because of price competition, pricing becomes a highly dynamic and crucial function. 8.3. Objectives of Pricing Business organizations normally have many objectives to be considered while making pricing decisions. Objectives could be long-term or short-term, and primary or secondary. These objectives always arise from the general corporate objectives or specific marketing objectives of the organization. Pricing objectives normally form a mixed bag of varied interests depending upon the organization’s objectives and policies. Some common pricing objectives of organizations are given below: 1. Profit maximization in the short run, and profit optimization in the long run. 2. Assured minimum return on investment or sales turnover. 3. Ensure a specified targeted sales volume or market share. 4. Make entry into new markets or achieve deeper market penetration in existing market. 5. Maintain price leadership or price parity with competitors. CU IDOL SELF LEARNING MATERIAL (SLM)
122 Marketing Management 6. Launch price war to check competitors’ activity or keep competitors out of the race. 7. Improving cash flow through faster sales. 8. Liquidation of accumulated inventory of products. 8.4. Factors Determining Pricing Decisions Pricing decisions of a company are affected by both internal company factors and external environmental factors. Internal Factors The internal factors influencing pricing decisions include the company’s marketing objectives, marketing mix, costs and organizational considerations. Marketing Objectives: A company has to first decide on its marketing objectives and strategy for the product before setting a price. If the company has carefully selected its target market and positioning, then its marketing mix strategy, including price, will be fairly straightforward. For example, Benz and BMW cars are positioned as super luxury cars in the high income segment, which require charging a high price. The company may seek other objectives like market leadership, current profit maximization, survival or product quality leadership, and accordingly set a low, average or high price. Marketing Mix Strategy: Price decisions must be coordinated with other variables of the marketing mix like product design, promotion and distribution. So any decision made for any other variable in the marketing mix could affect or influence pricing decisions. If a large number of retailers are planned for distribution of products, larger retailer margin will have to be built into the price. Some companies resort to position their products based on price and then adjust other marketing mix decisions to that price. This technique is called target costing. It starts with our ideal selling price based on customer considerations, and then targets costs that will ensure that the price is met. Swatch watches are a good example. They gave the identified segment of watch buyers the watch they wanted – low cost, fashionable – at a price they were willing to pay, and managed the new product’s costs accordingly. Costs: Costs form the base level for price decisions. Any company wants to charge a price that both covers all its costs and gives a rate of return. Therefore, costs become an important element in the pricing strategy. Lower prices are charged by some companies CU IDOL SELF LEARNING MATERIAL (SLM)
Pricing Decisions 123 with lower costs, which result in larger sales volumes and profits. The company has to consider fixed, variable and total costs while making price decisions. Organizational Considerations: Pricing decisions are handled differently in different companies. In small companies, top management takes the decision, whereas in large companies, the divisional or product line managers in marketing function decide pricing. In the case of business markets, sales people often negotiate price with customers within certain ranges, and top management approves it. External Factors Factors in the external environment of the company also affect pricing decisions. They include the nature of the market and demand, competition and other environmental factors. The Market and Demand: The upper limit of prices depends on the market and demand. Consumer and business buyers compare the price of a product or service against benefits or utility. The pricedemand relationship will vary according to the nature of the markets, i.e., pure competition, monopolistic competition, oligopolistic competition or pure monopoly. Further, consumers’ perceptions of price also influence pricing decision. If customers perceive that the price is greater than the product’s value, they will not buy the product. If the price is below the product’s value, customers will buy it, but the marketer loses profit. Competition: The activities of competitors, their costs and prices, competitors’ reactions to the company’s pricing, etc., will also influence pricing decisions. The company’s pricing strategy will vary according to the nature of competition or nature of its marketing strategy to face competition. Some companies go for price leadership, others go for low-price, low-margin strategy to wipe out competitors from the market or keep them under check. Other Environmental Factors: While making pricing decisions, the company has to consider other environmental factors. Economic conditions (boom or recession, inflation and interest rates) affect pricing due to its effect on cost of production and consumer perceptions of the product’s price and value. The company should also consider the reaction or impact of its pricing on external parties in its environment like wholesalers and retailers who expect a fair margin. Governmental policies will also affect pricing decisions. The company should also consider overall societal and social concerns while deciding prices. CU IDOL SELF LEARNING MATERIAL (SLM)
