1 Introduction to Marketing Management

Marketing Management is an art and science of selecting the targets and constructing profitable base.

Marketing is defined as the analyzing, planning, organizing and controlling of the firm’s
potential customers, resources and policies and activities with a view to satisfy the needs and
wants of the customer groups at a profit. Marketing is a process of planning and executing the
conception, pricing and production and distinction of ideas, goals and services to create an
exchange that satisfies the individual and organizational objectives. Basically, marketing is a
social and managerial process by which individual groups obtain what they want by creating
and exchanging products of value with others. There will always be some need for selling but
marketing aims to make selling superfluous. It aims at knowing and understanding the
customer’s needs so well that a product or service fits him and sells itself [1]. Ideally,
marketing strategies should result in a potential customer who is ready to buy and create the
circumstances that make the product or service readily available.

1.1 Concept of Marketing

In earlier times, the concept of marketing evolved from distribution and selling of goods into
available market relating the firms to its market dynamically [2]. Firms concentrated on
promotions that would enhance their sales and result in maximal profit. Less focus was put on
attaining a particular quality level, i.e. no inclination towards customer satisfaction [3]. Also,
the field of marketing dealt with economic exchange of goods for money. Today the scope of
marketing has been broadened to include the exchange of tangibles even with the transfer of
intangible products (i.e. services). The importance of marketing has gradually been recognized
in business. Adoption of a better marketing concept has shifted management’s attention from
the product to the consumer. The marketing concept directs the manager to focus on [4]:

Considering consumer wants as top objectives.

Mobilizing the entire firm to meet the challenges.
Long-term profit rather than short-term goals.

In recent times, customer satisfaction has become of the utmost importance. Pricing policy,
quality, distinction and sales services are the focal point, which helps the long-term profit of
the company. This can be considered a marketing concept. To meet all this, the marketing
department of a firm conducts market surveys, consumer sampling and so forth and sees the
demand for the various products and which product needs to be modified according to
people’s requirements. The marketing department then advises the company’s various
department to modify the product so that the customers’ needs are satisfied. Today’s
marketing concept is based upon customer orientation planned by integrating marketing
efforts and aims at generating customer satisfaction as the key to success. Thus, customers are
at the top of the orientation chart and instead of trying for the easiest mode of selling, firms
should focus more on the customer’s willingness. Moreover, creativity and intelligence should
be applied in achieving sales by satisfying customers wants and needs.

1.2 Role of the Marketing Manager

The marketing manager is a person who is in-charge of managing marketing resources for
either a product or a service within an organization. Managers should be highly focused, goal-
oriented and very reliable people in terms of meeting the timelines. Some important roles a
marketing manager performs are:

Managers strive to discover, entice, maintain and develop a loyal customer base by
providing high-value products or services.
Managers play a crucial role in determining the potential market and the people who will
be served, their nature and the level of need the products can satisfy.
Managers assist the top management in developing sound plans and policies.
Managers coordinate various activities related to production, procurement, packaging
and even promotional campaigns.
Mangers generate ideas for new products or services to satisfy the growing needs of the
consumer.
Managers develop a strategy that can differentiate their offering from that of their
competitors.

1.3 Marketing Orientation

Market orientation is a technique in which businesses identify the needs and desires of
consumers and create products that satisfy them [4]. The conventional approach focused on
selling and designing products which increased profit, but modern-day marketing advocates
the creation of products/services according to the needs and wants of the customer. At
present, the orientation is customer-focused. Firms invest heavily in understanding the
customers’ preferences, personal needs and concerns which can assist in analyzing the desires
which were not expressed [5]. This understanding can help in meeting anticipated demands
and in improving existing products. This helps to ensure that buyer satisfaction remains high
and promotes brand loyalty and positive word-of-mouth communication. Two among many
well-known firms that focus on market orientation are Amazon and Coca-Cola. Both of these
companies use vast resources to understand the consumer which is the reason behind their
great success. As they have grown and evolved, they have been constantly adding process and
features based on the perceptions and desires of potential consumers. Key to the success of
any organization is to understand the consumer and to produce accordingly. If the customers
are not satisfied, they will buy from a competitor offering to fulfill their requirements.

1.4 Product and Selling Concept

The product concept and the selling concept are two diverse perceptions that originate from
the demand in the market. The product concept states that buyers choose the product that is
of the highest value and has better performance and function. The product concept is an
obligatory concept which delivers the highest possible quality product to the client as per the
requirements at a low price. The product’s survival in the market calls for different elements
of commercial enterprise like advertising and marketing, distribution and many others to
achieve success [6]. Using the product concept, an organization can provide identity to the
product as well as value so that the buyers seek and subsequently the consumers purchase the
product.
Once experts recognized the failure of the product concept the selling concept was
introduced. Under this theory, it is believed that the consumers will not adopt the product
until they are persuaded to do so with the help of promotional channels, i.e. the customers do
not purchase products in their own initiative, they need to be influenced. Sales can be
increased by developing consumer interest and creating a need for the products in the
consumers’ minds by educating them through various modes of advertising. The selling
concept of advertising focuses the attention on the wishes of the vendor but no longer on
potential purchasers. Its ambition is to boost sales and bring in earnings via advertisements.
This period of 1930 –1950 has always been known as the “Ideal Sales Era” as supply was more
than the demand that occurred during that period. Some corporations are determined to agree
with the promoting idea even today. This technique believes that efforts ought to be made so
that the customers realize the necessity of the product so that they can adopt it. The selling
concept puts emphasis on the purchase but does not take care of the after-sale services.

1.5 Types of Marketing

In the past, marketing was only viewed as something related to the selling of goods. Lately,
several new types of marketing have evolved:

Co-marketing: a partnership between two or more companies that jointly market each
 other’s products, e.g. a company that manufactures video cards may partner with a game
software company and both will market each other’s related product.
Viral marketing: in internet and online advertising, viral marketing is a type of
marketing technique that relies on and encourages people to pass along a message by
word of mouth marketing. In viral marketing, online user blogs and social networks are
used to produce positive word of mouth brand awareness.
Online marketing: it refers to a set of powerful tools and methodologies used for
promoting products and services through the internet. It includes a wider range of
marketing elements than traditional business marketing because of extra channels and
marketing mechanisms available on the internet. It connects organizations with qualified
potential customers and takes business development to a much higher level than
traditional advertising. Further, it combines the internet’s creative and technical tools,
including design, development, sales and advertising, while focusing on e-commerce,
lead-based websites, affiliated marketing and so on.
Green marketing: this kind of marketing tactic is being adopted and practiced by all of
the firms that are committed to sustainable development or corporate social
responsibility (CSR). It can also be defined as the selling of products or services based on
environmental factors and also made from renewable materials which can be recycled
and which are not using excessive packaging materials.
Rural marketing: as the name itself implies that marketing which is concentrated in
catering to rural markets. This terminology is similar to marketing, the difference being
the target population. Here the market specifically consists of rural regions. Thus, it is the
application of basic of marketing to the rural sector of the economy.
Service marketing: this is a special branch of marketing aiming to build relationships
and value. This kind of marketing pedagogy can be adopted for both products and
services. As the larger part of the economy is dependent on the service industry this type
of marketing is the need of the hour.

1.6 Problems for Self-Assessment

i. Explain the concept of marketing.

ii. Distinguish between the product and the selling concepts.
iii. Discuss the market orientation view from a consumer perspective.
iv. Explain the role of the marketing manager.
v. Differentiate between rural and service marketing.

References
1. Moorman, C., & Rust, R. T. (1999). The role of marketing. Journal of Marketing, 63(4_suppl
1), 180–197.
2. Arli, D., Bauer, C., & Palmatier, R. W. (2018). Relational selling: Past, present and future.
Industrial Marketing Management, 69, 169–184.
3. Day, G. S. (1994). The capabilities of market-driven organizations. Journal of Marketing,
58(4), 37–52.
4. Kotler, P. (1972). A generic concept of marketing. Journal of Marketing, 36(2), 46–54.
5. Borden, N. H. (1964). The concept of the marketing mix. Journal of Advertising Research,
4(2), 2–7.
6. Szymanski, D. M. (1988). Determinants of selling effectiveness: The importance of
declarative knowledge to the personal selling concept. Journal of Marketing, 52(1), 64–77.
2 Need for Scientific Marketing Analysis
Marketing has now become the technology driven discipline.

Decision-making is a process involving information, choice of alternative actions,

implementation and evaluation that is directed at the achievement of certain stated goals.
Successful implementation of a decision significantly depends on the extent of understanding
of the decision and its implications and the motivation of the subordinates who have to carry
it out. Also, decision-making significantly impacts several aspects of marketing. Marketing is
schematically described as “setting the proper product inside the right vicinity, at the right
cost, on the right time”. Though this feels like running a simple errand, a variety of difficult
tasks and research are performed to put these simple words into action. And if even one single
offering does not meet the mark, a promising service or product can fail completely and end
up costing the firm substantially. Hence the use of scientific planning. It’s not just that
advertising and marketing have grown to be technologically sound. Marketers have found
themselves in an area where responsibility is supreme, making them dependent on data and
analytics to extract insights and deliver more results rapidly [1]. Saying that marketing
process has changed would be misleading, the fact of the matter is that marketing as a process
is experiencing an evolutionary momentum. Accordingly, organizations have found it
important to develop an understanding of this marketing mix which is considered to be the
foundation of many businesses.

2.1 Decision-Making: A Quantitative Approach

Decision-making is an indispensable component of the management process. It permeates all
aspects of management and involves every part of an enterprise. In fact, whatever a manager
does, he or she does through decision-making only; the end products of a manager’s work are
decisions and actions. For example, a manager has to decide:

i. What are the long-term objectives of the organization, how to achieve these objectives
and what strategies, policies or procedures need to be adopted (planning)?
ii. How the jobs should be structured, what type of structure and how to match jobs with
individuals (organizing)?
iii. How to motivate people to peak performance, which leadership style should be used and
 how to integrate effort and resolve conflicts (leading)?
iv. What activities should be controlled and how to control them (controlling)?

Thus, decision-making is a central, important part of managing. Managers are essentially just
decision makers. Almost everything managers do involves decision-making. In fact, decision-
making is a universal requirement for all human beings. Each of us makes decisions every day
in our lives. What college to attend, which job to choose, whom to marry, where to invest and
so on. Surgeons, for example, make life-and-death decisions; engineers make decisions on
construction projects; gamblers contemplate risky decisions and computer technologists make
highly complex decisions involving crores of rupees. Thus, whether right or wrong,
individuals as members of different organizations make decisions. Collectively the decisions
of these members give form and direction to the work an organization does. Some researchers
have even equated decision-making with planning. In fact, Koontz and O’Donnell [2] viewed
decision-making as the core of planning, implying that it is not the core of organizing or
controlling. However, instead of taking extreme positions it would be better to view decision-
making as a pervasive function of managers aimed at achieving goals. There are two
important reasons for learning about decision-making [3]:

Mangers spend a great deal of time making decisions. In order to improve managerial
skills, it is necessary to know how to make effective decisions.
Managers are evaluated on the basis of the number and importance of the decisions
made. To be effective, managers should learn the art of making better decisions.

