Principles of Marketing (BBA 204) Unit 3

Principles of Marketing (BBA 204)

Unit 3

Marketing Mix (Product, Price, Place, Promotion)

Q.1. Define marketing mix and its importance for a marketer.                                                                               Answer . ''Marketing mix is the set of marketing tools that a firm uses to pursue its marketing objectives in the target market''. 'The marketing mix refers to set of actions or tactics that a company uses to promote its brand or product in the market. The 4Ps make up a typical market mix -price, product, promotion, and place. However, nowadays, the marketing mix increasingly includes several other Ps like packaging, positioning, people and even politics as vital mix elements. 

4Ps of marketing mix are discussed as follows:

1.Price  - Price refers to the value that is put for a product . It depends on costs of production, segment targeted, ability of the market to pay, supply - demand and an indirect marketing tool that firm uses to pursue its marketing.                                                         

2. Product  - Product refers to the item actually being sold. The product must deliver a minimum level of performance, otherwise even the best work on the other elements of the marketing mix won't do any good .                                                                     

3. Promotion  - Promotion this refers to all the activities undertaken to make the product or service known to the user or trade .This can include advertising ;word of mouth , press-reports ,incentives ,commission and awards to the trade .It can also include consumer schemes ,direct marketing ,contests and prizes .

4. Place - Place refers to the product of the sale .In every industry, catching the eye of the consumer and making it easy for her to buy it is the main aim of a good distribution or 'place' strategy .Retailers pay a premium for the right location .In fact, the mantra of a successful retail business is 'location', location, location.                                                                                                   

Importance of marketing mix:                           

All the elements of the marketing mix influence each other. They mark up the business plan for a company and handled right, can give it great success. But handled wrong and the business could take years to recover. The marketing mix needs a lot of understanding, market research and consultation with several people, from users to trade to manufacturing and several others.                                                

Q.2:  Define product. What are the various types of products? Explain with suitable examples.                                              

Answer. The product element of the marketing mix signifies the tangible or intangible product offered to the customer which is the satisfier of the need. It has a combination of tangible or intangible attributes (benefits, features, function, uses) that a seller offers a buyer for purchase. For example -a seller of a toothbrush not only offers the physical product but also the idea that the consumer will be improving the health of their teeth.                                            

Types of product

1. Consumer product              

2. Industrial product

1.Consumer product -Product which are for direct consumption or which require no further processing are known as consumer product. These goods are offered to household and ultimate consumer e.g shirts, cars, watches etc. Consumer product can be further classified into following categories :

ON THE BASIS OF DURABILITY

1.Durable product -The goods which are used for a longer period of time are known as durable goods. They are generally of high price and requires after sale service and promotion tools for sale.

2.Non durable product -Goods which are consumed in short period of time are called non durable goods. These product are generally sold at low price and with less profit margin.

3.Services -Services refer to an activity, performance, benefits or satisfaction which are offered for sale.   

ON THE BASIS OF BUYING BEHAVIOUR         

1. Convenient goods-Which are bought by consumers with minimum shopping efforts i.e. the goods which are easily available everywhere For example, salt, match box, bread, etc.

2. Shopping goods -The goods or services which are bought after some shopping efforts i.e. search or comparison of goods on the basis of price, quality, suitability etc. e.g. TV, furniture, car, etc.

3. Specialty goods - These are the goods of unique nature and hold special importance for customers. The buyer puts special efforts in obtaining these goods. These can be low priced or high priced. For example:. Designer clothes, cars such as Mercedes etc.                       

2. Industrial products - Industrial products are used as input or raw material to produced consumer goods. For example. Tools, machinery etc.

1. Materials and parts - These product are used complete to product. There are raw materials such as cotton, sugar, etc. and manufacturing parts such as bulb , tyres, etc.

2.Capital item - These are the fixed assets which are used for production of final goods.

