Marketing Management

UNIT II
PRODUCT
According Philp Kotler, “A product is a bundle of physical services and symbolic
particulars expected to the yield satisfactions or benefits to the buyer.”
According to W. Alderson, “A product is a bundle of utilities consisting of various
features and accompanying services.”
According to George Fisk, “Product is cluster of psychological satisfactions.”
A Product can referred as a “Set of tangible offering made available to the
consumer to satisfy his/ her needs.”
Meaning and Definition Of Product:
➢ Consumer Satisfaction.
➢ Exchange values.
➢ Associated attributes.
➢ Intangible attributes
➢ Tangibility-Features of the Product

five product levels

core benefit of the product
generic product
expected product
augmented product
potential product

source: Kotler, marketing management

© provenmodels
In reality, the word marketing covers a much bigger topic than that and is a very
interesting study. Maybe as you know I have studied marketing and I have to admit
I loved to get to know the basic things that marketing also includes – like this
topic, which is the 5 levels of the product.
This is one of the basics of marketing and should be very important for each
company that want to know how to satisfy the needs of their customers.
A product is ‘anything that can be offered to a market that might satisfy a want or
need’. So this means the word product can also mean the sweet promise/hope that
the physical product in your hand can offer, like you will be as beautiful when you
use the body lotion, as the women in the ad This might be weird, but think about it:
you really bought that lotion last time because you really think it will help
you/make you more beautiful, etc.
Also, several added values can be given to each product – basically everything you
can think of when speaking about a product can fit into the following categories:
The 5 product levels
• Potential product – it is the final product that is available on the market and
that the consumers can buy. This includes all the additional values and
augmentations that the company finally included in the product to differentiate
it from the competitors’ products.
• Augmented product – those attributes of the product that can differentiate it
from the competitors’ products and might provide a slight advantage over
them for the consumers. These may include the brand name, the design, the
packaging, the overall quality, the additional functions (apart from the basic
features), the installation, the after-sale service, the warranty, the home
delivery and the possibility to accept credit from the consumers.
• Expected product – the properties that the product has and that are absolutely
necessary for the consumer to think about buying the product.
• Basic product – the basic product that might satisfy the inner needs of the
consumer. On this stage the product only contains those values that are totally
necessary for it to function.
• Core benefit – the inner need that urges the consumers to buy something, no
matter if it is a product or a service. The main aim of consumers is to satisfy
this inner urge.

Example of a service: a hotel room

 • Core benefit: the inner urge of customers to sleep and have some privacy and
silence.
• Basic product: a hotel room with a single bed, and basically that’s all.
• Expected product: A hotel room with a bed that is neat and clean and the
room has at least a small bathroom.
• Augmented product: a hotel room with a bed in a popular hotel; the room has
a nice bathroom with hair dryer, is air conditioned and has a TV and a minibar.
• Potential product: a hotel room with a huge double bed with water mattress,
LCD television, a big bathroom with a hydro-massage shower cabin, etc.
Example of a product: car
• Core benefit: the need to get from one place to another.
• Basic product: a car on its own; on this level this basically means that the car
has 4 wheels
• Expected product: a car that is in working condition, so the owner can use it
for transportation, it has decent mileage, etc.
• Augmented product: a Ford (or any other brand for that matter) that is in
fully working condition, has an attractive design, passed all safety tests, has 4-
wheel steering, built-in alarm and air condition, etc. The car is also
accompanied by other benefits provided by the motor company like warranty,
instalments, etc.
• Potential product: the car is much safer than the competitors’ products; it
tends to break down less frequently than other cars, has the best mileage, etc.
Product Classifications
In addition to understanding a product’s position in the hierarchy, the marketer also
must understand how to classify the product on the basis of three characteristics:
durability, tangibility, and consumer or industrial use. Each product classification
is associated.