The administration of the modern business enterprise has become an enormously complex
exercise. There has been an increasing tendency to turn to quantitative techniques and models
as a potential means for solving many problems that arise in such an enterprise. Management
in action is decision-making. Decision-making in business is considered to be a process
whereby management, when confronted with a problem, selects a specific course of action or
solution from a set of possible courses of actions. As there is generally some uncertainty about
the future, we cannot be sure of the consequences of the decision made. The process of
making decisions in a business has the same essential characteristics as problem-solving
behavior in general.

2.1.1 BUSINESS DECISIONS

A business manager always wants to choose the course of action that is most effective in
attaining the goals of the organization. In judging the effectiveness of different decisions, we
must use some measuring unit. The most commonly used measure in making decisions is the
amount of profit in monetary terms but for our purpose here, we will use some of the
following:

1. Decisions made under certainty or uncertainty.

2. Decisions made for one time period only or a sequence of passive decisions over several
time-periods.
3. Decisions where the opponent is a thoughtful person (setting the price of a product after
considering the actions of the competitors).

The following general solution process is adopted for all types of decision situations:

1. Establish the criteria that will be utilized. One of the criteria may be maximization of
profit. In a capital budgeting decision, we choose the project with the highest pay off.
2. Select a set of alternatives for consideration.
3. Determine the model which will be used and the values of the process parameters, e.g.
we may decide that the algebraic expression of the model of total expenses is:
Total Expenses = a + b units sold
4. Determine that alternative which optimizes or falls in line with the criterion that has
been chosen in item 1.

2.1.2 ABSTRACTION
Real life problems are very complicated in nature. In empirical situations there are a large
number of inherent “facts”. Moreover, every potential course of action triggers a chain
reaction—of course effect and interaction—and there is no end to this process. Consider the
problem of erecting a factory building. Much time is spent on gathering factual information
about the project, e.g. the exact location, the physical features of the building; a minute study
of the climate conditions of the potential sites and their bearing on most of the construction;
the raising of the finance and the cost of the finance raised. If the manger as the decision-
maker prefers to collect all the facts before he or she acts, it follows that he or she will never
act. It should be acknowledged that it is beyond the comprehension of humankind to consider
every aspect and dimension of an empirical problem. Some characteristics of the problem
must be ignored if a decision is to be made at all. In other words, it is for the decision-maker
to abstract from the empirical situations those factors which he or she considers to be most
relevant to the problem he or she faces. In this way, abstraction initiates the solution of many
problems.

2.1.3 MODEL BUILDING

Once the selection of the critical factors or variables has been made by the decision-maker, the
next step is to combine them in a logical manner so as to form a model of the empirical
situation; ideally, the model strips a natural phenomenon of its complexity and duplicates the
essential behavior of the natural phenomenon with a few variables that are simply related.
The greater the simplicity of the model, the better it is for the decision-maker, provided the
model serves as a reasonably reliable counter path of the empirical order. The advantages of
the simple model are:

1. It saves time as well as thought.

2. It is within the bounds of the comprehension and ability of the decision-maker.
3. If necessary, the model can be modified quickly and effectively.

The aim of the decision-maker in constructing a model is to approximate reality as much as

possible. In other words, a model is a de facto approximation of reality. Replication of reality
seems to be a lofty aim and meeting it would consume an infinite length of time. Besides, such
an elaborate model would be beyond the reach of human comprehension. Therefore, the
manager as a decision-maker wants the simplest possible model that predicts outcomes
reasonably well and is consistent with effective action on his or her part.

2.1.4 SOLUTIONS
Having constructed the model, it is possible to draw certain conclusions about its behavior by
means of a logical analysis. The decision-maker bases his or her actions or solutions on these
conclusions. The effectiveness of a model depends upon the logical analysis used in drawing
conclusions and the abstraction of critical variables. In our factory example, the decision-
maker may decide that an interest rate of 12% matches the annual monetary opportunity cost
for their firm. They can make their decision on the construction of the factory building by
calculating the present value of the cash flows and would not have to consider the alternative
uses for which the funds could be used in detail.

2.1.5 ERRORS
Generally, there are two possible types of errors in decision-making to start with. The
decision-maker can make a mistake in applying logic to the reasoning process from premise to
conclusion. In the example, funds may be obtainable at the cost of 12%, but management may
have decided not to raise any new capital. The premise that one can use the interest rate to
represent an opportunity cost is valid, but the conclusion that the use of the interest rate
applies to all investments is erroneous.
Secondly, there may be a mistake in selecting the variables or the variables selected may
not be adequate for the construction of the model. In our example, the decision-maker has
taken into account the time value of money but has ignored the risk element that is associated
with the use of money. It is not possible to eliminate errors of this type altogether because it
would amount to a consideration of conceivable pertinent variables and would preclude
decisive actions. Abstraction does violate reality to some extent but it is a necessary condition
for problem-solving. This is one reason why decision-making carries with it the possibility of
errors.

2.1.6 MODEL-BUILDING TECHNIQUES

There are several ways of representing the models. Commonplace, repetitive problems such as
eating, walking and opening doors are a matter of informal and intuitive thinking in the mind
of the decision-maker. Such problems are resolved without the aid of a formal model. If the
problem is somewhat more complex or unusual, we spend more time on it. It is possible to
speed to the selection of the important elements of the problem and proceed to examine and
experiment with them. The nature of the variables determines the techniques of describing
and relating the selected variables. If the variables are amenable to a quantitative
representation, then there are strong reasons for selecting a mathematical representation of
the model. Mathematics has a theoretical rigor of its own, and so it ensures a certain orderly
procedure on the part of the investigator. It demands specificity with respect to the variables
that have been abstracted and the relationships assumed to exist among them. For example, it
is more difficult to make implicit assumptions in a mathematical model than in a literary
model. Secondly, mathematics is a potent tool for relating variables and for deriving logical
conclusions from the given premises. Mathematics facilitates the solution of problems of
bewildering complexity and also facilitates the decision-making process where quantitative
analysis is applicable.
In the recent past, especially since World War II, a host of business problems have been
quantified with some degree of success, leading to a general approach which has been
designated as operations research. Undoubtedly, the quantitative representation of business
problems is much older that operations research, considering the practices of accountancy.
However, recently the use of quantitative techniques has included all areas of modern
businesses.
A word of caution is necessary for those in business who employ quantitative techniques
for business decisions. The conclusion derived from a mathematical model contains some
degree of error because of the abstraction process. It is a matter of judgement as to when to
modify the conclusion in view of the magnitude of error [4]. Operations research supplements
business judgement; it does not supplant it. Moreover, there are many business problems
which cannot be given a quantitative representation and so they require the use of qualitative
models and solutions. Within the constraint mentioned here, quantitative analysis can become
an extremely productive technique for managerial decision-making. Problems which would
perplex the most experienced executives may, on some occasions, be resolved with relative
ease.

2.2 Marketing Mix—The Traditional 4Ps

The traditional marketing mix model is also known as the 4Ps model which forms the
backbone for developing the marketing strategies required for selling products [5]. These 4 Ps
are:

Product: This is the company’s offering, which can be tangible or intangible, that is
being sold. The company can be selling something physical or providing a service.
Historically [5], the notion was that a good product will sell itself. However, at present
there are no or very few unsuitable products in the competitive market. There are many
laws giving the consumer the right to return products that they perceive as
bad/unsafe/unfit. For businesses, packaging is the most important parameter. Other
parameters that go into making of a product are design, quality, size, brand name,
warranties, services and returns.
Price: Price is the charge for the product/service being offered. The customer is often
sensitive to price discounts and special offers. Thus, pricing is a balancing act between
what the company charges, what are the prices set by the competitor and what the
prospective consumers will pay for products or services. Price also has an irrational side,
i.e. something that is expensive must be good; therefore, underpricing may lead to people
thinking that the product is of low quality because of the belief “You get what you pay
for”. However, charging too much will result in people thinking that the product is out of
their reach. So, the firm must assess the market factors and develop a pricing strategy
that gives it a fair share of revenue while providing real value for its consumers.
Allowances, payment periods, credit terms are also a part of pricing.
Place: Here companies are looking for the answer to the question, how will customers
acquire a product or a service? Place brings the firm’s products or services to the target
audience. Place is about distribution and convenience. There are certain ways to sell
products or services viz. through established retailers or wholesalers, direct mail or direct
marketing (by telephone) or by using the internet. The availability of products at the
right place, at the right time and in the right quantity has brought a revolution in most
businesses. Location, transportation of inventory, assortments, channels and coverage are
other aspects of place.
Promotion: As competition has intensified it has become a survival tool. Thus, it is
imperative to determine how the customers will learn about the products/services.
Promotion is basically informing and educating the target audience about the
 organization and about its products or services. This includes all weapons in the
marketing arsenal such as sales promotion, advertisement, public relations, direct
marketing (door to door) and many more.

2.3 Modern Concept of the Marketing Mix

As we cited before, the advertising mix is predominately related to the 4Ps of advertising and
marketing, the 7Ps and the 4Cs theories developed in the 1990s [5]. At present, the marketing
mix also includes three more Ps in which people and process are explicit whereas physical
evidence is an implicit function [6, 7].

People: People form an important dimension for marketing of services, as the service
provider has to provide the right product to the customers. After all, the customers are
likely to be loyal to the organization if it serves them well. For integrated marketing
efforts, the company instills marketing orientation in the people who deliver goods and
services.
Process: This refers to the process by which a customer is served with a desired product.
It includes procedure, mechanisms, flow of activities and routines which remain within
the organization. The decisions in service process include technology, specific equipment,
location and layout. Effective marketing must communicate through the right processes
so that customer convenience is paramount.
Physical Evidence: A customer needs the service, but it is also important how the
service is offered. When people exchange services as in the case of hotels, airports, etc.,
the provision of adequate facilities becomes more important. The second part of physical
evidence is peripherals which are controllable parts; the uncontrollable part is the actual
service as it is qualitative. Today customers require good presentation and standards
when a service is being provided to them. The means and environment in which the
service is delivered comprise both of; tangible and intangible goods and the ability of the
business to provide customer satisfaction.

These seven prospects comprise the modern extended marketing mix that is particularly
relevant in the service industry. Thus, the 7Ps are the major factors that influence the
availability of the service and people’s behavior in using the service. With the changing
marketing scenario, the people who are delivering the service have become as important a
factor as the service itself.
The 4Cs marketing model has been proposed by Lauterborn [8]. It is a modification of the
4Ps model in which product should be customer value; price can be the cost the customer is
willing to pay; place is replaced with convenience and promotion is replaced with
communication. The components of his marketing model are:
 Customer: According to the modern concept of marketing, the marketer must emphasize
the development of goods and services which can satisfy consumer needs and wants, i.e.
companies should focus on production of such goods which have attached value to
satisfy their potential purchasers.
Cost: Firms should focus on cost as a whole rather than just on price as the cost in
entirety would include various components including price.
Convenience: Rather than placing goods as per firm’s requirement the emphasis should
be laid on the customer’s convenience, i.e. the goods/services can be procured from any
place at any point in time and any way. The emphasis should be on easy accessibility so
that the product/service can be easily bought.
Communication: Promotional efforts are the one-way communications in which firms
are persuading consumers to buy, which seem to be quite forceful. But the beginning of
the modern era calls for the development of a two-way communication between the
customers and the companies to develop better understanding.

