1.1 Definition and Evolution of Markets.

the term market refers to the group of consumers or organizations that is interested in the product, has the resources to purchase the product, and is permitted by law and other regulations to acquire the product.

market development process:

1. Establish market development aims and targets.2. Identify target market(s), sectors and niches.3. Assess your existing sales organisation and develop it as necessary.4. Source/utilise a suitable prospect database - ensure data is clean and up to date, and

strategic decision-makers are identified.5. Develop and agree your strategic proposition(s) - with reference to USP's, UPB's,

competitors, positioning, product mix, margins, etc.6. Design your communication(s) and method(s) to generate enquiries.7. Design your response and sales processes and establish or provide required capabilities.8. Design and provide your required monitoring, measurement and reporting systems.9. Implement your sales development activity and reinforce it through coaching, training,

meetings, executive endorsement, etc. 10. Follow-up the activity: coach as required, review, monitor, seek customer and prospect

feedback (successful and unsuccessful) and report on performance.11. Make changes and improvements and continue your activity at the appropriate stage.

What is a Market

In the words of Cournot, French Economist, “Economists understand by the term market not any particular market place in which things are bought and sold but the whole of any region in which buyers and seller’s are in such free inter course with one another that the prices of same goods & services tend to equality easily and quickly”. Thus Market is a real or imaginary place where goods and services are traded.

Essentials of Market

1. Good or service to be traded.2. Buyers and sellers3. A place, be it with real boundaries or imaginary (like world market)4. Contact between buyers and sellers

Markets, on the basis of goods or services traded between, can be classified as goods or commodity market or it can be factor market for services. However, the popular basis of market structure is the factors that form the environment of market.

Market Environment

The following are the main factors that form the environment of market and the markets are usually classified on the basis of these factors.

1. The number of buyers and sellers.2. The nature of product produced. Whether it is homogenous or differentiated ?3. Price elasticity of demand.4. Ease of entry into an industry.5. Degree of control over price (Regulated or deregulated).

Classification of Market

On the basis of the above, the markets are classified to be

1. Perfect Competition2. Imperfect Competition

1. Perfect Competition

1. Large no of sellers & buyers number2. Homogeneous products perfectly3. Free entry and exit.4. Perfect knowledge of price cost (no control over price)5. Perfectly price elastic demand imperfect competition.

2. Imperfect Competition

Monoplistic Competition Oligopoly Monoply

Monopolistic Competition

1. Large no of sellers and buyers2. Differentiated products which are close substitute.3. Free entry but firms can produce only close substitutes.4. Some control our price.5. Less than perfectly price elastic demand.

Oligopoly

1. Few producers2. Homogenous (Pure Oligopoly) and differentiated but close substitutes (Differentiated Oligopoly)3. Barriers to entry4. Small control (Pure Oligopoly) large control (Differentiated Oligopoly) over price5. P.E of D. small (Pure Oligopoly) large (Differentiated Oligopoly)

Monopoly

1. Single firm2. Perfectly differentiated product without close substitute3. Very strong barriers to entry4. Extreme control over price5. Near to in elastic price elasticity of demand

What is Marketing Strategic Planning

Marketing Strategic Planning means to plan all the activities of a business to ensure competitive advantages and profitability. Marketing Strategic planning involves adapting the firm to take advantage of opportunities in its constantly changing marketing environment.

Marketing Strategic planning engages a firm to take advantages from the available opportunities in frequently changing marketing environment.

Steps in Marketing Strategic Planning

Following are the steps in marketing strategic planning

1. Defining The Company Mission2. Setting Company Objective and Goals3. Establishing Strategic Units (SBUs)4. Performing Situational Analysis5. Developing Marketing Strategy6. Implementing Planning7. Feed back

1. Defining the Company Mission Statement

Frist step in marketing strategic planning is defining the company mission statement. Mission statement a statement of organization’s purpose, what it wants to accomplish in the larger environment. The mission statement should be base on the following facts that it should be:

Market oriented rather than product oriented Realistic Specific Fit the market environment Base on its distinctive competencies Motivating

2. Company Objectives and Goals

After to define company’s mission, the second step in marketing strategic planning is the company objectives and goals for each level of management, and the managers will responsible to achieve them. Marketing strategies are necessary to support these marketing objectives.  If

increase its market shares, the company should increase its products availability and promotion. To take place in new markets it should cut its prices. The company’s mission is translated into a set of objectives for the current period. 

The objectives should be

Specific and stated Achievable

For example “To increase our market share to 10% in one year”

3. Establishing Strategic Business Units

Most companies operate several businesses. A business must be viewed as a customer satisfying process, not a goods producing process. A business can be defined in three dimensions Customer Group, Customer Needs & Technology. Large companies manage variety of businesses for each business a strategy is needed. For instance there are 49 Strategic Business Units of General Electronic and there are three main characteristics of every SBU.

It is single business or collection of related business that can be planned separately the rest of the company.

It has it own set of competitors. It has a manager who is responsible for strategic planning and profit performance.

4. Performing Situation Analysis

Performing situation analysis is the fourth step of marketing strategic planning. In performing situation analysis a business analyze both internal and external environment.

Internal Environment

Each Business needs to evaluate its internal environment (Strengths and weaknesses) periodically. A company management or consultant review marketing, financial, manufacturing and organizational competitors and evaluate each factor as a major or minor strength and major or minor weakness.

External Environment

In External Environment the company analysis (opportunities & Threats), once the company examine its opportunities & threats which facing a specific business unit, it characterized it business in four outcomes business overall attractiveness.

1. An ideal business is high in opportunities and low in threats.2. A speculative business in both major opportunities and threats.3. A mature business is low in major opportunities and low in threats.4. A troubled business is low in opportunities and high in threats.

5. Marketing Strategy

Strategy is the fifth setp of marketing strategic planning. Strategy is a game plan for getting the objectives. Every business must plan a strategy and achieve its objectives.  Consisting of all marketing strategy and compatible technology strategy and sourcing strategy.

Types of Marketing Strategy

Overall Cost Leadership

In this strategy the business work hard for low production and distribution cost. So it price lower and win market share.

Differentiation

The businesses try to achieve superior performance in an important customers benefits area valued by large part of market.

Focus

Here business focuses one or more narrow market segments.  The firm gets to know these segments either cost leadership or differentiation within the target segment.

6. Implementing Planning

A clear strategy may be useless if the firm fails to implement it carefully.  In this stage managers will work a lot and get work from their subordinates. Successful marketing implementation depends on who well the company blends its people, organization structure, decision and reward system, and company culture into a cohesive action program that supports its strategies. The company’s formal organization structure plays an important role in implementation marketing strategy. The best example is Mckinesy 7s framework for successful implementation.

