UNIT 3

Product decisions are a crucial aspect of marketing strategy, involving the development,
management, and enhancement of products or services offered by a company. These decisions play
a pivotal role in determining the success and competitiveness of a business in the marketplace.
Product decisions encompass a variety of factors, including product design, features, branding,
pricing, packaging, positioning, and lifecycle management.

PRODUCT CLASSIFICATION

They are typically classified into several categories based on different criteria:

1. Product Classification by Type:

- Tangible Products: Physical goods that can be touched, felt, and seen, such as smartphones,
cars, or clothing.

- Intangible Products: Services or experiences that cannot be touched but provide value to
customers, such as education, healthcare, or consulting services.

2. Product Classification by Consumer Durability:

- Durable Goods: Products that are expected to last for an extended period and withstand repeated
use, such as appliances, electronics, or furniture.

- Non-durable Goods: Products that are consumed quickly or have a short lifespan, such as food,
beverages, or toiletries.

3. Product Classification by Consumer Use:

- Consumer Products: Goods or services purchased for personal consumption, such as groceries,
clothing, or entertainment.

- Industrial Products: Goods or services used as inputs in the production of other goods or
services, such as machinery, raw materials, or components.

4. Product Classification by Buying Habits:

- Convenience Products: Inexpensive, frequently purchased items requiring minimal effort in

decision-making, such as snacks, newspapers, or toiletries.

- Shopping Products: Items consumers compare based on price, quality, and suitability before
making a purchase, such as clothing, appliances, or electronics.

- Specialty Products: Unique or high-end items for which consumers are willing to make a
special effort to purchase, often based on brand loyalty or specific preferences, such as luxury cars,
designer clothing, or gourmet foods.

- Unsought Products: Products that consumers do not actively seek out or know about until they
need them, such as insurance, funeral services, or emergency medical supplies.
5. Product Classification by Newness and Innovation:

- New Products: Innovations or offerings that are entirely new to the market, such as
groundbreaking technologies or inventions.

- Product Line Extensions: Variations or enhancements of existing products to target different

market segments or address changing consumer needs, such as new flavors of snacks or additional
features in software updates.

6. Product Classification by Lifecycle Stage:

- Introduction: Launching a new product into the market.

- Growth: Rapid sales growth as awareness and acceptance increase.

- Maturity: Sales stabilize as the product reaches market saturation.

- Decline: Sales decline due to changing consumer preferences, technological advancements, or

market saturation.

Understanding these classifications helps businesses tailor their product strategies to meet the
diverse needs and preferences of consumers while maximizing profitability and sustaining
competitiveness in the market.

BRANDING

Branding is a comprehensive marketing concept that involves creating a unique identity and
perception for a product, service, company, or individual in the minds of consumers. It
encompasses a range of functions and strategies aimed at building and managing a brand's
reputation, visibility, and loyalty. Here are the key components of branding, including its functions
and strategies:

FUNCTIONS OF BRANDING:

1. Identification and Differentiation: Brands help consumers identify and distinguish products or
services from competitors in the marketplace. A strong brand stands out and is easily recognizable
among alternatives.

2. Value Proposition: Brands communicate the unique value proposition of products or services to
consumers. They convey promises about quality, performance, reliability, and other attributes that
influence purchasing decisions.

3. Emotional Connection: Brands evoke emotions and sentiments in consumers, fostering a sense
of connection, trust, and loyalty. Emotional branding taps into consumers' values, aspirations, and
lifestyles to create meaningful relationships.
4. Risk Reduction: Strong brands mitigate perceived risks associated with purchasing decisions by
providing assurance of consistent quality and reliability. Consumers are more inclined to choose
familiar brands they trust, reducing uncertainty and anxiety.

5. Price Premium: Well-established brands can command price premiums over generic or
unbranded alternatives. Consumers are often willing to pay more for products associated with
trusted and reputable brands.

6. Brand Extensions: Brands can leverage their equity and credibility to expand into new product
categories or markets, facilitating brand extensions and diversification strategies.

BRANDING STRATEGIES:

1. Brand Positioning: Establishing a distinct and favorable position in consumers' minds relative to
competitors. This involves defining the brand's unique attributes, benefits, and target audience.

2. Brand Identity: Creating a cohesive and memorable visual and verbal identity that reflects the
brand's personality, values, and positioning. This includes elements such as logos, slogans, colors,
typography, and brand voice.

3. Brand Communication: Developing effective messaging and communication strategies to convey

the brand's story, values, and benefits to the target audience through various channels such as
advertising, social media, public relations, and experiential marketing.

4. Brand Experience: Ensuring consistent and positive experiences at every touchpoint of the
customer journey, including product quality, customer service, packaging, retail environment, and
digital interactions.

5. Brand Extension: Extending the brand into new product categories or market segments that align
with the brand's core values and strengths. Successful brand extensions leverage existing brand
equity to drive acceptance and adoption of new offerings.

6. Brand Management: Implementing ongoing brand monitoring, evaluation, and adaptation

strategies to maintain relevance, consistency, and resonance with evolving consumer preferences
and market dynamics.