Durability and tangibility: Nondurable goods are tangible goods that are
normally consumed in one or a few uses (such as beer and soap). Because these
goods are consumed quickly and purchased frequently, the appropriate strategy is
to make them available in many locations, charge only a small markup, and
advertise heavily to induce trial and build preference. Durable goods are tangible
goods that normally survive many uses (such as refrigerators). hese products
normally require more personal selling and service, command a higher margin, and
require more seller guarantees. Services are intangible, inseparable, variable, and
perishable products (such as haircuts or cell phone service), so they normally
require more quality control, supplier credibility, and adaptability.
Consumer-goods classification: Classified according to consumer shopping
habits, these products include:
convenience goods that are usually purchased frequently, immediately, and with a
minimum of effort, such as newspapers;
Shopping goods that the customer, in the process of selection and purchase,
characteristically compares on the basis of suitability, quality, price, and style, such
as furniture.
Specialty goods with unique characteristics or brand identification, such as cars,
for which a sufficient number of buyers are willing to make a special purchasing
effort.
Unsought goods that consumers do not know about or do not normally think of
buying, such as smoke detectors. Dealers that sell specialty goods need not be
conveniently located but must communicate their locations to buyers; unsought
goods require more advertising and personal sales support.
Industrial-goods classification:
Materials and parts are goods that enter the manufacturer’s product completely.
Raw materials can be either farm products (e.g., wheat) or natural products (e.g.,
lumber). Farm products are sold through intermediaries; natural products are
generally sold through long-term supply contracts, for which price and delivery
reliability are key purchase factors. Manufactured materials and parts fall into two
categories: component materials (iron) and component parts (small motors); again,
price and supplier reliability are important considerations.

Capital items are long-lasting goods that facilitate developing or managing the
finished product. They include two groups: installations (such as factories) and
equipment (such as trucks and computers), both sold through personal selling.
Supplies and business services are short-lasting goods and services that facilitate
developing or managing the finished product.

Product Mix
A product mix is the set of all products and items that a particular marketer offers
for sale. At Kodak, the product mix consists of two strong product lines:
information products and image products. At NEC (Japan), the product mix
consists of communication products and computer products. The product mix of an
individual company can be described in terms of:
Width: refers to how many different product lines
Length: refers to the total number of items in the mix.
Depth: mix refers to how many variants of each product are offered.
Consistency: refers to how closely related the various product lines are in end use,
production requirements, distribution channels, or some other way the company
carries.
.
Brand
defines a brand as a name, term, sign, symbol, or design, or a combination of these,
intended to identify the goods or services of one seller or group of sellers and to
differentiate them from those of
competitors.
Branding The marketing practice of creating a name, symbol or design that
identifies and differentiates a product from other products
Brand Name A word, name, symbol, etc., especially one legally registered as a
trademark, used by a manufacturer or merchant to identify its products
distinctively from others of the same type and usually prominently displayed on its
goods, in advertising, etc.
Brand Mark Aspect or element (such as color, design, picture, symbol, typeface)
of a brand that cannot be expressed in words.
◼ Trade Mark: When a brand name or brand mark is registered & legalized it
becomes a trade mark.
◼ Trade Name: Name of business, preferably the name of organization itself.
It may also be a brand name.
◼ Patents: Public documents conferring certain rights, privileges, titles or
offices. It confers the right to the use of technical invention.
◼ Copy right: Applicable in case of books. Provides a sole right to reproduce
literary, dramatic, musical or artistic work.
Functions of Branding
• Product identification & distinctiveness.
• Denotes the quality & standard of product
• Eliminates product imitation
• Ensures legal right on product
• Helps in advertising & packaging activities
• Helps to create & sustain brand loyalty
• Helps in price differentiation of products.
Kinds of Brands
◼ Manufacturer’s Brand:
➢ National Brands
➢ Regional Brands
➢ Blanket/ single/family brands
 ➢ Multiple Brands or Individual brands
◼ Distributor’s Brand:
➢ Private brand
➢ Store Brand
➢ Dealer Brand
➢ House brand

Brand Strategy Decision

Line Extensions: Line extensions introduce additional items in the same product
category under the same brand name, such as new flavors, forms, colors, added
ingredients, and package sizes. Dannon introduced several Dannon yogurt line
extensions, including fat-free “light” yogurt and dessert flavors such as “mint
chocolate cream pie.” The vast majority of new products are actually line
extensions.
Brand Extensions A company may use its existing brand name to launch new
products
in other categories. Autobytel.com, a pioneer of Internet-based car sales, used
brand extensions to introduce automotive financing, insurance, and car repairs on
its Web site.
Multiband A company will often introduce additional brands in the same product
category. Sometimes the firm is trying to establish different features or appeal to
different buying motives. Multibranding also enables the company to lock up more
distributor shelf space and to protect its major brand by setting up flanker brands.
For example, Seiko uses one brand for higher-priced watches and another for
lower-priced watches (Pulsar) to protect its flanks.
New Brands When a company launches products in a new category, it may find
that none of its current brand names are appropriate. If Timex decides to make
toothbrushes, it is not likely to call them Timex toothbrushes. Yet establishing a
new brand name in the U.S. marketplace for a mass-consumer-packaged good can
cost anywhere from $50 million to $100 million, making this an extremely critical
decision.
Co-brands A rising phenomenon is the emergence of co-branding (also called
dual branding), in which two or more well-known brands are combined in an offer.
Each brand sponsor expects that the other brand name will strengthen preference or
purchase intention. In the case of co-packaged products, each brand hopes it might
be reaching a new audience by associating with the other brand.

