Month: November 2021

Market Skimming

Price skimming is a price setting strategy that a firm can employ when launching a product or service for the first time. By following this price skimming method and capturing the extra profit a firm is able to recoup its sunk costs quicker as well as profit off of a higher price in the market before new competition enters and lowers the market price. It has become a relatively common practice for managers in new and growing market, introducing prices high and dropping them over time.

Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the consumer surplus early in the product life cycle in order to exploit a monopolistic position or the low price sensitivity of innovators.

Price skimming happens when a marketer initially offers an item at a high price that consumers with the strongest desire and funds to purchase it will, and then as that demand is depleted the price gets lowered to the next layer of customer desire in the market.

Limitations of price skimming

• It is effective only when the firm is facing an inelastic demand curve. If the long run demand curve is elastic (as in the adjacent diagram), market equilibrium will be achieved by quantity changes rather than price changes. Penetration pricing is a more suitable strategy in this case. Price changes by any one firm will be matched by other firms resulting in a rapid growth in industry volume. Dominant market share will typically be obtained by a low cost producer that pursues a penetration strategy.
• A price skimmer must be careful with the law. Price discrimination is illegal in many jurisdictions, but yield management is not. Price skimming can be considered either a form of price discrimination or a form of yield management. Price discrimination uses market characteristics (such as price elasticity) to adjust prices, whereas yield management uses product characteristics. Marketers see this legal distinction as quaint since in almost all cases market characteristics correlate highly with product characteristics. If using a skimming strategy, a marketer must speak and think in terms of product characteristics to stay on the right side of the law.
• The inventory turn rate can be very low for skimmed products. This could cause problems for the manufacturer’s distribution chain. It may be necessary to give retailers higher margins to convince them to handle the product enthusiastically.
• Price skimming can attract more competition to the market due to firms intrigued by the high price margins and introducing their own product, also eroding the inelasticity of the demand curve.
• Skimming results in a slower rate of product diffusion and adoption. This results in a higher level of untapped demand, giving competitors time to either imitate the product or leapfrog it with an innovation. If competitors do this, the window of opportunity will have been lost. The slower rate of adoption can also have an effect on brand loyalty as fewer customers get their hands on or are aware of the item being sold.
• The manufacturer could develop negative publicity if they lower the price too fast and without significant product changes. Some early purchasers will feel they have been ripped off. They will feel it would have been better to wait and purchase the product at a much lower price. This negative sentiment will be transferred to the brand and the company as a whole.
• High margins may make the firm inefficient. There will be less incentive to keep costs under control. Inefficient practices will become established making it difficult to compete on value or price.
• The lower quantity demand for the item may mean a firm can not take advantage of economies of scale.

When considering a relatively new product with a limited supply and a short life cycle, price skimming can be introduced as a strategy during the first stage of the product life cycle, because some customers want to be the first to buy the product and are willing to pay the premium. Then the price will go down after a certain selling period, which is also referred to as market exit time.

Price skimming occurs for example in the luxury car and consumer electronics markets. In consumer electronics, there is a confounding factor that there is typically high price deflation due to continual reductions in manufacturing cost and improvements in product quality for example, a printer priced at $200 today would have sold for a far higher price a decade ago.

Market Penetration

Market penetration refers to the successful selling of a product or service in a specific market. It is measured by the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market penetration is the key for a business growth strategy stemming from the Ansoff Matrix. H. Igor Ansoff first devised and published the Ansoff Matrix in the Harvard Business Review in 1957, within an article titled “Strategies for Diversification”. The grid/matrix is utilized across businesses to help evaluate and determine the next stages the company must take in order to grow and the risks associated with the chosen strategy. With numerous options available, this matrix helps narrow down the best fit for an organization.

This strategy involves selling current products or services to the existing market in order to obtain a higher market share. This could involve persuading current customers to buy more and new customers to start buying or even converting customers from their competitors. This could be implemented using methods such as competitive pricing, increasing marketing communications, or utilizing reward systems such as loyalty points/discounts. New strategies involve utilizing pathways and finding new ways to improve profits and increase sales and productivity in order to stay competitive.

