Principl of Marketing-Module

Principles of Marketing
Birhan College
Business and Economics

Management Department
Principle of Marketing
June, 2022
Debre Berhan
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INTRODUCTION TO THE COURSE
Marketing is all around us, every day we are exposed to it thousands of times on average
according to some estimates. From the obvious examples of advertisements on TV and
othermedia, through the concentrated exposure every time we go into a shop, to the more
subtle manifestations of marketing through branding we are all, to an increasing extent,
―consumers‖of marketing.
Think about the products or services that you buy. Marketing would have contributed in a
number of ways to your decision to purchase those products. From identifying your needs
through to pricing and distributing the product in such a way as to make it accessible or
aspirational, depending on the nature of the product, marketing will inform many of the
producing organisation’s actions.
This course is primarily designed to provide students with some preliminary insights of
marketing management. It deals with the basic concepts of marketing: marketing
management; the role and importance of marketing department in an organization; the main
functions of marketing which include the product designing, promoting, pricing, and
distributing want satisfying products.
Course Objectives
Marketing touches all of our everyday lives. Market oriented thinking is thus a necessity in
today’s competitive world. Hence, this course is designed with the following objectives.
Up on completion of the course, students will be able to:
 To develop the themes of marketing management as a process function and people
management activity with respect to the four strategic elements of marketing its
product, pricing strategy, distribution system and promotional activities.
 To develop the students‟ abilities to apply their marketing knowledge and skills in
their special field.
 To familiarize students with the concepts and principles of marketing and the
significance of different forces that influence the marketing effort.
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CHAPTER ONE
NATURE AND SCOPE OF MARKETING
Contents
1.1. Basic concepts and definitions
1.2. Evolution and Philosophies of marketing
1.3. Importance of marketing
1.4. Marketing Tasks
1.4.1. Building Customer Relationship
1.4.2. Demand Management
Aims and objectives
After completing this chapter you should be able to:
 Define marketing
 Identify the basic marketing philosophies
 Explain the importance of marketing
 List the marketing tasks/functions
1.1. Basic concepts and definitions
Welcome, Dear learners, we encounter the word marketing in our everyday language. A layman
views it more or less equivalent to the term selling and advertising. In fact not only a layman
that considers it this way but also there are some companies that considers marketing as a
business function whose responsibility area is to dispose of whatever products the firm decided
to produce. However, in today’s turbulent and competitive business environment, selling and
advertising are only part of marketing.
In order to visualize the concept of marketing, first the word marketing should be viewed as
business philosophy i.e. the basic philosophy that a business enterprise operates to achieve its
ultimate objective.
Marketing has been described by one scholar or another as a business activity; as a group of
related business; as a trade phenomenon; as a frame of mind; as an economic process; as a
structure of institution; as a process of demand-supply adjustment; and as many other things.
The followings are some of the definitions forwarded by different scholars
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According to American Marketing Association, marketing is defined as the performance

of business activities that direct the flow of goods and services from producers to consumers or
users.
According to William J. Stanton, Marketing is a system of business activities designed to

plan, price, promote and distribute want satisfying goods and services to present and potential
customers.
According to Evans and Berman, Marketing is the anticipation, stimulation, facilitation,

regulation and satisfaction of consumer and public’s demand for products, services,
organizations, people, places, and ideas through the exchange process.
Others define Marketing as activities involved in business that are directed towards
converting customer purchasing power into effective demand for a specific product and there by
moving the product to the final consumer, so as to achieve company’s ultimate object of profit.
According to Philip Kotler, Marketing is a Social and Managerial process by which

individuals and groups obtain what they need and want through creating, offering, and
exchanging products of value with others.
This definition of marketing rests on the following core concepts: needs, wants, and demands;
products (goods, services, and ideas); value, cost and satisfaction, exchange and transactions;
markets, and marketers.
Need:The most basic concept underlying marketing is that of human needs. Marketing starts with
human needs and wants. A human need is a state of deprivation of some basic satisfaction;
people require food, clothing, shelter, safety, belonging, and esteem. These needs are not created
by society or by marketers. They exist in the very texture of human biology and the human
condition.
Wants can be defined, as the desire for specific satisfiers of the basic needs taken as shaped by
culture and individual personality. For e.g. an Ethiopian needs food and wants "Injera", "wet",
and a "Tej", in another society these needs might be satisfied differently. Although people's needs
are few, their wants are many. Human wants are continually shaped and reshaped by social
forces and institutions, including churches, schools, families, and business corporations.
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Demands: People have almost unlimited wants but limited resources. Thus, they want to choose
products that provide the most value and satisfaction for their money and hence they will spend
their resource (money) in such a way. So, when buying power backs want, it becomes demand.
Simply demand means wants for specific products that are backed by an ability and willingness
to buy them. Wants become demands when supported by purchasing power. Many people want
to have personal computer; only a few are able and willing to buy. Companies must therefore
measure not only how many would want a product but more importantly would actually be
willing and able to buy it.
Product (Goods, Services, and Ideas): People satisfy their needs and wants with products. A
product is anything that can be offered to satisfy a need or want. The concept of product is not
limited to physical objects but also it includes intangible goods such as, service(s), and idea(s)
which may be activities or benefits to customers. Sometimes, it may be a combination of physical
product along with services.
Value and satisfaction: Consumers usually face a broad array of products and services that
might satisfy a given need. Hence, consumers make buying choices based on their perceptions of
the value that various products and services deliver. Customer value is the difference between the
value of customer gains from owning and using a product and the costs of obtaining the product.
Customer Satisfactiondepends on a product’s perceived performance in delivering value relative
to buyer expectations. If a product's performance falls short of the customer's expectations, the
buyer is dissatisfied. If performance exceeds expectations, the buyer is delighted. If performance
matches exceptions, the buyer is satisfied. Outstanding marketing companies do out of their way
to keep their customers satisfied because satisfied customers make repeat purchases, and they tell
others about their experience which obviously provides the firm with competitive advantage
(good word of mouth communication), otherwise, if they are not satisfied, customers will not
only be refrained from buying a company’s products but also they are likely to talk negatively
about the firm to the very prospective customers who may possibly purchase the company’s
products (bad word of mouth communication). Some companies even aim to delight customers
by promising only what they can deliver, then delivering more than they promised.
Exchange: Earlier when we defined marketing we said that it involves exchange of products
from one party to the other party to satisfy need. Hence, we can say that marketing occurs when
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people decide to satisfy needs and wants through exchange. Exchange is the act of obtaining a
desired product from someone by offering something in return. It is only one of the ways that
people can obtain what they need. A person may get what he needs by begging others, hunting,
robbing etc. As a means of satisfying needs, exchange has much in its favor. People do not have
to prey on others or depend on donations, nor do they must possess every necessity for
themselves. They can concentrate on making things that they are good at making and trading
them for needed items made by others. Thus, exchange allows a society to produce much more
than it would with any alternative system. Exchange must be seen as a process rather than as an
event. Two parties are engaged in exchange if they are negotiating and moving toward an
agreement. When an agreement is reached, we say that a transaction takes place. A transaction
consists of a trade of values between two parties.
In conjunction to exchange, the marketer should be able to offer something (product) valuable to
the customer so that they will be initiated to make the exchange. Generally transaction marketing
is a means by which the so-called marketer and prospect (customer) exchange values to each
other, hence with this relationship in between the marketer and the customer is to be created.
Here, the relationship might turn out to be for short-term transaction (relationship that lasts with
the completion of the exchange process) or long-term transaction (relationship that continues
after the transaction is completed.). Obviously the relationship that a marketer should strive to
build should be long-term relation with customers by promising and consistently delivering high
quality products, good service, and fair prices then profit will be gained from customers on long
term basis from repeated purchases.
Markets: The concept of exchange leads to the concept of a market. A market consists of all the
potential and actual customers sharing a particular need or want who might be willing and able to
engage in exchange to satisfy that need or want. Thus the size of the market depends on the
number of people who exhibit the need or want, have resources that interest others, and are
willing and able to offer these resources in exchange for what they want. Here, unlike the
Economics approach that considers market as a collection of buyers and sellers, we shall consider
market as a collection of buyers only and the sellers are considered as industry.
Modern economies operate on the principle of division of labor, where by each person
specializes in producing something, receives payment and buys needed things with this money.
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Thus modern economies abound in markets. Producers go to resource markets (raw material,
money, labor markets), buy resources, turn them into products and sell them to intermediaries,
who sell them to consumers. The consumers sell their labor, for which they receive income to
pay for the goods and services they buy. Thus, each nation’s economy and the whole world
economy consist of complex, interacting sets of markets that are linked through exchange
processes. In this regard marketers are keenly interested in markets. Their goal is to understand
the needs and wants of specific markets and to select the markets that they can serve best. In turn,
they can develop products that will create value and satisfaction for customers in these markets,
resulting in sales and profits for the company.
Marketer: The concept of markets abounds us to the concept of marketing as marketing means
simply human activity that takes place in relation to markets to make an exchange of values
among individuals. Simply we can say that marketing means working with markets to actualize
potential exchanges for the purpose of satisfying human needs and wants. If one of the two
parties involved is more actively seeking an exchange than the other party, obviously it should
make some efforts to make the other party interested in the exchange and hence, this party is
referred to as marketer. This means marketer is a party that seeks a resource from the other party
and in return willing to offer something valuable to the other party and the party with whom the
marketer needs to make exchange is known as prospect. In the event that both the parties
actively seek an exchange, we say that both of them are marketers and call the situation as
reciprocal marketing.
1.2. Evolution and Philosophies of marketing
Marketing management is defined as the conscious effort to achieve desired exchange outcomes
with target markets. Like any other business functions, marketing activities should be carried out
under a well-thought-out philosophy of efficiency, effectiveness and social responsibility. But what
philosophy should guide marketing efforts? What relative weight should be given to the interest of
the organization, the customers, and society? Very often these interests are in conflict. In tracing the
development of marketing philosophies under which organizations can choose to conduct their
marketing activities, there are five competing concepts under which organization conduct marketing
activities.
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1. Production concept: This is the oldest business philosophy in marketing. It used to be practiced
in early economies where in appealing to buy was the order of the day (where in customers don’t
have that much alternative choices to buy). During the early economies, buyers do not have that
much alternative to choose. Hence, they were likely to buy whatever available to them irrespective
of their interest. Hence, manufacturers of that age were primarily concerned with making products
available at economical price and it is from this fact that, the assumption of this philosophy:
―consumers will favor products that are widely and highly affordable (consumers are primarily
interested in product availability and low price)‖ is emanated. As such, follower of this philosophy
designs its product as per his desire and strives to make the product at the possible economical
price. Hence, such a company focuses on the internal capability of the firm rather than on the desire
and needs of the customer so as to secure production efficiency and low cost. Hence, managers of
production oriented firms’ concentrate on achieving high production efficiency, low cost and
mass distribution, and thus denying the consumer choice. This shows to what extent production
department is considered as the central core of the entire business, with other functions such as
marketing, finance etc being of secondary importance. In fact, there is nothing wrong with focusing
on the firm’s production system; indeed, such assessment is major in strategic marketing planning.
In effect, as when competition is weak and demand exceeds supply, a production orientation firm
can survive and even prosper. More often, however, firms that succeed in competitive markets
should have a clear understanding of customer choice and there by produce accordingly, rather than
focusing on what the company thinks to produce. Thus, as competition began to increase with the
emergency of mass production techniques on a large scale, products of many companies fell short
off demand thus loss for the respective companies. Hence, this approach tends to be obsolete. But,
even today, it may be practiced according to the scenario, i.e. if demand is far greater than supply
or if the unit price of the product is very high and customers are very much concerned with lower
prices.
2. Product concept: as companies devise a way for producing products on large scale basis, excess
production that leads to excess supply comes to be the order of the day. This eventually resulted in
fall off demand as compared to supply and thus loss for the respective companies. Hence,
companies need to compete to each other in order to attract customers by offering benefits in terms
of quality, additional performance and innovative feature. Thus, the situation compelled companies
to make their products offer the most quality, performance and innovative features so as to attract
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customers. This eventually paved the way for product concept to appear in the business scene. This
approach can be described as orientation towards making continuous product improvement. The
problem of this philosophy is that, the company concentrates on the product rather than the needs of
customer. The company sees itself as selling a product rather than providing a solution to a need.
Hence, such companies may suffer what we call marketing myopia: - when a company is so taken
with its products, it focuses only on current needs and hence it will lose sights of underlying
customer needs. Such companies will have trouble if a new product comes along that serves the
customer needs better or less expensively. Thus, the product of such firms may lack acceptance in
the market whatever their quality, performance and innovative features is, as they are not produced
in accordance with customer preference and specification. The most important issue here for
management in this circumstance is continuous improvement in products. Here, the underlying
philosophy is that customers are reluctant and need to be coerced by means of superior performance
into buying. However, even if consumers were willing to buy, there may be so many potential
suppliers that firms will have the problem of stiff competition to overcome. Thus, in competitive
markets this approach may not be fruitful.
3. The Selling Concept: - As competition began to be tough, companies found it difficult to make
sell to customers by basing upon only the attributes (performance) of the product. Rather, they
should come up with the so called selling approach that calls for convincing customers by any
means to make purchase. This, in due course, lined the way for this concept to come into being.
This concept holds that consumers, if left alone, will ordinarily not buy enough of the firm’s
product. The firm, therefore, must undertake an aggressive selling and promotionseffort. To such
firms, marketing means selling things and collecting money (marketing people are responsible for
disposing whatever the firm produce irrespective of whether it is needed by customers or not).
Thus, sales oriented firms often find that, despite the quality of their sales force, they cannot
convince people to buy products that are neither wanted nor needed. It is with this orientation that
many of the hard sell techniques that are in some cases both dishonest and unethical and in so many
ways contributed to the tainted (bad) image of sales man that still exists in the minds of many
people today emerge. Generally we can say that selling concept is preoccupied with the seller’s
need to convert his product into cash rather than the idea of satisfying the needs of the customer.
Thus, it focuses on short term sales transactions rather than on building long term,profitable
relation with the customer.It assumes that customers who are persuaded into buying the
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product will like it or, if they do not like it, they will possibly forget their disappointment and
buy it again later. In today’s business environment, this approach may be practiced for unsought
goods: goods about which the customer may or may not know but will not be actually that much
interested to purchase e.g. life insurance etc, by non-profit organizations, political parties etc
otherwise, it is very hard, let alone to succeed, even to survive with this orientation in today’s
competitive market environment.
4. Marketing concept: It is a simple intuitive appealing theory. With the emergence of modern
economies, the foundation of markets started to change. Earlier when the number of sellers is
relatively smaller (the amount supplied) as compared to buyers (quantity demanded), it was
customers who should appeal to buy as they have no that much alternative. But, with the emergence
of mass production and as the number of sellers increased over time, excess production and excess
supply became common place word and this, in due course, leads to the emergence of competition
i.e. unlike the early economic situation wherein customers were appealing, companies should
compete to each other in order to attract customers. Hence, in today’s competitive environment
where in buyers have a number of choices for a single product; sellers should appeal to sell. This
means, if the products of the company are not liked by customers, it is hard for the company, let
alone to get a profit, even to survive. Hence, today, it is customers’ decision to purchase that
ensures the survivality of a company and rational customers buy only those products that enhance
their satisfaction. Taking into consideration all these, this approach (marketing concept) states the
social and economic justification for an organization’s existence is the satisfaction of customer
needs and wants while meeting organizational goals. Generally, it is based on an understanding that
a sale does not depend on aggressive sales force, but rather on customer’s decision to purchase.
Hence, in these days environment, it is obvious that what a business thinks to produce is not of
primary importance to its successes. Instead, what customers think they are buying, their
satisfaction defines a business.
Hence, according to this approach, to undo the today’s toughest competition, firms should deliver
their offering as a function of customer satisfaction so that they can efficiently achieve their profit
motto for which purpose they exist; otherwise, all their efforts will tend to be much ado about
nothing. In effect, modern marketing calls beyond producing in accordance with customers need
and want i.e. to satisfy customers more efficiently and effectively than competitors do.
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Marketing is preoccupied with the idea of satisfying the customers’ needs of the product and the
whole cluster of things associated by creating and delivering the product. The marketing concept
rests on four main pillars, namely target market, customer needs, coordinated marketing, and
profitability.
Fig.1.1 The Selling and marketing concepts Contrast
The selling concept (Inside-out view that focuses on existing products and heavy
selling)
Starting Focus Means Ends
point
Factory Products Selling & promotion Profits through sales

volume
The marketing concept (outside- in view that focuses on satisfying customer

needs as path of profit)
Target Customer Needs Coordinated marketing Profits through

market Customer Satisfaction
5.Societal marketing Concept: It holds that the organization should determine the needs, wants,
and interests of the target markets and deliver the desired satisfaction more effectively and
efficiently than competitors in a way that maintains or improves the customer’s and the society’s
well-being. The societal marketing concept calls upon marketers to balance three considerations in
setting their marketing policies. Originally, companies based their marketing decisions largely on
short-run company profit. Overtime, companies began to recognize the long-run importance of
satisfying consumer wants, and introduced the marketing concept. Now they are beginning to think
of society’s interests when making decisions. The societal marketing concept calls for balancing all
three considerations-company profits, consumer wants, and society’s interests.
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Fig.1.2 Consideration underlying social marketing concept
Society (human welfare)
Social Marketing
Concept
Consumer (want satisfaction) Company (Profits)
1.3 The Importance of Marketing
Financial success often depends on marketing ability. Finance, operations, accounting, and
other business functions 'Will not really matter if there isn't sufficient demand for products
and services so the company can make a profit. There must be a top line for there to be a
bottom line. Many companies have now created a Chief Marketing Officer, or CMO, position
to put marketing on a more equal footing with other C-Ievel executives, such as the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO). Press releases from
organizations of all kinds-from consumer goods makers to health care insurers and from
nonprofit organizations to industrial product manufacturers-trumpet their latest marketing
achievements on their Web sites. In the business press, countless articles are devoted to
marketing strategies and tactics.
In stating their business priorities, CEOs acknowledge the importance of marketing. One
survey of the top 10 challenges CEOs face around the world in 2006 revealed that among the
top 5 were both "sustained and steady top line growth" and "customer loyalty/retention,"
challenges whose achievement depends heavily on marketing. CEOs also recognize the
importance of marketing to building brands and a loyal customer base, intangible assets that
make up a large percentage of the value of a firm.
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Marketing is tricky, however, and it has been the Achilles' heel of many formerly prosperous
companies like General Motors, Kodak, and Sony all have confronted newly empowered
customers and new competitors and have had to rethink their business models.
Even market leaders such as Intel, Microsoft, and Wal-Mart recognize that they cannot afford
to relax as their leadership is challenged. Jack Welch, GE's former CEO, repeatedly warned his
company: "Change or die."
Making the right decisions about change isn't always easy. Marketing managers must decide
what features to design into a new product, what prices to offer customers, where to sell
products, and how much to spend on advertising, sales, or the Internet. They must also decide
on details such as the exact wording or color for new packaging. The companies at greatest risk
are those that fail to carefully monitor their customers and competitors and to continuously
improve their value offerings. They take a short-term, sales-driven view of their business and
ultimately they fail to satisfy their stockholders, employees, suppliers, and channel partners.
Skillful marketing is a never-ending pursuit.
In short, marketing has the following impotence:
Marketing affects almost every aspect of your daily life: All the goods and services you buy,
the stores where you shop, and the radio and TV programs paid for by advertising are there because
of marketing.
Marketing versus Economic Growth: An even more basic reason for studying marketing is
that marketing plays a big part of economic growth and development.
Marketing stimulates research and new ideas-resulting in new goods and services.
Marketing gives customers a choice among products. If these products satisfy customers,
fuller employment, higher incomes, and higher standard of living can result. An effective marketing
is important to the future of all nations.
1.4. Marketing Tasks
The following are the basic marketing functions:
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1. Environmental Analysis and Marketing Research: Involves monitoring and adapting to

external factors that affect success or failures, such as the economy and competition; and
collecting data to resolve specific marketing issues.
2. Consumer Analysis: Involves examining and evaluating customer characteristics, needs,
and purchase processes and selecting the group of consumers at which to aim marketing
efforts.
3. Product Planning: (including goods, services and ideas) Involves developing and
maintaining products, product assortments, product images, brands, and packaging, and
optional features; and deleting faltering products.
4. Distribution Planning: Involves establishing relations with distribution-channel
intermediaries, physicaldistribution, inventory management, warehousing, transportation, the
allocation of goodsand services, wholesaling and retailing
5. Promotion Planning: Involves communicating with customers, the general public and
others through someform of advertising, publicity, personal selling, and/or sales promotion.
6. Price Planning: Involves determining price levels and ranges, price techniques, terms of
purchase, priceadjustments, and the use of price as an active or passive factor.
7. Broadening the organizations' /individuals' scope: Involves deciding on the emphasis to
place, as well as the approach to take, on international marketing, service/ -non-profit
marketing and societal issues.
8. Marketing Management: Involves planning, implementation, and controlling the
marketing program (strategy) andindividual marketing functions; and appraising the risks and
benefits in decision-making.
1.4.1. Building Customer Relationship
Customer relationship management is perhaps the most important concept of modern
marketing. Some marketers define it narrowly as a customer data management activity (a
practice called CRM). By this definition, it involves managing detailed information about
individual customers and carefully managing customer ―touch points‖ to maximize customer
loyalty.
Most marketers, however, give the concept of customer relationship management a broader
meaning. In this broader sense, customer relationship management is the overall process of
building and maintaining profitable customer relationships by delivering superior customer
value and satisfaction. It deals with all aspects of acquiring, keeping, and growing customers.
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1.4.2. Demand Management

Marketing managers must decide which customers they want to target and on level, timing,
and nature of their demand. Simply put, marketing management is customermanagement and
demand management.Marketers are responsible for demand management. They may have to
manage negative demand (avoidance of a product), no demand (lack of awareness or interest
in a product), latent demand (a strong need that cannot be satisfied by existing products),
declining demand (lower demand), irregular demand (demand varying by season, day, or
hour), full demand (a satisfying level of demand), overfull demand (more demand than can be
handled), or unwholesome demand (demand for unhealthy or dangerous products). To meet
the organization’s objectives, marketing managers seek to influence the level, timing, and
composition of these various demand states.
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CHAPTER TWO
MARKETING ENVIRONMENT
Contents
2.1. Introduction
2.2 Macro environment
2.3. Micro environment
Aims and objectives
 Evaluate the macro environmental factors that affect the company’s marketing
activities and its overall performance
 Evaluate the micro environmental factors that affect the company’s marketing
activities and its overall performance
2.1. Introduction
Organizations operate not in a vaccum rather in a complex and changing environment.

