Substitute- Awareness Effect: Buyers are less price sensitive when they are less aware of the substitutes.

Difficult-Comparison Effect: Buyers are less price sensitive when they cannot easily compare the quality of substitutes

Total Expenditure Effect: Buyers are less price sensitive of the product is not very expensive with respect to their income.

End-Benefit Effect: Buyers are less price sensitive the less the expenditure is to the total cost of the product.

Shared Cost Effect: Buyers are less price sensitive part of the cost is borne by another party.

Price Quality Effect: Buyers are less price sensitive when the product is assumed to have more quality, prestige or exclusiveness.

Inventory Effect: Buyers are less price sensitive when they cannot store the product.

III Estimating Cost a company will like to charge a price that covers its cost of producing, distributing and selling the product, including a fair return for its efforts and risk.

Types of Costs A company’s cost takes two forms, fixed and variable. Fixed cost are the costs that do not vary with production of sales revenue. Examples of fixed costs includes monthly rent, interest etc.
Variable costs vary directly with the level of production. These costs tend to be constant per unit produced. They are called variable because their with the number of unit produced.
Total cost consists of the sum of the fixed and variable costs for a given level of production. Management will like to charge a price that will be at least cover the total production costs at a given level of production.

IV Analysing competitors price and offers: Competitors prices and possible price reactors help the firm establish where its prices might be set. The company needs to learn the price and quality of each competitors offer.
Once the company is aware of competitors prices and offers, it can use them as an orienting point for its own pricing. If the firm’s offer is similar to a major competitor’s offer, then the firm will have to price close to the competitors or lose sales. If the firm’s offer is inferior, the firm will not be able to charge more than the competitor. If the firm offer is superior, the firm can charge more than the competitor.
V. Selecting a Pricing Method: A company can select any of the following pricing method:
a. Mark-up Pricing
b. Target-return Pricing
c. Perceived value pricing
d. Going rate Pricing
e. Select-bid Pricing

A. Mark-up Pricing: The most elementary pricing method is to add a standard mark-up to the cost of the product.

B. Target Return Pricing: The firm determines the price that would yield its target rate of return on investment (ROI). Suppose a manufacturer has invested one million in the business and wants t set price to earn a 20 percent ROI i.e 2,00,000. he hopes to sell 50,000 pieces and the unit cost Rs. 16/-. The target return price is given by the formula

Target return price = Unit Cost + Desired return X Capital Invested
Unit Sales

= 16 0.20 X 10,00,000 =Rs. 20/-
50,000

Hence the manufactures will set a price of Rs. 20/-.
The manufacturer can also use break-even analysis, the break-even volume is given by

Break-even Volume = Fixed Costs
Price-Variable Cost

Suppose the fixed cost is Rs, 300000 and variable cost is Rs. 10/- and the produces wants to charge price of Rs. 20/-, then the break-even volume is given by

300000 = 30,000 Pieces
20-10

Perceived value Pricing: An increasing number of companies are basing their price on the product’s perceived value. They see the buyer’s perception of value, not the sellers cost, as the key to pricing. They use the non-price variables in the marketing mix to build up perceived value in the buyers mind, price is set to capture the perceived value.

Going Rate Pricing: In going rate pricing, the firm bases its price largely on competitors prices. With less attention paid on its own cost and demand. The firm might charge the same, more of less than its major competitors.

Sealed Bid Pricing: Competitive-oriented Pricing is common where firm for jobs. The firm bases its price on expectations of how competitors will price rather than on a rigid relation of the firm’s costs or demands. The firm wants to win the contract , and winning normally requires submitting a lower price than competitors.

VI. Selecting the Final Price: While selecting the final price, the company has to select some additional factors such as:-

Psychological Pricing: Sellers should consider the psychology of prices in addition to their economies. Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes and expensive cars.

The influence of others Marketing-mix elements on Price: The Final price must take into account the brander’s quality and advertising relative to competition. Brands with average relative high quality but high relative advertising budgets able to charge premium price, consumers are willing to pay higher prices for know products than for unknown products.

Adapting the Price

Price Discounts and Allowances: Most companies will modify their basic price to reward customers for such acts as early payment, volume purchases and off-search buying. These price adjustment – called discounts and allowances can be of various types such as:-

Cash Discounts: A cash discount is a price reduction to buyers who promptly pay their bills. Such discounts, serve the purpose of reducing the sellers liquidity and reducing credit-collection cost and bad-debts.

