Category: Management Notes

Management Notes

Advertising, Functions, Criticism

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Advertising is a means of communication with the users of a product or service. Advertisements are messages paid for by those who send them and are intended to inform or influence people who receive them, as defined by the Advertising Association of the UK.

Advertising is always present, though people may not be aware of it. In today’s world, advertising uses every possible media to get its message through. It does this via television, print (newspapers, magazines, journals etc), radio, press, internet, direct selling, hoardings, mailers, contests, sponsorships, posters, clothes, events, colours, sounds, visuals and even people (endorsements).

The advertising industry is made of companies that advertise, agencies that create the advertisements, media that carries the ads, and a host of people like copy editors, visualizers, brand managers, researchers, creative heads and designers who take it the last mile to the customer or receiver. A company that needs to advertise itself and/or its products hires an advertising agency. The company briefs the agency on the brand, its imagery, the ideals and values behind it, the target segments and so on. The agencies convert the ideas and concepts to create the visuals, text, layouts and themes to communicate with the user. After approval from the client, the ads go on air, as per the bookings done by the agency’s media buying unit.

Functions of Advertising

Advertising has become an essential marketing activity in the modern era of large-scale production and severe competition in the market.

It performs the following functions:

(i) Promotion of Sales

Advertising promotes the sale of goods and services by informing and persuading the people to buy them. A good advertising campaign helps in winning customers and generating revenues.

(ii) Introduction of New Products

Advertising helps in the introduction of new products in the market. A business enterprise can introduce itself and its products to the public through advertising. Advertising enables quick publicity in the market.

(iii) Support to Production System

Advertising facilitates large-scale production. The business firm knows that it will be able to sell on a large-scale with the help of advertising. Mass production will reduce the cost of production per unit by making possible the economical use of various factors of production.

(iv) Increasing Standard of Living

Advertising educates the people about the products and their uses. It is advertising which has helped people in adopting new ways of life and giving up old habits. It has contributed a lot towards the betterment of the standard of living of the society.

(v) Public Image

Advertising builds up the reputation of the advertiser. Advertising enables a business firm to communicate its achievements and its efforts to satisfy the customers’ needs to the public. This increases the goodwill and reputation of the firm.

(vi) Support to Media

Advertising sustains press. Advertising provides an important source of revenue to the publishers of newspapers and magazines and the producers of T.V. programmes.

6 MAIN CRITICISMS AGAINST ADVERTISING

(i) Increased Price of The Product

Advertising increases the cost of the product as the expenses on it form the part of the total cost of the product. The increased prices are borne by the consumers. But it cannot be denied that advertising leads to large scale production which considerably reduces the total and per unit cost of production. The consumer may pay less rather than higher.

(ii) Multiplication of Needs

Advertising creates artificial demand for the product and induces people to buy those products which are not needed by them. On account of its repetition, it allures and creates a desire in the minds of the people to possess an article not required by them.

(iii) Deceptive

Sometimes advertising is used as an instrument of cheating. In order to impress upon the people false statements are given with regard to different virtues of a product. Fraudulent means and deceptive practice are resorted to by various traders in order to sell their products. All these things adversely affect the public confidence in the advertising.

(iv) It Leads to Monopoly

Advertising sometimes leads to monopoly in a particular brand of a product. By investing large sums in advertising of his brand, a big producer eliminates small producers of the same product from the market and creates brand monopoly. This leads to exploitation of consumers.

But in reality this argument does not hold good. The monopoly powers are temporarily acquired by the manufacturers as they face strong competition by the rival producers of the same product. In the words of Marry Hepner “advertisement stimulates competition. It often enables the small businessmen to compete with large concerns as well as to start new business”.

(v) Harmful For the Society

Sometimes advertisements are un-ethical and objectionable. Most often, these carry indecent language and virtually nude photographs in order to attract the customers. This adversely affects the social values.

(vi) Wastage of Precious National Resources

A serious drawback levied against the advertisement is that it destroys the utility of certain products before their normal life. The latest and improved model of a product leads to the elimination of old ones. For instance, in the U.S.A., people like to possess the latest models of cars and discarding the old ones which are still in useable conditions. This leads to wastage of national resources.

Objective of Advertising

  1. To introduce a new product by creating interest for it among the prospective customers.
  2. To support personal selling programme. Advertising may be used to open customers’ doors for salesmen.
  3. To reach people inaccessible to salesmen.
  4. To enter a new market or attract a new group of customers.
  5. To fight competition in the market and to increase the sales.
  6. To enhance the goodwill of the enterprise by promising better quality products and services.

Significance of Advertising

Advertising helps in spreading information about the advertising firm, its products, qualities and place of availability of its products and so on. It helps to create a non-personal link between the advertiser and the receivers of the message.

The significance of advertising has increased in the modern era of large scale production and tough competition in the market. Advertising is needed not only to the manufacturers and traders but also to the customers and the society. The benefits of advertising to different parties are discussed in the following paragraphs.

Benefits to Manufacturers and Traders

It pays to advertise. Advertising has become indispensable for the manufacturers and distributors because of the following advantages:

(i) Advertising helps in introducing new products. A business enterprise can introduce itself and its products to the public through advertising.

(ii) Advertising develops new taste among the public and stimulates them to purchase the new product through effective communication.

(iii) Advertising assists to increase the sale of existing products by entering into new markets and attracting new customers.

(iv) Advertising helps in creating steady demand of the products. For instance, a drink may be advertised during summer as a product necessary to fight tiredness caused by heat and during winter as an essential thing to resist cold.

(v) Advertising helps in meeting the forces of competition in the market. If a product is not advertised continuously, the competitors may snatch its market through increased advertisements. Therefore, in certain cases, advertising is necessary to remain in the market.

(vi) Advertising is used to increase the goodwill of the firm by promising improved quality to the customers.

(vii) Advertising increases the morale of the employees of the firm. The salesmen feel happier because their task becomes easier if the product is advertised and known to the public.

(viii) Advertising facilitates mass production of goods which enables the manufacturer to achieve lower cost per unit of product. Distribution costs are also lowered when the manufacturer sells the product directly to the customers. Advertising also facilitates distribution of the product through the retailers who are encouraged to deal in the advertised products.

Benefits to Customers

(i) Advertising helps the customers to know about the existence of various products and their prices. They can choose from the various products to satisfy their wants. Thus, they cannot be exploited by the sellers.

(ii) Advertising educates the people about new products and their diverse uses.

(iii) Advertising increases the utility of existing products for many people adding to the amount of satisfaction which they are already enjoying.

(iv) Advertising induces the manufacturers to improve the quality of their products through research and development. This ensures supply of better quality products to the customers.

Benefits to Society

(i) Advertising provides employment to persons engaged in writing, designing and issuing advertisements, and also those who act as models. Increased employment brings additional income with the people which stimulate more demand. Employment is further generated to meet the increased demand.

(ii) Advertising promotes the standard of living of the people by increasing the variety and quality in consumption as a result of sustained research and development activities by the manufacturers.

(iii) Advertising educates the people about the various uses of different products and this increases their knowledge. Advertising also helps in finding customers in the international market which is essential for earning foreign exchange.

(iv) Advertising sustains the press, and other media. It provides an important source of income to the press, radio and television network. The customers are also benefitted because they get newspapers and magazines at cheaper rates. The publishers of newspapers and magazines are benefitted because of increased circulation of their publications. Lastly, advertising also encourages commercial art.

Management Notes

Elements of Promotion Mix.

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The Promotion Mix refers to the blend of several promotional tools used by the business to create, maintain and increase the demand for goods and services.

The fourth element of the 4 P’s of Marketing Mix is the promotion; that focuses on creating the awareness and persuading the customers to initiate the purchase. The several tools that facilitate the promotion objective of a firm are collectively known as the Promotion Mix.

Gary Armstrong defines promotion mix as, “A company’s promotional mix includes advertising, personal selling, sales promotion, public relations, direct marketing. It also includes product design, shape, package, colour, label etc., as all these communicate something to buyer.”

Philip Kotler opines, “A company’s total marketing communication mix also called promotion mix consists of specific blends of advertising, personal selling, sales promotion, public relations and direct marketing tools that the company use to pursue its advertising and marketing objectives.”

Promotion is a process of communication involving information, persuasion, and influence. It includes all types of personal or impersonal communication by a producer with prospective customers as well as middlemen in the distribution network.

The purpose of promotion is to inform, persuade and influence the prospective customers. Personal selling, advertising, public relations, sales promotion and direct marketing are widely used to inform the people about the availability of products and create among them the desire to buy the products.

Promotion is a form of corporate communication that uses various methods to reach a targeted audience with a certain message in order to achieve specific organizational objectives. Nearly all organizations, whether for-profit or not-for-profit, in all types of industries, must engage in some form of promotion.

Such efforts may range from multinational firms spending large sums on securing high-profile celebrities to serve as corporate spokespersons to the owner of a one-person enterprise passing out business cards at a meeting of local business persons.

Promotion is communication from a marketers to the prospective buyers in the market. It tries to instil into buyer’s minds images (through advertising, personal selling, sales promotion and publicity) that make them buy the product.

