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Product Decisions:

When placing a product within a market many factors and decisions have to be taken into
consideration. These include:

1. Product Design: Will the design be the selling point for the organization?
2. Product Quality: Quality has to be consistent with other elements of the marketing mix.
A premium based pricing strategy has to reflect the quality a product offers.
3. Product Features: What features should be added, that may increase the benefit
offered to the target market? Will the organization use a discriminatory pricing policy
for offering these additional benefits?
4. Branding: One of the most important decisions a marketing manager can make is about
branding. The value of brands in today’s environment is phenomenal. Brands message
of confidence, quality and reliability to their target market.

The Product Hierarchy:

The product hierarchy stretches from basic needs to particular items that satisfy those needs.
We can identify six levels of the product hierarchy, using the below example:

1. Need Family: The core need that underlies the existence of a product family.
Example: Health care.
2. Product Family: All the product classes that can satisfy a core need with reasonable
effectiveness.
Example: Oral Hygiene (Colgate).
3. Product Class: A group of products within the product family recognized as having a
certain functional coherence. Also known as a product category.
Example: Sensitivity (Colgate - Sensodyne).
4. Product Line: A group of products within a product class that are closely related because
they perform a similar function, are sold to the same outlets or channels, or fall within
given ranges. A product line may consist of different brands or a single family brand, or
individual brand that has been extended.

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Example: Sensodyne (3 Varieties).

5. Product Type: A group of items within a product line that share one of several possible
forms of the product.
Example: Mint Sensodyne.
6. Item (also called stock keeping unit or product variant): A distinct unit within a brand
or product line distinguishable by size, price, appearance, or some other attribute.
Example: 100g – Mint Sensodyne.

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New Product Development:

Once a company has carefully segmented the market, chosen its target customers, identified
their needs and determined its market positioning, it is better able to develop new products.

New Product Development Process:

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1. Idea Generation:
 An Innovation or invention as a result of a gap in the current market.
 An idea to produce a product or service not currently available.
2. Idea Screening:
 Not all ideas good ones (e.g. new coke, Mc. Pizza, etc.)
 Marketers need to test consumer reaction to their idea before they continue.
 Throw the idea around and see what people think.

3. Concept Development and Testing:

 If the feedback from consumers and your associates is positive, a prototype or sample is
created.
 This stage will allow you to see if the product works and to allow your target market to
use it, provide feedback for improvements, etc.
4. Marketing Strategy Development:
 The development of your marketing strategy.
 Determine your target market and how to use 4 P’s to optimally sell them your product.
5. Business Analysis:
 Many questions are answered in this stage, For example:
 Materials/ Labor required?
 Cost of production?
 Distribution channels?
 Cost of promotion?
 This analysis will simply answer the following question:
 Can we make and sell this product and make money doing it?
6. Product Development:
 How the product will look like.
 The design will depend on what it does and what the target market want.

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7. Test Marketing:
 Test acceptance of the product.
 Usually occurs by offering the product to a random sample of your target market.
 Customer feedback is used to improve the venture and determine whether the product
should “go to market”.
8. Commercialization:
 The product is officially “in the market” and being sold to all.
 The “Product Life Cycle” begins and its life will be determined by the consumer market,
competition and further product advances.

Diffusion/ Adoption Process:

Diffusion: The process by which the adoption of an innovation spreads.

Everett Rogers defines the innovation diffusion process as “the spread of a new idea from its
source of innovation or creation to its ultimate users or adopters”.

Adopters of new products move through five stages:

1. Awareness: The consumer becomes aware of the innovation but lacks information
about it.
2. Interest: The consumer is stimulated to seek information about the innovation.
3. Evaluation: The consumer considers whether to try the innovation.
4. Trial: The consumer tries the innovation to improve his or her estimate of its value.
5. Adoption: The consumer decides to make full and regular use of the innovation.