7. Feedback of Marketing Strategic Planning

After implementing its strategy the firm needs to track the result and monitor new developments in external and internal environment.

1.3 Functions of Marketing.

Basic Functions of Marketing

The marketing process performs certain activities as the goods or services move from producer to consumer. Every firm does not perform all these activities or jobs. However, any company that wants to operate its marketing system successfully must carry them out. The following marketing tasks have been recognized for a long time.

1. SellingIt is core of marketing. It is concerned with the persuasion of prospective buyers to actually complete the purchase of an article. Setting pays an important part in realizing the ultimate aim of earning profit. Selling is enhanced by means of personal selling, advertising, publicity and sales promotion.

2. BuyingIt involves what to buy, what quality, how much, from whom, when and at, what price. People in business buy to increase sales or to decrease costs. Purchasing agents are much influenced by quality, service and price. The products that the retailers buy for resale are determined by the need and preferences of their customers.

3. TransportationTransport is the physical means whereby goods are moved from the places where they are produced to those they are needed for consumption. Transportation is essential from the procurement of raw materials to the delivery of finished products to the customers places. Marketing relies mainly on railroads, tracks, waterways, pipelines and air transport. The type of transportation is chosen on several consideration such as suitability, speed and cost.

4. StorageIt involves the holding of goods in proper condition from the time they are produced until they are needed by consumers (in case of finished products) or by the production department (in case of raw materials and stores). Storing protects the goods from deterioration and helps in carrying over surplus for feature consumption or use in production. Goods may be stored in various warehouses situated at different places. Storing assumes greater importance when production is seasonal or consumption may be seasonal. Retail firms are called “stores”.

5. Standardization and GradingThe other activities that facilitate marketing are standardization and grading. Standardization means establishment of certain standards or specifications for products based on intrinsic physical qualities of any commodity. This may involved quantity (weight or size) or it may involve quality (colour, shape, appearance, material, taste, sweetness etc). Government may also set some standards e.g., in case of agricultural products. A standard conveys a uniformity of the products.

“Grading means classification of standardized products into certain well-defined classes or groups.” It involves the division of products into clauses made up of unit processing similar characteristics of size and quality. Grading is very important for “raw material” (such as fruits and cerials), mining products” (such as coal, iron-ore and mangenese) and “forest products” (such as timber). Branded consumer products may bear grade levels, – A B C.

6. FinancingIt involves the use of capital to meet financial requirements of the agencies dealing with various activities of marketing. The services of providing the credit and money needed to meet the cost of getting merchandise into the hands of the final user is commonly referred to as finance, function in marketing. In marketing, finances are needed for working capital and fixed capital,

which may be secured from three sources – onward capital, bank loans and advances, and trade credit (provided by the manufactures to wholesaler and by the wholesaler to the retailers).

7. Risk TakingRisk means lose due to some unforeseen circumstances in future. Risk-bearing in marketing refers to the financial risk inherent in the ownership of goods held for an anticipated demand, including the possible losses due to a fall in price and the losses from spoilage, depreciation, obsolescence, fire and floods or any other loss that may occur with the passage of time. From production of goods to its selling stage, many risks are involved due to changes in marker conditions, natural causes and human factors. Changes in fashions or interventions also cause risks. Legislative measures of the government may also cause risks.

8. Market InformationThe only sound foundation, on which marketing decisions may be based, is correct and timely market information. Right facts and information reduce the aforesaid risks and thereby result in cost reduction. Business firms collect, analyze and interpret facts and information from internal sources, such as records, sales people and findings of the market research department. They also seek facts and information from external sources, such as business publications, government reports and commercial research firms. Retailers need to know about sources of supply and also about customers buying motives and buying habits. Manufacturers need to know about retailers and about advertising media. Firms in both these groups need information about competitors activities and about their markets. Even ultimate consumers need market information about availability of products, their quality standards, their prices, and also about the after-sale service facility Common sources for consumers are sales people, media advertisements, colleagues etc.

It may be noted that in addition to the mentioned jobs, the marketing manager is also involved in product planning, pricing of products, selection of distribution channels, framing of marketing objectives, environmental scanning, target market selection, market programming and developing marketing strategy.

Modern Concepts of Marketing.

1. Nature2. Foundation 3. Importance4. Limitation

1. Nature

customer orientation

Consumer Orientation is the focus on meeting the needs of one's customers, internal or external. This service establishes specific customer satisfaction standards and actively monitors client satisfaction, taking steps to clarify and meet customer needs and expectations (both expressed and unexpressed). At lower levels the service involves courteous and timely responsiveness to the requests of customers, while at the higher levels, it involves developing the relationship of partner and trusted advisor.

Marketing researchMarketing Research is a systematic method of collecting, recording and analysing of data which is used to solve marketing problems.

A company faces many marketing problems. It faces problems about consumers, product, market competition, sales promotion, etc. Marketing research helps to solve these problems. Marketing research is a systematic process. It first collects data (Information) about the Marketing problem. Then it records this data. Then it analysis (studies) this data. Then it draws conclusions about this data. After that, it gives suggestions (advice) for solving the marketing problem. So, Marketing research helps to solve the marketing problems quickly, correctly and systematically.

Marketing research collects full information about the consumers. It finds out the needs and expectations of the consumers. So the company produces the goods according to the needs and expectations of the consumers. Marketing research helps the company to make its production and marketing policies. It helps the company to introduce new products in the market. It helps to identify new markets. Marketing research also collects full information about the competitors. The company uses this information to fight competition. It also helps the marketing manager to take decisions.

Marketing research is a special branch of Marketing Management. It is the soul of Marketing management. It is of recent origin and widely used by manufacturers, exporters, distributors and service organisations.

Marketing research is very systematic, scientific, objective and organised. It has a wide scope. It includes product research, consumer research, packaging research, pricing research, etc. Marketing research is a continuous process. It has a few limitations. However, a company cannot survive and succeed without Marketing research.

Market planning

Marketing is the process of developing and implementing a plan to identify, anticipate and satisfy consumer demand, in such a way as to make a profit. The two main elements of this plan

are market research to identify and anticipate customer requirements and the planning of an appropriate marketing mix to meet these requirements. Market research involves gathering and recording information about consumers, market, product, and the competition in an organised way. The information is then analysed and used to inform marketing decisions. There are three main ways of gathering information for market research: 1.From internal information already held by an organisation, e.g. details of existing customers and their spending habits.2. External primary information - i.e. information collected at first hand by interviewing customers and potential customers to get their views about a company, products and services. 3. External secondary information - using published sources of information e.g. those produced by marketing organisations about products, markets and brands. Marketing planning can then be used: 1. To assess how well the organisation is doing in its markets. 2. To identify current strengths and weaknesses in these markets. 3. To establish marketing objectivesto be achieved in these markets. 4. To establish a marketing mix for each market designed to achieve organisational objectives. Service organisations like the Inland Revenue and Abbey will carry out marketing to find out about the sort of service that their customers and clients require in order to create an appropriate marketing plan. Manufacturing organisations like Cadbury Schweppes, Corus, Audi and Nissan will carry out product research in order to create an appropriate marketing plan for their products (as well as associated services). A simple definition of market research is 'keeping those who provide goods and services in touch with the needs and wants of those who buy the goods and services.'