124 Marketing Management 8.5. Pricing Strategies Pricing strategies or methods will depend on the pricing objective of the company. The strategy must be suitable for achieving the desired objectives. Some categories of pricing methods are given below: 1. Cost-based pricing 2. Demand-based pricing 3. Competition-oriented pricing 4. Value pricing 5. Product line pricing 6. Tender pricing 7. Affordability-based pricing 8. Differentiated pricing 9. Psychological pricing The different methods normally used for pricing under these categories are explained below: 1. Cost-Based Pricing: The commonly used methods under this category are mark-up pricing or cost plus pricing, absorption cost pricing, target rate of return pricing, and marginal cost pricing. Mark-up pricing involves fixing a price for a product by adding (marking up) a margin to its cost price. The mark-ups will be different for markets and products. Absorption cost pricing or full cost pricing is based on the estimated unit cost of the product at normal level of production and sales. Variable and fixed costs of production, selling and administration costs are all added to get the total cost. By adding the required margin to the total cost, selling price is arrived at. While the mark-up in absorption cost pricing is added arbitrarily, in target rate of return pricing, a rational approach is used to arrive at the mark-up. The aim of marginal cost pricing is to maximize contribution towards fixed costs. It aims at realizing all the direct variable costs of the product, plus part of the fixed costs. Most of the cost-based methods of pricing evolve from the break-even concept. The break-even point is the level where the total costs exactly equal the total revenues; that is, the costs and revenues break even at a particular level. Profit will be zero at break-even point. At a level where revenues exceed costs, profits come in and at the other level, CU IDOL SELF LEARNING MATERIAL (SLM)
Pricing Decisions 125 losses are incurred. The number of units that are required to be produced and sold to reach a no-loss-no-profit situation at a given price is known as the break even point. 2. Demand/Market-Based Pricing: The common methods under this category are ‘what the market can bear’ pricing, skimming pricing and penetration pricing. In these methods, the basic assumption is that sales and profits are independent of costs, but are dependent on the demand. In ‘what the market can bear’ pricing, highest price that the customers are willing to pay for the product under a specified situation is fixed. This method brings in high profits in the short term. Skimming and penetration pricing methods are used for new products. Skimming method skims the market initially with a high price and high profits, and later settles down for a lower price. This is specially suitable for luxury or speciality products. Penetration pricing seeks to achieve greater market penetration through relatively low prices. This method is suitable for non-luxury products purchased by ordinary consumers. It ensures high sales volume at reasonable price. Price elasticity of demand has to be reckoned in all demand-based pricing methods. Price elasticity of demand is the relative sensitivity of demand for a product to changes in its price. If an increase or decrease in the price of the product results in a significant decrease or increase in its off-take, the product is said to be price elastic. If price change does not significantly affect the sales volume, the product is price inelastic. 3. Competition-Oriented Pricing: In a competitive market situation, companies opt for competition-based or competitive parity pricing. They follow three alternative courses — premium pricing, discount pricing, or parity pricing. A given competitor’s price will serve as the benchmark in these options. Premium pricing involves pricing above the competitor’s price. Discount pricing is pricing below such level. Parity pricing or going rate pricing is matching the price of competitors. 4. Value Pricing: Value pricing is based on the assumption that the objective of pricing is not to recover costs, but to realise the value of the product perceived by the customers. The merit of this method is the belief that the customer is interested not in the cost of the product but only in the value. When marketers deliver value in excess of costs, their profits will be ensured along with customer loyalty. 5. Product Line Pricing: In the case of companies that market different product lines, they need not fix optimal price for each product, independent of other products in the line. Prices of different products can be fixed in sucha way that the product line as a whole is priced optimally which will result in optimal sales of all products put together and CU IDOL SELF LEARNING MATERIAL (SLM)
