Module 3

DESIGNING CUSTOMER VALUE

SERVICES
3.4.1. Meaning and Definition of Services
A service is the non-material equivalent of good. A service provision is an economic activity
that does not result in ownership but implying an exchange of value between seller and buyer
in the market place, and this is what differentiates it from providing physical goods.

It is claimed to be a process that creates benefits by facilitating a change in customers, a change

in their physical possessions, or a change in their intangible assets. In common way, the term
cannot be applied to only personal services like auto repairing, hair-cutting, services of dentists,
legal consultants and so on. The marketing experts view the problem in a bit different way.
The expert feels that the contents of services are much wider. There is no doubt in it that a
number of experts have attempted to define the services but no single definition has been
accepted universally.

According to Philip Kotler, “A service is an act or performance that one party can offer to
another that is essentially intangible and does not result in the ownership of anything. Its
production may or may not be tied to a physical product”.

According to Zeithaml and Bitner, “Services are deeds, processes and performances”. Here,
deeds are the actions of the service provider, processes are the steps in the provision of service,
and performance is the customers’ understanding of how the service has been delivered.

According to Christopher Lovelock, “Services are economic activities offered by one party to
another, most commonly employing time-based performances to bring about desired results in
recipients themselves or in objects or other assets for which purchasers have responsibility”.

3.4.2. Nature and Characterstics of Services

Services posses four unique inherent characteristics not found in goods, apart from these
inherent characteristics, services also posses some other characteristics.

1) Intangibility: Services are intangible. Unlike physical products, they cannot be seen,
tasted felt, heard, or smelled before they are bought. The person getting a face lift
 cannot see the exact results before the purchase, and the patient in the psychiatrist’s
office cannot know the exact outcome.
2) Inserparability: Inseparability is the next unique feature of service. Some experts refer
to it by the term immediacy’. In fact, services are marked by two kinds of
inseparability:
i) Inseparability of production and consumption.
ii) Inseparability of the service from the personal who possesses the skill and
performs the service.

Services are typically produced and consumed simultaneously. This is not true of physical
goods, which are manufactured, put into inventory, distributed through multiple resellers, and
consumed later. If a person renders the service, then the provider is part of the service.
Because the client is also present as the service is produced, provider-client interaction is a
special feature of services marketing. Both provider and client affect the outcome.

3) Variability/Heterogeneity: Services are also marked by

variability/individuality/heterogeneity. Each service is unique. It is one-time generated,
rendered and consumed and can never be exactly repeated as the point in time,
location, circumstances, conditions, current configurations and/or assigned resources
are different for the next delivery, even if the same service consumer requests the same
service. Many services are regarded as heterogeneous or lacking homogeneity and are
typically modified for each service consumer or each new situation. This is so because
of three reasons:
i) The inseparability of the service from the provider leads to some variability; the
provider of the service being inseparable from the service, variability
automatically enters the picture, depending on the person performing the
service.
ii) Services are highly people intensive. And, anything that is people intensive is
bound to be marked by variability. Services are often categorized on the basis of
the type of people who provide them-like unskilled services, skilled services, and
complete professional services. In the case of physical products, who produces
the product is immaterial.
iii) In services, the effect varies dependent on when and where the service is
provided.

As a combined result of the three factors, services are marked by a high degree of
variability/individuality/heterogeneity.

4) Perishability - Services are Perishable as Well: Services cannot be stored. Some doctors
charge patients for missed appointments because the service value existed only at that
 point. The perishability of services is not a problem when demand is steady. When
demand fluctuates, service firms have problems. For example, public-transportation
companies have to own much more equipment because of rush-hour demand than if
demand were even throughout the day.
5) Other Characteristics of Services: A part from the four unique characteristics of services
there are some other characteristics of services which are:
i) Ownership: It is also ownership that makes it significant to market the services in
a bit different way. The goods sold are transferred from one place to another,
the ownership is also transferred and this provides to the buyers an opportunity
to resell. In the case of services, people do not find the same thing. The users
have just an access to the service. For example, a consumer can use personal
care services or Medicare services or can use a hotel room or swimming pool;
however the ownership rests with the providers.
ii) Service as Performance: While products are produced, services are performed.
In most cases, the latter are totally unconnected to any physical product.
iii) Simultaneity: Services cannot be delivered to customers or users. Services do
not move through the channel of distribution. For availing the services, it is
essential that the users are brought to the providers or the providers go to the
users. It is right to say that the services have limited geographical areas.
iv) Quality Measurement: The quality of service requires another tool of
measurement. One cannot measure it in terms of service level. It is very difficult
to rate or quantify the total purchase. For example, one can quantify the food
served in a hotel but the way a waiter or a carrier serves it or overall
environment or behavior of other staff can’t be ignored while rating the total
process. Hence he can determine the level of satisfaction at which the users are
found satisfied. A firm sells atmosphere, conveniences, consistent quality,
status, anxiety, moral etc.
v) Nature of Demand: While going through the features of services, one cannot
underestimate the factor related to the nature of demand. Generally the
services are found of fluctuating nature. Particularly during the peak season, he
finds an abnormal increase in the demand. For example, the mobility of
passenger is go the tourist spots or resorts especially during summer when he
finds the weather condition suitable. The cricket stadiums are used in winter.
vi) Customer Involvement: In most services, the consumer is an integral part of the
production process, as he has to be physically present when the service is
produced. This is not true of physical products. In fact, a service situation
requires the presence of not merely the consumer but that of the producer as
well. Quite often, the consumer and the service provider are face to face when
 the service is produced. Hence, service provider-consumer interaction becomes
a special feature of services.
vii) Labour Intensity: Labour intensity is another characteristic of services. In fact,
labour is usually the most important determinant of services organization
effectiveness. A service firm recruits people with specific knowledge and skills in
the service disciplines that it offers. Service delivery is labour intensive and
cannot be easily automated, although knowledge management systems enable a
degree of knowledge capture and sharing. While on the other hand,
manufacturers can automate many of their production processes to reduce their
labour requirements.

3.4.5. Excellence in Services

For an organization, service excellence refers to consistency and flexibility of service
delivery to exceed the expectations of the customer as made possible through the
empowerment of employees, identified seven characteristics valued by employees that
work in organizations achieving service excellence – innovation, joy, respect, teamwork,
social profit, integrity, and excellence. These characteristics of an empowered work
culture should translate into the consistent and flexible delivery of service.

In general, service excellence can be viewed in many different ways. Typically, service
excellence within an organization refers to excellent service that is provided both
internally and externally as a competitive advantage between businesses. The type of
service being provided and the clientele that is receiving the service generally influences
how organizations define their service cultures and service excellence.

According to Frey et al., “Service excellence strategies should also encourage the
creation of work cultures that are innovative, proactive, accountable, and emphasize
mutual respect and communication between all levels of employees. Service excellence
in any business is ultimately reliant on the individual employees that are providing the
service to customers”.

Strategies to Achieve Service Excellence

1) Continuous improvement: In order for a service quality philosophy to be readily
assimilated into the company, service excellence must not be presented as a novelty
– rather as a logical extension of what the company is already doing. Those
companies which are most successful in installing a service philosophy ensure that
this is marketed throughout the organization as a continuous process rather than a
one-off campaign.
 2) Enger-der Ownership: The more employees feel involved in the development of a
service strategy, the more successful will be the ownership of its principles. Ideas
owned by staff are more likely to be accepted and implemented. This is particularly
important for the new breeds of employees, generation Y, who need to feel valued
and see value in what they do, and who are less likely to stay in one job for life. It is
vital to involve employees in the design of the program and to communicate clearly
to them its objectives and key success criteria and the time scale for
implementation.
3) Test the Waters: One useful means of introducing a service philosophy is to
demonstrate the effectiveness by running a pilot scheme. A pilot scheme is
particularly helpful where resistance to change is likely to be high. To ensure the
success of the program it is useful for employees to see the benefits of a new
approach. Through identifying part of the organization which is typical of the
business in size and structure in which to pilot an approach, a useful example is
often set which can then act as an illustration of the success of the program. A
comparable control situation should also be chosen which will not undertake the
program but which can also be monitored and the achievements of the pilot can be
assessed.