Integrated Marketing

Integrated marketing occurs when the marketer devises marketing activities and assembles marketingprograms to create, communicate, and deliver value for consumers such that the whole isgreater than the sum of its parts. Two key themes are that (1) many different marketing activitiescan create, communicate, and deliver value and (2) marketers should design and implement anyone marketing activity with all other activities in mind.When a hospital buys an MRI from GeneralElectric s Medical Systems division, for instance, it expects good installation, maintenance, andtraining services to go with the purchase.

Service Marketing

Introduction

The world economy nowadays is increasingly characterized as a service economy. This is primarily due to the increasing importance and share of the service sector in the economies of most developed and developing countries. In fact, the growth of the service sector has long been

considered as indicative of a country’s economic progress.

Economic history tells us that all developing nations have invariably experienced a shift from agriculture to industry and then to the service sector as the main stay of the economy.

This shift has also brought about a change in the definition of goods and services themselves. No longer are goods considered separate from services. Rather, services now increasingly represent an integral part of the product and this interconnectedness of goods and services is represented on a goods-services continuum.

Definition and characteristics of Services

The American Marketing Association defines services as - “Activities, benefits and satisfactions which are offered for sale or are provided in connection with the sale of goods.”

The defining characteristics of a service are:

Intangibility: Services are intangible and do not have a physical existence. Hence services cannot be touched, held, tasted or smelt. This is most defining feature of a service and that which primarily differentiates it from a product. Also, it poses a unique challenge to those engaged in marketing a service as they need to attach tangible attributes to an otherwise intangible offering.

1. Heterogeneity/Variability: Given the very nature of services, each service offering is unique and cannot be exactly repeated even by the same service provider. While products can be mass produced and be homogenous the same is not true of services. eg: All burgers of a particular flavor at McDonalds are almost identical. However, the same is not true of the service rendered by the same counter staff consecutively to two customers.

2. Perishability: Services cannot be stored, saved, returned or resold once they have been used. Once rendered to a customer the service is completely consumed and cannot be delivered to another customer. eg: A customer dissatisfied with the services of a barber cannot return the service of the haircut that was rendered to him. At the most he may decide not to visit that particular barber in the future.

3. Inseparability/Simultaneity of production and consumption: This refers to the fact that services are generated and consumed within the same time frame. Eg: a haircut is delivered to and consumed by a customer simultaneously unlike, say, a takeaway burger which the customer may consume even after a few hours of purchase. Moreover, it is very difficult to separate a service from the service provider. Eg: the barber is necessarily a part of the service of a haircut that he is delivering to his customer.

Types of Services

1. Core Services: A service that is the primary purpose of the transaction. Eg: a haircut or the services of lawyer or teacher.

2. Supplementary Services: Services that are rendered as a corollary to the sale of a tangible product. Eg: Home delivery options offered by restaurants above a minimum bill value.

Difference between Goods and Services

Given below are the fundamental differences between physical goods and services:

Goods Services

A physical commodity A process or activity

Tangible Intangible

Homogenous Heterogeneous

Production and distribution are separation from their consumption

Production, distribution and consumption are simultaneous processes

Can be stored Cannot be stored

Transfer of ownership is possible Transfer of ownership is not possible

Services marketing

Services marketing is a sub field of marketing, which can be split into the two main areas of goods marketing (which includes the marketing of fast moving consumer goods (FMCG) and durables) and services marketing. Services marketing typically refers to both business to consumer (B2C) and business to business (B2B) services, and includes marketing of services like telecommunications services, financial services, all types of hospitality services, car rental services, air travel, health care services and professional services. The range of approaches and expressions of a marketing idea developed with the hope that it be effective in conveying the ideas to the diverse population of people who receive it.

Services are economic activities offered by one party to another. Often time-based, performances bring about desired results to recipients, objects, or other assets for which purchasers have responsibility. In exchange for money, time, and effort, service customers expect value from access to goods, labor, professional skills, facilities, networks, and systems; but they do not normally take ownership of any of the physical elements involved.[1]

There has been a long academic debate on what makes services different from goods. The historical perspective in the late-eighteen and early-nineteenth centuries focused on creation and possession of wealth. Classical economists contended that goods were objects of value over which ownership rights could be established and exchanged. Ownership implied tangible possession of an object that had been acquired through purchase, barter or gift from the producer or previous owner and was legally identifiable as the property of the current owner.

Adam Smith’s famous book, The Wealth of Nations, published in Great Britain in 1776, distinguished between the outputs of what he termed “productive” and “unproductive” labor. The former, he stated, produced goods that could be stored after production and subsequently exchanged for money or other items of value. But unproductive labor, however” honorable,...useful, or... necessary” created services that perished at the time of production and therefore didn’t contribute to wealth. Building on this theme, French economist Jean-Baptiste Say argued that production and consumption were inseparable in services, coining the term “immaterial products” to describe them.

Characteristics of Services

Classification of Services

It is required to design & apply marketing techniques to completely satisfy the customer & increase profits & identify new emerging services.

Classifications can be done on following basis:

• Classification by Industry

• Classification by Target Effect

• Skill level of service provider (Professional/ Nonprofessional)

• Labor intensiveness (People-based/Equipment-based)

• Degree of customer contact (High / Low)

Goal of the service provider (Profit /Nonprofit)

Classification By Industry

a. Entertainment industry

b. Education

c. Telecommunications

d. Finance & Insurance

e. Transportation

f. Public utilities

g. Government services

h. Health

i. Hospitability Industry

j. Business services

k. Telecommunications

l. Trading

Problems in Service Marketing

Sometimes, service-oriented industries are easier to run than product-oriented industries. For example, a tennis coach might experience no expenses, while a seller of tennis rackets will at least need to buy space to store and sell the tennis rackets. However, those in service industries run into a variety of problems inherent to services that can be difficult to overcome.

