B.com-Principles of management

B.Com

Second Year Paper No. 7 PRINCIPLES OF

BHARATHIAR UNIVERSITY SCHOOL OF DISTANCE EDUCATION COIMBATORE – 641 046

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CONTENT

Lessons PAGE No. UNIT-I Lesson 1 and Marketing 7 Lesson 2 Evolution of Concept of Marketing 15 Lesson 3 Recent Development in Marketing Concept 23 Lesson 4 Functions of Marketing 31 Lesson 5 40 UNIT-II Lesson 6 Product and Product Policy 53 Lesson 7 Product Life Cycle 64 Lesson 8 Product Mix 77 Lesson 9 Channels of 83 Lesson 10 Branding and Packaging 92 UNIT-III Lesson 11 103 Lesson 12 Factors Affecting Price Determination 112 Lesson 13 Methods of Setting Prices 119 Lesson 14 Cost-Demand and Competition 132 Lesson 15 Pricing Policies and Strategies 142 UNIT-IV Lesson 16 Sales 156 Lesson 17 168 Lesson 18 180 Lesson 19 Kinds of Media 189 Lesson 20 and Multi-Level Marketing 200 UNIT-V Lesson 21 Marketing 211 Lesson 22 Marketing of Services 221 Lesson 23 E-Marketing 232 Lesson 24 240 Lesson 25 Consumerism 247

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(Syllabus) PRINCIPLES OF MARKETING

OBJECTIVE: To endow the students with the knowledge of Marketing

UNIT- I

Market- marketing- Definition- Object and Importance of Marketing- Evolution of concept of Marketing- recent Developments in Marketing Concept- Marketing functions- Approaches to the Study of Marketing- Market Segmentation- Basis – Criteria- Benefits.

UNIT – II

Product policy- Product planning and development- Product life-Cycle- Product mix- Distribution Channels- Types of Channels- Factors Affecting Choice of distribution- Branding- Features- Types- Functions- Packaging- Features- Types- Advantages- name and trademark.

UNIT - III

Pricing- Definition- Objectives- Factors affecting price determination- Methods of setting prices- Cost- demand and competition- pricing policies and strategies.

UNIT – IV

Sales Promotion- Objectives and Importance of - Personal Selling- Advertising- Meaning- Objectives- Functions and Importance- Kinds of Media- Direct Marketing- Multi-Level Marketing.

UNIT - V

Retail marketing- methods- problems- retail marketing in India- marketing of services- Emarketing- marketing ethics- Consumerism- meaning- evolution- types of exploitation- Consumer rights- Laws protecting the consumer interest- consumer protection acts- consumer courts

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UNIT – I

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LESSON-1 MARKET AND MARKETING

Contents: 1.0 Aims and Objectives 1.1 Meaning of market 1.2 Definition of market 1.3 Classification of markets 1.4 Meaning of Marketing 1.5 Definition of Marketing 1.6 Object of Marketing 1.7 Importance of Marketing 1.8 Let us sum up 1.9 Check your progress

1.0 AIMS AND OBJECTIVES

This part views the basic of marketing which will help us to know the srong foundation of marketing and its importance. After going through the unit, you will be able to: i. Know the meaning of market and marketing ii. How and in what basis markets are classified? iii. Object and Importance of marketing

1.1 MEANING OF MARKET

A market is any place where the sellers of a particular good or service can meet with the buyers of that goods and service where there is a potential for a transaction to take place. The buyers must have something they can offer in exchange for there to be a potential transaction. The term market is derived from the Latin word “Mercatus”, meaning “to trade”. The common use of the term may imply any of the following: 1. A public gathering held for buying and selling merchandise. 2. A place where goods are offered for sale. 3. A store or shop that sells a particular type of merchandise. 4. The business of buying and selling a specified commodity. 5. A market price. 6. A geographic region considered as a place for sales 7. The act of buying and selling

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1.2 DEFINITION OF MARKET

Market is defined by different persons as follows • “Market includes both place and region in which buyers and sellers are in free competition with one another”- Pyle. • “The term market refers not to a place, but to a commodity or commodities and buyers and sellers who are in direct competition with one another”- Chapman. • “A market is a centre about which or an area in which the forces leading to exchange of title to a particular product operate and towards which the actual goods tend to travel”- Clark and Clark.

1.3 CLASSIFICATION OF MARKETS

Markets can be classified under the following categories (i) On geographic or area basis (a) Family Market: These markets existed during ‘village economy’ and are extinct now. (b) Local Market: These markets existed during ‘town economy’. They are gradually disappearing due to innovations and development in transport and communications. They, however, still exist in villages but are too few in numbers. (c) National Market: The rise and growth of industrialization has widened markets on the national level. Most of the products today have acquired national markets. (d) World Market or International Market: They came onto existence with the growth of international transport and communications. (e) Urban and rural Markets: On the basis of location, markets are also classified into urban and rural markets. Urban markets are those located in cities or towns primarily catering to the needs of elite consumers. On the contrary, rural markets are located in villages. (ii) On economic basis (a) Perfect Market: A perfect market has three essential features. First, there should be a group of buyers and sellers. Secondly, there should be effective competition between buyers and sellers for the purchase and sale of a commodity. Finally, only one price should prevail for the same commodity in the same market. (b) Imperfect Market: This refers to a market where some kind of maladjustment in demand and supply is experienced. Every market is, in a way, imperfect.

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(iii) On time basis (a) Very short-period Market: It means the existence of the market for a day and at a particular place. It started in a village economy but exists even today. Such markets generally sell perishable goods. (b) Short period Market: This market is otherwise known as a weekly market or a fair. It is a centre for local trade which was very prominent in village economy where perishables and consumables were traded. Such markets are in existence even today in remote villages. (c) Long period Market: This market is meant for selling durables. The above two markets are primarily meant for perishable commodities. It is the long period market which paved the way for present ‘Retail market’. (iv) On the basis of business (a) Wholesale Market: It is a market where a wholesaler is the supplier and retailers are the buyers. Here goods are bought and sold in bulk quantities. (b) Retail Market: This market is the last link in the chain of distribution. It directly deals with consumers and hence sometimes referred to as consumer market. Here goods are sold in small quantities, preferably to the ultimate consumers. (v) On the basis of importance (a) Primary Market: It is a market where agricultural products are sold. Primary markets are mostly found in villages. The products in the market are bought by the producers or trader. This also includes products of mines. (b) Secondary Market: Generally, semi-manufactured or partly manufactured goods are sold in this market. (c) Terminal Market: It is the market where the final product is sold to ultimate consumers either as raw products or in value-added forms (e.g., paddy, rice). These terms are usually used in agricultural marketing. (vi) On the basis of Goods (a) Commodity Market: It is a market in which different kinds of commodities are sold. Commodity market is further divided into • Produce exchange: In such markets only certain commodities are sold and bought. Produce exchanges are set up by buyers and sellers of a particular commodity. They are also known as ‘Commodity Exchange’. • Manufactured goods market: In this market manufactured goods are sold. • Bullion Market: This market deals in valuable metals like gold and silver (b) Capital Market: This is the second type of market classified on the basis of goods. This market is further divided into three types

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• Money market: Here money is bought and sold, that is, money is lent and borrowed. This market is termed as money market or capital market on the basis of the period for which money is borrowed. Short-term borrowing is undertaken in money market and long term borrowing in capital market. • Foreign exchange market: In these markets, currencies of different countries are purchased and sold. This market plays an important roe in the international trade. It arranges foreign currency for importers to enable them to buy and for exporters in converting foreign currency into local currency. • Stock market or security market: It is also known as stock exchange. This market came into being along with the organization of joint stock companies. The shares of companies and similar types of instruments are dealt in this market. (vii) On the basis of regulation (a) Regulated Markets: These markets are regulated by statutory measures. Produce exchanges, stock exchanges are examples of this. (b) Unregulated or Free Markets: These markets are uncontrolled. They are left free and mostly operate according to demand and supply. (viii) On the basis of nature of transactions (a) Spot Market: It is a part of organized market such as a commodity exchange. In a spot market, physical delivery of goods takes place immediately. (b) Futures Market: It is the counterpart of spot market. In such markets no physical delivery of goods takes place and future contracts are made for sale and purchase.

1.4 MEANING OF MARKETING

Marketing is a societal process which discerns consumers' wants, focusing on a product or service to fulfill those wants, attempting to move the consumers toward the products or services offered. Marketing is fundamental to any businesses growth. It is a process by which • one identifies the needs and wants of the people. • one determines and creates a product/service to meet the needs and wants. [PRODUCT] • one determines a way of taking the product/service to the market place. [PLACE] • one determines the way of communicating the product to the market place. [PROMOTIONS]

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• one determines the value for the product.[PRICE]. • one determines the people, who have needs/ wants. [PEOPLE] and then creating a transaction for exchanging the product for a value and thus creating a satisfaction to the buyer's needs/wants. The essence of marketing is an exchange or a transaction, intended to satisfy human needs or wants. That is, marketing is a human activity directed at satisfying needs and wants, through an exchange process.

1.5 DEFINITION OF MARKETING

The term marketing has changed and evolved over a period of time, today marketing is based around providing continual benefits to the customer, these benefits will be provided and a transactional exchange will take place. The American Marketing Association has defined marketing as "Marketing is an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders." Boone and Kurtz has defined "Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, services, organizations, and events to create and maintain relationships that will satisfy individual and organizational objectives." The Chartered Institute of Marketing defines marketing as ‘The management process responsible for identifying, anticipating and satisfying customer requirements profitability’. If we look at this definition in more detail Marketing is a management responsibility and should not be solely left to junior members of staff. Marketing requires co-ordination, planning, implementation of campaigns and a competent manager(s) with the appropriate skills to ensure success. Philip Kotler defines marketing as ‘satisfying needs and wants through an exchange process’. Within this exchange transaction customers will only exchange what they value (money) if they feel that their needs are being fully satisfied; clearly the greater the benefit provided the higher transactional value an organization can charge. Peter Drucker's definition of marketing is: "Marketing and innovation are the two chief functions of business. You get paid for creating a customer, which is marketing. And you get paid for creating a new dimension of performance, which is innovation. Everything else is a cost center."

1.6 OBJECT OF MARKETING

Marketing is a broad topic that covers a range of aspects, including advertising, public relations, sales, and promotions. The following are the main aims of marketing:

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1. Intelligent and capable application of modern marketing policies. 2. To develop the marketing field. 3. To develop guiding policies and their implementation for a good result. 4. To suggest solutions by studying the problems relating to marketing. 5. To find sources for further information concerning the market problems. 6. To retrieve existing marketing function, if shortcomings are found. 7. To take appropriate actions in the course of action.

1.7 IMPORTANCE OF MARKETING

Marketing in its new version is considered as a human activity involving creation, communication and delivering of values to the society. “Marketing” creates changes in the society. These changes occurred as a result of an external influencing force which motivates the members of the society in order to satisfy their needs and wants with maximum efficiency. It is a force which acts within the society as a chain reaction but it originates from an external entity sharing some common values with society and also has some unique values of its own and this entity shall be called as business.

Marketing is that activity linking the business and the society in general and it is directed towards Society’s and organization’s growth through customer satisfaction. The environmental factors influencing the marketer in taking or implementing marketing decisions, in short it can be summarized as ‘S-L-E-P-T’ denoting S-Social, L- Legal, E-Economic, P- Political, and T – Technological. The terms “market” and “society” are the same in the global system. If not, then what is called a “market” where marketing activities takes place at the macro level? If the above said “market” and the “society” are one and the same then we should assume that those environmental factors affecting market would affect the society too. It is also noteworthy that these environmental factors are mutually interactive in nature.

• Social factors – reveals the demographic profile of the market, social class profile, culture and sub cultural factors, family life cycle stages, religion and ethics. Consumer perception and the social class stratification will differ from place to place. Morality has shaped in a society with respect to its culture and religious values. As far as Indian market is concerned, the demographic pattern reveals specific consumption needs and these needs are being originated from the family influences and the various stages of family life cycle. Marketers are interested to learn and segment these variables and also try to identify the segment or the social class which they can serve well in the market.

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• Legal factors – reveals the new dimensions of law, rules, regulations that influence the marketer and the consumer today. Technically speaking today new laws, rules and regulations are originated not in the parliaments or such places, instead it is happening in the market place it self, which means that the conditions, stipulations or the contract itself is generally made by the marketers and then it will be ratified by the legislature system. The legal system across and outside the market also have some influence in marketing. E.g. Patent Rights, W.T.O agreements etc. Consumerism is an area relevant in this context. Consumer protection Acts passed by the legal authorities help consumers to ensure safety and minimum level of quality in the goods and services offered by the marketers. Irrespective of the social sanction of a business, it’s mandatory for all business concerns to get the legal approval from the competent authority.

• Economic factors - explains the economic conditions , interest rate , inflation, employment situations , purchasing power parity , demand & supply positions , EXIM policy etc. which affect the market decisions. The above said economic conditions are not confined to particular business alone but affect the entire market place. These factors are uncontrollable by business firms as well as to the entire consumer community in total. Hence consumers should act as a representative of the society so as to take decisions which will yield long term results and strengthen the overall economic situation.

• Political factors – influences the marketers in managing their internal as well as external resources. It leads to new opportunities and threats to the existing market as a whole. In a demographic system of governance, consumers and producers constitute the people who encourage certain ideologies and further the scope of formulating policies for the government. But these policies and programs are being formulated by the government, only after considering the overall needs and aspirations of the society. Here the society has a role to play by influencing the politicians for maintaining the balance in distribution of resources. A stable political environment helps the business firms to provide value to the society in a much sort after manner. Hence consumer’s education or their enlightenment is very much required to produce better results for tomorrow.

• Technological factors - stimulates the market in developing and creating value to the products and enhance productivity in all marketing efforts. Consumer knowledge and utility improvement helps marketers in achieving growth. Advent of better market information system influences the marketers and the society tremendously. Technology is the technical means people use to improve their surroundings. It is also the knowledge of using tools and machines to do tasks efficiently. Marketers use technology to organize the society in which they do business. Here by Technology means that a marketer uses knowledge, tools, and systems to make their business easier and better.

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1.8 LET US SUM UP

In this lesson we have briefly touched upon the following points • The term market originated from the Latin word Mercatus meaning ‘to trade’. There are different perspectives on which a market is explained • The markets can be classified on the basis of their location, kinds of commodities handled, regulations imposed, nature of transactions etc. • The main aims of marketing includes Intelligent and capable application of modern marketing policies, developing the marketing field, guiding policies suggesting solutions, finding sources, retrieve existing marketing function and taking appropriate actions in the course of action. • The Importance of Marketing includes Social, Legal, Economic, Political, and Technological aspects.

1.9 CHECK YOUR PROGRESS

• How would you establish the relationship between business and marketing? (Refer 1.1) • Define market and define marketing (Refer 1.2 and 1.4) • What are the objectives of marketing? (Refer 1.6) • Bring out the importance of marketing. (Refer 1.7) • How markets could be classified? Give examples to suit different classifications. (Refer 1.3)

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LESSON-2 EVOLUTION OF CONCEPT OF MARKETING

Contents: 2.0 Aims and Objectives 2.1 Introduction 2.2 Evolution of concept of marketing 2.2.1 Historical Perspective 2.2.2 Functional Perspective 2.3 Modern Marketing concept 2.3.1 Consumer’s Need Orientation 2.3.2 Integrated Marketing 2.3.3 Customer Satisfaction 2.4 Let us sum up 2.5 Check your progress 2.6 Activity

2.0 AIMS AND OBJECTIVES

In the previous part, we saw about the basics of marketing. In this part let us discuss about the evolution of the concept of marketing and the modern marketing concepts which will help you to know

i. How marketing concept is transformed from the traditional way of marketing to modern way of marketing?

2.1 INTRODUCTION

Marketing is indeed an ancient art; it has been practiced in one form or the other since the days of Adam and Eve. The word, marketing has been defined differently by authorities in different ways. The traditional objective of marketing had been to make the goods available at places where they are needed. This idea was later on changed by shifting the emphasis from “exchange” to “satisfaction of human wants.” Different authorities tried to give suitable definition from their viewpoint. Some are very broad, others are rather too narrow. Some emphasis on the traditional view of producing goods and finding out customers, others emphasize on the modern view that marketing must first find out what customers want and then plan a product to satisfy that want. As any other subject, it has its own origin, growth and development. Let us briefly trace the evolution of marketing.

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2.2 EVOLUTION OF THE CONCEPT OF MARKETING

The concept of marketing is not a particularly complicated or even original idea. Sayings such as ‘the customer comes first’, or ‘the customer is always right’, have been used by forward-thinking entrepreneurs throughout the ages. Based on that age-old principle, marketing is really a more formalized business orientation that has developed into a management discipline over the years. It would be appropriate to trace the concept of marketing from its origin till present date. This appears to be essential as the term has been interpreted by many ways by different persons. From time to time, the term was associated with varied connotations by different sets of people. These explanations were found to be consonance with the experience one might have had with different aspects of marketing. Naturally, this paved the way for terminological and conceptual differences.

This is quite akin to any discipline that is innately dynamic. Marketing is no exception to this rule. Since inception, the concept of marketing has been growing multi-dimensionally and multi-disciplinary. Moreover, marketing has permeated into each and every functional aspects of business. All these have contributed to the confusion that is prevailing now on precisely defining the term marketing.

An analysis of contemporary literature reveals vividly the conceptual variations in the use of the term marketing. They describe it as a ‘function’, ‘an orientation’, ‘an approach or an attitude’, ‘a philosophy of business’ and ‘a management science or technique’. A closer analysis would reveal that marketing infact conveys all of these and often more. An attempt is made here to trace the evolution of marketing from all the possible perspectives.

2.2.1 HISTORICAL PERSPECTIVE

Marketing is basically concerned with exchange or trade. Trade in its most basic form has existed ever since mankind has been capable of producing a surplus. Historically, this surplus was usually agricultural produce that was often traded for manufactured goods such as textiles or earthenware. Exchange brought into existence places that facilitated trade, such as village fairs and local markets. The emergence of trade allowed people to specialize in producing particular goods and services that could be exchanged in markets for other goods they needed. This idea was later on changed by shifting the emphasis from ‘exchange’ to ‘satisfaction of human wants’.

Before the Industrial Revolution, the production and distribution of goods tended to be on a small scale. Industrialization resulted in dramatic gains in productivity, mainly due to the development of machines. Production became more geographically concentrated and was carried out in purpose-built mills or factories. Enterprises became larger, production runs longer and products more standardized. Firms produced in volume, not only for local markets, but for a national and even an international market. The growth of the ‘factory system’

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caused the migration of the population from the countryside to the new and rapidly expanding industrial towns. Because of developments during the period of the Industrial Revolution, firms could produce more in terms of volume than the local economy could absorb. Consumption therefore became dispersed over greater geographical distances and producers no longer had immediate contact with their markets. To overcome this problem, many forward thinking entrepreneurs of the time started to plan their business operations in a ‘marketing orientated’ manner, although the terms ‘marketing’ or ‘marketing orientation’ were not formally used to describe this process until well into the twentieth century as we explain later. In order for producers to be able to manufacture goods and services that would appeal and sell in widely dispersed markets, it became necessary for them to carefully analyze and interpret the needs and wants of customers and to manufacture products which would ‘fit in’ with those needs and wants. The process of matching the resources of a firm to the needs and wants of the market place is called entrepreneurship. A craftsman, such as a blacksmith or potter, develops a high degree of skill in a particular activity. Industrialization took the processes of specialization and division of labour a stage further, resulting in greater productivity which, in turn, reduced costs and hence the selling price of products. However, the rise in job specialization also increased the need for exchange. Larger-scale production meant that marketing channels had to be created to facilitate the distribution of goods to enable the effective demand from the much larger market to be met. This development laid the foundations of the modern industrial economy, which is still based on the fundamental concept of trade or exchange.

2.2.2 FUNCTIONAL PERSPECTIVE

The marketing concept is the philosophy that firms should analyze the needs of their customers and then make decisions to satisfy those needs, better than the competition. Today most firms have adopted the marketing concept, but this has not always been the case.

In 1776 in The Wealth of Nations, Adam Smith wrote that the needs of producers should be considered only with regard to meeting the needs of consumers. While this philosophy is consistent with the marketing concept, it would not be adopted widely until nearly 200 years later.

To better understand the marketing concept, it is worthwhile to put it in perspective by reviewing other philosophies that once were predominant. While these alternative concepts prevailed during different historical time frames, they are not restricted to those periods and are still practiced by some firms today. • The Production Concept The production concept prevailed from the time of the industrial revolution until the early 1920's. The production concept was the idea that a firm should focus on those products that it could produce most efficiently and that the creation of

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a supply of low-cost products would in and of itself creates the demand for the products. The key questions that a firm would ask before producing a product were: • Can we produce the product? • Can we produce enough of it? At the time, the production concept worked fairly well because the goods that were produced were largely those of basic necessity and there was a relatively high level of unfulfilled demand. Virtually everything that could be produced was sold easily by a sales team whose job it was simply to execute transactions at a price determined by the cost of production. The production concept prevailed into the late 1920's. • The Sales Concept By the early 1930's however, mass production had become commonplace, competition had increased, and there was little unfulfilled demand. Around this time, firms began to practice the sales concept (or selling concept), under which companies not only would produce the products, but also would try to convince customers to buy them through advertising and personal selling. Before producing a product, the key questions were: • Can we sell the product? • Can we charge enough for it? The sales concept paid little attention to whether the product actually was needed; the goal simply was to beat the competition to the sale with little regard to customer satisfaction. Marketing was a function that was performed after the product was developed and produced, and many people came to associate marketing with hard selling. Even today, many people use the word "marketing" when they really mean sales. • The Marketing Concept After World War II, the variety of products increased and hard selling no longer could be relied upon to generate sales. With increased discretionary income, customers could afford to be selective and buy only those products that precisely met their changing needs, and these needs were not immediately obvious. The key questions became: • What do customers want? • Can we develop it while they still want it? • How can we keep our customers satisfied? In response to these discerning customers, firms began to adopt the marketing concept, which involves: • Focusing on customer needs before developing the product • Aligning all functions of the company to focus on those needs

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• Realizing a profit by successfully satisfying customer needs over the long- term When firms first began to adopt the marketing concept, they typically set up separate marketing departments whose objective it was to satisfy customer needs. Often these departments were sales departments with expanded responsibilities. While this expanded sales department structure can be found in some companies today, many firms have structured themselves into marketing organizations having a company-wide customer focus. Since the entire organization exists to satisfy customer needs, nobody can neglect a customer issue by declaring it a "marketing problem" - everybody must be concerned with customer satisfaction.

2.3 MODERN MARKETING CONCEPT

The old view of marketing concentrated totally on the functions of distribution of goods and commodities. The flow of goods from producer to the consumer is sales-oriented, aiming to maximize the profits through maximizing the sales. In the past, various innovations, growth of mass communication, competition in the market, rapid growth in the field of science and technology etc., enlarged the scope of marketing. The producers face the changing conditions created by human behavior. Thus the change in the marketing functions is necessitated. Realizing the importance of marketing to the success of a firm, the business administrators began to think of a new idea. The aim, objectives, follow ups etc are designed to suit the current needs, desires and changing behavior of customers. The customers are not to be told what to purchase but asked what to be provided for customer- creating value satisfaction. “The marketing concept is a consumer’s needs orientation backed by integrated marketing aimed at generating consumer satisfaction as the key to satisfying organizational goals.”

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The marketing concept holds that the key to achieving organizational goals consists in determining the needs and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors. Perspectives on what constitutes marketing and on what place marketing holds in the firm, have undergone substantial changes in the recent years. In earlier years, marketing was viewed as not much different from selling. But marketing concept can be expressed as “FIND WANTS AND FILL THEM”, “MAKE WHAT YOU CAN SELL, INSTEAD OF TRYING TO SELL WHAT YOU CAN MAKE”, “LOVE THE CUSTOMERS AND NOT THE PRODUCT”. Essentially, the marketing concept focuses on all the activities of the organization for satisfying customer needs by integrating these activities with marketing to accomplish the organization’s long range objectives. The ideas of marketing concept are as follows

2.3.1 CONSUMER’S NEED ORIENTATION

“Selling focuses on the need of the buyer. Selling is preoccupied with the seller’s need to convert his product into cash; marketing, with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering and finally consuming it.” It is expressed in the following ways also: • Consumer is the king. He gets what he needs. • Consumer has voice and tops in the organization chart. • Consumer’s need and desires are considered in production planning. • Consumer’s need and desires are shaped through products. • Firms produce acceptable products and not the product easy to manufacture.

2.3.2 INTEGRATED MARKETING

All the departments in an organization recognize the importance of buyers. For instance, a firm may have many departments headed by department heads. When the buyer has any dealing with the departments, a good feeling or a goodwill must be created through the dealings. Another example, a buyer who is financially sound obtains credit purchases. Then the collection department should not treat him as a mere debtor. A customer should have a feeling that all the departments are doing something for him.

2.3.3 CUSTOMER SATISFACTION

Firms aim to give satisfaction to consumers through marketing concept. The firma try to help the buyers in solving the problems, better than competitors. In the concept of consumer satisfaction, there are short-run consumer satisfaction and long-run consumer welfare. The short-run consumer satisfaction is achieved by supplying items like liquor, cigarettes, tasty but non-nutritious food

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etc., without making any social judgments about the consumer’s wants. This reformulates the marketing concept into societal marketing concept.

“The societal marketing concept is a consumer’s needs orientation backed by integrated marketing aimed at generating consumer satisfaction and long-run consumer welfare as the key to satisfying organization goals.” The long-run consumer welfare further broadens the concept of marketing i.e., servicing one’s market and society. The marketer must see that consumers with purchasing power constitute a potential market. No sales can be made unless there are buyers. It is essential for the marketer to carry out the business in such a way that they give satisfaction to consumer’s needs at a profit. In many cases consumers are ignorant about their needs. The marketer adopts the consumer’s point of view and tries to make what they can sell, but not to sell what they can make. They become consumer-oriented.

A manufacturer should study the consumers in relation to their needs, desire and satisfaction and then design and make products to match the taste of the consumers. Thus consumers have been given supreme place in the field of marketing through surveys to find out the real needs of different groups of buyers. Secondly, buyers do not buy products and services themselves but for the promise of what theses purchases will do for them. For instance, buyers do not buy toothpaste, but they buy the promise of healthy teeth and an attractive smile. Thus consumers buy satisfaction. Thirdly, consumers buy price. That is, price is the basic consideration. Consumers have unlimited desire but with limited purchasing power. While buying, a consumer chooses the best product at a reasonable price, which is based upon the objectives of pricing policies. Thus price is a consideration in practically all consumer’s decisions to buy or not to buy. Fourthly, consumers buy images. While buying, a consumer is greatly influenced by his images of the of various competing sellers. The brand images are products personalities. For instance, design, colour, package, price etc can be a strong influence in determining a brand’s image- Bajaj Scooter, HMT watches, Bata shoes, Amul butter, Nescafe coffee, Pears soap, Ponds talcum powder etc have a strong and individual attraction for the buyers.

2.4 LET US SUM UP

In this lesson, we have discussed about the following points

• The evolution of marketing is analyzed through different perspectives. All these different concepts finally culminate to the point that marketing concept has to be primarily consumer-oriented. Because, a business would exist only when it could create and retain a consumer hence the very purpose of the business should be to create customers.

• The modern marketing concept is a consumer’s needs orientation backed by integrated marketing aimed at generating consumer satisfaction as the key to satisfying organizational goals

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2.5 CHECK YOUR PROGRESS

• What does marketing mean to you and which concept do you believe in? (Refer 2.2 to 2.3 and answer it in your own) • Discuss clearly the modern concept of marketing. How does it differ from the traditional concept? (Refer 2.3, 2.3.1, 2.3.2 and 2.3.3) • What major considerations distinguish the production concept from the sales concept? (Refer 2.2.2) • How will you find out whether the firm is really consumer-oriented? (Refer 2.3, 2.3.1, 2.3.2 and 2.3.3)

2.6 ACTIVITY (ANSWER IT IN YOUR OWN)

Activity 1: Analyze a company has decided to introduce the marketing concept into its business activities. The company is in the line of manufacturing quartz watches. Can you give a write-up as to how you could make the company really consumer-oriented? Activity 2: Production versus marketing orientation Many firms have redefined their orientation to reflect the customer’s viewpoint. Using the first two companies as examples, provide a marketing orientation for the other three companies

PRODUCTION MARKETING ORIENTATION ORIENTATION Disney We produce movies and We provide fantasies and run theme parks entertainment Prudential We sell insurance We provide financial security American Airlines We run an airline IBM We make computers Amazon.com We sell books and other products over the internet

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LESSON-3 RECENT DEVELOPMENT IN MARKETING CONCEPT

Contents: 3.0 Aims and Objectives 3.1 Introduction 3.2 Traditional Marketing- The 4 P’s of Marketing 3.3 Customer Targeted Marketing: 3.3.1 Need for Customer-Targeted Marketing 3.3.2 The Process of Transition: 3.4 Competitive Strategies 3.5 Business versus Consumer Markets 3.6 Internet Marketing 3.7 Marketing for Small Businesses 3.8 Let us sum up 3.9 Check your progress 3.10 Activity

3.0 AIMS AND OBJECTIVES

In this part, let us clearly discuss in-depth about the recent developments in marketing concept and bring out the significance of customer-targeted marketing to face the challenges and hurdles in the competitive market. This will help you to answer the following questions ii. How traditional marketing concept was undertaken in the past? iii. What is the need for customer-targeted marketing? iv. What strategies and technologies were used in business to satisfy customers?

3.1 INTRODUCTION

In a world economy that is in constant flux and undergoing turbulence, more companies are realizing that their most precious asset is their customer base. An even more important realization is the need to satisfy the whims and fancies of these customers in order to survive in these increasingly competitive markets. With the rapid advancement of information technology (especially the rise of the Web) and the increasing difficulties of meeting customer’s needs and wants (for example, their expectations of 24 / 7 customer service especially for online transactions), there is a shift from a traditional marketing approach to customer

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targeted marketing. Many organizations and marketing consultants are emphasizing the need to allocate more funds to apply new-found knowledge of consumer behavior in new products development, build better customer relationships through customer loyalty and retention programs.

3.2 TRADITIONAL MARKETING-THE 4 PS OF MARKETING

The marketing mix or what is commonly known as the 4 Ps is a framework for marketers to implement a marketing concept. It consists of a set of major decision areas that a company needs to manage in order to at least satisfy consumer needs. The traditional marketing mix contains four major elements, the "4 Ps of marketing". As defined by Kotler et al. (1999): • Product: Anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. In includes physical objects, services, persons, places, organizations and ideas. • Price: The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service. • Promotion: Activities that communicate the product or service and its merits to target customers with a view to persuading them to buy. • Place: All the company’s activities that make the product or service available to target customers. With the rapid changes surrounding organizations, the traditional marketing mix of the 4 Ps has been criticized for being too myopic in this current market situation. The traditional marketing mix has also been disparaged for being too product-focused and for taking an overly inward-looking strategy with regards to the organization’s resources and capabilities in production matters. This is antithetical to attending to the more important organizational goal of satisfying the desired needs and wants of customers. In addition, the Web and E-commerce revolution has played a major role in alleviating customers’ ability to shape their relationships with the company. This has led customers to expect companies to market their products and services in ways that reflect more directly their individual needs. These changes have prompted enterprises that wish to stay ahead of their competitors to shift their traditional marketing approach to customer-targeted marketing.

3.3 CUSTOMER TARGETED MARKETING

In customer targeted marketing, the customer becomes the central focus of the organization’s strategy and activities, rather than the product itself (which is the prime concern in traditional marketing). The organization’s paradigm shift in marketing requires a company to build a commitment to quality and to listen

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critically to the customer to determine the market needs and how the company can meet those needs more effectively.

One of the major characteristics of the approach is to focus on each customer’s interests and interactions with the organization to deliver targeted, personal messages. This would require the company to be constantly gathering information about their customers in an effort to better serve them and, most importantly, to retain them as loyal customers. With the customers’ data and feedback, the organization will apply the knowledge to develop more customer- centric products and services and/ or to improve existing ones. In addition, the information will be shared within the organization to encourage employees at all levels to focus on creating maximized customer value and loyalty.

3.3.1 NEED FOR CUSTOMER-TARGETED MARKETING

In order to have a competitive edge and to satisfy increasing levels of customers’ desires, companies realized that they have to see their customers as individuals rather a homogeneous mass of similar tastes, values and buying behaviors. Due to such transformation, companies need to be more customer-focused in its overall . This has resulted in organizations adopting a customization strategy to increase customer’s loyalty to their products and services. For example, in banking and insurance industry, there has been a move towards greater customization. Standard products/services have been given way to a varied menu of features from which customers may select their own preferred combination.

In view of these changes, companies that understand the asset value of each customer, and that tailor their marketing efforts (and their costs) to acquire and sustain the highest-value assets, will win over less-adaptable traditional marketing approach of the 4 Ps.

3.3.2 THE PROCESS OF TRANSITION

In order to strategically change from a traditional marketing approach to customer targeted marketing, an organization must be aware of these following areas:

• Paradigm Shift. A company must fully understand that customer targeted marketing requires a shift in the organizational mindset, and not just structural organizational changes. They must realize that their sole purpose is to continuously satisfy customers’ needs and wants. Thus, to ensure a smooth transition from a traditional marketing approach to customer targeted approach, an organization must reflect and ask itself questions as to what areas need to be analyzed and to understand the ramifications of such a transition in the organization. On the other hand, an organization needs to realize the negative consequences for not willing to be a more customer-focused marketing organization.

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• Customer Targeted Planning. As in any organizational change initiative, proper planning is needed. The objective of planning customer-centric marketing strategies is to find win-win opportunities with customer and to identify the best mutual opportunities for your customers and your company. In short, the organization’s shift to customer-targeted marketing should embrace these three important points:

1. Planning should focus on customer wants and not looking inwardly at company goals

2. Focus on the honest feedback and suggestions through creating different channels of communications. Listen to the customers, rather than forcing them to listen to you.

3. Integrate your customers in every aspects of your business, from new product design to after-sales services and more.

• Organization-wide Responsibility. For the approach to be successful, members need to understand the new philosophy of marketing and embrace it organization-wide. Many organizations tend to underestimate the degree to which every facet of the enterprise needs to be involved in the process and to be integrated into the actual customer relationship.

• Organization Redesign. An organization has to assess the roles of all functional departments interacting with customers to ensure that they add value to customers instead of increasing the costs. By reorganizing the company with the customer as the focus, many departmental roles and responsibilities will have to be redesigned. And when that happens, the employees will have to adopt new work processes that would be more customer-centric in nature.

• Human Resource Training. There is a need to develop customer-focused human resource through customer behavior training, across the functional departments. By investing in such training at all levels, the members will be more knowledgeable, more autonomous, and more efficient in anticipating and meeting the needs of the customers.

• Use of Information Technology. With the advancement and increased affordability in information technology, more companies are able to collect available data on customer purchase behavior more efficiently. For example, technologies ranging from checkout scanning to Internet cookies are commonly used to track customers' buying behaviors. Companies that employ such technology will be more adept at acquiring new customers, retaining existing customers, and cross selling than those who do not.

• Enhanced Customers Communications. With the use of the Internet as a medium for targeted communication, this allows companies to be in touch with customers at less than one-hundredth of the cost of more traditional snail mail, brochures or flyers. Communication through emails with the

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customers is almost free, and the customers can retrieve communications almost immediately. However, this has also resulted in customers having 24 / 7 service expectations of these companies.

• Customer Targeted Measurement. An organization must be able to measure and evaluate the success of their customer targeted marketing strategy. In most cases, traditional measurement techniques such as profitability, market share and profit margins are used to measure the success. There should be an added emphasis given to developing measures that are customer-centric and which are able to assess the marketing strategy. Customer acquisition costs, conversion rates, retention rates, customer sales rates, loyalty measures and customer share within a brand are some examples of customer-centric measures than a customer-focused organization can adopt

The need for survival has provoked many organizations to shift from traditional to customer targeted marketing. The market conditions surrounding us will continue to change at an accelerating rate and customer’s expectation will continue to rise. Hence, without any doubts, more and more companies will adopt a customer-targeted marketing strategy with increased intensity.

3.4 COMPETITIVE STRATEGIES

Often times, decisions about product, place, promotion, and price will be dictated by the competitive stance that a firm assumes in its target market. Companies that adopt a low-cost supplier strategy are usually characterized by a vigorous pursuit of efficiency and cost controls. A company that manufactures a low-tech or commodity product, such as wood paneling, would likely adopt this approach. Such firms compete by offering a better value than their competitors, accumulating market share, and focusing on high-volume and fast inventory turnover.

Companies that adhere to a differentiation strategy achieve market success by offering a unique product or service. They often rely on brand loyalty, specialized distribution channels or service offerings, or patent protection to insulate them from competitors. Because of their uniqueness, they are able to achieve higher- than-average profit margins, making them less reliant on high sales volume and extreme efficiency. For example, a company that markets proprietary medical devices would likely assume a differentiation strategy.

Firms that pursue a niche market strategy succeed by focusing all of their efforts on a very narrow segment of an overall target market. They strive to prosper by dominating their selected niche. Such companies are able to overcome competition by aggressively protecting market share and by orienting every action and decision toward the service of its select group. An example of a company that might employ a niche strategy would be a firm that produced floor coverings only for extremely upscale commercial applications.

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3.5 BUSINESS VERSUS CONSUMER MARKETS

An important micro-marketing delineation is that between industrial and consumer markets. Marketing strategies and activities related to transferring goods and services to industrial and business customers are generally very different from those used to lure other consumers. The industrial, or intermediate, market is made up of buyers who purchase for the purpose of creating other goods and services. Thus, their needs are different from general consumers. Buyers in this group include manufacturers and service firms, wholesalers and retailers, governments, and nonprofit organizations.

In many ways, it is often easier to market to a target group of intermediate customers. They typically have clearly defined needs and are buying the product for a very specific purpose. They are also usually less sensitive to price and are more willing to take the time to absorb information about goods that may help them do their job better. On the other hand, marketing to industrial customers can be complicated. For instance, members of an organization usually must purchase goods through a multi-step process involving several decision makers. Importantly, business buyers will often be extremely cautious about trying a new product or a new company because they do not want to be responsible for supporting what could be construed as a poor decision if the good or service does not live up to the organization's expectations.

A chief difference between marketing to intermediate and consumer markets is that members of the latter are typically considering purchasing goods and services that they might enjoy but are not absolutely necessary. As a result, they are more difficult to sell to than are business buyers. Consumers are generally less sophisticated than intermediate buyers, are less willing to spend time absorbing individual marketing messages of interest to them, and are more sensitive to the price of a good or service. Consumers typically make a buying decision on their own, however (or, for larger purchases, with the help of a friend or family member), and are much more likely to buy on impulse than are industrial customers.

Despite the differences, a dominant similarity between marketing to intermediate buyers and consumers is that both groups ultimately make purchases based on personal needs. Consumers typically act on their desires to belong, have security, feel high self esteem, and enjoy freedom and status. Business and industrial consumers react more strongly to motivators such as fear of loss, fear of the unknown, the desire to avoid stress or hardship, and security in their organizational role.

3.6 INTERNET MARKETING

A discussion of marketing would not be complete without mentioning the emerging field of Internet marketing. Increasingly, small businesses have sought to take advantage of the global reach of the World Wide Web and the huge number of potential customers available online. Although it may seem like a

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completely new field, Internet marketing actually combines many of the basic elements of traditional marketing.

Whether the internet campaign is intended to increase awareness of an existing brand, draw visitors to a Web site, or promote a new product offering, the first step involves identifying the target market. As is the case with any other type of marketing campaign, the small business must conduct in order to define the target audience for the campaign, and then use the information gathered to determine how best to reach them.

The next step is to develop a strategy for the campaign. This involves setting concrete and measurable goals and tying the campaign into the organization's traditional marketing efforts. The third step is to present the strategy to key decision makers in the small business. It is important at this stage to develop a timeline and budget, and also to be prepared to encounter resistance among colleagues not familiar with cyberspace. The fourth step is to implement the Internet marketing campaign. The final step, evaluation, should be conducted throughout the process. Online surveys of customers are one source of potential feedback.

3.7 MARKETING FOR SMALL BUSINESSES

In the early stages of forming a small business, a business plan is a vital tool to help an entrepreneur chart the future direction of the enterprise. A well- prepared business plan should include an extensive marketing component that explores the needs of the target market and lays out a marketing program to meet them. In fact, some experts claim that entrepreneurs should actually design their organizations in a way that gives the marketing function prominence. Once the needs of the target customers have been identified, these experts say, every aspect of the company's marketing program, as well as the basic image that the company develops, should be oriented toward satisfying these needs. For example, the company's selection of advertising, channels of distribution, packaging, price, and even vehicles and dress codes should all be coordinated to appeal to the target market.

As a small business grows, it may be helpful to create a separate . While similar in format to the general business plan, a marketing plan focuses on expanding a certain product line or service rather than on the overall business. A number of resources are available to assist small businesses in marketing their products and services. It may be prudent to seek legal advice before implementing a marketing plan, for example. A firm with experience in consumer law could review the small business's product, packaging, labeling, advertising, sales agreements, and price policies to be sure that they meet all relevant regulations to prevent problems from arising later. In addition, many advertising agencies and market research firms offer a variety of means of testing the individual elements of marketing programs. Although such testing can be expensive, it can significantly increase the effectiveness of a company's marketing efforts.

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3.8 LET US SUM UP

In this lesson, we have discussed about the following points • The role of traditional marketing and what is the need for customer-targeted marketing? • The process of transition from traditional marketing to customer-targeted marketing. • The competetive atrategies used in business • Business Versus Consumer Markets • Internet marketing and • Marketing for Small Businesses

3.9 CHECK YOUR PROGRESS

• Write notes on internet marketing (Refer 3.6)

• State the need for target marketing and explain the transition process (Refer 3.3, 3.3.1 and 3.3.2)

• Explain the competitive strategies which are followed by the company in order to establish their product in the market. (Refer 3.4)

• Bring out the difference between business and consumer markets. (Refer 3.5)

• Is the marketing strategy followed by small business differs from large scale business? Discuss. (Refer 3.7)

3.10 ACTIVITY (ANSWER IT IN YOUR OWN)

Activity 1: Think About it?

Although the majority of the internet users are young, older people are going online. Once they learn to use the internet, older people spend more money and time on average than any other demographic group. Which products and services are older people likely to buy over the internet?

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LESSON-4 FUNCTIONS OF MARKETING

Contents: 4.0 Aims and Objectives 4.1 Introduction 4.2 Functions of Marketing 4.2.1 Functions of Exchange 4.2.2 Functions of Physical supply 4.2.3 Facilitating functions 4.3 Approaches To The Study Of Marketing 4.3.1. Product or Commodity Approach 4.3.2. Institutional Approach 4.3.3. Functional Approach 4.3.4. Management Approach 4.3.5. Systems Approach 4.3.6. Societal Approach 4.3.7. Legal Approach 4.3.8. Economic Approach 4.4 Let us sum up 4.5 Check your progress 4.6 Actvity

4.0 AIMS AND OBJECTIVES

From the previous lessons, the basics and evolution of marketing would given us a clear picture about the transition of marketing Now let us move forward towards the functions of marketing and how marketing has been approached in more than one way. After going through this unit, you will be able to discuss

i. What are the basic fuctions of marketing? ii. How marketing is approached in different ways?

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4.1 INTRODUCTION

Marketing involves certain activities to make the goods to start journey from the place of production to the place of consumption. The act, operation and service which are concerned with the marketing activities are called marketing functions. The functional approach to the study of marketing splits the whole process into several smaller activities. The marketing functions link the producer and the ultimate consumer. The functions of marketing involve a number of operations, to be performed side by side. Take for example wheat; it travels from the land (cultivator) to the final consumer through the functions of collection or buying, storing, grading, packing, selling, transporting etc. Thus it involves many functions including risk-bearing and market information.

4.2 FUNCTIONS OF MARKETING

Clark and Clark divided the marketing functions under three major groups as functions of exchange, functions of physical supply and fcilitating functions. All the essential functions are included. It is an accepted classification. The classification is shown below MARKETING FUNCTIONS

Functions of Functions of Physical Facilitating functions Exchange supply 1. Selling 1. Transportation 1. Financing 2. Assembling 2. Storage & Warehousing 2. Risk- bearing (buying) 3. Standardization 4. Market Information 5. Promotion Thus the marketing functions are classified as under 1. Exchange functions (a) Buying and Assembling (b) Selling 2. Physical functions (a) Storage and Warehousing (b) Transport 3. Facilitating functions (a) Financing (b) Risk-bearing (c) Standardization (d) Market information (e) Promotion A brief explanation of the above mentioned classification is given under

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4.2.1 FUNCTIONS OF EXCHANGE

Exchange brings about changes in the ownership of products. In the process of changes i.e., transfer in the ownership, the two important functions are buying and selling. Thus, it is a two-way process involving two separate, but supporting activities. Both, buying and selling are complementary to each other but not contradictory with a different view-point. For better understanding of the activities, this function is sub-divided into buying and assembling and selling.

(a) Buying

It is needless to say that buying is the first step of marketing functions. It is carried out by all marketers- the manufacturers, the wholesalers, the retailers etc. Buying and selling are inseparable. Both happen at the same time. For exmaple, if we buy a thing, then there should be some person to sell the thing. Seller is the person who sells the product. When the buying function is over, the buyer gets the title to the product. Buying may be done either directly or through middlemen. Buying implies business.

(b) Assembling

Assembling is concerned with the collection and concentration of goods of same type from different sources at a place for further movement. Generally goods are bought from many sellers. When they are purchased from different small producers, scattered over a wide area, they are to be assembled together at a central place. For example, retailers buy different commodities of different sizes in different quantity, in different quality for their further movement. The main aim of assembling is ot bring the products at a central palce in order to disperse them either for production or sonsumption purposes. The job of assembling is carried out by middlemen, manufacturers etc.

(c ) Selling

Selling and buying are complement to each other. Marketing efforts evolve around buying and selling functions. In business, the selling function is very important. The primary objective of marketing is to sell the products at a profit. By selling, the ownership is transferred to the buyer. Sales are concerned with the activities, which convert the desire into demand. Creation of demand, its maintenance, expansion etc, are the soul of sales efforts. In this modern period, with mass productions, stiff competitions in market etc., the process of selling is a complicated function.

4.2.2 FUNCTIONS OF PHYSICAL SUPPLY

The second group of marketing process is the physical supply. These are the functions that are related with creation of palce and time utilities. Physical transfer of goods from the manufacturer to consumer takes place by means of transportation and storage.

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(a) Transportation

As tansportation marketing functin assumes unique importance because of mass production, mass distribution and ever widening markets. Since markets are geographically separated from the production place, transportation is essential. The function of exchange i.e., buying and selling provide the transfer of ownership from seller to buyer. When ownership changes, possession is also changed. And through transport the possession is enjoyed by the buyer. When the distance between the production place and the consumption place increases, the importance of transport expands. The goods from a plce where they are mot needed, are transferred to place where they are needed. The function of transport can be as that of a nerve system, through which the blood circulates and keeps the body working at ease. Goods are sent ot the markets through land, sea and air. The cost of transport is justified by the creation of place utility.

(b) Storage and Warehousing

Storage creates time utility. Products are preserved from the time of production to the time of consumption. Production may be during a particular season, but demand is regular. In the same way, production may be regular, but demand may be only in seasonal time. In both the cases, products have to be stored. Storage function, is necessary in concentration as well as in dispersion. The function is done by the manufacturers, wholesalers and professional warehouse keepers. Marketers can easily adjust the supply with demand through warehousing and transportation. Storage function is performed through warehouses. Storage is the base for consumers to get the goods.

4.2.3 FACILITATING FUNTIONS

In addition to functions of exchange and physical supply, there is facilitating function. Facilitating functions are Financing, Risk-bearing, Standardization, Market information and Promotion. All these are supporting activities. But thesse activities contribute in carrying out other functions. In brief they are:

(a) Financing

Finance is the most fundamental aspect for any merchandise transactions. Funda are required to hold the stocks and to meet the cost of marketing. Finance is needed for production as well as for marketing- a self-blood of industry. Generally, there is a gap of period between the purchase of raw materials and the production of finished goods. It means that the manufacturer who invests in raw materials has to wait till the consumers pay for the finished goods. This waiting period is undertaken by financial instituitions by granting loans. At every stage of buying or selling, the question of payment of price arises. The bankers, who are dealers in money, provide money on credit to the business. Merchandising machines are lubricated constantly by such financial instituitions. There are various kinds of finance needed- short term, medium

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term, long term etc., and the source are commercial banks, co-operative credit societies, other agencies etc.

(b) Risk-bearing

In marketing, there arise numerous risks such as damages to goods, physical loss, changes in economic values of goods, mismanagement, credit losses tec. These are more or less inherent in th emarketing process. These are losses on account of fire, flood, deterioration, bad debts etc. On all these occasions, an intelligent businessman reduces the possibility of risks. Thus, the risks are to be shouldered, shifted or reduced. Some of the risks are insurable, while others are not. For example, loss on account of fire, accident etc., can be insured with the insurance companies. For example, loss on account of fall in demand, prices, competition etc., cannot be insured.

(c ) Standardization

Standardization is related with the division of commodities into distinct groups. Standard is used in providing certain basic qualities to the goods for their use. Standard is a specification. It is a ‘norm’, ‘grade’ or ‘category’. Standards are fixed on physical characteristics of products. The standardized products possess uniform characteristics. For example, shape, weight, size etc.

Grading applies certain qualitative specifications. For example grading of fruits, agricultural produces etc., according to their size, colour, juice content, taste tec. Grading starts where standardization ends. That is standardization precedes grading. Both are closely related activities. Standardization and grading are important and they widen the markets. Buying and selling becomes easier. It also facilitates purchase or sales by description.

(d) Market information

The desired success of marketing depends on correct and timely decisions. These decisions are based on market information or market intelligence. Modern marketing must have information of size, location, characteristics of markets etc. The customer’s wants, habits, purchasing power etc., are to be considered, the strength or weakness of competitors, trend in market, supply and demand etc, are laso to be taken into account. Marketing conditions are dynamic and affect the industry to any extent. Market information includes all facts, estimates, opinion and other information used in making decisions, which affect the marketing of products or services. Most of the major decisions of business firms are based on the interpretations of the available data. Plans and programmes of marketing are not based on the information through market research and market intelligence services.

(e) Promotion

Promotion is a wide term including advertising, personal selling, sales promotions etc. Marketing communications are essential for both sellers and buyers. Sales promotion are marketing device to stimulate or restimulate

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demand for products. The behaviour of buyers can favourably be influenced only through promotion. Promotional programmes are neede for both consumer goods as well as industrial goods. Persuasive communication or effective promotion will facilitate the marketers to increase and maintain their market share.

A marketing function is an act, operation or service by which the original producer and the final consumer are linked together. This functional approach to the study of marketing has made it possible to split economic structure of exchange into smaller parts so that equal weight may be given to its each operation and by studying each function separately the best and most economical method of performaing them, may be discovered. Marketing embraces every step which affects transfers in the ownership of goods and care for their physical distribution. Goods must be moved from producers to the customers and that too through a marketing machinery i.e., buying ands selling until their ownership is transferred to the user.