Regarding this, other actors in the environment such as suppliers, competitors, intermidiaries,
customers etc may work with or against the company. Likewise, major forces in the economic ,
demographic, natural, technological etc environment may shape opportunities or pose threats,
and hence affect the organization’s ability to serve customers and develope long lasting
relationship with them. Similarly, the company’s differnt departments, resources etc may act as
a source of its weakness and strength. To this end, organizations need to identify and then
respond to numereous environmental forces that may have implication on the different activities
that the organization is engaged. These environmental forces can be devided into two catagories
based on their sources: factors external to the organization and internal to the organization.
Internal Environment
Internal environment refers to factors essentially emenated from the organizations own teritory
and thus a company can have full control over such factors. For e.g. a company can exercise
control over its resources, activities of different departments such as marketing, production,
finance etc. For e.g. suppose that a company is contempleting of adding additional product,
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before rushing to decision, the company should determine whether existing production facilities
and expertise can be used or not, if there are sufficient financial rssource, etc. Generally,
internal environment is abounded by the company’s resources, activities etc. So, this
environment is the basic source of the organization’s strengthe and weakness. For instance,
workforce of a given company could be more efficient than that of the other company. In this
case, the company’s workforce is acting as a source of strengthe for the company. On the other
hand, a company may operate with old machineries and production techniques that makes it lag
behind its competitors in producing attractive products to customers.So this can be source of
weakness.
External Environment: refers to the actors and forces outside of the company that affect the
organization’s ability to develop and maintain sucessful relationship with its target market. As
these factors are stem from the external forces, they may provide the organization with emense
opportunuties that may pave a way for better sucess or threats that may endanger to the
organization’s existence. Hence, an organization should constantly scan the different
opportunities and/or threats being shaped by external environment and in this regard marketers
are the most responsible for scanning the tendency of such actors as they are responsible for
dealing with the organization’s market. This eventually enables them to revise and adapt
marketing strategies to meet new challenges and opportunities in the market place.
The marketing environment consists of a microenvironment and a macro environment.
2.2 Macro environment
These are factors springing from demographic, economic, poletical, cultural, physical and
technological forces. They are said macro because they affect all the companies operating in a
given market. As they are overall factors and external, they are largely uncontrollable by a
givren company. But this by no means that a company’s sucess depend on a mere chance rather
companies should systematically asses these forces and shape their activities in light with the
environment’s trend. Apart from this, all these forces are inter related to eachother. Hence, a
change in one of these factors is likely to cause a change in one or more of the others.
Additionally, all they are dynamic in nature, that is, they are subject to change at an alarmic rate.
Now, lets have a look at each of them one by one in detail.
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Demographic environment: demography is the study of human population in terms of size,

density, location, age, gender, race, occupation etc. This environment is of major concern to
marketers because it essentially involves people and people constitute markets. In the first place,
the explosive growth of population has great implication for companies. Primarly population
growth results in an increase in human needs that must be fullfilled, hence we can think of it in
terms of the opportunity it may have, but it does not mean growing market unless, otherwise the
growth of population is backed up by sufficient purchasing power. On the other hand, if the
population growth presses too hard against the available food supply and resources, costs will
shoot up and hence profit marigins will be depressed. In addition to this, national demographic
factors which vary from country to country, also have significant impact on marketing. For e.g.
in one country the number of youngesters may be far greater than that of seniors, this may tell to
the marketers what possible behaviors are dominant in the market, which group represents the
most influence etc. Likewise, in a country, where the proportion of litrate is so small,
advertising through megazines may not be fruitfull as it doesnot make the message reach to the
maximum nuber of customers. Similarly, the household pattern composition may also have
implication. For e.g. traditionally, household consists of husband, wive and children. No matter
how, we can have a lot other kind of households such as only mother and children, father and
children and only wife and husband (which is being accustomed recently). Each of these groups
may represent different kind of market segments as each group may have different buying
behavior based on the selected characteristic. Generally, marketers should look into all these
aspects on continous basis to learn if any of these demographic factors are changing in such a
way that they are capable enough to pose threats or create opportunities to the organization.
Economic environment: people alone do not represent markets. They must have the ability and
willingness to buy. Individuals purchasing power is a function of different interacting forces in
the so called economic environment. When we say economic environment, we are referring to
factors that directly affect customers purchasing and spendingpattern. Among the factors
affecting customers purchasing and spending pattern, level of the economy and income
distribution are the most important. As far as the level of economy concerns, some countries
havesubsistent economy:- they consume most of their own agricultural and industrial out put.
Hence, such economies represent a less attractive opportunity. At the other extrem are
industrial economies, which constitute rich markets for many goods and services. Apart from
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this, the income distribution in a country may have a lot with customers purchasing power and
spending pattern. Suppose that in a given country, much of the income goes to a verry small part
of the population leaving the mass with a very insignificant portion of the income. This
obviously tells that much of the purchasing power is confined in the hands of fews and hence,
major part of the society does not represent attractive market as it has limited purchasing power.
The other force, in this regard, is the over all situation of the economy: booming and
depression. An economy is said to be booming if the economic situation of a country go on
improving due to the additional employment opportunity in an economy, additional income,
more investment etc. Contrary to this, an economy is said to be on depression if the economical
situation in a country keeps on aggravating from time to time such as increased unemployment,
decrease in investment, decrease in income etc. Both these two kinds of situations have their
own impact on the purchasing power and psychology of individuals. In a booming economy,
individuals income is improving. This eventually results in higher purchasing power. Apart
from this, in such economies, individuals will have the confidence to spend what they have now
thinking that they will have no problem in terms of secured income in the future. Hence,
booming economy represents additional opportunity. Unlike this, depression has negative
impact on customers. In the first place, due to the many negative factors such as unemployment,
decrease in investment etc, individuals income will go on decling and this in turn result in the
shrink of purchasing power. Additionally, individuals will have no confidence to sacrifice their
current resource for their current need thinkingthat the future is more agravated than it is now.
Hence, this represents a threat.
Apart from all these, the so called inflation and deflation are the other important forces.
Inflation is a rise in the prices of goods and services. Hence the purchasing power of a currency
declines.( when prices rise at a faster rate than personal income, consumers buying power
declines). This as well affect consumers psychology and purchasing power and there by
marketing program of a company. For e.g. high inflation obviously results in a decrease
consumption as it makes purchasing power decline. Likewise, it may psychologically force
consumers to overspend today for fear that prices will be higher tomorrow. Apart from this,
sever inflation is a real challenge for a company as it makes managing prices of final products
and inputs difficult. In the same way, extereme deflation (when the purchasing power of
currency raises at an alarmic rate) may have implication to organizations in different ways.In
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particular, it is very difficult for firms to raise prices because of consumer resistance. Hence,
their only option will be to concentrate on as to how cost of products can be decreased,
otherwise, profit will evaporate.
In addition to all these factors, consumers expenditures are highly affected by savings, debt and
credit availability and interest rate. Hence, marketers must pay careful attention to major
changes in all these factors.
Technological environment: it is one of the most dramatic force shaping people’s lives. It has a
tremendous impact on life-styles, consumption patterns and economic well being. You can think
of the many technological breakthroughs that are expanding our horizon as we progress into the
future. It is realy hard to grasp each and every aspect in this regard. Technology can affect
companies in different ways:
 By starting new industries such as computer, robot etc
 By radically altering or virtually destroying existing industries as it paves the way for
improved products, innovative producst etc. E.g. emergemcy of television over radios,
computers on type writer machine industries etc.
Apart from this, technology has affected marketing activities extensively. The breakthrough in
communication now permite people and organizations to transact from almost any location at
any time of the day.
We should also keep in mind that technology is a mixed blessing in some ways. A new
technology may improve our life in one way while creates environmental and societal
challenges and problems on the other. E.g. automobile industry has made life greate but blamed
for polluting the environment. And, in fact, technology is expected to solve some of the
problemes for which it is being criticized. E.g. air pollution through environmentally adaptive
products.
Socio-cultural environment: it is made up of institutions and other forces that affect a society’s
basic values, perceptions, preferences and behaviors. The society in which people live shapes
their basic beliefes, values and norms. They absorb a world view that defines their relationship
to themselves, to others, to nature etc. People in every society hold many core beliefes and
20
values that tend to exist for a long. For e.g. many Ethiopians believe in patriotism, in getting
married, in giving to the poor, not eating pork etc. These are cultures that passed down from
parents to children and of course are being reinforced by different institutions such as churches,
businesss, government etc. Obviously if there are cultures that work against a company’s
marketing activities, the company will be at the odd but if the culture commonsurates with the
company’s marketing activities, it will be verry conducive. Hence, companies need to asses if
there are any culture operating against or with the company’s marketing activities and there by
should devise ways as to how they can cope up with the challenges being pose by that culture or
as to how they can make the best use of the opportunity. In addition to this, marketers should
continously look if there are any cultural shifts and if there, whether they are adaptive
(conducive) to the organization or not. As we all know, culture is not something that standstill
always as it is. Rather it is subject to change owing to various reasons for e.g. in Ethiopian
culture, it was housewife who is responsible for dealing with the many things involved in a
family such as taking care of child, homemaking etc. But as time passed, it came to be evidents
that this culture is changing and hence to day specially in urban areas the role of a husband and
wife is deviating from its traditional position. This eventaully may have implication on
traditional buying pattern of households. Additional, children are being given more attention in
terms of their interest to day than that of what traditionally accustomed before. Likewise, in
urban areas an increasing number of femels are becomming office workers and such women are
seeking for better balance between work and familiy. This is essentially changing their attitude
towards shopping etc. In such a way, we can think of the differnt kind of changes happenning to
our culture begining from changing the existing upto the creation of new cultures. Generally, in
such constantly changing cultures, companies should respond on timely basis as the culture
changes otherwise their activities will be obsolated with the obsolated culture or the cultural
changes may endanger their sucess in one way or another or they may over look the new
opportunities coming along with cultural changes etc.
Natural Environment: it refers to thephysical environment with in which the company

operates. It involves natural resources that are needed as an input by companies or that are
affected by activitieas of companies. The change in this environment may have greater
implication on the activity of marketers.
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In the first place, this environment is the source of different kind of resources the company may
need. In this regard, the first kind of resources are what we call infinite resources such as water
and air but today pollusion of such resources has become a major issue and challenge for
companies. Likewise, the so called finite but renewable (recoverables) such as food, forest etc
should also be exploited in economical and reasonable manner that they can be recovered
otherwise if they are used extremly, it will be diffiicult to recover them back and this as we
know will have impact on companies in different ways begining from degradation of
environment up to shortage of resources. In the same way, the so called finite but non renewable
such as petroleum, coal and various minerals pose a verry greate challenge for companies.
Firms making products that require such materials as an input will face large cost increase, even
if the materials remain available .
Apart from all these, the activities of companies may cause problems to the environment such as
pollusion. Hence, the government and the society at large may make movements against such
companies for the dangers they are causing to the environment. This in turn may compell
companies to put their large sum of money to take care the physical environment and further it
may compell them to look for improved products that are friendly to the environment. For
example car producing companies are doing their best to create cars that minimizes the
pollusion of environment.
Generally, marketer should look into all these aspects if there are any tendencies posing a
challenge or creating a chance for the company.
Poletical and legal Environment: this consists of laws, governmental agencies and pressure
groups. In the first place, countries will have their own legeslation aimed at protecting
companies from unfair competition, protecting consumers from unfair business practices and/or
to protect the society’s interest from unbridled business behavior. Hence, marketers must have a
good knowledge of the major laws protecting competition, consumers and society. Additionally,
new framework of laws might be introduced as it becomes necessary and this newly created law
may affect the organization’s activity posetivelly or negatively in addition to the exisiting ones.
Apart from all this, the government may have its own regulations and priorities and the
initiation it give may change over time for different kind of businesses. In addition to this, there
might be some influential groups that are capable enough to influece the legeslation bodey and
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the government to introduce new laws or take actions. Hence, marketers need to look into all
this aspects on continous basis to identify the possible threats being posed on the company or
opportunities coming along with the changes of these factors.
2.3 Micro environment

The environment micro includes all the actors like other company departments, suppliers,
marketing intermediaries,competitors, various publics, and customers which are close to the
company that affect,positively or negatively, its ability tocreate value for and relationships
withits customers. These are factors that are specific only for the company under consideration.
They are not the same for all companies operating in a given market (economy). For. E.g. a
company’s suppliers might be differnt from one company to the other. In the same way,
customers (markets) the firm serves might be different in accordance with the company’s
business. Generally, all the aspects mentioned above are things that can change from one
company to the other. They are not the same for all companies like macro factors. As they are
external to the company, still these forces are uncontrollable by a company but are not that
much difficult to influence like macro factors. For e.g. a company may not control the activity
of its competitors but can systematically affect its activity. Likewise., a company may not exert
control over its suppliers but still may have the bairgaining power to influence their activity.
Now let’s have a look at of the main such factors one by one:
1. The Company: In designing marketing plans, marketing management takes other

company groups intoaccount—groups such as top management, finance, research and
development (R&D), purchasing,operations, and accounting. Top management sets the
company’s mission, objectives, broad strategies, and policies. Marketing managers make
decisions within the strategies and plans made by top management.Marketing managers must
work closely with other company departments. Other departments have an impact on the
marketing department’s plans and actions. And, under the marketing concept, all of these
functions must ―think consumer.‖
2. Suppliers: Suppliers are specific to the company. i.e. suppliers of a company in one
inductry are/may be different from the other company engaged in other industry and even for
companies engaged in the same industry, suppliers might be differnt from one company to the
other. They can affect an organization’s activity in so many ways. For e.g. if the supplier can not
23
deliver the materials on timely basis, it will be difficult for the company to deliver the product
for customers in areas where they are in need of on timely basis. In the same way, if suppliers
fail to meet quality requirments, it will be difficult for the company to come up with supperior
quality products. Likewise, if suppliers increase the price of the materials they are delivering, it
may enforce the company to raise prices of its final products etc. In return a company may have
some bargaining power to affect suppliers activity. E.g. a company may inforce suppliers to
meet some quality requirment, may inforce them to decrease price etc. Hence, it is of
paramount importance to contenously monitor the activities of suppliers in terms of their their
materials quality, dependability, etc. This is so because if a supplier stops delivering abruptly, it
may threat the company’s business. In the same way, if the number of suppliers go on raising, it
can be considered as opportunity for the company as it will make getting in puts less difficult.
3. Marketing intermediaries: these are all those parties that are involved in delivering the
company’s products to the market from where they are produced . They are involved in the
exchange process with the company’s target market in one way or another. These include
retailers, physical distribution companies (transportation and warhousing companies), marketing
service companies such as advertising companies, marketing research companies etc and
financial intermediaries such as banks and insurances. It is obviouse that, these may have
posetive and/or negative impact on a company. So, its so important to follow up any changes in
such an atomspher so that the company can prepare the things it may encounter in advance.
4. Competitors: A company’s competitive environment is a major influence on its

marketing activities. A company is rarely stands alone in its effert to serve a given customer
market. There will always be a host of competitors. Hence, a company must provide greater
customer value and satisfaction than its competitors do. Thus, marketers must do more than
simply adapt to the needs of target consumers. They also must gain strategic advantage by
positioning their offerings strongly against competitors’ offerings in the minds of consumers.
A comapny generally face three type of competition
Brand competition: comes from marketers of directly similar products e.g. coca and
pepsi.
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Substitute products: products from other catagories but can substitute the company’s
products e.g. video producing companies and theaters compete for entertainment
need(recreational need). May be Jucies, Ambo weha, Highland spring, Coca etc appeal for
satisfying the same need refreshment drink.
general type of competition: every company is a rival as all strive to get the limited
buying power of buyers.
5. Customers: are the most important actors in the company’s microenvironment. The aim
of the entire value delivery network is to serve target customers and create strong relationships
with them. The justification for an organizations existence is the decision of customers to
purchase. Hence, in today’s competitive environment, every activity of the organization should
revolve arround the needs and specification of customers. In todays changing environment, what
customers are interested today may be outdated by tomorrow. Thus, companies should keep on
improving themselves with the changing environment of their customers. That means if the
interest of customers starts to shift, in the same way the company should adjust it self in
accordance with that change. To this end, it is compulsary for companies to continously scan
their customers and adjust themseleves accordingly.
6. The Public: is any groupthat has an actual or potential interest in or impact on an

organization’s ability to achieve itsobjectives. We can identify seven types of publics:
• Financial publics. This group influences the company’s ability to obtain funds. Banks,
investment analysts, and stockholders are the major financial publics.
• Media publics. This group carries news, features, and editorial opinion. It includes
newspapers, magazines, television stations, and blogs and other Internet media.
• Government publics. Management must take government developments into account.
Marketers must often consult the company’s lawyers on issues of product safety, truth in
advertising, and other matters.
• Citizen-action publics. A company’s marketing decisions may be questioned by consumer
organizations, environmental groups, minority groups, and others. Its public relations
department can help it stay in touch with consumer and citizen groups.
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• Local publics. This group includes neighborhood residents and community organizations.
Large companies usually create departments and programs that deal with local community
issues and provide community support.
• General public. A company needs to be concerned about the general public’s attitude toward
its products and activities. The public’s image of the company affects its buying.
• Internal publics. This group includes workers, managers, volunteers, and the board of
directors. Large companies use newsletters and other means to inform and motivate their
internal publics. When employees feel good about the companies they work for, this positive
attitude spills over to the external publics.
A company can prepare marketing plans for these major publics as well as for its customer
markets. Suppose the company wants a specific response from a particular public, such as
goodwill or favorable word of mouth. The company would have to design an offer to this
public that is attractive enough to produce the desired response.
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CHAPTER THREE
UNDERSTANDING THE MARKET
Contents
3.1. What is a market?
3.2. Types of market
3.2.1. Consumer markets and buying behavior
3.2.2. Organizational markets and buying behavior
Aims and objectives
 Define the consumer market and construct a simple model of consumer buyer
behavior.
 Name the four major factors that influence consumer buyer behavior.
 List and define the major types of consumer buying decision behavior and the stages in
the buyer decision process.
 Define the business market and explain how business markets differ from consumer
markets.
 Identify the major factors that influence business buyer behavior
 List and define the steps in the business buying decision process
3.1. What is a market?