Employees who are involved in a pilot need to understand that as this is the first time that such
an initiative has taken place; the strategy may not be perfect. A time scale should be set for the
pilot and the initiative evaluated. Importantly the comments and feedback of employees
involved in the pilot scheme must be sought to ensure that, when the strategy is rolled-out
throughout the organization, the learning points from the pilot can be incorporated.

4) Establish a Steering Group: A useful means of beginning a program designed to

make the service strategy come alive is to establish a steering group whose
members can be drawn from all parts of the organization and whose role is to
spearhead the implementation of the strategy. The steering group need not be
large, but its members need to be sufficiently influential within the organization and
should be drawn from across job grades and functions. Steering group members
must posses good communication skills. It is also beneficial for team members to
understand group processes so they can successfully work together. An open and
honest discussion among team members to establish individuals’ expectations and
motivations prior to the team beginning to work together is often a useful exercise.

3.4.6. Difference between Products and Services

Services and products/goods are not equivalent. There are a number of salient features that
establish a clear cut difference between the two. Something which can be physically touched,
verified, attracted or exchanged with or even without making profits are known as goods. On
this basis, goods are food, clothes, books, other domestic and industrial items that can be
carried home, can be stored at a place and are tangible. On the other hand, the services are
hotel business, personal care, legal or medical services, banking services, insurance services,
transportation services and many other services which cannot be stored at a place and one has
to hire someone else to perform the services. The effects are pleasure, joy, and entertainment,
a relief from ailment or so.

Basis to Difference Products Services

1) Perishability Products have a long storage life Services cannot be produced and
and are mostly non perishable stockpiled (inventoried) before
consumption: they exist only at the
time of their production.
2) Inseparability While products are first produced, With regard to service it is
then sold and finally consumed it is inseparable from the service
separable. provider and heterogeneous, where
each time the service is offered it
may vary in quality, output, and
delivery.
3) Variability Uneven quality of a product made Services are highly variable because
by the same manufacturer. A the quality of service depends on
manufacturer is responsible for who provides and where and when
producing products of similar they are provided.
quality, and can be held liable for
those that deviate materially from a
model, sample, or standard.
4) Tangibility When a buyer purchases a product, When a buyer purchases a service,
the buyer is purchasing something the buyer is purchasing something
that is tangible. For example, a that is intangible. For example, an
computer. insurance policy.
5) Trust Less emphasis on trust and More emphasis on trust and
confidence as product quality is confidence as service performance
important. is important.
6) Time When one sells a product, there is Services by their very nature are
time invested to create or acquire time-intensive activities because
the product and then it is sold again there is no way to continue
and again without further time providing a service without
invested. continuing to invest time
performing the service.
7) Deliverability When one is marketing products, he Services must be created after
can give customers a delivery date they’re ordered, and delivery times
estimate if they’re ordering online will vary. The challenge with
or through the mail, and they can marketing services is being able to
walk out the door with the product convince customers that one can
in hand if they buy it. and will deliver quality results
within a given period of time.
8) Wants and Needs Many products can be marketed in Services are rarely impulse buys.
ways that trigger impulse buying. For example, A lawn care service
For example. If Someone sees a pair can include convenience and free
of shoes, he/she can suddenly time as part of their marketing
 decide to buy them whether they’re materials, to persuade buyers to
needed or not. sign up.
9) Relationships Marketing a product-based business Marketing a service-based business
relies less on building a relationship. relies more on building a
relationship.
10) Returnability Products are returnable. Services are not returnable.
11) Elements Marketing a product requires what Marketing a service adds three
are known as the “4 P’s”: Product, more “P’s” to the traditional “4 P’s”:
Price, Place, and Promotion. People, Physical evidence, and
Process.

3.3. DIFFERENTIATION

3.3.1. Introduction
Differentiation in marketing means creating specialized products and services that gain
competitive advantage with a particular segment of the market. Product or service
differentiation is a competitive business strategy whereby firms attempt to gain a competitive
advantage by increasing the perceived value of their products and services relative to the
perceived value of other firm’s products and services.

Organisational structure, management control systems, and compensation policies must be

consistent with a firm’s product or service differentiation efforts if a firm is to realize the full
potential of those efforts.

A differentiation strategy involves marketing a unique product or service to a broad-based

market. Because this type of strategy involves a unique product or service, price is not the
significant factor. In fact, consumers may be willing to pay a high price for a product that they
perceive as different. The product or service difference may be based on product design,
method of distribution, or any aspect of the product (other than price) that is significant to a
broad market group of consumers. A company choosing this strategy must develop and
maintain a product or service that is perceived as different enough from the competitor’s
products or services to warrant the asking price.

3.3.2. Product Differentiation

In marketing, differentiation is the process of distinguishing the differences of a product or

offering from others, to make it more attractive to a particular target market. This involves
differentiating it from competitors’ products as well as one’s own product offerings.
Differentiation is the act of designing a set of meaningful differences to distinguish the
company’s offering from competitors’ offerings.
Differentiation is a source of competitive advantage. Although research in a niche market may
result in changing your product in order to improve differentiation, the changes themselves are
not differentiation. Marketing or product differentiation is the process of describing the
differences between products or services, or the resulting list of differences.

This is done in order to demonstrate the unique aspects of your product and create a sense of
value. Marketing textbooks are firm on the point that any differentiation must be valued by
buyers. The term unique selling proposition refers to advertising to communicate a product’s
differentiation.

The objective of differentiation is to develop a position that potential customers see as unique.
Product differentiation and positioning are key parts of a company’s marketing strategy and are
necessary to keep ahead of competition. A positioning and differentiation strategy is one of the
most important factors in marketing a business. The easiest way to look at this is to break
down the words. If a marketer’s product is different or stands out above others and it finds the
correct way, place and time to market it, marketer has created a positioning, and
differentiation strategy.

3.3.2.1. Reasons for Product Differentiation

The Company will have three main reasons for differentiating products:

1) To Simulate Product Preference in the Mind of Customers: The objective is to

influence the intended customer or buyer and to ensure that when the customer or
buyer considers which single product to buy from a range of different products offered
by the company and its competitors, he or she consciously perceives differences
between the products or service and must be sufficiently strong and positive as it
influences the final buying decision. This buying decision must lead to customer
satisfaction, repeat business and loyalty, whether the product be clothes or aircraft.
2) To Distinguish the Product from other Products Marketed by Competitors: In this case
the company tailors the distinctive features of its product mainly vis-à-vis his
competitor’s products, and does not aim primarily at greater market satisfaction. In
practice, the company’s products and competitive products may well have the same
performance satisfaction value. The prime objective is to establish a company, product
group or brand image or strong identity in the market place.
3) To Serve or Cover the Market Better: This approach recognizes that each customer, or
group of customers represents a different market segment with different needs, calling
for variations in products for different applications. In this case, the objective is to
identify attractive market segments, to follow the market in those segments, and
provide the customer with what he or she wants, in other words, to follow the
 marketing concept. Specialty food products, chemical products and mass-produced cars
are examples of his approach.

The need for product differentiation varies from one business to another and depends upon the
stage the product has reached in its life cycle. Consumer goods and industrial products call for
different forms of differentiation and the solution will be specific to each situation.