4.3 APPROACHES TO THE STUDY OF MARKETING

The study of marketing has been approached in more than one way. To some it has meant to sell something at a shop or market place, to some it has meant the study of individual product and its movement in the market; to some it has meant the study of persons- wholesalers, retailers, agents etc., who move the products and to some it has meant the study of behaviour of commodity movement and the way the persons involved to move them.

The approach to the study of marketing has passed through several stages before reaching the present stage. There is a process of evolution in the development of thesse approaches. To facilitate the study, these different appoaches may be classified as follows

4.3.1 PRODUCT OR COMMODITY APPROACH

Under the commodity approach the focus is placed on the product or it is an approach on the marketing on commoditywise basis. In other words, the study relates to the flow of a certain commodity and its movement from the original producer right up to the ultimate customer. The subject-matter, under this study, is commodity. When one studies the marketing on the basis of commodity approach, one must begin to study and analyse the problems elating to a commodity i.e., sources and conditions of supply, nature and extent of demand, mode of transporting, storage, standardization, packing etc. Again, take an example of a commodity, say rice. One has to study the sources of rice, location, people involved in buying and selling, means of transport, problems of selling the product, financing, storage, packing etc. Thus, we get a full picture of the marketing from the original producer to the ultimate consumer. The method of study is repeated for each item.

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The system claims that it is simple and gives good result over the marketing of each product, description study is possible. But at the same time this approach is time-consuming and repetitive process which is a drawback.

4.3.2 INSTITUTIONAL APPROACH

In the instituitional approach, the focus is on the study of instituitions- middlemen, wholesalers, retialers, importers, exporters, agencies, warehousing etc., engaged in the marketing during the ovement of goods. The approach is also known as middlemen approach. Here, emphasis is given to understand and analyse the functions of instituitions, who are discharging their marketing functions. The activities of ach instituition form a part of marketing and collectively complete the marketing functions. In the process of moving the goods from th eproducer to the final consumers, a large number of persons are engaged. This system pays attention to the problems and functions of marketing instituitions- transporting, banks and other financial instituitions, warehousing, advertising, insurance etc.

This method does not give adequate knowledge of the entire marketing functions and also fails to explain the interrelations of different instituitions.

4.3.3 FUNCTIONAL APPROACH

The functional approach gives importance on th evarious functions of marketing. In other words, one concentrates attention on the specialised services or functions performed by marketers. In this approach, marketing splits into many functions- buying, selling, pricing, standardization, storage, transportation, advertising, packing etc. In this approach, marketing is regarded as “business of buying and selling and as including those business activities involved in the flow of goods and services between producers and customers.”

This system gives too musch importance to various marketing functios and fails to explain how such functions are applied to the specific bsuiness operations.

4.3.4 MANAGEMENT APPROACH

This approach is the latest and scientific. It concentrates upon the activities or marketing functions and focuses on th erole of decision-making at the level of firm. This approach is mainly concerned with how managers handle specific problems and situations. It aims through evaluation of current market practices to achieve specific marketing objectivbes. Generally there are two factors- controllable and uncontrollable., which are more concerned with the decision- making. Controllables include price adjustment, advertisement etc. Uncontrollables- economical, sociological, psychological, political etc, are the basic causes for market changes. And these cahnges cannot be controlled by any firm. But controllables can be controlled by the firm. The uncontrollables limit the marketing opportunities. As such, managerial approach is concerned

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with the study of uncontrollables and then taking decisions for controlables within the scope set by uncontrollables.

Managerial or decision-making approach emphasises on the practical aspects of marketing, but ignores the theoretical aspects of marketing. At the same time, this approach, provides an overall information of the entire business.

4.3.5 SYSTEMS APPROACH

The system approach can be defined as “ a set of objects together with the relationships among them and their attributes.” Systems focus on interrelations and interconnections among the functions of marketing. The system examines marketing connections (linkage) inside as well as outside the firm. Inside the firm there is a co-ordination of business activities- engineering, production, marketing, price etc. On the basis of feedback information proper control is exercised to modify or alter in th eproducing process, so that the desired output can be produced. Here, the aim is to secure profit through customer satisfaction. Markets can be understood only through the study of marketing information. For instance, business is composed of many functions, which are composed of subfunctions. Each function or sub-function is independent, but interrelated and enables the other to achieve marketing objectives.

4.3.6 SOCIETAL APPROACH

This approach has been originated recently. The marketing process is regarded as a means by which society meets its own consumption needs. This system gives no importance as to how the business meets the consumer’s needs. Therefore, attention is paid to ecological factors (sociological, cultural, legal etc.) and marketing decisions and their impact on the society’s well-being.

4.3.7 LEGAL APPROACH

This approach emphasises only one aspect i.e., transfer of ownership to buyer. It explains the regulatory aspect of marketing. In India, the marketing activities are largely controlled by Sales of Goods Act, Carrier Act etc. The study is concentrated only on legal aspects, leaving other important aspects. This does not give an idea of marketing.

4.3.8 ECONOMIC APPROACH

This approach delas with only the problems of supply, demand and price. These are important from the economic point of view, but fall to give a clear idea of marketing.

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4.4 LET US SUM UP

• Functions of marketing is divided into three major headings namely Functions of exchange, Functions of Physical supply and Facilitating functions.

• There are diiferent perspective through which marketing could be studied. Important among these are: Product approach views the markeitng through keping a commodity as the nodal point, Instituitional approach that examines the role of marketing instituitions and Functional approach by splitting up the marketing into minute functions. Decision making approach, Economic approach andd Legal approach are other perspectives through their application is much limited.

• Recently systems approach is also adopted which is considered to be relevant in the context of constraints imposed by controllable and non- controllable variables on marketing.

4.5 CHECK YOUR PROGRESS

• Name the following functions a) Moving goods from the place of production to the markets b) Collecting and keeping goods in a centrally-located place c) Inherent risks in the process of marketing Ans (a) Transportation, (b) Warehousing, (c) Risk bearing • What are the different approaches to the study of marketing? (Refer 4.3, 4.3.1 to 4.3.8) • What is managerial approach to study of marketing? (Refer 4.3.4) • Examine the different functions of marketing (Refer 4.2, 4.2.1 to 4.2.3) • “Concentration, Equalisation and Dispersion are the soul of marketing”- Comment. (Refer 4.2, 4.2.1 to 4.2.3 and answer it in your own)

4.6 ACTIVITY (ANSWWER IT IN YOUR OWN)

Activity 1: Which approach of marketing would you recommend in the following cases (a) Air Conditioners (b) Reducing cost of marketing (c) Rice and Wheat. (d) Restriction of trade (e) Transportation (f) Wholesalers and retailers

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LESSON-5 MARKET SEGMENTATION

Contents: 5.0 Aims and Objectives 5.1 Meaning of market Segmentation 5.2 Need for Market Segmentation 5.3 Objectives of Market Segmentation 5.4 Criteria / Requirements of Market Segments 5.5 Basis of Segmentation 5.5.1 Basis for Segmentation in Consumer Markets 5.5.2 Basis for Segmentation in Industrial Markets 5.6 The Segmentation Process 5.7 Methods of Segmenting Markets 5.7.1. Demographic Segmentation 5.7.2. Geo demographic techniques 5.7.3. Benefit segmentation and behavioural segmentation 5.7. 4. Psychographics and life style segmentation 5.7.5. Business - to -business market segmentation 5.8 Benefits of Segmentation 5.9 Let us sum up 5.10 Check your progress

5.0 AIMS AND OBJECTIVES

The previous section explained the functions and approaches to marketing. In this chapter concentration is given on consumer behaviour. Here the term is used in more specific way to mean group of persons seeking products in a specific product category. In short you will learn, i. How consumers are segregated in the market? ii. How the process of segmentation goes on? iii. What are the different methods of segmentation?

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5.1 MEANING OF MARKET SEGMENTATION

Market segmentation is the process in marketing of grouping a market (i.e. customers) into smaller sub-groups. Market segmentation is the identification of portions of the market that are different from one another. Segmentation allows the firm to better satisfy the needs of its potential customers.

Market segmentation is the process of identifying key groups or segments within the general market that share specific characteristics and consumer habits. Once the market is broken into segments, companies can develop advertising programs for each segment, focus advertising on one or two segments or niches, or develop new products to appeal to one or more of the segments. Companies often favor this method of marketing to the one-size-fits-all mass marketing approach, because it allows them to target specific groups that might not be reached by mass marketing programs. Market segmentation is widely defined as being a complex process consisting in two main phases:

• identification of broad, large markets

• segmentation of these markets in order to select the most appropriate target markets and develop Marketing mixes accordingly.

To identify segments, marketers examine consumers' interests, tastes, preferences, and socioeconomic characteristics in order to determine their patterns of consumption and how they will respond to various marketing strategies. The primary information marketers seek is why consumers purchase specific products or services but not others. Catalog retailers and direct- marketing firms make up some of the key users of market segmentation, although many other kinds of companies and organizations use this technique.

5.2 THE NEED FOR MARKET SEGMENTATION

The marketing concept calls for understanding customers and satisfying their needs better than the competition. But different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike.

Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, and mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same offering is unlikely to be viewed as optimal by all customers.

Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them with the same offering. The first step in target marketing is to identify different market segments and their needs.

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5.3 OBJECTIVES OF MARKET SEGMENTATION

1. Market segmentation is the first of three important steps in developing marketing strategy. 2. Segmentation groups customers with similar needs and responses; targeting determines which segments to serve; positioning is about how the product (or product portfolio) should compete with others in the market. 3. The objectives of market segmentation are to more accurately meet the needs of selected customers in a more profitable way.

5.4 CRITERIA / REQUIREMENTS OF MARKET SEGMENTS

In addition to having different needs, for segments to be practical they should be evaluated against the following criteria: • Identifiable: the differentiating attributes of the segments must be measurable so that they can be identified. • Accessible: the segments must be reachable through communication and distribution channels. • Substantial: the segments should be sufficiently large to justify the resources required to target them. • Unique needs: to justify separate offerings, the segments must respond differently to the different marketing mixes. • Durable: the segments should be relatively stable to minimize the cost of frequent changes.

A good market segmentation will result in segment members that are internally homogenous and externally heterogeneous; that is, as similar as possible within the segment, and as different as possible between segments. The main purpose of market segmentation is to measure the changing behaviour patterns of consumers. It should also be remembered that variations in consumer behaviour are both numerals and complex. Therefore, the segments should be capable of giving accurate measurements. But this is often a difficult task and the segments are to be under constant review. For example, the segment of a market for a car is motivated by a number of considerations such as economy, status, quality etc.

5.5 BASIS OF SEGMENTATION 5.5.1 BASIS FOR SEGMENTATION IN CONSUMER MARKETS

Consumer markets can be segmented on the following customer characteristics. • Geographic • Demographic

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• Psychographic • Behavioralistic Geographic Segmentation: The following are some examples of geographic variables often used in segmentation. • Region: by continent, country, state, or even neighborhood • Size of metropolitan area: segmented according to size of population • Population density: often classified as urban, suburban, or rural • Climate: according to weather patterns common to certain geographic regions Demographic Segmentation: Some demographic segmentation variables include: • Age • Gender • Family size • Family lifecycle • Generation: baby-boomers, Generation X, etc. • Income • Occupation • Education • Ethnicity • Nationality • Religion • Social class Psychographic Segmentation: Psychographic segmentation groups customers according to their lifestyle. Activities, interests, and opinions (AIO) surveys are one tool for measuring lifestyle. Some psychographic variables include: • Activities • Interests • Opinions • Attitudes • Values Behavioralistic Segmentation: Behavioral segmentation is based on actual customer behavior toward products. Some behavioralistic variables include: • Benefits sought • Usage rate

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• Brand loyalty • User status: potential, first-time, regular, etc. • Readiness to buy • Occasions: holidays and events that stimulate purchases Behavioral segmentation has the advantage of using variables that are closely related to the product itself. It is a fairly direct starting point for market segmentation.

5.5.2 BASIS FOR SEGMENTATION IN INDUSTRIAL MARKETS

In contrast to consumers, industrial customers tend to be fewer in number and purchase larger quantities. They evaluate offerings in more detail, and the decision process usually involves more than one person. These characteristics apply to organizations such as manufacturers and service providers, as well as resellers, governments, and institutions. Many of the consumer market segmentation variables can be applied to industrial markets. Industrial markets might be segmented on characteristics such as:

• Location

• Company type

• Behavioral characteristics Location: In industrial markets, customer location may be important in some cases. Shipping costs may be a purchase factor for vendor selection for products having a high bulk to value ratio, so distance from the vendor may be critical. In some industries firms tend to cluster together geographically and therefore may have similar needs within a region. Company Type: Business customers can be classified according to type as follows:

• Company size

• Industry

• Decision making unit

• Purchase Criteria Behavioral Characteristics: In industrial markets, patterns of purchase behavior can be a basis for segmentation. Such behavioral characteristics may include:

• Usage rate

• Buying status: potential, first-time, regular, etc.

• Purchase procedure: sealed bids, negotiations, etc.

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5.6 THE SEGMENTATION PROCESS

Once a company has gathered information from these segmentation bases, it must decide how to divide the market, bearing in mind that market segmentation seeks to minimize the differences within a segment and maximize the differences among segments. Consequently, depending on the product or service to be marketed, simple divisions along age, gender, or geographic lines alone may yield segments that are too vague to be of use. Instead, marketers may have to consider several characteristics or clusters of characteristics in order to divide the market into useful segments. When considering beer consumption, for example, marketers must look at both age and gender: the majority of beer drinkers are both young and male.

Hence, to begin segmenting the market, marketing managers must select the segmentation bases they will use to develop the segments, depending on the products or services to be marketed. Marketers may select a few segmentation bases they believe are the most relevant at the outset and develop market segments using them. On the other hand, they may compile a large array of information using all the segmentation bases and use this information to group consumers in various segments.

Next, marketers conduct any primary market analysis they may need, by preparing questionnaires and samples and by assessing the response to them. Using this information, marketers try to determine the most fruitful segments— the ones with greatest similarities within them. Because this process can be labor-intensive and require advanced knowledge of statistics, companies often rely on outside firms or artificial intelligence technology to produce meaningful market segments.

Once relevant, stable, reachable, profitable market segments are established, marketers can target the segments they believe will offer the best opportunities for growth given their products and resources and the ones they believe that correspond to the products being marketed the best. Finally, marketers can develop and launch advertising campaigns that appeal to the various segments.

Companies tend to choose the largest segments, although the segments with the most consumers are not always the most profitable and usually have the most competition. Consequently, marketers might benefit from considering targeting smaller segments or segments ignored by competitors, such as low-income consumers, which is frequently referred to as "niche marketing."

5.7 METHODS OF SEGMENTING MARKETS 5.7.1 DEMOGRAPHIC SEGMENTATION

Demographic segmentation is one of the most straightforward bases for segmenting markets; they are also one of the most meaningful. The main demographic categories are described below:

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Age- For many products buying behaviour is closely related to age category. The range of these categories will vary depending upon the product or service, thus a discotheque may appeal to the 18-30 age range, whereas visiting historic properties may be popular with the 25-45 age range. Age is regularly used to define the behaviour of certain markets. For instance younger people tend to be more active in making business trips than they are in domestic holiday trips. Sex will also determine consumption patterns.

Family size and life cycle - In developed western economies the family remains the basic social unit. Many consumption patterns are developed and taught within the family as it proceeds through a life cycle. This life cycle has been used by research services combined with income, and occupation to delineate different consumer groups. The approach is as follows. First consumers are divided into one of four possible life cycle groups: • Dependent adults - single adults • Pre-Family - Adults married without children • Family - One or more children • Late - Adults whose children have left home

These four life cycle groups are then broken down further by a combination of occupation and/or income to produce 12 major SAGACITY groupings. Evidence suggests that SAGACITY is a powerful discriminator between consumer groups for a wide range of products and services.

Social class/income - The current convention in the UK is to use a mixture of social class and income. Classifications are based on the occupation of the head of household. Socio economic groupings used in the UK are those established by the National Readership Survey, and fall into the following categories: A. Higher managerial, administrative or professional B. Intermediate managerial, administrative and professional C1. Supervisory, clerical, junior administrative or professional C2. Skilled manual workers D. Semi and unskilled manual workers E. State pensioners, widows, lowest grade workers.

Despite criticisms of this classification for being inadequate to describe consumer groups recent research has emphasized that it still maintains its discriminating power.

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5.7.2 GEO DEMOGRAPHIC TECHNIQUES

This approach to segmentation combines a number of variables such as where a customer lives, with home ownership, size of family, and so on. They are particularly relevant to the location and development of hospitality/tourism operations such as pubs, restaurants, leisure facilities. One approach to geo demographic segmentation using, geographic, cultural, socio economic and other factors is 'A Classification of Residential Neighborhoods' or ACORN. The ACORN system is a method of mapping geographically the concentrations of particular types of people. The assumption is that the demographic/socio economic characteristics of people can be correlated to the housing characteristics of a particular area. The ACORN classifications are derived using a multi-variable statistical treatment of census of population data and are divided into ACORN groups and sub divided into ACORN types. There are eleven ACORN groups including:

A - Agricultural areas

B - Modern family housing higher incomes

These are then subdivided into ACORN types, for instance group B has five sub categories described below:

B3 - Cheap modern private housing

B4 - Recent private housing young families

B5 - Modern private housing, older children

B6 - New detached houses, young families

B7 - Military Bases

5.7.3 BENEFIT SEGMENTATION AND BEHAVIOURAL SEGMENTATION

Benefit segmentation uses causal rather than descriptive variables to group consumers. Different people buy the same or similar products for different reasons. For instance some people will visit a restaurant because it has a reputation for good food or drink and therefore seek gastronomic experience; others may visit the same restaurant to derive social benefits or status. Behavioural segmentation identifies consumption rates of a product or service as a means of segmenting markets. For instance customers of a local leisure centre may be classified as: • Frequent users (Daily visits) • Less frequent users (At least once a week) • Users ( Occasional visits) • Non users.

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If a company can identify the characteristics of frequent users (they may live in a certain area and have other common features such as income) they can target those segments in order to increase the number of frequent users. Loyalty status. A market can also be segmented according to the degree of consumer loyalty to a product or service brand. A brewery may identify the pubs in a post code area for instance pub A, pub B, pub C, pub D and classify the local population according to their loyalty.

5.7.4 PSYCHOGRAPHICS AND LIFE STYLE SEGMENTATION

Some of the previously mentioned segmentation methods such as demographics and social class may be too narrow to describe the wide variations in behaviour and outlook of a sophisticated population. Life style and psychographic segmentation seek to remedy this situation. Both attempt to cluster consumers into groups depending upon common interests and attitudes which will determine the way they spend their time and money. Thus the AB socio economic group could be sub divided into life style, 'leisure groups' which may include:

• 'young aspiring sophisticates' - Generally well educated, enjoys clubs and societies, gregarious, interested in new leisure ideas.

• 'young fogey' - Generally conservative, well educated, enjoys traditional pursuits, country sports, resists new ideas.

Life style segmentation can be used to classify specific markets for particular products groups, for instance food retailing, cars, electrical goods and so on. The research required to develop life style groups can be expensive and difficult to interpret but the valuable insights it provides into consumer markets justifies its use as a valuable marketing tool.

5.7.5 BUSINESS - TO -BUSINESS MARKET SEGMENTATION

Substantial parts of the market for hospitality services are represented by other businesses, or organizations for instance conferences, seminars, incentive travel packages, air crew services are all aimed at other businesses rather than consumer markets. The concept of segmentation can be applied, although the bases used are likely to be different. A more detailed discussion is given by Webster and Wind. Some of the most frequently used industrial market segments include: • Size of firms • Type of industry • Geographical region • Type of buying organization

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Slow growth in consumer demand and increasing competition in hospitality markets has meant that companies are finding it increasingly difficult to practice mass marketing. Target marketing and market segmentation enables firms to focus their scarce resources more precisely with a greater chance of success. Hospitality, tourism and service organizations are in the enviable position of dealing directly with the consumer and therefore have an opportunity to analyze more precisely consumer profiles and buying behaviour. Developments in computer technology and its availability to firms of all sizes will encourage the use of increasingly sophisticated segmentation techniques.

5.8 BENEFITS OF SEGMENTATION

1. The manufacturer is in a better position to find out and compare the marketing potentialities of his products. He is able to judge product acceptance or assess the resistance to his product.

2. The result obtained from market segmentation is an indicator, to adjust the production, using men, amterials and other resources in a most profitable manner. In other words, the organization could allocate and appropriate its efforts in a most useful manner.

3. Changes required may be studied and implemented without losing markets. As soon as the product becomes obsolete, or even earlier, the product line could be diversified or even discontinued.

4. It helps in determining the kinds of promotional devices that are effective and also helps to evaluate their results.

5. Appropriate timing for the introduction of new products, advertising, etc., could be easily determined.

5.9 LET US SUM UP

• Market segmentation is the process in marketing of grouping a market (i.e. customers) into smaller subgroups. Once the market is broken into segments, companies can develop advertising programs for each segment, focus advertising on one or two segments or niches, or develop new products to appeal to one or more of the segments.

• Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Target marketing on the other hand recognizes the diversity of customers and does not try to please all of them with the same offering.

• The Basis of Segmentation is sub-divided into two parts: Basis for Segmentation in Consumer Markets and Basis for segmentation in Industrial markets.

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• The Methods of Segmenting Markets is based on Demographic Segmentation, Geo demographic segmentation, Benefit segmentation and behavioural segmentation, Psychographics and life style segmentation and Business - to -business market segmentation

5.10 CHECK YOUR PROGRESS

• What is market segmentation? Discuss the importance of market segmentation in developing marketing strategy. (Refer 5.1 and 5.2) • Describe the criteria for segmenting the market. Illustrate with a consumer durable. (Refer 5.4 and answer it in your own) • What is the object of market segmentation? Write a note on the basis of segmenting a market (Refer 5.3, 5.5, 5.5.1 and 5.5.2) • Explain the different methods of segmenting markets.(Refer 5.7, 5.7.1 to 5.7.8)

• Explain the benefits of segmentation. (Refer 5.8)

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UNIT – II

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LESSON-6 PRODUCT AND PRODUCT POLICY

Contents: 6.0 Aims and Objectives 6.1 Meaning of product 6.2 Categories of Products 6.2.1 Categories of Consumer Products 6.2.2 Categories of Business Products 6.3 Components of product 6.3.1. Core Benefits 6.3.2. Actual Product 6.3.3. Augmented Product 6.4 Product policy 6.4.1. Product Planning and Development 6.4.2. Product Line 6.4.3. Product Mix 6.4.4. Product Branding 6.4.5. Product Style 6.4.6 Product Packaging 6.5 Let us sum up 6.6 Check your progress

6.0 AIMS AND OBJECTIVES

We discussed about consumer-market segmentation in the previous lesson. The consumers will be satisfied only if they consume standardized products. Therefore the importance of products is well understood. In this lesson, let us discuss about the different types of products and the policies which are framed in developing the market strategy. This will be helpful to answer

i. How products are categorized in the market? ii. What are all the components in a product? iii. How product policies determine the sales?

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6.1 MEANING OF PRODUCT

In a most simple way a product could be defined as “everything the purchaser gets in exchange for his money.” In business, a product is a good or service which can be bought and sold. In retailing, products are called merchandise. In manufacturing, products are purchased as raw materials and sold as finished goods. Commodities are usually raw materials such as metals and agricultural products, but a commodity can also be anything widely available in the open market.

In marketing, a product is anything that can be offered to a market that might satisfy a want or need. The term “product” is often used as a catch-all word to identify solutions a marketer provides to its target market. We will follow this approach and permit the term “product” to cover offerings that fall into one of the following categories:

• Goods – Something is considered a good if it is a tangible item. That is, it is something that is felt, tasted, heard, smelled or seen. For example, bicycles, cell phones, and donuts are all examples of tangible goods. In some cases there is a fine line between items that affect the senses and whether these are considered tangible or intangible. We often see this with digital goods accessed via the Internet, such as listening to music online or visiting an information website. In these cases there does not appear to be anything that is tangible or real since it is essentially computer code that is proving the solution. However, for our purposes, we distinguish these as goods since these products are built (albeit using computer code), are stored (e.g., on a computer hard drive), and generally offer the same benefits each time (e.g., quality of the download song is always the same).

• Services – Something is considered a service if it is an offering a customer obtains through the work or labor of someone else. Services can result in the creation of tangible goods (e.g., a publisher of business magazines hires a freelance writer to write an article) but the main solution being purchased is the service. Unlike goods, services are not stored, they are only available at the time of use (e.g., hair salon) and the consistency of the benefit offered can vary from one purchaser to another (e.g., not exactly the same hair styling each time).

• Ideas – Something falls into the category of an idea if the marketer attempts to convince the customer to alter their behavior or their perception in some way. Marketing ideas is often a solution put forth by non-profit groups or governments in order to get targeted groups to avoid or change certain behavior. This is seen with public service announcements directed toward such activity as youth smoking, automobile safety, and illegal drug use.

While in some cases a marketer offers solutions that provide both tangible and intangible attributes, for most organizations their primary offering -- the thing that is the main focus of the marketing effort -- is concentrated in one area. So

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while a manufacturer may offer intangible services or a service firm provides certain tangible equipment, these are often used as add-ons that augment the organization’s main product.

6.2 CATEGORIES OF PRODUCTS 6.2.1 CATEGORIES OF CONSUMER PRODUCTS

Product is actually a complex, multidimensional concept. It is defined broadly enough to include services, programs, and attitudes and includes whatever you are offering the target market in an effort to meet their needs. It involves all tangible and intangible aspects of the good or service you offer your target market. These are things which have value and are balanced against the value you expect to receive from the target consumer. In addition to categorizing by type of offering, most products intended for consumer use can be further categorized by how frequently and where they are purchased. • Convenience Products – These are products that appeal to a very large market segment. They are generally consumed regularly and purchased frequently. Examples include most household items such as food, cleaning products, and personal care products. Because of the high purchase volume, pricing per item tends to be relatively low and consumers often see little value in shopping around since additional effort yields minimal savings. From the marketer’s perspective the low price of convenience products means that profit per unit sold is very low. In order to make high profits marketers must sell in large volume. Consequently, marketers attempt to distribute these products in mass through as many retail outlets as possible. • Shopping Products – These are products consumers purchase and consume on a less frequent schedule compared to convenience products. Consumers are willing to spend more time locating these products since they are relatively more expensive than convenience products and because these may possess additional psychological benefits for the purchaser, such as raising their perceived status level within their social group. Examples include many clothing products, personal services, electronic products, and household furnishings. Because consumers are purchasing less frequently and are willing to shop to locate these products, the target market is much smaller than that of convenience goods. Consequently, marketers often are more selective when choosing distribution outlets to sell their products. • Specialty Products – These are products that tend to carry a high price tag relative to convenience and shopping products. Consumption may occur at about the same rate as shopping products but consumers are much more selective. In fact, in many cases consumers know in advance which product they prefer and will not shop to compare products. But they may shop at retailers that provide the best value. Examples include high-end luxury automobiles, expensive champagne, and celebrity hair care experts. The target markets are generally very small and outlets selling the products are very limited to the point of being exclusive.

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In addition to the three main categories above, products are classified in at least two additional ways:

• Emergency Products – These are products a customer seeks due to sudden events and for which pre-purchase planning is not considered. Often the decision is one of convenience (e.g., whatever works to fix a problem) or personal fulfillment (e.g., perceived to improve purchaser’s image).

• Unsought Products – These are products whose purchase is unplanned by the consumer but occur as a result of marketer’s actions. Such purchase decisions are made when the customer is exposed to promotional activity, such as a salesperson’s persuasion or purchase incentives like special discounts offered to certain online shoppers. These promotional activities often lead customers to engage in Impulse Purchasing.

6.2.2 CATEGORIES OF BUSINESS PRODUCTS

Products sold within the b-to-b market fall into one of the following categories:

• Raw Materials – These are products obtained through mining, harvesting, fishing, etc., that are key ingredients in the production of higher-order products.

• Processed Materials – These are products created through the processing of basic raw materials. In some cases the processing refines original raw materials while in other cases the process combines different raw materials to create something new. For instance, several crops including corn and sugar cane can be processed to create ethanol which has many uses including as a fuel to power car and truck engines.

• Equipment – These are products used to help with production or operations activities. Examples range from conveyor belts used on an assembly line to large buildings used to house the headquarters staff of a multi-national company.

• Basic Components – These are products used within more advanced components. These are often built with raw material or processed material. Electrical wire is an example.

• Advanced Components – These are products that use basic components to produce products that offer a significant function needed within a larger product. Yet by itself an advanced component does not stand alone as a final product. In computers the motherboard would be an example since it contains many basic components but without the inclusion of other products (e.g., memory chips, microprocessor, etc.) would have little value.

• Product Component – These are products used in the assembly of a final product though these could also function as stand alone products. Dice included as part of a children’s board game would be an example.

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• MRO (Maintenance, Repair and Operating) Products – These are products used to assist with the operation of the organization but are not directly used in producing goods or services. Office supplies, parts for a truck fleet and natural gas to heat a factory would fall into this category.

6.3 COMPONENTS OF A PRODUCT

On the surface it seems a product is simply a marketing offering, whether tangible or intangible, that someone wants to purchase and consume. In which case one might believe product decisions are focused exclusively on designing and building the consumable elements of goods, services or ideas. For instance, one might think the key product decision for a manufacturer of floor cleaners is to focus on creating a formula that cleans more effectively. In actuality, while decisions related to the consumable parts of the product are extremely important, the Total Product consists of more than what is consumed. The total product offering and the decisions facing the marketer can be broken down into three key parts:

1. Core Benefits 2. Actual Product 3. Augmented Product

6.3.1 CORE BENEFITS

Consider what we have talked about many times in this study material; people make buying decisions that satisfy their needs. While many needs are addressed by the consumption of a product or service, some needs are not. For instance, customers may need to be perceived highly by other members of their group or need a product that is easy to use or need a risk-free purchase. In each of these cases, and many more, the core product itself is the benefit the customer receives from using the product. In some cases these core benefits are offered by the product itself (e.g., floor cleaner) while in other cases the benefit is offered by other aspects of the product (e.g., the can containing the floor cleaner that makes it easier to spread the product). Consequently, at the very heart of all product decisions is determining the key or core benefits a product will provide. From this decision, the rest of the product offering can be developed.

6.3.2 ACTUAL PRODUCT

The core benefits are offered through the components that make up the actual product the customer purchases. For instance, when a consumer returns home from shopping at the grocery store and takes a purchased item out of her shopping bag, the actual product is the item she holds in her hand. Within the actual product is the consumable product, which can be viewed as the main good, service or idea the customer is buying. For instance, while toothpaste may come in a package that makes dispensing it easy, the Consumable Product is

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the paste that is placed on a toothbrush. But marketers must understand that while the consumable product is, in most cases, the most critical of all product decisions, the actual product includes many separate product decisions including product features, branding, packaging, labeling, and more. Full coverage of several of these important areas is provided later in this study material.

6.3.3 AUGMENTED PRODUCT

Marketers often surround their actual products with goods and services that provide additional value to the customer’s purchase. While these factors may not be key reasons leading customers to purchase (i.e., not core benefits), for some the inclusion of these items strengthens the purchase decision while for others failure to include these may cause the customer not to buy. Items considered part of the augmented product include:

• Guarantee – This provides a level of assurance that the product will perform up to expectations and if not the company marketing the product will support the customer’s decision to replace, have it repaired or return for a refund.

• Warranty – This offers customers a level of protection that often extends past the guarantee period to cover repair or replacement of certain product components.

• Customer Service – This consists of additional services that support the customer’s needs including offering training and assistance via telephone or online.

• Complementary Products – The value of some product purchases can be enhanced with add-on products, such as items that make the main product easier to use (e.g., laptop carry bag), enhance styling (e.g., cell phone face plates) or extend functionality (e.g., portal keyboard for PDA’s).

• Accessibility – How customers obtain the product can affect its perceived value depending on such considerations as how easy it is to obtain (e.g., stocked at nearby store, delivered directly to office), the speed at which it can be obtained, and the likelihood it will be available when needed.

6.4 PRODUCT POLICY

Product policies are the general rules set up by the management itself in making product decisions. Products of a firm are tha backbone with which profit is earned, enabling the firm to exist. Therefore, the product is the fundamental feature which determines the firm’s success or failure. Good product policies are the basis on which the right products are produced and marketed successfully. The fundamental function of a product policy is that it guides the activities of a firm and is measured not only with the current profits, but also with the long life

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of the firm. The policies of the firm must be to manufacture right products for the consumers. “Product policy is concerned with defining the type, volume and timing of the products a company offers for sale.” The product policy is the objectives and guidelines, which determines the nature of the product or services, to be marketed. All types of commercial function must have a policy. When a product is concerned, a policy is essential to make the product up to the standard expected by consumers. The product policy is a broad term and includes many activities. A product policy, generally covers the following: 1. Product planning and development 2. Product Line 3. Product Mix 4. Product Branding 5. Product style 6. Product packaging

6.4.1 PRODUCT PLANNING AND DEVELOPMENT

™ Product Planning is the ongoing process of identifying and articulating market requirements that define a product’s feature set. The product plan helps resolve issues related the markets, the types of products and the opportunities that the company will invest in and the resources required to support product development. More specifically, the product plan is used to:

• Define an overall strategy for products to guide selection of development projects;

• Define target markets, customers, competitive strengths, and a competition strategy (e.g., competing head-on or finding a market niche);

• Position planned products relative to competitive products and identify what will differentiate or distinguish these products from the competition;

• Rationalize these competing development projects and establish priorities for development projects;

• Provide a high-level schedule of various development projects; and

• Estimate development resources and balance project resource requirements with a budget in the overall business plan.

Few companies have a formal product planning process, let alone a rigorous process. While a product plan is generally prepared on an annual basis, it should be reviewed and updated at least quarterly, if not monthly. Market conditions will change, new product opportunities will be identified, and new product technology will emerge all causing a potential impact to the product

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plan. These opportunities need to be evaluated and the product plan changed if needed

A marketing plan outlines the specific actions you intend to carry out to interest potential customers and clients in your product and/or service and persuade them to buy the product and/or services you offer. The marketing plan implements your marketing strategy, "the marketing strategy provides the goals for your marketing plans. It tells you where you want to go from here. The marketing plan is the specific roadmap that's going to get you there.” A marketing plan may be developed as a standalone document or as part of a business plan. Either way, the marketing plan is a blueprint for communicating the value of your products and/or services to your customers.

™ Product development is the process of designing, creating, and marketing an idea or product. The product can either be one that is new to the marketplace or one that is new to your particular company, or, an existing product that has been improved. In many instances a product will be labeled new and improved when substantial changes have been made. All product development goes through a similar planning process. Although the process is a continuous one, it is crucial that companies stand back after each step and evaluate whether the new product is worth the investment to continue. That evaluation should be based on a specific set of objective criteria, not someone's gut feeling. Even if the product is wonderful, if no one buys it the company will not make a profit. Brainstorming and developing a concept is the first step in product development. Once an idea is generated, it is important to determine whether there is a market for the product, what the target market is, and whether the idea will be profitable, as well as whether it is feasible from an engineering and financial standpoint. Once the product is determined to be feasible, the idea or concept is tested on a small sample of customers within the target market to see what their reactions are.

6.4.2 PRODUCT LINE

Product lining is the marketing strategy of offering for sale several related products. Unlike product bundling, where several products are combined into one, lining involves offering several related products individually. A line can comprise related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of product variants in a line. Line consistency refers to how closely related the products that make up the line are. Line vulnerability refers to the percentage of sales or profits that are derived from only a few products in the line.

The number of different product lines sold by a company is referred to as width of product mix. The total number of products sold in all lines is referred to as length of product mix. If a line of products is sold with the same brand name, this is referred to as family branding. When you add a new product to a line, it is referred to as a line extension. When you add a line extension that is of better

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quality than the other products in the line, this is referred to as trading up or brand leveraging. When you add a line extension that is of lower quality than the other products of the line, this is referred to as trading down. When you trade down, you will likely reduce your . You are gaining short-term sales at the expense of long term sales.

Price lining is the use of a limited number of prices for all your product offerings. This is a tradition started in the old five and dime stores in which everything cost either 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices. There are many important decisions about product and service development and marketing. In the process of product development and marketing we should focus on strategic decisions about product attributes, product branding, product packaging, product labeling and product support services. But product strategy also calls for building a product line.

6.4.3 PRODUCT MIX

You may have heard of the "four Ps" of marketing: product, price, place, and promotion. Collectively these are called the marketing mix. More comprehensively they are viewed as:

• product, service, or program - something of value you are offering the customer, client, or park visitor

• price - what the customer, client, or park visitor pays (direct costs are financial, indirect or alternative costs are such things as time it takes and the things people give up if they choose your offering)

• place, distribution, location, or accessibility - where the transaction takes place, perhaps in a park

• promotion or communication - this is how you inform the target market about the benefits in your marketing mix

The marketing mix should be viewed as an integrated and coordinated package of benefits that reflect the characteristics of customers and various targeted publics and satisfy their needs, wants, and expectations. Note that the elements of the marketing mix should be integrated because each element of the mix usually has some impact, direct or indirect, on the other three. For example, if you improve the product or service you probably have to change the price because it costs more to produce. Although you may not have to change where the product is delivered to the customer, you will almost certainly have to change the promotion or communication with the customer because you need to tell the customer about the changes you have made in the product and how the changes will make it more desirable and satisfying.

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6.4.4 PRODUCT BRANDING

Branding involves decisions that establish an identity for a product with the goal of distinguishing it from competitors’ offerings. In markets where competition is fierce and where customers may select from among many competitive products, creating an identity through branding is essential. It is particularly important in helping position the product (see discussion of product position) in the minds of the product’s target market.

While consumer products companies have long recognized the value of branding, it has only been within the last 10-15 years that organizations selling component products in the business-to-business market have begun to focus on brand building strategies. The most well-known company to brand components is Intel with its now famous “Intel Inside” slogan. Intel’s success has led many other b-to-b companies and even non-profits to incorporate branding within their overall marketing strategy.

A brand is a product from a known source (organization). The name of the organization can also serve as a brand. The brand value reflects how a product's name, or company name, is perceived by the marketplace, whether that is a target audience for a product or the marketplace in general (clearly these can have different meanings and therefore different values). It is important to understand the meaning and the value of the brand (for each target audience) in order to develop an effective marketing mix, for each target audience. The value of the brand for a web-based company may have heightened importance due to the intangible nature of the web.

6.4.5 PRODUCT STYLE

As pointed out earlier, certain products are bought by consumers instantaneously. Some products are rejected by them spontaneously. Why is so? It was explicitly shown earlier that the quality of a product alone is not the criterion for acceptance. In fact blind product tests have proved that consumers are unable to distinguish one brand from another by mere taste. Most of the products are bought to meet the psychological needs only. For example cigarette, perfume, shaving lotion etc., have only very little functional use. Physiologically these products are not at all necessary. Therefore their need is only subjective and not objective. Yet, this completely subjective force is recognized as the pivotal point of economic behaviour and is called ‘style’. This element is so dangerously dynamic that a product becomes obsolete in no time.

Fundamentally, the style of a product cannot be changed materially except for very marginal alterations. But the same product can be made suitable to changes of style, provided the firm stresses the need with a changed emphasis. Toothpaste offers a good example in this regard. Originally toothpaste manufacturers stressed certain health aspects. Subsequently the information of chlorophyll changed the image of the toothpaste. Today, it is the anti-decay

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feature that is considered to be more important and is emphasized in campaigns. But through all these changes, the product has remained the same.

6.4.6 PRODUCT PACKAGING

A package or packaging is the material or item used to protect, contain, or transport a commodity or product. A package can also be a material or item that is physically attached to a product or its container for the purposes of marketing the product or communicating information about the product. Packaging performs a number of essential functions, during transportation, storage, marketing and use including:

• containment of the product to ensure its integrity and safety • protection of the product from physical damage, spoilage and/or deterioration • convenience of use and consumer acceptance

The package must satisfy a number of legal and regulatory requirements related to the contents and their safe use, as well as provide other information and messages.

6.5 LET US SUM UP

• Product is actually a complex, multidimensional concept. It involves all tangible and intangible aspects of the good or service you offer your target market.

• The total product offering and the decisions facing the marketer can be broken down into three key parts: Core Benefits, Actual Product and Augmented Product.

• A firm should have a well laid-out product policy. Such a policy should encompass: product planning and development, decisions on product line, with right product mix, branding, style and packaging.

6.6 CHECK YOUR PROGRESS

• What is a product? Explain the different components of product.(Refer 6.1, 6.3, 6.3.1 to 6.333)

• Discuss the different categories of product. (Refer 6.2, 6.2.1 and 6.2.2)

• Explain the product policies and bring out its significance in marketing. (Refer 6.4, 6.4.1 to 6.4.6)

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LESSON-7 PRODUCT LIFE CYCLE

Contents: 7.0 Aims and Objectives 7.1 Planning with the Product Life Cycle 7.2 The PLC and Marketing Planning 7.3 Development Stage 7.3.1 Early Development Stage 7.3.2 Late Development Stage 7.4 Introduction Stage 7.4.1 Early Introduction Stage 7.4.2 Late Introduction Stage 7.5 Growth Stage 7.5.1 Early Growth Stage 7.5.2 Middle Growth Stage 7.5.3 Late Growth Stage 7.6 Maturity Stage 7.6.1 Early Maturity Stage 7.6.2 Late Maturity Stage 7.7 Let us sum up 7.8 Check your progress

7.0 AIMS AND OBJECTIVES

The previous lesson explained the meaning of products, how products are categorized and how product policies are determined. In this part, let us see in detail the life-cycle of the product. This will help you to answer i. What are the different stages of product life-cycle? ii. How product life-cycle is planned in marketing?

7.1 PLANNING WITH THE PRODUCT LIFE CYCLE

As we have seen, there are many components, both internal and external, that must be considered within the marketing planning process. In fact, for many

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marketers creating the Marketing Plan represents one of the most challenging and burdensome tasks they face. Fortunately, over the years marketing academics and professionals have put forth theories, models and other tools that aid planning. Possibly the most widely used planning tool within marketing is the Product Life Cycle (PLC) concept. The basic premise of the PLC is that products go through several stages of “life” with each stage presenting the marketer with different challenges that must be met with different marketing approaches. By understanding a product’s position in the PLC, the marketer may be able to develop more effective plans.

There have been several attempts over the years to define the stages that make up the PLC. Unfortunately, the PLC may be different for different products, different markets and different market conditions (e.g., economic forces). Consequently, there is not a one-model-fits-all PLC. Yet there is enough evidence to suggest that most products experience patterns of activity that divide the evolution of the product into five distinct stages. These stages are:

• Development – Occurs before the product is released to the market and is principally a time for honing the product offering and preparing the market for product introduction.

• Introduction – Product is released to the market and sales begin though often gradually as the market becomes aware of the product.

• Growth – If the product is accepted it may reach a stage of rapid growth in sales and in profits.

• Maturity –At some point sales of a product may stabilize. For some products the maturity phase can be the longest stage as the product is repeatedly purchased by loyal customers. However, while overall sales may grow year-over-year, percentage sales increases may be small.

• Decline – All products eventually see demand decline as customers no longer see value in purchasing the product.

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7.2 THE PLC AND MARKETING PLANNING

With a basic understanding of the PLC, we now turn to how this is used in marketing planning. As we will see, the PLC helps the marketer understand that marketing decisions must change as a product moves from one stage to another. For example, marketers will find that what works when appealing to Innovators in the Introduction stage is different than marketing methods used to attract Early Majority during the Growth stage.

7.3 DEVELOPMENT STAGE

The Product Life Cycle begins long before a product is brought to market. While technically sales do not start until the next stage, marketers must address many of the same issues they will face once the product is launched. Most of what occurs in this stage is experienced only by companies who are on the forefront of innovation of a new product form. In our discussion, the Development stage is divided into two distinct sub-stages: early and late.

7.3.1 EARLY DEVELOPMENT STAGE

• Competition: No real competition exists since the product is in early development much of which is in-house and not readily viewable to competitors. However, from a research perspective competitors are now being identified.

• Target Market: The target market exists only in market research terms. Possibly a small number of target customers are used to assist with research.

• Product: The product exists only in the form of ideas and prototypes. Inventory is not yet available.

• Prices: Non-existent unless the company charges research customers a fee to be part of early product testing.

• Promotion: Promotion has yet to occur as companies continue to refine the product form and build their marketing plan.

• Distribution: Mostly limited to internal analysis of possible distribution alternatives, though there may be some communication with a limited number of distribution partners in order to gauge interest.

• Profits: At this stage there are costs only. For firms developing a new product form this stage is primarily concerned with market research. This stage matches the Concept Development and Testing step for New Product Development. Customers and distribution partners are only involved to aid in information gathering often through focus group research.

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Because the product form is still in early development the marketer has yet to determine whether the company will move forward with a full product launch.

7.3.2 LATE DEVELOPMENT STAGE

• Competition: While a marketer may not face competition in terms of sales, they may face competitive pressure from companies developing similar products, such as competition to acquire materials or technologies for product development, competition to line up product evaluators, and competition to get early word out about the product to the news media. Additionally, competition may exist in the form of other types of products that potential customers currently use to satisfy needs targeted by the new product form. If these competitors are aware that a new product form is being developed, they may increase efforts to sell their product with the intention of reducing the market’s need for the new product.

• Target Market: Companies may test market the product among a small group of customers or within a selected geographic market.

• Product: Companies researching the product form begin to produce small quantities of the product, primarily for testing or to build initial awareness (e.g., for display at trade shows).

• Prices: Initial market price is discussed and if there are active test markets the company may be testing different price levels.

• Promotion: Promotion often begins prior to product launch as marketers prime the market. Emphasis may be on public relations in an attempt to encourage the media to discuss the product prior to launch. If a real test market is used the companies may be using several promotional options including advertising and sales promotion.

• Distribution: For product sold through distributors, the ground work is being laid to build the distribution network. In some cases distributor education and training will start prior to product launch.

• Profits: A small amount of revenue may be generated if real test markets are used, but overall marketers continue to experience substantial costs.

Products that have moved to the late stage of development have done so because market research suggests there is strong potential for success. By this point a marketer has a real product (not just ideas) and is in the position to test it in the market. Consequently, this stage matches the Market Testing step for New Product Development. Firms electing to test their product in real “test markets” will do so using all their marketing tools.

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7.4 INTRODUCTION STAGE

This stage represents the launch of the new product form by one or more companies. It is done only after the marketer has created a detailed Marketing Plan. In many cases tactical marketing decisions (i.e., product, price, promotion, distribution, target market) have been adjusted as the product has gone through the Development stage. The Introduction stage is divided into two distinct sub- stages: early and late.

7.4.1 EARLY INTRODUCTION STAGE

• Competition: In many cases, when two or more companies are working to be first to market with a new product form, one company will be out ahead and for a period of time have the market to itself. However, this does not mean there is no competition. The company that launched the product still faces competition from existing products that customers previously purchased in order to satisfy their needs.

• Target Market: To establish interest in the market for a new product form marketers will initially target Innovators and to a larger extent Early Adopters.

• Product: From the target market’s perspective, product options are limited since only one or a very small number of companies are selling products. Because of the uncertainty in whether the product will be accepted by a larger market and because of the expense involved in producing products in small volume (primarily due to low demand) there are very few product options available.

• Prices: In most cases marketers follow a pricing strategy called price skimming in which price is set at a level that is much higher than can be sustained once competitors enter. Price skimming allows the company to recover development and initial marketing costs before the onslaught of competitors eventually lowers price.

• Promotion: For products considered to be a leap ahead of existing products, early marketers may have some difficulty explaining how the product satisfies customer’s needs. This is particularly an issue with high-tech products. In this situation the marketer must engage in a promotional campaign that is designed to educate the market on the product form and not necessarily push a specific brand. Additional sales promotion may be used to encourage product trial. Also, the sales force may begin a strong push to acquire distributors.

• Distribution: Upon product launch marketers continue efforts to build their distributor network. As we saw in the Development stage, the focus of marketers is to find distributors committed to handling the product.

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• Profits: Marketers often experience low profits and most likely a loss as the cost of acquiring customers (i.e., promotion) is high and marketers also need to pay back development expense.

For the early entrants in the market the most important goal is to create awareness for the product form. If customers can see that the product form holds similar characteristics to existing products then the marketer's task is easier since their job becomes one of convincing customer that this new product form is better than what they are currently using.

However, if the product form is significantly different than existing products then the marketers’ job may be far more difficult. Under these conditions the marketer must not only make customers aware of the new product but they must also educate customers as to what the product is, how it works and what benefits are derived from its use. For some products, such as technology products, conveying this message can prove difficult as customers may not fully understand how the product works and, consequently, not see a need for the product. Whether customers understand the product or not, this stage requires promotional spending directed to addressing the need for customer education and building awareness. Also, education and awareness alone is not enough; customer must often be enticed to try a product through special promotional efforts (e.g., free trials).

7.4.2 LATE INTRODUCTION STAGE

• Competition: By this stage any company that was alone in launching the new product form is alone no longer, as it is highly likely at least one competitor has entered the market.

• Target Market: Marketers are now engaged heavily in getting a high percentage of Early Adopters to accept the product.

• Product: With competitors entering the choices available to customers expand, though the difference between competitors’ offerings is often not that significant.

• Prices: Product pricing remains high, though any new competitor entering at this stage may attempt to compete with the early entrants by offering a lower relative price.

• Promotion: The promotional message is still one designed to educate the market on the benefits of this new product form but with more competition there is a noticeable increase in the use of advertising that highlights a company’s brand. Also, personal selling and sales promotion have increased especially targeting the channel of distribution as entrants attempt to secure distributors.

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• Distribution: The number of distributors continues to increase with many now offering products from several market entrants (which at this point may still be only a few).

• Profits: Losses continue to mount due to high marketing cost and the need to recover development expense. Losses may be even higher than anticipated if the market adopts slower than forecast or if more companies enter than expected.

Early entrants continue to create awareness and educate customers, but their promotional orientation may shift to a "buy-our-brand" approach if more companies enter the market. Thus, at this stage, marketers begin to position their products with the intention of separating themselves from the competition.

7.5 GROWTH STAGE

The Growth stage is characterized by product sales increasing often at a very rapid rate. This is seen by large percentage sales increases over previous periods (e.g., 50% increase in sales from one quarter to the next). This is an indication the product has advanced beyond Early Adopters and is now being purchased by the mass market (i.e., Early Majority). It is also the stage when early entrants begin to realize profits, though the fact the market is now profitable invariably leads to increased competition. It is also the time in which competitors try to actively position their brand in a way that will separate it from the onslaught of new entrants. For many products the Growth stage is represented by three distinct sub-stages: early, middle and late.

7.5.1 EARLY GROWTH STAGE

• Competition: Only a few competitors may be in the market as others wait to see whether the mass market will adopt the product. However, competitors selling products customers previously purchased to satisfy needs now addressed by the new product form may be getting very aggressive in their marketing tactics as they sense the new product form to be a threat.

