PD

# 2000 University of South Africa All rights reserved Printed and published by the University of South Africa Muckleneuk,
Pretoria MNM303- 6/1/2000 -2002 3B2
CONTENTS
FOREWORD PRODUCT DECISIONS PART 1
TOPIC 1 THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT TOPIC 2 PLANNING FOR PRODUCT MANAGEMENT TOPIC 3 NEW PRODUCT DEVELOPMENT TOPIC 4 PRODUCT STRATEGY TOPIC 5 MANAGING THE PRODUCT OVER ITS LIFE CYCLE TOPIC 6 MULTIPLE PRODUCT MANAGEMENT 3 23 34 64 84 96 (iv)
PRICE DECISIONS PART II

TOPIC 7 PRICE AND ITS IMPORTANCE TOPIC 8 STEPS IN THE SETTING OF PRICE 104 11 1
MNM303-6/1/20002002
III
FOREWORD
We trust you will enjoy this module in Marketing Management. As consumers we are all familiar with one end of the marketing process, which is the purchase and consumption of a wide variety of need-satisfying products. In Product Management you will be introduced to the other end, namely the way in which consumers are supplied with these products and services.
Prescribed books
Baker, MJ & Hart, S. 1999. Product strategy and management. Hertfordshire: Prentice-Hall. Cant, MC & Machado, R. 1998. Marketing success stories. 3rd edition. Halfway House: International Thompson.
Getting a feel for this module

Y should use this study guide to guide you in your study of the prescribed ou books and any other sources you wish to consult. Part1of the study guide provides a framework of basic information you should incorporate other relevant information into this framework. There is no prescribed book for part 2 of this module, but examples of the practical application of marketing can be found in Cant and Machado (1998). Consult the topic index grid in front of Cant and Machado (1998) to find case studies or readings applicable to specific topics.
PART I Product decisions Topics: 1 The meaning of product and product management 2 Planning for product management 3 New product development 4 Product strategy 5 Managing the product over its life cycle 6 Multiple product management PART II Price decisions Topics: 7 Price and its importance 8 Steps in the setting of price
Assignments
As you work through each topic, answer the self-evaluation questions that appear at the end of each topic.The purpose of these questions is to help you test your knowledge and understanding of each section. Make sure that you can answer these questions since they are the type of questions that you can expect in your assignments and examination. There are a number of activities in the text. The main aim of these activities is to explain, in a practical way, the principles of the theory.Read these activities very carefully and try to place yourself in the practical situation this will make it so much easier for you to answer the questions in the activities and also in the assignments and examination.
IV
Part I
PRODUCT DECISIONS
TOPIC 1
The meaning of product and product management
TOPIC 2
Planning for product management
TOPIC 3
New product development
TOPIC 4
Product strategy
TOPIC 5
Managing the product over its life cycle
TOPIC 6
Multiple product management
topic 1
THE MEANING OF PRODUCTAND PRODUCT MANAGEMENT CONTENTS

GETTING AN OVERVIEW Study unit 1 THE PRODUCT CONCEPT
1.1 1.2 Introduction The components of the product concept
Study unit 2 PRODUCT/BRAND MANAGEMENT

2.1 2.2 Introduction The product or brand manager
Study unit 3 PRODUCT CLASSIFICATION

3.1 3.2 3.3 3.4 The reasons for product classification Industrial products Commercial services Consumer products
Study unit 4 PRODUCT DECISIONS

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Introduction Decisions regarding the product mix Product diversification and product specialisation Simplification and product standardisation Product differentiation Product obsolescence Packaging Conclusion
OVERVIEW
GETTING ANOVERVIEW
The marketer or product manager should never see the product as just a physical object or a service act, because this is not how the consumer views the product. For the consumer a product is a means of satisfying some of his or her needs. Even very similar products will not necessarily satisfy the needs of the consumer equally well; this is because of differences in the total market offering. It is therefore important that the marketer be aware of the marketing decisions that can make the product more appealing to the consumer by better satisfying his or her needs. In this topic we will focus primarily on the different product decisions. The product decisions taken depend on the nature of the product. This includes classification of the product according to consumer behaviour. The following map illustrates the major components of product and product management. Nature of the product Product concept Product classification Product management Principles of product and brand management Product decisions
. What is meant by the product concept? . How can consumer products be classified according to consumers' buying habits? . What are the reasons for product classification? . What are the duties of a product or brand manager? . What is meant by product management? . What is meant by each of the following product decisions? product simplification product standardisation product obsolescence product mix product diversification product differentiation
. . . . .
What do the packaging decisions entail? the product concept product/brand management product classification product decisions
Study unit 1: The product concept
study unit 1
THE PRODUCTCONCEPT
(Study chapter 3 ``The product in theory and practice'' in Baker & Hart 1999:39^58, as indicated in the sections below.)
1.1 INTRODUCTION
A product entails more than just its physical characteristics. As a consumer, you will probably agree that even products satisfying the same basic need vary in the extent to which they can satisfy your needs, depending on their value-added components. An example here is clothing. Clothing is not only used to cover the body for reasons of modesty and warmth, but can provide extra value (eg owing to the material it is made of, styling, the brand name, quality). Clothing can be bought to enhance our self-image, for protection from the cold, for acceptance in a group and for many more reasons. Cosmetics are not bought just for their content. The consumer buys beauty, acceptance, self-confidence and youth. A handyman is not just interested in the components of a drill; he actually buys the holes, the convenience, the quality and new capabilities of a drill.
1.2 THE COMPONENTS OF THE PRODUCT CONCEPT