3.3.2.2. Methods for Product Differentiation

A company can differentiate its market offering along five dimensions as given below:

1) Product Differentiation: It is based on the several characteristics related with the core
products in order to differentiate it:
i) Form: Many products can be differentiated in form, size, shape, or physical
structure of a product. Let us take an example of any product, which can be in
many forms like Disprin. As Disprin is essentially a commodity, it can be
differentiated by the dosage size, shape, and coating and action time.
ii) Features: Most products can be offered with varying features, characteristics
that supplement the product’s basic function. Being the first to introduce valued
new features is one of the most effective ways to compete.

Companies in the television, audio and refrigerator industries in India, for example,
came with ‘mega sized’ products, and used the ‘mega’ feature as part of their
differentiation effort. In television sets, BPL, Videocon, Onida, Philips, Optonica, and
Bush have introduced large screen models. The screen sizes first went up from 21
inches to 29 inches, and then to 33 inches.

iii) Performance Quality: Most products are established at one of four performance
levels; low average, high or superior. Performance quality refers to the level at
which the product’s primary characteristics operate.
For example, Godrej has built a reputation in many of its business, based on
quality. It gives quality products and highlights the quality standards in its
marketing communications.
iv) Conformance Quality: Buyers expect products to have a high conformance
quality, which is the degree to which all the produced units are identical and
meet the promised specifications.
v) Durability: Durability a measure of the product’s expected operating life under
natural or stressful conditions are valued attribute for certain products. It is
important for products such as vehicles and kitchen appliances to be durable.
 vi) Reliability: Buyers normally pay a premium for more reliable products.
Reliability is a measure of the probability that a product will not malfunction or
fail within a specified time period.
vii) Reparability: Buyers prefer products that are easy to repair. Reparability is a
measure of the ease to fixing a product when it malfunctions or fails. An
automobile made with standard parts that are easily replaced has high
reparability.
viii) Style: Style describes the product’s look and feel to the buyer. Buyers are
normally willing to pay a premium for products that are attractively styled. The
innovations taking place in packaging materials, package design and convenience
is a major differentiation. For example, Frooti in aseptic tetrapack, Brylcream in
a handy tube, LeSancy in a see-through-pack and Harpic toilet cleanser with an
application-friendly nozzle are all instances of differentiation through packaging.
ix) Design: As competition intensifies, design offers a potent way to differentiate
and position a company’s products and services. Product design has a lot to do
with product success. Quite naturally, product design becomes a good avenue
for product differentiation. A well-designed product makes real difference to
the customer. It ensures product reliability and durability. In addition, it
enhances user comfort.
x) Differentiation based on Ingredients/Formula: Products can be differentiated
on the basis of ingredients it is made of, as given in following examples:
Vatika with Herbal Ingredients- Dabur Vatika claimed distinction as a hair-oil
carrying a blend of several natural, herbal ingredients traditionally used by
Indian Women for hair care. The ingredients included coconut oil, ‘brahmi’,
lime, ‘mehandi’, etc.
2) Services Differentiation: When the physical product can not easily be differentiated, the
key to competitive success may lie in adding valued services and improving there
quality.

Some companies gain services differentiation through speedy, convenient, or careful delivery.
For example, Commerce Bank has positioned itself as “the most convenient bank in America” –
It remains open seven days a week, including evenings, and you can get a debit card while you
wait. Installation service can also differentiate one company from another, as can repair
services. Many an automobile buyer will gladly pay a little more and travel a little farther to
buy a car from a dealer that provides top-notch repair services.

The main service differentiators are:

i) Ordering Ease: Ordering ease refers to how easy it is for the customer to place an
order with the company.
ii) 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.
iii) Installation: Installation refers to the work done to make a product operational in its
planned location. Buyers of heavy equipment expect good installation service.
iv) Customer Training: Customer training refers to training the customer’s employees
to use the vendor’s equipment properly and efficiently.
For example, General Electric not only sells installs expensive X-rays equipment in
hospitals, but also gives extensive training to users of this equipment.
v) Customer Consulting: Customer consulting refers to data, information systems, and
advising services that the seller offers to buyers.
vi) Maintenance and Repair: Maintenance and repair describes the service program
for helping customers keep purchased products in good working order.
3) Personnel Differentiation: Companies can gain a strong competitive advantage through
having better-trained people.
For example, Kingfisher Airlines enjoys an excellent reputation in large part because of
its flight attendants. The McDonald’s people are courteous, the IBM people are
professional and the Disney people are upbeat. The sales forces of such companies as
General Electric, Cisco, Frito-Lay, and ICICI life insurance enjoy an excellent reputation.
Well-trained personnel exhibit six characteristics: competence, courtesy, credibility,
reliability, responsiveness and communication.
Better-trained personnel exhibit six characteristics:
i) Competence : They possess 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 customers’ requests and problems;
and
vi) Communication: They make an effort to understand the customer and
communicate clearly.
4) Channel Differentiation: Companies can achieve competitive advantage through the
way they design their distribution channels’ coverage, expertise, and performance.
For example, ‘Dell Computers’ has also distinguished itself by developing and managing
superior direct-marketing channels using telephone and internet sales.
5) Image Differentiation: Buyers respond differently to company and brand images,
Identity and image need to be distinguished. Identity comprises the ways that a
 company aims to identify or position itself or its product. Image is the way the public
perceives the company or its products.
Image is affected by many factors beyond the company’s control:
i) Symbols: Images can be amplified by strong symbols. The company can choose
a symbol such as the loin (Harris Bank), or apple (Apple Computer).
ii) Media: The chosen image must be worked into ads and media that convey a
story, a mood, a claim-something distinctive. It should appear in annual reports,
brochures, catalogs, the company stationery, and business cards.
iii) Atmosphere: The Physical space occupied by the company is another powerful
image generator.
iv) Events: A Company can build an identity through the events it sponsors. Perrier,
the bottled water company, came into prominence by laying out exercise tracks
and sponsoring health sports events.

3.3.3. Service Differentiation

Kotler has observed that differentiation is a major issue in service industries as most service
innovations are easily copied. Service companies, therefore, face the challenge of continuously
developing new innovations to gain a succession of temporary advantages over their
competitors.

However, Kotler observed that firms invariably view the potential sources of differentiation too
narrowly. He agreed to the fact that a firm needs to differentiate its offer from that of
competitors by providing something unique that is valuable to the buyer. If this is successfully
achieved then the firm can command a premium price – it would sell more of its product in the
long-run and win greater loyalty.

Services Differentiation is “the meaningful process of adding meaningful differences to the

brand to as to distinguish it from competitors”. This strategy is also known as selective
marketing. Here the firm differentiates its services to suit different segment needs and
expectations. With this approach, the business will identify two or more specific consumer
groups that are highly likely to become loyal customers. The marketing efforts will focus
primarily on creating rapport with those identified consumers, by appealing to them in ways
that are relevant to characteristics such as location, age and gender, economic status, and any
other attribute that is widely shared among that group of consumers. This approach can often
involve creating specific programs that speak to the needs of the targeted markets, although
the goods and services provided are essentially the same for all programs.
For example, an airline that differentiates its products in three classes – the first class, business
class and economy class. Each of these classes is targeted at a specific segment whose needs
are different from the other.

3.3.3.1. Methods for Services Differentiation

Innovation is the key for service differentiation. The most important way through which service
firms can achieve differentiation advantage over competition is innovation. Peter F. Drucker
said that most innovative business ideas come from methodically analyzing listing seven areas
of opportunity, some of which lie within particular companies of industries and some of which
lie in broader social or demographic trends. Astute managers will ensure that their
organizations maintain a clear focus on all seven. But analysis will take you only so far. Once
you have identified an attractive opportunity, you still need a leap of imagination to arrive at
the right response called ‘functional inspiration’. Innovations require knowledge, ingenuity
and, above all else, focus.

