B.

com-Principles of marketing management

B.Com

Second Year
Paper No. 7
PRINCIPLES OF MARKETING
MANAGEMENT

BHARATHIAR UNIVERSITY
SCHOOL OF DISTANCE EDUCATION
COIMBATORE – 641 046

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CONTENT

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

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(Syllabus)
PRINCIPLES OF MARKETING

OBJECTIVE: To endow the students with the knowledge of Marketing

UNIT- I

Market- marketing- Definition- Object and Importance of Marketing- Evolution

of concept of Marketing- recent Developments in Marketing Concept- Marketing
functions- Approaches to the Study of Marketing- Market Segmentation- Basis –
Criteria- Benefits.

UNIT – II

Product policy- Product planning and development- Product life-Cycle- Product

mix- Distribution Channels- Types of Channels- Factors Affecting Choice of
distribution- Branding- Features- Types- Functions- Packaging- Features-
Types- Advantages- Brand name and trademark.

UNIT - III

Pricing- Definition- Objectives- Factors affecting price determination- Methods of

setting prices- Cost- demand and competition- pricing policies and strategies.

UNIT – IV

Sales Promotion- Objectives and Importance of Sales Promotion- Personal

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

UNIT - V

Retail marketing- methods- problems- retail marketing in India- marketing of

services- Emarketing- marketing ethics- Consumerism- meaning- evolution-
types of exploitation- Consumer rights- Laws protecting the consumer interest-
consumer protection acts- consumer courts

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UNIT – I

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LESSON-1
MARKET AND MARKETING

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

1.0 AIMS AND OBJECTIVES

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

1.1 MEANING OF MARKET

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

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1.2 DEFINITION OF MARKET

Market is defined by different persons as follows

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

1.3 CLASSIFICATION OF MARKETS

Markets can be classified under the following categories

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

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(iii) On time basis

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

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

1.4 MEANING OF MARKETING

Marketing is a societal process which discerns consumers' wants, focusing on a

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

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• one determines the value for the product.[PRICE].

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

1.5 DEFINITION OF MARKETING

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

1.6 OBJECT OF MARKETING

Marketing is a broad topic that covers a range of aspects, including advertising,

public relations, sales, and promotions. The following are the main aims of
marketing:

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1. Intelligent and capable application of modern marketing policies.

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

1.7 IMPORTANCE OF MARKETING

Marketing in its new version is considered as a human activity involving

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

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

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

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

• Economic factors - explains the economic conditions , interest rate ,

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

• Political factors – influences the marketers in managing their internal as

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

• Technological factors - stimulates the market in developing and creating

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

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1.8 LET US SUM UP

In this lesson we have briefly touched upon the following points

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

1.9 CHECK YOUR PROGRESS

• How would you establish the relationship between business and

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

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LESSON-2
EVOLUTION OF CONCEPT OF MARKETING

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

2.0 AIMS AND OBJECTIVES

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

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

to modern way of marketing?

2.1 INTRODUCTION

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

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2.2 EVOLUTION OF THE CONCEPT OF MARKETING

The concept of marketing is not a particularly complicated or even original idea.

Sayings such as ‘the customer comes first’, or ‘the customer is always right’,
have been used by forward-thinking entrepreneurs throughout the ages. Based
on that age-old principle, marketing is really a more formalized business
orientation that has developed into a management discipline over the years. It
would be appropriate to trace the concept of marketing from its origin till
present date. This appears to be essential as the term has been interpreted by
many ways by different persons. From time to time, the term was associated
with varied connotations by different sets of people. These explanations were
found to be consonance with the experience one might have had with different
aspects of marketing. Naturally, this paved the way for terminological and
conceptual differences.

This is quite akin to any discipline that is innately dynamic. Marketing is no

exception to this rule. Since inception, the concept of marketing has been
growing multi-dimensionally and multi-disciplinary. Moreover, marketing has
permeated into each and every functional aspects of business. All these have
contributed to the confusion that is prevailing now on precisely defining the
term marketing.

An analysis of contemporary literature reveals vividly the conceptual variations

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

2.2.1 HISTORICAL PERSPECTIVE

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

Before the Industrial Revolution, the production and distribution of goods

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

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

2.2.2 FUNCTIONAL PERSPECTIVE

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

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

To better understand the marketing concept, it is worthwhile to put it in

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

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

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• Realizing a profit by successfully satisfying customer needs over the long-

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

2.3 MODERN MARKETING CONCEPT

The old view of marketing concentrated totally on the functions of distribution of

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

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

2.3.1 CONSUMER’S NEED ORIENTATION

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

2.3.2 INTEGRATED MARKETING

All the departments in an organization recognize the importance of buyers. For

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

2.3.3 CUSTOMER SATISFACTION

Firms aim to give satisfaction to consumers through marketing concept. The

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

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

“The societal marketing concept is a consumer’s needs orientation backed by

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

A manufacturer should study the consumers in relation to their needs, desire

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

2.4 LET US SUM UP

In this lesson, we have discussed about the following points

• The evolution of marketing is analyzed through different perspectives. All

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

• The modern marketing concept is a consumer’s needs orientation backed by

integrated marketing aimed at generating consumer satisfaction as the key to
satisfying organizational goals

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2.5 CHECK YOUR PROGRESS

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

2.6 ACTIVITY (ANSWER IT IN YOUR OWN)

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

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

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LESSON-3
RECENT DEVELOPMENT IN MARKETING CONCEPT

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

3.0 AIMS AND OBJECTIVES

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

3.1 INTRODUCTION

In a world economy that is in constant flux and undergoing turbulence, more

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

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targeted marketing. Many organizations and marketing consultants are

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

3.2 TRADITIONAL MARKETING-THE 4 PS OF MARKETING

The marketing mix or what is commonly known as the 4 Ps is a framework for

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

3.3 CUSTOMER TARGETED MARKETING

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

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

One of the major characteristics of the approach is to focus on each customer’s

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

3.3.1 NEED FOR CUSTOMER-TARGETED MARKETING

In order to have a competitive edge and to satisfy increasing levels of customers’

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

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

3.3.2 THE PROCESS OF TRANSITION

In order to strategically change from a traditional marketing approach to

customer targeted marketing, an organization must be aware of these following
areas:

• Paradigm Shift. A company must fully understand that customer targeted

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

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• Customer Targeted Planning. As in any organizational change initiative,

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

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

company goals

2. Focus on the honest feedback and suggestions through creating different

channels of communications. Listen to the customers, rather than forcing
them to listen to you.

3. Integrate your customers in every aspects of your business, from new

product design to after-sales services and more.

• Organization-wide Responsibility. For the approach to be successful,

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

• Organization Redesign. An organization has to assess the roles of all

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

• Human Resource Training. There is a need to develop customer-focused

human resource through customer behavior training, across the functional
departments. By investing in such training at all levels, the members will
be more knowledgeable, more autonomous, and more efficient in
anticipating and meeting the needs of the customers.

• Use of Information Technology. With the advancement and increased

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

• Enhanced Customers Communications. With the use of the Internet as a

medium for targeted communication, this allows companies to be in touch
with customers at less than one-hundredth of the cost of more traditional
snail mail, brochures or flyers. Communication through emails with the

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customers is almost free, and the customers can retrieve communications

almost immediately. However, this has also resulted in customers having
24 / 7 service expectations of these companies.

• Customer Targeted Measurement. An organization must be able to

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

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

3.4 COMPETITIVE STRATEGIES

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

Companies that adhere to a differentiation strategy achieve market success by

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

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

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3.5 BUSINESS VERSUS CONSUMER MARKETS

An important micro-marketing delineation is that between industrial and

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

In many ways, it is often easier to market to a target group of intermediate

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

A chief difference between marketing to intermediate and consumer markets is

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

Despite the differences, a dominant similarity between marketing to intermediate

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

3.6 INTERNET MARKETING

A discussion of marketing would not be complete without mentioning the

emerging field of Internet marketing. Increasingly, small businesses have sought
to take advantage of the global reach of the World Wide Web and the huge
number of potential customers available online. Although it may seem like a

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

Whether the internet campaign is intended to increase awareness of an existing

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

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

3.7 MARKETING FOR SMALL BUSINESSES

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

As a small business grows, it may be helpful to create a separate marketing

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

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3.8 LET US SUM UP

In this lesson, we have discussed about the following points

• The role of traditional marketing and what is the need for customer-targeted
marketing?
• The process of transition from traditional marketing to customer-targeted
marketing.
• The competetive atrategies used in business
• Business Versus Consumer Markets
• Internet marketing and
• Marketing for Small Businesses

3.9 CHECK YOUR PROGRESS

• Write notes on internet marketing (Refer 3.6)

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

• Explain the competitive strategies which are followed by the company in

order to establish their product in the market. (Refer 3.4)

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

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

3.10 ACTIVITY (ANSWER IT IN YOUR OWN)

Activity 1: Think About it?

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

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LESSON-4
FUNCTIONS OF MARKETING

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

4.0 AIMS AND OBJECTIVES

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

i. What are the basic fuctions of marketing?

ii. How marketing is approached in different ways?

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4.1 INTRODUCTION

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

4.2 FUNCTIONS OF MARKETING

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

Functions of Functions of Physical Facilitating functions

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

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4.2.1 FUNCTIONS OF EXCHANGE

Exchange brings about changes in the ownership of products. In the process of

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

(a) Buying

It is needless to say that buying is the first step of marketing functions. It is

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

(b) Assembling

Assembling is concerned with the collection and concentration of goods of same

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

(c ) Selling

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

4.2.2 FUNCTIONS OF PHYSICAL SUPPLY

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

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(a) Transportation

As tansportation marketing functin assumes unique importance because of

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

(b) Storage and Warehousing

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

4.2.3 FACILITATING FUNTIONS

In addition to functions of exchange and physical supply, there is facilitating

function. Facilitating functions are Financing, Risk-bearing, Standardization,
Market information and Promotion. All these are supporting activities. But
thesse activities contribute in carrying out other functions. In brief they are:

(a) Financing

Finance is the most fundamental aspect for any merchandise transactions.

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

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

(b) Risk-bearing

In marketing, there arise numerous risks such as damages to goods, physical

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

(c ) Standardization

Standardization is related with the division of commodities into distinct groups.

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

Grading applies certain qualitative specifications. For example grading of fruits,

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

(d) Market information

The desired success of marketing depends on correct and timely decisions.

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

(e) Promotion

Promotion is a wide term including advertising, personal selling, sales

promotions etc. Marketing communications are essential for both sellers and
buyers. Sales promotion are marketing device to stimulate or restimulate

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

A marketing function is an act, operation or service by which the original

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

4.3 APPROACHES TO THE STUDY OF MARKETING

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

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

4.3.1 PRODUCT OR COMMODITY APPROACH

Under the commodity approach the focus is placed on the product or it is an

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

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

4.3.2 INSTITUTIONAL APPROACH

In the instituitional approach, the focus is on the study of instituitions-

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

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

4.3.3 FUNCTIONAL APPROACH

The functional approach gives importance on th evarious functions of marketing.

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

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

4.3.4 MANAGEMENT APPROACH

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

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

Managerial or decision-making approach emphasises on the practical aspects of

marketing, but ignores the theoretical aspects of marketing. At the same time,
this approach, provides an overall information of the entire business.

4.3.5 SYSTEMS APPROACH

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

4.3.6 SOCIETAL APPROACH

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

4.3.7 LEGAL APPROACH

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

4.3.8 ECONOMIC APPROACH

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

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4.4 LET US SUM UP

• Functions of marketing is divided into three major headings namely

Functions of exchange, Functions of Physical supply and Facilitating
functions.

• There are diiferent perspective through which marketing could be studied.

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

• Recently systems approach is also adopted which is considered to be

relevant in the context of constraints imposed by controllable and non-
controllable variables on marketing.

4.5 CHECK YOUR PROGRESS

• Name the following functions

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

4.6 ACTIVITY (ANSWWER IT IN YOUR OWN)

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

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LESSON-5
MARKET SEGMENTATION

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

5.0 AIMS AND OBJECTIVES

The previous section explained the functions and approaches to marketing. In

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

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5.1 MEANING OF MARKET SEGMENTATION

Market segmentation is the process in marketing of grouping a market (i.e.

customers) into smaller sub-groups. Market segmentation is the identification of
portions of the market that are different from one another. Segmentation allows
the firm to better satisfy the needs of its potential customers.

Market segmentation is the process of identifying key groups or segments within

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

• identification of broad, large markets

• segmentation of these markets in order to select the most appropriate

target markets and develop Marketing mixes accordingly.

To identify segments, marketers examine consumers' interests, tastes,

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

5.2 THE NEED FOR MARKET SEGMENTATION

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

Mass marketing refers to treatment of the market as a homogenous group and

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

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

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5.3 OBJECTIVES OF MARKET SEGMENTATION

1. Market segmentation is the first of three important steps in developing

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

5.4 CRITERIA / REQUIREMENTS OF MARKET SEGMENTS

In addition to having different needs, for segments to be practical they should be

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

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

5.5 BASIS OF SEGMENTATION

5.5.1 BASIS FOR SEGMENTATION IN CONSUMER MARKETS
Consumer markets can be segmented on the following customer characteristics.
• Geographic
• Demographic

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

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

5.5.2 BASIS FOR SEGMENTATION IN INDUSTRIAL MARKETS

In contrast to consumers, industrial customers tend to be fewer in number and

purchase larger quantities. They evaluate offerings in more detail, and the
decision process usually involves more than one person. These characteristics
apply to organizations such as manufacturers and service providers, as well as
resellers, governments, and institutions.
Many of the consumer market segmentation variables can be applied to
industrial markets. Industrial markets might be segmented on characteristics
such as:
• Location
• Company type
• Behavioral characteristics
Location: In industrial markets, customer location may be important in some
cases. Shipping costs may be a purchase factor for vendor selection for products
having a high bulk to value ratio, so distance from the vendor may be critical. In
some industries firms tend to cluster together geographically and therefore may
have similar needs within a region.
Company Type: Business customers can be classified according to type as
follows:
• Company size
• Industry
• Decision making unit
• Purchase Criteria
Behavioral Characteristics: In industrial markets, patterns of purchase behavior
can be a basis for segmentation. Such behavioral characteristics may include:
• Usage rate
• Buying status: potential, first-time, regular, etc.
• Purchase procedure: sealed bids, negotiations, etc.

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5.6 THE SEGMENTATION PROCESS

Once a company has gathered information from these segmentation bases, it

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

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

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

Once relevant, stable, reachable, profitable market segments are established,

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

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

5.7 METHODS OF SEGMENTING MARKETS

5.7.1 DEMOGRAPHIC SEGMENTATION

Demographic segmentation is one of the most straightforward bases for

segmenting markets; they are also one of the most meaningful. The main
demographic categories are described below:

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

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

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

Social class/income - The current convention in the UK is to use a mixture of

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

Despite criticisms of this classification for being inadequate to describe

consumer groups recent research has emphasized that it still maintains its
discriminating power.

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5.7.2 GEO DEMOGRAPHIC TECHNIQUES

This approach to segmentation combines a number of variables such as where a

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

A- Agricultural areas

B- Modern family housing higher incomes

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

B3 - Cheap modern private housing

B4 - Recent private housing young families

B5 - Modern private housing, older children

B6 - New detached houses, young families

B7 - Military Bases

5.7.3 BENEFIT SEGMENTATION AND BEHAVIOURAL SEGMENTATION

Benefit segmentation uses causal rather than descriptive variables to group

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

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

5.7.4 PSYCHOGRAPHICS AND LIFE STYLE SEGMENTATION

Some of the previously mentioned segmentation methods such as demographics

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

• 'young aspiring sophisticates' - Generally well educated, enjoys clubs

and societies, gregarious, interested in new leisure ideas.

• 'young fogey' - Generally conservative, well educated, enjoys traditional

pursuits, country sports, resists new ideas.

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

5.7.5 BUSINESS - TO -BUSINESS MARKET SEGMENTATION

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

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Slow growth in consumer demand and increasing competition in hospitality

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

5.8 BENEFITS OF SEGMENTATION

1. The manufacturer is in a better position to find out and compare the

marketing potentialities of his products. He is able to judge product
acceptance or assess the resistance to his product.

2. The result obtained from market segmentation is an indicator, to adjust the

production, using men, amterials and other resources in a most profitable
manner. In other words, the organization could allocate and appropriate its
efforts in a most useful manner.

3. Changes required may be studied and implemented without losing markets.

As soon as the product becomes obsolete, or even earlier, the product line
could be diversified or even discontinued.

4. It helps in determining the kinds of promotional devices that are effective

and also helps to evaluate their results.

5. Appropriate timing for the introduction of new products, advertising, etc.,

could be easily determined.

5.9 LET US SUM UP

• Market segmentation is the process in marketing of grouping a market (i.e.

customers) into smaller subgroups. Once the market is broken into
segments, companies can develop advertising programs for each segment,
focus advertising on one or two segments or niches, or develop new
products to appeal to one or more of the segments.

• Mass marketing refers to treatment of the market as a homogenous group

and offering the same marketing mix to all customers. Target marketing on
the other hand recognizes the diversity of customers and does not try to
please all of them with the same offering.

• The Basis of Segmentation is sub-divided into two parts: Basis for

Segmentation in Consumer Markets and Basis for segmentation in
Industrial markets.

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• The Methods of Segmenting Markets is based on Demographic

Segmentation, Geo demographic segmentation, Benefit segmentation and
behavioural segmentation, Psychographics and life style segmentation and
Business - to -business market segmentation

5.10 CHECK YOUR PROGRESS

• What is market segmentation? Discuss the importance of market

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

• Explain the benefits of segmentation. (Refer 5.8)

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UNIT – II

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LESSON-6
PRODUCT AND PRODUCT POLICY

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

6.0 AIMS AND OBJECTIVES

We discussed about consumer-market segmentation in the previous lesson. The

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

i. How products are categorized in the market?

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

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6.1 MEANING OF PRODUCT

In a most simple way a product could be defined as “everything the purchaser

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

In marketing, a product is anything that can be offered to a market that might

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

• Goods – Something is considered a good if it is a tangible item. That is, it is

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

• Services – Something is considered a service if it is an offering a customer

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

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

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

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while a manufacturer may offer intangible services or a service firm provides

certain tangible equipment, these are often used as add-ons that augment the
organization’s main product.

6.2 CATEGORIES OF PRODUCTS

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

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

• Emergency Products – These are products a customer seeks due to sudden

events and for which pre-purchase planning is not considered. Often the
decision is one of convenience (e.g., whatever works to fix a problem) or
personal fulfillment (e.g., perceived to improve purchaser’s image).

• Unsought Products – These are products whose purchase is unplanned by

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

6.2.2 CATEGORIES OF BUSINESS PRODUCTS

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

• Raw Materials – These are products obtained through mining, harvesting,

fishing, etc., that are key ingredients in the production of higher-order
products.

• Processed Materials – These are products created through the processing of

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

• Equipment – These are products used to help with production or operations

activities. Examples range from conveyor belts used on an assembly line to
large buildings used to house the headquarters staff of a multi-national
company.

• Basic Components – These are products used within more advanced

components. These are often built with raw material or processed
material. Electrical wire is an example.

• Advanced Components – These are products that use basic components to

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

• Product Component – These are products used in the assembly of a final

product though these could also function as stand alone products. Dice
included as part of a children’s board game would be an example.

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• MRO (Maintenance, Repair and Operating) Products – These are products

used to assist with the operation of the organization but are not directly
used in producing goods or services. Office supplies, parts for a truck fleet
and natural gas to heat a factory would fall into this category.

6.3 COMPONENTS OF A PRODUCT

On the surface it seems a product is simply a marketing offering, whether

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

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

6.3.1 CORE BENEFITS

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

6.3.2 ACTUAL PRODUCT

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

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

6.3.3 AUGMENTED PRODUCT

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

• Guarantee – This provides a level of assurance that the product will

perform up to expectations and if not the company marketing the product
will support the customer’s decision to replace, have it repaired or return
for a refund.

• Warranty – This offers customers a level of protection that often extends

past the guarantee period to cover repair or replacement of certain product
components.

• Customer Service – This consists of additional services that support the

customer’s needs including offering training and assistance via telephone
or online.

• Complementary Products – The value of some product purchases can be

enhanced with add-on products, such as items that make the main product
easier to use (e.g., laptop carry bag), enhance styling (e.g., cell phone face
plates) or extend functionality (e.g., portal keyboard for PDA’s).

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

6.4 PRODUCT POLICY

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

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

6.4.1 PRODUCT PLANNING AND DEVELOPMENT

™ Product Planning is the ongoing process of identifying and articulating

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

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

projects;

• Define target markets, customers, competitive strengths, and a competition

strategy (e.g., competing head-on or finding a market niche);

• Position planned products relative to competitive products and identify

what will differentiate or distinguish these products from the competition;

• Rationalize these competing development projects and establish priorities

for development projects;

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

• Estimate development resources and balance project resource requirements

with a budget in the overall business plan.

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

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

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

™ Product development is the process of designing, creating, and marketing

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

6.4.2 PRODUCT LINE

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

The number of different product lines sold by a company is referred to as width

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

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

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

6.4.3 PRODUCT MIX

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

• product, service, or program - something of value you are offering the

customer, client, or park visitor

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

• place, distribution, location, or accessibility - where the transaction takes

place, perhaps in a park

• promotion or communication - this is how you inform the target market

about the benefits in your marketing mix

The marketing mix should be viewed as an integrated and coordinated package

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

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6.4.4 PRODUCT BRANDING

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

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

A brand is a product from a known source (organization). The name of the

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

6.4.5 PRODUCT STYLE

As pointed out earlier, certain products are bought by consumers

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

Fundamentally, the style of a product cannot be changed materially except for

very marginal alterations. But the same product can be made suitable to
changes of style, provided the firm stresses the need with a changed emphasis.
Toothpaste offers a good example in this regard. Originally toothpaste
manufacturers stressed certain health aspects. Subsequently the information of
chlorophyll changed the image of the toothpaste. Today, it is the anti-decay

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feature that is considered to be more important and is emphasized in publicity

campaigns. But through all these changes, the product has remained the same.

6.4.6 PRODUCT PACKAGING

A package or packaging is the material or item used to protect, contain, or

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

• containment of the product to ensure its integrity and safety

• protection of the product from physical damage, spoilage and/or
deterioration
• convenience of use and consumer acceptance

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

6.5 LET US SUM UP

• Product is actually a complex, multidimensional concept. It involves all

tangible and intangible aspects of the good or service you offer your target
market.

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

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

6.6 CHECK YOUR PROGRESS

• What is a product? Explain the different components of product.(Refer 6.1,

6.3, 6.3.1 to 6.333)

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

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

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LESSON-7
PRODUCT LIFE CYCLE

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

7.0 AIMS AND OBJECTIVES

The previous lesson explained the meaning of products, how products are
categorized and how product policies are determined. In this part, let us see in
detail the life-cycle of the product. This will help you to answer

i. What are the different stages of product life-cycle?

ii. How product life-cycle is planned in marketing?

7.1 PLANNING WITH THE PRODUCT LIFE CYCLE

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

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

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

• Development – Occurs before the product is released to the market and is

principally a time for honing the product offering and preparing the market
for product introduction.

• Introduction – Product is released to the market and sales begin though

often gradually as the market becomes aware of the product.

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

sales and in profits.

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

• Decline – All products eventually see demand decline as customers no

longer see value in purchasing the product.

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7.2 THE PLC AND MARKETING PLANNING

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

7.3 DEVELOPMENT STAGE

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

7.3.1 EARLY DEVELOPMENT STAGE

• Competition: No real competition exists since the product is in early

development much of which is in-house and not readily viewable to
competitors. However, from a research perspective competitors are now
being identified.

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

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

• Prices: Non-existent unless the company charges research customers a fee

to be part of early product testing.

• Promotion: Promotion has yet to occur as companies continue to refine the

product form and build their marketing plan.

• Distribution: Mostly limited to internal analysis of possible distribution

alternatives, though there may be some communication with a limited
number of distribution partners in order to gauge interest.

• Profits: At this stage there are costs only.

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

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

7.3.2 LATE DEVELOPMENT STAGE

• Competition: While a marketer may not face competition in terms of sales,

they may face competitive pressure from companies developing similar
products, such as competition to acquire materials or technologies for
product development, competition to line up product evaluators, and
competition to get early word out about the product to the news media.
Additionally, competition may exist in the form of other types of products
that potential customers currently use to satisfy needs targeted by the new
product form. If these competitors are aware that a new product form is
being developed, they may increase efforts to sell their product with the
intention of reducing the market’s need for the new product.

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

• Product: Companies researching the product form begin to produce small

quantities of the product, primarily for testing or to build initial awareness
(e.g., for display at trade shows).

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

• Promotion: Promotion often begins prior to product launch as marketers

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

• Distribution: For product sold through distributors, the ground work is

being laid to build the distribution network. In some cases distributor
education and training will start prior to product launch.

• Profits: A small amount of revenue may be generated if real test markets

are used, but overall marketers continue to experience substantial costs.

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

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7.4 INTRODUCTION STAGE

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

7.4.1 EARLY INTRODUCTION STAGE

• Competition: In many cases, when two or more companies are working to

be first to market with a new product form, one company will be out ahead
and for a period of time have the market to itself. However, this does not
mean there is no competition. The company that launched the product still
faces competition from existing products that customers previously
purchased in order to satisfy their needs.

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

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

• Prices: In most cases marketers follow a pricing strategy called price

skimming in which price is set at a level that is much higher than can be
sustained once competitors enter. Price skimming allows the company to
recover development and initial marketing costs before the onslaught of
competitors eventually lowers price.

• Promotion: For products considered to be a leap ahead of existing products,

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

• Distribution: Upon product launch marketers continue efforts to build their

distributor network. As we saw in the Development stage, the focus of
marketers is to find distributors committed to handling the product.

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

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

However, if the product form is significantly different than existing products

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

7.4.2 LATE INTRODUCTION STAGE

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

• Target Market: Marketers are now engaged heavily in getting a high

percentage of Early Adopters to accept the product.

• Product: With competitors entering the choices available to customers

expand, though the difference between competitors’ offerings is often not
that significant.

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

• Promotion: The promotional message is still one designed to educate the

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

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• Distribution: The number of distributors continues to increase with many

now offering products from several market entrants (which at this point
may still be only a few).

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

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

7.5 GROWTH STAGE

The Growth stage is characterized by product sales increasing often at a very

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

7.5.1 EARLY GROWTH STAGE

• Competition: Only a few competitors may be in the market as others wait to

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

• Target Market: Continued focus is on Early Adopters but marketers begin

to identify new market segments that contain the Early Majority.

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

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

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• Promotion: Promotions are broadened with more emphasis on mass

promotions and sales promotions that encourage product trial. Also,
personal selling and sales promotions to distributors continue as marketers
attempt to make inroads into distributors that target the mass market.

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

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

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

Additionally, greater emphasis is placed on using promotion to continue building

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

7.5.2 MIDDLE GROWTH STAGE

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

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

• Product: Companies increase the number of product offerings in order to

differentiate themselves from competitors. In most cases new product
offerings do improve on the performance or benefits offered by earlier
products. However, the target market may begin to feel burdened by too
many choices.