2.4 Development of an Effective Marketing Mix

As soon as the firm has identified its target market and competitors, there comes the task of
creating the appropriate marketing mix, which is based on the 7Ps as previously discussed. As
individuals are unique so the target market to which they belong also requires a unique
marketing mix that can satisfy the consumers at the same time as it helps the firm achieve its
goals. The decisions regarding the marketing mix form the key characteristic of marketing
concept employment. At the starting point, it is easier to briefly examine all of the elements of
the marketing mix so that marketers can develop the understanding that is the essence of
judicious decision-making. Moreover, the understanding can also be used to show potential
prospects of how the firm’s product or service is different and better than their competitors.
Creation of a successful combination of 4Ps that will lead to increased sales may necessitate
some kind of experimentation and research.

2.5 Types of Competition

Competition within and among industries is fiercer today than ever before partly because of
increasing strength of foreign markets. A firm’s marketing strategy is significantly influenced
by the competition it faces. Market structure is determined by the elements of competition
within the market which is determined by the number and types of competitors existing in
the market. However, the pattern of pricing policy also determines the type of market
structure. Based on these two aspects market structure can be classified as pure/perfect
competition or impure/imperfect competition.
2.5.1 PERFECT COMPETITION
In perfectly competitive markets, sellers and purchasers are sufficiently large in number to
ensure that no single enterprise/individual has the strength to impact market prices [9]. This
competition occurs when there is only a marginal difference between the products and
consequently little opportunity to influence price [9]. Organizations in a highly/purely
competitive environment seek clarity to ensure the widespread distribution of their
products/services at a competitive price. Pure competition is characterized as follows [10, 11]:

Existence of many firms: There must exist a significant number of organizations, each of
which controls a very small portion of the total output so that its inclusion or exclusion
from the market has very little or no impact.
Identical products: Each firm has their own particular product/service, but all firms
produce homogeneous products/services.
Independence to enter or exit from the market: Organizations are free to withdraw their
offerings from the market and have an equal opportunity to enter into the market.
Existence of a large number of consumers: A substantially large number of consumers
exists and these potential consumers must have full knowledge of products/services
being offered.
Restriction on influencing pricing decisions: No firm is large enough to impact the price
of products/services in the marketplace and all firms are assumed to sell at a price
determined by the collective efforts.

2.5.2 IMPERFECT COMPETITION

In the imperfect competition scenario, there are a large number of companies that produce
different goods/services which are near substitutes for each other. There are large number of
sellers offering similar but differentiated products and can compete with each other [12]. With
product differentiation, each firm provides goods which are slightly different or which the
customer believes to be different from the competitor’s offering. The product variations may
in fact involve not only the characteristics of the products themselves, but may also include
more attractive wrapping, after purchase services, or free gifts along with the product which
may form the basis for the customer’s preference. Examples include many consumable goods
like tooth paste, soaps, etc. This market composition is very similar to free competition except
for the feature of product differentiation [12].
Imperfect competition can be classified as follows:

1. Pure Monopoly: If a single firm or company is the sole producer of the product and there
is no substitute for that product in the market, then this can be called a case of pure
 monopoly. A well-known example is Indian Railways providing a cheap and easy mode
of transportation. Thus, monopoly exists when one company is the exclusive producer of
particular products/services. Under this monopolistic structure firms are not concerned
about competition as no alternative/substitute exists which can be bought by the
potential consumers.
2. Discriminating Monopoly: Under this structure, the same firm charges different
customers different prices for the same products/services being offered. A common
example is airlines. The airline industry wants to make sure that people have the money
to fly with them, so they need to offer an appropriate pricing policy. But in addition, they
want to discover the proper balance between (a) making sure all of the seats are booked
on a flight and (b) earning enough money to justify all of the fees that cover the costs of
operating the flight.
3. Bilateral Monopoly: This is a situation when a single purchaser without competition
buys a product from a monopolistic seller. These situations are typically analyzed using
the approach of Nash bargaining games, and price and output can be decided by forces
like the bargaining strength of both customer and seller.
4. Oligopoly: Oligopoly occurs where there are a small number of large firms producing a
bulk of the industry’s output and each has the same effect on market price and possibly
on prices of others in the industry and entry and exit of firms affects the market
condition. In this structure, the market is shared between a few firms, and it is said to be
highly concentrated in a few hands. Examples of oligopolistic industry include the steel
and cement industries in India.
5. Duopoly: A duopoly is a type of oligopolistic market structure, characterized by two basic
companies working in a marketplace or industry and generating an equal or comparable
number of products and services. The key components of a duopoly are how the
corporations engage with one another and how they affect each other. This structure is
quite significant owing to the fact that it forces each competing firm to analyze how its
movements can impact its rival. It influences how every agency operates, the way it
produces its items and how it advertises its services and ultimately what and how items
and services are both offered and priced. Examples include Tata Motors and Ashok
Leyland both producing buses and trucks.

2.5.2.1 Application of Game Theory in the Imperfect Competition Scenario

Game theory was developed to evaluate situations where individuals and firms have
conflicting objectives. In oligopoly and duopoly markets, firms must consider the effect of
decisions or anticipate how other firms will respond. Thus, the goal of the firm in the
oligopoly market is to earn economic profits by outguessing their rival firms. Game theory
has helped to more clearly understand how firms behave in the oligopoly market. Game
theory attempts to study decision-making in situations where two or more intelligent
opponents are involved under conditions of conflict and cooperation. Such situations are basic
to oligopoly market structure. Game theory seeks to determine a rivals most profitable
counter strategy to one’s own best move to formulate appropriate defensive measures. For
example, if two firms are involved in a competition to maintain their market share, then a
price cut by the first firm will invite a similar reaction from the second firm. This will, in turn,
affect the sales and profits of the first firm, which will again have to develop a counter
strategy to meet the challenge from the second firm. The game will thus go on. Game theory
helps to determine the best course of action for a firm in view of the expected counter move
from the competitor.
The competitors in the game are called players. A game is thus a competitive situation
where the market players pursue their own interest and no player can detect the outcome.
Games that firms/players play can be of two types:

1. Cooperative games: In this type of game the players can negotiate a binding contract to
plan joint strategies (actions).
2. Non-cooperative games: In this type of game it is not possible to negotiate a binding
contract to plan joint strategies.

It is assumed that there exists interdependencies on each other’s strategies, i.e. the existence of
a number of strategies for each player. Some other assumptions are:

There are a finite number of competitors.

For every player, there exists a finite number of actions called strategies.
The game rules are known to all.
Strategies are not known in advances; they are only disclosed once exercised.
The final result can be either positive, negative or zero.

The positive outcome depicts gain, negative means loss and zero means a no gain, no loss
situation which is generally referred to as a zero-sum game in which the loss of one player is
the gain for another. Hence, zero will be the net result of the whole play. Suppose that there
are two players, P and Q, trying to win over the market share for each other’s products, then
the gain in the market share to P from Q is normally referred as P’s payoff matrix. Implying
that the positive entries in P’s payoff matrix will be a gain in market share and a negative
entry indicates a loss in market share for player P. In a similar manner, one can define the
payoff for player Q by converting the sign of all entries in the payoff matrix of player P.
However, in a positive sum game the gain of one market player is not the loss of their
opponent.
Consider if the advertising strategies of a cigarette company do not induce new customers
into the cigarette smoker(s) group then the total market will remain unaltered irrespective of
the strategies of both P and Q; given this situation P’s gain definitely means Q’s loss and vice
versa which would be a zero-sum game. In contrast, if the firm’s advertisements lead to the
addition of new consumers by converting non-smokers into smokers then a market may
increase without impacting the other consumers. Under such a situation P’s gain may be
entirely from the new customers. Also, it is assumed that both the market players know the
other’s payoff, but they are not aware of the strategy that will be adopted. Furthermore, both
players are expected to play their strategies simultaneously.
Strategy is a complete specification of the plan of action by a firm or player after taking
into consideration all possible reactions of its competitors as they compete for profit or other
advantages. As there are only a few firms in the industry, the actions of each firm affect the
others and the reactions of others must be kept in mind for the first firm while choosing its
own best course of action. There are two strategies:

1. Pure Strategy: If the player or firm selects the same strategy or only one course of action
every time in response to the competitor’s action, this is called pure strategy. Use of this
type of strategy requires that each player has complete knowledge of the strategy of their
opponents.
2. Mixed Strategy: In many games pure strategy would be a very poor choice. The use of
mixed strategy means that players do not use a single strategy but mix of strategies.
Mixed strategy is used to reduce cost.

The payoff is the result or outcome of the strategy. For each strategy adopted by a firm, there
are usually a number of strategies available to the rival firm. The payoff is an outcome or
consequence of each combination of strategy by the two firms. The payoff is usually
expressed in terms of profits or losses of the firm. As a result of a firm’s strategies and their
rival’s responses, the table giving the payoff from all strategies open to the firm and their
rival’s responses is called the payoff matrix. On the basis of payoff, the course of action or
plan which puts the player or firm in the most preferred position irrespective of the strategies
of their competitors is called its optimum strategy. Any deviation from this strategy results in
a decreased payoff for the player.
How can a firm choose its optimal strategy? A particular strategy may be successful or
more profitable if competitors make a particular choice or decision but will not be successful
or profitable if they make other choices. However, the dominant strategy is one which will be
successful or optimal for a firm regardless of what other firms do. It is that strategy which will
be most beneficial to the firm no matter what strategy the rival firms adopt. It is the optimal
choice for the player no matter the opponent does.
Consider an example of two firms, A and B, in which each has two options whether to
advertise or not to advertise and the corresponding payoff matrix is given in Table 2.1.
Now let us understand and evaluate the best strategy for both firms. A expects higher profit
if it advertises than if it does not. Let us consider A first. If firm B advertises then firm A has
two option, i.e. if it does advertise it will have a profit of 4 and if it does not it will have a
profit of 2. Therefore, firm A should advertise if firm B does. Secondly, if firm B does not
advertise then firm A will have a profit of 5 if it advertises and 3 if it does not advertise. Thus,
firm A should advertise irrespective of whether firm B advertises or not. Hence the dominant
strategy for firm A is to advertise. Similarly, if we analyze firm B’s strategy given the strategy
of firm A, we will find that firm B has the dominant strategy to advertise irrespective of what
strategy firm A selects. Thus, in this case both firm A and firm B have a dominant strategy of
advertising.

TABLE 2.1 Payoff Matrix for an Advertising Game (Profit)

Firm B
Advertise Don’t Advertise
Firm A Advertise 4; 3 5; 1
Don’t Advertise 2; 5 3; 2

This example pertains to the case of dominant strategy but other situations may also occur.
In the literature on optimization and decision-making, many examples exist for solving game
theory-based problems but these can only be applied when the number of players is small
which is a major limitation. Still, this technique can be applied in price determination, new
product introduction and understanding the producer and distributor business relation. It can
also highlight the optimal mode of advertising that a firm can choose.