The Promotion Mix is the integration of Advertising, Personal Selling, Sales Promotion, Public Relations and Direct Marketing. The marketers need to view the following questions in order to have a balanced blend of these promotional tools.

  • What is the most effective way to inform the customers?
  • Which marketing methods to be used?
  • To whom the promotion efforts be directed?

Objectives of Promotion Mix

Promotion can be used for number of reasons for ex: Promotional activity can increase sales, raise awareness or concerns about particular issues develop a brand image or alter public opinion.

The possible objectives for promotion mix may include the following:

  1. Build Awareness

New products and new companies are often unknown to a market, which means initial promotional efforts must focus on establishing an identity. In this situation the marketer must focus promotion to effectively reach customer and tell the market who they are and what they have to offer.

  1. Create Interest

Moving a customer from awareness of a product to making a purchase can present a significant challenge. Consumer buying behaviour depends on the type of customer so the customer must first recognize they have a need before they actively start to consider a purchase.

The focus on creating messages that convince customers that a need exists has been the hallmark of marketing for a long time with promotional appeals targeted at basic human characteristics such as emotions, fears, humor, sex etc.

  1. Provide Information

Some promotions are designed to assist customers in the search stage of the purchasing process. In some cases, such as when a product is so novel it creates a new category of product and has few competitors the information is simply intended to explain what the product is and may not mention any competitors.

In other situations where the product competes in an existing market, informational promotion may be used to help with a product positing strategy.

  1. Stimulate Demand

The right promotion can drive customers to make a purchase. In the case of products that a customer has not previously purchased or has not purchased in a long time, the promotional efforts may be directed at getting the customer to try the product.

This is often seen on the internet where software companies allow for free demonstrations or even free downloadable trials of their products. For customer base products, promotion can encourage customers to increase their purchasing by providing a reason to purchase products sooner or purchase in greater quantities than they normally do.

  1. Reinforce the Brand

Once a purchase is made a marketer can use promotion to build a strong relationship that can lead to the purchaser becoming a loyal customer. For instance, many retail stores now ask for a customer’s email address so that follow-up emails containing additional product information or even an incentive to purchase other products from the retailer can be sent in order to strengthen the customer marketer relationship.

Elements of promotional mix are also called as tools, means, or components. Basically, there are five elements involved in promotional mix. Some authors have considered more elements, too. However, we will consider five elements as shown in Figure 1.

  1. Advertising

Advertising is defined as any paid form of non-personal presentation and promotion of ideas, goods, and services by an identified sponsor. It is a way of mass communication. It is the most popular and widely practiced tool of market promotion. Major part of promotional budget is consumed for advertising alone. Various advertising media – television, radio, newspapers, magazines, outdoor means and so forth – are used for advertising the product.

Characteristics of advertising are as follow:

(i) Adverting is non-personal or mass communication. Personal contact is not possible.

(ii) It is a paid form of communication.

(iii) It is a one-way communication.

(iv) Identifiable entity/sponsor-company or person gives advertising.

(v) It is costly option to promote the sales.

(vi) It can be reproduced frequently as per need.

(vii) Per contact cost is the lowest.

(viii) Various audio-visual, print, and outdoor media can be used for advertising purpose.

(ix) It is a widely used and highly popular tool of market promotion.

  1. Sales Promotion

Sales promotion covers those marketing activities other than advertising, publicity, and personal selling that stimulate consumer purchasing and dealer effectiveness. Sales promotion mainly involves short-term and non-routine incentives, offered to dealers as well consumers. The popular methods used for sales promotion are demonstration, trade show, exhibition, exchange offer, seasonal discount, free service, gifts, contests, etc.

Characteristics of sales promotion are as follows:

(i) The primary purpose of sales promotion is to induce customers for immediate buying or dealer effectiveness or both.

(ii) Excessive use of sale promotion may affect sales and reputation of a company adversely.

(iii) It is taken as supplementary to advertising and personal selling efforts.

(iv) It involves all the promotional efforts other than advertising, personal selling, and publicity.

(v) It consists of short-term incentives, schemes, or plans offered to buyers, salesmen, and/ or dealers.

(vi) It involves non-routine selling efforts.

  1. Personal Selling

Personal selling includes face-to-face personal communication and presentation with prospects (potential and actual customers) for the purpose of selling the products. It involves personal conversation and presentation of products with customers. It is considered as a highly effective and costly tool of market promotion.

Characteristics of personal have been listed below:

(i) Personal selling is an oral, face-to-face, and personal presentation with consumers.

(ii) Basic purpose is to promote products or increase sales.

(iii) It involves two-way communication.

(iv) Immediate feedback can be measured.

(v) It is an ability of salesmen to persuade or influence buyers.

(vi) It is more flexible way of market communication.

(vii) Per contact cost is higher than advertising.

(viii) It involves teaching, educating, and assisting people to buy.

  1. Publicity

Publicity is also a way of mass communication. It is not a paid form of mass communication that involves getting favourable response of buyers by placing commercially significant news in mass media. William J. Stanton defines: “Publicity is any promotional communication regarding an organization and/or its products where the message is not paid for by the organization benefiting from it.”

It is the traditional form of public relations. Publicity is not paid for by the organization. Publicity comes from reporters, columnists, and journalists. It can be considered as a part of public relations. Publicity involves giving public speeches, giving interviews, conducting seminars, charitable donations, inauguration by film actor, cricketer, politician or popular personalities, stage show, etc., that attract mass media to publish the news about them.

Main characteristic of publicity include

(i) Publicity involves obtaining favourable presentation about company or company’s offers upon radio, television, or stage that is not paid for by the sponsor.

(ii) It is a non-paid form of market promotion. However, several indirect costs are involved in publicity.

(iii) It may include promotion of new product, pollution control efforts, special achievements of employees, publicizing new policies, etc., for increasing sales. It is primarily concerns with publishing or highlighting company’s activities and products. It is targeted to build company’s image.

(iv) Mostly, publicity can be carried via newspapers, magazines, radio or television.

(v) Company has no control over publicity in terms of message, time, frequency, information, and medium.

(vi) It has a high degree of credibility. Publicity message is more likely to be read and reacted by audience.

(vii) Publicity can be done at a much lower cost than advertising. Company needs to spend a little amount to get the event or activity publicized.

(viii) Frequency or repetition of publicity in mass media depends upon its social significance or the values for news. Mostly, it appears only once.

  1. Public Relations

The public relations is comprehensive term that includes maintaining constructive relations not only with customers, suppliers, and middlemen, but also with a large set of interested publics. Note that public relations include publicity, i.e., publicity is the part of public relations.

William Stanton defines:

“Public relations activities typically are designed to build or maintain a favourable image for an organisation and a favourable relationship with the organization’s various publics. These publics may be customers, stockholders, employees, unions, environmentalists, the government, and people in local community, or some other groups in society.” Thus, public relations include organization’s broad and overall communication efforts intended to influence various groups’ attitudes toward the organization. Some experts have stated that the public relations are an extension of publicity.

Main characteristic of publicity are as under:

(i) Public relations is a paid form of market promotion. Company has to incur expenses.

(ii) Public relations activities are designed to build and maintain a favourable image for an organization and a favourable relationship with the organization’s various publics.

(iii) It is an integral part of managerial function. Many companies operate a special department for the purpose, known as the public relations department.

(iv) It involves a number of interactions, such as contacting, inviting, informing, clarifying, responding, interpreting, dealing, transacting, and so forth.

(v) Public relations covers a number of publics – formal and informal groups. These publics may be customers, stockholders, employees, unions, environmentalists, the government, people of local community, or some other groups in society.

(vi) Public relations activities are undertaken continuously. It is a part of routine activities.

(vii) All the officials, from top level to supervisory level, perform public relations activities.

(viii) In relation to modern management practices, the public relations is treated as the profession.

Thus, there are five major elements or promotion mix. Each tool/element has its advantages, limitations, and applicability. Depending upon company’s internal and external situations, one or more tools are used. Mostly, company’s promotional programme involves more elements, each element supplements others.

Management Notes

Promotion

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Promotion is a type of communication between the buyer and the seller. The seller tries to persuade the buyer to purchase their goods or services through promotions. It helps in making the people aware of a product, service or a company. It also helps to improve the public image of a company. This method of marketing may also create interest in the minds of buyers and can also generate loyal customers.

Promotions in marketing are generally the fourth and final P of the marketing mix. This is because before promotions, the product, price and place (distribution) should be ready. Promotions in marketing generally use integrated marketing communication. Integrated marketing communication is the use of different media vehicles to get the message of the brand from the company to the consumer.

So, if you are a jewelry brand, you will use TV commercials and other ATL media to promote your own products. Whereas if you are a small time brand, you will use print media or Internet and Out of home media to promote your brand. Thus, depending on the segmentation, targeting and positioning you are planning, your promotions can be planned.

Methods of Promotion

  1. Advertising

Advertising means to advertise a product, service or a company with the help of television, radio or social media. It helps in spreading awareness about the company, product or service. Advertising is communicated through various mass media, including traditional media such as newspapers, magazines, television, radio, outdoor advertising or direct mail; and new media such as search results, blogs, social media, websites or text messages.