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Adopter Categorization on the basis of Relative Time Adoption of Innovations:

Time of Adoption of Innovation

Innovators
Innovators are the “early-bird” customers, that is, the first ones to adopt the new product. They
do normally not represent more than 2.5% of the population. They are venturesome in nature
and are prepared to run the risk of buying a product that ultimately proves not to live up to
their expectations, rather than missing the chance to try something new. For the marketer,
innovators are important since they represent the initial target and influence later adopters. A
new product that fails to win the esteem of this group is not very likely to ever reach and
penetrate the mass market.
Early adopters
Early adopters represent the next 13.5% of the population to adopt the new product. As
respected members of the community, they are likely to be opinion leaders for others who will
only buy the product when it has been “approved” by the early adopters.
Early Majority
The early majority accounts for about 34% of the population. This type of customer is more
cautious of new products than the early adopters. If they are exposed to sufficient information,
they will follow the example of the early adopters. The early majority is an important target for
firms who aim for taking their products from the introduction to the growth stage of the PLC.

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Late majority
The late majority are the 34% of the population who are more skeptical about new products
and harder to persuade. They place greater importance on word of mouth recommendations
than the media for to obtain information about new products.
Laggards
Laggards are the last 16% of the population. They are the most reluctant to try new products.
Often, they adopt new products only when their favored items have been discontinued.
Members of this group are often older and/or from lower socio-economic groups.

Product Life Cycle (PLC)

The Product Life Cycle contains mainly four distinct stages. For the four stages introduction,
growth, maturity and decline, we can identify specific product life cycle strategies. These are based
on the characteristics of each PLC stage. Which product life cycle strategies should be applied in
each stage is crucial to know in order to manage the PLC properly.

Product-Life-Cycle-Stages

1. Introduction stage

The introduction stage is the stage in which a new product is first distributed and made available for
purchase, after having been developed in the product development stage. Therefore, the
introduction stage starts when the product is first launched. But introduction can take a lot of time,

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and sales growth tends to be rather slow. Nowadays successful products such as frozen foods and
HDTVs lingered for many years before entering a stage of more rapid growth.

Furthermore, profits in the introduction stage are negative or low due to the low sales on the one
hand and high-distribution and promotion expenses on the other hand. Obviously, much money is
needed to attract distributors and build their stocks. Also, promotion spending is quite high to inform
consumers of the new product and get them to try it.

In the introduction stage, the focus is on selling to those buyers who are the most ready to buy
(innovators).

Concerning the product life cycle strategies we can identify the proper launch strategy: the company
must choose a launch strategy that is consistent with the intended product positioning. Without
doubt, this initial strategy can be considered to be the first step in a grander marketing plan for the
product’s entire life cycle.

The main objective should be to create product awareness and trial.

To be more precise, since the market is normally not ready for product improvements or refinements
at this stage, the company produces basic versions of the product. Cost-plus pricing should be used
to recover the costs incurred. Selective distribution in the beginning helps to focus efforts on the
most important distributors. Advertising should aim at building product awareness among innovators
and early adopters. To entice trial, heavy sales promotion is necessary. Following these product life
cycle strategies for the first PLC stage, the company and the new product are ready for the next
stages.

2. Growth stage

The growth stage is the stage in which the product’s sales start climbing quickly. The reason is that
early adopters will continue to buy, and later buyers will start following their lead, in particular if they
hear favourable word of mouth. This rise in sales also attracts more competitors that enter the
market. Since these will introduce new product features, competition is fierce and the market will
expand. As a consequence of the increase in competitors, there is an increase in the number of
distribution outlets and sales are augmented due to the fact that resellers build inventories. Since
promotion costs are now spread over a larger volume and because of the decrease in unit
manufacturing costs, profits increase during the growth stage.

The main objective in the growth stage is to maximize the market share.

Several product life cycle strategies for the growth stage can be used to sustain rapid market growth
as long as possible. Product quality should be improved and new product features and models
added. The firm can also enter new market segments and new distribution channels with the
product. Prices remain where they are or decrease to penetrate the market. The company should
keep the promotion spending at the same or an even higher level. Now, there is more than one main
goal: educating the market is still important, but meeting the competition is likewise important. At the
same time, some advertising must be shifted from building product awareness to building product
conviction and purchase.

The growth stage is a good example to demonstrate how product life cycle strategies are
interrelated. In the growth stage, the firm must choose between a high market share and high
current profits. By spending a lot of money on product improvements promotion and distribution, the

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firm can reach a dominant position. However, for that it needs to give up maximum current profits,
hoping to make them up in the next stage.