2.Suppliers and business service - These products are used to give finishing touch to products and facilitate smooth flow of goods produced by industry.

Q.3. Differentiate between following:

1. Goods and services

2. Consumer goods and industrial goods

1. Goods and services

1. Goods is a tangible output of a process that has physical dimensions. This distinction has important business implications since a service innovation; unlike a product innovation cannot be patented. Thus a company with a new concept must expand rapidly before competitors copy its procedures.                                  

Goods, on the hand are generally produced in a facility separate from the customer. They can be made according to a production schedule that is efficient for the company.                                                                          

Goods
>Pure goods
Food product
chemical

Book
Publishing

>Core goods

Appliances
Data storage System
Automobiles

2. Services- Services intangibility also presents a problem for customer since, unlike with a physical product, they cannot try it out and test it before purchase.

Service requires some degree of interaction with the customer for it to be a service. The interaction may be brief but it must exist for the service to be complete. Where facts to face service required, the service facility must be designed to handle the customers’ presence. 
>Services

Core services

Hotels, Airlines, Internet, Service

Pure services

Teaching, Medical advice, Financial, Consulting

2. Consumer goods and industrial goods

Consumer goods -Product which are for direct consumption or which require no further processing are known as consumer goods. These goods are offered to household and ultimate consumer i.g.,shirts, cars, watches etc. Consumer products can be further classified into following categories.

On the basis of durability

1. Durable products - The goods which are used for a longer period of time are known as durable goods. These goods are generally of high price and require after sale service and promotion tools for sale.

2. Non durable products -Goods which are consumer in short period of time are called non durable goods. These products are generally sold at low price and with fewer profit margins.

3. Services - Services refers to benefits are satisfaction which are offered for sale.

On the basis of buying behaviour

1. Convenient goods - Which are bought by consumers with minimum shopping efforts i.e. the goods which are easily available everywhere for example, salt, match box, bread etc.

2. Shopping goods - The goods or services which are bought after some shopping efforts i.e. search or comparison of goods on the basis of price, quality, suitability etc. e.g. T.V, furniture, cars etc.

3. Specialty goods - These are the goods of unique nature and hold special importance for customers. The buyer puts special efforts in obtaining these goods. These can be low priced or high priced for example, designer, clothes, cars, such as Mercedes etc.

Industrial goods- Industrial goods are used as input or raw material to produce consumer goods for example, tools, machinery etc.

1. Materials and parts - These products used complete product. There are raw materials such as cotton, suger, etc, and manufactured parts such as bulb, tyre etc.

2. Capital item - These are the fixed assets which are used for production of final goods.

3. Supplies and business services - These products are used to give finishing touch to products and facilitate smooth flow of goods produced by industry.

Q.4) What is new product? Why do companies manufacture a new product? Explain the process of new product development.

Answer. New Product: Any offer which is different or improved or modified from the existing product is known as new product.

There could be many reasons for new product development and launch

1. The company would like to increase its product portfolio so that the customers can choose the product from portfolio.

2. Entry into new segment, sub segment.

3. Increase the turnover, and in turn profitability.

4. To increase the customer base.

5. To counter the negative growth of existing product.

The company always tries to improve its sales and introduction of new products or line extension are simple methods by which it can do so.

PROCESS OF NEW PRODUCT DEVELOPMENT

1. Idea Generation- New product development starts with idea generation - the systematic search for new product ideas. A company typically has to generate many ideas in order to find a few good ones.

2. Idea screening- The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding stages is to reduce the number. The first idea -reducing stage is idea screening, which helps spot good ideas and drop poor ones as soon as possible.

3. Concept Development and Testing-An attractive idea developed into a product concept. It is important to distinguish between a product concept, and a product image.

Concept Testing -Testing new-product concepts with a group of target consumers to find out ot the concepts have strong consumer appeal.

4. Marketing Strategy Development- Designing an initial marketing strategy for a new product based on the product concept. Suppose Daimler Chrysler finds that concept for the fuel-cell-powered electric car tests best.