Quantity Discount: A quantity discount is a price reduction to buyers who buy large volumes. Quantity discounts must not exceed the.

Many managers believe that revenue maximization will lead to long-run profit maximization and market share growth.

Maximum Sales Growth: Some companies want to maximize unit sales. They believe that a higher sales volume will lead to lower unit costs and higher long run profit. They set the lowest price, assuming the market is price sensitive. This is called market penetration pricing.

Maximum Market skimming: Many Companies favour setting high prices to skim to the market. If estimates the highest price it can charge given the comparative benefits of its new product versus the available substitutes. Each time sales slow down, it lowers the price to draw in the next price sensitive layer of customers.

Product-Quality Leadership:- A company might aim to be the product-quality leader in the market.

Determining Demand: Each price that the company might charge will lead to a different level of demand and will therefore, have a different impact of its marketing objectives. In normal case, demand and price are inversely related , that is, the higher the price, the lower the demand.

MATURITY STAGE: At some time, a product’s rate of sales growth will slow down and the product will outer a stage of relative maturity. The maturity stage is divided into three phases. In the first phase, growth maturity, the sales growth rate starts to decline. There are new distribution channels to fill. In the second phase, stable maturity, sales flatter on a per capita basis because of market saturation. Most potential consumers have tried the product, and future sales are governed by population growth and replacement demand. In the third phase, decaying maturity the absolute level of sales now starts to decline and consumers starts to other products and substitutes.
The slowdown in the rate of sales growth creates overcapacity in the industry. This overcapacity leads to intensified competition. Competitors scramble to find and enter niches. They engage is frequent markdowns and off-list pricing. They increase their advertising and trade and consumer deals.

Marketing Strategies in the Maturity Stage: In the maturity state, some companies abandon their weaker products, believing there is little they can do. They think the best thing is to conserve their money and spend it on newer products in the development pipeline.
Marketers systematically consider strategies of market, product and marketing mix modification.

Market Modification: The company can try to expand the number of brand users in three ways:
a) Convert Non Users: The company can attract non users to the product.
b) Enter New Market Segment: The company can try to enter new market segments- geographic, demographic and so on.
c) win Competition’s Customers: The company can attract competitors customers to try or adopt the brand.
Volume can also be increased by getting current brand users to increase their annual usage of the brand by convincing the customers to
a) Use product more frequently
b) More usage per Occasion
c) New and more varied uses.

Product Modification: Managers also try to stimulate sales by modifying the product’s characteristics. This can take several forms:
a) A strategy of quality movement aims at increasing the functional performance of the product – its durability, reliability, speed, taste etc.
b) a strategy of features improvement aims at adding new features that expand the product’s versatility, safely or convenience.
c) A strategy of style improvement aims at increasing the aesthetic appeal of the product.

Marketing Mix Modification : Product managers might also try to stimulate sales by modifying one or more marketing mix elements which include Prices, Distribution, Services, Advertising, Sales Promotion or Personal selling.

DECLINE STAGE: The sales of most product forms and brands eventually decline. Sales decline for a number of reasons including technological advances, consumer shifts in tastes and increased and foreign. All lead to overcapacity, increased price cutting and profit erosion.
As sales and profits decline, some firms withdraw from the market. Those remaining may reduce the number of product offerings. They may withdraw from smaller market segments and weaker trade channels. They may cut the promotion budget and reduce their price further.
Marketing Strategies during the Decline Stage:
- Increasing the firm’s investment (to dominate or strengthen its competitive position)
- Maintaining the firm’s investment level until the uncertainties about the industry are resolved
- Decreasing the firm’s investment level selectively, by sloughing of unprofitable customer groups, while simultaneously strengthening the firms investment in lucrative niches.
- Harvesting (or milking) the firm’s investment to recover cash quickly.
- Divesting the business quickly by disposing of its assets as advantageously as possible.