• Target Market: Continued focus is on Early Adopters but marketers begin to identify new market segments that contain the Early Majority.

• Product: A basic product sold to the Early Adopters remains, but plans are underway to introduce products with different configurations, such as more options (e.g., advanced models) and fewer options (i.e., stripped down model). An expanded product line may be necessary to satisfy many different potential segments of the mass market.

• Prices: The average selling price may remain high especially in cases where market demand is strong and only a few competitors have entered.

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• Promotion: Promotions are broadened with more emphasis on mass promotions and sales promotions that encourage product trial. Also, personal selling and sales promotions to distributors continue as marketers attempt to make inroads into distributors that target the mass market.

• Distribution: Marketers look for new distribution channels that enable the product to begin to reach the mass market. For instance, consumer products may look to gain distribution in large discount retailers.

• Profits: The early market entrants may begin to experience profits as early development costs have been covered and overall demand is gaining steam.

In the early part of the Growth stage marketers are looking to expand the market beyond the Early Adopters and into the mass market using Market Expansion strategies such as: 1) Grow Sales with Existing Products primarily by getting new market segments to buy, and 2) Grow Sales with New Products by introducing new models containing different sets of features. The latter strategy is used not only to appeal to new customers but also to encourage repeat purchasing by existing customers.

Additionally, greater emphasis is placed on using promotion to continue building awareness and driving interest in the product form. This is due to: 1) the need to reach a broader market, and 2) to maintain an effective “share of voice” (i.e., percentage of all promotions in the market) so the marketer’s message is not lost among competitors’ increased promotional spending.

7.5.2 MIDDLE GROWTH STAGE

• Competition: More competitors are attracted to the market as they see the market potential to provide high profits. Competitors selling products customers previously purchased to satisfy needs now addressed by the new product form may be extremely aggressive (may be entering the Maturity stage of their industry’s PLC) resulting in major price reductions. This may delay the adoption of the new product form by some Early Majority.

• Target Market: The Early Majority sector of the mass market begins to purchase in higher volume and depending on the product, existing customers (i.e., Early Adopters) may be purchasing again. The Late Majority are beginning to become customers.

• Product: Companies increase the number of product offerings in order to differentiate themselves from competitors. In most cases new product offerings do improve on the performance or benefits offered by earlier products. However, the target market may begin to feel burdened by too many choices.

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• Prices: As more competitors enter with more product options prices may begin to fall, though the effect may not be felt as strongly if demand remains strong. Pricing may be somewhat more competitive if large companies with strong financial backing are now entering, or in smaller segments where multiple companies are trying to establish a niche.

• Promotion: Emphasis has shifted to heavy advertising and promotions that promote individual brands and not just awareness and education of the product form. Heavy selling and sales promotion continues with distributors.

• Distribution: Distribution reaches saturated levels as all possible channels are now handling the product.

• Profits: Marketers who were early entrants to the market may begin to see very high profits as demand is increasing while the pricing levels remain fairly strong. Depending on the product, unit cost of production may be dropping as manufacturing levels increase.

In the middle part of Growth stage the objective is to continue a Market Expansion strategy, including seeking out new market segments that have not been targeted. This stage is also a time to focus on product positioning. The idea is to use marketing decisions to affect customer’s perceptions of a brand by trying to either: 1) separate a brand from other products (i.e., differentiate), or 2) bring a brand closer to competitor’s offerings (i.e., equivalency). For the differentiation approach marketers use promotional methods that show why their brand is different while the equivalency approach may suggest that a brand is equal to other brands but offers an advantage, generally on price.

Late-to-market competitors may use a penetration pricing approach to establish a position in the market. Penetration pricing intentionally sets a price that is below long-term pricing in order to capture large share of market. The firm will raise price once the product is established. Some marketers also determine that it is time to focus on specific segments of the market via a Niche strategy approach.

7.5.3 LATE GROWTH STAGE

• Competition: As the market begins to see slower growth, companies find themselves in a highly competitive market with fierce battles occurring on some fronts, such as within certain segments, where demand is falling faster than in other segments.

• Target Market: The overall market is still growing in terms of sales volume, especially as the product spreads to the Late Majority. But there is some evidence that while sales are increasing it is occurring at a decreasing rate.

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• Product: With so many competitors offering numerous product options customers feel overwhelmed and confused by the choices available. In cases where customers do not fully understand the product (e.g., technology product) they may feel more comfortable purchasing from top brands or products sold at major distributors.

• Prices: The average price is falling rapidly as market growth begins to slow and competitors struggle to maintain their market share. Price wars may break out.

• Promotion: Heavy spending on advertising and especially on sales promotions designed to offer incentives to customers to purchase and to re- purchase.

• Distribution: With demand beginning to slow, some distributors cut back on the number of products they stock and persuade leading product marketers to offer more incentives to remain with the distributor.

• Profits: Marketers begin to see a leveling off of profits as overall revenue flattens due to slowing demand and falling prices. However, marketing costs still remain high.

Many marketers find this to be the most difficult part of the PLC. The late growth stage is a turbulent time with firms fighting just to survive. The turbulence is brought on by the slowing of growth. This is not to say that overall sales are declining but that the percentage of growth from one period to the next is declining. For instance, sales over a three-year period may show an overall increase but it is occurring at a decreasing rate compared to the previous years (e.g., 20%,15%, 10%).

The key objective for a marketer is to remain competitive by maintaining a power position (e.g., leading brand name) or by achieving an insulated position within a niche. Brands may use promotional tactics that keep existing customers happy (e.g., coupons, improved customer service) and entice new customers to try the product (e.g., rebates, extended payment, try-before-you-buy). Distribution partners are encouraged to remain loyal through such actions as special pricing, promotional assistance and special packaging.

7.6 MATURITY STAGE

At some point in time sales of the product form slows. Instead of double-digit growth from one period to the next, the industry limps along with low single digit sales increases or worse. There are two key reasons why this occurs. First, the market has become saturated with a large majority of potential customers having already purchased the product. In the case of products that have a long buy-cycle (i.e., time between repeat purchases) the infrequency of repurchase results in slow sales for some time. Second, customers have moved on to purchase other products that are seen as replacements for this product form. In this situation, the growth of the product form may have been interrupted with

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the introduction of a new product form (e.g., cassette tape players replaced by CD players).

The slowing of market growth is a signal that the product form may have reached the Maturity stage of the PLC. In our discussion the Maturity stage is divided into two distinct sub-stages: early and late.

7.6.1 EARLY MATURITY STAGE

• Competition: By far the fiercest competition takes place as marketers move to grab customers from often weakened competitors. At this stage many competitors fail or merge with others.

• Target Market: Little or no growth is occurring as the market is saturated or the target market looks to other product to satisfy their needs. Laggards may start buying but only if they can no longer purchase products they previously purchased to satisfy their needs.

• Product: Many products still exist though some level of product standardization has occurred. Any new models introduced do not lead to major improvements in product performance or benefits offered, but instead offer minor incremental improvements.

• Prices: The average price continues to fall possibly below cost as competitors attempt to remain in market. Price wars occur in many segments.

• Promotion: Heavy competitive advertising and extensive promotions take place with the objective of getting existing customers to switch (for their repeat purchases) and encouraging distributors not to drop from their inventory.

• Distribution: Distributors continue to reduce their inventory and promotional focus for the product form and become very selective on the products they will carry.

• Profits: Industry profits fall rapidly and many firms lose money as they increase spending in hopes of remaining in the market.

In the early part of the maturity stage, the key objective is to enact strategies that enable a product to survive in the face of strong competition driven by lessening of demand. In fact, marketers may be happy following a Status Quo strategy that is intended to just maintain their market position. Unfortunately, this may prove difficult as this stage, often called the “shakeout stage”, leads to many products failing or being absorbed by competitors (i.e., companies merge, products are sold). In order to survive, marketers may need to resort to tactics designed to "steal customers" from others which often involves significant price promotions (e.g., heavy discounting) or strong promotions intended to improve image or solidify a niche. Marketers who have avoided competing on price may

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be in a better position to weather the storm if they have convinced the market they offer special features that few others offer. This can be the case if they have successfully established a strong position in a niche market.

7.6.2 LATE MATURITY STAGE

• Competition: The competitive landscape has stabilized with only the survivors remaining often made up of a few market giants and several small niche firms.

• Target Market: The market has become saturated for first time buyers and focus is now on getting existing customers to remain loyal.

• Product: The introduction of new models is reduced to just a few product performance enhancements, though there may be more stylistic improvements.

• Prices: Overall prices stabilize and may rise due to limited competition.

• Promotion: Large competitors begin to cut back on expensive promotions designed to attract new customers and focus on reminder promotions to loyal customers.

• Distribution: Has stabilized with few new distributors agreeing to handle product. For products sold at retail stores there is a noticeable reduction in shelf space devoted to the product.

• Profits: Companies see profits recover as demand stabilizes, pricing rises and overall marketing costs drop.

If companies have failed to extend the PLC in the early part of the maturity stage, it is very likely the product form may never again experience growth. Instead the companies will continue to market the product, with little effort other than making it available to customers who have been purchasing it for some time. By the late part of the maturity stage the companies that are still selling may no longer consider the product an important product for the future of the company, but this does not mean the product is not important.

7.7 LET US SUM UP

• The basic premise of the PLC is that products go through several stages of “life” with each stage presenting the marketer with different challenges that must be met with different marketing approaches.

• PLC is divided into five distinct stages such as development, introduction, growth, maturity and decline.

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• Development – Occurs before the product is released to the market and is principally a time for honing the product offering and preparing the market for product introduction.

• Introduction – Product is released to the market and sales begin though often gradually as the market becomes aware of the product.

• Growth – If the product is accepted it may reach a stage of rapid growth in sales and in profits.

• Maturity –At some point sales of a product may stabilize. For some products the maturity phase can be the longest stage as the product is repeatedly purchased by loyal customers. However, while overall sales may grow year-over-year, percentage sales increases may be small.

• Decline – All products eventually see demand decline as customers no longer see value in purchasing the product.

7.8 CHECK YOUR PROGRESS

• What is meant by product lifecycle? (Refer 7.1 and 7.2)

• At what stage of the product life cycle are the following products and what future can you predict for each one (a) Cigarettes, (b) Automobiles (Refer 7.2 to 7.6 and answer it in your own)

• Explain how the product lifecycle concept is of practical use to the marketer. (Refer 7.2 to 7.6 and comment in your own)

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LESSON-8 PRODUCT MIX

Contents 8.0 Aims and Objectives 8.1 Meaning of Product Mix 8.2 The Product Mix Variables 8.2.1 The Product-line and Product range 8.2.2 Product Design 8.2.3 Product package 8.2.4 Product Quality 8.2.5. Product Labeling 8.2.6. Product Branding 8.2.7. After-sales services and guarantees 8.3 Difference between Product Mix and Product Line 8.4 Let us sum up 8.5 Check your progress

8.0 AIMS AND OBJECTIVES

The different stages of product is discussed in previous lesson. In this lesson, let us discuss about the product mix which is one of the element of marketing mix. After going through this lesson, you will be able to answer i. What is the meaning of product mix? ii. What are the product mix variables? iii. What differentiates product mix from product line?

8.1 MEANING OF PRODUCT MIX

The product is the focus of making and marketing efforts. Product is the sum- total of physical and psychological satisfaction it provides to the buyer. For instance, a car in a physical sense is a fabricated conveyance powered by gasoline engine which moves people from one place to another. To a teenager, with its driving licence, it is a sign that he is no longer a boy- but a fully grown up man; to his father, a particular make is an indication of success in his life as a status symbol. A product is the sum-total of parts like materials used in its construction and its ability to perform, its packaging, its brands and the intangibles associated with it- all that speak about its personality or image. The

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product mix is the composite of products offered for sale by the firm, over a period of time.

Product mix is a combination of products manufactured or traded by the same business house to reinforce their presence in the market, increase market share and increase the turnover for more profitability. Normally the product mix is within the synergy of other products for a medium size organization. However large groups of Industries may have diversified products within core competency. Larsen & Turbo Ltd, Godrej, Reliance in India are some of the examples.

8.2 THE PRODUCT MIX VARIABLES

The product mix has the following important variables and deserves a brief outlining:

8.2.1 THE PRODUCT-LINE AND PRODUCT RANGE

‘Product-line’ is a group of closely related products which are able to satisfy a class of need, to be used together, to be sold to the same consumer groups, to be moved through the same distribution channels or fall within a given price ranges. Each firm has its own product-line. Thus, Godrej Company has product- line consisting of- vanaspati, soaps, detergents, fridges, furniture, machine tools, and soft-drinks and so on. Product-line stands for the entire range of products manufactured by the firm. That is, taking a particular product say, TV set, we have so many companies in India and other countries manufacturing and selling along with closely related products. Precisely, it speaks of the width of the product mix. ‘Product range’ on the other hand, speaks the depth of specialization in terms off varieties based on consumer pockets and functional requirements.

8.2.2 PRODUCT DESIGN

The marketing decisions start with designing the product in a way which is required by the target consumer. Product design is an important factor in the sale of many products. The trend in the product appearance is a way from ornamentation and leaning towards greater simplicity in form and construction. The form, the colour and the line of all the products are being planned to give greater proportion, beauty and functional utility. Products designed properly enhance their utility, attractiveness, ease of operation, safety and appeal; good design; therefore, increases sales volume provides advertising and selling features permits higher prices, reduces manufacturing costs, minimizes service and reduces transportation charges. Design is major selling feature in almost all the consumer goods- be it a readymade garment, draperies, millionaire items, wall paper, silver ware or even an automobile. Similarly, style merchandise manufacturers are to go as per style movement. Product design is influenced by

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• External appearance determined by size, shape, proportions, colour, finish, texture, dimensions, ornamentation and other physical features that appeal to the consumer senses of beauty- utility and distinctiveness. • Construction- the arrangement of parts and materials to give the user greater convenience, ease of maintenance, economy in operation, durability and longer life, more mobility, greater aesthetic satisfaction, higher reliability and above all lower cost. • Production capacity- the ability of the plant and the personal to make design economic and profitable. • Available capital- so sufficient that enables the producer to purchase the facilities, equipment and the necessary tools and materials to make a new and improved product. • Uses or applications for a product should be considered in designing its appearance and internal construction features so as to provide greater utility and usefulness to the users. • Relationship to other products in the line the design must conform to a family range of products. • Service requirements in relation to the construction and appearance, mechanical service and maintenance required and • The competitor’s design- has deeper bearing on the company product designs.

8.2.3 PRODUCT PACKAGE

Package is the container or a wrapper used to house the product. What clothes are to the human beings so are packages for the products. Packaging is the general group of activities in designing the container or wrappers for the products. A good package has the pride of place in merchandising because; it protects the products, provides convenience to the consumers, increases economy and communicates. Packages protect the products against deterioration, preserve freshness and flavor, insure against evaporation loss and physical changes due to climatic conditions, diminish loss from handling and reduces the amount of shopworn merchandise. It provides greater convenience to both the consumers and dealers. For consumers packages keep products clean and sanitary, make possible easy storage and handling, and help in quick identification. For dealers- packages are helping them for easy handling, save time and money in selling, facilitate inventory control and make possible attractive store displays.

Attractive packages are having communicating value. An attractive package in a self-service store helps the consumers to identify the product, builds consumer confidence, describes merits and limits of products and encourages impulsive buying. Thus, it makes possible easy brand identification, prevents substitution

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and short weight and an element of advertising and sales-promotion. Package design is a significant factor in successful merchandising. Good package design includes such elements as size, colour, shape, material, construction, closure, copy and illustration. While designing a new or redesigning an old package, the manufacturers must take into account the nature of the product, the cost of packaging, product family resemblance, packing materials, advertising value of packaging, size and price and above all the legal requirements.

8.2.4 PRODUCT QUALITY

Establishment and control of quality standards is a basic step in merchandising. Generally, specific grades or standard quality are established for products either by agreement among the producers or by law. These product quality standards are based on factors like colour, texture, flavor, weight, finish, appearance, size, shrinkage, strength, shape, moisture and the other physical features depending on the nature of the product. Once the standards of quality are established by the manufacturer, continuous efforts are made to see that the products conform to the standards so set. Product quality depends on proper design, engineering, choice of materials, manufacturing processes, workmanship and packaging.

8.2.5 PRODUCT LABELING

A product label may be either descriptive, informative, grade designating or a combination of these. Labels are fixed to products to identify them and to describe their ingredients, quantity, quality, and other characteristics. A descriptive label is one that describes the contents of the package or the ingredients of the product. Thus a tin of ‘Rasgullas’ may describe the contents by size, weight, number of pieces, syrup, cups and number of servings. An informative label may include descriptive material, but it informs primarily the users how the product is made and how to use it for best results. A grade label designates the ISI mark to which the product conforms. In any country, labeling is mandatory in case of food, drug and cosmetic products so that the manufacturer is to give the details of his name, place of manufacture, date of manufacture, expiry date, lot number, composition and so on.

8.2.6 PRODUCT BRANDING

The brand image is the part of a complex activities used to reduce the risk inherent in modern business by creating a degree of loyalty among the consumers. This is very true as we experience that today people do not want just a face-power but a particular brand say ‘Emami’ talc or say ‘Pond’s dream- flower’. What is true of this face-powder is true of all the consumer durable and non-durable products. It applies to industrial goods also. A brand is a symbol, a mark, a name, a communication which brings about an identity of a given product. A brand is a product image, a quality, a value, a personality. Products are identified and labeled with trade-marks or brands composed of letters, numbers, words and designs. A good brand name is one which is easy to

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remember, pronounce, describe the product or its use, suggests product quality distinctive and compliment with legal sanction.

8.2.7 AFTER-SALES SERVICES AND GUARANTEES

With every increase in the use of machinery, appliances, equipments and gadgets, there is inherent need for after-sale services such as installation, guarantees and warrantees against defect, servicing, repairs, spare-parts, maintenance and the like. Manufacturers of machines, instruments, gadgets and technical equipments will have to establish service policy and a plan for servicing their equipments after sale. Mechanical service is an important sales asset. It is instrumental in securing repeat sales, customer goodwill and word of mouth advertising. The heart of sound service policy is the product guarantee or warranty which defines the producer’s liability for defects in materials or workmanship over a certain period of time ranging from one year to five years under normal circumstances.

Every manufacturer should determine as to who shall be responsible for service to customers. It may be responsibility of manufacturer or distributor or wholesaler of retailer. Such a decision depends on factors like nature of product- the amount and type of service required and the resources of the manufacturer. In case the middlemen are responsible, the manufacturer should train those in the areas of after-sale services such as installation, servicing and maintenance.

8.3 DIFFERENCE BETWEEN PRODUCT MIX AND PRODUCT LINE

A product mix (also called product assortment) is the set of all products and items that a particular seller offers. A product mix consists of various product lines.

A product line is a group of products that are closely related, because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges.

Width – Number of different product lines offered

Length – Number of products offered within a particular product line.

Managers must know the revenues and profits of each item in the product line as well as market profile of each product line. Market Profile Analysis involves understanding the product line offerings in comparison to the offerings by competitors. A product line is too short if profits can be increased by adding items; the line is too long if profits can be increased by dropping items.

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Table 8.1- Product-mix Width and Product-Line Length for Hindustan Lever Products

Product Mix Width Product Line Bath Soaps Fabric Wash Beverages Length Dove Surf Bru Liril Rin Red Label

Le Sancy Wheel Green Label

Pears Sunlight 3 Roses Rexona Ala Taaza

Lifebuoy 501 Deepam

Hamam Taj Mahal Breeze Super Dust Tai Ruby Dust Moti A 1

In case of non-profit organizations, line length determined on the basis of achievement of organization’s objectives. • Line pruning - There is a tendency for product lines to lengthen over time. Hence a review must be carried out regularly. • Line modernization – Modernizing all products in the line • Line featuring – Selecting a few items from the line and promoting them aggressively to attract attention to the total line

8.4 LET US SUM UP

In this lesson, we have discussed about the • Meaning of product mix • The essential variables of product mix such as Product-line and Product range, Product Design, Product package, Product Quality, Product Labeling, Product Branding and After-sales services and guarantees • Difference between product mix and product line.

8.5 CHECK YOUR PROGRESS

• Explain the term ‘Product Mix’.(Refer 8.1) • Explain the product mix variables in detail.(Refer 8.2 to 8.2.7) • State the difference between product mix and product line with examples. (Refer 8.3)

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LESSON-9 CHANNELS OF DISTRIBUTION

Contents: 9.0 Aims and Objectives 9.1 Introduction 9.2 Distribution Objectives 9.2.1 Interrelated objectives 9.2.2 Narrow vs. wide reach 9.3 Distribution opportunities 9.4 Deciding on a strategy. 9.5 Meaning of Channels of Distribution 9.6 Kinds of Distribution Channels 9.7 Type of Channel Members 9.7.1 Resellers 9.7.2 Specialty Service Firms 9.8 Choice of Channel of Distribution 9.8.1 Market Considerations 9.8.2 Product Considerations 9.8.3 Middlemen Considerations 9.9 Let us sum up 9.10 Check your progress 9.11 Activity

9.0 AIMS AND OBJECTIVES

The aim of this lesson is to present a clear picture about the various distribution channels. The available distribution opportunities, the distribution strategy decision, the different types of channels of distribution etc. This will help you to answer i. What is the basic objective of distribution? ii. What are the different channels which help in distribution? iii. Who are all the channel members in distribution? iv. What are the basic considerations in channel of distribution?

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9.1 INTRODUCTION

Distribution of products constitutes an important element of marketing mix of a firm. After development of the product, the entrepreneur has to decide channels or routes through which the product will flow from the factory to the potential customers. He has a number of alternatives available to him. The entrepreneur may choose to distribute the product directly to customers without using any intermediaries. Alternatively, he may use one or more middlemen including wholesalers, selling agents, and retailers. Big firms have their zonal or regional authorized agents or dealers spread over the entire country. The dealers, in turn, work with distributors and retailers. On the other hand, small firms cannot afford to have zonal offices, but are devising their own ways of doing business. They also receive regular orders for goods. Entry may be difficult for the small firms. It has been observed that many authorized dealers of known brands also stock other unknown or new brands of goods. They also insist on the customer buying the lesser known brand because of higher margin of profit. The small entrepreneur, with fewer overheads and low labour costs along with better planning and management, may be able to earn good profits.

9.2 DISTRIBUTION OBJECTIVES 9.2.1 INTERRELATED OBJECTIVES

A firm’s distribution objectives will ultimately be highly related—some will enhance each other while others will compete. For example, as we have discussed, more exclusive and higher service distribution will generally entail less intensity and lesser reach. Cost has to be traded off against speed of delivery and intensity (it is much more expensive to have a product available in convenience stores than in supermarkets, for example).

9.2.2 NARROW VS. WIDE REACH

The extent to which a firm should seek narrow (exclusive) vs. wide (intense) distribution depends on a number of factors. One issue is the consumer’s likelihood of switching and willingness to search. For example, most consumers will switch soft drink brands rather than walking from a vending machine to a convenience store several blocks away, so intensity of distribution is essential here. However, for sewing machines, consumers will expect to travel at least to a department or discount store, and brands may have more credibility if they are carried only in full service specialty stores. Retailers involved in a more exclusive distribution arrangement are likely to be more “loyal”—i.e., they will tend to • Recommend the product to the customer and thus sell large quantities; • Carry larger inventories and selections;

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• Provide more services

Thus, for example, Compaq in its early history instituted a policy that all computers must be purchased through a dealer. On the surface, Compaq passed up the opportunity to sell large numbers of computers directly to large firms without sharing the profits with dealers. On the other hand, dealers were more likely to recommend Compaq since they knew that consumers would be buying these from dealers. When customers came in asking for IBMs, the dealers were more likely to indicate that if they really wanted those, they could have them—“But first, let’s show you how you will get much better value with a Compaq.”

9.3 DISTRIBUTION OPPORTUNITIES

Distribution provides a number of opportunities for the marketer that may normally be associated with other elements of the marketing mix. For example, for a cost, the firm can promote its objective by such activities as in-store demonstrations/samples and special placement (for which the retailer is often paid). Placement is also an opportunity for promotion—e.g., airlines know that they, as “prestige accounts,” can get very good deals from soft drink makers who are eager to have their products offered on the airlines. Similarly, it may be useful to give away, or sell at low prices, certain premiums (e.g., T-shirts or cups with the corporate logo.) It may even be possible to have advertisements printed on the retailer’s bags (e.g., “Got milk?”)

9.4 DECIDING ON A STRATEGY

In view of the need for markets to be balanced, the same distribution strategy is unlikely to be successful for each firm. The question, then, is exactly which strategy should one use? It may not be obvious whether higher margins in a selective distribution setting will compensate for smaller unit sales. Here, various research tools are useful. In focus groups, it is possible to assess what consumers are looking for which attributes are more important. Scanner data, indicating how frequently various products are purchased and items whose sales correlate with each other may suggest the best placement strategies. It may also, to the extent ethically possible, be useful to observe consumers in the field using products and making purchase decisions.

Here, one can observe factors such as (1) how much time is devoted to selecting a product in a given category, (2) how many products are compared, (3) what different kinds of products are compared or are substitutes (e.g., frozen yogurt vs. cookies in a mall), (4) what are “complementing” products that may cue the purchase of others if placed nearby. Channel members—both wholesalers and retailers—may have valuable information, but their comments should be viewed with suspicion as they have their own agendas and may distort information.

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9.5 MEANING OF CHANNELS OF DISTRIBUTION

A channel of distribution or trade channel is the path or route along which goods move from producers to ultimate consumers. It is a distribution network through which a producer puts his products in the hands of actual users. A trade or marketing channel consists of the producer, consumers or users and the various middlemen who intervene between the two. The channel serves as a connecting link between the producer and consumers. By bridging the gap between the point of production and the point of consumption, a channel creates time, place and possession utilities. A channel of distribution represents three types of flows: a. Goods flow from producer to consumers; b. Cash flow from consumers to producer as payment for goods; and c. Marketing information flows in both directions, from producers to consumers in the form of information on new products, new uses of existing products, etc. The flow of information from consumers to producers is the feedback of the wants, suggestions, complaints, etc.

9.6 KINDS OF DISTRIBUTION CHANNELS

Every small-scale entrepreneur requires a channel that can distribute his product to the right customers at the right time and at the right cost. It consists of all the middlemen which participate in the distribution of goods and which serve as a link between the manufacturer and the consumer.

A brief explanation of different channels of distribution is given below:

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¾ Manufacturer _ Customer:

This is also known as direct selling because no middlemen are involved. A producer may sell directly through his own retail stores, for example, Bata. This is the simplest and the shortest channel. It is fast and economical. Small producers and producers of perishable commodities also sell directly to the local consumers. Big firms adopt direct selling in order to cut distribution cost and because they have sufficient facilities to sell directly to the consumers. The producer or the entrepreneur himself performs all the marketing activities.

¾ Manufacturer _ Retailer _ Customer:

This is one stage distribution channel having one middleman, i.e., retailer. In this channel, the producer sells to big retailers like departmental stores and chain stores who in turn sell to customer. This channel is very popular in the distribution of consumer durables such as refrigerators, T V sets, washing machines, typewriters, etc. This channel of distribution is very popular these days because of emergence of departmental stores, super markets and other big retail stores. The retailers purchase in large quantities from the producer and perform certain marketing activities in order to sell the product to the ultimate consumers.

¾ Manufacturer _ Wholesaler _ Retailer _ Customer:

This is the traditional channel of distribution. There are two middlemen in this channel of distribution, namely, wholesaler and retailer. This channel is most suitable for the products with widely scattered market. It is used in the distribution of consumer products like groceries, drugs, cosmetics, etc. It is quite suitable for small scale producers whose product line is narrow and who require the expert services and promotional support of wholesalers.

9.7 TYPE OF CHANNEL MEMBERS

Channel activities may be carried out by the marketer or the marketer may seek specialist organizations to assist with certain functions. We can classify specialist organizations into two broad categories: resellers and specialty service firms.

9.7.1 RESELLERS

These organizations, also known within some industries as intermediaries, distributors or dealers, generally purchase or take ownership of products from the marketing company with the intention of selling to others. If a marketer utilizes multiple resellers within its distribution channel strategy the collection of resellers is termed a Reseller Network. These organizations can be classified into several sub-categories including:

• Retailers – Organizations that sell products directly to final consumers.

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• Wholesalers – Organizations that purchase products from suppliers, such as manufacturers or other wholesalers, and in turn sell these to other resellers, such as retailers or other wholesalers.

• Industrial Distributors – Firms that work mainly in the business-to- business market selling products obtained from industrial suppliers.

9.7.2 SPECIALTY SERVICE FIRMS

These are organizations that provide additional services to help with the exchange of products but generally do not purchase the product (i.e., do not take ownership of the product):

• Agents and Brokers – Organizations that mainly work to bring suppliers and buyers together in exchange for a fee.

• Distribution Service Firms – Offer services aiding in the movement of products such as assistance with transportation, storage, and order processing.

• Others – This category includes firms that provide additional services to aid in the distribution process such as insurance companies and firms offering transportation routing assistance.

9.8 CHOICE OF CHANNEL OF DISTRIBUTION

While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution. In order to select the right channel for distributing his product, a small-scale manufacturer should keep in mind the following considerations:

9.8.1 MARKET CONSIDERATIONS

The nature of the market is a key factor influencing the choice of channels of distribution. The following features of the market should be considered to determine the channels: • Consumer or industrial market: If the product is meant for industrial users, the channel of distribution will be a short one. This is because industrial users buy in a large quantity and the producer can easily establish a direct contact with them. But in case for goods meant for consumers, retailers may have to be included in the channels of distribution. • Number and location of buyers: When the number of potential customers is small or the market is geographically located in a limited area, direct selling is easy and economical. In case of large number of customers, use of wholesalers and retailers becomes necessary.

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• Size of order: Direct selling is convenient and economical where customers place order in big lots as in case of industrial goods. But where the product is sold in small quantities, middlemen are used to distribute such products. A manufacturer may use different channels for different types of buyers. He may sell directly to big retail stores and may use wholesalers to sell to small retailers. • Customers buying habits: The customer buying habits like the time he is willing to spend, the desire for credit, the preference of personal attention and one stop shopping significantly affect the choice of distribution channels.

9.8.2 PRODUCT CONSIDERATIONS

The type and nature of the product influence the number and type of middlemen to be chosen for distributing the product. The important factors with respect to the product are as follows:

• Unit value: Products of low unit value and common use are generally sold through middlemen, as they cannot bear the cost of direct selling. On the other hand, expensive consumer goods and industrial products are sold directly by the producers.

• Persihability: Perishable products like vegetables, fruits and bakery items have relatively short channels, as they cannot withstand repeated handling. Goods, which are subject to frequent changes in fashion and style, are generally distributed through short channels, as the producer has to maintain close and continuous touch with the market.

• Bulk and weight: Heavy and bulky products are distributed directly to minimize handling costs. Coal, bricks, stones, etc., are some examples.

• Standardization: Custom-made and non-standardized products usually pass through short channels due to the need for direct contact between the producer and the consumers. Standardized and mass-made goods can be distributed through middlemen.

• Technical nature: Industrial products requiring demonstration, installation and after sale service are often sold directly. The consumer products of technical nature are generally sold through retailers.

• Product line: An entrepreneur producing a wide range of products may find it economical to set up its own retail outlets. On the other hand, firms with one or two products find it profitable to distribute through wholesalers and retailers.

• Age of the product: A new product needs greater promotional effort and few middlemen may like to handle it. As the product gains acceptance in the market, more middlemen may be employed for its distribution.

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9.8.3 MIDDLEMEN CONSIDERATIONS

The cost and efficiency of distribution depend largely upon the nature and type of middlemen as given in the following factors:

• Availability: When middlemen as desired are not available, an entrepreneur may have to establish his own distribution network. Non-availability of middlemen may arise when they are handling competitive products, as they do not like to handle more brands.

• Attitudes: Middlemen who do not like a firm’s marketing policies may refuse to handle its products. For instance, some wholesalers and retailers demand sole selling rights or a guarantee against fall in prices.

• Services: Use of those middlemen is profitable who provide financing, storage, promotion and after sale services.

• Sale Potential: An entrepreneur generally prefers a dealer who offers the greatest potential volume of sales.

• Costs: Choice of a channel should be made after comparing the costs of distribution through alternative channels.

After deciding the number of middlemen, an entrepreneur has to select the particular dealers through whom he will distribute his products. While selecting a particular wholesaler or retailer, the following factors should be taken into consideration:

i. Location of dealer’s business premises;

ii. Financial position and credit standing of the dealer;

iii. Knowledge and experience of the dealer;

iv. Storage and showroom facilities of the dealer;

v. Ability of the dealer to secure adequate business and to cover the market;

vi. Capacity of the dealer to provide after-sale service; vii. General reputation of the dealer and his sales force; viii. Willingness of the dealer to handle the entrepreneur’s products;

ix. Degree of co-operation and promotion service he is willing to provide;

x. Nature of other products, if any handled by the dealer.

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9.9 LET US SUM UP

In this lesson the following points are covered: • Channel of distribution is the route taken by goods as they move from producers to consumers. • The Distribution Objectives and distribution opportunities were discussed clearly • Meaning of Channels of Distribution • Kinds of Distribution Channels • Type of Channel Members which includes Resellers and Specialty Service Firms • Choice of Channel of Distribution and other considerations

9.10 CHECK YOUR PROGRESS

• What do you mean by channels of distribution? (Refer 9.5) • Discuss the different channels available to an entrepreneur for the distribution of products to the consumers. (Refer 9.6) • What factors will you take into account while selecting a suitable channel of istribution? (Refer 9.8) • Explain the different types of channel members. (Refer 9.7, 9.7.1 and 9.7.2)

9.11 ACTIVITY (ANSWER IT IN YOUR OWN)

Activity 1- In your own locality, find out: • Where can you buy goods directly from producers? • Which shops get the goods from the wholesalers? • Which retailers stock the goods of only one producer?

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LESSON-10 BRANDING AND PACKAGING

Contents: 10.0 Aims and Objectives 10.1 Introduction 10.2 Meaning of Brand 10.3 Features/ characteristics of Brand 10.4 Types of brands 10.5 Kinds of Brand name 10.6 Functions/ Importance of brand 10.7 Advantages of Brands 10.8 Meaning of Packaging 10.9 Types of Packaging 10.10 Purposes / Functions of Packaging 10.11 Factors to Consider When Making Packaging Decision 10.12 Labeling 10.13 Let us sum up 10.14 Check your progress

10.0 AIMS AND OBJECTIVES

The lessons 6 to 9 explained about the term product. For every product some special features are attached to it. These special features help in creating brand preference. So let us now discuss about the concept of branding, packaging and labeling. After going through this lesson, you will be able to answer

i. What is the need for branding the products? ii. What are the different types of brands and brand name? iii. What is the essence of packaging and labeling the products?

10.1 INTRODUCTION

Products are as dear as their own children to manufacturers and producers. When a manufacturer wants to introduce a new product to the market, he wants to identify his product rather with striking name- Brand name. The buyers identify the product and differentiate it from those of competitors.

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In olden days, most of the products went unbranded. They sold the products without the supplier’s identification. In the present age, almost all the products are branded and packaged successfully. At present, brand and package are the two attributes of a product. The study of marketing is incomplete, if we do not take into account the study of branding and packaging. Each firm wants to identify its products through brand names. Branding plays more important role than mere name. The basic purpose of branding is to fix identity of the producer of a given product. In India, branding process started with agricultural products meant for export as well as internal consumption (under AGMARK scheme) and with manufactured products (under ISI mark).

10.2 MEANING OF BRAND

A Brand is a “name, term, symbol or design to identify the goods or services and to differentiate them from those of the competitors.” American Marketing Association defines a brand as, “the use of a name, term, symbol or design, or some combination of these, to identify the product of a certain seller from those of competitors.” A brand identifies the product for a buyer. A seller can earn the goodwill and have the patronage repeated.

Branding involves decisions that establish an identity for a product with the goal of distinguishing it from competitors’ offerings. In markets where competition is fierce and where customers may select from among many competitive products, creating an identity through branding is essential. It is particularly important in helping position the product (see discussion of product position) in the minds of the product’s target market.

While consumer products companies have long recognized the value of branding, it has only been within the last 10-15 years that organizations selling component products in the business-to-business market have begun to focus on brand building strategies. The most well-known company to brand components is Intel with its now famous “Intel Inside” slogan. Intel’s success has led many other b-to-b companies and even non-profits to incorporate branding within their overall marketing strategy.

BRAND: A name, term, sign, symbol or design or a combination of them which is intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors.

BRAND NAME: That part of a brand which can be vocalized- utterable. For examples, Fiat Car, Sony TV, Bata Shoes etc.

BRANDING: It is a process by which a product is branded.

BRAND/ TRADE MARK: That part of a brand which can be recognized but not utterable, such as a symbol, design or distinctive coloring or lettering.

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10.3 FEATURES/ CHARACTERISTICS OF BRAND

• Brand should suggest something about the product- purpose, quality, benefit, use, action, etc. For instance, Tiger locks, Godrej Typewriter. • It should be simple, short and easy to pronounce and remember, for example, Lux, Hamam, Murphy etc. • It should be easy to advertise and identify • It should be of a permanent nature. • It should be clear and attractive • It should be capable of being registered and protected legally. • It should be distinctive. • It must have a pleasing sound to the ear, when pronounced. • It should be economical to reproduce • It must be original • It should not be pronounced in several ways. • It should not be offensive • It should create a good image. • It should not be out of date.

10.4 TYPES OF BRANDS

1. Individual Brand: A firm may decide upon a policy of adopting distinctive brands for each of its products.

2. Family Brand: Family name is limited to one line of products. The term family brand refers to one brand name which a firm adopts for a variety of its products. For instance, Johnson and Johnson, Tata, Godrej, Amul, Dippy etc.

3. Company Brand: We may have for all products the name of the company or the producer. When a firm manufactures many products, this type of brand is used, for instance Tata’s textiles, engineering goods, chemicals etc.

4. Combination Device: Products have individual names and company brands to indicate the firm producing them. For instance, Tata’s taj.

5. Private or middlemen’s Brand: Such brands are owned and controlled by middlemen rather than manufacturers. Manufacturer introduces his products under a distributor’s name.

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10.5 KINDS OF BRAND NAME

• Descriptive Name: It includes all words that describes the products. For instance, Glucose biscuit, Colgate Tooth brush, Pond’s face powder etc.

• Suggestive Name: The name suggests something about the function of the product. For instance, band-aid sticking plaster, Quickfix etc.

• Arbitrary name: It is the name which neither relates to the product nor to the producer.

• Coined Name: Importance is given to the producer’s identity. For example, ‘Vimal’ alone is meaningless, unless attached to suitings.

10.6 FUNCTIONS/ IMPORTANCE OF BRAND

When building a brand for your business you create a valuable, intangible asset that can't be purchased. However, it can be sold quite easily. A well developed brand will performs five fundamental functions for your business. These functions add a great deal to all of our marketing activities, no matter what they are and when you deliver them. Let’s take a look at them in now.

1. Delivers a clear and consistent message to the market

Your brand communicates to your prospects and clients what you do, what value offer, what differentiates you from your competition, and why they should trust you. With communication come awareness, knowledge, and trust. Your message must be clear and consistent to create the conditions that will lead to sales. Spend time to get to know your market and how they communicate. It is worth the investment.

2. Establishes your credibility

Credibility is essential to building trust and advancing toward the sale. Companies that brand themselves well are perceived to be a lower risk because prospects assign greater credibility to companies they are familiar with. They judge your credibility on the cues and information they receive from your communications and the opinions of others. Your brand is the primary tool you possess to develop a relationship with a prospect. Remember they begin ignorant of your value and it is up to you to establish credibility with a consistent and dialog.

3. Emotionally connects with your target market

As humans, felling rule our decisions on almost every issue we face. This emotional connection is especially true when it comes to purchasing a product or service. Brands that make the prospect or client feel good about their decision are the most successful. Human beings buy emotionally and justify the purchase with logic. Logical facts and figures are often the most vital criteria in a

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sale, but gut feelings based on a trusted relationship is the deciding factor a vast majority of sales. The perception of your brand is at the center of this emotional connection. People buy brands that they admire or love. What is it about your brand that will make consumers passionate about purchasing it?

4. Builds positive recognition of your benefits

People buy the benefits that you product or service provides, not the features. Everyone enters the market looking for a solution to a problem or need that they have at that moment. When they are motivated enough to take action, they begin researching and assembling a list of possible sources whose benefits meet their desired solution. The winner is the product that has the benefits that alleviates or improves their condition. They don’t care about if it is red, blue or green until they are satisfied with the results they are purchasing.

5. Nurtures loyalty within your market

Brand loyalty is the mark of excellence in the branding game. This occurs when you have established a trusted relationship with your clients, delivered on your promises, and added measurable value to their life. You want them to love your products and services with a passion so they will tell others of their experience. You achieve loyalty when they purchase again from you and didn’t even consider another option during their decision making process. Loyalty is the top of the mountain and it takes time effort and planning to get there.

Your brand permeates everything about your business so you must master these fundamentals to continuously grow. If you lack in any one of these five fundamental functions you business will suffer. Make sure that these are part of your branding game plan and review if you are achieving them consistently with all of your marketing efforts

10.7 ADVANTAGES OF BRANDS

A strong brand offers many advantages for marketers including:

• Brands provide multiple sensory stimuli to enhance customer recognition. For example, a brand can be visually recognizable from its packaging, logo, shape, etc. It can also be recognizable via sound, such as hearing the name on a radio advertisement or talking with someone who mentions the product.

• Customers who are frequent and enthusiastic purchasers of a particular brand are likely to become Brand Loyal. Cultivating brand loyalty among customers is the ultimate reward for successful marketers since these customers are far less likely to be enticed to switch to other brands compared to non-loyal customers.

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• Well-developed and promoted brands make product positioning efforts more effective. The result is that upon exposure to a brand (e.g., hearing it, seeing it) customers conjure up mental images or feelings of the benefits they receive from using that brand. The reverse is even better. When customers associate benefits with a particular brand, the brand may have attained a significant competitive advantage. In these situations the customer who recognizes he needs a solution to a problem (e.g., needs to bleach clothes) may automatically think of one brand that offers the solution to the problem (e.g., Clorox). This “benefit = brand” association provides a significant advantage for the brand that the customer associates with the benefit sought.

• Firms that establish a successful brand can extend the brand by adding new products under the same “family” brand. Such branding may allow companies to introduce new products more easily since the brand is already recognized within the market.

• Strong brands can lead to financial advantages through the concept of Brand Equity in which the brand itself becomes valuable. Such gains can be realized through the out-right sale of a brand or through licensing arrangements.

10.8 MEANING OF PACKAGING

Packing means wrapping of goods before they are transported or stored or delivered to a consumer. Nearly all tangible products (i.e., goods) are sold to customers within a container or package that, as we will discuss, serves many purposes including protecting the product during shipment. In a few cases, such as with certain produce items, the final customer may purchase the product without a package but the produce marketer still faces packaging decisions when it comes to shipping to the store. Thus, for many products there are two packaging decisions – final customer and distribution.

10.9 TYPES OF PACKAGING

There are three types of packaging, depending on use. The container that directly holds the product is the PRIMARY package. That may be a can, bottle, jar, tube, carton, drum, etc.

Any outer wrappings that help to store, transport, inform, display and protect the product are SECONDARY packaging. The decorated carton or gift box are common examples.

Lastly, TERTIARY packaging is the grouping of products for storage and transportation. The corrugated, brown carton is the most familiar. Large pallets of shrink- wrapped boxes are a common ware house sight reflecting tertiary packaging.

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For any product, from one to all three types of packaging may be necessary depending on the intended purpose.

10.10 PURPOSES / FUNCTIONS OF PACKAGING

Each package for any product basically serves up to five of the following purposes: • Contain: To hold the product directly; this is PRIMARY packaging. Examples include the tube or pump for toothpaste, the can or jar for food, the bottled beverage, the drum for a cleaning product. • Inform: To identify the brand and any related companies, to explain how it should be used, to warn about the hazards for misuse, and to reveal product contents. Much of this information is required according to various laws and agencies. • Protect: To prevent spoilage, leakage, breakage, moisture changes, theft and tampering. These packages: seal out contaminants in the environment (germs, dirt, dust, moisture, etc.); protect against tampering, theft, breakage, and spoilage. • Transport: To easily and safely move the product from the manufacturer, perhaps to a warehouse, then to the retailer and finally, to the consumer. Instead of all communities manufacturing all goods for their residents, costs are -I reduced when production centers can specialize in the development of a particular item. Parts and/or products can then be transported to communities when completed and/or needed. And storage space at these various locations can be used much more efficiently when cartons are stacked. • Display: To attractively display, to sell (a marketing tool). Size, cost, colors, brands, illustrations and shape are all considered for display. As this country changed from the sales person mode to self-service, the package was needed to inform and sell the product.

10.11 FACTORS TO CONSIDER WHEN MAKING PACKAGING DECISION

Packaging decisions are important for several reasons including:

• Protection – Packaging is used to protect the product from damage during shipping and handling, and to lessen spoilage if the protect is exposed to air or other elements.

• Visibility – Packaging design is used to capture customers’ attention as they are shopping or glancing through a catalog or website. This is particularly important for customers who are not familiar with the product and in situations, such as those found in grocery stores, where a product must stand out among thousands of other products. Packaging designs that standout are more likely to be remembered on future shopping trips.

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• Added Value – Packaging design and structure can add value to a product. For instance, benefits can be obtained from package structures that make the product easier to use while stylistic designs can make the product more attractive to display in the customer’s home.

• Distributor Acceptance – Packaging decisions must not only be accepted by the final customer, they may also have to be accepted by distributors who sell the product for the supplier. For instance, a retailer may not accept packages unless they conform to requirements they have for storing products on their shelves.

• Cost – Packaging can represent a significant portion of a product’s selling price. For example, it is estimated that in the cosmetics industry the packaging cost of some products may be as high as 40% of a product’s selling price. Smart packaging decisions can help reduce costs and possibly lead to higher profits.

• Expensive to Create - Developing new packaging can be extremely expensive. The costs involved in creating new packaging include: graphic and structural design, production, customer testing, possible destruction of leftover old packaging, and possible advertising to inform customer of the new packaging.

• Long Term Decision – When companies create a new package it is most often with the intention of having the design on the market for an extended period of time. In fact, changing a product’s packaging too frequently can have negative effects since customers become conditioned to locate the product based on its package and may be confused if the design is altered.

• Environmental or Legal Issues – Packaging decisions must also include an assessment of its environmental impact especially for products with packages that are frequently discarded. Packages that are not easily bio- degradable could draw customer and possibly governmental concern. Also, caution must be exercised in order to create packages that do not infringe on intellectual property, such as copyrights, trademarks or patents, held by others

10.12 LABELING

Label is a part of the product, which carries verbal information about the product or the seller. It may be a part of a package, or it may be a tag attached directly to the product. Most packages, whether final customer packaging or distribution packaging, are imprinted with information intended to assist the customer. For consumer products, labeling decisions are extremely important for the following reasons.

• Labels serve to capture the attention of shoppers. The use of catchy words may cause strolling customers to stop and evaluate the product.

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• The label is likely to be the first thing a new customer sees and thus offers their first impression of the product.

• The label provides customers with product information to aid their purchase decision or help improve the customer’s experience when using the product (e.g., recipes).

• Labels generally include a universal product codes (UPC) and, in some cases, radio frequency identification (RFID) tags, that make it easy for resellers, such as retailers, to checkout customers and manage inventory.

• For companies serving international markets or diverse cultures within a single country, bilingual or multilingual labels may be needed.

• In some countries many products, including food and pharmaceuticals, are required by law to contain certain labels such as listing ingredients, providing nutritional information or including usage warning information

10.13 LET US SUM UP

In this lesson we have discussed about the following points • Meaning of Brand, Features/ characteristics of Brand • Types of brands and Kinds of Brand name • Functions/ Importance of brand, its advantages • Meaning of Packaging, types and functions of packaging • Factors to Consider When Making Packaging Decision and • Labeling

10.14 CHECK YOUR PROGRESS

• Distinguish the terms Brand, Brand name and trademark. (Refer 10.2) • Enumerate briefly the functions of packaging. (Refer 10.10) • State the importance of labeling. (Refer 10.12) • What are the characteristics of good brand? (Refer 10.3 ) • Define packaging; explain its role in marketing. (Refer 10.8 and 10.10 ) • What are the factors considered when making packaging decision? (Refer 10.11 ) • Bring out the importance of branding. (Refer 10.6)

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UNIT – III

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LESSON-11 PRICING

Contents: 11.0 Aims and Objectives 11.1 Introduction 11.2 Meaning of price 11.3 Definition of pricing 11.4 Objectives of pricing 11.5 Importance of pricing 11.6 Let us sum up 11.7 Check your progress

11.0 AIMS AND OBJECTIVES

In this part, we discuss about the term pricing. Pricing is very essential part in marketing. The objective and importance of pricing is discussed in detail, which will help you to answer the following i. What is the need for pricing a product? ii. How price acts as a key element in marketing mix?

11.1 INTRODUCTION

The pricing decision is a critical one for most marketers, yet the amount of attention given to this key area is often much less than is given to other marketing decisions. One reason for the lack of attention is that many believe price setting is a mechanical process requiring the marketer to utilize financial tools, such as spreadsheets, to build their case for setting price levels. While financial tools are widely used to assist in setting price, marketers must consider many other factors when arriving at the price for which their product will sell. It is simultaneously a strategic element as it is related to the perception of quality and a major tactical variable, as it can be changed quickly for competitive purposes. Changes in price can be made much faster than changes in any other marketing mix variables.

The opportunities and constraints of using this variable have been stated very succinctly by Martin Bell: “Price is a dangerous and explosive marketing force. It must be used with caution. The damage done by improper pricing may completely destroy the effectiveness of the rest of a well-conceived marketing strategy...As a marketing weapon; pricing is the “big gun”. It should be triggered exclusively by those thoroughly familiar with its possibilities and dangers..

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Therefore, all marketing planners should be equipped to make correct pricing decisions.” A comparative study of performance of different grocery products in relation to prices is given in the end note.

11.2 MEANING OF PRICE

Price has different connotations. It has an economic base, psychological base and firms view it in different ways. In general terms price is a component of an exchange or transaction that takes place between two parties and refers to what must be given up by one party (i.e., buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price means to participants in the transaction. In fact, price means different things to different participants in an exchange:

Buyers’ View – For those making a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up is financial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up. Sometimes in a barter situation a buyer may acquire a product by giving up their own product. For instance, two farmers may exchange cattle for crops. Also, as we will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn to use the product).

Sellers’ View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For marketing organizations price also serves as a marketing tool and is a key element in marketing promotions. For example, most retailers highlight product pricing in their advertising campaigns.

