Friday, October 26, 2018

PRINCIPLES OF MARKETING NOTES (3RD SEMESTER): PRODUCT PLANNING AND PRICING


Unit – III: Product Planning and Pricing
Meaning and Definition of Product
In a narrow sense, a product is a set of tangible physical attributes assembled in an identifiable form. Each product carries a name, such as car, iron, building etc. But in marketing, a product is anything which can satisfy a need, want or desire of consumers and can be offered in an exchange process. Hence, a product can be commodity, service, idea or a combination of all these.
When buyers purchase a product, they decide to buy after considering both tangible and intangible attributes of the product for example a car is a tangible product but its after sales service, durability, colour, manufactures reputation etc. are intangible part of product. Good products are key to market success and therefore products should be produced as per the needs and wants of target market.
In the words of W. Anderson, “A product is a set of tangible and intangible attributes including packaging, colour, price, quality and brand plus the services and reputation of the seller. A product may be a tangible goods, service, place, person or idea” “A product should be considered as a bundle of utilities consisting of various product features and accompanying services”.
In the words of Philip Kotler, “A product is anything that can be offered to a market for attention, acquisition, use or consumption that might satisfy a want or need. It includes physical objectives, services, person, places, organisation and ideas”.
Characteristics of a Product
The product concept is a management orientation that assumes that consumer will favour those products that offer the most quality and other features for the price and therefore producers should efforts for continuous improvement of product quality and other features of product.
From the above definitions, some of essential features can be identified as given below :
(a) Tangibility: To be a product, it should have a tangibility character such as it can be touched or seen, for example a car, building, cloth etc.
(b) Intangible Attributes: The product may also be intangible in the form of services for instance, banking, insurance, music composition, repairing, nursing etc.
(c) Associated Attributes: A product may have number of features which differentiate it from competitor’s products. Associated attributes usually cover the colour, package, brand name, installation instruction etc
(d) Exchange Value: A product may be tangible or intangible but it must have exchange value. It must be capable of being exchanged between seller and buyer at mutual agreed price.
(e) Consumer satisfaction: A product should have the capacity to satisfy consumer’s real or psychological needs and wants. At the same time, it must have capacity to generate profit for the satisfaction of sellers.
Classification of Products
Broadly products can be classified into following categories.
(A) Products based on uses :
(i) Consumer Products : These are the products or services that are meant for final consumers for their personal, family or house hold use. These products are used by buyer for their consumption or selling but not for further processing. For example pen, watch, books, newspaper etc. Consumer products are further classified as below:
(a) Convenience goods: These products or services are purchased with minimum efforts. For example bread, newspaper etc.
(b) Emergency goods: Goods required meeting the urgent needs and so the purchasers do not get time for selection. For example needs of umbrella during raining season, repairing of T.V. during world cup cricket etc.
(c) Impulse goods: The consumer is not usually pre-planned or predetermined to purchase such goods but during shopping all of a sudden he decides to purchase this type of goods because of product exposure or attraction. For example chocolate, balloon, a new type of ball pen etc.
(d) Shopping Goods: These goods are consumer durable item and so he/she selects or purchases these goods only after making comparisons on such bases as suitability, quality, price, style and durability. Examples: T.V., Furniture, mobile hand-set etc.
(e) Specialty Goods : These products are particular brands, stores and persons to which consumers are loyal. For Example - Branded surgical instruments for doctors, life saving drugs, Bhupen Hazarika as a singer, Peter England dresses etc.
(f) Unsought Products: The buyers do not know about the existence of product or they do not want to purchase. It may be regularly unsought product such as service of life insurance company, a layer’s service, safety alarm etc. or/and new unsought products which are completely new products and unfamiliar to consumers.
(II) Industrial Products: Goods which are used for commercial production or in carrying of some business activities are known as industrial goods. It is for commercial use not for personal use. The same product may be consumer product as well as industrial product depending on its purpose of use. For example: Rice when we cook and eat at home, it is consumer products and when the same is sold in a restaurant or hotel, it is treated as industrial goods. Industrial buyers are mostly rational buyer, i.e. they are cost, quality and standard conscious. The various types of industrial goods are discussed below:
(a) Installations: These are capital goods which determine the nature, scope, capacity and efficiency of production as well as company. These are non portable and heavy goods. Examples are plants and machinery, major equipments, building, assembly lines etc.
(b) Raw Materials: These are the main inputs to the final products. These are the part of the final products. Some of the raw-materials are required processing before incorporated in the final products and there primary materials from extractive and agricultural industrials-minerals, petroleum, iron ore etc do not require any process.