3. Maturity stage

The maturity stage is the stage in which the product’s sales growth slows down or levels off after
reaching a peak. This will happen at some point, since the market becomes saturated. Generally,
the maturity stage lasts longer than the two preceding stages. Consequently, it poses strong
challenges to marketing management and needs a careful selection of product life cycle strategies.
Most products on the market are, indeed, in the maturity stage.

The slowdown in sales growth is due to many producers with many products to sell. Likewise, this
overcapacity results in greater competition. Since competitors start to mark down prices, increase
their advertising and sales promotions and increase their product development budgets to find better
versions of the product, a drop in profit occurs. Also, some of the weaker competitors drop out,
eventually leaving only well-established competitors in the industry.

The company’s main objective should be to maximize profit while defending the market
share.

To reach this objective, several product life cycle strategies are available. Although many products in
the maturity stage seem to remain unchanged for long periods, most successful ones are actually
adapted constantly to meet changing consumer needs. The reason is that the company cannot just
ride along with or defend the mature product – a good offence is the best defense. Therefore, the
firm should consider to modify the market, product and marketing mix. Modifying the market means
trying to increase consumption by finding new users and new market segments for the product. Also,
usage among present customers can be increased. Modifying the product refers to changing
characteristics such as quality, features, style or packaging to attract new users and inspire more
usage. And finally, modifying the marketing mix involves improving sales by changing one or more
marketing mix elements. For instance, prices could be cut to attract new users or competitors’
customers. The firm could also launch a better advertising campaigns or rely on aggressive sales
promotion.

4. Decline stage

Finally, product life cycle strategies for the decline stage must be chosen. The decline stage is the
stage in which the product’s sales decline. This happens to most product forms and brands at a
certain moment. The decline can either be slow, such as in the case of postage stamps, or rapid, as
has been the case with VHS tapes. Sales may plummet to zero, or they may drop to a low level
where they continue for many years.

Reasons for the decline in sales can be of various natures. For instance, technological advances,
shifts in consumer tastes and increased competition can play a key role. As sales and profits
decline, some competitors will withdraw from the market.

Also for the decline stage, careful selection of product life cycle strategies is required. The reason is
that carrying a weak product can be very costly to the firm, not just in profit terms. There are also
many hidden costs. For instance, a weak product may take up too much of management’s time. It
requires advertising and sales-force efforts that could better be used for other, more profitable
products in other stages. Most important may be the fact that carrying a weak product delays the

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search for replacements and creates a lopsided product mix. It also hurts current profits and
weakens the company’s foothold on the future.

Therefore, proper product life cycle strategies are critical. The company needs to pay more attention
to its aging products to identify products in the decline stage early. Then, the firm must take a
decision: maintain, harvest or drop the declining product.

The main objective in the decline stage should be to reduce expenditure. General strategies for
the decline stage include cutting prices, choosing a selective distribution by phasing out unprofitable
outlets and reduce advertising as well as sales promotion to the level needed to retain only the most
loyal customers.

If management decides to maintain the product or brand, repositioning or reinvigorating it may be an

option. The purpose behind these options is to move the product back into the growth stage of the
PLC. If management decides to harvest the product, costs need to be reduced and only the last
sales need to be harvested. However, this can only increase the company’s profits in the short-term.
Dropping the product from the product line may involve selling it to another firm or simply liquidate it
at salvage value.

In the following, all characteristics of the four product life cycle stages discussed are listed. For each,
product life cycle strategies with regard to product, price, and distribution, advertising and sales
promotion are identified. Choosing the right product life cycle strategies is crucial for the company’s
success in the long-term.

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Product Mix Strategies

Product mix, also known as product assortment, is the total number of product lines that a company
offers to its customers. The product lines may range from one to many and the company may have
many products under the same product line as well. All of these product lines when grouped
together form the product mix of the company.

The product mix is a subset of the marketing mix and is an important part of the business model of a
company.

Product Mix depends on many factors like

 Company Age
 Financial Standing
 Area of Operation
 Brand identity, etc.