11.3 DEFINITION OF PRICING

Definition: To establish a selling price for a product

No matter what type of product you sell, the price you charge your customers or clients will have a direct effect on the success of your business. Though pricing strategies can be complex, the basic rules of pricing are straightforward: • All prices must cover costs and profits. • The most effective way to lower prices is to lower costs. • Review prices frequently to assure that they reflect the dynamics of cost, market demand, response to the competition, and profit objectives. • Prices must be established to assure sales.

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Before setting a price for your product, you have to know the costs of running your business. If the price for your product or service doesn't cover costs, your cash flow will be cumulatively negative, you'll exhaust your financial resources, and your business will ultimately fail.

To determine how much it costs to run your business, include property and/or equipment leases, loan repayments, inventory, utilities, financing costs, and salaries/wages/commissions. Don't forget to add the costs of markdowns, shortages, damaged merchandise, employee discounts, cost of goods sold, and desired profits to your list of operating expenses.

Most important is to add profit in your calculation of costs. Treat profit as a fixed cost, like a loan payment or payroll, since none of us is in business to break even. Because pricing decisions require time and market research, the strategy of many business owners is to set prices once and "hope for the best." However, such a policy risks profits that are elusive or not as high as they could be.

When is the right time to review your prices? Do so if:

• You introduce a new product or product line;

• Your costs change;

• You decide to enter a new market;

• Your competitors change their prices;

• The economy experiences either inflation or recession;

• Your sales strategy changes; or

• Your customers are making more money because of your product or service.

11.4 OBJECTIVES OF PRICING

Pricing objectives or goals give direction to the whole pricing process. Determining what your objectives are is the first step in pricing. When deciding on pricing objectives you must consider: 1) the overall financial, marketing, and strategic objectives of the company; 2) the objectives of your product or brand; 3) consumer price elasticity and price points; and 4) the resources you have available.

Some of the more common pricing objectives are: • maximize long-run profit • maximize short-run profit • increase sales volume (quantity)

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• increase dollar sales • increase market share • obtain a target rate of return on investment (ROI) • obtain a target rate of return on sales • stabilize market or stabilize market price • company growth • maintain price leadership • desensitize customers to price • discourage new entrants into the industry • match competitors prices • encourage the exit of marginal firms from the industry • survival • avoid government investigation or intervention • obtain or maintain the loyalty and enthusiasm of distributors and other sales personnel • enhance the image of the firm, brand, or product • be perceived as “fair” by customers and potential customers • create interest and excitement about a product • discourage competitors from cutting prices • use price to make the product “visible" • build store traffic • help prepare for the sale of the business (harvesting) • social, ethical, or ideological objectives • To get competitive advantage

As in other areas on marketing planning, pricing strategy begins with the determination of objectives. Long – range goals that managers wish to pursue in their pricing decisions are often stated as pricing strategies. The relative importance of pricing objectives in the corporate objectives may be seen in the following chart

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Fig 11.1- The Hierarchy of Pricing Objectives

CORPORATE OBJECTIVES

MARKETING OBJECTIVES

MARKETING PROGRAMME

PRICING OBJECTIVES

PRICING POLICIES

PRICING TACTICS

IMPLEMENTATION

Pricing objectives are overall goals that describe what the firm wants to achieve through its pricing efforts. Because pricing objectives influence decisions in most functional areas – including finance accounting and production – the objectives must be consistent with the organisation’s overall mission and purpose.

The following may be listed as pricing objectives: 1. Return on Investment (R.O.I) From the point of view investors, principal pricing goal is to achieve the expected profit. The profit must compensate the investment made. This is a common pricing objective mostly found with small firms. This may also be considered a profit – related pricing objective. 2. Market Share Increase in market share is the best method of evaluation as far as efficiency of pricing is concerned. This is because many companies believe that maintaining or increasing market share is a key to the effectiveness of their marketing mix. Marketing share and ROI are closely related. For example, a larger market

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share might increase profitability because of greater economies of scale, market power and ability to compensate top-quality management. 3. Meeting competition This is also a most important objective of pricing especially when a product is introduced in a competitive market. Price – cutting may have to be adopted without incurring huge losses. The pricing method adopted in this regard is referred to as ‘Extinction pricing’. It is viewed as a long-run strategy and is used as a way of eliminating competition. It involves pricing the product below variable cost. This will eliminate marginal competitors and then prices will be raised to normal levels. 4. Profit Although maximising profits could be stated as an objective of pricing, it cannot be made operational because its achievement is difficult to measure. Usually profit objectives are set in terms of percentage change or in terms of actual rupees in relation to profits earned during the previous period. Correct pricing involves finding the best possible exchange value for the products. The modern manufacturer must not only know the worth of his own product, but also what competitors offer, what substitutes are available, etc. In addition, he must have a good understanding of costs and must understand what constitutes value in the eyes of the consumer. All these call for a set of price policies. This will make price setting a little easier. Such policies help a firm to meet any changes in the market confidently. When the price policies are designed, the following aspects should be considered to make the policy meaningful: Consumer Situation: • Utility to the buyer, • Return to the buyer, • Comparable and substitute products-actual and brand, • Custom and customary prices, • Prestige position of the product and brand, • Presence of buying habits, motives, and • Psychological aspects. Cost consideration: • Cost of production – historical, • Cost of production – future and • Volume anticipated.

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Other factors: Stages in the Product Life Cycle – • Usually high price in introduction stage, • Stable price in growth stage, • Price decline in maturity stage Competition • Distribution Strategy • Promotion strategy • Price consciousness

11.5 IMPORTANCE OF PRICING

Price is a key element in the marketing mix because it relates directly to the generation of total revenue. The total revenue, in turn, depends on three constituents which may be expressed in the following formula.

Profit = (Price * Quantity sold) – Total costs

The price affects an organisation’s profits, which are its life-blood for long-term survival. Price affects the profit equation in several ways. It has a direct bearing on the profit as is explicit from the above equation. It indirectly affects the quantity sold. It is usual that price increase immediately reflects in reduced demand.

The price has a psychological impact on consumers and hence marketers can use it symbolically. There is a belief that high price is positively correlated to superior quality and buying high-priced articles is status symbol. On the contrary, low prices emphasis a bargain to many consumers. In both the ways prices can have a strong effect on sales.

The question of a ‘correct price’ to a product is still a complicated problem before the marketing managers. This is particularly so because marketing objectives could only be realised through proper pricing policies. Perhaps, this may be the reason why strategic importance of pricing has increased during the last decade. It is through effective pricing techniques that external forces are brought under some control. Inflation, recession, Government regulation, rising consumerism are other factors that have forced marketing managers to become more price conscious. This is evident from the following table.

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Table 11.1- Ranking of marketing activities by different companies

Manufacturers of Manufacturers of Transportation and industrial goods consumer goods utility companies 1. Pricing 1. Pricing 1. Customer service 2. Customer service 2. Research & 2. Public relation Development 3. Sales personnel 3. Pricing management 3. Sales personnel 4. Sales personnel management 4. Product Research management 4. Customer service 5. Physical 5. Marketing cost distribution 5. Marketing cost

Pricing decisions are of paramount importance in marketing strategy. Like the other elements in the marketing mix, the price of the product should be related to the achievement of marketing and corporate goals. In addition, pricing decision is important for its direct and indirect effect upon profits. For instance, price not only affects the margin through its revenue impact but affects the quantity sold through its influence on demand. The price of the product also will have an interactive effect with other elements of the marketing mix. Naturally the price set must be appropriate to marketing programme already laid.

Price is an important element in meeting consumer needs. Price and pricing policies are among the most important problems that confront managements always an important consideration both to the buyer and the seller. It can often spell success or disaster to a firm.

In perfect markets, price is determined by supply and demand. This, however, assumes that there are many buyers and sellers, that buyers are fully informed of the supply available and are free to come into the market or go out of the market at will. Actually, it is doubtful whether such a state exists. According to A.C. Pigou, “Perfect competition implies uniformity of price. But uniformity of price does not necessarily mean the market is perfect.” Economists today refer our economy as one with monopolistic competition, oligopoly, administered or controlled completion, etc., all of which indicate the absence of a perfect market.

Economic theories, by and large, are concerned with price theory. Economists use a large number of tools in determining the price. In spite of the varied tools, it is still doubtful whether the price theory is capable of describing with the fundamental tendencies that are at work in various types of market structures. Even if businessmen were willing to follow theoretical concepts in setting prices, they could not do so due to lack of necessary data. Theoretically, it is possible to explain the relationship between marginal revenue and marginal cost and their relationship to price and quantities. But for practical application, data are

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not available for all these and a businessman has to depend on some other practical methods. Pricing is a point where theory and practice do not reconcile. This could be illustrated by the following example. The concept of the elasticity of demand describes the relationship between changes in prices and the accompanying changes in demand. The theory states that the change in price will make changes in demand and that they are inversely related. If the prices are cut down the demand will naturally expand. But the theory fails to give any indication in exact terms. And it remains only as a kind of general guideline.

11.6 LET US SUM UP

• Price is the value placed on what is exchanged. • The buyer exchanges purchasing power- which depends on the buyer’s income, credit and wealth- for satisfaction or utility. • Price has different connotations- premium, interest, toll etc. • Price is the key element in the marketing mix because it relates directly to the generation of revenues. Revenue in turn, depends on three factors: price, quality sold and total costs. • Pricing objectives influence decisions in most functional areas – including finance accounting and production – the objectives must be consistent with the organisation’s overall mission and purpose such as Return on Investment (R.O.I), Market share, Meeting competition and profit.

11.7 CHECK YOUR PROGRESS

• What is pricing and bring out its importance in marketing.(Refer pg no: 95 to 97, 100 to 102)

• Explain the various objectives of pricing. (Refer pg no:97 to 100 )

• How does a pricing objective of sales growth and expansion differ from an objective to increase market share? (refer pg no: 97 to 100)

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LESSON-12 FACTORS AFFECTING PRICE DETERMINATION

Contents: 12.0 Aims and Objectives 12.1 Introduction 12.2 Factors Affecting pricing decisions 12.3 Internal factors 12.3.1 Company and Marketing Objectives 12.3.2 Marketing Strategy 12.3.3 Costs 12.4 External Market Factors 12.4.1 Elasticity of Demand 12.4.2 Customer and Channel Partner Expectations 12.4.3 Competitive and Related Products 12.4.4 Government Regulation 12.5 Let us sum up 12.6 Check your progress

12.0 AIMS AND OBJECTIVES

The last lesson gave us an overview of pricing and pricing strategy. Here, we discuss the major factors which affect the pricing decision. After going through this chapter you will be able to answer i. What are the internal factors which affect pricing decision? ii. What are the external factors which affect pricing decision?

12.1 INTRODUCTION

For the remainder of this study material we look at factors that affect how marketers set price. The economic factors are not the only factors that influence the price determination. There are other factors also that play an equally important part in the price determination of a product. In short, a businessman when setting a price of goods today has to consider various factors like consumer demand, competition, political consequences, legal aspects and even ethical aspects of pricing. In addition, he must consider his own costs, the cost of the channels he uses to reach the market, and the various activities he has to

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perform in connection with the sale (such as advertisement and sales promotion, freight, handling cost, discount, etc.). For convenience, the factors that can influence price decisions may be divided into two groups: internal factors and external factors.

12.2 FACTORS AFFECTING PRICING DECISION

The final price for a product may be influenced by many factors which can be categorized into two main groups:

• Internal Factors - When setting price, marketers must take into consideration several factors which are the result of company decisions and actions. To a large extent these factors are controllable by the company and, if necessary, can be altered. However, while the organization may have control over these factors making a quick change is not always realistic. For instance, product pricing may depend heavily on the productivity of a manufacturing facility (e.g., how much can be produced within a certain period of time). The marketer knows that increasing productivity can reduce the cost of producing each product and thus allow the marketer to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time.

• External Factors - There are a number of influencing factors which are not controlled by the company but will impact pricing decisions. Understanding these factors requires the marketer conduct research to monitor what is happening in each market the company serves since the effect of these factors can vary by market

12.3 INTERNAL FACTORS

The pricing decision can be affected by factors that are controlled by the marketing organization. These factors include:

12.3.1 COMPANY AND MARKETING OBJECTIVES

Marketing decisions are guided by the overall objectives of the company. While we will discuss this in more detail when we cover marketing strategy in a later study material, for now it is important to understand that all marketing decisions, including price, work to help achieve company objectives.

Corporate objectives can be wide-ranging and include different objectives for different functional areas (e.g., objectives for production, human resources, etc). While pricing decisions are influenced by many types of objectives set up for the marketing functional area, there are four key objectives in which price plays a central role. In most situations only one of these objectives will be followed,

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though the marketer may have different objectives for different products. The four main marketing objectives affecting price include:

• Return on Investment (ROI) – A firm may set as a marketing objective the requirement that all products attain a certain percentage return on the organization’s spending on marketing the product. This level of return along with an estimate of sales will help determine appropriate pricing levels needed to meet the ROI objective.

• Cash Flow – Firms may seek to set prices at a level that will insure that sales revenue will at least cover product production and marketing costs. This is most likely to occur with new products where the organizational objectives allow a new product to simply meet its expenses while efforts are made to establish the product in the market. This objective allows the marketer to worry less about product profitability and instead directs energies to building a market for the product.

• Market Share – The pricing decision may be important when the firm has an objective of gaining a hold in a new market or retaining a certain percent of an existing market. For new products under this objective the price is set artificially low in order to capture a sizeable portion of the market and will be increased as the product becomes more accepted by the target market. For existing products, firms may use price decisions to insure they retain market share in instances where there is a high level of market competition and competitors who are willing to compete on price.

• Maximize Profits – Older products that appeal to a market that is no longer growing may have a company objective requiring the price be set at a level that optimizes profits. This is often the case when the marketer has little incentive to introduce improvements to the product (e.g., demand for product is declining) and will continue to sell the same product at a price premium for as long as some in the market is willing to buy.

12.3.2 MARKETING STRATEGY

Marketing strategy concerns the decisions marketers make to help the company satisfy its target market and attain its business and marketing objectives. Price, of course, is one of the key marketing mix decisions and since all marketing mix decisions must work together, the final price will be impacted by how other marketing decisions are made. For instance, marketers selling high quality products would be expected to price their products in a range that will add to the perception of the product being at a high-level.

It should be noted that not all companies view price as a key selling feature. Some firms, for example those seeking to be viewed as market leaders in product quality, will deemphasize price and concentrate on a strategy that highlights non-price benefits (e.g., quality, durability, service, etc.). Such non-price competition can help the company avoid potential price wars that often break

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out between competitive firms that follow a market share objective and use price as a key selling feature

12.3.3 COSTS

For many for-profit companies, the starting point for setting a product’s price is to first determine how much it will cost to get the product to their customers. Obviously, whatever price customers’ pay must exceed the cost of producing a good or delivering a service otherwise the company will lose money. When analyzing cost, the marketer will consider all costs needed to get the product to market including those associated with production, marketing, distribution and company administration (e.g., office expense). These costs can be divided into two main categories: • Fixed Costs - Also referred to as overhead costs, these represent costs the marketing organization incurs that are not affected by level of production or sales. For example, for a manufacturer of writing instruments that has just built a new production facility, whether they produce one pen or one million they will still need to pay the monthly mortgage for the building. From the marketing side, fixed costs may also exist in the form of expenditure for fielding a sales force, carrying out an advertising campaign and paying a service to host the company’s website. These costs are fixed because there is a level of commitment to spending that is largely not affected by production or sales levels. • Variable Costs – These costs are directly associated with the production and sales of products and, consequently, may change as the level of production or sales changes. Typically variable costs are evaluated on a per-unit basis since the cost is directly associated with individual items. Most variable costs involve costs of items that are either components of the product (e.g., parts, packaging) or are directly associated with creating the product (e.g., electricity to run an assembly line). However, there are also marketing variable costs such as coupons, which are likely to cost the company more as sales increase (i.e., customers using the coupon). Variable costs, especially for tangible products, tend to decline as more units are produced. This is due to the producing company’s ability to purchase product components for lower prices since component suppliers often provide discounted pricing for large quantity purchases.

12.4 EXTERNAL MARKET FACTORS

The pricing decision can be affected by factors that are not directly controlled by the marketing organization. These factors include:

12.4.1 ELASTICITY OF DEMAND

Marketers should never rest on their marketing decisions. They must continually use market research and their own judgment to determine whether

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marketing decisions need to be adjusted. When it comes to adjusting price, the marketer must understand what effect a change in price is likely to have on target market demand for a product. Understanding how price changes impact the market requires the marketer have a firm understanding of the concept economists call elasticity of demand, which relates to how purchase quantity changes as prices change. Elasticity is evaluated under the assumption that no other changes are being made (i.e., “all things being equal”) and only price is adjusted. The logic is to see how price by itself will affect overall demand. Obviously, the chance of nothing else changing in the market but the price of one product is often unrealistic. Elasticity deals with three types of demand scenarios: • Elastic Demand – Products are considered to exist in a market that exhibits elastic demand when a certain percentage change in price results in a larger and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by greater than 10%. • Inelastic Demand – Products are considered to exists in an inelastic market when a certain percentage change in price results in a smaller and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by less than 10%. • Unitary Demand – This demand occurs when a percentage change in price results in an equal and opposite percentage change in demand. For example, if the price of a product increases (decreases) by 10%, the demand for the product is likely to decline (rise) by 10%.

12.4.2 CUSTOMER AND CHANNEL PARTNER EXPECTATIONS

Possibly the most obvious external factor that influences price setting are the expectations of customers and channel partners. As we discussed, when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. When deciding on a price marketers need to conduct customer research to determine what “price points” are acceptable. Pricing beyond these price points could discourage customers from purchasing.

Firms within the marketer’s channels of distribution also must be considered when determining price. Distribution partners expect to receive financial compensation for their efforts, which usually means they will receive a percentage of the final selling price. This percentage or margin between what they pay the marketer to acquire the product and the price they charge their customers must be sufficient for the distributor to cover their costs and also earn a desired profit.

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12.4.3 COMPETITIVE AND RELATED PRODUCTS

Marketers will undoubtedly look to market competitors for indications of how price should be set. For many marketers of consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used. Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price. Analysis of competition will include pricing by direct competitors, related products and primary products. • Direct Competitor Pricing – Almost all marketing decisions, including pricing, will include an evaluation of competitors’ offerings. The impact of this information on the actual setting of price will depend on the competitive nature of the market. For instance, products that dominate markets and are viewed as market leaders may not be heavily influenced by competitor pricing since they are in a commanding position to set prices as they see fit. On the other hand in markets where a clear leader does not exist, the pricing of competitive products will be carefully considered. Marketers must not only research competitive prices but must also pay close attention to how these companies will respond to the marketer’s pricing decisions. For instance, in highly competitive industries, such as gasoline or airline travel, competitors may respond quickly to competitors’ price adjustments thus reducing the effect of such changes. • Related Product Pricing - Products that offer new ways for solving customer needs may look to pricing of products that customers are currently using even though these other products may not appear to be direct competitors. For example, a marketer of a new online golf instruction service that allows customers to access golf instruction via their computer may look at prices charged by local golf professionals for in- person instruction to gauge where to set their price. While on the surface online golf instruction may not be a direct competitor to a golf instructor, marketers for the online service can use the cost of in-person instruction as a reference point for setting price. • Primary Product Pricing - As we discussed earlier, marketers may sell products viewed as complementary to a primary product. For example, Bluetooth headsets are considered complementary to the primary product cell phones. The pricing of complementary products may be affected by pricing changes made to the primary product since customers may compare the price for complementary products based on the primary product price. For example, companies that sell accessory products for the Apple iPod may do so at a cost that is only 10% of the purchase price of the iPod. However, if Apple were to dramatically drop the price, for instance by 50%, the accessory at its present price would now be 20% of the of iPod price. This may be perceived by the market as a doubling of the accessory’s price. To maintain its perceived value the accessory marketer may need to respond to the iPod price drop by also lowering the price of the accessory.

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12.4.4 GOVERNMENT REGULATION

Marketers must be aware of regulations that impact how price is set in the markets in which their products are sold. These regulations are primarily government enacted meaning that there may be legal ramifications if the rules are not followed. Price regulations can come from any level of government and vary widely in their requirements. For instance, in some industries, government regulation may set price ceilings (how high price may be set) while in other industries there may be price floors (how low price may be set). Additional areas of potential regulation include: deceptive pricing, price discrimination, predatory pricing and price fixing. Finally, when selling beyond their home market, marketers must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently marketers must have a clear understanding of regulations in each market they serve.

12.5 LET US SUM UP

• The factors that can influence price decisions may be divided into two groups: internal factors and external factors. • The pricing decision can be affected by factors that are controlled by the marketing organization. These factors include: Company and Marketing Objectives, Marketing Strategy and Costs. • The pricing decision can be affected by factors that are not directly controlled by the marketing organization. These factors include: Elasticity of Demand, Customer and Channel Partner Expectations, Competitive and Related Products and Government Regulation.

12.6 CHECK YOUR PROGRESS

• What are the major factors (internal and external) that should be taken into account in developing a price policy? (Refer 12.3 to 12.4.4) • What factors would you suggest to a large company planning to introduce a new consumer product? (Refer 12.3 to 12.4.4 and answer it in your own)

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LESSON-13 METHODS OF SETTING PRICES

Contents: 13.0 Aims and Objectives 13.1 Introduction 13.2 Steps in the Price Setting Process 13.3 Step 1: Examine Company and Marketing Objectives 13.4 Step 2: Determine an Initial Price 13.4.1 Cost Pricing 13.4.2 Market Pricing 13.4.3 Competitive Pricing 13.4.4 Bid Pricing 13.5 Step 3: Set Standard Price Adjustments 13.5.1 Quantity Discounts 13.5.2 Trade Allowances 13.5.3 Special Segment Pricing 13.5.4 Geographic Pricing 13.6 Step 4: Determine Promotional Pricing 13.6.1 Markdowns 13.6.2 Loss Leaders 13.6.3 Sales Promotions 13.6.4 Bundle Pricing 13.6.5 Dynamic Pricing 13.7 Step 5: State Ownership and Payment Options 13.7.1 Form of payment 13.7.2 Timeframe of payment 13.8 Let us sum up 13.9 Check your progress

13.0 AIMS AND OBJECTIVES

In this part of the lesson we look at the process of how marketers when set product prices. This coverage includes examination of: approaches to setting an

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initial price; different price adjustments marketers make before settling on a final selling price; payment options; and additional issues that affect pricing. This will help you to answer i. What are the steps involved in setting prices?

13.1 INTRODUCTION

The central point of this study material is a five-step process for setting price. We want to emphasize that while the process serves as a useful guide for making price decisions, not all marketers follow this step-by-step approach. As we will see many marketers may choose to bypass Steps 3 and 4 altogether. Additionally it is important to understand that finding the right price is often a trial-and-error exercise where continual testing is needed.

Like all other marketing decisions, market research is critical to determining the optimal selling price. Consequently, the process laid out here is intended to open the marketer’s eyes to the options to consider when setting price and is in no way presented as a guide for setting the “perfect” price.

13.2 STEPS IN THE PRICE SETTING PROCESS

We view price setting as a series of decisions the marketer makes in order to determine the price direct and indirect customers pay to acquire the product. Direct customers are those who purchase products directly from the marketer. For example, consider the direct pricing decisions that take place when a new novel is sold: • Publisher of the book must decide at what price they will charge their immediate customers in the channel of distribution such as online booksellers (e.g., Amazon.com). • Booksellers must decide at what price they will sell the book to their immediate customers which are typically final consumers (e.g., website shopper). With an understanding that marketers must consider many factors when setting price, we now turn to the process by which price is set. We present this as a five-step approach. As we noted earlier, while not all marketers follow these steps, what is presented does cover the methods used by many marketers.

The steps we cover include: 1. Examine Company and Marketing Objectives 2. Determine an Initial Price 3. Set Standard Price Adjustments 4. Determine Promotional Pricing 5. State Ownership and Payment Options

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13.3 STEP 1: EXAMINE COMPANY AND MARKETING OBJECTIVES

Marketing decisions including price are driven by the objectives set by the management of the organization. These objectives come at two levels. First, the overall objectives of the company guide all decisions for all functional areas (e.g., marketing, production, human resources, finance, etc.). Guided by these objectives the marketing department will set its own objectives which may include return on investment, cash flow, market share and maximize profits to name a few.

Pricing decisions like all other marketing decisions will be used to help the department meet its objectives. For instance, if the marketing objective is to build market share it is likely the marketer will set the product price at a level that is at or below the price of similar products offered by competitors.

Also, the price setting process looks to whether the decisions made are in line with the decisions made for the other marketing decisions (i.e., target market, product, distribution, promotion). Thus, if a company with a strong brand name targets high-end consumers with a high quality, full-featured product, the pricing decision would follow the marketer’s desire to have the product be considered a high-end product. In this case the price would be set high relative to competitors’ products that do not offer as many features or do not have an equally strong brand name.

13.4 STEP 2: DETERMINE AN INITIAL PRICE

With the objectives in Step 1 providing guidance for setting price, the marketer next begins the task of determining an initial price level. We say initial because in many industries this step involves setting a starting point from which further changes may be made before the customer pays the final price.

Sometimes called list price or published price, marketers will often use this as a promotional or negotiating tool as they move through the other price setting steps. For companies selling to consumers, this price also leads to a projection of the recommended selling price at the retail level often called the manufacturer’s suggested retail price (MRP). Marketers have at their disposal several approaches for setting the initial price which include: • Cost Pricing • Market Pricing • Competitive Pricing • Bid Pricing

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13.4.1 COST PRICING

Under cost pricing the marketer primarily looks at production costs as the key factor in determining the initial price. This method offers the advantage of being easy to implement as long as costs are known. But one major disadvantage is that it does not take into consideration the target market’s demand for the product. This could present major problems if the product is operating in a highly competitive market where competitors frequently alter their prices. There are several types of cost pricing including: Markup Pricing : This pricing method, often utilized by resellers who acquire products from suppliers, uses a percentage increase on top of product cost to arrive at an initial price. A major general retailer, such as Big Bazaar, may apply a set percentage for each product category (e.g., women’s clothing, automotive, garden supplies, etc.) making the pricing consistent for all like-products. Alternatively, the predetermined percentage may be a number that is identified with the marketing objectives (e.g., required 20% ROI). Resellers differ in how they use markup pricing with some using the Markup-on- Cost method and others using the Markup-on-Selling-Price method. We will demonstrate each using an item that costs a reseller Rs.50 to purchase from a supplier and sells to customers for Rs.65. Markup-on-Cost – Using this method, markup is reflected as a percentage by which initial price is set above product cost as reflected in this formula:

Markup Amount = Markup Percentage Item Cost

15 = 30% 50

The calculation for setting initial price is determined by simply multiplying the cost of each item by a predetermined percentage then adding the result to the cost:

Item Cost + (Item Cost x Markup Percentage) = Price

50 + (50 x .30 = 15) = 65

Markup-on-Selling-Price – Many resellers, and in particular retailers, discuss their markup not in terms of Markup-on-Cost but as a reflection of price. That is, the markup is viewed as a percentage of the selling price and not as a percentage of cost as it is with the Markup-on-Cost method. For example, using the same information as was used in the markup on cost, the markup on selling price reflected in this formula:

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Markup Amount = Markup Percentage Selling Price

15 = 23% 65

The calculation for setting initial price using Markup-on-Selling-Price is:

Item Cost = Price (1.00 – Markup Percentage)

50 = 65 (1.00 – .23) Cost-Plus Pricing: In the same way markup pricing arrives at price by adding a certain percentage to the product’s cost, cost-plus pricing also adds to the cost by using a fixed monetary amount rather than percentage. Breakeven Pricing: Breakeven pricing is associated with breakeven analysis, which is a forecasting tool used by marketers to determine how many products must be sold before the company starts realizing a profit. Like the markup method, breakeven pricing does not directly consider market demand when determining price, however it does indicate the minimum level of demand that is needed before a product will show a profit. From this the marketer can then assess whether the product can realistically achieve these levels. The formula for determining breakeven takes into consideration both variable and fixed costs as well as price, and is calculated as follows: Fixed Cost = # of Units to Breakeven Price – Variable Cost per Unit

13.4.2 MARKET PRICING

Under the market pricing method cost is not the main factor driving price decisions; rather initial price is based on analysis of market research in which customer expectations are measured. The main goal is to learn what customers in an organization’s target market are likely to perceive as an acceptable price. Of course this price should also help the organization meet its marketing objectives. For those marketers who use market pricing, options include: • Backward Pricing • Psychological Pricing • Price Lining

Backward Pricing: In some marketing organizations the price the market is willing to pay for a product is an important determinant of many other marketing decisions. This is likely to occur when the market has a clear perception of what it believes is an acceptable level of pricing. For example, customers may question a product that carries a price tag that is double that of

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a competitor’s offerings but is perceived to offer only minor improvements compared to other products. In these markets it is important to undertake research to learn whether customers have mentally established a price range or reference price for products in a certain product category.

Psychological Pricing ; For many years researchers have investigated customers’ response to product pricing. Some of the results point to several interesting psychological effects price may have on customers’ buying behavior and on their perception of individual products. We stress that certain pricing tactics “may” have a psychological effect since the results of some studies have suggested otherwise. But enough studies have shown an effect that this topic is worthy of discussion.

• Odd-Even Pricing - One effect dubbed “odd-even” pricing relates to whole number pricing where customers may perceive a significant difference in product price when pricing is slightly below a whole number value.

• Prestige Pricing - Another psychological effect, called prestige pricing, points to a strong correlation between perceived product quality and price. The higher the price the more likely customers are to perceive it has being higher quality compared to a lower priced product.

Price Lining: The difference in the “needs-set” between customers often leads marketers to realization that the overall market is really made up of a collection smaller market segments. These segments may seek similar products but with different sets of product features, which are presented in the form of different models (e.g., different quality of basketball sneakers) or service options (e.g., different hotel room options).

13.4.3 COMPETITIVE PRICING

Clearly when setting price it makes sense to look at the price of competitive offerings. For some, competitor’s price serves as an important reference point from which they set their price. In some industries, particularly those in which there are a few dominant competitors and many small companies, the top companies are in the position of holding price leadership roles where they are often the first in the industry to change price. Smaller companies must then assume a price follower role and react once the big companies adjust their price.

When basing pricing decisions on how competitors are setting their price, firms may follow one of the following approaches:

• Below Competition Pricing - A marketer attempting to reach objectives that require high sales levels (e.g., market share objective) may monitor the market to insure their price remains below competitors.

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• Above Competition Pricing - Marketers using this approach are likely to be perceived as market leaders in terms of product features, brand image or other characteristics that support a price that is higher than what competitors offer.

• Parity Pricing - A simple method for setting the initial price is to price the product at the same level competitors’ price their product.

13.4.4 BID PRICING

Not all selling situations allow the marketer to have advanced knowledge of the prices offered by competitors. While the Internet has made researching competitor pricing a relatively routine exercise, this is not the case in markets where bid pricing occurs. Bid pricing typically requires a marketer to submit a price to a potential buyer that is sealed or unseen by competitors. It is not until all bids are obtained and unsealed that the marketer is informed of the price listed by competitors.

Bid pricing occurs in several industries though it is a standard requirement when selling to local, national and international governments. In these situations the marketer’s pricing strategy depends on the projected winning bid price, which is generally the lowest price. However, price alone is only the deciding factor if the bidder meets certain qualifications. The fact that marketers often operate in the dark in terms of available competitor research, makes this type pricing one of the most challenging of all pricing setting methods.

13.5 STEP 3: SET STANDARD PRICE ADJUSTMENTS

With the first round of pricing decisions now complete, the marketer’s next step is to consider whether there are benefits to making adjustments to the list or published price. For our purposes we will consider two levels of price adjustments – standard and promotional. The first level adjustments are those we label as “standard” since these are consistently part of the marketer’s pricing program and not adjustments that appear only occasionally as part of special promotions (see Step 4: Determine Promotional Pricing). In most cases standard adjustments are made to reduce the list price in an effort to either stimulate interest in the product or to indirectly pay channel partners for the services they offer when handling the product. In some circumstances the adjustment goes the other way and leads to price increases in order cover additional costs incurred when selling to different markets. It should be noted that many companies do not make adjustments to their list price, particularly those selling directly to final customers. There are two key reasons for this. First, the product is in high demand and therefore the marketer sees little reason to lower the price. Second, the marketer believes the product holds sufficient value for customers at its current list price and the

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marketer feels reducing the price may actually lead buyers to question the quality of the product (e.g., “How can they offer all those features for such a low price? Something must be wrong with it.”). In such cases holding fast to the list price allows the marketer to maintain some control over the product’s perceived image. For firms that do make standard price adjustments, options include: • Quantity Discounts • Trade Allowances • Special Segment Pricing • Geographic Pricing

13.5.1 QUANTITY DISCOUNTS

This adjustment offers buyers an incentive of lower per-unit pricing as more products are purchased. Most quantity or volume discounts are triggered when a buyer reaches certain purchase levels. For instance, a buyer may pay the list price when they purchase between 1-99 units but receive a 5% discount off the list price when the purchase exceeds 100 units.

Options for offering price adjustments based on quantity ordered include:

• Discounts at Time of Purchase – The most common quantity discounts exist when a buyer places an order that exceeds a certain minimum level. While quantity discounts are used by marketers to stimulate higher purchase levels, the rational for using these often rests in the cost of product shipment.

• Discounts on Cumulative Purchases – This method allows the buyer to receive a discount as more products are purchased over time. For instance, if a buyer regularly purchases from a supplier they may see a discount once the buyer has reached predetermined monetary or quantity levels. The key reason to use this adjustment is to create an incentive for buyers to remain loyal and purchase again.

13.5.2 TRADE ALLOWANCES

Manufacturers who rely on channel partners to distribute their products (e.g., retailers, wholesalers) offer discounts off of list price called trade allowances. These discounts function as an indirect form of payment for a channel member’s work in helping to market the product (e.g., keep product stocked, talk to customers about the product, provide feedback to the manufacturer, etc.).

Essentially the difference between the trade discounted price paid by the reseller and the price the reseller charges its customer will be the reseller’s profit. For example, let’s assume the maker of snack products sells a product to retailers that carries a stated MRP of Rs.2.95 but offers resellers a trade allowance price

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of Rs.1.95. If the retailer indeed sells the product for the MRP, the retailer will realize a 33% markup on selling price (Rs.1.95/(1-.33) = Rs.2.95). Obviously this percentage will be different if the retailer sells the product at a price that is different than the MRP, but the important point to understand is that marketers must factor in what reseller’s expect to earn when they are setting trade discounts. This amount needs to be sufficient to entice the reseller to agree to handle and possibly promote the product.

13.5.3 SPECIAL SEGMENT PRICING

In some industries special classes of customers within a target market are offered pricing that differs from the rest of the market. The main reasons for doing this include: building future demand by appealing to new or younger customers; improving the brand’s image as being sensitive to customer’s needs; and rewarding long time customers with price breaks.

For instance, many companies including movie theaters, fitness facilities and pharmaceutical firms offer lower prices to senior citizens. Some marketers offer non-profit customers lower prices compared to that charged to for-profit firms. Other industries may offer lower prices to students or children.

Another example used by service firms is to offer pricing differences based on convenience and comfort enjoyed by customers when experiencing the service such as seat location at a sporting or entertainment event.

13.5.4 GEOGRAPHIC PRICING

Products requiring marketers to pay higher costs that are affected by geographic area in which a product is sold may result in adjustments to compensate for the higher expense. The most likely cause for charging a different price rests with the cost of transporting a product from the supplier’s distribution location to the buyer’s place of business. If the supplier is incurring all costs for shipping then they may charge a higher price for products in order to cover the extra transportation costs. For instance, shipping products by air to Hawaii may cost a Los Angeles, California manufacturer a much higher transportation cost than a shipment made to San Diego. Transportation expense is not the only cost that may raise a product’s price. Special taxes or tariffs may be imposed on certain products by local, regional or international governments which a seller passes along in the form of higher prices.

13.6 STEP 4: DETERMINE PROMOTIONAL PRICING

The final price may be further adjusted through promotional pricing. Unlike standard adjustments, which are often permanently part of a marketer’s pricing strategy and may include either a decrease or increase in price, promotional pricing is a temporary adjustment that only involves price reductions. In most

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cases this means the marketer is selling the product at levels that significantly reduce the profit they make per unit sold. The options for promotional pricing include: • Markdowns • Loss Leaders • Sales Promotions • Bundle Pricing • Dynamic Pricing

13.6.1 MARKDOWNS

The most common method for stimulating customer interest using price is the promotional markdown method, which offers the product at a price that is lower than the product’s normal selling price. There are several types of markdowns including:

• Temporary Markdown – Possibly the most familiar pricing method marketers use to generate sales is to offer a temporary markdown or “sale’ pricing. These markdowns are normally for a specified period of time the conclusion of which will result in the product being raised back to the normal selling price.

• Permanent Markdown – Unlike the temporary markdown where the price will eventually be raised back to a higher price, the permanent markdown is intended to move the product out of inventory. This type of markdown is used to remove old products that: are perishable and close to being out of date (e.g., donuts); are an older model and must be sold to make room for new models; or are products that the marketer no longer wishes to sell.

• Seasonal – Products that are primarily sold during a particular time of the year, such as clothing, gardening products, sporting goods and holiday- specific items, may see price reductions at the conclusion of its prime selling season.

13.6.2 LOSS LEADERS

An important type of pricing program used primarily by retailers is the loss leader. Under this method a product is intentionally sold at or below the cost the retailer pays to acquire the product from suppliers. The idea is that offering such a low price will entice a high level of customer traffic to visit a retailer’s store or website. The expectation is that customers will easily make up for the profit lost on the loss leader item by purchasing other items that are not following loss leader pricing. For instance, a convenience store may advertise a very low price for cups of coffee in order to generate traffic to the store with the

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hope that customers will purchase regularly priced products to go along with the coffee purchase.

Marketers should beware that some governmental agencies view loss leaders as a form of predatory pricing and thus consider it illegal. Predatory pricing occurs when an organization is deliberately selling products at or below cost with the intention of driving competitors out of business.

13.6.3 SALES PROMOTIONS

Marketers may offer several types of pricing promotions to simulate demand. While we have already discussed “sale” pricing as a technique to build customer interest, there are several other sales promotions that are designed to lower price. These include rebates, coupons, trade-in, and loyalty programs.

13.6.4 BUNDLE PRICING

Another pricing adjustment designed to increase sales is to offer discounted pricing when customers purchase several different products at the same time. Termed bundle pricing, the technique is often used to sell products that are complementary to a main product. For buyers, the overall cost of the purchase shows a savings compared to purchasing each product individually.

13.6.5 DYNAMIC PRICING

The concept of dynamic pricing has received a great deal of attention in recent years due to its prevalent use by Internet retailers. But the basic idea of dynamic pricing has been around since the dawn commerce. Essentially dynamic pricing allows for the point-of-sale (i.e., at the time and place of purchase) price adjustments to take place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling; the give-and-take that takes place between buyer and seller as they settle on a price. While the word haggling may conjure up visions of transactions taking place among vendors and customers in a street market, the concept is widely used in business markets as well where it carries the more reserved label of negotiated pricing.

13.7 STEP 5: STATE OWNERSHIP AND PAYMENT OPTIONS

With the price decided, the final step for the marketer is to determine in what form and in what timeframe customers will make payment. As one would expect payment is most often in a monetary form though in certain situations the payment may be part of a barter arrangement in which products or services are exchanged.

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13.7.1 FORM OF PAYMENT

The monetary payment decision can be a complex one. First marketers must decide in what form payments will be accepted. These options include cash; check, money orders, credit card, online payment systems (e.g., PayPal) or, for international purchases, bank drafts, letters of credit, and international reply coupons, to name a few.

13.7.2 TIMEFRAME OF PAYMENT

One final pricing decision considers when payment will be made. Many marketers find promotional value in offering options to customers for the date when payment is due. Such options include: • Immediate Payment in Full – Requires the customer make full payment at the time the product is acquired. • Immediate Partial Payment – Requires the customer make a certain amount or percentage of payment at the time the product is acquired. This may be in the form of a down payment. Subsequent payments occur either in one lump sum or at agreed intervals (e.g., once per month) through an installment plan.

• Future Payment – Provides the buyer with the opportunity to acquire use of the product with payment occurring some time in the future. Future payment may require either payment in full or partial payment.

13.8 LET US SUM UP

• Setting up of prices includes examination of: approaches to setting an initial price; different price adjustments marketers make before settling on a final selling price; payment options; and additional issues that affect pricing.

• The first and foremost step is to examine company and marketing objectives by overall objectives of the firm and marketing objectives.

• The next step is to fix initial price level. Marketers have at their disposal several approaches for setting the initial price which include: Cost Pricing, Market Pricing, Competitive Pricing and Bid Pricing

• The third step is to set standard price adjustments. For firms that do make standard price adjustments, options included are Quantity Discounts, Trade Allowances. Special Segment Pricing and Geographic Pricing

• The final price may be further adjusted through promotional pricing. The options for promotional pricing include: Markdowns, Loss Leaders, Sales Promotions, Bundle Pricing and Dynamic Pricing.

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• With the price decided, the final step for the marketer is to determine in what form and in what timeframe customers will make payment

13.9 CHECK YOUR PROGRESS

• What are all the factors does the marketer must consider when setting prices for establishing his products in the market? (Refer 13.2 to 13.7.2 and sum up)

• What is initial price? Discuss the several approaches for setting the initial price by the marketers.(Refer 13.4 to 13.4.4)

• Discuss several types of cost pricing. (Refer 13.4.1)

• Explain the different options of standard price adjustments. (Refer 13.5 to 13.5.4)

• Does promotional pricing leads to reduce profit or increase profit? Discuss. (Refer 13.6 to 13.6.5)

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LESSON-14 COST- DEMAND AND COMPETITION

Contents: 14.0 Aims and Objectives 14.1 Introduction 14.2 Characteristics of a market structure 14.3 Classification of Cost-demand Competition 14.3.1 Perfect Competition 14.3.2 Monopolistic Competition 14.3.3 Oligopoly 14.3.4 Monopoly 14.4 Let us sum up 14.5 Check your progress

14.0 AIMS AND OBJECTIVES

This part of lesson is dealt with cost and demand impact in different types of competition. This will give a clear picture about the different market conditions and its impact in pricing strategy. After going through this chapter, you will be able to answer i. What are the different types of market competitions prevailing in the market? ii. How cost and demand impacts in pricing decision in different markets?

14.1 INTRODUCTION

The notion of competition is very widely used in economics in general and in microeconomics in particular. Competition is also considered the basis for capitalist or free market economies. In standard usage of the term, competition may also imply certain virtues. Markets are the heart and soul of a capitalist economy, and varying degrees of competition lead to different market structures, with differing implications for the outcomes of the market place. This entry will discuss the following market structures that result from the successively declining degrees of competition in the market for a particular commodity. These elements are perfect competition, monopolistic competition, oligopoly, and monopoly. Based on the differing outcomes of different market structures, economists consider some market structures more desirable, from the point of view of the society, than others.

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14.2 CHARACTERISTICS OF A MARKET STRUCTURE

Each of the above mentioned market structure describes a particular organization of a market in which certain key characteristics differ. The characteristics are: (a) number of firms in the market, (b) control over the price of the relevant product, (c) type of the product sold in the market, (d) barriers to new firms entering the market, and (e) existence of non-price competition in the market. Each of these characteristics is briefly discussed below.

• Number of Firms in the Market: The number of firms in the market supplying the particular product under consideration forms an important basis for classifying market structures. The number of firms in an industry, according to economists, determines the extent of competition in the industry. Both in perfect competition and monopolistic competition, there are large numbers of firms or suppliers. Each of these firms supplies only a small portion of the total output for the industry. In oligopoly, there are only a few (presumably more than two) suppliers of the product. When there are only two sellers of the product, the market structure is often called duopoly. Monopoly is the extreme case where there is only one seller of the product in the market.

• Control over Product Price: The extent to which an individual firm exercises control over the price of the product it sells is another important characteristic of a market structure. Under perfect competition, an individual firm has no control over the price of the product it sells. A firm under monopolistic competition or oligopoly has some control over the price of the product it sells. Finally, a monopoly firm is deemed to have considerable control over the price of its product.

• Type of the product sold in the market: The extent to which products of different firms in the industry can be differentiated is also a characteristic that is used in classifying market structures. Under perfect competition, all firms in the industry sell identical products. In other words, no firm can differentiate its product from those of other firms in the industry. There is some product differentiation under monopolistic competition—the firms in the industry are assumed to produce somewhat different products. Under an oligopolistic market structure, firms may produce differentiated or identical products. Finally, in the case of a monopoly, product differentiation is not truly an issue, as there is only one firm—there are no other firms from whom it should differentiate its product.

• Barriers to new firms entering the market: The difficulty or ease with which new firms can enter the market for a product is also a characteristic of market structures. New firms can enter market structures classified as perfect competition or monopolistic competition relatively easily. In these cases, barriers to entry are considered low, as only a small investment may be required to enter the market. In oligopoly, barriers to entry is considered very high—huge amounts of investment, determined by the very nature of the

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product and the production process, are needed to enter these markets. Once again, monopoly constitutes the extreme case where the entry of new firms is blocked, usually by law. If for whatever reasons, new firms are allowed to enter a monopolistic market structure, it can no longer be termed a monopoly.

• Existence of Non-Price Competition: Market structures also differ to the extent that firms in industry compete with each other on the basis of non- price factors, such as, differences in product characteristics and advertising. There is no non-price competition under perfect competition. Firms under monopolistic competition make considerable use of instruments of non-price competition. Oligopolistic firms also make heavy use of non-price competition; finally, while a monopolist also utilizes instruments of non-price competition, such as advertising, these are not designed to compete with other firms, as there are no other firms in the monopolist's industry.

14.3 CLASSIFICATION OF COST-DEMAND COMPETITION

We now turn to discussing each of the four market forms mentioned at the beginning, in light of the preceding characteristics used to classify market structures. The discussion that follows also provides additional details about the four market structures.

14.3.1 PERFECT COMPETITION

Perfect competition is an idealized version of market structure that provides a foundation for understanding how markets work in a capitalist economy. The other market structures can also be understood better when perfect competition is used as a standard of reference. Even so, perfect competition is not ordinarily well understood by the general public. For example, when business people speak of intense competition in the market for a product, they are, in all likelihood, referring to rival suppliers, about whom they have quite a bit of information. However, when economists refer to perfect competition, they are particularly referring to the impersonal nature of this market structure. The impersonality of the market organization is due to the existence of a large number of suppliers of the product—there are so many suppliers in the industry that no firm views another supplier as a competitor. Thus, the competition under perfect competition is impersonal.

To understand the nature of competition under the perfectly competitive market form, one should briefly examine the three conditions that are necessary before a market structure is considered "perfectly competitive." These are: homogeneity of the product sold in the industry, existence of many buyers and sellers, and perfect mobility of resources or factors of production. Homogeneity of product means that the product sold by any one seller in the market is identical to the product sold by any other supplier. The homogeneity of product has an important implication for the market: if products of different sellers are identical, buyers do not care who they buy from, so long as the price is also the same.

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While the first condition of a perfect market sounds extreme, it is, in fact, met in markets for many products. Wheat and corn are good examples. Wheat and corn produced by different farmers is essentially the same, and can thus be considered identical.

The second condition, existence of many buyers and sellers, again leads to an important outcome. When there are a large number of buyers or sellers, each individual buyer or seller is so small relative to the entire market that he or she does not have any power to influence the price of the product under consideration. As a result, whether a person is a buyer or a seller, he or she must accept the market price. All buyers and sellers in the market are effectively price takers, not price makers. The market as a whole establishes product prices, and individual buyers or sellers simply decide how much to buy or sell at the given market price. The third condition, perfect mobility of resources, requires that all factors of production (resources used in the production process) can be readily switched from one use to another. Furthermore, it is required that all buyers, sellers, and owners of resources have full knowledge of all relevant technological and economic data. The implication of the third condition is that resources move to the most profitable industry.

No industry in the world (now or in the past) satisfies all three conditions stipulated above fully. Thus, no industry in the world can be considered perfectly competitive in the strictest sense of the term. However, there are token examples of industries that come quite close to being a perfectly competitive market. Some markets for agricultural commodities, while not meeting all three conditions, come reasonably close to being characterized as perfectly competitive markets. The market for wheat, for example, can be considered a reasonable approximation. The wheat market is characterized by an almost homogenous product, and it has a large number of buyers and sellers. It thus satisfies the first two conditions fairly well. However, it is difficult to assert that resources employed in the wheat industry are perfectly mobile.

Despite the fact that no industry is truly perfectly competitive, it is still worthwhile to study perfect competition as a market structure. Conclusions derived from the study of the idealized version of perfect competition are often helpful in explaining behavior in the real world.

• The Economics Of Perfect Competition.

The study of the idealized version of perfect competition leads to some important conclusions regarding solutions to key economic problems, such as quantity of the relevant product produced, price charged, and the mechanism of adjustment in the industry.

As mentioned earlier, under perfect competition, an individual supplier of the product has to take the market price as given. Given this price, the supplier determines how much to produce and sell. The quantity he or she decides to produce is the quantity that maximizes profit for the firm (more technically, where marginal cost of producing the product equals the market price of the

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product). The total production of all firms in the industry determines the market supply of the product under consideration. This market supply of the product, in conjunction with the total demand for the product by all consumers, determines the market price. Thus, while an individual buyer or seller is a price taker, the collective decisions affect the market price. Since the consumers of the product receive a price that is equal to the cost of production (on the margin), it is argued that consumers are treated fairly under perfect competition.

In addition, the total output produced under perfect competition is larger than, for example, under monopoly. To understand this, we should look at the mechanics of maximizing profit, the guiding force behind a supplier's output decision. In order to maximize profits, a supplier has to look at cost and revenue. Usually, it is assumed that a supplier's marginal cost (the cost of producing an additional unit of the product under consideration) rises ultimately. The producer then, in making the output decision, must compare the cost of producing an additional unit of the product with the revenue the sale of that additional unit (called the marginal revenue) brings to the firm. So long as the marginal revenue from the sale exceeds the marginal cost, there is a gain from producing that additional unit—the unit adds more to revenue (proceeds) than to costs. The supplier will continue producing while the process is profitable (i.e., it increases profits or reduces loss). The firm will stop production where marginal revenue equals marginal cost—this output level maximizes profits (or minimizes loss). In the case of a perfectly competitive firm, the market price for the product is also the marginal revenue. Since the firm is a price taker and supplies an insignificant portion of the total market supply of the product, it can sell as many units of the product as it desires at the going price. We will later show that this is not the case with a monopolist, for example. A monopolist stops production of the product before reaching the point where marginal cost of the product equals the market price of the product.

• The Desirability Of Perfect Competition.

Perfect competition is considered desirable for society for at least two reasons. First, the price charged to individuals equals the marginal cost of production to each firm. In other words, one can say sellers charge buyers a reasonable or fair price. Second, in general, output produced under a perfectly competitive market structure is larger than other market organizations. Thus, perfect competition becomes desirable also for the amount of the product supplied to consumers as a whole.

These are two reasons why a capitalist society adores the virtues of perfect competition. In fact, to maintain a reasonable amount of competition in a market is generally considered a goal of government regulatory policies. No single firm dominates the market under perfect competition; this parallels the status of an individual citizen in a democracy, a widely practiced form of government in capitalist countries.