126 Marketing Management optimum total profits from the line. This method is also known as the product line promotion method of pricing. 6. Tender Pricing: On many occasions, business organizations are required to go for price fixation on the basis of tenders. This option is more applicable to business markets where institutional customers normally call for competitive bidding through sealed tenders or quotations. These buyers look for the best possible (lowest) price consistent with the minimum assured quality specifications. The difficulty here is of fixing a price that takes care of all costs and profits and is low enough to get the business. 7. Affordability-Based Pricing: In the context of products which form essential commodities group which meet the basic needs of all segments of consumers, affordability-based pricing method is useful. The pricing is done in such a way that all segments of the total market can afford to buy and consume the products as per their need. Here price is set independent of the costs involved and in some cases governmental price subsidy element is involved. Such items are also distributed through public distribution system. This method is also known as social welfare pricing. 8. Differentiated Pricing: In this method, different prices are charged for the same product by the company, in different market segments or zones. Price differentiation is also made occasionally, based on customer class rather than geographic marketing territory. Another variation which is commonly used is where differentiated pricing is done on the basis of purchase volume. Price is less for bulk quantity buyers and higher for small volume buyers. 9. Psychological Pricing: Consumer buying decisions are influenced mostly by psychological factors. Many marketers take this into account and try to avoid the psychological barrier in respect to price with psychological pricing. Instead of fixing the price at `300 or `500, they peg it at `295 or `499. Bata Shoe Company is the best example for this pricing method. It is also followed by many marketers of consumer durables like TV, PC, washing machine, etc. 8.6. Steps in Pricing Process Pricing procedure is the actual activity or process of deciding the price using one or many combinations of methods. The usual steps involved are as below: 1. The target customer segments have to be identified first and their profiles prepared. 2. The company has to decide the market position and price image for its brand. CU IDOL SELF LEARNING MATERIAL (SLM)
Pricing Decisions 127 3. Price elasticity of demand of the product is to be assessed along with the extent of price sensitivity of target customer groups. 4. The product’s life cycle is to be considered. 5. Competitors’ prices are to be analysed. 6. Various other environmental factors are to be analysed. 7. The pricing method to be adopted is to be chosen considering all the above factors. 8. The final price is arrived at. 9. The price, pricing method and the pricing procedure are to be reviewed periodically. 8.7. Price and Terms of Sale Normally, price and terms of sale are quoted in combination as a package. The price will appear vague without the terms of sale. The normal terms of sale include the following: 1. Cash sale price 2. Credit sale price 3. Instalment sale price 4. Ex-factory price 5. Ex-warehouse price 6. Delivered at customer’s doors anywhere price 7. Free on Board (FOB) price 8. Free on Rail (FOR ) price 9. CIF price Rebates and discounts offered to trade (wholesalers and retailers) or customers (end users) also form part of the terms of sale. Terms of sale and discounts have to be considered by companies while taking price decisions. 8.8. Special Pricing Strategies Marketers occasionally resort to certain special pricing strategies for products under certain circumstances. Some such strategies are explained below. CU IDOL SELF LEARNING MATERIAL (SLM)
128 Marketing Management New Product Pricing Marketers have two strategic pricing alternatives for new products. They are: 1. Skimming pricing 2. Penetration pricing 1. Skimming Pricing Strategy: In skimming pricing, the objective is to skim the market and take the cream, by pricing the new product high and concentrating on market segments which are not price sensitive. This strategy will bring in high profits which could be ploughed back for further market development and promotion. There are two ways of skimming – rapid skimming and slow skimming. Later, the company could reduce the price while going in for mass markets which are more price sensitive. Skimming pricing cannot be used if the product cannot command the patronage of an affluent, non-price-sensitive market segment. Example: Shahnaz Hussain’s herbal beauty products. 2. Penetration Pricing Strategy: If the new product is likely to be highly price sensitive and if there is no affluent market for it, penetration pricing is resorted to. Here the objective is to penetrate a large market using low prices. The large volume of sales generated will bring in economies in unit cost of production and marketing cost. This strategy is helpful to establish the new product in the market. This strategy is also practised in two ways – rapid penetration and slow penetration. Example: The Times of India newspaper was introduced in Bangalore market at the low price of ‘One Rupee’ and succeeded in gaining a foothold in the market. The same paper was being sold at the regular price of Rs. 3 in all other cities in India. The other standard newspapers like The Hindu, The Indian Express and Deccan Herald were being sold in Bangalore at Rs. 3 at that time. Price Discrimination This strategy is usually called monopoly price discrimination. Monopoly power must be present in a market for price discrimination to exist. With monopoly power, the opportunity may exist for the firm to offer different terms (of which price is only one component) to different buyers, thus going for market segmentation. Price discrimination refers to the situation where a monopoly firm charges different prices for the same product. The firm discriminates between different buyers by charging them different prices. The buyers of its product have no choice but to buy from it as the product has no close substitutes. CU IDOL SELF LEARNING MATERIAL (SLM)