New ideas are the first basic foundation for innovation. Theodore Levitt observed that a
powerful new idea can lie around unused in a company for years, not because its merits are not
recognized but because nobody has assumed the responsibility for converting it from words
into action. What is often lacking is not creativity in the idea creating sense but innovation in
the action producing sense, i.e., putting ideas to work. All in all, creation of ideas is relatively
abundant it is the implementation that is scarcer. Service firms need to search continuously for
new ideas from the people within the organization and the sources outside such as customers,
competitors and research institutes. Firms also need to design an institutional framework with
an ability to transform an idea into an innovative offer. Service firms are prone to competitive
threats and surprising challenges owing to the dynamic environment they encounter. The right
strategy therefore to reach the consumers, overtaking competitors, is to offer Additional
Innovative Value (AIV). When competitors are at par with the company in terms of financial,
technological and human resources, it is innovation that provides the competitive edge.

1) Best Cost Provider Strategy: Providing more value for the money customers pay for the
service is the aim of this strategy. Service firms will focus on providing key service
quality features and performance attributes in such a way that they exceed customer
expectations, in relation to price. Organisations should work for achieving cost efficiency
in various service process attributes and strive to achieve excellent quality of service at a
lower cost than competitors.
2) Focused (Market Niche) Strategy Based on Low Cost: Focused marketing or niche
marketing is to identify subgroups within a broad market segment that has a distinctive
set of traits and may seek a special combination of benefits. Niches are smaller and
generally attract very few competitors. Service organizations focusing on niche markets
 find an opportunity to direct their limited resources for providing a relatively small
group of consumers. Service firms may follow a strategy of serving the consumers in a
niche market at a cost lower than their competitors by providing comparable or better
quality service.
3) Focused (Market Niche) Strategy Based on Differentiation: The aim of this focused
strategy is to do a better job serving buyers in the target market niche. When a
company identifies a substantial group with well-defined desires, requiring special
service attributes and quality levels, this strategy is capable of earning rich dividends.

3.3.3.2. Factors Involved in Service Differentiation

The main factors which can be used for service differentiation are:

1) Ordering Ease: It refers to how easy it is for one to place an order with the company.
Baxter Healthcare has eased the ordering process by supplying hospitals with computer
through which they send orders directly to Baxter’ consumers can now order and
receive groceries without going to the supermarket through web-based service such as
peapod and net grocer. Thus these services have differentiated themselves through
ease of ordering.
2) Delivery: It is related to how well the product or service is delivered to the customer,
covering speed, accuracy and customer care. Deluxe check printer, inc., has built an
impressive reputation for shipping out its checks one day after receiving an order-
without being late once in 18 years.
3) Installation: It refers to the work done to make a product operational in its planned
location. Buyers of heavy equipment expect good installation service. Differentiation
by installation is particularly important for companies that offer complex products such
as computers.
4) Customer Training: It refers to how the customer’s employees are trained to use the
vendor’s equipment properly and efficiently. General Electric not only sells installs
expensive X-rays equipment in hospitals, but also gives extensive training to users of this
equipment.
5) Customer Consulting: It refers to data, information system and advising services the
seller offers to buyers. For example, the Rite and drugstore chain’s communications
program, called the Vitamin Institute, provide customers with research so they can
make more educated judgments and fell comfortable asking for help. On the Web, Rite
Aid has teamed with drugstore.com to offer even more health-related information.
6) Maintenance and Repair: It describes the service program for helping customers keep
purchasing products in good working order, an important consideration for many
products.
3.4. PRICING
3.4.1. Meaning and Definition of Pricing
Price is the marketing-mix element that produces revenue; the others produce costs. Price
is also one of the most flexible elements: it can be changed quickly, unlike product features
and channel commitments.

To a manufacturer, price represent quantity of money (or goods and services in a barter
trade) received by the firm or seller. To a customer, it represents sacrifice and hence his
perception towards the value of the product. Conceptually, it is:

Quantity of money received by the seller

Price = ----------------------------------------------------------------------------------
Quantity of goods and services rendered received by the buyer

In this equation, both the numerator and the denominator are important for price
decisions. Price of a product or service is what the seller feels it worth, in terms of money,
to buyer.

Pricing is the art of translating into quantitative terms (rupees and paisa) the value of the
product or a unit of a service to customers at a point in time.

According to Prof. K.C. Kite, “Pricing is a managerial task that involves establishing pricing
objectives, identifying the factors governing the price, ascertaining their relevance and
significance, determing the product value in monetary terms and formulation of price
policies and the strategies, implementing them and controlling them for the best results”.

Thus, pricing is the function of determining the product or services or idea value in
monetary terms by the marketing manager before it is offered to the target consumers for
sale. Precisely, pricing is the process of setting objectives, determining the available
flexibility, developing strategies, setting in implementation and control.

Pricing is a powerful marketing instrument for a company. Every marketing plan involves a
pricing decision. Hence, marketers must make accurate and planned pricing decision.
3.4.3 Importance of Pricing
1) Most Flexible Marketing Mix Variable: For marketers price is the most adjustable of all
marketing decisions. The flexibility of pricing decisions is particularly important in times
when the marketers seeks to quickly stimulate demand or respond to competitor price
actions.

2) Setting the Right Price: Pricing decisions made hastily without sufficient research,
analysis, and strategic evaluation can lead to the marketing is particularly important in
times when the marketer seeks to quickly stimulate demand or respond to competitor
price.

3) Trigger of First Impressions: The final decision to make a purchase may be based on the
value offered by the entire marketing offering (i.e., entire product) it is possible the
customer will not evaluate a marketer’s product at all based on price alone. If so, pricing
may become the most important of all marketing decisions if it can be shown that
customers are avoiding learning more about the product because of the price.

4) Important Part of Sales Promotion: Many times price adjustments are part of sales
promotions that lower price for a short term to stimulate interest in the product. Marketers
must guard against the temptation to adjust prices too frequently since continually
increasing and decreasing price can lead customers to be conditioned to anticipate price
reductions and, consequently, withhold purchase until the price reduction occurs again.

5) Supply and Demand: Supply and demand are like a seesaw in that, as one factor goes up,
the other correspondingly lowers. This is even more evident with items that are always in
demand, such as food and gas. Constant review of the supply and demand of the products
or services offered by a business will allow it to adjust prices accordingly.

6) Position: Simply put, a business position is how its target market views its offering in
comparison to companies that offer similar products or services. Certain companies are
viewed as being high-quality and thus are able to charge more for their products or services.

7) Sales Volumes: One of the most obvious affects pricing will have on the business is an
increase or decrease in sales volume. Economics study price elasticity, or the response of
consumer purchasing to a price change.

8) Loss Leaders: Some business price products or services at or below cost to get customers
into their business, who then spend more money elsewhere.
3.4.4 Factors Influencing Pricing
The pricing decisions are influenced by many factors. The price policies should be consists
with pricing objectives. The influencing factors for a price decision can be divided into two
groups as discussed below:

1) Internal Factors: Internal factors affecting pricing decisions are as follows:

i) Marketing Objectives: Organisations have both general and specific objectives.
General objectives include survival, current profit maximization, market share
leadership. At a more specific level, a company can set prices low to prevent
competition from entering the market or set prices at competitors’ levels to
stabilize the market. Prices can be set to keep the loyalty and support of
resellers or to avoid government intervention. Prices can be reduced
temporarily to create excitement for a product or to draw more customers into a
retail store. One product may be priced to help the sales of other products in
the company’s line. Thus, pricing may play an important role in helping to
accomplish the company’s objectives at many levels.
ii) Marketing Mix Strategies: Price is only one of the marketing mix tools that a
company uses to achieve its marketing objectives. Price decisions must be
coordinated with product design, distribution, and promotion decisions to form
a consistent and effective marketing programme. Decisions made of other
marketing mix variables may affect pricing decisions.