product concept
Baker and Hart (1999) do not explain the basic components of the product concept very clearly. The following discussion supplements figure 3.6 in Baker and Hart (1999:57). No marketer should think about the product merely as a physical object, but as a total need-satisfying market offering. From a marketing point of view, in the broadest sense, a product can be defined as a collection of need-satisfying utilities (perceptible and/or imperceptible) offered to a market (ie consumers). Different meanings can be attached to products, which means that three basic product elements can be identified: the formal product, the core product and the augmented product. . The core product is the essential need-satisfaction that the consumer expects to obtain from the products offered by the retailer. The business must consider what the basic needs are that the business wants to satisfy. A hairdryer is basically for drying hair and a telephone for communication and conversation. . The formal product is simply the physical product or service offered to the market.This includes the product's physical distinguishing characteristics such as styling, quality, features, brand name and packaging Think, for example, about the difference made to the total product by
Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT
the packaging of some cosmetics and the styling of cars, clothes and cellular phones. . The augmented product consists of all the added benefits that the consumers get from the formal product. The market offering sold by a retailer is not only a physical object, but also includes financing, expert advice, delivery, after-sales service, guarantees, installation and even gift-wrapping services. These days, businesses such as retailers place a great deal of emphasis on customer service as part of the product offering and the product concept. These services can greatly add to the value of the retailer's product offering. Such services help to distinguish a business's product offering from competitors and may lead to brand loyalty. Of course, many service features are not tangible.
Activity 1.1
Study `Àre services different?'' in Baker and Hart (1999:5557) and then answer the following question: Identify the four different components of the total product concept and illustrate these components by giving appropriate practical examples in the case of a pair of shoes.
Did you realise that the core benefit is related to the consumers' need for foot protection? Was it also clear to you that there are different styles and materials, qualities and brand names? These are the tangible product features. Did you take a careful look at the box and any accompanying cards for information about warranties? Will this make any difference to your product choice? In this case, there are actually very few augmented product features.
study unit 2
PRODUCT/BRAND MANAGEMENT
2.1 INTRODUCTION
Products can and should be managed to optimise their performance in the market. A strategically-oriented business will implement its product planning, implementation and control decisions to achieve its product goals,
Study unit 2: Product/brand management
rather than let circumstances dictate the fate of its products. Products can be successful because, among other reasons, consumers find them distinctive and superior and good value for money. It is the task of product management to find out what makes the product distinctive, superior and good value for money in the eyes of the consumers in the relevant target market/s.These winning characteristics can then be built into the product and emphasised in the marketing strategy. Product management must keep up to date with changes in consumers' needs and desires, because these may change over time.
2.2 THE PRODUCTOR BRAND MANAGER

product manager
brand manager
Not every business has a person called a product manager, a brand manager or even a marketing manager. The term ``product manager'' is the generic term for a person responsible for managing a product. We can use the term``brand manager'' in large businesses that employ a particular employee to take responsibility for the management of one brand. Even in the case of a product manager the whole issue of product management revolves around the brands, building brand identity, and achieving a sustainable competitive advantage and brand loyalty.
Activity 2.1
Study study unit 2 and then answer the following questions: . When will it be advisable to appoint brand managers in a business? . Can you think of any businesses where brand managers have been appointed or where brand managers can easily be appointed?
T to think of businesses that market a variety of brands; in other words, ry multi-brand businesses such as Coca-Cola, which manufactures various brands of cold drink, and Gilbeys, which market brands such as Smirnoff vodka, J&B Whiskey, Cinzano Spumante, Tweejongengezellen wine and Bertrams VO brandy. Nestle go even further and manage numerous brands for products such as coffee and tea, Milo, chocolate bars and even cosmetics. To make it easier to keep track of the many different brands that make up the Nestle Company, their products are grouped into nine categories: baby foods and cereals; milk and dairy products; breakfast cereals; desserts, snacks and ice creams; chocolate and confectionery; what's cooking (which includes convenience and prepared foods); hot and cold beverages; mineral water; and pet care. Each category contains a few brands and it is obvious that a brand manager can be appointed to take responsibility for different brands.
study unit 3
PRODUCTCLASSIFICATION
3.1 THE REASONS FOR PRODUCT CLASSIFICATION
Product decisions can be considerably simplified if they are taken in accordance with basic product classification. As far as the marketer or product manager is concerned, products include physical objects, services, personalities, places, institutions and ideas that satisfy one or more needs of a specific target market.However, the particular characteristics, production and marketing methods of all products differ, as does the purpose for which they are used. Consequently, it is useful for marketing management to classify products into more or less homogeneous groups according to a classification system. Products are basically divided into three main groups, namelyindustrial products, commercial services and consumer products. Each of these main groups has further subclassifications.
3.2 INDUSTRIAL PRODUCTS

industrial products
Industrial products are products destined for use in a production processin order to generate other goods and services (Van der Walt et al 1996:182). Several subclassifications of production goods are possible. Mining products, partlyprocessed materials and components, installations, accessory equipment and operating supplies are examples of such subclassifications.
3.3 COMMERCIAL SERVICES

commercial services
Commercial services are independent, separate, identifiable, intangible, needsatisfying activities destined ultimately for consumers and industrial users. They are not necessarily related to the sale of a product or another service. Insurance, medical and dental services, entertainment, management consultants, researchers and communication services are examples of commercial services.
3.4 CONSUMER PRODUCTS

consumer products
The emphasis in this module is mainly on consumer product decisions.We shall therefore discuss the characteristics and marketing considerations of consumer products in more detail.Consumer products are intended for direct consumption byhouseholds or endusers.Different bases can be used to classify consumer products such as durability and consumer buying habits. Firstly, consumer products can be classified according to their durability, that is, whether they are durable or non-durable consumer products. Durable products are used repeatedly over a long period of time (examples are stoves, clothing, motorcars and furniture). Non-durable consumer
durability classification
Study unit 3: Product classification
products are goods that have a short lifespan and which are mainly destined for a single use or relatively few uses (examples are cigarettes, butter and toilet soap).This distinction has important challenges for the marketer. Products which are used rapidly and bought regularly (non-durable goods) have to be available at many outlets (intensive distribution).These products require a relatively low profit margin, and normally elicit strong brand loyalty among consumers. Durable products, on the other hand, require more personal selling and service, carry relatively high profit margins, and often require the seller to give warranties.
buying habits classification
Secondly, consumer products can be classified according to consumers' buying habits; these products can be classified as convenience products, shopping products and speciality products. The consumer's buying habits are influenced by the following two factors: . the consumer's knowledge of the exact nature and characteristics of the product before he or she starts out on his or her shopping trip . the value that can be derived from searching for and comparing products, weighed against the time and effort required Given these two factors, consumer products can be classified into the following categories:
3.4.1 Convenience products