2.6 Problems for Self-Assessment

i. Explain the role of decision-making.

ii. Describe the 4Ps of marketing.
iii. What is the 4Cs model as given by Lauterborn?
iv. Differentiate between the modern marketing mix and the traditional marketing mix
concepts.

References
1. Ailawadi, K. L., Lehmann, D. R., & Neslin, S. A. (2001). Market response to a major policy
change in the marketing mix: Learning from Procter & Gamble’s value pricing strategy.
Journal of Marketing, 65(1), 44–61.
2. Koontz, H., & O’Donnell, C. (1976). Management: A systems and contingency analysis of
managerial functions. Book World Promotions.
3. Janis, I. L., & Mann, L. (1977). Decision making: A psychological analysis of conflict, choice,
and commitment. Free Press.
4. Brooksbank, R. (1994). The anatomy of marketing positioning strategy. Marketing
Intelligence & Planning, 12(4), 10–14.
5. Jackson, G., & Ahuja, V. (2016). Dawn of the digital age and the evolution of the marketing
mix. Journal of Direct, Data and Digital Marketing Practice, 17(3), 170–186.
6. Grönroos, C. (1995). Relationship marketing: The strategy continuum. Journal of the
Academy of Marketing Science, 23(4), 252–254.
7. Smith, K. T. (2003). The marketing mix of IMC: A move from the 4 P’s to the 4C’s. Journal
of Integrated Marketing Communications, 1–3.
8. Lauterborn, B. (1990). New marketing litany: Four Ps passé: C-words take over. Advertising
Age, 61(41), 26.
9. Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse selection.
Econometrica, 85(1), 67–105.
10. McNulty, P. J. (1967). A note on the history of perfect competition. Journal of Political
Economy, 75(4, Part 1), 395–399.
11. Makowski, L., & Ostroy, J. M. (2001). Perfect competition and the creativity of the market.
Journal of Economic Literature, 39(2), 479–535.
12. Mahoney, N., & Weyl, E. G. (2017). Imperfect competition in selection markets. Review of
Economics and Statistics, 99(4), 637–651.
3 Understanding the Consumer’s
Perspective
Key to firms’ survival is understanding consumer behavior.

A dynamically changing market environment and intensified competition forces marketers to

come up with new products. The products that are offered may be slightly different from the
existing alternatives, some may be slightly different, and some may be totally new. These
products fall under the purview of “innovation” and the products and services are referred to
as “innovative products/services”. The penetration/spread and the way this new product or
service will cater to the market is described by the innovation diffusion process [1]. The
outlook is understanding the base of innovation diffusion aspect and the consumer viewpoint.

3.1 External–Internal Influence Diffusion Model

The success of any firm depends on its customer base in the marketplace which consists of all
the individuals and entities/units that play a significant role in making a decision regarding
the purchase of products or services. There exist different kinds of participants in the market
which include actual users (those who buy and use the product for themselves), buyers (those
who purchase the product) and also people who motivate others to make purchase decisions
[2]. All of these come under the broad term adopters which means that of the adopters some
can be users whereas some are just buyers.
Successful products pave the way for growth of the firm. At the same time, however, the
amount of risk involved in developing and promoting a new product with regard to financial
losses is also formidable which can be minimized by using a quantitative decision-making
approach. Diffusion theory can be used and is the most widely used technique for modeling
the life cycle of innovative products from the time of their launch in the market to the time of
their obsolesce. The theory of innovation diffusion relates how a new idea, a new product or a
service is accepted into a social system over time [3].
With the introduction and development of a new product, the next important aspect is to
focus on the diffusion aspect of an innovation. It means studying the pattern in which the
adoption will occur in the marketplace. Generally, there exist two factors impacting the sales
of the product which are internal and external factors. When the sales are impacted only by
the promotional activities carried out by the organizations then the sales are only because of
external factors whereas if the only driving force for adoption is because of word of mouth
communication or the experience of purchasers then sales are because of internal factors.
The following are some basic notation:

: Expected number of adopters by time't'

: Expected number of potential adopters
: Coefficient of external influence
: Coefficient of internal influence

3.1.1 EXTERNAL INFLUENCE MODEL

The model describes an exponential cumulative adoption curve [2]. The basic external
influence model is governed by the following differential equation:

(3.1)

Solving the above differential equation under the initial condition we have:

(3.2)

3.1.2 INTERNAL INFLUENCE MODEL

The basic internal influence model is governed by the following differential equation [2]:

(3.3)

Solving the above differential equation under the initial condition we have:

(3.4)

The model describes an S-shaped cumulative adoption curve (logistic curve).

3.1.3 MIXED INFLUENCE MODEL—THE BASS MODEL

As every model is based on a certain set of assumptions, the Bass model [4], one of the most
quoted aggregated diffusion models in marketing literature, was developed based on some
assumptions:

Assumption 1. The diffusion process is a binary process and the population is homogeneous.
 Assumption 2. The population of adopters does not vary.
Assumption 3. The parameters of external and internal influence do not change.
Assumption 4. Only one adoption per adopter is permitted.
Assumption 5. Geographical frontiers do not alter.
Assumption 6. The innovation is diffused in isolation
Assumption 7. The characteristics of an innovation or its perception do not change.
Assumption 8. There are no supply restrictions.
Assumption 9. The impact of marketing strategies is implicitly captured by the model
parameters.

The innovation diffusion model (IDM) assumes that there exists a finite population of
prospective buyers who with time increasingly adopt the product. The buyers can be
categorized as innovators andimitators depending upon the mode through which they
receive information about the product. People who have already bought do not influence the
innovators in the timing of their purchase but innovators may be affected by the steady flow
of non-personal promotion. As the process continues the relative number of innovators will
diminish monotonically with time. However, imitators are influenced by the number of
previous buyers and increase in number relative to the number of innovators as the process
continues. The differential equation can be given as follows:

(3.5)

The solution of the above differential equation for initial condition , can be given as
follows:

(3.6)

The plot of marginal adoptions over time, i.e. the non-cumulative adopter distribution peaks
at time ; this is the point of inflection of the S-shaped cumulative adoption curve which
can enable the managers to solve an important concern of new products by determining the
time to peak sales ( ) and magnitude ( ). The Bass model [4] shows that the time to
peak and magnitude as:

(3.7)

and maximum sales at a point given by:

(3.8)
For these reasons the Bass model [4] has sparked considerable research interest among
consumer behavior and marketing scientists. This model has acted as a platform for further
extensions and has also helped in classifying adopters into different categories based on their
time to adopt the product.

3.2 Adopters Categorization

French sociologist Gabriel Tarde [5] originally claimed that sociology was based on small
psychological interactions among individuals, especially imitation and innovation. This
process has been studied extensively in the scholarly literature from a variety of viewpoints,
most notably in Everett Rogers [3, 6] classic book, The Diffusion of Innovations. Rogers
proposed that the distribution of adoption of any innovation over time approached normality.
At some point customers begin to demand and the product growth increases more rapidly.
New incremental innovations or changes to the product allow growth to continue.
Towards the end of a product’s life cycle growth slows and may even begin to decline. In
the later stages, no amount of new investment in that product will yield a normal rate of
return. Using a bell curve, Rogers [6] categorized adopters of any new innovation as:

Innovators—are the first to buy and are typically described as venturesome, younger,
well-educated, financially stable and willing to take risks.
Early adopters—are local opinion leaders who read magazines and who are more
integrated into the social system than the average consumer.
Early majority—solid, middle-class consumers who are more deliberate and cautious.
Late majority—described as older, more conservative, traditional and skeptical of new
products.
Laggards—resist change, like tradition, are conservative and are often older have a lower
socioeconomic status.

Making use of (3.6), (3.7) and (3.8) the mathematical equation for the number of adopters can
be obtained as given in Table 3.1.
FIGURE 3.1 Adoption categorization.
Source: Rogers [6]

TABLE 3.1 Analytical Categorization of Adopters

Source: Mahajan et al. [7]

3.3 Alternative Formulation to the Bass Model

The Bass model [4] and its revised form [8] have been used for forecasting innovation
diffusion in retail service, industrial technology and agricultural, educational, pharmaceutical
and consumer durable goods markets and successfully predicts the actual shape of the
diffusion curve and the timing and magnitude of its peak sales for a number of products. The
alternate solution of the Bass model proposed by Kapur et al [8] uses a logistic function to
denote the rate of adoption per remaining adopter.
In the last decade, communication media have become strong entities with significant
influence on our lives. Also because of the development of technology such as mobile phones
the expression of thoughts and experiences has become easier and faster. Therefore, it has
become difficult to categorize adopters as an innovator or an imitator. Most of the imitators
get exposed to media promoting the product. Moreover, an innovator may by chance or by
choice be able to get an opinion on the product from a purchaser. Hence an individual
estimation of innovation and imitation coefficients is very difficult in the present times.
The parameters of logistic function describe the adopter’s behavioral aspects prevailing in
the market avoiding the distinction between the adopters as innovators and imitators. The
mathematical equation (3.5) describing the Bass model [4] can be written as:

(3.9)

(3.10)

The Bass model was derived alternatively [8] by changing the mathematical form of the rate
of adoption per remaining adopters denoted by . Flexibility in the Bass Model is captured
by proposing a logistic time dependent form for , given by

(3.11)

Consequently, the diffusion model as given in equation (3.10) takes the following form:

(3.12)

Solving equation (3.12) with the initial boundary condition we get

(3.13)

Substituting and we observe that equation (3.13) is identical to equation

(3.6). The S-shape in the cumulative adoption curve is created by the S-shaped . The major
benefit of the alternative derivation of the Bass model [4] is that it simplifies further extension
of the model. How the alternative derivation of the Bass model [4] can be used to extend the
model by relaxing some simplified assumptions of the Bass model [4] is discussed in the
following section.

3.4 Market Expansion Strategies

One of the simplifying assumptions of the Bass model [4] is that the number of potential
adopters is constant at the time of product launch and remains the same over the life cycle of
the product. However, this is not a practical situation where the total number of potential
adopters keeps on changing. Several promotional activities are being conducted by marketers
to promote a firms’ product in order to make more and more customers aware of the product
presence and value and to persuade them to make a purchase. With an efficient promotional
campaign, they are able to stimulate a large proportion of the population as compared to the
initial prediction made. An increasing trend is observed in the population of potential
adopters. Increase in the population and the purchasing power of the population and changes
in government policies can be some of the potential aspects accounting for an increase in
market size over time.
Mahajan et al. [2] described dynamic diffusion models in which the market was growing
with the passage of time. Yet these models were complex and researchers could try only one
form. However, using the alternative formulation of the Bass model it is simple to obtain a
closed form solution of the models incorporating these forms and several other forms with
respect to time.
An important phenomenon observed during the diffusion process is the possibility of repeat
purchasing. The existing adopters may repurchase a number of products for a second or for a
greater number of times. Therefore, the increase in number of purchasers of a new product
can be because of both first purchase and repeat purchase. Several firms are more interested in
estimating the increase in number of adopters because of repeat purchasing as they may
become the loyal customers of the product. For consumer durable products, repeat purchasing
is observed during the later stages of the product life cycle. The Bass model [4] assumes that
each adopter buys only one product, and hence may provide a wrong estimate of the number
of potential buyers for products which can be repurchased. Thus, the equation for the same is:

(3.14)

On solving this with different types of mathematical forms of the following expressions
are obtained.
Form-I: When the market expands exponentially, i.e. ; using this in equation
(3.14) and with the help of initial conditions:

(3.15)

Form-II: The growth in market with the passage of time, i.e. ; using this in
equation (3.14) and solving further leads to:

(3.16)

Form-III: The increase in initial market size because of repeat purchases, i.e.
 ; on considering in the differential equation (3.14) and under boundary
condition leads to:

(3.17)

Equations (3.15), (3.16) and (3.17) represent the cumulative number of adopters at any time
point 't' when the market is expanding.