(c) Fabricated materials and parts: These are semi processed goods but they may require further processing before being the part of final products. For example pig iron for the production of steel.
(d) Operating Supplies: These are not the part of final products but these are required to continue the production process such as light bulbs, pen, paper, computers etc.
(e) Accessory Equipment: These are portable goods which are necessary to keep the capital goods fit for operation. These are relatively less expensive. These neither become the part of final product nor change its form. For example bearing of a plant, wheal of a machine etc.
B. Products based on durability: 
(I) Perishable products : These are the products which have very short life and can not be stored for long time such as newspaper, a particular service for one day or limited period.
(II) Non-durable products: When the consumers start consuming or using the products, the products last for few uses and get depleted on consumption are non durable goods. For example, tooth paste, powder etc.
(III) Durable products: These are products which have a long life and consumers may use it for several years. For example - T.V., watch, furniture, mobile hand-set etc. The consumers usually take long time to take the decision of purchasing.
C. Products based on Tangibility :
(I) Tangible products : It must be capable of being touched, seen, verified its quality etc. For example pen, pencil, book.
(II) Intangible products: A product may be intangible also but capable of providing satisfaction through its service. For example repairing, consultancy service, nursing etc.
Product Life Cycle
A product is like a human being. It is born, grows up fast, matures and then finally passes away. Product life cycle is the stages through which a product or its category bypass. From its introduction to the marketing, growth, maturity to its decline or reduce in demand in the market.  Not all products reach this final stage, some continue to grow and some rise and fall. In short, The PLC discusses the stages which a product has to go through since the day of its birth to the day it is taken away from the market.
However, the basic difference in case of human beings and products is that a product has to be killed by someone. Either the company (to bring better products) or by competition (too much external competition). There are several products in the market which have lived on since ages (Light Bulbs, Tubelights), whereas there are others which were immediately taken off the shelf (HD DVD).

Product Life Cycle
Thus the Product life cycle deals with four stages of a products life.
Stages of Product life cycle:
A) Introduction: The stage 1 is where the product is launched. A product launch is always risky. You never know how the market will receive the product. There have been numerous failures in the past to make marketers nervous during the launch of the product. The length of the introduction stage varies according to the product.
If the product is technological and receives acceptance in the market, it may come out of the introductory phase as soon as it is launched. Whereas if the product is of a different category altogether and needs market awareness, it may take time to launch.
Characteristics of Introductory stages of Product life cycle
Ø  Higher investment, lesser profits
Ø  Minimal Competition
Ø  Company tries to Induce acceptance and gain initial distribution
Ø  Company needs Promotions targeted towards customers to increase awareness and demand for product
Ø  Company needs Promotions targeted towards channel to increase confidence in the product
B) Growth: Once the introductory phases are over, the product starts showing better returns on investment. Your customers and channels begin responding. There is better demand in the market and slowly the product starts showing profits.
This is a stage where competition may step in to squash the product before it has completely launched. Any marketing mistakes done at this stage affect the product considerably as the product is being exposed to the market and bad news travels fast. Thus special care has to be taken in this stage to ensure competition or bad decisions do not affect the growth stage of the product.
Characteristics of Growth stage of Product life cycle
Ø  Product is successfully launched
Ø  Demand increases
Ø  Distribution increases
Ø  Competition intensifies
Ø  Company might introduce secondary products or support services.
Ø  Better revenue generation and ROI
C) Maturity stage: One of the problems associated with maturity stages in a technologically advanced environment is the problem of duplication. Not only is the product available in duplicate markets, but also there are several competing products which arise with the same features and capabilities. As a result, the USP’s of the product become less attrative.
Along with competition, Penetration pricing becomes a weapon for competitors. Competitors sell products with the same features at lesser prices thereby trying to penetrate in the market. Nonetheless, The sales of a product (especially sales from return customers) is at its peak point during the maturity stages. The growth of sales may be lesser, but the sales revenue of the organization is maximum during the maturity stage of product life cycle.
Characteristics of Maturity stages of Product life cycle
Ø  Competition is high
Ø  Product is established and promotion expenditures are less
Ø  Little growth potential for the product
Ø  Penetration pricing, and lower profit margins
Ø  The major focus is towards extending the life cycle and maintaining market share
Ø  Converting customers product to your own is a major challenge in maturity stage
D) Decline: 1 product, 10 competitors, minimum profits, huge amount of manpower and resources in use – A typical scenario which a product might face in its last stage. In this stage the expenditures begin to equal the profits or worse, expenses are more than profits.