Brand Equity
Brands vary in the amount of power and value they have in the marketplace. At
one extreme are brands that are not known by most buyers. Then there are brands
for which buyers have a fairly high degree of brand awareness. Beyond this are
brands with a high degree of brand acceptability. Next are brands that enjoy a high
degree of brand preference. Finally there are brands that command a high degree
of brand loyalty. Aaker distinguished five levels of customer attitude toward a
brand.

Product Development
In this fast-changing world we are experiencing change in our daily life and at
marketplace too. Customer needs, wants, and expectations are changing more
rapidly. Customers are increasingly demanding advance features, appealing
designs, better quality, and reliability in products. To meet the changing demands
of customer, business organizations are investing heavily in research and
development (R&D). Business organizations are updating existing products and
developing new products to satisfy changing customer needs, wants, and
expectations. The development of competitive new products is a prerequisite for
every business organization to be successful. Samsung has outperformed Nokia in
the global mobile-phone market and become the global leader. Samsung updates
its existing mobile phones and brings new mobile phones more frequently at
competitive low price with advance features, appealing designs, better quality and
reliability. Nokia failed to satisfy changing customer needs, wants, and
expectations, and lost its market position.

Definition of Product Development

In general, the Product Development can be defined as "creating, innovating, or

developing entirely a new product, or presenting an existing product with
enhanced utility, improved features, more appealing design, better quality and
reliability to satisfy the requirements of its end-users."

Meaning
Product means a good, service, idea or object created as a result of a process and
offered to serve a need or satisfy a want.
Development means the act or process of growing, progressing, or developing.

Product Development is a process of improving the existing product or to

introduce a new product in the market. It is also referred as New Product
Development. The functions of product development are as follows:-
 1. Creation of an entirely new product or upgrading an existing product,
2. Innovation of a new or an existing product to deliver better and enhanced
services,
3. Enhancing the utility and improving the features of an existing product,
4. Continuous improvement of a product to satisfy rapidly changing customer
needs and wants.

Product Development Process

Product development process is a crucial process for the success and survival of
any business. Today, businesses are operating in a highly dynamic and competitive
environment. Business organizations have to continuously update their products to
conform to current trends. The product development process starts from idea
generation and ends with product development and commercialisation. Following
are the steps in the process of product development.

1. Idea Generation - The first step of product development is Idea Generation

that is identification of new products required to be developed considering
consumer needs and demands. Idea generation is done through research of
market sources like consumer liking, disliking, and competitor policies.
Various methods are available for idea generation like - Brain Storming,
Delphi Method, or Focus Group.
2. Idea Screening - The second step in the process of product development is
Idea Screening that is selecting the best idea among the ideas generated at
the first step. As the resources are limited, so all the ideas are not converted
to products. Most promising idea is kept for the next stage.
3. Concept Development - At this step the selected idea is moved into
development process. For the selected idea different product concepts are
developed. Out of several product concepts the most suitable concept is
selected and introduced to a focus group of customers to understand their
reaction. For example - in auto expos different concept cars are presented,
these models are not the actual product, they are just to describe the concept
say electric, hybrid, sport, fuel efficient, environment friendly, etc.
4. Market Strategy Development - At this step the market strategies are
developed to evaluate market size, product demand, growth potential, and
profit estimation for initial years. Further it includes launch of product,
selection of distribution channel, budgetary requirements, etc.
5. Business Analysis - At this step business analysis for the new product is
done. Business analysis includes - estimation of sales, frequency of
purchases, nature of business, production and distribution related costs and
expenses, and estimation of profit.
 6. Product Development - At this step the concept moves to production of
finalized product. Decisions are taken from operational point of view
whether the product is technically and commercially feasible to produce.
Here the research and development department develop a physical product.
7. Test Marketing - Now the product is ready to be launched in market with
brand name, packaging, and pricing. Initially the product is launched in a
test market. Before full scale launching the product is exposed to a carefully
chosen sample of the population, called test market. If the product is found
acceptable in test market the product is ready to be launched in target
market.
8. Commercialization - Here the product is launched across target market with
a proper market strategy and plan. This is called commercialization phase of
product development.