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14.3.2 MONOPOLISTIC COMPETITION

As pointed out above, industries in the real world rarely satisfy the stringent conditions necessary to qualify as perfectly competitive market structures. The world in which we live is invariably characterized by competition of lesser degrees than stipulated by perfect competition. Many industries that we often deal with have market structures that are monopolistic competition or oligopoly. Apparel retail stores (with many stores and differentiated products) provide an example of monopolistic competition.

• Major Characteristics Of Monopolistic Competition.

As in the case of perfect competition, monopolistic competition is characterized by the existence of many sellers. Usually, if an industry has 50 or more firms (producing products that are close substitutes of each other), it is said to have a large number of firms. However, the number of firms must be large enough that each firm in the industry can expect its actions go unnoticed by rival firms.

Unlike perfect competition, the sellers under monopolistic competition differentiate competitive product. In other words, the products of these firms are not considered identical. It is, in fact, immaterial whether these products are actually different or simply perceived to be so. So long as consumers treat them as different products, they satisfy one of the characteristics of monopolistic competition. This product differentiation is considered a key attribute of monopolistic competition. In many U.S. markets, producers practice product differentiation by altering the physical composition, using special packaging, or simply claiming to have superior products based on brand images and/or advertising. Toothpastes and toilet papers are examples of differentiated products.

In addition to the existence of a large number of firms and product differentiation, relative ease of entry into the industry is considered another important requirement of a monopolistically competitive market organization. Also, there should be no collusion among firms in the industry, like price fixing or agreements regarding the market shares of individual companies. With the large number of firms that monopolistic competition requires, collusion is generally difficult, though not impossible.

The above mentioned characteristics of monopolistic competition basically yield a market form that is very competitive, but probably not to the extent of perfect competition.

• The Economics Of Monopolistic Competition.

As in the case of perfect competition, a firm under monopolistic competition decides about the quantity of the product produced on the basis of the profit maximization principle—it produces the quantity that maximizes the firm's profit. Also, conditions of profit maximization remain the same—the firm stops production where marginal revenue equals marginal cost of production. But

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unlike perfect competition, a firm under monopolistic competition has some control over the price it charges, as the firm differentiates its products from those of others. However, this price making power of a monopolistically competitive firm is rather small, since there are a large number of other firms in the industry with somewhat similar products. Remember that a perfectly competitive firm has no price making power—each firm is a price taker, as it produces a product identical to those produced by a large number of other firms in the industry.

An important consequence of the price making power of a monopolistically competitive firm is that when such a firm reduces price, it can attract customers buying other "brands" of the product. The opposite is also true when the firm increases the price it charges for its product. Because of this, price charged for a product is different from the marginal revenue for the product (marginal revenue refers to the increase in total revenue as a result of selling one more unit of the product under consideration). To understand this, consider, for example, that a firm reduces the price for its product. The firm must now sell all units at this lower price. Because the lower price applies to all units sold, not just the last or the marginal unit, price for the product is higher than the marginal revenue at each level of sale. It should be noted that as there are a large number of firms under monopolistic competition, individual firms in the industry are not appreciably affected by a particular firm's behavior.

As mentioned above, a monopolistically competitive firm stops production where marginal revenue equals marginal cost of production—the output level that maximizes its profits (often called the equilibrium output for the firm).

• The Desirability Of Monopolistic Competition.

Aforementioned profit maximizing behavior of a monopolistically competitive firm implies that now the price associated with the product (at the equilibrium or the profit maximizing output) is higher than marginal cost (which equals marginal revenue). Thus, the production under monopolistic competition does not take place to the point where price equals marginal cost of production. Remember that, with increased production, price charged (which is higher than marginal revenue at every level of output) is successively falling while the marginal cost of production is rising. Therefore, if a monopolistically competitive firm were to stop production where price is equal to marginal cost (a condition met under a perfectly competitive market structure), output produced would be greater than when it stops production where marginal revenue equals marginal cost (its profit maximizing output). The net result of the profit maximizing decisions of monopolistically competitive firms is that price charged under monopolistic competition is higher than under perfect competition. In addition, quantity of the commodity produced under monopolistic competition is simultaneously lower. Thus, both on the basis of price charged and output produced, monopolistic competition is less socially desirable than perfect competition.

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14.3.3 OLIGOPOLY

Oligopoly is a fairly common market organization. In the United States, both the steel and auto industries (with three or so large firms) provide good examples of Oligopolistic market structures.

• Major Characteristics Of Oligopoly.

An important characteristic of an Oligopolistic market structure is the interdependence of firms in the industry. The interdependence, actual or perceived, arises from the small number of firms in the industry. However, unlike monopolistic competition, if an Oligopolistic firm changes its price or output, it has perceptible effects on the sales and profits of its competitors in the industry. Thus, an oligopolist firm always considers the reactions of its rivals in formulating its pricing or output decisions.

There are huge, though not insurmountable, barriers to entering an Oligopolistic market. These barriers can involve large financial requirements, availability of raw materials, access to the relevant technology, or simply patent rights of the firms currently in the industry. Several industries in the United States provide good examples of Oligopolistic market structures with obvious barriers to entry. The U.S. auto industry provides an example of a market where financial barriers to entry exist. In order to efficiently operate an automobile plant, one needs upward of half a billion dollars of initial investment. The steel industry in the United States, on the other hand, provides an example of an oligopoly where barriers to entry have been created by the ownership of raw materials needed for producing the product. In this industry, a few huge firms own most of the available iron ore, a necessary raw material for steel production.

An Oligopolistic industry is also typically characterized by economies of scale. Economies of scale in production imply that as the level of production rises the cost per unit of product falls for the use of any plant (generally, up to a point). Thus the economies of scale lead to obvious advantage for large producers. Once again, the automobile industry provides an example of a market structure where firms experience economies of scale. It should be noted that there may exist economies of scale in promotion just as there exist economies of scale in production. In the automobile industry, the promotion cost per unit of product falls as sales increase since promotion costs rise less than proportionately to sales.

• Economics And Desirability Of Oligopoly.

There is no single theoretical framework that provides answers to output and pricing decisions under an Oligopolistic market structure. Analyses exist only for special sets of circumstances. For example, if an Oligopolistic firm cuts its price, it is met with price reductions by competing firms; however, if it raises the price of its product, rivals do not match the price increase. For this reason, prices may remain stable in an Oligopolistic industry for a prolonged period of time.

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14.3.4 MONOPOLY

Monopoly can be considered the opposite of perfect competition. It is a market form in which there is only one seller. While at first glance a monopoly may appear to be a rare market structure, it is not so. Several industries in the United State have monopolies. Some utility companies provide examples of a monopolist.

• Causes and Characteristics of Monopoly.

There are many factors that give rise to a monopoly. For example, in the United States the inventor of an item has the exclusive right to produce that product for 17 years. Thus, a monopoly can exist in an industry because a patent was obtained for a product by its inventor. The United Shoe Machinery Company held such a monopoly in certain important shoe making equipment until 1954, when the monopoly was broken under the antitrust laws. A monopoly can also arise if a company owns the entire supply of a necessary material needed to produce a product. The Aluminum Company of America exercised such power until 1945, when its monopoly was also broken under provisions of the antitrust laws. A monopoly can be legally created by a government agency when it sells a market franchise a particular product or service. Often a monopoly so established is also regulated by the appropriate government agency. Provision of local telephone service in the United States provides an example of such a monopoly. Finally, a monopoly may arise due to declining cost of production for a particular product. In such a case the average cost of production falls and reaches a minimum at an output level that is sufficient to satisfy the entire market. In such an industry, rival firms will be eliminated until only the strongest firm (now the monopolist) is left in the market. This is often called a case of natural monopoly. A good example of a natural monopoly is the electricity industry. The electric power industry reaps benefits of economies of scale and yields decreasing average cost. A natural monopoly is usually regulated by the government.

• The Economics Of Monopoly.

Generally speaking, price and output decisions of a monopolist are similar to those of a monopolistically competitive firm, with the major distinction of a large number of firms under monopolistic competition and only one firm under monopoly. Thus, one may technically say that there is no competition under monopoly. This is not strictly true, as even a monopolist is threatened by indirect and potential competition. Like monopolistic competition, a monopolistic firm also maximizes its profits by producing up to the point where marginal revenue equals marginal cost. As the monopolist is a price maker and can increase the amount of sales by lowering the price, a monopolist does not lure consumers away from rivals, rather he or she induces them to buy more. Nevertheless, at any output level, the price charged by a monopolist is higher than the marginal revenue. As a result, a monopolist also does not produce to

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the point where price equals marginal cost (a condition met under a perfectly competitive market structure).

• Desirability Of Monopoly.

An industry characterized by a monopolistic market structure produces less output and charges higher prices than under perfect competition (and presumably under monopolistic competition). Thus, on the basis of price charged and quantity produced, a monopoly is less desirable socially. However, a natural monopoly is generally considered desirable if the monopolist's price behavior can be regulated.

14.4 LET US SUM UP

In this lesson we have discussed about the following: • Characteristics of a Market Structure • Classification of Cost-demand Competition in different market structures such as Perfect competition, Monopolistic Competition, Oligopoly and Monopoly competition.

14.5 CHECK YOUR PROGRESS

• Explain the characteristics of market structures (Refer 14.2) • Explain how price is determined under different market conditions in detail. (Refer 14.3 to 14.3.4) • Explain the major characteristics of Monopolistic Competition. (Refer 14.3.2) • Explain the major characteristics Of Oligopoly. (Refer 14.3.3)

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LESSON-15 PRICING POLICIES AND STRATEGIES

Contents: 15.0 Aims and Objectives 15.1 Introduction 15.2 Pricing policies and strategies 15.2.1 Cost-Based Pricing 15.2.2 Value-Based Pricing. 15.2.3 Demand-Based Pricing 15.2.4 Competition-Based Pricing 15.3 Strategies for New and Established Products 15.3.1 New Product Pricing Strategy. 15.3.2 Established Product Pricing Strategy. 15.4 Kinds of pricing 15.4.1 Odd pricing 15.4.2 Psychological pricing 15.4.3 Customary prices 15.4.4 Pricing at the prevailing prices 15.4.5 Prestige pricing 15.4.6 Price lining 15.4.7 Geographic pricing 15.4.8 Dual pricing 15.4.9 Administered pricing 15.4.10 Monopoly pricing 15.4.11 Skimming pricing 15.4.12 Penetration pricing 15.4.13 Expected pricing 15.4.14 Sealed bid pricing 15.4.15 Negotiated pricing 15.4.16 Mark-up pricing 15.5 Let us sum up 15.6 Check your progress

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15.0 AIMS AND OBJECTIVES

Yet another crucial element in marketing mix is pricing of products. On the one hand, pricing is a complex mechanism and, on the other, it is the measuring rod of the success of the firm in more than one way. This part deals with the pricing policies and strategies which will help you to answer i. What are the different policies and strategies followed in pricing? ii. What are the different types of pricing?

15.1 INTRODUCTION

Managers should start setting prices during the development stage as part of strategic pricing to avoid launching products or services that cannot sustain profitable prices in the market. This approach to pricing enables companies to either fit costs to prices or scrap products or services that cannot be generated cost-effectively. Through systematic pricing policies and strategies, companies can reap greater profits and increase or defend their market shares. Setting prices is one of the principal tasks of marketing and finance managers in that the price of a product or service often plays a significant role in that product's or service's success, not to mention in a company's profitability. Generally, pricing policy refers how a company sets the prices of its products and services based on costs, value, demand, and competition. Pricing strategy, on the other hand, refers to how a company uses pricing to achieve its strategic goals, such as offering lower prices to increase sales volume or higher prices to decrease backlog. Despite some degree of difference, pricing policy and strategy tend to overlap, and the different policies and strategies are not necessarily mutually exclusive.

After establishing the bases for their prices, managers can begin developing pricing strategies by determining company pricing goals, such as increasing short-term and long-term profits, stabilizing prices, increasing cash flow, and warding off competition. Managers also must take into account current market conditions when developing pricing strategies to ensure that the prices they choose fit market conditions. In addition, effective pricing strategy involves considering customers, costs, competition, and different market segments.

15.2 PRICING POLICIES AND STRATEGIES

Pricing policies are more specific than the objectives and deal with situations in the foreseeable future that generally recurs. Pricing polices provide the framework and consistency needed by the firm to make reasonable, practicable and effective pricing decisions. The correctness of any pricing policy depends on such variables as managerial philosophy, competitive conditions, and the firm’s marketing and pricing objectives.

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Pricing strategy entails more than reacting to market conditions, such as reducing pricing because competitors have reduced their prices. Instead, it encompasses more thorough planning and consideration of customers, competitors, and company goals. Furthermore, pricing strategies tend to vary depending on whether a company is a new entrant into a market or an established firm. New entrants sometimes offer products at low cost to attract market share, while incumbents' reactions vary. Incumbents that fear the new entrant will challenge the incumbents' customer base may match prices or go even lower than the new entrant to protect its market share. If incumbents do not view the new entrant as a serious threat, incumbents may simply resort to increased advertising aimed at enhancing customer loyalty, but have no change in price in efforts to keep the new entrant from stealing away customers.

The following sections explain various ways companies develop pricing policy and strategy. First, cost-based pricing is considered. This is followed by the second topic of value-based pricing. Third, demand-based pricing is addressed followed by competition-based pricing. After this, several strategies for new and established pricing strategies are explained.

15.2.1 COST-BASED PRICING

The traditional pricing policy can be summarized by the formula: Cost + Fixed profit percentage = Selling price. Cost-based pricing involves the determination of all fixed and variable costs associated with a product or service. After the total costs attributable to the product or service have been determined, managers add a desired profit margin to each unit such as a 5 or 10 percent markup. The goal of the cost-oriented approach is to cover all costs incurred in producing or delivering products or services and to achieve a targeted level of profit. By itself, this method is simple and straightforward, requiring only that managers study financial and accounting records to determine prices. This pricing approach does not involve examining the market or considering the competition and other factors that might have an impact on pricing. Cost- oriented pricing also is popular because it is an age-old practice that uses internal information that managers can obtain easily. In addition, a company can defend its prices based on costs, and demonstrate that its prices cover costs plus a markup for profit. However, critics contend that the cost-oriented strategy fails to provide a company with an effective pricing policy. One problem with the cost-plus strategy is that determining a unit's cost before its price is difficult in many industries because unit costs may vary depending on volume. As a result, many business analysts have criticized this method, arguing that it is no longer appropriate for modern market conditions. Cost-based pricing generally leads to high prices in weak markets and low prices in strong markets, thereby impeding profitability because these prices are the exact opposites of what strategic prices would be if market conditions were taken into consideration.

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While managers must consider costs when developing a pricing policy and strategy, costs alone should not determine prices. Many managers of industrial goods and service companies sell their products and services at incremental cost, and make their substantial profits from their best customers and from short-notice deliveries. When considering costs, managers should ask what costs they can afford to pay, taking into account the prices the market allows, and still allow for a profit on the sale. In addition, managers must consider production costs in order to determine what goods to produce and in what amounts. Nevertheless, pricing generally involves determining what prices customers can afford before determining what amount of products to produce. By bearing in mind the prices they can charge and the costs they can afford to pay, managers can determine whether their costs enable them to compete in the low-cost market, where customers are concerned primarily with price, or whether they must compete in the premium-price market, in which customers are primarily concerned with quality and features.

15.2.2 VALUE-BASED PRICING

Value pricers adhere to the thinking that the optimal selling price is a reflection of a product or service's perceived value by customers, not just the company's costs to produce or provide a product or service. The value of a product or service is derived from customer needs, preferences, expectations, and financial resources as well as from competitors' offerings. Consequently, this approach calls for managers to query customers and research the market to determine how much they value a product or service. In addition, managers must compare their products or services with those of their competitors to identify their value advantages and disadvantages.

Yet, value-based pricing is not just creating customer satisfaction or making sales because customer satisfaction may be achieved through discounting alone, a pricing strategy that could also lead to greater sales. However, discounting may not necessarily lead to profitability. Value pricing involves setting prices to increase profitability by tapping into more of a product or service's value attributes. This approach to pricing also depends heavily on strong advertising, especially for new products or services, in order to communicate the value of products or services to customers and to motivate customers to pay more if necessary for the value provided by these products or services.

15.2.3 DEMAND-BASED PRICING

Managers adopting demand-based pricing policies are, like value pricers, not fully concerned with costs. Instead, they concentrate on the behavior and characteristics of customers and the quality and characteristics of their products or services. Demand-oriented pricing focuses on the level of demand for a product or service, not on the cost of materials, labor, and so forth.

According to this pricing policy, managers try to determine the amount of products or services they can sell at different prices. Managers need demand

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schedules in order to determine prices based on demand. Using demand schedules, managers can figure out which production and sales levels would be the most profitable. To determine the most profitable production and sales levels, managers examine production and marketing costs estimates at different sales levels. The prices are determined by considering the cost estimates at different sales levels and expected revenues from sales volumes associated with projected prices.

The success of this strategy depends on the reliability of demand estimates. Hence, the crucial obstacle managers face with this approach is accurately gauging demand, which requires extensive knowledge of the manifold market factors that may have an impact on the number of products sold. Two common options managers have for obtaining accurate estimates are enlisting the help from either sales representatives or market experts. Managers frequently ask sales representatives to estimate increases or decreases in demand stemming from specific increases or decreases in a product or service's price, since sales representatives generally are attuned to market trends and customer demands. Alternatively, managers can seek the assistance of experts such as market researchers or consultants to provide estimates of sales levels at various unit prices.

15.2.4 COMPETITION-BASED PRICING

With a competition-based pricing policy, a company sets its prices by determining what other companies competing in the market charge. A company begins developing competition-based prices by identifying its present competitors. Next, a company assesses its own product or service. After this step, a company sets it prices higher than, lower than, or on par with the competitors based on the advantages and disadvantages of a company's product or service as well as on the expected response by competitors to the set price. This last consideration-the response of competitors-is an important part of competition-based pricing, especially in markets with only a few competitors. In such a market, if one competitor lowers its price, the others will most likely lower theirs as well.

This pricing policy allows companies to set prices quickly with relatively little effort, since it does not require as accurate market data as the demand pricing. Competitive pricing also makes distributors more receptive to a company's products because they are priced within the range the distributor already handles. Furthermore, this pricing policy enables companies to select from a variety of different pricing strategies to achieve their strategic goals. In other words, companies can choose to mark their prices above, below, or on par with their competitors' prices and thereby influence customer perceptions of their products. For example, if a Company A sets its prices above those of its competitors, the higher price could suggest that Company A's products or services are superior in quality. Harley Davidson used this with great success. Although Harley-Davidson uses many of the same parts suppliers as Honda, Kawasaki, Yamaha, and Honda, they price well above the competitive price of

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these competitors. Harley's high prices combined with its customer loyalty and mystique help overcome buyer resistance to higher prices. Production efficiencies over the last two decades, however, have made quality among motorcycle producers about equal, but pricing above the market signals quality to buyers; whether or not they get the quality premium they pay for.

15.3 STRATEGIES FOR NEW AND ESTABLISHED PRODUCTS

Product pricing strategies frequently depend on the stage a product or service is in its life cycle; that is, new products often require different pricing strategies than established products or mature products.

15.3.1 NEW PRODUCT PRICING STRATEGY

Entrants often rely on pricing strategies that allow them to capture market share quickly. When there are several competitors in a market, entrants usually use lower pricing to change consumer spending habits and acquire market share. To appeal to customers effectively, entrants generally implement a simple or transparent pricing structure, which enables customers to compare prices easily and understand that the entrants have lower prices than established incumbent companies.

Complex pricing arrangements, however, prevent lower pricing from being a successful strategy in that customers cannot readily compare prices with hidden and contingent costs. The long-distance telephone market illustrates this point; large corporations have lengthy telephone bills that include numerous contingent costs, which depend on location, use, and service features. Consequently, competitors in the corporate long-distance telephone service market do not use lower pricing as the primary pricing strategy, as they do in the consumer and small-business markets, where telephone billing is much simpler.

Another example is the computer industry. Dell, Fujitsu, HP, and many others personal computer makers offer bundles of products that make it more difficult for consumers to sort out the true differences among these competitors. For example, consumers purchasing an HP computer from the retailer, Best Buy, will have not only the computer itself, but also six months of "free" Internet access bundled into the price. Comparing the absolute value of each personal computer become more difficult as an increasing number of other products such as Quicken, Adobe's Photoshop Elements, and other software are sold together with the purchase. For Macintosh users or for those who might consider switching from a personal computer to a Macintosh, Apple announced in 2005 that it would begin selling the Mac Mini, a Macintosh that, as with PC makers, bundles its iLife® software into the mix. By extending its brand to non-premium price tiers, Apple will compete head-to-head with established firms. And although the Mac Mini is at a low price point, starting at $499, it will be difficult for consumers to directly compare the bundled products of PCs directly with the

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bundled products of Apple's Mac Mini. The complexity of these comparisons is what can make such new product pricing successful.

15.3.2 ESTABLISHED PRODUCT PRICING STRATEGY

Sometimes established companies need not adjust their prices at all in response to entrants and their lower prices, because customers frequently are willing to pay more for the products or services of an established company to avoid perceived risks associated with switching products or services.

However, when established companies do not have this advantage, they must implement other pricing strategies to preserve their market share and profits. When entrants are involved, established companies sometimes attempt to hide their actual prices by embedding them in complex prices. This tactic makes it difficult for customers to compare prices, which is advantageous to established companies competing with entrants that have lower prices. In addition, established companies also may use a more complex pricing plan, such as a two-part pricing tactic. This tactic especially benefits companies with significant market power. Local telephone companies, for example, use this strategy, charging both fixed and per-minute charges.

15.4 KINDS OF PRICING

Adopting basic principle explained above, firms may choose various kinds of pricing for their products. There are discussed below.

15.4.1 ODD PRICING

The term ‘odd pricing’ are used in two ways. It may be a price ending in an odd number or a price just under a round number. Such a pricing is adopted generally by the seller of specialty or convenience goods; for example, a shoe manufacturer pricing one of his products at, say, Rs.49.92.

There is no conclusive evidence that such a pricing would attract more sales. In fact it seems from the ‘psychological pricing’ explained below. There are certain critical points in pricing just below that would attract buyers, as they would feel it is a ‘marked down price’.

15.4.2 PSYCHOLOGICAL PRICING

The price under this method is fixed at a full number. The price-setters feel that such a price has an apparent psychological significance from the viewpoint of buyers. For example, it is stated that there are certain critical points at prices such as 1, 5 and 10. The experiments conducted proved that change of price over a certain range, has little effect until some critical point is reached.

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15.4.3 CUSTOMARY PRICES

Such prices are fixed by custom. For example, sweets manufacturers price their products in such a way that a particular variety of sweets are sold at approximately the same price. Soft drinks are also priced in the same manner. Such a pricing is usually adopted by chain stores.

15.4.4 PRICING AT THE PREVAILING PRICES

This kind of pricing is undertaken to meet the competition. Hence, such a pricing is also termed as ‘Pricing at the Market’. Such a strategy presumes a market inelasticity of demand below the current market price. In other words, a price above those of the competitors would sharply bring down sales while a lower price would not significantly increase them. Obviously, such a policy is aimed at avoiding price competition and price wars. In such circumstances, it is not possible to have any further price reduction.

15.4.5. PRESTIGE PRICING

Many customers judge the quality of a product by its price. Generally prestige pricing is applied to luxury goods, where the seller is successful in creating a prestige for his product. The price fixed normally will be in excess of those asked for near-perfect substitutes. In such cases sale would be less at low prices than at higher ones. The merchandise can be priced too high. Customers may fear that at the low price it cannot be of good quality, and will actually buy more at a somewhat higher price than they would at a lower price.

15.4.6. PRICE LINING

This policy of pricing is usually found among retailers. Technically, it is closely related to both psychological and customary prices. Under this policy the pricing decisions are made only initially and such fixed prices remain constant over long periods of time. Any change in the market conditions are met by adjustments in the quality of merchandise. In other words, the decision is made with reference to the prices paid for merchandise rather than the prices at which it will be sold.

15.4.7. GEOGRAPHIC PRICING

This policy is sometimes used where a manufacturer serves a number of distinct regional markets. He can adopt different prices in each area without creating any ill-will among customers. For example, petrol is priced in this way, depending on the distance from the storage area to the retail outlet. It is evident from this example that a price that is quoted without transportation cost may be a different price than a price quotation on which the seller agrees to absorb such

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cost. There are three methods that relate to the absorption of distribution cost in the price. (a) FOB pricing, (b) Zone pricing, and (c) Basic point pricing FOB pricing (Free on Board) may be of two types: FOB origin and FOB destination. In the first case the buyer will have to incur the cost of transit, and in the later, the price quoted is inclusive of transit charges. Zone pricing denotes some amount of equality of prices in the same zone. For instance, if India is divided into South Zones, North zones, etc., a product will be sold in the South zone at the same price irrespective of the difference in distance between two places inside the zone. Basic point pricing system charges the buyer the transportation cost from the basic points to the buyer’s location.

15.4.8 DUAL PRICING

When a manufacturer sells the same product at two or more different prices, it is dual pricing. This is possible only if the same market, different brands are marketed. The method should not be confused with the geographical pricing. There, for the same products, the prices are different at two places. The price differential is justified on account of varying distribution costs. The dual pricing is adopted in Railways. For the same distance of travel, in the very same vehicle, the services are sold to passengers at different prices under different classes. (Except for a few advantages, 1st class passengers do not gain much either in speed or in the distance traveled.) This is also referred to as ‘discriminatory pricing’.

15.4.9 ADMINISTERED PRICING

This applies to the practice of pricing the products for the market, not on the basis of cost, competitive pressures, or the laws of supply and demand, but purely on the basis of the policy decisions of the sellers. In theory, this would mean that the seller disregards all other considerations except his own desire for maximizing profits. The administered prices usually remain unchanged for substantial periods of time. In a sense, every price is an administered one. In other words, to the extent the management makes conscious pricing decision of its own it is an administered price.

15.4.10 MONOPOLY PRICING

New product pricing is, in essence, monopoly pricing. Since competition is absent, the seller has a free hand in fixing the price. Such pricing will be on the principles of “what the traffic will bear”. Such a price will maximize the profit.

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15.4.11 SKIMMING PRICING

This is also termed as “Skim-the-Cream-pricing” (Stanton). It involves setting a very high price for a new product initially and to reduce the price gradually as competitors enter the market. It is remarked, “Launching a new product with high price is an efficient device for breaking up the market into segments that differ in price elasticity of demand.”

The initial high price serves to skim the cream of the market, that is, relatively insensitive to price. In the case of text-books this method is followed by having a high price for the first edition and lesser prices for subsequent editions. When an item is clearly different and the right price is not apparent, this method may be used.

This approach to pricing is, in effect, an experimental search for the right price, and it may result in a market-determined price. The method starts with a high price (skim price) and moves the price downward by steps until the right price is reached. The idea is that when one is unsure about what price to chare, it is advantageous to begin with too high an initial price and move systematically downwards. This procedure is thought better than starting the price experiment at too low a price and subsequently increasing the price. It is, therefore, a self or automatically administered price.

15.4.12 PENETRATION PRICING

This method is opposite to the skimming method outlined above. The skimming price policy is most convenient and profitable in the case of new products, especially in the initial years. Penetration pricing, on the other hand, is intended to help the product penetrate into markets to hold a position. This can be done only by adopting low price in the initial period or till such time the product is finally accepted by customers. This method of pricing is most common and is desirable under the following conditions: • When sales volume of the product is very sensitive to price, • When a large volume of sales is to be effected, • When the product faces a threat from competitors, and • When stability of price is required,

One important consideration in the choice between skimming and penetration price policies is fundamentally based on the ease and the speed with which the competitors can bring out substitute products. But penetration price policies are usually considered when substitute product is marketed. Low starting prices sacrifice short-run profits for long-run profits and there, discourage potential competitors. The recently introduced ‘Dhara’ brand oil by NDDB proves this point.

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15.4.13 EXPECTED PRICING

In this method, the price that will be accepted by the consumers is found out. Naturally a fixed price cannot be decided beforehand and hence price range is offered. The response of consumers to the price is analyzed and, later, a price is fixed.

15.4.14 SEALED BID PRICING

This method is followed in the case of specific job works. Government contracts are usually warded through a system known as Tenders. The expenditure anticipated is worked out in detail and the competitors’ offer a price (known as contract price). The minimum price quoted is accepted and the work is awarded to the party.

15.4.15 NEGOTIATED PRICING

This method is invariably adopted by industrial suppliers. Manufacturers who require goods of highly specialized and individually designed nature often negotiate and only then fix the price. For example, in the case of automobiles, various components required for the manufacturer are not actually produced by the company’s marketing the automobiles. They find out the suppliers and entrust them with the work of manufacturing and supplying various components. This ensures fixed prices, or otherwise the price of their final product would also go up. Under such circumstances the prices are negotiated and fixed.

15.4.16 MARK-UP PRICING

This method is adopted by wholesalers and retailers in establishing a sale price. When the goods are received, the retailer adds a certain percentage to the manufacturer’s price to arrive at the retail price. For example, an item that costs Rs.20 is sold for Rs.25; the mark-up is Rs.5 or 25%.

The initial murk-up is also referred to as ‘Mark on’. If the retailer had to cut down the price to Rs.23, the difference between cost and the selling price would be Rs.2 or 8%. The latter figure is called ‘Gross Margin’ or ‘Maintained mark- up’. The maintained mark-up reflects actual demand and is much more important than the mark-on. Mark-on is calculated using the following formula:

Gross margin + Retail reduction

Mark-on: 100(%) + Retail reduction

Retail reduction refers to pilferage, damages and discounts to be incurred by retailers while holding stock.

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15.5 LET US SUM UP

• Pricing polices provide the framework and consistency needed by the firm to make reasonable, practicable and effective pricing decisions.

• Pricing strategy entails more than reacting to market conditions, such as reducing pricing because competitors have reduced their prices.

• Pricing policies are based on cost, value, demand and competition. Product pricing strategies frequently depend on the stage a product or service is in its life cycle; that is, new products often require different pricing strategies than established products or mature products.

• Firms may choose various kinds of pricing for their products such as Odd pricing, Psychological pricing, Customary prices, Pricing at the prevailing prices, Prestige pricing, Price lining, Geographic pricing, Dual pricing, Administered pricing, Monopoly pricing, Skimming pricing, Penetration pricing, Expected pricing, Sealed bid pricing, Negotiated pricing and Mark- up pricing

15.6 CHECK YOUR PROGRESS

• What are the basic pricing policies? (Refer 15.2 to 15.2.4)

• Under what circumstances would you recommend: (Refer pg no:141 and 142 and answer it in your own)

(a) Skimming pricing

(b) Penetration pricing and

(c) Negotiated pricing?

• Discuss the possible pricing policies for the product of a new manufacturing company? What factors will you take into account in formulating a suitable price strategy? (Refer 15.4.11, 15.4.12 and 15.4.15 and answer it in your own)

• What is meant by ‘Skim-the-cream price policy? What are the reasons for adopting this policy? (Refer 15.4.11)

• Explain the different kinds of pricing. (Refer 15.4 to 15.4.16)

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UNIT – IV

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LESSON-16 SALES PROMOTION

Contents: 16.0 Aims and Objectives 16.1 Introduction 16.2 Meaning of Sales Promotion 16.3 Objectives of Sales Promotion 16.4 Types of Sales Promotion 16.4.1. Consumer Sales Promotion 16.4.2. Trade Sales Promotions 16.4.3 Business-to-Business Sales Promotions 16.5 Trends in Sales Promotion 16.6 Let us sum up 16.7 Check your progress

16.0 AIMS AND OBJECTIVES

After pricing the products, it becomes the duty of the marketer to introduce some sales promotional tools to market his products. In this lesson, we are going to discuss about the various sales promotional tools which strengthens the marketer in promoting his business. This will help you to answer i. What is the need for sales promotion? ii. What are the types of sales promotion? iii. What are the recent trends introduced by the marketer in promoting sales?

16.1 INTRODUCTION

In a time when customers are exposed daily to a nearly infinite amount of promotional messages, many marketers are discovering that advertising alone is not enough to move members of a target market to take action, such as getting them to try a new product. Instead, marketers have learned that to meet their goals they must use additional promotional methods in conjunction with advertising.

Other marketers have found that certain characteristics of their target market (e.g., small but geographically dispersed) or characteristics of their product (e.g., highly complex) make advertising a less attractive option. For these marketers better results may be obtained using other promotional approaches and may

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lead to directing all their promotional spending to non-advertising promotions. Finally, the high cost of advertising may drive many to seek alternative, lower cost promotional techniques to meet their promotion goals.

In this section we continue our discussion of promotion decisions by looking at the promotion mix item, sales promotion. Sales promotions are used widely in many industries and especially by marketers selling to consumers. We will see that the objectives of sales promotion are quite different than advertising and are specifically designed to encourage customer response.

16.2 MEANING OF SALES PROMOTION

Sales promotion describes promotional methods using special short-term techniques to persuade members of a target market to respond or undertake certain activity. As a reward, marketers offer something of value to those responding generally in the form of lower cost of ownership for a purchased product (e.g., lower purchase price, money back) or the inclusion of additional value-added material (e.g., something more for the same price). Sales promotions are often confused with advertising. For instance, a television advertisement mentioning a contest awarding winners with a free trip to a Caribbean island may give the contest the appearance of advertising. While the delivery of the marketer’s message through television media is certainly labeled as advertising, what is contained in the message, namely the contest, is considered a sales promotion. The factors that distinguish between the two promotional approaches are: • whether the promotion involves a short-term value proposition (e.g., the contest is only offered for a limited period of time), and • the customer must perform some activity in order to be eligible to receive the value proposition (e.g., customer must enter contest). The inclusion of a timing constraint and an activity requirement are hallmarks of sales promotion. Sales promotions are used by a wide range of organizations in both the consumer and business markets, though the frequency and spending levels are much greater for consumer products marketers. One estimate by the Promotion Marketing Association suggests that in the US alone spending on sales promotion exceeds that of advertising.

16.3 OBJECTIVES OF SALES PROMOTION

Sales promotion is a tool used to achieve most of the five major promotional objectives which are discussed below

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1. Building Product Awareness – Several sales promotion techniques are highly effective in exposing customers to products for the first time and can serve as key promotional components in the early stages of new product introduction. Additionally, as part of the effort to build product awareness, several sales promotion techniques possess the added advantage of capturing customer information at the time of exposure to the promotion. In this way sales promotion can act as an effective customer information gathering tool (i.e., sales lead generation), which can then be used as part of follow-up marketing efforts. 2. Creating Interest – Marketers find that sales promotions are very effective in creating interest in a product. In fact, creating interest is often considered the most important use of sales promotion. In the retail industry an appealing sales promotions can significantly increase customer traffic to retail outlets. Internet marketers can use similar approaches to bolster the number of website visitors. Another important way to create interest is to move customers to experience a product. Several sales promotion techniques offer the opportunity for customers to try products for free or at low cost. 3. Providing Information – Generally sales promotion techniques are designed to move customers to some action and are rarely simply informational in nature. However, some sales promotions do offer customers access to product information. For instance, a promotion may allow customers to try a fee-based online service for free for several days. This free access may include receiving product information via email. 4. Stimulating Demand – Next to building initial product awareness, the most important use of sales promotion is to build demand by convincing customers to make a purchase. Special promotions, especially those that lower the cost of ownership to the customer (e.g., price reduction), can be employed to stimulate sales. 5. Reinforcing the Brand – Once customers have made a purchase sales promotion can be used to both encourage additional purchasing and also as a reward for purchase loyalty (see loyalty programs below). Many companies, including airlines and retail stores, reward good or “preferred” customers with special promotions, such as email “special deals” and surprise price reductions at the cash register.

16.4 TYPES OF SALES PROMOTION

Sales promotion can be classified based on the primary target audience to whom the promotion is directed. These include: 1. Consumer Market Directed - Possibly the most well-known methods of sales promotion are those intended to appeal to the final consumer. Consumers are exposed to sales promotions nearly everyday, and as discussed later, many buyers are conditioned to look for sales promotions prior to making purchase decisions.

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2. Trade Market Directed – Marketers use sales promotions to target all customers including partners within their channel of distribution. Trade promotions are initially used to entice channel members to carry a marketer’s products and, once products are stocked, marketers utilize promotions to strengthen the channel relationship. 3. Business-to-Business Market Directed – A small, but important, sub-set of sales promotions are targeted to the business-to-business market. While these promotions may not carry the glamour associated with consumer or trade promotions, B-to-B promotions are used in many industries. In the next few sections we discuss each category in more detail.

16.4.1 CONSUMER SALES PROMOTION

Consumer sales promotions encompass a variety of short-term promotional techniques designed to induce customers to respond in some way. The most popular consumer sales promotions are directly associated with product purchasing. These promotions are intended to enhance the value of a product purchase by either reducing the overall cost of the product (i.e., get same product but for less money) or by adding more benefit to the regular purchase price (i.e., get more for the money). While tying a promotion to an immediate purchase is a major use of consumer sales promotion, it is not the only one. As we noted above, promotion techniques can be used to achieve other objectives such as building brand loyalty or creating product awareness. Consequently, a marketer’s promotional toolbox contains a large variety of consumer promotions. Next we discuss the following 11 types of consumer sales promotions: i. Coupons ii. Rebates iii. Promotional Pricing iv. Trade-In v. Loyalty Programs vi. Sampling and Free Trials vii. Free Product viii. Premiums ix. Contests and Sweepstakes x. Demonstrations xi. Personal Appearances

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i. Coupons: Most consumers are quite familiar with this form of sales promotion, which offers purchasers price savings or other incentives when the coupon is redeemed at the time of purchase. Coupons are short-term in nature since most (but not all) carry an expiration date after which the value may not be received. Also, coupons require consumer involvement in order for value to be realized. In most cases involvement consists of the consumer making an effort to obtain the coupon (e.g., clip from newspaper) and then presenting it at the time of purchase.

Coupons are used widely by marketers across many retail industries and reach consumers in a number of different delivery formats including: • Free-Standing Inserts (FSI) – Here coupon placement occurs loosely (i.e., inserted) within media, such as newspapers and direct mail, and may or may not require the customer to cut away from other material in order to use. • Cross-Product – These consist of coupons placed within or on other products. Often a marketer will use this method to promote one product by placing the coupon inside another major selling product. For example, a pharmaceutical company may imprint a coupon for a cough remedy on the box of a pain medication. Also, this delivery approach is used when two marketers have struck a cross promotion arrangement where each agrees to undertake certain marketing activity for the other. • Printout – A delivery method that is common in many food stores is to present coupons to a customer at the conclusion of the purchasing process. These coupons, which are often printed on the spot, are intended to be used for a future purchase and not for the current purchase which triggered the printing. • Product Display – Some coupons are nearly impossible for customers to miss as they are located in close proximity to the product. In some instances coupons may be contained within a coupon dispenser fastened to the shelf holding the product while in other cases coupons may be attached to a special display (see POP display below) where customers can remove them (e.g., tear off). • Internet – Several specialized websites, such as HotCoupons.com, and even some manufacturer’s sites, allow customers to print out coupons. These coupons are often the same ones appearing in other media, such as newspapers or direct mail. In other cases, coupons may be sent via email, though to be effective the customer’s email program must be able to receive HTML email (and not text only) in order to maintain required design elements (e.g., bar code). • Electronic – The Internet is also seeing the emergence of new non-printable coupons redeemable through website purchases. These electronic coupons are redeemed when the customer enters a designated coupon code during the purchase process.

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ii. Rebates: Rebates, like coupons, offer value to purchasers typically by lowering the customer’s final cost for acquiring the product. While rebates share some similarities with coupons, they differ in several keys aspects. First, rebates are generally handed or offered (e.g., accessible on the Internet) to customers after a purchase is made and cannot be used to obtain immediate savings in the way coupons are used. (So called “instant rebates”, where customers receive price reductions at the time of purchase, have elements of both coupons and rebates, but for our purposes we will classify these as coupons due to the timing of the reward to the customer.)

Second, rebates often request the purchaser to submit personal data in order to obtain the rebate. For instance, customer identification, including name, address and contact information, is generally required to obtain a rebate. Also, the marketer may ask those seeking a rebate to provide additional data such as indicating the reason for making the purchase.

Third, unlike coupons that always offer value when used in a purchase (assuming it is accepted by the retailer), receiving a rebate only guarantees value if the customer takes actions. Marketers know that not all customers will respond to a rebate. Some will misplace or forget to submit the rebate while others may submit after a required deadline. Marketers factor in the non-redemption rate as they attempt to calculate the cost of the rebate promotion.

Finally, rebates tend to be used as a value enhancement in higher priced products compared to coupons. For instance, rebates are a popular promotion for automobiles and computer software where large amounts of money may be returned to the customer. iii. Promotional Pricing: One of the most powerful sales promotion techniques is the short-term price reduction or, as known in some areas, “on sale” pricing. Lowering a product’s selling price can have an immediate impact on demand, though marketers must exercise caution since the frequent use of this technique can lead customers to anticipate the reduction and, consequently, withhold purchase until the price reduction occurs again. iv. Trade- In: Trade-in promotions allow consumers to obtain lower prices by exchanging something the customer possess, such as an older product that the new purchase will replace. While the idea of gaining price breaks for trading in another product is most frequently seen with automobile sales, such promotions are used in other industries, such as computers and golf equipment, where the customer’s exchanged product can be resold by the marketer in order to extract value v. Loyalty Programs: Promotions that offer customers a reward, such as price discounts and free products, for frequent purchasing or other activity are called loyalty programs. These promotions have been around for many years but grew rapidly in popularity when introduced in the airline industry as part of frequent-filer programs. Loyalty programs are also found in

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numerous other industries, including grocery, pizza purchasing and online book purchases, where they may also be known as club card programs since members often must use a verification card as evidence of enrollment in the program.

Many loyalty programs have become ingrained as part of the value offered by a marketer. That is, a retailer or marketing organization may offer loyalty programs as general business practice. Under this condition loyalty program does not qualify as a sales promotion since it does not fit the requirement of offering a short-term value (i.e., it is always offered). However, within a general business practice loyalty program a sales promotion can be offered, such as special short-term offer that lowers the number of points needed to acquire a free product. vi. Samples and Free Trials: Enticing members of a target market to try a product is often easy when the trial comes at little or no cost to the customer. The use of samples and free trials may be the oldest of all sales promotion techniques dating back to when society advanced from a culture of self-subsistence to a culture of trade.

Sampling and free trials give customers the opportunity to experience products, often in small quantities or for a short duration, without purchasing the product. Today, these methods are used in almost all industries and are especially useful for getting customers to try a product for the first time. vii. Free Product: Some promotional methods offer free products but with the condition that a purchase be made. The free product may be in the form of additional quantities of the same purchased product (e.g., buy one, get one free) or specialty packages (e.g., value pack) that offer more quantity for the same price as regular packaging. viii. Premiums: Another form of sales promotion involving free merchandise is premium or “give-away” items. Premiums differ from samples and free product in that these often do not consist of the actual product, though there is often some connection. For example, a cell phone manufacturer may offer access to free downloadable ring tones for those purchasing a cell phone. ix. Contests and Sweepstakes: Consumers are often attracted to promotions where the potential value obtained is very high. In these promotions only a few lucky consumers receive the value offered in the promotion. Two types of promotions that offer high value are contests and sweepstakes.

Contests are special promotions awarding value to winners based on skills they demonstrate compared to others. For instance, a baking company may offer free vacations to winners of a baking contest. Contest award winners are often determined by a panel of judges.

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Sweepstakes or drawings are not skill based but rather based on luck. Winners are determined by random selection. In some cases the chances of winning may be higher for those who make a purchase if entry into the sweepstake occurs automatically when a purchase is made. But in most cases, anyone is free to enter without the requirement to make a purchase.

A sub-set of both contests and sweepstakes are games, which come in a variety of formats such as scratch-off cards and collection of game pieces. Unlike contests and sweepstakes, which may not require purchase, to participate in a game customers may be required to make a purchase. In the United States and other countries, where eligibility is based on purchase, games may be subjected to rigid legal controls and may actually fall under that category of lotteries, which are tightly controlled. x. Demonstrations: Many products benefit from customers being shown how products are used through a demonstration. Whether the demonstration is experienced in-person or via video form, such as over the Internet, this promotional technique can produce highly effective results. Unfortunately, demonstrations are very expensive to produce. Costs involved in demonstrations include paying for the expense of the demonstrator, which can be high if the demonstrator is well-known (e.g., nationally known chef), and also paying for the space where the demonstration is given. xi. Personal Appearances: An in-person appearance by someone of interest to the target market, such as an author, sports figure or celebrity, is another form of sales promotion capable of generating customer traffic to a physical location. However, as with demonstrations, personal appearance promotion can be expensive since the marketer normally must pay a fee for the person to appear.

16.4.2 TRADE SALES PROMOTIONS

Certain promotions can help “push” a product through the channel by encouraging channel members to purchase and also promote the product to their customers. For instance, a trade promotion aimed at retailers may encourage retailers to instruct their employees to promote a marketer’s brand over competitors’ offerings. With thousands of products competing for limited shelf space, spending on trade promotion is nearly equal that spent on consumer promotions.

Many sales promotions aimed at building relationships with channel partners follow similar designs as those directed to consumers including promotional pricing, contests and free product. In addition to these, several other promotional approaches are specifically designed to appeal to trade partners. These approaches include: i. Point-of-Purchase Displays ii. Advertising Support Programs

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iii. Short Term Allowances iv. Sales Incentives or Push Money v. Promotional Products vi. Trade Shows Below is a discussion of each approach. i. Point-of-Purchase Displays: Point of purchase (POP) displays are specially designed materials intended for placement in retail stores. These displays allow products to be prominently presented, often in high traffic areas, and thereby increase the probability the product will standout. POP displays come in many styles, though the most popular are ones allowing a product to stand alone, such as in the middle of a store aisle or sit at the end of an aisle (i.e., end-cap) where it will be exposed to heavy customer traffic. For channel partners, POP displays can result in significant sales increases compared to sales levels in a normal shelf position. Also, many marketers will lower the per-unit cost of products in the POP display as an incentive for retailers to agree to include the display in their stores. ii. Advertising Support Programs In addition to offering promotional support in the form of physical displays, marketers can attract channel members’ interest by offering financial assistance in the form of advertising money. These funds are often directed to retailers who then include the company’s products in their advertising. In certain cases the marketer will offer to pay the entire cost of advertising, but more often, the marketer offers partial support known as co-op advertising funds. iii. Short Term Trade Allowances This promotion offers channel partners price breaks for agreeing to stock the product. In most cases the allowance is not only given as encouragement to purchase the product but also as an inducement to promote the product in other ways such as by offering attractive shelf space or store location, highlighting the product in company-produced advertising or website display, or by agreeing to have the retailer’s sales personnel “talk-up” the product to customers. Allowances can be in the form price reductions (eg. off-invoice promotion) and buy-back guarantees if the product does not sell in certain period of time. iv. Sales Incentives or Push Money Since sales promotions are intended to stimulate activity that leads to meeting promotional objectives, it makes sense that these can also apply to those in a channel member’s organization who also affect sales. Thus, a marketer may offer sales promotions to their reseller’s sales force and

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customer service staff where they are used as incentives to help sell more of the marketer’s product. Sometimes called push money, these promotions typically offer employees cash or prizes, such as trips, for those that meet sales requirements. v. Promotional Products Among the most widely used methods of sales promotions is the promotional product; products labeled with the brand or company name that serve as reminders of the actual product. For instance, companies often hand out free calendars, coffee cups and pens that contain the product logo. vi. Trade Shows One final type of trade promotion is the industry trade show (eg. exhibitions, conventions). Trade shows are organized events that bring both industry buyers and sellers together in one central location. Spending on trade shows is one of the highest of all sales promotions. In fact, the Promotion Marketing Association estimates that over (US) $20 billion is spent annually by marketers to participate in trade shows. Marketers are attracted to trade shows since these offer the opportunity to reach a large number of potential buyers in one convenient setting. At these events most sellers attempt to capture the attention of buyers by setting up a display area to present their product offerings and meet with potential customers. These displays can range from a single table covering a small area to erecting specially built display booths that dominate the trade show floor.

16.4.3 BUSINESS-TO-BUSINESS SALES PROMOTIONS

The use of sales promotion is not limited to consumer products marketing. In business-to-business markets sales promotions are also used as a means of moving customers to action. However, the promotional choices available to the B-to-B marketer are not as extensive as those found in the consumer or trade markets. For example, most B-to-B marketers do not use coupons as a vehicle for sales promotion with the exception of companies that sell to both consumer and business customers (e.g., products sold through office supply retailers). Rather, the techniques more likely to be utilized include: • price-reductions • free product • trade-in • promotional products • trade shows Of the promotions listed, trade shows are by far the mostly widely used sales promotion for B-to-B marketers.

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16.5 TRENDS IN SALES PROMOTION

Marketers who employ sales promotion as a key component in their promotional strategy should be aware of how the climate for these types of promotions is changing. The important trends in sales promotion include:

• Customers Expectations: The onslaught of sales promotion activity over the last several decades has eroded the value of the short-term requirement to act on sales promotions. Many customers are conditioned to expect a promotion at the time of purchase otherwise they may withhold or even alter their purchase if a promotion is not present. For instance, food shoppers are inundated on a weekly basis with such a wide variety of sales promotions that their loyalty to certain products has been replaced by their loyalty to current value items (i.e., products with a sales promotion). For marketers the challenge is to balance the advantages short-term promotions offer versus the potential to erode loyalty to the product.

• Electronic Delivery: Sales promotions are delivered to customers in many ways such as by mail, in-person or within print media. However, the Internet and mobile technologies, such as cell phones, present marketers with a number of new delivery options. For examples, the combination of mobile devices and geographic positioning technology will soon permit marketers to target promotions to a customer’s physical location. This will allow retailers and other businesses to issue sales promotions, such as electronic coupons, to a customer’s mobile device when they are near the location where the coupon can be used.

• Tracking: As we discussed in our coverage of advertising, tracking customer’s response to marketers’ promotional activity is critical for measuring success of an advertisement. In sales promotion, tracking is also used. For instance, grocery retailers, whose customers are in possession of loyalty cards, have the ability to match customer sales data to coupon use. This information can then be sold to coupon marketers who may use the information to get a better picture of the buying patterns of those responding to the coupon.

• Internet Communication: For many years consumers typically became aware of sales promotions in passive ways. That is, most customers obtained promotions not through an active search but by being a recipient of a marketer’s promotion activity (e.g., received coupons in the mail). The Internet is changing how customers obtain promotions. In addition to websites that offer access to coupons, there are a large number of community forum sites where members share details about how to obtain good deals which often include information on how or where to find a sales promotion. Monitoring these sites may offer marketers insight into how customers feel about certain promotions and may even suggest ideas for future sales promotions.