Thus it becomes a typical scenario for the product to exit the market. It also becomes advantageous for the company as the company can use resources it was spending on the declining product on an altogether different project. Characteristics of Decline stages of Product life cycle
Ø  Market is saturated
Ø  Sales and profits decline
Ø  Company becomes cost conscious
Ø  A lot of resources are blocked in rejuvenating the dead product.
Strategies for the differing stages of the Product Life Cycle
A) Introduction: The need for immediate profit is not a pressure. The product is promoted to create awareness. If the product has no or few competitors, a skimming price strategy is employed. Limited numbers of product are available in few channels of distribution.
B) Growth: Competitors are attracted into the market with very similar offerings. Products become more profitable and companies form alliances, joint ventures and take each other over. Advertising spend is high and focuses upon building brand. Market share tends to stabilise.
C) Maturity: Those products that survive the earlier stages tend to spend longest in this phase. Sales grow at a decreasing rate and then stabilise. Producers attempt to differentiate products and brands are key to this. Price wars and intense competition occur. At this point the market reaches saturation. Producers begin to leave the market due to poor margins. Promotion becomes more widespread and use a greater variety of media.
D) Decline: At this point there is a downturn in the market. For example more innovative products are introduced or consumer tastes have changed. There is intense price-cutting and many more products are withdrawn from the market. Profits can be improved by reducing marketing spend and cost cutting.
Product Planning and Development
Product planning is the initial step of the overall marketing programme. In the competitive business world, producers try to produce products which can be nearer to consumer expectation. The pressure of competition forces the producers to replace the existing products by developing new consumers’ suitable and friendly products. Product planning covers all activities which enable producers and middle men to determine what should constitute a company’s line of products. Product development covers the technical activities of product research, production and design. The well attempt effort of product development increases the scope to satisfy the needs of the customers.
The product planning and development cover the following decision making area:
(I) What products should be produced?
(II) Expansion of product line.
(III) Determine the new use of its products.
(IV) What brand, package and label are used for different products?
(V) What should be quantity of its production?
(VI) Pricing policy etc.
In short, product planning involves the innovation of new products and improvement in the existing product.  In the words of Karl. H. Tietjen, “Product planning is the act of marketing and commercialization of new products, the modification of existing lines and the discontinuance of marginal or unprofitable items”. As per this definition product planning covers these three considerations.
(I) The development and introduction of new products.
(II) The modification of existing lines to suit the changing consumer needs and preferences and
(III) Elimination of unprofitable products.

Objectives of Product Planning:
Product planning is one of the most important functions of a marketing manager. The following are its objectives:
Ø  To offer products based upon customer needs.
Ø  To diversify, to capitalize on the company’s strength.
Ø  To utilize the available resources more profitability.
Ø  To decide on the elimination of non-profitable products.
Ø  To change the features of the product as per the changes in the market.
Ø  For long-term survival.
Components of Product Planning:
1.       Product Innovation
2.       Product Diversification
3.       Product Development
4.       Product Standardization
5.       Product Elimination
6.       Product Mix & Product Line
1.       Product Innovation: Innovation is a part of continuous improvement. In the absence of innovation, products become stale & hence die in the market. Innovation is required to keep up with the phase of changing market needs. According to Drucker, “Innovation will change customer’s wants, create new ones, extinguish old ones & create new ways of satisfying wants.”
2.       Product Diversification: When a manufacturer offers more products in different areas, it is referred as product diversification. In fact, when a manufacturer diversification. Diversification normally involves business in a new area. E.g.: ITC entering into hotel business, sony entering into film production business.
3.       Product Development: It involves introducing a new product either by replacing the existing one or innovating a completely new product. It can either be brand extension or line extension. Company must be careful while developing new products because research shows that 92% of them fall in the market. Another danger of product development is cannibalization.
4.       Product Standardization: It implies a limitation of types of products in a given class. It gives uniformity in terms of quality, economy, convenience & Value. E.g.: Each model of T.V. gives a different standard. Standardization promises a minimum level of performance & hence is used as a benchmark for quality.
5.       Product Elimination: This involves an emotional decision of withdrawing the existing product line. Decision must be carefully taken based upon current market share, future prospects etc. The product elimination involves reviewing the present product portfolio, analyze their profitability & then decide on discontinuance of a product.
6.       Product Mix & Product Line: Product line is defined as a group of products offered by a company which belongs to same family of products or similar to each other or substitutes. E.g.: Product line of ponds for personal care products includes cold creams, talcum powders, etc. Product Mix is defined as combination of product lines offered by a company. E.g.: Product mix of Bajaj includes two wheelers, home appliances, electrical appliances, financial products etc.