  1. Direct Marketing

Direct marketing is a form of advertising where organizations communicate directly to customers through a variety of media including cell phone text messaging, email, websites, online adverts, database marketing, fliers, catalog distribution, promotional letters and targeted television, newspaper and magazine advertisements as well as outdoor advertising. Among practitioners, it is also known as a direct response.

  1. Sales Promotion

Sales promotion uses both media and non-media marketing communications for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability.

  1. Personal Selling

The sale of a product depends on the selling of a product. Personal Selling is a method where companies send their agents to the consumer to sell the products personally. Here, the feedback is immediate and they also build a trust with the customer which is very important.

  1. Public Relation

Public relation or PR is the practice of managing the spread of information between an individual or an organization (such as a business, government agency, or a nonprofit organization) and the public. A successful PR campaign can be really beneficial to the brand of the organization.

The effect of promotions in marketing is:

(a) Awareness

The first and foremost role of promotions in marketing is to create Awareness. Whenever a new product is launched, or a company introduces a new scheme, awareness needs to be created. Thus, companies use promotions in the marketing mix which are ATL and BTL to promote the product.

(b) Brand building

The idiom “A brand is a promise” is one of the most commonly used ones in the world of marketing. However, a brand comprises both – The product as well as the marketing communications from the company to the customer. Thus brands like Apple and Coca cola are at the top of the brand equity table, because of their promotions and marketing communication efforts throughout the last few decades.

(c) Positioning

When you talk about premium cars, which is the product that comes in mind? Is it BMW, AUDI, FERRARI or any other? All these companies are trying to get the top positioning in your mind and similarly in other customers mind. The type of promotions from a company directly contribute to the positioning of the brand in the mind of the customer.

(d) Acceptance

A customer is more likely to accept a product, if he has heard the brand or the companies name. Thus, along with awareness, promotions also increase the acceptance of the product in the market. But, in some cases, how much ever promotions you do, if the product is not proper, the market will never accept the same. Thus, promotions in marketing has its own limitations.

(e) Targeting of customers

The promotions of a company help the company target their desired customer. For example – pepsi targets youngsters, Adidas targets healthy and sport loving people, so on and so forth. Thus, segmentation targeting and positioning can all be achieved with the right promotions.

(f) Brand recall

There are many objectives of promotions, one of the most common one being brand recall. Many brands over a time become so common in the market, that they might not need brand recall ads. On the other hand, sectors like pharmaceuticals, which have high competition and a line of generic products, regularly need to release promotions which promote the brand recall in the market. Thus, promotions in marketing can help the recall of your brand in the customers market, thereby promoting the sales and the brand equity of the product.

(g) Acquire new customers

The ultimate aim of promotions, or of any activity in marketing for that matter, is to attract new customers, convert them towards the company and gain better profit margins for the company. With ATL and BTL activities working simultaneously, and a proper marketing communication plan in place, it becomes easier for the company to acquire more customers.

Thus, there are many roles which are played by promotions in marketing. It is therefore no surprise, that many people are involved in promotions for the organization. In house marketing managers, executives, branding department, outsourced agencies are all involved in media buying and selling activities. These activities, on a whole, contribute to achieve the right promotions mix for the organization.

Management Notes

Types of Intermediaries

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Unless customers are buying a product directly from the company that makes it, sales are always facilitated by one or more marketing intermediaries, also known as middlemen. Marketing intermediaries do much more than simply take a slice of the pie with each transaction. Not only do they give customers easier access to products, they can also streamline a manufacturer’s processes. Four types of traditional intermediaries include agents and brokers, wholesalers, distributors and retailers.

Types of Intermediaries:

  • Wholesalers

Wholesalers typically are independently owned businesses that buy from manufacturers and take title to the goods. These intermediaries then resell the products to retailers or organizations. If they’re full-service wholesalers, they provide services such as storage, order processing and delivery, and they participate in promotional support. They generally handle products from several producers but specialize in particular products. Limited-service wholesalers offer few services and often serve as drop shippers where the retailer passes the customer’s order information to the wholesaler, who then packages the product and ships it directly to the customer.

  • Retailers

Retailers work directly with the customer. These intermediaries work with wholesalers and distributors and often provide many different products manufactured by different producers all in one location. Customers can compare different brands and pick up items that are related but aren’t manufactured by the same producer, such as bread and butter. Purchasing bread or medications directly from a manufacturer or pharmaceutical company would be time-consuming and expensive for a customer. But buying these products from a local retail “middleman” is simple, quick and convenient.

  • Distributors

Distributors are generally privately owned and operated companies, selected by manufacturers, that buy product for resale to retailers, similar to wholesalers. These intermediaries typically work with many businesses and cover a specific geographic area or market sector, performing several functions, including selling, delivery, extending credit and maintaining inventory. Although main roles of distributors include immediate access to goods and after-sales service, they typically specialize in a narrower product range to ensure better product knowledge and customer service.

  • Agents and Brokers

Agents and brokers sell products or product services for a commission, or a percentage of the sales price or product revenue. These intermediaries have legal authority to act on behalf of the manufacturer or producer. Agents and brokers never take title to the products they handle and perform fewer services than wholesalers and distributors. Their primary function is to bring buyers and sellers together. For example, real estate agents and insurance agents don’t own the items that are sold, but they receive a commission for putting buyers and sellers together. Manufacturers’ representatives that sell several non-competing products and arrange for their delivery to customers in a certain geographic region also are agent intermediaries.

Role of Intermediaries

  • Purchasing

Wholesalers purchase very large quantities of goods directly from producers or from other wholesalers. By purchasing large quantities or volumes, wholesalers are able to secure significantly lower prices.

Imagine a situation in which a farmer grows a very large crop of potatoes. If he sells all of the potatoes to a single wholesaler, he will negotiate one price and make one sale. Because this is an efficient process that allows him to focus on farming (rather than searching for additional buyers), he will likely be willing to negotiate a lower price. Even more important, because the wholesaler has such strong buying power, the wholesaler is able to force a lower price on every farmer who is selling potatoes.

The same is true for almost all mass-produced goods. When a producer creates a large quantity of goods, it is most efficient to sell all of them to one wholesaler, rather than negotiating prices and making sales with many retailers or an even larger number of consumers. Also, the bigger the wholesaler is, the more likely it will have significant power to set attractive prices.

  • Warehousing and Transportation

Once the wholesaler has purchased a mass quantity of goods, it needs to get them to a place where they can be purchased by consumers. This is a complex and expensive process. McLane Company operates eighty distribution centers around the country. Its distribution center in Northfield, Missouri, is 560,000 square feet big and is outfitted with a state-of-the art inventory tracking system that allows it to manage the diverse products that move through the center. It relies on its own vast trucking fleet to handle the transportation.

  • Grading and Packaging

Wholesalers buy a very large quantity of goods and then break that quantity down into smaller lots. The process of breaking large quantities into smaller lots that will be resold is called bulk breaking. Often this includes physically sorting, grading, and assembling the goods. Returning to our potato example, the wholesaler would determine which potatoes are of a size and quality to sell individually and which are to be packaged for sale in five-pound bags.

  • Risk Bearing

Wholesalers either take title to the goods they purchase, or they own the goods they purchase. There are two primary consequences of this, both of which are both very important to the distribution channel. First, it means that the wholesaler finances the purchase of the goods and carries the cost of the goods in inventory until they are sold. Because this is a tremendous expense, it drives wholesalers to be accurate and efficient in their purchasing, warehousing, and transportation processes.

Second, wholesalers also bear the risk for the products until they are delivered. If goods are damaged in transport and cannot be sold, then the wholesaler is left with the goods and the cost. If there is a significant change in the value of the products between the time of the purchase from the producer and the sale to the retailer, the wholesaler will absorb that profit or loss.

  • Marketing

Often, the wholesaler will fill a role in the promotion of the products that it distributes. This might include creating displays for the wholesaler’s products and providing the display to retailers to increase sales. The wholesaler may advertise its products that are carried by many retailers.

Wholesalers also influence which products the retailer offers. For example, McLane Company was a winner of the 2016 Convenience Store News Category Captains, in recognition for its innovations in providing the right products to its customers. McLane created unique packaging and products featuring movie themes, college football themes, and other special occasion branding that were designed to appeal to impulse buyers. They also shifted the transportation and delivery strategy to get the right products in front of consumers at the time they were most likely to buy. Its convenience store customers are seeing sales growth, as is the wholesaler.

  • Distribution

As distribution channels have evolved, some retailers, such as Walmart and Target, have grown so large that they have taken over aspects of the wholesale function. Still, it is unlikely that wholesalers will ever go away. Most retailers rely on wholesalers to fulfill the functions that we have discussed, and they simply do not have the capability or expertise to manage the full distribution process. Plus, many of the functions that wholesalers fill are performed most efficiently at scale. Wholesalers are able to focus on creating efficiencies for their retail channel partners that are very difficult to replicate on a small scale.