5. Business Analysis - A review of the sales, costs, and profit projections for a new product to find out whether these factors satisfy the company's objectives.

6. Product Development - Developing the product concept into a physical product in order to ensure that the product idea can be turned into a workable product.

7. Test Marketing - The stage of new-product development in which the product and marketing program are tested in more realistic market setting.

8. Commercialization - Introducing a new product into the market at a large scale. 

                        

Q.5.) What do you mean by product life cycle? Explain the various stages with their characteristics. Discus different strategies adopted by a company to increase sales of its products in each stage of product life cycle?

Answer. The course of product's sales and profits over its life time is known as PLC. It involves four distinct stages; introduction, growth, maturity, and decline.

1.Introduction – It is the first stage when a product is being introduced first time. Customers come to know first time about the product, they are not aware. The middle men are also not interested  to accept as its new. Introduction is a period of slow sales growth as the product is introduced in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction.

2. Growth - Growth is a period of rapid market acceptance and increasing profits. Now people have become aware about the product. The middle men start demanding the product. Sales starts gradually.

3. Maturity – This is the stage which is known as cash cow of any company. Each company want to maximize the period of maturity stage of its products as ;longer as possible. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition.

4. Decline  - Decline is the period when sales fall off and profits drops. The sales of most product forms and brands eventually dip. The decline may be slow, as in the case of oatmeal, or rapid, as in the case of phonograph records sales may plunge to zero, or they may drop to low level where they continue for many years. This is the decline stage.

SUMMARY OF PRODUCT LIFE -CYCLE CHARACTERISTICS, AND STRATEGIES

Q.6.) Define Price. What are the different strategies used for pricing adopted by marketer to sell its products?

Ans.)  Price is the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk taking ability. Pricing is the most important element of the marketing mix, as price is the only element of the marketing mix, which generates a turnover for the organisation.

An organisation can adopt a number of pricing strategies, the pricing strategy will usually be based on corporate objectives. Followings are the different pricing strategies adopted by marketer :

Pricing Strategy	Definition	Example
Penetration Pricing	Here the organisation sets a low price to increase sales and market share. Once market share has been captured the firm may well then increase their price.	A television satellite company sets a low price to get subscribers then increases the price as their customer base increases.
Skimming Pricing	The organisation sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer.	A games console company reduces the price of their console over 5 years, charging a premium at launch and lowest price near the end of its life cycle.
Competition Pricing	Setting a price in comparison with competitors. Really a firm has three options and these are to price lower, price the same or price higher than competitors.	Some firms offer a price matching service to match what their competitors are offering. Other firms may take this further by refunding the customer more money than the difference between their product price and the lower price offered by the competitor firm.
Product Line Pricing	Pricing different products within the same product range at different price points.	An example would be a DVD manufacturer offering different DVD recorders with different features at different prices e.g. A HD and non-HD version.. The greater the features and the benefit obtained the greater the consumer will pay. This form of price discrimination assists the company in maximising turnover and profits.
Bundle Pricing	The organisation bundles a group of products at a reduced price. Common methods are buy one and get one free promotions or BOGOFs as they are now known. Within the UK some firms are now moving into the realms of buy one get two free can we call this BOGTF i wonder?	This strategy is very popular with supermarkets who often offer such strategies.
Psychological Pricing	The seller here will consider the psychology of price and the positioning of price within the market place	The seller will therefore charge 99p instead £1 or $199 instead of $200. The reason why this methods work, is because buyers will still say they purchased their product under £200 pounds or dollars, even thought it was a pound or dollar away. My favourite pricing strategy.
Premium Pricing	The price set is high to reflect the exclusiveness of the product.	Examples of products and services using this strategy include London department store Harrods, first class airline services and Porsche.
Optional Pricing	The organisation sells optional extras along with the product to maximise its turnover.	This strategy is used commonly within the car industry as I found out when purchasing my car.
Cost Plus Pricing	Cost plus pricing sets the price of the product by adding a set amount (mark up) to the production costs. The mark up is based on how much profit that the firm want to make. Cost plus pricing ensures that the costs of production are covered but it could place the company at a competitive disadvantage as it fails to consider consumer demand or competitor pricing.	For example a product may cost £100 to produce and as the firm have decided that their profit should be 20% they set the product's price at £120.00 (£100 plus 100/100*20)
Cost Based Pricing	Cost based pricing is similar to cost plus pricing as it is based on costs of production and marketing but it will build in additional factors such as market conditions to set pricing.	Cost based pricing can be useful for firms who want to base their products on costs but operate in an industry where product pricing changes regularly (volatile pricing).