3.5 Consumer Buying Behavior

At this moment, we are all consumers and each one of us is unique. This can be because of
differing information that we receive regarding products/services being offered which shapes
diverse opinions. Developing an understanding of consumer behavior has become vital for a
firm’s survival. The major point in consumer behavior is “what”, “how” and “when”
consumers buy and from “where” they buy. We all have different needs as we have different
family structure, income, etc. which influence us to acquire different products or services
making it important for marketers to know the consumer behavior [9]. There are several
reasons:

At first it is important to know the reaction of the purchaser to the current marketing
strategy because this has a great influence on success.
The firm can recreate the same strategy to satisfy customer needs.
It is much easier for the marketer, if they know about the buying behaviors, to predict
the reaction of consumers to upcoming marketing strategies.
It helps determine who should be focused upon, i.e. the buyer or the user of the product,
as many times the people who buy don’t consume or use the product.

Some factors which influence consumer behavior [9]:

1. Social Groups: Different social groups have different impacts on consumer behavior.

Reference Group: This becomes the reference base for making comparisons or
contrasts and to evaluate one’s appearance and performance.
Family roles: The members of a family influence the decision-making process in the
purchase of different products.
Social Class: This is determined by occupation, income, education, wealth and other
variables. People within a given social class tend to possess identical buying
behaviors.
 2. Cultural: The culture refers to the way of life of the people. It refers to social
phenomenon [9, 10].
3. Personal: It consists of many factors: age and life cycle stage, education level,
occupation, income, lifestyle and personality.
4. Psychological: It consists of motivation, perception, beliefs, attitude and learning.

A large number of factors contribute in impacting consumer behavior. Figure 3.2 describes
that attitude and motivation are influential factors shaping the act of purchasing.
This model is the work of Nicosia [10] which is based upon understanding the relationship
between the organizations and its potential buyers. Following are the basic assumptions:

1. The rate of change of the level of buying of a brand X at time 't' is a function of the level
of a consumer’s motivation 'M' toward that brand and the level of buying 'B' at time 't'.
2. The level of a consumer’s motivation 'M' towards brand X at time 't' is a function of the
level of a consumer’s attitude 'A' towards that brand at time 't'.
3. The rate of change of the level of a consumer’s attitude towards brand X at time 't' is a
function of their level of buying B of that brand, level of attitude 'A' towards that brand
and level of communication 'C' of that brand at time 't'.
4. The level of communication 'C' at time 't' is not a variable of consumer decision process
but is rather an exogenous variable.
FIGURE 3.2 Information flow in shaping consumer behavior.
Source: Nicosia [10]

The layout for the decision process for a purchaser of brand X can be described as follows:

(3.18)

The coefficient 'b' in equation (3.18) determines how rapidly the consumer will resolve the
conflict (i.e. the difference) between the level of buying 'B' times with the level of
motivation 'M'.

(3.19)

The coefficient 'm' in equation (3.19) describes search and evaluation procedures of field-2 as
depicted in Figure 3.2.

(3.20)

The analog is meaning and assumptions for coefficient 'a' as applied to equation (3.18) for
coefficient 'b'. The coefficient 'c' determines the impact of advertising 'C' on the rate of change
in the level of attitude towards the advertising brand.

(3.21)

where all the assumed variables have positive values and all the coefficients are constant, i.e.
have constant values. Also, a steady situation can occur where everything
remains unchanged.
Equation (3.18) and (3.21) can be rewritten as:

(3.22)

(3.23)

On equilibrium, equation (3.22) reduces to

(3.24)

If the coefficient then the level of buying would decrease as the motivation is
increased. Similarly, for equation (3.23) in the absence of an external influence such as
advertising then the coefficient establishes the relation as:
 (3.25)

where can be termed as the behavior coefficient which measures the level of attitude.

Differentiating equation (3.18) we get:

(3.26)

Differentiating equation (3.19) we have

(3.27)

Equation (3.26) in equation (3.27) we have:

(3.28)

Equation (3.28) can be rewritten as:

(3.29)

On further substituting (3.23) in (3.29) we have:

(3.30)

Equation (3.22) can be rewritten as:

(3.31)

Combining equation (3.31) and (3.19) results into:

(3.32)

Hence on putting equation (3.32) in (3.30) we have:

(3.33)

Simplified as:

(3.34)
which is a non-homogeneous differential equation with constant coefficients. The complete
solution can be obtained as follows:

(3.35)

Equation (3.35) represents the general solution for equation (3.34).

3.6 New Product Development

There can be several reasons for the coming up with a new product which may or may not
exist in the market [1]. Some of them are:

1. Organizations may want to make use of capacity which is not utilized by the present
production processes for their major products, i.e. they have surplus capacity in terms of
machine hours or manpower and the firms are interested in utilizing this surplus
capacity.
2. Organizations may be interested in expansion; they may have surplus money and instead
of investing this money in a bank or in giving loans they can invest in new products so
that extra profit can be earned. If they don’t have surplus money, they can float shares
and debentures. The money received can be utilized to make new products.
3. Organizations may be interested in the potential of a product in the market; it may be a
new product for the organization but not for the market.

Once a firm has decided to start the new product, then the product development has to go
through different stages. These are:

i. Product Idea Generation: When management is seeking an idea for development of

new product, i.e. which product can be produced with the different resources available.
The major sources of new product idea generation can be: customers, competitors, the
company’s salesman and the company’s top-executives. The goal is to collect as many
ideas as possible to satisfy the needs arising in the market.
ii. Product Search or Utility Measure: Here management may have in mind different
products that can be produced (from the 1st stage). To consider only a few out of the
many products, management uses a search or filter process to discard most of the
products and select only few. The search for a product begins by focusing on the general
acceptability of each of the ideas which has been put forth. This can be done by
considering the utility measure; by utility measure we mean how much utility a product
has for a particular firm.
 In order to get deep insights for this stage let us consider the following case:
When the question of acceptability develops, utility as a measure can be considered. So,
define the utility measures for all the potential product ideas for a particular firm and
arrange these product ideas with respect to their utilities. The one with high utility can
be selected.
The Utility Measure has three major factors:

1. Production ability: For each product idea try to ask different questions and then try
to associate different categories starting from very good to very poor based on their
capabilities in terms of Equipment, Personnel (technical know-how) and kind of
Raw Materials required.
2. Marketability: In terms of marketability one might be concerned with the following:
relationship to the present distribution channels, competitive quality–price
relationship and effect on sales of existing products.
3. Durability: Here durability of the product may be evaluated in terms of: size of the
potential market, resistance to economic fluctuations and the product’s life cycle.

Once the various levels for each of the factors have been defined then we scale these
numerically in an arbitrary but consistent fashion which indicates their relative worth. For the
sake of simplicity, we assign these weights as 10, 8, 6, 4 and 2 respectively to Very Good,
Good, Average, Poor and Very Poor. To weight the factors numerically, we might simply
divide 100 units of worth among the factors according to the decision maker’s estimate of
their relative importance to the organization’s objective. The overall utility measure can thus
be obtained by multiplying the factor weight, the weight attached to a particular level and the
probability of achieving that level and summing across all factors and levels. After obtaining
the utility measure for each product idea then we arrange these product ideas according to
descending order of their utility measure. The upper 10% are retained for further analysis; the
remaining 90% are rejected according to the value of utility measure. This acts as a filtering
device.

iii. Product Evaluation: After filtration, a quantitative analysis of each is performed with
the help of break-even analysis. In this, the company attempts to determine the quantity
of the product which it will have to sell in order to break even, i.e. where the total cost is
equal to the total revenue and hence no profit.
iv. Product Development/Product Planning: When a product is selected with the help of
the above three stages, then a list of activities has to be performed until it comes to
market. This is done with the help of PERT (Program Evaluation Review Technique) and
CPM (Critical Path Method). Here, the aim is to reduce the time of different activities
which ultimately reduces the time for a product to come to market. All this comes under
 Product Planning.

3.7 Problems for Self-Assessment

i. Describe the various factors that shape consumer behavior for an innovation.
ii. What can be the possible reasons for coming up with a new product in marketplace?
iii. Describe the mathematical structure to measure the sales of the product under the mixed
influence criteria.
iv. What are the possible ways of categorizing adopters into different categories?

References
1. Loury, G. C. (1979). Market structure and innovation. Quarterly Journal of Economics, 93(3),
395–410.
2. Mahajan, V., Muller, E., & Bass, F. M. (1990). New product diffusion models in marketing: A
review and directions for research. Journal of Marketing, 54(1), 1–26.
3. Rogers, E. M. (2002). Diffusion of preventive innovations. Addictive Behaviors, 27(6), 989–
993.
4. Bass, F. M. (1969). A new product growth for model consumer durables. Management
Science, 15(5), 215–227.
5. Tarde, G. 1903. The laws of imitation. New York: Holt, Rinehart and Winston Inc.
6. Rogers Everett, M. (1995). Diffusion of innovations (12th ed.). New York: Free Press.
7. Mahajan, V., Muller, E., & Srivastava, R. K. (1990). Determination of adopter categories by
using innovation diffusion models. Journal of Marketing Research, 27(1), 37–50.
8. Kapur, P. K., Bardhan, A. K., & Jha, P. C. (2004). An alternative formulation of innovation
diffusion model and its extension. In V. K. Kapoor (Ed.), Mathematics and information
theory (pp. 17–23). New Delhi: Anamaya Publication.
9. Howard, J. A. (1977). Consumer behavior: Application of theory (Vol. 325). New York:
McGraw-Hill.
10. Nicosia, F. M. (1966). Consumer decision process. Eaglewood Cliff, NJ: Prentice-Hall.
4 Product and Brand Management
Product acts as remembrance whereas Brand is a promise.

In the field of marketing, product management relates to the manner in which the marketers
plan, forecast and look for the product’s production. It also describes how the product will be
marketed in its different phases. On the other hand, brand management is the controlled and
planned analysis of the manner in which the brand will be recognized and perceived. With
the aim of understanding and developing knowledge of these both theoretical and quantitative
aspects are presented.

4.1 Product Life Cycle (PLC)

An important concept in the field of marketing management, PLC depicts different phases
through which a product passes from the point it is perceived until its final removal from the
market. It is not always the case that every product will reach the end of its life cycle but
some may continue to grow and others rise and fall.
Traditionally, PLC was portrayed as a bell-shaped curve, but owing to advances it can now
depict three different patterns as laid by Kotler et al. [1] and Rink et al. [6]; viz. “Style”,
“Fashion” and “Fad”. In general, during the launch or development of a product in the market,
it has to pass through four stages:

FIGURE 4.1 Life cycle of a product.