Stages in New Product Development Process
The introduction of new product usually passes through various stages. In each stage, the management must decide whether to move on to next stage with the product idea or not. Practically, in this process some of the ideas will be eliminated at every step. There are six stages involved in the new product development. The stages are given below:
(I) Idea generation: New products are produced on the basis of new ideas. Ideas may be generated from various sources like customers, dealers, distributors, salesman, top executive, consultancy organisation, Research and Development Department etc. The first step is to collect ideas as many as possible so that the company can find out one of the best idea out of those ideas to convert the same in to actual product.
(II) Screening of Ideas: All new ideas cannot be converted into products as it requires heavy capital investments. Those ideas should be screened and all unworkable ideas should be dropped. Only most viable, feasible and promising one should be selected for further processing. The company uses the concept testing method. In this method, consumer response to a description or picture or drawings is measured even before the product is actually produced. The purpose is to find out few best ideas.
(III) Business Analysis: During this stage, an attempt is made to predict the economic consequences of the product for the company. In these stages, the management should perform the following:
(a) Identify product features.
(b) Estimate market demand and product profitability.
(c) Establish a programme to develop the product.
(d) Assign responsibility for further study of the product feasibility.
(IV) Product Development or Prototype testing:  This step consists of the following:
(a) Prototype development giving visual image of the product.
(b) Consumer testing of the model or prototype product.
(c) Branding, packing and labeling of the product.
The marketing people determine an appropriate brand name, package and price and making sure that both tangible and intangible features are considered and included. Focus groups, target market surveys and other market research techniques with the physical product give the marketer additional information.
(V) Market Testing: Test marketing involves placing a full developed new product for sale in one or more selected areas and observing its actual performance under a proposed marketing plan. In the words of P. Kotler- “Test marketing is the stage at which the product and marketing programme are introduced into more realistic market settings”. The basic purpose is to evaluate the product performance and marketing programme in a real setting prior to the commercialization. This step provides the scope of correction and modification of the product as well as marketing programme. Many products fail after commercialization because of lack of test marketing. In this process, the marketers approach the trial purchasers and first repeat purchaser to know their feelings and reaction about the product as well as marketing programme. On the basis of their opinions the marketers make certain required modification in the product as well as marketing programme. After the favourable result usually, products are sent for commercialization.
(VI) Commercialization: After favourable response in test marketing, full scale production and marketing programme are planned and then the product is launched. It may be in phased manner or the product may be introduced simultaneously depending on the company’s plan and resources available. The phased manner introduction helps to avoid short supply of the product due to initial gaps in production and distribution.
Meaning of 'Packaging'
In this age of competition, good and appropriate packaging occupies much significance. The policies pertaining to the packaging are a part of the product planning and product development program.
Some of the main definitions of 'packaging' are being given hereunder:
In the opinion of Prof. Rustom S. Davar, Packaging is that art and/or science which is related to the development and use of materials, methods and equipment, for the packing of the goods in some containers, so that the product, while passing through various stages of distribution, could remain fully safe.
William Stanton has opined that the meaning of packaging is the total group of activities under the product planning which are related to the chalking out of a design of the outer cover of a product and the concerned production.
Importance (Functions) of Packaging
a)      Safety of the Products. The main function of packaging is to protect the things from dust, water, moisture, insects, etc. Good packing saves the products against perishing, loss and other damages.
b)      Facility in Marketing Activities. Due to the packing, the movement of the products, shifting, preserving, opening, collect­ing and storage, become economical and easier for both the mid­dlemen as well as the consumers.
c)       Advertisement. One of the functions of packing is adver­tisement too. Till there exists any product packet, it keeps us aware of the same.
d)      Facility in Collecting. It is easier to store the packaged goods. Due to packing, the products remain safe in the godowns.
e)      Information to the Customers. While making the product attractive, the packing could also make the product useful and informative. It can extend necessary instructions and information more effectively to the customer regarding the use of the product.
Characteristics of a Good Package
a)      Could attract one's attention.
b)      Could make the prompt recognition possible.
c)       Could create interest and maintain the same.
d)      Could create the desire for the procuring of the product.
e)      Could compel for purchasing the product.
f)       Could impress the heart of the consumer.
g)      Could add to the work-suitability, characteristics and total image of the brand.
In the end, it might be said that a very well made packing, would immediately attract the attention, would create interest, would develop desire and would ultimately press the consumer either to investigate and make enquiries into the product, or for pur­chasing the same.