Q.7.) What do you mean by promotion mix? Explain the various elements of promotion mix?

Ans.) Promotion Mix can be defined as a specific combination of promotional methods used for one product or a family of products. The promotion mix is one of the 4Ps of the marketing mix. It is believed that there is an optimal way of allocating budgets for the different elements within the promotional mix to achieve best marketing results, and the challenge for marketers is to find the right mix of them. It consists of public relations, advertising, sales promotion, personal selling, etc.

Various elements of promotion mix are as follows :

1. Advertising : Any non personal paid form of communication using any form of mass media. It is the paid presentation and promotion of ideas, goods, or services by an identified sponsor in a mass medium. Examples include print ads, radio, television, billboard, direct mail, brochures and catalogs, signs, in-store displays, posters, mobile apps, motion pictures, web pages, banner ads, emails

2. Sales Promotion : It is media and non-media marketing communication used for a pre-determined limited time to increase consumer demand, stimulate market demand or improve product availability. Examples include coupons, sweepstakes, contests, product samples, rebates, tie-ins, self-liquidating premiums, trade shows, trade-ins, and exhibitions

3. Personal Selling : It is the process of helping and persuading one or more prospects to purchase a good or service or to act on any idea through the use of an oral presentation, often in a face-to-face manner or by telephone. Examples include sales presentations, sales meetings, sales training and incentive programs for intermediary salespeople, samples, and telemarketing

4. Direct Selling : It Involves door-to-door selling. It involves direct face to face contact  between the buyer and the seller. Here the company appoints its employ to move from house to house in order to promote or sell the maximum quantity with respective time period, usually they are targeted.

5. Direct Marketing : Direct Marketing is a channel-agnostic form of advertising that allows businesses and nonprofits to communicate directly to the customer, with methods such as mobile messaging, email, interactive consumer websites, online display ads, fliers, catalog distribution, promotional letters, and outdoor advertising.

6.) Publicity : Publicity is gaining public visibility or awareness for a product, service or your company via the media. It is the publicist that carries out publicity, while PR is the strategic management function that helps an organization communicate, establish and maintain communication with the public. Examples include newspaper and magazine articles, TVs and radio presentations, charitable contributions, speeches, issue advertising, seminars.

Q.8.) What do you mean by sales promotion? Discuss the different types of sales promotion.

Ans.) Sales promotion is one level or type of marketing aimed either at the consumer or at the distribution channel (in the form of sales-incentives). It is used to introduce new product, clear out inventories, attract traffic, and to lift sales temporarily. Sales promotions are the set of marketing activities undertaken to boost sales of the product or service. Sales promotions typically increase the level of sales for the duration they are floated. Usually, as soon as the schemes end, the sales fall, but hopefully, settle at a higher level than they were before the sales promotion started. Examples are buy soap, get diamond free; buy biscuits, collect runs; buy TV and get some discount or a free item with it and so on. 

There are three types of Sales Promotion strategies :

1. Consumer Sales Promotion : Promotion which directly targets the consumer is known as consumer sales promotion. Consumer sales promotion is a marketing technique that is used to entice customers to purchase a product. The promotions typically last for a set period of time and are used to achieve a specific purpose, such as increasing market share or unveiling a new product. 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).