Strategies

Price adjustments

One of the common market penetration strategies is to lower the products’ prices. Businesses aim to generate more sales volume by increasing the number of products purchased by putting on lower prices (price competition) for consumers comparing to the alternative goods. Companies may alternatively pursue strategies of higher prices depending on the demand elasticity of the product, in the hope that it will generate an increased sales volume and result in higher market penetration.

Penetration pricing

Penetration pricing is a marketing technique which is used to gain market share by selling a new product for a price that is significantly lower than its competitors. The company begins to raise the price of the product once it has achieved a large customer base and market share. Penetration pricing is frequently used by network provider and cable or satellite services companies. Many of the providers will initially offer an unbeatable price to attract customers into switching to their service and after the discount period has ended, the price increases dramatically and some customers will be forced to stay with the provider because of contract issues.

Penetration pricing benefits from the influence of word-of-mouth advertising, allowing customers to spread the words of how affordable the products are prior to business increasing the prices. It will also discourage and disadvantage competitors who are not willing to undersell and losing sales to others. However, businesses have to ensure they have enough capital to stay in surplus before the price is raised up again.

Increased promotion

Businesses can also increase their market penetration by offering promotions to customers. A promotion is a strategy often linked with pricing, used to raise awareness of the brand and generate profit to maximise their market share.

More distribution channels

A distribution channel is the connection between businesses and intermediaries before a good or service is purchased by the consumers. Distribution can also contribute to sales volumes for businesses. It can increase consumer awareness, change the strategies of competitors and alter the consumer’s perception of the product and the brand, and is another method to increase market penetration.

Product improvements

Product management is crucial to a high market penetration in the targeted market and by improving the quality of products, businesses are able to attract and out-quality the competitors’ products to match customers’ requirements and eventually lead to more sales made. Product improvements can be utilised to create new interests in a declining product, for example by changing the design of the packaging or material/ingredients.

Market development

Market development aims at non-buying shoppers in targeted markets and new customers in order to maximise the potential market. Before developing a new market, companies should consider all the risks associated with the decision including its profitability. If a company is confident about their products, believes in their strengths, and is enticing to new consumers, then market development is a suitable strategy for the business.

Psychological pricing is the business practices of setting prices lower than a whole number. The idea behind psychological pricing is that customers will read the slightly lowered price and treat it lower than the price actually is. An example of psychological pricing is an item that is priced Rs. 399 but conveyed by the consumer as Rs. 300 and not Rs. 400 , treating Rs. 399 as a lower price than Rs. 4.00.

Leader Pricing

An adequate system of price setting is fundamental for any independent venture to survive in this competitive world. Adding overall revenues and advertising techniques, pricing policies make a connection among clients and an organization’s accounts. While numerous techniques and innovative strategies for pricing are accessible to retailers, leader pricing, otherwise called loss leader pricing, includes selling things with decreased overall revenue with the expectation that less price will pull in extra clients to a store.

For instance, a product costs 1k in its making and then is sold at a lesser price, i.e., 6k. It is sold at a loss of 1k. This type of pricing is known as leader pricing when a product is sold at a price less than its cost.

Purpose

• The strategy is mainly targeted to attract customers to the business by using price as a weapon to fight competitors.
• The prime purpose of loss leader pricing is to gain market penetration and attain a customer base.
• It is aimed at targeting customers, making them buy their product, spread through a word-of-mouth pattern, retain the customers and eventually sell them other products or complimentary products by keeping a higher profit margin. Thus, what the business is doing is that first selling certain products at zero or negative profit margin and afterward selling some other products at a much higher profit margin to compensate for the initial losses made.
• This strategy needs to be properly executed as it may lead to the bankruptcy of the business if there is no proper business model or planning.
• The main purpose of this strategy is to draw more traffic from the competitors and in this way generate more sales.
• This strategy works best in the way of introducing the customer the cheapest product or services with the hope of building a bigger customer base and generating recurring revenue in the future.

Leader Pricing Types

Different types of businesses use this pricing strategy for different purposes.