Introduction stage : The introduction stage starts when the new product is launched. It takes time to roll out the product in several markets and to fill dealers pipelines, so sales growth is apt to be slow.
In this stage, profits are negative or low because of the low sales and heavy distribution and promotion expenses. Much money is needed to attract distributors and fill the pipeline.
Promotional expenses are at the highest ratio to sales because of the need for a high level of promotional efforts to (i) inform potential consumers of the new and unknown product (ii) include trial of the product and (iii) Secure distribution in retail outlets.
Considering only price and promotion, an organisation can pursue one of the four strategies in introduction stage.
(a) Rapid Skimming (b) slow Skimming (c) Rapid Penetration (d) Slow Penetration

(A) Rapid Skimming: – Consist of launching the new product at a high price in order to recovers as much gross profit per unit as possible. It spends heavily on promotion to convince the market of the products merit even at a high price level. This strategy makes sense under the following assumptions:-
i) a large part of the market is unaware of the product.
ii) those who become aware are eager to have the product and can pay the asking price.
iii) the firm faces the potential competition and wants to build up the brand preference.

B) Slow Skimming:- Strategy consists of launching the new product at a high price and low promotion. The high price helps recover as much gross profit per unit as possible and low level of promotion keeps marketing expenses down. This strategy makes sense when
i) the maket is limited in size.
ii) most of the market is aware of the product.
iii) buyers are willing to pay a high price.
iv) Potential competition is not imminent.

C) Rapid Penetration: Consist of launching the product at a low price and spending heavily on promotion. This strategy promises to bring about the fastest market penetration and the largest market share. This strategy makes sense when
i) the market is large.
ii) the market is unaware of the product.
iii) most buyers are price sensitive.
iv) there is strong potential competition
v) the company’s unit manufacturing experience

D) Slow Penetration Strategy: Consist of launching the new product at a low price and low level of promotion. The low price will encourage rapid product acceptance; and the company keeps its promotion costs down in order to realize more net profit. The company believes that market demand is highly price elastic but minimally promotion elastic. This strategy makes sense when
i) the market is large.
ii) the market is highly aware of the product.
iii) the market is price sensitive and
iv) there is some potential competition.

GROWTH STAGE: The growth stage is marked by a rapid climb in the sale. The early adopters like the product, and the middle majority consumers start buying the product. New competitors enter the market, attracted by the opportunities for large scale production and profit. They introduce new product features and this move further expands the market. The increased number of distribution outlets leads to an increase in the number to fill the distribution pipeline.
Price remains where they are or fall insofar as demand is increasing quite rapidly. Companies maintain their promotional expenditure at the same or at a slightly increased level to meet competition and to continue to educate the market.
Profits increase during this stage as promotion costs are spread over a larger volume and unit manufacturing costs fall faster than declines owing to the experience curve effect.

STAGES IN THE BUYING PROCESS

There are seven in buying process. They are:-
1) Problem Recognition: The buying process begins when someone in the company recognizes a problem or need that can be met by acquiring a good or service.
2) General need description and product specification : The buyer identifies the needed item’s general characteristics and required quantity. It includes characteristics like reliability, durability or price. Business marketers can help by describing how their products meet the buyer’s needs.
3) Supplier Search: The buyers now try to identify the most appropriate suppliers. The buyer can examine trade directors, contact other companies for recommendations. Watch trade advertisement and attend trade shows. Now a days, they can even search internet.
4) Proposal Solicitation: The buyer invites qualified supplier to submit proposals. If the item is complex or expensive the buyer will require a detailed written proposal from a qualified supplier. After evaluating the proposals, the buyer will invite a few suppliers to make formal presentation.
5) Supplier Selection: Before selecting a supplier, the buyer will specify desired supplier attributes and indicate their relative importance. It will then rate suppliers on these attributes and identify the most attractive suppliers.
6) Order-Routine specification: after selecting suppliers, the buyer negotiates the final order, listing the technical specifications, policies, warranties and so on. In the case of maintenance, repair and operating items, buyers are inclined towards signing blanket contracts. A blanket contract establishes a long term relationship in which suppliers promises to re-supply the buyer as needed, at agreed-upon prices, over a specified period of time. The buyer’s computer automatically sends an order to the seller when stock is needed.
7) Performance Review: The buyer periodically reviews the performance of the chosen suppliers. Three methods are commonly used. The buyer may contact the end user and ask for the evaluations; the buyer may rate the supplier on several criteria using a weighted score method; or the buyer might aggregate the cost of poor supplier performance to come up with adjusted costs of purchase, including price. The performance review may lead the buyer to continue, modify or end the relationship with the supplier.