Meaning of Product Mix

Product mix or product assortment refers to the number of product lines that an
organization offers to its customers. It consists of various product lines that an
organization offers, an organization may have just one product line in its product
mix and it may also have multiple product lines. These product lines may be fairly
similar or totally different, for example - Dish washing detergent
liquid and Powder are two similar product lines, both are used for cleaning and
based on same technology; whereas Deodorants and Laundry are totally different
product lines.

Product line is a group of related products manufactured or marketed by a single

company. Such products function in similar manner, sold to the same customer
group, sold through the same type of outlets, and fall within a same price range.

An organization’s product mix has following four dimensions:-

1. Width
2. Length
3. Depth
4. Consistency
Width
The width of an organization’s product mix pertains to the number of product lines
that the organization is offering. For example, Hindustan Uni Lever offers wide
width of its home care, personal care and beverage products. Width of HUL
product mix includes Personal wash, Laundry, Skin care, Hair care, Oral care,
Deodorants, Tea, and Coffee.

Length
The length of an organization’s product mix pertains to the total number of
products or items in the product mix. As in the given diagram of Hindustan Uni
Lever product mix, there are 23 products; hence, the length of product mix is 23.

Depth
The depth of an organization’s product mix pertains to the total number of variants
of each product offered in the line. Variants include size, color, flavors, and other
distinguishing characteristics. For example, Close-up, brand of HUL is available in
three formations and in three sizes.
Consistency
The consistency of an organization’s product mix refers to how closely related the
various product lines are in use, production, distribution, or in any other manner.

Product mix decision refers to the decisions regarding adding a new or eliminating
any existing product from the product mix, adding a new product line, lengthening
any existing line, or bringing new variants of a brand to expand the business and to
increase the profitability.
• Product Line Decision - Product line managers takes product line decisions
considering the sales and profit of each item in the line and comparing their
product line with the competitors' product lines in the same markets.
 Marketing managers have to decide the optimal length of the product line by
adding new items or dropping existing items from the line.
• Line Stretching Decision - Line stretching means lengthening a product
line beyond its current range. An organization can stretch its product line
downward, upward, or both ways.
Downward Stretching means adding low-end items in the product line,
for example in Indian car market, watching the success of Maruti-Suzuki in
small car segment, Toyota and Honda also entered the segment.
Upward Stretching means adding high-end items in the product line,
for example Maruti-Suzuki initially entered small car segment, but later entered
higher end segment.
Two-way Stretching means stretching the line in both directions if an
organization is in the middle range of the market.

Line Filling Decision - It means adding more items within the present range of the
product line. Line filling can be done to reach for incremental profits, or to utilise
excess capacity.

Product Life Cycle Concept

We have a life cycle, we are born, we grow, we mature, and finally we pass away.
Similarly, products also have life cycle, from their introduction to decline they
progresses through a sequence of stages. The major stages of the product life cycle
are - introduction, growth, maturity, and decline. Product life cycle describes
transition of a product from its development to decline.

The time period of product life cycle and the length of each stage varies from
product to product. Life cycle of one product can be over in few months, and of
another product may last for many years. One product reach to maturity in years
and another can reach it in few months. One product stay at the maturity for years
and another just for few months.

Product life cycle can be defined as "the change in sales volume of a specific
product offered by an organization, over the expected life of the product."
Stages of the Product Life Cycle
The four major stages of the product life cycle are as follows:-
1. Introduction,
2. Growth,
3. Maturity, and
4. Decline.
Introduction Stage

At this stage the product is new to the market and few potential customers are
aware with the existence of product. The price is generally high. The sales of the
product is low or may be restricted to early adopters. Profits are often low or losses
are being made, this is because of the high advertising cost and repayment of
developmental cost. At the introductory stage :-

• The product is unknown,

• The price is generally high,
• The placement is selective, and
• The promotion is informative and personalized.