• Some companies use this pricing to clear off their inventory. The lower price creates more demand and hence it becomes easier to sell these products in high volume.
• Some companies use it to sell a new product. This saves on their marketing cost of acquiring new customers through some other mediums like advertisements.
• Retailers use this pricing strategy to attract more customers in their shops. But since they don’t want to make loss, they price some other product higher so as to compensate for the loss made by the loss leader priced product. Sometimes it also pays off when the high volume of sales compensates for the loss made by lowering the price.

Odd Pricing

Odd even pricing is extremely common to find these days and is being used widely. Many producers have started using this for a range of products. Some shops that give out discounts to their customers are also using this technique.

The concept is extremely simple to understand. You would have come across several products being priced in the following manner: Rs. 9,999 or Rs. 4449 or Rs. 14,499 or Rs. 99 etc.

Odd-Even pricing technique prices products at an odd number which is slightly less that a rounded off even number. So instead of pricing a product at Rs 1020, you discount it and price it at rs 999. This 21 rs reduction will give much more turnover because people will judge the product being priced at 900 rs and not 1000 rs.

Even pricing is when multiples of 10 are used to price a product. So a small scoop of ice cream will be 30 rs, a larger scoop will be 60 rs and even larger will be 90 rs. This makes the user understand the quantity which he will be getting against the price.

Besides quantity, Even pricing can be used to denote quality. Pricing at 99 or 49 has become so common, that pricing at even values can be a standout from the crowd. However, even pricing is used very seldom and in the combination of Odd Even pricing, odd pricing takes the upper hand.

Some people are of the opinion that this was initially done so that the cashier would be forced to open the change drawer to hand over change to a customer, thus being forced to record a transaction and make it legitimate. However, research on consumer behaviour has shown that this kind of pricing has a psychological effect on the consumer’s mind where he/she, for example, considers a price of Rs. 9,999 to be just above Rs. 9,000 rather than just below Rs. 10,000.

Psychological effect on customers

Odd pricing is believed to have a considerable impact on a customer’s mind. The illusion of much cheaper products compels a buying response. Also it is believed that because consumers are exposed to a continuous flow of prices; they store only the more valuable first digits of a number. This is so because the memory processing time is slower in humans. Odd pricing is also believed to put across the impression that goods are marked at the lowest possible price because it is a belief that even prices is an outcome of the retailer rounding up the price to a whole number. Odd prices for the same reason even give an impression of honesty of a retailer.

Single Pricing

Single price policy refers to the offering of all goods at a single price (e.g., everything for Rs. 500, or Rs. 1000, etc.).

The single price method is the trading method where orders are send to the ISE Stock Market Trading System without any matching for a certain period of time and at the end of that period, a price level is calculated which enables to execute the maximum amount of transactions, and all the transactions are executed over that price level.

Stages of the Single Price Method:

The single price method is basically comprised of two stages:

Order Collection: During this time period, orders are send to the System, and ranked according to price and time priority rules. There is no matching. In this process, the order book and depth information are not displayed.

Price Determination and Execution of Transactions: During this stage which starts immediately after the order collection stage, the orders sent to the system are evaluated, whereupon a price at which maximum quantity of transactions can be performed is determined, and orders which are eligible in terms of price and time priorities are converted to a transaction over that single price level provided that they have sufficient amount of counter orders. At this stage, all market inquiries are available in the electronic trading system.

Orders which remain unexecuted at the opening stage of the single price determination processes within the same session are carried to the next single price process. If a daily order is placed, the remaining orders may be carried from the first session to the second session.

Multiple Pricing

A price multiple is any ratio that uses the share price of a company in conjunction with some specific per-share financial metric for a snapshot on valuation. The share price is typically divided by a chosen per-share metric to form a ratio. Price multiples enable investors to evaluate the market value of a company’s stock in relation to a fundamental metric, such as earnings, cash flow, or book value.

As the name suggests, multiple pricing refers to the practice of offering more than one price for the same product. The supplier charges different prices based on:

• Type of customer
• Ordered Quantity
• Delivery time
• Payment terms etc.

Advantages:

• It helps the customers or buyers to get a better deal and reduces the per-unit price of the product.
• Multiple unit pricing helps in faster liquidation of the products. The stocks are consumed faster, which helps to get more sale per unit of time for the organization.
• It helps new products to establish themselves by providing affordable prices to the customers and providing lucrative prices. This makes the product more economic ergo attractive to the customers.