Brand Name
A brand is define as a name, term, sign, symbol or special design or some combinations of these elements that is intended to identify the goods or services of one seller or a group of sellers. A brand differentiates these products from those of competitors. A brand in short is an identifier of the seller or the maker. A brand name consists of words, letters and / or numbers that can be vocalized. A brand mark is the visual representation of the brand like a symbol, design, distinctive colouring or lettering.
In the opinion of American Marketing Association, Brand is a name, position, symbol or design or their combination by which the products and services of a seller or different sellers are recognized and are differentiated from the products and services of competition.
In the views of Lapland, The 'brand' can be defined as any indication, symbol, letter or letters which indicate the origin or the ownership of any product and differentiate the product from its variety, and don't grant the same right to others for using them for the similar object.
Characteristic of a good brand name
A good brand name should possess as many of the following characteristics as possible.
a)      It should be distinctive. A unique and distinctive symbol is not only easy to remember but also a distinguish feature.
b)      It should be suggestive. A well-chosen name or symbol should be suggestive of quality, or may be associated with superiority or a great personality. The name VIP Classic for travel wares is suggestive of a superior quality for a distinct class of people. Promise is suggestive of an assurance of tooth health.
c)       It should be appropriate.
d)      It should be easy to read, pronounce and spell.
e)      It should be adoptable to new products.
f)       It should be registrable under the Indian laws of Trade Marks and copyrights.
Elements of a Good Brand
It is generally a difficult decision to select any brand, for the producer-firm, for its produced goods. Although no legal restriction is there regarding the selection of a brand, yet the marketing managers are required to keep enough of care and precaution in selecting the brand. While selecting the brand, the following qualities must be essentially borne into consideration:
a)      Indicative of the Qualities or Merits of the Product. The brand which is selected must be capable of expressing the max­imum qualities of the products.
b)      No Confusion about the Product. It must not be lead­ing to confusion to the consumers.
c)       Simple and Brief. The brand must be brief so that the people could easily remember it, e.g. Murphy, Bush, Amul, Cibaca, Dalda, etc.
d)      Simple to Pronounce. It must be capable of being easily spoken or pronounced.
e)      Facility in Advertising. The brand must be such that by means of any advertising medium, it could be used to publicize the same.
f)       Attractive. The brand should be such that it could be melodious in hearing and could attract consumers.
g)      Not Vulgar. From social point of view, the brand should not be vulgar or obscene.
h)      Facility in Registration. The brand should be such that there is not much problem in getting it registered.
i)        Specific. It must be specific and it must contain some dif­ferentiating characteristics, compared to other products.
j)        Economical. There must not be much expenditure to be incurred in getting the brand printed on the label or packet during the advertising campaign.
Trade Mark
In General, a trade mark is defined as any sign, as any combination of sign, inherently capable of distinguish the goods or service of one undertaking. Trade marks may be a combination of words, letters, and numerals. They may consist of drawings, symbols, colours used as distinguish features. The owner of the mark may not be involved in the relevant trade and acts purely as a certification authority. The internationally accepted ―ISO 9000 quantity standards are examples of such widely recognized certifications.
Distinction between Brand and Trade-Mark
The following are the distinctions between the brand and trade-mark:
a)      Registration. Brand is merely a word, symbol or a design. If it is got registered under law, it becomes a trade-mark. But the brand is not required to be legally registered.
b)      Action against Imitating. If the brand has been copied out by some other concern competing the business, no legal proceed­ings against it could be undertaken for the same. As against it, if someone imitates the `trade-mark', the body might be legally sued for.
c)       Scope. The scope for brand is limited while the trade­mark is quite extensive in its sphere.
d)      Use or Utilization. When the brand has been got regis­tered, it becomes the trade-mark and its use could be permissible to the same body or undertaking only. Against it, one and the same brand might be used by various manufacturers, producers or sellers.
e)      All the Brands are not the Trade-Marks. All the trade-marks have to be brands, but all the brands are not the trade-marks.
After Sales Service
Customers are the assets of every business. Sales professionals must try their level best to satisfy customers for them to come back again to their organization. After sales service refers to various processes which make sure customers are satisfied with the products and services of the organization. The needs and demands of the customers must be fulfilled for them to spread a positive word of mouth. In the current scenario, positive word of mouth plays an important role in promoting brands and products.
After sales service makes sure that products and services meet or surpass the expectations of the customers. After sales service includes various activities to find out whether the customer is happy with the products or not? After sales service is a crucial aspect of sales management and must not be ignored.