Source: Kotler et al. [1]

Introduction: In this stage, competition is almost negligible until the time competitor’s
offerings exist in the market. Following are some highlights:

i. The growth in the sales volume is at a lower rate because of lack of knowledge or
popularity of the product.
ii. High expenditures have to be incurred on advertising and other promotional
techniques.
iii. Prices are highest in this stage because of small-scale production, technological
problems and heavy promotional expenditures.
iv. The market is limited owing to lack of innovation knowledge.

Growth: As the product gains popularity, it moves into the second phase of its life cycle,
namely, the growth stage. The marketing management focuses its attention on improving
the market share by deeper penetration into the existing markets or by entering into new
markets. The failing ratio of promotional activities expenditure to sales leads to increases
in profitability during this stage. In this phase:

i. Demand expands rapidly because of the product’s popularity.

ii. Prices fall because of less expenditure in the promotional sector.
iii. Competition increases because the competitors enter the market looking at the
popularity of the product.
iv. Distribution is widened.

Maturity: As the competition intensifies, the product enters the maturity stage. Sooner
or later, demand for the product is generated in the market. Product differentiation,
identification of new segments and product improvement are emphasized during this
stage. Some key aspects are:

i. Profit decreases because of stiff competition

ii. Marketing expenditure (promotional expenditure) increases.
iii. Prices are decreased owing to competition and innovation in technology
iv. There is market saturation as there is the possibility of sales increase.

Decline: This is characterized by either the product’s gradual displacement by some new
technological advancement or by changing consumer buying behavior. Basic features of
this phase are:

i. The sales decrease sharply and expenditure on promotion has to be decreased

 drastically.
ii. The decline may be rapid with the product soon passing out of the market or slow if
new uses for the product are found.
iii. Market saturation and/or competition.
iv. Decline in profits and weaker cash flows.

The preceding discussion is based on traditional aspects but as per the recent scenario:

Style: This pattern is being observed in all those products in which new designs, types,
varieties and techniques are included from time to time to enhance adoptability. Further,
the product in this policy never reaches the end of its life and some modified version of
the same category reappears before the decline phase can be reached.

Fashion: Products which follow the current trend generally follow this kind of PLC
pattern. In this category some products can have short or long life depending upon the
customer base the product is able to acquire.
Fade: This particular pattern is suitable for short-life products whose sales are stimulated
by hype from different promotional tools and techniques. Mostly, this situation describes
the occurrence of a sudden peak in sales which may arise and went depart very quickly.

FIGURE 4.2 Different pattern of product life cycle.

Source: Kotler et al. [1]
4.2 Product Line
Product line is the cluster of interrelated products sold and managed under one canopy, i.e. a
company producing somewhat similar products which are sold, managed, promoted or priced
under same brand name or different brand name but similar manufacturer. Correspondingly,
the pool of potential customers is also somewhat the same. Mostly, this technique is adopted
to expand the firm’s business by increasing the number of products under a similar brand
name. In this way, it significantly reduces switching to other brands. Also, the customers who
are brand loyal may prefer the entire product falling under a similar brand name or
manufactured by a similar company with a different brand name.
Several examples of Product Line are:

i. Colgate toothpaste which was further extended to Colgate active salt toothpaste, i.e. the
same category of toothpaste but extended the production line.
ii. Products manufactured and sold by HUL, which has different lines as detergent,
cosmetics, etc. and includes a list of brands, namely Lux, Surf Excel, Rin, Fair & Lovely,
Vaseline, Dove, Clinic Plus and many more.

4.3 Product Mix Strategies

Product mix refers to amalgamation of various features about the product or service to be
offered for selling. It involves decisions concerning the quality, size, range, package, brand
name, label and service, etc. In other words, it is a collection of different product lines owned
and operated by a particular company. It is often seen that the same company has products in
different product categories; the well-known brand Nike offers a mix of apparels, footwear
and accessories.
Some main components need to be focused upon are:

i. The range of products to be offered for selling.

ii. The firm may decide to sell a complete set of products or one or two products only.
iii. The brand name of the product.
iv. The packaging of the product.
v. The label on the package or product.

Product mix has several dimensions and the most important ones include width, length, depth
and consistency. In brief:

1. Width: The width of a company’s product mix pertains to the number of product lines
that a company offers. For example, if an organization has three product lines then its
 width is three.
2. Length: Product mix length pertains to the number of total products or items in a
company’s product mix. If a company has two product lines and two products within
each product line then the length would be four.
3. Depth: Depth of a product mix refers to the number of variants in each product line. For
example, in a case in which the company sells two sizes and three flavors of soft drinks,
this it has a depth of six.
4. Consistency: Product mix consistency pertains to how closely related the product lines
are to one another which can be in terms of use, production and distribution.

These four product mix dimensions show how a firm can grow and expand into business.
Product selection is as important as the product you are selling. Firms need to strike a balance
between giving customer’s choice and trying to cater to everyone.

4.4 Concept of Multi Generations of a Product

A recent pedagogy adopted by marketers is to provide product in generations so that they are
able to maintain market share. At the same time the sales may increase as some consumers
may perceive each generation as new product. This ideology is not only focused on
consumables but on high technology products. The clearest examples are from the area of
information technology and the telecommunication industry. Also, the time gap between
successive generations of products is decreasing and the replacement of earlier technologies
with the latest one is occurring quite frequently.
With compatibility no longer a problem area for major product categories, consumers today
have more choices and the opportunity to choose from new as well as older generations of a
technology after evaluating the prices, utilities, risk, etc. In addition, there are also repeat
purchasers who upgrade their older technologies with the latest one, increasing the potential
market size. The factors involved in these two kinds of adoptions can be very different. As a
result, it has become strategically more important to study the technological changes and the
growth rate of consumer preference towards a generation and the corresponding market
behavior.
FIGURE 4.3 Diffusion curves for two successive generations of Apple’s iPhone.

4.4.1 A FRAMEWORK BY NORTON AND BASS

The Norton and Bass [2] model was the first model used to explicitly describe the diffusion
process of the sequence in the diffusion of separate generations. For a sequence of
technological generations described through the Norton and Bass model, Jaakkola et al. [3]
have observed a certain diffusion pattern and have depicted the following observations:

The rapid adoption phase or growth phase (i.e. the change point of lower strata of
adoption to the higher strata) of a new technology generation is shorter than that of the
earlier generation.
Any variation in the diffusion of a new technology is more noticeable than that of the
old technology.
The market potential is monotonically increasing from generation to generation These
changes can be well explained by the word-of-mouth communication effect, better
performance level of the latest generations, etc.

The original Bass model is for a single generation and it assumes that a fixed adopter
population can be divided into two groups: innovators and imitators. Norton and Bass
extended this result for multiple generations of products. The Norton—Bass model equations
for two generations are:

(4.1)

(4.2)
where equation (4.1) represents the diffusion equation of the first-generation product and
equation (4.2) that of the second-generation product. Also, is the shipment of
generation product at time 't' and represents the fraction of adoption for the
generation product at time 't', which is a cumulative Bass distribution of the form

(4.3)

and is the population served by the generation product. The coefficients

determine the rate of diffusion of an innovation and these coefficients remain constant over a
sequence of generations.

4.5 Concept of Brand and Its Name Selection

Brand is something that exists in your head and is a promise that links product/service to the
consumer. It is something that is able to differentiate one’s offerings from others with similar
products/services. It creates a distinguishable image which identifies the seller or
manufacturer. These differences may be functional, rational or tangible related to the product
performance of the brand. Branding distinguishes goods of one company from another.
Consumers learn about brands from past experience or marketing programs. Brand can be
defined as “a word, symbol or a letter which creates its distinct image in consumer mind”, but
it is more than an identification mark. A brand name can be protected through registered
trademarks; a manufacturing process can be protected through patents and packaging can be
protected through copyrights and design.

Functions of Brand

1. It helps in product handling and tracking.

2. It helps in inventory organization and accounting records.
3. Brand help firms get legal protection for the unique features included in the product.
4. Brand displays a certain level of quality so that the buyers can choose the product again.
5. Brand loyalty provides predictability and security of demand for the firm.
6. Branding is used as a powerful method of gaining a competitive advantage.

Creation of brand signifies:

i. Attributes: A brand brings to mind attributes such as well-built, durable, prestigious,

well-engineered and many more.
 ii. Benefits: Attributes are translated into functional and emotional benefits.
iii. Values: The brand speaks about the producer’s value.
iv. Culture: The brands represents a certain culture.
v. Personality: The brand can project a certain personality.
vi. User: The brand suggests the kind of consumers who buy or use the product.

Once brand consensus has been built, then the next step is to select a brand name. “Brand
name can be defined as a name selected by the advertisers, to identify a product to the
consumer and to set it apart from all the products”. The following must be kept in mind while
choosing a brand name.

The brand name must be short and simple. Long and complicated names must be
avoided as they create difficulty in reading and remembering them.
The brand name must be easily pronounceable as customers at the point of purchase
would not ask for names that are difficult to pronounce.
Suggestive brand names are better as they can convey the products attributes or benefits.
The name should be distinctive, i.e. it should not lose its identity in a crowded market. A
brand is distinctive when it stands apart from others in the same category.
A brand name must be selected considering its meaning in other languages. Some words
may be perfect in one language/culture but offensive in others.

4.6 Brand Equity and Brand Switching Analysis

Brand equity is added value endowed to the product and services. This value may be referred
to as how the consumer thinks, feels and acts with respect to the brand, as well as the prices,
market share and profitability that brands brings to the firm [4, 7]. A brand is said to have
high brand equity when consumers react more favorably to a product and the way it is
identified as compared to when it is not.
Brands have different values and power in the market. At one extreme there are brands
which are not known by most buyers, then there are those with a high degree of acceptability,
and there are those brands which enjoy a high degree of brand preference and those which
have a high degree of brand loyalty.
There are five levels of customer attitude:

1. Devotion to brand.
2. Switching owing to price issues.
3. Satisfied and no switching or substitution.
4. Satisfied but thinks that switching might incur cost.
5. Values particular brand and takes it as commitment.
Advantages of high brand equity [5]

i. The price charged can be higher than the competitors as the brand has higher perceived
quality.
ii. The company can more easily launch extensions as the brand name carries high
credibility.
iii. The brand offers the company some defense against price competition.

In any market for a certain product there is some percentage of consumers who stick to one
brand and there may be some percentage of customers who may shift from one brand to
another. This is possible in the case of successive purchasing as a customer who purchases a
brand may stick to the first brand or may switch to another. The aggregate brand switching
behavior displayed by large groups of customers from one time period to another may be
described probabilistically. The probabilistic descriptions are given by a transition matrix,
whose elements give the probabilities of various changes which may occur. If is the
probability that the customer will switch from brand 'i' to brand 'j' from one period to the
next, then the transition matrix can be given as:

(4.4)

where represents the probability that the customer will stick to brand 'A' and 'B'
respectively; represents the probability of customers shifting from brand 'A' to
'B' and vice versa.
Here the sum of the row of elements is one, i.e.:

(4.5)

This is because the customer will purchase 'A' or 'B'. But the sum of columns need not be one
as the company wants to promote its sales, i.e. more and more customers retained/sticking to
their own brand but also attract the competitors’ customers.
If the transition probability matrix is given by:

(4.6)

where are the probability of customers will stick to brand 'A' and 'B' respectively, and
the initial shares of competing brands are 'S' and' ' respectively for brand 'A' or 'B'.
Thus, the change in market share at stage one can be given as follows:

(4.7)

Further, in the second stage we have:

(4.8)

Similarly, for the transition stage we have:

(4.9)

Now for steady state

implies that steady state is independent of initial
market shares of the company.