Disadvantages:

• Dealing with multiple unit pricing is cumbersome in case of record keeping. Multiple unit pricing is difficult to maintain in accounting books.
• Multiple unit pricing reduces the profit margin of the products for the companies. Not only the companies, but it also reduces the profit margins of middlemen like retailers and distributors.

Anchor Pricing

Anchor Pricing is the concept of making a product that was first offered seem cheaper when it put alongside another product. An example of this would be initially offering a customer a product that costs Rs. 300 but then showing and comparing a more expensive alternative, say Rs. 450 to that customer. That first product then acts as an anchor as customers will use that first product as a reference point for selecting a product to purchase. Customers will perceive the price of two products relative to one another, and the customer uses the first product offered as a comparison point for other products as well.

Advantages:

Avoiding risks

Customers enjoy taking risks every now and then, but they are wary when it comes to leaving the pack and walking towards extremes. This is something that is seen when choosing between three different products of different sizes. Customers tend to pick the middle product because it is not the smallest/doesn’t have the least amount of features, and it isn’t the most expensive.

Decisions, decisions, decisions

Customers tend to be very indecisive when it comes to choosing what product to buy when they have many different products to choose from. This can become a problem because customers can walk away if they are unable to decide what product is best for them. Firms can avoid this problem by sticking a ‘most popular’ or ‘customer favourite’ label on the product.

Price perception

The price of a product is relative, it is essentially never cheap or expensive for that matter. Because the price of a product is a relative concept, customers tend to compare one product or service to another. A customer might be on the market for a new computer monitor. That same customer might look at a 32 inch monitor that costs Rs. 20,000 and feel as though it is a little bit too expensive. What retailers will do in this situation is offer another monitor that is 35 inches but costs Rs. 20,000 more. The customer will usually think that the 32 inch monitor is a much better deal and will purchase that monitor. The key point that should be mentioned is that the retailer intended for that to happen, using that Rs. 40,000 monitor as an anchor so that the customer will think that they are getting a bargain when they purchase the Rs. 20,000 monitor.

Variable Pricing

Variable pricing is a pricing strategy for products. Traditional examples include auctions, stock markets, foreign exchange markets, bargaining, electricity, and discounts. More recent examples, driven in part by reduced transaction costs using modern information technology, include yield management and some forms of congestion pricing.

Due to advances in technology, another variant of variable pricing, called “real-time pricing”, has arisen. In some markets events occur so fast that there is insufficient time to either set a fixed price or engage in lengthy negotiations. By the time one has all the information to determine a price, everything has changed. Examples include airline tickets, stock markets, and foreign exchange markets. In each case prices can change in less than a second. By linking all the market participants through internet connections, price changes are disseminated instantly as they occur.

A variant of real time pricing is online auction business model (such as eBay). All participants can view the price changes soon after they occur (technically this is not quite real time pricing because there is a delay built into the eBay system). Traditional auctions are inefficient because they require bidders (or their representatives) to be physically present. By solving this problem, online auctions reduce the transaction costs for bidders, increase the number of bidders, and increase the average bid price.

Sales are a traditional example of discriminatory pricing. During the Christmas shopping season prices are high. Come the new year there are sales. Other examples of sales occur on various goods such as appliances and cars. Electronics, clothes washers/dryers, etc. typically have a season of the year where sales occur. Cars are sold at discounts before the new model year. Discriminatory pricing is not always bad. It helps people who will/cannot pay “list” or even street price an opportunity to buy at a better price if they are willing to wait and/or to buy older models. At the same time it helps merchants clear out old stock and/or items for which they misjudged the market.

This kind of price discrimination is largely and widely used by rental car companies. Usually, those firms need to know their customers’ country of residence so they can adjust the price. Depending on the answer it is possible to get significantly different quotes for the same vehicle, date and time of rental. It is also true when accessing the rental car site through the .com main site.

Electricity real-time pricing allows charging higher prices when demand is highest, which is expected to reduce actual use during peak demand periods, which increases production costs because it drives the expansion of costly equipment.

Models

Variable Pricing based on Location:

Now, this pricing model works on the basis of the location of the store. Stores which are located at the central or mainstream location of the town. Whereas the same store located at the less popular place might sell the same product at lower rates.