By effectively executing these functions and strategies, brands can build strong relationships with
consumers, drive preference and loyalty, and ultimately, achieve sustainable competitive advantage
in the marketplace.

GOOD BRAND NAME

A good brand name is crucial for creating a strong identity and establishing a positive perception in
the minds of consumers. When selecting a brand name, it's important to consider various types and
qualities that contribute to its effectiveness. Here are some types and qualities of a good brand
name:
TYPES OF BRAND NAMES:

1. Descriptive Names: These names directly describe the product, service, or its benefits. Examples
include General Electric, American Airlines, and Pizza Hut.

2. Suggestive Names: These names suggest qualities or characteristics of the product or service
without explicitly describing them. They evoke imagery or concepts related to the brand's
offerings. Examples include Airbnb, Netflix, and Amazon.

3. Abstract Names: Abstract names are invented words that have no inherent meaning but are
memorable and distinctive. They offer flexibility and uniqueness. Examples include Google,
Kodak, and Xerox.

4. Acronyms/Initials: Acronyms or initials are formed from the initial letters of a longer name or
phrase. Examples include IBM (International Business Machines), BMW (Bayerische Motoren
Werke), and UPS (United Parcel Service).

5. Founder's Name: Some brands are named after their founders or key individuals associated with
the company. Examples include Ford, McDonald's, and Johnson & Johnson.

6. Compound Names: Compound names combine two or more words to create a distinctive and
memorable brand identity. Examples include Facebook, Instagram, and Microsoft.

QUALITIES OF A GOOD BRAND NAME:

1. Memorability: A good brand name should be easy to remember, pronounce, and spell. It should
stick in the minds of consumers and facilitate word-of-mouth marketing.

2. Relevance: The brand name should be relevant to the product, service, or the brand's values and
positioning. It should convey a sense of what the brand represents.

3. Distinctiveness: A strong brand name should stand out from competitors and avoid confusion
with other brands in the market. It should be unique and recognizable.

4. Meaningfulness: Whether descriptive, suggestive, or abstract, the brand name should have
meaning or evoke positive associations related to the brand's offerings or attributes.

5. Versatility: The brand name should be adaptable across different markets, product lines, and
marketing channels. It should allow for future expansion and evolution of the brand.

6. Legality and Availability: It's crucial to ensure that the chosen brand name is legally available
for use and does not infringe on existing trademarks. Conducting thorough trademark research is
essential to avoid potential legal issues.
7. Emotional Appeal: A good brand name should evoke positive emotions and resonate with the
target audience. It should connect on an emotional level and foster affinity and loyalty.

8. Timelessness: While trends may influence naming conventions, a good brand name should have
longevity and withstand the test of time. It should remain relevant and impactful over the years.

By considering these types and qualities of a good brand name, businesses can develop a strong
brand identity that resonates with consumers, drives recognition, and supports long-term growth
and success.

What is new product development?

New Product Development refers to the complete process of bringing a new product to market.
This can apply to developing an entirely new product, improving an existing one to keep it
attractive and competitive, or introducing an old product to a new market.
The emergence of new product development can be attributed to the needs of companies to
maintain a competitive advantage in the market by introducing new products or innovating existing
ones. While regular product development refers to building a product that already has a proof of
concept, new product development focuses on developing an entirely new idea—from idea
generation to development to launch.

New Product Development (NPD) is the a set of design, engineering, and research processes which
combine to create and launch a new product to market. Unlike regular product development, NPD
is specifically about developing a brand new idea and seeing it through the entire product
development process.
In today's competitive market, the ability to offer products that meet customers' needs and
expectations has never been more important.
Customer requirements and behaviors, technology, and competition are changing rapidly, and
businesses can not rely on existing products to stay ahead of the market. They need to innovate,
and that means to develop and successfully launch new products.

The 7 stages of new product development

When it comes to new product development, each journey to a finished product is different.
Although the product development process can vary from company to company, it's possible to
break it down into seven main stages. Let's have a look at them one by one.

1. Idea generation
Idea generation involves brainstorming for new product ideas or ways to improve an existing
product. During product discovery, companies examine market trends, conduct product research,
and dig deep into users' wants and needs to identify a problem and propose innovative solutions.
A SWOT Analysis is a framework for evaluating your Strengths, Weaknesses, Opportunities, and
Threats. It can be a very effective way to identify the problematic areas of your product and
understand where the greatest opportunities lie.
 There are two primary sources of generating new ideas. Internal ideas come from different areas
within the company—such as marketing, customer support, the sales team, or the technical
department. External ideas come from outside sources, such as studying your competitors and,
most importantly, feedback from your target audience.
Some methods you can use are:
 Conducting market analysis
 Working with product marketing and sales to check if your product's value is being positioned
correctly
 Collecting user feedback
 with interviews, focus groups, surveys, and data analytics
 Running user tests to see how people are using your product and identify gaps and room for
improvement
Ultimately, the goal of the idea generation stage is to come up with as many ideas as possible while
focusing on delivering value to your customers.

2. Idea screening
This second step of new product development revolves around screening all your generated ideas
and picking only the ones with the highest chance of success. Deciding which ideas to pursue and
discard depends on many factors, including the expected benefits to your consumers, product
improvements most needed, technical feasibility, or marketing potential.
The idea screening stage is best carried out within the company. Experts from different teams can
help you check aspects such as the technical requirements, resources needed, and marketability of
your idea.