Growth Stage

At this stage the product is becoming more widely known and acceptable in the
market. Marketing is done to strengthen brand and develop an image for the
product. Prices may start to fall as competitors enter the market. With the increase
in sales, profit may start to be earned, but advertising cost remains high.
At the growth stage:-

• The product is more widely known and consumed,

• The sales volume increases,
• The price begin to decline with the entry of new players,
• The placement becomes more widely spread, and
• The promotion is focused on brand development and product image
formation.
Maturity Stage

At this stage the product is competing with alternatives. Sales and profits are at
their peak. Product range may be extended, by adding both with and depth. With
the increases in competition the price reaches to its lowest point. Advertising is
done to reinforce the product image in the consumer's minds to increase repeat
purchases.
At maturity stage :-
• The product is competing with alternatives,
• The sales are at their peak,
• The prices reaches to its lowest point,
• The placement is intense, and
• The promotion is focused on repeat purchasing.

Decline Stage

At this stage sales start to fall fast as a result product range is reduced. The product
faces reduced competition as many players have left the market and it is expected
that no new competitor will enter the market. Advertising cost is also reduced.
Concentration is on remaining market niches as some price stability is expected
there. Each product sold could be profitable as developmental costs have been paid
at earlier stage. With the reduction in sales volume overall profit will also reduce.
At decline stage :-
• The product faces reduced competition,
• The sales volume reduces,
• The price is likely to fall,
• The placement is selective, and
• The promotion is focused on reminding.

Price- Among the different components of the marketing-mix, price plays an

important role to bring about product-market integration. Price is the only element
in the marketing-mix that products revenue. In the narrowest sense, price is the
amount of money charges for a product or service. More broadly, price is the sum
of all the values that customer exchange for the benefits of having or using the
product or service. Price may be defined as the value of product attributes
expressed in monetary terms which a customer pays or relationship and facilities
the transfer of ownership of goods and services from the company to buyers. The
managerial tasks involved in product pricing include establishing the pricing
objectives, identifying the price governing factors, ascertaining their relevance and
relative importance, determining product value in monetary terms and formulation
of price policies and strategies. Thus, pricing play a far greater role in the
marketing-mix of a company and significantly contributes to the effectiveness and
success of the marketing strategy and success of the firm.

PRICING PROCEDURE

The pricing procedure usually involves the following steps:

1. Development of Information Base: The first step in determining the basic

price of a company’s product(s) is to develop an adequate and up-to-date
information base on which price decisions can be based. It is composed of
decision-inputs such as cost of production, consumer demand, industry, prices and
practices, government regulations.
2. Estimating Sales and Profits: Having developed the information base,
management should develop a profile of sales and profit at different price levels in
order to ascertain the level assuring maximum sales and profits in a given set of
situation. When this information is matched against pricing objectives,
management gets the preview of the possible range of the achievement of
objectives through price component in the marketing-mix.
3. Anticipation of Competitive Reaction: Pricing in the competitive environment
necessitates anticipation of competitive reaction to the price being set. The
competition for company’s product(s) may arise from similar products, close
substitutes. The competitor’s reaction may be violent or subdued or even none.
Similarly, the reaction may be instant or delay. In order to anticipate such a variety
of reactions, it is necessary to collect information about competitors in respect of
their production capacity, cost structure, market share and target consumers.
4. Scanning The Internal Environment: Before determining the product price it
is also necessary to scan and understand the internal environment of the company.
In relation to price the important factors to be considered relate to the production
capacity sanctioned and used, the ease of expansion, contracting facilities, input
supplies, and the state of labour relations. All these factors influence pricing
decisions.
5. Consideration of Marketing-mix Components: Another step in the pricing
procedure is to consider the role of other components of the marketing-mix and
weigh them in relation to price. In respect of product the degree of perishability
and shelf-life, shape the price and its structure; faster the perishability lower is
likely to be the price.
6. Selections of Price Policies and Strategies: The next important step in the
pricing procedure is the selection of relevant pricing policies and strategies. These
policies and strategies provide consistent guidelines and framework for setting as
well as varying prices to suit specific market and customer needs.
7 Price Determination: Having taken the above referred steps, management may
now be poised for the task of price determination. For determination of price, the
management should consider the decisions inputs provided by the information base
and develop minimum and maximum price levels. These prices should be matched
against the pricing objectives, competitive reactions, government regulations,
marketing-mix requirements and the pricing policing and strategies to arrive at a
price. However, it is always advisable to test the market validity of its price during
test marketing to ascertain its match with consumer expectations.