1. Simultaneous Production and Consumption

o Services are different from products in that services are produced and consumed at the same time, while products are produced and then can be consumed at a later date. For example, dance shoes are made by manufacturers and can sit on a shelf and then sit in a closet for any length of time before they are finally put on. These dance shoes are products. However, if a professional dancer produces a dance for an audience, the dancer performs the dance and the audience consumes the dance at the same time. For the service, the producer must be present to provide the service. For the dance shoes, the producer could be somewhere else, but the consumer can still use the product, the dance shoes.

Inconsistency

o Those selling products can make sure that their products are consistent. For example, a restaurant can use the exact same process and ingredients to create a meal that has a consistent flavor. However, services are inconsistent. Those serving the food can have varying degrees of efficiency and friendliness, depending on the skills and personality of the servers. Therefore, both business owners and business customers cannot predict the quality of delivered services.

Services Can't Be Stocked

o Service industries have a much more difficult time managing supply and demand than product industries. If a mattress salesman cannot sell a mattress today, she can always sell it tomorrow. However, a hotel owner who doesn't book a hotel room today will forever lose the profit he would have earned from that hotel room today.

Unpredictable Service Quality

o Since customers cannot see the service ahead of time, they cannot always tell if they will like the service. For example, a customer will know that a wrench works after trying it out, but the customer won't know if the plumber will successfully fix the broken toilet until after the plumber arrives and tries to fix it.

Professionalism Required

o Customers have an easier time trusting businesses selling products than businesses selling services. If a business sells a hairbrush, customers can tell that they're getting a hairbrush even if the vendor selling the hairbrush behaves unprofessionally. But a hairstylist must always appear professional or customers may not trust the hairstylist's ability to cut hair well. Therefore, service providers must commit themselves toward behaving professionally on a much more consistent basis.

Levels Of service

World class service: - These are also called luxury hotels , they target top business executives, entertainment celebrities , high- ranking political figures, and wealthy clientele as their primary markets . They provide upscale restaurants and lounges , concierge services and also private dining facilities . Guestrooms are oversized , heated and plush bath towels , large soaps bars , shampoo , shower caps and all amenities . Housekeeping services are given two times a day including turn-down service . Above all luxury hotels give personalized service to the guest and have a relatively high ration of staff members to guests.

 

Mid-Range Service: - Hotels offering mid-range service appeal ti the largest segment of the travelling public . This kind of hotels does not provide elaborate service and have a adequate staffing . They also provide uniformed service , food and beverage room service, in room entertainment's and also Wi-Fi . Property may offer a speciality restaurant , coffee shop and lounge that cater to visitors as well as hotel guests . Type of guests who like to stay at these hotels are business people , individual travellers ,and families . Rates are lower than luxury hotels as they provide fewer services , smaller rooms and a smaller range of facilities and recreational activities .

 

Economy / Limited Service: These hotels provide clean , comfortable , safe , inexpensive rooms and meet the basic need of guests . Economy hotels appeal primarily to budget minded travellers who wants a room with minimum services and amenities required for comfortable stay, without unnecessary paying additional cost for costly services . The cliental of these hotels include families with children , travelling business people , backpackers , vacationers retirees etc. These type of hotels might not offer food and beverage facilities .

FEATURES OF HOTEL INDUSTRY

The hospitality industry consists of companies within the food services,accommodations, recreation, and entertainment sectors.The hospitality industry is a several billion dollar industry that mostly depends onthe availability of leisure time and disposable income. A hospitality unit such as arestaurant, hotel, or even an amusement park consists of multiple groups such as facilitymaintenance, direct operations (servers, housekeepers, porters, kitchen workers,bartenders, etc.), management, marketing, and human resources.Usage rate is an important variable for the hospitality industry. Just as a factoryowner would wish to have his or her productive asset in use as much as possible (asopposed to having to pay fixed costs while the factory isn't producing), so do restaurants,hotels, and theme parks seek to maximize the number of customers they "process".In viewing various industries, "barriers to entry" by newcomers and competitiveadvantages between current players are very important. Among other things, hospitalityindustry players find advantage in old classics (location), initial and ongoing investmentsupport (reflected in the material upkeep of facilities and the luxuries located therein), andparticular themes adopted by the marketing arm of the organization in question (such as arestaurant called the 51st fighter group that has a WW2 theme in music and otherenvironmental aspects). Very important is also the characteristics of the personnel workingin direct contact with the customers. The authenticity, professionalism, and actual concern

for the happiness and well-being of the customers that is communicated by successfulorganizations is a clear competitive advantageThis significant growth of the tourism industry is the direct result of changes ininternational consumer behaviors as well as economic prosperity and political stabilitywithin the region. Historically, the supply of lodging facilities within the region has provedto be both inadequate in terms of product quality as well as insufficient in quantity formeeting the increasing levels of demand.

These elements of supply and demand have created a favorable investment climatefor development within the region, resulting in a real estate boom in both tourism andresidential development. The growth in residential real estate development has beenprimarily driven by foreign demand for vacation and retirement homes in both urban andresort destinations within the region. Investment and development has been furthersupported by the variety of financial incentives for investment in tourism projects offeredby national governments as well as the availability of local capital for the financing oflarge projects.The first goal is to find ways to operate the hotel according to the idea of a “triplebottom line,” which embodies profitable operation combined with attention to the peoplewho use and work in the hotel and a focus on careful stewardship of resources. While thatgoal is important, even more vital is to use the hotel’s position as an industry leader in thenation’s capital to demonstrate to the hotel industry, customers, and vendors thatsustainable operation is the best strategy to ensure successful hotel operation. Thesustainability initiative goes beyond such well-known ideas as reusing guest linens,recycling waste materials, and changing to compact fluorescent lamps.

THREE LEVELS OF A PRODUCT

Introduction

In the book "Principle Of Marketing" Philip Kotler et al devised a very interesting concept of benefit building for products. Kotler suggested that if you view a product on three levels it will help you extract all the benefits that your product offers. This strategy has various names including Total Product Concept, Augmented Product and Three Levels Of a Product.

Level One: Core Product

Level one is the most basic level and simply looks at what people set out to buy and what benefits the producer would like their product to offer buyers. For example a camera is expected to take pictures but there may be other benefits that the producer wants the buyer to enjoy such as a wide lens, face recognition and high definition videos. So prior to designing any product designers should list the core benefits the product needs to provide.

Level 2: Actual Product

Level two is about translating the list of core product benefits into a product that people will buy. There may be competitor products offering the same benefits so the aim at this stage is to design a product that will persuade people to purchase your product. Kotler states that this can involve deciding on the quality level, product and service features, styling, branding and packaging. For example Apple's iPhone design has enabled it to become a smart phone market leader so that by September 2012 it was able to launch the iPhone 5, the 5th version of this product. There are other smart phones on the market but Apple has managed to design a product which people pre-order and camp overnight outside Apple's retail stores so that they can be the first ones to buy the product.