3. Concept development and testing

All ideas passing the screening stage are developed into concepts. A product concept is a detailed
description or blueprint of your idea. It should indicate the target market for your product, the
features and benefits of your solution that may appeal to your customers, and the proposed price for
the product. A concept should also contain the estimated cost of designing, developing, and
launching the product.
Developing alternative product concepts will help you determine how attractive each concept is to
customers and select the one that would provide them the highest value.
Once you’ve developed your concepts, test each of them with a select group of consumers. Concept
testing is a great way to validate product ideas with users before investing time and resources into
building them.
Concepts are also often used for market validation. Before committing to developing a new
product, share your concept with your prospective buyers to collect insights and gauge how viable
the product idea would be in the target market.

4. Marketing strategy and business analysis

Now that you’ve selected the concept, it’s time to put together an initial marketing strategy to
introduce the product to the market and analyze the value of your solution from a business
perspective.
 The marketing strategy serves to guide the positioning, pricing, and promotion of your new
product. Once the marketing strategy is planned, product management can evaluate the business
attractiveness of the product idea.
 The business analysis comprises a review of the sales forecasts, expected costs, and profit
projections. If they satisfy the company’s objectives, the product can move to the product
development stage.
 5. Product development
The product development stage consists of developing the product concept into a finished,
marketable product. Your product development process and the stages you’ll go through will
depend on your company’s preference for development, whether it’s agile product development,
waterfall, or another viable alternative.
This stage usually involves creating the prototype and testing it with users to see how they interact
with it and collect feedback. Prototype testing allows product teams to validate design decisions
and uncover any flaws or usability issues before handing the designs to the development team.

6. Test marketing
Test marketing involves releasing the finished product to a sample market to evaluate its
performance under the predetermined marketing strategy.
There are two testing methods you can employ:
 Alpha testing is software testing used to identify bugs before releasing the product to the public
 Beta testing is an opportunity for actual users to use the product and give their feedback about it
The goal of the test marketing stage is to validate the entire concept behind the new product and get
ready to launch the product.

7. Product launch
At this point, you’re ready to introduce your new product to the market. Ensure your
product, marketing, sales, and customer support teams are in place to guarantee a successful
launch and monitor its performance.
Here are some essential elements to consider.
 Customers: Understand who will be making the final purchasing decisions and why they will be
purchasing your product. Create buyer personas and identify their roles, objectives, and pain points.
 Value proposition: Identify what makes you different from the competition and why people
should choose to buy your product
 Messaging: Determine how you will communicate your product’s value to potential customers
 Channels: Pick the right marketing channels to promote your products, such as email marketing,
social media, SEO, and more
You will need to constantly track and measure the success of your product launch and make
adjustments if it doesn't achieve the desired goals

TIPS FOR CREATING A PRODUCT DEVELOPMENT PROCESS

Align around the same vision

Understand your customers’ needs
At every stage of the product development process, there is one critical driving factor: the
customer. Identify what your customers need, which features would help them the most, and how
to make your product appealing to them.
When it comes to making and validating decisions, Ian points out that it’s always best to have
qualitative data alongside quantitative information. You can use product surveys, customer
interviews, market research, but make sure you back up those insights with behavioral data on how
users use the product.
Build a strong team
Supportive leadership, clear direction, an open and high empathy culture, and a learning mindset
are crucial to building productive teams and great products.
Also, each team is different. So, it’s essential to create a supportive and flexible environment that
allows you to identify which product development process works best for you and your
organization.

Difference Between Brand and Trademark

What is a Trademark?

A trademark is a unique symbol, logo, design, or word that distinguishes it from other businesses or
products of similar nature. A trademark not only distinguishes the product or brand from each other
but also protects the interest of the product owners and helps avoid confusion and duplicity. An
individual, legal entity or company can own a trademark.

What is a Brand?

A brand name is a name that a company gives to the products and services that helps the consumers
identify them and also evokes the consumer’s emotions and imagination. It includes the character,
reputation, identity, image, culture, personality, etc.

Types of Brand Names

Here’s a list of the types of brand names -

 It can be formed by using the initials of anything or a name.

 Any name that describes the advantage of the product
 Foreign words in a different language
 A combination of multiple words

Types of Trademark

Here’s a list of the trademarks and their types

 Service marks
  Suggestive, arbitrary, and fanciful trademarks (strongest and most protected ones)
 General and descriptive (weakest trademarks)
 Simply descriptive
 Trade name

Brand Vs. Trademark

 PRICE

Meaning

Price can be defined as the monetary considerations asked for or exchanged for a specific unit of
goods or services offering some utility. For consumers or buyers, the price is a package of
expectations and satisfactions. According to some authors, for consumers, price means a sacrifice
of purchasing power as amount spent on purchasing one product will not be available for
something else.

Role of price is important in production, exchange, consumption and distribution. Price is the
base for consumer decision-making. Consumers compare the prices (among other things like
product features) of alternative items and make a final choice.