Many new companies start with a limited width, length, depth and high consistency of the product
mix, while companies with good financial standing have wide, long, deep and less consistency of the
product mix. Area of operation and brand identity also affects its product mix.

PRODUCT MIX STRATEGIES:

The major product mix strategies (given by William Stanton and others) have been discussed briefly
as under:

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1. Expansion of Product Mix

Expansion of product mix implies increasing the number of product lines. New lines may be related
or unrelated to the present products. For example, Bajaj Company adds car (unrelated expansion) in
its product mix or may add new varieties in two wheelers and three wheelers. When company finds it
difficult to stand in market with existing product lines, it may decide to expand its product mix.

For example, Hindustan Unilever Limited has various products in its product mix such as:

 Toilet soaps, detergent cakes, washing powders, etc.

 Cosmetic products,
 Edible items,
 Shaving creams and blades,
 Pesticides, etc.

If company adds soft drink as a new product line, it is the example of expansion of product mix.

2. Contraction of Product Mix

Sometimes, a company contracts its product mix. Contraction consists of dropping or eliminating one
or more product lines or product items. Here, fat product lines are made thin. Some models or
varieties, which are not profitable, are eliminated. This strategy results into more profits from fewer
products. If Hindustan Unilever Limited decides to eliminate particular brand of toilet shop from the
toilet shop product line, it is example of contraction.

3. Deepening Product Mix Depth

Here, a company will not add new product lines, but expands one or more excising product lines.
Here, some product lines become fat from thin. For example, Hindustan Unilever Limited offering ten
varieties in its editable items decides to add four more varieties.

4. Alteration or Changes in Existing Products

Instead of developing completely a new product, marketer may improve one or more established
products. Improvement or alteration can be more profitable and less risky compared to completely a
new product. For example, Maruti Udyog Limited decides to improve fuel efficiency of existing
models. Modification is in forms of improvement of qualities or features or both.

5. Developing New Uses of Existing Products

This product mix strategy concerns with finding and communicating new uses of products. No
attempts are made to disturb product lines and product items. It is possible in terms of more
occasions, more quantity at a time, or more varied uses of existing product. For example, Coca Cola
may convince to use its soft drink along with lunch.

6. Trading Up

Trading up consists of adding the high-price-prestige products in its existing product line. The new
product is intended to strengthen the prestige and goodwill of the company. New prestigious product

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increases popularity of company and improves image in the mind of customers. By trading up
product mix strategy, demand of its cheap and ordinary products can be encouraged.

7. Trading Down

The trading down product mix strategy is quite opposite to trading up strategy. A company producing
and selling costly, prestigious, and premium quality products decides to add lower- priced items in its
costly and prestigious product lines.

Those who cannot afford the original high-priced products can buy less expensive products of the
same company. Trading down strategy leads to attract price-sensitive customers. Consumers can
buy the high status products of famous company at a low price.

8. Product Differentiation

This is a unique product mix strategy. This strategy involves no change in price, qualities, features,
or varieties. In short, products are not undergone any change. Product differentiation involves
establishing superiority of products over the competitors.

By using rigorous advertising, effective salesmanship, strong sales promotion techniques, and/or
publicity, the company tries to convince consumers that its products can offer more benefits,
services, and superior performance. Company can communicate the people the distinct benefits of
its products.

Product Mix Example

Coca-Cola has product brands like Minute Maid, Sprite, Fanta, Thumbs up, etc. under its name.
These constitute the width of the product mix. There are a total of 3500 products handled by the
Coca-Cola brand. These constitute the length. Minute Maid juice has different variants like apple
juice, mixed fruit, etc. They constitute the depth of the product line ‘Minute Maid’. Coca-Cola deals
majorly with drinking beverage products and hence has more product mix consistency.

Product Line Strategies

Product Line

A product line is a group of related products under a single brand sold by the same company.
Companies sell multiple product lines under their various brands. Companies often expand their
offerings by adding to existing product lines, because consumers are more likely to purchase
products from brands with which they are already familiar.

A product line is a group of items manufactured by a company which are similar or related.
Companies may develop one product line, or may diversify to appeal to the masses. Product line
strategies help the company determine which items to produce and how they should be marketed.