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• Clutter and Need for Creativity: In the same way an advertisement competes with other ads for customers’ attention, so to do sales promotions. This is particularly an issue with inserted coupon promotions that may be included in mailing or printed media along with numerous other offerings. The challenge facing marketers is to find creative ways to separate their promotions from those offered by their competitors.

16.6 LET US SUM UP

• Sales promotion describes promotional methods using special short-term techniques to persuade members of a target market to respond or undertake certain activity. • Sales promotion is a tool used to achieve most of the five major promotional objectives such as Building Product Awareness, Creating Interest, Providing Information, Stimulating demand and Reinforcing the Brand. • Sales promotion can be classified based on the primary target audience to whom the promotion is directed. These include Consumer Market Directed, Trade Market and Business-to-Business Market Directed. • Consumer sales promotions encompass a variety of short-term promotional techniques such as coupons, rebates, promotional pricing, trade-in etc designed to induce customers to respond in some way. • Trade promotions can help to “push” a product through the channel by encouraging channel members through different approaches such as Point- of-Purchase Displays, Advertising Support Programs, Short Term Allowances, Sales Incentives or Push Money, Promotional Products and Trade Shows. • In business-to-business markets sales promotions are also used as a means of moving customers to action.

16.7 CHECK YOUR PROGRESS

• What is sales promotion? What is its importance in marketing industrial products? (Refer 16.2 and 16.3) • What measures would you suggest for sales promotion of a consumer product? (Refer 16.4.1) • Discuss the objective of sales promotion. (Refer 16.3) • Explain the various sales promotion methods undertaken at dealer’s level. (Refer 16.4.2) • What are the recent trends introduced in sales promotion? (Refer 16.5)

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LESSON-17 PERSONAL SELLING

Contents: 17.0 Aims and Objectives 17.1 Introduction 17.2 Meaning of personal selling 17.3 Advantages of Personal Selling 17.4 Disadvantages of Personal Selling 17.5 Objectives/ Importance of Personal Selling 17.6 Classifying Selling Roles 17.6.1 Order Getters 17.6.2 Order Takers 17.6.3 Order Influencers 17.6.4 Sales Support 17.7 Activities in the Selling Process 17.7.1 Generating Sales Leads 17.7.2 Qualifying Leads 17.7.3 Preparation for the Sales Call 17.7.4 The Sales Meeting 17.7.5 Handling Buyer Resistance 17.7.6 Closing the Sale 17.7.7 Account Maintenance 17.8 Let us sum up 17.9 Check your progress

17.0 AIMS AND OBJECTIVES

In the past few study materials we saw how marketers can use sales promotion to reach a large number of customers. While these methods of promotion offer many advantages, they each share one major disadvantage: they are a non- personal form of communication. And whether a company is in retailing or manufacturing, sells goods or services, is a large multi-national or a local startup, is out to make a profit or is a non-profit, in all probability at some point they will need to rely on personal contact with customers. In other words, they

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will need to promote using personal selling. This will help you to answer the following questions i. What is the main objective of personal selling? ii. What are the different roles played by salesman? iii. What are the different activities undertaken in selling process?

17.1 INTRODUCTION

Personal selling is considered to be the most powerful element in promotional mix. Unfortunately, personal selling is widely misunderstood. For instance, many customers think salespeople possess traits that include being manipulative, arrogant, aggressive and greedy. While many marketers believe salespeople are only out to make a quick sale intended to increase their income and that they often do this by making unscrupulous deals undermining the marketer’s attempt to build strong brands.

While there certainly are some salespeople that fit these descriptions, today the most successful salespeople are those who work hard to understand their customers’ needs with the ultimate goal of ensuring that customer’s needs are satisfied at a high level. And, more importantly, personal selling holds a key role in the promotional activities of a large number of organizations. In fact, in the business market where one company sells products to another company, money spent to support the selling function far exceeds spending on advertising.

17.2 MEANING OF PERSONAL SELLING

Personal selling is a promotional method in which one party (e.g., salesperson) uses skills and techniques for building personal relationships with another party (e.g., those involved in a purchase decision) that results in both parties obtaining value. In most cases the “value” for the salesperson is realized through the financial rewards of the sale while the customer’s “value” is realized from the benefits obtained by consuming the product. However, getting a customer to purchase a product is not always the objective of personal selling. For instance, selling may be used for the purpose of simply delivering information.

Because selling involves personal contact, this promotional method often occurs through face-to-face meetings or via a telephone conversation, though newer technologies allow contact to take place over the Internet including using video conferencing or text messaging (e.g., online chat).

17.3 ADVANTAGES OF PERSONAL SELLING

One key advantage personal selling has over other promotional methods is that it is a two-way form of communication. In selling situations the message sender (e.g., salesperson) can adjust the message as they gain feedback from message

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receivers (e.g., customer). So if a customer does not understand the initial message (e.g., doesn’t fully understand how the product works) the salesperson can make adjustments to address questions or concerns. Many non-personal forms of promotion, such as a radio advertisement, are inflexible, at least in the short-term, and cannot be easily adjusted to address audience questions.

The interactive nature of personal selling also makes it the most effective promotional method for building relationships with customers, particularly in the business-to-business market. This is especially important for companies that either sell expensive products or sell lower cost but high volume products (i.e., buyer must purchase in large quantities) that rely heavily on customers making repeat purchases. Because such purchases may take a considerable amount of time to complete and may involve the input of many people at the purchasing company (i.e., buying center), sales success often requires the marketer develop and maintain strong relationships with members of the purchasing company.

Finally, personal selling is the most practical promotional option for reaching customers who are not easily reached through other methods. The best example is in selling to the business market where, compared to the consumer market, advertising, public relations and sales promotions are often not well received.

17.4 DISADVANTAGES OF PERSONAL SELLING

Possibly the biggest disadvantage of selling is the degree to which this promotional method is misunderstood. Most people have had some bad experiences with salespeople who they perceived were overly aggressive or even downright annoying. While there are certainly many salespeople who fall into this category, the truth is salespeople are most successful when they focus their efforts on satisfying customers over the long term and not focusing own their own selfish interests.

A second disadvantage of personal selling is the high cost in maintaining this type of promotional effort. Costs incurred in personal selling include:

• High cost-per-action (CPA) –CPA can be an important measure of the success of promotion spending. Since personal selling involves person-to- person contact, the money spent to support a sales staff (i.e., sales force) can be steep. For instance, in some industries it costs well over (US) $300 each time a salesperson contacts a potential customer. This cost is incurred whether a sale is made or not! These costs include compensation (e.g., salary, commission, bonus), providing sales support materials, allowances for entertainment spending, office supplies, telecommunication and much more. With such high cost for maintaining a sales force, selling is often not a practical option for selling products that do not generate a large amount of revenue.

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• Training Costs – Most forms of personal selling require the sales staff be extensively trained on product knowledge, industry information and selling skills. For companies that require their salespeople attend formal training programs, the cost of training can be quite high and include such expenses as travel, hotel, meals, and training equipment while also paying the trainees’ salaries while they attend.

A third disadvantage is that personal selling is not for everyone. Job turnover in sales is often much higher than other marketing positions. For companies that assign salespeople to handle certain customer groups (e.g., geographic territory), turnover may leave a company without representation in a customer group for an extended period of time while the company recruits and trains a replacement.

17.5 OBJECTIVES/ IMPORTANCE OF PERSONAL SELLING

Personal selling is used to meet the five objectives of promotion in the following ways: • Building Product Awareness – A common task of salespeople, especially when selling in business markets, is to educate customers on new product offerings. In fact, salespeople serve a major role at industry trades shows where they discuss products with show attendees. But building awareness using personal selling is also important in consumer markets. As we will discuss, the advent of controlled word-of-mouth marketing is leading to personal selling becoming a useful mechanism for introducing consumers to new products. • Creating Interest – The fact that personal selling involves person-to-person communication makes it a natural method for getting customers to experience a product for the first time. In fact, creating interest goes hand- in-hand with building product awareness as sales professionals can often accomplish both objectives during the first encounter with a potential customer. • Providing Information – When salespeople engage customers a large part of the conversation focuses on product information. Marketing organizations provide their sales staff with large amounts of sales support including brochures, research reports, computer programs and many other forms of informational material. • Stimulating Demand – By far, the most important objective of personal selling is to convince customers to make a purchase. In the next part we will see how salespeople accomplish this when we offer detailed coverage of the selling process used to gain customer orders. • Reinforcing the Brand – Most personal selling is intended to build long- term relationships with customers. A strong relationship can only be built over time and requires regular communication with a customer. Meeting with customers on a regular basis allows salespeople to repeatedly discuss their company’s products and by doing so helps strengthen customers’ knowledge of what the company has to offer.

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17.6 CLASSIFYING SELLING ROLES

As we noted above, worldwide millions of people have careers that fit in the personal selling category. However, the actual functions carried out by someone in sales may be quite different. Below we discuss the four major types of selling roles: order getters, order takers, order influencers, and sales support. It should be noted that these roles are not mutually exclusive and that a salesperson can perform more than one and possibly all activities.

17.6.1 ORDER GETTERS

The role most synonymous with selling is a position in which the salesperson is actively engaged in using their skills to obtain orders from customers. Such roles can be further divided into: (a) New Business Development– A highly challenging yet potentially lucrative sales position is one where the main objective is to find new customers. Sales jobs in this category are often in fields that are very competitive, but offer high rewards for those that are successful. The key distinguishing factor of these positions is that once a sale is made new business salespeople pass customers on to others in their organization who handle account maintenance. These positions include: • Business Equipment Sales - These salespeople are often found in industries where a company’s main profits come from the sale of supplies and services that come after an initial equipment purchase. The key objective of business equipment salespeople is to get buyers to purchase the main piece of equipment for which supplies and service are needed in order for the equipment to function. • Telemarketing – This category includes product sales over the phone, whether aimed at business or consumer. While in the US laws restrict unsolicited phone selling, the practice is still widely used in the business market. • Consumer Selling – Certain companies are very aggressive in their use of salespeople to build new consumer business. These include: retailers selling certain high priced consumer products including furniture, electronics and clothing; housing products including real estate, security services, building replacement products (e.g., windows); and in-home product sellers including those selling door-to-door and products sold at “home party” events such as cosmetics, kitchenware and decorative products. (b) Account Management – Most people engaged in sales are not only involved in gaining the initial order, but work to build and maintain relationships with clients that are intended to last a long time. Salespeople involved in account management are found across a broad range of industries. Their responsibilities involve all aspects of building customer relationships from initial sale to follow-up account servicing. These include:

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• Business-to-Business Selling – These salespeople sell products for business use with an emphasis on follow-up sales. In many cases, business-to- business salespeople have many different items available for sale (i.e., broad and/or deep product line) rather than a single product. So while the initial sale may only result in the buyer purchasing a few products, the potential exists for the buyer to purchase many other products as the buyer-seller relationship grows.

• Trade Selling – Sales professionals working for consumer products companies normally do not sell to the final user (i.e., consumer). Instead their role is focused on first getting distributors, such wholesalers and retailers, to handle their products and once this is accomplished, helping distributors sell their product by offering ideas for product advertising, in- store display and sales promotions.

17.6.2 ORDER TAKERS

Selling does not always require a salesperson use methods designed to encourage customers to make a purchase. In fact, the greatest number of people engaged in selling are not order getters, rather they are considered order takers. In this role, salespeople primarily assist customers with a purchase in ways that are much less assertive than order getters. As might be expected, compensation for order takers is generally lower than that of order getters. Among those serving an order taker role are:

• Retail Clerks – While some retail salespeople are involved in new business selling, the vast majority of retail employees handle order taking tasks, which range from directing customers to products to handling customer checkout.

• Industrial Distributor Clerks – Industrial purchase situations, such as distributors of building products, will also have clerks to handle customer purchases.

• Customer Service – Order taking is also handled in non face-to-face ways through customer service personnel. Usually this occurs via phone conversations, though newer technologies are allowing for these tasks to be handled through electronic means such as online chat.

17.6.3 ORDER INFLUENCERS

Some salespeople are not engaged in direct selling activities at all. That is, they do not sell directly to the person who is the ultimate purchaser for their product. Instead these salespeople concentrate on selling activity that targets those who influence purchases made by the final customer. The primary example of an order influencer is the missionary salesperson: These salespeople are used in industries where customers make purchases based on the advice or requirements of others. Two industries in which missionary selling is commonly

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found are pharmaceuticals, where salespeople, known as product detailers, discuss products with doctors (influencers) who then write prescriptions for their patients (final customer) and higher education, where salespeople call on college professors (influencers) who make requirements to students (final customer) for specific textbooks.

17.6. 4 SALES SUPPORT

A final group involved in selling mostly assist with the selling activities of other sales professionals. These include:

• Technical Specialists - When dealing with the sale of technical products, particularly in business markets, salespeople may need to draw on the expertise of others to assist with the process. This is particularly the case when the buying party consists of a buying center. We indicated that in business selling many people from different functional areas may be involved in the purchase decision. If this buying center includes technical people, such as scientists and engineers, a salesperson may seek assistance from members of their own technical staff, who can help address specific questions.

• Office Support – Salespeople also may receive assistance from their company’s office staff in the form of creating promotional materials, setting up sales appointments, finding sales leads, arranging meeting space or organizing trade shows exhibits.

17.7 ACTIVITIES IN THE SELLING PROCESS

The selling process is a set of activities undertaken to successfully obtain an order and begin building long-term customer relations. While the activities we discuss apply to all forms of selling and can be adapted to most selling situations (including non-product selling such as selling an idea), we will mainly concentrate on the activities carried out by professional salespeople. For our purposes, we define professional salespeople as those whose principle occupation involves selling products (i.e., goods and services) to buyers and do so for organizations that appreciate and support sellers who are well-trained and ethically responsible. The selling activities undertaken by professional salespeople include: 1. Generating Sales Leads 2. Qualifying Leads 3. Preparation for the Sales Call 4. The Sales Meeting 5. Handling Buyer Resistance 6. Closing the Sale 7. Account Maintenance

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It should be noted that while we present these activities in an order that is suggestive of a step-by-step approach (i.e., one activity must be carried out before the next), in many selling situations this will not be the case.

17.7.1 GENERATING SALES LEADS

Selling begins by locating potential customers. A potential customer or “prospect” is first identified as sales lead, which simply means the salesperson has obtained information to suggest that someone exhibits key characteristics that lend them to being a prospect. For salespeople actively involved in generating leads, they are continually on the look out for potential new business. In fact, for salespeople whose chief role is that of order getter, there is virtually no chance of being successful unless they can consistently generate sales leads. Sales leads can come from many sources including:

• Prospect Initiated – Includes leads obtained when prospects initiate contact such as when they fill out a website form, enter a trade show booth or respond to an advertisement.

• Profile Fitting – Uses market research tools, such as company profiles, to locate leads based on customers that fit a particular profile likely to be a match for the company’s products. The profile is often based on the profile of previous customers.

• Market Monitoring – Through this approach leads are obtained by monitoring media outlets, such as news articles, Internet forums and corporate press releases.

• Canvassing – Here leads are gathered by cold-calling (i.e., contacting someone without pre-notification) including in-person, by telephone or by email.

• Data Mining – This technique uses sophisticated software to evaluate information (e.g., in a corporate database) previously gathered by a company in hopes of locating prospects.

• Personal and Professional Contacts – A very common method for locating sales leads uses referrals. Such referrals may come at no cost to the salesperson or, to encourage referrals, salespeople may offer payment for referrals. Non-paying methods including asking acquaintances (e.g., friends, business associates) and networking (e.g., joining local or professional groups and associations). Paid methods may include payment to others who direct leads that eventually turn into customers including using Internet affiliate programs (i.e., paid for website referrals).

• Promotions – The method uses free gifts to encourage prospect to provide contact information or attend a sales meeting. For example, offering free software for signing up for a demonstration of another product.

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17.7.2 QUALIFYING SALES LEADS

Not all sales leads hold the potential for becoming sales prospects. There are many reasons for this including: • Cannot be Contacted – Some prospects may fit the criteria for being a prospect but gaining time to meet with them may be very difficult (e.g., high-level executives). • Need Already Satisfied - Prospects may have already purchased a similar product offered by a competitor and, thus, may not have the need for additional products. • Lack Financial Capacity - Just because someone has a need for a product does not mean they can afford it. Lack of financial capacity is major reason why sales leads do not become prospects. • May Not Be Key Decision Maker - Prospects may lack the authority to approve the purchase. • May Not Meet Requirements to Purchase - Prospects may not meet the requirements for purchasing the product (e.g., lack other products needed for seller’s product to work properly).

The process of determining whether a sales lead has the potential to become a prospect is known as “qualifying” the lead. In some cases, a sales lead can be qualified by the seller prior to making first contact. For instance, this can be done through the use of research reports, such as an evaluation of a company’s financial position using publicly available financial reporting services. More likely, sellers will not be in a position to qualify leads until they establish contact with a lead, which may occur in activities associated with either Preparation for the Sales Call or The Sales Meeting.

17.7.3 PREPARATION FOR THE SALES CALL

If a prospect has been qualified or if qualifying cannot take place until additional information is obtained (e.g., when first talking to the prospect), a salesperson’s next task is to prepare for an eventual sales call. This activity in the selling process has two main objectives:

• Learn More About the Customer: While during the lead generation and qualifying portion of the selling process a seller may have gained a great deal of knowledge about a customer, invariably there is much more to be known that will be helpful once an actual sales call is made. Salespeople can attempt to gather this information through several sources including: corporate research reports, information on the prospect’s website, conversations with non-competitive salespeople who have dealt with the prospect, website forums where industry information is discussed, and by asking questions when setting up sales meetings.

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• Arranging Prospect Contact: With some information about the prospect in- hand, the salesperson must then move to make initial contact. In a few cases a salesperson may be fortunate to have the prospect contact her/him but in most cases salespeople will need to initiate contact. In many ways arranging for contact is as much as selling effort as selling a product. There are two main approaches to arranging contact, Cold Calling for Presentation and Cold Calling for Appointment.

17.7.4 THE SALES MEETING

The heart of the selling process is the meeting that takes place between the prospect and the salesperson. At this stage of the selling process the salesperson will spend a considerable amount of time presenting the product. While the word “presenting” may imply the seller is taking center stage and does most of the talking by discussing the product’s features and benefits, in actuality successful sellers find effective presentations to be more of a give-and- take conversation.

Additionally, the meeting is not just about the seller discussing the product, rather much more takes place during this part of the selling process including:

• Establishing Rapport with the Prospect – Successful salespeople know that jumping right into a discussion of their product is not the best why to build relationships. Often it is important that, upon first greeting the prospect, the salesperson spend a short period of time in a friendly conversation to help establish a rapport with the potential buyer.

• Gaining Background Information – The salesperson will use questioning skills to learn about the prospect and the prospect’s company and industry.

• Access Prospect’s Needs - Taking what is learned from the prospect’s response to questions, the salesperson can determine the prospect’s needs. To accomplish this task successfully, sellers must be skilled at listening and understanding responses.

• Presenting the Product – The salesperson will stimulate a prospect’s interest by discussing a product’s features and benefits in a way that is tailored to the needs of the customer. Part of this discussion may include a demonstration of the product.

• Assess the Prospect - Throughout the presentation the seller will use techniques, including interpreting non-verbal cues (e.g., body language), to gauge the prospect understands and acceptance of what is discussed.

17.7.5 HANDLING BUYER RESISTANCE

It is a rare instance when a salesperson does not receive resistance from a prospect. By resistance we are referring to a concern a prospect has regarding

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the product (or company) and how it will work for their situation. While handling sales resistance may sound like a difficult part of selling, most successful salespeople actually welcome and even encourage it as part of the selling process. Why? Because it is an indication the prospect is paying attention to the presentation and may even have an interest in the product if the resistance can be effectively addressed.

To overcome resistance, salespeople are trained to make sure they clearly understand the prospect’s concern. Sometimes prospects say one thing that appears to be an objection to the product but, in fact, they have another issue that is preventing them from agreeing to a purchase. Salespeople are rarely able to make the sale unless resistance is overcome.

17.7.6 CLOSING THE SALE

Most people involved in selling acknowledge that this part of the selling process is the most difficult. Closing the sale is the point when the seller asks the prospect to agree to make the purchase. It is also the point at which many customers are unwilling to make a commitment and, consequently, respond to the seller’s request by saying no. For anyone involved in sales such rejection can be very difficult to overcome, especially if it occurs on a consistent basis.

Yet the most successful salespeople will say that closing the sale is actually fairly easy if the salesperson has worked hard in developing a relationship with the customer. Unfortunately some buyers, no matter how satisfied they are with the seller and their product, may be insecure or lack confidence in making buying decisions. For these buyers, salespeople must rely on persuasive communication skills that help assist and even persuade a buyer to place an order.

The use of persuasive communication techniques is by far the most controversial and most misunderstood concept related to the selling process. Why? Because to many people the act of persuasion is viewed as an attempt to manipulate someone into doing something they really do not want to do. However, for sales professionals this is not what persuasive communication is about. Instead, persuasion is a skill for assisting someone in making a decision; it is not a technique for making someone make a decision. The difference is important. Where one is manipulative, the other is helpful and designed to benefit the buyer. And as we noted, persuasion does not always occur. Many times buyers take the lead in closing a sale since they are convinced the product is right for them.

17.7.7 ACCOUNT MAINTENANCE

While account maintenance is listed as the final activity in the selling process, it really amounts to the beginning of the next sale and, thus, the beginning of a buyer-seller relationship. In selling situations where repeat purchasing is a goal

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(compared to a one-time sale), following up with a customer is critical to establishing a long-term relationship.

After a sale, salespeople should work hard to insure the customer is satisfied with the purchase and determine what other ways the salesperson can help the customer be even more satisfied with the purchase. The level and nature of after-sale follow-up will often depend on the product sold. Expensive, complex purchases that require installation and training may result in the salesperson spending considerable time with the customer after the sale while smaller purchases may have the seller follow-up with simple email correspondence.

By maintaining contact after the sale the seller is in a position to become more accepted by the customer which invariably leads to the salesperson learning more about the customer and the customer’s business. With this knowledge the salesperson will almost always be presented with more selling opportunities.

17.8 LET US SUM UP

• Personal selling is a promotional method in which one party (e.g., salesperson) uses skills and techniques for building personal relationships with another party (e.g., those involved in a purchase decision) that results in both parties obtaining value.

• Personal selling is used to meet the five objectives of promotion in the following ways to Build Product Awareness, Create Interest, Provide Information, Stimulate Demand and Reinforce the Brand.

• The actual functions carried out by someone in sales may be quite different and the four major types of selling roles are order getters, order takers, order influencers, and sales support.

• The selling activities undertaken by professional salespeople include: Generating Sales Leads, Qualifying Leads, Preparation for the Sales Call, The Sales Meeting, Handling Buyer Resistance, Closing the Sale and Account Maintenance.

17.9 CHECK YOUR PROGRESS

• What is personal selling and discuss the importance of personal selling.(Refer 17.2 and 17.5) • What are the advantages of personal selling? Are there any limitations? (Refer 17.3 and 17.4) • Classify the selling roles of a salesperson (Refer 17.6 to 17.6.4) • Explain the selling activities undertaken to successfully obtain an order and begin building long-term customer relations. (Refer 17.7 to 17.7.7)

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LESSON-18 ADVERTISING

Contents: 18.0 Aims and Objectives 18.1 Introduction 18.2 Meaning of Advertising 18.3 Definition of Advertising 18.4 Advertising Objectives 18.5 Functions of Advertising 18.5.1 Increasing the Number of Customers 18.5.2 Increasing the Consumption Rate among the Present Customers 18.6 Importance of Advertising 18.6.1 Benefits to Manufacturers 18.6.2 Benefits to Retailers. 18.6.3 Benefits to Customers 18.7 Let us sum up 18.8 Check your progress

18.0 AIMS AND OBJECTIVES

Generally, marketing communication is undertaken to pass on the message of the product or sale to the ultimate consumers. Therefore advertising is considered to be the best source of communication. Here, in this lesson we are going to discuss the essence of marketing in the modern marketing concept by answering the following questions

i. What is the objective of marketing? ii. What are the basic functions of advertising? iii. How the manufacturers, retailers and customers are benefited through advertising?

18.1 INTRODUCTION

The present era is of mass production and mass distribution. Similar products are taken to the market. This involves stiff competition among the producers. Many firms adopt the vigorous means to maintain their existence in the market, as there are many substitutes in the market. This tendency is a struggle for the

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producers for their survival in the modern business world. All businessmen aim to make profit by increasing the sales at a remunerative price policy. When we manufacture good quality products or offer expert services, these must be known to the public. For this mass communication is needed as the population is great or the market area is wide. We can adopt sale promotion and advertising as tools to mobilize the marketing machinery. In the present business world, suitable publicity is done through advertising, which is adopted by commercial and industrial undertakings and almost all types of concerns. Therefore advertisement is a method of publicity.

18.2 MEANING OF ADVERTISING

Advertising is a non-personal form of promotion that is delivered through selected media outlets that, under most circumstances, require the marketer to pay for message placement. Advertising has long been viewed as a method of mass promotion in that a single message can reach a large number of people. But, this mass promotion approach presents problems since many exposed to an advertising message may not be within the marketer’s target market, and thus, may be an inefficient use of promotional funds. However, this is changing as new advertising technologies and the emergence of new media outlets offer more options for targeted advertising.

Advertising also has a history of being considered a one-way form of marketing communication where the message receiver (i.e., target market) is not in position to immediately respond to the message (e.g., seek more information). This too is changing. For example, in the next few years technologies will be readily available to enable a television viewer to click a button to request more details on a product seen on their favorite TV program. In fact, it is expected that over the next 10-20 years advertising will move away from a one-way communication model and become one that is highly interactive.

Another characteristic that may change as advertising evolves is the view that advertising does not stimulate immediate demand for the product advertised. That is, customers cannot quickly purchase a product they see advertised. But as more media outlets allow customers to interact with the messages being delivered the ability of advertising to quickly stimulate demand will improve.

18.3 DEFINITION OF ADVERTISING

Littlefield defines it as “Advertising is mass communication of information intended to persuade buyers as to maximize profits.”

Hall defines it as “Salesmanship in writing, print or pictures or spreading information by means of the written and printed word and the pictures.”

Stanton says, “Advertising consists of all the activities in presenting to a group a non personal, oral or visual, openly sponsored message regarding a product, service or idea.”

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American Marketing Association defines “advertising as any paid form of non- personal presentation and promotion of ideas, goods, or services by an identified sponsor.”

From the above definitions, it is stated that advertising indicates that

• Advertisement is a message to large groups.

• It is in the form of non-personal communication.

• It persuades the general public to purchase the goods or services, advertised.

• It is paid for by advertiser to publisher.

• Advertising messages are identified with the advertiser.

18.4 ADVERTISING OBJECTIVES

An objective is defined as "something toward which effort is directed: an aim, a goal." Every organization should have objectives to provide a framework for action. In advertising, the well-developed campaign has aims and goals. Good objectives provide the advertiser with guidance and direction for the development of the campaign. How? They provide the framework for decision making. they also provide the advertiser with an aim or goal that can be used to evaluate the actual advertising results.

Advertising objectives are generally placed in two categories: Direct-action (sales) objectives and Indirect-action (communication) objectives Direct-action objectives are more easily measured in terms of results- sales go up, sales leads increase and/or more people try the product for the first time. These happenings may all be the result of advertising - advertising that was developed as a result of direct-action objectives.

Advertisements with these objectives or goals are more concerned with communicating an idea that should result in increased sales in the long run. No immediate effect can be attributed to such ads in most situations. In other words, the evaluation process for ads with indirect-action (communication) objectives is much more subjective than is the case for the sales or action- oriented advertising effort.

Depending on the planned marketing strategy for the company, various objectives will be decided on - objectives that may be direct action, indirect action, or some mixture of the two as determined by the needs of the organization. Eleven popular advertising objectives that may be used either individually or in combination are:

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1. Induce Trial. When a product comes on the market, the advertising goal may be to get people to try it. Every ad will be developed with this idea in mind. Benefits will be much in evidence in the copy. Coupons may be used. Free offers are also quite popular. If a person tries the product just once, the objective has been met.

2. Intensify Usage. When people think of cheese, they may, for example think of Amul. However, Amul does not need to get people to try its products (Induce trial). What is needed is an increase in per capita consumption of the product. Ads, therefore, may feature recipes or have other suggestions on how to use the product. If people already know of a product and can be shown how to use more of it through advertising, they become better customers. This objective is based on the premise that there is no better prospect than a current customer.

3. Sustain Preference. Coca-Cola has advertised heavily in good times and bad times in order to maintain product awareness as well as preference.

4. Confirm Imagery. The illustration, the copy, and where the ad is placed all serve to confirm what the customer already thinks about the product. If an ad for Rolls Royce is run in unpopular media, the ad would serve to confuse the image of the product and should be avoided since it would cause cognitive dissonance on the part of the consumer.

5. Change Habits. Advertising can sell people on new ideas. Maruti 800 sold the concept of the small car. MasterCard and Visa sold the idea of one-card credit. Such examples illustrate that advertising has been used to change popular thinking.

6. Building Line Acceptance. Hindustan Lever Limited, Amul are among the many companies that advertise numerous products while working to build a total product line. Advertisement for Hindustan Lever Limited features everything from skin care to personal care. Johnson and Johnson uses common product-line promotions with supporting point-of-purchase displays and other media to sell its line. In every instance, the objective is to build sales for the total line as opposed to sales for a specific item alone.

7. Break The Ice. The Avon ad helps its representatives to sell, since the customer has heard of Avon. As an unsought good, insurance cannot generally be sold by advertising. But advertising can make people aware of an insurance company so that they have heard of it when the salesperson calls on them. In many business situations, advertising is crucial as an icebreaker. If buyers have not heard of the company, they may automatically be disinterested. Advertising may wave the product name just enough to provide brand recognition and, thereby, get the salesperson in to see the buyer.

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8. Build Ambience. Advertising can help to create a positive feeling about a business. MacDonalds campaign with its Ronald McDonalds and friends as well as its young, attractive employees who look so ready to serve the customer help to create a positive feeling about the company. Ambiance, or environment in an ad, is crucial to any firm in the business of selling a service. Advertising can work to build good ambiance, but such an effort can have long-term success only if there actually is a positive environment within the firm.

9. Generate Sales Leads. The objectives of these ads may be centered around obtaining the names of prospective customers by offering free gifts, return coupon, etc.

10. Increase Awareness. "Drugs can harm your baby before it is born." Such a campaign has as its objective to build awareness of the problems addressed in the ads. Of course every ad, regardless of the stated objective, should promote awareness in some form. Without awareness, the result could be no sales.

11. Increase Sales. For most organizations, an advertising objective that calls for an increase in sales is most desirable.

A general objective, like increase sales, provides no guidance or direction. It is an aim or goal that was known before it was stated. At best, an increase in sales is a long-run objective. To make it more short term and useful, the advertiser should narrow the objective's scope in terms of coverage while attempting to quantify it in some way.

18.5 FUNCTIONS OF ADVERTISING

The main objective of advertising is to stimulate or increase sales to all customers- present, former and future. Advertising increases the present sales and potential demand of the product. The above objectives are realized by the functions of advertising. Following are the functions of advertising.

18.5.1 INCREASING THE NUMBER OF CUSTOMERS

(a) By increasing the customers and widening the market: Advertising through communication media informs consumers about the presence of a product in the market. The effective advertisement works in two ways. First it stimulates demand and then it strengthens the stimulated demand. The benefits and various uses of the products must be made known to the public area where the marketer wants to enter for marketing. To achieve the objectives, advertising is the only way. It serves to widen the market through increasing the buyers.

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(b) By developing a Brand loyalty: All traders or manufacturers aim to attract the prospects in favour of their products and services. Development of loyalty to one’s brand among the customers is important. For instance, if one is using a particular brand of soap, then advertising must aim at making him to use only this soap. Advertising and its impact make him a continuous and ever user and do not want him to leave it for another brand.

(c) Offset the competing brands: Many similar products are flowing towards the market and consumers are tempted to buy them through various promotional measures. Further, advertising facilitates the creation, direction and extension of demand for the particular products or service. A good advertising policy is always linked with the ultimate behaviour of customers. For instance, when one buys a bathing soap today, one may go in for a particular brand the next time. By focusing the qualities and merits of the product in a better way than other similar products, the competitors can be defeated by capturing their share of the market.

18.5.2 INCREASING THE CONSUMPTION RATE AMONG THE PRESENT CUSTOMERS

(a) Increasing usage of the products: When a product is introduced in the market, it is meant for a specific use. But when the product is put into use consumers may come to know to its new uses. This is possible through research. Advertising will explain the multiple uses to the masses.

(b) Reminding the consumers: The demand may be seasonal-cool drinks, woolen dresses, air-coolers etc. They are saleable during the season period, but during off season period, no sales may be possible. Again at the arrival of the season, customers may not remember the brand used by them, before making purchase. In these circumstances, advertising reminds the customers about the forgotten products.

(c) Educating the public: Advertisement being a connecting link between the producer and the consumers also plays its role by imparting knowledge. Consumers may not know the good or bad reactions of a certain product or services. For instance, when we purchase cloth, we are warned through advertisement, to go in for stanforized cloth. Stanforized cloth will not shrink. Those who do not know this, buy bad material and when stitched the dress becomes tight. Another example is baby milk food. The producer gives full instructions even on the package about the measurement of milk powder according to the age of babies. Take the example of new model scooter or car. The company appoints its own mechanics to see to the repairs and this will be published in newspapers. In case you approach any other mechanic to repair your new model vehicle the inexperienced mechanic may spoil it. Other similar instances are shampoo, hair dye, soap, powder, hair oil, medicine etc. The understanding of the product, its uses, advantages etc can be well-educated through advertising.

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(d) Shaping goodwill: Almost every firm wants to establish a good name in the society. Like a human being, a firm doing good services to the society or offering products- different from others, better and cheaper than other products etc., earns good name. Such a firm may ever be remembered by the consumers. The consumers may prefer a product, because of low price, fashion, service after sales, multiple uses, quality merchandise and wider publicity. All these merits are known to the consumers through advertising, and sales are boosted automatically. Thus a firm can build goodwill for its products.

Advertising plays a vital role in creating a background or an interest in the public and the salesman easily convert the public into consumers. It can tell mass-thousands of people- about the product in the shortest span of time at the least cost. Publicity facilitates large scale production, followed by mass consumption, creating employment opportunities, apart from profits.

18.6 IMPORTANCE OF ADVERTISING

The standard of living of the public is raised by introducing modern products and the techniques through advertising. Mass production followed by large-scale consumption facilitates to earn more profits. Large-scale production decreases unit cost. The selling price is also reduced, but not to the extent of decreased cost of production. It means, the price of the product is decreased, thereby consumers are satisfied and dividend rate is increased, thereby shareholders are satisfied. All these happen because of advertising. Items like pens, radios, scooters, watches, refrigerators, television sets, cameras, foot wares and many other modern amenities are examples.

Advertisement creates demand for the goods and makes it possible for the introduction of mass production. It is not only beneficial to manufacturer but also to retailer and consumers.

18.6.1 BENEFITS TO MANUFACTURERS

• Advertisement increases demand of the product hence manufacturer can go for latest state of art machinery. This results in improved quality of product and reduction in cost of production.

• Mass production needs mass selling efforts, which are possible or because of advertisement.

• Through advertising the manufacturer can create the demand for his product and maintain it throughout the year and thereby reduces seasonal slumps in the business.

• Advertising also protects manufacturers against unfair competition because customers learn to recognize the brand with the name of manufacturer.

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• Advertising also creates pressure on the retailer to stock goods which have demand.

• Advertising tends to stabilize the selling price and this can create confidence in the public.

• Pushing the goods through salesmen is a slow process and expensive too. Advertising is comparatively less expensive marketing tool.

• In case of change in products or product features or new outlets, revised price, etc., advertising helps in giving necessary information very quickly to customers.

18.6.2 BENEFITS TO RETAILERS.

• It quickens the return on investment, reduces risk on dead stock and thus can result in proportionate reduction of overhead expenses.

• Retailer is afraid of fluctuations in prices. Advertising normally aims stabilization of price.

• Looking at current demand to the product, retailer can easily estimate the sales accordingly plan the stock.

• It helps the customer to know existence of retailers in their areas and the type of products available with them.

• Wholesaler or retailer may have his own sales people. The advertising helps these salesmen to sell the product, the awareness about which is already created by advertisement.

18.6.3 BENEFITS TO CUSTOMERS

• The manufacturer is compelled to maintain the quality of the goods advertised. The money spent on advertisement should be taken by him as long-term investment but he is bound to maintain the quality to ensure this return in the future.

• Advertised goods are generally bear certain quality and thus consumers get the quality matching to the price.

• Advertising also acts as information and educates the consumers.

• Advertising stimulates demand thereby increases production and hence reduces the cost per unit. This benefit goes to the consumer.

• Advertising also makes it possible to sell direct to the consumers by mail order like say Asian Sky Shop.

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• As manufacturers control the price of goods and services, the price cutting is not available to more retailers. The only way retailer can get more business is to attract customers by providing satisfactory service or place additional benefits like installment, credit etc.

18.7 LET US SUM UP

• Advertising is a non-personal form of promotion that is delivered through selected media outlets that, under most circumstances, require the marketer to pay for message placement.

• American Marketing Association defines “advertising as any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor.”

• Advertising objectives are generally placed in two categories: Direct-action (sales) objectives and Indirect-action (communication) objectives.

• The main functions of advertising are to increase the number of customers and to increase the Consumption Rate among the present customers.

• Advertisement creates demand for the goods and makes it possible for the introduction of mass production. It is not only beneficial to manufacturer but also to retailer and consumers.

18.8 CHECK YOUR PROGRESS

• Define advertising. (Refer 18.3) • What is advertising? Discuss the objectives of advertising. (Refer 18.2 and 18.4) • Explain the importance of advertising. (Refer 18.6 to 18.6.3) • Explain the functions of advertising. (Refer 18.5 to 18.5.2)

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LESSON-19 KINDS OF MEDIA

Contents: 19.0 Aims and Objectives 19.1 Introduction 19.2 Advertising media 19.2.1 Television Advertising 19.2.2 Radio Advertising 19.2.3 Print Publications Advertising 19.2.4 Internet Advertising 19.2.5 Direct Mail 19.2.6 Signage and Bill Boards 19.2.7 Advertising 19.2.8 Mobile Devices Advertising 19.2.9 Sponsorships 19.2.10 Others 19.3 Selecting Media Outlets 19.3.1 Creative Options 19.3.2 Creative Cost 19.3.3 Media Market Reach 19.3.4 Message Placement Cost 19.3.5 Length of Exposure 19.3.6 Advertising Clutter 19.3.7 Response Tracking 19.4 Let us sum up 19.5 Check your progress

19.0 AIMS AND OBJECTIVES

In the previous lesson, we discussed about the basic concepts of advertising. In this part, let us discuss about the different kinds of media through which advertising is made very effective. After going through this chapter, you can answer the following questions i. What are the different kinds of media available? ii. What is the process of selecting media outlets?

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19.1 INTRODUCTION

Advertising is a form of communication whose purpose is to inform potential customers about products and services and how to obtain and use them. Many advertisements are also designed to generate increased consumption of those products and services through the creation and reinforcement of brand image and brand loyalty. For these purposes advertisements often contain both factual information and persuasive messages. Every major medium is used to deliver these messages, including: television, radio, movies, magazines, newspapers, video games, the Internet, and billboards. Advertising is often placed by an advertising agency on behalf of a company. Advertisements can also be seen on the seats of grocery carts, on the walls of an airport walkway, on the sides of buses, heard in telephone hold messages and in-store public address systems. Advertisements are usually placed anywhere an audience can easily and/or frequently access visuals and/or audio and print Organizations which frequently spend large sums of money on advertising but do not strictly sell a product or service to the general public include: political parties, interest groups, religion-supporting organizations, and militaries looking for new recruits. Additionally, some non-profit organizations are not typical advertising clients and rely upon free channels, such as public service announcements.

19.2 ADVERTSING MEDIA

The term Media advertising or advertising media is given to the use of media to advertise products and services to a relevant audience. The list of advertising opportunities across different formats of media is endless, so we'll only cover the key ones here. While just a few years ago marketers needed to be aware of only a few media outlets, today’s marketers must be well-versed in a wide range of media options. The reason for the growing number of media outlets lies with advances in communication technology, in particular, the Internet. The number of media outlets will continue to grow as new technologies emerge. Next we provide an overview of 10 leading media outlets: 1. Television 2. Radio 3. Print Publications 4. Internet 5. Direct Mail 6. Signage 7. Product Placement 8. Mobile Devices 9. Sponsorships 10. Others

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19.2.1 TELEVISION ADVERTISING

Television advertising offers the benefit of reaching large numbers in a single exposure. Yet because it is a mass medium capable of being seen by nearly anyone, television lacks the ability to deliver an advertisement to highly targeted customers compared to other media outlets. Television networks are attempting to improve their targeting efforts. In particular, networks operating in the pay- to-access arena, such as those with channels on cable and satellite television, are introducing more narrowly themed programming (i.e., TV shows geared to specific interest groups) designed to appeal to selective audiences. However, television remains an option that is best for products that targeted to a broad market.

The geographic scope of television advertising ranges from advertising within a localized geographic area using fee-based services, such as cable and fiber optic services, to national coverage using broadcast programming.

Television advertising, once viewed as the pillar of advertising media outlets, is facing numerous challenges from alternative media (e.g., Internet) and the invasion of technology devices, such as digital video recorders, that have empowered customers to be more selective on the advertisements they view. Additionally, television lacks effective response tracking which has led many marketers to investigate other media that offer stronger tracking options.

19.2.2 RADIO ADVERTISING

Promotion through radio has been a viable advertising option for over 80 years. Radio advertising is mostly local to the broadcast range of a radio station, however, at least three options exist that offer national and potentially international coverage. First, in many countries there are radio networks that use many geographically distinct stations to broadcast simultaneously. In the United States such networks as Disney (children’s programming) and ESPN (sports programming) broadcast nationally either through a group of company- owned stations or through a syndication arrangement (i.e., business agreement) with partner stations. Second, within the last few years the emergence of radio programming delivered via satellite has become an option for national advertising. Finally, the potential for national and international advertising may become more attractive as radio stations allow their signals to be broadcast over the Internet.

In many ways radio suffers the same problems as television, namely, a mass medium that is not highly targeted and offers little opportunity to track responses. But unlike television, radio presents the additional disadvantage of limiting advertisers to audio-only advertising. For some products advertising without visual support is not effective.

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19.2.3 PRINT PUBLICATION ADVERTISING

Print publications such as magazines, newspapers and Special Issue publications offer advertising opportunities at all geographic levels. Magazines, especially those that target specific niche or specialized interest areas, are more narrowly targeted compared to broadcast media. Additionally, magazines offer the option of allowing marketers to present their message using high quality imagery (e.g., full color) and can also offer touch and scent experiences (e.g., perfume). Newspapers have also incorporated color advertisements, though their main advantage rests with their ability to target local markets. Special Issue publications can offer very selective targeting since these often focus on extremely narrow topics (e.g., auto buying guide, tour guides, college and university ratings, etc.).

19.2.4 INTERNET ADVERTISING

The fastest growing media outlet for advertising is the Internet. Compared to spending in other media, the rate of spending for Internet advertising is experiencing tremendous growth. However, total spending for Internet advertising remains relatively small compared to other media. Yet, while Internet advertising is still a small player, its influence continues to expand and each year more major marketers shift a larger portion of their promotional budget to this medium. Two key reasons for this shift rest with the Internet’s ability to: 1) narrowly target an advertising message and, 2) track user response to the advertiser’s message.

The Internet offers many advertising options with messages delivered through websites or by email. • Website Advertising - Advertising tied to a user’s visit to a website accounts for the largest spending on Internet advertising. For marketers, website advertising offers many options in terms of: Creative Types – Internet advertising allows for a large variety of creative types including text-only, image-only, multimedia (e.g., video) and advanced interactive (e.g., advertisement in the form of online games). Size – In addition to a large number of creative types, Internet advertisements can be delivered in a number of different sizes (measured in screen pixels) ranging from full screen to small square ads that are only a few pixels in size. The most popular Internet ad sizes include banner ads (468 x 60 pixels), leader board (728 x 90 pixels) and skyscraper (160 x 600 pixels). Placement – The delivery of an Internet advertisement can occur in many ways including fixed placement in a certain website location (e.g., top of page), processed placement where the ad is delivered based on user characteristics (e.g., entry of words in a search box, recognition of user via Internet tracking cookies), or on a separate webpage where the user may not see the ad until they leave a site or close their browser (e.g., pop- under).

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Delivery – When it comes to placing advertisements on websites marketers can, in some cases, negotiate with websites directly to place an ad on the site or marketers can place ads via a third-party advertising network, which has agreements to place ads on a large number of partner websites. • Email Advertising – Using email to deliver an advertisement affords marketers the advantage of low distribution cost and potentially high reach. In situations where the marketer possesses a highly targeted list, response rates to email advertisements may be quite high. This is especially true if those on the list have agreed to receive email, a process known as “opt-in” marketing. Email advertisement can take the form of a regular email message or be presented within the context of more detailed content, such as an electronic newsletter. Delivery to a user’s email address can be viewed as either plain text or can look more like a website using web coding (i.e., HTML). However, as most people are aware, there is significant downside to email advertising due to highly publicized issues related to abuse (i.e., spam).

19.2.5 DIRECT MAIL

This method of advertising uses postal and other delivery services to ship advertising materials, including postcards, letters, brochures, catalogs and flyers, to a physical address of targeted customers. Direct mail is most effective when it is designed in a way that makes it appear to be special to the customer. For instance, a marketer using direct mail can personalize mailings by including a message recipient’s name on the address label or by inserting their name within the content of marketer’s message.

Direct mail can be a very cost-effective method of advertising, especially if mailings contain printed material. This is due to cost advantages obtained by printing in high volume since the majority of printing costs are realized when a printing machine is initially setup to run a print job and not the because of the quantity of material printed. Consequently, the total cost of printing 50,000 postcards is only slightly higher than printing 20,000 postcards but when the total cost is divided by the number of cards printed the cost per-card drops dramatically as more pieces are printed. Obviously there are other costs involved in direct mail, primarily postage expense.

While direct mail can be seen as offering the benefit of a low cost-per-contact, the actual cost-per-impression can be quite high as large numbers of customers may discard the mailing before reading. This has led many to refer to direct mail as “junk mail” and due to the name some marketers view the approach as ineffective. However, direct mail, when well-targeted, can be an extremely effective promotional tool.

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19.2.6 SIGNAGE AND BILLBOARDS

The use of signs to communicate a marketer’s message places advertising in geographically identified areas in order to capture customer attention. The most obvious method of using signs is through billboards, which are generally located in high traffic areas. Outdoor billboards come in many sizes, though the most well-known are large structures located near transportation points intending to attract the interest of people traveling on roads or public transportation. Indoor billboards are often smaller than outdoor billboards and are designed to attract the attention of foot traffic (i.e., those moving past the sign). For example, smaller signage in airports, train terminals and large commercial office space fit this category.

While billboards are the most obvious example of signage advertising, there are many other forms of signage advertising include: • Sky writing where airplanes use special chemicals to form words • Plane banners where large signs are pulled behind an airplane • Mobile billboards where signs are placed on vehicles, such as buses and cars, or even carried by people • Plastic bags used to protect newspapers delivered to homes • Advertisements attached to grocery carts

19.2.7 PRODUCT PLACEMENT ADVERTISING

Product placement is an advertising approach that intentionally inserts products into entertainment programs such as movies, TV programs and video games. Placement can take several forms including:

• visual imagery in which the product appears within the entertainment program

• actual product use by an actor in the program

• words spoken by an actor that include the product name

Product placement is gaining acceptance among a growing number of marketers for two main reasons. First, in most cases the placement is subtle so as not to divert significant attention from the main content of the program or media outlet. This approach may lead the audience to believe the product was selected for inclusion by program producers and not by the marketer. This may heighten the credibility of the product in the minds of the audience since their perception, whether accurate or not, is that product was selected by an unbiased third- party. Second, entertainment programming, such as television, is converging with other media, particularly the Internet. In the future a viewer of a television program may be able to easily request information for products that appear in a program by simply pointing to the product on the screen. With the information

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they may get the option to purchase the product. As this technology emerges it is expected that product placement opportunities will become a powerful promotional option for many marketers.

19.2.8 MOBILE DEVICE ADVERTISING

Handheld devices, such as cell phones, personal digital assistants (PDAs) and other wireless devices, make up the growing mobile device market. Such devices allow customers to stay informed, gather information and communicate with others without being tied to a physical location. While the mobile device market is only beginning to become a viable advertising medium, it may soon offer significant opportunity for marketers to reach customers at anytime and anyplace.

Also, with geographic positioning features included in newer mobile devices, the medium has the potential to provide marketers with the ability to target customers based on their geographic location. Currently, the most popular advertising delivery method to mobile devices is through plain text messaging, however, over the next few years multimedia advertisements are expected to become the dominant message format.

19.2.9 SPONSORSHIPS

A subtle method of advertising is an approach in which marketers pay, or offer resources and services, for the purpose of being seen as a supporter of an organization’s event, program or product offering (e.g., section of a website). Sponsorships are intended not to be viewed a blatant advertisement and in this way may be appealing for marketers looking to establish credibility with a particular target market. However, many sponsorship options lack the ability to tie spending directly to customer response. Additionally, the visibility of the sponsorship may be limited to relatively small mentions especially if the marketer is sharing sponsorship with many other organizations.

19.2.10 OTHERS

While the nine media outlets discussed above represent the overwhelming majority of advertising methods, there are several more including:

• advertising using telephone recordings (e.g., political candidate’s messages) • advertising via fax machine (though there may be certain legal issues with this method) • advertising through inserted material in product packaging (e.g., inside credit card bill) • advertising imprinted on retail receipts (e.g., grocery store, cash machine)

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19.3 SELECTING MEDIA OUTLETS

With an objective and a budget in place, the advertising campaign will next need to focus on developing the message. However, before effort is placed in developing a message the marketer must first determine which media outlets will be used to deliver their message since the choice of media outlets guides the type of message that can be created and how frequently the message will be delivered.

An advertising message can be delivered via a large number of media outlets. These range from traditional outlets, such as print publications, radio and television, to newly emerging outlets, such as the Internet and mobile devices. However, each media outlet possess different characteristics and, thus, offer marketers different advantages and disadvantages.

The characteristics by which different media outlets can be assessed include the following seven factors: 1. Creative Options 2. Creative Cost 3. Media Market Reach 4. Message Placement Cost 5. Length of Exposure 6. Advertising Clutter 7. Response Tracking

19.3.1 CREATIVE OPTIONS

An advertisement has the potential to appeal to four senses – sight, sound, smell and touch. However, not all advertising media have the ability to deliver multi- sensory messages. Traditional radio, for example, is limited to delivering audio messages while roadside billboards offer only visual appeal. Additionally, some media may place limits on when particular options can be used. For instance, some search engines or websites may only accept graphical-style ads, such as images, if these conform to certain large dimensions and limit small advertising to text-only ads.