Pricing is the act of determining product value in monetary terms before it is offered for sale.
Prof. K C Kite defined pricing as a managerial task involving pricing objectives, identifying the
factors influencing price, asserting their relevance, determining product value in monetary terms
and formulating pricing policies and strategies.

Pricing decision is important as price of the product affects producers, sellers and consumers.
Price is important variable as it determines firm’s sales volume, sales revenue, profitability and
return on investment.
3. Pricing Objectives

Pricing of products cannot be done unless pricing objectives are set. These objectives act as
benchmark for fixing price, framing policies and formulating strategies. These objectives also act
as standards for measuring managerial performance in crucial areas. The pricing objectives should
be consistent with the overall organizational objective and compatible with prevailing external
environment. The firms can have variety of pricing objectives. However some of the common
pricing objectives are described as below:

 Profit Maximisation : This is the most common objective of every firm. Firms want to maximize
profit through price under given set of marketing conditions. However, it can be a long term
objective as in short run and in initial stages of product life cycle, profit maximisation objective can
not be achieved. In the short run, some tactics including cut in prices may be required to increase
sales or capture more market which will help in maximizing profits in the long run. In initial stages
of product life cycle, market penetration is necessary which is possible only with low prices.
Further, profit maximization objective is not set in relation to single product only but
to whole product line.
 Market Share : A firm may aim to achieve a particular market share called as target market share
by using price as an input. Target market share, usually expressed as a percentage, implies that
portion of industry sale which a firm wishes to attain. Market share as pricing objective is
important for firms in developing countries as in such countries market share acts as a barometer
for measuring economic development. Price is an important variable to increase or maintain market
share but sometimes it is used to reduce market share so as to restrain a firm from becoming a
‘dominant undertaking’ under MRTP Act 1969. Thus, market share as pricing objective is
important for firms desiring to attain a target market share.
 Target return on investment : The pricing objective of the firm may be to achieve a certain rate
of return on capital employed over a period of time. For this, prices are so fixed that overall sales
revenue generated during the financial year will become sufficient enough to cover total cost and
 provide desired return on investment. This objective is relevant for firms which are selling in
markets where currently there is little or no competition.
 Meeting or Preventing Competition : The firm may aim at meeting competition or preventing the
competition through the instrument of price. The objective of meeting competition is set
by firm who is not price leader. Such firm will set prices at par or little less than the competitors to
neutralize the competitive impact. On the contrary, the objective of preventing competition is set
by the firm who has substantial control in the market and wants to restrict the entry of competitors
by making drastic price changes. However, such practice is restrictive trade practice. Therefore,
generally firms do not clearly set it as objective but their actions show their such intentions.
 Resource mobilisation: Generating funds for expansion or development purpose can be another
pricing objective. In such cases, prices will be fixed in such a manner that sufficient resources are
made available for the desired purpose. Prices will be deliberately set high. Public sector
undertakings usually have this pricing objective.
 Maintaining the loyalty of middlemen : The pricing objective may be to maintain loyalty of
middlemen in the chain of distribution. This is done by fixing price in a way that it will leave
sufficient margin for middlemen. The price structure which will allow huge trade discounts will
boost the morale of middlemen and they will be motivated to sell more of firm’s brand.
 Enhance the image of firm : The firm may aim to maintain or enhance its image through correct
pricing. The firm with reputation may sell high quality product at high price due to customer’s
perception of reliability, better quality and better service. Thus, prices are set high for standardized
and branded products ensuring same or higher level of customer satisfaction every time. This
enhances the reputation of firm.

4. Pricing Procedure

After laying down the objectives, the price of the product is determined. It is the base price
which is set initially and quoted to buyers. This price is subject to changes as per policies and
strategies of firm to meet specific market situation. The pricing procedure consists of the following
steps:

(i) Collecting the necessary information: First of all, a strong and upto date information base is
developed to take an effective decision regarding price. Information about cost of production,
government regulations, collaboration arrangements and industry practices is collected. The cost of
production indicates the expenses incurred to make the product. Obviously the price should not be
fixed below cost. It will lead to losses to firm. The price control measures of government should be
studied. Upto date information about various laws affecting price or seller’s pricing policies is of
utmost importance and needs to be collected. Restrictions imposed by foreign collaborators of the
firm are required to be thoroughly studied. Sometimes agreements with suppliers also affect pricing
decisions. So these should be considered to create a sound information base. Further, it is equally
important to have knowledge about practices and methods of pricing adopted by other members of
industry.

(ii) Selecting the target market: It is important to select the market where marketing manager
wants to sell the product. The paying capacity, willingness to pay, buying pattern, buying motives,
price sensitivity and attitude about firm of customers / consumers in the target market affect the
pricing decision.

(iii) Estimating demand : Next step, is to estimate the demand of the product. For this, there is
need to know the expected prices for which survey may be conducted of competitors’ price,
potential buyer or even test marketing can be initiated. Then, there is need to determine the sales
volume at different prices. So demand schedule is developed which indicates demand as reflected
in sales volume at different prices. Thus, sales forecasts, intermediaries’ opinion and degree of
market competition will help in determining total demand.