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Examples of Famous Product Lines

Microsoft Corporation as a brand sells several highly recognized product lines including Windows,
Office, Xbox and SharePoint. Nike Inc. has product lines for various sports, such as track and field,
basketball, and soccer. The company’s product lines include footwear, clothing and equipment.
Starbucks Corporation’s product lines include coffee, ice cream and drinkware.

Product Line Strategy

In most businesses, strategic decisions are implemented by changes in the components of the
product line or shifts in emphasis within a product line. In fact, most products actually belong to a line
sold through the same distribution channel and this is true for cars, dog foods, electronic equipment,
or even raw materials or travel tour packages. Also, each individual product is a quite rigid offering
which cannot easily meet the changes in the market place. Thus gradual changes in emphasis within
a product line make possible adaptive strategic moves that satisfy the needs for continuity in the
business and for discretion in respect to competitors. But this fundamental business aspect is often
overlooked. Marketeers wonder if they should decrease the price of their existing products to make
room for a newcomer. They wonder if they have enough products in the line. They wonder if they
should advertise the highest or the lowest part of their product line, and do not find easy ready
answers. In fact, most business or marketing concepts seem to be related to individual products or
different markets. Dealing with product line strategies is nevertheless one of the most important
areas in market strategy.

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Packaging and Labeling

PACKAGING:

According to William J. Stanton, “Packaging may be defined as the general group of activities in
product planning which involves designing and producing the container or wrapper for a product”.

Purpose of Packaging:

 Product Protection
 Product Attractiveness
 Product Identification
 Product Convenience
 Effective sales tool
 Segmentation
 Increase Marketing
 Bring Distribution efficiency

Packaging is the science, art and technology of enclosing or protecting products for distribution,
storage, sale, and use. Packaging also refers to the process of designing, evaluating, and producing
packages. Packaging can be described as a coordinated system of preparing goods for transport,
warehousing, logistics, sale, and end use. Packaging contains, protects, preserves, transports,
informs, and sells. In many countries it is fully integrated into government, business, institutional,
industrial, and personal use.

Packaging has four distinct marketing functions, according to the book “Essentials of Marketing,” by
Charles W. Lamb and colleagues. It contains and protects your product. It promotes your product. It
helps consumers use your product — for example, by allowing them to reseal it between uses.
Finally, packaging facilitates recycling and reduces environmental damage.

Packaging Types

Packaging consists of several different types. For example, a transport package or distribution
package is the package form used to ship, store, and handle the product or inner packages. Some
identify a consumer package as one that is directed toward a consumer or household.

It is sometimes convenient to categorize packages by layer or function: “Primary,” “secondary,” etc.

(i) Primary packaging is the material that first envelops the product and holds it. This usually is the
smallest unit of distribution or use and is the package that is in direct contact with the
contents. Primary packaging examples- Aerosol spray can, Bags-In-Boxes, Beverage can, Wine
box, Bottle, Blister pack, Carton, Cushioning, Envelope, Plastic bag, Plastic bottle.

(ii) Secondary packaging is outside the primary packaging—perhaps used to group primary
packages together. Secondary packaging examples– Box, Carton, Shrink wrap

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(iii) Tertiary packaging is used for bulk handling and shipping. Tertiary packaging examples–
Bale, Barrel, Crate, Container, Edge protector, Intermediate bulk, container, Pallet, Slip sheet,
Stretch wrap.

LABELING

The section of the product which conveys the details of the product and the seller is called as ‘labeling’.

According to Mason and Rath, “The label is an information tag, wrapper or seal attached to a
product’s package”.

Your product’s label delivers your sales message. You can explain what benefits you offer that
competitors don’t, for example, or promote a prize or discount. You also can develop brand goodwill
by showing customers you share their values. For instance, images of happy families, healthy
athletes and green pastures each speak to different types of consumers.

Labels also must fulfill your legal obligations. Food manufacturers, for example, must publish
detailed nutritional information in a specific format and employ marketing terms — such as “low-fat”
or “reduced cholesterol” — that conform to federal regulations. Finally, your product might need a
UPC, or universal product code, especially if it will be sold in high-volume retail outlets.

