Question No. 12 - Principles of Marketing BCOE - 141

 

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BCOE - 141 - Principles of Marketing

Question No. 12

Distinguish between the following: 

(a) Skimming and penetration pricing         (b) Product and services

a) Skimming and Penetration Pricing

• Definition of Penetration Pricing

Penetration Pricing implies a pricing technique in which new product is offered at low price, by adding a nominal markup to its cost of production, to penetrate the market as early as possible. It aims at maximizing the market share of the product, and once it is achieved, i.e. when the demand picks up, the firm can increase the price of the product.

Penetration pricing results in lower profits in the short run, however, in the long run, it results in higher profits because it increases the market base. The reasons behind adopting penetration pricing are as under:

• New product offered by the firm is already provided by other well-established brands. The low price will lure customers to switch to the new product, who are already familiar with other brands.
• It can help in increasing sales of the product in short period.
• It restricts new entrants from entering the market.

• Definition of Skimming Pricing

The pricing strategy in which high markup is charged for the new product, leading to the high price, so as to skim the cream from the market, is known as Skimming Pricing. It entails fixing a high price for the new product before other competitors step into the market.

This technique is used in case of new product, which faces no to little competition in the market, and have a great extent of consumer acceptability. Market skimming pricing is adopted by the company, due to the following reasons:

• In the early stages, the demand for the product is inelastic, till the product occupies a good position in the market.
• In the initial phase, the demand for the product is not known, and high price helps in covering the cost of production.
• In the beginning, there is a huge requirement of capital for producing the product, resulting in high production cost. Further, a huge amount is invested in the promotional activities, that also adds to its cost. When the product is charged high, it will cover the cost of production and promotion expenses easily.

Key Differences Between Penetration Pricing and Skimming Pricing

The difference between penetration and skimming pricing are presented hereunder:

1. Penetration Pricing can be described as a pricing method adopted by the firm to attract more and more customers, in which the product is offered at low price at the early stage. Conversely, skimming pricing is used to mean a pricing technique, in which high price is charged at the beginning to earn maximum profit.
2. Penetration pricing aims at achieving a greater market share, by offering the product at low prices. As against the object of using skimming pricing strategy is to earn maximum profit from the customers, by offering the product at the highest price.
3. Penetration pricing strategy is put into practice when the demand for the product is relatively elastic. On the other hand, skimming pricing is used when the demand for the product is inelastic.
4. In case of penetration pricing, the profit margin is low, whereas, in skimming pricing, the profit margin is very high.
5. As the price of the product is initially low in penetration pricing, huge quantities of product is sold by the firm. As against, due to high price of the product customer demand small quantity of the product, in case of skimming pricing.

b) Product and Services

1. Products are tangible – they are physical in nature such that they can be touched, smelled, felt and even seen. Services are intangible and they can only be felt not seen.
2. Need vs. Relationship– a product is specifically designed to satisfy the needs and wants of the customers and can be carried away. However, with a service, satisfaction is obtained but nothing is carried away. Essentially, marketing of a service is primarily concerned with creation of customer relationship.
3. Perishability- services cannot be stored for later use or sale since they can only be used during that particular time when they are offered. On the other hand, it can be seen that products are perishable. For example, fresh farm and other food products are perishable and these can also be stored for later use or sale.   
4. Quantity- products can be numerically quantified and they come in different forms, shapes and sizes. However, services cannot be numerically quantified. Whilst you can choose different service providers, the concept remains the same.
5. Inseparability- services cannot be separated from their providers since they can be consumed at the same time they are offered. On the other hand, a product can be separated from the owner once the purchase has been completed.  
6. Quality- quality of products can be compared since these are physical features that can be held. However, it may be difficult to compare the quality of the services rendered by different service providers.
7. Returnability- it is easier to return a product to the seller if the customer is not satisfied about it. In turn, the customer will get a replacement of the returned product. However, a service cannot be returned to the service provider since it is something that is intangible.
8. Value perspective- the value of a service is offered by the service provider while the value of the product is derived from using it by the customer. Value of a service cannot be separated from the provider while the value of a product can be taken or created by the final user of the product offered on the market.
9. Shelf line- a service has a shorter shelf line compared to a product. A product can be sold at a later date if it fails to sell on a given period. This is different with regard to a service that has a short shelve line and should be sold earlier.

Question No. 11 - Principles of Marketing BCOE - 141

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BCOE - 141 - Principles of Marketing

Question No. 11

Write short notes on the following: 

(a) Cash discount        (b) Branding 

a) CASH DISCOUNT

Cash Discounts are the discounts or incentives given by the seller to the customer for paying dues on or before the due date as per the company’s terms and conditions.