Companies often position their products on price and then tailor other
marketing mix decisions to the prices they want to charge. Here, Price is a
crucial product-positions factor that defines the product’s market, competition,
and design. Many firms support such price-positioning strategies with a
technique called target costing, a potent strategic weapon. For example, P&G
used target costing to price and develop its highly successful Crest SpinBrush
electric toothbrush.

Thus, marketers must consider the total marketing mix when setting prices. If
the product is positioned on non price factors, then decisions about quality,
promotion and distribution will strongly affect price. If price is a crucial
positioning factor, then price will strongly affect decisions made about the other
marketing mix elements. But even when featuring price, marketers need to
remember that customers rarely buy on price alone. Instead, they seek products
that give them the best value in terms of benefits received for the price paid.
 iii) Costs: It sets the floor for the price that the company can charge. The company
wants to charge a price that both covers all its costs for producing, distributing,
and selling the product and delivers a fair rate of return for its effort and risk. A
company’s costs may be an important element in its pricing strategy. Many
companies, such as Southwest Airlines, Wal-Mart, and Union Carbide, work to
become the “low-cost producers” in their industries. Companies with lower can
set lower prices that result in greater sales and profits.
iv) Organisational Considerations: Management must decide who within the
organization should set prices. Companies handle pricing in a variety of ways. In
small companies, prices are often set by top management rather than by the
marketing or sales departments. In large companies, pricing is typically handled
by divisional or product line managers. In industrial markets, salespeople may
be allowed to negotiate with customers within certain price ranges. Even so, top
management sets the pricing objectives and policies, and it often approves the
prices proposed by lower-level management or salespeople. In industries in
which pricing is a key factor (aerospace, steel, railroads, oil companies),
companies often have a pricing department to set the best prices or help others
in setting them. The department reports to the marketing department or top
management. Others who have an influence on pricing include sales managers,
production managers, finance managers, and accountants.
2) External Factors: External factors that affect pricing decision include:
i) Competitors’ Costs, Prices, and Offers: Another external factor affecting the
company’s pricing decisions is competitors’ costs and prices and possible
competitor’s reactions to the company’s own pricing moves. A consumer who is
considering the purchase of a Sony digital camera will evaluate Sony’s price and
value against the prices and values of comparable products made by Nikon,
Kodak, and others. In addition, the company’s pricing strategy may affect the
nature of the competition it faces. If Sony follows a high-price, high-margin
strategy, it may attract competition. A low-price, low-margin strategy, however,
may stop competitors or drive them out of the market. Sony needs to
benchmark its costs and value against competitors’ costs and value. It can then
use these benchmarks as a starting point for its own pricing.
ii) Economic Conditions: Economic conditions can have a strong impact on the
firm’s pricing strategies. Economic factors such as boom or recession, inflation,
and interest rates affect pricing decisions because they affect both the costs of
producing a product and consumer perceptions of the product’s price and value.
The company must also consider what impact its prices will have on other parties
 in its environment. How will resellers react to various prices? The company
should set prices that give resellers a fair profit, encourage their support and
help them to sell the product effectively,
iii) Government Controls and Subsidies: Government actions limits the freedom of
management to adjust prices, the maintenance of margins is definitely
compromised. Government control can also take the form of prior cash deposit
requirements imposed on importers. This is a requirement that a company has
to tie up funds in the form of a non-interest bearing deposit for a specified
period of time it wishes to import products. Such requirements create an
incentive for a company to minimize the price of the imported product; lower
price means smaller deposits. Government subsidies can also force a company
to make strategic use of sourcing to be price competitive.

3.4.5. Pricing Environment

A key goal of pricing is to understand how leading firms are adapting their pricing strategies to
the ongoing shifts in the competitive environment. The whole pricing environment is therefore
considered, first from the point of view of the company and its strategies and then from the
aspect of the consumer.

Pricing is influenced by the surrounding conditions and competitive environment. Companies

have to adapt to a changing environment in their industries. They must include the
environmental factors in designing the prices.

Throughout most of history, prices were set by negotiation between buyers and sellers.

1) Setting one price for all buyers – is a relatively modern idea that arose with the
development of large-scale retailing at the end of the nineteenth century.
2) Some companies are now reversing the fixed pricing trend. They are using dynamic
pricing – charging different prices depending on individual customers and situations.

Dynamic pricing offers many advantages for marketers.

1) Internet sellers can mine their databases lo guage a specific shopper’s desires, measure
his or her means, instantaneously tailor products to fit that shopper’s behavior, and
price products accordingly.
2) Many B2B marketers monitor inventories, costs and demand at any given moment and
adjust prices instantly.
3) Buyers also benefit from the Web and dynamic pricing.
 i) A Wealth of Web sites gives instant product and price comparisons from
thousands of vendors.
ii) Buyers can also negotiate prices at online auction sites and exchanges.

Strategies Adopted in Changing Pricing Environment

The strategies adopted, according to the changing pricing environment is as follows:

1) Segmented Pricing: In segmented pricing, some customers are charged more based on
their willingness to pay more for a given service or product. For example,
businesspeople may be a higher price for an airline ticket that allows them to fly mid-
week. Some customers may be willing to pay more for faster service, higher quality or
more features.
2) Peak User Pricing: Peak user pricing is a strategy common in transportation businesses.
For example, airlines and train companies often charge a higher price to travel during
rush hour on Monday through Friday than at other times and on weekends. Utility
companies also set prices based on peak times. For example, they may charge higher
fees for phone calls made, or electricity used, between 9 a.m. and 6 p.m.
3) Service Time: Another dynamic pricing strategy is to charge more for faster service. For
example, same-day dry cleaning would cost more than overnight cleaning. Or they can
give discounts to clients for volume business but not include higher-cost items, such as
rush orders, in the discount. This strategy can increase customer loyalty without
sacrificing profit margin.
4) Time of Purchase: Some dynamic pricing strategy offer customers different prices based
on when they buy. Again, airlines frequently use this strategy. The price of economy-
class seats on a particular flight may fluctuate over time. For example, the airline may
try to fill seats by lowering the price as the day of the flight draws closer, or try to fill
business-class seats first by raising prices on economy tickets. For games with low
demand, tickets are cheaper than for games with high demand.
5) Changing Conditions: The dynamic pricing for products works best when there is a lot
of uncertainty in the market-for example when the product may have a very short life
span, as is the case with movie tie-ins. Sellers can maximize profits by lowering prices as
sales fall, then raising prices again as demand increases.

3.4.6. Steps in Price Setting: Pricing Procedure

Price setting is one of the most difficult decisions a marketer has to make- profitability
depends on it, and prices, once set, can be difficult to change. Furthermore, while the
accountant may propose a price, it is the customer who will decide whether or not to pay. In
practice, pricing decisions, while rooted in financial analysis, must be made in the light of
judgments about the target market, about the competition, about product content, about
positioning and about distribution. The procedure for setting pricing is as follows:

1) Selecting Pricing Objectives: The foremost step is identifying pricing objectives. The
company first decides where it wants to position its marketing offering. The clearer a
firm’s objectives, the easier it is to set price. Companies pursue survival, as their major
objective if they are plagued with overcapacity intense competition, or changing
consumer wants. As long as prices cover variable costs and some fixed costs, the
company stays in business. Survival is a short-run objective: in the long run, the firm
must learn how to add value or face extinction.