2. Salesforce Sales Promotion : Promotion which target the sales directly is known as salesforce sales promotion. These schemes are intended to motivate sales people to put in more efforts to increase sales, increase distribution, promote new or seasonal products, sell more deals to resellers, book more orders, develop prospects lists and build up morale and enthusiasm.
Some of these activities are meant to prepare the sales people to do their jobs well and include sales meetings and manuals, training programmes, sales presentations, film and slide shows etc. Prize distribution to winners is the more tangible aspect of any such programme.

3. Trade Sales Promotion : Promotion which target the dealers directly is known as trade promotion. They work to push a product through the channel by increasing a retailer or other intermediary's demand. Trade sales promotion is a promotional incentive directed at retailers, wholesalers, or other business buyers to stimulate immediate sales. It include the following: Off-Invoice Allowances, Buying allowance, Display and advertising allowance, etc.

Q.9.) Explain the process of Personal Selling by taking suitable example.

Ans.)  The personal selling process is an 7 step approach: prospecting, pre-approach, approach, presentation, meeting objections, closing the sale, and follow-up. Each step of the process has sales-related issues, skills, and training needs, as well as marketing solutions to improve each discrete step.

Process of personal selling are as follows :

1. Prospecting : Searching for prospects is prospecting. Here, prospect is a person or an institution who is likely to be benefited by the product the salesman wants to sell and can afford to buy it. Prospecting is the work of collecting the names and addresses or persons who are likely to buy the firm’s products and services. While collecting the details, ‘suspects’ must be separated from ‘prospects’ to avoid or reduce waste of time, treasure and talent.

For example, Suppose you are hired by ‘The Hindustan Unilever Limited’ to sell ‘Pure It’ RO water purifier. Here you have to analyse those who can afford purchasing the product and those who are in need of it.

2. Pre-approach: Pre-approach is to get more detailed facts about a specific individual to have effective sales appeals on him or her. It is a record round effort to get details regarding the prospect such as his ability, need, authority, accessibility to buy; it is a closer look of prospects, likes and dislikes, tastes, habits, financial status, social esteem, material status, family background and the like. The sources of information are his fellow salesmen, customers, local newspapers, special investigators, sales office, directories, observation and the prospect.

Here you are required to analyse those who have the potentials to buy the product. You need to analyse certain characterstics or qualities like nature,etc of the potential buyers.

3. Approach: Approach means the meeting of the prospect in person by the salesman where he makes face to face contact with prospects to understand them better. Approach is such a delicate and critical stage of the sales process that the sales are either won or lost. Approach is stepping stone for sales presentation. It is because of this delicacy that sales are likened to a chain where break of one link will break it into useless lump of hooks.

Here you have to approach to the potential buyers respectively and to move to next step i.e presentation.

4. Presentation : Presentation implies an array and decoration of articles in the shop. It is the heart of selling process. Effective presentation has the capacity to convince the customer of his sales proposition. It creates and holds the interest of customers towards the products. It would be wrong to assume that all those who enter the shop do buy the products.

Here you are required to give brief details about the products including price, quality, status, merits, advantages, scope, etc. You should use only positive words about your product.

  5. Meeting Objections: For a creative and persuasive salesman, the process of selling really starts when the prospect raises objections. In absence of sales resistance the salesman is merely an order booking clerk. For every action of salesman there is prospect’s pro-action or reaction that is, approval or disapproval. These objections may be genuine or mere excuses. Overcoming objections is really a delicate stage that makes or mars the unbroken chain of selling process. Being a very crucial aspect, the experts have a set procedure for overcoming the objections namely, listen to the prospect cushion the jolt anticipate the objections and prevent their occurrence. It is the creative task of bringing the customer to the sales track once again.