The company offers it to its customers to make the early payment in cash. It is known as a sales discount from the perspective of the company selling the goods and purchase discount from the perspective of the buyer purchasing the goods.

Cash discount reduces the chances of the bad debts that might arise in the future due to non-payment of dues by the customers of the company. Thus with such a discount, the company generally gets more amount of money when calculated for the overall business.

In the case of a business unit where a sufficient amount of the cash reserves is available in the company, they only lead to fewer profits because the earlier recovery of cash is of no use and will not give any benefit to the seller when checked on an overall basis.

b) BRANDING

Branding is the process of creating a strong, positive perception of a company, its products or services in the customer’s mind by combining such elements as logo, design, mission statement, and a consistent theme throughout all marketing communications. Effective branding helps companies differentiate themselves from their competitors and build a loyal customer base.

This means that customers expect that your tone of voice is the same over email, your website, customer service, and every other touchpoint in your business. If you rebrand, you need to change your logo, and styling everywhere both online and offline. Make sure you create a consistent brand so that your customers revel in your omni-channel presence. 

Branding in store can be very different to online branding as in store you have to worry about positioning of products and props that can effect how a customer experiences your brand. Branding in store is more experiential as people can walk around and pick things up, whereas customers online are experiencing a two-dimensional scene. Of course certain elements of branding are consistent with both online and in store. These include consistent imagery and logos.

Question No. 10 - Principles of Marketing BCOE - 141

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BCOE - 141 - Principles of Marketing

Question No. 10

What do you understand by marketing environment? Explain the types of marketing environment.

Marketing environment is the combination of external and internal factors and forces that affect the company’s ability to establish a relationship and serve its customers.

The marketing environment of a business consists of an internal and an external environment.

• The internal environment is company-specific and includes owners, workers, machines, materials etc.
• The external environment is further divided into two components: micro & macro.
• The micro or the task environment is also specific to the business but is external. It consists of factors engaged in producing, distributing, and promoting the offering.
• The macro or the broad environment includes larger societal forces which affect society as a whole. It is made up of six components: demographic, economic, physical, technological, political-legal, and social-cultural environment.

TYPES OF MARKETING ENVIRONMENT

The marketing environment is made up of the internal and external environment of the business. While the internal environment can be controlled, the business has less or no control over the external environment.

• Internal Environment

The internal environment of the business includes all the forces and factors inside the organisation which affect its marketing operations. These components can be grouped under the Five Ms of the business, which are:

• Men: The people of the organisation including both skilled and unskilled workers.
• Minutes: Time taken for the processes of the business to complete.
• Machinery: Equipment required by the business to facilitate or complete the processes.
• Materials: The factors of production or supplies required by the business to complete the processes or production.
• Money: Money is the financial resource used to purchase machinery, materials, , and pay the employees.

The internal environment is under the control of the marketer and can be changed with the changing external environment. Nevertheless, the internal marketing environment is as important for the business as the external marketing environment. This environment includes the sales department, the marketing department, the manufacturing unit, the human resource department, etc.

• External Environment

The external environment constitutes factors and forces which are external to the business and on which the marketer has little or no control. The external environment is of two types:

• Micro marketing environment
• Macro marketing environment

• Micro Environment

The micro-component of the external environment is also known as the task environment. It comprises external forces and factors that are directly related to the business. These include suppliers, market intermediaries, customers, partners, competitors and the public

• Suppliers include all the parties which provide resources needed by the organisation.
• Market intermediaries include parties involved in distributing the product or service of the organisation.
• Partners are all the separate entities like advertising agencies, market research organisations, banking and insurance companies, transportation companies, brokers, etc. which conduct business with the organisation.
• Customers comprise of the target group of the organisation.
• Competitors are the players in the same market who targets similar customers as that of the organisation.
• Public is made up of any other group that has an actual or potential interest or affects the company’s ability to serve its customers.

• Macro Environment

The macro component of the marketing environment is also known as the broad environment. It constitutes the external factors and forces which affect the industry as a whole but don’t have a direct effect on the business. The macro-environment can be divided into 6 parts.

• Demographic Environment

The demographic environment is made up of the people who constitute the market. It is characterised as the factual investigation and segregation of the population according to their size, density, location, age, gender, race, and occupation.

• Economic Environment

The economic environment constitutes factors that influence customers’ purchasing power and spending patterns. These factors include the GDP, GNP, interest rates, inflation, income distribution, government funding and subsidies, and other major economic variables.

• Physical Environment

The physical environment includes the natural environment in which the business operates. This includes the climatic conditions, environmental change, accessibility to water and raw materials, natural disasters, pollution etc.