4.7 Problems for Self-Assessment

i. Discuss the concept of brand switching.

ii. Explain the multi-generation concept by giving examples for consumer durables.
iii. Discuss briefly the key points that a marketer should focus upon when deciding on the
brand name.
iv. Highlight the benefits of high brand equity.
v. Explain the product mix dimension.
vi. Discuss the level of competition an organization will face at different stages of product
life cycle.
vii. Consider the transition matrix as:
 If this matrix is a true representation of the market situation between two competing
brands ‘A’ and ‘B’, and assuming that both brands have an equal share at the
beginning then compute the steady-state market share for both firms.

References
1. Kotler, P., Keller, K. L., Ang, S. H., Tan, C. T., & Leong, S. M. (2018). Marketing management:
An Asian perspective. Harlow: Pearson.
2. Norton, J. A., & Bass, F. M. (1987). A diffusion theory model of adoption and substitution
for successive generations of high-technology products. Management Science, 33(9), 1069–
1086.
3. Jaakkola, H., Gabbouj, M., & Neuvo, Y. (1998). Fundamentals of technology diffusion and
mobile phone case study. Circuits, Systems and Signal Processing, 17(3), 421–448.
4. Colombo, R. A., & Morrison, D. G. (1989). Note—A brand switching model with
implications for marketing strategies. Marketing Science, 8(1), 89–99.
5. Keller, K. L. (1993). Conceptualizing, measuring, and managing customer-based brand
equity. Journal of Marketing, 57(1), 1–22.
6. Rink, D. R., & Swan, J. E. (1979). Product life cycle research: A literature review. Journal of
Business Research, 7(3), 219–242.
7. Wood, L. (2000). Brands and brand equity: Definition and management. Management
Decision, 38(9), 662–669.
5 Pricing Decision: A General Perspective
Pricing: A managerial dilemma.

Over the years, the market has undergone many changes from being profit specific to
customer oriented. Consequently, selection of a price has become a key aspect. These days
organizations have several alternatives for deciding appropriate pricing. Mainly, selection can
be made by using either cost, demand or competition as key attributes. Pricing is the manner
of determining what a firm will acquire for its products or services. An enterprise can use
various pricing techniques whilst selling a service or product. The price should be set to
maximize the profit earned with each unit being sold. It may be used to protect the present
market from new entrants, to increase the marketplace proportion inside a market or to enter
a brand-new marketplace.

5.1 Pricing Decisions and Their Objective

“What and how should the price be set?” arises quite frequently in the minds of marketers.
Generally, they look for the answer when a new product is being developed or when a
modified version of their regular product is being launched into an existing or into a new
distribution channel or geographical area. Pricing too heavily will reduce the customer base
and leads to a decline in sales, whereas pricing too low creates an adverse image, i.e.
consumers may perceive that the product is of low quality. Often firms have to make a trade-
off to overcome these complex situations.
Various objectives that help in making optimal pricing decisions [1, 2]:

1. Market Penetration: A few companies set relatively low price in order to stimulate
product growth in the market with the intension of capturing a large share based on
following conditions:

The market is highly price sensitive, i.e. many additional buyers would come into
the market if the product were priced low.
The unit cost of the product and distribution is low with increased output.
A low price would discourage actual and potential competitors.

2. Early Cash Recovery: Certain companies set prices which will lead to early/rapid
 recovery of cash which can be additionally obtained by giving cash discounts, gifts,
vouchers, etc.
3. Product Line Promotion: Not many but a few firms seek to set a price that can enhance
the sales of an entire product line rather that yield a profit for just the product itself. This
category of product is termed a profit leader, as it helps to increase the total profit by
increasing the sales of the entire line.
4. Satisfactory Rate of Return: Some companies describe their pricing objective as the
achievement of a satisfactory rate of return on their investments.
5. Product Quality Leadership: A company might adopt the objective of being the product
quality leadership in the market. This manually calls for charging a high price to cover
high product quality and high cost of R&D.
6. Survival Under Competition Scenario: In the presence of intense competition and
changing consumer needs and wants a company sets survival as the major objective for
which they set relatively low price hoping that the market is price sensitive.
7. Market Skimming: In this case, firms take advantage of the fact that there exist some
potential consumers who can buy the product at much higher prices than others as the
product for some reason presents high value to them. The basic purpose of skimming is
to gain a premium price from such buyers and then gradually reduce the price to draw in
the more elastic segment of the market. It makes sense if any of the following conditions
prevails:

There are sufficiently large numbers of buyers whose demand is price inelastic (i.e.
there should be a stable demand at a high price).
The unit cost of production and distribution of producing a smaller number of units
is not much higher than the profit gained by charging more.
There is little danger that the high price will stimulate the growth of competitive
firms.

8. Market Share Leadership: Some companies want to achieve the dominant market share.
They believe that the company owning the largest market share will enjoy the lowest
cost and highest long-term profits. They go after market share leadership by setting
prices as low as possible.

5.2 Setting Prices Under Perfect and Imperfect Competition Environments

As explained in Chapter 3, market structure can be classified as perfect or imperfect based on
the level of competition that occurs. Consequently, the marketer should select the price based
on the presence of competitors in the market.
5.2.1 PRICING BASED ON THE PERFECT COMPETITION SCENARIO
Perfect competition is characterized by the occurrence of following:

1. A large number of firms such that the output of each individual firm is very small
compared to the total output.
2. Identical product, i.e. there is little or no product differentiation.
3. Freedom of entry and exit from the market.
4. Independent decision-making power.
5. Existence of a large number of consumers having full knowledge about the product.

Considering a particular product and competition to be perfect, the market price is governed
by the law of supply and demand and cannot be set by the individual firms/ competitors. In
general, the demand concept states that there exists an inverse relationship between demand
and product price, i.e. when the price of a product increases, demand decreases and vice versa.
However, the supply curve behaves in an opposite fashion, i.e. when the price increases the
supply of goods is increased by the producer/seller as more profit can be earned and supply is
less when the price is less. The demand and supply jointly determine the market price at any
point of time. Now the supply and demand curves jointly determine the market price in a
perfect competitive market, and the price is determined at the equilibrium point, i.e. when the
demand and supply curve intersect or when supply and demand are equal. This price is called
as the equilibrium price.
Some deviating situations occur:

1. If the unit price is higher than the equilibrium price, supply is high and the stock piles up
in the warehouse of the suppliers; to dispose of it, the producer will cut the price
(because they have already incurred the cost of producing excess units) and as a result
more will be demanded.
2. If the unit price is below the equilibrium price where demand exceeds supply, consumers
will tend to pay the prices to get the delivery of goods. Or the supply is less than the
demand. Shortages will occur for the producer.

Under the influence of both 1 and 2, price will tend to move towards but not beyond the
equilibrium price, i.e. the point where the quantity demanded is equal to the quantity
supplied. This law constitutes the law of demand and supply which forms the basis of
economics analysis of pricing decisions. So, we can say that in perfect competition individual
firms have no pricing decisions, the optimal pricing is governed by the demand and supply
law.
5.2.2 PRICING STRATEGIES UNDER IMPERFECT COMPETITION
In this situation an individual firm has sole rights in the pricing policy [3, 4]. Price is naturally
set to maximize the profit. Basically, there exist three different types of techniques: cost-
oriented pricing, demand-oriented pricing and competition-oriented pricing.

1. Cost Oriented Pricing: A large number of firms set their prices largely or even wholly on
the basis of their production cost which includes all types of costs, i.e. fixed cost and
variable cost of raw materials, operational costs including labor, distribution costs and
overhead cost components [4]. Further, cost oriented pricing is subdivided into markup
pricing and target pricing.

Markup Pricing (MP): The most common method is to add a standard markup to
the product’s cost. This pricing strategy is most often used by retail traders where
the retailers add pre-determined but different markups to different goods they carry.

(5.1)

Following are the key points that the firms should focus on:

i. Markup should vary inversely with unit cost: When unit cost is less the retailer is
satisfied adding high mark-ups and when the unit cost is high, he/she is satisfied
with low markups.
ii. Markup should vary inversely with turnover: When the intensity of the demand is
very high then retailers may be satisfied with a small markup or if revenue is high,
the markup is low.
iii. Markup should vary inversely with demand elasticity.
Let us consider the relationship between markup and demand elasticity in detail. Assuming
that the demand is a function of price and total variable cost as a function of
demand level, i.e.

(5.2)

Thus, profit can be given as:

(5.3)

(5.4)

The objective is to maximize the overall profit being earned. On partially differentiating
 equation (5.4) we have:

(5.5)

Equating (5.5) to zero we have:

(5.6)

Price elasticity of demand can be defined as the ratio of percentage change of demand to
percentage change in price, i.e.

(5.7)

(5.8)

Equation (5.8) can be rewritten as:

(5.9)

From equation (5.6) and (5.9) we have:

(5.10)

where MC is the marginal cost. Thus, according to equation (5.10)

(5.11)

i.e. the markup of any commodity is the reciprocal of the price elasticity of demand' '.
Markup is taken as profit on marginal units taken as a fraction of the unit selling price.
Therefore, if the price is fixed in such a way that the above conditions are satisfied then
that will maximize the net profit. This is known as Markup pricing. Pricing with
standard markup ignores current demand and competition. So, it is not likely to lead to
the optimal price, but it remains popular for a number of reasons:

Sellers have greater certainty about the costs than the demand, so once the price is
tied to the cost it simplifies their own pricing task and they do not have to make
 frequent adjustments as demand changes.
When all firms in the industry use this pricing method, their price tends to be
similar and price competition is minimized.
Many people feel that markup pricing is fairer to both the buyer and the seller, i.e.
the seller does not take advantage of buyers when the demand becomes acute, but
still the seller earns a fair return on their investment.

Target Pricing: Another common cost-oriented approach used by marketers is target

pricing, in which the firm tries to determine the price that would give it a specific target
rate of return on its total cost at an estimated sales volume. The pricing producer used in
target pricing is as follows [4]:

Estimating the total cost at various levels of output.