Here you are required to handle all the objections of the respective buyer very smartly.

6. Closing: All the earlier stages of sales talk namely, prospecting, pre-approach; approach, presentation and handling the objections have been designed to induce the prospect to make decision to buy so that a sale can be concluded. The success in earlier stages will lead to the last stage of closing the sale and clinch the deal. Here, ‘closing’ means the act of actually getting the prospect’s assent to the sales proposal or he gets an order. The underlying point of closing sale is to persuade the prospect to act right now than postponing or delaying the action. It is here that the prospect is turned into a customer desire into demand. Though it sounds very easy, it is the most difficult task.

If deals turn out to be positive, then give details regarding delivery period, any other offers(if included), after sale services, mode of payment etc.

7. Follow up : It includes all the after sale services. It only occurs if the previous stage i.e. closing of sale has occurred positive. It includes taking feedback, other services, etc. It helps to build a positive reputation in the eye of customers.

Here includes taking timely feedback after respective time of delivery and other things.

Q.10.) What do you mean by Distribution Channel? What are the different types of Distribution Channel . explain each with suitable examples ?

Ans. Distribution Channel : The path through which goods and services travel from the vendor to the consumer or payments for those products travel from the consumer to the vendor. A distribution channel can be as short as a direct transaction from the vendor to the consumer, or may include several interconnected intermediaries along the way such as wholesalers, distributers, agents and retailers. Each intermediary receives the item at one pricing point and movies it to the next higher pricing point until it reaches the final buyer. Coffee does not reach the consumer before first going through a channel involving the farmer, exporter, importer, distributor and the retailer.

A distribution channel is the chain of businesses or intermediaries through which a good or service passes until it reaches the end consumer. A distribution channel can include wholesalers, retailers, distributors and even the internet. Channels are broken into direct and indirect forms, with a "direct" channel allowing the consumer to buy the good from the manufacturer and an "indirect" channel allowing the consumer to buy the good from a wholesaler. Direct channels are considered "shorter" than "indirect" ones.

Types of Distribution Channel :

Distribution channels are the ways that goods and services are made available for use by the consumers. All goods go through channels of distribution, and your marketing will depend on the way your goods are distributed. The route that the product takes on its way from production to the consumer is important because a marketer must decide which route or channel is best for his particular product.

A.      Direct Channel

1.      Manufacturer to Customer (Zero Level)

Manufacturer makes the goods and sells them to the consumer directly with no intermediary, such as a wholesaler, agent or retailer. Goods come from the manufacturer to the user without an intermediary. For example, a farmer may sell some produce directly to customers. For example, a bakery may sell cakes and pies directly to customers. It is also known as direct distribution.

B.     Indirect Channel

2.      Manufacturer to Retailer to Consumer :(One level)

Purchases are made by the retailer from the manufacturer and then the retailer sells the merchandise to the consumer. This channel is used by manufacturers that specialize in producing shopping goods. For example, clothes, shoes, furniture and fine china. This merchandise may not be needed immediately and the consumer may take her time and try on the items before making a buying decision. Manufacturers that specialize in producing shopping goods prefer this method of distribution.

3.      Manufacturer to Wholesaler to Retailer to  Customer : (two level)

Consumer’s can buy directly from the wholesaler. The wholesaler breaks down bulk packages for resale to retailer who sells to the consumer. The wholesaler reduces some of the cost to the consumer such as service cost or sales force cost, which makes the purchase price cheaper for the consumer. For example, all non durable items used in toilets and kitchen.

4.      Manufacturer to Agent to Wholesaler to Retailer to Customer (three level)

Distribution that involves more than one intermediary involves an agent called in to be the middleman and assist with the sale of the goods. An agent receives a commission from the producer. Agents are useful when goods need to move quickly into the market soon after the order is placed. For example, a fishery makes a large catch of seafood; since fish is perishable it must be disposed of quickly. It is time consuming for the fishery to contact many wholesalers all over the country so he contacts an agent. The agent distributes the fish to the wholesalers. The wholesalers sell to retailers and then retailers sell to consumers.