Management Notes

Physical Distribution Channels, Role, Factors, Importance, Types

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Physical Distribution Channels refer to the path or route through which goods and services travel from the producer or manufacturer to the final consumer. These channels include intermediaries such as wholesalers, retailers, agents, or distributors, who play an essential role in making the product available to the target market. The goal of distribution channels is to ensure that products reach the right place, at the right time, and in the right condition. Effective distribution channel management helps companies expand market reach, enhance product availability, and optimize costs, contributing to overall business success.

Role of Physical Distribution Channels:

(i) Distribution channels provide time, place, and ownership utility

They make the product available when, where, and in which quantities the customer wants. But other than these transactional functions, marketing channels are also responsible to carry out the following functions:

(ii) Logistics and Physical Distribution

Marketing channels are responsible for assembly, storage, sorting, and transportation of goods from manufacturers to customers.

(iii) Facilitation

Channels of distribution even provide pre-sale and post-purchase services like financing, maintenance, information dissemination and channel coordination.

(iv) Creating Efficiencies

This is done in two ways: bulk breaking and creating assortments. Wholesalers and retailers purchase large quantities of goods from manufacturers but break the bulk by selling few at a time to many other channels or customers. They also offer different types of products at a single place which is a huge benefit to customers as they don’t have to visit different retailers for different products.

(v) Sharing Risks

Since most of the channels buy the products beforehand, they also share the risk with the manufacturers and do everything possible to sell it.

(vi) Marketing

Distribution channels are also called marketing channels because they are among the core touch points where many marketing strategies are executed. They are in direct contact with the end customers and help the manufacturers in propagating the brand message and product benefits and other benefits to the customers.

Role Determining the Choice of Distribution Channels:

Selection of the perfect marketing channel is tough. It is among those few strategic decisions which either make or break your company.

Even though direct selling eliminates the intermediary expenses and gives more control in the hands of the manufacturer, it adds up to the internal workload and raises the fulfilment costs. Hence these four factors should be considered before deciding whether to opt for the direct or indirect distribution channel.

Importance of Physical Distribution Channels:

  • Ensures Product Availability

Physical distribution channels ensure products are available to customers at the right place and time. They bridge the gap between production and consumption, making goods accessible in various markets. Efficient distribution minimizes stockouts and ensures continuous supply. By strategically placing products where demand exists, businesses can serve customers promptly, increase satisfaction, and build loyalty. This availability directly influences purchase decisions and repeat sales, especially in competitive markets. Without effective physical distribution, even high-quality products may fail to reach intended customers, resulting in lost opportunities and reduced profitability.

  • Reduces Transportation and Storage Costs

Efficient physical distribution channels optimize transportation routes, load capacity, and storage facilities to minimize costs. By consolidating shipments and using appropriate warehousing strategies, businesses can lower expenses while maintaining timely deliveries. Cost reduction also improves pricing competitiveness in the market. Advanced logistics systems, such as just-in-time (JIT) inventory management, help reduce the need for large storage facilities, saving rent and maintenance costs. Moreover, bulk transportation through well-managed channels reduces per-unit freight charges. These cost efficiencies ultimately increase profitability and allow companies to offer competitive prices to customers without compromising service quality.

  • Expands Market Reach

Physical distribution channels help businesses reach diverse geographic areas, including rural, urban, and international markets. Well-established networks of wholesalers, distributors, and retailers ensure products penetrate deeper into different customer segments. This expansion enables companies to serve untapped markets, increasing overall sales volume and market share. Global brands often rely on sophisticated distribution systems to ensure consistent product availability across countries. Additionally, local adaptation of distribution strategies allows businesses to cater to specific market needs. By extending reach effectively, companies can strengthen their brand presence and establish dominance over competitors in multiple regions simultaneously.

  • Enhances Customer Satisfaction

An efficient physical distribution channel ensures fast, reliable, and damage-free delivery of products, directly contributing to customer satisfaction. Customers value convenience and timely service, and a strong distribution network fulfills these expectations. Quick product availability enhances trust in the brand and encourages repeat purchases. In industries like FMCG, electronics, and e-commerce, seamless delivery is a major factor in customer retention. Furthermore, prompt handling of returns and exchanges through distribution networks adds to a positive buying experience. Overall, smooth distribution strengthens customer relationships and boosts long-term loyalty, which is crucial for business sustainability.

  • Improves Competitiveness

A strong distribution system gives companies a competitive edge by ensuring products reach markets faster than competitors. Businesses that can deliver products promptly gain an advantage in customer preference and loyalty. Efficient logistics also allow companies to respond quickly to changing market demands or seasonal fluctuations. By maintaining a wide and reliable network, businesses can secure better shelf space in retail outlets and negotiate favorable terms with distributors. This operational strength often translates into a dominant market position, higher sales volumes, and stronger brand visibility, making it harder for competitors to match performance.

  • Facilitates Smooth Supply Chain Management

Physical distribution channels are a crucial link in the supply chain, ensuring smooth movement of goods from manufacturers to end-users. Well-coordinated channels improve communication between producers, wholesalers, retailers, and customers, leading to better inventory control and demand forecasting. This reduces delays, stock imbalances, and wastage. Integration with technology like GPS tracking and warehouse management systems further enhances efficiency. By aligning supply with demand in real-time, companies can avoid overproduction or shortages. Smooth supply chain operations also improve overall productivity and operational efficiency, which directly benefits profitability and customer satisfaction.

  • Supports Sales Growth

Effective physical distribution channels directly contribute to higher sales by ensuring wide product availability and convenience for customers. Products that are easy to find and purchase naturally sell more, leading to increased revenue. Distributors and retailers often promote products within their networks, providing additional marketing support. Furthermore, consistent supply to high-demand areas maximizes sales potential and minimizes lost opportunities. Seasonal products, in particular, benefit from quick and efficient distribution to capture peak demand. Ultimately, a robust distribution network is a strategic driver for sustainable business growth and long-term market expansion.

Types of Distribution Channels:

Distribution channels refer to the pathways through which products move from the producer to the final consumer. The choice of distribution channel impacts the product’s availability, cost, and customer experience. There are several types of distribution channels, each suited to different business models and customer needs.

  • Direct Distribution Channel

In a direct distribution channel, the producer sells the product directly to the consumer without involving intermediaries. This can be done through physical stores, company-owned retail outlets, or online platforms. Direct channels allow businesses to have full control over the pricing, branding, and customer experience. They are commonly used for high-value, customized products, or when a business wants to establish direct relationships with customers, as seen in industries like luxury goods, technology, and exclusive services.

  • Indirect Distribution Channel

Indirect distribution channels involve intermediaries between the producer and the consumer. These intermediaries can be wholesalers, distributors, or retailers who help move the product through the market. Indirect channels are common for mass-market products where reaching a larger audience efficiently is crucial. For example, a manufacturer of consumer electronics may sell its products to wholesalers, who then distribute them to various retailers, making the product available in multiple locations.

  • Dual Distribution Channel

A dual distribution channel, also known as a hybrid channel, combines both direct and indirect methods. A company uses direct sales to reach some customers while also using intermediaries to sell through other channels. This type of distribution is useful for companies that want to diversify their sales efforts or reach different market segments. For example, a company might sell directly to large corporate clients but rely on retailers to reach individual consumers. This approach increases market coverage and flexibility.

  • Intensive Distribution

Intensive distribution aims to make the product available in as many locations as possible. This type of channel is used for products with high demand, low unit cost, and frequent purchases, such as consumer packaged goods, snacks, or toiletries. The goal is to saturate the market and make the product widely accessible. The product is sold through multiple retailers, wholesalers, and other outlets to ensure it is readily available for customers.

  • Selective Distribution

Selective distribution involves using a limited number of outlets or intermediaries to distribute products. The company selectively chooses the intermediaries based on their ability to provide quality service, reach specific customer segments, or meet certain brand standards. This approach is often used for moderately priced products such as electronics or appliances. It allows the producer to maintain some control over the product’s distribution while still reaching a broad audience.

  • Exclusive Distribution

Exclusive distribution channels are characterized by a highly selective approach where the producer only sells the product through a few specific intermediaries. This type of channel is often used for luxury or high-end products, where exclusivity and prestige are critical. By limiting the number of distributors or retailers, the brand can control its image and ensure that the product is positioned correctly in the market. For example, a high-end automobile manufacturer may only sell its cars through a select network of authorized dealerships.

Choosing the Right Distribution Channel:

Choosing the right distribution channel is a crucial decision that can significantly impact a company’s success in reaching its target market. The process involves evaluating various options based on the product type, target customer preferences, cost considerations, and competitive environment.

  • Product Type

The nature of the product plays a vital role in determining the best distribution channel. For example, perishable goods like fresh food products may require direct distribution to maintain freshness, while durable goods can be sold through wholesalers or retailers. Similarly, high-end, luxury products may be best suited for exclusive distribution channels, while mass-market items benefit from extensive channel networks.

  • Market Coverage

The level of market coverage needed for the product influences the choice of distribution channel. If the goal is to achieve intensive distribution (wide availability in as many outlets as possible), using intermediaries like wholesalers or retailers is essential. On the other hand, exclusive distribution may require fewer intermediaries to maintain control and exclusivity, which works well for high-end products.