Pricing Decisions 129 There are three types of price discrimination – first degree, second degree and third degree. (a) First degree price discrimination refers to a situation where the monopolist charges a different price for different units of output according to the consumer’s willingness to pay. For example, a doctor who is the only super-specialist in the town may charge different fee for conducting surgery, from different patients based on their ability to pay. (b) Second degree price discrimination refers to a situation where the monopolist charges different prices for different sets of units of the same product. For example, the electricity charges per unit of the first 10 kwts of power consumption may be different from the rate charged for the additional 100 kwts. In the case of railway passenger fares, the per kilometer fare is higher for the first fewkilometers, which declines as the distance increases. Here the discrimination is based on volume of purchases. (c) Third degree price discrimination. Here the monopolist firm segments the market for its product into two or more markets and charges different price in each market. For example, airlines ticket rates are different for economy class and business class. Similarly, electricity rates applicable to residential users are lower than those applied for commercial use. Price Bundling Bundling is the practice of selling two or more separate products together for a single price, i.e., bundling takes place when goods or services which could be sold separately are sold as a package. Example: “Buy one, get the second at half price” offers. A camera is sold in a box with a free film. A hotel room often comes with accompanying breakfast. Bundling is done in three ways: (i) Pure bundling involves selling two products only as a package and not separately. For example, Reliance WLL cellphone handset and connection are only available together and not available separately. Microsoft’s bundle of Windows and Internet Explorer could be considered a pure bundle. (ii) Mixed bundling involves selling products separately as well as a bundle. McDonald’s Value Meals and Microsoft Office are examples. Recently The Times of India and The Economic Times could be purchased together for week days for a price much less than if purchased separately. In most cases mixed bundling provides price saving for consumers. (iii) Tying involves purchase of the main product (tying product) along with purchase of another product (tied product) which is generally an additional or complementary CU IDOL SELF LEARNING MATERIAL (SLM)
130 Marketing Management product. When you buy a Mach 3 razor, you must buy the tied product, i.e., the cartridge that fits into the Mach 3 razor. Captive-Product Pricing or ‘Razor and Bait’ Marketing Some companies offer a basic product at a low price without much built-in margin or profit. But the spares or consumables will be priced very high with high built-in margin and profit. For example, computer printer is priced cheap and cartridges are very costly. Gillette sells low-priced razors but makes money on the replacement cartridges. The customer is forced to buy the cartridge at the high price as there is no other alternative. This method is sarcastically called ‘Razor and Bait’ marketing. The cheap base product is the bait to catch the customer. Once caught, the marketer uses the razor to cut into the wallet of the customer. 8.9 Summary Price is the amount of money charged for a product or service. It is the total value the customers exchange for the benefits of having or using products or services. Pricing decisions of a company are influenced by both internal company factors and external environmental factors. Some common pricing objectives of organizations are given below: 1. Profit maximization in the short run, and profit optimization in the long run. 2. Assured minimum return on investment or sales turnover. 3. Ensure a specified targeted sales volume or market share. 4. Make entry into new markets or achieve deeper market penetration in existing market. 5. Maintain price leadership or price parity with competitors. 6. Launch price war to check competitors’ activity or keep competitors out of the race. 7. Improving cash flow through faster sales. 8. Liquidation of accumulated inventory of products. Pricing strategies or methods will depend on the pricing objectives of the company. The strategy must be suitable for achieving the desired objectives. Some categories of pricing methods are as below: 1. Cost-based pricing 2. Demand-based pricing 3. Competition-based pricing CU IDOL SELF LEARNING MATERIAL (SLM)
Pricing Decisions 131 4. Value pricing 5. Product line pricing 6. Tender pricing 7. Affordability-based pricing 8. Differentiated pricing 9. Psychological pricing Marketers have two strategic pricing alternatives for new products. They are: 1. Skimming pricing 2. Penetration pricing 8.10 Key Words/Abbreviations Pricing: Deciding the price Tender pricing: Quotations for a product or service Differentiated pricing: Charging different prices for different segments Psychological pricing: Prices like `4999/- , `999/- Price discrimination: Varied prices for different customers Skimming pricing: High introductory price to skim market Penetration pricing: Low introductory price to capture market breakeven point: Point in graph where total cost equals total revenue Elasticity of demand: Variations in demand due to price changes Profit maximisation: Seeking profit in short run Optimisation: Seeking profit in long run ROI: Return on investment Price leadership: Strong brand leaders fixing high price Price war: Competitors trying to undercut price drastically Cash flow: Money flow into company Inventory: Quantity of unsold products Boom: High growth for companies in economy CU IDOL SELF LEARNING MATERIAL (SLM)