Step 1: Selecting the Pricing Objective

A company can pursue any of five major objectives through pricing:
➤ Survival. This is a short-term objective that is appropriate only for companies
that are plagued with overcapacity, intense competition, or changing consumer
wants. As long as prices cover variable costs and some fixed costs, the company
will be able to remain in business.
➤ Maximum current profit. To maximize current profits, companies estimate the
demand and costs associated with alternative prices and then choose the price that
produces maximum current profit, cash flow, or return on investment. However, by
emphasizing current profits, the company may sacrifice long-run performance by
ignoring the effects of other marketing-mix variables, competitors’ reactions, and
legal restraints on price.
➤ Maximum market share. Firms such as Texas Instruments choose this
objective because they believe that higher sales volume will lead to lower unit
costs and higher long-run profit. With this market-penetration pricing, the firms set
the lowest price, assuming the market is price sensitive. This is appropriate when
(1) the market is highly price sensitive, so a low price stimulates market growth;
(2) production and distribution costs fall with accumulated production experience;
and (3) a low price discourages competition.
➤ Maximum market skimming. Many companies favor setting high prices to
“skim” the market. This objective makes sense under the following conditions: (1)
A sufficient number of buyers have a high current demand; (2) the unit costs of
producing a small volume are not so high that they cancel the advantage of
charging what the
Traffic will bear; (3) the high initial price does not attract more competitors to the
market; and (4) the high price communicates the image of a superior product.
➤ Product-quality leadership. Companies such as Maytag that aim to be
product-quality leaders will offer premium products at premium prices. Because
they offer top quality plus innovative features that deliver wanted benefits, these
firms can charge more. Maytag can charge $800 for its European-style washers—
double what most other washers cost—because, as its ads point out, the appliances
use less water and electricity and prolong the life of clothing by being less
abrasive. Here, Maytag’s strategy is to encourage buyers to trade up to new models
before their existing appliances wear out. Nonprofit and public organizations may
adopt other pricing objectives. A university aims for partial cost recovery, knowing
that it must rely on private gifts and public grants to cover the remaining costs,
while a nonprofit theater company prices its productions to fill the maximum
number of seats. As another example, a social services agency may set prices
geared to the varying incomes of clients.
Step 2: Determining Demand
Each price will lead to a different level of demand and, therefore, will have a
different impact on a company’s marketing objectives. The relationship between
alternative prices and the resulting current demand is captured in a demand curve.
Normally, demand and price are inversely related: The higher the price, the lower
the demand. In the case of prestige goods, however, the demand curve sometimes
slopes upward because some consumers take the higher price to signify a better
product. Still, if the
price is too high, the level of demand may fall.
Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative
prices, summing the reactions of many individuals who have different price
sensitivities. The first step in estimating demand is to understand what affects price
sensitivity.
There is less price sensitivity when:
➤ The product is more distinctive,
➤ Buyers are less aware of substitutes,
➤ Buyers cannot easily compare the quality of substitutes,
➤ The expenditure is a lower part of buyer’s total income,
➤ The expenditure is small compared to the total cost of the end product,