Level 3: Augmented product

Level three involves deciding the additional non tangible benefits that a product can offer. Competition at this level is based around after sales service, help lines, warranties, free/cheap delivery and so on. In other words it is things that the product does not do but customers may find them useful. Non tangible benefits such as product warranties offer customers peace of mind and demonstrate the manufacturer has faith in the quality of its product. In fact the ubiqtous use of some augmented benefits have turn some level three benefits into a customer expectation for example customers expect cars to have manufacturer warranties.

NEW PRODUCT DEVELOPMENT OR LAUNCHINTRODUCTIONMEANING OF NEW PRODUCT LAUNCHSTAGES IN NEW PRODUCT LAUNCHThe term product is used frequently in marketing. Consumerspurchase different products which are useful and agreeable to them. Aproduct can be defined as bundle of attributes that satisfies a consumerdemand.A product has utility. In addition , it has various features such asphysical attributes, brand, design, color, shape, size and so on. Manythings have to be considered before development or launch of a newproduct.A perfect product personality includes following components:Basic constituent. {Physical aspect of the product.}The associated feature. {Features, merits, uses etc.}The brand name given to the product.The package used for the product.The label attached to the product.New product launch means introducing a new product into themarket.In other words it is adding a new product in the existing product line ofthe company.New product launch is an important aspect of product policy andproduct management. For expansion of business time to time launch ofnew product is very necessary.Generating new product ideas of product with promising marketingprospects.Idea Screening.Concept Testing.Business Analysis.Marketing Analysis.Actual development of a new productTest marketingCommercialization.

NEW PRODUCT LAUNCHNATURE Plus Hair Shampoo will be launched in India. Under thebrand name of HLL( Hindustan Liver Limited). The main aim would be tomake it India's largest selling shampoo, offering the five most importanthair health benefits: strengthens weak hair, prevents hair breakage,softens rough dry hair, shine for thick and healthy hair, and contains antidandruffingredient.We have to decide a product launch for this shampoo so followingmeasures have to be taken.The five most important hair health benefits: strengthens weakhair, prevents hair breakage, softens rough dry hair, shine for thick andhealthy hair, and contains anti-dandruff ingredient.The packaging of the product should be in such a way that it shouldbe very eye catching and attractivePlus here indicates that it contains scientific as well as ayurvedicvariant.After all new ideas and concept the product should be prepared byRND department and it should be tested. It should be carried out invarious tests whether the Shampoo is really effective or no. It shouldhave all the features mentioned. It does not has any side effects. Themost important is it should has a long .The total expenditure should be calculated. The market structure,the company’s market share, company’s goodwill and image plays vitalrole in such a plan of action. ( New Product Launch.)The total budget should be made and proper testing of the productshould be made. So being a branded company in this field they have agood image in the market and also a very vast product line in market.1. New ideas and a latest concept.2. Testing of the product.3. Business Analysisshelf- life.31 % of the shampoo sales of Hindustan Lever Limited1. P & Gs rejoice shampoo2. Cavin care's Chik shampooIn the Rs 1,000 crore shampoo market, HLL is a clear leaderhogging 65% of the market share with Nature plus contributing 31% .HLLenjoys a price advantage over its competitors. With low prices HLLbelieves that “it can neutralize significant part of cost of this initiativeovertime while fortifying our market position”.The average medium class person can be easily targeted by theproduct as the cost of the product is very low.

The Product Life Cycle

A product's life cycle (PLC) can be divided into several stages characterized by the revenue generated by the product. If a curve is drawn showing product revenue over time, it may take one of many different shapes, an example of which is shown below:

Product Life Cycle Curve

The life cycle concept may apply to a brand or to a category of product. Its duration may be as short as a few months for a fad item or a century or more for product categories such as the gasoline-powered automobile.

Product development is the incubation stage of the product life cycle. There are no sales and the firm prepares to introduce the product. As the product progresses through its life cycle, changes in the marketing mix usually are required in order to adjust to the evolving challenges and opportunities.

Introduction Stage

When the product is introduced, sales will be low until customers become aware of the product and its benefits. Some firms may announce their product before it is introduced, but such announcements also alert competitors and remove the element of surprise. Advertising costs typically are high during this stage in order to rapidly increase customer awareness of the product and to target the early adopters. During the introductory stage the firm is likely to incur additional costs associated with the initial distribution of the product. These higher costs coupled with a low sales volume usually make the introduction stage a period of negative profits.

During the introduction stage, the primary goal is to establish a market and build primary demand for the product class. The following are some of the marketing mix implications of the introduction stage:

Product - one or few products, relatively undifferentiated Price - Generally high, assuming a skim pricing strategy for a high profit margin as the

early adopters buy the product and the firm seeks to recoup development costs quickly. In some cases a penetration pricing strategy is used and introductory prices are set low to gain market share rapidly.

Distribution - Distribution is selective and scattered as the firm commences implementation of the distribution plan.

Promotion - Promotion is aimed at building brand awareness. Samples or trial incentives may be directed toward early adopters. The introductory promotion also is intended to convince potential resellers to carry the product.

Growth Stage

The growth stage is a period of rapid revenue growth. Sales increase as more customers become aware of the product and its benefits and additional market segments are targeted. Once the product has been proven a success and customers begin asking for it, sales will increase further as more retailers become interested in carrying it. The marketing team may expand the distribution at this point. When competitors enter the market, often during the later part of the growth stage, there may be price competition and/or increased promotional costs in order to convince consumers that the firm's product is better than that of the competition.

During the growth stage, the goal is to gain consumer preference and increase sales. The marketing mix may be modified as follows:

Product - New product features and packaging options; improvement of product quality. Price - Maintained at a high level if demand is high, or reduced to capture additional

customers. Distribution - Distribution becomes more intensive. Trade discounts are minimal if

resellers show a strong interest in the product. Promotion - Increased advertising to build brand preference.

Maturity Stage

The maturity stage is the most profitable. While sales continue to increase into this stage, they do so at a slower pace. Because brand awareness is strong, advertising expenditures will be reduced. Competition may result in decreased market share and/or prices. The competing products may be very similar at this point, increasing the difficulty of differentiating the product. The firm places effort into encouraging competitors' customers to switch, increasing usage per customer, and converting non-users into customers. Sales promotions may be offered to encourage retailers to give the product more shelf space over competing products.

During the maturity stage, the primary goal is to maintain market share and extend the product life cycle. Marketing mix decisions may include:

Product - Modifications are made and features are added in order to differentiate the product from competing products that may have been introduced.