Traditionally, a "market" was a physical place where buyers and sellers gathered to buy and
sell goods. Economists describe a market as a collection of buyers and sellers who transact
over a particular product or product class (such as the housing market or the grain market).
Modern economies abound in such markets.
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Fig.3.1 various types of markets
Five basic markets and their connecting flows are shown in Figure 1.1. Manufacturers go to
resource markets (raw material markets, labor markets, money markets), buy resources and
turn them into goods and services, and then sell finished products to intermediaries, who sell
them to consumers. Consumers sell their labor and receive money with which they pay for
goods and services. The government collects tax revenues to buy goods from resource,
manufacturer, and intermediary markets and uses these goods and services to provide public
services. Each nation's economy, and the global economy, consists of complex interacting sets
of markets linked through exchange processes.
Marketers often use the term market to cover various groupings of customers. They view
sellers as constituting the industry and buyers as constituting the market.
Figure 1.2 shows the relationship between the industry and the market. Sellers and buyers are
connected by four flows. The sellers send goods and services and communications such as ads
and direct mail to the market; in return they receive money and information such as customer
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attitudes and sales data. The inner loop shows an exchange of money for goods and services; the
outer loop shows an exchange of information.
3.2. Types of market
Markets are broadly classified as consumer and industrial markets. Consumer markets consist of
purchasers and/or individual household members who intend to consume or benefit from the
purchased products and who do not buy products to make profits.
Industrial markets (organizational buyers), also called business-to-business markets, are grouped
broadly into producer, reseller, governmental, and institutional categories. These markets
purchase specific kinds of products for use in making other products, or for day to day operations
by others.
3.2.1. Consumer markets and buying behavior
Consumers around the world vary tremendously in age, income, education level, and tastes.
They also buy an incredible variety of goods and services. How these diverse consumers relate
with each other and with other elements of the world around them impact their choices among
various products, services, and companies. Here we examine the fascinating array of factors
that affect consumer behavior.
Model of consumer behavior

Earlier when we discuss about the basic concepts and trends of marketing, we said that in todays
competitive and turbulent business environment a marketer should produce his products in such
a manner that the offers (products) value is capable enough to deliver the desired satisfaction
more effectively and efficiently than competitors’ products do. Otherwise as they have many
other alternatives, customers will switch over to other products that appeared to deliver the
desired satisfaction more efficiently and effectively and thereby it will be difficult for the firm
let alone to fulfill its ultimate object of profit even to survive. Hence, it is obvious that a
marketer should have a clear vision about what benefits, specifications, prices etc customers of
target market expect and as to when and how they purchase the product under consideration. To
understand these, however, he needs to be acquainted (aware) with the rationale behind
customers purchase desire as to how buyers make purchase decision. Nonetheless,
understanding customers is never simple. Customers may say one thing but do another. They
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may not be in touch with their deeper motivations. They may respond to influences that change
their minds at the last minute. This by no means that purchase decisions are entirely dependent
upon a matter of spontaneous responses of customers and hence, marketers should hinge upon
chance for success. Rather studying customers provides clues for developing new products,
product features, pricing strategies, channels, messages and other marketing mix elements.
In this regard it is better for the marketer to begin with the analogy that it is customer's decision
to purchase that determines the company's success. Hence, he should dig into consumers buying
decisions in great detail to answer questions about what consumers buy, where they buy, how
and how much they buy, when they buy and why they buy. As clarified above a marketer may
study the actual consumer purchases to find out what they buy, where and how much. But
learning about the whys of consumer buying behavior is not so easy as the answers are often
locked deep within the consumer's mind. To see how customers make decision, let's have a look
at of the proposed model of buyers' behavior. According to the model, marketing stimuli such as
product, price, promotion and place enter customers' mind and there are also other stimuli that
include major forces and events in the buyer's environment: economic, technological, social,
cultural etc. All these inputs enter the buyer's mind, where they are turned into a set of
observable buyer response such as product choice, brand choice, timing decision, amount
decision etc. Hence, the marketer needs to understand how the stimulus entered consumers mind
is changed into response inside the consumers' mind, which has two facets. First, the buyer's
characteristics influence how he or she perceives and reacts to a stimulus (factors influencing
buyers' decision). Second, the buyer's decision-making process itself affects the buyer's
behaviors. In line with this, in this chapter we shall dwell upon factors that influence customers
buying behavior and the buying process model.
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Fig.3.2 Model of consumer buying behavior
Factors influencing consumer purchase decision.
Customers before making buying decision require a sort of information about the product they
are considering. Until they know what products and brands are available, what features and
benefits they offer, who sells them at what prices, and where they can be purchased, there
cannot be a purchase decision process to be made by customer. Even if a customer has all
these information, there are lots of factors that affect his decision for e.g. the culture with in
which the customer live and the persons around him may affect his decision. Likewise, the
customer's personality aspect and his psychological makeup may have implication upon his
purchase decision. Here, let's dwell upon them more in detail.
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Table. 3.1 Factors affecting consumer buying behavior
Cultural Social Personal Psychological
Culture Reference group Age Motivation
Sub culture Family Occupation Perception
Social class Roles and status Economy Learning
Life style Beliefs and

attitudes
Personality
Self concept
1. Cultural factors
Culture
It is the most basic cause of human wants and behavior. It is a set of symbols and artifacts
created by a society and handed down from generation to generation as determinants and
regulators of human behavior. It does not include instinctive acts (natural act) but it may affect
person's instinctive behaviors. For e.g. everybody needs clothing (instinctive behavior) but
what, when and how to put on cloth vary according to culture. It may refer to intangibles such as
learned behaviors, attitude, perceptions, and values and wants individuals acquire from their
society, family, and institutions such as church as they grow up or tangibles such as housing,
works of art, tools etc. It is shared by the majority members of the society. Hence, a marketer's
task is to identify cultures in the target market that have something to do with the firm's product
i.e. as to how the culture affects the product's acceptability (positively or negatively), and then
to design the product in such a way that it is commensurate with the culture. In addition, as old
patterns gradually give way to new, culture is subjected to change through time. Hence, a
marketer should also keenly look in to any cultural shifts in order to find out if any kind of
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threat for the firm's product (to keep up its products in line with the new trends of culture) or
opportunity such as for developing new product emerges thereof.
Subculture
Each culture contains smaller subcultures or groups of people with shared value systems based
on common life experience and situation. Subcultures include nationalities, religious, racial
groups, geographical regions etc. When subcultures grow large and affluent enough to
comprise important market segment, companies often design important marketing programs to
serve them.
Social class
Virtually all-human societies exhibit social stratification. The stratification may take different
bases such as a cast system where members of different casts are reared for certain roles, or
hierarchically ordered social class etc. Each social class is supposed to be relatively
homogenous along with members having similar values, interests, behaviors, recreational
preferences etc. Hence, people's buying behavior is often strongly related to the social class to
which they belong or to which they aspire. Generally social classes reflect not only a single
factor such as the income but it is measured as a combination of occupation, education,
residence area etc. Knowing social classes in the market is significantly important because
people within the same social class tend to exhibit the similar buying behavior (distinct
preference towards a product may be attached to a given of a social class).
2. Social factors
In addition to cultural factors, a buyer decision may also be affected by such social factors as
reference groups, family and social roles and status.
Groups: every group in a society has its own standards of behavior that guides or shapes
members behavior or to which members are expected to comply as members share these values.
Groups that affect individuals in one way or another are referred to as reference group. Hence,
we can say that a person's behavior is influenced by many reference groups around him. Groups
that have a direct influence and to which the individual belongs are called membership groups.
Some membership groups are primary groups such as family, friends, neighbors, and co-
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workers, with whom the person interacts fairly continuously and informally. People also belong
to secondary groups, such as religious, professional, and trade union groups, which tend to be
more formal and require less continuous interaction.
There are possibilities for the individual to be influenced by a given group even if the individual
is not actually member of the group. This may take two forms: groups we admire and aspire to
join (aspirational group) groups whose values or behavior is what an individual rejects
(dissociative groups).
People may be influenced by reference groups in three ways: First reference groups expose an
individual to new behaviors and lifestyles and second it may affect attitude and self-concept of
individual and third it may create pressures that may affect actual product and brand choices.
Now a day there is a great tendency to make use of reference groups especially in advertising
for e.g. when a known individual advertises a given product.
In addition, to this what marketer should do is to reach and influence the so-called opinion
leaders in a group. Opinion leaders are persons in informal, product related communications
who offers advice or information about a specific product or product category.
Family
The family is the most important and influential primary reference group. There are two kinds
of families in the buyer's life. The family of orientation consists of parents and siblings (family
in which the individual born and brought up). From such family a person acquires an orientation
towards religion, politics and economics and a sense of personal ambition, self worth and love.
Even if a buyer ceases interacting with his family of orientation, their influence may still be
significant. The other kind of family is family of procreation (namely one's spouse and
children), which has a more direct influence on specific purchase decision.
The roles that individuals have in their family have greater implication, as family is the most
important consumer buying organization. As we all know, the role assumed by a husband, wife
and children in families is different from country to country culture-to-culture and different
social classes. In the Ethiopian context for e.g. still a housewife has traditionally been acting as
the family's purchasing agent especially for food and related aspects and a husband is relatively
34
is not that much concerned with home consumption purchases. Hence, it is of paramount
importance for marketers to know the roles of family members in a given society in light with
the company's product and there by tailored their product to the one that seem influential. In
this regard marketer need to assess the buying behavior of a household as to who influences the
buying decision, who makes the buying decision, who makes the purchase and who uses the
product. In addition, the role that members of a family assume in a given society changes with
the passage of time and hence, a marketer should also try to visualize the trends in household
members role.
Roles and status
A person participates in various groups: family, organization, clubs etc. The person's position in
each group can be defined in terms of role and status. A role consists of the activities people are
expected to perform according to the persons around them. For e.g. a person plays a role of
child with his parents, plays a role of husband with his wife and plays a role assumed by his
position in his organization. Accordingly, a person will buy a product in accordance with his
role.
3. Personal factors
A buyer decisions are also influenced by personal characteristics such as buyer's age, and life-
cycle, occupation, economic circumstance, lifestyle, and personality and self concept.
Age and life cycle stage
People change the goods and services they buy over their life times. Buying is also shaped by
the stage of family life cycle, the stages through which families might pass as they mature over
time. Marketers often define their markets in terms of family life cycle stages and develop
appropriate products and marketing plans for each stage. Traditional family life cycle stage
includes young singles and married couples with children. Today, however, marketers are
increasingly catering to a growing number of alternative, nontraditional stages such as
unmarried couples, couples marrying later in life, children couples, single parents etc.
Occupation and economic circumstance
35
A person's occupation affects the goods and services bought. Hence, marketers should try to
find out the occupational groups that have an above average interest in their products and
services. A company can even specialize in making products needed by a given occupational
groups.
A person's economic situation will affect his products choice. Hence, marketer should take into
consideration buyer's economic situation and cater its products accordingly.
Lifestyle
It is a person pattern of living in connection to activities (hobbies, work, shopping, sports, social
events), opinions (about themselves, social issues, business, products etc) etc. People from the
same culture, subculture or social class may differ in their life style. In connection to this,
researchers divided consumers into six groups based on two major dimensions: self –orientation
and resource. Self-orientation groups include principle oriented consumers who buy based on
their views of the world, status oriented buyers who base their purchase on the actions and
opinions of others and action oriented buyers who are driven by their desire by activity, variety
and risk taking. Consumers within each orientation are further divided into those with abundant
resources and those with minimal resources, depending on whether they have high or low
levels of income, education, health, self-confidence, energy and other factors. People without
regard to their self-orientation are classified into actualizes and strugglers. Actualizes are people
with so many resources that they can indulge in any or all of the self-orientation groups. In
contrast strugglers are those with limited resources to be included in any of consumer
orientation.
Personality
It refers to the unique psychological characteristic that lead to relatively consistent and lasting
responses to one’s own environment. It is described by traits such as self-confidence,
dominance, sociability, autonomy defensiveness, adaptability, and aggressiveness. It is useful
for marketers in analyzing consumers’ behavior.
4. Psychological factors
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A person’s buying decision may be affected by four major psychological factors: motivation,
perception, learning, and, beliefs and attitudes.
Motivation:
It refers to an inner state of affaire that urges individuals to act upon something. As we all know
individuals try to pursue something to satisfy their need. This by no means that all needs
individuals have urge individuals to act but some needs are active enough to influence
individuals to elicit some kind of action. Such kind of need that is sufficiently pressing
individuals to act upon something to satisfy that respective need is what we call motive. E.g. a
person who is in need of food will exert its effort to satisfy his need of food but the individual
may have many other dormant needs apart from the need for food that are not currently pressing
him to act and in this case the need for food is a motivational factor for the individual. In line
with this, it is desirable for marketers to know what factors are pressing to drive customers to
act. In this regard we cannot forward any hard and fast opinion but we know that a person may
have many needs at a time. Some of his needs may emanate from biological in nature i.e. arising
from a state of tensions such as hunger, thirst or discomfort. Other needs may happen due to
psychological states such as need for recognition, esteem or belongingness. Generally
identifying the motives for purchase is not a simple task. It can range from simple to impossible.
In the first place, a buyer may recognize and is quit willing to talk about the reason why he
purchases a given product. Or he may be aware of the motives (reasons) for buying but may not
admit them for others e.g. a person may purchase luxurious product to impress others but when
questioned about their motives, they may offer other reasons that they think will be more
socially appropriate or in some cases even buyers cannot explain the factors motivating them to
purchase a given product (unconscious or subconscious motives). In conjunction to this,
Psychologists developed many theories of human motivation but Abraham Maslow’s hierarchy
of needs and Sigmund Freud’s theory of motivation are the most popular ones.
Freud’s theory: He assumed that the psychological forces shaping human behavior are largely
unconscious and that a person cannot fully understand his or her motivations. Accordingly,
individuals purchasing a given product may not readily know the motives behind their purchase.
Hence, in this regard marketers should conduct in depth investigation why customers buy that
respective product in a given market (to find the hidden (unconscious) motive of customers).
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Maslow’s theory: He sought to explain why people are driven by particular needs at particular
times. Why does one person spend much time and energy on basic needs such as food, shelter
etc and the other on personal safety? According to Maslow this is because human needs are
arranged in hierarchical order from the most pressing (important) at a time to the least pressing
(least important to a person at a time). Accordingly he labeled the motives in the following
sequential order:
Physiological needs: - these are the basic needs or sustaining human life such as food, water,
shelter, sex, hunger, thirst,
Safety needs: -Safety of individuals from hazards i.e. needs for security, protection and order
Social needs: -after establishing safety, people look for love, friendship, acceptance and affection.
Esteem needs: - this need also includes need for power achievement, and status, need for self
respect, reputation and prestige.
Self-actualization: - A state of self fulfillment in which people realize their highest potential,
each in his or her own unique way. As he claimed first a person strive to satisfy a need that
appears to be the most important for the individual then after satisfying that need the
individual will switch over to satisfying the next need that appears in the aforementioned
sequential order. Hence, he concluded that when one set of needs is satisfied, this kind of
ceases to be a motivator as it is replaced by the next need.
Fig. 3.3 Maslow hierarchy of Needs
Perception:
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A motivated person is ready to act. But how the person acts is influenced by his own perception
of the situation that he is encountering. All of us learn by the flow of information through our
five senses. However each of us receive, organize and interpret this sensory information in an
individual way. Perception is the process by which individuals select, organize and interpret
information to a meaningful picture of the world. People can form different perceptions of the
same stimuli because of three perceptual processes: selective attention, selective distortion and
selective retention.
Selective attention: people are exposed to a tremendous amount of daily information. Hence,
they are not in a position to grasp the massage transmitted in every communication. Rather they
tend to concentrate upon some that appears to be the most attractive and impressive to them.
This tendency is what we call selective attention. Hence, marketers should strive to attract the
consumers’ attention than others by designing their communication in such a way it is attractive
and reachable to the prospective customers.
Selective distortion: Even noticed stimuli do not always come across in the way senders
intended. Individuals may tend to twist information into personal meanings and interpret
information in a way that will fit their preconceptions. Individuals generally have the tendency
to interpret information in a way that will support what they already believe. For e.g. say that
Mr. A, who is making up his mind to purchase a certain electronic set, believes that Philips
electronics has superior performance to others. In information about products he may hear a
sales person mentioning some good and bad things about Philips and other brands. But because
he has a strong leaning towards Philips, he is likely to distort those points mentioned about
other brands in order to conclude that Philips is the better brand. In fact there is no that much
precautions that marketers can do but it is better for them to take into consideration as to how
costumers’ mind sets will affect their interpretations of the firm’s advertisings and sales
information.
Selective retention: Most often individuals tend to forget much about what they learnt but are
likely to remember information that supports their attitude and beliefs. For e.g. in the
aforementioned example the individual may forget what the sales person informed him about
the qualities of the competing brands but is likely to remember good point the sales person
mentioned in connection to Philips brand. This tendency is what we call selective retention.
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Learning:
It refers to the changes in the individual’s behavior due to their experience. It has greater
implication in marketing because most human behaviors are learned. According to learning
theorists, individuals tend towards a given product if their prior experience about the company
that produces a given product is well reinforced. For e.g. in the above example suppose that the
individual purchased Philips. If he finds the product performing well, then the next time when
he needs to purchase electronic products, the probability that he will buy Philips product will
obviously high.
Beliefs and attitudes:
Through doing and learning people acquire beliefs and attitudes, which in turn affect their
purchase decision. A belief is a descriptive thought that a person holds about something.
Obviously peoples beliefs about a product influences their purchase decision. For e.g. in
developing countries people tend to believe that foreign products are superior as compared to
local (e.g. the Eth. Context). Hence, marketers should dig to learn much about the beliefs that
customers have in mind about their company’s products and then act accordingly.
An attitude is a person’s enduring favorable or unfavorable evaluations, emotional feelings and

action tendencies towards some object or phenomenon. In this regard obviously the attitudes
that people have towards a product will have greater implication upon their purchase decision.
E.g. the failure of Bure Water, which was very famous drinking water once upon a time in
Ethiopia, is due to the attitude (as we all know, by then there was a propaganda (bad word of
mouth) against Bure water prompted by one newspaper) created in the minds of people that put
the product at the odd.
Types of buying decision behavior
Based on the degree of buyer involvement and differentiation among brands, there are four buying
behaviors.
Table3.2 Buying behavior of consumers
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High involvement Low involvement
Significant differences Complex buying behavior Variety-seeking buying behavior