Many companies try to set a price that will maximize current profits. They estimate the
demand and costs associated with alternative prices and choose the price that produces
maximum current profits, cash flow or rate of return on investment. This strategy assumes that
the firm has knowledge of its demand and cost functions; in reality these are difficult to
estimate.

Some companies want to maximize their market share. 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. The following conditions favour setting a low price. The
market is highly price sensitive, and a low price stimulates market growth. Production and
distribution costs fall with accumulated production experience. A low price discourages actual
and potential competition Companies unveiling a new technology favour setting high prices to
“skim” the market. Sony is a frequent practitioner of market skimming pricing. Whatever the
specific objective, businesses that use price as a strategic tool will profit more than those who
simply let costs of the market determine their pricing.

Various pricing objectives has been discussed in this Unit under the heading Objectives of
Pricing.

2) Determining Demand: Following the identification of objectives, the firm needs to

determine demand. Each price will lead to a different level of demand and therefore
have a different impact on a company’s marketing objectives. In the normal case,
demand and price are inversely related the higher the price, the lower the demand. In
the case of prestige goods, the demand curve sometimes slopes upward.
For example, Perfume Company raised its price and sold more perfume rather than less.
Some consumers take the higher price to signify a better product. However if the price
is too high, the level of demand may fall.
 The relation between alternative prices and the resulting current demand is captured in
a demand curve.
i) Price Sensitivity: There are 9 factors that affect the price sensitivity:
a) Unique Value Effect: Buyers are less price sensitive when the product is more
distinctive.
b) Substitute – Awareness Effect: Buyers are less price sensitive when they are less
aware of substitutes.
c) Difficult-Comparison Effect: Buyers are less price sensitive whey they cannot easily
compare the quality of substitutes.
d) Total Expenditure Effect: Buyers are less price sensitive the lower the expenditure
is as a part of their local income.
e) End-Benefit Effect: Buyers are less price sensitive the smaller the expenditure is to
total cost of the end product.
f) Shared-Cost Effect: Buyers are less price sensitive when part of the cost is borne by
another party.
g) Sunk-Investment Effect: Buyers are less price-sensitive when the product is used in
conjunction with assets previously bought.
h) Price-Quality Effect: Buyers are less price-sensitive when the product is assumed to
have more quality, prestige or exclusiveness.
i) Inventory Effect: Buyers are less price sensitive when they cannot store the product.
ii) Estimating Demand Curves: The companies use different methods to measure
the demand curves:
a) First method involves statistically analyzing past prices, quantities sold and other
factor to estimate their relationship.
b) Second method is to conduct price experiments. One example is to vary the prices
of several products sold in a discount store and observed the results.
c) The third approach calls for asking buyers to state how many units they would buy
at different proposed prices.
iii) Price Elasticity of Demand: The Price Elasticity of Demand (PED) is the
responsiveness of changes in the quantity demanded to changes in the price. It
is calculated using the following formula:
% Change in Demand / % Change in Price
3) Estimating Costs: Demand sets a ceiling on the price the company can charge for the
product. Costs set the floor. The company wants to charge a price that covers its cost
of producing, distributing and setting the product, including a fair return for its effort
and risk. A company’s costs can be of two forms:
 i) Fixed Costs or Overhead: The costs that do not vary with production or sales
revenue. For example, the land cost remains same whatever amount you
produce.
ii) Variable Costs: These costs vary directly with the level of production. For
example, the cost of raw material varies with the amount you produce.

Total costs can be calculated as the sum of fixed and variable cost for any given level of
production whereas the average cost is the cost per unit at given level of production. Average
cost falls with accumulated production experience. It is called experience curve or learning
curve.

Today’s companies try to adapt their offers and terms to different buyers. In order to estimate
the real profitability of dealing with various customers, companies need to use Activity Based
Costing (ABC). The issues to be considered are:

i)Costs are incurred because an organization performs activities

ii) Those activities are performed because the organization makes and sells products

iii)Activity-based costing first relates those costs that cannot be directly attributed to specific
products to the activities that make the costs necessary

iv)If then attributes the accumulated costs of the activities to the products that make the
activities necessary.

4) Analysing Competitor’s Pricing: Analysing competitor’s costs, prices and offers is also
important factor in setting prices. Within the range of possible prices determined by
market demand and company costs, the firm must take the competitor’s costs, prices
and possible price reactions into account.

While demand sets a ceiling and costs set a floor to pricing, competitors prices provide an in
between point that one must consider in setting prices. Marketers must learn the price and
quality of each competitor’s product or service by sending out comparison shoppers to price
and compare, and acquire competitors’ price lists and buy competitors’ products and analyse
them. Marketers must also ask customers how they perceive the price and quality of each
competitor’s product or service. If the product or service is similar to a major competitor’s
product or service, then one will have to price close to the competitor or lose sales. If the
product or service is inferior, one will not be able to charge as much as the competitor. It is
also possible that competitor might even change their prices in response to the price.
Within the range of possible prices determined by market demand and company costs, the firm
must take the competitors costs, prices and possible price reactions into account. There could
be 3 possibilities:

i)If the firm offers inferior product than its competitors, then the firm should offer a price less
than competitors.

ii) If the firm offers similar product as that of its competitors, they have to price same or close
to the competitors prices.

iii)If the firm’s offer is superior, the firm can charge more than the competitor.

5) Selecting Pricing Method: While selecting the final price, the companies must decide 3
factors commonly known as 3 C’s:

i)Cost Oriented Price: It sets a floor price.

ii)Competitors Oriented Price: It establishes the ceiling price.

iii)Customers Demand Oriented Price: It establishes the ceiling price.

Various pricing methods have been discussed in this Unit under the heading methods of
Pricing.

6) Selecting the Final Price: Pricing methods narrow the range form which the company
must select its final price. In selecting that price, the company must consider some
additional factors that are described below:

i) Psychological Pricing: Many consumers use price as an indicator of quality. Price and quality
perceptions of products interact. Higher-priced products such as cars are perceived to possess
high quality and vice versa. When alternative information about true quality is available, price
becomes a less significant indicator of quality. When this information is not available, price acts
as a signal of quality. If you see the price of a Mercedes Benz car costs 5 lakhs only, you will not
consider it as a highly prestigious car. When looking at a product, the buyers carry in their
minds a reference price formed by noticing current prices, past prices or the buying context.
Sellers often manipulate these reference prices.

ii) Company’s Pricing Policies: The price must be consistent with the company pricing policies.
Many companies set up a pricing department to develop policies and establish or approve
decisions. The aim is to ensure that the salespeople quote prices that are reasonable to
customers and profitable to the company.
iii)Impact of Price on Other Parties: Management must also consider the reactions of other
parties to the contemplated price. How will the distributors and dealers feel about it? Will the
sales force be willing to sell at that price? How will the competitors react? Will suppliers raise
their prices when they see the company’s prices? Will the government intervene and prevent
this price being charged?

iv)Influence of Other Marketing Mix Elements: The final price must take into account the
brand’s quality and advertising relative to competition. Experts examined the relationships
among relative price, quality and advertising and found the following:

a) Brands with average relative quality but high relative advertising budgets were able to
charge premium prices. Consumers apparently were willing to pay higher prices for
known products than for unknown products.
b) Brands with high relative quality and high relative advertising obtained highest prices.
Conversely, brands with low quality and low advertising charged the low prices.
c) The positive relationship between high prices and high advertising held most strongly in
the later stages of PLC for market leaders.