  • Customer Preferences

Understanding how customers prefer to buy products is critical when selecting a distribution channel. In the digital age, many customers prefer purchasing products online, while others prefer a traditional in-store experience. Businesses need to assess the purchasing behavior and preferences of their target market to choose a channel that aligns with their customers’ expectations.

  • Cost Considerations

The cost of using a particular distribution channel is an important factor. Direct distribution, such as selling through a company-owned retail outlet or an e-commerce platform, may involve higher operational costs but provides more control. Indirect channels like wholesalers and retailers may reduce operational costs but may result in lower profit margins due to commissions and markups. Companies need to balance cost considerations with revenue goals to make the most cost-effective choice.

  • Control and Flexibility

When a company chooses a distribution channel, it also determines the level of control it will have over its products and brand. Direct distribution allows a company to maintain more control over product presentation, pricing, and customer experience. However, indirect channels offer less control, as they rely on intermediaries to sell the product. If maintaining control over branding and customer experience is a priority, a company may opt for a direct distribution channel.

  • Competition

The distribution strategy should also consider competitors’ actions. If competitors are using particular distribution channels, entering the same channels could help a company maintain its competitive edge. Alternatively, choosing unique or innovative channels can provide differentiation in the marketplace.

  • Market Reach

The geographical scope of the target market also affects the choice of distribution channels. If a company plans to reach international or distant markets, using a distribution network that includes international agents or global e-commerce platforms might be necessary. Alternatively, for a local or regional target market, a more localized approach with regional wholesalers or retailers may be sufficient.

  • Speed and Efficiency

The time it takes for products to reach customers is another consideration. If the market demands fast delivery, a direct distribution channel, such as e-commerce with quick fulfillment services or direct sales through retail stores, may be ideal. In contrast, some customers may be willing to wait for their products, in which case a slower, but more cost-effective, channel may suffice.

Management Notes

Methods of Pricing

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Pricing is the process of determining the monetary value of a product or service. It involves assessing various factors, including production costs, market demand, competition, and customer perception of value. Effective pricing strategies aim to maximize profitability, attract customers, and maintain a competitive edge, balancing the need for revenue generation with the desire to provide perceived value to consumers.

An organization has various options for selecting a pricing method. Prices are based on three dimensions that are cost, demand, and competition. The organization can use any of the dimensions or combination of dimensions to set the price of a product.

  1. 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. Cost-based pricing can be of two types, namely, cost-plus pricing and markup pricing.

These two types of cost-based pricing are as follows:

(i) Cost Plus Pricing

Refers to the simplest method of determining the price of a product. In cost-plus pricing method, a fixed percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total cost to set the price. For example, XYZ organization bears the total cost of Rs. 100 per unit for producing a product. It adds Rs. 50 per unit to the price of product as’ profit. In such a case, the final price of a product of the organization would be Rs. 150.

Cost-plus pricing is also known as average cost pricing. This is the most commonly used method in manufacturing organizations.

In economics, the general formula given for setting price in case of cost-plus pricing is as follows:

P = AVC + AVC (M)

AVC = Average Variable Cost

M = Mark-up percentage

AVC (m) = Gross profit margin

Mark-up percentage (M) is fixed in which AFC and net profit margin (NPM) are covered.

AVC (m) = AFC + NPM

For determining average variable cost, the first step is to fix prices. This is done by estimating the volume of the output for a given period of time. The planned output or normal level of production is taken into account to estimate the output.

The second step is to calculate Total Variable Cost (TVC) of the output. TVC includes direct costs, such as cost incurred in labor, electricity, and transportation. Once TVC is calculated, AVC is obtained by dividing TVC by output, Q. [AVC = TVC / Q]. The price is then fixed by adding the mark-up of some percentage of AVC to the profit [P = AVC + AVC (m)].

Advantages of cost-plus pricing method are as follows:

  • Requires minimum information
  • Involves simplicity of calculation
  • Insures sellers against the unexpected changes in costs

Disadvantages of cost-plus pricing method are as follows:

  • Ignores price strategies of competitors
  • Ignores the role of customers

(ii) Markup Pricing

Refers to a pricing method in which the fixed amount or the percentage of cost of the product is added to product’s price to get the selling price of the product. Markup pricing is more common in retailing in which a retailer sells the product to earn profit. For example, if a retailer has taken a product from the wholesaler for Rs. 100, then he/she might add up a markup of Rs. 20 to gain profit.

It is mostly expressed by the following formula:

  • Markup as the percentage of cost= (Markup/Cost) *100
  • Markup as the percentage of selling price= (Markup/ Selling Price)*100
  • For example, the product is sold for Rs. 500 whose cost was Rs. 400. The mark up as a percentage to cost is equal to (100/400)*100 =25. The mark up as a percentage of the selling price equals (100/500)*100= 20.

  1. Demand Based Pricing:

Demand-based pricing refers to a pricing method in which the price of a product is finalized according to its demand. If the demand of a product is more, an organization prefers to set high prices for products to gain profit; whereas, if the demand of a product is less, the low prices are charged to attract the customers.

The success of demand-based pricing depends on the ability of marketers to analyze the demand. This type of pricing can be seen in the hospitality and travel industries. For instance, airlines during the period of low demand charge less rates as compared to the period of high demand. Demand-based pricing helps the organization to earn more profit if the customers accept the product at the price more than its cost.

  1. 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.

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.

  1. Other Pricing Methods

In addition to the pricing methods, there are other methods that are discussed as follows:

(i) Value Pricing

Implies a method in which an organization tries to win loyal customers by charging low prices for their high- quality products. The organization aims to become a low cost producer without sacrificing the quality. It can deliver high- quality products at low prices by improving its research and development process. Value pricing is also called value-optimized pricing.

(ii) Target Return Pricing

Helps in achieving the required rate of return on investment done for a product. In other words, the price of a product is fixed on the basis of expected profit.

(iii) Going Rate Pricing

Implies a method in which an organization sets the price of a product according to the prevailing price trends in the market. Thus, the pricing strategy adopted by the organization can be same or similar to other organizations. However, in this type of pricing, the prices set by the market leaders are followed by all the organizations in the industry.

(iv) Transfer Pricing

Involves selling of goods and services within the departments of the organization. It is done to manage the profit and loss ratios of different departments within the organization. One department of an organization can sell its products to other departments at low prices. Sometimes, transfer pricing is used to show higher profits in the organization by showing fake sales of products within departments.

Management Notes

Pricing, Meaning, Objectives, Strategies, Nature, Scope, Challenges and Factors Influencing Pricing

indiafreenotesby indiafreenotes0

Pricing refers to the process of determining the value of a product or service in monetary terms. It is a critical aspect of marketing and business strategy, influencing demand, profitability, and market positioning. Effective pricing considers various factors, including production costs, competition, market demand, and perceived value. Businesses can adopt different pricing strategies, such as cost-plus pricing, value-based pricing, or penetration pricing, to achieve their objectives.

Objectives of Pricing:

  • Revenue Generation

One of the primary objectives of pricing is to generate revenue for the business. By setting prices that reflect the value of the product or service, companies can ensure that they are covering costs and making a profit. Pricing strategies should align with revenue goals, whether for short-term gains or long-term sustainability.

  • Market Penetration

Businesses often aim for market penetration through competitive pricing strategies. Lower prices can attract customers and increase market share, especially for new products entering a competitive landscape. This approach helps establish a foothold in the market, encouraging customer loyalty and fostering brand recognition.

  • Profit Maximization

Pricing is a critical lever for maximizing profits. By strategically adjusting prices based on demand, cost structure, and competitive landscape, businesses can enhance their profit margins. This may involve premium pricing for high-value products or competitive pricing to drive volume and reduce costs.

  • Competitive Positioning

Effective pricing can differentiate a product from competitors, positioning it as either a premium offering or a budget-friendly alternative. Understanding competitors’ pricing strategies allows businesses to craft their pricing in a way that highlights unique features or benefits, enhancing their market position.

  • Customer Perception

The price of a product often influences customer perception and brand image. A well-calibrated pricing strategy can convey quality, exclusivity, or affordability. For instance, luxury brands may adopt high pricing to reinforce their premium image, while discount retailers focus on value to attract cost-conscious consumers.

  • Cost Recovery

Another objective of pricing is to ensure that all costs associated with a product or service are recovered. This includes fixed costs (like overhead and salaries) and variable costs (like raw materials and production). Businesses must carefully analyze their cost structure to set prices that adequately cover expenses and support financial health.

  • Market Stabilization

Pricing strategies can also be used to stabilize markets and reduce price wars. By establishing a consistent pricing approach, companies can help prevent excessive competition that may lead to eroded profits. Collaborative pricing strategies or price signaling can help maintain market stability.

  • Demand Management

Pricing can be used as a tool to manage demand for a product or service. By implementing dynamic pricing strategies, companies can adjust prices based on real-time demand fluctuations. For example, airline ticket prices often vary based on seasonality and occupancy rates, helping to optimize revenue.

  • Promotion and Sales Strategy

Pricing objectives are often tied to promotional activities and sales strategies. Temporary discounts, bundled pricing, or special offers can be employed to stimulate sales during slow periods or to clear inventory. These strategies enhance customer engagement and drive purchases.