Importance of after sale service
After sales service plays an important role in customer satisfaction and customer retention. It generates loyal customers. Customers start believing in the brand and get associated with the organization for a longer duration. They speak well about the organization and its products. A satisfied and happy customer brings more individuals and eventually more revenues for the organization. After sales service plays a pivotal role in strengthening the bond between the organization and customers.
After Sales Service Techniques
Ø  Sales Professionals need to stay in touch with the customers even after the deal. Never ignore their calls. Call them once in a while to exchange pleasantries.
Ø  Give them the necessary support. Help them install, maintain or operate a particular product.
Ø  Any product found broken or in a damaged condition must be exchanged immediately by the sales professional. Don’t harass the customers.
Ø  Create a section in organization’s website where the customers can register their complaints. Every organization should have a toll free number where the customers can call and discuss their queries.
Ø  Feedback of the products and services from the customers. Feedback helps the organization to know the customers better and incorporate the necessary changes for better customer satisfaction.
Ø  Ask the customers to sign Annual Maintenance Contract (AMC) with your organization. AMC is an agreement signed between the organization and the customer where the organization promises to provide after sales services to the second party for certain duration at nominal costs.
Price and Pricing
Price is defined as the amount we pay for goods or a service or an idea. Price is the only element in the marketing mix of a firm that generates revenue. All other elements generates only cost. Price is a matter of importance to both seller & buyer in the market place. Only when a buyer & a seller agree on price, we can have exchange of goods and services leading to transfer of ownership.
The term ― Price need not be confused with the term ― Pricing. Price is the value that is put to a product or service and is the result of a complex set of calculations, research and understanding and risk taking ability. A pricing strategy takes into account segments, ability to pay, market conditions, competitor actions, trade margins and input costs, amongst others. It is targeted at the defined customers and against competitors. 
Objectives of Pricing
A business firm will have a number of objectives in the area of pricing. These objectives can be short term or long term or primary objectives:-
(i) Profit maximization in the short term.
(ii) Profit optimization in the long term.
(iii) A minimum return on investment
(iv) A minimum return on sales turnover.
(v) Achieving a particular sales volume.
(vi) Achieving a particular market share.
(vii) Deeper penetration of the market.
(viii) Entering new markets.
(ix) Target project on the entire product line.
(x) Keeping competition out, or keeping it under check.
(xi) Keeping parity with competition.
(xii) Fast turnaround & early cash recovery.
(xiii) Stabilizing price & margins in the market.
(xiv) Providing the commodities at prices affordable by weaker section.
(xv) Providing the commodities at prices that will stimulate economic development.
Importance of Pricing:
Importance of pricing is spelled out by the following points.
1. Price is the pivot for an economy: Price is the prime mover of the wheels of the economy namely, production, consumption, distribution & exchange price influences consumer purchase decision. It reflects purchasing power of currency. It can determine the general living standards of people. In essence, by and large every facet of our economy life is directly or indirectly governed by pricing.
2. Price Regulates Demand: Price increase or decrease the demand for the product de- marketing strategy can be easily implemented to meet the rising demand for goods & service.
3. Price is the competitive weapon: The marketers have to perform in a highly competitive environment. Price is a very important instrument to fight competition. It is the competition that contributes maximum to the importance of pricing. Pricing is a highly dynamic function. Because of the immense competition and in meeting competition, pricing decisions acquire their real importance.
4. Price is the Determinants of profitability: Price determines the profitability of firm by influencing the sales revenue. Low price is not always necessary to increase profit. A right price can increase the sales volume and there by profit. The impact of price rise of fall is reflected instantly in the rise or fall of the product profitability.
5. Price is a Decision Input: Pricing is highly risky decision area & mistakes in pricing might reasonably affect the firm, its profits, growth and future.
6. Marketing Communication: Price plays an important role in marketing communication. High price may indicate higher quality. Price communicates value to the consumer. Customers are basically value-maximizes. They want to have the maximum value from a given purchase. They form an expectation of value and act on it. A buyer’s satisfaction is a function of the product’s perceived performance and the buyer’s expectations. So, if the product meets the expectations of consumers and their value definitions at the given price point, price is seen as acceptable. Otherwise consumers tend to be dissatisfied. They may say that the product is overpriced and they may reject the offer. 
The above discussion indicates that pricing is a critical element in any company’s marketing plan, because it directly affects revenue and profit goals. Effective pricing strategies must consider costs as well as customer perceptions and competitor reactions, especially in highly competitive markets. Today, many firms are trying to follow the low-price trend. At the same time, many marketers have been successful in selling more expensive products and services by combining unique product formulations with engaging marketing campaigns. 