3.4.7. Methods of Pricing: Pricing Policy

Fundamentals which may affect price decisions are consumer situation and cost considerations.
It is quite unfortunate that many firms have no clear pricing policies. The following are the
basic policies recognized for pricing as given below:

1) Cost Based Pricing: Cost of production of a product is the most important variable and
most important determinant of its price. There may be many types of costs such as -
fixed cost, variable cost, total cost, average cost and marginal cost etc. Methods of
determining price on the basis of cost areas under:

i) Mark-up Pricing or Cost plus Pricing Method: In this method, the marketer estimates the
total cost of producing or manufacturing the product and then adds it a markup or the margin
that the firm wants. This is indeed the most elementary pricing method and many of services
and projects are priced accordingly. To arrive at the mark up price, one can use the following
formula:
 a

Mark up price =-------------------

(1-r)

Where, alpha=Unit cost (fixed cost + variable cost);

r = Expected return on sales expressed as a precent

ii)Full Cost or Absorption Cost Pricing: Absorption cost pricing or full cost pricing rests on the
estimated unit cost of the product at the normal level of production and sales. The method
uses standard costing techniques and works out the variable and fixed costs involved in
manufacturing, selling and administering the product. This method is also known as full cost
pricing since it envisages the realization of full costs from each unit sold.

iii)Marginal Cost or Incremental Cost Pricing Method: Here, the company may work on the
premise of recovering its marginal cost and getting a contribution towards its overheads. This
method works well in a market already dominated by giant firms or characterized by intense
competition and the objective of the firm is to get a foothold in the market. This pricing
procedure is often adopted when the firm:

a) Wants to introduce its product into new markets:

b) Faces stiff competition in the market; or
c) Has unutilized capacity,

iv)Break Even Point or B.E.P. Pricing Method: Break even point is the volume of sales at which
the total sales revenue of the product is equal to its total cost. In other words, it can also be
said that break even point is the volume of sales at which there is no profit and no loss.
Therefore, this method is also known as ‘No Profit No Loss Pricing Method’.

For the purpose of determining price under this method, total cost of production of a product is
divided into two parts – Fixed Costs and Variable Costs. This method of pricing is very useful for
determining the price of a competitive product, Under this method B.E.P. can be calculated as
under:
 Fixed Costs

B.E.P. (In Units)=-----------------------------------------------------------------

Selling Price per unit – Variable Costs per unit

Fixed Costs X Total Sales

B.E.P. (In Rs.)=-----------------------------------------------------------------------

Total Sales – Total Variable Costs

v)Rate of Return or Target Pricing Method: Under this method of price determination, first of
all, a rate of return desired by the enterprise on the amount of capital invested by it is
determined. The amount of profit desired by the enterprise is calculated on the basis of this
rate of return. This amount of profit is added to the cost of production of the product and thus,
the price per unit of the product is determined.

2) Customer Demand Based Pricing: The basic feature of all these demand-based method is
that profits ca be expected independent to the costs involved, but are dependent on the
demand. This pricing method differs from Cost-driven pricing, as it starts by asking at what
price the market will be prepared to pay for the product and works back to the level of profit
and costs, which that price will afford to the organization.

i) ‘What the Traffic Can Bear’ pricing: Pricing based on ‘what the traffic can bear’ is not a
sophisticated method. It is used by retail traders as well as by some manufacturing firms. This
method brings high profits in the short term. But ‘what the traffic can bear’ is not a safe
concept. Chances of errors in judgment are very high. Also, it involves trial and error. It can be
used where monopoly/oligopoly conditions exist and demand is relatively inelastic to price.

ii)Skimming Based Pricing: One of the most commonly discussed pricing methods is the
skimming, pricing. This pricing method to the firm’s desire to skim the market, by selling at a
premium price. This pricing method delivers results in the following situations:

a) When the target market associates quality of the product with its price, and high price is
perceived to means of high quality of the product.
 b) When the customer is aware and is willing to buy the product at a higher price just to be
an opinion leader.
c) When the product is perceived as enhancing the customer’s status in society.
d) When competition is non-existent or the threat from potential competition exists in the
industry because of low entry and exist barriers.
e) When the product represents significant technological breakthroughs and is perceived
as a ‘high technology’ product.

iii)Penetration Based Pricing: As opposed to the skimming pricing, the objective of penetration
pricing method is to gain a foothold in a highly competitive market. The objective of this pricing
method is market share or market penetration. Here, the firm prices its product lower than the
others do in competition. This method delivers results in the following situations:

a) When the size of the market is large and it is a growing market.

b) When customer loyalty is not high customers have been buying the existing brands
more because of habit rather than any specific preferences for it.
c) When the market is characterized by intensive competition.
d) When the firm uses it as a entry strategy.
e) Where price-quality association is weak.

iv)Market/Competitor Based Pricing: Market-based pricing means different things in different

contexts. One uses it to refer to the practice of pricing based solely on the prices being offered
by the competition. It is commonly applied by smaller players in situations in which there is a
clear market leader – e.g., a smaller cola brand might set its price based on the price of Coca-
Cola. Market-based pricing can also be an effective strategy for a low-cost supplier seeking to
enter a new market. Most companies fix the prices of their products after a careful
consideration of the competitors’ price structure. Deliberate policy may be formulated to sell
its products in the competitive market. Four policy alternatives are available to the firm under
this pricing method:

a) Parity Pricing or Going Rate Pricing: Under this method, the price of a product is
determined on the basis of the price of competitor’s products. This method is used
when the firm is new in the market or when the existing firm introduces a new product
in the market. This method is used when there is a tough competition in the market.
b) Pricing Below Competitive Level or Discount Pricing: Discount pricing means when the
firm determines the price of its products below the competitive level i.e., below the
price of the same products of the competitors. This policy pays where customers are
price; the method is used by new firms entering the market.
c) Pricing Above Competitive Level or Premium Pricing: Premium pricing means where
the firm determines the price of its product above the price of the same products of the
 competitors. Price of the firm’s product remains higher showing that its quality is
better. The price policy is adopted by the firms of high reputation only because; they
have created the image of quality producer in the minds of the public. They became the
market leader.
d) Competitive Bidding/Sealed Bid/Tender Pricing: Another form of competition oriented
pricing is the sealed bid pricing. In a large number of projects, industrial marketing and
marketing to the government, suppliers are asked to submit their quotations, as a part
of tender. The price quoted reflects the firm’s cost and its understanding of
competition.

If the firm has to price its offer only at its cost level, it may be the lowest bidder and may
even get the contract but may not make any profit out of the deal. So, it is important that
the firm uses expected profit at different price levels to arrive at the most profitable price.

3)Other Pricing Methods: The major other pricing methods are as follows:

i) Value Based Pricing: Good pricing begins with a complete understanding of the value that a
product or service creates for customers. Value-based pricing uses buyer’s perceptions of
value, not the seller’s cost, as the key to pricing. Value-based pricing means that the marketer
firstly designs a product, after that marketing program and then set the price. Price is
considered along with the other marketing mix variables before the marketing program is set.
Analysis will readily show that the following scenarios are possible with the cost-value price
chain:

i) Value>Price>Costs ii) Price>Value>Costs

iii)Price>Costs>Value iv) Price=Value>Costs

ii)Affordability Based Pricing: This method is relevant in respect of essential commodities,

which meet the basic needs of all sections of people. The idea here is to set prices in such a way
that all sections of the population are in a position to try and consume the products to the
required extent. The price is set independent of the costs involved, often an element of state
subsidy is involved and the items are.

iii)Prestige Based Pricing: As a purchasing motivation, ‘prestige’ is rarely openly admitted.

Many buyers do not realize that this might be their prime motivation for wanting to possess a
particular item.

iv)Market and Demand Based Pricing: Good pricing starts with an understanding of how
customers’ perceptions of value affect the prices they are willing to pay. Both consumer
and industrial buyers balance the price of a product or service against the benefits of
owning it. Thus, before setting prices, the marketer must understand the relationship
between price and demand for its product.