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

• Promotion: Emphasis has shifted to heavy advertising and promotions that

promote individual brands and not just awareness and education of the
product form. Heavy selling and sales promotion continues with
distributors.

• Distribution: Distribution reaches saturated levels as all possible channels

are now handling the product.

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

In the middle part of Growth stage the objective is to continue a Market

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

Late-to-market competitors may use a penetration pricing approach to establish

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

7.5.3 LATE GROWTH STAGE

• Competition: As the market begins to see slower growth, companies find

themselves in a highly competitive market with fierce battles occurring on
some fronts, such as within certain segments, where demand is falling
faster than in other segments.

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

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• Product: With so many competitors offering numerous product options

customers feel overwhelmed and confused by the choices available. In cases
where customers do not fully understand the product (e.g., technology
product) they may feel more comfortable purchasing from top brands or
products sold at major distributors.

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

• Promotion: Heavy spending on advertising and especially on sales

promotions designed to offer incentives to customers to purchase and to re-
purchase.

• Distribution: With demand beginning to slow, some distributors cut back

on the number of products they stock and persuade leading product
marketers to offer more incentives to remain with the distributor.

• Profits: Marketers begin to see a leveling off of profits as overall revenue

flattens due to slowing demand and falling prices. However, marketing
costs still remain high.

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

The key objective for a marketer is to remain competitive by maintaining a power

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

7.6 MATURITY STAGE

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

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

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

7.6.1 EARLY MATURITY STAGE

• Competition: By far the fiercest competition takes place as marketers move

to grab customers from often weakened competitors. At this stage many
competitors fail or merge with others.

• Target Market: Little or no growth is occurring as the market is saturated

or the target market looks to other product to satisfy their needs. Laggards
may start buying but only if they can no longer purchase products they
previously purchased to satisfy their needs.

• Product: Many products still exist though some level of product

standardization has occurred. Any new models introduced do not lead to
major improvements in product performance or benefits offered, but
instead offer minor incremental improvements.

• Prices: The average price continues to fall possibly below cost as

competitors attempt to remain in market. Price wars occur in many
segments.

• Promotion: Heavy competitive advertising and extensive promotions take

place with the objective of getting existing customers to switch (for their
repeat purchases) and encouraging distributors not to drop from their
inventory.

• Distribution: Distributors continue to reduce their inventory and

promotional focus for the product form and become very selective on the
products they will carry.

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

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

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

7.6.2 LATE MATURITY STAGE

• Competition: The competitive landscape has stabilized with only the

survivors remaining often made up of a few market giants and several small
niche firms.

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

• Product: The introduction of new models is reduced to just a few product

performance enhancements, though there may be more stylistic
improvements.

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

• Promotion: Large competitors begin to cut back on expensive promotions

designed to attract new customers and focus on reminder promotions to
loyal customers.

• Distribution: Has stabilized with few new distributors agreeing to handle

product. For products sold at retail stores there is a noticeable reduction in
shelf space devoted to the product.

• Profits: Companies see profits recover as demand stabilizes, pricing rises

and overall marketing costs drop.

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

7.7 LET US SUM UP

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

• PLC is divided into five distinct stages such as development, introduction,

growth, maturity and decline.

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• Development – Occurs before the product is released to the market and is

principally a time for honing the product offering and preparing the market
for product introduction.

• Introduction – Product is released to the market and sales begin though

often gradually as the market becomes aware of the product.

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

sales and in profits.

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

• Decline – All products eventually see demand decline as customers no

longer see value in purchasing the product.

7.8 CHECK YOUR PROGRESS

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

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

• Explain how the product lifecycle concept is of practical use to the

marketer. (Refer 7.2 to 7.6 and comment in your own)

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LESSON-8
PRODUCT MIX

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

8.0 AIMS AND OBJECTIVES

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

8.1 MEANING OF PRODUCT MIX

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

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

Product mix is a combination of products manufactured or traded by the same

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

8.2 THE PRODUCT MIX VARIABLES

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

8.2.1 THE PRODUCT-LINE AND PRODUCT RANGE

‘Product-line’ is a group of closely related products which are able to satisfy a

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

8.2.2 PRODUCT DESIGN

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

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• External appearance determined by size, shape, proportions, colour, finish,

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

8.2.3 PRODUCT PACKAGE

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

Attractive packages are having communicating value. An attractive package in a

self-service store helps the consumers to identify the product, builds consumer
confidence, describes merits and limits of products and encourages impulsive
buying. Thus, it makes possible easy brand identification, prevents substitution

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and short weight and an element of advertising and sales-promotion. Package

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

8.2.4 PRODUCT QUALITY

Establishment and control of quality standards is a basic step in merchandising.

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

8.2.5 PRODUCT LABELING

A product label may be either descriptive, informative, grade designating or a

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

8.2.6 PRODUCT BRANDING

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

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

8.2.7 AFTER-SALES SERVICES AND GUARANTEES

With every increase in the use of machinery, appliances, equipments and

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

Every manufacturer should determine as to who shall be responsible for service

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

8.3 DIFFERENCE BETWEEN PRODUCT MIX AND PRODUCT LINE

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

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

Width – Number of different product lines offered

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

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

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

Lever Products

Product Mix Width

Product Line Bath Soaps Fabric Wash Beverages
Length
Dove Surf Bru
Liril Rin Red Label
Le Sancy Wheel Green Label
Pears Sunlight 3 Roses
Rexona Ala Taaza
Lifebuoy 501 Deepam
Hamam Taj Mahal
Breeze Super Dust
Tai Ruby Dust
Moti A1

In case of non-profit organizations, line length determined on the basis of

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

8.4 LET US SUM UP

In this lesson, we have discussed about the

• Meaning of product mix
• The essential variables of product mix such as Product-line and Product
range, Product Design, Product package, Product Quality, Product Labeling,
Product Branding and After-sales services and guarantees
• Difference between product mix and product line.

8.5 CHECK YOUR PROGRESS

• Explain the term ‘Product Mix’.(Refer 8.1)

• Explain the product mix variables in detail.(Refer 8.2 to 8.2.7)
• State the difference between product mix and product line with examples.
(Refer 8.3)

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LESSON-9
CHANNELS OF DISTRIBUTION

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

9.0 AIMS AND OBJECTIVES

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

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9.1 INTRODUCTION

Distribution of products constitutes an important element of marketing mix of a

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

9.2 DISTRIBUTION OBJECTIVES

9.2.1 INTERRELATED OBJECTIVES

A firm’s distribution objectives will ultimately be highly related—some will

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

9.2.2 NARROW VS. WIDE REACH

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

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• Provide more services

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

9.3 DISTRIBUTION OPPORTUNITIES

Distribution provides a number of opportunities for the marketer that may

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

9.4 DECIDING ON A STRATEGY

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

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

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9.5 MEANING OF CHANNELS OF DISTRIBUTION

A channel of distribution or trade channel is the path or route along which

goods move from producers to ultimate consumers. It is a distribution network
through which a producer puts his products in the hands of actual users. A
trade or marketing channel consists of the producer, consumers or users and
the various middlemen who intervene between the two. The channel serves as a
connecting link between the producer and consumers. By bridging the gap
between the point of production and the point of consumption, a channel creates
time, place and possession utilities. A channel of distribution represents three
types of flows:

a. Goods flow from producer to consumers;

b. Cash flow from consumers to producer as payment for goods; and

c. Marketing information flows in both directions, from producers to

consumers in the form of information on new products, new uses of
existing products, etc. The flow of information from consumers to producers
is the feedback of the wants, suggestions, complaints, etc.

9.6 KINDS OF DISTRIBUTION CHANNELS

Every small-scale entrepreneur requires a channel that can distribute his

product to the right customers at the right time and at the right cost. It consists
of all the middlemen which participate in the distribution of goods and which
serve as a link between the manufacturer and the consumer.

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

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¾ Manufacturer _ Customer:

This is also known as direct selling because no middlemen are involved. A

producer may sell directly through his own retail stores, for example, Bata. This
is the simplest and the shortest channel. It is fast and economical. Small
producers and producers of perishable commodities also sell directly to the local
consumers. Big firms adopt direct selling in order to cut distribution cost and
because they have sufficient facilities to sell directly to the consumers. The
producer or the entrepreneur himself performs all the marketing activities.

¾ Manufacturer _ Retailer _ Customer:

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

¾ Manufacturer _ Wholesaler _ Retailer _ Customer:

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

9.7 TYPE OF CHANNEL MEMBERS

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

9.7.1 RESELLERS

These organizations, also known within some industries as intermediaries,

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

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

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• Wholesalers – Organizations that purchase products from suppliers, such

as manufacturers or other wholesalers, and in turn sell these to other
resellers, such as retailers or other wholesalers.

• Industrial Distributors – Firms that work mainly in the business-to-

business market selling products obtained from industrial suppliers.

9.7.2 SPECIALTY SERVICE FIRMS

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

• Agents and Brokers – Organizations that mainly work to bring suppliers

and buyers together in exchange for a fee.

• Distribution Service Firms – Offer services aiding in the movement of

products such as assistance with transportation, storage, and order
processing.

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

9.8 CHOICE OF CHANNEL OF DISTRIBUTION

While selecting a distribution channel, the entrepreneur should compare the

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

9.8.1 MARKET CONSIDERATIONS

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

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• Size of order: Direct selling is convenient and economical where customers

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

9.8.2 PRODUCT CONSIDERATIONS

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

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

• Persihability: Perishable products like vegetables, fruits and bakery items

have relatively short channels, as they cannot withstand repeated handling.
Goods, which are subject to frequent changes in fashion and style, are
generally distributed through short channels, as the producer has to
maintain close and continuous touch with the market.

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

• Standardization: Custom-made and non-standardized products usually

pass through short channels due to the need for direct contact between the
producer and the consumers. Standardized and mass-made goods can be
distributed through middlemen.

• Technical nature: Industrial products requiring demonstration, installation

and after sale service are often sold directly. The consumer products of
technical nature are generally sold through retailers.

• Product line: An entrepreneur producing a wide range of products may find

it economical to set up its own retail outlets. On the other hand, firms with
one or two products find it profitable to distribute through wholesalers and
retailers.

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

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9.8.3 MIDDLEMEN CONSIDERATIONS

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

• Availability: When middlemen as desired are not available, an entrepreneur

may have to establish his own distribution network. Non-availability of
middlemen may arise when they are handling competitive products, as they
do not like to handle more brands.

• Attitudes: Middlemen who do not like a firm’s marketing policies may

refuse to handle its products. For instance, some wholesalers and retailers
demand sole selling rights or a guarantee against fall in prices.

• Services: Use of those middlemen is profitable who provide financing,

storage, promotion and after sale services.

• Sale Potential: An entrepreneur generally prefers a dealer who offers the

greatest potential volume of sales.

• Costs: Choice of a channel should be made after comparing the costs of

distribution through alternative channels.

After deciding the number of middlemen, an entrepreneur has to select the

particular dealers through whom he will distribute his products. While selecting
a particular wholesaler or retailer, the following factors should be taken into
consideration:

i. Location of dealer’s business premises;

ii. Financial position and credit standing of the dealer;

iii. Knowledge and experience of the dealer;

iv. Storage and showroom facilities of the dealer;

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

vi. Capacity of the dealer to provide after-sale service;

vii. General reputation of the dealer and his sales force;

viii. Willingness of the dealer to handle the entrepreneur’s products;

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

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

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9.9 LET US SUM UP

In this lesson the following points are covered:

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

9.10 CHECK YOUR PROGRESS

• What do you mean by channels of distribution? (Refer 9.5)

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

9.11 ACTIVITY (ANSWER IT IN YOUR OWN)

Activity 1- In your own locality, find out:

• Where can you buy goods directly from producers?
• Which shops get the goods from the wholesalers?
• Which retailers stock the goods of only one producer?

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LESSON-10
BRANDING AND PACKAGING

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

10.0 AIMS AND OBJECTIVES

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

i. What is the need for branding the products?

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

10.1 INTRODUCTION

Products are as dear as their own children to manufacturers and producers.

When a manufacturer wants to introduce a new product to the market, he wants
to identify his product rather with striking name- Brand name. The buyers
identify the product and differentiate it from those of competitors.

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

10.2 MEANING OF BRAND

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

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

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

BRAND: A name, term, sign, symbol or design or a combination of them which is

intended to identify the goods or services of one seller or group of sellers and to
differentiate them from those of competitors.

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

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

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

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10.3 FEATURES/ CHARACTERISTICS OF BRAND

• Brand should suggest something about the product- purpose, quality,

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

10.4 TYPES OF BRANDS

1. Individual Brand: A firm may decide upon a policy of adopting distinctive

brands for each of its products.

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

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

4. Combination Device: Products have individual names and company

brands to indicate the firm producing them. For instance, Tata’s taj.

5. Private or middlemen’s Brand: Such brands are owned and controlled by

middlemen rather than manufacturers. Manufacturer introduces his
products under a distributor’s name.

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10.5 KINDS OF BRAND NAME

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

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

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

• Coined Name: Importance is given to the producer’s identity. For example,

‘Vimal’ alone is meaningless, unless attached to suitings.

10.6 FUNCTIONS/ IMPORTANCE OF BRAND

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

1. Delivers a clear and consistent message to the market

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

2. Establishes your credibility

Credibility is essential to building trust and advancing toward the sale.

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

3. Emotionally connects with your target market

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

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

4. Builds positive recognition of your benefits

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

5. Nurtures loyalty within your market

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

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

10.7 ADVANTAGES OF BRANDS

A strong brand offers many advantages for marketers including:

• Brands provide multiple sensory stimuli to enhance customer recognition.

For example, a brand can be visually recognizable from its packaging, logo,
shape, etc. It can also be recognizable via sound, such as hearing the
name on a radio advertisement or talking with someone who mentions the
product.

• Customers who are frequent and enthusiastic purchasers of a particular

brand are likely to become Brand Loyal. Cultivating brand loyalty among
customers is the ultimate reward for successful marketers since these
customers are far less likely to be enticed to switch to other brands
compared to non-loyal customers.

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• Well-developed and promoted brands make product positioning efforts more

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

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

• Strong brands can lead to financial advantages through the concept of

Brand Equity in which the brand itself becomes valuable. Such gains can
be realized through the out-right sale of a brand or through licensing
arrangements.

10.8 MEANING OF PACKAGING

Packing means wrapping of goods before they are transported or stored or

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

10.9 TYPES OF PACKAGING

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

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

Lastly, TERTIARY packaging is the grouping of products for storage and

transportation. The corrugated, brown carton is the most familiar. Large pallets
of shrink- wrapped boxes are a common ware house sight reflecting tertiary
packaging.

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

10.10 PURPOSES / FUNCTIONS OF PACKAGING

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

10.11 FACTORS TO CONSIDER WHEN MAKING PACKAGING DECISION

Packaging decisions are important for several reasons including:

• Protection – Packaging is used to protect the product from damage during

shipping and handling, and to lessen spoilage if the protect is exposed to
air or other elements.

• Visibility – Packaging design is used to capture customers’ attention as they

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

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

• Distributor Acceptance – Packaging decisions must not only be accepted by

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

• Cost – Packaging can represent a significant portion of a product’s selling

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

• Expensive to Create - Developing new packaging can be extremely

expensive. The costs involved in creating new packaging include: graphic
and structural design, production, customer testing, possible destruction of
leftover old packaging, and possible advertising to inform customer of the
new packaging.

• Long Term Decision – When companies create a new package it is most

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

• Environmental or Legal Issues – Packaging decisions must also include an

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

10.12 LABELING

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

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

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

• The label provides customers with product information to aid their

purchase decision or help improve the customer’s experience when using
the product (e.g., recipes).

• Labels generally include a universal product codes (UPC) and, in some

cases, radio frequency identification (RFID) tags, that make it easy for
resellers, such as retailers, to checkout customers and manage inventory.

• For companies serving international markets or diverse cultures within a

single country, bilingual or multilingual labels may be needed.

• In some countries many products, including food and pharmaceuticals, are

required by law to contain certain labels such as listing ingredients,
providing nutritional information or including usage warning information

10.13 LET US SUM UP

In this lesson we have discussed about the following points

• Meaning of Brand, Features/ characteristics of Brand
• Types of brands and Kinds of Brand name
• Functions/ Importance of brand, its advantages
• Meaning of Packaging, types and functions of packaging
• Factors to Consider When Making Packaging Decision and
• Labeling

10.14 CHECK YOUR PROGRESS

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

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UNIT – III

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LESSON-11
PRICING

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

11.0 AIMS AND OBJECTIVES

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

11.1 INTRODUCTION

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

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

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Therefore, all marketing planners should be equipped to make correct pricing

decisions.” A comparative study of performance of different grocery products in
relation to prices is given in the end note.

11.2 MEANING OF PRICE

Price has different connotations. It has an economic base, psychological base

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

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

Sellers’ View - To sellers in a transaction, price reflects the revenue generated

for each product sold and, thus, is an important factor in determining profit.
For marketing organizations price also serves as a marketing tool and is a key
element in marketing promotions. For example, most retailers highlight product
pricing in their advertising campaigns.

11.3 DEFINITION OF PRICING

Definition: To establish a selling price for a product

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

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

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

Most important is to add profit in your calculation of costs. Treat profit as a

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

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

• You introduce a new product or product line;

• Your costs change;

• You decide to enter a new market;

• Your competitors change their prices;

• The economy experiences either inflation or recession;

• Your sales strategy changes; or

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

service.

11.4 OBJECTIVES OF PRICING

Pricing objectives or goals give direction to the whole pricing process.

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

Some of the more common pricing objectives are:

• maximize long-run profit
• maximize short-run profit
• increase sales volume (quantity)

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• increase dollar sales

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

As in other areas on marketing planning, pricing strategy begins with the

determination of objectives. Long – range goals that managers wish to pursue in
their pricing decisions are often stated as pricing strategies. The relative
importance of pricing objectives in the corporate objectives may be seen in the
following chart

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Fig 11.1- The Hierarchy of Pricing Objectives

CORPORATE OBJECTIVES

MARKETING OBJECTIVES

MARKETING PROGRAMME

PRICING OBJECTIVES

PRICING POLICIES

PRICING TACTICS

IMPLEMENTATION

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

The following may be listed as pricing objectives:

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

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share might increase profitability because of greater economies of scale, market

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

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

11.5 IMPORTANCE OF PRICING

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

Profit = (Price * Quantity sold) – Total costs

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

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

The question of a ‘correct price’ to a product is still a complicated problem before

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

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Table 11.1- Ranking of marketing activities by different companies

Manufacturers of Manufacturers of Transportation and

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

Pricing decisions are of paramount importance in marketing strategy. Like the

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

Price is an important element in meeting consumer needs. Price and pricing

policies are among the most important problems that confront managements
always an important consideration both to the buyer and the seller. It can often
spell success or disaster to a firm.

In perfect markets, price is determined by supply and demand. This, however,

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

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

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

11.6 LET US SUM UP

• Price is the value placed on what is exchanged.

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

11.7 CHECK YOUR PROGRESS

• What is pricing and bring out its importance in marketing.(Refer pg no: 95

to 97, 100 to 102)

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

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

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LESSON-12
FACTORS AFFECTING PRICE DETERMINATION

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

12.0 AIMS AND OBJECTIVES

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

i. What are the internal factors which affect pricing decision?

ii. What are the external factors which affect pricing decision?

12.1 INTRODUCTION

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

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

12.2 FACTORS AFFECTING PRICING DECISION

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

• Internal Factors - When setting price, marketers must take into

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

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

12.3 INTERNAL FACTORS

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

12.3.1 COMPANY AND MARKETING OBJECTIVES

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

Corporate objectives can be wide-ranging and include different objectives for

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

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

• Return on Investment (ROI) – A firm may set as a marketing objective the

requirement that all products attain a certain percentage return on the
organization’s spending on marketing the product. This level of return
along with an estimate of sales will help determine appropriate pricing
levels needed to meet the ROI objective.

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

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

• Maximize Profits – Older products that appeal to a market that is no longer

growing may have a company objective requiring the price be set at a level
that optimizes profits. This is often the case when the marketer has little
incentive to introduce improvements to the product (e.g., demand for
product is declining) and will continue to sell the same product at a price
premium for as long as some in the market is willing to buy.

12.3.2 MARKETING STRATEGY

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

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

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

12.3.3 COSTS

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

12.4 EXTERNAL MARKET FACTORS

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

12.4.1 ELASTICITY OF DEMAND

Marketers should never rest on their marketing decisions. They must

continually use market research and their own judgment to determine whether

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marketing decisions need to be adjusted. When it comes to adjusting price, the

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

12.4.2 CUSTOMER AND CHANNEL PARTNER EXPECTATIONS

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

Firms within the marketer’s channels of distribution also must be considered

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

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12.4.3 COMPETITIVE AND RELATED PRODUCTS

Marketers will undoubtedly look to market competitors for indications of how

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

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12.4.4 GOVERNMENT REGULATION

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

12.5 LET US SUM UP

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

12.6 CHECK YOUR PROGRESS

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

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LESSON-13
METHODS OF SETTING PRICES

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

13.0 AIMS AND OBJECTIVES

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

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initial price; different price adjustments marketers make before settling on a

final selling price; payment options; and additional issues that affect pricing.
This will help you to answer

i. What are the steps involved in setting prices?

13.1 INTRODUCTION

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

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

13.2 STEPS IN THE PRICE SETTING PROCESS

We view price setting as a series of decisions the marketer makes in order to

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

The steps we cover include:

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

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13.3 STEP 1: EXAMINE COMPANY AND MARKETING OBJECTIVES

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

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

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

13.4 STEP 2: DETERMINE AN INITIAL PRICE

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

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

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13.4.1 COST PRICING

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

Markup Amount = Markup Percentage

Item Cost

15 = 30%
50

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

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

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

Markup-on-Selling-Price – Many resellers, and in particular retailers, discuss

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

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Markup Amount = Markup Percentage

Selling Price

15 = 23%
65

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

Item Cost = Price

(1.00 – Markup Percentage)

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

13.4.2 MARKET PRICING

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

Backward Pricing: In some marketing organizations the price the market is

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

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a competitor’s offerings but is perceived to offer only minor improvements

compared to other products. In these markets it is important to undertake
research to learn whether customers have mentally established a price range or
reference price for products in a certain product category.

Psychological Pricing ; For many years researchers have investigated customers’

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

• Odd-Even Pricing - One effect dubbed “odd-even” pricing relates to whole

number pricing where customers may perceive a significant difference in
product price when pricing is slightly below a whole number value.

• Prestige Pricing - Another psychological effect, called prestige pricing,

points to a strong correlation between perceived product quality and price.
The higher the price the more likely customers are to perceive it has being
higher quality compared to a lower priced product.

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

13.4.3 COMPETITIVE PRICING

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

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

• Below Competition Pricing - A marketer attempting to reach objectives that

require high sales levels (e.g., market share objective) may monitor the
market to insure their price remains below competitors.

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• Above Competition Pricing - Marketers using this approach are likely to be

perceived as market leaders in terms of product features, brand image or
other characteristics that support a price that is higher than what
competitors offer.

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

13.4.4 BID PRICING

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

Bid pricing occurs in several industries though it is a standard requirement

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

13.5 STEP 3: SET STANDARD PRICE ADJUSTMENTS

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

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

13.5.1 QUANTITY DISCOUNTS

This adjustment offers buyers an incentive of lower per-unit pricing as more

products are purchased. Most quantity or volume discounts are triggered when
a buyer reaches certain purchase levels. For instance, a buyer may pay the list
price when they purchase between 1-99 units but receive a 5% discount off the
list price when the purchase exceeds 100 units.

Options for offering price adjustments based on quantity ordered include:

• Discounts at Time of Purchase – The most common quantity discounts

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

• Discounts on Cumulative Purchases – This method allows the buyer to

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

13.5.2 TRADE ALLOWANCES

Manufacturers who rely on channel partners to distribute their products (e.g.,

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

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

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

13.5.3 SPECIAL SEGMENT PRICING

In some industries special classes of customers within a target market are

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

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

Another example used by service firms is to offer pricing differences based on

convenience and comfort enjoyed by customers when experiencing the service
such as seat location at a sporting or entertainment event.

13.5.4 GEOGRAPHIC PRICING

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

13.6 STEP 4: DETERMINE PROMOTIONAL PRICING

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

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

13.6.1 MARKDOWNS

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

• Temporary Markdown – Possibly the most familiar pricing method

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

• Permanent Markdown – Unlike the temporary markdown where the price

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

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

13.6.2 LOSS LEADERS

An important type of pricing program used primarily by retailers is the loss

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

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

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

13.6.3 SALES PROMOTIONS

Marketers may offer several types of pricing promotions to simulate demand.

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

13.6.4 BUNDLE PRICING

Another pricing adjustment designed to increase sales is to offer discounted

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

13.6.5 DYNAMIC PRICING

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

13.7 STEP 5: STATE OWNERSHIP AND PAYMENT OPTIONS

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

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13.7.1 FORM OF PAYMENT

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

13.7.2 TIMEFRAME OF PAYMENT

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

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

13.8 LET US SUM UP

• Setting up of prices includes examination of: approaches to setting an

initial price; different price adjustments marketers make before settling on
a final selling price; payment options; and additional issues that affect
pricing.

• The first and foremost step is to examine company and marketing

objectives by overall objectives of the firm and marketing objectives.

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

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

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

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

13.9 CHECK YOUR PROGRESS

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

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

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

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

13.5.4)

• Does promotional pricing leads to reduce profit or increase profit? Discuss.

(Refer 13.6 to 13.6.5)

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LESSON-14
COST- DEMAND AND COMPETITION

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

14.0 AIMS AND OBJECTIVES

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

14.1 INTRODUCTION

The notion of competition is very widely used in economics in general and in

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

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14.2 CHARACTERISTICS OF A MARKET STRUCTURE

Each of the above mentioned market structure describes a particular

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

• Number of Firms in the Market: The number of firms in the market

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

• Control over Product Price: The extent to which an individual firm

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

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

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

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

• Existence of Non-Price Competition: Market structures also differ to the

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

14.3 CLASSIFICATION OF COST-DEMAND COMPETITION

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

14.3.1 PERFECT COMPETITION

Perfect competition is an idealized version of market structure that provides a

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

To understand the nature of competition under the perfectly competitive market

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

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

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

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

Despite the fact that no industry is truly perfectly competitive, it is still

worthwhile to study perfect competition as a market structure. Conclusions
derived from the study of the idealized version of perfect competition are often
helpful in explaining behavior in the real world.

• The Economics Of Perfect Competition.

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

As mentioned earlier, under perfect competition, an individual supplier of the

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

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

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

• The Desirability Of Perfect Competition.

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

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

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14.3.2 MONOPOLISTIC COMPETITION

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

• Major Characteristics Of Monopolistic Competition.

As in the case of perfect competition, monopolistic competition is characterized

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

Unlike perfect competition, the sellers under monopolistic competition

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

In addition to the existence of a large number of firms and product

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

The above mentioned characteristics of monopolistic competition basically yield

a market form that is very competitive, but probably not to the extent of perfect
competition.