  • Market Segmentation

Differentiated pricing strategies can be employed to cater to various market segments. Businesses can use price discrimination, charging different prices for the same product based on customer characteristics or buying behavior. This approach allows companies to maximize revenue from each segment by capturing consumer surplus.

Strategies of Pricing:

1. Cost-Based Pricing

Cost-based pricing involves setting prices based on the costs of producing a product or service, with a markup added for profit. This strategy ensures that a business covers its expenses and achieves a desired level of profitability. It’s straightforward and easy to calculate but may not always consider market conditions or customer demand.

  • Example: A manufacturer calculates the production cost of a product and adds a 20% markup to set the retail price.

2. Penetration Pricing

Penetration pricing is used when a company aims to enter a new market or increase its market share quickly. This strategy involves setting low prices initially to attract customers, generate interest, and build brand recognition. After gaining a sufficient market share, the company may gradually raise prices.

  • Example: A new streaming service offering a low subscription fee to attract users, with plans to raise the price once customer loyalty is established.

3. Price Skimming

Price skimming is a strategy where businesses set high prices for a new or innovative product, targeting customers willing to pay a premium. Over time, prices are gradually lowered to attract more price-sensitive customers. This approach allows businesses to maximize profit from early adopters before reducing prices to capture a broader market.

  • Example: Technology companies like Apple often use skimming pricing for new smartphone launches.

4. Psychological Pricing

Psychological pricing takes advantage of consumer psychology to influence purchasing decisions. This strategy often uses pricing techniques like “charm pricing” (e.g., $9.99 instead of $10) to create the perception of a better deal. It can also involve premium pricing to position a product as high-quality or exclusive.

  • Example: A retailer prices items at $19.99 instead of $20 to make the price appear more attractive.

5. Dynamic Pricing

Dynamic pricing involves adjusting prices in real time based on factors like demand, competition, or seasonality. This strategy is commonly used in industries like airlines, hospitality, and ride-sharing services, where prices fluctuate depending on market conditions.

  • Example: Uber uses dynamic pricing (surge pricing) to increase fares during peak times or in areas with high demand.

6. Bundle Pricing

Bundle pricing is the strategy of offering multiple products or services together at a lower price than if they were purchased individually. This encourages customers to buy more items while perceiving a better value. It is often used in both consumer goods and services industries.

  • Example: Fast food chains offer meal combos, such as a burger, fries, and drink, at a discounted rate when bought together.

7. Value-Based Pricing

Value-based pricing is centered around setting prices based on the perceived value to the customer rather than the cost of production. This strategy requires businesses to understand their customers’ needs and how much they are willing to pay for the product’s benefits, features, or unique qualities.

  • Example: High-end cosmetics companies use value-based pricing by positioning their products as luxury items with added benefits like superior ingredients or packaging.

8. Competitive Pricing

Competitive pricing involves setting prices in line with competitors in the market. This strategy can either match, beat, or slightly exceed the competition’s prices based on a company’s positioning. It works best in markets with many similar products where price competition is high.

  • Example: Retailers often price similar products at competitive rates to ensure they remain attractive to consumers and avoid losing business to cheaper alternatives.

Nature of Pricing:

1. Strategic Tool

Pricing is a strategic tool that plays a pivotal role in a company’s market positioning and overall marketing mix. The price of a product or service affects how customers perceive the quality, value, and brand identity. By adjusting pricing, businesses can influence demand, increase market share, and attract specific customer segments.

  • Example: Premium pricing strategies can create a perception of high quality, while competitive pricing might be used to attract price-sensitive customers.

2. Dynamic

Pricing is not static; it is subject to change based on various internal and external factors, including demand, competition, economic conditions, and costs. Businesses often adjust their prices to respond to market fluctuations, consumer behavior, and competitor pricing strategies. Dynamic pricing helps companies remain competitive and optimize profits in a changing environment.

  • Example: Airlines often adjust ticket prices based on demand, time of booking, and availability.

3. Reflects Costs and Profit Margins

The price of a product or service is often based on the costs involved in its production, distribution, and marketing. Pricing must not only cover these costs but also ensure a profit margin for the company. Understanding fixed and variable costs is essential for setting an appropriate price that ensures profitability.

  • Example: A retailer pricing a product will factor in the cost of manufacturing, shipping, and overheads while adding a profit margin.

4. Customer-Oriented

The price must align with the perceived value of the product or service from the customer’s perspective. A customer-oriented pricing strategy considers factors such as the target market’s buying behavior, their willingness to pay, and the product’s perceived benefits. This approach helps in setting a price that customers find fair and reasonable.

  • Example: Apple’s pricing of its smartphones is based on consumer perception of innovation and quality.

5. Competitive

Pricing is heavily influenced by competition. Companies need to analyze competitors’ pricing strategies to set a price that is competitive in the market. Pricing too high may drive customers to competitors, while pricing too low could lead to a loss of perceived value. Competitive pricing ensures that businesses maintain market relevance and profitability.

  • Example: Supermarkets often adjust their prices based on competitor promotions.

6. Legal and Ethical Considerations

Pricing must adhere to legal regulations and ethical standards. In many countries, laws prevent unfair pricing practices such as price-fixing, price discrimination, and deceptive pricing. Businesses must ensure that their pricing strategies do not exploit consumers or violate antitrust laws.

  • Example: The Indian government regulates the maximum retail price (MRP) of essential goods to protect consumers.

Scope of  Pricing

1. Cost-Based Pricing

The scope of pricing starts with understanding the costs involved in producing and delivering a product or service. Pricing must cover both fixed and variable costs, while ensuring a reasonable profit margin. Cost-based pricing is often the starting point for setting prices. This approach involves determining the total cost of production and adding a desired profit margin.

  • Example: A manufacturer of a gadget may calculate its production cost and add a 20% markup to set the retail price.

2. Market-Based Pricing

Market-based pricing involves setting prices according to market demand, competition, and customer expectations. Businesses must consider external factors, including competitor pricing, market trends, and consumer demand, when setting their prices. By analyzing the market and understanding customer perceptions of value, companies can adjust their pricing strategies accordingly.

  • Example: A clothing retailer might adjust prices based on seasonal demand or competitive pricing in the market.

3. Psychological Pricing

The scope of pricing also includes psychological pricing, which uses pricing tactics to influence customer behavior. It involves setting prices that create an emotional impact, such as $9.99 instead of $10, or using prestige pricing to indicate luxury and exclusivity. These strategies are designed to appeal to the customer’s emotions and perception of value.

  • Example: A luxury brand may set prices at higher levels to create a perception of quality and exclusivity.

4. Penetration Pricing

In markets where companies aim to gain market share quickly, penetration pricing is used. This strategy involves setting a low price initially to attract customers and build brand awareness. Once the market share increases, the business may gradually raise prices. This approach is especially useful in new market entries or highly competitive industries.

  • Example: A new streaming service may offer low subscription prices to attract customers before increasing the rates.

5. Skimming Pricing

Skimming pricing strategy is often used for new, innovative products. Here, businesses set high initial prices, targeting customers who are willing to pay a premium for the latest product or service. Over time, as demand decreases or competition increases, the price is gradually reduced. This helps businesses maximize profits in the early stages of a product’s lifecycle.

  • Example: Technology companies often launch new smartphones at a high price before reducing them after a few months.

6. Discount and Promotional Pricing

Discounts and promotions are an integral part of the scope of pricing, especially in retail and e-commerce. Offering discounts, seasonal sales, or limited-time promotions can stimulate demand, clear out inventory, and attract new customers. This strategy helps businesses manage inventory and improve sales volumes during specific periods.

  • Example: A retailer offering 30% off during a holiday sale to boost sales.

7. Dynamic Pricing

Dynamic pricing is an advanced pricing strategy that involves adjusting prices in real-time based on demand, supply, or other external factors. This type of pricing is particularly common in industries like airlines, hospitality, and ride-sharing services, where prices fluctuate according to demand and availability.

  • Example: Airlines adjust ticket prices based on factors such as the time of booking and available seats.

Challenges of Pricing:

  • Market Dynamics

Market conditions, including competition, consumer demand, and economic fluctuations, can change rapidly. Businesses must continually assess these dynamics to set appropriate prices, making it challenging to maintain consistent pricing strategies. Unexpected shifts, such as economic downturns or new entrants in the market, can disrupt established pricing models.

  • Cost Fluctuations

Prices must reflect the costs associated with producing and delivering a product or service. However, fluctuating costs of raw materials, labor, and logistics can complicate pricing strategies. Businesses must frequently adjust their pricing to maintain profitability without alienating customers who may be sensitive to price increases.

  • Consumer Perception

Understanding how consumers perceive value is crucial for effective pricing. If prices are set too high, customers may perceive the product as overpriced; if too low, it may be viewed as low-quality. Striking the right balance between perceived value and price is a persistent challenge.

  • Competition

Competitive pricing is essential to attract and retain customers, but it can lead to price wars, eroding profit margins. Businesses must carefully analyze competitors’ pricing strategies and find ways to differentiate their offerings without engaging in destructive price competition.