convenience products
Convenience products are those consumer products of which the consumer has comprehensive knowledge before he or she goes shopping to buy them. Normally, the benefits which the consumer derives from shopping around and comparing prices and quality do not justify the extra time and effort required. Brand preferences for convenience products are normally not strong. Convenience products are often subdivided into: . Staple products. Consumers buy these products regularly. These are products such as sugar, bread, vegetables, fruit, toothpaste and soft drinks. . Impulse products.These are convenience products which are normally bought without much preplanning and effort. These products are available at a variety of retail outlets and the consumer often makes the decision to buy at the point of sale. . Emergency products. These products are normally bought immediately when the need arises. Examples are towropes for motor cars, matches, torch batteries, adhesive plaster, plastic raincoats and umbrellas. The same product can be classified into different categories in different situations, depending on the consumer's shopping behaviour.
staple products
impulse products
emergency products
Activity 3.1
Describe the classification of convenience products refer to product examples that indicate how the same product can be
classified in different categories in different situations, depending on the consumer's relevant shopping behaviour.
Y should have referred to staple impulse and emergency products. A ou good example of a product that can be classified into any of these categories is cold drink. If bought regularly with the monthly groceries, for example, cold drink can be seen as a staple product, but if bought on impulse while standing in a queue in a supermarket it can be regarded as an impulse product.On the other hand, if it is bought while the consumer is travelling through the dry Karroo in midsummer, it can be classified as an emergency product. The same arguments can be applied to ice cream; sometimes ice cream is bought on the spur of the moment, with the groceries. Alternatively, it may be bought in an emergency eg if the consumer is preparing a dinner for important guests and the planned desert was a disaster. The following marketing considerations apply to convenience products: . Convenience products have to be made easily available to consumers. They require intensive distribution at retail level and, normally, a long distribution channel (manufacturer wholesaler retailer); this is because it may be uneconomical for the manufacturer to sell directly to all retailers. Retailers usually stock several trade names (brands) of specific convenience products (eg toothpaste) and they are not very keen to advertise individual products. . The quality and prices of competitive convenience products tend to be much the same. As far as the consumer is concerned, these products do not require much explanation, and the retailer does not receive much incentive to promote one brand rather than another. Consequently, convenience products are mostly marketed on a self-service basis and the entire marketing communication campaign is usually the manufacturer's responsibility. The manufacturer has to advertise extensively to develop brand recognition and preference for the product. Self-service requires effective packaging, shelf space and point-of-sale advertising, especially since many convenience items are bought on impulse.
3.4.2 Shopping products

shopping products
Shopping products are those consumer products which the consumer is willing to shop around for in order to compare physical attributes, suitability quality work, , manship, prices and style. In this case, the consumer does not have complete knowledge of the product attributes beforehand because, usually, the product is not bought regularly.This is why the consumer is prepared to shop around to obtain this knowledge. However, the consumer will only continue shopping as long as the advantages of doing so are still greater than the effort and time required to visit several shops. Examples of shopping products are furniture, clothing and jewellery. Shopping products normally
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Study unit 3: Product classification
have a higher unit value than convenience goods and are also bought less frequently. In the case of shopping products, the following marketing considerations normally outweigh other factors: Relatively few outlets (selective distribution) are required because the consumer is prepared to shop around for the goods. To make shopping easier for the consumer, manufacturers normally endeavour to distribute their products through retailers who deal in competitive shopping products and who are situated close to each other.These retailers also prefer to be clustered together. Their individual attraction is thereby increased, while customers can be interchanged and intercepted.
3.4.3 Speciality products

speciality products
Speciality products are consumer products with unique characteristics and/or brand insistence in other words, consumer products which a significant group of consumers is habitually willing to make a special purchasing effort. The buyer knows what he or she wants. As in the case of convenience products, the consumer has comprehensive knowledge of the particular product before he or she starts out on a shopping trip.The distinguishing and key characteristic of speciality products is that the buyer insists on a particular brand and will accept only that one. In other words, the consumer will avoid substitute products, even if obtaining the preferred brand requires considerable time and effort. Products such as special or exclusive motorcars, hi-fi and photographic equipment and television sets are normally classified as speciality products. If they are not regarded as exclusive, these items can be regarded as shopping products. A business will therefore benefit from trying an persuade the consumer to perceive its product or brand as exclusive. Otherwise, the business should market a shopping product as a speciality product (for which the consumer is prepared to make a special shopping effort), or a brand that will be insisted upon. Some marketing considerations which apply to speciality products that are worth mentioning are as follows: . Normally only one outlet (exclusive distribution) in a specific territory or target market is used, and the manufacturer markets directly to selected retailers. . Brands are extremely important to speciality products and, because relatively few outlets are used, both manufacturer and retailer have to advertise extensively. Normally the manufacturer bears part of the retailer's advertising costs and the name of the retailer concerned often appears in the manufacturer's advertisements. It is important to note, once again, that the classification of convenience, shopping and speciality products is based on the consumer's buying habits. Since buying habits regarding a specific product vary among consumers, the same product (eg a radio) may be a convenience item for one, a shopping item for another, and a speciality item for a third person.
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Activity 3.2
Study ``Product classification'' in Baker and Hart (1999:4447) and then answer the following question. Mr Kokoravicha comes from Latvia; he is a chocolatier (ie chocolate-maker) trained in Switzerland in the art of making very high-class chocolates, especially ornamental chocolates sold as gifts and exclusive confectionary. These chocolates are sold at quite a high price. Based on the product classification, how would you recommend that he distribute his product?
Chocolate can usually be seen as a convenience product that is sold in as many outlets as possible. It is usually available at till points and even filling stations. But there is a difference in the case of Mr Kokoravicha's chocolates. If consumers see them as a very special product, a gift or an exclusive item of confectionary, then the product has become a shopping product in the eyes of the consumer. Some of the varieties may even be regarded as speciality products.These chocolates will then be suitable for selling in, for example, speciality sweet and gift shops.
study unit 4
PRODUCT DECISIONS
4.1 INTRODUCTION
Various product decisions are taken into consideration when managing the product on a daily basis. It is essential that any marketer or product manager is fully aware of the product decisions he or she can take.
4.2 DECISIONS REGARDING THE PRODUCT MIX