(iv) Anticipating competitive reaction : It is essential to anticipate the reaction of competitors

at present and in future as it has great impact on pricing decision of the firm. The firm may face
competition from similar products like car manufacturer faces competition from other car
manufacturer; from close substitutes like motorcycle manufacturer face competition from scooter
manufacturer; or even from unrelated product seeking same consumer’s disposable income.

Competitors’ reaction may be instant or delayed. In instant reaction, competitor changes price
quickly so as to be at par with the firm or capture a large market share. In delayed reaction,
competitor watches the market reaction and then reacts if he seeks any opportunity or feels threat.

To know the competitors’ reaction, it is essential to collect information about competitors

regarding their cost structure, production capacity, market share, promotional strategies and various
marketing policies.

(v) Understanding the internal environment: The next step is to study and understand the
internal environment of the firm in terms of labour relations, production capacity, contracting
facilities, ease of expansion and supply of inputs. Sometimes, inefficiencies in internal environment
lead to more wastages or increased overheads due to idle plant, idle labour or penalties etc. These
inefficiencies result in increased cost of production per unit. So prices are to be fixed higher in such
circumstances to cover the cost.

(vi) Considering components of marketing-mix: In this stage, there is need to consider the
other components of marketing mix such as product, distribution channels and promotion for
determining price. The price of the product is influenced by the degree of perishability of product.
Faster the perishability of product, lower will be the price. Thus, price is affected
by nature of product i.e. whether product is durable or perishable, old or new, consumer product or
industrial product. Apart from this, strength, composition and quality of product do affect its price.

The length of distribution channel affects the pricing decision. Longer channel would
require higher list price so as to provide a sufficient margin for middlemen.

Likewise, more promotional efforts would require higher price to cover promotional expense.

(vii) Selection of pricing policies and strategies : Pricing policies and strategies provide
guidelines for setting as well as varying the prices as per specific market need. There are number of
pricing policies available and a firm can choose suitable policies. Keeping in mind the pricing
objectives, a suitable pricing strategy should be selected. Skimming pricing strategy is
characterized by high prices. It can be used if the new product is distinctive and consumers are not
price sensitive. Penetrating pricing strategy is characterized by low initial prices. It can be used if
consumers are price sensitive or there is possibility of high competition.

(viii) Price determination : For determining the price, the management should use all decision
inputs and determine a suitable price. The price may be determined on the basis of cost of
production, competitive prices or forces of demand and supply. It is necessary that the price should
be checked against pricing objectives to determine the consistency of price with pricing objectives
and narrow down their difference. It is also desirable to test market validity of price through test
marketing for its wider acceptance in actual market.
 Before quoting the price as list price to consumer, a feedback of consumers’ reaction (in test
market) and intermediaries’ reaction should be taken and accordingly a realistic price should be
fixed and quoted.

5. Factor Affecting Pricing Decisions

Pricing decisions play a significant role in designing marketing mix. These decisions
interconnect marketing actions with financial objectives of the company. Marketing
manager decides the price of the product keeping in mind the impact of various internal and
external factors. Internal factors are within the control of marketing manager, however, he has no
control over external factors.

Various internal and external factors which impinge on the pricing decisions of a company/firm
have been described as follows :

I. Internal factors : Internal factors affecting pricing decisions include cost of production,
pricing objectives, product life cycle, marketing mix, pricing policies and product differentiation. A
brief explanation of these factors is given as follows:

 Pricing Objectives : A company lays down objectives which act as benchmarks against which the
prices are fixed. These act as standards. So every pricing decision should consider various pricing
objectives of the company which may be price stability, sales maximization, profit maximization,
increased market share, meeting competition or earning a target rate of return. Prices should be
fixed in such a way that pricing objectives are achieved as far as possible.
 Cost of Production : Cost is an important consideration while fixing the price of product. Both
cost and price have a close relationship. Many companies use cost plus method. While some
companies use demand or competition based method for price fixation. Whatever may be the
method of pricing, the aim should be to cover the cost of production and make some surplus.
Therefore, product cost should be given due consideration at the time of determining its price.
 Product life cycle: Every product passes through different stages i.e. introduction, growth,
maturity and decline. Each stage of product life cycle has a great influence on pricing decisions.
Prices should be consciously decided during each stage to achieve marketing objectives.

In the introductory stage, the prices are fixed low so that product can easily enter the market.
During growth stage, the prices can be raised to some extent.

As the product reaches maturity stage, attempt is made to keep the same prices or lower down
the prices to meet competition. In the declining stage, there is cut in prices to maintain demand.

However, in case of innovative products, high price can be fixed at the introductory stage which
will be lowered down in subsequent stages of product life cycle.

 Marketing Mix : Marketing mix is an effective blend of product, price, place and promotion.
These four elements are well co-ordinated in marketing programme to have synergic effect. Price is
an important component of marketing mix. Pricing decision will definitely have bearing on other
elements of marketing mix.

An organization can raise price of product if it wishes to generate more funds or it can cut down
price in case it wants to attract more customers. Price change in either way will not bring fruitful
results if such price decision is taken, in isolation, without considering it a part of total marketing
programme. For effective results, price decisions should be coordinated with product, place and
 promotion decisions. For example, a firm wishing to increase price may add new features to the
product or increase promotional expenditure.