• The Economics Of Monopolistic Competition.

As in the case of perfect competition, a firm under monopolistic competition

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

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unlike perfect competition, a firm under monopolistic competition has some

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

An important consequence of the price making power of a monopolistically

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

As mentioned above, a monopolistically competitive firm stops production where

marginal revenue equals marginal cost of production—the output level that
maximizes its profits (often called the equilibrium output for the firm).

• The Desirability Of Monopolistic Competition.

Aforementioned profit maximizing behavior of a monopolistically competitive firm

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

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14.3.3 OLIGOPOLY

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

• Major Characteristics Of Oligopoly.

An important characteristic of an Oligopolistic market structure is the

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

There are huge, though not insurmountable, barriers to entering an Oligopolistic

market. These barriers can involve large financial requirements, availability of
raw materials, access to the relevant technology, or simply patent rights of the
firms currently in the industry. Several industries in the United States provide
good examples of Oligopolistic market structures with obvious barriers to entry.
The U.S. auto industry provides an example of a market where financial barriers
to entry exist. In order to efficiently operate an automobile plant, one needs
upward of half a billion dollars of initial investment. The steel industry in the
United States, on the other hand, provides an example of an oligopoly where
barriers to entry have been created by the ownership of raw materials needed for
producing the product. In this industry, a few huge firms own most of the
available iron ore, a necessary raw material for steel production.

An Oligopolistic industry is also typically characterized by economies of scale.

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

• Economics And Desirability Of Oligopoly.

There is no single theoretical framework that provides answers to output and

pricing decisions under an Oligopolistic market structure. Analyses exist only for
special sets of circumstances. For example, if an Oligopolistic firm cuts its price,
it is met with price reductions by competing firms; however, if it raises the price
of its product, rivals do not match the price increase. For this reason, prices may
remain stable in an Oligopolistic industry for a prolonged period of time.

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14.3.4 MONOPOLY

Monopoly can be considered the opposite of perfect competition. It is a market

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

• Causes and Characteristics of Monopoly.

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

• The Economics Of Monopoly.

Generally speaking, price and output decisions of a monopolist are similar to

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

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

• Desirability Of Monopoly.

An industry characterized by a monopolistic market structure produces less

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

14.4 LET US SUM UP

In this lesson we have discussed about the following:

• Characteristics of a Market Structure
• Classification of Cost-demand Competition in different market structures
such as Perfect competition, Monopolistic Competition, Oligopoly and
Monopoly competition.

14.5 CHECK YOUR PROGRESS

• Explain the characteristics of market structures (Refer 14.2)

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

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LESSON-15
PRICING POLICIES AND STRATEGIES

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

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15.0 AIMS AND OBJECTIVES

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

15.1 INTRODUCTION

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

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

15.2 PRICING POLICIES AND STRATEGIES

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

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Pricing strategy entails more than reacting to market conditions, such as

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

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

15.2.1 COST-BASED PRICING

The traditional pricing policy can be summarized by the formula:

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

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

15.2.2 VALUE-BASED PRICING

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

Yet, value-based pricing is not just creating customer satisfaction or making

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

15.2.3 DEMAND-BASED PRICING

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

According to this pricing policy, managers try to determine the amount of

products or services they can sell at different prices. Managers need demand

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schedules in order to determine prices based on demand. Using demand

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

The success of this strategy depends on the reliability of demand estimates.

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

15.2.4 COMPETITION-BASED PRICING

With a competition-based pricing policy, a company sets its prices by

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

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

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

15.3 STRATEGIES FOR NEW AND ESTABLISHED PRODUCTS

Product pricing strategies frequently depend on the stage a product or service is

in its life cycle; that is, new products often require different pricing strategies
than established products or mature products.

15.3.1 NEW PRODUCT PRICING STRATEGY

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

Complex pricing arrangements, however, prevent lower pricing from being a

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

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

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bundled products of Apple's Mac Mini. The complexity of these comparisons is

what can make such new product pricing successful.

15.3.2 ESTABLISHED PRODUCT PRICING STRATEGY

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

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

15.4 KINDS OF PRICING

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

15.4.1 ODD PRICING

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

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

15.4.2 PSYCHOLOGICAL PRICING

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

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15.4.3 CUSTOMARY PRICES

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

15.4.4 PRICING AT THE PREVAILING PRICES

This kind of pricing is undertaken to meet the competition. Hence, such a

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

15.4.5. PRESTIGE PRICING

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

15.4.6. PRICE LINING

This policy of pricing is usually found among retailers. Technically, it is closely

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

15.4.7. GEOGRAPHIC PRICING

This policy is sometimes used where a manufacturer serves a number of distinct

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

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

15.4.8 DUAL PRICING

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

15.4.9 ADMINISTERED PRICING

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

15.4.10 MONOPOLY PRICING

New product pricing is, in essence, monopoly pricing. Since competition is

absent, the seller has a free hand in fixing the price. Such pricing will be on the
principles of “what the traffic will bear”. Such a price will maximize the profit.

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15.4.11 SKIMMING PRICING

This is also termed as “Skim-the-Cream-pricing” (Stanton). It involves setting a

very high price for a new product initially and to reduce the price gradually as
competitors enter the market. It is remarked, “Launching a new product with
high price is an efficient device for breaking up the market into segments that
differ in price elasticity of demand.”

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

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

15.4.12 PENETRATION PRICING

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

One important consideration in the choice between skimming and penetration

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

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15.4.13 EXPECTED PRICING

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

15.4.14 SEALED BID PRICING

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

15.4.15 NEGOTIATED PRICING

This method is invariably adopted by industrial suppliers. Manufacturers who

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

15.4.16 MARK-UP PRICING

This method is adopted by wholesalers and retailers in establishing a sale price.

When the goods are received, the retailer adds a certain percentage to the
manufacturer’s price to arrive at the retail price. For example, an item that
costs Rs.20 is sold for Rs.25; the mark-up is Rs.5 or 25%.

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

Gross margin + Retail reduction

Mark-on: 100(%) + Retail reduction

Retail reduction refers to pilferage, damages and discounts to be incurred by

retailers while holding stock.

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15.5 LET US SUM UP

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

• Pricing strategy entails more than reacting to market conditions, such as

reducing pricing because competitors have reduced their prices.

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

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

15.6 CHECK YOUR PROGRESS

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

• Under what circumstances would you recommend: (Refer pg no:141 and

142 and answer it in your own)

(a) Skimming pricing

(b) Penetration pricing and

(c) Negotiated pricing?

• Discuss the possible pricing policies for the product of a new

manufacturing company? What factors will you take into account in
formulating a suitable price strategy? (Refer 15.4.11, 15.4.12 and 15.4.15
and answer it in your own)

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

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

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UNIT – IV

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LESSON-16
SALES PROMOTION

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

16.0 AIMS AND OBJECTIVES

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

16.1 INTRODUCTION

In a time when customers are exposed daily to a nearly infinite amount of

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

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

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lead to directing all their promotional spending to non-advertising promotions.

Finally, the high cost of advertising may drive many to seek alternative, lower
cost promotional techniques to meet their promotion goals.

In this section we continue our discussion of promotion decisions by looking at

the promotion mix item, sales promotion. Sales promotions are used widely in
many industries and especially by marketers selling to consumers. We will see
that the objectives of sales promotion are quite different than advertising and are
specifically designed to encourage customer response.

16.2 MEANING OF SALES PROMOTION

Sales promotion describes promotional methods using special short-term

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

16.3 OBJECTIVES OF SALES PROMOTION

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

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1. Building Product Awareness – Several sales promotion techniques are

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

16.4 TYPES OF SALES PROMOTION

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

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2. Trade Market Directed – Marketers use sales promotions to target all

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

16.4.1 CONSUMER SALES PROMOTION

Consumer sales promotions encompass a variety of short-term promotional

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

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

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

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ii. Rebates: Rebates, like coupons, offer value to purchasers typically by

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

Second, rebates often request the purchaser to submit personal data in

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

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

Finally, rebates tend to be used as a value enhancement in higher priced

products compared to coupons. For instance, rebates are a popular
promotion for automobiles and computer software where large amounts of
money may be returned to the customer.

iii. Promotional Pricing: One of the most powerful sales promotion techniques
is the short-term price reduction or, as known in some areas, “on sale”
pricing. Lowering a product’s selling price can have an immediate impact
on demand, though marketers must exercise caution since the frequent use
of this technique can lead customers to anticipate the reduction and,
consequently, withhold purchase until the price reduction occurs again.

iv. Trade- In: Trade-in promotions allow consumers to obtain lower prices by
exchanging something the customer possess, such as an older product that
the new purchase will replace. While the idea of gaining price breaks for
trading in another product is most frequently seen with automobile sales,
such promotions are used in other industries, such as computers and golf
equipment, where the customer’s exchanged product can be resold by the
marketer in order to extract value

v. Loyalty Programs: Promotions that offer customers a reward, such as

price discounts and free products, for frequent purchasing or other activity
are called loyalty programs. These promotions have been around for many
years but grew rapidly in popularity when introduced in the airline industry
as part of frequent-filer programs. Loyalty programs are also found in

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numerous other industries, including grocery, pizza purchasing and online

book purchases, where they may also be known as club card programs
since members often must use a verification card as evidence of enrollment
in the program.

Many loyalty programs have become ingrained as part of the value offered
by a marketer. That is, a retailer or marketing organization may offer
loyalty programs as general business practice. Under this condition loyalty
program does not qualify as a sales promotion since it does not fit the
requirement of offering a short-term value (i.e., it is always offered).
However, within a general business practice loyalty program a sales
promotion can be offered, such as special short-term offer that lowers the
number of points needed to acquire a free product.

vi. Samples and Free Trials: Enticing members of a target market to try a
product is often easy when the trial comes at little or no cost to the
customer. The use of samples and free trials may be the oldest of all sales
promotion techniques dating back to when society advanced from a culture
of self-subsistence to a culture of trade.

Sampling and free trials give customers the opportunity to experience

products, often in small quantities or for a short duration, without
purchasing the product. Today, these methods are used in almost all
industries and are especially useful for getting customers to try a product
for the first time.

vii. Free Product: Some promotional methods offer free products but with the
condition that a purchase be made. The free product may be in the form of
additional quantities of the same purchased product (e.g., buy one, get one
free) or specialty packages (e.g., value pack) that offer more quantity for the
same price as regular packaging.

viii. Premiums: Another form of sales promotion involving free merchandise is

premium or “give-away” items. Premiums differ from samples and free
product in that these often do not consist of the actual product, though
there is often some connection. For example, a cell phone manufacturer
may offer access to free downloadable ring tones for those purchasing a cell
phone.

ix. Contests and Sweepstakes: Consumers are often attracted to promotions

where the potential value obtained is very high. In these promotions only a
few lucky consumers receive the value offered in the promotion. Two types
of promotions that offer high value are contests and sweepstakes.

Contests are special promotions awarding value to winners based on skills

they demonstrate compared to others. For instance, a baking company
may offer free vacations to winners of a baking contest. Contest award
winners are often determined by a panel of judges.

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

A sub-set of both contests and sweepstakes are games, which come in a

variety of formats such as scratch-off cards and collection of game pieces.
Unlike contests and sweepstakes, which may not require purchase, to
participate in a game customers may be required to make a purchase. In
the United States and other countries, where eligibility is based on
purchase, games may be subjected to rigid legal controls and may actually
fall under that category of lotteries, which are tightly controlled.

x. Demonstrations: Many products benefit from customers being shown how

products are used through a demonstration. Whether the demonstration is
experienced in-person or via video form, such as over the Internet, this
promotional technique can produce highly effective results. Unfortunately,
demonstrations are very expensive to produce. Costs involved in
demonstrations include paying for the expense of the demonstrator, which
can be high if the demonstrator is well-known (e.g., nationally known chef),
and also paying for the space where the demonstration is given.

xi. Personal Appearances: An in-person appearance by someone of interest to

the target market, such as an author, sports figure or celebrity, is another
form of sales promotion capable of generating customer traffic to a physical
location. However, as with demonstrations, personal appearance
promotion can be expensive since the marketer normally must pay a fee for
the person to appear.

16.4.2 TRADE SALES PROMOTIONS

Certain promotions can help “push” a product through the channel by

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

Many sales promotions aimed at building relationships with channel partners

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

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iii. Short Term Allowances

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

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

16.4.3 BUSINESS-TO-BUSINESS SALES PROMOTIONS

The use of sales promotion is not limited to consumer products marketing. In

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

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16.5 TRENDS IN SALES PROMOTION

Marketers who employ sales promotion as a key component in their promotional

strategy should be aware of how the climate for these types of promotions is
changing. The important trends in sales promotion include:

• Customers Expectations: The onslaught of sales promotion activity over

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

• Electronic Delivery: Sales promotions are delivered to customers in many

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

• Tracking: As we discussed in our coverage of advertising, tracking

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

• Internet Communication: For many years consumers typically became

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

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• Clutter and Need for Creativity: In the same way an advertisement

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

16.6 LET US SUM UP

• Sales promotion describes promotional methods using special short-term

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

16.7 CHECK YOUR PROGRESS

• What is sales promotion? What is its importance in marketing industrial

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

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LESSON-17
PERSONAL SELLING

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

17.0 AIMS AND OBJECTIVES

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

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

17.1 INTRODUCTION

Personal selling is considered to be the most powerful element in promotional

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

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

17.2 MEANING OF PERSONAL SELLING

Personal selling is a promotional method in which one party (e.g., salesperson)

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

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

17.3 ADVANTAGES OF PERSONAL SELLING

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

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receivers (e.g., customer). So if a customer does not understand the initial

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

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

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

17.4 DISADVANTAGES OF PERSONAL SELLING

Possibly the biggest disadvantage of selling is the degree to which this

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

A second disadvantage of personal selling is the high cost in maintaining this

type of promotional effort. Costs incurred in personal selling include:

• High cost-per-action (CPA) –CPA can be an important measure of the

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

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

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

17.5 OBJECTIVES/ IMPORTANCE OF PERSONAL SELLING

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

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17.6 CLASSIFYING SELLING ROLES

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

17.6.1 ORDER GETTERS

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

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• Business-to-Business Selling – These salespeople sell products for business

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

• Trade Selling – Sales professionals working for consumer products

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

17.6.2 ORDER TAKERS

Selling does not always require a salesperson use methods designed to

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

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

• Industrial Distributor Clerks – Industrial purchase situations, such as

distributors of building products, will also have clerks to handle customer
purchases.

• Customer Service – Order taking is also handled in non face-to-face ways

through customer service personnel. Usually this occurs via phone
conversations, though newer technologies are allowing for these tasks to be
handled through electronic means such as online chat.

17.6.3 ORDER INFLUENCERS

Some salespeople are not engaged in direct selling activities at all. That is, they
do not sell directly to the person who is the ultimate purchaser for their
product. Instead these salespeople concentrate on selling activity that targets
those who influence purchases made by the final customer. The primary
example of an order influencer is the missionary salesperson: These salespeople
are used in industries where customers make purchases based on the advice or
requirements of others. Two industries in which missionary selling is commonly

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found are pharmaceuticals, where salespeople, known as product detailers,

discuss products with doctors (influencers) who then write prescriptions for their
patients (final customer) and higher education, where salespeople call on college
professors (influencers) who make requirements to students (final customer) for
specific textbooks.

17.6. 4 SALES SUPPORT

A final group involved in selling mostly assist with the selling activities of other
sales professionals. These include:

• Technical Specialists - When dealing with the sale of technical products,

particularly in business markets, salespeople may need to draw on the
expertise of others to assist with the process. This is particularly the case
when the buying party consists of a buying center. We indicated that in
business selling many people from different functional areas may be
involved in the purchase decision. If this buying center includes technical
people, such as scientists and engineers, a salesperson may seek
assistance from members of their own technical staff, who can help address
specific questions.

• Office Support – Salespeople also may receive assistance from their

company’s office staff in the form of creating promotional materials, setting
up sales appointments, finding sales leads, arranging meeting space or
organizing trade shows exhibits.

17.7 ACTIVITIES IN THE SELLING PROCESS

The selling process is a set of activities undertaken to successfully obtain an

order and begin building long-term customer relations. While the activities we
discuss apply to all forms of selling and can be adapted to most selling
situations (including non-product selling such as selling an idea), we will mainly
concentrate on the activities carried out by professional salespeople. For our
purposes, we define professional salespeople as those whose principle
occupation involves selling products (i.e., goods and services) to buyers and do
so for organizations that appreciate and support sellers who are well-trained and
ethically responsible.
The selling activities undertaken by professional salespeople include:
1. Generating Sales Leads
2. Qualifying Leads
3. Preparation for the Sales Call
4. The Sales Meeting
5. Handling Buyer Resistance
6. Closing the Sale
7. Account Maintenance

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It should be noted that while we present these activities in an order that is

suggestive of a step-by-step approach (i.e., one activity must be carried out
before the next), in many selling situations this will not be the case.

17.7.1 GENERATING SALES LEADS

Selling begins by locating potential customers. A potential customer or

“prospect” is first identified as sales lead, which simply means the salesperson
has obtained information to suggest that someone exhibits key characteristics
that lend them to being a prospect. For salespeople actively involved in
generating leads, they are continually on the look out for potential new
business. In fact, for salespeople whose chief role is that of order getter, there is
virtually no chance of being successful unless they can consistently generate
sales leads. Sales leads can come from many sources including:

• Prospect Initiated – Includes leads obtained when prospects initiate contact

such as when they fill out a website form, enter a trade show booth or
respond to an advertisement.

• Profile Fitting – Uses market research tools, such as company profiles, to

locate leads based on customers that fit a particular profile likely to be a
match for the company’s products. The profile is often based on the profile
of previous customers.

• Market Monitoring – Through this approach leads are obtained by

monitoring media outlets, such as news articles, Internet forums and
corporate press releases.

• Canvassing – Here leads are gathered by cold-calling (i.e., contacting

someone without pre-notification) including in-person, by telephone or by
email.

• Data Mining – This technique uses sophisticated software to evaluate

information (e.g., in a corporate database) previously gathered by a
company in hopes of locating prospects.

• Personal and Professional Contacts – A very common method for locating

sales leads uses referrals. Such referrals may come at no cost to the
salesperson or, to encourage referrals, salespeople may offer payment for
referrals. Non-paying methods including asking acquaintances (e.g.,
friends, business associates) and networking (e.g., joining local or
professional groups and associations). Paid methods may include payment
to others who direct leads that eventually turn into customers including
using Internet affiliate programs (i.e., paid for website referrals).

• Promotions – The method uses free gifts to encourage prospect to provide

contact information or attend a sales meeting. For example, offering free
software for signing up for a demonstration of another product.

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17.7.2 QUALIFYING SALES LEADS

Not all sales leads hold the potential for becoming sales prospects. There are
many reasons for this including:
• Cannot be Contacted – Some prospects may fit the criteria for being a
prospect but gaining time to meet with them may be very difficult (e.g.,
high-level executives).
• Need Already Satisfied - Prospects may have already purchased a similar
product offered by a competitor and, thus, may not have the need for
additional products.
• Lack Financial Capacity - Just because someone has a need for a product
does not mean they can afford it. Lack of financial capacity is major reason
why sales leads do not become prospects.
• May Not Be Key Decision Maker - Prospects may lack the authority to
approve the purchase.
• May Not Meet Requirements to Purchase - Prospects may not meet the
requirements for purchasing the product (e.g., lack other products needed
for seller’s product to work properly).

The process of determining whether a sales lead has the potential to become a
prospect is known as “qualifying” the lead. In some cases, a sales lead can be
qualified by the seller prior to making first contact. For instance, this can be
done through the use of research reports, such as an evaluation of a company’s
financial position using publicly available financial reporting services. More
likely, sellers will not be in a position to qualify leads until they establish contact
with a lead, which may occur in activities associated with either Preparation for
the Sales Call or The Sales Meeting.

17.7.3 PREPARATION FOR THE SALES CALL

If a prospect has been qualified or if qualifying cannot take place until additional
information is obtained (e.g., when first talking to the prospect), a salesperson’s
next task is to prepare for an eventual sales call. This activity in the selling
process has two main objectives:

• Learn More About the Customer: While during the lead generation and
qualifying portion of the selling process a seller may have gained a great
deal of knowledge about a customer, invariably there is much more to be
known that will be helpful once an actual sales call is made. Salespeople
can attempt to gather this information through several sources including:
corporate research reports, information on the prospect’s website,
conversations with non-competitive salespeople who have dealt with the
prospect, website forums where industry information is discussed, and by
asking questions when setting up sales meetings.

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• Arranging Prospect Contact: With some information about the prospect in-
hand, the salesperson must then move to make initial contact. In a few
cases a salesperson may be fortunate to have the prospect contact her/him
but in most cases salespeople will need to initiate contact. In many ways
arranging for contact is as much as selling effort as selling a product. There
are two main approaches to arranging contact, Cold Calling for
Presentation and Cold Calling for Appointment.

17.7.4 THE SALES MEETING

The heart of the selling process is the meeting that takes place between the
prospect and the salesperson. At this stage of the selling process the
salesperson will spend a considerable amount of time presenting the product.
While the word “presenting” may imply the seller is taking center stage and does
most of the talking by discussing the product’s features and benefits, in
actuality successful sellers find effective presentations to be more of a give-and-
take conversation.

Additionally, the meeting is not just about the seller discussing the product,
rather much more takes place during this part of the selling process including:

• Establishing Rapport with the Prospect – Successful salespeople know that

jumping right into a discussion of their product is not the best why to build
relationships. Often it is important that, upon first greeting the prospect,
the salesperson spend a short period of time in a friendly conversation to
help establish a rapport with the potential buyer.

• Gaining Background Information – The salesperson will use questioning

skills to learn about the prospect and the prospect’s company and industry.

• Access Prospect’s Needs - Taking what is learned from the prospect’s

response to questions, the salesperson can determine the prospect’s needs.
To accomplish this task successfully, sellers must be skilled at listening
and understanding responses.

• Presenting the Product – The salesperson will stimulate a prospect’s

interest by discussing a product’s features and benefits in a way that is
tailored to the needs of the customer. Part of this discussion may include a
demonstration of the product.

• Assess the Prospect - Throughout the presentation the seller will use
techniques, including interpreting non-verbal cues (e.g., body language), to
gauge the prospect understands and acceptance of what is discussed.

17.7.5 HANDLING BUYER RESISTANCE

It is a rare instance when a salesperson does not receive resistance from a

prospect. By resistance we are referring to a concern a prospect has regarding

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the product (or company) and how it will work for their situation. While
handling sales resistance may sound like a difficult part of selling, most
successful salespeople actually welcome and even encourage it as part of the
selling process. Why? Because it is an indication the prospect is paying
attention to the presentation and may even have an interest in the product if the
resistance can be effectively addressed.

To overcome resistance, salespeople are trained to make sure they clearly

understand the prospect’s concern. Sometimes prospects say one thing that
appears to be an objection to the product but, in fact, they have another issue
that is preventing them from agreeing to a purchase. Salespeople are rarely able
to make the sale unless resistance is overcome.

17.7.6 CLOSING THE SALE

Most people involved in selling acknowledge that this part of the selling process
is the most difficult. Closing the sale is the point when the seller asks the
prospect to agree to make the purchase. It is also the point at which many
customers are unwilling to make a commitment and, consequently, respond to
the seller’s request by saying no. For anyone involved in sales such rejection
can be very difficult to overcome, especially if it occurs on a consistent basis.

Yet the most successful salespeople will say that closing the sale is actually
fairly easy if the salesperson has worked hard in developing a relationship with
the customer. Unfortunately some buyers, no matter how satisfied they are with
the seller and their product, may be insecure or lack confidence in making
buying decisions. For these buyers, salespeople must rely on persuasive
communication skills that help assist and even persuade a buyer to place an
order.

The use of persuasive communication techniques is by far the most

controversial and most misunderstood concept related to the selling process.
Why? Because to many people the act of persuasion is viewed as an attempt to
manipulate someone into doing something they really do not want to do.
However, for sales professionals this is not what persuasive communication is
about. Instead, persuasion is a skill for assisting someone in making a decision;
it is not a technique for making someone make a decision. The difference is
important. Where one is manipulative, the other is helpful and designed to
benefit the buyer. And as we noted, persuasion does not always occur. Many
times buyers take the lead in closing a sale since they are convinced the product
is right for them.

17.7.7 ACCOUNT MAINTENANCE

While account maintenance is listed as the final activity in the selling process, it
really amounts to the beginning of the next sale and, thus, the beginning of a
buyer-seller relationship. In selling situations where repeat purchasing is a goal

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(compared to a one-time sale), following up with a customer is critical to

establishing a long-term relationship.

After a sale, salespeople should work hard to insure the customer is satisfied
with the purchase and determine what other ways the salesperson can help the
customer be even more satisfied with the purchase. The level and nature of
after-sale follow-up will often depend on the product sold. Expensive, complex
purchases that require installation and training may result in the salesperson
spending considerable time with the customer after the sale while smaller
purchases may have the seller follow-up with simple email correspondence.

By maintaining contact after the sale the seller is in a position to become more
accepted by the customer which invariably leads to the salesperson learning
more about the customer and the customer’s business. With this knowledge the
salesperson will almost always be presented with more selling opportunities.

17.8 LET US SUM UP

• Personal selling is a promotional method in which one party (e.g.,

salesperson) uses skills and techniques for building personal relationships
with another party (e.g., those involved in a purchase decision) that results
in both parties obtaining value.

• Personal selling is used to meet the five objectives of promotion in the

following ways to Build Product Awareness, Create Interest, Provide
Information, Stimulate Demand and Reinforce the Brand.

• The actual functions carried out by someone in sales may be quite different
and the four major types of selling roles are order getters, order takers,
order influencers, and sales support.

• The selling activities undertaken by professional salespeople include:

Generating Sales Leads, Qualifying Leads, Preparation for the Sales Call,
The Sales Meeting, Handling Buyer Resistance, Closing the Sale and
Account Maintenance.

17.9 CHECK YOUR PROGRESS

• What is personal selling and discuss the importance of personal

selling.(Refer 17.2 and 17.5)
• What are the advantages of personal selling? Are there any limitations?
(Refer 17.3 and 17.4)
• Classify the selling roles of a salesperson (Refer 17.6 to 17.6.4)
• Explain the selling activities undertaken to successfully obtain an order
and begin building long-term customer relations. (Refer 17.7 to 17.7.7)

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LESSON-18
ADVERTISING

Contents:
18.0 Aims and Objectives
18.1 Introduction
18.2 Meaning of Advertising
18.3 Definition of Advertising
18.4 Advertising Objectives
18.5 Functions of Advertising
18.5.1 Increasing the Number of Customers
18.5.2 Increasing the Consumption Rate among the Present Customers
18.6 Importance of Advertising
18.6.1 Benefits to Manufacturers
18.6.2 Benefits to Retailers.
18.6.3 Benefits to Customers
18.7 Let us sum up
18.8 Check your progress

18.0 AIMS AND OBJECTIVES

Generally, marketing communication is undertaken to pass on the message of

the product or sale to the ultimate consumers. Therefore advertising is
considered to be the best source of communication. Here, in this lesson we are
going to discuss the essence of marketing in the modern marketing concept by
answering the following questions

i. What is the objective of marketing?

ii. What are the basic functions of advertising?
iii. How the manufacturers, retailers and customers are benefited through
advertising?