A business does not always have the capacity to manufacture a wide range of products and consumers may not even demand this.The variety of products that an enterprise offers for sale is called its product mix.
product mix product item product line
The product mix refers to the set of total product lines and items that the seller offers for sale. A product item is a particular version of a product within the business's product mix. A product line is a group of products which are broadly related ( such as a line of toiletries). A store may, for example, carry groceries, sporting
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Study unit 4: Product decisions
goods, hardware, appliances and furniture, each of which is an example of a product line. The business must decide how many product lines (width of the mix) and product items per product line (depth of the product mix) it is going to offer for sale.There are three types of relationships between width and depth: . Narrow and deep.Only a small selection is offered, but this is stocked in depth (eg two styles of jeans, but in all sizes and colours). . Broad and shallow.The business offers a wide variety of product lines, but a limited variety of each product line. For example casual, smart, sports and children's clothing. However, it only offers a few designs and colours of each of these lines. . Combination. This is a combination of the two, such as a specified number of product lines varying in depth. For example, clothing for babies, toddlers and young children in different colours and designs. The ideal product mix must both satisfy consumers and enable the business to achieve its objectives. Consumers' needs and desires may be virtually limitless, but the business faces quite a few limitations or constraints when making product mix decisions. The breadth of the business's product mix (assortment) will depend on many factors. These include availablity of funds, adequate demand, and profitability possibilities. It is important to realise that, while all product items must contribute to the profitability of the business, some products can ``carry'' a higher profit margin than others. Since the image of the business depends a great deal on the type of merchandise it sells, the desired image will determine the products that must be included in the product mix.The retailer can distinguish the retailer's store from competitors by the product mix and store image. There is, for example a vast difference in the product mix and store image of Pep Stores and Edgars. Pep Stores concentrates mainly on stocking a large variety of low-cost clothing items. Edgars, on the other hand, offers more product lines and a greater depth of product mix. These product mixes, together with other factors, create the different images these stores portray. The managing of the product mix will be covered in greater detail in topic 6,``Multiple product management''.
Activity 4.1
Study the section above and answer the question below. Do you think a business that markets fast-moving, low mark-up consumer products should have a wide or a narrow product mix? Give reasons for your answer.
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Fast-moving consumer goods fall into the category of convenience products. It would be wise to have a reasonably wide product mix, because of the low profit margin and because the consumer will not be prepared to shop around.
4.3 PRODUCT DIVERSIFICATION AND PRODUCT SPECIALISATION

A variety of decisions has to be taken virtually every day about the existing product mixand product ranges.Decisions on new products and existing products are, obviously, interrelated.
product diversification
Product diversification and product specialisation are concepts normally used in connection with a business's existing product mix. Product diversification means the expansion of the product mixbyadding new product items, product lines or product ranges to the existing mix.
product specialisation
Product specialisation is the opposite of product diversification and means the elimination of product items, product lines or product ranges from the product mixin order to reduce or narrow the mix.
4.4 SIMPLIFICATION AND PRODUCT STANDARDISATION

simplification
Product simplification means that a business deliberately limits the variety of dimensions, shapes, qualities and otherattributes which are possible in one product. In other words, the business manufactures only limited variations of a product. For example, a manufacturer makes televisions in only four sizes instead of seven; a shoe factory makes men's shoes in six sizes, three colours and three styles only, instead of ten sizes, six colours and five styles; and cars are supplied in certain engine capacities only. Standardisation refers to a group of business or authorities who set the specific dimensions, norms or standards according to which products will be made or evaluated. Standardisation differs from simplification in the following ways (among others): simplification refers to the individual business's product items, product lines and product ranges, while standardisation refers to the products of a specific industry and often occurs as a result of input from the authorities, experts and consumers. In the case of simplification, the individual manufacturer decides on the characteristics of the product. Standardisation is actually simplification across an industry: it requires cooperation between the various manufacturers about the product they are going to make.The product characteristics for the individual producer are therefore largely prescribed.This can limit the competitive advantages of the individual business, since product differentiation now becomes more difficult.
standardisation
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The VHS format can be regarded as a standard for video machines. The same applies to the 340 ml cold drink cans, and the A series of paper sizes. In the computer industry standards are also set from time to time for example, regarding the 31/2 inch floppy and compatible programs.
Activity 4.2
Study the section above and then answer the following question: Can you think of any other examples of product standardisation (other than the ones discussed in the block above) from which both the consumer and industry can benefit?
There are numerous examples. But have you thought about the following? Dry cell batteries for flash lights and radios, tyre sizes of cars, the sizes of shoes, films, guns and ammunition and, of course, there are many more examples.
4.5 PRODUCT DIFFERENTIATION

Every consumer knows that, although many products of a product type may be very similar, there are frequently very important differences between them; some of these differences are obvious, and others are more subtle. Cars, for example, are very similar in the sense that they have seats, a steering wheel, an engine, four wheels and so on, but in terms of styling, for example, they are sometimes very different.They also differ in terms of engine power, status, quality and back-up service and so forth. Some manufacturers have succeeded in successfully differentiating their products from those of their competitors.
differentiation
By differentiation a business tries to distinguish its product/s physically and/or psychologically from other virtuallyidenticalcompetitive products; it tries to do this in such a way that its product/s will be seen by the consumer as totally different product from competitors'product/s.Thiscan be done byshape, colour, dimensions, quality packaging, brand, image, status and other need-satisfyingattributes. Here , you can take another look at the added values in the augmented product as part of the product concept. A whole marketing strategy can be based on product differentiation and can provide a business with an exploitable, competitive advantage.
4.6 PRODUCTOBSOLESCENCE
Most people nowadays are quite aware that products don't last forever. Clothes, for example, can become unwearable because they get too old, frayed or too unfashionable.This is called product obsolescence.We may wish that the products we buy would last forever, but we are quick to purchase
product obsolescence
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new products if we can, even though their novelty fades quickly. This can also be seen as product obsolescence. In general, four types of obsolescence can be identified. But in practice a specific obsolescence strategy is often based on two or more types of obsolescence.
physical product obsolescence psychological obsolescence
planned obsolescence
. Physical product obsolescence occurs because the product wears out and becomes physically unfit for further use; examples here are clothing, soap, a tooth brush or car tyres. . Psychological obsolescence can occur as a result of the development of a new competitive product which provides the consumer with greater real or perceived need satisfaction; note that, in this case, the old product may still be physically useful. Here we can think of products such as new fashionable clothing, a new model car, a new-generation computer or a new magazine or newspaper. . Planned obsolescence can result from a specific production and marketing strategy. New products are purposefully developed with a specific physical life span (planned technical obsolescence), while attempts are also made to replace the older product (which may still be physically effective), with a new product that has only minor technical modifications (planned psychological obsolescence). The new product is usually supported by a powerful marketing communication strategy. Planned obsolescence occurs especially in the case of passenger cars, durable household equipment and clothing (in the case of clothing, new styles and fashions are often introduced annually). Planned obsolescence is open to a great deal of criticism in a world that is running out of basic resources, especially if it encourages throwing away or destroying products which are still perfectly useful. Planned obsolescence, however, should not be confused with the development of new products which are necessary for the existence and growth of the business.
4.7 PACKAGING 4.7 The traditional roles of packaging .1