  • Price Sensitivity

Different market segments exhibit varying levels of price sensitivity. Determining how sensitive customers are to price changes can be complex, especially in diverse markets. Businesses need to use segmentation strategies to tailor pricing to different consumer groups effectively.

  • Regulatory Constraints

Pricing can be influenced by government regulations and industry standards, especially in highly regulated sectors like pharmaceuticals, utilities, and telecommunications. Businesses must navigate these constraints while ensuring compliance and maintaining competitive pricing.

  • Psychological Pricing

Consumer psychology plays a significant role in pricing. Strategies like charm pricing (e.g., setting prices at $9.99 instead of $10) can influence purchasing decisions, but businesses must understand the psychological impact of pricing and how it relates to brand positioning.

  • Global Pricing Strategies

For companies operating in multiple countries, establishing a global pricing strategy can be particularly challenging. Factors like currency fluctuations, local market conditions, and cultural differences affect pricing decisions and require a nuanced approach.

  • Technology and Data Analytics

While technology provides tools for data-driven pricing strategies, it also introduces complexity. Businesses must effectively leverage analytics to monitor pricing performance and make informed decisions, requiring investment in technology and expertise.

Factors Influencing Pricing

  • Cost of Production

The fundamental factor influencing pricing is the cost incurred in producing goods or services. This includes direct costs (materials, labor) and indirect costs (overheads). Businesses typically set prices to cover these costs while ensuring a profit margin. Understanding the total cost structure helps in determining the minimum price point necessary for sustainability.

  • Market Demand

The level of consumer demand for a product or service significantly influences pricing. When demand is high, businesses may set higher prices due to increased willingness to pay. Conversely, when demand is low, prices may need to be reduced to stimulate sales. Market research helps identify demand elasticity and assists in forecasting how changes in price can affect sales volume.

  • Competitive Landscape

The pricing strategies of competitors play a critical role in determining a company’s pricing. Businesses must analyze competitor pricing to ensure their offerings are competitively positioned. This may involve setting prices lower to attract price-sensitive customers or higher if offering superior value or differentiation.

  • Customer Perception and Value

Customer perception of value is pivotal in pricing decisions. Pricing should reflect the perceived value of the product or service in the eyes of consumers. Factors influencing this perception include brand reputation, product quality, and the benefits offered. Effective communication of value can justify higher prices and enhance consumer willingness to pay.

  • Economic Conditions

Broader economic factors, such as inflation, interest rates, and economic growth, impact pricing decisions. In an inflationary environment, businesses may need to raise prices to maintain profit margins. Economic downturns may necessitate price reductions to retain customers facing tighter budgets.

  • Regulatory and Legal Factors

Government regulations, industry standards, and legal considerations can influence pricing. Certain industries may have pricing regulations to protect consumers, prevent price gouging, or maintain fair competition. Companies must stay compliant with these regulations while formulating their pricing strategies.

  • Distribution Channels

The choice of distribution channels affects pricing due to varying costs associated with each channel. Direct sales may allow for lower prices, while intermediaries (wholesalers, retailers) can add markup to prices. Understanding the entire distribution strategy helps in setting appropriate end-user prices.

  • Marketing Objectives

The overall marketing strategy and objectives of a business also influence pricing. For example, a company aiming to penetrate the market may adopt penetration pricing, setting low prices to attract customers quickly. Alternatively, a company focusing on premium positioning may implement skimming pricing to maximize revenue from early adopters.

Management Notes

Product Lifecycle, Meaning and Stages in PLC

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Product Life Cycle (PLC) is a marketing concept that describes the stages a product goes through from its introduction to its decline. It typically consists of four main phases: Introduction, where the product is launched and awareness is built; Growth, marked by increasing sales and market acceptance; Maturity, where sales stabilize and competition intensifies; and Decline, characterized by decreasing sales as consumer preferences shift.

Product Life Cycle Stages:

  • Introduction Stage

Introduction stage marks the launch of a new product into the market, following its development. This phase begins when the product is first made available for purchase. During this period, sales growth is often slow as the market takes time to adapt to the new offering. For instance, products like frozen foods and HDTVs may remain in this stage for several years before entering a phase of rapid growth.

Profits during the introduction stage are typically negative or low due to high initial costs associated with distribution and promotion. Companies must invest heavily to attract distributors and build inventory while also spending significantly on advertising to raise consumer awareness and encourage trial. The focus here is on reaching early adopters who are most inclined to buy.

A successful launch strategy aligned with the product’s intended positioning is critical. The primary goal during this stage is to create product awareness and encourage trial. Since the market may not be ready for advanced features or refinements, companies often produce basic versions of the product. Cost-plus pricing is commonly used to recover development costs. Selective distribution helps focus efforts on key distributors, and advertising aims to build awareness among innovators. Heavy sales promotions are essential to stimulate trial among potential customers.

  • Growth Stage

Growth stage is characterized by a significant increase in sales as early adopters continue to purchase the product, attracting later buyers influenced by positive word-of-mouth. This growth phase also invites competition, prompting new entrants to the market, which leads to increased distribution and sales as resellers build inventory. Because promotion costs are spread over a larger volume and manufacturing costs decrease, profits typically rise during this stage.

The main objective during the growth stage is to maximize market share. To sustain rapid growth, companies can enhance product quality and introduce new features or models. Expanding into new market segments and distribution channels is also a strategy to capitalize on the growing demand. Pricing strategies may involve maintaining or lowering prices to penetrate the market effectively. Promotion efforts shift from building awareness to fostering conviction and encouraging purchases.

Strategically, the growth stage exemplifies the interconnectedness of product life cycle strategies, as companies must balance the pursuit of high market share with the need for current profits. Investments in product improvements and promotional efforts can solidify a dominant market position, even if it means sacrificing immediate profits for future gains.

  • Maturity Stage

Maturity stage sees sales growth slow or plateau after reaching a peak, often due to market saturation. This phase tends to last longer than the previous stages and poses significant challenges for marketing management. Many products on the market are in this maturity phase.

Sales growth decelerates as competition intensifies, with multiple producers vying for market share. As competitors lower prices, increase advertising, and ramp up product development budgets to innovate, profit margins may decline. Weaker competitors may exit the market, leaving only established firms.

The primary goal in the maturity stage is to maximize profit while defending market share. To achieve this, companies can modify the market, product, or marketing mix. Modifying the market involves seeking new users and segments, while modifying the product may include enhancing characteristics like quality or features. Additionally, changes in the marketing mix, such as price adjustments or improved advertising, can help sustain sales.

Successful products in this stage often undergo continuous adaptations to meet evolving consumer needs, emphasizing that proactive strategies are essential for defending a mature product.

  • Decline Stage

Decline stage is when a product experiences a reduction in sales. This decline can occur slowly or rapidly, depending on factors like technological advancements, shifts in consumer preferences, or increased competition. Sales may drop significantly or stabilize at a lower level for an extended period.

Recognizing and managing declining products is crucial, as carrying a weak product can incur hidden costs, including resource allocation and reduced management focus on more profitable products. Companies must select appropriate strategies during this stage, deciding whether to maintain, harvest, or discontinue the product.

The primary objective in the decline stage is to reduce expenditures. Strategies include cutting prices, selectively distributing through profitable channels, and minimizing advertising and promotions to retain loyal customers. If a company opts to maintain the product, it may seek to reposition or reinvigorate it to re-enter the growth stage. Conversely, harvesting involves reducing costs while maximizing short-term profits, and dropping the product could mean selling it to another firm or liquidating it.

 

Management Notes

Product Mix, Meaning, Elements and Strategy

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Product Mix refers to the complete range of products that a company offers for sale to its customers. It includes all product lines and individual products that a company markets, showcasing variety in terms of size, design, functionality, or price. The product mix is characterized by four key dimensions: width (the number of product lines), length (the total number of products), depth (the variety within each product line), and consistency (how closely related the product lines are). A well-balanced product mix allows companies to meet diverse customer needs and expand market reach.

Elements of Product Mix

Elements of the Product mix. refer to the various components that make up a company’s range of products. These elements help a business manage its products and create a comprehensive strategy for satisfying customer needs and driving profitability. The main elements of the product mix are Product line, Product width, Product length, Product depth, and Product consistency.

1. Product Line

Product line is a group of related products that a company offers under a single brand. These products usually share similar characteristics, cater to the same target market, or serve similar purposes. For example, a company that produces personal care items may have separate product lines for hair care, skincare, and hygiene products.

  • Example: Apple’s product lines include iPhones, iPads, MacBooks, and Apple Watches

2. Product Width

Product width refers to the number of different product lines that a company offers. A wider product mix means a company has a diverse range of product lines, while a narrower mix indicates fewer product lines. A broad product width allows companies to cater to various customer segments, reduce market risk, and create cross-selling opportunities.

  • Example: Procter & Gamble has a wide product mix, offering a variety of product lines including beauty, grooming, health care, and household cleaning.

3. Product Length

Product length is the total number of individual products or items offered across all product lines. This includes all variants within each product line. The length helps companies assess the variety of products they offer within each product line.