Price - Possible price reductions in response to competition while avoiding a price war. Distribution - New distribution channels and incentives to resellers in order to avoid

losing shelf space. Promotion - Emphasis on differentiation and building of brand loyalty. Incentives to get

competitors' customers to switch.

Decline Stage

Eventually sales begin to decline as the market becomes saturated, the product becomes technologically obsolete, or customer tastes change. If the product has developed brand loyalty, the profitability may be maintained longer. Unit costs may increase with the declining production volumes and eventually no more profit can be made.

During the decline phase, the firm generally has three options:

Maintain the product in hopes that competitors will exit. Reduce costs and find new uses for the product.

Harvest it, reducing marketing support and coasting along until no more profit can be made.

Discontinue the product when no more profit can be made or there is a successor product.

The marketing mix may be modified as follows:

Product - The number of products in the product line may be reduced. Rejuvenate surviving products to make them look new again.

Price - Prices may be lowered to liquidate inventory of discontinued products. Prices may be maintained for continued products serving a niche market.

Distribution - Distribution becomes more selective. Channels that no longer are profitable are phased out.

Promotion - Expenditures are lower and aimed at reinforcing the brand image for continued products.

Limitations of the Product Life Cycle Concept

The term "life cycle" implies a well-defined life cycle as observed in living organisms, but products do not have such a predictable life and the specific life cycle curves followed by different products vary substantially. Consequently, the life cycle concept is not well-suited for the forecasting of product sales. Furthermore, critics have argued that the product life cycle may become self-fulfilling. For example, if sales peak and then decline, managers may conclude that the product is in the decline phase and therefore cut the advertising budget, thus precipitating a further decline.

Nonetheless, the product life cycle concept helps marketing managers to plan alternate marketing strategies to address the challenges that their products are likely to face. It also is useful for monitoring sales results over time and comparing them to those of products having a similar life cycle.

SETTING PRICESHaving decided what to be and offer and towhom, the next most important decision isprice. Pricing is a critical decision because itdetermines, first, whether or not the intendedcustomers will purchase, and second, whetherthey will be satisfied with the value offeredand, thus, be willing to return. Third, it determineswhether the hotel will be financiallyhealthy enough to maintain itself and rewardits employees so customers can once again besatisfied when they do return.Three factors must come into considerationin pricing—the Three Cs of pricing, if youwill: costs, competition, and customers’ comfortzones. In F&B, costs drive pricing ofmenu items and beverages. Drucker (1999,115–6) says American industry has too muchcost-driven pricing, and that it needs moreprice-driven costing. Doesn’t F&B have the opportunityto build and test menus to discoverwhere price points should be set, and is not thechef challenged to manage ingredients and portionsize to deliver the cost and margin structuredesired? Yet the cost-driven practice continues.In rooms, competition is most often thedominant factor. Costs play a role, butchanges in variable cost of an occupied roomare generally small and rooms’ contributionmargins are large, typically 65 percent or bet-310 Chapter 7 _ Marketing and Associated Activities

ter. Moreover, hotel accounting does notmeasure discounts from a standard price, asdo almost all other industries. So there is novisible cost in reducing price to meet competitors.Remember: Any damn fool can cuthis price, and some damn fool always will.Must everyone follow? No. The key is to getin the head of the customer. The truly controllingfactor is customer comfort zones, andall too often hotel management leave moneyon the table because they don’t know whatthose comfort zones are. At what price doesthe offer attract and deliver value? That is thekey question in setting prices.Price setting requires talent and skill in

data gathering and analysis, accounting andbuilding pro formas, interpreting and drawinginferences, and decision making. Do not letsalespeople set prices; do not let controllersset prices. Only one person—the GM—canpull together the inputs of sales, control, operations,reservations, and the rest, and makethis crucial judgment call. Also, build at leastthree price scenarios and have the controllerand marketing director agree on occupancyimpacts. Then run a GOP pro forma on each.Out of that exercise will come a sense of thebest pricing approach to take. Setting prices isthe one task the GM cannot delegate, for heor she must live with and be accountable forall that results from this critical decision.PRICING TIP

Include staffers in contact with customersin pricing discussions. A ski resortowner-operator asked me to review his proposedprice schedules. I asked to have includedin our meeting a senior reservationagent, a bellman, a bartender, and a frontdesk agent. After probing them on what theyheard from customers about value, we increasedfour of the seven proposed room typeprices, to the owner-operator’s delight.

HOTEL PRICING STRATEGY

Pricing is the tool that matches supply and demand. Price influences the demandfor a product, which in turn determines volume sales. Therefore, setting an appropriateprice is one of the most critical factors in demand management and in generatingrevenue. Price is the only element of the marketing mix that is not a cost,because price generates revenue. Pricing decisions contribute to product and brandimage, and product and pricing decisions are therefore inseparable.

Stages in setting pricesKotler (2000) proposed a generic pricing model that recommends eight stages insetting prices:1 Select pricing objectives2 Assess the target market’s ability to afford the purchase price and consumers’perception of the price/product offer3 Determine the potential demand, including the price elasticity of demand4 Analyze the demand, cost, volume, price and profit relationships; businessesneed to understand their fixed and variable costs5 Research competitors’ price/product offer6 Select a pricing strategy7 Select appropriate pricing methods

8 Set specific prices for rooms, food, beverages, conference and leisure products,and for special product-price bundles.

Pricing strategiesHaving established the price objectives, hospitality companies need to considerpricing strategies, which must be linked to the quality standards offered by theoperation. In hotels, consumers often associate star ratings with quality standards.Alternative pricing strategies include the market leader and market followeroptions but there are also unsustainable pricing strategies, which are ultimately selfdefeating.

Market leader strategiesWell-established hotel companies, with a loyal customer base and a strong brandimage, can adopt market leader strategies where the prices are aligned with servicequality. These strategies are suitable for:_ The most exclusive, luxurious, 5-star hotels in the world; they deliver the highestquality customer experience, and can justify charging premium and prestige prices_ Traditional 3 star, well maintained hotels, in good locations and with a high levelof loyal customers and repeat business, offering appropriate value for money andcompeting effectively with a mid-market pricing strategy_ Budget hotels and motels charging relatively low prices for a product offeringfewer facilities and delivering value for money.

Market follower strategiesNew entrants and less established hotel brands, seeking to build market share bypenetration pricing, adopt a market follower strategy. A market follower strategyoffers similar quality but pitches prices lower than the market leader in order to bemore competitive, attract customers and grow market share. These strategies aresuitable for:_ High quality 4/5 star properties, seeking to grow market share by exceptionalvalue pricing_ Mid-market hotels competing against more established properties; or aggressivechains, and individual properties, seeking to increase room occupancy and buildmarket share by offering exceptional value pricing.