Q11. Define Price? Discuss the objectives of Pricing ?

Ans. Price : A value that will purchase a finite quantity, weight, or other measure of a good or service. As the consideration given in exchange for transfer of ownership, price forms the esssential basis of commercial transactions. It may be fixed by a contract, left to be determined by an agreed upon formula at a future date, or discovered or negotiated during the course of dealings between the parties involved. In commerce, price is determined by what (1) a buyer is willing to pay, (2) a seller is willing to accept and (3) the competition is allowing to be charged. With product, promotion and place of marketing mix, it is one of the business variables over which organisations can exercise some degree of control. It is a criminal offence to manipulate prices in collusion with other suppliers and to give a misleading indication of price such as charging for items that are reasonably expected to be included in the advertised, list or quoted price. Also called sale price or selling price.

Objectives of Pricing :

A firm seeks to meet a number of objectives through pricing

Profit, optimum or maximum, long term or current, cannot be the only objective of pricing. A multiplicity or mix of objectives is inevitably involved in pricing. Each firm seeks to meet a community of interests through its price policy. The interest may be vary from firm to firm. Accordingly, pricing policy may also vary. But no firm can remain satisfied with a single objective in pricing. The various objectives sought to be realized through pricing are listed below :

·         Profit maximization in the short term

·         Profit maximization in the long term

·         A minimum return ( or target return) on investment

·         A minimum return on sales turnover

·         Target sales volume

·         Target market share

·         Deeper penetration of the market

·         Entering new markets

·         Target profit on the entire product line irrespective of profit level in individual products

·         Keeping competition out, or keeping it under check

·         Keeping parity with competition

·         Fast turn around and early cash recovery

·         Stabilising prices and margins in the market

·         Providing commodities at prices affordable by weaker sections

·         Providing commodities/services at prices that will stimulate economic development

Of the basket of objectives different permutations apply to different firms :

Obviously, all the objectives of pricing mentioned above may not be relevant in all the cases. For example, the last two objectives in the list are relevant only to public utility services, infrastructure items and essential commodities distributed through the public distributed system. As regards the vast majority of products and services that are produced and marketed by commercial firms, these considerations enter the pricing decisions only in a subdued manner; their pricing cannot be principally based on societal consideration.

Q12. Describe various methods and strategies of Pricing?

Ans. The two methods of pricing are as follows:

A.    COST ORIENTED METHOD       B. MARKET ORIENTED METHOD

There are several methods of pricing products in the market. While selecting the method of fixing prices, a marketer must consider the factors affecting pricing. The pricing methods can be broadly divided into two groups – cost oriented method and market oriented method.

A.    Cost-Oriented Method :

Because cost provides the base for a possible price range, some firms may consider cost-oriented methods to fix the price.

Cost – oriented methods or pricing are as follows :

1.      Cost plus pricing :

It involves adding a certain percentage to cost in order to fix the price. For instance, if the cost of a product is Rs.200 per unit and the marketer expects 10% profit on costs, then  the selling price will be Rs.220. the difference between the selling price and the cost is the profit. This method is simpler as marketers can easily determine the costs and add a certain percentage to arrive at the selling price.

2.       Mark-up pricing :

Mark up pricing is a variation of cost pricing. In this case, mark-ups are calculated as a percentage of the selling price and not as a percentage of the cost price. Firms that use cost-oriented methods use mark-up pricing.

Since only the cost and the desired percentage markup on the selling price are known, the following formula is used to determine the selling price:

Average unit cost/selling price

3.      Break –even pricing :

In this case, the firm determines the level of sales needed to cover all the relevant fixed and variable costs. The break-even price is the price at which the sales revenue is equal to the cost of goods sold. In other words, there is neither profit nor loss.