18.1 INTRODUCTION

The present era is of mass production and mass distribution. Similar products
are taken to the market. This involves stiff competition among the producers.
Many firms adopt the vigorous means to maintain their existence in the market,
as there are many substitutes in the market. This tendency is a struggle for the

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producers for their survival in the modern business world. All businessmen aim
to make profit by increasing the sales at a remunerative price policy. When we
manufacture good quality products or offer expert services, these must be
known to the public. For this mass communication is needed as the population
is great or the market area is wide. We can adopt sale promotion and advertising
as tools to mobilize the marketing machinery. In the present business world,
suitable publicity is done through advertising, which is adopted by commercial
and industrial undertakings and almost all types of concerns. Therefore
advertisement is a method of publicity.

18.2 MEANING OF ADVERTISING

Advertising is a non-personal form of promotion that is delivered through

selected media outlets that, under most circumstances, require the marketer to
pay for message placement. Advertising has long been viewed as a method of
mass promotion in that a single message can reach a large number of people.
But, this mass promotion approach presents problems since many exposed to
an advertising message may not be within the marketer’s target market, and
thus, may be an inefficient use of promotional funds. However, this is changing
as new advertising technologies and the emergence of new media outlets offer
more options for targeted advertising.

Advertising also has a history of being considered a one-way form of marketing

communication where the message receiver (i.e., target market) is not in position
to immediately respond to the message (e.g., seek more information). This too is
changing. For example, in the next few years technologies will be readily
available to enable a television viewer to click a button to request more details
on a product seen on their favorite TV program. In fact, it is expected that over
the next 10-20 years advertising will move away from a one-way communication
model and become one that is highly interactive.

Another characteristic that may change as advertising evolves is the view that
advertising does not stimulate immediate demand for the product advertised.
That is, customers cannot quickly purchase a product they see advertised. But
as more media outlets allow customers to interact with the messages being
delivered the ability of advertising to quickly stimulate demand will improve.

18.3 DEFINITION OF ADVERTISING

Littlefield defines it as “Advertising is mass communication of information

intended to persuade buyers as to maximize profits.”

Hall defines it as “Salesmanship in writing, print or pictures or spreading

information by means of the written and printed word and the pictures.”

Stanton says, “Advertising consists of all the activities in presenting to a group a

non personal, oral or visual, openly sponsored message regarding a product,
service or idea.”

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American Marketing Association defines “advertising as any paid form of non-

personal presentation and promotion of ideas, goods, or services by an identified
sponsor.”

From the above definitions, it is stated that advertising indicates that

• Advertisement is a message to large groups.

• It is in the form of non-personal communication.

• It persuades the general public to purchase the goods or services,

advertised.

• It is paid for by advertiser to publisher.

• Advertising messages are identified with the advertiser.

18.4 ADVERTISING OBJECTIVES

An objective is defined as "something toward which effort is directed: an aim, a

goal." Every organization should have objectives to provide a framework for
action. In advertising, the well-developed campaign has aims and goals. Good
objectives provide the advertiser with guidance and direction for the
development of the campaign. How? They provide the framework for decision
making. they also provide the advertiser with an aim or goal that can be used to
evaluate the actual advertising results.

Advertising objectives are generally placed in two categories: Direct-action (sales)

objectives and Indirect-action (communication) objectives Direct-action
objectives are more easily measured in terms of results- sales go up, sales leads
increase and/or more people try the product for the first time. These happenings
may all be the result of advertising - advertising that was developed as a result
of direct-action objectives.

Advertisements with these objectives or goals are more concerned with

communicating an idea that should result in increased sales in the long run. No
immediate effect can be attributed to such ads in most situations. In other
words, the evaluation process for ads with indirect-action (communication)
objectives is much more subjective than is the case for the sales or action-
oriented advertising effort.

Depending on the planned marketing strategy for the company, various

objectives will be decided on - objectives that may be direct action, indirect
action, or some mixture of the two as determined by the needs of the
organization. Eleven popular advertising objectives that may be used either
individually or in combination are:

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1. Induce Trial. When a product comes on the market, the advertising goal
may be to get people to try it. Every ad will be developed with this idea in
mind. Benefits will be much in evidence in the copy. Coupons may be used.
Free offers are also quite popular. If a person tries the product just once,
the objective has been met.

2. Intensify Usage. When people think of cheese, they may, for example think
of Amul. However, Amul does not need to get people to try its products
(Induce trial). What is needed is an increase in per capita consumption of
the product. Ads, therefore, may feature recipes or have other suggestions
on how to use the product. If people already know of a product and can be
shown how to use more of it through advertising, they become better
customers. This objective is based on the premise that there is no better
prospect than a current customer.

3. Sustain Preference. Coca-Cola has advertised heavily in good times and

bad times in order to maintain product awareness as well as preference.

4. Confirm Imagery. The illustration, the copy, and where the ad is placed all
serve to confirm what the customer already thinks about the product. If an
ad for Rolls Royce is run in unpopular media, the ad would serve to confuse
the image of the product and should be avoided since it would cause
cognitive dissonance on the part of the consumer.

5. Change Habits. Advertising can sell people on new ideas. Maruti 800 sold
the concept of the small car. MasterCard and Visa sold the idea of one-card
credit. Such examples illustrate that advertising has been used to change
popular thinking.

6. Building Line Acceptance. Hindustan Lever Limited, Amul are among the
many companies that advertise numerous products while working to build
a total product line. Advertisement for Hindustan Lever Limited features
everything from skin care to personal care. Johnson and Johnson uses
common product-line promotions with supporting point-of-purchase
displays and other media to sell its line. In every instance, the objective is
to build sales for the total line as opposed to sales for a specific item alone.

7. Break The Ice. The Avon ad helps its representatives to sell, since the
customer has heard of Avon. As an unsought good, insurance cannot
generally be sold by advertising. But advertising can make people aware of
an insurance company so that they have heard of it when the salesperson
calls on them. In many business situations, advertising is crucial as an
icebreaker. If buyers have not heard of the company, they may
automatically be disinterested. Advertising may wave the product name just
enough to provide brand recognition and, thereby, get the salesperson in to
see the buyer.

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8. Build Ambience. Advertising can help to create a positive feeling about a

business. MacDonalds campaign with its Ronald McDonalds and friends as
well as its young, attractive employees who look so ready to serve the
customer help to create a positive feeling about the company. Ambiance, or
environment in an ad, is crucial to any firm in the business of selling a
service. Advertising can work to build good ambiance, but such an effort
can have long-term success only if there actually is a positive environment
within the firm.

9. Generate Sales Leads. The objectives of these ads may be centered

around obtaining the names of prospective customers by offering free gifts,
return coupon, etc.

10. Increase Awareness. "Drugs can harm your baby before it is born." Such a
campaign has as its objective to build awareness of the problems addressed
in the ads. Of course every ad, regardless of the stated objective, should
promote awareness in some form. Without awareness, the result could be
no sales.

11. Increase Sales. For most organizations, an advertising objective that calls
for an increase in sales is most desirable.

A general objective, like increase sales, provides no guidance or direction. It is

an aim or goal that was known before it was stated. At best, an increase in sales
is a long-run objective. To make it more short term and useful, the advertiser
should narrow the objective's scope in terms of coverage while attempting to
quantify it in some way.

18.5 FUNCTIONS OF ADVERTISING

The main objective of advertising is to stimulate or increase sales to all

customers- present, former and future. Advertising increases the present sales
and potential demand of the product. The above objectives are realized by the
functions of advertising. Following are the functions of advertising.

18.5.1 INCREASING THE NUMBER OF CUSTOMERS

(a) By increasing the customers and widening the market: Advertising

through communication media informs consumers about the presence of a
product in the market. The effective advertisement works in two ways. First
it stimulates demand and then it strengthens the stimulated demand. The
benefits and various uses of the products must be made known to the
public area where the marketer wants to enter for marketing. To achieve
the objectives, advertising is the only way. It serves to widen the market
through increasing the buyers.

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(b) By developing a Brand loyalty: All traders or manufacturers aim to attract

the prospects in favour of their products and services. Development of
loyalty to one’s brand among the customers is important. For instance, if
one is using a particular brand of soap, then advertising must aim at
making him to use only this soap. Advertising and its impact make him a
continuous and ever user and do not want him to leave it for another
brand.

(c) Offset the competing brands: Many similar products are flowing towards
the market and consumers are tempted to buy them through various
promotional measures. Further, advertising facilitates the creation,
direction and extension of demand for the particular products or service. A
good advertising policy is always linked with the ultimate behaviour of
customers. For instance, when one buys a bathing soap today, one may go
in for a particular brand the next time. By focusing the qualities and merits
of the product in a better way than other similar products, the competitors
can be defeated by capturing their share of the market.

18.5.2 INCREASING THE CONSUMPTION RATE AMONG THE PRESENT

CUSTOMERS

(a) Increasing usage of the products: When a product is introduced in the

market, it is meant for a specific use. But when the product is put into use
consumers may come to know to its new uses. This is possible through
research. Advertising will explain the multiple uses to the masses.

(b) Reminding the consumers: The demand may be seasonal-cool drinks,

woolen dresses, air-coolers etc. They are saleable during the season period,
but during off season period, no sales may be possible. Again at the arrival
of the season, customers may not remember the brand used by them,
before making purchase. In these circumstances, advertising reminds the
customers about the forgotten products.

(c) Educating the public: Advertisement being a connecting link between the
producer and the consumers also plays its role by imparting knowledge.
Consumers may not know the good or bad reactions of a certain product or
services. For instance, when we purchase cloth, we are warned through
advertisement, to go in for stanforized cloth. Stanforized cloth will not
shrink. Those who do not know this, buy bad material and when stitched
the dress becomes tight. Another example is baby milk food. The producer
gives full instructions even on the package about the measurement of milk
powder according to the age of babies. Take the example of new model
scooter or car. The company appoints its own mechanics to see to the
repairs and this will be published in newspapers. In case you approach any
other mechanic to repair your new model vehicle the inexperienced
mechanic may spoil it. Other similar instances are shampoo, hair dye,
soap, powder, hair oil, medicine etc. The understanding of the product, its
uses, advantages etc can be well-educated through advertising.

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(d) Shaping goodwill: Almost every firm wants to establish a good name in the
society. Like a human being, a firm doing good services to the society or
offering products- different from others, better and cheaper than other
products etc., earns good name. Such a firm may ever be remembered by
the consumers. The consumers may prefer a product, because of low price,
fashion, service after sales, multiple uses, quality merchandise and wider
publicity. All these merits are known to the consumers through advertising,
and sales are boosted automatically. Thus a firm can build goodwill for its
products.

Advertising plays a vital role in creating a background or an interest in the

public and the salesman easily convert the public into consumers. It can
tell mass-thousands of people- about the product in the shortest span of
time at the least cost. Publicity facilitates large scale production, followed
by mass consumption, creating employment opportunities, apart from
profits.

18.6 IMPORTANCE OF ADVERTISING

The standard of living of the public is raised by introducing modern products

and the techniques through advertising. Mass production followed by large-scale
consumption facilitates to earn more profits. Large-scale production decreases
unit cost. The selling price is also reduced, but not to the extent of decreased
cost of production. It means, the price of the product is decreased, thereby
consumers are satisfied and dividend rate is increased, thereby shareholders are
satisfied. All these happen because of advertising. Items like pens, radios,
scooters, watches, refrigerators, television sets, cameras, foot wares and many
other modern amenities are examples.

Advertisement creates demand for the goods and makes it possible for the
introduction of mass production. It is not only beneficial to manufacturer but
also to retailer and consumers.

18.6.1 BENEFITS TO MANUFACTURERS

• Advertisement increases demand of the product hence manufacturer can go

for latest state of art machinery. This results in improved quality of product
and reduction in cost of production.

• Mass production needs mass selling efforts, which are possible or because
of advertisement.

• Through advertising the manufacturer can create the demand for his
product and maintain it throughout the year and thereby reduces seasonal
slumps in the business.

• Advertising also protects manufacturers against unfair competition because

customers learn to recognize the brand with the name of manufacturer.

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• Advertising also creates pressure on the retailer to stock goods which have
demand.

• Advertising tends to stabilize the selling price and this can create
confidence in the public.

• Pushing the goods through salesmen is a slow process and expensive too.
Advertising is comparatively less expensive marketing tool.

• In case of change in products or product features or new outlets, revised

price, etc., advertising helps in giving necessary information very quickly to
customers.

18.6.2 BENEFITS TO RETAILERS.

• It quickens the return on investment, reduces risk on dead stock and thus
can result in proportionate reduction of overhead expenses.

• Retailer is afraid of fluctuations in prices. Advertising normally aims

stabilization of price.

• Looking at current demand to the product, retailer can easily estimate the
sales accordingly plan the stock.

• It helps the customer to know existence of retailers in their areas and the
type of products available with them.

• Wholesaler or retailer may have his own sales people. The advertising helps
these salesmen to sell the product, the awareness about which is already
created by advertisement.

18.6.3 BENEFITS TO CUSTOMERS

• The manufacturer is compelled to maintain the quality of the goods

advertised. The money spent on advertisement should be taken by him as
long-term investment but he is bound to maintain the quality to ensure this
return in the future.

• Advertised goods are generally bear certain quality and thus consumers get
the quality matching to the price.

• Advertising also acts as information and educates the consumers.

• Advertising stimulates demand thereby increases production and hence

reduces the cost per unit. This benefit goes to the consumer.

• Advertising also makes it possible to sell direct to the consumers by mail

order like say Asian Sky Shop.

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• As manufacturers control the price of goods and services, the price cutting
is not available to more retailers. The only way retailer can get more
business is to attract customers by providing satisfactory service or place
additional benefits like installment, credit etc.

18.7 LET US SUM UP

• Advertising is a non-personal form of promotion that is delivered through

selected media outlets that, under most circumstances, require the
marketer to pay for message placement.

• American Marketing Association defines “advertising as any paid form of

non-personal presentation and promotion of ideas, goods, or services by an
identified sponsor.”

• Advertising objectives are generally placed in two categories: Direct-action

(sales) objectives and Indirect-action (communication) objectives.

• The main functions of advertising are to increase the number of customers

and to increase the Consumption Rate among the present customers.

• Advertisement creates demand for the goods and makes it possible for the
introduction of mass production. It is not only beneficial to manufacturer
but also to retailer and consumers.

18.8 CHECK YOUR PROGRESS

• Define advertising. (Refer 18.3)

• What is advertising? Discuss the objectives of advertising. (Refer 18.2 and
18.4)
• Explain the importance of advertising. (Refer 18.6 to 18.6.3)
• Explain the functions of advertising. (Refer 18.5 to 18.5.2)

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LESSON-19
KINDS OF MEDIA

Contents:
19.0 Aims and Objectives
19.1 Introduction
19.2 Advertising media
19.2.1 Television Advertising
19.2.2 Radio Advertising
19.2.3 Print Publications Advertising
19.2.4 Internet Advertising
19.2.5 Direct Mail
19.2.6 Signage and Bill Boards
19.2.7 Product Placement Advertising
19.2.8 Mobile Devices Advertising
19.2.9 Sponsorships
19.2.10 Others
19.3 Selecting Media Outlets
19.3.1 Creative Options
19.3.2 Creative Cost
19.3.3 Media Market Reach
19.3.4 Message Placement Cost
19.3.5 Length of Exposure
19.3.6 Advertising Clutter
19.3.7 Response Tracking
19.4 Let us sum up
19.5 Check your progress

19.0 AIMS AND OBJECTIVES

In the previous lesson, we discussed about the basic concepts of advertising. In

this part, let us discuss about the different kinds of media through which
advertising is made very effective. After going through this chapter, you can
answer the following questions
i. What are the different kinds of media available?
ii. What is the process of selecting media outlets?

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19.1 INTRODUCTION

Advertising is a form of communication whose purpose is to inform potential

customers about products and services and how to obtain and use them. Many
advertisements are also designed to generate increased consumption of those
products and services through the creation and reinforcement of brand image
and brand loyalty. For these purposes advertisements often contain both factual
information and persuasive messages. Every major medium is used to deliver
these messages, including: television, radio, movies, magazines, newspapers,
video games, the Internet, and billboards. Advertising is often placed by an
advertising agency on behalf of a company.
Advertisements can also be seen on the seats of grocery carts, on the walls of an
airport walkway, on the sides of buses, heard in telephone hold messages and
in-store public address systems. Advertisements are usually placed anywhere an
audience can easily and/or frequently access visuals and/or audio and print
Organizations which frequently spend large sums of money on advertising but
do not strictly sell a product or service to the general public include: political
parties, interest groups, religion-supporting organizations, and militaries looking
for new recruits. Additionally, some non-profit organizations are not typical
advertising clients and rely upon free channels, such as public service
announcements.

19.2 ADVERTSING MEDIA

The term Media advertising or advertising media is given to the use of media to
advertise products and services to a relevant audience. The list of advertising
opportunities across different formats of media is endless, so we'll only cover the
key ones here.
While just a few years ago marketers needed to be aware of only a few media
outlets, today’s marketers must be well-versed in a wide range of media options.
The reason for the growing number of media outlets lies with advances in
communication technology, in particular, the Internet. The number of media
outlets will continue to grow as new technologies emerge. Next we provide an
overview of 10 leading media outlets:
1. Television
2. Radio
3. Print Publications
4. Internet
5. Direct Mail
6. Signage
7. Product Placement
8. Mobile Devices
9. Sponsorships
10. Others

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19.2.1 TELEVISION ADVERTISING

Television advertising offers the benefit of reaching large numbers in a single

exposure. Yet because it is a mass medium capable of being seen by nearly
anyone, television lacks the ability to deliver an advertisement to highly targeted
customers compared to other media outlets. Television networks are attempting
to improve their targeting efforts. In particular, networks operating in the pay-
to-access arena, such as those with channels on cable and satellite television,
are introducing more narrowly themed programming (i.e., TV shows geared to
specific interest groups) designed to appeal to selective audiences. However,
television remains an option that is best for products that targeted to a broad
market.

The geographic scope of television advertising ranges from advertising within a

localized geographic area using fee-based services, such as cable and fiber optic
services, to national coverage using broadcast programming.

Television advertising, once viewed as the pillar of advertising media outlets, is

facing numerous challenges from alternative media (e.g., Internet) and the
invasion of technology devices, such as digital video recorders, that have
empowered customers to be more selective on the advertisements they view.
Additionally, television lacks effective response tracking which has led many
marketers to investigate other media that offer stronger tracking options.

19.2.2 RADIO ADVERTISING

Promotion through radio has been a viable advertising option for over 80 years.
Radio advertising is mostly local to the broadcast range of a radio station,
however, at least three options exist that offer national and potentially
international coverage. First, in many countries there are radio networks that
use many geographically distinct stations to broadcast simultaneously. In the
United States such networks as Disney (children’s programming) and ESPN
(sports programming) broadcast nationally either through a group of company-
owned stations or through a syndication arrangement (i.e., business agreement)
with partner stations. Second, within the last few years the emergence of radio
programming delivered via satellite has become an option for national
advertising. Finally, the potential for national and international advertising may
become more attractive as radio stations allow their signals to be broadcast over
the Internet.

In many ways radio suffers the same problems as television, namely, a mass
medium that is not highly targeted and offers little opportunity to track
responses. But unlike television, radio presents the additional disadvantage of
limiting advertisers to audio-only advertising. For some products advertising
without visual support is not effective.

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19.2.3 PRINT PUBLICATION ADVERTISING

Print publications such as magazines, newspapers and Special Issue

publications offer advertising opportunities at all geographic levels. Magazines,
especially those that target specific niche or specialized interest areas, are more
narrowly targeted compared to broadcast media. Additionally, magazines offer
the option of allowing marketers to present their message using high quality
imagery (e.g., full color) and can also offer touch and scent experiences (e.g.,
perfume). Newspapers have also incorporated color advertisements, though
their main advantage rests with their ability to target local markets. Special
Issue publications can offer very selective targeting since these often focus on
extremely narrow topics (e.g., auto buying guide, tour guides, college and
university ratings, etc.).

19.2.4 INTERNET ADVERTISING

The fastest growing media outlet for advertising is the Internet. Compared to
spending in other media, the rate of spending for Internet advertising is
experiencing tremendous growth. However, total spending for Internet
advertising remains relatively small compared to other media. Yet, while
Internet advertising is still a small player, its influence continues to expand and
each year more major marketers shift a larger portion of their promotional
budget to this medium. Two key reasons for this shift rest with the Internet’s
ability to: 1) narrowly target an advertising message and, 2) track user response
to the advertiser’s message.

The Internet offers many advertising options with messages delivered through
websites or by email.
• Website Advertising - Advertising tied to a user’s visit to a website
accounts for the largest spending on Internet advertising. For marketers,
website advertising offers many options in terms of:
Creative Types – Internet advertising allows for a large variety of creative
types including text-only, image-only, multimedia (e.g., video) and advanced
interactive (e.g., advertisement in the form of online games).
Size – In addition to a large number of creative types, Internet
advertisements can be delivered in a number of different sizes (measured in
screen pixels) ranging from full screen to small square ads that are only a
few pixels in size. The most popular Internet ad sizes include banner ads
(468 x 60 pixels), leader board (728 x 90 pixels) and skyscraper (160 x 600
pixels).
Placement – The delivery of an Internet advertisement can occur in many
ways including fixed placement in a certain website location (e.g., top of
page), processed placement where the ad is delivered based on user
characteristics (e.g., entry of words in a search box, recognition of user via
Internet tracking cookies), or on a separate webpage where the user may
not see the ad until they leave a site or close their browser (e.g., pop-
under).

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Delivery – When it comes to placing advertisements on websites marketers

can, in some cases, negotiate with websites directly to place an ad on the
site or marketers can place ads via a third-party advertising network, which
has agreements to place ads on a large number of partner websites.
• Email Advertising – Using email to deliver an advertisement affords
marketers the advantage of low distribution cost and potentially high
reach. In situations where the marketer possesses a highly targeted list,
response rates to email advertisements may be quite high. This is
especially true if those on the list have agreed to receive email, a process
known as “opt-in” marketing. Email advertisement can take the form of a
regular email message or be presented within the context of more detailed
content, such as an electronic newsletter. Delivery to a user’s email
address can be viewed as either plain text or can look more like a website
using web coding (i.e., HTML). However, as most people are aware, there is
significant downside to email advertising due to highly publicized issues
related to abuse (i.e., spam).

19.2.5 DIRECT MAIL

This method of advertising uses postal and other delivery services to ship
advertising materials, including postcards, letters, brochures, catalogs and
flyers, to a physical address of targeted customers. Direct mail is most effective
when it is designed in a way that makes it appear to be special to the customer.
For instance, a marketer using direct mail can personalize mailings by including
a message recipient’s name on the address label or by inserting their name
within the content of marketer’s message.

Direct mail can be a very cost-effective method of advertising, especially if

mailings contain printed material. This is due to cost advantages obtained by
printing in high volume since the majority of printing costs are realized when a
printing machine is initially setup to run a print job and not the because of the
quantity of material printed. Consequently, the total cost of printing 50,000
postcards is only slightly higher than printing 20,000 postcards but when the
total cost is divided by the number of cards printed the cost per-card drops
dramatically as more pieces are printed. Obviously there are other costs
involved in direct mail, primarily postage expense.

While direct mail can be seen as offering the benefit of a low cost-per-contact,
the actual cost-per-impression can be quite high as large numbers of customers
may discard the mailing before reading. This has led many to refer to direct mail
as “junk mail” and due to the name some marketers view the approach as
ineffective. However, direct mail, when well-targeted, can be an extremely
effective promotional tool.

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19.2.6 SIGNAGE AND BILLBOARDS

The use of signs to communicate a marketer’s message places advertising in

geographically identified areas in order to capture customer attention. The
most obvious method of using signs is through billboards, which are generally
located in high traffic areas. Outdoor billboards come in many sizes, though the
most well-known are large structures located near transportation points
intending to attract the interest of people traveling on roads or public
transportation. Indoor billboards are often smaller than outdoor billboards and
are designed to attract the attention of foot traffic (i.e., those moving past the
sign). For example, smaller signage in airports, train terminals and large
commercial office space fit this category.

While billboards are the most obvious example of signage advertising, there are
many other forms of signage advertising include:
• Sky writing where airplanes use special chemicals to form words
• Plane banners where large signs are pulled behind an airplane
• Mobile billboards where signs are placed on vehicles, such as buses and
cars, or even carried by people
• Plastic bags used to protect newspapers delivered to homes
• Advertisements attached to grocery carts

19.2.7 PRODUCT PLACEMENT ADVERTISING

Product placement is an advertising approach that intentionally inserts products

into entertainment programs such as movies, TV programs and video games.
Placement can take several forms including:

• visual imagery in which the product appears within the entertainment

program

• actual product use by an actor in the program

• words spoken by an actor that include the product name

Product placement is gaining acceptance among a growing number of marketers

for two main reasons. First, in most cases the placement is subtle so as not to
divert significant attention from the main content of the program or media
outlet. This approach may lead the audience to believe the product was selected
for inclusion by program producers and not by the marketer. This may heighten
the credibility of the product in the minds of the audience since their perception,
whether accurate or not, is that product was selected by an unbiased third-
party. Second, entertainment programming, such as television, is converging
with other media, particularly the Internet. In the future a viewer of a television
program may be able to easily request information for products that appear in a
program by simply pointing to the product on the screen. With the information

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they may get the option to purchase the product. As this technology emerges it
is expected that product placement opportunities will become a powerful
promotional option for many marketers.

19.2.8 MOBILE DEVICE ADVERTISING

Handheld devices, such as cell phones, personal digital assistants (PDAs) and
other wireless devices, make up the growing mobile device market. Such devices
allow customers to stay informed, gather information and communicate with
others without being tied to a physical location. While the mobile device market
is only beginning to become a viable advertising medium, it may soon offer
significant opportunity for marketers to reach customers at anytime and
anyplace.

Also, with geographic positioning features included in newer mobile devices, the
medium has the potential to provide marketers with the ability to target
customers based on their geographic location. Currently, the most popular
advertising delivery method to mobile devices is through plain text messaging,
however, over the next few years multimedia advertisements are expected to
become the dominant message format.

19.2.9 SPONSORSHIPS

A subtle method of advertising is an approach in which marketers pay, or offer

resources and services, for the purpose of being seen as a supporter of an
organization’s event, program or product offering (e.g., section of a website).
Sponsorships are intended not to be viewed a blatant advertisement and in this
way may be appealing for marketers looking to establish credibility with a
particular target market. However, many sponsorship options lack the ability to
tie spending directly to customer response. Additionally, the visibility of the
sponsorship may be limited to relatively small mentions especially if the
marketer is sharing sponsorship with many other organizations.