 Pricing Policies : Pricing policies are the general guidelines which provide a framework to the
marketing manager to fix prices in a way that will match market needs. Policies act as guide to
thinking. So due to this obvious reason, pricing decisions should be taken as per the pricing
policies of the organization.
 Product differentiation : Product differentiation is the ability of manufacturer to create
distinctiveness of product through design, shape, package, colour or brand name. Product
differentiation allows a marketer to fix higher price when it is done better than competitors.
Especially, product differentiation is good weapon in hands of manufacturers of consumer goods.
They can set higher price for their unique product, better quality or attractive package. Customers
are willing to pay more price for highly differentiated product.

II. External Factors : These are the factors which are beyond the control of company but have
significant influence on its pricing decisions. These factors need careful analysis and interpretation.
Some of the important external factors are described below :

 Competition : No organisation can remain unaffected by its competitors. It has to plan its move
and counter moves as per the level of competition prevailing in the market unless it has monopoly.

Competition affects the pricing decisions of management. Management has to consider the
pricing policies, objectives, strategies, strengths and weakness of competitors while determining
price of the product. The level of competitors’ reaction to particular price is also assessed while
fixing price. Thus, prices are fixed high, low or same as that of competitors’ price depending upon
the nature and intensity of competition. In monopolistic conditions, prices are determined by
keeping in mind the competition with that of substitute products.

 Economic conditions : Inflationary or deflationary conditions prevailing in the economy affect the
pricing decisions. During inflation, high prices are fixed to meet the rising costs. In boom period,
the prices are increased to cover increasing distribution and promotion cost and to earn sizable
profit. However, during recession period, prices are reduced to a considerable extent.
 Government regulations : Government regulations influence the pricing decisions of a firm. The
firm has to set prices within the framework of government regulations. In case prices are fixed
by government, it has no choice than to accept it. The Government has framed laws to restrict
monopoly and unnecessary price hikes. Thus a firm cannot fix higher prices at its own.
 Distribution Channel : The use of intermediaries (wholesalers, retailers, distributor, sole agent)
for distribution of goods is an important factor that influences pricing decisions. Intermediaries
facilitate the flow of goods from manufacturer to final consumer. They are rewarded with
commission or trade discounts. To cover this commission or trade discounts, high prices are fixed.
Thus, pricing decisions are affected due to channel structure. Longer the channel of distribution
(distributor, wholesaler, retailer), higher will be the price and vice-versa. But it does not mean that
shorter distribution channel should be used so as to fix low price of product. Rather a sound
channel management is required.
 Image of the company : Market image of an organisation in terms of reliability, quality,
durability, after sale services, product mix and technology affects its pricing decisions.
An organisation enjoying better image among customers can fix higher price as the customers will
be willing to pay higher price for perceived better quality or better services of the organisation.
 Consumer behaviour : Buying pattern of consumer has impact on pricing decision of
an organisation. If consumers buy the product frequently, lower price may be fixed. It will result in
more sales and high overall profit.
 Composition and strength of buyers : Organised buyers have influence on the pricing decisions
of an organisation. If the buyers are large in number but unorganized, they will do little to influence
price. However, few buyers who place large orders or are large users will have impact on the
pricing decisions. The pricing decisions are also affected by the composition or class of consumers
i.e. industrial users or house hold users. The price will be different for both classes of consumers.
 Suppliers : The price of product is directly affected by cost of raw materials or various fabricated
parts. Obviously, the suppliers of these inputs will influence the pricing decisions. If suppliers raise
the price, the manufacturers are forced to raise the price of final product.
 Elasticity of demand : Price elasticity of demand has considerable influence on pricing decision.
Price elasticity of demand implies a relative change in demand due to change in price. If the
demand of product is elastic, then a firm has to fix lower price. On the contrary, if demand is
inelastic, higher price may be fixed as customers are not sensitive to price.

6. Role of Pricing

Pricing is important marketing function and it affects consumers, middlemen and manufacturers.
Proper pricing contributes to the success of marketing strategy. Pricing helps in number of ways as
discussed below:

 Regulating demand: Price is used as an instrument to influence and regulate demand. In case of
surplus production, price may be reduced to create more demand. Similarly, when there is
insufficient production, price may be increased to discourage demand. In developing countries,
price plays a special role in regulating demand.
 Facing competition : Each firm in the market is affected by moves or actions of its rival firms.
When rival firms use tactics such as price reduction to capture more market share, the firm has to
react to such situation to stay in market. Price reduction or adjustments in price structure are made
to meet competitive manoeuvres.
 Increase in profitability : Price affects the profitability of a firm through sales revenue. It is used
as a weapon to increase profitability. In case of competition, a small change in price may
result into increased profitability provided other things remain constant.

7. Summary

Price can be defined as the monetary considerations asked for or exchanged for a specific unit of
goods or services offering some utility. Pricing is the act of determining product value in monetary
terms before it is offered for sale. Pricing decision is important as price of the product affects
producers, sellers and consumers.