There are types of buying situation:- the straight rebuy, Modified rebuy and new task.

Straight Rebuy: The straight rebuy is a buying situation in which the purchasing department reorders on a routine basis(e.g. office Supplies, bulk chemicals). The buyer choose from supplier on an approved list. These supplier make an effort to maintain product and service quality. The outside supplier attempt to offers something new or to exploit dissatisfaction with a current supplier.

Modified Rebuy: The modified rebuy is a situation in which the buyers want to modify product specifications, prices delivery requirements, or other terms. The modified rebuy usually involves additional decision participants on both sides.

New Task: The new task is a buying situation in which a purchase buys a product or service for the first time. The greater the cost or risk, the larger the number of decision participants and the greater their information gathering and therefore the longer the time to decision completion.
Many business buyers prefer to buy a total solution to their problem from one seller called System Buying , the buyer would solicit bids from prime contractors, who would assemble the package or system. The contractor who was awarded the contract would be responsible for bidding out and assembling the system’s subcomponents from second tier contractors. The prime contractor would thus provide a turnkey solution , so called because the buyer had to turn one key to get the job done.

Participents in the business buying process

The decision unit of the buying organization includes all the members of the organization who play any role in the purchase decision process. They include:-
1) Initiators:- Those who request that something be purchased. They may be users or others in the organization.
2) Users:- Those who will use the product or service. In many cases, the users initiate the buying proposals and help define the product requirement.
3) Influencer:- People who influence the buying decision. They often help define specifications and also provide information for evaluating alternatives. Technical personnel are particularly important influences.
4) Deciders:- People who decide on product requirements or supplies.
5) Approvers:- People who authorise the proposed actions of deciders or buyers.
6) Buyers:- People who have formal authority to select the supplier and arrange the purchase terms. They play a major role in selecting vendor and negotiating.

a) Form:- Many product can be differentiated from the size, shape of physical structure of a product.
b) Features:- Most products can be offered with varying features that supplement the product’s basic functions. Being the first to introduce valued new features is one of the most effective ways to compete.
c) Performance Quality: Most products are established one of four performance levels: low, average, high or superior. Performance Quality is the level at which the products primary characteristics operate.
d) Conformance Quality: Buyers expect products to have a high conformance quality, which is the degree to which all produced units are identical and meet the promised specifications.
e) Durability: Durability, a measure of the products expected operating life under natural stressful conditions, is a valued attribute for certain products.
f) Reliability: Reliability is a measure of the probability that a product will not malfunction or fail within specified time period.
g) Repairability : Repairability is a measure of the ease of repairing a product when it malfunctions or fails.
h) Style: style describes the product’s look and feel to the buyer. Style has the advantage of creating distinctiveness that is difficult to copy.
i) Design: As competition intensifies, design offers a potent way to differentiate and position a company’s products and services. Design is the totality of features that effect how a product looks and functions in terms of customer requirements.
Service Differentiation : When the physical product can not easily be differentiated, the key to competitive success may lie in adding valued service and improving their quality. The main service differentiators are ordering ease, delivery installation, customer training, customer consulting and maintenance and repair.
a) Ordering Ease: Ordering ease refers to how easy it is for the customer to place an order with the company.
b) Delivery: Delivery refers to how well the product or service is delivered to the customer. It includes speed, accuracy and care attending the delivery process.
c) Installation: Installation refers to the work done to make a product operational in its planned location. Buyers of heavy equipment expect good installation service. Differentiation at this point in the consumption chain is particularly important for companies with complex products.
d) Customer Training: Customer training refers to training the customer’s employers to use the vender’s equipment properly and efficiently.
e) Customer Consulting: Customer consulting refers to data, information systems and advice services that the seller offers to buyers
f) Maintenance and Repair: Maintenance and repair describes the service programme for helping customers keep purchased products in good working order.
Personal Differentiation: Companies can gain strongly through having better- trained people. Better trained personnel exhibit six characteristics:-
i) Competence: They posses the required skill and knowledge.
ii) Courtesy: They are friendly, respectful and considerate.
iii) Credibility: They are trustworthy.
iv) Reliability: They perform the service consistently and accurately.
v) Responsiveness: They respond quickly to customer’s requests and problems.
vi) Communication: They make an effort to understand the customer and communicate clearly.
Channel Differentiation: Companies can achieve competitive advantage through the way they design their distribution channel’s coverage expertise and performance.
Image Differentiation: Buyers respond differently to company and brand image. Image is the way the public perceives the company or its product.