19.2.10 OTHERS

While the nine media outlets discussed above represent the overwhelming
majority of advertising methods, there are several more including:

• advertising using telephone recordings (e.g., political candidate’s messages)

• advertising via fax machine (though there may be certain legal issues with
this method)
• advertising through inserted material in product packaging (e.g., inside
credit card bill)
• advertising imprinted on retail receipts (e.g., grocery store, cash machine)

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19.3 SELECTING MEDIA OUTLETS

With an objective and a budget in place, the advertising campaign will next need
to focus on developing the message. However, before effort is placed in
developing a message the marketer must first determine which media outlets
will be used to deliver their message since the choice of media outlets guides the
type of message that can be created and how frequently the message will be
delivered.

An advertising message can be delivered via a large number of media outlets.

These range from traditional outlets, such as print publications, radio and
television, to newly emerging outlets, such as the Internet and mobile devices.
However, each media outlet possess different characteristics and, thus, offer
marketers different advantages and disadvantages.

The characteristics by which different media outlets can be assessed include the
following seven factors:
1. Creative Options
2. Creative Cost
3. Media Market Reach
4. Message Placement Cost
5. Length of Exposure
6. Advertising Clutter
7. Response Tracking

19.3.1 CREATIVE OPTIONS

An advertisement has the potential to appeal to four senses – sight, sound, smell
and touch. However, not all advertising media have the ability to deliver multi-
sensory messages. Traditional radio, for example, is limited to delivering audio
messages while roadside billboards offer only visual appeal. Additionally, some
media may place limits on when particular options can be used. For instance,
some search engines or websites may only accept graphical-style ads, such as
images, if these conform to certain large dimensions and limit small advertising
to text-only ads.

19.3.2 CREATIVE COST

The media type chosen to deliver a marketer’s message also impacts the cost of
creating the message. For media outlets that deliver a multi-sensory experience
(e.g., television and Internet for sight and sound; print publications for sight,
touch and smell) creative cost can be significantly higher than for media
targeting a single sensory experience. But creative costs are also affected by the
expectation of quality for the media that delivers the message. In fact, media

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outlets may set minimal production standards for advertisements and reject ads
that do not meet these standards. Television networks, for example, may set
high production quality levels for advertisements they deliver. Achieving these
standards requires expensive equipment and high cost labor, which may not be
feasible for small businesses. Conversely, creating a simple text only Internet
advertisement requires very little cost that almost anyone is capable of creating.

19.3.3 MEDIA MARKET REACH

The number of customers exposed to a single promotional effort within a target

market is considered the reach of a promotion. Some forms of advertising, such
as television advertising, offer an extensive reach, while a single roadside
billboard on a lightly traveled road offers very limited reach.
Market reach can be measured along two dimensions: 1) channels served and, 2)
geographic scope of a media outlet.
• Channels Served - This dimension relates to whether a media outlet is
effective in reaching the members within the marketer’s channel of
distribution. Channels can be classified as:
Consumer Channel – Does the media outlet reach the final consumer
market targeted by the marketer?
Trade Channel – Does the media outlet reach a marketer’s channel partners
who help distribute their product?
Business-to-Business – Does the media outlet reach customers in the
business market targeted by the marketer?
• Geographic Scope – This dimension defines the geographic breadth of the
channels served and includes:
International – Does the media outlet have multi-country distribution?
National – Does the media outlet cover an entire country?
Regional – Does the media outlet have distribution across multiple
geographic regions such as counties, states, provinces, territories, etc.?
Local – Does the media outlet primarily serve a limited geographic area?
Individual – Does the media outlet offer individual customer targeting?

19.3.4 MESSAGE PLACEMENT COST

Creative development is one of two major spending considerations for

advertising. The other cost is for media placement; the purchase of ad time,
space or location with media outlets that deliver the message. Advertising
placement costs vary widely from very small amounts for certain online
advertisements to exorbitant fees for advertising on major television programs

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Media outlets set placement cost using several factors though the most
important are determined by audience size, audience type and an
advertisement’s production characteristics:
• Audience Size – Refers to the number of people who experience the media
outlet during a particular time period. For example, for television outlets
audience size is measured in terms of number of program viewers, for print
publications audience is measured by number of readers, and for websites
audience is measured by number of visitors. In general, the more people
experiencing a media outlet, the more the outlet can charge for ads.
• Audience Type –The key to marketing is aligning marketing decisions to
satisfy the needs of a target market. When choosing a media outlet,
selection is evaluated based on the outlet’s customer profile (i.e., viewers,
readers, website visitors) and whether these match the characteristics
sought by the marketer’s desired target market. The more selectively
targeted the audience, the more valuable this audience is to advertisers
since with targeted advertising promotional funds are being spent on those
with the highest potential to respond to the advertiser’s message.
• Characteristics of the Advertisement – Media outlet also charge different
rates based on creative characteristics of the message. Characteristics that
create ad rate differences include:
ƒ Run Time (e.g., length of television or radio ads )
ƒ Size (e.g., print ads size, billboard size)
ƒ Print Style (e.g., black-and-white vs. color)
ƒ Location in Media (e.g., back magazine cover vs. inside pages)

19.3.5 LENGTH OF EXPOSURE

Some products require customers be exposed to just a little bit of information in

order to build customer interest. For example, the features and benefits of a
new snack food can be explained in a short period of time using television or
radio commercials. However, complicated products need to present more
information for customers to fully understand the product. Consequently,
advertisers of these products well seek media formats that allot more time to
deliver the message.

Media outlets vary in how much exposure they offer to their audience.
Magazines and other publications provide opportunities for longer exposure
times since these media types can be retained by the audience (i.e., keep old
magazines) while exposure on television and radio are generally limited to the
time the ad was broadcast.

19.3.6 ADVERTISING CLUTTER

In order to increase revenue, media outlets often include a large number of ads
within a certain time, space or location. For instance, television programs may

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contain many ads inserted during the scheduled run-time of a program. A large
number of advertisements create an environment of advertising clutter, which
makes it difficult for those in the targeted market to recognize and remember
particular advertisements. To break through the clutter advertisers may be
required to increase the frequency of their advertising efforts (i.e., run more
ads). Yet greater advertising frequency increases advertising expense.
Alternatively, advertisers may seek opportunities that offer less clutter where an
ad has a better chance of standing out from others. This can be seen with
online downloads (e.g., pod casts) of sports and news programming where a 5-10
minute story will be presented with a single 30-60 second ad.

19.3.7 RESPONSE TRACKING

Marketers are embracing new technologies that make it easier to track audience
response to advertisements. Newer media developed using Internet technology
offer effective methods for tracking audience response compared to traditional
media. But Internet-media are not alone in providing response tracking. Other
advertising outlets, such as advertising by mail and television infomercial
programming, also provide useful measures of audience reaction.

19.4 LET US SUM UP

• The term Media advertising or advertising media is given to the use of

media to advertise products and services to a relevant audience.
• The numbers of media outlets will continue to grow as new technologies
emerge. The 10 leading media outlets are Television, Radio, Print
Publications, Internet, Direct Mail, Signage, Product Placement, Mobile
Devices, Sponsorships and Others such as advertising using telephone
recordings, advertising via fax machine etc
• Effort is placed in developing a message the marketer must first determine
which media outlets will be used to deliver their message since the choice of
media outlets guides the type of message that can be created and how
frequently the message will be delivered.

19.5 CHECK YOUR PROGRESS

• What is advertising media? Explain different types of advertising media.
(Refer 19.2 to 19.2.10)
• Explain the different types of internet advertising. (Refer 19.2.4)
• Compare television advertising with internet advertising. (refer 19.2.1 and
19.2.4)
• What criteria should be considered while selecting the advertising media?
(Refer 19.3 to 19.3.7)

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LESSON-20
DIRECT MARKETING AND MULTI- LEVEL MARKETING

Contents:
20.0 Aims and Objectives
20.1 Meaning of Direct Marketing
20.2 Channels of Direct Marketing
20.2.1 Direct mail
20.2.2 Telemarketing
20.2.3 Email Marketing
20.2.4 Broadcast faxing
20.2.5 Couponing
20.2.6 Direct response television marketing
20.2.7 Direct selling
20.3 Benefits and Drawbacks of Direct Marketing
20.4 Meaning of Multi- Level Marketing
20.5 Origins and Development of MLM
20.6 MLM Basics
20.7 Pyramid Schemes of MLM
20.8 Advantages and Drawbacks of MLM
20.9 Let us sum up
20.10 Check your progress

20.0 AIMS AND OBJECTIVES

There are various types of marketing of products, some of which we discussed in

the previous chapters. In this lesson, the concept of direct marketing and multi-
level marketing is discussed in detail. This will ensure the reader to equip with
the following questions

i. What are the different channels of direct marketing?

ii. How multi-level marketing operates?

20.1 MEANING OF DIRECT MARKETING

Direct marketing is a type of advertising campaign that seeks to elicit an action

(such as an order, a visit to a store or Web site, or a request for further
information) from a selected group of consumers in response to a
communication from the marketer. The communication itself may be in any of a

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variety of formats including postal mail, telemarketing, direct e-mail marketing,

and point-of-sale (POS) interactions. Customer response should be measurable:
for example, the marketer should be able to determine whether or not a
customer offered a discount for online shopping takes advantage of the offer.

Direct marketing is a sub-discipline and type of marketing. There are two main
definitional characteristics which distinguish it from other types of marketing or
advertising. The first is that it attempts to send its messages directly to
consumers, without the use of intervening media. This involves commercial
communication (direct mail, e-mail, telemarketing) with consumers or
businesses, usually unsolicited. The second characteristic is that it is focused on
driving purchases that can be attributed to a specific "call-to-action." This
aspect of direct marketing involves an emphasis on trackable, measurable
positive (but not negative) responses from consumers (known simply as
"response" in the industry) regardless of medium.

If the advertisement asks the prospect to take a specific action, for instance call
a free phone number or visit a website, then the effort is considered to be direct
response advertising.

20.2 CHANNELS OF DIRECT MARKETING

Some direct marketers also use media such as door hangers, package inserts,
magazines, newspapers, radio, television, email, internet banner ads, pay-per-
click ads, billboards, transit ads. And according to Ad Age, "In 2005, U.S.
agencies generated more revenue from marketing services (which include direct
marketing) than from traditional advertising and media."

20.2.1 DIRECT MAIL

The most common form of direct marketing is direct mail, sometimes called junk
mail, used by advertisers who send paper mail to all postal customers in an area
or to all customers on a list.

Any medium that can be used to deliver a communication to a customer can be

employed in direct marketing. Probably the most commonly used medium for
direct marketing is mail, in which marketing communications are sent to
customers using the postal service. The term direct mail is used in the direct
marketing industry to refer to communication deliveries by the Post Office,
which may also be referred to as "junk mail" or "admail" and may involve bulk
mail.

Junk mail includes advertising circulars, catalogs, free trial CDs, pre-approved
credit card applications, and other unsolicited merchandising invitations
delivered by mail or to homes and businesses, or delivered to consumers'
mailboxes by delivery services other than the Post Office. Bulk mailings are a
particularly popular method of promotion for businesses operating in the
financial services, home computer, and travel and tourism industries.

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In many developed countries, direct mail represents such a significant amount

of the total volume of mail that special rate classes have been established. In the
United States and United Kingdom, for example, there are bulk mail rates that
enable marketers to send mail at rates that are substantially lower than regular
first-class rates. In order to qualify for these rates, marketers must format and
sort the mail in particular ways - which reduces the handling (and therefore
costs) required by the postal service.

Advertisers often refine direct mail practices into targeted mailing, in which mail
is sent out following database analysis to select recipients considered most likely
to respond positively. For example a person who has demonstrated an interest in
golf may receive direct mail for golf related products or perhaps for goods and
services that are appropriate for golfers. This use of database analysis is a type
of database marketing. The United States Postal Service calls this form of mail
"advertising mail" (admail for short).

20.2.2 TELEMARKETING

The second most common form of direct marketing is telemarketing, in which

marketers contact consumers by phone. The unpopularity of cold call
telemarketing (in which the consumer does not expect or invite the sales call)
has led some US states and the US federal government to create "no-call lists"
and legislation including heavy fines. Marketers call telephone numbers. This
process may be outsourced to specialist call centres. The agents sit at
computerised work-stations and try to sell the products of the clients.

In the US, a national do-not-call list went into effect on October 1, 2003. Under
the law, it is illegal for telemarketers to call anyone who has registered
themselves on the list. After the list had operated for one year, over 62 million
people had signed up.[3] The telemarketing industry opposed the creation of the
list, but most telemarketers have complied with the law and refrained from
calling people who are on the list.

20.2.3 EMAIL MARKETING

Email Marketing may have passed telemarketing in frequency at this point, and
is a third type of direct marketing. A major concern is spam.

20.2.4 BROADCAST FAXING

A fourth type of direct marketing, broadcast faxing, is now less common than
the other forms. This is partly due to laws in the United States and elsewhere
which make it illegal.

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20.2.5 COUPONING

Couponing is used in print media to elicit a response from the reader. An

example is a coupon which the reader cuts out and presents to a super-store
check-out counter to avail of a discount. Coupons in newspapers and magazines
cannot be considered direct marketing, since the marketer incurs the cost of
supporting a third-party medium (the newspaper or magazine); direct marketing
aims to circumvent that balance, paring the costs down to solely delivering their
unsolicited sales message to the consumer, without supporting the newspaper
that the consumer seeks and welcomes.

20.2.6 DIRECT RESPONSE TELEVISION MARKETING

A related form of marketing is infomercials. They are typically called direct

response marketing rather than direct marketing because they try to achieve a
direct response via broadcast on a third party's medium, but viewers respond
directly via telephone or internet.

TV-response marketing--i.e. infomercials--can be considered a form of direct

marketing, since responses are in the form of calls to telephone numbers given
on-air. This both allows marketers to reasonably conclude that the calls are due
to a particular campaign, and allows the marketers to obtain customers' phone
numbers as targets for telemarketing. Under the Federal Do-Not-Call List rules
in the US, if the caller buys anything, the marketer would be exempt from Do-
Not-Call List restrictions for a period of time due to having a prior business
relationship with the caller. Major players are firms like QVC, Thane Direct, and
Interwood Marketing Group then cross-sell, and up-sell to these respondents.

20.2.7 DIRECT SELLING

Direct selling is the sale of products by face-to-face contact with the customer,
either by having salespeople approach potential customers in person, through
indirect means such as Tupperware parties.

20.3 BENEFITS AND DRAWBACKS OF DIRECT MARKETING

Direct marketing is attractive to many marketers, because in many cases its

positive effect (but not negative results) can be measured directly. For example,
if a marketer sends out one million solicitations by mail, and ten thousand
customers can be tracked as having responded to the promotion, the marketer
can say with some confidence that the campaign led directly to the responses.
The number of recipients who are offended by the junk mail/spam, however, is
not easily measured. By contrast, measurement of other media must often be
indirect, since there is no direct response from a consumer. Measurement of
results, a fundamental element in successful direct marketing, is explored in
greater detail elsewhere in this article.

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While many marketers like this form of marketing, some direct marketing efforts
using particular media have been criticized for generating unwanted
solicitations. For example, direct mail that is irrelevant to the recipient is
considered junk mail, and unwanted email messages are considered spam. Some
consumers are demanding an end to direct marketing for privacy and
environmental reasons, which direct marketers are able to provide by using "opt
out" lists, variable printing and more targeted mailing lists.

20.4 MEANING OF MULTI- LEVEL MARKETING

Multi-level marketing (MLM), also known as Network Marketing is a business

distribution model that allows a parent multi-level marketing company to
market their products directly to consumers by means of relationship referral
and direct selling. Multilevel systems provide an alternative to conventional
arrangements that involve wholesalers and retailers. Besides eliminating costs
associated with middlemen, network marketing reduces advertising and
promotion expenses and, in theory, passes savings to the independent
distributors and customers.

Independent unsalaried salespeople of multi-level marketing referred to as

distributors (associates, independent business owners, franchise owners, sales
consultants, consultants, independent agents, etc.), represent the parent
company and are rewarded a commission relative to the volume of product sold
through each of their independent businesses (organizations). Independent
distributors develop their organization by either building an active customer
base, who buy direct from the parent company and / or by recruiting a downline
of independent distributors who also build a customer base, expanding the
overall organization. Additionally, distributors can also earn a profit by retailing
products which they purchased from the parent company at wholesale price.

Distributors earn a commission based on the sales efforts of their organization,

which includes their independent sale efforts as well as the leveraged sales
efforts of their downline. This arrangement is similar to franchise arrangements
where royalties are paid from the sales of individual franchise operations to the
franchisor as well as to an area or region manager. Commissions are paid to
multi-level marketing distributors according to the company’s compensation
plan. There can be multiple levels of people receiving royalties from one person's
sales.

20.5 ORIGINS AND DEVELOPMENT OF MLM

MLM was pioneered in the 1940s by Carl F. Rehnborg, an American. Rehnborg

learned about the value of nutrition while scavenging for food in a Chinese
internment camp in the 1920s. After he was freed, he started Nutrilite Products
Inc., a manufacturer of vitamin-enriched food supplements. Rehnborg was
extremely successful at marketing his products through an innovative
distribution process that would become known as multilevel marketing. Nutrilite
flourished throughout the 1940s and 1950s and was eventually purchased in

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1959 by Amway Corp., a company founded by former Nutrilite distributors.

Using similar MLM tactics, Amway, now a multibillion-dollar enterprise, thrived
and spawned a string of imitators during the 1960s and 1970s.

During the 1960s and 1970s, fraudulent pyramid schemes exploited the success
of MLM companies. Although they closely resembled MLM organizations,
pyramids bilked investors and members out of millions of dollars. A mass of
legislation passed during the 1970s almost ended MLM altogether, including
organizations like Amway. However, laws were eventually modified to
accommodate legitimate multilevel marketers and similar organizations.

Tupperware, for example, achieved stellar sales during the 1960s and 1970s
with techniques that mimicked MLM systems. In fact, network marketing has
traditionally been associated with cosmetics and household items. Still
considered in its infancy, MLM was increasingly used in the 1980s and early
1990s to sell products and services ranging from vacations and books to
software and food items. During the 1990s, services were an increasingly
important growth category for MLM, which made inroads into such service
industries as legal services, broadcasting and computer network services, and
long-distance telephone services.

20.6 MLM BASICS

In essence, MLM uses customers to distribute products (or services). A company

begins by selling its product to selected customers in specific geographic areas.
Those customers then become salespeople by telling friends, associates, and
contacts about the product and trying to get them to buy. The salespeople are
usually paid a commission for the products that they sell. More importantly,
they also receive commissions for the products that their customers, or recruits,
sell. In other words, new customers are added to the sales network, many of
whom also become distributors. As the number of levels of customers grows, so
does the distribution network. Thus, by trying to sell the products themselves,
customers also become recruiters for the company that represents the products.

MLM organizations are based on commissions that accumulate exponentially.

For example, assume that Sandy buys some products from a distributor in the
MLM Company. She then sells the product to five of her friends and receives a
commission. Next, three of her friends sell the products to six of their friends.
Not only would those three salespeople receive a commission, but Sandy would
also receive a (usually smaller) commission for each of the sales. If four of the six
new customers each sold to four contacts, the number of people that could
potentially be selling products to Sandy's benefit would suddenly lurch past 15.
It is easy to see how the sales network originated by Sandy could quickly jump
into the hundreds or thousands. In theory, all of the people in the network
would benefit from the efforts and purchases of the people below them.

The compensation system is the infrastructure that supports and drives a MLM
program. Sellers in the network usually receive relatively large commissions on
sales that they make personally. The commission is the difference between what

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the salesperson sells the products for and what he (she) must pay to buy them
from the company. In addition, purchases made by the same customer at a later
date will often result in "residual income" to the person that made the first sale
to that buyer. As sellers build a network of customers that also become sellers,
they also earn group bonuses, or "overrides." An override is the fraction of sales
that is paid to the originator of a network. In general, sales made by distributors
further down the network, or at lower levels, pay a lower bonus.

Sellers may also get a "leadership bonus," which is effectively a bonus paid to
sellers that help distributors in their network to achieve specific levels of sales
success. Leadership bonuses provide an incentive for sellers to train and help
their customers to become better distributors and recruiters. "Usage" bonuses
are provided to sellers based on the total purchases (product usages) by
members of their network. Usage bonuses usually take the form of discounts on
air travel or long distance telephone service. They provide an impetus for people
in the organization to continue purchasing the goods themselves.

20.7 PYRAMID SCHEMES OF MLM

Numerous laws exist that regulate MLM organizations to protect consumers

against fraud. Most of those laws are designed to discourage pyramid schemes,
which closely resemble legitimate MLM systems. The difference between
pyramids and legal network marketing is that the latter derives income from the
sale of products. In contrast, pyramid organizations get most of their income by
bringing new members into the network, or pyramid, and charging them fees.

The classic pyramid scheme is the chain letter. A pyramid scheme is called a
pyramid scheme because of the shape of a pyramid: a three dimensional
triangle. If a pyramid were started by a human being at the top with just 10
people beneath him, and 100 beneath them, and 1000 beneath them, etc., the
pyramid would involve everyone on earth in just ten layers of people with one
con man on top. The human pyramid would be about 60 feet high and the
bottom layer would have more than 4.5 billion people!
A diagram might help see this: Fig 20.1
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
100,000,000
1,000,000,000
10,000,000,000

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Thus, in very short order, 10 recruiting 10 and so on would reach 10 billion, well
in excess of the earth's population. If the entire population of earth were 5 billion
and we all got involved in a pyramid scheme, the bottom layer would consist of
about 90 percent of the planet, i.e., about 4.5 billion people. Thus, for 500
million people to be WINNERS, 4.5 billion must be LOSERS. The problem is
obviously more serious than the chain letter example when larger amounts of
money and effort are required of pyramid members and promises of wealth go
unfulfilled.

Some pyramid organizations disguise their objective by mimicking MLM

companies. They integrate into the scheme a product or service that they "sell"
to newcomers—a strategy known as inventory loading—or they simply charge
sellers a fee to join the network. Then they encourage members to recruit, rather
than sell the product to, other people.

20.8 ADVANTAGES AND DRAWBACKS OF MLM

The obvious enticement for members of a MLM network is the seemingly

unlimited profit potential. By purchasing as little as, say, Rs.100 worth of a
product, they can become distributors in a network that can pay them
thousands or, theoretically, millions of rupees. In addition, MLM sellers get to be
their own boss, make their own hours, and choose their own course to success
or failure. They also get the advantage of buying the product at nearly the
wholesale price.

The company that initiates and supports the network and supplies the products
or services may also benefit significantly. It will likely incur costs associated with
supporting the organization, including those related to making training videos
and audio tapes, warehousing, transportation, and printing brochures. However,
even after paying commissions, its advertising and promotion costs may be
much lower than those of traditional marketing and distribution channels.
Start-up capital requirements are usually much lower because the bulk of the
marketing costs are not incurred until the products are actually sold. And the
company benefits from strong customer loyalty and a solid base of repeat
customers. Furthermore, MLM is more effective for some types of products than
is traditional mass media because sales are conducted face-to-face.

Despite its many advantages, network marketing possesses several drawbacks

that make it undesirable for many companies. For instance, it usually takes a
long time to develop a large, profitable customer base compared to selling
techniques like advertising through print and broadcast media. Furthermore,
administrative duties and paperwork are usually much greater for MLM
operations. Perhaps the greatest disadvantage of network marketing, though, is
that the company loses control of its distribution process. It may have no idea of
the types of people that are representing (or misrepresenting) its products. A
corporate or product image can become quickly tarnished by overly enthusiastic
or dishonest salespeople hungry for commissions.

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MLM also has several disadvantages for sellers. Long hours are typically
required to get a sizable network started, particularly if the product or service is
perceived to be of average value by potential consumers. Because of poorly
contrived or fraudulent MLM schemes, moreover, many people have attached a
stigma to network marketing that sellers must overcome. Indeed, a major
drawback of MLM to distributors is risk—they may lose their initial investment
or be lured into purchasing additional goods or services that they will never use
if the company backing the network is ill-willed or poorly operated.

20.9 LET US SUM UP

• Direct marketing is a sub-discipline and type of marketing. There are two

main definitional characteristics which distinguish it from other types of
marketing or advertising. The first is that it attempts to send its messages
directly to consumers, without the use of intervening media. The second
characteristic is that it is focused on driving purchases that can be
attributed to a specific "call-to-action."

• Channels of Direct Marketing includes Direct Mail, Telemarketing, Email

Marketing, Broadcast faxing, Couponing, Direct response television
marketing and Direct selling.

• Multi-level marketing (MLM), also known as Network Marketing is a

business distribution model that allows a parent multi-level marketing
company to market their products directly to consumers by means of
relationship referral and direct selling.

• In MLM, a company begins by selling its product to selected customers in

specific geographic areas. Those customers then become salespeople by
telling friends, associates, and contacts about the product and trying to get
them to buy. The salespeople are usually paid a commission for the
products that they sell. More importantly, they also receive commissions for
the products that their customers, or recruits, sell.

20.10 CHECK YOUR PROGRESS

• What is Direct Marketing? (Refer 20.1)

• Explain the channels of Direct Marketing. (Refer 20.2 to 20.2.7)
• Bring out the advantages and disadvantages of Direct Marketing. (Refer
20.3)
• What is Multi-level marketing? (Refer 20.4)
• Is Multi-level marketing a boon or scam in marketing? (Refer 20.8)
• Explain the pyramid structure of MLM (Refer 20.7)

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UNIT – V

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LESSON-21
RETAIL MARKETING

Contents:
21.0 Aims and Objectives
21.1 Introduction
21.2 Meaning of Retailing
21.3 Methods of Retailing
21.2.1 Target Markets Served
21.2.2 Products Carried
21.2.3 Pricing Strategy
21.2.4 Promotional Focus
21.2.5 Distribution Method
21.2.6 Service Level
21.2.7 Ownership Structure
21.4 Problems in Retail Marketing
21.5 Retail Marketing in India
21.6 Opportunities in Indian Organized Retail sector
21.7 Growth of Retail Companies in India
21.8 Let us sum up
21.9 Check your progress

21.0 AIMS AND OBJECTIVES

In this lesson we examine retailers as resellers of a marketer’s products. In

terms of sales volume and number of employees, retailing is one of the largest
sectors of most economies. We will see that retailing is quite diverse and
marketers, who want to distribute through retailers, must be familiar with the
differences that exist among different retail options. This will help you to answer
i. What are the different methods of retailing?
ii. What are the opportunities and growth of retail companies in India?

21.1 INTRODUCTION

In an ideal business world, most marketers would prefer to handle all their
distribution activities by way of the corporate channel arrangement. Such an
arrangement provides the marketer with two important benefits. First, being

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responsible for all distribution means the marketing organization need only
worry about making decisions concerning their product. When others, such as
resellers, are involved in distribution attention is not given to a single supplier
but is stretched across all products the reseller carries. Second, having control
on all distribution means the marketer is always in direct contact with buyers of
their products, which can make it easier to build strong, long-term relationships
with customers.