Pricing of products cannot be done unless pricing objectives are set. These objectives act as
benchmark for fixing price, framing policies and formulating strategies. Common pricing
objectives of different firms can be profit maximization, target market share, target return on
investment, meeting or preventing, competition, resource mobilization, maintaining the loyalty of
middlemen and enhance the image of firm. After laying down the objectives, the price of the
product is determined. The price determination process consists of the various steps such as (i)
Collecting the necessary Information (ii) Selecting the target market (iii) Estimating demand (iv)
Anticipating competitive reaction (v) Understanding the internal environment (vi)Considering
components of marketing-mix (vii)Selection of pricing policies and strategies and (viii) Price
determination.

Pricing decisions play a significant role in designing marketing mix. These decisions
interconnect marketing actions with financial objectives of the company. However, these decisions
are affected by various internal and external factors like pricing objectives, cost of production,
product life cycle, marketing mix, pricing policies, product differentiation, competition, economic
conditions, government regulations, distribution channel etc. Pricing is important marketing
function. It helps in regulating demand, facing competition and increasing profitability. Hence,
pricing decisions should be taken very carefully by considering various factors to achieve desired
results.

Pricing Strategies

In terms of the marketing mix some would say that pricing is the least attractive element.
Marketing companies should really focus on generating as high a margin as possible. The
argument is that the marketer should change product, place or promotion in some way before
resorting to pricing reductions. However price is a versatile element of the mix as we will see.
Let us now understand the various pricing strategies −

1. Penetration Pricing.

The price charged for products and services is set artificially low in order to gain market share.
Once this is achieved, the price is increased. This approach was used by France Telecom and
Sky TV. These companies need to land grab large numbers of consumers to make it worth their
while, so they offer free telephones or satellite dishes at discounted rates in order to get people to
sign up for their services. Once there is a large number of subscribers prices gradually creep up.
Taking Sky TV for example, or any cable or satellite company, when there is a premium movie
or sporting event prices are at their highest – so they move from a penetration approach to more
of a skimming/premium pricing approach.
 2. Economy Pricing.

This is a no frills low price. The costs of marketing and promoting a product are kept to a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc. Budget airlines are
famous for keeping their overheads as low as possible and then giving the consumer a relatively
lower price to fill an aircraft. The first few seats are sold at a very cheap price (almost a
 promotional price) and the middle majority are economy seats, with the highest price being paid
for the last few seats on a flight (which would be a premium pricing strategy). During times of
recession economy pricing sees more sales. However it is not the same as a value pricing
approach which we come to shortly.

3. Price Skimming.

Price skimming sees a company charge a higher price because it has a substantial competitive
advantage. However, the advantage tends not to be sustainable. The high price attracts new
competitors into the market, and the price inevitably falls due to increased
supply.Manufacturers of digital watches used a skimming approach in the 1970s. Once other
manufacturers were tempted into the market and the watches were produced at a lower unit cost,
other marketing strategies and pricing approaches are implemented. New products were
developed and the market for watches gained a reputation for innovation.The diagram depicts
four key pricing strategies namely premium pricing, penetration pricing, economy pricing, and
price skimming which are the four main pricing policies/strategies. They form the bases for the
exercise.
However there are other important approaches to pricing, and we cover them throughout the
entirety of this lesson.

4. Psychological Pricing.

This approach is used when the marketer wants the consumer to respond on an emotional, rather
than rational basis. For example Price Point Perspective (PPP) 0.99 Cents not 1 US Dollar. It’s
strange how consumers use price as an indicator of all sorts of factors, especially when they are
in unfamiliar markets. Consumers might practice a decision avoidance approach when buying
products in an unfamiliar setting, an example being when buying ice cream. What would you
like, an ice cream at $0.75, $1.25 or $2.00? The choice is yours. Maybe you’re entering an
entirely new market. Let’s say that you’re buying a lawnmower for the first time and know
nothing about garden equipment. Would you automatically by the cheapest? Would you buy the
most expensive? Or, would you go for a lawnmower somewhere in the middle? Price therefore
may be an indication of quality or benefits in unfamiliar markets.

Product Line Pricing.

Where there is a range of products or services the pricing reflects the benefits of parts of the
range. For example car washes; a basic wash could be $2, a wash and wax $4 and the whole
package for $6. Product line pricing seldom reflects the cost of making the product since it
delivers a range of prices that a consumer perceives as being fair incrementally – over the range.

If you buy chocolate bars or potato chips (crisps) you expect to pay X for a single packet,
although if you buy a family pack which is 5 times bigger, you expect to pay less than 5X the
price. The cost of making and distributing large family packs of chocolate/chips could be far
more expensive. It might benefit the manufacturer to sell them singly in terms of profit margin,
although they price over the whole line. Profit is made on the range rather than single items.
1

Optional Product Pricing.

Companies will attempt to increase the amount customers spend once they start to buy. Optional
‘extras’ increase the overall price of the product or service. For example airlines will charge for
optional extras such as guaranteeing a window seat or reserving a row of seats next to each other.
 Again budget airlines are prime users of this approach when they charge you extra for additional
luggage or extra legroom.

Captive Product Pricing

Where products have complements, companies will charge a premium price since the consumer
has no choice. For example a razor manufacturer will charge a low price for the first plastic razor
and recoup its margin (and more) from the sale of the blades that fit the razor. Another example
is where printer manufacturers will sell you an inkjet printer at a low price. In this instance the
inkjet company knows that once you run out of the consumable ink you need to buy more, and
this tends to be relatively expensive. Again the cartridges are not interchangeable and you have
no choice.