between brands
Few differences Dissonance-reducing Habitual buying behavior

between brands buying behavior
Complex Buying Behavior
Consumers undertake complex buying behavior when they are highly involved in a purchase
and perceive significant differences among brands. Consumers may be highly involved when
the product is expensive, risky, purchased infrequently, and highly self-expressive. Typically,
the consumer has much to learn about the product category. For example, a PC buyer may not
know what attributes to consider. Many product features carry no real meaning: a ―3.2GHz
Intel Core i7 processor, or ―8GB dual-channel DDR2 SDRAM memory.‖
This buyer will pass through a learning process, first developing beliefs about the product,
then attitudes, and then making a thoughtful purchase choice. Marketers of high-involvement
products must understand the information-gathering and evaluation behavior of high-
involvement consumers. They need to help buyers learn about product-class attributes and
their relative importance. They need to differentiate their brand’s features, perhaps by
describing the brand’s benefits using print media with long copy. They must motivate store
salespeople and the buyer’s acquaintances to influence the final brand choice.
Dissonance- Reducing Buying Behavior
Dissonance-reducing buying behavior occurs when consumers are highly involved with an
expensive, infrequent, or risky purchase but see little difference among brands. For example,
consumers buying carpeting may face a high-involvement decision because carpeting is
expensive and self-expressive. Yet buyers may consider most carpet brands in a given price
range to be the same. In this case, because perceived brand differences are not large, buyers
may shop around to learn what is available but buy relatively quickly. They may respond
primarily to a good price or purchase convenience.
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After the purchase, consumers might experience post-purchase dissonance (after-sale

discomfort) when they notice certain disadvantages of the purchased carpet brand or hear
favorable things about brands not purchased. To counter such dissonance, the marketer’s
after-sale communications should provide evidence and support to help consumers feel good
about their brand choices.
Habitual Buying Behavior
Habitual buying behavior occurs under conditions of low-consumer involvement and little
significant brand difference. For example, salt. Consumers have little involvement in this
product category—they simply go to the store and reach for a brand. Consumers appear to
have low involvement with most low-cost, frequently purchased products.
In such cases, consumer behavior does not pass through the usual belief attitude behavior
sequence. Consumers do not search extensively for information about the brands, evaluate
brand characteristics, and make weighty decisions about which brands to buy. Instead, they
passively receive information as they watch television or read magazines. Ad repetition
creates brand familiarity rather than brand conviction. Consumers do not form strong attitudes
toward a brand; they select the brand because it is familiar.
Because buyers are not highly committed to any brands, marketers of low-involvement
products with few brand differences often use price and sales promotions to promote buying.
Alternatively, they can add product features or enhancements to differentiate their brands from
the rest of the pack and raise involvement.
Variety Seeking Buying Behavior
Consumers of such behavior reflect very low involvement and however with comprehensive
perceived brand difference. Varity seekers move from a brand to another out of boredom or simply
to try something different.Brand switching occurs for the sake of variety rather than because of
dissatisfaction.
In such product categories, the marketing strategy may differ for the market leader and minor
brands. The market leader will try to encourage habitual buying behavior by dominating shelf space,
keeping shelves fully stocked, and running frequent reminder advertising. Challenger firms will
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encourage variety seeking by offering lower prices, special deals, coupons, free samples, and
advertising that presents reasons for trying something new
The buying decision process of consumers
Earlier we said that to make a purchase decision, the buyer should collect information about the
product they are going to purchase i.e. what benefits and attributes available brands have, at what
price they might be purchased, where they might be purchased etc and of course additional
information from the surrounding. Then, by using the information gathered in such a way, a
customer will make his decision in his mind. In this regard we said that there are factors that affect
customers in making purchase decision such as the culture with in which the customer is brought up,
his psychological makeup, personality etc. But in addition to these factors, the decision-making
process by itself can affect buyers’ decision. In this portion we shall dwell upon this aspect i.e. as to
how the final consumers make buying decision.
Here, before rushing to making purchase decision, first the buyer feels the need for that product.
Then he should look for information about those products that might satisfy this need. Then after, he
should evaluate each alternative product in satisfying his needs which will be followed by selection
of one to be purchased. And finally they will evaluate their purchase decision in this case it is what
we call post purchase behavior. Now let’s have a look at of each one by one.
a. Need recognition: normally any purchase decision begins with the recognition of needs or
problem. The need may be triggered by internal stimuli such as hunger, thirst or sex. For e.g. before
thinking about purchasing something to eat a person first should be hungered. It may also be
triggered by external stimuli for e.g. a person passes a restaurant and smell nice food that stimulates
his hunger. In this case, the stimuli are external. At this stage, the marketer should research
consumers to find out what kinds of needs or problems are associated with the product, what factors
brought them about, and how they led the consumer to this particular product. Then they can
develop marketing strategies that that trigger consumers’ interest.
b. Information search: after a customer recognizes his need, he is likely to gather information
about the products that may satisfy his need. But, this will depend upon the situation. In some
circumstances, customers may be so much aroused by the need that they may not have enough time
to spend on searching information (urgent). In such cases, the consumer is likely to make the
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purchase decision without gathering information. In the same way, in some cases, we may find the
need that we are feeling as routine and repetitive that we have already have sufficient information
about the product, from where it may be purchased, from whom we can purchase it so on. In such
cases as well, this searching information stage might be escaped. Apart from this, in some cases we
may experience needs (problems) that are not routine in nature and may involve the scarification of
sufficient resources. In such circumstances, looking for information is likely as customers want it to
make their decision. The customer may gather information from different sources such as personal
sources (family, friends, and neighbors), commercial sources (advertising, sales people, dealers,
displays etc) public sources (mass media, consumer rating companies). The relative influence of
these may differ from product to product, and from buyer to buyer. Generally, the consumer
receives the most information from commercials which is controlled by marketers but the most
effective sources in influencing customers as research connotes are, however, personal sources. This
is so because usually commercial sources inform the buyer but personal sources legitimize or
evaluate products for the buyer.
c. Evaluation of alternatives: in this regard, unfortunately consumers do not use a simple and
single evaluation process in all buying situations. Instead, several evaluation processes are at work.
The consumer arrives at attitude towards different brand through some evaluation procedure. How
consumers go about evaluating purchase alternatives depend on the individual consumer and the
specific buying situation. In some cases, consumers use careful calculations and logical thinking. At
other times, the same consumers do little or no evaluating; instead, they buy on impulse and rely on
intuition. Sometimes consumers make buying decisions on their own; sometimes they turn to
friends, consumers’ guides or sales peoples for buying advice. Generally, marketers should study
buyers to find out how they actually evaluate brand alternatives. If they know what evaluative
process go on, marketers can take steps to influence the buyer’s decision.
d. Purchase Decision: In the evaluation stage the consumer ranks brands and forms purchase
intentions. Generally, the consumer purchase decision will be to buy the most preferred brand, but
two factors can come between the purchase intention and the purchase decision. The first factor is
the attitude of others. The second is unexpected situational factors. The consumer may form a
purchase intention based on factors such as expected income, expected price, and expected product
benefits. However, unexpected events may change the purchase intention e.g. lose of individuals
own job, emergence of some other more urgent purchase or a close competitor may drop the price.
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Thus, the preference and even the purchase intentions do not always result in actual purchase
choice.
e. Post purchase decision: The marketer’s job does not end when the product is bought. After
purchasing the product, the consumer will be satisfied or dissatisfied based on the product’s
performance and will engage in post purchase behavior, which is of great importance to the
marketer. The relationship between consumers’ expectation and the product’s perceived
performance is the determinant of consumers’ satisfaction. The greater the gap between expectation
and performance, the greater the consumer dissatisfaction or satisfaction will be. This suggests that
seller should make product claims that faithfully represent the product’s performance so that buyers
are satisfied. And even some sellers might even understate their products performance so that buyers
will be dissatisfied or delighted as they initially have lower expectation about the product’s
performance.
3.2.2. Organizational Markets and buying behavior

Business buyer behavior refers to the buying behavior of the organizations that buy goods
and services for use in the production of other products and services that are sold, rented, or
supplied to others. It also includes the behavior of retailing and wholesaling firms that acquire
goods to resell or rent them to others at a profit. In the businessbuying process, business
buyers determine which products and services their organizations need to purchase and then
find, evaluate, and choose among alternative suppliers and brands. Business-to-business (B-to-
B) marketers must do their best to understand business markets and business buyer behavior.
Then, like businesses that sell to final buyers, they must build profitable relationships with
business customers by creating superior customer value.
Table3.3 Characteristics of business markets
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Major Type of Buying Situations
There are three major types of buying situations. In a straight re-buy, the buyer reorders
something without any modifications. It is usually handled on a routine basis by the
purchasing department. To keep the business, ―in‖ suppliers try to maintain product and
service quality. ―Out‖ suppliers try to find new ways to add value or exploit dissatisfaction so
that the buyer will consider them.
In a modified re-buy, the buyer wants to modify product specifications, prices, terms, or
suppliers. The in suppliers may become nervous and feel pressured to put their best foot
forward to protect an account. Out suppliers may see the modified re-buy situation as an
opportunity to make a better offer and gain new business.
A company buying a product or service for the first time faces a new task situation. In such
cases, the greater the cost or risk, the larger the number of decision participants and the greater
the company’s efforts to collect information. The new task situation is the marketer’s greatest
opportunity and challenge. The marketer not only tries to reach as many key buying influences
as possible but also provides help and information. The buyer makes the fewest decisions in
the straight rebuy and the most in the new task decision. Many business buyers prefer to buy a
complete solution to a problem from a single seller rather than separate products and services
from several suppliers and putting them together. The sale often goes to the firm that provides
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the most complete system for meeting the customer’s needs and solving its problems. Such a
system selling (or solutions selling) is often a key business marketing strategy for winning
and holding accounts.
Participants in the Business Buying Process
Who does the buying of the trillions of dollars’ worth of goods and services needed by
business organizations? The decision-making unit of a buying organization is called its
buyingcenter—all the individuals and units that play a role in the business purchase decision
making process. This group includes the actual users of the product or service, those who
make the buying decision, those who influence the buying decision, those who do the actual
buying, and those who control buying information.
The buying center includes all members of the organization who play any of five roles in the
purchase decision process.
• Users are members of the organization who will use the product or service. In many cases,
users initiate the buying proposal and help define product specifications.
• Influencers often help define specifications and also provide information for evaluating
alternatives. Technical personnel are particularly important influencers.
• Buyers have formal authority to select the supplier and arrange terms of purchase.
Buyers may help shape product specifications, but their major role is in selecting vendors and
negotiating. In more complex purchases, buyers might include high-level officers participating
in the negotiations.
• Deciders have formal or informal power to select or approve the final suppliers. In routine
buying, the buyers are often the deciders, or at least the approvers.
• Gatekeepers control the flow of information to others. For example, purchasing agents often
have authority to prevent salespersons from seeing users or deciders. Other gatekeepers
include technical personnel and even personal secretaries.
The buying center is not a fixed and formally identified unit within the buying organization. It
is a set of buying roles assumed by different people for different purchases. Within the
organization, the size and makeup of the buying center will vary for different products and for
different buying situations. For some routine purchases, one person—say, a purchasing
agent—may assume all the buying center roles and serve as the only person involved in the
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buying decision. For more complex purchases, the buying center may include 20 or 30 people
from different levels and departments in the organization.
The buying center concept presents a major marketing challenge. The business marketer must
learn who participates in the decision, each participant’s relative influence, and what
evaluation criteria each decision participant uses. This can be difficult.
Major Influences on Business Buyers
Business buyers are subject to many influences when they make their buying decisions. Some
marketers assume that the major influences are economic. They think buyers will favor the
supplier who offers the lowest price or the best product or the most service. They concentrate
on offering strong economic benefits to buyers. Such economic factors are very important to
most buyers, especially in a rough economy. However, business buyers actually respond to
both economic and personal factors. Far from being cold, calculating, and impersonal,
business buyers are human and social as well. They react to both reason and emotion.
The following are lists various groups of influences on business buyers—environmental,

organizational, interpersonal, and individual.
Environmental Factors
Business buyers are heavily influenced by factors in the current and expected economic
environment, such as the level of primary demand, the economic outlook, and the cost of
money. Another environmental factor is the supply of key materials. Many companies now are
more willing to buy and hold larger inventories of scarce materials to ensure adequate supply.
Business buyers also are affected by technological, political, and competitive developments in
the environment. Finally, culture and customs can strongly influence business buyer reactions
to the marketer’s behavior and strategies, especially in the international marketing
environment. The business buyer must watch these factors, determine how they will affect the
buyer, and try to turn these challenges into opportunities.
Organizational Factors
Each buying organization has its own objectives, strategies, structure, systems, and
procedures, and the business marketer must understand these factors well. Questions such as
these arise: How many people are involved in the buying decision? Who are they? What are
their evaluative criteria? What are the company’s policies and limits on its buyers?
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Interpersonal Factors
The buying center usually includes many participants who influence each other, so
interpersonal factors also influence the business buying process. However, it is often difficult
to assess such interpersonal factors and group dynamics. Buying center participants do not
wear tags that label them as ―key decision maker‖ or ―not influential.‖ Nor do buying center
participants with the highest rank always have the most influence. Participants may influence
the buying decision because they control rewards and punishments, are well liked, have
special expertise, or have a special relationship with other important participants.
Interpersonal factors are often very subtle. Whenever possible, business marketers must try to
understand these factors and design strategies that take them into account.
Individual Factors
Each participant in the business buying decision process brings in personal motives,
perceptions, and preferences. These individual factors are affected by personal characteristics
such as age, income, education, professional identification, personality, and attitudes toward
risk. Also, buyers have different buying styles. Some may be technical types who make in-
depth analyses of competitive proposals before choosing a supplier. Other buyers may be
intuitive negotiators who are adept at pitting the sellers against one another for the best deal.
Fig3.4 factors affecting business buyers
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CHAPTER FOUR
MARKET SEGMENTATION, TARGETING, AND POSITIONING

Contents
4.1. Market segmentation
4.2. Targeting
4.3. Positioning
Aims and objectives
When you have mastered this chapter, you should;
 Define the major steps in designing a customer-driven marketing strategy: market
segmentation, targeting, differentiation, and positioning.
 List and discuss the major bases for segmenting consumer and business markets.
 Explain how companies identify attractive market segments and choose a market
targeting strategy.
 Discuss how companies differentiate and position their products for maximum
competitive advantage.
In order to identify its potential buyers, organizations choose to segment or not to segment a
market. An organization that does not segment chooses a mass-market -- the same product is
offered to all customers. Marketers segment (divide) a market because different groups within
the market have different needs. To be successful, the chosen segment must be identifiable and
measurable, profitable, economically accessible, and exhibit a relatively homogeneous response
function to the marketing efforts designed for it. Marketers focus their efforts on target markets,
or groups of customers with similar needs, rather than on the entire market. (Many of the models
in advertisements are chosen to represent the target market.) The marketing concept holds that
marketing will be more effective if it is tailored to the unique needs of each target market. For
example, even Coca-Cola is adapted to each country’s local tastes and conditions, by being less
sweet or less carbonated in certain countries.
Earlier we defined that market means all the potential and actual customers sharing a particular
need or want who might be willing and able to engage in exchange to satisfy that need or want.
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A company that decides to operate in a broad market recognizes that it cannot appeal to all
buyers in those markets or at least not to all buyers in the same way. Buyers are too numerous,
too widely scattered and too varied in their needs and buying practices. Simply buyer may differ
in their wants, resources, geographical areas, buying attitudes and buying practices that a
company normally cannot serve all customers in that market with a single product. More over
different companies vary widely in their ability to serve different kinds of customers. Hence,
instead of competing everywhere and in an entire market, sometimes against superior
competitors, it is better for companies to identify the parts of the market that it can best serve (to
identify the market segments that it serves most effectively). To this end today many companies
are moving from mass marketing to target marketing. In target marketing sellers distinguish the
major market segments, target one or more of these segments and develop products and
marketing programs tailored to each segment. Instead of scattering their marketing effort, they
can focus on the buyers whom they have the greatest chance of satisfying.
4.1 Market segmentation
Marget segmentation means the process of deviding the whole market for a product into several
smaller, internally homogenous groups. I.e. it is dividing a market into distinct groups of buyers
with different needs, characteristics, or behaivior who might require separate products of
marketing mixes. A company that practices market segmentation recognizes that buyers differ
in thier needs perceptions, and buying behaviors. Hence, the company tries to isolate the broad
segments that make up the market and adapts its offers to more closely match the needs of one
or more segments. The esence of segmentation is that the members of each group are similar
with respect to the factors that influence demand. Hence, sometimes the ability to segment
markets effectively is considered as a major element for company sucess.
Advantages of Segmentation
1. The process of breaking up a homogeneous market into heterogeneous segments forces

the marketer to analyse and consider both the needs of the market and the company’s
ability to competently serve those needs – thereby making the company better informed
about its customers
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2. Competitor offerings and marketing positioning must also be analysed in this context so
the company must consider what its competitive advantages and disadvantages are,
helping it to clarify its own positioning strategy
3. Limited resources are used to best advantage, targeted at those segments that offer the
best potential.
Limitations of segmentation
1. Segmentation can be expensive in terms of production and marketing of products to only

those specific groups of the market.
2. Mass production offers economies of scale.
3. Standardisation of service offers increased delivery speed and efficiency.
4. Increase in promotion, administrative and inventory costs.
Requirements for Effective Segmentation
1) Measurability: - the size, purchasing power and profiles of the segments should be
measurable.
2) Accessible: - the market segments should be effectively reached and served.
3) Substantial: - the market segments must be large(profitable) enough to serve.
4) Differentiable: - the segments should be conceptually and practically distinguishable
and respond differently to different marketing mix and programs.
5) Actionable: - it should be possible to design effective programs for attracting and
serving the segments.
Bases for Segmenting Consumers Markets
There is no a single way to segment a market. A marketer has to try different segmentation
variables, alone and in combination, to find the best way to view the market structure. There are
four commonly used bases for segmenting consumers markets. These are:
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A. Geographic Segmentation: Geographic segmentation is dividing of an overall market into

homogeneous groups on the basis of population location. This is the earliest form that served a
base for segmenting markets. It considers current population location and residence (urban or
rural) and future expected shifts. Geographic segmentation is used in order to know regional
variation in customer taste and also determine and supply good appropriate to climate changes.
B. Demographic Segmentation: Demographic segmentation is dividing an overall market into

homogeneous group based upon population characteristics such as age, sex and income level. It
is now the most common approach used for market segmentation. This method uses such
variables as sex, age, income, occupation, education, household size and stage in the family life
cycle. These variables are often used because
They are easy to identify
They are associated with the sale of many products and services
They are typically referred to describing the audiences of advertising media
C. Psychographics: Demographic data are used to segment a market because they are related to
behavior and because they are relatively easy to gather. However, demographics are not in
themselves the causes of behavior. That means demographics are related to behavior but they do
not explain it. But if possible the desirable thing for marketers is to know the rationale why
customers buy a given product. Psychographics segmentation utilizes behavioral profiles
developed from analyses of the activities, opinions, interest and life styles of consumers. The
life-styles of potential consumers may prove important in order to determine their preferences;
life style refers to the mode of lives. Consumer’s life-styles are regarded as a composite of their
individual psychological make-ups their needs, motives perceptions and attitudes. In addition a
marketer may use personality aspects which are usually described in terms of traits that
influence behavior to divide his market or he may use values: reflection of our needs adjusted
for the realities of the world in which we live.
D. Behavioral Segmentation: Benefit segmentation focuses on product related behavior of

customers. This focuses on such attributes as product usage rates (heavy users, medium users or
light users), the benefits derived from the product(benefit sought), attitude towards the
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product(enthusiastic, positive, indifferent, negative, hostile), buyers readiness stage(unaware,

aware, informed, interested, desirous, intending to buy), users and non-users etc. The summary
of custom segmentation bases are as shown below in the table.
Table 4.1 Common bases of markets segmentation
Psycho graphic Geographic Behavioral