21.2 MEANING OF RETAILING

The word ‘retail’ is derived from the French word ‘retailer’, meaning ‘to cut a
piece off’ or ‘to break bulk’. In simple terms, it implies a first-hand transaction
with the customer. Retailing can be defined as the buying and selling of goods
and services. It can also be defined as the timely delivery of goods and services
demanded by consumers at prices that are competitive and affordable.

Retailing involves a direct interface with the customer and the coordination of
business activities from end to end- right from the concept or design stage of a
product or offering, to its delivery and post-delivery service to the customer. The
industry has contributed to the economic growth of many countries and is
undoubtedly one of the fastest changing and dynamic industries in the world
today.

Retailing is a distribution channel function where one organization buys

products from supplying firms or manufactures the product themselves, and
then sells these directly to consumers. A retailer is a reseller (i.e., obtains
product from one party in order to sell to another) from which a consumer
purchases products.

In the majority of retail situations, the organization from which a consumer

makes purchases is a reseller of products obtained from others and not the
product manufacturer. Some manufacturers also operate their own retail outlets
in a corporate channel arrangement. While consumers are the retailer’s buyers,
a consumer does not always buy from retailers. For instance, when a consumer
purchases from another consumer (e.g., eBay) the consumer purchase would not
be classified as a retail purchase. This distinction can get confusing but in the
US and other countries the dividing line is whether the one selling to consumers
is classified as a business (e.g., legal and tax purposes) or is selling as a hobby
without a legal business standing.

21.3 METHODS OF RETAILING

There are many ways retailers can be categorized depending on the

characteristics being evaluated. For our purposes we will separate retailers
based on six factors directly related to major marketing decisions:
• target markets served
• product offerings

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• pricing structure
• promotional emphasis
• distribution method
• service level

And one operational factor:

• ownership

However, these groups are not meant to be mutually exclusive. In fact, as we

will see in some way all retailers can placed into each category.

21.3.1 TARGET MARKETS SERVED

The first classification looks at the type of markets a retailer intends to target.
These categories are identical to the classification scheme when we discussed
the levels of distribution coverage.

• Mass Market – Mass market retailers appeal to the largest market possible
by selling products of interest to nearly all consumers. With such a large
market from which to draw customers, the competition among these
retailers is often fierce.

• Specialty Market – Retailers categorized as servicing the specialty market

are likely to target buyers looking for products having certain features that
go beyond mass marketed products, such as customers who require more
advanced product options or higher level of customer service. While not as
large as the mass market, the target market serviced by specialty retailers
can be sizable.

• Exclusive Market – Appealing to this market means appealing to

discriminating customers who are often willing to pay a premium for
features found in very few products and for highly personalized services.
Since this target market is small, the number of retailers addressing this
market within a given geographic area may also be small.

21.3.2 PRODUCTS CARRIED

Under this classification retailers are divided based on the width (i.e., number of
different product lines) and depth (i.e., number of different products within a
product line) of the products they carry.

• General Merchandisers – These retailers carry a wide range of product

categories (i.e., broad width) though the number of different items within a
particular product line is generally limited (i.e., shallow depth).

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• Multiple Lines Specialty Merchandisers - Retailers classified in this

category stock a limited number of product lines (i.e., narrow width) but
within the categories they handle they often offer a greater selection (i.e.,
extended depth) than are offered by general merchandisers. For example, a
consumer electronics retailer would fall into this category.

• Single Line Specialty Merchandisers – Some retailers limit their offerings to

just one product line (i.e., very narrow width), and sometimes only one
product (i.e., very shallow depth). This can be seen online where a
relatively small website may sell a single product such as computer gaming
software. Another example may be a small jewelry store that only handles
watches.

21.3.3 PRICING STRATEGY

Retailers can be classified based on their general pricing strategy. Retailers

must decide whether their approach is to use price as a competitive advantage
or to seek competitive advantage in non-price ways.
• Discount Pricing – Discount retailers are best known for selling low priced
products that have a low profit margin (i.e., price minus cost). To make
profits these retailers look to sell in high volume. Typically discount
retailers operate with low overhead costs by vigorously controlling
operational spending on such things as real estate, design issues (e.g.,
store layout, website presentation), and by offering fewer services to their
customers.
• Competitive Pricing – The objective of some retailers is not to compete on
price but alternatively not to be seen as charging the highest price. These
retailers, who often operate in specialty markets, aggressively monitor the
market to insure their pricing is competitive but they do not desire to get
into price wars with discount retailers. Thus, other elements of the
marketing mix (e.g., higher quality products, nicer store setting) are used to
create higher value for which the customer will pay more.
• Full Price Pricing – Retailers targeting exclusive markets find such markets
are far less price sensitive than mass or specialty markets. In these cases
the additional value added through increased operational spending (e.g.,
expensive locations, more attractive design, more services) justify higher
retail prices. While these retailers are likely to sell in lower volume than
discount or competitive pricing retailers, the profit margins for each
product are much higher.

21.3.4 PROMOTIONAL FOCUS

Retailers generate customer interest using a variety of promotional technique,

yet some retailers rely on certain methods more than others as their principle
promotional approach.

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• Advertising – Many retailers find traditional mass promotional methods of

advertising, such as through newspapers or television, continue to be their
best means for creating customer interest. Retailers selling online rely
mostly on Internet advertising as their promotional method of choice.

• Direct Mail – A particular form of advertising that many retailers use for the
bulk of their promotion is direct mail – advertising through postal mail.
Using direct mail for promotion is the primary way catalog retailers
distribute their materials and is often utilized by smaller local companies
who promote using postcard mailings.

• Personal Selling – Retailers selling expensive or high-end products find a

considerable amount of their promotional effort is spent in person-to-
person contact with customers. While many of these retailers use other
promotional methods, in particular advertising, the consumer-salesperson
relationship is key to persuading consumers to make purchase decisions.

21.3.5 DISTRIBUTION METHOD

Retailers sell in many different formats with some requiring consumers visit a
physical location while others sell to customers in a virtual space. It should be
noted that many retailers are not tied to a single distribution method but
operate using multiple methods.

• Store-Based Sellers – By far the predominant method consumers use to

obtain products is to acquire these by physically visiting retail outlets
(a.k.a. brick-and-mortar). Store outlets can be further divided into several
categories. One key characteristic that distinguishes categories is whether
retail outlets are physically connected to one or more others stores:

Stand-Alone – These are retail outlets that do not have other retail outlets
connected.

Strip-Shopping Center – A retail arrangement with two or more outlets

physically connected or that share physical resources (e.g., share parking
lot).

Shopping Area – A local center of retail operations containing many retail

outlets that may or may not be physically connected but are in close
proximity to each other such as a city shopping district.

Regional Shopping Mall – Consists of a large self-contained shopping area

with many connected outlets.

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• Non-Store Sellers – A fast growing method used by retailers to sell products

is through methods that do not have customers physically visiting a retail
outlet. In fact, in many cases customers make their purchase from within
their own homes.

Online Sellers – The fastest growing retail distribution method allows

consumer to purchase products via the Internet. In most cases delivery is
then handled by a third-party shipping service.

Direct Marketers – Retailers that are principally selling via direct methods
may have a primary location that receives orders but does not host
shopping visits. Rather, orders are received via mail or phone.

Vending – While purchasing through vending machines does require the

consumer to physically visit a location, this type of retailing is considered
as non-store retailing as the vending operations are not located at the
vending company’s place of business.

21.3.6 SERVICE LEVEL

Retailers attract customers not only with desirable products and affordable
prices, but also by offering services that enhance the purchase experience.
There are at least three levels of retail service:

• Self-Service – This service level allows consumers to perform most or all of

the services associated with retail purchasing. For some consumers self-
service is considered a benefit while others may view it as an
inconvenience. Self-service can be seen with: 1) self-selection services,
such as online purchasing and vending machine purchases, and 2) self-
checkout services where the consumer may get help selecting the product
but they use self-checkout stations to process the purchase including
scanning and payment.

• Assorted-Service – The majority of retailers offer some level of service to

consumers. Service includes handling the point-of-purchase transaction;
product selection assistance; arrange payment plans; offer delivery; and
many more.

• Full-Service – The full-service retailer attempts to handle nearly all aspects

of the purchase to the point where all the consumer does is select the item
they wish to purchase. Retailers that follow a full-price strategy often
follow the full-service approach as a way of adding value to a customer’s
purchase.

21.3.7 OWNERSHIP STRUCTURE

Finally, we can categorize retailers based on the ownership structure of the

business.

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• Individually Owned and Operated – Under this ownership structure an

individual or corporate entity owns and operates one or a very small
number of outlets. Single ownership of retail outlets most frequently
occurs with small retail stores, though there are some cases, for instance in
the automotive or furniture industries, where single ownership involves
very large outlets.
• Corporate Chain – A retail chain consists of multiple retail outlets owned
and operated by a single entity all performing similar retail activities. While
the number of retail outlets required to be classified as a chain has never
been specified, we will assume that anyone owning more than five retail
locations would be considered a chain.
• Corporate Structure – This classification covers large retailers
predominantly operating in the non-store retail arena such as online,
catalog and vending.

21.4 PROBLEMS IN RETAIL MARKETING

Big in size and turnover, Indian retailing industry is characterized by certain

problems which are as follows

• The network of retailers reaches every nook and corner of the country. So
any product produced anywhere in the country can be easily accessed by
the buyers from any location. Thus the spatial convenience of Indian
retailers is vary high.

• Secondly, in India the retailing industry is an unorganized lot consisting of,

in most of the cases, small entrepreneurs. And the virtual omnipresence of
the Indian retailer can be attributed to these small entrepreneurs only.

• Power of the retailers, as such is very less, and in many cases it is

negligible. This weakness has been exploited by the manufacturers and the
stronger partners of the marketing channel. The retailers, in general, abide
by the terms and conditions set by the manufacturers and other “big
brothers” of the channel.

• The manufacturers cannot directly reach all retailers in a particular

geographical area. Therefore, the manufacturers cannot maintain the
desired relationship with the retailers, which in turn make management of
the channel complicated. This also makes the possibility of a direct
feedback loop from the retailers almost remote.

• Therefore, the member operating between the manufacturers and retailers

become more powerful as they can block the channel of communication
between the two. So the dependence of retailers on other channel members
increases to a high extent. Thus the participation of retailers in the flows of
marketing mix becomes lower than desired.

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• The financial strength of the Indian retailers, in general, is very low and
hence the investment capabilities. This makes the retailers more dependent
on the other channel members.

21.5 RETAIL MARKETING IN INDIA

Indian organized retail market is growing at a fast pace due to the boom in the
India retail industry. In 2005, the retail industry in India amounted to Rs.10,
000 billion accounting for about 10% to the country's GDP. The organized retail
market in India out of this total market accounted for Rs.350 billion which is
about 3.5% of the total revenues.

Retail market in the Indian organized sector is expected to cross Rs.1000 billion
by 2010. Traditionally the retail industry in India was largely unorganized,
comprising of drug stores, medium, and small grocery stores. Most of the
organized retailing in India have started recently and is concentrating mainly in
metropolitan cities.

The growth in the Indian organized retail market is mainly due to the change in
the consumers behavior. This change has come in the consumer due to
increased income, changing lifestyles, and patterns of demography which are
favorable. Now the consumer wants to shop at a place where he can get food,
entertainment, and shopping all under one roof. This has given Indian organized
retail market a major boost.

Retail market in the organized sector in India is growing can be seen from the
fact that 1500 supermarkets, 325 departmental stores, and 300 new malls are
being built. Many Indian companies are entering the Indian retail market which
is giving Indian organized retail market a boost. One such company is the
Reliance Industries Limited. It plans to invest US$ 6 billion in the Indian retail
market by opening 1000 hypermarkets and 1500 supermarkets.

Pantaloons is another Indian company which plans to increase its retail space to
30 million square feet with an investment of US$ 1 billion. Bharti Telecoms an
Indian company is in talks with Tesco a global giant for a £ 750 million joint
venture. A number of global retail giants such as Walmart, Carrefour, and Metro
AG are also planning to set up shop in India. Indian organized retail market will
definitely grow as a result of all this investments. Indian organized retail market
is increasing and for this growth to continue the Indian retailers as well as
government must make a combined effort.

21.6 OPPORTUNITIES IN INDIAN ORGANIZED RETAIL SECTOR

The opportunities in Indian organized retail sector are many for this sector is
witnessing a boom. The retail industry in India amounted to US$ 200 billion in
2006, and out of this amount the Indian organized retail sector amounted to
US$ 6.4 billion. The opportunities in India organized retail sector can be judged
from the fact that by 2010 it is expected to rise to US$ 23 billion.

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The various opportunities in the organized retail sector in India are mainly there
for the Indian consumers behavior pattern has changed. Now the Indian
consumer gets more hefty pay- packages, is younger, a large number of women
are working, western influences, and more disposable income have opened a lot
of opportunities in Indian organized retail sector. The Indian consumer wants to
shop, eat and get entertainment in one place and is have also given Indian
organized retail sector an opportunity to grow.

The Indian government in 2005 allowed foreign direct investment (FDI) in single
brand retail to 51%. This have opened up a lot of opportunities in India
organized retail sector. In fact 325 departmental stores, 300 new malls, and
1500 supermarkets are being built which shows the tremendous opportunities
in the organized retail sector in India.

Many Indian companies seeing the various opportunities in organized retail

sector in India have entered it. Pantaloons have decided to increase its retail
space to 30 million square feet with an investment of US$ 1 billion. Reliance
Industries Limited is targeting for annual sales of US$ 25 billion by 2011. It is
planning to invest US$ 6 billion in order to open 1,500 supermarkets and 1000
hypermarkets. Bharti Telecoms is planning a joint venture with Telco a global
retail giant worth £ 750 million. The opportunities in the organized retail sector
in India have also increased with the desire of many global retail giants to set up
shop here. The global retail giants who are entering the Indian organized retail
sector are:
• Tesco
• Wal- Mart
• Metro AG
• Carrefour SA
The opportunities in Indian organized retail sector are varied and it must be fully
exploited by the Indian retailers.

21.7 GROWTH OF RETAIL COMPANIES IN INDIA

Growth of Retail Companies in India exhibits the boom in the retail industry in
India over the years. The increase in the purchasing power of the Indian middle
classes and the influx of the foreign investments have been encouraging in the
Growth of Retail Companies in India.
Growth of Retail Companies in India is still not yet in a matured stage with great
potentials within this sector still to be explored. Apart from the retail company
like Nilgiri's of Bangalore, most of the retail companies are sections of other
industries that have stepped in the retail sector for a better business. The
Growth of Retail Companies in India is most pronounced in the metro cities of
India, however the smaller towns are also not lagging behind in this. The retail
companies are not only targeting the four metros in India but also is considering
the second graded upcoming cities like Ahmedabad, Baroda, Chandigarh,
Coimbatore, Cochin, Ludhiana, Pune, Trivandrum, Simla, Gurgaon, and others.

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The South Indian zone have adopted the process of shopping in the
supermarkets for their daily requirements and this has also been influencing
other cities as well where many hypermarkets are coming up day to day.
The retail companies are found to be rising in India at a remarkable speed with
the years and this have brought a revolutionary change in the shopping attitude
of the Indian customers. The Growth of Retail Companies in India is facilitated
by certain factors like
• existing Indian middle classes with an increased purchasing power
• rise of upcoming business sectors like the IT and engineering firms
• change in the taste and attitude of the Indians
• effect of globalization
• heavy influx of FDI in the retail sectors in India

21.8 LET US SUM UP

• Retailing can be defined as the buying and selling of goods and services. It
can also be defined as the timely delivery of goods and services demanded
by consumers at prices that are competitive and affordable.
• There are many ways retailers can be categorized depending on the
characteristics being evaluated such as target markets served, product
offerings, pricing structure, promotional emphasis, distribution method,
service level and ownership.
• The growth in the Indian organized retail market is mainly due to the
change in the consumers behavior. This change has come in the consumer
due to increased income, changing lifestyles, and patterns of demography
which are favorable.

21.9 CHECK YOUR PROGRESS

• What is retailing? What are the problems faced in retailing. (Refer 21.2 and
21.4 )
• Explain the different methods of retailing. (Refer 21.3 to 21.3.7)
• Discuss retail marketing in India. (Refer 21.5)

• What are the opportunities available in Indian retail sector? (Refer 21.6)

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LESSON-22
MARKETING OF SERVICES

Contents:
22.0 Aims and Objectives
22.1 Introduction
22.2 Marketing of Services
22.3 Differences between Products and Services
22.4 Characteristics of services
22.5 Kinds of Services
22.6 Marketing Mix for Services
22.7 Service Mix
22.8 Price Mix
22.9 Physical Distribution Mix
22.10 Promotion Mix
22.11 Let us sum up
22.12 Check your progress

22.0 AIMS AND OBJECTIVES

In the last lesson we saw about the retailing concepts, here we discuss about the
marketing of services. This will give a clear picture of how services are marketed
through different strategies. After going through this lesson, you will be able to
answer
i. What is the difference between marketing of services and marketing of
products?
ii. What are the various kinds of services?
iii. What is the marketing mix undertaken for services?

22.1 INTRODUCTION

Ten years ago it would have been difficult for you to find an advertising
sponsored by a hospital. But what is the picture today? Many private hospitals
do advertise though in an indirect way. It has been quoted, “to attract patients,
St. Joseph’s Hospital in Flint, Michigan, offers a ‘special delivery package’ for
expectant mothers and their new born infants, which includes a 24-hour
hospital stay and follow-up visits for one-third regular price of a baby delivery.”
Like other firms, service and non-profit organizations are realizing the

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importance of marketing. “In these competitive times, we want to develop

allegiance with as many people as we can.” In India also the picture is not
different. Specialists attached to hospitals in health care are advertised, though
the stress is more on publicity.

22.2 MARKETING OF SERVICES

Marketing is often defined in terms of both products and services. Marketing

executives and theoreticians generally have focused their attention on products
under the assumption that services are marketed in much the same way. It is,
however, not easy to provide a sharp definition of services. But a better
understanding is possible if a product is seen as a noun and service as a verb.
In this sense, a product is a tangible object or device, whereas service is a deed,
a performance. In purchasing a product, the buyer obtains an asset, in
purchasing a service the buyer incurs an expense. For example, when we stay
in a rented room in a hotel, we take nothing away with us but the experience of
a night’s stay. Although a consultant’s product may appear as a bound report,
what the consumer bought was mental capability, not paper and ink. Today,
services include a host of businesses, such as, electricity, telephone, travel
agencies, catering services and so on.

Unlike a product, a service is an intangible thing – something one cannot see,

feel, hear, taste or smell. The American Marketing Association defines services
as “activities, benefits or satisfactions which are offered for sale or are provided
in connection with the sale of goods.” The definition points out three kinds of
services:

• The activities those are intangible in nature, e.g., Transportation. Here,

some kind of products (Car, Bus) is used to derive the so-called intangible
service.

• Benefits purely derived from services; e.g., Medical service, Insurance

service, etc.

• The service obtained along with the buying of a product, e.g., after-sales
service or the services rendered by a retailer.

Thus, “Services are separately identifiable, intangible activities which provide

want satisfactions when marketed to consumers and/or industrial users and
which are not necessarily tied to the sale of product or another service.”

It is only pertinent, here, to ask why the marketing of services should be

distinguished from the marketing of a product when the ultimate aim in both
the cases is the satisfaction of consumers’ wants. But the nature and
characteristic features of services require them to be considered independently.

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22.3 DIFFERENCES BETWEEN PRODUCTS AND SERVICES

The main problem from the marketing standpoint is to determine when a

product becomes a service and vice versa. Theoretically, a car is product. But
when it is hired by a person to take him from one place to another, it ceases to
be a product and becomes a service to the purchaser of the service. Further,
when marketing a product, the primary task of the producer is to create a desire
or need for his product in the mind of the consumer. It is also necessary to
convince the consumer that a particular product is better than that of the
competitors. Advertising has become an inevitable evil in the sale of products.

On the contrary, services are best marketed by meeting the already established
needs of the consumer and by performance. If a service is performed well, the
business or profession will prosper. It will flourish simply by “word-of-mouth”
advertising. Doctors, lawyers, and accountants who follow the ethics of their
profession do not advertise at all. Still their practice grows, and this growth is
on the basis of their performance.

The second distinguishing factor is the variety of ways in which the selling of
services is undertaken. There are many ways of selling services as there are
services themselves. The products are sold under different methods but they all
have a common service pattern. For example, in the case of banking service,
different bankers adopt different methods for attracting various kinds of
deposits. These are deposits, whether fixed, savings or current.

Thirdly, many service businesses are outgrowths of the sales of certain products.
For example, when a car is sold, the buyer must have insurance, financial
assistance, repair facilities, etc.

A product is identifiable and one can feel its presence in various ways. But a
service takes a product and converts it into something that can be purchased
but cannot be identified. For example, a car as a product could be identified but
not the various services rendered by it.

Finally, the opportunities for offering services are unlimited unlike products.
Flexibility for changing or conversion is also greater in the case of services. For
example, a house that is rented out for a family could be converted into a lodge.

Thus, there do exist certain differences between goods and services. However,
similarity is also present at least in the process of defining and analyzing a
market for a product and a market for a service. But the similarity ends there.
“The most certain differences between goods and services are the intangibility of
services. Services lack tangible features which will appeal to a buyer’s sense of
hearing, sight, taste, smell and touch.”

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22.4 CHARACTERISTICS OF SERVICES

Services have several unique characteristics which often present certain special
marketing problems. Hence the decisions to be taken for marketing services are
substantially different from those made for the marketing of products.
1. Intangibility. Many of the problems faced in the marketing of services are
due to the intangible nature of services. The fact that a service cannot appeal to
a buyer’s sense, places a burden on the marketing organization. This will affect
the promotional program and may even influence the decisions on channels of
distribution. Since a service firm is selling an idea and not a product, it must
tell the buyer what the service will do. It is usually unable to illustrate,
demonstrate, or display the service in use. Intangibility makes the promotion of
services difficult and it is practically impossible to give sample. Consequently,
buyers are unable to judge quality and value prior to purchase. Thus the
services are bought purely relying on the manufacturers’ reputation and the
reputation of their salesmen.
Intangibility has certain obvious advantages also. First, there is no problem
about its physical distribution. No warehousing problem, as there is practically
nothing to store. The losses that may arise on account of decline in inventory
values also do not affect services.
2. Inseparability. In many cases a service cannot be separated from the person
who sells it. Therefore, services are often created and marketed simultaneously.
Because of the simultaneous production and marketing of most services, the
main concern of the marketer is usually the creation of time and place utilities.
For example, electricity is generated and distributed (marketed) simultaneously.
This inseparability element influences the selection of the channel of
distribution. This inseparability often means that direct sale, is the only feasible
channel of distribution. “In fact, until recently, many service firms failed to
differentiate between the production and marketing of services.” The
inseparability, very often, limits the scale of operation also.
But some industries have been able to modify the inseparability characteristics.
In such industries there may be a tangible representation of the service by
someone other than the producer. In other words, tangible representations of
the service are transferable, and various middlemen such as agents can,
therefore, be utilized. For example, insurance services. Here, insurance
company is the producer of the service and the services are distributed through
agents.
3. Persihability and Fluctuating Demand. The utility of most services is short-
lived. Services cannot be mass produced ahead of time and stored for periods of
peak demand. The perishable nature of service is a challenging feature for the
marketing men. Unused electrical power, idle seats in a bus or train represent
business which is lost forever. In this respect also, services are quite different
from goods. Yet another example is electricity which cannot be stored except in
relatively small quantities as in a battery. Air travel is highly seasonal and the

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advertisements offering concessions for air travel are a regular feature now. “A
special feature in aviation is that unlike the non-durable or durable goods
aircraft seat is the most perishable commodity. Let the plane take off with that
one empty seat and it is gone irretrievably and irrecoverably.”
Fluctuations in demand pose another problem. The markets for services
fluctuate usually by seasons and often by day or week. There is a peak period
followed by a slack period. The combination of Persihability and fluctuating
demand has created a host of problems. Special efforts are necessary to even out
demand throughout. For example, Telephone department offers concessions for
using their services during off-peak periods. For this, special advertising,
separate channels of distribution, etc., are to be established, which is not at all
necessary in the case of products.
4. Highly Differentiated Marketing System. In the case of products the
marketing system evolved out of past experience would be sufficient. Even if
changes occur in future, the system already in vogue may not become obsolete
and may be used with very minor modifications. However, in the case of
services, no fixed pattern could be adopted. For example, the marketing of
banking and other financial services bears little or no resemblance to the
marketing of repair services. The entire area of service marketing, and more
specifically the selection of the channels of distribution, demands greater
creativity and ingenuity on the part of the marketer.
Table 22.1 Basic Differences between Services and Goods
Services Goods
1. Services are often intangible. 1. Goods are tangible. They are
They may involve acts, deeds, objects, things, materials.
performances, efforts. Many Value is based on ownership.
services cannot be physically
possessed. The value of a service
may be based on an experience.
2. Services are usually perishable. 2. Goods can be stored. Surpluses
Unused capacity cannot be stored in one period can applied
or shifted from one time to against shortages in another
another. period.
3. Services are frequently 3. Goods can be manufactured by
inseparable. One cannot separate one firm and marketed by
quality of many services from the another. The quality of good
services provided. can be differentiated from a
channel member’s quality.
4. Services may vary in quality over
time. It is difficult to standardize 4. Goods can standardize. Mass
some services because of their production and quality control
labour intensiveness and the can be used.
involvement of the service user in
diagnosing his or her service
needs.

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Moreover, it is very difficult to maintain uniform performance standards for

services. The quality of service varies not only among firms in the same industry
but also from one service transaction of the firm to the next. The basic reason
for such variation in quality is that service industries are human – intensive.
5. Absence of Certain Marketing Functions. Since most service firms do not
deal in tangible products, the elimination or reduction of certain market storage,
inventory control, etc., need be not performed at all. This naturally has a
certain impact on channel decisions. Since services cannot be stored, there
need be not any merchant middlemen. This leaves the producer with two
alternatives, the use of direct channel or the use of agent middlemen.
6. Heterogeneity. Services are numerous and it is impossible to standardize
the output. The services of even the same seller are sometimes remarkably
dissimilar. For example, no two hair-cuts from the same barber are identical. It
is particularly so in designing the quality beforehand. A music program offers a
good example. It cannot definitely satisfy all the listeners equally. This might
place added strain on the marketing men of services. The management in such
instances should ensure consistent and high quality performance.
The heterogeneity of services offers both an advantage and a challenge to the
service salesman. On the one hand, he has greater flexibility. A service
salesman is better equipped to adapt his services to the individualized needs of
his customers. Insurance policy, for example, conforms to standardized rules,
but the agent is still able to choose from alternative options to design an
individual policy for each buyer. Secondly, heterogeneity forces a salesman to
have a complete knowledge of the entire range of his company’s services.
Moreover, satisfactory matching of service offerings and customers’ needs
require him to be a more creative salesman.
7. Customer Relationship. Normally the buyer is more prominent in the
marketing and production of services than goods. In many service transactions,
a client relationship exists between the buyer and seller, as distinguished from a
customer relationship, for example, the doctor-patient relationship. It is highly
personal and most direct in nature. In such cases, the buyer places himself in
the hands of the seller and abides by the suggestion or advice provided by him.
“In addition, since many service organizations are client-serving organizations,
many (but not all) seem to approach the marketing functions in a professional
manner, e.g., Financial, Legal, Educational, etc.
8. Lack of Standardization. Another notable feature of services is that they
cannot be perfectly standardized as is the case of products. The example of
hair-cut mentioned above is apt here also.