Product Bundle Pricing.

Here sellers combine several products in the same package. This also serves to move old stock.
Blu-ray and videogames are often sold using the bundle approach once they reach the end of
their product life cycle. You might also see product bundle pricing with the sale of items at
auction, where an attractive item may be included in a lot with a box of less interesting things so
that you must bid for the entire lot. It’s a good way of moving slow selling products, and in a
way is another form of promotional pricing.

Promotional Pricing.

Pricing to promote a product is a very common application. There are many examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free), money off
vouchers and discounts. Promotional pricing is often the subject of controversy. Many countries
have laws which govern the amount of time that a product should be sold at its original higher
price before it can be discounted. Sales are extravaganzas of promotional pricing!

Geographical Pricing.

Geographical pricing sees variations in price in different parts of the world. For example rarity
value, or where shipping costs increase price. In some countries there is more tax on certain
types of product which makes them more or less expensive, or legislation which limits how
many products might be imported again raising price. Some countries tax inelastic goods such as
alcohol or petrol in order to increase revenue, and it is noticeable when you do travel overseas
that sometimes goods are much cheaper, or expensive of course.

Value Pricing.
This approach is used where external factors such as recession or increased competition force
companies to provide value products and services to retain sales e.g. value meals at McDonalds
and other fast-food restaurants. Value price means that you get great value for money i.e. the
price that you pay makes you feel that you are getting a lot of product. In many ways it is similar
to economy pricing. One must not make the mistake to think that there is added value in terms of
the product or service. Reducing price does not generally increase value.
 Our financial objectives in terms of price will be secured on how much money we intend
to make from a product, how much we can sell, and what market share will get in relation
to competitors. Objectives such as these and how a business generates profit in
comparison to the cost of production, need to be taken into account when selecting the
right pricing strategy for your mix. The marketer needs to be aware of its competitive
position. The marketing mix should take into account what customers expect in terms of
price.

There are many ways to price a product. Let’s have a look at some of them and try to
understand the best policy/strategy in various situations.

Premium Pricing.

Use a high price where there is a unique brand. This approach is used where a substantial
competitive advantage exists and the marketer is safe in the knowledge that they can charge
a relatively higher price. Such high prices are charged for luxuries such as Cunard Cruises,
Savoy Hotel rooms, and first class air travel.

ETHICAL ISSUES IN PRICING DECISION

Pricing decisions are integral to business operations and can have significant ethical
implications. Here are some ethical issues commonly associated with pricing decisions:

1. Price Discrimination: Charging different prices to different customers for the same product
or service based on factors such as income, demographics, or purchasing history. While price
discrimination may increase profits, it can raise concerns about fairness and equity.

2. Price Gouging: Exploiting market demand during emergencies or crises to significantly

increase prices for essential goods or services. Price gouging can harm vulnerable consumers
and communities by making essential items unaffordable.

3. Predatory Pricing: Setting prices below cost or at a loss to drive competitors out of the
market. While predatory pricing may benefit consumers in the short term, it can lead to
monopolistic behavior and reduced competition, ultimately harming consumers and stifling
innovation.

4. Opaque Pricing Practices: Using complex pricing structures, hidden fees, or misleading
tactics to deceive consumers and obscure the true cost of a product or service. Opaque pricing
practices can erode trust and undermine consumer confidence.
5. Price Fixing: Colluding with competitors to fix prices at artificially high levels, thereby
reducing competition and increasing profits at the expense of consumers. Price fixing is
illegal and violates antitrust laws designed to protect market competition.

6. Bait-and-Switch Tactics: Advertising a product or service at a low price to attract

customers, only to upsell or switch them to a higher-priced alternative once they are
committed. Bait-and-switch tactics deceive consumers and can damage brand reputation.

7. Dynamic Pricing: Using algorithms and data analytics to adjust prices in real-time based
on factors such as demand, supply, and consumer behavior. While dynamic pricing can
improve revenue optimization, it raises concerns about transparency and fairness, especially
when consumers are unaware of price fluctuations.

8. Environmental Externalities: Failing to account for the environmental costs associated with
production, distribution, or disposal of goods and services in pricing decisions. Ignoring
environmental externalities can lead to overconsumption, resource depletion, and
environmental degradation.

9. Price Transparency: Withholding information about pricing terms, conditions, or additional

charges, preventing consumers from making informed purchasing decisions. Lack of price
transparency can result in confusion, frustration, and mistrust among consumers.

10. Fair Trade Practices: Ensuring that prices paid to suppliers and producers are fair and
equitable, particularly in global supply chains. Fair trade practices promote social
responsibility, ethical sourcing, and sustainable livelihoods for workers and communities.

Addressing these ethical issues requires businesses to prioritize transparency, fairness, and
consumer welfare in their pricing decisions. Adopting clear pricing policies, providing
accurate information to consumers, and adhering to legal and ethical standards can help
businesses build trust, foster customer loyalty, and create long-term value for stakeholders.