We have all received a packaged item as a present through the mail and felt excited as we opened it! Packaging adds so much value to whatever is inside, even in the case of a ``not so welcome'' present! In the past, consumers usually bought different products from a supply store where the shopkeeper placed the purchased items into multi-purpose brown paper bags bearing no identification.Nowadays, many of these early forms of packaging find their way into antique shops. Most of these packages indicated only the brand name, manufacturer's name and the contents. The old system could not, however, cope with the tremendous and continuous increase in the number of product items on shop shelves, particularly
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during the decades immediately following World War II. Shopkeepers and traditional grocery stores had to make way for the supermarket system.
4.7 The contemporary roles of packaging .2

roles of packaging
Today packaging plays a very interesting and important role as a silent persuader in the marketing of consumer products and particularly convenience products. (These are products which the consumer needs, but isn't willing to spend much time and effort shopping for.) A package can be described as a container for a product and may, for example, be a plastic or glass bottle, wooden or cardboard box, a bag or a wrapping. Each product type has unique requirements as far as packaging is concerned. Although packaging is essentially a product decision, it is also the medium by which the marketer communicates promotional messages to the consumer. It provides a surface for communicating the price and can make distribution easier. Packaging represents the company and the marketer in the shop it is a silent salesperson. The most important of the numerous roles played by packaging are as follows: . Basic protection, ensuring preservation and durability against damage or wear and tear in the store, the home and in transit; protection against pilferage, contamination, extremes of temperature, flavour loss, leakage, mould, insects, corrosion and other chemical change, and so on. . Convenience both in use and for handling, storage and transportation. . Environmental adaptability emphasising returnable and recyclable materials rather than pollutants such as aerosols and plastics; minimising packaging waste; legality, complying with the need to conform to increasingly stringent regulations concerning accurate identification of contents, ingredients, weights, price, production and sell-by dates and manufacturer details. . Promotion, including the communication of product information, the use of shape, design and colour to stimulate visual appeal and product differentiation, the incorporation of specific sales promotion campaigns such as special offers and coupons, and utilising logos and slogans to make brand statements, create a favourable product image, reinforce corporate identity and support media advertising. . Economic viability, taking into account research and material costs and the need for different packaging decisions to satisfy protection, promotion and transportation requirements.
4.7 Demands from the marketplace on packaging .3

The self-service system and the tremendous increase in products and the battle for shelf space have made particular demands of product packaging. The package must be designed to stand out from competitive packages. This design requires disciplined creativity.There is often a conflict between
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a package which will attract the maximum amount of attention and one which will project the correct image. The cost of packaging is a further restraint. On the part of the supermarket, the package must be convenient to stock and display; it must be capable of preserving and protecting the contents during storage and display; and it should not be easily soiled. `À package must protect what it sells and sell what it protects''. Designing a distinctive and unique package is not easy.The most important features of the design include the shape, colour and material of the package and the illustrations and lettering. The package must also identify its contents very carefully, taking into account all the considerations that will be present when the package is displayed in practice. Products in a supermarket are displayed in a multicolour environment and under good lighting conditions.The colour characteristic of the artificial lighting in supermarkets can, however, influence the perception (intensity or warmth) of the colour on the package and this, too, must be taken into consideration in the design and testing stages.
4.7 Some important components of packaging .4

4.7 The shape ofthe package .4.1
The shape of the package also plays a very important role in the supermarket; an unusually shaped package can be easily identified on a supermarket shelf. Different forms also convey different images.This is important in the wine and cosmetic industry. Someone once said that simple rightness of form gives us pleasure and we call it beauty. Gilbeys achieved success with the relaunch of theirTweejongegezellen range of white wines.The relaunch included the introduction of new blends and new packaging for the entire range. According to the product manager,``The wines were good anyway, but with revamped packaging they began to earn the attention they deserved''. The cost of such distinctive packaging can be quite high. Care must therefore be taken not to add any unnecessary frills which have no real communication purpose. A tall, slender bottle with graceful curves may suggest the ideal image for a beauty product, but the retailer may dislike this type of packaging because of the difficulty in stacking it. This problem may be overcome by packing the bottle in a box and then utilising the surface design to suggest an image of gracefulness. The retailer can also move the shelves closer together to overcome the problem of stacking. Slender, flat-sided bottles can be knocked over quite easily, frustrating both retailer and consumer. However, these bottles often appear larger than their actual size and provide a larger face for surface design, an advantage which should be weighed carefully against the disadvantages.
4.7 .4.2 Colour

Colour is one instrument that the marketer can use to communicate with the target market. Colour can convey different types of messages:
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. Colour can convey certain symbolic values which may influence consumers unconsciously.The colour scheme, for instance, must be considered carefully. It must be attractive and have visual impact but, at the same time, the psychological meaning of different colours must also be kept in mind. Green is definitely not an appropriate packaging choice for meat products, but may well create the idea of freshness if the product in question is canned vegetables. . All colours possess unique qualities and have the ability to influence a consumer without the the consumer being aware of it. It is interesting to note how often bright colours such as red are used in packaging and other promotion material. . Colour can also convey a perceptualillusion.Y ellow or white objects, for example, appear larger than red, green or blue objects. Products which have red packaging also appear to be heavier than packaging that uses other colours.This is also why red clothing is not usually recommended for overweight people.
4.7 .4.3 Packaging materials