132 Marketing Management Recession: Slowdown in businesses Inflation: Value of money going down Value pricing: High value for low price Tender pricing: Calling quotations Markup pricing: Adding profit to actual cost Variable cost: Cost of rawmaterials and conversion FOB: Free on board FOR: Free on rail CIF: Cost, insurance and freight 8.11 Learning Activity 1. Identify the different pricing strategies used for 5 consumer non-durable and 5 durable products. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 2. Identify 5 new products introduced in India using skimming and penetration strategies for pricing. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 3. Using examples of at least 4 services, identify how they use price discrimination strategy. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 4. Identify 4 companies which use ‘razor and blade’ pricing strategy in India. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- 5. Search the recent news papers and collect details of at least 5 organizations which has called for tender pricing contracts for various works. ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- CU IDOL SELF LEARNING MATERIAL (SLM)
Pricing Decisions 133 8.12 Unit End Questions (MCQ and Descriptive) A. Descriptive Types Questions 1. Price is the only P of the 4P’s of marketing that brings in money into the company. Do you agree? Justify your answer. 2. Pricing decisions are determined/influenced by several factors. Elaborate. 3. Discuss the different types of pricing policies and strategies used by marketing companies. 4. Explain the special pricing strategies used by marketing companies for new product pricing. Give examples for each strategy. 5. Discuss the meaning of price discrimination and its different types, giving examples. 6. “Price is influenced by the life cycle stage of a product.” Elaborate in relation to internal factors affecting marketing. 7. “Price decisions must be coordinated with other variables of the marketing mix like product design promotion and distribution.” Elaborate in relation to internal factors affecting marketing. 8. Explain the consumer buying decision process in detail with the help of a diagram. B. Multiple Choice/Objective Type Questions 1. Cost-based pricing method uses: (a) Mark-up pricing (b) Marginal cost pricing (c) Absorption cost pricing (d) All of above 2. Competition-based pricing involves: (a) Premium pricing (b) Discount pricing (c) Parity pricing (d) All of above 3. Value pricing is based on: (a) Value perceived by customers (b) Total cost of product (c) Highest price chargeable (d) None of above 4. Product line pricing involves: (a) High prices for one product line (b) Different prices in product line, but as a whole optimal CU IDOL SELF LEARNING MATERIAL (SLM)
134 Marketing Management (c) Low prices for all product lines (d) None of above. Ans.: 1. (d), 2. (d), 3. (a), 4. (b). 8.13 References Textbooks Dr. K.Karunakaran, Marketing Management, ed. HPH Reference Books Philip Kotler, Marketing Management, ed. Pearson/PHI. Web resources 1. www.productscholl.com 2. www.productplan.com 3. www.mindtheproduct.com CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 9 PROMOTION MANAGEMENT Structure: 9.0 Learning Objectives 9.1 Introduction to Advertising 9.2 Components of Promotion Mix 9.3 Advantages and Disadvantages of Advertising 9.4 Classifications of Advertising 9.5 The IMC Process 9.6 Promotion Mix Strategies – Push and Pull 9.7 Factors Determining Promotion Mix 98 Sales Promotion (a) Consumer Sales Promotion (b) Trade Promotions 9.9 Public Relations 9.10 Publicity 9.11 Summary 9.12 Key Words/Abbreviations 9.13 Learning Activity 9.14 Unit End Questions (MCQ and Descriptive) 9.15 References
136 Marketing Management 9.0 Learning Objectives After studying this unit, you will be able to: Learn the basics of advertising Understand integrated marketing communications Familiarise with the tools of promotion mix Learn the fundamentals of sales promotion Differentiate between publicity and public relations 9.1 Introduction to Advertising Men, women and children all over the world are today influenced to some degree by advertising and other forms of promotion. Organizations in both private and public sectors have learned that the ability to communicate effectively and efficiently with their target audiences is critical for their success in any business. Advertising causes deal with societal problems like HIV/AIDS prevention alcohol and drug abuse. Consumers are finding it increasingly difficult to avoid the efforts of marketers, who are constantly searching for new ways to communicate with them like the latest use of the Internet and mobile phones. Stealth messages and product visuals are even embedded into movies (like the Tissot watch worn by Angelina Jolie) and popular TV programmes. The main objectives of advertising are as below: Advertising Objectives Informative: Informs people about availability of products/brands Persuasive: Persuades or motivates people to buy and use products/brands Reminder: Frequently reminds people to buy or use a product/brand Reinforcement: Gives assurance to buyers about the correctness of their buying decisions. 9.2 Components of Promotion Mix The promotion mix consists of “the specific blend of advertising, sales promotion, public relations, personal selling, and direct marketing tools that a company uses to pursue its advertising and marketing objectives.” (Philip Kotler). CU IDOL SELF LEARNING MATERIAL (SLM)