19.3.2 CREATIVE COST

The media type chosen to deliver a marketer’s message also impacts the cost of creating the message. For media outlets that deliver a multi-sensory experience (e.g., television and Internet for sight and sound; print publications for sight, touch and smell) creative cost can be significantly higher than for media targeting a single sensory experience. But creative costs are also affected by the expectation of quality for the media that delivers the message. In fact, media

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outlets may set minimal production standards for advertisements and reject ads that do not meet these standards. Television networks, for example, may set high production quality levels for advertisements they deliver. Achieving these standards requires expensive equipment and high cost labor, which may not be feasible for small businesses. Conversely, creating a simple text only Internet advertisement requires very little cost that almost anyone is capable of creating.

19.3.3 MEDIA MARKET REACH

The number of customers exposed to a single promotional effort within a target market is considered the reach of a promotion. Some forms of advertising, such as television advertising, offer an extensive reach, while a single roadside billboard on a lightly traveled road offers very limited reach. Market reach can be measured along two dimensions: 1) channels served and, 2) geographic scope of a media outlet. • Channels Served - This dimension relates to whether a media outlet is effective in reaching the members within the marketer’s channel of distribution. Channels can be classified as: Consumer Channel – Does the media outlet reach the final consumer market targeted by the marketer? Trade Channel – Does the media outlet reach a marketer’s channel partners who help distribute their product? Business-to-Business – Does the media outlet reach customers in the business market targeted by the marketer? • Geographic Scope – This dimension defines the geographic breadth of the channels served and includes: International – Does the media outlet have multi-country distribution? National – Does the media outlet cover an entire country? Regional – Does the media outlet have distribution across multiple geographic regions such as counties, states, provinces, territories, etc.? Local – Does the media outlet primarily serve a limited geographic area? Individual – Does the media outlet offer individual customer targeting?

19.3.4 MESSAGE PLACEMENT COST

Creative development is one of two major spending considerations for advertising. The other cost is for media placement; the purchase of ad time, space or location with media outlets that deliver the message. Advertising placement costs vary widely from very small amounts for certain online advertisements to exorbitant fees for advertising on major television programs

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Media outlets set placement cost using several factors though the most important are determined by audience size, audience type and an advertisement’s production characteristics: • Audience Size – Refers to the number of people who experience the media outlet during a particular time period. For example, for television outlets audience size is measured in terms of number of program viewers, for print publications audience is measured by number of readers, and for websites audience is measured by number of visitors. In general, the more people experiencing a media outlet, the more the outlet can charge for ads. • Audience Type –The key to marketing is aligning marketing decisions to satisfy the needs of a target market. When choosing a media outlet, selection is evaluated based on the outlet’s customer profile (i.e., viewers, readers, website visitors) and whether these match the characteristics sought by the marketer’s desired target market. The more selectively targeted the audience, the more valuable this audience is to advertisers since with targeted advertising promotional funds are being spent on those with the highest potential to respond to the advertiser’s message. • Characteristics of the Advertisement – Media outlet also charge different rates based on creative characteristics of the message. Characteristics that create ad rate differences include: ƒ Run Time (e.g., length of television or radio ads ) ƒ Size (e.g., print ads size, billboard size) ƒ Print Style (e.g., black-and-white vs. color) ƒ Location in Media (e.g., back magazine cover vs. inside pages)

19.3.5 LENGTH OF EXPOSURE

Some products require customers be exposed to just a little bit of information in order to build customer interest. For example, the features and benefits of a new snack food can be explained in a short period of time using television or radio commercials. However, complicated products need to present more information for customers to fully understand the product. Consequently, advertisers of these products well seek media formats that allot more time to deliver the message.

Media outlets vary in how much exposure they offer to their audience. Magazines and other publications provide opportunities for longer exposure times since these media types can be retained by the audience (i.e., keep old magazines) while exposure on television and radio are generally limited to the time the ad was broadcast.

19.3.6 ADVERTISING CLUTTER

In order to increase revenue, media outlets often include a large number of ads within a certain time, space or location. For instance, television programs may

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contain many ads inserted during the scheduled run-time of a program. A large number of advertisements create an environment of advertising clutter, which makes it difficult for those in the targeted market to recognize and remember particular advertisements. To break through the clutter advertisers may be required to increase the frequency of their advertising efforts (i.e., run more ads). Yet greater advertising frequency increases advertising expense. Alternatively, advertisers may seek opportunities that offer less clutter where an ad has a better chance of standing out from others. This can be seen with online downloads (e.g., pod casts) of sports and news programming where a 5-10 minute story will be presented with a single 30-60 second ad.

19.3.7 RESPONSE TRACKING

Marketers are embracing new technologies that make it easier to track audience response to advertisements. Newer media developed using Internet technology offer effective methods for tracking audience response compared to traditional media. But Internet-media are not alone in providing response tracking. Other advertising outlets, such as advertising by mail and television infomercial programming, also provide useful measures of audience reaction.

19.4 LET US SUM UP

• The term Media advertising or advertising media is given to the use of media to advertise products and services to a relevant audience. • The numbers of media outlets will continue to grow as new technologies emerge. The 10 leading media outlets are Television, Radio, Print Publications, Internet, Direct Mail, Signage, Product Placement, Mobile Devices, Sponsorships and Others such as advertising using telephone recordings, advertising via fax machine etc • Effort is placed in developing a message the marketer must first determine which media outlets will be used to deliver their message since the choice of media outlets guides the type of message that can be created and how frequently the message will be delivered.

19.5 CHECK YOUR PROGRESS

• What is advertising media? Explain different types of advertising media. (Refer 19.2 to 19.2.10) • Explain the different types of internet advertising. (Refer 19.2.4) • Compare television advertising with internet advertising. (refer 19.2.1 and 19.2.4) • What criteria should be considered while selecting the advertising media? (Refer 19.3 to 19.3.7)

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LESSON-20 DIRECT MARKETING AND MULTI- LEVEL MARKETING

Contents: 20.0 Aims and Objectives 20.1 Meaning of Direct Marketing 20.2 Channels of Direct Marketing 20.2.1 Direct mail 20.2.2 Telemarketing 20.2.3 Email Marketing 20.2.4 Broadcast faxing 20.2.5 Couponing 20.2.6 Direct response television marketing 20.2.7 Direct selling 20.3 Benefits and Drawbacks of Direct Marketing 20.4 Meaning of Multi- Level Marketing 20.5 Origins and Development of MLM 20.6 MLM Basics 20.7 Pyramid Schemes of MLM 20.8 Advantages and Drawbacks of MLM 20.9 Let us sum up 20.10 Check your progress

20.0 AIMS AND OBJECTIVES

There are various types of marketing of products, some of which we discussed in the previous chapters. In this lesson, the concept of direct marketing and multi- level marketing is discussed in detail. This will ensure the reader to equip with the following questions i. What are the different channels of direct marketing? ii. How multi-level marketing operates?

20.1 MEANING OF DIRECT MARKETING

Direct marketing is a type of advertising campaign that seeks to elicit an action (such as an order, a visit to a store or Web site, or a request for further information) from a selected group of consumers in response to a communication from the marketer. The communication itself may be in any of a

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variety of formats including postal mail, telemarketing, direct e-mail marketing, and point-of-sale (POS) interactions. Customer response should be measurable: for example, the marketer should be able to determine whether or not a customer offered a discount for online shopping takes advantage of the offer.

Direct marketing is a sub-discipline and type of marketing. There are two main definitional characteristics which distinguish it from other types of marketing or advertising. The first is that it attempts to send its messages directly to consumers, without the use of intervening media. This involves commercial communication (direct mail, e-mail, telemarketing) with consumers or businesses, usually unsolicited. The second characteristic is that it is focused on driving purchases that can be attributed to a specific "call-to-action." This aspect of direct marketing involves an emphasis on trackable, measurable positive (but not negative) responses from consumers (known simply as "response" in the industry) regardless of medium.

If the advertisement asks the prospect to take a specific action, for instance call a free phone number or visit a website, then the effort is considered to be direct response advertising.

20.2 CHANNELS OF DIRECT MARKETING

Some direct marketers also use media such as door hangers, package inserts, magazines, newspapers, radio, television, email, internet banner ads, pay-per- click ads, billboards, transit ads. And according to Ad Age, "In 2005, U.S. agencies generated more revenue from marketing services (which include direct marketing) than from traditional advertising and media."

20.2.1 DIRECT MAIL

The most common form of direct marketing is direct mail, sometimes called junk mail, used by advertisers who send paper mail to all postal customers in an area or to all customers on a list.

Any medium that can be used to deliver a communication to a customer can be employed in direct marketing. Probably the most commonly used medium for direct marketing is mail, in which marketing communications are sent to customers using the postal service. The term direct mail is used in the direct marketing industry to refer to communication deliveries by the Post Office, which may also be referred to as "junk mail" or "admail" and may involve bulk mail.

Junk mail includes advertising circulars, catalogs, free trial CDs, pre-approved credit card applications, and other unsolicited merchandising invitations delivered by mail or to homes and businesses, or delivered to consumers' mailboxes by delivery services other than the Post Office. Bulk mailings are a particularly popular method of promotion for businesses operating in the financial services, home computer, and travel and tourism industries.

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In many developed countries, direct mail represents such a significant amount of the total volume of mail that special rate classes have been established. In the United States and United Kingdom, for example, there are bulk mail rates that enable marketers to send mail at rates that are substantially lower than regular first-class rates. In order to qualify for these rates, marketers must format and sort the mail in particular ways - which reduces the handling (and therefore costs) required by the postal service.

Advertisers often refine direct mail practices into targeted mailing, in which mail is sent out following database analysis to select recipients considered most likely to respond positively. For example a person who has demonstrated an interest in golf may receive direct mail for golf related products or perhaps for goods and services that are appropriate for golfers. This use of database analysis is a type of database marketing. The United States Postal Service calls this form of mail "advertising mail" (admail for short).

20.2.2 TELEMARKETING

The second most common form of direct marketing is telemarketing, in which marketers contact consumers by phone. The unpopularity of cold call telemarketing (in which the consumer does not expect or invite the sales call) has led some US states and the US federal government to create "no-call lists" and legislation including heavy fines. Marketers call telephone numbers. This process may be outsourced to specialist call centres. The agents sit at computerised work-stations and try to sell the products of the clients.

In the US, a national do-not-call list went into effect on October 1, 2003. Under the law, it is illegal for telemarketers to call anyone who has registered themselves on the list. After the list had operated for one year, over 62 million people had signed up.[3] The telemarketing industry opposed the creation of the list, but most telemarketers have complied with the law and refrained from calling people who are on the list.

20.2.3 EMAIL MARKETING

Email Marketing may have passed telemarketing in frequency at this point, and is a third type of direct marketing. A major concern is spam.

20.2.4 BROADCAST FAXING

A fourth type of direct marketing, broadcast faxing, is now less common than the other forms. This is partly due to laws in the United States and elsewhere which make it illegal.

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20.2.5 COUPONING

Couponing is used in print media to elicit a response from the reader. An example is a coupon which the reader cuts out and presents to a super-store check-out counter to avail of a discount. Coupons in newspapers and magazines cannot be considered direct marketing, since the marketer incurs the cost of supporting a third-party medium (the newspaper or magazine); direct marketing aims to circumvent that balance, paring the costs down to solely delivering their unsolicited sales message to the consumer, without supporting the newspaper that the consumer seeks and welcomes.

20.2.6 DIRECT RESPONSE TELEVISION MARKETING

A related form of marketing is infomercials. They are typically called direct response marketing rather than direct marketing because they try to achieve a direct response via broadcast on a third party's medium, but viewers respond directly via telephone or internet.

TV-response marketing--i.e. infomercials--can be considered a form of direct marketing, since responses are in the form of calls to telephone numbers given on-air. This both allows marketers to reasonably conclude that the calls are due to a particular campaign, and allows the marketers to obtain customers' phone numbers as targets for telemarketing. Under the Federal Do-Not-Call List rules in the US, if the caller buys anything, the marketer would be exempt from Do- Not-Call List restrictions for a period of time due to having a prior business relationship with the caller. Major players are firms like QVC, Thane Direct, and Interwood Marketing Group then cross-sell, and up-sell to these respondents.

20.2.7 DIRECT SELLING

Direct selling is the sale of products by face-to-face contact with the customer, either by having salespeople approach potential customers in person, through indirect means such as Tupperware parties.

20.3 BENEFITS AND DRAWBACKS OF DIRECT MARKETING

Direct marketing is attractive to many marketers, because in many cases its positive effect (but not negative results) can be measured directly. For example, if a marketer sends out one million solicitations by mail, and ten thousand customers can be tracked as having responded to the promotion, the marketer can say with some confidence that the campaign led directly to the responses. The number of recipients who are offended by the junk mail/spam, however, is not easily measured. By contrast, measurement of other media must often be indirect, since there is no direct response from a consumer. Measurement of results, a fundamental element in successful direct marketing, is explored in greater detail elsewhere in this article.

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While many marketers like this form of marketing, some direct marketing efforts using particular media have been criticized for generating unwanted solicitations. For example, direct mail that is irrelevant to the recipient is considered junk mail, and unwanted email messages are considered spam. Some consumers are demanding an end to direct marketing for privacy and environmental reasons, which direct marketers are able to provide by using "opt out" lists, variable printing and more targeted mailing lists.

20.4 MEANING OF MULTI- LEVEL MARKETING

Multi-level marketing (MLM), also known as Network Marketing is a business distribution model that allows a parent multi-level marketing company to market their products directly to consumers by means of relationship referral and direct selling. Multilevel systems provide an alternative to conventional arrangements that involve wholesalers and retailers. Besides eliminating costs associated with middlemen, network marketing reduces advertising and promotion expenses and, in theory, passes savings to the independent distributors and customers.

Independent unsalaried salespeople of multi-level marketing referred to as distributors (associates, independent business owners, franchise owners, sales consultants, consultants, independent agents, etc.), represent the parent company and are rewarded a commission relative to the volume of product sold through each of their independent businesses (organizations). Independent distributors develop their organization by either building an active customer base, who buy direct from the parent company and / or by recruiting a downline of independent distributors who also build a customer base, expanding the overall organization. Additionally, distributors can also earn a profit by retailing products which they purchased from the parent company at wholesale price.

Distributors earn a commission based on the sales efforts of their organization, which includes their independent sale efforts as well as the leveraged sales efforts of their downline. This arrangement is similar to franchise arrangements where royalties are paid from the sales of individual franchise operations to the franchisor as well as to an area or region manager. Commissions are paid to multi-level marketing distributors according to the company’s compensation plan. There can be multiple levels of people receiving royalties from one person's sales.

20.5 ORIGINS AND DEVELOPMENT OF MLM

MLM was pioneered in the 1940s by Carl F. Rehnborg, an American. Rehnborg learned about the value of nutrition while scavenging for food in a Chinese internment camp in the 1920s. After he was freed, he started Nutrilite Products Inc., a manufacturer of vitamin-enriched food supplements. Rehnborg was extremely successful at marketing his products through an innovative distribution process that would become known as multilevel marketing. Nutrilite flourished throughout the 1940s and 1950s and was eventually purchased in

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1959 by Amway Corp., a company founded by former Nutrilite distributors. Using similar MLM tactics, Amway, now a multibillion-dollar enterprise, thrived and spawned a string of imitators during the 1960s and 1970s.

During the 1960s and 1970s, fraudulent pyramid schemes exploited the success of MLM companies. Although they closely resembled MLM organizations, pyramids bilked investors and members out of millions of dollars. A mass of legislation passed during the 1970s almost ended MLM altogether, including organizations like Amway. However, laws were eventually modified to accommodate legitimate multilevel marketers and similar organizations.

Tupperware, for example, achieved stellar sales during the 1960s and 1970s with techniques that mimicked MLM systems. In fact, network marketing has traditionally been associated with cosmetics and household items. Still considered in its infancy, MLM was increasingly used in the 1980s and early 1990s to sell products and services ranging from vacations and books to software and food items. During the 1990s, services were an increasingly important growth category for MLM, which made inroads into such service industries as legal services, broadcasting and computer network services, and long-distance telephone services.

20.6 MLM BASICS

In essence, MLM uses customers to distribute products (or services). A company begins by selling its product to selected customers in specific geographic areas. Those customers then become salespeople by telling friends, associates, and contacts about the product and trying to get them to buy. The salespeople are usually paid a commission for the products that they sell. More importantly, they also receive commissions for the products that their customers, or recruits, sell. In other words, new customers are added to the sales network, many of whom also become distributors. As the number of levels of customers grows, so does the distribution network. Thus, by trying to sell the products themselves, customers also become recruiters for the company that represents the products.

MLM organizations are based on commissions that accumulate exponentially. For example, assume that Sandy buys some products from a distributor in the MLM Company. She then sells the product to five of her friends and receives a commission. Next, three of her friends sell the products to six of their friends. Not only would those three salespeople receive a commission, but Sandy would also receive a (usually smaller) commission for each of the sales. If four of the six new customers each sold to four contacts, the number of people that could potentially be selling products to Sandy's benefit would suddenly lurch past 15. It is easy to see how the sales network originated by Sandy could quickly jump into the hundreds or thousands. In theory, all of the people in the network would benefit from the efforts and purchases of the people below them.

The compensation system is the infrastructure that supports and drives a MLM program. Sellers in the network usually receive relatively large commissions on sales that they make personally. The commission is the difference between what

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the salesperson sells the products for and what he (she) must pay to buy them from the company. In addition, purchases made by the same customer at a later date will often result in "residual income" to the person that made the first sale to that buyer. As sellers build a network of customers that also become sellers, they also earn group bonuses, or "overrides." An override is the fraction of sales that is paid to the originator of a network. In general, sales made by distributors further down the network, or at lower levels, pay a lower bonus.

Sellers may also get a "leadership bonus," which is effectively a bonus paid to sellers that help distributors in their network to achieve specific levels of sales success. Leadership bonuses provide an incentive for sellers to train and help their customers to become better distributors and recruiters. "Usage" bonuses are provided to sellers based on the total purchases (product usages) by members of their network. Usage bonuses usually take the form of discounts on air travel or long distance telephone service. They provide an impetus for people in the organization to continue purchasing the goods themselves.

20.7 PYRAMID SCHEMES OF MLM

Numerous laws exist that regulate MLM organizations to protect consumers against fraud. Most of those laws are designed to discourage pyramid schemes, which closely resemble legitimate MLM systems. The difference between pyramids and legal network marketing is that the latter derives income from the sale of products. In contrast, pyramid organizations get most of their income by bringing new members into the network, or pyramid, and charging them fees.

The classic pyramid scheme is the chain letter. A pyramid scheme is called a pyramid scheme because of the shape of a pyramid: a three dimensional triangle. If a pyramid were started by a human being at the top with just 10 people beneath him, and 100 beneath them, and 1000 beneath them, etc., the pyramid would involve everyone on earth in just ten layers of people with one con man on top. The human pyramid would be about 60 feet high and the bottom layer would have more than 4.5 billion people! A diagram might help see this: Fig 20.1 1 10 100 1,000 10,000 100,000 1,000,000 10,000,000 100,000,000 1,000,000,000 10,000,000,000

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Thus, in very short order, 10 recruiting 10 and so on would reach 10 billion, well in excess of the earth's population. If the entire population of earth were 5 billion and we all got involved in a pyramid scheme, the bottom layer would consist of about 90 percent of the planet, i.e., about 4.5 billion people. Thus, for 500 million people to be WINNERS, 4.5 billion must be LOSERS. The problem is obviously more serious than the chain letter example when larger amounts of money and effort are required of pyramid members and promises of wealth go unfulfilled.

Some pyramid organizations disguise their objective by mimicking MLM companies. They integrate into the scheme a product or service that they "sell" to newcomers—a strategy known as inventory loading—or they simply charge sellers a fee to join the network. Then they encourage members to recruit, rather than sell the product to, other people.

20.8 ADVANTAGES AND DRAWBACKS OF MLM

The obvious enticement for members of a MLM network is the seemingly unlimited profit potential. By purchasing as little as, say, Rs.100 worth of a product, they can become distributors in a network that can pay them thousands or, theoretically, millions of rupees. In addition, MLM sellers get to be their own boss, make their own hours, and choose their own course to success or failure. They also get the advantage of buying the product at nearly the wholesale price.

The company that initiates and supports the network and supplies the products or services may also benefit significantly. It will likely incur costs associated with supporting the organization, including those related to making training videos and audio tapes, warehousing, transportation, and printing brochures. However, even after paying commissions, its advertising and promotion costs may be much lower than those of traditional marketing and distribution channels. Start-up capital requirements are usually much lower because the bulk of the marketing costs are not incurred until the products are actually sold. And the company benefits from strong customer loyalty and a solid base of repeat customers. Furthermore, MLM is more effective for some types of products than is traditional mass media because sales are conducted face-to-face.

Despite its many advantages, network marketing possesses several drawbacks that make it undesirable for many companies. For instance, it usually takes a long time to develop a large, profitable customer base compared to selling techniques like advertising through print and broadcast media. Furthermore, administrative duties and paperwork are usually much greater for MLM operations. Perhaps the greatest disadvantage of network marketing, though, is that the company loses control of its distribution process. It may have no idea of the types of people that are representing (or misrepresenting) its products. A corporate or product image can become quickly tarnished by overly enthusiastic or dishonest salespeople hungry for commissions.

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MLM also has several disadvantages for sellers. Long hours are typically required to get a sizable network started, particularly if the product or service is perceived to be of average value by potential consumers. Because of poorly contrived or fraudulent MLM schemes, moreover, many people have attached a stigma to network marketing that sellers must overcome. Indeed, a major drawback of MLM to distributors is risk—they may lose their initial investment or be lured into purchasing additional goods or services that they will never use if the company backing the network is ill-willed or poorly operated.

20.9 LET US SUM UP

• Direct marketing is a sub-discipline and type of marketing. There are two main definitional characteristics which distinguish it from other types of marketing or advertising. The first is that it attempts to send its messages directly to consumers, without the use of intervening media. The second characteristic is that it is focused on driving purchases that can be attributed to a specific "call-to-action."

• Channels of Direct Marketing includes Direct Mail, Telemarketing, Email Marketing, Broadcast faxing, Couponing, Direct response television marketing and Direct selling.

• Multi-level marketing (MLM), also known as Network Marketing is a business distribution model that allows a parent multi-level marketing company to market their products directly to consumers by means of relationship referral and direct selling.

• In MLM, a company begins by selling its product to selected customers in specific geographic areas. Those customers then become salespeople by telling friends, associates, and contacts about the product and trying to get them to buy. The salespeople are usually paid a commission for the products that they sell. More importantly, they also receive commissions for the products that their customers, or recruits, sell.

20.10 CHECK YOUR PROGRESS

• What is Direct Marketing? (Refer 20.1) • Explain the channels of Direct Marketing. (Refer 20.2 to 20.2.7) • Bring out the advantages and disadvantages of Direct Marketing. (Refer 20.3) • What is Multi-level marketing? (Refer 20.4) • Is Multi-level marketing a boon or scam in marketing? (Refer 20.8) • Explain the pyramid structure of MLM (Refer 20.7)

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UNIT – V

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LESSON-21 RETAIL MARKETING

Contents: 21.0 Aims and Objectives 21.1 Introduction 21.2 Meaning of Retailing 21.3 Methods of Retailing 21.2.1 Target Markets Served 21.2.2 Products Carried 21.2.3 Pricing Strategy 21.2.4 Promotional Focus 21.2.5 Distribution Method 21.2.6 Service Level 21.2.7 Ownership Structure 21.4 Problems in Retail Marketing 21.5 Retail Marketing in India 21.6 Opportunities in Indian Organized Retail sector 21.7 Growth of Retail Companies in India 21.8 Let us sum up 21.9 Check your progress

21.0 AIMS AND OBJECTIVES

In this lesson we examine retailers as resellers of a marketer’s products. In terms of sales volume and number of employees, retailing is one of the largest sectors of most economies. We will see that retailing is quite diverse and marketers, who want to distribute through retailers, must be familiar with the differences that exist among different retail options. This will help you to answer i. What are the different methods of retailing? ii. What are the opportunities and growth of retail companies in India?

21.1 INTRODUCTION

In an ideal business world, most marketers would prefer to handle all their distribution activities by way of the corporate channel arrangement. Such an arrangement provides the marketer with two important benefits. First, being

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responsible for all distribution means the marketing organization need only worry about making decisions concerning their product. When others, such as resellers, are involved in distribution attention is not given to a single supplier but is stretched across all products the reseller carries. Second, having control on all distribution means the marketer is always in direct contact with buyers of their products, which can make it easier to build strong, long-term relationships with customers.

21.2 MEANING OF RETAILING

The word ‘retail’ is derived from the French word ‘retailer’, meaning ‘to cut a piece off’ or ‘to break bulk’. In simple terms, it implies a first-hand transaction with the customer. Retailing can be defined as the buying and selling of goods and services. It can also be defined as the timely delivery of goods and services demanded by consumers at prices that are competitive and affordable.

Retailing involves a direct interface with the customer and the coordination of business activities from end to end- right from the concept or design stage of a product or offering, to its delivery and post-delivery service to the customer. The industry has contributed to the economic growth of many countries and is undoubtedly one of the fastest changing and dynamic industries in the world today.

Retailing is a distribution channel function where one organization buys products from supplying firms or manufactures the product themselves, and then sells these directly to consumers. A retailer is a reseller (i.e., obtains product from one party in order to sell to another) from which a consumer purchases products.

In the majority of retail situations, the organization from which a consumer makes purchases is a reseller of products obtained from others and not the product manufacturer. Some manufacturers also operate their own retail outlets in a corporate channel arrangement. While consumers are the retailer’s buyers, a consumer does not always buy from retailers. For instance, when a consumer purchases from another consumer (e.g., eBay) the consumer purchase would not be classified as a retail purchase. This distinction can get confusing but in the US and other countries the dividing line is whether the one selling to consumers is classified as a business (e.g., legal and tax purposes) or is selling as a hobby without a legal business standing.

21.3 METHODS OF RETAILING

There are many ways retailers can be categorized depending on the characteristics being evaluated. For our purposes we will separate retailers based on six factors directly related to major marketing decisions: • target markets served • product offerings

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• pricing structure • promotional emphasis • distribution method • service level

And one operational factor: • ownership

However, these groups are not meant to be mutually exclusive. In fact, as we will see in some way all retailers can placed into each category.

21.3.1 TARGET MARKETS SERVED

The first classification looks at the type of markets a retailer intends to target. These categories are identical to the classification scheme when we discussed the levels of distribution coverage.

• Mass Market – Mass market retailers appeal to the largest market possible by selling products of interest to nearly all consumers. With such a large market from which to draw customers, the competition among these retailers is often fierce.

• Specialty Market – Retailers categorized as servicing the specialty market are likely to target buyers looking for products having certain features that go beyond mass marketed products, such as customers who require more advanced product options or higher level of customer service. While not as large as the mass market, the target market serviced by specialty retailers can be sizable.

• Exclusive Market – Appealing to this market means appealing to discriminating customers who are often willing to pay a premium for features found in very few products and for highly personalized services. Since this target market is small, the number of retailers addressing this market within a given geographic area may also be small.

21.3.2 PRODUCTS CARRIED

Under this classification retailers are divided based on the width (i.e., number of different product lines) and depth (i.e., number of different products within a product line) of the products they carry.

• General Merchandisers – These retailers carry a wide range of product categories (i.e., broad width) though the number of different items within a particular product line is generally limited (i.e., shallow depth).

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• Multiple Lines Specialty Merchandisers - Retailers classified in this category stock a limited number of product lines (i.e., narrow width) but within the categories they handle they often offer a greater selection (i.e., extended depth) than are offered by general merchandisers. For example, a consumer electronics retailer would fall into this category.

• Single Line Specialty Merchandisers – Some retailers limit their offerings to just one product line (i.e., very narrow width), and sometimes only one product (i.e., very shallow depth). This can be seen online where a relatively small website may sell a single product such as computer gaming software. Another example may be a small jewelry store that only handles watches.

21.3.3 PRICING STRATEGY

Retailers can be classified based on their general pricing strategy. Retailers must decide whether their approach is to use price as a competitive advantage or to seek competitive advantage in non-price ways. • Discount Pricing – Discount retailers are best known for selling low priced products that have a low profit margin (i.e., price minus cost). To make profits these retailers look to sell in high volume. Typically discount retailers operate with low overhead costs by vigorously controlling operational spending on such things as real estate, design issues (e.g., store layout, website presentation), and by offering fewer services to their customers. • Competitive Pricing – The objective of some retailers is not to compete on price but alternatively not to be seen as charging the highest price. These retailers, who often operate in specialty markets, aggressively monitor the market to insure their pricing is competitive but they do not desire to get into price wars with discount retailers. Thus, other elements of the marketing mix (e.g., higher quality products, nicer store setting) are used to create higher value for which the customer will pay more. • Full Price Pricing – Retailers targeting exclusive markets find such markets are far less price sensitive than mass or specialty markets. In these cases the additional value added through increased operational spending (e.g., expensive locations, more attractive design, more services) justify higher retail prices. While these retailers are likely to sell in lower volume than discount or competitive pricing retailers, the profit margins for each product are much higher.

21.3.4 PROMOTIONAL FOCUS

Retailers generate customer interest using a variety of promotional technique, yet some retailers rely on certain methods more than others as their principle promotional approach.

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• Advertising – Many retailers find traditional mass promotional methods of advertising, such as through newspapers or television, continue to be their best means for creating customer interest. Retailers selling online rely mostly on Internet advertising as their promotional method of choice.

• Direct Mail – A particular form of advertising that many retailers use for the bulk of their promotion is direct mail – advertising through postal mail. Using direct mail for promotion is the primary way catalog retailers distribute their materials and is often utilized by smaller local companies who promote using postcard mailings.

• Personal Selling – Retailers selling expensive or high-end products find a considerable amount of their promotional effort is spent in person-to- person contact with customers. While many of these retailers use other promotional methods, in particular advertising, the consumer-salesperson relationship is key to persuading consumers to make purchase decisions.

21.3.5 DISTRIBUTION METHOD

Retailers sell in many different formats with some requiring consumers visit a physical location while others sell to customers in a virtual space. It should be noted that many retailers are not tied to a single distribution method but operate using multiple methods.

• Store-Based Sellers – By far the predominant method consumers use to obtain products is to acquire these by physically visiting retail outlets (a.k.a. brick-and-mortar). Store outlets can be further divided into several categories. One key characteristic that distinguishes categories is whether retail outlets are physically connected to one or more others stores:

Stand-Alone – These are retail outlets that do not have other retail outlets connected.

Strip-Shopping Center – A retail arrangement with two or more outlets physically connected or that share physical resources (e.g., share parking lot).

Shopping Area – A local center of retail operations containing many retail outlets that may or may not be physically connected but are in close proximity to each other such as a city shopping district.

Regional Shopping Mall – Consists of a large self-contained shopping area with many connected outlets.

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• Non-Store Sellers – A fast growing method used by retailers to sell products is through methods that do not have customers physically visiting a retail outlet. In fact, in many cases customers make their purchase from within their own homes.

Online Sellers – The fastest growing retail distribution method allows consumer to purchase products via the Internet. In most cases delivery is then handled by a third-party shipping service.

Direct Marketers – Retailers that are principally selling via direct methods may have a primary location that receives orders but does not host shopping visits. Rather, orders are received via mail or phone.

Vending – While purchasing through vending machines does require the consumer to physically visit a location, this type of retailing is considered as non-store retailing as the vending operations are not located at the vending company’s place of business.

21.3.6 SERVICE LEVEL

Retailers attract customers not only with desirable products and affordable prices, but also by offering services that enhance the purchase experience. There are at least three levels of retail service:

• Self-Service – This service level allows consumers to perform most or all of the services associated with retail purchasing. For some consumers self- service is considered a benefit while others may view it as an inconvenience. Self-service can be seen with: 1) self-selection services, such as online purchasing and vending machine purchases, and 2) self- checkout services where the consumer may get help selecting the product but they use self-checkout stations to process the purchase including scanning and payment.

• Assorted-Service – The majority of retailers offer some level of service to consumers. Service includes handling the point-of-purchase transaction; product selection assistance; arrange payment plans; offer delivery; and many more.

• Full-Service – The full-service retailer attempts to handle nearly all aspects of the purchase to the point where all the consumer does is select the item they wish to purchase. Retailers that follow a full-price strategy often follow the full-service approach as a way of adding value to a customer’s purchase.

21.3.7 OWNERSHIP STRUCTURE

Finally, we can categorize retailers based on the ownership structure of the business.

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• Individually Owned and Operated – Under this ownership structure an individual or corporate entity owns and operates one or a very small number of outlets. Single ownership of retail outlets most frequently occurs with small retail stores, though there are some cases, for instance in the automotive or furniture industries, where single ownership involves very large outlets. • Corporate Chain – A retail chain consists of multiple retail outlets owned and operated by a single entity all performing similar retail activities. While the number of retail outlets required to be classified as a chain has never been specified, we will assume that anyone owning more than five retail locations would be considered a chain. • Corporate Structure – This classification covers large retailers predominantly operating in the non-store retail arena such as online, catalog and vending.

21.4 PROBLEMS IN RETAIL MARKETING

Big in size and turnover, Indian retailing industry is characterized by certain problems which are as follows

• The network of retailers reaches every nook and corner of the country. So any product produced anywhere in the country can be easily accessed by the buyers from any location. Thus the spatial convenience of Indian retailers is vary high.

• Secondly, in India the retailing industry is an unorganized lot consisting of, in most of the cases, small entrepreneurs. And the virtual omnipresence of the Indian retailer can be attributed to these small entrepreneurs only.

• Power of the retailers, as such is very less, and in many cases it is negligible. This weakness has been exploited by the manufacturers and the stronger partners of the marketing channel. The retailers, in general, abide by the terms and conditions set by the manufacturers and other “big brothers” of the channel.

• The manufacturers cannot directly reach all retailers in a particular geographical area. Therefore, the manufacturers cannot maintain the desired relationship with the retailers, which in turn make management of the channel complicated. This also makes the possibility of a direct feedback loop from the retailers almost remote.

• Therefore, the member operating between the manufacturers and retailers become more powerful as they can block the channel of communication between the two. So the dependence of retailers on other channel members increases to a high extent. Thus the participation of retailers in the flows of marketing mix becomes lower than desired.

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• The financial strength of the Indian retailers, in general, is very low and hence the investment capabilities. This makes the retailers more dependent on the other channel members.

21.5 RETAIL MARKETING IN INDIA

Indian organized retail market is growing at a fast pace due to the boom in the India retail industry. In 2005, the retail industry in India amounted to Rs.10, 000 billion accounting for about 10% to the country's GDP. The organized retail market in India out of this total market accounted for Rs.350 billion which is about 3.5% of the total revenues.

Retail market in the Indian organized sector is expected to cross Rs.1000 billion by 2010. Traditionally the retail industry in India was largely unorganized, comprising of drug stores, medium, and small grocery stores. Most of the organized retailing in India have started recently and is concentrating mainly in metropolitan cities.

The growth in the Indian organized retail market is mainly due to the change in the consumers behavior. This change has come in the consumer due to increased income, changing lifestyles, and patterns of demography which are favorable. Now the consumer wants to shop at a place where he can get food, entertainment, and shopping all under one roof. This has given Indian organized retail market a major boost.

Retail market in the organized sector in India is growing can be seen from the fact that 1500 supermarkets, 325 departmental stores, and 300 new malls are being built. Many Indian companies are entering the Indian retail market which is giving Indian organized retail market a boost. One such company is the Reliance Industries Limited. It plans to invest US$ 6 billion in the Indian retail market by opening 1000 hypermarkets and 1500 supermarkets.

Pantaloons is another Indian company which plans to increase its retail space to 30 million square feet with an investment of US$ 1 billion. Bharti Telecoms an Indian company is in talks with Tesco a global giant for a £ 750 million joint venture. A number of global retail giants such as Walmart, Carrefour, and Metro AG are also planning to set up shop in India. Indian organized retail market will definitely grow as a result of all this investments. Indian organized retail market is increasing and for this growth to continue the Indian retailers as well as government must make a combined effort.

21.6 OPPORTUNITIES IN INDIAN ORGANIZED RETAIL SECTOR

The opportunities in Indian organized retail sector are many for this sector is witnessing a boom. The retail industry in India amounted to US$ 200 billion in 2006, and out of this amount the Indian organized retail sector amounted to US$ 6.4 billion. The opportunities in India organized retail sector can be judged from the fact that by 2010 it is expected to rise to US$ 23 billion.

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The various opportunities in the organized retail sector in India are mainly there for the Indian consumers behavior pattern has changed. Now the Indian consumer gets more hefty pay- packages, is younger, a large number of women are working, western influences, and more disposable income have opened a lot of opportunities in Indian organized retail sector. The Indian consumer wants to shop, eat and get entertainment in one place and is have also given Indian organized retail sector an opportunity to grow.

The Indian government in 2005 allowed foreign direct investment (FDI) in single brand retail to 51%. This have opened up a lot of opportunities in India organized retail sector. In fact 325 departmental stores, 300 new malls, and 1500 supermarkets are being built which shows the tremendous opportunities in the organized retail sector in India.

Many Indian companies seeing the various opportunities in organized retail sector in India have entered it. Pantaloons have decided to increase its retail space to 30 million square feet with an investment of US$ 1 billion. Reliance Industries Limited is targeting for annual sales of US$ 25 billion by 2011. It is planning to invest US$ 6 billion in order to open 1,500 supermarkets and 1000 hypermarkets. Bharti Telecoms is planning a joint venture with Telco a global retail giant worth £ 750 million. The opportunities in the organized retail sector in India have also increased with the desire of many global retail giants to set up shop here. The global retail giants who are entering the Indian organized retail sector are: • Tesco • Wal- Mart • Metro AG • Carrefour SA The opportunities in Indian organized retail sector are varied and it must be fully exploited by the Indian retailers.

21.7 GROWTH OF RETAIL COMPANIES IN INDIA

Growth of Retail Companies in India exhibits the boom in the retail industry in India over the years. The increase in the purchasing power of the Indian middle classes and the influx of the foreign investments have been encouraging in the Growth of Retail Companies in India. Growth of Retail Companies in India is still not yet in a matured stage with great potentials within this sector still to be explored. Apart from the retail company like Nilgiri's of Bangalore, most of the retail companies are sections of other industries that have stepped in the retail sector for a better business. The Growth of Retail Companies in India is most pronounced in the metro cities of India, however the smaller towns are also not lagging behind in this. The retail companies are not only targeting the four metros in India but also is considering the second graded upcoming cities like Ahmedabad, Baroda, Chandigarh, Coimbatore, Cochin, Ludhiana, Pune, Trivandrum, Simla, Gurgaon, and others.

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The South Indian zone have adopted the process of shopping in the supermarkets for their daily requirements and this has also been influencing other cities as well where many hypermarkets are coming up day to day. The retail companies are found to be rising in India at a remarkable speed with the years and this have brought a revolutionary change in the shopping attitude of the Indian customers. The Growth of Retail Companies in India is facilitated by certain factors like • existing Indian middle classes with an increased purchasing power • rise of upcoming business sectors like the IT and engineering firms • change in the taste and attitude of the Indians • effect of globalization • heavy influx of FDI in the retail sectors in India

21.8 LET US SUM UP

• Retailing can be defined as the buying and selling of goods and services. It can also be defined as the timely delivery of goods and services demanded by consumers at prices that are competitive and affordable. • There are many ways retailers can be categorized depending on the characteristics being evaluated such as target markets served, product offerings, pricing structure, promotional emphasis, distribution method, service level and ownership. • The growth in the Indian organized retail market is mainly due to the change in the consumers behavior. This change has come in the consumer due to increased income, changing lifestyles, and patterns of demography which are favorable.

21.9 CHECK YOUR PROGRESS

• What is retailing? What are the problems faced in retailing. (Refer 21.2 and 21.4 ) • Explain the different methods of retailing. (Refer 21.3 to 21.3.7) • Discuss retail marketing in India. (Refer 21.5)

• What are the opportunities available in Indian retail sector? (Refer 21.6)

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LESSON-22 MARKETING OF SERVICES

Contents: 22.0 Aims and Objectives 22.1 Introduction 22.2 Marketing of Services 22.3 Differences between Products and Services 22.4 Characteristics of services 22.5 Kinds of Services 22.6 Marketing Mix for Services 22.7 Service Mix 22.8 Price Mix 22.9 Physical Distribution Mix 22.10 Promotion Mix 22.11 Let us sum up 22.12 Check your progress

22.0 AIMS AND OBJECTIVES

In the last lesson we saw about the retailing concepts, here we discuss about the marketing of services. This will give a clear picture of how services are marketed through different strategies. After going through this lesson, you will be able to answer i. What is the difference between marketing of services and marketing of products? ii. What are the various kinds of services? iii. What is the marketing mix undertaken for services?

22.1 INTRODUCTION

Ten years ago it would have been difficult for you to find an advertising sponsored by a hospital. But what is the picture today? Many private hospitals do advertise though in an indirect way. It has been quoted, “to attract patients, St. Joseph’s Hospital in Flint, Michigan, offers a ‘special delivery package’ for expectant mothers and their new born infants, which includes a 24-hour hospital stay and follow-up visits for one-third regular price of a baby delivery.” Like other firms, service and non-profit organizations are realizing the

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importance of marketing. “In these competitive times, we want to develop allegiance with as many people as we can.” In India also the picture is not different. Specialists attached to hospitals in health care are advertised, though the stress is more on publicity.

22.2 MARKETING OF SERVICES

Marketing is often defined in terms of both products and services. Marketing executives and theoreticians generally have focused their attention on products under the assumption that services are marketed in much the same way. It is, however, not easy to provide a sharp definition of services. But a better understanding is possible if a product is seen as a noun and service as a verb. In this sense, a product is a tangible object or device, whereas service is a deed, a performance. In purchasing a product, the buyer obtains an asset, in purchasing a service the buyer incurs an expense. For example, when we stay in a rented room in a hotel, we take nothing away with us but the experience of a night’s stay. Although a consultant’s product may appear as a bound report, what the consumer bought was mental capability, not paper and ink. Today, services include a host of businesses, such as, electricity, telephone, travel agencies, catering services and so on.

Unlike a product, a service is an intangible thing – something one cannot see, feel, hear, taste or smell. The American Marketing Association defines services as “activities, benefits or satisfactions which are offered for sale or are provided in connection with the sale of goods.” The definition points out three kinds of services:

• The activities those are intangible in nature, e.g., Transportation. Here, some kind of products (Car, Bus) is used to derive the so-called intangible service.

• Benefits purely derived from services; e.g., Medical service, Insurance service, etc.

• The service obtained along with the buying of a product, e.g., after-sales service or the services rendered by a retailer.

Thus, “Services are separately identifiable, intangible activities which provide want satisfactions when marketed to consumers and/or industrial users and which are not necessarily tied to the sale of product or another service.”

It is only pertinent, here, to ask why the marketing of services should be distinguished from the marketing of a product when the ultimate aim in both the cases is the satisfaction of consumers’ wants. But the nature and characteristic features of services require them to be considered independently.

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22.3 DIFFERENCES BETWEEN PRODUCTS AND SERVICES

The main problem from the marketing standpoint is to determine when a product becomes a service and vice versa. Theoretically, a car is product. But when it is hired by a person to take him from one place to another, it ceases to be a product and becomes a service to the purchaser of the service. Further, when marketing a product, the primary task of the producer is to create a desire or need for his product in the mind of the consumer. It is also necessary to convince the consumer that a particular product is better than that of the competitors. Advertising has become an inevitable evil in the sale of products.

On the contrary, services are best marketed by meeting the already established needs of the consumer and by performance. If a service is performed well, the business or profession will prosper. It will flourish simply by “word-of-mouth” advertising. Doctors, lawyers, and accountants who follow the ethics of their profession do not advertise at all. Still their practice grows, and this growth is on the basis of their performance.

The second distinguishing factor is the variety of ways in which the selling of services is undertaken. There are many ways of selling services as there are services themselves. The products are sold under different methods but they all have a common service pattern. For example, in the case of banking service, different bankers adopt different methods for attracting various kinds of deposits. These are deposits, whether fixed, savings or current.

Thirdly, many service businesses are outgrowths of the sales of certain products. For example, when a car is sold, the buyer must have insurance, financial assistance, repair facilities, etc.

A product is identifiable and one can feel its presence in various ways. But a service takes a product and converts it into something that can be purchased but cannot be identified. For example, a car as a product could be identified but not the various services rendered by it.

Finally, the opportunities for offering services are unlimited unlike products. Flexibility for changing or conversion is also greater in the case of services. For example, a house that is rented out for a family could be converted into a lodge.

Thus, there do exist certain differences between goods and services. However, similarity is also present at least in the process of defining and analyzing a market for a product and a market for a service. But the similarity ends there. “The most certain differences between goods and services are the intangibility of services. Services lack tangible features which will appeal to a buyer’s sense of hearing, sight, taste, smell and touch.”

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22.4 CHARACTERISTICS OF SERVICES

Services have several unique characteristics which often present certain special marketing problems. Hence the decisions to be taken for marketing services are substantially different from those made for the marketing of products. 1. Intangibility. Many of the problems faced in the marketing of services are due to the intangible nature of services. The fact that a service cannot appeal to a buyer’s sense, places a burden on the marketing organization. This will affect the promotional program and may even influence the decisions on channels of distribution. Since a service firm is selling an idea and not a product, it must tell the buyer what the service will do. It is usually unable to illustrate, demonstrate, or display the service in use. Intangibility makes the promotion of services difficult and it is practically impossible to give sample. Consequently, buyers are unable to judge quality and value prior to purchase. Thus the services are bought purely relying on the manufacturers’ reputation and the reputation of their salesmen. Intangibility has certain obvious advantages also. First, there is no problem about its physical distribution. No warehousing problem, as there is practically nothing to store. The losses that may arise on account of decline in inventory values also do not affect services. 2. Inseparability. In many cases a service cannot be separated from the person who sells it. Therefore, services are often created and marketed simultaneously. Because of the simultaneous production and marketing of most services, the main concern of the marketer is usually the creation of time and place utilities. For example, electricity is generated and distributed (marketed) simultaneously. This inseparability element influences the selection of the channel of distribution. This inseparability often means that direct sale, is the only feasible channel of distribution. “In fact, until recently, many service firms failed to differentiate between the production and marketing of services.” The inseparability, very often, limits the scale of operation also. But some industries have been able to modify the inseparability characteristics. In such industries there may be a tangible representation of the service by someone other than the producer. In other words, tangible representations of the service are transferable, and various middlemen such as agents can, therefore, be utilized. For example, insurance services. Here, insurance company is the producer of the service and the services are distributed through agents. 3. Persihability and Fluctuating Demand. The utility of most services is short- lived. Services cannot be mass produced ahead of time and stored for periods of peak demand. The perishable nature of service is a challenging feature for the marketing men. Unused electrical power, idle seats in a bus or train represent business which is lost forever. In this respect also, services are quite different from goods. Yet another example is electricity which cannot be stored except in relatively small quantities as in a battery. Air travel is highly seasonal and the

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advertisements offering concessions for air travel are a regular feature now. “A special feature in aviation is that unlike the non-durable or durable goods aircraft seat is the most perishable commodity. Let the plane take off with that one empty seat and it is gone irretrievably and irrecoverably.” Fluctuations in demand pose another problem. The markets for services fluctuate usually by seasons and often by day or week. There is a peak period followed by a slack period. The combination of Persihability and fluctuating demand has created a host of problems. Special efforts are necessary to even out demand throughout. For example, Telephone department offers concessions for using their services during off-peak periods. For this, special advertising, separate channels of distribution, etc., are to be established, which is not at all necessary in the case of products. 4. Highly Differentiated Marketing System. In the case of products the marketing system evolved out of past experience would be sufficient. Even if changes occur in future, the system already in vogue may not become obsolete and may be used with very minor modifications. However, in the case of services, no fixed pattern could be adopted. For example, the marketing of banking and other financial services bears little or no resemblance to the marketing of repair services. The entire area of service marketing, and more specifically the selection of the channels of distribution, demands greater creativity and ingenuity on the part of the marketer. Table 22.1 Basic Differences between Services and Goods Services Goods 1. Services are often intangible. 1. Goods are tangible. They are They may involve acts, deeds, objects, things, materials. performances, efforts. Many Value is based on ownership. services cannot be physically

possessed. The value of a service may be based on an experience. 2. Services are usually perishable. 2. Goods can be stored. Surpluses Unused capacity cannot be stored in one period can applied or shifted from one time to against shortages in another another. period. 3. Services are frequently 3. Goods can be manufactured by inseparable. One cannot separate one firm and marketed by quality of many services from the another. The quality of good services provided. can be differentiated from a channel member’s quality. 4. Services may vary in quality over time. It is difficult to standardize 4. Goods can standardize. Mass some services because of their production and quality control labour intensiveness and the can be used. involvement of the service user in diagnosing his or her service needs.

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Moreover, it is very difficult to maintain uniform performance standards for services. The quality of service varies not only among firms in the same industry but also from one service transaction of the firm to the next. The basic reason for such variation in quality is that service industries are human – intensive. 5. Absence of Certain Marketing Functions. Since most service firms do not deal in tangible products, the elimination or reduction of certain market storage, inventory control, etc., need be not performed at all. This naturally has a certain impact on channel decisions. Since services cannot be stored, there need be not any merchant middlemen. This leaves the producer with two alternatives, the use of direct channel or the use of agent middlemen. 6. Heterogeneity. Services are numerous and it is impossible to standardize the output. The services of even the same seller are sometimes remarkably dissimilar. For example, no two hair-cuts from the same barber are identical. It is particularly so in designing the quality beforehand. A music program offers a good example. It cannot definitely satisfy all the listeners equally. This might place added strain on the marketing men of services. The management in such instances should ensure consistent and high quality performance. The heterogeneity of services offers both an advantage and a challenge to the service salesman. On the one hand, he has greater flexibility. A service salesman is better equipped to adapt his services to the individualized needs of his customers. Insurance policy, for example, conforms to standardized rules, but the agent is still able to choose from alternative options to design an individual policy for each buyer. Secondly, heterogeneity forces a salesman to have a complete knowledge of the entire range of his company’s services. Moreover, satisfactory matching of service offerings and customers’ needs require him to be a more creative salesman. 7. Customer Relationship. Normally the buyer is more prominent in the marketing and production of services than goods. In many service transactions, a client relationship exists between the buyer and seller, as distinguished from a customer relationship, for example, the doctor-patient relationship. It is highly personal and most direct in nature. In such cases, the buyer places himself in the hands of the seller and abides by the suggestion or advice provided by him. “In addition, since many service organizations are client-serving organizations, many (but not all) seem to approach the marketing functions in a professional manner, e.g., Financial, Legal, Educational, etc. 8. Lack of Standardization. Another notable feature of services is that they cannot be perfectly standardized as is the case of products. The example of hair-cut mentioned above is apt here also.

22.5 KINDS OF SERVICES

Services may be classified into: 1. Personal Services. Many services are of personal nature, e.g., house painting and various domestic services.