Pricing Method

Markup Pricing
The most elementary pricing method is to add a standard markup to the product’s
cost. Construction companies do this when they submit job bids by estimating the
total project cost and adding a standard markup for profit. Similarly, lawyers and
accountants typically price by adding a standard markup on their time and costs.
.
Target-Return Pricing
In target-return pricing, the firm determines the price that would yield its target
rate of return on investment (ROI). Target pricing is used by many firms, including
General Motors, which prices its automobiles to achieve a 15–20 percent ROI.
Value Pricing
Value pricing is a method in which the company charges a fairly low price for a
high quality offering. Value pricing says that the price should represent a high-
value offer to consumers. This is a major trend in the computer industry, which has
shifted from charging top dollar for cutting-edge computers to offering basic
computers at lower prices. For instance, Monorail Computer started selling PCs in
1996 for as little as $999 to woo price-sensitive buyers. Compaq and others
quickly followed suit.
Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitors’ prices. The
firm might charge the same, more, or less than its major competitor(s) charges. In
oligopolistic industries that sell a commodity such as steel, paper, or fertilizer,
firms normally charge the same price. The smaller firms “follow the leader,”
changing their prices when the market leader’s prices change rather than when
their own demand or costs change. Some firms may charge a slight premium or
slight discount, but they typically preserve the amount of difference. When costs
are difficult to measure or competitive response is uncertain, firms feel that the
going price represents a good solution, since it seems to reflect the industry’s
collective wisdom as to the price that will yield a fair return and not jeopardize
industrial harmony.
Sealed-Bid Pricing
Competitive-oriented pricing is common when firms submit sealed bids for jobs. In
bidding, each firm bases its price on expectations of how competitors will price
rather than on a rigid relationship to the firm’s own costs or demand. Sealed-bid
pricing involves two opposite pulls. The firm wants to win the contract—which
means submitting the lowest price—yet it cannot set its price below cost.
Step 6: Selecting the Final Price
The previous pricing methods narrow the range from which the company selects its
final price. In electing that price, the company must consider additional factors:
psychological pricing, the influence of other marketing-mix elements on price,
company pricing policies, and the impact of price on other parties.
Psychological Pricing
Many consumers use price as an indicator of quality. Image pricing is especially
effective with ego-sensitive products such as perfumes and expensive cars. A $100
bottle of perfume might contain $10 worth of scent, but gift givers pay $100 to
communicate their high regard for the receiver. Similarly, price and quality
perceptions of cars interact: Higher-priced cars are perceived to possess high
quality; higher-quality cars are likewise perceived to be higher priced than they
actually are. In general, when information about true quality is unavailable, price
acts as a signal of quality. When looking at a particular product, buyers carry in
their minds a reference price formed by noticing current prices, past prices, or the
buying context. Sellers often manipulate these reference prices. For example, a
seller can situate its product among expensive products to imply that it belongs in
the same class. Reference-price thinking is also created by stating a high
manufacturer’s suggested price, by indicating that the product was priced much
higher originally, or by pointing to a rival’s high price. Often sellers set prices that
end in an odd number, believing that customers who see a television priced at $299
instead of $300 will perceive the price as being in the $200 range rather than the
$300 range. Another explanation is that odd endings convey the notion of a
discount or bargain, which is why both toysrus.com and etoys.com set prices
ending in 99. But if a company wants a high-price image instead of a low price
image, it should avoid the odd-ending tactic.
Geographical Pricing
In geographical pricing, the company decides how to price its products to different
customers in different locations and countries. For example, should the company
charge distant customers more to cover higher shipping costs, or set a lower price
to win additional business? Another issue is how to get paid. This is particularly
critical when foreign buyers lack sufficient hard currency to pay for their
purchases. Many buyers want to offer other items in payment in a practice known
as countertrade, which accounts for 15–25 percent of world trade and takes several
forms:
➤ Barter: The direct exchange of goods, with no money and no third party
involved. For example, Eminence S.A., a major clothing maker in France, bartered
$25 million worth of U.S.-produced underwear and sportswear to customers in
eastern Europe in exchange for transportation, magazine advertising space, and
other goods and services.
➤ Compensation deal: The seller is paid partly in cash and partly in products. A
British aircraft manufacturer used this approach to sell planes to Brazil for 70
percent cash and the rest in coffee.
➤ Buyback arrangement: The seller sells a plant, equipment, or technology to
another country and agrees to accept as partial payment products manufactured
with the supplied equipment. As one example, a U.S. chemical firm built a plant
for an Indian company and accepted partial payment in cash and the remainder in
chemicals manufactured at the plant.
➤ Offset: The seller receives full payment in cash but agrees to spend a
substantial amount of that money in that country within a stated time period. For
example, PepsiCo sells its cola syrup to Russia for rubles and agrees to buy
Russian vodka at a certain rate for sale in the United States.
Price Discounts and Allowances
Most companies will adjust their list price and give discounts and allowances for
early payment, volume purchases, and off-season buying,. However, companies
must do this carefully or they will find that their profits are much less than
planned.
Cash Discounts: A cash discount is a price reduction to buyers who pay their bills
promptly. A typical example is “2/10, net 20,” which means that payment is due
within 30 days and that the buyer can deduct 2 percent by paying the bill within 10
days. Such discounts are customary in many industries.
Quantity Discounts: A quantity discount is a price reduction to those buyers who
buy large volumes .A typical example is “$10 per unit for less than 100 units; $9
per unit for 100 or more units.” Quantity discounts must be offered equally to all
customers and must not exceed the cost savings to the seller associated with selling
large quantities. They can be offered on a noncumulative basis (on each order
placed) or a cumulative basis (on the number of units ordered over a given period).
Functional Discounts: Functional discounts (also called trade discounts) are
offered by a manufacturer to trade-channel members if they will perform certain
functions, such as selling, storing, and record keeping. Manufacturers may offer
different functional discounts to different trade channels but must offer the same
functional discounts within each channel.
Seasonal Discounts: A seasonal discount is a price reduction to buyers who buy
merchandise or services out of season. Ski manufacturers will offer seasonal
discounts to retailers in the spring and summer to encourage early ordering. Hotels,
motels, and airlines will offer seasonal discounts in slow selling periods.
Allowances: Allowances are extra payments designed to gain reseller participation
in special programs. Trade-in allowances are price reductions granted for turning
in an old item when buying a new one. Trade-in allowances are most common in
durable goods categories. Promotional allowances are payments or price reductions
to reward dealers for participating in advertising and sales support programs.
Promotional Pricing
Companies can use any of seven promotional pricing techniques to stimulate early
purchase. However, smart marketers recognize that promotional-pricing strategies
are often a zero-sum game. If they work, competitors copy them and they lose their
effectiveness. If they do not work, they waste company money that could have
been put into longer impact marketing tools, such as building up product quality
and service or strengthening product image through advertising.
Promotional Pricing Techniques