Packaging material also conveys an image and the marketer needs to determine consumer preference here.To market tomato sauce in plastic instead of glass, for example, immediately makes a statement about the product.One statementitdoes notmakeis that theproductis`ùp-market''.Exactly whatit will say depends on the target market, whose interpretation of the plastic bottle can be anything from economical to inferior. These days, there is an increasing trend to use clear packaging, which allows consumers to inspect all the items in a pack. In the takeaway food business a crisp type of paper that``crackles'' is better as a package or wrapping than a soft plastic bag or wrapping, since crisp paper conveys an image of freshness. The basic change from bags to boxes had a dramatic impact on the sales of Kellogg's breakfast cereals. Sales of corn flakes, for example, rocketed to a stunning 60% over budget within four months.This decision was the result of market research. The only disadvantage was increased cost, but Kellogg's reports that the pluses outweighed the minuses. The choice of the material to be used for packaging depends on consumer preference; futhermore, the packaging chosen must fit in with the whole marketing strategy and the image and message the marketer wants to convey.
4.7 The extended communication role of packaging .4.4

Packaging does not, however, stop communicating to the consumer at the point of purchase. It begins the communication process again when the consumer unpacks the articles at home. For example, the issues answered by the evaluation of packaging after purchase may include the following:
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. Did the package succeed in protecting the contents effectively during transport? . Can the product be easily stored at home and are the contents well protected during storage, or when in use? . Can the packaging be easily opened and, if necessary, does it making using the product easier? Furthermore: . The instructions for use are read at home. . The after-sales service is given on the packaging or enclosed pamphlet. . Attractive packages can be displayed in the kitchen, bathroom or on the dressing table. . Some packages are tamperproof to prevent misuse or accidents. . Re-usable packages and canisters continue their communication task long after the product has been used. Post-purchase communication can contribute towards the consumer's post-purchase satisfaction and help to minimise or even eliminate cognitive dissonance. As we have suggested already, the product's packaging is a bit like taking a salesman home. Post-purchase communication must be taken seriously, since it can, and does, often influence the image and repurchase of the product and therefore future brand loyalty.
4.7 Evaluating packaging .5

Marketing management use five criteria to evaluate different kinds of packaging: . The brand must be clearly visible (legible and recognisable). . The package must clearly reflect the nature, purpose and benefits of the product. . The package must be directed at the consumers in the target market (ie it must be consumer related). . The package must have visual impact. . The graphic design must be attractive and striking. Each package must be evaluated in terms of each of these criteria and in terms of the criteria as a whole.
Activity 4.3
Study the section above and then perform the following activities. Take a few packages from the kitchen, for example, and try to identify the different components of the packaging and the different roles played by the packaging. When you go into the grocery store again, try to see which packages you can easily recognise from a distance and try to determine why.
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When you looked at the packages in the kitchen, did you, for example, spot the following packaging functions? Protection and easy handling in the case of bottles of cooking oil, margarine tubs and spices? Did you find any packages with communication on them? What was communicated? Instructions, recipes, contact particulars, content, illustrations of use, ingredients? Have you realised that the colour, size, print size, shape, brands and illustrations all contribute towards package and brand recognition?
4.7 Different forms of packaging .6

forms of packaging
Marketing management has different forms of packaging to choose from in order to reach their marketing objectives. Some of these forms of packaging are discussed below.
4.7 Packaging ofthe product mix .6.1

For the packaging of a product mix there is a choice between family packaging (for all the products in the product mix), orindividual and unique packaging (for each product line or product item).
family packaging
. Family packaging means that all products in the mix are more or less identically packed or have at least one or more important packaging characteristics in common (eg the packaging of Royco soup and gravy powder or Kellogg's products). Family packaging is linked to family brands. . Individual packaging usually takes the form of speciality packaging; that is, when a manufacturer wants to create an image of product distinctiveness and exclusiveness.Certain types of liquor, for example, are packaged in uniquely shaped bottles covered with raffia plaits, while jewellery and fountain pens are packaged in gilt-edged containers.
individual packaging
4.7 .6.2 Reusable packaging

reusable packaging
A business can select and design containers for its products that can be used for some other purpose after the contents have been consumed. Peanuts, biltong and spices are marketed in glasses, and washing powders and coffee sold in special plastic reusable containers.This type of packaging serves as an additional buying incentive, especially if it does not excessively increase the price of the product. Reusable packaging can also encourage repeat purchases, since the consumer may wish to collect a set of glasses or plastic containers.
4.7 .6.3 Multiple packaging

multiple packaging
Here, severalcomplementary products are packedin one container.Deodorants, aftershave lotions, shaving cream and hair spray such products are often packed in one container. Multiple packaging is particularly useful for introducing a new product and obtaining brand recognition.Furthermore, multiple packaging is often used as special offers (loss-leaders). Multiple
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packaging can also have certain cost benefits for the retailer, since handling costs and the costs involved in the marketing of goods should now be lower per product unit. Multiple packaging is also being used in the computer industry. For example, NetActive is selling a modem together with their program and other software in the same package. A replacement cartridge for an inkjet printer is sometimes sold with a CD containing computer programs or some special inkjet paper.
4.7 .6.4 Kaleidoscopic packaging

kaleidoscopic packaging
The term ``kaleidoscopic packaging'' is used to identify packaging decisions where certain aspects of the packaging are changed continually. Examples include a series of wildlife pictures printed on the flaps of Weet-Bix boxes or games, coupons or collectable recipes on cereal boxes. The basic idea behind this packaging decision is to create a demand for the product via the demand for the packaging.
4.8 CONCLUSION
In this study unit we discussed different packaging decisions that can enhance the value of the product for the consumer and differentiate the product from competitors' products (in a way that gives the product a competitive advantage).
SELF-TESTQUESTIONS
Y have reached the end of topic1, which was aimed at giving you an overou viewof themeaningof theproduct and thebasic decisionsinproduct marketing.Y should now test your knowledge of the topic by doing the following: ou (1) Describe the product concept. (2) Describe the classification of consumer products. (3) Define each of the following: (a) product differentiation (b) product obsolescence (c) product standardisation (4) Describe the basic functions of packaging and the different forms of packaging. Have done ................................................................................................. Y should now have a clear understanding of the various meanings of a proou duct, the classification of products and product decisions. In the next topic we will focus on the planning that forms part of product management. Will do .......................................................................................................
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topic 2
PLANNING FOR PRODUCT MANAGEMENT CONTENTS