The reason behind adopting this model is to increase the foot traffic in those stores. For example, a store of the same brand might sell the same product at high prices than a store located in suburban areas.

Variable Pricing Based on demand:

This model of variable pricing is designed based on the demand for the product. Some products and services are more in demand during a certain period.

During the demand period, the prices of the products raised and are lowered when they are not in demand to let new customers try that product.

For example, the price of hotel rooms at tourist places peak up during the rush season, and another example of this variable pricing model based on demand is the sale on off-season clothes. Usually, stores sell clothes of the winter season on heavy discounts during the summer season.

Variable Pricing Based on Groups:

This is a smart variable pricing model. In this model, the consumers of a product or service are divided into different groups based on their location, type, and demographic information, etc. Then the same product is sold to these different groups at different prices on the basis of their categorization.

However, this model is not liked by most consumers, and there have been many lawsuits filed against this model of variable pricing.

Price Discrimination

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers’ willingness to pay and in the elasticity of their demand. For price discrimination to succeed, a firm must have market power, such as a dominant market share, product uniqueness, sole pricing power, etc. All prices under price discrimination are higher than the equilibrium price in a perfectly-competitive market. However, some prices under price discrimination may be lower than the price charged by a single-price monopolist.

The term “differential pricing” is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product, but it can also refer to a combination of price differentiation and product differentiation. Other terms used to refer to price discrimination include “equity pricing“, “preferential pricing“, “dual pricing” and “tiered pricing”. Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is:

• “Personalized pricing” (or first-degree price differentiation): Selling to each customer at a different price; this is also called one-to-one marketing. The optimal incarnation of this is called “perfect price discrimination” and maximizes the price that each customer is willing to pay.
• “Product versioning” or simply “Versioning” (or second-degree price differentiation): Offering a product line by creating slightly different products for the purpose of price differentiation, i.e. a vertical product line. Another name given to versioning is “menu pricing”.
• “Group pricing” (or third-degree price differentiation): dividing the market into segments and charging a different price to each segment (but the same price to each member of that segment). This is essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized pricing. Typical examples include student discounts and seniors’ discounts.

Different Types of Price Discrimination

First Degree Price Discrimination

Also known as perfect price discrimination, first-degree price discrimination involves charging consumers the maximum price that they are willing to pay for a good or service. Here, consumer surplus is entirely captured by the firm. In practice, a consumer’s maximum willingness to pay is difficult to determine. Therefore, such a pricing strategy is rarely employed.

Second Degree Price Discrimination

Second-degree price discrimination involves charging consumers a different price for the amount or quantity consumed. Examples include:

• A phone plan that charges a higher rate after a determined number of minutes are used
• Reward cards that provide frequent shoppers with a discount on future products
• Quantity discounts for consumers that purchase a specified number of more of a certain good

Third Degree Price Discrimination

Also known as group price discrimination, third-degree price discrimination involves charging different prices depending on a particular market segment or consumer group. It is commonly seen in the entertainment industry.

A lifestyle brand is a brand that attempts to embody the values, aspirations, interests, attitudes, or opinions of a group or a culture for marketing purposes. Lifestyle brands seek to inspire, guide, and motivate people, with the goal of their products contributing to the definition of the consumer’s way of life. As such, they are closely associated with the advertising and other promotions used to gain mind share in their target market. They often operate from an ideology, hoping to attract a relatively high number of people and ultimately become a recognised social phenomenon.

A lifestyle brand is an ideology created by a particular organisation’s brand. An organisation achieves a lifestyle brand by focusing on evoking an emotional connection with its customers, creating a desire for a consumer to be affiliated with a particular group or brand. Furthermore, the consumer will believe that their identity will be reinforced if they publicly associate themselves with a particular lifestyle brand, such as expression by using a brand on social media.

As individuals have different identities based on their personal experiences, choices or background (including social class, ethnicity or culture), an organisation must understand to whom it directs its brand. By operating off a lifestyle brand ideology, an organisation’s ultimate goal is to become a recognised social phenomenon.

Lifestyle brand marketing uses market research to segment target markets based on psychographics rather than demographics.