Pricing Methods
There are several methods of pricing & they can be grouped into few broad categories:-
(1) Cost Based Pricing
(2) Demand Based Pricing
(3) Competition Oriented Pricing
(4) Value Pricing
(5) Product Line Oriented Pricing
(6) Tender Pricing
(7) Affordability Based Pricing
(8) Differentiated Pricing.
(1) Cost Based Pricing: Under the cost based pricing, different methods used are:-
Ø  Mark Up Pricing
Ø  Absorption Cost Pricing
Ø  Target Rate of Return Pricing
Ø  Marginal Cost Pricing
Mark Up Pricing: It refers to the pricing methods in which the selling price of the product is fixed by adding a margin to its cost price. The mark ups may vary depending on the nature of the product & the market. Usually, the higher the value of the product, the larger is the mark up.
Absorption Cost Pricing: ACP rests on the estimated unit cost of the product at the normal level of production & sales. The method uses standard costing techniques & works out the variable & fixed costs involved in manufacturing, selling & administering the product. By adding the costs of operations, we get the total costs. The selling price of the product is arrived by adding the required margin towards profit to such total costs.
Target Rate of Return Pricing: It is similar to absorption cost pricing. The rate of return pricing uses a rational approach to arrive at the mark up. It is arrived in such a way that the ROI criteria of the firm are met in the process. But this process amounts to an improvement over absorption costing since it uses a rational basis for arriving at the mark up.
Marginal Cost Pricing: It aims at maximizing the contribution towards fixed costs. Marginal costs include all the direct variable costs of the product. In marginal cost pricing, these direct variable costs are fully realized. In addition, a portion of the fixed costs is also realized under competitive market conditions marginal cost pricing is more useful.
(2) Demand Based Pricing: The following methods belong to the category of demand / market based pricing:-
Ø  What the Traffic can Bear’ Pricing
Ø  Skimming Pricing
Ø  Penetration Pricing
What the Traffic can Bear’ Pricing: The seller takes the maximum price that the customers are willing to pay for the product under the given circumstances. This method is used more by retail traders than by manufacturing firms. This method brings high profits in the short term. But in the long run it is not a safe concept, chances of errors in judgment are very high.
Skimming Pricing : This method aims at high price & high profits in the early stage of marketing the product. It profitably taps the opportunity for selling at high prices to those segments of the market, which do not bother much about the price. This method is very useful in the pricing of new products, especially those that have a luxury or specialty elements.
Penetration Pricing : Penetration pricing seeks to achieve greater market penetration through relatively low price. This method is also useful in pricing of new products under certain circumstances. For e.g. when the new product is capable of bringing in large volume of sales, but it is not a luxury item & there is no affluent / price insensitive segment, the firm can choose the penetration pricing & make large size sales at a reasonable price before competitors enter the market with a similar product. Penetration pricing in such cases will help the firm have a good coverage of the market & keep competition out for some time.
In all demand based pricing methods, the price elasticity of demand is taken into account directly or indirectly.
(3) Competition Oriented Pricing : In a competitive economy, competitive oriented pricing methods are common. The methods in this category rest on the principle of competitive parity in the matter of pricing. Three policy options are available to the firm under this pricing method :
Ø  Premium Pricing
Ø  Discount Pricing
Ø  Parity Pricing
Premium pricing means pricing above the level adopted by competitors. Discount pricing means pricing below such level & parity pricing means matching competitors pricing.
(4) Value Pricing : Value pricing is a modern innovative & distinctive method of pricing. Value pricing rests on the premise that the purpose of pricing is not to recover costs, but to capture the value of the product perceived by the customer. Analysis will readily show that the following scenarios are possible with the cost value price chain:
Ø  Value > Price > Costs
Ø  Price > Value > Costs
Ø  Price > Costs > Value
Ø  Price > Value > Costs
(5) Product Line Pricing : When a firm markets a variety of products grouped into suitable product lines, a special possibility in pricing arises. As the product in a given product line are related to each other, sales of one influence that of the others. They also have interrelated costs of manufacturing & distribution. It can fix the prices of the different product in such a manner that the product line as a whole is priced optimally, resulting in optimal sales of all the products put together & optimal total profits from the line.
(6) Tender Pricing : Business firms are often required to fix the prices of their products on a tender basis. It is more applicable to industrial products & products purchased by Institutional customers. Such customers usually go by competitive bidding through sealed tenders. They seek the best price consistent with the minimum quality specification & thus bag the order.
(7) Affordability Based Pricing : The affordability based pricing is relevant in respect of essential commodities, which meet the basic needs of all sections of people. Idea here is to set prices in such a way that all sections of the population are in a position to buy & consume the products to the required extent.