Role of Labeling:

 Identifies product.

 Grades product

 Promotes product

 Protects customers

 Provides information required by law

 Facilitates buying process

 Encourages self-service

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The objectives of packaging and package labeling

(i) Physical Protection: The objects enclosed in the package may require protection from, among
other things, shock, vibration, compression, temperature, etc.

(ii) Barrier Protection: A barrier from oxygen, water vapor, dust, etc., is often required. Package
permeability is a critical factor in design. Some packages contain desiccants, or oxygen absorbers,
to help extend shelf life. Modified atmospheres or controlled atmospheres are also maintained in
some food packages. Keeping the contents clean, fresh, and safe for the intended shelf life is a
primary function.

(iii) Containment or Agglomeration: Small objects are typically grouped together in one package
for reasons of efficiency. For example, a single box of 1,000 pencils requires less physical handling
than 1,000 single pencils. Liquids, powders, and flowables need containment.

(iv) Information transmission: Packages and labels communicate how to use, transport, recycle,
or dispose of the package or product. With pharmaceutical, food, medical, and chemical products,
some types of information are required by governments.

(v) Marketing: The packaging and labels can be used by marketers to encourage potential buyers
to purchase the product. Package design has been an important and constantly evolving
phenomenon for dozens of years. Marketing communications and graphic design are applied to the
surface of the package and (in many cases) the point of sale display.

(vi) Security: Packaging can play an important role in reducing the security risks of shipment.
Packages can be made with improved tamper resistance to deter tampering and also can have
tamper-evident features to help indicate tampering. Packages can be engineered to help reduce the
risks of package pilferage: Some package constructions are more resistant to pilferage and some
have pilfer-indicating seals. Packages may include authentication seals to help indicate that the
package and contents are not counterfeit. Packages also can include anti-theft devices, such as
dye-packs, RFID tags, or electronic article surveillance tags which can be activated or detected by
devices at exit points and require specialized tools to deactivate. Using packaging in this way is a
means of loss prevention.

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(vii) Convenience: Packages can have features that add convenience in distribution, handling,
display, sale, opening, re-closing, use, and reuse.

(viii) Portion Control: Single-serving or single-dosage packaging has a precise amount of contents
to control usage. Bulk commodities (such as salt) can be divided into packages that are a more
suitable size for individual households. It also aids the control of inventory: Selling sealed one-liter
bottles of milk, rather than having people bring their own bottles to fill themselves.

Pricing Decisions:

Pricing can be defined as the task of deciding the monetary value of an idea, a product or a
service by the marketing manager before he sells it to his target customers.

Pricing Concepts for Establishing Value:

Key Terms:

Price: The overall sacrifice a consumer is willing to make — money, time, energy — to acquire a specific
product or service.

Profit Orientation: A company objective that can be implemented by focusing on target profit pricing,
maximizing profits, or target return pricing.

Maximizing Profits: A profit strategy that relies primarily on economic theory. If a firm can accurately
specify a mathematical model that captures all the factors required to explain and predict sales and
profits, it should be able to identify the price at which its profits are maximized.

Target Return Pricing: A pricing strategy implemented by firms less concerned with the absolute level of
profits and more interested in the rate at which their profits are generated relative to their investments;
designed to produce a specific return on investment, usually expressed as a percentage of sales.

Sales Orientation: A company objective based on the belief that increasing sales will help the firm more
than will increasing profits.

Premium Pricing: A competitor-based pricing method by which the firm deliberately prices a product
above the prices set for competing products to capture those consumers who always shop for the best
or for whom price does not matter.

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Competitor Orientation: A company objective based on the premise that the firm should measure itself
primarily against its competition.

Competitive Parity: A firm’s strategy of setting prices that are similar to those of major competitors.

Status Quo Pricing: A competitor-oriented strategy in which a firm changes prices only to meet those of
competition.

Customer Orientation: A company objective based on the premise that the firm should measure itself
primarily according to whether it meets its customers’ needs.

Demand Curve: Shows how many units of a product or service consumers will demand during a specific
period at different prices.

Prestige Products or Services: Those that consumers purchase for status rather than functionality.