Factors that influence consumer decision process

It is evident that consumers in our modern world continually face multiple decisions with regard to product choice due to many competing products, such aspects as a products attributes have been shown to be involved in the consumer decision process. A number of factors can be identified that affect a consumer’s choice of product brand which influences their lifestyle. Consumers are known to choose a brand that is acceptable to their self-image that they are trying to portray. This has left companies having to re-establish and position their products to ensure they meet the lifestyle a consumer is trying to obtain. They have an opportunity to refine their target market which would limit competition due to a reduced number in consumers who would be attracted to their specific brand because of the way they might perceive their lifestyle.

Consumers have a tendency to evaluate product attributes as opposed to a case-by-case assessment. There is the need for brands to be understood and how they can be influential with regard to consumer’s decision-making considerations. Three processes are identified as being intertwined in choice behaviour. These are psychological, sociological and economic processes. Within these three processes lifestyle of the consumer also becomes intertwined with consumers tending to choose a brand they feel is congruent with their self-image, their identity who they feel they are and what they connect with the most. A consumer’s values, goals and vision for their life along with aesthetic style are all reflective of individual lifestyle.

Consumer self-expression

Consumers use brands to express their identity. The need for self-expression can be related to the need for acceptance within society and the societal view on brands and how different brands portray income or wealth. An advantage to lifestyle brands is that consumers can express their identity in a number of ways. This is a dominating factor that would lead on to the consumer adopting a certain lifestyle. Brands allow for customers to express themselves and portray their identity and lifestyle. Lifestyle brands in particular portray a type of meaning that allows a particular reference group to attach themselves based on their lifestyle, values or beliefs.

Perceived brand value

If a consumer loves fashion this will have a positive effect on his/her willingness to pay for a luxury, top-end brand. In order for a lifestyle brand to be successful and dominate market share it needs to enhance customers experiences and provide more than just a product. Consumers are more willing and likely to purchase a brand that establishes itself as to value and satisfaction. Brand value is defined as comparing focal brands with unbranded products that have had the same level or same ways of marketing to consumers, as well as adopting the same product attributes.

Luxury brands target those that have an extreme lifestyle. Price is never a factor. Three categories are identified as measuring brand value: brand loyalty, perceived value and brand awareness/association. Consumers associate themselves with luxury fashion brands to portray their lifestyle and separate them from the rest. Social value is an aspect that relates to consumers’ desire to obtain luxury brands that they hope will offer them a symbolic part of a group or culture. There are emotional factors that are connected to the consumption of a luxury brand: for example those that bring pleasure or excitement. Consumers who purchase luxury brands tend to have a strong social function within their social class.

Retail brands

Lifestyle retail branding is the way in which retailers refine their products or services to interest lifestyles in specific market segments. Examples of lifestyle retail brands include Laura Ashley, GAP and Benneton. These retailers offer a distinct and recognised set of values to consumers. Over time, a number of retailers have come up with their own brand strategies and are now seen as lifestyle retail brands because they are targeting consumers who adopt their brand to align themselves with a lifestyle they want to obtain.

Psychology

It is important for an organisation to understand its brand’s role amongst consumers. To achieve this, an organisation must use the following aspects of the lifestyle brand model.

Brand categorisation

This is defined as a consumer sorting products or brands into categories, based on their past experiences with that brand. It is used to avoid confusion, as consumers may be overwhelmed when comparing one product with an extensive range of other brands of the same product. Categorisation helps consumers evaluate the quality of the product. For example, a consumer may choose to purchase an Apple iPhone over a Huawei mobile phone, as they may believe that the iPhone has a better camera quality.

Brand affect

This aspect is defined as the effect or influence a brand may have upon an organisation and its consumers. For example, Whole Foods can affect a consumer by going the extra mile to offer organic foods products that suit that particular consumer’s needs.

Brand personality

This is when a brand encompasses a consistent set of traits in which the consumer can relate. For example, Crossfit is a lifestyle brand which encompasses the idea of pushing yourself for your fitness. This idea is consistent on a global level. Through this lifestyle, consumers or participants have the opportunity to feel a part of a group of healthy, motivated fitness fanatics.