  • Example: In the beverage category, Coca-Cola offers a long product line, with products such as Coke, Diet Coke, Coke Zero, Sprite, and Fanta.

4. Product Depth

Product depth refers to the number of variations offered within a single product line. Variations can include different sizes, flavors, colors, designs, or any other features that differentiate products within a line. Greater product depth allows companies to meet diverse customer preferences and capture niche markets.

  • Example: Colgate offers various toothpaste options in terms of flavors, packaging sizes, and specific benefits (e.g., whitening, cavity protection, sensitivity relief).

5. Product Consistency

Product consistency refers to how closely related the product lines are in terms of use, production requirements, distribution channels, or branding. High consistency means the products are closely related, while low consistency indicates a mix of unrelated products.

  • Example: A company like PepsiCo has a relatively consistent product mix focused on beverages and snacks, while a conglomerate like General Electric has a low consistency with products ranging from jet engines to medical devices.

Example of Product Mix.: in Table

Here’s a table that illustrates an example of a Product Mix. for a hypothetical company, including various product lines and their respective products:

Element Description Example
Product Line A group of related products offered by a company under one brand, sharing similar characteristics. Apple’s product lines include iPhones, iPads, MacBooks, and Apple Watches.
Product Width The number of different product lines a company offers. Procter & Gamble offers product lines in beauty, grooming, health care, and household cleaning.
Product Length The total number of individual products or items offered across all product lines. Coca-Cola’s beverage category includes Coke, Diet Coke, Coke Zero, Sprite, and Fanta.
Product Depth The number of variations offered within a single product line (e.g., sizes, flavors, colors). Colgate offers toothpaste in various sizes, flavors, and specific benefits like whitening or sensitivity relief.
Product Consistency How closely related product lines are in terms of use, production, distribution, or branding. PepsiCo focuses on beverages and snacks (high consistency), while General Electric offers diverse products like jet engines and medical devices (low consistency).

Product Mix Strategies

Product Mix Strategies are techniques companies use to manage and optimize their range of products to better meet customer needs and improve market performance. These strategies help in deciding what products to introduce, modify, or discontinue.

  • Expansion

A company adds new product lines or variants to its product mix. This strategy is used when a company wants to diversify its offerings, target new market segments, or increase sales volume.

  • Contraction

Also known as product line pruning, this strategy involves reducing the number of products or product lines. Companies use this when certain products become unprofitable or when they want to focus on their core products.

  • Product Modification

Company makes improvements or changes to existing products, such as adding new features, improving quality, or updating design. This strategy helps keep products competitive and relevant in the market.

  • Diversification

Company enters new markets or introduces entirely new product categories. It can be related or unrelated diversification, depending on whether the new products are similar or different from the existing lines.

  • Product Differentiation

This strategy focuses on making a product stand out from competitors’ offerings by highlighting its unique features, branding, or design. It aims to create a competitive advantage and attract specific customer segments.

  • Trading Up (Upward Stretching)

Company adds higher-end, more premium products to its product line to target more affluent customers. This strategy helps elevate the brand and capture a more profitable segment of the market.

  • Trading Down (Downward Stretching)

Company introduces lower-priced products to appeal to a broader audience or to compete with lower-cost competitors. This can help companies gain market share in a more price-sensitive segment.

  • Line Filling

Company adds new products within its existing range to fill gaps in the product line. This prevents competitors from exploiting these gaps and helps the company meet customer demands more effectively.

  • Product Line Extension

This involves expanding a particular product line by adding more variants, such as different sizes, flavors, or features. It helps attract different customer preferences within the same product line.

  • Cannibalization Management

This strategy ensures that new products introduced do not negatively affect the sales of the company’s existing products. Companies need to carefully manage product mix to avoid overlap and sales losses.

Management Notes

Personality in Marketing

indiafreenotesby indiafreenotes0

Marketers today are often leveraging more personal marketing campaigns. Understanding more about personality-based marketing and the future tactics that are shaping the industry can help individuals in a marketing based business to adopt some of the newest approaches to their work. Attaching behavioral science in the execution of a marketing campaign will help to make sure that marketers can exceed their targets.

One of the biggest problems that marketers face with personal marketing campaigns is recent controversies with Cambridge analytic and Facebook. These types of personalized marketing campaigns threaten the potential of marketers before they can customize a full campaign.

By using personal information for marketing, it is possible for marketers to have an extra nuance for all of their messages. With the way, the data is captured today however the personalization based off of demographics and other expressed desires of customers is set to grow a little more difficult.

Targeting individuals personally in marketing is now seen as more of a dark art. Using behavioral science and remaining careful with personal data on social media regarding ethics can help you with personalized marketing. Consumers and businesses alike can often have better experiences when their behavioral data is considered.

Personality science in marketing involves looking into the characteristics of patterns for the way that people will feel, behave and think as they are viewing an advertisement or accessing a page. Personality scientists have seen relationships between the way that people behave, their lineage and more. Personality tests have taken place over generations, and through some of these forms of testing and data gathering, it is possible to recognize some trends inconsistency and data.

For the use of marketers, some individuals are looking towards larger populations and searching for the promotion of various behaviors. By gathering data and working to predict behaviors are personality traits it’s possible to empathize with individuals and engage them with a particular message. Finding a way to resonate with an individual and a large population or demographic is something that marketers should be investing in.

Personality Marketing

Again, the theory is that if you can match the tone and framing of the communications or marketing with the personality profiles and thinking styles of potential customers, patients, voters, or those whose behavior you’d like to change, you can boost effectiveness.

For example, look at retail shoppers. Some do not particularly like shopping. They take a functional approach. It’s a chore. They are not wedded to brands and are motivated by price. Psychologists call them “utilitarian” shoppers. Meanwhile, “hedonic” shoppers enjoy shopping and love brands and join loyalty programs. They identify with brands and may use them to signal who they are and what they stand for. They may look identical when viewed through traditional demographic data, but you would be sorely mistaken to treat them the same way. Certain personality profiles correlate with utilitarian versus hedonic shoppers. So, if you can know shoppers’ personalities, you can customize how you engage them.

But these findings are not limited to retail shopping. In fact, tailored communication has proven highly successful in the context of health care and health communication. We know that people show higher compliance rates when receiving messages that are customized to their individual motivations, and we also know that such messages help in changing a number of cancer-related behaviors, including smoking, dieting, exercising, and regular cancer screenings.  What if we could not only increase the chances that a customer buys a handbag, but improve their quality of health or the uptake of flu shots or vaccinations by tailoring the messaging to different personalities and cognitive styles?

The ethics of personality marketing

The essentials of gathering and using personality traits ethically should follow the general guidelines of other behavioral science research of consumers, employees or patients. They include: transparency of intent and usage; abiding by privacy laws and regulations; and aligning researcher/marketer interests with those of respondents (in other words, help them rather than exploit them).

That last principle is the right starting point for marketers: Is your use of personality research actually making your customers better off, or just helping you? As the field evolves, marketers should look to the research community for inspiration and guidance on transparency. And, of course, businesses must comply with the law.

Putting personality marketing in action

Given the promise and accessibility of this new form of communication, how should marketers get started?

In our experience, the first step is to understand the challenge or goal you’re trying to achieve. Is it to align employees with corporate goals, or to promote smoking cessation, or to increase uptake of vaccinations, or to change consumer behavior, or better segment consumers by what really motivates them (which they cannot articulate)?

Next, identify the cognitive biases and heuristics serve as barriers or drivers along the way to achieving the goal. (The Ogilvy Center for Behavioral Science has built a tool to navigate thousands of studies to surface the relevant biases.) Map the biases to steps along the consumer (or patient) journey. Doing so will help you identify steps along that journey where creative communications or content can help consumers overcome specific biases or other hurdles to a decision or new behavior.

Once you have a strong understanding of the customer journey, you can run a personality test and combine it with other data to reveal correlations between personality traits and certain behaviors, preferences, or mindsets.

The final step and the “art” of personality marketing is to craft the messaging, advertising or content to match different personality profiles while also considering the stage of the customer journey at which you plan to engage. This isn’t easy, by any means. But it offers the opportunity to create the most effective and empathetic messaging with different groups of customers.

Personality marketing is just one aspect of a new, fast-emerging approach to understanding people from the inside out. We can now move from observational oddities of what makes humans “Predictably Irrational,” as the behavioral scientist Daniel Ariely has written, to decoding what truly moves individuals at scale and engaging them on their terms. How we do this will determine whether it is used for empathetic communication and positive outcomes, or for manipulation and exploitation.

Psychological traits in the past were often measured by official personality tests. Today however with the sharing of data and the digital footprints that people are leaving, it has become much easier to test personality. Digital psychometrics regarding questionnaire responses, consented likes, tweets, shares and browsing history can all lend a hand to producing a high-quality data set that can be beneficial for testing personality traits.

Even trends in America showcase that the average American is liking and sharing around 250 pages within an average year. This offers a wealth of data to marketers if they get involved with the right data collection company and begin experimenting with highly targeted advertising.

Personality-based marketing can offer some incredible advantages for the future of your marketing budget. This type of marketing and data collection for personality marketing needs to be done in a responsible and ethical fashion, however.

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