Loss-leader pricing: Stores drop the price on well-known brands to stimulate

additional store traffic.
Special-event pricing: Sellers establish special prices in certain seasons to draw in
more customers.
Cash rebates: Manufacturers offer cash rebates to encourage purchase of their
products within a specified period; his helps clear inventories without cutting the
stated price.
Low-interest financing: Instead of cutting its price, the company can offer
customers low-interest financing. Longer payment terms: Sellers stretch loans over
longer periods and thus lower the monthly payments that customers pay.
Warranties and service contracts: Companies can promote sales by adding a free
or low-cost warranty or service contract.
Psychological discounting: Used legitimately, this involves offering the item at
substantial savings from the normal price.
Discriminatory Pricing
Companies often adjust their basic price to accommodate differences in customers,
products, locations, and so on. Discriminatory pricing occurs when a company
sells a product or service at two or more prices that do not reflect a proportional
difference in costs. Discriminatory pricing takes several forms:
Customer-segment pricing: Different customer groups pay different prices for the
same good or service. For example, museums often charge a lower admission fee
to students and senior citizens.
➤ Product-form pricing: Different versions of the product are priced differently
but not proportionately to their respective costs. Evian, for instance, prices a 48-
ounce bottle of its mineral water at $2, while its 1.7 ounce moisturizer spray sells
for $6.
➤ Image pricing: Some companies price the same product at two different levels
based on image differences. For instance, a perfume manufacturer can put its
perfume in one bottle with a certain name and image priced at $10 an ounce; the
same perfume in another bottle with a different name and image could be priced at
$30 an ounce.
➤ Location pricing: The same product is priced differently at different locations
even though the costs are the same; for example, theaters often vary seat prices
according to audience preferences for different locations.
➤ Time pricing: Prices are varied by season, day, or hour. Public utilities use
time pricing, varying energy rates to commercial users by time of day and weekend
versus weekday. A special form of time pricing is yield pricing, which is often
used by airlines to fill as many seats as possible.
INITIATING AND RESPONDING TO PRICE CHANGES
i) Initiating Price Cuts
When considering price-cutting, marketers need to be aware of three possible
traps: (1) Customers may assume that lower-priced products have lower quality;
(2) a low price buys market share but not market loyalty because the same
customers will shift to any lower-price firm; and (3) higher-priced competitors may
cut their prices and still have longer staying power because of deeper cash
reserves.
ii) Initiating Price Increases:
With delayed quotation pricing, the company does not set a final price until the
product is finished or delivered. This is prevalent in industries with long
production lead times.
➤ with escalator clauses, the company requires the customer to pay today’s price
and all or part of any inflation increase that occurs before delivery, based on some
specified price index. Such clauses are found in many contracts involving
industrial projects of long duration.
➤ With unbundling, the company maintains its price but removes or prices
separately one or more elements that were part of the former offer, such as free
delivery or installation.
➤ With reduction of discounts, the company no longer offers its normal cash and
quantity discounts.