Price Elasticity of Demand: Measures how changes in a price effect the quantity of the product
demanded; specifically the ratio of the percentage change in quantity demanded to the percentage
change in price.

Elastic: Refers to a market for a product or service that is price sensitive; that is, relatively small changes
in price will generate fairly large changes in the quantity demanded.

Inelastic: Refers to a market for a product or service that is price insensitive; that is, relatively small
changes in price will generate fairly small changes in the quantity demand.

Dynamic Pricing: Refers to the process of charging different prices for goods or services based on the
type of customer, time of day, week, or even season, and level of demand.

Individualized Pricing: (SAME AS DYNAMIC PRICING)

Income Effect: Refers to the change in the quantity of a product demanded by consumers due to a
change in their income.

Substitution Effect: Refers to a consumer’s ability to substitute other products for the focal brand, thus
increasing the price elasticity of demand for the focal brand.

Cross-Price Elasticity: The percentage change in demand for Product A that occurs to a response to a
percentage change in price of Product B.

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Complementary Products: Products whose demand curves are positively related, such that they rise or
fall together; a percentage increase in demand for one results in a percentage increase in demand for
the other.

Substitute Products: Products for which changes in demand are negatively related; that is, a percentage
increase in the quantity demanded for Product A results in a percentage decrease in the quantity
demanded for Product B.

Variable Costs: Those costs, primarily labor and materials, that vary with production volume.

Fixed Costs: Those costs that remain essentially at the same level, regardless of any changes in the
volume of production.

Total Cost: The sum of the variable and fixed costs.

Break-Even Analysis: Technique used to examine the relationships among cost, price, revenue, and
profit over different levels of production and sales to determine the break-even point.

Break-Even Point: The point at which the number of units sold generates just enough revenue to equal
the total costs; at this point, profits are zero.

Contribution per Unit: Equals the price less the variable cost per unit. Variable used to determine the
break-even point in units.

Monopoly: One firm provides the product or service in a particular industry.

Oligopolistic Competition: Occurs when only a few firms dominate a market.

Price War: Occurs when two or more firms compete primarily by lowering their prices.

Monopolistic Competition: Occurs when there are many firms that sell closely related but not
homogeneous products; these products may be viewed as substitutes but are not perfect substitutes.

Pure Competition: Occurs when different companies sell commodity products that consumers perceive
as substitutable; price usually is set according to the laws of supply and demand.

Gray Market: Employs irregular but not necessarily illegal methods; generally, it legally circumvents
authorized channels of distribution to sell goods at prices lower than those intended by the
manufacturer.

Five C’s of Pricing:

1. Competition
2. Costs

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3. Company Objectives
4. Customers
5. Channel Members

Pricing Strategies:
1. Value Based Pricing:

Value-based pricing is a strategy of setting prices primarily based on a consumer's

perceived value of a product or service. Value pricing means that companies base their
pricing on how much the customer believes a product is worth.

Value-based pricing is different than "cost-plus" pricing, which factors the costs of
production into the pricing calculation. Companies that offer unique or highly valuable
features or services are better-positioned to take advantage of the value based
pricing model than companies that chiefly sell commoditized items.

 Value-based pricing is based on a consumer's perceived value of the product or service

in question.
 Value pricing means that companies base their pricing on how much the customer
believes a product is worth.
 Unique and highly valuable products are best-positioned to take advantage of the value
pricing model.
 Commoditized items are poorly positioned to use value pricing.
 Value pricing is different from cost-plus pricing, which factors the costs of production
into pricing.

2. Cost Based Pricing:

Cost-based pricing refers to a pricing method in which some percentage of desired
profit margins is added to the cost of the product to obtain the final price. In other
words, cost-based pricing can be defined as a pricing method in which a certain
percentage of the total cost of production is added to the cost of the product to
determine its selling price.
3. Competition-based Pricing:
Competition-based pricing refers to a method in which an organization considers the
prices of competitors’ products to set the prices of its own products. The organization
may charge higher, lower, or equal prices as compared to the prices of its competitors.