22.5 KINDS OF SERVICES

Services may be classified into:

1. Personal Services. Many services are of personal nature, e.g., house
painting and various domestic services.

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2. Facility Services. When products are offered to the customers to provide

some facilities, the services may be described as facility services, e.g., car,
theatre, etc.
The above distinction is not perfect as some services are really a mixture of the
above two. In some cases the personal services cannot be offered without
extensive physical facilities, e.g., hospital, university.
3. Business Services. When services are rendered to business houses they are
called business services. These services include activities such as marketing
services, management consultancy services, etc.
4. Customer Services. The services that are offered to ultimate consumers are
known as customer services. Such services include laundries, hotels, etc.
Some services are meant both for industry and the ultimate consumer,
depending on who the buyer happens to be e.g., insurance, transportation, etc.
Like tangible goods, the consumer services may be further classified into
convenience, shopping and specialty services. Personal services such as dry
cleaning and shoe repairs are commonly purchased on a convenience basis.
Banking and auto repairs are services that are normally purchased after
considerable shopping to compare price and quality. Finally, specialty services
include highly technical services, such as professional services, including
medical, legal and financial assistance.

22.6 MARKETING MIX FOR SERVICES

The unique service features listed above and the kinds of services pose peculiar
problems for marketing managers of services. A summary of this is given in
Table.

Table 22.2 Service Characteristics and Marketing Problems

Unique service features Resulting marketing problems

Intangibility Cannot be stored
Cannot be protected through patents
Cannot be readily displayed or communicated
Prices are difficult to set
Inseparability Consumer is involved in production
Other consumers are involved in production
Centralized mass production is difficult
Persihability Services cannot be inventoried
Heterogeneity Standardization and quality are difficult to control

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It is to be reiterated that the marketing concept is equally applicable to goods,

services and ideas. Thus, service marketers, like goods marketers, must strive
to provide a bundle of benefits that satisfies the needs of consumers.
Unfortunately most of the firms providing services do not give any importance to
the marketing planning as in the case of products. Most producers feel that a
service is a necessity and hence the demand will be instantaneous. This seems
to be an incorrect philosophy. On the contrary, adoption of proper planning in
service marketing could work wonders.
Theodore Levitt’s concept of ‘Marketing Myopia’ is found to have influenced in
preventing the adoption of marketing planning in its full perspective in the area
of marketing of services. For instance, the activities of a film studio are often
described as “making movies” instead of “marketing entertainment”. In
developing a service marketing strategy many firms were seen to consider the
following seven areas:
1. Marketing should occur at all levels, from the marketing department to the
point where the service is provided.
2. Wherever possible, establish direct contact with the customers.
3. Use only high-quality personnel for marketing job.
4. Creation of loyalty among existing customers.
5. Ensure quick resolving of problems faced by customers.
6. Provision of improved services at lower cost.
7. Brand the services offered.

22.7 SERVICE MIX

Goods can be defined in terms of their physical attributes, but services cannot
be because they are intangible. But there are also tangibles (such as facilities,
communications) associated with a service. These tangible elements help form a
part of the product and are often the only aspect of a service that can be viewed
prior to purchase, which is why marketers must pay close attention to
associated tangibles and make sure that they are consistent with the selected
image of the service product. All other components of product mix discussed
earlier are relevant here also. However, a caution may be noted. The service
product is often equated with the service provider; for example, the teller
becomes the service of a bank or the beautician becomes the service a beauty
parlour provides. Because consumers tend to view services in terms of the
service personnel and because personnel are inconsistent in their behaviour, it
is imperative that marketers effectively select, train, motivate and control
contact people. It is true to say that service marketers are selling long-term
relationships as well as performance.

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22.8 PRICE MIX

Another difference between the sale of products and services lies in the
techniques of pricing. It has been observed earlier that pricing a new product is
one of the most important and puzzling marketing problems. This is more so in
the case of services where pricing plays both an economic and a psychological
role. It is psychological because consumers rely on price as the sole indicator of
service quality when other quality indicators are absent. In its economic role,
price determines revenue and influences profits.

Pricing of services can also help smooth fluctuations of demand. Given the
perishability of service products, this is an important function. A higher price
may be used to reduce demand during peak periods, and a lower price may be
used to stimulate demand during slack periods. For example, if a room in a
hotel is not rented out or if there are vacant seats in a bus, the potential income
is lost permanently. The concessional charge allowed for telephone calls in the
night proves the stimulation of demand during off peak period.

22.9 PHYSICAL DISTRIBUTION MIX

Distribution for services is usually simpler and more direct than channels of
distribution for goods. This is due to the intangibility of services. The marketer
of services is often less concerned with storage, transportation and inventory
control, and shorter channels of distribution are typically employed as shown in
Fig.22.1 Further, the element of inseparability (i.e., services cannot be
separated from producers) has created a feeling that direct sale alone is possible
in the matter of sale of services. This is, however, not completely true. It is
quite common to recognize some middlemen in certain areas. The following
kinds of middlemen are found in the channel of distribution of services:
Fig 22.1 Channel Alternative for Services

SERVICE CONSUMER
MANUFACTURE

SERVICE AGENT/BROKER CONSUMER

MANUFACTURE /WHOLESALER

Agent: For example, Travel agents, Employment agencies, Insurance agents.

These agents are at par with agent middlemen who do not take a title.

Wholesalers and Retailers: The actual service may not be easily transferable as
the products could be transferred. Still, tangible representations of the services

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are transferable, for example, the transfer of shares. This type of channel is
often found in cases where a contract exists as a tangible representation of the
service.

The merchant middlemen dealing in services are rare. When an organization

contracts for charter flight and then sells space to others, it is acting as a
merchant middleman because it is now the temporary owner of the service. In
India, electricity was bought and distributed by some agencies in the past.

Some service firms may market on a wholesale basis. For example, many
transporting agencies undertake to transport goods although they do not own
any vehicle. The consumer actually has no contract with the firm that actually
produces the services, namely the transport company. These transport agents
are actually wholesalers or retailers working on a fixed commission from the
fleet owner.

22.10 PROMOTION MIX

Promotion mix is definitely an important aspect of the marketing mix for

services. For instance, the advertising of services is somewhat challenging
because they are tangible-dominant products. The intangibility makes it
difficult to use different media of advertising. Service advertising should thus
emphasize tangible cases that will help consumers understand and evaluate the
service. The cues may be the physical facilities in which the service is performed
or some relevant tangible object that symbolizes the services itself. For example,
hotels may stress their physical facilities – clean, hygienic room facilities, etc.

Personal selling is potentially powerful in services because this form of

promotion lets consumers and sales people, interact. Customer contact
uncertainty, gives reassurance, reduce dissonance, and promote the reputation
of the organization.

Sales promotions, such as contests, are feasible for service firms, but other
types of promotions are more difficult to implement. For instance, a service can
neither be displayed nor can it give free samples.

Although the role of publicity and the implementation of a publicity campaign do

not differ significantly in the goods and service sectors, service marketers appear
to rely on publicity, much more than goods marketers do.

Consumers tend to value word-of-mouth communications more than company

sponsored communications. This preference is probably true for all products
but especially for services because they are experimental in nature. For this
reason, service firms should attempt to stimulate and simulate word-of-mouth
communications. In this connection it is highly essential for a service marketer
to know clearly the distinctions between Advertising, Publicity and Public
Relations.

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22.11 LET US SUM UP

• The American Marketing Association defines services as “activities, benefits

or satisfactions which are offered for sale or are provided in connection with
the sale of goods.”

• Services have several unique characteristics which often present certain

special marketing problems. Some special characteristics are intangibility,
inseparability, Persihability and fluctuating demand, highly differentiated
marketing system, absence of certain marketing functions, Heterogeneity,
Customer Relationship and Lack of Standardization.

• Services may be classified into Personal Services, Facility Services,

Business Services and Customer Services.

• Service Mix has to be planned cautiously by paying close attention to

associated tangibles of services. This is required because service product is
often equated with the service provider.

• Pricing of services can also help smooth fluctuations of demand. Given the
Persihability of service products, this is an important function.

• In the matter of physical distribution mix, direct channel is the major

option. However, depending on the type of services indirect channels also
be used in a limited way.

22.12 CHECK YOUR PROGRESS

• Identify and discuss the distinguishing characteristics of services. What

problems do these characteristics present to marketers? (Refer 22.2 and
22.4)
• Distinguish between products and services. (Refer 22.2 and 22.3)
• Discuss the role of promotion in services marketing. (Refer 22.10)
• Explain the different kinds of services. (Refer 22.5)
• Explain the Marketing Mix for Services. (Refer 22.6)

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LESSON-23
E- MARKETING

Contents:
23.0 Aims and Objectives
23.1 Introduction
23.2 Meaning of e-marketing
23.3 Benefits of e-marketing over traditional marketing
23.4 Difference between e-Business, e-Commerce and e-marketing
23.5 The 7 Cs (Fundamentals) of e-marketing
23.5.1 Contract
23.5.2 Content
23.5.3 Construction
23.5.4 Community
23.5.5 Concentration
23.5.6 Convergence
23.5.7 Commerce
23.6 Types of e-marketing
23.6.1 Banner Advertisements
23.6.2 Sponsorship
23.6.3 Classifieds Listings
23.6.4 Email Marketing
23.6.5 Partnership or affiliate marketing
23.6.6 Search Engine Marketing
23.7 Let us sum up
23.8 Check your progress

23.0 AIMS AND OBJECTIVES

Till now we discussed the basic concepts of marketing, marketing of products

and services. Now in this part, we discuss the advanced modern concept of e-
marketing. This will give the clear picture of fundamentals of e-marketing and
types of e-marketing. This will help you to answer
i. What are the basic fundamentals of e-marketing?
ii. What are the different types of e-marketing?

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23.1 INTRODUCTION

Marketing has pretty much been around forever in one form or another.
Since the day when humans first started trading whatever it was that they
first traded, marketing was there. Marketing was the stories they used to
convince other humans to trade. Humans have come a long way since then,
(Well, we like to think we have) and marketing has too.

The methods of marketing have changed and improved, and we've become a
lot more efficient at telling our stories and getting our marketing messages
out there. eMarketing is the product of the meeting between modern
communication technologies and the age-old marketing principles that
humans have always applied.

23.2 MEANING OF e-MARKETING

Very simply put, eMarketing or electronic marketing refers to the application

of marketing principles and techniques via electronic media and more
specifically the Internet. The terms eMarketing, Internet marketing and
online marketing, are frequently interchanged, and can often be considered
synonymous.

E-Marketing is the process of marketing a brand using the Internet. It

includes both direct response marketing and indirect marketing elements
and uses a range of technologies to help connect businesses to their
customers.

By such a definition, eMarketing encompasses all the activities a business

conducts via the worldwide web with the aim of attracting new business,
retaining current business and developing its brand identity

23.3 BENEFITS OF e-MARKETING OVER TRADITIONAL MARKETING

1. Reach: The nature of the internet means businesses now have a truly
global reach. While traditional media costs limit this kind of reach to huge
multinationals, eMarketing opens up new avenues for smaller businesses,
on a much smaller budget, to access potential consumers from all over the
world.
2. Scope: Internet marketing allows the marketer to reach consumers in a
wide range of ways and enables them to offer a wide range of products and
services. eMarketing includes, among other things, information
management, public relations, customer service and sales. With the range
of new technologies becoming available all the time, this scope can only
grow.

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3. Interactivity: Whereas traditional marketing is largely about getting a

brand's message out there, eMarketing facilitates conversations between
companies and consumers. With a two-way communication channel,
companies can feed off of the responses of their consumers, making them
more dynamic and adaptive.
4. Immediacy: Internet marketing is able to, in ways never before imagined,
provide an immediate impact. Imagine you're reading your favourite
magazine. You see a double-page advert for some new product or service,
maybe BMW's latest luxury sedan or Apple's latest iPod offering. With this
kind of traditional media, it's not that easy for you, the consumer, to take
the step from hearing about a product to actual acquisition.
With E-Marketing, it’s easy to make that step as simple as possible,
meaning that within a few short clicks you could have booked a test
drive or ordered the iPod. And all of this can happen regardless of
normal office hours. Effectively, Internet marketing makes business
hours 24 hours per day, 7 days per week for every week of the year. By
closing the gap between providing information and eliciting a consumer
reaction, the consumer's buying cycle is speeded up and advertising
spend can go much further in creating immediate leads.
5. Demographics and targeting: Generally speaking, the demographics of the
Internet are a marketer's dream. Internet users, considered as a group,
have greater buying power and could perhaps be considered as a
population group skewed towards the middle-classes.
Buying power is not all though. The nature of the Internet is such that
its users will tend to organise themselves into far more focussed
groupings. Savvy marketers who know where to look can quite easily
find access to the niche markets they wish to target. Marketing
messages are most effective when they are presented directly to the
audience most likely to be interested. The Internet creates the perfect
environment for niche marketing to targeted groups.
6. Adaptivity and closed loop marketing: Closed Loop Marketing
requires the constant measurement and analysis of the results of
marketing initiatives. By continuously tracking the response and
effectiveness of a campaign, the marketer can be far more dynamic in
adapting to consumers' wants and needs.
With eMarketing, responses can be analysed in real-time and campaigns
can be tweaked continuously. Combined with the immediacy of the
Internet as a medium, this means that there's minimal advertising
spend wasted on less than effective campaigns.
Maximum marketing efficiency from eMarketing creates new
opportunities to seize strategic competitive advantages.

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23.4 DIFFERENCE BETWEEN e-BUSINESS, e-COMMERCE AND

e-MARKETING

E-Business is a very broad entity dealing with the entire complex system that
comprises a business that uses electronic medium to perform or assist its
overall or specialized business activities.

E-Commerce is best described in a transactional context. So for example an

electronic transaction of funds, information or entertainment falls under the
category handled by principles of e-Commerce. Technically e-Commerce is a part
of e-Business.

E-Marketing is also a part of e-Business that involves electronic medium to

achieve marketing objectives. E-Marketing is set on a strategic level in addition
to traditional marketing and business strategy.

23.5 THE 7 CS (FUNDAMENTALS) OF E-MARKETING

The Internet allows for the entire sales cycle to be conducted on one medium,
early instantaneously. From making the consumer aware of the product to
providing additional information to transacting the final purchase, the Internet
can accomplish it all. The Internet is like one big point-of-sales display, with
easy access to products and the ability for impulse shopping. Impulse shoppers
have found a true friend in the Internet. Within seconds from being made aware
of a product, consumers can purchase it online. Further, with the targeting
techniques available to advertisers, consumers who turn down a product
because of the price can be identified and served a special offer more likely to
result in a purchase. In the right hands, with the right tools, the Internet really
is an advertiser’s dream come true.

The changing outlook in the area of e-marketing can be explained on the

basis of 7 Cs of e-marketing.

23.5.1 CONTRACT

The e-marketer’s first goal is to communicate a core promise for a truly

distinctive value proposition appealing to the target customers.

23.5.2 CONTENT

It refers to whatever appears on the website itself and on hot linked websites. If
chosen appropriately, it can increase both the rates at which browsers are
converted into buyers and their transactions.

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23.5.3 CONSTRUCTION

The promises made by e-marketers are not unique to the Internet, but the
medium’s interactive capabilities make it easier for them to deliver on their
promises quickly, reliably, and rewardingly. In practice, this means that
promises must be translated into specific interactive functions and Web design
features collectively giving consumers a seamless experience. Such design
features as one-click ordering and automated shopping help deliver the promise
of convenience.

23.5.4 COMMUNITY

Through site-to-user and user-to-user forms of interactivity (such as chat

rooms), e-marketers can develop a core of dedicated customers who become avid
marketers of the site too.

23.5.5 CONCENTRATION

Targeting through online behavioral profiling. Advertisers have known for some
time that behavioral targeting (also known as profiling) is vastly superior to
simple demographic targeting. Knowledge of a consumer’s past purchases
interests, likes/dislikes, and behavior in general allows an advertiser to target
an advertisement much more effectively. Department stores have long kept track
of consumers’ past purchases. They are thus able to project what other types of
products a consumer might be interested in and then send an appropriate
coupon or sale offer. Credit card companies

are the ultimate gatherers of behavioral targeting information. They maintain

vast databases of cardholders’ past transactions, and they sell lists of this data
to advertisers. The same type of behavioral model is forming on the Internet.
Publishers and advertisement networks monitor the items that a consumer has
expressed interest in or purchased on a site (or network of sites) in the past and
target advertisements based on this information.

23.5.6 CONVERGENCE

We will soon enter the next round of the E-marketing battle as broadband
reaches the masses. The Internet will become more ubiquitous and wireless;
televisions will become more interactive; video/data/voice appliances will
converge; brand advertising and direct marketing practices will integrate;
domestic brands, commerce and marketing will become even more global; and
big marketing spenders will spend more money online. Many companies that are
well positioned today will need to continue to evolve to take advantage of the
opportunities. The success of Internet advertising companies will largely be
driven by how they maneuver among the coming developments. Rich media,
brought on by broadband, will allow advertisers much greater creativity by
bringing in new types of advertising to the Internet, as well as enhancing some of

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the more traditional forms. Broadband technology will allow the convergence of
television and the Internet.

23.5.7 COMMERCE

The last emerging fundamental of e-marketing is commerce, whether it includes

offering goods and services directly, or marketing those of another company for a
fee, thus helping to cover the fixed costs of site operations and to offset customer
acquisition costs.

23.6 TYPES OF e-MARKETING

E-marketing can be broadly categorized as any or all of the elements below.

Each method is purpose specific and has its particular strengths and
weaknesses. Before you invest in any eMarketing, make sure you are using the
appropriate element that will deliver the outcome you need.

23.6.1 BANNER ADVERTISEMENTS

A graphical file (usually 468 x 60 pixels) that can be hypertext linked for
potential customers to ‘click’ directly to an advertiser's website. Banner
advertising is mostly used for driving awareness of your product or offer with
your target market. It can also drive response if you have a call to action such as
– ”Like the house you saw on the weekend? Click here now to see if you can
afford it!”

Banners advertisements are a popular form of advertising and come in different

shapes and sizes.

23.6.2 SPONSORSHIP

Closely associates content with the advertiser and is suitable for corporate
branding and creating awareness. When you sponsor a web site online, your
brand takes on the attributes of that site. For example, if a bank sponsors a real
estate site, then one could say that the user has come to that site to find a
house, and they could then go to the bank’s site to seek finance.

23.6.3 CLASSIFIEDS LISTINGS

Like newspaper classifieds, online classifieds are a powerful way to place your
business in front of people who are ready to buy. The strength of online
classifieds over offline classifieds is that users can search for exactly what they
want very quickly through clever indexing technology (product, price, location,
etc)., Also, because of the technology advantage, online classifieds extend not
just to traditional classifieds but also online auctions which offer a whole new
way of selling products and services.

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23.6.4 EMAIL MARKETING

Email marketing can be done in two ways. The first is to place advertising or a
message in someone else’s email newsletter. For example, when you receive a
newsletter from The Age online, it will contain advertiser messages and usually a
small display banner advertisement. This is a great way to neatly target your
audience. All you have to do is find a newsletter that is sent to a target market
similar to yours and you can market to that group very effectively!

The second form of email marketing is by actually publishing an email

marketing communication or newsletter yourself to your customers. This is a
great way to keep top of mind with your customers. When undertaking this type
of eMarketing, be careful not to just push products and specials. It is also good
to provide information about your products so your customers can make a more
informed decision about their purchases.

23.6.5 PARTNERSHIP OR AFFILIATE MARKETING

Advertisers selling goods online can develop networks of ‘affiliates’ that put up
banner advertisements or other links on their own websites in return for a
proportion of the business generated. This is a great way to limit the risk of
advertising by only paying for successful sales.

23.6.6 SEARCH ENGINE MARKETING

Apart from email, more people search the Internet using search engines such as
Google and Yahoo more than any other application. Most people who don’t know
where to find what they are looking for on the World Wide Web start at a search
engine. Therefore, if your business is not known by everyone, and even if you
are, a great way to get noticed is to get your website listed on a search engine. It
is important to make sure your site is registered with all the major search
engines. Some of these are free, others cost money. If you have a little more
money you can actually buy keywords. For example, if you are a plumber and
you buy the word “plumbing”, your website will be returned to the results page
following someone typing in the word ‘plumbing’ into the Search engine.

23.7 LET US SUM UP

• E-marketing or electronic marketing refers to the application of

marketing principles and techniques via electronic media and more
specifically the Internet.

• The terms eMarketing, Internet marketing and online marketing, are

frequently interchanged, and can often be considered synonymous.

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• E-Business is a very broad entity dealing with the entire complex system
that comprises a business that uses electronic medium to perform or assist
its overall or specialized business activities.

• E-Commerce is best described in a transactional context. So for example an

electronic transaction of funds, information or entertainment falls under
the category handled by principles of e-Commerce. Technically e-Commerce
is a part of e-Business.

• The changing outlook in the area of e-marketing can be explained on the

basis of 7 Cs of e-marketing such as Contract, Content, Construction,
Community, Concentration, Convergence and Commerce.

• E-marketing can be broadly categorized into Banner Advertisements,

Sponsorship, Classifieds Listings, Email Marketing, Partnership or affiliate
marketing and Search Engine Marketing

23.8 CHECK YOUR PROGRESS

• What is E-marketing? How far it is better than traditional marketing?

(Refer 23.2 and 23.3)
• Explain the fundamentals of e-marketing. (Refer 23.5 to 23.5.7)
• What are all the different types of E-marketing? Which type of E-
marketing is considered to be most effective one? (Refer 23.6 to 23.6.6
and answer it in your own )
• State the difference between e-Business, e-Commerce and e-Marketing.
(Refer 23.4)

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LESSON-24
MARKETING ETHICS

Contents:
24.0 Aims and Objectives
24.1 Introduction
24.2 Basic Principle of Marketing Ethics
24.3 Areas of Marketing Ethics
24.3.1 Unfair or Deceptive Marketing Practices
24.3.2 Offensive Materials and Objectionable Marketing Practices
24.3.3 Ethical Product and Distribution Practices
24.4 Special Ethical Issues in Marketing to Children
24.5 Ethical Issues in Marketing to Minorities
24.6 Ethical Issues Surrounding the Portrayal of Women in Marketing Efforts
24.7 Ethical Norms and Values for Marketers
24.8 Let us sum up
24.9 Check your progress

24.0 AIMS AND OBJECTIVES

In this part, we discuss the ethics or rules of marketing. This acts as an

essential feature of marketing, as all activities comes around these ethics to
overcome the difficulties in marketing. After going through this lesson, you will
be able to answer
i. What are the basic principles followed in marketing ethics?
ii. What are the ethical issues that affect marketing?
iii. What are the different areas of marketing ethics?

24.1 INTRODUCTION

Ethics are a collection of principles of right conduct that shape the decisions
people or organizations make. Practicing ethics in marketing means deliberately
applying standards of fairness, or moral rights and wrongs, to marketing
decision making, behavior, and practice in the organization.
In a market economy, a business may be expected to act in what it believes to be
its own best interest. The purpose of marketing is to create a competitive
advantage. An organization achieves an advantage when it does a better job than
its competitors at satisfying the product and service requirements of its target

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markets. Those organizations that develop a competitive advantage are able to

satisfy the needs of both customers and the organization.
As our economic system has become more successful at providing for needs and
wants, there has been greater focus on organizations' adhering to ethical values
rather than simply providing products. This focus has come about for two
reasons. First, when an organization behaves ethically, customers develop more
positive attitudes about the firm, its products, and its services. When marketing
practices depart from standards that society considers acceptable, the market
process becomes less efficient—sometimes it is even interrupted. Not employing
ethical marketing practices may lead to dissatisfied customers, bad publicity, a
lack of trust, lost business, or, sometimes, legal action. Thus, most
organizations are very sensitive to the needs and opinions of their customers
and look for ways to protect their long-term interests.
Second, ethical abuses frequently lead to pressure (social or government) for
institutions to assume greater responsibility for their actions. Since abuses do
occur, some people believe that questionable business practices abound. As a
result, consumer interest groups, professional associations, and self-regulatory
groups exert considerable influence on marketing. Calls for social responsibility
have also subjected marketing practices to a wide range of federal and state
regulations designed to either protect consumer rights or to stimulate trade.

24.2 BASIC PRINCIPLE OF MARKETING ETHICS

Ethics refers to the study of moral principles, or “right and wrong”, therefore
marketing ethics is all about marketers doing the “right thing”. Exactly what the
right thing is, is not always completely clear-cut since what is “right” may vary
depending on whether you are looking at it from the perspective of the company,
its customers or the society in which they both exist. There are however several
basic principles involved in ethical marketing :
• Taking responsibility : marketers need to take responsibility for their
products and their decisions. In the past marketers have often responded
to social concern about particular products by defending them on the basis
of “It was what the customer wanted”;
• Dealing fairly : marketers need to be honest and fair in their dealings with
all stakeholders. This means that products must be fit for use and
accurately described, and contracts (both formal and implicit) should be
drawn up in good faith and honoured;
• Respecting consumer rights : including the right of redress, the right to
information and the right to privacy

24. 3 AREAS OF MARKETING ETHICS

24.3.1 UNFAIR OR DECEPTIVE MARKETING PRACTICES

Marketing practices are deceptive if customers believe they will get more value
from a product or service than they actually receive. Deception, which can take

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the form of a misrepresentation, omission, or misleading practice, can occur

when working with any element of the marketing mix. Because consumers are
exposed to great quantities of information about products and firms, they often
become skeptical of marketing claims and selling messages and act to protect
themselves from being deceived. Thus, when a product or service does not
provide expected value, customers will often seek a different source.
Deceptive pricing practices cause customers to believe that the price they pay for
some unit of value in a product or service is lower than it really is. The deception
might take the form of making false price comparisons, providing misleading
suggested selling prices, omitting important conditions of the sale, or making
very low price offers available only when other items are purchased as well.
Promotion practices are deceptive when the seller intentionally misstates how a
product is constructed or performs, fails to disclose information regarding
pyramid sales (a sales technique in which a person is recruited into a plan and
then expects to make money by recruiting other people), or employs bait-and-
switch selling techniques (a technique in which a business offers to sell a
product or service, often at a lower price, in order to attract customers who are
then encouraged to purchase a more expensive item). False or greatly
exaggerated product or service claims are also deceptive. When packages are
intentionally mislabeled as to contents, size, weight, or use information, that
constitutes deceptive packaging. Selling hazardous or defective products without
disclosing the dangers, failing to perform promised services, and not honoring
warranty obligations are also considered deception.