Demographic
Age Personality Region Volume usage
Gender Attitudes Urban, Suburban End use
Ethnicity Motives Rural Expectations
Income Lifestyle Market density Brand loyalty
Education Climate Price sensitivity
Occupation Terrain Occasions
Family size City size User status
Family life cycle Country size Usage rate
Religion State size Readiness stage
Social class State size Attitude towards a

product
Clearly there are many ways to segment a market as we have seen above, but not all
segmentation is effective.
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Segmenting Business Markets
Consumer and business marketers use many of the same variables to segment their markets.
Business buyers can be segmented geographically, demographically (industry, company size),
or by benefits sought, user status, usage rate, and loyalty status. Yet, business marketers also
use some additional variables, such as customer operating characteristics, purchasing
approaches, situational factors, and personal characteristics. Almost every company serves at
least some business markets. For example, American Express targets businesses in three
segments: merchants, corporations, and small businesses. It has developed distinct marketing
programs for each segment. In the merchants segment, American Express focuses on
convincing new merchants to accept the card and managing relationships with those that
already do.
The Market Segmentation Process
 Stage I: Identify Segmentation Process

 Stage II: Develop Relevant Profile
 Stage III: Forecast Market Potential
 Stage IV: Forecast Market Share
 Stage V: Select Specific Segment
 Stage I: Identify Segmentation Process

 Marketers follow two methods to determine the bases on which to identify
markets:
 Segments are predefined by managers based on their observation of the
behavioral and demographic characteristics of likely users
 Segments are defined by asking customers which attributes are
important and then clustering the responses
 Stage II: Develop Relevant Profile
 Next, marketers seek further understanding of the consumer in each promising
segment
 Must develop a profile of the typical consumer and each segment
 Helps to accurately match consumer needs with the firm’s marketing offers
 Stage III: Forecast Market Potential
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 Market segmentation and market opportunity analysis combine to produce a

forecast of market potential within each segment
 Defines a preliminary ―go or no-go‖ decision since the sales potential in each
segment must justify resources devoted to further analysis
 Stage IV: Forecast Market Share
 The next step is to forecast the firm’s probable market share
 Competitors’ positions in targeted segments must be analyzed
 A specific marketing strategy must be designed to serve the targeted segments
 The firm determines the expected level of resources it must commit to tap the
potential demand in each segment
 Stage V: Select Specific Segment
 The preceding information, analysis, and forecasts allow management to assess
the potential for achieving company goals and to justify committing resources
in developing one or more segments
 Marketers also weigh more than monetary costs and benefits at this stage
4.2 Market targeting
After a market is segmented, the company must decide which and how many segments to serve.
This is what we call market selection (target marketing). A target market consists of a set of
buyers who share common needs or characteristics that the company decides to serve. In
selecting markets, it is advisable for companies to take into consideration the followings
1) First, target markets should be compatible with the organization’s goals and image.
2) Second, the segment’s opportunity should commensurate with the company’s resource.
3) The segment must be profitable.
4) Fourth, a company ordinarily should seek a market where there are the least and
smallest competitors.
Strategies for Reaching Target Markets
There are four alternative strategies in target marketing.
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1. Aggregation strategy: (undifferentiated marketing or mass strategy): - a firm might decide

to ignore market segment differences and go after the whole market with one offer (treating the
total market as a single segment). An aggregate market’s members are considered to be alike
with respect to demand for the product i.e. customers are willing to make some compromises on
less important dimensions in order to enjoy the primary benefit the product offers. Hence, this
approach focuses on what is common among consumers rather than what is different. The
company designs a product and a marketing program that will appeal to the largest number of
buyers. It relies on mass distribution and mass advertising and one pricing strategy and superior
image in the people’s minds. Undifferentiated marketing provides cost economies. The narrow
product line keeps down production, inventory and transportation costs. The undifferentiated
advertising program keeps down advertising costs. The absence of segments marketing research
and planning lowers the costs of marketing research and product management. But it may not be
advantageous to use this approach in today’s competitive environment. This is because this
approach targets its products at everybody or the average customer. The fallacy of developing
products directed at average customer is that relatively a few customers are exist. Typically,
population is characterized by diversity. An average is simply midpoint in some set of
characteristics. Because most customers are not average they are not likely to be attracted to an
average product. Rather they tend to use the products of other companies that appear to tailor to
their specific needs. It may be applied when the total market for the type of product under
consideration (the majority of customers in the total market) are likely to respond in very similar
fashion to one marketing mix. In addition, it may be appropriate for firms that are marketing an
undifferentiated, staple product like salt or sugar. For most customers sugar is sugar and salt is
salt.
2. Multiple segment strategy (differentiated marketing) :- When a firm selects two or more
market segments to serve. A separate marketing mix (program) is designed for each of such
market segments. Companies pursuing this strategy hope that a stronger position in several
segments will strengthen consumers’ over all identification of the company with the product
category. This strategy may provide the company with higher sales as compared to other
strategies and of course minimizes the vulnerability of the firm for risk as it operates in more
than one segment. No matter how, companies advocating this approach should recognize that
the costs associated with this strategy is relatively greater than the other approaches. This is so,
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first because marketing for different segments requires producing different kinds of products
tailored to each segment hence, production costs are obviously greater. Second, the company
should come up with different promotional and distribution programs for each segment, which
in turn keeps the associated costs up.
3. Single segment strategy (Concentrated marketing): - is selecting one segment among

many segments. Then one marketing mix (program) will be designed to reach this market
segment. This approach is desirable when the company has limited resource to serve many
segments. Apart from this, it enables companies to penetrate new market in depth and to acquire
reputation as a specialist in that market. No matter how this advantage, it may turn out to be a
little bit disadvantageous from the risk point of view. In this approach, the company invests the
whole of its resources in a single market and hence if anything wrong happens with that market,
say if the market declines, the seller will suffer considerably.
4. Micromarketing: involves targeting potential customers at a very basic level, such as by

specific occupation, lifestyle, or individual household. The Internet may allow marketers to
make micromarketing even more effective.
4.3 Market Positioning
After segmenting and targeting its market, then the company should develop marketing mix
program to each target market that it will tailored to each targeted market so that customers in
each target market will respond in favor of the company’s product. This, the act of – designing
the company’s offering and image to occupy a distinctive place in the mind of the target
customers is what we call positioning. The end result of positioning is the successful creation of
a customer focused value proposition, a cogent reason why the target market should buy the
product. In positioning, the firm will decide upon the nature of the product i.e. form, attribute,
performance quality, conformance quality, durability, reliability etc aspects of the product in
light with each segment, the pricing strategy, promotional approach and distribution strategy
associated with each segment.
Positioning task consists of three steps: identifying a set of competitive advantage upon which
to build a position, selecting the right competitive advantages, and effectively communicating
and delivering the chosen position to the market.
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a. Identifying possible competitive advantage:- Consumers typically choose products that

give them the greatest value. Thus the key to success is to understand customer needs and
buying process better than competitors do. That means a firm should come up with some kind of
benefits to customers that make it different from competitors so that customers will be attracted
to the company’s products than competitor products. To this end, a company needs to know on
what grounds it can make its offers peculiar from competitors. A company’s offer can be
differentiated along the lines of product, services, people or image.
1. Product differentiation: - Physical products vary in their potential for differentiation. At

one extreme we find products that allow little variation and at the other extreme products
capable of high differentiation. Here, a firm can have the following abundance of design
parameters:
Form: many products can differentiate in form: size, shape or physical structure of a
product.
Features: products can be differentiated with varying features that supplement the
product’s basic function.
Performance quality: refers to the level at which the product’s primary characteristic
operates. A company has an option to make it average, high or superior.
Conformance quality: This term is used in the context of quality that consumers expect
from various products and services, which is the degree to which all the produced nits of
a company are identical and meet the promised specifications. The problem with low
conformance quality is that the product will disappoint some buyers, as it may not come
to their expectations
Durability: measures the products expected operating life under natural condition. It is a
valuable attribute of the product.
Reparability: it refers to the ease of fixing a product when it malfunction or fail.
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2. Service differentiation: when the physical product cannot easily be differentiated, this may
be a key to do so. The followings may be considered as the key to make a difference in terms of
service given to customers.
Ordering ease: refers to how easy it is for customers to place an order with the
company.
Delivery: refers to how well the product or service is delivered to the customers. It
includes speed, accuracy and care attending the delivery process.
Customer training: refers to training customer as to how they can effectively make use
of the product.
Customer consulting: refers to advice service the seller offers to buyers.
Maintenance and repair: describes the service program for helping customers keep
purchased products in good working order.
3. Personnel differentiation: companies can get competitive advantage through hiring and
training better people than their competitors do. People differentiation requires that a company
select its customers –contact people carefully and trained them well.
4. Channel differentiation: companies can gain competitive advantage through the way they
design their distribution channel’ coverage, expertise and performance.
5. Image differentiation: Buyers respond differently to company and brand image. Image
refers to the way the public perceives the company or its product.
b. Selecting the right competitive advantage: suppose that a company is fortunate enough to
discover several potential competitive advantages. It now must choose the ones on which it will
build its positioning strategy. It must decide how many differences to promote and which ones.
How many to promote:there is no fast and hard rule in this regard. A company may select as
many differentiation bases as it needs. Today in a time when mass marketing is fragmenting in
favor of small segments, companies most often tend to broaden their positioning strategy by
accommodating more than one differentiation basis. However, as they increase the number of
claims of their brands, they risk disbelief and a loss of clear positioning.
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Which difference to promote: Not all brand differences are meaningful or worthwhile, not
every difference is a good differentiator. Each difference has a potential to create company costs
as well as customer benefits. Therefore, the company must carefully select the ways in which it
will distinguish itself from competitors. A difference is worth establishing to the extent that it
satisfies highly valued benefit to customers (important), possibility to deliver it in distinct way
than competitors (distinctive), the difference must be presented in superior ways than it is
presented by competitors (superior), it should be communicable and visible to customers
(communicability), it should be difficult for competitors to copy the difference (preemptive), it
should be affordable at prices desired by buyers (affordability), and it should be profitable to the
company.
3. Communicating and delivering the chosen position: - Once it has chosen the position, the
company must take strong steps to deliver and communicate the desired position to target
customers. All company’s marketing mix elements should support the positioning strategy.
Positioning calls for concrete action not talk. E.g. if the company decides to position on better
quality and service, it should not only communicate these differentiation bases to the
prospective target markets but also should deliver it. Otherwise, it bound to fail sooner or later
even if its positioning strategy is the best one.
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CHAPTER FIVE
MANAGING MARKETING MIX ELEMENTS
5.1. Meaning of Product
Product is anything that can be offered to a market for attention, acquisition, use or consumption
and that might satisfy a need or want. It can be physical good, persons, places, ideas or
organization. More often, however, a company’s offer to the market place includes physical
(tangible product) and intangible attributes (services) with varied consequences for a consumer.
For e.g. when Sony offers its television with repair and maintenance services it is not only
delivering the physical aspect of the television to customers as a product but the accompanying
service as well.
5.1.1. Classification of products
Based on the purpose that products are acquired (the types of consumers that use them), products
have traditionally been classified into two broad categories: consumer products and industrial
products.
Consumer products are products bought by the final consumers for personal consumption while
industrial products are products bought by individuals and organizations for further processing or
for use in conducting business. Each of these broad categories is further classified into different
groups.
Consumer products: based on the shopping habit, consumer products are classified into four
groups.
1. Convenience products: are products that consumers buy frequently, immediately with a
minimum of comparison and buying effort. E.g. soap, tobacco, fast foods etc. generally, these
are a kind of products with low price and hence are available in many locations by companies to
sell when customers need them.
2. Shopping products: are less frequently purchased products. Hence, when they purchase
them, customers compare them carefully on suitability, quality, price, style etc. To this end, when
buying such kind of products, customers spend much time and effort in gathering information
and making comparisons e.g. furniture, clothing, hotel services etc.
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3. Specialty products: are products with unique characteristic or brand identification for which
a significant group of buyers is willing to make a special purchase effort. Here, buyers do not
normally compare specialty products but simply they are willing to invest their time and
resources to reach dealers carrying the wanted products.
4. Unsought products: are products that the consumer either does not know or does know but
normally do not think of buying E.g. new innovations can be considered as unsought goods until
the consumer becomes aware of them through advertisings.
Industrial products: these are also further divided in to three groups.
1. Materials and parts: refers to those products that make up the final product of the company
(component part of the final product). E.g. raw materials, manufactured materials, parts etc.
2. Capital items: are products that aids in the buyers production or operation. They neither
make up the final product of the company nor are consumed but are used to produce the final
product of the company for e.g. installations (buildings, offices, main machineries etc),
accessories such as portable tools and equipments etc.
3. Supplies and services: supplies refer to those products that are consumed in the production
process or operation of buyers. E.g. lubricants, oil, paper, pencil, repair and maintenance items
etc. Services refer to maintenance and repair services that the firm purchases from outsiders or
services supplied by outsiders such as legal, management counseling, advertising etc.
5.1.2. New products
New product: A term of many opinions and practices, but most generally defined as an
original product, product improvements, product modifications, and new brands that the firm
develops through its own research and development efforts.
5.1.3. New product Development
A company has to be good at developing and managing new products. Every product seems to go
through a life cycle: it is born, goes through several phases, and eventually dies as newer
products come along that better serve customer needs. This pattern presents two major challenges
to a firm. First, because all products eventually decline, a firm must be good at developing new
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products to replace aging ones (the problem of new product). Second, the firm must be good at
adapting its marketing strategies in the face of changing tastes, technologies, and competition as
products passes through life cycle stages (the problem of product life cycle). Here in this section
we shall dwell upon new product development aspect and in the later part we shall discus about
product life cycle.
A firm can obtain new products in two ways: by acquisition- by buying the whole company,
patent or license etc and the other is through new product development. Here by new products we
mean original products, product improvements, product modifications and new brands the firm
develops through its research and development efforts.
There are some sequential steps that companies need to pass through in developing new product.
1. Idea generation: refers to the systematic search for new product ideas. The company should
develop a framework (clearly defining new product development strategy) through which new
product ideas that correlates with its operation can be generated in order to make the search for
ideas systematic. Ideas for new products can come from interacting with various sources and
from using creativity generating sources. It may emanate from customers, scientists, competitors,
employees, suppliers and distributors etc.
2. Idea screening: the purpose of idea generation is to create a large number of ideas. The purpose
of this stage is to reduce that number by accommodating good ideas and dropping poor ones so
that the company can go ahead with the product ideas that will hopefully turn into profitable
products. In screening ideas, the benchmark may be different from company to company but it is
at this stage that companies should make sure the idea is compatible with the firm’s objective,
strategies and resources. Hence, it is desirable to drop those ideas that do not match with the
aforementioned aspects of a company.
3. Concept development and testing: attractive ideas must be developed into a product concept. A
product idea is an idea for a possible product that the company can see itself offering to the
market. A product concept is a detailed version of the idea stated in a meaningful consumer
terms. Then the developed concept should be tested with a group of target consumers to find out
if the concepts have strong consumer appeal.
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4. Developing marketing strategy: Following a successful concept test, a company should

develop a preliminary marketing strategy plan for introducing the new product into the market.
The plan consists of three parts. The first part describes the target market’s size, structure and
behavior; the second about product positioning; the third about the sales, market share and profit
goals sought in the first few years.
5. Business analysis: Once management has decided on its product concept and marketing strategy,
it can evaluate the business attractiveness of the proposal. Business analysis involves reviewing
of sales, costs, and profit projections for a new product to find out whether they satisfy the
company’s objectives or not.
6. Product development: It refers to developing the product concept into a physical product in
order to ensure that the product idea can be turned into a workable product. In this regard, the
company should first produce one or more physical versions of a product as a prototype that have
the required functional features and also capable enough to convey the intended psychological
characteristics.
7. Test marketing:After the product is developed, it is better to test the product along with its
marketing program into a more realistic market settings in order to examine how well it will
perform. This eventually enable the company to visualize/asses its all-marketing program of the
product i.e. positioning strategy, advertising, distribution, pricing, branding, packaging and
budget levels.
8. Commercialization: Based on the market test, the management then makes a decision about
whether to launch the new product or to make amendment up on the tested product and its
marketing plans. If the company goes ahead, it will enter into commercialization stage, in which
it faces high costs due to production, advertising, sales promotion and other marketing efforts. In
launching a new product, a firm should first decide when to introduce the product (timing) and
where to launch the new product introduction: in a single location, a region, the national market
or the international market.
5.1.4. Product life cycle & its management
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Once it has offered a given product to the market, a firm should not expect to sell the product
forever as it is. This is so because the market situation, competitors’ position and the test and
interest of customers will go on changing through time and in some cases the need for the
product may drift away after sometime. To this end, the firm should change its positioning and
differentiation strategies according to these and the like factors. Here, in connection to this,
we shall describe the normal changes that a company encounters in the market beginning from
introducing the product for the first time to the market up to a time when the demand for the
product starts to decline and finally in some cases dies. Namely there are four stages that
products pass through: introduction, growth maturity and decline as shown in figure.
Fig.5.1 Product life cycle

Sales
Introduction Growth Maturity Decline

Time
Introduction: starts when a new product is launched. At this stage customers are notfamiliar
with the product. Hence, the firm’s objective in the early stage of the product life cycle should
be to stimulate demand for the new product. To this end, huge promotional campaign stressing
on introducing the product to the market should be conducted so as to get customers try the
product. Because the market is not ready, the pioneer company and its competitors produce
the basic version of the product at this stage. The basic features are as listed below:
 Customers are hesitant in buying the product
 Productivity is low since demand is low
 Sales volume is low
 High amount of money is placed in advertisement
 Expenses are high
 Therefore it is the least profitable stage
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Growth stage: If the new product satisfies the market it will enter the next stage, in which
sales will start climbing quickly. The early buyers will keep on buying, and latter buyers will
start to follow their lead as the good word of mouth about the product passes across the
market. On the other hand, being attracted by the opportunities for profit, new competitors
will enter the market, which eventually paves the way for the introduction of additional
features to the basic product aspect. Likewise, the increase in the number of competitors will
increase the number of distribution out lets. Here at this stage, companies will keep their
promotion spending at the same level or slightly higher level. But, the beginning of
competition will slightly decrease price. Generally, at this stage educating the market is still
the company’s major goal but the company should meet the competition as well. Generally a
company will pursue its marketing strategy in such a way that it will be able to catch the lion
share of the growing market. To this end, the firm should improve product quality, add new
product features and models, and look for new market segments, new distribution channels. In
addition, it may shift its advertising from building product awareness to convincing buyers to
make purchases and also lowering prices if necessary to secure market share. Generally at this
stage a firm should strive to secure a high market share even if it means losing current benefits
(profits), which will be compensated by the long run benefit (profit). Generally, this stage has
the following characteristics:
 This stage has the highest growth rate
 Customers are now familiar with the merits and demerits of the product
 Accordingly, sales volume increases very rapidly
 A proportional rise in profits occurs
 In this stages, competitors enter the market bringing about imitation of the product
 Promotional campaign is still very high.
Maturity stage: At some point, the market for a product will saturate and hence the sales
growth starts to slow down (continue to grow at decreasing rate till some time). At this stage,
the slowdown sales growth will results in many producers with many products. This will
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eventually add fuel to the syrups of the competition that has started in the previous stage. To
out race the competition, firms will start to cut price, increase their promotion in general and
sales promotion in particular, rise R and D budgets to find better versions of the product.
Generally, the stiff competition may compel some firms to leave the market and eventually the
market will contain only well established competitors at this stage. Generally, the central
focus of the firm at this stage will shift to retaining the existing customers and attracting
competitor’s customers rather than looking for new users of the product. Thus by no means
that the firm will totally forget about new users of the product but because the market has
saturated (stopped expanding) it will concentrate up on the existing market not on the
potential market. In this regard a firm may pursue two strategies: increasing the consumption
of the current users of the company’s product and attracting competitors’ customers and new
users. This stage can be summarized as
 Large number of competitors have entered market
 Available products exceed customer demand
 Sales increase levels out into a plateau reaching its highest peak. Reduction in prices may
occur in this stage.
Decline stage: In the final stage, shifting consumer preferences or other market forces such as
technological advances or increased competition bring about decline in sales. Eventually sales
may plunge to zero or it may drop to a low level where it continues for many years in such a
way. As sales and profit decline, some firms may withdraw from the market. Those remaining
may prune their product offerings. They may drop smaller market segments and marginal
trade channels, or they may cut promotion budget and reduce their prices further. Generally
such weak products are disadvantageous to a firm not only for the sake of profit but such
products may take up the attention of the company’s management body, promotional effort etc
that otherwise might be used to other products. In addition it may hurt the firm’s reputation.
Hence, companies should identify products in the decline stage by regularly reviewing sales,
market shares, costs and profit trends. Then management must decide whether to maintain,
harvest or drop the product.
 Sales show downward trends,
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 Profits decline, in some cases actually becoming negative,
 It necessitates product differentiation, that is having different uses for the same product,
 Or a totally new product may have to be introduced.
Product life cycle assumes that products have their own life stage through which profits assume
and go certain pattern. The length of the life cycle is considerably different from one product to
another. A new fashion may have a total life span of one calendar year, with an introductory
stage of two months. But the automobile has been in maturity stage for more than twenty years.
This by no means, all products pass through all these stages. Some products may die right after
they are introduced others may stay mature stage for a long, long time or some enter may enter
the decline stage and are then recycled in to the growth stage through strong promotion or
repositioning.
Table5.1 Summary of Product Life Cycle Characteristics, Objectives, and Strategies
CHARACTERISTICS of PLC
Characteristics Introduction Growth Maturity Decline
Sales Law sales Rapidly rising sales Peak sales Declining sales
High cost per Average cost per Low cost per Low cost per
Costs customer customer customer customer
Profits Negative Rising profits High profits Declining profits
Innovators Early adopters Middle majority