Q4. Write a detailed note on the tools of Product Differentiation.
Ans: Differentiation can be defined as the process of adding a set of meaningful & valued difference to distinguish the companies offering from competitors offerings.
All products can be differentiated to some extend, but not all differences are meaningful or worthwhile. A difference will be stronger to the extent that it satisfies the following criteria:-
 Important : The difference delivered a highly valued benefit to a sufficient number of buyers.
 Distinctive: The difference delivered in a distinctive way.
 Superior: The difference is superior to other ways of obtaining the benefit.
 Preemptive: The difference can not be easily copied by the competitors.
 Affordable: The buyer can afford to pay for the difference.
 Profitable: The company will find it profitable to introduce the difference.

The number of differentiation opportunities varies with the type of industry. There exist four types of industry based on the numbers of available competitive advantages & their sizes.
a) Volume Industry: One in which company is can gain only a few but large competitive advantages. In the construction equipment industry, a company can strive for a low cost position or highly differentiated position & win big on either basis. Profitability is correlated with the company size & market shares.
b) Stalemated Industry: One in which there are few potential competitive advantages & each is small. In the steel industry it is hard to differentiate the product or decrease manufacturing costs. Company can try to heir better sales people, entertain more lavishly, and the like, but these are small advantages. Profitability is unrelated to company market share.
c) Fragmented Industry: One in which companies faces many for competitive advantages is small. A restaurant can differentiated in many ways but end up not gaining a large market share. Both small and large restaurant can be profitable or unprofitable.
d) Specialized Industry: One in which companies face many differentiation opportunities, and each differentiation can have a high pay off. Among companies making specialized machinery for selected market segments, some small companies can be profitable as some large companies

II. Selecting the Market Segment: a target market consists of a set of buyers sharing common needs or characteristics that the company decides to serve. The company can consider five patterns: a) Single-segment concentration b) Selective specialization c) Market Specialization d) Product Specialization and e) Full Coverage.

a) Single- Segment Concentration:- In the simplest case, the company selects a single segment. Through concentrated marketing, the firm achieves a strong market position in the segment owing to its greater knowledge of the segment’s needs and the special reputation it builds. At the same time, concentrated marketing involves higher than normal risks. The particular market segment can turn sour. Or the competitors may decide to enter the same segment. Foe these reasons, many companies prefer operate in more than one segment.

b) Selective specialization:- Here the firm selects a number of segments, each of which is objectively attractive and matches the firm’s objectives and resources. Each segment promises to be a money maker. This strategy of multi segment coverage has an advantage over single segment coverage of diversifying the firm’s risk. Even if one segment becomes unattractive, the firm can continue to earn money in other segments.

c) Product Specialization:- Here the firm concentrates on making a certain product that it sells to several segments. Through this strategy, the firm builds up a strong reputation in the specific product area.

d) Market Specialization:- Here the firm concentrates on serving many needs of a particular customer group. The firm gains a strong reputation of specializing in serving this customer group and becomes a channel agent for all new products that this customer group could feasibly use.

e) Full Market Coverage:- Here the firm attempts to serve all customer groups with all the products that they might need. Only large firms can undertake a full market coverage strategy. Examples would include coca cola (non-alcoholic beverage) ; IBM (Computer market) etc.
Large Firms can cover a whole market in two broad ways:- namely through undifferentiated marketing or differentiated marketing.
Undifferentiated Marketing:- The firm might ignore market segment differences and go after whole market with one market offer. It designs a product and a marketing programme that will appeal to the broadest number of buyers. It relies on mass distribution and mass advertising.
Undifferentiated Marketing depends on the grounds of cost economics. The narrow product line keeps down production, inventory and transportation cost.

Differentiated Marketing:- Here the firm operates in most market segments but designs different programmes for each segment. General motor claims to do this when it says that it produces car for every purse, purpose and personality. However, it also increases the cost of doing business.