Brand symbolism

This is defined as the strong symbolism that a brand transmits to its consumers, which is adopted for its social benefit. It allows consumers to feel as though they can express themselves through a form of identity, whilst being provided with a sense of belonging to a group (Wu, Klink & Guo, 2013). For example, Tiffany & Co. are a jewellery brand which offer affordable and expensive, high-quality jewellery products. When a person sees a consumer wearing its product in public, that person may aim to own a piece of Tiffany & Co. jewellery themselves, with the aim to seek social benefits or fit into a particular group.

Brand attachment

Attachment is brought about when people form an emotional connection between themselves and a brand. For example, Coca-Cola uses advertisements to portray its happy lifestyle to consumers. These advertisements are used to form an emotional connection with the audience. Through the use of the “Open happiness” slogan, consumers may believe that by purchasing and consuming a Coca-Cola drink, they will feel like they are happy and having fun.

The main process of marketing is buying. There are two aspects of exchange, i.e buying and selling. In the absence of buying, exchange or marketing becomes impossible. Without buying, selling cannot be done, similarly, without selling buying cannot be.

Buying and selling are the two functions to be performed at a time in marketing process. Buying goods for use or resale is called buying function. Taking goods by paying certain price to the seller is buying.

In marketing, the function of buying does not mean only buying something. It is used in broad sense. Buying function of marketing includes the functions such as determining necessary goods, finding out the supply sources, selecting quantity, quality, grade, size, deciding on price, discount, delivery date, means of transport and other agreement and finally transferring ownership.

So, producers/manufacturers, wholesalers, retailers or ultimate consumers buy goods. So, buyers can be divided in three classes as manufacturers, middlemen and ultimate consumers.

1. Manufacturers

Manufacturers buy goods to use in production. They may buy raw materials, semi-finished goods and parts etc. to use in producing certain goods. They may buy capital goods such as machines, tools, manufacturing plant, building etc. They also may buy necessary supplies and operating materials to facilitate production process. Such buyers are called industrial buyers.

2. Middlemen

Wholesalers and retailers also buy goods. They are called middlemen. Wholesalers buy bulk quantity of goods directly from manufacturers to sell to retailers or consumers. Similarly, retailers buy goods directly from manufacturers or wholesalers to sell to ultimate consumers. In this way wholesalers or retailers work both as buyers and sellers in marketing process.

3. Ultimate Consumers

Ultimate consumers buy goods to satisfy their need. They buy daily necessary goods such as food, grains. clothes, medicines, education materials, etc. to meet their needs and also buy luxury capital goods like motorcar, radio, TV, refrigerator, washing machine and so on. Ultimate consumers buy necessary goods in small quantity repeatedly and also may buy in bulk quantity use for longer time.

In this way, different buyers buy goods for different purposes. The buying function include the important activities such as taking decisions on what to buy, when to buy, where to buy from etc.

Category management is a retailing and purchasing concept in which the range of products purchased by a business organization or sold by a retailer is broken down into discrete groups of similar or related products; these groups are known as product categories (examples of grocery categories might be: tinned fish, washing detergent, toothpastes). It is a systematic, disciplined approach to managing a product category as a strategic business unit. The phrase “category management” was coined by Brian F. Harris.

Retail category management aims to meet consumer needs, by focusing on consumer-oriented marketing and merchandising practices. Partnerships between retailers and suppliers are the foundation for effective category management. Usually, a category captain is appointed to build the relationship between supplier and retailer to maintain healthy communication.

A category manager is a valuable resource, helping retailers make category management decisions, providing them guidance on merchandising questions, like what, how much and where. A category captain manages the retailer’s inventory and displays its products, enhancing their core performance, while achieving their goals – selling more of the products.

The collaborative partnership between retailer and supplier is a source of competitive advantage. Such a partnership improves customer service and asset utilisation while increasing profits and reducing costs.

Performance measurement >> Strategy >> Organizational Capabilities

Trading Partner Relationships >> Business Process >> Information Technology

The category management 8-step process (Retail)

The industry standard model for category management in retail is the 8-step process, or 8-step cycle developed by the Partnering Group.[10] The eight steps are shown in the adjacent diagram; they are:

• Define the category (i.e. what products are included/excluded).
• Define the role of the category within the retailer.
• Assess the current performance.
• Set objectives and targets for the category.
• Devise an overall Strategy.
• Devise specific tactics.
• The eighth step is one of review which takes us back to step 1.