Unsustainable strategiesUnfortunately, some hotels implement over-priced strategies, which are unsustainableas a long-term proposition. These companies charge rates higher than the quality160 Hospitality Marketingcan justify. Some of these hotels might have myopic management who unknowinglyhave become over-priced. As customers recognize the poor value for money,the reputation of the business will rightly suffer. Either the company will have toadopt a more appropriate balanced strategy, or be forced in to either selling orliquidating the business._ Old-established, grand 3/4 star hotels, which are no longer as luxurious as theyused to be, and whose facilities no longer match the price charged; these propertiesare trading on an historic image as they gradually decline; they will eventuallyeither have to re-invest in their facilities or reduce their prices_ Once glorious, now shabby hotels, possibly in good locations, which only generatepassing trade and charging high prices; this rip-off value will lead to a poorreputation, and limited – if any – repeat and recommended business_ Mid-market hotels with falling standards but still maintaining a medium pricingstrategy, which does not represent value for money_ Budget operations, which have gradually increased prices to pay for ‘amenitycreep’ items, and are no longer competitively priced.

Finally, some hotels can adopt an unsustainable price/quality strategy, where theprice offered is too low to support the product/quality offer indefinitely._ High-quality 4/5 star properties charging unsustainable prices either because oflow season or due to a decline in the destination’s popularity_ Mid-market hotels operating in highly competitive environments and offeringbudget hotel prices without reducing quality standards.Companies need to adopt a pricing strategy, which takes into account their relativequality compared to the competition. Table 7.1 provides several examples of hospitalityproducts combined with price objectives, strategies and tactics.

Pricing objectives:

It is necessary that the marketing manager decide the objective of pricing before actually setting price. According to experts, pricing objectives are the overall goals that describe the role of price in an organizationÃÂÃÂs long-range plans. The objectives help the marketing manager as � � � �guidelines to develop marketing strategies. The following are the important pricing objectives.

Market penetration Market skimming Target rate of return Price stabilization Meet of follow competition Market share Profits maximization Cash flow Product line promotion Survival

Market penetration objective:

In the initial stages of entering the market, the entrepreneurs may set a relatively low price. This is mainly to secure a large share of the market. In a highly price sensitive market, the businessman may continue to sell his products even without profit. He is interested in growth rather than in making a profit. In the market penetration objective, the unit cost of production and distribution will decrease when the volume of sales attain a particular target. In brief, market penetration objective is an attempt to secure a large share of the market by deliberately setting the low prices.

Market skimming objective:

Market skimming means utilizing the opportunities in the market to reap the benefits of high sales, increased profits and low unit costs. Some of the entrepreneurs study the buyers needs and try to provide the suitable goods, but charge them high prices. This objective is realized in those markets where the magnitude of competition is very low. The entrepreneurs, in this situation, make profits over a short period. The market-skimming objective would not be meaningful, when the consumer refuses to purchase the goods at the prices fixed by the producers. This pricing objective would be suitable in the markets where the consumers feel that costly goods are of the superior quality.

Target rate of return objective:

Rate of return is normally measured in relation to investment and sales. The producers enjoying some protection may prefer to earn a target rate on investment. This would be possible where the entrepreneur enjoys a franchise or a monopolistic situation. But in the long run, every businessman attempts to secure an adequate return on investment through price setting. Mostly, middleman like wholesalers, retailers will price their merchandise to earn a particular rate of return on sales.

Price stabilization objective:

Frequent changes in the prices of product will harm the long-term interests of the companies. Hence, they aim at stabilization of prices. They do not exploit a short supply position to earn the maximum. During the periods of good business, they try to keep prices from rising and during the periods of depression, they keep prices from falling too low. Thus, they take a long-term view in achieving price stability.

Meet or follow competition objective:

Pricing is often done to meet or even prevent competition. If a company is a price leader, it is better to follow it to ward off the possibility of competition.

Market share objective:

A company may either have the objective of maintaining the present market share or increase its share depending upon its stature. Particularly, big business houses adopt such pricing that it enables them to retain their market share. If they raise their market share, they may draw the attention of the government and if they shed their share, they may lose revenues. Contrary to this, small business houses are found interested in raising their share in the market so as to reap the benefit of large-scale production. In few cases, firms may sell the products even at a lower cost to capture the market. However, such practice may lead to financial crisis. As a matter of fact, this is an objective to be adopted by new firms cautiously.

Profit maximization objective:

Profit maximization does not mean profiteering. There is nothing wrong in this policy if practiced over the long run. As a matter of fact, many of the enterprises strive to maximize their profits. Maximization of profits should be on the total output and not on a single item. In such case, consumers do not get dissatisfied since a particular group is not called for paying a high price. While adopting this pricing objective, the marketers should attempt to project their image in the market through sales promotion techniques. The marketers should watch the reactions of the consumers. Profit maximization through price hikes should be sparingly used.

Cash flow objective:

One of the important objectives of pricing is to recover invested funds within a stipulated period. Most of the time you will find different prices for the cash and credit transactions. Generally, you find lower prices for the cash sales and high prices for the credit sales. But this pricing objective could be implemented with good results only when the firm has monopoly in the market.

Product line promotion objective:

Product line means a group of products that are related either because they satisfy similar needs of different market segments or because they satisfy different but related needs of a given market segment. While framing the product line, the marketer may also include such goods, which are not popular. The intention of the marketer is to push through all the goods without any discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In this pricing objective, equal prices are adopted for the entire product line.

Survival objective:

Perpetual existence of the business over a period is the indication of the sound financial position of the enterprise. All organizations will have to meet expected and unexpected, initial and external economic losses. These enterprises have to pool up the resources to meet all the contingencies through appropriate pricing strategies. Price is use to increase sale volume to level up the ups and downs that come to the organization.

Pricing Policy CHAPTER SUMMARY

The simplest way to set price is through uniform pricing. At the profit-maximizing uniform price, the incremental margin percentage equals the reciprocal of the absolute value of the price elasticity of demand. The most profitable pricing policy is complete price discrimination, where each unit is priced at the benefit that the unit provides to its buyer. To implement this policy, however, the seller must know each potential buyer’s individual demand curve and be able to set different prices for every unit of the product.

The next most profitable pricing policy is direct segment discrimination. For this policy, the seller must be able to directly identify the various segments. The third most profitable policy is indirect segment discrimination. This involves structuring a set of choices around some variable to which the various segments are differentially sensitive. Uniform pricing is the least profitable way to set a price.

A commonly used basis for direct segment discrimination is location. This exploits a difference between free on board and cost including freight prices. A commonly used method of indirect segment discrimination is bundling. Sellers may apply either pure or mixed bundling.