Customers Laggards
Competitors Few Growing number Stable number Declining number

beginning to
decline
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MARKETING OBJECTIVES
Reduce
Create product Maximize market Maximize profit expenditure
awareness share while defending and milk
and trial market share the brand
STRATEGIES
Product Offer a Offer product Diversify brands Phase out weak

basic product extensions service and models items
warranty
Price Charge Price to penetrate Price to match or Cut price

cost-plus market best competitors
Go selective:
Distribution Build selective Build intensive Build more phase out
distribution distribution intensive unprofitable
distribution outlets
Advertising Build product Build Stress brand Reduce to level
awareness awareness differences needed to retain
among early and interest and benefits hard-core loyals
adopters and in the mass market
dealers
Sales Promotion Use heavy Reduce to take Increase to Reduce to
sales advantage of heavy encourage brand minimal level
promotion to consumer demand switching
entice trial
5.1.5. Product attributes
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In planning its market offerings (product), the marketer’s task is the difficult one of deciding how
many attributes to build in to a product, how much quality to include in each of the attributes and
how to put the attributes together to gain a competitive advantage. Fortunately, due largely to
implicit coping strategies employed by consumers in every day decision making, only a few
product attributes are important in any actual choice process. As products become more complex
and consumers become more sophisticated, however, marketers must build more attributes into
the product. Note, too, that the key attributes vary by market segment and therefore, the
marketing effort must change accordingly. In this regard, product planners need to think through
the three levels of product i.e. the basic product aspect, the actual product aspect and the
augmented product aspect.
1. The basic product aspect: - The most fundamental level is the core benefit, the fundamental
benefit that the customer is really buying. It refers to problem solving benefits that customers
seek when they buy a product or a service. This may take different form and concerns in different
markets for the same product for e.g. in the low income group customers most importantly focus
on the capability of the shoe that they buy in protecting their leg for a long period of time but in
the higher income group protection may not be the main focus but safety or style or some other
attribute may be the central focus of their attention. Hence, in determining the basic aspect of the
product for these markets, the marketer should be able to understand the core benefit difference
in these two markets and hence turn the core benefit into a basic product accordingly.
2. The actual product aspect: - At the second level, the marketer should prepare an expected
product, a set of attributes that buyers normally expect and agree to when they buy a product.
This includes the product’s quality aspect, features, design, brand name, packaging and labeling.
All this things should be combined and integrated to deliver the core benefit.
3. Augmented product: At the third level, the marketer should prepare an augmented product,
one that includes additional services and benefits that distinguish the company’s offers from that
of competitors around the core and actual product e.g. product warranties, maintenance and
repair services, customers counseling services, customer training etc.
Generally, if managers focus only on the product’s physical attributes, as intuitive it may seem,
they may entirely miss the subtleties that make people want to buy their product instead of
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competing product. Market place success requires that managers come to see their offerings not
so much as a physical entity, but rather as means for customers to fulfill their utilitarian or
experiential needs. Aside from the physical aspect, products have rational, moral and emotional
meanings for customers Therefore, managers should think about their product in terms of what it
takes to satisfy customer needs and wants so that they can control attributes, which consumers
mentally process and interpret in terms of their personal goals, efficiently. This goals represent
the value that customer anticipate. In turn, customers use perceived value to estimate their likely
satisfaction arising from purchase. After purchase and use, customers’ actual satisfaction or
dissatisfaction feedback and either confirm or negate the value assessment. This leads to
decisions to repurchase or not, good or bad word of mouth communication and other actions in
relation to a product or a company.
5.1.6. Product mix policies and strategies
A product mix (also called a product assortment) is the set of all products and items a particular
seller offers for sale. Product line: refers to a group of products that are closely related to each
other because they function in a similar manner, are sold to the same customer groups, are
marketed through the same out lets or fall within given price ranges.
A product mix consists of various product lines. A company's product mix has a certain width,
length, depth, and consistency. The width of a product mix refers to how many different product
lines the company carries.
The length of a product mix refers to the total number of items in the mix
The depth of a product mix refers to how many variants are offered of each product in the line.
The consistency of the product mix refers to how closely relate the various product lines 'in
end use, production requirements, distribution channels, or some other way.
These four product-mix dimensions permit the company to expand its business in four ways. It
can add new product lines, thus widening its product mix. It can lengthen each product line. It
can add more product variants to each product and deepen its product mix. Finally, a company
can pursue more product-line consistency. To make these product decisions, it is useful to
conduct product-line analysis.
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5.1.7. Product branding, packaging, and labeling
1. Branding: - refers to a name, term, sign or symbol or a combination of all these that
identifies the maker of a product or seller. In today’s competitive market, branding is one of
competitive forces that give edges for companies to compete. In this regard you can imagine to
what extent the difference will be if Sony sells its television without brand and with brand. In
addition, it provides a legal protection for unique product features that might otherwise be copied
by competitors. Apart from this, it enables the company to segment its market in profitable way.
Branding is not only beneficiary for producer but also for customers. It enables customers to
easily identify products that might benefit them. In addition, it will give them a guarantee that
they will get the same features and benefits and quality each time they buy a given product.
Branding is not an easy task for a marketer. In giving brand name there are some considerations
that good brand name should posses.
1. The name should suggest something about the product’s benefit and its qualities.
2. It should be easy to pronounce recognize and remember the name.
3. It should be distinctive from other brand names.
4. It should be easily translatable to other languages.
Apart from all this, a manufacturer may have three options to launch branding of a product
(sponsor). The product may be launched as manufacturers brand (national brand) or the
manufacturer sell to resellers who will in turn give it a private brand (store or distributor brand)
the company may use licensed brand.
2. Packaging: refers to designing and producing the container or wrapper for a product. It may
take different forms. It may be primary container: a container to be used throughout the life of the
product or secondary container: a container to be thrown away when the product is about to be
used or the shipping package: container necessary to ship or store the product. Traditionally, the
primary function of package was to contain and protect the product. No matter how, in today’s
competitive market environment, packaging concern extended to include issues such as attracting
customers, describing the product, convincing buyers to make sale etc. Developing a good
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packaging for a product requires making many decisions. First, the company must establish the
packaging concept, which states what the package should be or do for the product. Should it
mainly offer product protection, introduce a new dispensing method; suggest certain qualities
about the product or something else? Decision then must be made on specific elements of the
package such as size, shape, materials, color, text etc. All these elements must work together to
support the product’s position and marketing strategy. Additionally, growing environmental
concerns in connection to packaging should also be taken in to consideration.
3. Labeling: refers to printed information appearing on or with the package. It ranges from the
simple tags attached to products to complex graphics on the package or with the package. The
label may include brand name, who made it, where it was made, its contents, how it is to be used,
and how to use it safely.
5.2. PRICE DECISION

5.2.1. Meaning and significance of pricing
In today’s competitive environment, non price factors such as product aspect, distribution and
promotion have become significant bases for companies to compete efficiently in the market.
Hence, today, we may see many companies trying to make their offers more attractive and
appealing to customers than competitors primarily through the use of these non price factors
rather than the products price and when companies pursue such approach; their competition base
is referred to as non-price competition. Despite the increased role of such non-price factors in the
modern marketing process, price still remains a critical element of the marketing mix. Price is
the amount of money charged for a product or a service.More broadly, price is the sum of all the
values that customers give up to gain the benefitsof having or using a product or service. Price is
the only element in the marketing mix that produces revenue; all other elementsrepresent costs.
Price is also one of the most flexible marketing mix elements. Unlike product features and
channel commitments, prices can be changed quickly. At the same time, pricing is the number-
one problem facing many marketing executives, and many companies o not handle pricing well.
Some managers view pricing as a big headache, preferring instead to focus on other marketing
mix elements. However, smart managers treat pricing as a key strategic tool for creating and
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capturing customer value. Prices have a direct impact on a firm’s bottom line. A small percentage
improvement in price can generate a large percentage increase in profitability. More importantly,
as part of a company’s overall value proposition, price plays a key role in creating customer
value and building customer relationships.
5.2.2. Pricing objectives
A company can pursue any of five major objectives through pricing:

➤Survival: This is a short-term objective that is appropriate only for companies that are
plagued with overcapacity, intense competition, or changing consumer wants. As long as
prices cover variable costs and some fixed costs, the company will be able to remain in
business.
➤Maximum current profit:To maximize current profits, companies estimate the demand and
costs associated with alternative prices and then choose the price that produces maximum
current profit, cash flow, or return on investment. However, by emphasizing current profits,
the company may sacrifice long-run performance by ignoring the effects of other marketing
mix variables, competitors’ reactions, and legal restraints on price.
➤Maximum market share: Firms choose this objective because they believe that higher sales
volume will lead to lower unit costs and higher long-run profit. With this market penetration
pricing, the firms set the lowest price, assuming the market is price sensitive. This is
appropriate when (1) the market is highly price sensitive, so a low price stimulates market
growth; (2) production and distribution costs fall with accumulated production experience;
and (3) a low price discourages competition.
➤Maximum market skimming: Many companies favor setting high prices to ―skim‖ the
market. This objective makes sense under the following conditions: (1) A sufficient number of
buyers have a high current demand; (2) the unit costs of producing a small volume are not so
high that they cancel the advantage of charging what the traffic will bear; (3) the high initial
price does not attract more competitors to the market; and (4) the high price communicates the
image of a superior product.
➤Product-quality leadership:Companies such as Maytag that aim to be product-quality
leaders will offer premium products at premium prices. Because they offer top quality plus
innovative features that deliver wanted benefits, these firms can charge more.
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5.2.3. Factors affecting pricing decisions
A firm’s pricing strategy is affected by both internal and external factors.
Internal factors affecting pricing:
1. Marketing objectives: -before setting a price, the company must decide on its strategy for
the product. If the company has selected its target market and positioning carefully, then its
marketing mix strategy, including pricing will be fairly strait forward. For e.g. if the company
decided to target high income group, this suggests that the price will be higher or if it positioned
its product as economical this requires low price. In addition, the company’s main objective in
the market may have implication on its price. For e.g. a company may set survival as its major
objective if it is troubled by too much capacity, heavy competition or changing consumer needs.
To keep the plant operating in such circumstance, a company may lower its price, hoping to
increase demand. (Survival should be only a short-term objective and in the long run a firm
should learn how to add value to its product). Otherwise, a company may have current profit
maximization as a major goal. In doing so a company will estimate its demand and cost and
choose the price level that will produce the maximum current profit. Apart from this, a company
may pursue market share leadership objective and hence may charge low price to attract more
customers. Or else a company may want to achieve product quality leadership, which normally
calls for charging higher prices for superior performance. A company may also set its price low
to prevent competition from new entrants.
2. Marketing mix strategy: Price is only one of marketing mix elements that a company uses
to achieve its objectives. Hence, price decision must be coordinated with other marketing mix
decisions (product design, distribution and promotion) to form a consistent and effective
marketing program. Decisions made for other marketing mix variable may affect pricing. For e.g.
a firm using many resellers who are expected to support and promote their products may have to
build larger reseller margins into their prices. On the other hand, the decisions on high
performance quality mean that the seller must charge a higher price to cover higher costs. Or else
a firm looking for attracting customers through promotional campaign may find cutting price as a
means to attract customers.
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3. Costs: costs set the floor for setting price that a company can charge for its product. Most
often under normal circumstances, companies need 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. Generally a company’s cost has paramount implication upon the price the company
needs to charge for e.g. a company interested to charge lower prices cannot do so unless it has
lower cost of production.
4. Organizational consideration: Responsibility for setting prices is different from

organization to organization for e.g. in small companies the top management may be involved in
setting prices for products while in the case of large companies this may be the responsibility
area of divisional or product manager. In any case the organizational set up by it self have
implication upon the pricing aspect.
External factors affecting pricing
1. The market and demand: While cost determines the lower limit of prices, the market and
demand set the upper limit. The sellers’ freedom of setting price varies according to the type of
market for e.g. in a competitive market situation and monopolistic market situation, a company’s
freedom of setting price will not be the same. In the later case, the presence of other producers
means that customers will have other alternatives to satisfy their need, this eventually makes
companies appeal customers through their price and other means. In the first case, the absence of
competitors gives the company greater freedom to the company to set its price. Apart from all
this, the demand of the product by it self has implication up on the price that the company sets.
As we all know according to Economists, demand and price are inversely related, that is the
higher the price is the lower the demand will be and vice versa. Hence, in setting its price a
company should take into consideration the resultant demand it will have for that price as the
sales volume basically emanates from the demand level of the company.
2. Competitor’s costs, prices and offers: A consumer who is considering buying a given
company’s product will evaluate the prices and values of a company against the prices and values
of other companies producing that product. In addition, the company’s pricing strategy may
affect the nature of the competition it faces for e.g. a company pursuing high price, high margin
strategy may change the nature of the competition as compared to a company whose strategy is
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low price, low margin. To this end, a company needs to benchmark its costs against its
competitor’s costs to learn whether it is operating at a cost advantage or not. Likewise, it also
needs to learn the price and quality of its competitors so that it can decide on its offers including
price in relatively attractive (comparable) way than competitors.
3. Other external factors: in setting its price, obviously a company should consider its
economic situation such as inflation, deflation, booming etc as such factors affect both the price
of the company and the perception of consumers about the company’s product value and price. In
addition, a company should consider the effect of its price on other parties in its environment
such as resellers, government, etc. Apart from all these, social concerns may have to be taken
into consideration.
5.2.4 Basic methods of determining price
1. Cost –plus pricing: is the simplest pricing method that adds a standard markup to cost of the
product in order to determine the price of a product. This method does not take into consideration
the demand and competitors price but it entirely depends on the cost of the company and the
desired profit the company wishes to get thereof. No matter how this weakness, it is a popular
one because sellers in most cases are certain about costs than about demand and it appears to be
somehow fair for both buyer and seller.
2. Break-even or target profit pricing: when a firm tries to set its price at a level that equates
its cost to sale or makes the target profit it is seeking. In this method the company will determine
what price will make it break even or desired profit at a given level of sales. In this regard it takes
into consideration only the cost aspect and the desired profit, it does not take into consideration
the price-demand relationship. Thus, in using this method a company should also consider the
effect of the price it is setting on demand.
3. Perceived Value based pricing: is a method that the price of a product is decided based on
the perception of consumers rather than sellers cost as the key factor. In this method, price is to
be determined in such a way that the combination of the quality of the product along with its
service are reasonable enough to justify the benefits customers expect to get from the product. (at
a fair price).
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4. Competition based pricing: is a method that considers the competition as the most
important factor to determine the price of a company. Hence, the company’s price is to be
determined in such a way that it is capable enough to attract consumers than competitors’
products (price that meet the competition). In perusing this approach, most often companies
follow the market leader’s price i.e. it may charge a little bit greater or lesser than the leader’s
price or the same as the leader’s price and will change their price when the leader changes its
price or when the prevailing price in the market changes.
New product pricing strategy
Pricing strategies usually changes as the product passes through its lifecycle. But the introductory
stage is very challenging than that of the others. In this regard we can distinguish between pricing
a product that is imitated from other existing product and pricing a product that is being
introduced for the first time.
A company that plans to develop an imitative product faces a product-positioning problem. It

must decide where to position the product versus competing products in terms of quality and
price. First a company may decide to use a premium pricing strategy – producing a high quality
product and charging the highest price. At the other extreme, it might decide on an economy
pricing strategy –producing a lower quality product but charging a low price. Apart from these, a
company may pursue a good pricing approach that represents a way to attack premium pricing. It
is positioning the product in such a way that it provides superior performance with lower price. If
this appears to be true for those customers who are quality sensitive, they will sensibly buy the
product and save money unless the premium product offers more status or performance to them.
All the above cases are when the product to be produced is a kind of imitated. But if it is a kind
of innovative; the company will face a challenge of setting price for the first time. In this regard
the company can choose between two strategies.
A. Market skimming strategy: it is an approach that advocates setting initially high prices to
skim revenues layer by layer from the market. This approach makes sense only under the
following circumstances. First, the product’s quality and image must support its higher price and
enough buyers must be willing to buy the product at that price. Second, the costs of producing a
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smaller volume cannot be so high that they cancel the advantage of charging more. Finally
competitors should not be able to enter the market easily and undercut the high price.
B. Market penetrating strategy: Rather than setting a high initial price to skim off small but
profitable market segments, a company may set a slow initial price to penetrate the market
quickly deeply – to attract a large number of buyers quickly and win a large market share. Thus
the high sales volume results in falling costs, allowing the company to cut its price even further.
The following are conditions that favor low pricing: First, the market must be highly price
sensitive so that a low price produces more market growth. Second, production and distribution
costs must fall as sales volume increases. Finally, the low price must help keep out the
competition, and the penetration pricier must maintain its low price position otherwise the price
advantage may be only temporary.
Generally, companies do not usually set a single price, but rather a pricing structure that reflects
variations in geographical demand and costs, market segment requirements, purchase timing,
order levels and other factors. After developing their pricing strategies, firms often face situations
where they need to change prices. A price decrease might be brought about by excess plant
capacity, declining market share, a desire to dominate the market through lower costs, economic
recession etc. A price increase might be brought about by cost inflation, over demand and the
like. These situations may call for anticipatory pricing, delayed quotation-pricing, escalator
clauses, unbundling of goods and services. There are also several alternatives to increase price,
including shrinking the amount of product instead of raising the price, substituting less expensive
materials or ingredients, and reducing or removing product features. It is often difficult how
customers and competitors will react to a price change. Generally, a firm should set its price in
such a manner that it is more attractive and appealing to customers than competitor products.
5.2.5. Pricing procedure
A firm must set a price for the first time when it develops a new product, introduces its regular
product into a new distribution channel or geographical area, and enters bids on new contract
work. Price is also a key element used to support a product’s quality positioning. Because a
firm, in developing its strategy, must decide where to position its product on price and quality,
there can be competition between price-quality segments.
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In setting a product’s price, marketers follow a six-step procedure: (1) selecting the pricing
objective; (2) determining demand; (3) estimating costs; (4) analyzing competitors’ costs,
prices, and offers; (5) selecting a pricing method; and (6) selecting the final price
Step 1: Selecting the Pricing Objective
A company can pursue any of five major objectives through pricing:
➤Survival
➤Maximum current profit:
➤Maximum market share:
➤Maximum market skimming
➤Product-quality leadership:
Step 2: Determining Demand
Each price will lead to a different level of demand and, therefore, will have a different impact
on a company’s marketing objectives. The relationship between alternative prices and the
resulting current demand is captured in a demand curve. Normally, demand and price are
inversely related: The higher the price, the lower the demand.
In the case of prestige goods, however, the demand curve sometimes slopes upward because
some consumers take the higher price to signify a better product. Still, if the price is too high,
the level of demand may fall.
Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative prices,
summing the reactions of many individuals who have different price sensitivities.
The first step in estimating demand is to understand what affects price sensitivity.
Nagle says there is less price sensitivity when:
➤ the product is more distinctive,
➤ Buyers are less aware of substitutes,
➤ Buyers cannot easily compare the quality of substitutes,
➤ the expenditure is a lower part of buyer’s total income,
➤ The expenditure is small compared to the total cost of the end product,
➤ Part of the cost is borne by another party,
➤ the product is used in conjunction with assets previously bought,
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➤ the product is assumed to have more quality, prestige, or exclusiveness, and