Promotion Management 137 Promotion mix is also called the marketing communications mix. Communication is an important function in marketing, and constitutes one of the 4 P’s of the marketing mix, i.e., Promotion, the other three being Product, Price and Place. It carries out the task of informing the target customers about the nature and type of products and services available, their unique features and benefits, uses, prices and places they are available in. Marketing communications are persuasive in nature, aimed at influencing the consumer behaviour in favour of a company’s product offerings. The marketing success of any product, whether it is toothpaste, TV, or car, depends, to a large extent, on appropriate use of the promotion mix by the companies. The components of promotion mix are the following: 1. Advertising 2. Sales Promotion 3. Public Relations 4. Personal Selling 5. Direct Marketing 6. Publicity 1. Advertising: Advertising includes any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor. It includes the use of such media as newspapers, magazines, outdoor posters, banners, hoardings, direct mail, radio, TV, the Internet, etc. 2. Sales Promotion: Short-term incentives to promote sales like displays, samples, exhibitions, demonstrations, coupons, contests, etc., constitute sales promotion. 3. Public Relations: Public relations include building good relations with the public by obtaining favourable publicity, building a good corporate image, and handling or avoiding unfavourable publicity, rumours and events. 4. Personal Selling: Personal selling includes direct personal presentation by company sales force for sales and building customer relationships. 5. Direct Marketing: Direct marketing involves direct communication with selected target customers on a one-to-one basis to obtain an immediate response and cultivate lasting customer relationships, using telephone, direct mail, fax, the Internet, etc. 6. Publicity: Publicity includes non-personal promotion of demand for products by obtaining publicity through news in media like TV, radio, newspapers, and magazines. Unlike advertising, this form of promotion is not paid for by the sponsor. CU IDOL SELF LEARNING MATERIAL (SLM)
138 Marketing Management 9.3 Advantages and Disadvantages of Advertising Advantages Cost-effective way for communicating, particularly with large audiences. Ability to create images and symbolic appeals and for differentiating similar products and services. Valuable tool for creating and maintaining brand equity. Ability to strike responsive chord with audience through creative advertising. Opportunity to leverage popular advertising campaigns into successful IMC programs which can generate support from retailers and other trade members. Ability to control the message (what, when and how something is said and where it is delivered). Disadvantages The cost of producing and placing ads can be very high, particularly television commercials. It can be difficult to determine the effectiveness of advertising. There are credibility and image problems associated with advertising. The vast number of ads has created clutter problems and consumers are not paying attention to much of the advertising they see and/or hear. The nature and purpose of advertising differs from one industry to another and across various situations as does its role and function in the promotional program. 9.4 Classifications of Advertising The common classifications of advertising to the consumer market include national, retail/local and direct-response advertising as well as primary versus selective demand advertising. Classifications of advertising to the business and professional market include industrial, professional and trade advertising. Advertising to Consumer Markets National advertising: All over India. Retail/local advertising: Only selected states/cities. Retailers advertising. CU IDOL SELF LEARNING MATERIAL (SLM)
Promotion Management 139 Advertising to increase demand Primary demand for the product category – Generic advertising Selective demand for a specific brand Business & professional advertising Business-to-business advertising Professional advertising: Lawers, doctors, consultants, etc. Trade advertising: meant for dealers/wholesalers. AIDA Model for Promotion Mix While framing the communication mix for products, the marketer should consider the AIDA model, consisting of Attention, Interest, Desire, and Action. The marketer should start by winning the attention of prospective buyers, then create interest in the product, inspire desire to buy and make the buyer act favourably to purchase. Hierarchy-of-Effects Model for Promotion Mix Under the Hierarchy-of-Effects Model, the buyer’s purchase decision is preceded by steps such as conviction about the product’s benefits, preference for the brand, liking for the brand, and knowledge relating to the benefits and features of the product, after an awareness of the product has been gained. These steps are also known as buyer-readiness stages. The basic implications of these two models of consumer responses are that the function of persuasive communication or promotion should be handled deftly at every stage of the buyer’s adoption process. CU IDOL SELF LEARNING MATERIAL (SLM)