For instance, if the fixed cost is Rs. 2,00,000; the variable cost per unit is Rs.10, and the selling price is Rs.15, then the firm needes to sell 40,000 units to break-even. Therefore, the firm will plan to sell more than 40,000 units to make a profit. If the firm is not in a position to sell 40,000 limits, then it has to increase the selling price.

The following formula is used to calculate the break-even point :

Contribution = selling price – variable cost per unit

4.      Target return pricing :

In this case, the firm sets prices in order to achieve a particular level of return on investment (ROI)

The target return price can be calculated by the following formula :

 Target return price = total costs + ( desired ROI investment)/total sales in units

For instance, if the total investment is Rs. 10,000; the desired ROI is 20%, the total cost is Rs.5,000 and the total sales expected are 1,000 units, then the target return price will be Rs.7/ unit as shown below :

5,000 + (20% * 10,000)/7000

Target return price = 7

The limitation of this method (like other cost- oriented methods) is that prices are derived from costs without considering market factors such as competition, demand and consumers’ perceived value. However, this method helps to enusre that prices exceed all costs and therefore contribute to profit.

5.      Early cash recovery pricing :

Some firms may fix a price to realize early recovery of investment involved, when market forecasts suggest that the life of the market is likely to be short, such as in the case of fashion-related profucts or technology-sensitive products.

Such pricing can also be used when a firm anticipates that a large firm may enter the market in the near future with its lower prices, forcing existing firms to exit. In such situations, firms may fix a price level, which would maximize short term revenues and reduce the firm’s medium term risk.

   

   

B.     Market- oriented methods :

1.      Perceived value pricing :

A good number of firms fix the price of their goods and services on the basis of customer’s perceived value. They consider customer’s perceived value as the primary factor for fixing prices and the firm’s costs as the secondary.

The customer’s perception can be influenced by several factors, such as advertising, sales on techniques, effective sales force and after sale service staff. If customers perceive a higher value, then the price fixed will be high and vice versa. Market research is needed to establish the customer’s perceived value as a guide to effective pricing.

2.      Going-rate pricing :

In this case, the benchmark for setting prices is the price set by major competitors. If a major competitor change its price, then the smaller firms may also change their price, irrespective of their costs or demand.

The going-rate pricing can be further divided into three sub-methods :

a.      Competitor’s parity method : A firm may set the same price as that of the major competitors.

b.      Premium pricing :  A firm may charge a little higher if its products have some additional special features as compared to major competitors.

c.       Discount pricing : A firm may charge a little lower price if its products lack certain features as compared to major competitors.

The going-rate method is very popular because it tends to reduce the livelihood of price wars emerging in the market. It also reflects the industry’s coactive wisdom relating to the price that would generate a fair return.

3.      Sealed-bid pricing :

This pricing is adopted in the case of large orders or contracts, especially those of industrial buyers or government departments. The firms submit sealed bids fo jobs in response to an advertisement.

In this case, the buyer expects the lowest possible price and the seller is expected to provide the best possible quotation or tender. If a firm wants to win a contract, then it has to submit a lower price bid. For this purpose, the firm has to anticipate the pricing policy of the competitors and decide the price offer.

4.      Differentiated pricing :

Firms may charge different prices for the same product or service.

The following are some the types of differentiated pricing:

a.      Customer segment pricing :

Here different customer groups are charged different prices for the same product or service depending on the size of the order, payment terms and so on.

b.      Time pricing :

Here different prices are charged for the same product  or service at different timings or season. It includes off-peak pricing, where low prices are charged during low demand timings or season.

c.       Area pricing :

Here different prices are charged for the same product in different market areas. For instance, a firm may charge a lower price in a new market to attract customers.

d.      Product form pricing :

Here different versions of the product are priced differently but not proportionately to their respective costs. For instance, soft drinks of 200, 300, 500ml, etc., are priced according to this strategy.