Significance of Category Management:

• Increased sales, goodwill and market share
• Proper care and devotion to each item of merchandise
• Increased sales further lead to increased turnover
• Maximize shelf efficiencies
• Less inventory shrinkage
• Recognizes procurement opportunities
• Enhances customer knowledge level
• Improves return on investment (ROI)
• Decreases chances of out-of-stock positions
• Enhances return on money invested in marketing efforts
• Classifies the performance of brands as doing well, not doing well, problem brands, etc.
• Purchasing merchandise exercise becomes easy and cost effective.

Essentials / Prerequisite of Category Management:

• Category should be divided and arranged as per consumers’ ease not because of retailer’s convenience.
• CM should be based on differentiation and uniqueness.
• CM should drive multiple item purchases at the same time.
• It should result in better customers’ relations rather than relations with suppliers.
• Category division should be based on the basis of product response, space, time and profitability.

Components of merchandising planning

Merchandise or product is the most basic component of merchandising planning. The retailer has to provide products which are expected to be demanded by his consumers. He is required to keep enough inventory of each products category so that he never runs out of it and lose business.

Products can be classified in the following categories:

1) Seasonal products:

This type of products is in demand in a particular season. An adequate amount of this type of products has to be kept in inventory before the beginning of the season, and it should be maintained properly so that it can sustain the whole season.

2) Staple:

Products which are always in demand such as food, clothes, etc. irrespective of the season. Adequate inventory should be maintained for such products.

3) Fashions:

Products which will remain in demand until fashion prevails. The retailer has to buy an estimated quantity of such products to last the fashion without running short of it.

4) fads:

This type of products has a limited period of demand. Retailers have to buy such products carefully by rightly estimating the fads.

Importance of merchandise planning

Buying merchandise and placing them in store for selling is one of the biggest expenses a retailer makes. There are several additional expenses that come with merchandise are delivery costs, shipping costs, storing costs, etc. in case you order wrong merchandise, your expenses will be doubled easily.

However, having a merchandise plan is much more important than only saving money. You will often find yourself struggling to meet consumers’ demands if you don’t have a well-prepared merchandise plan and satisfy the consumers’ needs is one of the most important duties of a retailer.

You can use available the right product, at the right time, at the right place, and in the right quantities only if you plan everything ahead. You can think about the consequences in case you fail to plan properly.

There are chances that your shelves will be overflowing with the wrong type of merchandise, and then you will have to provide heavy discounts to get rid of the excessive undesired merchandise.

Moreover, if you fail to provide the right merchandise at the right time, then your customers will move to your competition.

Category Captains

It is commonplace for a particular supplier in a category to be nominated by the retailer as a category captain. The category captain will be expected to have the closest and most regular contact with the retailer and will also be expected to invest time, effort, and often financial assets into the strategic development of the category within the retailer. In return, the supplier will gain a more influential voice with the retailer. The category captain is often the supplier with the largest turnover in the category. Traditionally the job of category captain is given to a brand supplier, but in recent times the role has also gone to particularly switched-on private label suppliers.

In order to do the job effectively, the supplier may be granted access to a greater wealth of data-sharing, e.g. more access to an internal sales database such as Walmart’s Retail Link.

The Responsibilities of category captains

Category Captains drive retailer profits by the strategic development of a specific category, building upon their knowledge and expertise of how consumers think and act when they enter a store.

When an inconsistency occurs, like what happened during my Sunday shopping trip, some consumers will abandon the store in search of another one which offers fast and convenient product placement. The category manager aims to prevent this from happening.

Other responsibilities of Category Captains include:

• Deciding which products should be on the shelf of their category.
• Determining how much space each product deserves.
• Taking sales into consideration when allocating space to products, without exerting bias toward a particular product.
• Developing Planograms for their category on behalf of the retailer.
• Managing the relationship between retailer and category partners.
• Creating the product placement layout and sending the category partners for feedback.