➤ Buyers cannot store the product
A number of forces, such as deregulation and instant price comparisons that are available over
the Internet, have turned products into commodities in the eyes of consumers and increased
their price sensitivity. More than ever, companies need to understand the price sensitivity of
their target market and the trade-offs that people are willing to make between price and
product characteristics. Even in the energy marketplace, where you would think that a kilowatt
is a kilowatt is a kilowatt, some utility companies are buying power, branding it, marketing it,
and providing unique services to customers.
Estimating Demand Curves

Companies can use one of three basic methods to estimate their demand curves. The first
involves statistically analyzing past prices, quantities sold, and other factors to estimate their
relationships. However, building a model and fitting the data with the proper techniques calls
for considerable skill. The second approach is to conduct price experiments.
An alternative here is to charge different prices in similar territories to see how sales are
affected. The third approach is to ask buyers to state how many units they would buy at
different proposed prices.6 One problem with this method is that buyers might understate their
purchase intentions at higher prices to discourage the company from setting higher prices.
In measuring the price-demand relationship, the marketer must control for various factors that
will influence demand, such as competitive response. Also, if the company changes other
marketing-mix factors besides price, the effect of the price change itself will be hard to isolate.
Price Elasticity of Demand
Marketers need to know how responsive, or elastic, demand would be to a change in price. If
demand hardly changes with a small change in price, we say the demand is inelastic. If
demand changes considerably, demand is elastic. Demand is likely to be less elastic when (1)
there are few or no substitutes or competitors; (2) buyers do not readily notice the higher
price; (3) buyers are slow to change their buying habits and search for lower prices; and (4)
buyers think the higher prices are justified by quality differences, normal inflation, and so on.
If demand is elastic, sellers will consider lowering the price to produce more total revenue.
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This makes sense as long as the costs of producing and selling more units do not increase
disproportionately
Price elasticity depends on the magnitude and direction of the contemplated price change. It
may be negligible with a small price change and substantial with a large price change; it may
differ for a price cut versus a price increase. Finally, long-run price elasticity may differ from
short-run elasticity. Buyers may continue to buy from their current supplier after a price
increase because they do not notice the increase, or the increase is small, or they are distracted
by other concerns, or they find that choosing a new supplier takes time. But they may
eventually switch suppliers. The distinction between short-run and long-run elasticity means
that sellers will not know the total effect of a price change until time passes.
Step 3: Estimating Costs

While demand sets a ceiling on the price the company can charge for its product, costs set the
floor. Every company should charge a price that covers its cost of producing, distributing, and
selling the product and provides a fair return for its effort and risk.
Types of Costs
A company’s costs take two forms—fixed and variable. Fixed costs (also known as overhead)
are costs that do not vary with production or sales revenue, such as payments for rent, heat,
interest, salaries, and other bills that must be paid regardless of output.
In contrast, variable costs vary directly with the level of production. Total costs consist of the
sum of the fixed and variable costs for any given level of production. Average cost is the cost
per unit at that level of production; it is equal to total costs divided by production.
Management wants to charge a price that will at least cover the total production costs at a
given level of production.
Step 4: Analyzing Competitors’ Costs, Prices, and Offers
Within the range of possible prices determined by market demand and company costs, the
firm must take into account its competitors’ costs, prices, and possible price reactions. If the
firm’s offer is similar to a major competitor’s offer, then the firm will have to price close to
the competitor or lose sales. If the firm’s offer is inferior, it will not be able to charge more
than the competitor charges. If the firm’s offer is superior, it can charge more than does the
competitor—remembering, however, that competitors might change their prices in response at
any time.
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Step 5: Selecting a Pricing Method

The the customers’ demand schedule, the cost function, and competitors’ prices—are major
considerations in setting price. First, costs set a floor to the price. Second, competitors’ prices
and the price of substitutes provide an orienting point. Third, customers’ assessment of unique
product features establishes the ceiling price. Companies must therefore select a pricing
method that includes one or more of these considerations. We will examine six price-setting
methods: markup pricing, target-return pricing, perceived-value pricing, value pricing, going-
rate pricing, and sealed-bid pricing.
Markup Pricing
The most elementary pricing method is to add a standard markup to the product’s cost.
Construction companies do this when they submit job bids by estimating the total project cost
and adding a standard markup for profit. Similarly, lawyers and accountants typically price by
adding a standard markup on their time and costs.
Markup pricing remains popular for a number of reasons. First, sellers can determine costs
much more easily than they can estimate demand. By tying the price to cost, sellers simplify
the pricing task. Second, when all firms in the industry use this pricing method, prices tend to
be similar, which minimizes price competition. Third, many people feel that cost-plus pricing
is fairer to both buyers and sellers: Sellers do not take advantage of buyers when demand
becomes acute, and sellers earn a fair return on investment.
Target-Return Pricing
In target-return pricing, the firm determines the price that would yield its target rate of return
on investment (ROI).
Perceived-Value Pricing
An increasing number of companies base price on customers’ perceived value. They see the
buyers’ perceptions of value, not the seller’s cost, as the key to pricing. Then they use the
other marketing-mix elements, such as advertising, to build up perceived value in buyers’
minds. The key to perceived-value pricing is to determine the market’s perception of the
offer’s value accurately. Sellers with an inflated view of their offer’s value will overprice their
product, while sellers with an underestimated view will charge less than they could. Market
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research is therefore needed to establish the market’s perception of value as a guide to

effective pricing.
Value Pricing
Value pricing is a method in which the company charges a fairly low price for a high-quality
offering. Value pricing says that the price should represent a high-value offer to consumers.
This is a major trend in the computer industry, which has shifted from charging top dollar for
cutting-edge computers to offering basic computers at lower prices
Going-Rate Pricing
In going-rate pricing, the firm bases its price largely on competitors’ prices. The firm might
charge the same, more, or less than its major competitor(s) charges. In oligopolistic industries
that sell a commodity such as steel, paper, or fertilizer, firms normally charge the same price.
The smaller firms ―follow the leader,‖ changing their prices when the market leader’s prices
change rather than when their own demand or costs change. Some firms may charge a slight
premium or slight discount, but they typically preserve the amount of difference. When costs
are difficult to measure or competitive response is uncertain, firms feel that the going price
represents a good solution, since it seems to reflect the industry’s collective wisdom as to the
price that will yield a fair return and not jeopardize industrial harmony.
Sealed-Bid Pricing
Competitive-oriented pricing is common when firms submit sealed bids for jobs. In bidding,
each firm bases its price on expectations of how competitors will price rather than on a rigid
relationship to the firm’s own costs or demand. Sealed-bid pricing involves two opposite
pulls. The firm wants to win the contract—which means submitting the lowest price—yet it
cannot set its price below cost.the lowest price—yet it cannot set its price below cost.
To solve this dilemma, the company would estimate the profit and the probability of winning
with each price bid. By multiplying the profit by the probability of winning the bid on the
basis of that price, the company can calculate the expected profit for each bid. For a firm that
makes many bids, this method is a way of playing the odds to achieve maximum profits in the
long run. However, firms that bid only occasionally or that badly want to win certain contracts
will not find it advantageous to use the expected-profit criterion.
Step 6: Selecting the Final Price
The previous pricing methods narrow the range from which the company selects its final
price. In selecting that price, the company must consider additional factors: psychological
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pricing, the influence of other marketing-mix elements on price, company pricing policies,
and the impact of price on other parties.
5.2.6. Pricing policies and strategies
The price must be consistent with company pricing policies. To accomplish this, many firms
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.
5.3. PROMOTION
5.3.1. Meaning and significance of promotion
Modern marketing calls for more than developing a good product, pricing it attractively, and
making it accessible to target customers. Companies must also communicate with their present
and potential customers. Every company is inevitably cast into the role of communicator and
promoter. For most companies, the question is not whether to communicate but rather what to
say, to whom, and how often. Communication decisions are one of the most important and
flexible links between an organization and its markets. Unlike product and distribution tact,
which are more difficult to change and which remain relatively stable over time, communication
is often the first and most effective lever an organization has to respond to or influence its
market.
Communication decision has two main objectives: to inform and influence another party. By
inform, we mean to provide information so that decision makers can make up their own minds.
For e.g. when an advertiser conveys a list of products attributes, the price of its brand or the place
where it may be purchased, it informs the public about its offerings. The goal is primarily to
create awareness or remind consumers about a brand. By influence, we mean to stimulate desire,
change attitudes, shape decisions or cause an action. When advertisers use emotional appeals,
retailers offer a rebate or sales people make a concession, they are trying to influence consumers.
The communication process consists of elements: sender, receiver, response, feedback, and noise.
To get their message through, marketers should encode their message in a way that takes into
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account how the target audience usually decodes message. They must also transmit the message
through efficient media that reach the target audience and develop feedback channels to monitor
the receivers’ response to the message. The audience may not receive the message due to
selective attention, selective distortion, or, selective recall. They must also consider the type of
product market in which they are selling, whether to use a push or a pull strategy, how ready
consumers are to make a purchase, the product’s life cycle, and the company’s market rank.
Measuring the promotion mix’s effectiveness involves asking the target audience whether they
recognize or recall the message, how many times they saw it, what points they recall, how they
felt about the message and their previous and current attitude towards the product and the
company.
5.3.2. The promotion mix elements
The marketing communication mix (also called promotion mix) consists of five major modes of
communications:
5.3.2.1.Advertising-
Advertising is any paid form or non-personal presentation and promotion of ideas, goods or
services by an identified sponsor. It can reach masses of geographically dispersed buyers at a
lower cost per exposure and it enables the seller to repeat the message many times. B/c of
advertising’s public nature, consumers tend to believe that advertised products are more
legitimate than unadvertised. It can be used to build up a long-term image of the company or it
may also be used to trigger quick sales. No matter how all this advantages, its impersonal ness
mean that it is not as directly persuasive as company sales people.
5.3.2.2 Personal selling-

Personal selling is face-to-face interaction with one or more prospective purchasers for the
purpose of making presentations, answering questions and procuring orders. It involves personal
interaction between two or more people, so each person can observe the other’s needs and
characteristics and make quick adjustments. It allows all kind of relationships to develop
beginning from short term up to long term relation with customers.
5.3.2.3 Sales promotions-

Sales promotion is a variety of short-term incentives to encourage trial or purchase of a product
or a service. It refers to the use of a wide assortment of tools – coupons, contests, cents-offs
deals, premiums, and others- all of which have many unique qualities. They attract consumers’
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attention, offer strong incentives to purchase and can be used to dramatize product offers and to
boost sagging sales. Its effect is short term, however, often are not as effective as advertising or
personal selling in building long run brand preference.
5.3.2.4 Public relations-

Public relations- a variety of programs designed to promote and/or protect a company’s image or
its individual products (by building good relations with the company’s various publics). Building
good relations with the company’s various publics by obtaining favorable publicity, building up a
good corporate image, and handling or heading off unfavorable rumors, stories, and events.
5.3.2.5 Direct marketing-

Direct marketing -use of mail, telephone, fax, e-mail and other non-personal contact tools to
communicate directly with or solicit a direct response from specific customers and prospects.
Promotion mix strategies
Marketer can choose from two basic promotion strategies: push and pull strategies. A push
strategy involves pushing the product through distribution channels to final consumers. The
producer directs its marketing activities (primarily personal selling and trade promotions)
toward channel members to induce them to carry the product and to promote it to the final
consumers. Using Pull strategy, the producer directs its marketing activities (primarily
advertising and consumer promotion) toward final consumers to induce them to buy the
product. If the pull strategy is effective, consumers will then demand the product from channel
members, who will in turn demand it form producers. Thus under pull strategy, consumers
demand pulls the product through the channel.
5.4. DISTRIBUTION
5.4.1. Meaning and importance of distribution
After producing and offering products capable enough to satisfy customers’ needs, a company
should not only promote its products but also should be able to make its offers available to its
ultimate customers in areas where they are in need of so that customers will be able to get access
of the company’s products conveniently, quickly and with a minimum of effort and thus, they
will be satisfied with the company’s performance. In connection to this, the channel of
distribution is the system of institutions used to deliver goods to the final consumers from where
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they are produced. Channel decisions must be considered carefully for several reasons. First, and
most obvious, the channel distribution is an essential link, gatekeeper to the market (one of the
factors affecting customers’ satisfaction). Shelf space in the super market or an account with
aggressive distributor is not only a necessity but tends to function as a self-fulfilling prophecy.
That is the channel stimulates demand just as advertising, product design and price cuts do. This
is so, because in the first place, customers need not only the right product but also at the right
place (place utility) and time (time utility) with compatible size (form utility) and they want the
enhanced transfer of ownership (possession utility). If the company fails to do these things
successfully, it will most hopefully result in the dissatisfaction of customers which eventually
puts the acceptability of the company at the odd. Second, it is very expensive and time
consuming to set up and maintain a distribution channel. Third, the channel may provide a
competitive edge over rivals. This edge may be a unique location, efficient inventory, and
delivery practices, special selling skills, market monitoring services and so on. Finally, the
selection of channel or channel design will constrain or facilitate the choice and implementation
of other marketing tact e.g. if the company chooses to have a number of intermediaries, this may
call the company to make sufficient margin in the company’s price to allow all the involved
intermediaries to get profit otherwise the final price that reaches to customers will be somehow
inflated as all intermediaries add their own profit margin on the original product’s price.
5.4.2. Marketing intermediaries and their functions
Most producers do not sell their goods directly to the final users. Between them stands a set of
intermediaries that perform a variety of functions. These intermediaries constitute a marketing
channel (also called a trade channel or distribution channel). Marketing channels are sets of
interdependent organizations involved in the process of making a product or service available
for use or consumption. Why would a producer delegate some of the selling job to
intermediaries? Although delegation means relinquishing some control over how and to whom
the products are sold, producers gain several advantages by using channel intermediaries:
➤ Many producers lack the financial resources to carry out direct marketing.
➤ Direct marketing simply is not feasible for some products.
➤ Producers who do establish their own channels can often earn a greater return by increasing
their investment in their main business. If a company earns a 20 percent rate of return on
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manufacturing and only a 10 percent return on retailing, it does not make sense to undertake
its own retailing.
Channel Functions and Flows
A marketing channel performs the work of moving goods from producers to consumers,
overcoming the time, place, and possession gaps that separate goods and services from those
who need or want them. Members of the marketing channel perform a number of key
functions:
➤ They gather information about potential and current customers, competitors, and other
actors and forces in the marketing environment.
➤ They develop and disseminate persuasive communications to stimulate purchasing.
➤ They reach agreement on price and other terms so that transfer of ownership or possession
can be effected.
➤ They place orders with manufacturers.
➤ They acquire the funds to finance inventories at different levels in the marketing channel.
➤ They assume risks connected with carrying out channel work.
➤ They provide for the successive storage and movement of physical products.
➤ They provide for buyers’ payment of their bills through banks and other financial
institutions.
➤ They oversee actual transfer of ownership from one organization or person to another.
Some functions (physical, title, promotion) constitute a forward flow of activity from the
company to the customer; other functions (ordering and payment) constitute a backward flow
from customers to the company. Still others (information, negotiation, finance, and risk
taking) occur in both directions.
5.4.3. Channel design and management
The design of the channel depends on how consumers make decisions about the particular
product, the number and dispersion of consumers, the amount of goods to be sold and their value,
the cost of various channel options, the task that must be performed and competitive practices.
Generally, in designing their channel, companies need to assess the following sequential steps so
that their channel will be able to address what it is supposed to.
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1. Analyze customers’ desired service output levels: this refers to assessing the level of
services that target market customers expect from the company’s distribution channel. This may
take different aspects. For e.g. the lot size (the number or size of products) that a typical customer
wants to buy on one occasion and product variety: the assortment breadth provided by the
marketing channel should be looked in to. In the same way, the average time (waiting time) that
customers should wait for receipt of the goods should as well be assessed. Likewise, the spatial
convenience: the degree to which the marketing channel should make it easy for customers to
purchase the product is also one of the factors to be considered. As well, the company should
also consider if there are possible service backups that customers may expect from the channel or
may attract customers such as delivery, credit, ordering etc.
2. Establish channel objectives and constraints: channel constraints and objectives should
be assessed taking in to account the targeted service output level to customers. The ultimate
objective of channels is to provide products available to targeted customers effectively and
efficiently. But in today’s competitive environment, it may not be enough. In addition to this
basic and traditional purpose, channels may be designed to accommodate additional aspects such
as additional services like transportation, on line ordering etc, risks associated with the transfer of
values etc so that the channel will be more conducive to customers than competitors’ channels
do. Abreast with this, channel constraints should be considered in light with the characteristics of
the products under consideration. For e.g. if the product is perishable or bulky in nature, or non-
standardized such as custom-built machineries, it may not be that much feasible to keep and
distribute such item through elongated intermediaries. Likewise, if the product by its very nature
requires installation or maintenance services or high unit value product, to distribute it thorough
traditional intermediaries may not be so viable. Rather, it may be reasonable to use company’s
own institution or franchised dealer. On the other hand, if the product is somehow perishable and
low unit value product, it may be feasible for intermediaries to carry the product and provide the
necessary services down to customers. Additionally, under competitive environment, channel
institutions should be arranged in such a way that the total channel cost with respect to the
desired level of service will be minimized. Apart from all these, in assessing channel objectives
and constraints, the larger environment with in which the business is to be practiced should be
taken into account i.e. economical, legal, technological etc situations.
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3. Identify major channel alternatives: companies can choose from a wide variety of channel
for reaching customers- from company’s own sales force to agents, distributors, internet etc.
Each of these options will have their own unique strength as well as weakness. Company’s own
sales force can handle complex products and transactions but they are too expensive. Distributors
can create sales but the company will lose direct contact with customers and the final price that
will be charged on customers will be relatively high as compared to companies own sales force.
Likewise, internet may be much less expensive but may not handle complex products and
transactions. Generally, as far as the alternatives of channels concerns, they can be categorized
into two broad options: direct marketing (distribution) and indirect marketing (distribution). A
company is said to use direct marketing (distribution) if it uses its own sales force and institutions
to distribute its products and indirect distribution if it uses external parties (intermediaries) to
distribute its products. If a company distributes its products by itself, it may turn out to be
advantageous as it enables the company to keep direct interaction with its customers and the
possible price that reaches to final consumers will not be that much inflated. Contrary to this,
even if they may be considered as disadvantageous from the above point of view, in today’s
situation it almost become infeasible for a company to distribute its products by it self owing to
the advantages of intermediaries that outraces their disadvantages. Hence, most producers do not
sell their goods directly to the final users. Between producers and consumers stands one or more
marketing channels, a host of marketing intermediaries performing a variety of functions. This is
so primarily because intermediaries are more efficient in making goods available to target
customers in areas where they are in need of than that of the company itself. Through contacts,
experience, specialization, and scale of operation, intermediaries usually offer products to
customers more than the organization can achieve on its own. Additionally, intermediaries
smooth the flows of products to buyers by performing the key functions of informing, promoting,
and physical possession (including negotiation, title, payment, risk taking and financing. The
information function involves gathering and distributing marketing research and intelligence
about the environment for planning purposes. Scanner technology provides a great amount of
information. The promotion function involves developing and spreading persuasive
communications about an offer. The physical possession function consists of the transporting
and storing of products. This activity involves the negotiations for reaching an agreement on
price and other terms. The title is the actual transfer of ownership from one organization or
person to another. The payment involves buyers paying their bills. The risk taking function
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assumes the risk of carrying the product and receiving payment. The financing function involves
acquiring and using funds to cover costs. Without an intermediary, each buyer has to negotiate
and exchange with each seller. Intermediaries reduce the number of contacts necessary to
complete a transaction. Thus, the use of intermediaries is extremely efficient for the consumer
and the manufacturer. Likewise, most manufacturers produce a single line of products (narrow
assortment) and sell them in large quantities. Intermediaries reduce this quantity discrepancy by
matching supply and demand. They buy in large quantities and sell in smaller quantities. They
help to smooth the distribution path for goods by creating utility, performing marketing
functions, and cutting costs. Producers do not have to deal directly with a large number of end-
users. Instead, marketing intermediaries handle the tasks involved. They are often specialists in
certain functions and can perform these activities more efficiently than producers can.
Consumers need an assortment of products and intermediaries resolve this assortment
discrepancy by gathering products from several manufacturers to offer a broad assortment to
consumers. By representing numerous producers, marketing intermediaries cut the costs of
buying and selling. Because they can consolidate orders, they may also be able to negotiate
better prices than individual consumers could. No matter how all this, today, in order to make
balanced benefit out of both options, today some companies are accustomed to make use of both
options but significant numbers of companies have already shown a tendency to use
intermediaries owing to its capitalized benefits as compared to drawbacks.
4. Evaluate the different alternatives and choose the conducive one: We can view channel
design process as follow. First the firm must identify what customers expect to be provided
through the firm’s channel and then should asses the constraints associated with delivering the
desired function to customers in light with the product’s nature and other characteristics and
finally decides on whether to sell direct or through intermediaries. This decision in turn depends
up on how well each channel option can perform the expected distribution functions for the firm
in managing the distribution of its goods and for customers in providing what they expect. In
addition each of the available options should be evaluated against economic, control and adaptive
criteria. Each channel alternative will produce a differential level of sales and cost. Hence, each
of the options should be evaluated from the potential sales and cost perspective. Apart from this,
control and adaptive criteria should be seen. Using sales agency posses control problem.
Intermediaries are independent parties seeking to maximize their profit. Hence, in some
93
circumstances, these intermediaries may act against the company’s desire in their effort to
capitalize their benefit and this in turn may put the company’s business at the odd. Hence, the
company should also consider to what extent it can influence and control the activities of its
intermediaries before choosing intermediaries. After all these assessments, if management
decides to sell through intermediaries, then it must choose the breadth of coverage needed to
reach customers. There are three possibilities in this regard: intensive distribution, exclusive
distribution and selection distribution.
Intensive distribution: it is a strategy to use as many outlets (intermediaries) as possible. This is