• Technological Environment

The technological environment constitutes innovation, research and development in technology, technological alternatives, innovation inducements also technological barriers to smooth operation. Technology is one of the biggest sources of threats and opportunities for the organisation and it is very dynamic.

• Political-Legal Environment

The political & Legal environment includes laws and government’s policies prevailing in the country. It also includes other pressure groups and agencies which influence or limit the working of the industry and/or the business in the society.

• Social-Cultural Environment

The social-cultural aspect of the macro-environment is made up of the lifestyle, values, culture, prejudice and beliefs of the people. This differs in different regions.

Question No. 9 - Principles of Marketing BCOE - 141

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BCOE - 141 - Principles of Marketing

Question No. 9

What is product life cycle? Discuss briefly. 

The term product life cycle refers to the length of time a product is introduced to consumers into the market until it's removed from the shelves. The life cycle of a product is broken into four stages—introduction, growth, maturity, and decline. This concept is used by management and by marketing professionals as a factor in deciding when it is appropriate to increase advertising, reduce prices, expand to new markets, or redesign packaging. The process of strategising ways to continuously support and maintain a product is called product life cycle management.

Products, like people, have life cycles. A product begins with an idea, and within the confines of modern business, it isn't likely to go further until it undergoes research and development (R&D) and is found to be feasible and potentially profitable. At that point, the product is produced, marketed, and rolled out.

As mentioned above, there are four generally accepted stages in the life cycle of a product—introduction, growth, maturity, and decline.

• Introduction: This phase generally includes a substantial investment in advertising and a marketing campaign focused on making consumers aware of the product and its benefits.
• Growth: If the product is successful, it then moves to the growth stage. This is characterized by growing demand, an increase in production, and expansion in its availability.
• Maturity: This is the most profitable stage, while the costs of producing and marketing decline.
• Decline: A product takes on increased competition as other companies emulate its success—sometimes with enhancements or lower prices. The product may lose market share and begin its decline.

When a product is successfully introduced into the market, demand increases, therefore increasing its popularity. These newer products end up pushing older ones out of the market, effectively replacing them. Companies tend to curb their marketing efforts as a new product grows. That's because the cost to produce and market the product drop. When demand for the product wanes, it may be taken off the market completely.

Question No. 8 - Principles of Marketing BCOE - 141

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BCOE - 141 - Principles of Marketing

Question No.  8

What are the factors affecting promotion mix.

The following are the factors influencing promotion mix:

1. Nature of the Product:

Promotion mix will vary according to the nature of the product. Consumer goods require mass advertisement. But industrial goods require personal selling, advertising, displays etc. Complex and technical products like computer need personal selling.

Non-technical products require advertising as promotional device. In case where there is no brand differentiation personal selling should be the method of promotion. Where there is brand differentiation advertising should be emphasised.

2. Nature of the Market:

For industrial market, advertising plays an informative role, but for consumer market it plays as informative as well as persuasive role. The promotion strategy varies with the target groups depending on age, sex, education, income, religion etc.

3. Stages in the Product Life Cycle:

The marketing objectives and strategies are different at each stage of the product in its life cycle. During the introductory stage intensive advertising and personal selling are required for effecting product awareness.

During growth stage advertising should be extended to maximise the market share. During maturity stage persuasive advertising and sales promotion techniques are beneficial. But at the declining stage advertisement and sales promotion are reduced to the minimum.

4. Market Penetration:

A product having good market penetration is well-known to the buyers. In that situation, middlemen are motivated to spend more an advertising.

5. Market Size:

It there is limited number of buyers, direct selling is enough. But if the market size is large the promotional tool is mainly advertising.

6. Characteristics of Buyers:

Experienced buyers of industrial product need personal selling. The experience of buyers, the time available for purchase, influence of friends, retailers etc. are the factors affecting promotion mix.

7. Distribution Strategy:

If the products are directly sold by the manufacturer personal selling is the tool of promotion.

Advertising is only a supporting tool. Personal selling and advertising is required for market penetration. If the product passes through a longer channel more importance should be given to advertising and less importance to personal selling.

8. Pricing Strategy:

Pricing influences promotion strategy. If the brand is priced higher than the competitor’s price, personal selling is used. If the price is comparatively low only little promotion is needed. If the middlemen are allowed higher profit margin, sales promotion at dealer level is important.

9. Cost of Promotion:

The cost of the media of advertising and sales promotion tools should also be considered while deciding the promotional mix.

10. Availability of Funds:

If the funds are adequate the firm can spend more for advertising and sales promotion. But small firms with limited resources can depend on personal selling.