(8) Differentiated pricing : Some firms charge different prices for the same product in different zones/ areas of the market. Sometimes, the differentiation in pricing is made on the basis of customer class rather than marketing territory.
Factors Affecting Pricing
Factors affecting pricing may be categorized into two categories- internal factors and external factors. In each of these categories some may be economic factors and some may be psychological factors. Some factors may be quantitative and some others may be qualitative. Some of the important factors affecting pricing are given below:
A. Internal Factors:
As regards pricing, the firm has certain objectives -long term as well as immediate. For example, the firm has certain costs of manufacturing and marketing; and it seeks to recover these costs through the price and thereby earning a profit. In respect of all the products, the firm may have a basic philosophy on pricing. The pricing decisions of the firm have to be consistent with this philosophy. Pricing also has to be consistent with the overall objectives of the firm. These objectives could be achieving market share, short term or long term profit. The firm may be interested in seeking a particular public image through its pricing policies. All these constitute the internal factors that influence pricing. From the above, it appears that pricing is influenced by objectives and marketing strategy of the enterprise, pricing philosophy, pricing objectives and policy. More specifically, the internal factors are: 
1. Corporate and marketing objectives of the firm: All pricing objectives emanate from the corporate and marketing objectives of the firm. A business firm will have a number of objectives in the area of pricing. Some of these objectives are long-term, while others are short-term. Profit is one of the major objectives in pricing. Firms may not be interested in profit maximization as such, they may be more interested in long term survival and growth.
2. The image sought by the firm through pricing: If a firm offers high quality goods at high prices, the firm will develop a premium image. 
3.The characteristics of the product: Sophisticated, complex and new to the world products normally carry high prices. Products having more features carry higher prices.
4. Price elasticity of demand of the product: If price increases, demand decreases and if price decreases demand increases. Marketers may decide on pricing based on ‘what the traffic can bear’. The marketer takes the maximum price which the customers are willing to pay for the product under the given circumstances.
5. The stage of the product on the product life cycle: When a product is introduced for the first time it carries a higher price. Gradually with increasing consumer acceptance and competition price decreases. 
6. Use pattern and turn around rate of the product: Price of newspaper and magazines may be different for the immediacy factor, permanence and the pass along readership. Newspapers are having a short life, while magazines enjoy a pass along readership.
7. Costs of manufacturing and marketing: Costs determine price to a great extent. Marketers will have to cover the cost and earn a profit. 
8. Extent of distinctiveness of the product and extent of product differentiation practised by the firm: Products having uniform size, shape and compositions can be manufactured at a lesser cost compared to products having differentiation. 
9. Other elements of the marketing mix of the firm and their interaction with pricing: Amount spent on product research, advertising, dealer development etc. are some factors which influence price of a product.
10. Composition of the product line of the firm: A firm may sell a number of products in the same product line.  In that case , the products are likely to be sold under different prices depending on their quality, features etc.
B. External Factors:
In addition to the internal factors mentioned above, any business firm has to encounter a set of external factors while formulating its pricing decisions. An enterprise exists in an environment and is influenced by environmental factors. The external factors are:
1. Market characteristics: Some markets are having very stiff competition and some are having less. The number of players in a market could be more or less. Market leadership factors also may be different. Different characteristics of the market have a bearing on price.
2. Buyer behaviour in respect of the given product: Value conscious buyers are likely to be interested in low prices. Image conscious buyers may be more attracted by product image rather than low price of the product.
3. Bargaining power of major customers: In industrial buying situations major buyers have a bargaining power. They are in a better position to negotiate prices.
4. Bargaining power of major suppliers: Similar is the case with major suppliers. They are in a better position to supply bulk quantities. They are also in a better position to negotiate terms.
5. Competitors’ pricing policy: Firm’s decision to set a price is heavily influenced by the price set by the competitors. In case of highly unique product having a niche market, a firm can have its own price. In most of the cases, competitive reactions to the price set by the firm have to be seriously studied for future programmes.
6. Government controls/regulations on pricing: As stated earlier the Governmental measures like import duties, excise, subsidy, sales tax etc. influence pricing decisions.
7. Social considerations: Firms have a responsibility to society and to its customers. Firms are not expected to exploit consumers by unnecessarily charging high prices.
As discussed above pricing decisions are complex. For pricing an individual product the firm has to consider its overall objective, prices set for other products, costs etc. These are internal factors. In addition, the pricing decisions are influenced heavily by the external factors as stated above.

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