feasible and advantageous especially for convenience products because the most important
consideration that customers care about is to get the products available in areas where they are in
need of on timely basis with compatible size. So, companies pursuing this strategy will make
their products available in the hands of every possible intermediary.
Exclusive distribution: By contrast, some producers purposefully may limit the number of their
intermediary in a given region to one intermediary in which the intermediary will have the
exclusive right to distribute the company’s products in the specified region.
Selective distribution: In some circumstances, companies may not limit the right to distribute
their products to only one or specific intermediary and as well may not allow all possible and
potential intermediaries to distribute their products but limit the right to distribute their products
for intermediaries more than one but fewer than all.
Generally, no matter what system is designed, the firm’s channel of distribution should be
designed in such a manner that it is capable enough to make products available and easily
accessible to areas where customers are in need of effectively and efficiently so as to enhance
customer satisfaction.
Channel-Management Decisions
After a company has chosen a channel alternative, it must select, train, motivate, and evaluate
the individual intermediaries. Then, because neither the marketing environment nor the
product life cycle remains static, the company must be ready to modify these channel
arrangements over time.
 Selecting Channel Members
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During the selection process, producers should determine what characteristics distinguish the
better intermediaries. They will want to evaluate number of years in business, other lines
carried, growth and profit record, solvency, cooperativeness, and reputation. If the
intermediaries are sales agents, producers will want to evaluate the number and character of
other lines carried and the size and quality of the sales force. If the intermediaries are store or
Internet retailers that want exclusive distribution, the producer will want to evaluate locations,
brand strength, future growth potential, and type of clientele.
 Training Channel Members
Companies need to plan and implement careful training programs for their distributors and
dealers because the intermediaries will be viewed as the company by end users.
 Motivating Channel Members
The most successful firms view their channel members in the same way they view their end
users. This means determining their intermediaries’ needs and then tailoring the channel
positioning to provide superior value to these intermediaries. To improve intermediaries’
performance, the company should provide training, market research, and other capability-
building programs. And the company must constantly reinforce that its intermediaries are
partners in the joint effort to satisfy customers.
 Evaluating Channel Members

Producers must periodically evaluate intermediaries’ performance against such standards as
sales-quota attainment, average inventory levels, customer delivery time, treatment of
damaged and lost goods, and cooperation in promotional and training programs.
A producer will occasionally discover that it is paying too much to particular intermediaries
for what they are actually doing. As one example, a manufacturer that was compensating a
distributor for holding inventories found that the inventories were actually held in a public
warehouse at the manufacturer’s expense. Producers should therefore set up functional
discounts in which they pay specified amounts for the trade channel’s performance of each
agreed-upon service. Underperformers need to be counseled, retrained, remotivated, or
terminated.
 Modifying Channel Arrangements
Channel arrangements must be reviewed periodically and modified when distribution is not
working as planned, consumer buying patterns change, the market expands, new competition
95
arises, innovative distribution channels emerge, or the product moves into later stages in the
product life cycle.
Rarely will a marketing channel remain effective over the entire product life cycle. Early
buyers might be willing to pay for high value-added channels, but later buyers will switch to
lower-cost channels. This was the pattern for many products, including small office copiers,
which were first sold by manufacturers’ direct sales forces, later through office-equipment
dealers, still later through mass merchandisers, and now by mail-order firms and Internet
marketers.
Adding or dropping an individual channel member requires an incremental analysis to
determine what the firm’s profits would look like with and without this intermediary.
Sometimes a producer considers dropping all intermediaries whose sales are below a certain
amount.
5.4.4. Factors affecting marketing channel decisions
Having laid out several possible alternative channel structures, the channel manager should
then evaluate a number of variables to determine how they are likely to influence various
channel structures.
Although there are a myriad of such variables, six basic categories can be formed in the
analysis of alternative channel structures:
1. Market variables
2. Product variables
3. Company variables
4. Intermediary variables
5. Environmental variables
6. Behavioral variables
In the course of discussing the variables in these categories, we will often cite a number of
heuristics (rules of thumb) that relate these variables to channel structure. An example of one
such heuristic is as follows:
If a product is technically complex, the manufacturer should sell directly to its user
instead of through intermediaries.
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Here a product variable (technical complexity) seemingly yields a simple prescription for
channel structure. It would be nice if things were this simple, but unfortunately such is not the
case. Such heuristics, which are commonly mentioned in the marketing literature, are only
crude guides to decision making. They should not be viewed as clear-cut prescriptions for
choosing a particular channel structure. They are useful only to the extent that they offer
some rough reflection of what would typically be expected given a particular condition, and
thereby provide a point of departure for the analysis of different channel structures.
With this caveat in mind, we turn to a discussion of these six categories of variables and some
of the related heuristics relevant to choosing channel structure.
Market variables
All of modern marketing management including channel management is based on the

underlying philosophy of the marketing concept, which stresses customer (market)
orientation. In developing and adapting the marketing mix, then, marketing managers should
take their basic cues from the needs and wants of the target markets at which they are aiming.
Hence, just as the products a firm offers, the prices it charges, and the promotional messages it
employs should closely reflect the needs and wants of the target market, so too should the
structure of its marketing channels. Market variables are therefore the most fundamental to
consider when designing a marketing channel.
Four basic subcategories of market variables are particularly important in influencing channel
structure. They are:
(1) Market geography,

(2) Market size,
(3) Market density, and
(4) Market behavior
Market Geography—refers to the geographical size of markets and their physical location
and distance from the producer or manufacturer. From a channel design standpoint, the basic
tasks that emerge when dealing with market geography are the development of a channel
structure that adequately covers the markets in question and provides for an efficient flow of
products to those markets.
A general heuristic for relating market geography to channel design can be stated at this point:
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The greater the distance between the manufacturer and its markets, the higher the probability
that the use of intermediaries will be less expensive than direct distribution.
Market Size—the number of customers making up a market (consumer or industrial)

determines the market size. From a channel design standpoint, the larger the number of
individual customers, the larger the market size will be.
The usual operational measures of market size are the actual number of potential consumers or
firms in the consumer and industrial markets, respectively. Birr volume is typically not a
good measure of market size because of the wide variations in Birr volume; that is, it is
possible to have high Birr volumes from a small number of customers and vice versa. Only if
Birr volume is highly correlated with the number of customers will it serve as a reliable
measure of market size.
A very general heuristic about market size relative to channel structure is as follows:
If the market is large, the use of intermediaries is more likely to be needed. Conversely, if the
market is small, a firm is more likely to be able to avoid the use of intermediaries.
Market Density—the number of buying units (consumers or industrial firms) per unit of land
area determines the density of the market. A market having 1,000 customers in an area of 100
square miles is denser than one containing the same number of customers in an area of 500
square miles.
In general, the less dense the market, the more difficult and expensive is distribution. This is
particularly true for the flow of goods to the market, but it also applies to the flow of
information. Consequently, a typically cited heuristic for market density and channel structure
is as follows:
The less dense the market, the more likely it is that intermediaries will be used. Stated
conversely, the greater the density of the market, the higher will be the likelihood of
eliminating intermediaries.
Market Behavior—refers to the following four types of buying behaviors:
(1) How customers buy,

(2) When customers buy,
(3) Where customers buy, and
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(4) Who does the buying?

Each of these patterns of buyer behavior may have a significant effect on channel structure.
The following table provides some examples. Here again we should keep in mind that the
heuristics shown in the table are merely rough indicators of what is typical. There are many
exceptions to these heuristics under differing sets of circumstances. The material in the table
should be seen as providing illustrative examples only; and not as a source of reference for
choosing a channel structure.
Table 8.1 how market behavior affects channel design
Buying Habits Corresponding Channel Structure Heuristics

How
Customers typically buy in Use long channels (perhaps several levels
very small quantities. of intermediaries) to reach the market.
When Add intermediaries to the channel to perform

Buying is highly seasonal. the storage function, thereby reducing peaks
and valleys in production.
Where Eliminate wholesale and retail intermediaries

Consumers increasingly tend to and sell direct.
shop at home.
99
Who Distribute through retailers who successfully

Consumer market: Husband and cater to both spouses
wife are generally both involved
in the purchase
Industrial market: Many Direct distribution for greater control of sales force to
individuals influence the successfully reach all parties Responsible for making
purchasing decision. purchase decisions.
Product Variables
Product variables are another important category to consider in evaluating alternative channel
structures. Some of the most important product variables are:
 Bulk and weight,

 Perishability,
 Unit value,
 Degree of standardization (custom-made versus standardized),
 Technical versus nontechnical, and newness.
Bulk and Weight—heavy and bulky products have very high handling and shipping costs
relative to their value. The producer of such products should therefore attempt to minimize
these costs by shipping only in large lots to the fewest possible points. Consequently, the
channel structure for heavy and bulky products should, as a general rule, be as short as
possible—usually direct from producer to user. The major exception to this occurs when
customers buy in small quantities and need quick delivery. In this case it may be necessary to
use some form of intermediary.
Perishability—products subject to rapid physical deterioration (such as fresh foods) and those
that experience rapid fashion obsolescence are considered to be highly perishable. The
necessary condition of channel design in this case is rapid movement of the product from
production to its final user to minimize the risks attendant to high perishability. The following
heuristic is appropriate;
100
When products are highly perishable, channel structures should be designed to provide for
rapid delivery from producers to consumers.
When producers and consumers are close, such channel structures can often be short. When
greater distances are involved, however, the only practical and economical way to provide the
necessary speed of delivery may be by using several intermediaries in the channel structure.
Unit Value—In general, the lower the unit value of a product, the longer the channels should
be. This is because the low unit value leaves a small margin for distribution costs. Such
products as convenience goods in the consumer market and operating supplies in the industrial
market typically use one or more intermediaries so that the costs of distribution can be shared
by many other products that the intermediaries handle, thus creating economies of scale and
scope. For example, it would be difficult to imagine the sale of a package of chewing gum
directly from one place to the consumer. Only by spreading the costs of distribution over the
wide variety of products handled by wholesale or retail intermediaries is it possible to buy a
package of chewing gum at retail for 50 cents.
Degree of Standardization—custom-made products go directly from the producer to the

user, but as products become more standardized, the opportunity to lengthen the channel by
including intermediaries increases. For example, totally custom-made products such as
industrial machinery very often are sold directly from the manufacturer to the user. Semi-
custom products such as accessory equipment in the industrial market and furniture in the
consumer market will often include one intermediary. On the other hand, highly standardized
products such as operating supplies in the industrial market and convenience goods in the
consumer market will frequently include more than one intermediary.
Technical Versus Nontechnical—in the industrial market, a highly technical product will
generally be distributed through a direct channel. The overriding reason for this is that the
manufacturer needs sales and service people who are capable of communicating the product’s
technical features to potential customers and who can provide continuing liaison, advice, and
service after the sale is made. In consumer markets, relatively technical products such as
personal computers are usually distributed through short channels for the same reasons.
Newness—many new products in both consumer and industrial markets require extensive and
aggressive promotion in the introductory stage to build primary demand. Usually, the longer
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the channel, the more difficult it is to achieve this kind of promotional effort from all of the
channel members. Consequently, in the introductory stage, a shorter channel is generally
viewed as an advantage for gaining product acceptance. Further, the degree of selectivity also
tends to be higher for new products because a more carefully selected group of intermediaries
is more likely to provide more aggressive promotion.
Company Variables
The most important company variables affecting channel design are:
(1) Size,
(2) Financial capacity,
(3) Managerial expertise, and
(4) Objectives and strategies.
Size—in general, the range of options for different channel structures is a positive function of
a firm’s size. The power bases available to large firms—particularly those of reward,
coercion, and expertise—enable them to exercise a substantial amount of power in the
channel. This gives large firms a relatively high degree of flexibility in choosing channel
structures, compared to smaller firms. Consequently, the larger firm’s capacity to develop
channel that at least approach an optimal allocation of distribution tasks is typically higher
than for smaller firms.
Financial Capacity—generally, the greater the capital available to a company, the lower is its
dependence on intermediaries. In order to sell directly to ultimate consumers or industrial
users, a firm often needs its own sales force and support services or retail stores, warehousing,
and order processing capabilities. Larger firms are better able to bear the high cost of these
facilities. There are, of course, exceptions to this pattern, particularly when direct mail-order
channels are used or more recently in the case of electronic channels utilizing the Internet. In
both of these cases, even small firms with very limited financial capacities can find it feasible
to sell directly to ultimate consumers.
Managerial Expertise—some firms lack the managerial skills necessary to perform

distribution tasks. When this is the case, channel design must of necessity include the services
of intermediaries, which may include wholesalers, manufacturers’ representatives, selling
102
agents, brokers, or others. Over time, as the firm’s management gains experience, it may be
feasible to change the structure to reduce the amount of reliance on intermediaries.
Objectives and Strategies—Marketing and general objectives and strategies (such as a

desire to exercise a high degree of control over the product and its service) may limit the use
of intermediaries. Further, such strategies as an emphasis on aggressive promotion and rapid
reaction to changing market conditions will constrain the types of channel structures available
to those firms employing such strategies.
Intermediary Variables
The key intermediary variables related to channel structure are:
(1) Availability,
(2) Costs, and
(3) The services offered.
Availability—in a number of cases, the availability of adequate intermediaries will influence
channel structure.
Costs—the cost of using intermediaries is always a consideration in choosing a channel

structure. If the channel manager determines that the cost of using intermediaries is too high
for the services performed, the channel structure is likely to minimize the use of
intermediaries.
Services—the services offered by intermediaries, is closely related to the problem of

selection.
Environmental Variables
Environmental variables may affect all aspects of channel development and management.
Economic, socio-cultural, competitive, technological, and legal environmental forces can have
a significant impact on channel structure. Indeed the impact of environmental forces is one of
the more common reasons for making channel design decisions.
Behavioral Variables
When choosing a channel structure, the channel manager should review the behavioral
variables. For example, developing more congruent roles for channel members can reduce a
major cause of conflict. Giving more attention to the influence of behavioral problems that can
103
distort communications fosters a channel structure with a more effective communications

flow.
By keeping in mind the power bases available, the channel manager ensures that the final
choice of a channel structure is more likely to reflect a realistic basis for influencing channel
members. For instance, a small, specialized manufacturer who decides to use large chain
retailers in the channel structure is unlikely to be able to gain much influence or control if
coercive power is used, yet he or she might very well be able to do so if expert power is
stressed. A channel manager who needs a very high level of control to achieve his or her
distribution objectives may find that the legitimate power base should serve as the basis for
the channel structure. These and many other implications of behavioral variables may in
particular instances be relevant for choosing an appropriate channel structure.
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Principles of Marketing

Business and Economics

INTRODUCTION TO THE COURSE

According to American Marketing Association, marketing is defined as the performance

According to William J. Stanton, Marketing is a system of business activities designed to

According to Evans and Berman, Marketing is the anticipation, stimulation, facilitation,

According to Philip Kotler, Marketing is a Social and Managerial process by which

1.2. Evolution and Philosophies of marketing

Fig.1.1 The Selling and marketing concepts Contrast

Factory Products Selling & promotion Profits through sales

The marketing concept (outside- in view that focuses on satisfying customer

Target Customer Needs Coordinated marketing Profits through

Fig.1.2 Consideration underlying social marketing concept

Society (human welfare)

Consumer (want satisfaction) Company (Profits)

1.3 The Importance of Marketing

In short, marketing has the following impotence:

1.4. Marketing Tasks

The following are the basic marketing functions:

1. Environmental Analysis and Marketing Research: Involves monitoring and adapting to

1.4.2. Demand Management

Organizations operate not in a vaccum rather in a complex and changing environment.

The marketing environment consists of a microenvironment and a macro environment.

2.2 Macro environment

Demographic environment: demography is the study of human population in terms of size,

 By starting new industries such as computer, robot etc

Natural Environment: it refers to thephysical environment with in which the company

2.3 Micro environment

1. The Company: In designing marketing plans, marketing management takes other

4. Competitors: A company’s competitive environment is a major influence on its

A comapny generally face three type of competition

6. The Public: is any groupthat has an actual or potential interest in or impact on an

3.1. What is a market?

Fig.3.1 various types of markets

3.2. Types of market

Model of consumer behavior

Fig.3.2 Model of consumer buying behavior

Factors influencing consumer purchase decision.

Table. 3.1 Factors affecting consumer buying behavior

Cultural Social Personal Psychological

Culture Reference group Age Motivation

Sub culture Family Occupation Perception

Social class Roles and status Economy Learning

Life style Beliefs and

Roles and status

Age and life cycle stage

Occupation and economic circumstance

Beliefs and attitudes:

An attitude is a person’s enduring favorable or unfavorable evaluations, emotional feelings and

Types of buying decision behavior

Table3.2 Buying behavior of consumers

High involvement Low involvement

Significant differences Complex buying behavior Variety-seeking buying behavior

Few differences Dissonance-reducing Habitual buying behavior

Complex Buying Behavior

After the purchase, consumers might experience post-purchase dissonance (after-sale

Habitual Buying Behavior