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2. Facility Services. When products are offered to the customers to provide some facilities, the services may be described as facility services, e.g., car, theatre, etc. The above distinction is not perfect as some services are really a mixture of the above two. In some cases the personal services cannot be offered without extensive physical facilities, e.g., hospital, university. 3. Business Services. When services are rendered to business houses they are called business services. These services include activities such as marketing services, management consultancy services, etc. 4. Customer Services. The services that are offered to ultimate consumers are known as customer services. Such services include laundries, hotels, etc. Some services are meant both for industry and the ultimate consumer, depending on who the buyer happens to be e.g., insurance, transportation, etc. Like tangible goods, the consumer services may be further classified into convenience, shopping and specialty services. Personal services such as dry cleaning and shoe repairs are commonly purchased on a convenience basis. Banking and auto repairs are services that are normally purchased after considerable shopping to compare price and quality. Finally, specialty services include highly technical services, such as professional services, including medical, legal and financial assistance.

22.6 MARKETING MIX FOR SERVICES

The unique service features listed above and the kinds of services pose peculiar problems for marketing managers of services. A summary of this is given in Table.

Table 22.2 Service Characteristics and Marketing Problems

Unique service features Resulting marketing problems Intangibility Cannot be stored Cannot be protected through patents Cannot be readily displayed or communicated Prices are difficult to set Inseparability Consumer is involved in production Other consumers are involved in production Centralized mass production is difficult Persihability Services cannot be inventoried Heterogeneity Standardization and quality are difficult to control

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It is to be reiterated that the marketing concept is equally applicable to goods, services and ideas. Thus, service marketers, like goods marketers, must strive to provide a bundle of benefits that satisfies the needs of consumers. Unfortunately most of the firms providing services do not give any importance to the marketing planning as in the case of products. Most producers feel that a service is a necessity and hence the demand will be instantaneous. This seems to be an incorrect philosophy. On the contrary, adoption of proper planning in service marketing could work wonders. Theodore Levitt’s concept of ‘Marketing Myopia’ is found to have influenced in preventing the adoption of marketing planning in its full perspective in the area of marketing of services. For instance, the activities of a film studio are often described as “making movies” instead of “marketing entertainment”. In developing a service marketing strategy many firms were seen to consider the following seven areas: 1. Marketing should occur at all levels, from the marketing department to the point where the service is provided. 2. Wherever possible, establish direct contact with the customers. 3. Use only high-quality personnel for marketing job. 4. Creation of loyalty among existing customers. 5. Ensure quick resolving of problems faced by customers. 6. Provision of improved services at lower cost. 7. Brand the services offered.

22.7 SERVICE MIX

Goods can be defined in terms of their physical attributes, but services cannot be because they are intangible. But there are also tangibles (such as facilities, communications) associated with a service. These tangible elements help form a part of the product and are often the only aspect of a service that can be viewed prior to purchase, which is why marketers must pay close attention to associated tangibles and make sure that they are consistent with the selected image of the service product. All other components of product mix discussed earlier are relevant here also. However, a caution may be noted. The service product is often equated with the service provider; for example, the teller becomes the service of a bank or the beautician becomes the service a beauty parlour provides. Because consumers tend to view services in terms of the service personnel and because personnel are inconsistent in their behaviour, it is imperative that marketers effectively select, train, motivate and control contact people. It is true to say that service marketers are selling long-term relationships as well as performance.

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22.8 PRICE MIX

Another difference between the sale of products and services lies in the techniques of pricing. It has been observed earlier that pricing a new product is one of the most important and puzzling marketing problems. This is more so in the case of services where pricing plays both an economic and a psychological role. It is psychological because consumers rely on price as the sole indicator of service quality when other quality indicators are absent. In its economic role, price determines revenue and influences profits.

Pricing of services can also help smooth fluctuations of demand. Given the perishability of service products, this is an important function. A higher price may be used to reduce demand during peak periods, and a lower price may be used to stimulate demand during slack periods. For example, if a room in a hotel is not rented out or if there are vacant seats in a bus, the potential income is lost permanently. The concessional charge allowed for telephone calls in the night proves the stimulation of demand during off peak period.

22.9 PHYSICAL DISTRIBUTION MIX

Distribution for services is usually simpler and more direct than channels of distribution for goods. This is due to the intangibility of services. The marketer of services is often less concerned with storage, transportation and inventory control, and shorter channels of distribution are typically employed as shown in Fig.22.1 Further, the element of inseparability (i.e., services cannot be separated from producers) has created a feeling that direct sale alone is possible in the matter of sale of services. This is, however, not completely true. It is quite common to recognize some middlemen in certain areas. The following kinds of middlemen are found in the channel of distribution of services: Fig 22.1 Channel Alternative for Services

SERVICE CONSUMER MANUFACTURE

SERVICE AGENT/BROKER CONSUMER MANUFACTURE /WHOLESALER

Agent: For example, Travel agents, Employment agencies, Insurance agents. These agents are at par with agent middlemen who do not take a title.

Wholesalers and Retailers: The actual service may not be easily transferable as the products could be transferred. Still, tangible representations of the services

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are transferable, for example, the transfer of shares. This type of channel is often found in cases where a contract exists as a tangible representation of the service.

The merchant middlemen dealing in services are rare. When an organization contracts for charter flight and then sells space to others, it is acting as a merchant middleman because it is now the temporary owner of the service. In India, electricity was bought and distributed by some agencies in the past.

Some service firms may market on a wholesale basis. For example, many transporting agencies undertake to transport goods although they do not own any vehicle. The consumer actually has no contract with the firm that actually produces the services, namely the transport company. These transport agents are actually wholesalers or retailers working on a fixed commission from the fleet owner.

22.10 PROMOTION MIX

Promotion mix is definitely an important aspect of the marketing mix for services. For instance, the advertising of services is somewhat challenging because they are tangible-dominant products. The intangibility makes it difficult to use different media of advertising. Service advertising should thus emphasize tangible cases that will help consumers understand and evaluate the service. The cues may be the physical facilities in which the service is performed or some relevant tangible object that symbolizes the services itself. For example, hotels may stress their physical facilities – clean, hygienic room facilities, etc.

Personal selling is potentially powerful in services because this form of promotion lets consumers and sales people, interact. Customer contact uncertainty, gives reassurance, reduce dissonance, and promote the reputation of the organization.

Sales promotions, such as contests, are feasible for service firms, but other types of promotions are more difficult to implement. For instance, a service can neither be displayed nor can it give free samples.

Although the role of publicity and the implementation of a publicity campaign do not differ significantly in the goods and service sectors, service marketers appear to rely on publicity, much more than goods marketers do.

Consumers tend to value word-of-mouth communications more than company sponsored communications. This preference is probably true for all products but especially for services because they are experimental in nature. For this reason, service firms should attempt to stimulate and simulate word-of-mouth communications. In this connection it is highly essential for a service marketer to know clearly the distinctions between Advertising, Publicity and Public Relations.

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22.11 LET US SUM UP

• The American Marketing Association defines services as “activities, benefits or satisfactions which are offered for sale or are provided in connection with the sale of goods.”

• Services have several unique characteristics which often present certain special marketing problems. Some special characteristics are intangibility, inseparability, Persihability and fluctuating demand, highly differentiated marketing system, absence of certain marketing functions, Heterogeneity, Customer Relationship and Lack of Standardization.

• Services may be classified into Personal Services, Facility Services, Business Services and Customer Services.

• Service Mix has to be planned cautiously by paying close attention to associated tangibles of services. This is required because service product is often equated with the service provider.

• Pricing of services can also help smooth fluctuations of demand. Given the Persihability of service products, this is an important function.

• In the matter of physical distribution mix, direct channel is the major option. However, depending on the type of services indirect channels also be used in a limited way.

22.12 CHECK YOUR PROGRESS

• Identify and discuss the distinguishing characteristics of services. What problems do these characteristics present to marketers? (Refer 22.2 and 22.4) • Distinguish between products and services. (Refer 22.2 and 22.3) • Discuss the role of promotion in services marketing. (Refer 22.10) • Explain the different kinds of services. (Refer 22.5) • Explain the Marketing Mix for Services. (Refer 22.6)

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LESSON-23 E- MARKETING

Contents: 23.0 Aims and Objectives 23.1 Introduction 23.2 Meaning of e-marketing 23.3 Benefits of e-marketing over traditional marketing 23.4 Difference between e-Business, e-Commerce and e-marketing 23.5 The 7 Cs (Fundamentals) of e-marketing 23.5.1 Contract 23.5.2 Content 23.5.3 Construction 23.5.4 Community 23.5.5 Concentration 23.5.6 Convergence 23.5.7 Commerce 23.6 Types of e-marketing 23.6.1 Banner Advertisements 23.6.2 Sponsorship 23.6.3 Classifieds Listings 23.6.4 Email Marketing 23.6.5 Partnership or affiliate marketing 23.6.6 Search Engine Marketing 23.7 Let us sum up 23.8 Check your progress

23.0 AIMS AND OBJECTIVES

Till now we discussed the basic concepts of marketing, marketing of products and services. Now in this part, we discuss the advanced modern concept of e- marketing. This will give the clear picture of fundamentals of e-marketing and types of e-marketing. This will help you to answer i. What are the basic fundamentals of e-marketing? ii. What are the different types of e-marketing?

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23.1 INTRODUCTION

Marketing has pretty much been around forever in one form or another. Since the day when humans first started trading whatever it was that they first traded, marketing was there. Marketing was the stories they used to convince other humans to trade. Humans have come a long way since then, (Well, we like to think we have) and marketing has too.

The methods of marketing have changed and improved, and we've become a lot more efficient at telling our stories and getting our marketing messages out there. eMarketing is the product of the meeting between modern communication technologies and the age-old marketing principles that humans have always applied.

23.2 MEANING OF e-MARKETING

Very simply put, eMarketing or electronic marketing refers to the application of marketing principles and techniques via electronic media and more specifically the Internet. The terms eMarketing, Internet marketing and online marketing, are frequently interchanged, and can often be considered synonymous.

E-Marketing is the process of marketing a brand using the Internet. It includes both direct response marketing and indirect marketing elements and uses a range of technologies to help connect businesses to their customers.

By such a definition, eMarketing encompasses all the activities a business conducts via the worldwide web with the aim of attracting new business, retaining current business and developing its brand identity

23.3 BENEFITS OF e-MARKETING OVER TRADITIONAL MARKETING

1. Reach: The nature of the internet means businesses now have a truly global reach. While traditional media costs limit this kind of reach to huge multinationals, eMarketing opens up new avenues for smaller businesses, on a much smaller budget, to access potential consumers from all over the world. 2. Scope: Internet marketing allows the marketer to reach consumers in a wide range of ways and enables them to offer a wide range of products and services. eMarketing includes, among other things, information management, public relations, customer service and sales. With the range of new technologies becoming available all the time, this scope can only grow.

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3. Interactivity: Whereas traditional marketing is largely about getting a brand's message out there, eMarketing facilitates conversations between companies and consumers. With a two-way communication channel, companies can feed off of the responses of their consumers, making them more dynamic and adaptive. 4. Immediacy: Internet marketing is able to, in ways never before imagined, provide an immediate impact. Imagine you're reading your favourite magazine. You see a double-page advert for some new product or service, maybe BMW's latest luxury sedan or Apple's latest iPod offering. With this kind of traditional media, it's not that easy for you, the consumer, to take the step from hearing about a product to actual acquisition. With E-Marketing, it’s easy to make that step as simple as possible, meaning that within a few short clicks you could have booked a test drive or ordered the iPod. And all of this can happen regardless of normal office hours. Effectively, Internet marketing makes business hours 24 hours per day, 7 days per week for every week of the year. By closing the gap between providing information and eliciting a consumer reaction, the consumer's buying cycle is speeded up and advertising spend can go much further in creating immediate leads. 5. Demographics and targeting: Generally speaking, the demographics of the Internet are a marketer's dream. Internet users, considered as a group, have greater buying power and could perhaps be considered as a population group skewed towards the middle-classes. Buying power is not all though. The nature of the Internet is such that its users will tend to organise themselves into far more focussed groupings. Savvy marketers who know where to look can quite easily find access to the niche markets they wish to target. Marketing messages are most effective when they are presented directly to the audience most likely to be interested. The Internet creates the perfect environment for niche marketing to targeted groups. 6. Adaptivity and closed loop marketing: Closed Loop Marketing requires the constant measurement and analysis of the results of marketing initiatives. By continuously tracking the response and effectiveness of a campaign, the marketer can be far more dynamic in adapting to consumers' wants and needs. With eMarketing, responses can be analysed in real-time and campaigns can be tweaked continuously. Combined with the immediacy of the Internet as a medium, this means that there's minimal advertising spend wasted on less than effective campaigns. Maximum marketing efficiency from eMarketing creates new opportunities to seize strategic competitive advantages.

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23.4 DIFFERENCE BETWEEN e-BUSINESS, e-COMMERCE AND e-MARKETING

E-Business is a very broad entity dealing with the entire complex system that comprises a business that uses electronic medium to perform or assist its overall or specialized business activities.

E-Commerce is best described in a transactional context. So for example an electronic transaction of funds, information or entertainment falls under the category handled by principles of e-Commerce. Technically e-Commerce is a part of e-Business.

E-Marketing is also a part of e-Business that involves electronic medium to achieve marketing objectives. E-Marketing is set on a strategic level in addition to traditional marketing and business strategy.

23.5 THE 7 CS (FUNDAMENTALS) OF E-MARKETING

The Internet allows for the entire sales cycle to be conducted on one medium, early instantaneously. From making the consumer aware of the product to providing additional information to transacting the final purchase, the Internet can accomplish it all. The Internet is like one big point-of-sales display, with easy access to products and the ability for impulse shopping. Impulse shoppers have found a true friend in the Internet. Within seconds from being made aware of a product, consumers can purchase it online. Further, with the targeting techniques available to advertisers, consumers who turn down a product because of the price can be identified and served a special offer more likely to result in a purchase. In the right hands, with the right tools, the Internet really is an advertiser’s dream come true.

The changing outlook in the area of e-marketing can be explained on the basis of 7 Cs of e-marketing.

23.5.1 CONTRACT

The e-marketer’s first goal is to communicate a core promise for a truly distinctive value proposition appealing to the target customers.

23.5.2 CONTENT

It refers to whatever appears on the website itself and on hot linked websites. If chosen appropriately, it can increase both the rates at which browsers are converted into buyers and their transactions.

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23.5.3 CONSTRUCTION

The promises made by e-marketers are not unique to the Internet, but the medium’s interactive capabilities make it easier for them to deliver on their promises quickly, reliably, and rewardingly. In practice, this means that promises must be translated into specific interactive functions and Web design features collectively giving consumers a seamless experience. Such design features as one-click ordering and automated shopping help deliver the promise of convenience.

23.5.4 COMMUNITY

Through site-to-user and user-to-user forms of interactivity (such as chat rooms), e-marketers can develop a core of dedicated customers who become avid marketers of the site too.

23.5.5 CONCENTRATION

Targeting through online behavioral profiling. Advertisers have known for some time that behavioral targeting (also known as profiling) is vastly superior to simple demographic targeting. Knowledge of a consumer’s past purchases interests, likes/dislikes, and behavior in general allows an advertiser to target an advertisement much more effectively. Department stores have long kept track of consumers’ past purchases. They are thus able to project what other types of products a consumer might be interested in and then send an appropriate coupon or sale offer. Credit card companies are the ultimate gatherers of behavioral targeting information. They maintain vast databases of cardholders’ past transactions, and they sell lists of this data to advertisers. The same type of behavioral model is forming on the Internet. Publishers and advertisement networks monitor the items that a consumer has expressed interest in or purchased on a site (or network of sites) in the past and target advertisements based on this information.

23.5.6 CONVERGENCE

We will soon enter the next round of the E-marketing battle as broadband reaches the masses. The Internet will become more ubiquitous and wireless; televisions will become more interactive; video/data/voice appliances will converge; brand advertising and direct marketing practices will integrate; domestic brands, commerce and marketing will become even more global; and big marketing spenders will spend more money online. Many companies that are well positioned today will need to continue to evolve to take advantage of the opportunities. The success of Internet advertising companies will largely be driven by how they maneuver among the coming developments. Rich media, brought on by broadband, will allow advertisers much greater creativity by bringing in new types of advertising to the Internet, as well as enhancing some of

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the more traditional forms. Broadband technology will allow the convergence of television and the Internet.

23.5.7 COMMERCE

The last emerging fundamental of e-marketing is commerce, whether it includes offering goods and services directly, or marketing those of another company for a fee, thus helping to cover the fixed costs of site operations and to offset customer acquisition costs.

23.6 TYPES OF e-MARKETING

E-marketing can be broadly categorized as any or all of the elements below. Each method is purpose specific and has its particular strengths and weaknesses. Before you invest in any eMarketing, make sure you are using the appropriate element that will deliver the outcome you need.

23.6.1 BANNER ADVERTISEMENTS

A graphical file (usually 468 x 60 pixels) that can be hypertext linked for potential customers to ‘click’ directly to an advertiser's website. Banner advertising is mostly used for driving awareness of your product or offer with your target market. It can also drive response if you have a call to action such as – ”Like the house you saw on the weekend? Click here now to see if you can afford it!”

Banners advertisements are a popular form of advertising and come in different shapes and sizes.

23.6.2 SPONSORSHIP

Closely associates content with the advertiser and is suitable for corporate branding and creating awareness. When you sponsor a web site online, your brand takes on the attributes of that site. For example, if a bank sponsors a real estate site, then one could say that the user has come to that site to find a house, and they could then go to the bank’s site to seek finance.

23.6.3 CLASSIFIEDS LISTINGS

Like newspaper classifieds, online classifieds are a powerful way to place your business in front of people who are ready to buy. The strength of online classifieds over offline classifieds is that users can search for exactly what they want very quickly through clever indexing technology (product, price, location, etc)., Also, because of the technology advantage, online classifieds extend not just to traditional classifieds but also online auctions which offer a whole new way of selling products and services.

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23.6.4 EMAIL MARKETING

Email marketing can be done in two ways. The first is to place advertising or a message in someone else’s email newsletter. For example, when you receive a newsletter from The Age online, it will contain advertiser messages and usually a small display banner advertisement. This is a great way to neatly target your audience. All you have to do is find a newsletter that is sent to a target market similar to yours and you can market to that group very effectively!

The second form of email marketing is by actually publishing an email marketing communication or newsletter yourself to your customers. This is a great way to keep top of mind with your customers. When undertaking this type of eMarketing, be careful not to just push products and specials. It is also good to provide information about your products so your customers can make a more informed decision about their purchases.

23.6.5 PARTNERSHIP OR AFFILIATE MARKETING

Advertisers selling goods online can develop networks of ‘affiliates’ that put up banner advertisements or other links on their own websites in return for a proportion of the business generated. This is a great way to limit the risk of advertising by only paying for successful sales.

23.6.6 SEARCH ENGINE MARKETING

Apart from email, more people search the Internet using search engines such as Google and Yahoo more than any other application. Most people who don’t know where to find what they are looking for on the World Wide Web start at a search engine. Therefore, if your business is not known by everyone, and even if you are, a great way to get noticed is to get your website listed on a search engine. It is important to make sure your site is registered with all the major search engines. Some of these are free, others cost money. If you have a little more money you can actually buy keywords. For example, if you are a plumber and you buy the word “plumbing”, your website will be returned to the results page following someone typing in the word ‘plumbing’ into the Search engine.

23.7 LET US SUM UP

• E-marketing or electronic marketing refers to the application of marketing principles and techniques via electronic media and more specifically the Internet.

• The terms eMarketing, Internet marketing and online marketing, are frequently interchanged, and can often be considered synonymous.

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• E-Business is a very broad entity dealing with the entire complex system that comprises a business that uses electronic medium to perform or assist its overall or specialized business activities.

• E-Commerce is best described in a transactional context. So for example an electronic transaction of funds, information or entertainment falls under the category handled by principles of e-Commerce. Technically e-Commerce is a part of e-Business.

• The changing outlook in the area of e-marketing can be explained on the basis of 7 Cs of e-marketing such as Contract, Content, Construction, Community, Concentration, Convergence and Commerce.

• E-marketing can be broadly categorized into Banner Advertisements, Sponsorship, Classifieds Listings, Email Marketing, Partnership or affiliate marketing and Search Engine Marketing

23.8 CHECK YOUR PROGRESS

• What is E-marketing? How far it is better than traditional marketing? (Refer 23.2 and 23.3) • Explain the fundamentals of e-marketing. (Refer 23.5 to 23.5.7) • What are all the different types of E-marketing? Which type of E- marketing is considered to be most effective one? (Refer 23.6 to 23.6.6 and answer it in your own ) • State the difference between e-Business, e-Commerce and e-Marketing. (Refer 23.4)

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LESSON-24 MARKETING ETHICS

Contents: 24.0 Aims and Objectives 24.1 Introduction 24.2 Basic Principle of Marketing Ethics 24.3 Areas of Marketing Ethics 24.3.1 Unfair or Deceptive Marketing Practices 24.3.2 Offensive Materials and Objectionable Marketing Practices 24.3.3 Ethical Product and Distribution Practices 24.4 Special Ethical Issues in Marketing to Children 24.5 Ethical Issues in Marketing to Minorities 24.6 Ethical Issues Surrounding the Portrayal of Women in Marketing Efforts 24.7 Ethical Norms and Values for Marketers 24.8 Let us sum up 24.9 Check your progress

24.0 AIMS AND OBJECTIVES

In this part, we discuss the ethics or rules of marketing. This acts as an essential feature of marketing, as all activities comes around these ethics to overcome the difficulties in marketing. After going through this lesson, you will be able to answer i. What are the basic principles followed in marketing ethics? ii. What are the ethical issues that affect marketing? iii. What are the different areas of marketing ethics?

24.1 INTRODUCTION

Ethics are a collection of principles of right conduct that shape the decisions people or organizations make. Practicing ethics in marketing means deliberately applying standards of fairness, or moral rights and wrongs, to marketing decision making, behavior, and practice in the organization. In a market economy, a business may be expected to act in what it believes to be its own best interest. The purpose of marketing is to create a competitive advantage. An organization achieves an advantage when it does a better job than its competitors at satisfying the product and service requirements of its target

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markets. Those organizations that develop a competitive advantage are able to satisfy the needs of both customers and the organization. As our economic system has become more successful at providing for needs and wants, there has been greater focus on organizations' adhering to ethical values rather than simply providing products. This focus has come about for two reasons. First, when an organization behaves ethically, customers develop more positive attitudes about the firm, its products, and its services. When marketing practices depart from standards that society considers acceptable, the market process becomes less efficient—sometimes it is even interrupted. Not employing ethical marketing practices may lead to dissatisfied customers, bad publicity, a lack of trust, lost business, or, sometimes, legal action. Thus, most organizations are very sensitive to the needs and opinions of their customers and look for ways to protect their long-term interests. Second, ethical abuses frequently lead to pressure (social or government) for institutions to assume greater responsibility for their actions. Since abuses do occur, some people believe that questionable business practices abound. As a result, consumer interest groups, professional associations, and self-regulatory groups exert considerable influence on marketing. Calls for social responsibility have also subjected marketing practices to a wide range of federal and state regulations designed to either protect consumer rights or to stimulate trade.

24.2 BASIC PRINCIPLE OF MARKETING ETHICS

Ethics refers to the study of moral principles, or “right and wrong”, therefore marketing ethics is all about marketers doing the “right thing”. Exactly what the right thing is, is not always completely clear-cut since what is “right” may vary depending on whether you are looking at it from the perspective of the company, its customers or the society in which they both exist. There are however several basic principles involved in ethical marketing : • Taking responsibility : marketers need to take responsibility for their products and their decisions. In the past marketers have often responded to social concern about particular products by defending them on the basis of “It was what the customer wanted”; • Dealing fairly : marketers need to be honest and fair in their dealings with all stakeholders. This means that products must be fit for use and accurately described, and contracts (both formal and implicit) should be drawn up in good faith and honoured; • Respecting consumer rights : including the right of redress, the right to information and the right to privacy 24. 3 AREAS OF MARKETING ETHICS 24.3.1 UNFAIR OR DECEPTIVE MARKETING PRACTICES

Marketing practices are deceptive if customers believe they will get more value from a product or service than they actually receive. Deception, which can take

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the form of a misrepresentation, omission, or misleading practice, can occur when working with any element of the marketing mix. Because consumers are exposed to great quantities of information about products and firms, they often become skeptical of marketing claims and selling messages and act to protect themselves from being deceived. Thus, when a product or service does not provide expected value, customers will often seek a different source. Deceptive pricing practices cause customers to believe that the price they pay for some unit of value in a product or service is lower than it really is. The deception might take the form of making false price comparisons, providing misleading suggested selling prices, omitting important conditions of the sale, or making very low price offers available only when other items are purchased as well. Promotion practices are deceptive when the seller intentionally misstates how a product is constructed or performs, fails to disclose information regarding pyramid sales (a sales technique in which a person is recruited into a plan and then expects to make money by recruiting other people), or employs bait-and- switch selling techniques (a technique in which a business offers to sell a product or service, often at a lower price, in order to attract customers who are then encouraged to purchase a more expensive item). False or greatly exaggerated product or service claims are also deceptive. When packages are intentionally mislabeled as to contents, size, weight, or use information, that constitutes deceptive packaging. Selling hazardous or defective products without disclosing the dangers, failing to perform promised services, and not honoring warranty obligations are also considered deception.

24.3.2 OFFENSIVE MATERIALS AND OBJECTIONABLE MARKETING PRACTICES

Marketers control what they say to customers as well as and how and where they say it. When events, television or radio programming, or publications sponsored by a marketer, in addition to products or promotional materials, are perceived as offensive, they often create strong negative reactions. For example, some people find advertising for all products promoting sexual potency to be offensive. Others may be offended when a promotion employs stereotypical images or uses sex as an appeal. This is particularly true when a product is being marketed in other countries, where words and images may carry different meanings than they do in the host country. When people feel that products or appeals are offensive, they may pressure vendors to stop carrying the product. Thus, all promotional messages must be carefully screened and tested, and communication media, programming, and editorial content selected to match the tastes and interests of targeted customers. Beyond the target audience, however, marketers should understand that there are others who are not customers who might receive their appeals and see their images and be offended. Direct marketing is also undergoing closer examination. Objectionable practices range from minor irritants, such as the timing and frequency of sales letters or commercials, to those that are offensive or even illegal. Among examples of

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practices that may raise ethical questions are persistent and high-pressure selling, annoying telemarketing calls, and television commercials that are too long or run too frequently. Marketing appeals created to take advantage of young or inexperienced consumers or senior citizens— including advertisements, sales appeals disguised as contests, junk mail (including electronic mail), and the use and exchange of mailing lists—may also pose ethical questions.

24.3.3 ETHICAL PRODUCT AND DISTRIBUTION PRACTICES

Several product-related issues raise questions about ethics in marketing, most often concerning the quality of products and services provided. Among the most frequently voiced complaints are ones about products that are unsafe, that are of poor quality in construction or content, that do not contain what is promoted, or that go out of style or become obsolete before they actually need replacing. An organization that markets poor-quality or unsafe products is taking the chance that it will develop a reputation for poor products or service. In addition, it may be putting itself in jeopardy for product claims or legal action. Sometimes, however, frequent changes in product features or performance, such as those that often occur in the computer industry, make previous models of products obsolete. Such changes can be misinterpreted as planned obsolescence. Ethical questions may also arise in the distribution process. Because sales performance is the most common way in which marketing representatives and sales personnel are evaluated, performance pressures exist that may lead to ethical dilemmas. Research is another area in which ethical is sues may arise. Information gathered from research can be important to the successful marketing of products or services. Consumers, however, may view organizations' efforts to gather data from them as invading their privacy. They are resistant to give out personal information that might cause them to become a marketing target or to receive product or sales information. When data about products or consumers are exaggerated to make a selling point, or research questions are written to obtain a specific result, consumers are misled. Without self-imposed ethical standards in the research process, management will likely make decisions based on inaccurate information.

24.4 SPECIAL ETHICAL ISSUES IN MARKETING TO CHILDREN

Children are an important marketing target for certain products. Because their knowledge about products, the media, and selling strategies is usually not as well developed as that of adults, children are likely to be more vulnerable to psychological appeals and strong images. Thus, ethical questions sometimes arise when they are exposed to questionable marketing tactics and messages. For example, studies linking relationships between tobacco and alcohol marketing with youth consumption resulted in increased public pressure directly leading to the regulation of marketing for those products. The proliferation of direct marketing and use of the Internet to market to children also raises ethical issues. Sometimes a few unscrupulous marketers design sites so that children are able to bypass adult supervision or control;

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sometimes they present objectionable materials to underage consumers or pressure them to buy items or provide credit card numbers. When this happens, it is likely that social pressure and subsequent regulation will result. Likewise, programming for children and youth in the mass media has been under scrutiny for many years. In the United States, marketing to children is closely controlled. Federal regulations place limits on the types of marketing that can be directed to children, and marketing activities are monitored by the Better Business Bureau, the Federal Trade Commission, consumer and parental groups, and the broadcast networks. These guidelines provide clear direction to marketers.

24.5 ETHICAL ISSUES IN MARKETING TO MINORITIES

The United States is a society of ever-increasing diversity. Markets are broken into segments in which people share some similar characteristics. Ethical issues arise when marketing tactics are designed specifically to exploit or manipulate a minority market segment. Offensive practices may take the form of negative or stereotypical representations of minorities, associating the consumption of harmful or questionable products with a particular minority segment, and demeaning portrayals of a race or group. Ethical questions may also arise when high-pressure selling is directed at a group, when higher prices are charged for products sold to minorities, or even when stores provide poorer service in neighborhoods with a high population of minority customers. Such practices will likely result in a bad public image and lost sales for the marketer. Unlike the legal protections in place to protect children from harmful practices, there have been few efforts to protect minority customers. When targeting minorities, firms must evaluate whether the targeted population is susceptible to appeals because of their minority status. The firm must assess marketing efforts to determine whether ethical behavior would cause them to change their marketing practices.

24.6 ETHICAL ISSUES SURROUNDING THE PORTRAYAL OF WOMEN IN MARKETING EFFORTS

As society changes, so do the images of and roles assumed by people, regardless of race, sex, or occupation. Women have been portrayed in a variety of ways over the years. When marketers present those images as overly conventional, formulaic, or oversimplified, people may view them as stereotypical and offensive. Examples of demeaning stereotypes include those in which women are presented as less intelligent, submissive to or obsessed with men, unable to assume leadership roles or make decisions, or skimpily dressed in order to appeal to the sexual interests of males. Harmful stereotypes include those portraying women as obsessed with their appearance or conforming to some ideal of size, weight, or beauty. When images are considered demeaning or harmful, they will work to the detriment of the organization. Advertisements, in particular, should be evaluated to be sure that the images projected are not offensive.

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24.7 ETHICAL NORMS AND VALUES FOR MARKETERS

Professional associations and accrediting bodies have identified guidelines for ethics in marketing. According to one of those associations, the American Marketing Association, the following rules guide marketing behavior. The American Marketing Association commits itself to promoting the highest standard of professional ethical norms and values for its members. Norms are established standards of conduct that are expected and maintained by society and / or professional organizations. Values represent the collective conception of what people find desirable, important and morally proper. Values serve as the criteria for evaluating the actions of others. Marketing practitioners must recognize that they not only serve their enterprises but also act as stewards of society in creating, facilitating and executing the efficient and effective transactions that are part of the greater economy. In this role Marketers should embrace the highest ethical norms of practicing professionals and the ethical values implied by their responsibility toward stakeholders (e.g., customers, employees, investors, channel members, regulators and the host community).

1. Responsibility of the marketer. Marketers must accept responsibility for the consequences of their activities and make every effort to ensure that their decisions, recommendations, and actions function to identify, serve, and satisfy all relevant publics: customers, organizations and society.

2. Honesty, Integrity and Quality are far more important than quick profits

3. Rights and duties in the marketing exchange process: - Participants should be able to expect that products and services are safe and fit for intended uses; that communications about offered products and services are not deceptive; that all parties intend to discharge their obligations, financial and otherwise, in good faith; and that appropriate internal methods exist for equitable adjustment and / or redress of grievances concerning purchases.

4. Organizational relationships: - Marketers should be aware of how their behavior influences the behavior of others in organizational relationships. They should not demand, encourage, or apply coercion to encourage unethical behavior in their relationships with others.

5. Conduct your business so as to build long term loyalty. When you get a customer, you want to keep that customer and build a sales relationship that can not only last years, but also create a stream of referral business.

6. Marketers must do no harm. This means doing work for which they are appropriately trained or experienced so that they can actively add value to their organizations and customers. It also means adhering to all applicable laws and regulations and embodying high ethical standards in the choices they make.

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7. Marketers must foster trust in the marketing system. This means that products are appropriate for their intended and promoted uses. It requires that marketing communications about goods and services are not intentionally deceptive or misleading. It suggests building relationships that provide for the equitable adjustment and / or redress of customer grievances. It implies striving for good faith and fair dealing so as to contribute toward the efficacy of the exchange process. 8. Marketers must embrace, communicate and practice the fundamental ethical values that will improve consumer confidence in the integrity of the marketing exchange system. These basic values are intentionally aspiration and include honesty, responsibility, fairness, respect, openness and citizenship.

24.8 LET US SUM UP

• Practicing ethics in marketing means deliberately applying standards of fairness, or moral rights and wrongs, to marketing decision making, behavior, and practice in the organization. • Several basic principles are involved in ethical marketing such as taking responsibility, dealing fairly and Respecting consumer rights. • Areas of Marketing Ethics include Unfair or Deceptive Marketing Practices, Offensive Materials and Objectionable Marketing Practices and Ethical Product and Distribution Practices. • The proliferation of direct marketing and use of the Internet to market to children also raises ethical issues. • Offensive practices may take the form of negative or stereotypical representations of minorities, associating the consumption of harmful or questionable products with a particular minority segment, and demeaning portrayals of a race or group. • Women have been portrayed in a variety of ways over the years. When marketers present those images as overly conventional, formulaic, or oversimplified, people may view them as stereotypical and offensive.

24.9 CHECK YOUR PROGRESS

• State the meaning of ethics and bring out the significance of ethics in marketing. (Refer 24.1) • Explain the principles of marketing ethics. (Refer 24.2) • Enumerate and discuss in detail, the areas of marketing ethics (Refer 24.3 to 24.3.3) • Discuss the ethical issues which relates to (a) Children (b) Minority and (c)Women. (Refer 24.5, 24.5 and 24.6) • Explain the ethical norms and values of marketers.(Refer 24.7)

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LESSON-25 CONSUMERISM

Contents: 25.0 Aims and Objectives

25.1 Introduction 25.2 Definition of Consumerism 25.3 Evolution of Consumerism 25.4 Consumer Exploitation in India 25.5 Types of Exploitation 25.5.1 Pricing 25.5.2 Adulteration 25.5.3 Duplication 25.5.4 Artificial Demand 25.5.5 Sub-standard 25.5.6 Product Risk 25.5.7 Advertising 25.5.8 Warranty and Services 25.5.9 Fitness 25.6 Laws Protecting the Consumer Interest 25.7 Consumer Protection Act, 1986 25.7.1 Objectives of Consumer Protection Act, 1986 25.7.2 Extent and Coverage of the Act 25.7.3 Rights of Consumers 25.7.4 Structure 25.8 Let us sum up 25.9 Check your progress

25.0 AIMS AND OBJECTIVES

Consumers are considered to be the king of modern business. Each and every activity revolves around them. Here, we discuss the exploitation of consumers through various sources and portraying the laws which is enacted to prevent exploitations. This will help you to answer i. How consumers are exploited in marketing? ii. What are the laws which govern consumers from exploitations?

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25.1 INTRODUCTION

Consumerism movement is a universal phenomenon. The goods or services available may be in abundance or in short supply, but the position of the consumer is weak, in relation to the seller. Sellers want customers, as buyers and not as complainants. The frustration and bitterness on the part of customers, who have been promised much is indeed great, but they realize less. It may be due to the existence of sellers’ market, where consumers are voiceless. There are many practices whereby consumers are not only being denied their basic rights but are being deceived too. Who is a consumer? A consumer is an individual who consumes goods manufactured by firms or created by nature (air, water etc.) and services offered by government or firms-hospital, educational institutions etc.

25.2 DEFINITION OF CONSUMERISM

Consumerism is defined by Richard H. Burkirk and James as “Organized efforts of consumers seeking redress, restitution and remedy for dissatisfaction they have accumulated in the acquisition of their standard of living.” Philip Kotler says that “Consumerism is not limited to organized efforts only but, is a social movement seeking to augment the rights and powers of buyers in relation to sellers.” Harper W. Boyed and David analyze the consumerism as “the dedication of those activities of both public and private organizations which are designed to protect individuals from practices that impinge upon their rights as consumers.” Thus, consumerism, as social movement, may be defined as an organized effort of consumers seeking redress, restitution and remedy for dissatisfaction they have accumulated in the acquisition of their standard of living.

25.3 EVOLUTION OF CONSUMERISM

The majorities of the consumers in advanced countries is well educated, well- informed and are in a position to protect them. But our Indian situation is different from the Western, where adequate production and proper distribution of products exist. In India, industries have not achieved the level of affluence of technology and the existing markets of products run in shortages, adulteration and black market prices. Indian people have less money at their disposal. The profit making attitude of the business failed to discharge social responsibilities of maintaining fair price, quality of goods and providing services etc. In short, consumerism is an outcome of sufferings and exploitation of consumers, and some businessmen, aim to make abnormal profit, which is at the cost of consumers’ safety and health. However, it has been accepted and agreed that “A consumer is a king of the Market,” but in fact he is not. The majority of the Indian problems relating to consumers are adulteration, artificial scarcity, unreasonable prices etc.

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There are different religious customs, traditions and languages in India; and about three-fourth of the population live in rural areas, where cultivation is the source of livelihood, and there is wide disparity of income of people. Majority of the people, who are most illiterate, have low income. To save or protect them, against exploitative practices of trade, consumerism has emerged and has been accepted as a defensive force to safeguard the interest of the customers.

The major causes of consumerism in India have been identified as rising prices, poor product performance and service quality, product shortages and deceptive advertising-shortages and inflation. Government has been very responsive to the consumer needs through legislative action. Economic discontent has been generated out of spiraling inflation. Thus, it has become necessary for the consumers to stand up for their rights through an effective organization in order to redress the grievances.

25.4 CONSUMER EXPLOITATION IN INDIA

Consumers at large become a prey to exploiters. Examples are not few but countless: 1. Supplied materials are sub-standard. Goods, in many cases, full short of their weight.

2. Goods and services are priced high.

3. Consumers are tortured with false advertisements.

4. Interested persons or profiteers create artificial scarcity to earn illegitimate profits.

5. At the time of price rising stages essential commodities are hoarded and black marketed at boosted price.

6. Rude behaviour of rationing shops-controlled by government.

7. Funs and contest advertisements have been a method of cheating innocent people.

8. People are made fools by advertising tall and false claims.

9. Mail order business is another form of crookedness.

10. Consumers have been harassed during the guarantee period, where free repair to warrant.

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Adulteration is at the maximum, about 50% food items, we are consuming now, are adulterated. 11. Further Examples 12. Tooth paste tubes filled with air at the other end. 13. Buying a package of biscuits, one finds more package materials than the quantity of biscuits. 14. 300 grams of vanaspati is found in a 500 grams tin of ghee, but labelled as PURE GHEE. 15. A 250 grams pure tea consists of 150 grams of exhausted tea leaves, which is artificially coloured and prepared, but the script of the label reads as “A1”. 1. 500 grams of chilly powder packet consists of 150 grams of red brick powder or coloured saw dust, where label reads “PURE”. 2. One litre “PURE MILK”. 3. One kilogram of sugar packet weighs only 970 grams, whereas labelled as NET WEIGHT ONE KILOGRAM. 4. When applying sandalwood (wet powder) on forehead, it leaves black scars on the skin. 5. When someone wants to commit suicide by taking poison, he will not die, as the poison is adulterated. 6. In a packet of one kilogram of black rum, one can easily find 100 grams of black coloured pebbles. 7. A match box does not contain the labelled number of sticks. 8. Making the bottom of the bottle or tin bulged inwards, thereby eating into the quantity of the contents.

25.5 TYPES OF EXPLOITATION

Further, consumerism in India is to be seen differently from that of affluent societies of the Western countries. Some of the major problems of consumers’ exploitation are given below:

25.5.1 PRICING

A rupee was rupee in 1949. It rose to Rs.1.04, in 1955. But today, it is worth quantity, but in actual practice it is not so. Prices of daily convenience items such as soaps, tooth paste, washing powders etc., are fixed by the producers. Producers generally stamp the price, which is 10% - 20% above the real price. This ensures a good margin to wholesalers, to whom the producers sell and create a demand from them. Shortages are created but at the same time such goods can be had from black marketers.

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25.5.2 ADULTERATION

Adulterations make illegitimate profits. Businessmen aim at profit-more profit. Profit is inherent in the business. When one wishes to have undue profit, one tries to adulterate the products. For example, mixing of coconut oil with palmolein, or cheaper fats in ghee, presence of stones in grains etc. About 25- 35% of the food we eat today is adulterated. Adulteration has become a commercial activity, causing so many harmful effects.

25.5.3 DUPLICATION

Duplicates are available for all types of products-milk, automobile parts, blade, pens, watches, radios, medicines, clothes, and even currency notes. Duplicate medicines are prevalent in large measure, from Cape to Kashmir. Persons, unfamiliar with original products can easily be fooled by the traders. There are industries, within India, manufacturers of everything duly stamped “Made in Japan”, “Made in U.S.A” etc.

25.5.4 ARTIFICIAL DEMAND

There are situations where the shop-keepers hang the board “No Stock” in front of their shops, where stocks are in abundance. Consumers, who need such items, may pay higher price. Even in cinema houses, board may be hung in the main entrance “House full”. But black marketers offer tickets to needy cinema goers. People may not bring these to the government’s notice.

25.5.5 SUB-STANDARD

There is a general tendency among the middlemen or manufacturers that reducing the quality and quantity of the products, is common after gaining good popularity for the product. Products are packed and sealed. Unless one makes an out-right purchase, goods cannot be inspected. If defective or damaged items are found in a pack, one cannot return it and the consumers have to blame themselves at their own cost. Generally, when one gets a product, no bill is made. Thus there is no proof. Even if a bill is made, print appears like “goods once sold will not be taken back.” Thus the seller does not accept the defective or damaged goods. Concealed sub-standard, reduced quantity and defective items are sold in the market. The innocent people, who are unaware of these, are cheated and they suffer.

25.5.6 PRODUCT RISK

In the absence of adequate information to the consumers, dangers do appear. There are many harmful medicines, electrically operated kitchen appliances etc.

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sold to the consumers, without giving adequate information. Beauty aid cosmetics, most of them, have reactions in the long run. Mainly poorly designed kitchen ranges cause injuries-even fatal to many who handle them. Certain type of small tablet of one paisa size is packed in a big packet, where one hundred of such tablets can be easily packed in it.

25.5.7 ADVERTISING

The main purpose of advertisement is to make product familiar among the public. But advertisement contains least information about the product. The role of advertising has been criticised in many ways-makes false claim, misrepresentation, fraud, cheating etc. The words-Super, A-1, Wonderful magical action etc, may possess no meaning in relation to the product.

25.5.8 WARRANTY AND SERVICE

When guarantee is given against the good performance of the product, it is made ineffective through pretext. Even during the guarantee period, if the product goes inoperative. There are many people who possess vehicles-cycle, scooter, bike, car and other products such as, radio, television, watches, tape recorders etc. and if they go under repair, the servicing mechanic or service station charges exorbitant charges, which is a punishment on the innocent consumers. There are many quacks (doctors) who make tall claims and, if approached it is at the cost of our life. Businessmen have unlimited tactics to cheat the consumes, who are like a sheep before a lion.

25.5.9 FITNESS

The product quality and durability along with suitability etc. may come under category of product fitness. What is claimed by the product advertiser must tally with the product. But in actual practice, it is not so. For instance, clothes having a seal of “stanforized” may shrink, battery having a label “leak proof” starts leaking, products, having a label of “unbreakable” break at use etc. For all these calamities, the possessor of the products becomes responsible instead of the producer. Thus, consumerism is an outcome of sufferings and exploitation of consumers, who aim to secure protection from commercial terrorism, and exploitative practices, in order to safeguard the interest by establishing the rights and powers in relation to products and sellers.

25.6 LAWS PROTECTING THE CONSUMER INTEREST

The former President of the U.S.A. Mr. Kennedy, defined the basic consumer rights- “As the Right of Safety, The Right to be informed, the Right to choose and the Right to be heard.” Increased product information for the consumers has been widely prescribed as a remedy. The government of India has enacted

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certain laws to protect the well being of the consumers and to safeguard them. A few are described below:

¾ The Prevention of Food Adulteration Act, 1954

This is a consumer-oriented legislation designed to protect the health of the public by prohibiting adulteration of food. An adulterated food article is one which is injurious to public health. It is deemed injurious when:

• The product quality is not as demanded or claimed;

• It contains an injurious substance;

• Any constituent of the article has been taken away;

• It has been prepared, packed or kept under unsanitary conditions;

• It is unfit for human consumption;

• It is obtained from decreased animals;

• It is poisonous or deleterious;

• It contains a prohibited preservative;

• It s quality or purity falls below the prescribed standards.

¾ The Essential Commodities Acts, 1955

It is one of the major consumer-oriented legislations of the country whose object is to control, in the interest of the general public, the production, supply and distribution of trade and commerce in certain commodities declared essential. A number of products are included under it. Whenever a company markets these products, the provisions of this act apply to it and influence its product, distribution and pricing decisions. In 1974, it was further amended with provisions against hoarders, black-marketers and profiteers. It is made compulsory to display the prices of essential commodities. ¾ Weights and Measures Act, 1958 This Act was enacted to safeguard the consumers against the exploitation of weighing measures of commodities by traders. Under this Act standard weights and measures are introduced and metric system of weights and measures has been introduced. ¾ The Monopolies and Restrictive Trade Practices Act, 1969 This Act was enacted in order to regulate the monopolistic and restrictive trade practices followed by companies. It applies only undertakings, except

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government and public undertakings. Monopolies and Restrictive Trade Practices Commission (MRTP) has been set up to enquire into monopolistic and restrictive trade practices upon a complaint by any trade or consumer association. The main objectives, it short, are checking concentration of economic power which is detrimental to the society, checking such monopolistic and restrictive trade practices which are injurious to public well-being and welfare and vesting the powers with the Central government to investigate and control mergers and expansions. ¾ Drugs and Cosmetics Act, 1940 Just as in food products, drugs of sub-standard quality are manufactured and marketed. The prices charged for medicines are not proportional to the cost of production. The high prices charged by the manufacturers are high enough to exploit the consumers. There is the problem of spurious drugs-manufactured by unscrupulous producers, and they are not only harmful but also dangerous to life. ¾ Packaged Commodities Order, 1975 This is an important measure for consumer protection. This order provides that producers of several packaged commodities should print on the packages the contents, weights, price, month of manufacture, the date of expiry of the products, the name of manufacturer meant for retail trade so that consumers will come to know what they purchase. It has valuable provisions to consumers. Further: Drugs Control Act, 1950 Dangerous Drug Act, 1930 The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954 Household Electrical Appliances (Quality Control) Order, 1976 and many other Acts in favour of consumers

25.7 CONSUMER PROTECTION ACT, 1986

The consumer protection Act, 1986 (68 of 1986) is a milestone in the history of socio-economic legislation in the country. It is one of the most progressive and comprehensive piece of legislations enacted for the protection of consumers. It was enacted after in-depth study of consumer protection laws in a number of countries and in consultation with representatives of consumers, trade and industry and extensive discussions within the Government.

25.7.1 OBJECTIVE OF CONSUMER PROTECTION ACT

The main objective of the act is to provide for the better protection of consumers. Unlike existing laws which are punitive or preventive in nature, the provisions of this Act are compensatory in nature. The act is intended to provide simple,

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speedy and inexpensive redressal to the consumers' grievances, and relief of a specific nature and award of compensation wherever appropriate to the consumer. The act has been amended in 1993 both to extend its coverage and scope and to enhance the powers of the redressal Machinery.

25.7.2 EXTENT AND COVERAGE OF THE ACT

The salient features of the Act are summed up as under:- • The Act applies to all goods and services unless specifically exempted by the Central Government. • It covers all the sectors whether private, public or cooperative. • The provisions of the Act are compensatory in nature.

25.7.3 RIGHTS OF CONSUMERS

It enshrines the following rights of consumers:-

• Right to be protected against the marketing of goods and services which are hazardous to life and property.

• Right to be informed about the quality, quantity, potency, purity, standard and price of goods or services so as to protect the consumer against unfair trade practices;

• Right to be assured , wherever possible , access to a variety of goods and services at competitive prices;

• Right to be heard and to be assured that consumers' interests will receive due consideration at appropriate forums;

• Right to seek redressal against unfair trade practices unscrupulous exploitation of consumers; and

• Right to consumer education

• The Act envisages establishment of Consumer Protection Councils at the Central and State levels, whose main objects will be to promote and protect the rights of the consumers.

25.7.4 STRUCTURE

To provide simple, speedy and inexpensive redressal of consumer grievances, the Act envisages three- tier quasi-judicial machinery at the National, State and District levels.

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• National Consumer Disputes Redressal Commission - known as "National Commission". • Consumer Disputes Redressal Commissions known as "State Commission". • Consumer Disputes Redressal Forums- known as "District Forum".

The consumer movement should be strengthened in our country so that the tendency to push up the prices could be curbed and the quality of services and products ensured. Among consumes under Indian condition, the literacy level is low and purchasing power is poor. But one must be aware of one’s rights and should not hesitate to exercise them in right direction. To face the businessmen, who are organized, the consumers should also create strength by organizing those good buyers through education and implementing various Acts. The consumers themselves have to protect themselves through powerful consumer movement.

25.8 LET US SUM UP

• Philip Kotler says that “Consumerism is not limited to organized efforts only but, is a social movement seeking to augment the rights and powers of buyers in relation to sellers.” • Consumers at large become a prey to exploiters Some of the major problems of consumers’ exploitation are Pricing, Adulteration, Duplication, Artificial Demand, Sub-standard, Product Risk, Advertising, Warranty and Services and Fitness. • Increased product information for the consumers has been widely prescribed as a remedy. The government of India has enacted certain laws to protect the well being of the consumers and to safeguard them. • The consumer protection Act, 1986 is one of the most progressive and comprehensive piece of legislations enacted for the protection of consumers. It was enacted after in-depth study of consumer protection laws in a number of countries and in consultation with representatives of consumers, trade and industry and extensive discussions within the Government.

25.9 CHECK YOUR PROGRESS

• Define consumerism and explain the consumer exploitations in India with examples. (Refer 25.2 and 25.4) • Explain the various types of exploitations. (Refer 25.5 to 25.5.9) • Does the government of India have enacted certain laws to protect the well being of the consumers? Discuss. (Refer 25.6 to 25.7.4) • Explain the Consumer Protection Act, 1986 in detail. (Refer 25.7 to 25.7.4)

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