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The aviation industry is the best example of competition-based pricing where airlines
charge the same or fewer prices for same routes as charged by their competitors. In
addition, the introductory prices charged by publishing organizations for textbooks are
determined according to the competitors’ prices.
4. New Product Pricing:

(i) Rapid Skimming Strategy

Rapid Skimming Strategy is an expensive initiative combining high price and high promotion,
directed at a low aware, low willingness-to-buy market. This strategy is very useful if the
market size and potential is very high and the likelihood of the competition to quickly adopt
and adapt to the offer is also very high.
When a firm has a short-term goal of profit maximisation and an increase in the sales volume,
it can resort to this strategy. The target markets are the Early Adopters and Innovators who do
not mind paying the high price for the privilege of being the early users.
(ii) Slow Skimming Strategy
Slow Skimming Strategy is used when the firm is confident that it can recoup its investments
insufficient time. This could be due to lack of competition (public sector undertakings,
infrastructure services like airlines, telecommunication, etc., are some examples), the
requirement of heavy investments in technology and systems to compete, etc.
The target market, mostly business and industrial users pay for the high price as the product is
exclusive and vital for their competitiveness.

(i) Rapid Penetration Strategy

If the firm has a long-term objective of being a market leader, market share and profit
maximisation, and if there exist entry barriers like intensive competition, then this strategy is
useful.

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ICICI Bank as also Korean firms like Samsung and LG entered India with their dreaded retailing,
using rapid penetration strategy. The price of their offers is lower but there is high visibility in
the media. Big Bazar, the discounter major has successfully used this strategy to make its mark.

(ii) Slow Penetration Strategy

When the market size is large, well aware of the products and service offer and sensitive to
price but the competitive threats are almost non-existent, this strategy is used. The long-term
objective of the firm is to maximise sales or profits.

Factors Affecting the Pricing Decisions:

Price is the only element of marketing mix that helps in generating income.

Therefore, a marketer should adopt a well-planned approach for pricing decisions.

The marketer should know the factors that influence the pricing decisions before setting the
price of a product.

1. Organizational Objectives

Affect the pricing decisions to a great extent. The marketers should set the prices as per the
organizational goals. For instance, an organization has set a goal to produce quality products,
thus, the prices will be set according to the quality of products. Similarly, if the organization has
a goal to increase sales by 18% every year, then the reasonable prices have to be set to increase
the demand of the product.

2. Legal and Regulatory Issues

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Persuade marketers to change price decisions. The legal and regulatory laws set prices on
various products, such as insurance and dairy items. These laws may lead to the fixing, freezing,
or controlling of prices at minimum or maximum levels.

3. Competition

Affects price significantly. The organization matches the prices with the competitors and adjusts
the prices more or less than the competitors. The organization also assesses that how the
competitors respond to changes in the prices.

4. Distribution Channels

Implies a pathway through which the final products of manufacturers reach the end users. If
the distribution channel is large, price of the product will be high and if the distribution channel
is short, the price of the product will be low. Thus, these are the major factors that influence
the pricing decisions.

5. Competitor’s Pricing Policies

Influence the pricing policies of the organizations. The price of a product should be determined
in such a way that it should easily face price competition.

6. Price Elasticity of Demand:

Refers to change in demand of a product due to change in price.

There are three situations that arise under it:

 Products that have inelastic demand will be highly priced

 Products that have more than elastic demand will be priced low
 Products that have elastic demand will be reasonably priced.

7. Pricing Objectives

Help an organization in determining price decisions. For instance, an organization has a pricing
objective to increase the market share through low pricing. Therefore, it needs to set the prices
less than the competitor prices to gain the market share. Giving rebates and discounts on
products is also a price objective that influences the customer’s decisions to buy a product.

8. Product Characteristics

Include the nature of the product, substitutes of the product, stage of life-cycle of the product,
and product diversification.

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9. Costs

Influence the price setting decisions of an organization. The organization may sell products at
prices less than that of the competitors even if it is incurring high costs. By following this
strategy, the organization can increase sales volumes in the short run but cannot survive in the
long run. Thus, the marketers analyze the costs before setting the prices to minimize losses.
Costs include cost of raw materials, selling and distribution overheads, cost of advertisement
and sales promotion and office and administration overheads.

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