24.3.2 OFFENSIVE MATERIALS AND OBJECTIONABLE MARKETING

PRACTICES

Marketers control what they say to customers as well as and how and where
they say it. When events, television or radio programming, or publications
sponsored by a marketer, in addition to products or promotional materials, are
perceived as offensive, they often create strong negative reactions. For example,
some people find advertising for all products promoting sexual potency to be
offensive. Others may be offended when a promotion employs stereotypical
images or uses sex as an appeal. This is particularly true when a product is
being marketed in other countries, where words and images may carry different
meanings than they do in the host country.
When people feel that products or appeals are offensive, they may pressure
vendors to stop carrying the product. Thus, all promotional messages must be
carefully screened and tested, and communication media, programming, and
editorial content selected to match the tastes and interests of targeted
customers. Beyond the target audience, however, marketers should understand
that there are others who are not customers who might receive their appeals and
see their images and be offended.
Direct marketing is also undergoing closer examination. Objectionable practices
range from minor irritants, such as the timing and frequency of sales letters or
commercials, to those that are offensive or even illegal. Among examples of

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practices that may raise ethical questions are persistent and high-pressure
selling, annoying telemarketing calls, and television commercials that are too
long or run too frequently. Marketing appeals created to take advantage of young
or inexperienced consumers or senior citizens— including advertisements, sales
appeals disguised as contests, junk mail (including electronic mail), and the use
and exchange of mailing lists—may also pose ethical questions.

24.3.3 ETHICAL PRODUCT AND DISTRIBUTION PRACTICES

Several product-related issues raise questions about ethics in marketing, most

often concerning the quality of products and services provided. Among the most
frequently voiced complaints are ones about products that are unsafe, that are
of poor quality in construction or content, that do not contain what is promoted,
or that go out of style or become obsolete before they actually need replacing. An
organization that markets poor-quality or unsafe products is taking the chance
that it will develop a reputation for poor products or service. In addition, it may
be putting itself in jeopardy for product claims or legal action. Sometimes,
however, frequent changes in product features or performance, such as those
that often occur in the computer industry, make previous models of products
obsolete. Such changes can be misinterpreted as planned obsolescence.
Ethical questions may also arise in the distribution process. Because sales
performance is the most common way in which marketing representatives and
sales personnel are evaluated, performance pressures exist that may lead to
ethical dilemmas. Research is another area in which ethical is sues may arise.
Information gathered from research can be important to the successful
marketing of products or services. Consumers, however, may view organizations'
efforts to gather data from them as invading their privacy. They are resistant to
give out personal information that might cause them to become a marketing
target or to receive product or sales information. When data about products or
consumers are exaggerated to make a selling point, or research questions are
written to obtain a specific result, consumers are misled. Without self-imposed
ethical standards in the research process, management will likely make
decisions based on inaccurate information.

24.4 SPECIAL ETHICAL ISSUES IN MARKETING TO CHILDREN

Children are an important marketing target for certain products. Because their
knowledge about products, the media, and selling strategies is usually not as
well developed as that of adults, children are likely to be more vulnerable to
psychological appeals and strong images. Thus, ethical questions sometimes
arise when they are exposed to questionable marketing tactics and messages.
For example, studies linking relationships between tobacco and alcohol
marketing with youth consumption resulted in increased public pressure
directly leading to the regulation of marketing for those products.
The proliferation of direct marketing and use of the Internet to market to
children also raises ethical issues. Sometimes a few unscrupulous marketers
design sites so that children are able to bypass adult supervision or control;

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sometimes they present objectionable materials to underage consumers or

pressure them to buy items or provide credit card numbers. When this happens,
it is likely that social pressure and subsequent regulation will result. Likewise,
programming for children and youth in the mass media has been under scrutiny
for many years.
In the United States, marketing to children is closely controlled. Federal
regulations place limits on the types of marketing that can be directed to
children, and marketing activities are monitored by the Better Business Bureau,
the Federal Trade Commission, consumer and parental groups, and the
broadcast networks. These guidelines provide clear direction to marketers.

24.5 ETHICAL ISSUES IN MARKETING TO MINORITIES

The United States is a society of ever-increasing diversity. Markets are broken

into segments in which people share some similar characteristics. Ethical issues
arise when marketing tactics are designed specifically to exploit or manipulate a
minority market segment. Offensive practices may take the form of negative or
stereotypical representations of minorities, associating the consumption of
harmful or questionable products with a particular minority segment, and
demeaning portrayals of a race or group. Ethical questions may also arise when
high-pressure selling is directed at a group, when higher prices are charged for
products sold to minorities, or even when stores provide poorer service in
neighborhoods with a high population of minority customers. Such practices will
likely result in a bad public image and lost sales for the marketer.
Unlike the legal protections in place to protect children from harmful practices,
there have been few efforts to protect minority customers. When targeting
minorities, firms must evaluate whether the targeted population is susceptible to
appeals because of their minority status. The firm must assess marketing efforts
to determine whether ethical behavior would cause them to change their
marketing practices.

24.6 ETHICAL ISSUES SURROUNDING THE PORTRAYAL OF WOMEN IN

MARKETING EFFORTS

As society changes, so do the images of and roles assumed by people, regardless

of race, sex, or occupation. Women have been portrayed in a variety of ways over
the years. When marketers present those images as overly conventional,
formulaic, or oversimplified, people may view them as stereotypical and
offensive.
Examples of demeaning stereotypes include those in which women are presented
as less intelligent, submissive to or obsessed with men, unable to assume
leadership roles or make decisions, or skimpily dressed in order to appeal to the
sexual interests of males. Harmful stereotypes include those portraying women
as obsessed with their appearance or conforming to some ideal of size, weight, or
beauty. When images are considered demeaning or harmful, they will work to
the detriment of the organization. Advertisements, in particular, should be
evaluated to be sure that the images projected are not offensive.

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24.7 ETHICAL NORMS AND VALUES FOR MARKETERS

Professional associations and accrediting bodies have identified guidelines for

ethics in marketing. According to one of those associations, the American
Marketing Association, the following rules guide marketing behavior. The
American Marketing Association commits itself to promoting the highest
standard of professional ethical norms and values for its members. Norms are
established standards of conduct that are expected and maintained by society
and / or professional organizations. Values represent the collective conception of
what people find desirable, important and morally proper. Values serve as the
criteria for evaluating the actions of others. Marketing practitioners must
recognize that they not only serve their enterprises but also act as stewards of
society in creating, facilitating and executing the efficient and effective
transactions that are part of the greater economy. In this role Marketers should
embrace the highest ethical norms of practicing professionals and the ethical
values implied by their responsibility toward stakeholders (e.g., customers,
employees, investors, channel members, regulators and the host community).

1. Responsibility of the marketer. Marketers must accept responsibility for the

consequences of their activities and make every effort to ensure that their
decisions, recommendations, and actions function to identify, serve, and
satisfy all relevant publics: customers, organizations and society.

2. Honesty, Integrity and Quality are far more important than quick profits

3. Rights and duties in the marketing exchange process: - Participants should

be able to expect that products and services are safe and fit for intended
uses; that communications about offered products and services are not
deceptive; that all parties intend to discharge their obligations, financial
and otherwise, in good faith; and that appropriate internal methods exist
for equitable adjustment and / or redress of grievances concerning
purchases.

4. Organizational relationships: - Marketers should be aware of how their

behavior influences the behavior of others in organizational relationships.
They should not demand, encourage, or apply coercion to encourage
unethical behavior in their relationships with others.

5. Conduct your business so as to build long term loyalty. When you get a
customer, you want to keep that customer and build a sales relationship
that can not only last years, but also create a stream of referral business.

6. Marketers must do no harm. This means doing work for which they are
appropriately trained or experienced so that they can actively add value to
their organizations and customers. It also means adhering to all applicable
laws and regulations and embodying high ethical standards in the choices
they make.

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7. Marketers must foster trust in the marketing system. This means that
products are appropriate for their intended and promoted uses. It requires
that marketing communications about goods and services are not
intentionally deceptive or misleading. It suggests building relationships that
provide for the equitable adjustment and / or redress of customer
grievances. It implies striving for good faith and fair dealing so as to
contribute toward the efficacy of the exchange process.
8. Marketers must embrace, communicate and practice the fundamental
ethical values that will improve consumer confidence in the integrity of the
marketing exchange system. These basic values are intentionally aspiration
and include honesty, responsibility, fairness, respect, openness and
citizenship.

24.8 LET US SUM UP

• Practicing ethics in marketing means deliberately applying standards of

fairness, or moral rights and wrongs, to marketing decision making,
behavior, and practice in the organization.
• Several basic principles are involved in ethical marketing such as taking
responsibility, dealing fairly and Respecting consumer rights.
• Areas of Marketing Ethics include Unfair or Deceptive Marketing Practices,
Offensive Materials and Objectionable Marketing Practices and Ethical
Product and Distribution Practices.
• The proliferation of direct marketing and use of the Internet to market to
children also raises ethical issues.
• Offensive practices may take the form of negative or stereotypical
representations of minorities, associating the consumption of harmful or
questionable products with a particular minority segment, and demeaning
portrayals of a race or group.
• Women have been portrayed in a variety of ways over the years. When
marketers present those images as overly conventional, formulaic, or
oversimplified, people may view them as stereotypical and offensive.

24.9 CHECK YOUR PROGRESS

• State the meaning of ethics and bring out the significance of ethics in
marketing. (Refer 24.1)
• Explain the principles of marketing ethics. (Refer 24.2)
• Enumerate and discuss in detail, the areas of marketing ethics (Refer 24.3
to 24.3.3)
• Discuss the ethical issues which relates to (a) Children (b) Minority and
(c)Women. (Refer 24.5, 24.5 and 24.6)
• Explain the ethical norms and values of marketers.(Refer 24.7)

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LESSON-25
CONSUMERISM

Contents:
25.0 Aims and Objectives

25.1 Introduction
25.2 Definition of Consumerism
25.3 Evolution of Consumerism
25.4 Consumer Exploitation in India
25.5 Types of Exploitation
25.5.1 Pricing
25.5.2 Adulteration
25.5.3 Duplication
25.5.4 Artificial Demand
25.5.5 Sub-standard
25.5.6 Product Risk
25.5.7 Advertising
25.5.8 Warranty and Services
25.5.9 Fitness
25.6 Laws Protecting the Consumer Interest
25.7 Consumer Protection Act, 1986
25.7.1 Objectives of Consumer Protection Act, 1986
25.7.2 Extent and Coverage of the Act
25.7.3 Rights of Consumers
25.7.4 Structure
25.8 Let us sum up
25.9 Check your progress

25.0 AIMS AND OBJECTIVES

Consumers are considered to be the king of modern business. Each and every
activity revolves around them. Here, we discuss the exploitation of consumers
through various sources and portraying the laws which is enacted to prevent
exploitations. This will help you to answer
i. How consumers are exploited in marketing?
ii. What are the laws which govern consumers from exploitations?

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25.1 INTRODUCTION

Consumerism movement is a universal phenomenon. The goods or services

available may be in abundance or in short supply, but the position of the
consumer is weak, in relation to the seller. Sellers want customers, as buyers
and not as complainants. The frustration and bitterness on the part of
customers, who have been promised much is indeed great, but they realize less.
It may be due to the existence of sellers’ market, where consumers are voiceless.
There are many practices whereby consumers are not only being denied their
basic rights but are being deceived too. Who is a consumer? A consumer is an
individual who consumes goods manufactured by firms or created by nature
(air, water etc.) and services offered by government or firms-hospital,
educational institutions etc.

25.2 DEFINITION OF CONSUMERISM

Consumerism is defined by Richard H. Burkirk and James as “Organized efforts

of consumers seeking redress, restitution and remedy for dissatisfaction they
have accumulated in the acquisition of their standard of living.”
Philip Kotler says that “Consumerism is not limited to organized efforts only but,
is a social movement seeking to augment the rights and powers of buyers in
relation to sellers.”
Harper W. Boyed and David analyze the consumerism as “the dedication of those
activities of both public and private organizations which are designed to protect
individuals from practices that impinge upon their rights as consumers.”
Thus, consumerism, as social movement, may be defined as an organized effort
of consumers seeking redress, restitution and remedy for dissatisfaction they
have accumulated in the acquisition of their standard of living.

25.3 EVOLUTION OF CONSUMERISM

The majorities of the consumers in advanced countries is well educated, well-

informed and are in a position to protect them. But our Indian situation is
different from the Western, where adequate production and proper distribution
of products exist. In India, industries have not achieved the level of affluence of
technology and the existing markets of products run in shortages, adulteration
and black market prices. Indian people have less money at their disposal. The
profit making attitude of the business failed to discharge social responsibilities
of maintaining fair price, quality of goods and providing services etc. In short,
consumerism is an outcome of sufferings and exploitation of consumers, and
some businessmen, aim to make abnormal profit, which is at the cost of
consumers’ safety and health. However, it has been accepted and agreed that “A
consumer is a king of the Market,” but in fact he is not. The majority of the
Indian problems relating to consumers are adulteration, artificial scarcity,
unreasonable prices etc.

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There are different religious customs, traditions and languages in India; and
about three-fourth of the population live in rural areas, where cultivation is the
source of livelihood, and there is wide disparity of income of people. Majority of
the people, who are most illiterate, have low income. To save or protect them,
against exploitative practices of trade, consumerism has emerged and has been
accepted as a defensive force to safeguard the interest of the customers.

The major causes of consumerism in India have been identified as rising prices,
poor product performance and service quality, product shortages and deceptive
advertising-shortages and inflation. Government has been very responsive to
the consumer needs through legislative action. Economic discontent has been
generated out of spiraling inflation. Thus, it has become necessary for the
consumers to stand up for their rights through an effective organization in order
to redress the grievances.

25.4 CONSUMER EXPLOITATION IN INDIA

Consumers at large become a prey to exploiters. Examples are not few but
countless:
1. Supplied materials are sub-standard.
Goods, in many cases, full short of their weight.

2. Goods and services are priced high.

3. Consumers are tortured with false advertisements.

4. Interested persons or profiteers create artificial scarcity to earn illegitimate

profits.

5. At the time of price rising stages essential commodities are hoarded and
black marketed at boosted price.

6. Rude behaviour of rationing shops-controlled by government.

7. Funs and contest advertisements have been a method of cheating innocent

people.

8. People are made fools by advertising tall and false claims.

9. Mail order business is another form of crookedness.

10. Consumers have been harassed during the guarantee period, where free
repair to warrant.

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Adulteration is at the maximum, about 50% food items, we are consuming now,
are adulterated.
11. Further Examples
12. Tooth paste tubes filled with air at the other end.
13. Buying a package of biscuits, one finds more package materials than the
quantity of biscuits.
14. 300 grams of vanaspati is found in a 500 grams tin of ghee, but labelled as
PURE GHEE.
15. A 250 grams pure tea consists of 150 grams of exhausted tea leaves, which
is artificially coloured and prepared, but the script of the label reads as
“A1”.
1. 500 grams of chilly powder packet consists of 150 grams of red brick
powder or coloured saw dust, where label reads “PURE”.
2. One litre “PURE MILK”.
3. One kilogram of sugar packet weighs only 970 grams, whereas labelled as
NET WEIGHT ONE KILOGRAM.
4. When applying sandalwood (wet powder) on forehead, it leaves black scars
on the skin.
5. When someone wants to commit suicide by taking poison, he will not die,
as the poison is adulterated.
6. In a packet of one kilogram of black rum, one can easily find 100 grams of
black coloured pebbles.
7. A match box does not contain the labelled number of sticks.
8. Making the bottom of the bottle or tin bulged inwards, thereby eating into
the quantity of the contents.

25.5 TYPES OF EXPLOITATION

Further, consumerism in India is to be seen differently from that of affluent societies of

the Western countries. Some of the major problems of consumers’ exploitation are given below:

25.5.1 PRICING

A rupee was rupee in 1949. It rose to Rs.1.04, in 1955. But today, it is worth
quantity, but in actual practice it is not so. Prices of daily convenience items
such as soaps, tooth paste, washing powders etc., are fixed by the producers.
Producers generally stamp the price, which is 10% - 20% above the real price.
This ensures a good margin to wholesalers, to whom the producers sell and
create a demand from them. Shortages are created but at the same time such
goods can be had from black marketers.

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25.5.2 ADULTERATION

Adulterations make illegitimate profits. Businessmen aim at profit-more profit.

Profit is inherent in the business. When one wishes to have undue profit, one
tries to adulterate the products. For example, mixing of coconut oil with
palmolein, or cheaper fats in ghee, presence of stones in grains etc. About 25-
35% of the food we eat today is adulterated. Adulteration has become a
commercial activity, causing so many harmful effects.

25.5.3 DUPLICATION

Duplicates are available for all types of products-milk, automobile parts, blade,
pens, watches, radios, medicines, clothes, and even currency notes. Duplicate
medicines are prevalent in large measure, from Cape to Kashmir. Persons,
unfamiliar with original products can easily be fooled by the traders. There are
industries, within India, manufacturers of everything duly stamped “Made in
Japan”, “Made in U.S.A” etc.

25.5.4 ARTIFICIAL DEMAND

There are situations where the shop-keepers hang the board “No Stock” in front
of their shops, where stocks are in abundance. Consumers, who need such
items, may pay higher price. Even in cinema houses, board may be hung in the
main entrance “House full”. But black marketers offer tickets to needy cinema
goers. People may not bring these to the government’s notice.

25.5.5 SUB-STANDARD

There is a general tendency among the middlemen or manufacturers that

reducing the quality and quantity of the products, is common after gaining good
popularity for the product. Products are packed and sealed. Unless one makes
an out-right purchase, goods cannot be inspected. If defective or damaged items
are found in a pack, one cannot return it and the consumers have to blame
themselves at their own cost. Generally, when one gets a product, no bill is
made. Thus there is no proof. Even if a bill is made, print appears like “goods
once sold will not be taken back.” Thus the seller does not accept the defective
or damaged goods. Concealed sub-standard, reduced quantity and defective
items are sold in the market. The innocent people, who are unaware of these,
are cheated and they suffer.

25.5.6 PRODUCT RISK

In the absence of adequate information to the consumers, dangers do appear.

There are many harmful medicines, electrically operated kitchen appliances etc.

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sold to the consumers, without giving adequate information. Beauty aid

cosmetics, most of them, have reactions in the long run. Mainly poorly designed
kitchen ranges cause injuries-even fatal to many who handle them. Certain type
of small tablet of one paisa size is packed in a big packet, where one hundred of
such tablets can be easily packed in it.

25.5.7 ADVERTISING

The main purpose of advertisement is to make product familiar among the

public. But advertisement contains least information about the product. The
role of advertising has been criticised in many ways-makes false claim,
misrepresentation, fraud, cheating etc. The words-Super, A-1, Wonderful
magical action etc, may possess no meaning in relation to the product.

25.5.8 WARRANTY AND SERVICE

When guarantee is given against the good performance of the product, it is made
ineffective through pretext. Even during the guarantee period, if the product
goes inoperative. There are many people who possess vehicles-cycle, scooter,
bike, car and other products such as, radio, television, watches, tape recorders
etc. and if they go under repair, the servicing mechanic or service station
charges exorbitant charges, which is a punishment on the innocent consumers.
There are many quacks (doctors) who make tall claims and, if approached it is at
the cost of our life. Businessmen have unlimited tactics to cheat the consumes,
who are like a sheep before a lion.

25.5.9 FITNESS
The product quality and durability along with suitability etc. may come under
category of product fitness. What is claimed by the product advertiser must
tally with the product. But in actual practice, it is not so. For instance, clothes
having a seal of “stanforized” may shrink, battery having a label “leak proof”
starts leaking, products, having a label of “unbreakable” break at use etc. For
all these calamities, the possessor of the products becomes responsible instead
of the producer.
Thus, consumerism is an outcome of sufferings and exploitation of consumers,
who aim to secure protection from commercial terrorism, and exploitative
practices, in order to safeguard the interest by establishing the rights and
powers in relation to products and sellers.

25.6 LAWS PROTECTING THE CONSUMER INTEREST

The former President of the U.S.A. Mr. Kennedy, defined the basic consumer
rights- “As the Right of Safety, The Right to be informed, the Right to choose and
the Right to be heard.” Increased product information for the consumers has
been widely prescribed as a remedy. The government of India has enacted

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certain laws to protect the well being of the consumers and to safeguard them.
A few are described below:

¾ The Prevention of Food Adulteration Act, 1954

This is a consumer-oriented legislation designed to protect the health of the

public by prohibiting adulteration of food. An adulterated food article is one
which is injurious to public health. It is deemed injurious when:

• The product quality is not as demanded or claimed;

• It contains an injurious substance;

• Any constituent of the article has been taken away;

• It has been prepared, packed or kept under unsanitary conditions;

• It is unfit for human consumption;

• It is obtained from decreased animals;

• It is poisonous or deleterious;

• It contains a prohibited preservative;

• It s quality or purity falls below the prescribed standards.

¾ The Essential Commodities Acts, 1955

It is one of the major consumer-oriented legislations of the country whose object

is to control, in the interest of the general public, the production, supply and
distribution of trade and commerce in certain commodities declared essential. A
number of products are included under it. Whenever a company markets these
products, the provisions of this act apply to it and influence its product,
distribution and pricing decisions. In 1974, it was further amended with
provisions against hoarders, black-marketers and profiteers. It is made
compulsory to display the prices of essential commodities.
¾ Weights and Measures Act, 1958
This Act was enacted to safeguard the consumers against the exploitation of
weighing measures of commodities by traders. Under this Act standard weights
and measures are introduced and metric system of weights and measures has
been introduced.
¾ The Monopolies and Restrictive Trade Practices Act, 1969
This Act was enacted in order to regulate the monopolistic and restrictive trade
practices followed by companies. It applies only undertakings, except

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government and public undertakings. Monopolies and Restrictive Trade

Practices Commission (MRTP) has been set up to enquire into monopolistic and
restrictive trade practices upon a complaint by any trade or consumer
association. The main objectives, it short, are checking concentration of
economic power which is detrimental to the society, checking such monopolistic
and restrictive trade practices which are injurious to public well-being and
welfare and vesting the powers with the Central government to investigate and
control mergers and expansions.
¾ Drugs and Cosmetics Act, 1940
Just as in food products, drugs of sub-standard quality are manufactured and
marketed. The prices charged for medicines are not proportional to the cost of
production. The high prices charged by the manufacturers are high enough to
exploit the consumers. There is the problem of spurious drugs-manufactured by
unscrupulous producers, and they are not only harmful but also dangerous to
life.
¾ Packaged Commodities Order, 1975
This is an important measure for consumer protection. This order provides that
producers of several packaged commodities should print on the packages the
contents, weights, price, month of manufacture, the date of expiry of the
products, the name of manufacturer meant for retail trade so that consumers
will come to know what they purchase. It has valuable provisions to consumers.
Further:
Drugs Control Act, 1950
Dangerous Drug Act, 1930
The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954
Household Electrical Appliances (Quality Control) Order, 1976 and many other
Acts in favour of consumers

25.7 CONSUMER PROTECTION ACT, 1986

The consumer protection Act, 1986 (68 of 1986) is a milestone in the history of
socio-economic legislation in the country. It is one of the most progressive and
comprehensive piece of legislations enacted for the protection of consumers. It
was enacted after in-depth study of consumer protection laws in a number of
countries and in consultation with representatives of consumers, trade and
industry and extensive discussions within the Government.

25.7.1 OBJECTIVE OF CONSUMER PROTECTION ACT

The main objective of the act is to provide for the better protection of consumers.
Unlike existing laws which are punitive or preventive in nature, the provisions of
this Act are compensatory in nature. The act is intended to provide simple,

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speedy and inexpensive redressal to the consumers' grievances, and relief of a

specific nature and award of compensation wherever appropriate to the
consumer. The act has been amended in 1993 both to extend its coverage and scope
and to enhance the powers of the redressal Machinery.

25.7.2 EXTENT AND COVERAGE OF THE ACT

The salient features of the Act are summed up as under:-

• The Act applies to all goods and services unless specifically exempted by
the Central Government.
• It covers all the sectors whether private, public or cooperative.
• The provisions of the Act are compensatory in nature.

25.7.3 RIGHTS OF CONSUMERS

It enshrines the following rights of consumers:-

• Right to be protected against the marketing of goods and services which are
hazardous to life and property.

• Right to be informed about the quality, quantity, potency, purity, standard

and price of goods or services so as to protect the consumer against unfair
trade practices;

• Right to be assured , wherever possible , access to a variety of goods and

services at competitive prices;

• Right to be heard and to be assured that consumers' interests will receive

due consideration at appropriate forums;

• Right to seek redressal against unfair trade practices unscrupulous

exploitation of consumers; and

• Right to consumer education

• The Act envisages establishment of Consumer Protection Councils at the

Central and State levels, whose main objects will be to promote and protect
the rights of the consumers.

25.7.4 STRUCTURE

To provide simple, speedy and inexpensive redressal of consumer grievances, the

Act envisages three- tier quasi-judicial machinery at the National, State and
District levels.

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• National Consumer Disputes Redressal Commission - known as

"National Commission".
• Consumer Disputes Redressal Commissions known as "State
Commission".
• Consumer Disputes Redressal Forums- known as "District Forum".

The consumer movement should be strengthened in our country so that the

tendency to push up the prices could be curbed and the quality of services and
products ensured. Among consumes under Indian condition, the literacy level is
low and purchasing power is poor. But one must be aware of one’s rights and
should not hesitate to exercise them in right direction. To face the
businessmen, who are organized, the consumers should also create strength by
organizing those good buyers through education and implementing various Acts.
The consumers themselves have to protect themselves through powerful
consumer movement.

25.8 LET US SUM UP

• Philip Kotler says that “Consumerism is not limited to organized efforts only
but, is a social movement seeking to augment the rights and powers of
buyers in relation to sellers.”
• Consumers at large become a prey to exploiters Some of the major
problems of consumers’ exploitation are Pricing, Adulteration, Duplication,
Artificial Demand, Sub-standard, Product Risk, Advertising, Warranty and
Services and Fitness.
• Increased product information for the consumers has been widely
prescribed as a remedy. The government of India has enacted certain laws
to protect the well being of the consumers and to safeguard them.
• The consumer protection Act, 1986 is one of the most progressive and
comprehensive piece of legislations enacted for the protection of consumers.
It was enacted after in-depth study of consumer protection laws in a
number of countries and in consultation with representatives of
consumers, trade and industry and extensive discussions within the
Government.

25.9 CHECK YOUR PROGRESS

• Define consumerism and explain the consumer exploitations in India with

examples. (Refer 25.2 and 25.4)
• Explain the various types of exploitations. (Refer 25.5 to 25.5.9)
• Does the government of India have enacted certain laws to protect the well
being of the consumers? Discuss. (Refer 25.6 to 25.7.4)
• Explain the Consumer Protection Act, 1986 in detail. (Refer 25.7 to 25.7.4)

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