4)Pricing in Different Types of Markets

i)Under Pure Competition, the market consists of many buyers and sellers trading in a
uniform commodity such as wheat, copper, or financial securities. No single buyer or seller
has much effect on the going market price. A seller cannot charge more than the going
price, because buyers can obtain as much as they need at the going price. Nor would sellers
charge less than the market price, because they can sell all they want at this price. If price
and profits rise, new sellers can easily enter the market.

ii)Under Monopolistic Competition, the market consists of many buyers and sellers who
trade over a range of prices rather than a single market price. A range of prices occurs
because sellers can differentiate their offers to buyers. Either the physical product can be
varied in quality, features, or style or the accompanying services can be varied. Buyers see
differences in sellers’ products and will pay different prices for them. Sellers try to develop
differentiated offers for different customer segments and, in addition to price, freely use
branding, advertising, and personal selling to set their offers apart.

iii)Under Oligopolistic Competition, the market consists of a few sellers who are highly
sensitive to each other’s pricing and marketing strategies. The product can be uniform
(steel, aluminium) or non-uniform (cars, computer). There are few sellers because it is
difficult for new sellers to enter the market. Each seller is alert to competitors’ strategies
and moves. If a steel company slashes its price by 10 percent, buyers will quickly switch to
this supplier. The other steelmakers must respond by lowering their prices or increasing
their services.

iv)In a Pure Monopoly, the market consists of one seller’. The seller may be a government
monopoly (the U.S. Postal Service), a private regulated monopoly (a power company), or a
private non-regulated monopoly (DuPont when it introduced nylon). Pricing is handled
differently in each case. In a regulated monopoly, the government permits the company to
set rates that will yield a “fair return”. Non-regulated monopolies are free to price at what
the market will bear. However, they do not always charge the full price for a number of
reasons; a desire not to attract competition, a desire to penetrate the market faster with a
low price, or a fear of government regulation.

v)Cycle Based Pricing: Cyclical pricing is based on the cyclical variations of economic activity
overtime. Time series data reveals that economic/business activity exhibits cyclical
variations that are termed as business/trade cycles.
The trough is the point where national output is lowest relative to its full employment level
(full employment level is defined as the total amount of goods and services that could have
been produced if there had been full employment). The firm should reduce prices to
operate when economic activity is at its ebb. Expansion is the subsequent phase during
which national output rises. The peak occurs when national output is highest relative to its
full employment level during which the firm should increase prices. Finally, recession is the
subsequent phase during which national output falls.

3.5. INITIATING & RESPONDING TO PRICE CHANGES

3.5.1. Initiating Price Changes

Organisations are not alone in the market. Hence they cannot sit idle by setting price on
their own products. They have to face competitions and hence they sometimes have to
alter their prices. After developing their pricing structures and strategies, companies often
face situations in which they must initiate price changes or respond or act to price changes
by competitors. In some cases, the company may find it desirable to initiate either a price
cut or a price increase. In both cases, it must anticipate possible customer and competitor
reactions.

3.5.1.1. Initiating Price Cuts

Several situations may lead a firm to consider cutting its price. Once such circumstance is
excess capacity. Another is falling demand in the face of strong price competition. In such
cases, the firm may aggressively cut prices to boost sales and share. But as the airline, fast
food, automobile, and other industries have learned in recent years, cutting prices in an
industry loaded with excess capacity may lead to price wars as competitors try to hold on to
market share. Big Bazaar has successfully used this strategy to become the largest retailer
in India.

Some circumstances force a company to lower its offering price, which could be:

1) Declining Market Share: The company cannot set up a rigid pricing policy and must
react promptly to any move made by the competitor. The company initiates price-
cutting when they see that they are losing their market share to their competitors. For
example, P&G has slashed prices of Pantene brand of shampoos by 16% reacting to
HUL’s moves to cut the prices of its Clinic Plus and Sunsilk shampoos by 50% to Rs.51
100 ml and Rs.98 for 200 ml pack. In detergent sector, HLL had to cut prices of Surf and
Wheel as P&G had earlier slashed prices of Airel and Tide.
 2) Market Domination: Sometimes the companies drastically reduce the price to dominate
the market by attaining the price leadership. This strategy is not only used to dominate
the market, but also to unsettle the competitors also. The price war between Times of
India and Hindustan Times in Delhi few years back was primarily for getting market
share.
3) Excess Production: When the production or supply of products exceeds the demand in
the market, the companies have to lower the price of their products. The consumer
durable goods manufacturing companies often announce consumer promotion schemes
by offering huge price cut on their washing machines, TVs or refrigerators.
4) Economic Downtrend: In the time of economic recession, the companies have to reduce
the price to march the consumer’s tendency to lower spending.

But mindless price-cutting may initiate various possible traps:

1) Low Quality Traps: The consumer may perceive price cutting measures as selling low
quality products.
2) Shallow-Pockets Trap: Lowering price may get market share but it does not geneate
market loyalty. The consumers who have been lured by lower prices may switch over
other companies that could offer further low prices.
3) Fragile Market Share Trap: The financially strong companies by adopting the same
strategy can weaken the lesser financially strong companies through their power of
sticking to low prices longer.

3.5.2. Responding to Competitor’s Price Changes

A company might assess and respond to a competitor’s price cut. Suppose the company learns
that a competitor has cut its price and decides that this price cut is likely to harm company sales
and profits. It might simply decide to hold its current price and profit margin. The company
might believe that it will not lose too much market share, or that it would lose too much profit
if it reduced its own price. Or it might decide that it should wait and respond when it has more
information on the effects of the competitor’s price change. However, waiting too long to act
might let the competitor get stronger and more confident as its sales increase.

The best response varies with the situation. Firms must consider the product’s stage in the life
cycle, its importance to the firm’s portfolio, the competitor’s intentions and resources, the
product’s price and quality sensitivity, the behavior of costs with volume, and alternative
opportunities. The leader may have to maintain price if it finds any of the following cases:

1) Price reduction will erode a large amount of profits.

 2) Price reduction will tarnish the image of the product and the company.
3) Keeping same price will not cause much loss in market share.
4) The loss in market share for not lowering the price can be regained without much effort
or expenditure.

But, Sometimes the maintenance of the same price may boomerang. The possible outcomes
are:

1) Attacker becomes confident and more motivated to unsettle the leaders.

2) The sales force of the leaders get demotivated.
3) The leader losses more market share than expected.
4) The leader finds out that regaining market share is more difficult and costly.

Responding to competitors’ price changes is often undertaken by the business firms as they
usually operates in a tough business environment and are compelled to respond against the
price changes in competing firms. If the company decides that effective action can and should
be taken, it might make any of four responses:

1) Reduce its Price: It could reduce its price to match the competitor’s price. It may decide
that the market is price sensitive and that it would lose too much market share to the
lower-priced competitor. Cutting the price will reduce the company’s profits in the
short-run. Some companies might also reduce their product quality, services, and
marketing communications to retain profit margins, but this will ultimately hurt long-run
market share. The company should try to maintain its quality as it cuts prices.
2) Raise the Perceived Value: The company might maintain its price but raise the
perceived value of its offer. It could improve its communications, stressing the relative
value of its product over that of the lower-price competitor. The firm may find it
cheaper to maintain price and spend money to improve its perceived value than to cut
price and operate at a lower margin.
3) Improve Quality and Increase Price: The company might improve quality and increase
price, moving its brand into a higher price-value position. The higher quality creates
greater customer value, which justifies the higher price. In turn, the higher price
preserves the company’s higher margins.
4) Launch a Low-Price “Fighting Brand” : The company might launch a low-price “fighting
brand” – adding a lower-price item to the line or creating a separate lower-price brand.
This is necessary if the particular market segment being lost is price sensitive and will not
respond to arguments of higher quality.