140 Marketing Management Aida & Hierarchy of Effects Models for Promotion Mix Often, advertising messages from different media and different promotional approaches all become part of a single message about the company. Conflicting messages from these different sources can lead to confusion in the customer’s mind about the company’s image and brand positions. To avoid this situation, companies are now adopting the concept of integrated marketing communications (IMC). “The Integrated Marketing Communications is a concept of marketing communications planning that recognizes the added value of a comprehensive plan that evaluates the strategic roles of a variety of communications disciplines – advertising, direct marketing, personal selling, sales promotion and public relations – and combines these to provide clarity, consistency and maximum communication impact.” Under this concept, the company carefully integrates and co-ordinates its many communication channels to deliver a clear, consistent, and compelling message about the organization and its products. IMC helps to build a very strong brand identity in the market. The IMC involves the process of using all forms of promotional tools to achieve maximum communication impact. It has to cover all sources of brand or company contact that a customer or prospective buyer has with a product or service. It requires the firms to develop a total marketing communications strategy that recognizes how all of a firm’s marketing activities, not just promotion, communicate with its customers. IMC calls for a centralized messaging function so that everything a company says and does communicates a common theme and positioning. The CU IDOL SELF LEARNING MATERIAL (SLM)
Promotion Management 141 adoption of IMC reflects as adaptation by marketers to a dynamic, changing environment, particularly with respect to consumers, technology and media. Marketers are facing decline in audience size for many media, and also the problem of consumers being less responsive to traditional advertising. This is prompting the marketers to look for alternative ways to reach the target audiences (like embedded promotions in films and TV shows). One other major reason for the growing importance of IMC over the past decade is that it plays a major role in the process of developing and sustaining brand identity and equity. 9.5 The IMC Process The Integrated Marketing Communication process involves participants who can be divided into five major groups: 1. The advertiser or client 2. Advertising agency 3. Media organizations 4. Marketing communications specialist 5. Collateral services Each of these groups has specific roles in the promotional process. 1. The Advertiser or Client: They are the key participants in the process. The client has the products, services or causes to be marketed and promoted, and also provides the funds that pay for advertising and promotions. The advertiser develops the marketing programme and makes the final decision regarding the advertising and promotional programme to be employed. The company may perform most of these efforts itself, either through its own advertising department or by setting up an in-house agency. 2. Advertising Agency: Most organizations use an advertising agency, an outside firm that specializes in the creation, production and placement of the communications message and that may provide other services to facilitate the marketing and promotions process. Many large advertisers retain the services of a number of agencies, particularly when they market a number of products. Proctor & Gamble, for example, uses the services of 12 ad agencies and two major media buying services companies. Advertising agencies are of different types like Full-Services Agencies and Creative Boutiques. Some leading agencies in India are Lowe-Lintas, Leo Burnett, Ogilvy & Mather (O & M), McCanErikson, Thomson Associates, ULKA, Mudra, Saatchi & Saatchi, etc. CU IDOL SELF LEARNING MATERIAL (SLM)
142 Marketing Management 3. Media Organizations: They are another major participant in the IMC process. Newspapers and TV channels provide an environment for a company’s marketing communications message. They should have editorial or programme content that attracts consumers so that advertisers and their agencies will want to buy time or space with them. Star and Zee TV network sell themselves to companies as an effective media. 4. Specialised Services: These specialists include direct-marketing agencies, sales promotion agencies, interactive agencies (the Internet, kiosks) and public relations firms. A direct-response agency develops and implements direct-marketing programmes, while sales promotion agencies develop promotional programmes such as contests and sweep stakes, premium offers, or sampling programmes. Interactive agencies are being retained to develop websites for the Internet and help marketers as they move deeper into the realm of interactive media. Public relations firms are used to generate and manage publicity for a company and its products and services as well as to focus on its relationships and communications with its relevant publics. 5. Collateral Services: They provide a wide range of support functions used by advertisers, agencies, media organizations, and specialized marketing communications firms. These individuals and companies perform all the specialized functions that the other participants use in planning and executing advertising and other promotional functions. Fig. 9.1: Push vs Pull Promotion Strategy CU IDOL SELF LEARNING MATERIAL (SLM)
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