KEY CONCEPTS

uniform pricing free on board (FOB)

price discrimination delivered pricing

complete price discrimination cost including freight (CF)

segment bundling

indirect segment discrimination cannibalization

direct segment discrimination

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GENERAL CHAPTER OBJECTIVES

1. Analyze uniform pricing and understand its limitations relative to price discrimination.

2. Understand that cost-plus pricing fails to maximize profit.

3. Analyze complete price discrimination and its informational requirements.

4. Analyze direct segment discrimination and its implementation and informational requirements.

5. Explain how location can be used as a basis for direct segment discrimination.

6. Analyze indirect segment discrimination and its implementation and informational requirements.

7. Explain how bundling serves to effect indirect segment discrimination.

8. Explain how the discriminating variable should be set.

9. Appreciate the hierarchy of pricing policies in terms of profitability and information requirement: (i) complete price discrimination; (ii) direct segment discrimination; (iii) indirect segment discrimination; and (iv) uniform pricing.

NOTES 1. Uniform pricing.

(a) Uniform pricing: a pricing policy where a seller charges the same price for every unit of the product.

(b) Profit maximizing price (incremental margin percentage rule): a price where the incremental margin percentage (i.e., price less marginal cost divided by the price) is equal to the reciprocal of the absolute value of the price elasticity of demand. This is the rule of marginal revenue equals the marginal cost.

i. Price elasticity may very along a demand curve, marginal cost changes with scale of production. The above procedure typically involves a series of trials and errors with different prices.

ii. Intuitive factors that underlie price elasticity: direct and indirect substitutes, buyers’ prior commitments, search cost.

(c) Price adjustments following changes in demand and cost.

i. To maximize profits, a seller should consider both demand and costs.

ii. A seller should adjust its price to changes in either the price elasticity or the marginal cost.

iii. It must consider the effect of the price change on the quantity demanded.

iv. If demand is more elastic (price elasticity will be a larger negative number), the seller should aim for a lower incremental margin percentage, and not necessarily a lower price, and likewise,

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v. If demand is less elastic, the seller should aim for a higher incremental margin percentage, and not necessarily a higher price.

vi. A seller should not necessarily adjust the price by the same amount as a change in marginal cost.

(d) Special notes.

i. Only the incremental margin percentage (i.e., price less marginal cost divided by the price) is relevant to pricing.

(1). Contribution margin percentage (i.e., price less average variable cost divided by the price) is not relevant to pricing.

(2). Variable costs may increase or decrease with the scale of production, and hence, marginal cost will not be the same as average variable cost.

ii. Setting price by simply marking up average cost will not maximize profit. Problems of cost plus pricing:

(1). In businesses with economies of scale, average cost depends on scale, but scale depends on price. It is a circular exercise.

(2). Cost plus pricing gives no guidance as to the markup on average cost.

(e) Limitations of uniform pricing (incremental margin percentage rule).

i. The inframarginal buyers do not pay as much as they will be willing to pay. A seller could increase its profit by taking some of the buyer surplus.

ii. Economically inefficient quantity of sales. By providing the product to everyone whose marginal benefit exceeds marginal cost, the seller could earn more profit.

2. Price discrimination. Pricing policy where a seller sets different incremental margins on various units of the same or similar product.

(a) To earn a higher incremental margin from buyers with higher benefit, and a smaller margin from buyers with lower benefit.

3. Complete price discrimination: the pricing policy where a seller prices each unit of output at the buyer’s benefit and sells a quantity where the marginal benefit equals the marginal cost.

(a) All the buyer surplus is extracted. Every buyer is charged the maximum she is willing for pay for each unit.

(b) Economically efficient quantity: all the opportunity for additional profit through changes in sales is exploited.

(c) Extracts a higher price for units that would be sold under uniform pricing and extends sales by selling additional units that would not be sold.

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(d) Requires information about each potential buyer’s entire individual demand curve.

4. Direct segment discrimination: The pricing policy where a seller charges a different incremental margin to each identifiable segment (with uniform pricing within each segment). A segment is a significant group of buyers within a larger market.

(a) Profit maximizing price: set prices so that the incremental margin percentage of each segment equals the reciprocal of the absolute value of that segment’s price elasticity of demand; i.e., applies the rule for uniform pricing to determine the profit maximizing prices for each segment.

(b) When marginal cost is increasing, any change in price for one segment that affects sales will affect (a) marginal cost, and (b) the incremental margin percentage for the other segment. Accordingly, the seller must conduct the trial and errors search for the prices to both segments at the same time.

(c) A seller can discriminate on the basis of a buyer’s location.

i. Free on board (FOB) price is a price that does not include delivery.

(1). FOB pricing ignores the differences between the price elasticities of demand in various markets.

(2). The differences among prices at various locations equal the differences in costs of delivery.

ii. Delivered pricing is the pricing policy where the seller’s price includes delivery. A cost including freight (CF) price is one that includes delivery.

(1). The seller can implement direct segment discrimination, aim for different incremental margin percentages in each market, and obtain higher profit.

(2). The differences among prices at various locations are the result of the different incremental margin percentages and the different marginal costs of supplying the various markets, and may be larger or smaller than the costs of delivery.

(d) Requirements.

i. Must directly identify the members of each segment. The identifiable buyer characteristic must be fixed.

ii. Must prevent buyers from reselling the product among themselves.

(1). Generally, resale of services is more difficult than resale of goods, hence there is more price discrimination in services than goods.

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(2). Sellers can limit resale of goods by restricting warranty service to the location of purchase.

(e) Limitations. For each segment, same limitations as uniform pricing.

5. Indirect segment discrimination: Pricing policy where a seller (who cannot directly identify the customer segments) structures a choice for buyers so as to earn different incremental margins from each segment.

(a) Profit maximizing price.

i. There is no simple rule to find the profit maximizing prices.

ii. Buyers might substitute among the various choices. Accordingly, the seller must analyze how changes in the price of one product affect the demand for other choices, and set the prices of all products at the same time. The seller must not price any product in isolation.

(b) Requirements.

i. Buyers must be differentially sensitive to some variable that the seller can control. The seller then uses this variable to structure a set of choices that will discriminate among the segments.

ii. Buyers must not be able to circumvent the differentiating variable. The seller must strictly enforce all conditions of sale to prevent switching.

iii. Cannibalization occurs when the sales of one product reduce the demand for another with a higher incremental margin.

(1). Mitigate cannibalization by degrading the quality of the low margin product.

(c) Less profitable than direct price discrimination.

i. Products provide less benefit than those with direct discrimination.

ii. Involves relatively higher costs.

iii. Leakage: indirect discrimination relies on various segments to voluntarily identify themselves through the structured choice. But consumers in one segment may buy the item aimed at another segment