GETTING AN OVERVIEW
Study unit 5 THE MARKETING PLAN

5.1 5.2 The marketing plan in perspective Components of the marketing plan
Study unit 6 CONSUMER ANALYSIS

6.1 Introduction 6.2 Who buys the product? 6.3 What do consumers buy?
Study unit 7 COMPETITIVE ANALYSIS

7.1 7.2 Introduction Methods of determining competition
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OVERVIEW
GETTING ANOVERVIEW There is a popular saying that ``failing to plan is planning to fail''. We know that before we start to build a house or buy a car or go on holiday we need to plan before we start. This is also true for product management. The marketing or product manager must have or prepare a plan that will guide his or her marketing actions. These plans will direct the decisions taken regarding marketing and product development. The following map will show you the approach taken in this topic and the background to product management.
Study the product against the background of the variables in the marketing environment such as .......... Consumers
Focused on in this topic. Forming the basis of the market for the product.
Competitors
The marketing plan for the market
Product decisions in the market (other topics)
. What is a marketing plan? . How is a marketing plan compiled? . What is the connection between a marketing plan and product management? . What are the components of a marketing plan? . Which aspects in the market must be studied as background information for product management? . Which aspects of consumer behaviour are important for product management? . How does a business determine who its competitors are? . marketing plan . consumer analysis . competitive analysis
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Study unit 5: The marketing plan
study unit 5
THE MARKETING PLAN

5.1 THE MARKETING PLANIN PERSPECTIVE
Cyril Crawford is the new product manager of Lightning Communications. He is responsible for their new telephone range, which consists of conventional and cellular phones. If he looks at the different variables such as the different products, competitors and changes in the market, he feels very confused. He realises that he must start somewhere in planning and organising the marketing of his products. All decisions regarding the management of a product or brand are taken against the full background picture of the business itself.The circumstances in which the product is marketed must be taken into consideration when formulating the marketing plan. Cyril realises that he must formulate a marketing plan for his products.
marketing plan
strategic plan
A marketing plan can broadly be described as a written document containing the guidelines for a business unit's marketing programmes and allocations during the product planning period. The marketing plan is based on the objectives and strategic plans of the business as a whole. The strategic plan defines the business's overall mission and objectives. Strategic planning takes place at a higher level than marketing planning. If the business unit consists of many product lines, brands and markets, plans must be drawn up for each. Marketing plans might include product plans, brand plans or market plans.The focus in this module is on product or brand plans.
Activity 5.1
Study section 5.1 above and answer the following question: What do you think are the objectives of a marketing plan?
The objectives of the marketing plan include the following: (1) To define the current situation, problems and opportunities facing the product. (2) To establish objectives and describe the strategies and programmes necessary to attain these objectives. (3) To allocate responsibilities. (4) To encourage a disciplined approach to attain the objectives in a consumer/competitor oriented way. The marketing plan is an operational document containing strategies for the business unit. It is more short-term oriented than the strategic plan on which it is based. Marketing plans are specific statements of how to achieve short-term results.
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Topic 2: PLANNING FOR PRODUCT MANAGEMENT
5.2 COMPONENTS OF THE MARKETING PLAN 5.2.1 An overview of the components of the marketing plan
Nearly every firm that uses marketing plans has its own marketing-plan format. Nevertheless, we can compile the layout and content of a general type of marketing plan. Such a plan will consist of the following main components: THE MARKETING PLAN Executive summary Background assessment Historical appraisal Situation analysis Planning assumptions Marketing objectives Marketing strategy Marketing programmes Financial documents Monitors and controls Contingency plans Without this background any product decisions will be out of context, and will not represent responsible decision-making.We will now discuss each of these components briefly.
5.2.2 The executive summary

A senior manager is often in a position where he or she has to review many marketing plans. In such situations, the senior manager must make a brief summary of each marketing plan, focusing on the objectives, strategies, and expected financial performance of the product in question.
5.2.3 Background assessment

Background data and analysis is vital for developing sound marketing plans and strategies. Background analysis consists of two parts, the historical evaluation and the situation analysis: . The historical evaluation seeks to identify long-term trends and shortterm changes in the market. Over time, a comprehensive set of data is obtained, and these data are often stored in a separate document called a Product Fact Book. . The situation analysis is the second major component of the background analysis. This is a detailed study of current events and, in turn, is composed of several parts.These are discussed below.
situation analysis
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Study unit 5: The marketing plan
(1) Sales analysis.This is an intensive study of a brand's sales records it is intended to uncover problems that are hidden by aggregate numbers. For example, an overall sales increase in all telephones manufactured by the business may hide the fact that the sales of particular models are dropping. (2) Industry attractiveness analysis. Since all markets are dynamic (because competitors, customers, technology, and sales growth rates change), the underlying attractiveness of an industry as an investment target also changes. The purpose of this section of the marketing plan is to identify those factors which can be used to assess the attractiveness of an industry in which the firm is currently competing. (3) Customer analysis. This section of the situation analysis is an attempt to guarantee the customer orientation that is crucial for the success of the product. It is vital to understand not only who the customers are, but also how and why they behave as they do. (4) Competitor analysis. What are the key competitors in the market likely to do in the future? This is the key question addressed in this section of the plan. Since virtually all markets are competitive, it is easy to see why this is a vital section of the situation analysis. (5) Resource analysis. This section of the plan is an analysis of the brand's competitors. In other words, the brand's strengths and weaknesses are determined by comparing it with its major competitors.
5.2.4 Planning assumptions

planning assumptions
The third part of the marketing plan deals with planning assumptions. Such assumptions involve a wide variety of quantitative factors. First, the product's market potential is obviously a key number, since its market potential has implications for expected future category growth, resource allocation, and many other constructs related to product decision making. Market and brand forecasts are relevant for this section too. Finally, assumptions made about variable factors, such as raw materials or labour supply, are also relevant here. The background assessment forms the ``homework'' part of the plan that has to be completed before marketing objectives and strategies can be formulated. While developing new business concepts for the next planning horizon is perhaps more enjoyable, up-front data collection and analysis are the most vital part of the plan.This is because time spent drawing conclusions from the background data often makes optimal strategies apparent (relatively speaking).
5.2.5 The marketing strategy section