Estimate the percentage of the capacity likely to be used in the coming period.
Specify the target rate of return.
The profit can be given by

(5.12)

where
'p' represents the selling price
represents the quantity sold and is a function of'p'
Thus, profit can be given as follows:

(5.13)

where and is the target rate of in investment and is the total cost of
producing 'D' units.
On equating equation (5.12) and (5.13)

(5.14)

Equation (5.14) on further simplification leads to

(5.15)

2. Demand-Oriented Pricing
Demand-oriented pricing focuses on the intensity of demand. Generally, a high price is
charged when demand intensifies to enhance the profit margin and a low price is
 charged when demand is low, even though the unit cost of production remains the same,
to increase the sales of the product.
Successful implementation of this pricing strategy depends upon the marketer’s ability
to correctly forecast the demand for the product. Price discrimination is the practice
adopted to characterize the fluctuations in demand. In this case revenue will be low, i.e.
markup will also be low. This form of pricing can be seen within the hospitality and tour
industries. For instance, airlines during a period of low demand charge less in
comparison to a period of excessive demand. Primarily demand-based pricing allows the
company to earn extra income if the customers are given the product at the rate greater
than its actual price.
Price discrimination: This is when the company sells a commodity at two or more
prices. Price discrimination on bulk purchasing is not treated as a form of price
discrimination. Price discrimination may take several forms:

Pricing that discriminates based on consumer: It may be because of the extent of the
customer’s requirements, variation in the customer knowledge about the product or
may be because of a relationship with the seller.
Pricing that discriminates based on product version: When slightly different
versions of a product are priced differently but not proportionately to their
respective marginal costs. For example, packed biscuits and loose biscuits, here
packaging prices are not very high but the firm is charging different prices for the
two and the cost differentiation is not as high as the change in price.
Pricing that discriminates based on time: At different times for the same commodity
the firm may charge different prices, e.g. telephone trunk calls for which day or
nighttime charges may vary.
Pricing that discriminates based on place: Here a different location is priced
differently even though the cost of offering at each location is the same. For
example, the price of tickets at movie theaters.

For price discrimination to be possible certain conditions must exist:

The market must be segmented and different markets should have different intensities of
demand.
There is a little chance that competitors will undersell goods in the segment in which the
price is high.
There should be no chance that the member of the segment paying the lower price could
resell the product to the segment paying the higher price.

3. Competition-Oriented Pricing
 Competition-based pricing refers to a technique in which an organization considers the
expenses of the competition’s products to set the prices of its personal merchandise. The
agency can price higher, lower, or the same in comparison to the prices of its
competition. The firm doesn’t seek to maintain a rigid relationship between its price and
its own cost and demand. The same firm will change its price when the competitor
changes their price even though their own cost and demand have not altered. For
example, in the soft drink industry, if one firm changes its price, all other firms will
adjust their price accordingly.
The airline industry is an excellent instance of competition-based pricing wherein
airlines set a price equal to or less than that charged by their competition for same.
Further, the introductory prices charged by book publishing stores for textbooks are
determined according to the costs of the competition.
Going rate pricing: Here a firm tries to keep its price at an average level as charged
by the industry. When the cost is difficult to measure, it is felt that going rate pricing
represents the collective wisdom of the industry concerning the price that will yield a
fair return. The difficulty of knowing how buyers and competitors would react to price
differentiation is another reason for this pricing.

5.3 Elasticity of Demand and Its Kind

A price change affects the quantity of goods demanded. Elasticity of demand means the
responsiveness (or reaction) of demand to changes in its determinants (such as price or the
income of the consumer, the price of related goods, etc.). In fact, when variable 'y' responds to
a change in variable 'x', variable y is said to be elastic. Thus, elasticity indicates the
responsiveness of one variable to another.
Price elasticity of demand: This shows the responsiveness of demand to a change in the
price of a commodity. According to the law of demand, demand for a commodity increases
with a decrease in its price and decreases with an increase in its price provided that other
factors remain the same. Although the law indicates the tendency or direction of change in
demand because of a change in price, it is silent on the quantity of the change in demand. In
general, elasticity of demand based on variations in price can be defined as a ratio of
percentage (proportionate) change in demand to the percentage (proportionate) change in
price which can be expressed as follows:

(5.16)
FIGURE 5.1 Different situations for price elasticity of demand.
Source: Kim et al. [3]

Price elasticity of demand is commonly called elasticity of demand because price in the most
changeable factor influencing the demand.

The Degrees of Price Elasticity of Demand:

i. Perfectly inelastic demand ( ): When the quantity demanded does not change at
all in response to a change in the price of the commodity, the demand for that
commodity is said to be perfectly inelastic.
ii. Less than unit elastic demand ( ): When the percentage change in the quantity
demanded is less than the percentage change in the price, the demand for the commodity
is said to be less than unit elastic or less elastic.
iii. Unit/Unitary elastic demand ( ): When the percentage change in the quantity
demanded is equal to the percentage change in the price, the demand for the commodity
is said to be unit elastic.
iv. More elastic/more than unit elastic demand ( ): When the percentage change in
the quantity demanded is more than the percentage change in the price, the demand is
said to be more than unit elastic or highly elastic. (Demand for luxury goods are
generally highly elastic).
 v. Perfectly elastic demand ( ): When the demand for a commodity expands or
contracts to any extent without any change or with every little change in price, the
demand for the commodity is said to be perfectly elastic or infinitely elastic. We rarely
come across such a situation. Thus, it is an imaginary situation.

Demand curves may depict different elasticity patterns as can vary from but in
real life we mostly come across three types of elasticity when it is equal to, less than or
greater than one.

5.4 Joint Optimization

Traditionally, the firm’s focus has only been on production and marketing only helped in
generating sales which increases profits without observing the after effects, i.e. quality,
availability, advertising, etc. of the product. In today’s scenario generating sales will not help
the firm if factors like quality, availability, advertising, etc. which are very much within the
firm’s area of control are ignored in favor of gaining more profits. Thus, in today’s market
situation a firm must make specific decisions with respect to price ('p'), advertising budget or
promotional efforts ('s'), quality index ('x'), availability or distribution ('a') and the quality
produced.
Further, expenditure on promotional efforts is constant and does not depend upon the
amount produced but expenditure on improving the quality is dependent on cost. Moreover,
expenditure on improving the quality is long-term whereas expenditure on promotional
efforts is short-term. Therefore, for short-term profits better promotional efforts are required
whereas to gain long-term profits quality improvement is necessary. It is further assumed that
price and quality are independent in the sense that if the quality of the product is improved by
an extra burden and price is kept unchanged then the cost of the product increases, which
means profit per unit decreases, but the total profit is going to be more as the overall sales
increase with the better quality. Hence, the price and quality can be treated as independent
variables. Further, as the cost of the product is directly proportional to the quality, they can be
treated as dependent variables.
Assume that a firm that faces a general marketing demand 'D' whose demand function is
represented as:

(5.17)

and the unit cost of the product is a function of the level of production or demand and the
quality of the product, i.e.

(5.18)
Therefore, the total cost of 'D' units can be given as:

(5.19)

Hence the firm’s total cost function can be given as follows:

(5.20)

which can be simplified as:

(5.21)

Here, advertising and availability are treated as discretionary fixed costs and 'F' represents the
sum of non-discretionary fixed costs.
If 'P' is the selling price of the product, then the profit function 'P' can be given as:

(5.22)

Making use of equation (5.21) and (5.22) we have the profit function as:

(5.23)

The firm’s objective is to maximize its joint optimization of 'p', 's', 'x' and 'a', so as to maximize
its total profit. The necessary conditions for joint optimization of these variables are:

(5.24)

(5.25)

(5.26)

(5.27)

Solving equations (5.24) to (5.27) we get:

(5.28)
In order to interpret (5.28), we need to define the following:
Price elasticity of demand as:

(5.29)

Elasticity of demand with respect to change in quality =

(5.30)

Marginal revenue with respect to change in advertising =

(5.31)

Marginal revenue with respect to distribution/availability =

(5.32)

Using equations (5.29), (5.30), (5.31) and (5.32) in equation (5.28), we get:

(5.33)

(5.34)

The above necessary condition for profit maximization states that value of price, advertising,
distribution and product quality must be set at such a level that price elasticity and marginal
revenue with respect to quality remains the same. This theorem is known as the Dorfman–
Steiner theorem which does not give the optimal values of these variables but instead gives
the condition that must be satisfied when the optimal values are found.
Further, Dorfman and Steiner made the following interesting observations which should be
noted. If it will be profitable to increase both s and p until equality is once more
restored and the converse if ; however, in the latter case if s were originally zero, then
clearly we could not decrease both s and p, nor would there be any point in decreasing p
alone as we are still assuming that quantity is constant. Thus, we need the two equilibrium
conditions, namely, if and if .
It is always guaranteed that changes in s and p will reach an equilibrium in and
because declines (after a point) as s increases and will ultimately reach zero (or less),
whereas a maximum profit price cannot occur unless ; if , marginal revenue is
negative and presumably production costs never are. Thus, will always be either below (as
in Figure 5.2 (A)) or will be equal to at least at one point (as in Figure 5.2 (B, C)).

FIGURE 5.2 Relationship between marginal revenue with respect to change in advertising and price elasticity of demand.
Source: Kim et al. [3]

The theorem also helps to rationalize, in a clearer fashion than the general marginalist
principal, the degree of advertising expenditure in the various market types which economists
emphasize. For example, impure competition elasticity of demand facing each firm is infinite,
hence for all levels of s and thus the optimal situation is one involving

SCENARIO 1: OPTIMAL ADVERTISING

If the price which a firm can charge is predetermined for a product of a given quality and if
the firm can influence its demand curve by advertising in order to maximize its profits,
choose its advertising budget and the resulting budget such that:

Marginal Cost (M.C.) = (5.35)

where'µ' is marginal revenue with respect to the change in advertising.

Because price and quality are assumed to be fixed, the only variable which can affect the
demand is the advertising budget.

(5.36)

and unit cost = C = (5.37)

If is the selling price of the product then the net profit, , is

(5.38)
The necessary condition for the maximization of profit with regard to 's' is

(5.39)

Marginal Cost is defined as change in total cost of units owing to change in demand.

(5.40)

Using equation (5.40) and (5.11) in (5.39), we get

(5.41)

(5.42)

which is the equilibrium condition.

On further simplification,

(5.43)

where is the profit on marginal units and is the profit on marginal units
taken as the fraction of unit selling price, which is also called marginal units.

SCENARIO 2: OPTIMAL QUALITY

“If the price which a firm can charge is predetermined and if the firm can influence its
demand curve by altering its product, it will, in order to maximize its profits, choose the
quality such that the ratio of price to average cost multiplied by the elasticity of demand with
respect to quality expenditure equals the reciprocal of the mark-up on the marginal utility”.
Here the firm wants to know the optimal level of quality to maximize its profit keeping the
price and the advertising budget at a constant level. Thus, demand will be a function of only
the quality index 'x' as:

(5.44)
and unit cost 'c', will be a function of the level of production/demand and the quality of the
product, i.e.

(5.45)

Therefore, profit function can be given by

(5.46)

In order to maximize the profit, the necessary condition is

(5.47)

which on simplification leads to

(5.48)

Using equations (9) and (5.40), equation (5.48) reduces to

(5.49)

(5.50)

where is the profit on marginal units taken as the fraction of unit cost, which is the
other form of markup on marginal unit.

5.5 Problems for Self-Assessment

i. Define pricing strategies.

ii. Define price and its relationship to cost.
iii. Discuss how pricing impacts marketing and business strategy.
iv. Discuss price as a competitive strategy in marketing.
v. Explain cost-based pricing.

References
1. Cannon, H. M., & Morgan, F. W. (1990). A strategic pricing framework. Journal of Services