It is logical that the background assessment be followed by the strategy part of the plan.This part consists of three sections:
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a statement of marketing objectives (where do we want to go?) the marketing strategy itself (how are we going to get there?) the marketing programmes consisting of the marketing instruments (exactly what do we do in what order?)
5.2.6 The rest of the plan

The final three parts of the marketing plan are vital, but do not form a cohesive unit. The financial documents report the budgets and estimated profit and loss (income) statements. Senior managers, naturally, inspect the expected financial outcome extremely carefully. The monitors and controls section specifies the type of marketing research and other information necessary to measure the progress toward achieving the stated objectives. Thus, the kind of information collected is determined by the objectives. For example, if a market share increase is the objective, then such information must be collected timeously to check for possible shortfalls. Finally, contingency plans are helpful, particularly in dynamic markets where either new products or competitors make it necessary to implement strategy changes while the product plan is still in place.
study unit 6
CONSUMER ANAL YSIS

6.1 INTRODUCTION
Products are manufactured and marketed to satisfy consumer needs. The marketing or product manager therefore needs to be well acquainted with the characteristics of the target market. Effective product decisions cannot be taken unless the marketing or product manager takes into account background information about the target market. Everything in consumer behaviour revolves around the satisfaction of consumer needs, the consumer's decision-making process and the internal and external variables influencing this process.
6.2 WHO BUYS THE PRODUCT?

When a product manager analyses the customers in the product category, his or her first question is ``Who are the customers?'' For most industrial goods and many consumer products, the who must be broken into several different buyer categories within the organisation or household:
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Study unit 6: Consumer analysis
. initiator (who identifies the need for the product) . influencer (who makes informational or preference input into the decision-making process) . decider (who makes the final decision) . purchaser (who makes the actual purchase) . user Product managers in industrial product businesses or expensive shopping products (eg durable goods purchases such as automobiles or houses, in addition to fast food, toys, and other categories already mentioned) will find the categories in the list above useful. Each of these categories must be described carefully, using a thorough description of the buying behaviour of the consumer.
6.3 WHAT DO CONSUMERS BUY? 6.3.1 Consumers buy benefits

consumer needs
When we buy clothes, we know that we are buying items that do far more than just cover our bodies. We are also buying benefits such as group acceptance, admiration, comfort, self-confidence. Customers do not purchase products and services simply for the features of the product. Instead, customers purchase the benefits the product provides. Another way to look at this is to say that the firm produces features, but the customer purchases benefits.The old story about the drill manufacturer that recognized it was selling holes, not drills, not only indicates that benefits are more important than the physical product, but also helps to define the brand's competitors. In other words, a key problem facing the product manager regarding customer analysis is to understand (through marketing research) the benefits different customer groups or market segments are seeking.
6.3.2 Product assortment

product assortment
A second useful piece of information related to the ``what'' question involves the number of different brands purchased by customers in the various segments. For many frequently-purchased consumer products, panel or similar data are available that provide the purchase histories of individual consumers. Such data can be analysed in a number of ways to measure competitive patterns.
6.3.3 Product uses

product uses
A classic illustration of a company that makes significant profits from studying how a product is used, can be seen in the analysis of consumers' use of baking soda.The company discovered that consumers used baking soda to absorb food odours in refrigerators and used baking soda to deodorize drains (among many other uses). Consumers find many uses for a product that the company may never have dreamed of. Interestingly, the way a pro-
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duct is used may or may not be related to the reason why consumers originally bought it.
study unit 7
COMPETITIVE ANAL YSIS

7.1 INTRODUCTION
A business has to be interested in what its competitors are doing if it wants to gain some advantage over the competition.
7.2 METHODS OF DETERMINING COMPETITION

Defining the competition may sound easy, but some businesses frequently have a misconception or false impression of who their competitors really are and therefore plan their strategies on the wrong basis. The easiest way to determine competition is that used by the industrial market. Here the Standard Industrial Classification (SIC) code can be used.This system assigns products to two-digit major groups.These external sources of information define competition based on physical product similarities (product form or category definitions). But relying exclusively on these categorizations will overlook both generic and budget competitors. There are two other approaches that can be used for industrial or consumer products.
7 .2.1 Management judgment

Product managers can often judge what the present and future competition is likely to be through experience, salesperson call reports, distributors, or other company sources.
7 .2.2 Customer-based measures

Two types of customer data are commonly used to assess market structures: actual purchase or usage data and judgments.
7 .2.2.1 Actual purchase data

Actual purchase or usage data are particularly useful for understanding product form and category competition. Because it is difficult to understand what alternatives were considered when purchases were actually made, the usual assumption is that purchases are made within a narrow
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Study unit 7: Competitive analysis
definition of competition. However, what customers have actually done does not necessarily indicate what they would have preferred to do (in the past) or are likely to do (in the future).
7 .2.2.2 Judgment data

Judgment data are needed to understand broader definitions of competition and to estimate how a new product influences the structure of competition. Several methods have been proposed for estimating competition from consumer judgments.Consumers are surveyed in focus groups, shopping mall intercepts, or other environments. They can provide insight into potential future market structures, help produce broader definitions of current structures.This is true of all types of products and services, including industrial products and consumer durables.
overall similarity
. Judged overall similarity measures between pairs of products. Alternatively, brands can be used to create geometric representations in multidimensional spaces called perceptual maps. The brands or products are represented by points in the space, while the dimensions represent the attributes consumers use to make similarity judgments. Brands located close to one another are judged to be similar and thus form a defined market. If brands are the objects of the mapping exercise, only product category or product form competition can be assessed, However, if a larger set of products is used, more interesting generic competition can be identified. Exhibit 7 is an example of a perceptual map of diffe.1 rent cars. . Similarityofconsideration sets is an approach that asks consumers to take a large group of products and divide them into groups of items that can be substituted for one another. In other words, the variety of items that the consumer can choose from in a specific situation. Consumers are then asked to judge the similarity of the products within each group. By accumulating consumers' similarity judgments, the business can develop a perceptual map.This approach is thus somewhat similar to the preceding one, but here the similarity judgments are collected after consideration sets have been formed. . Product deletion is based on customer reaction to product unavailability. Products or brands in a group are presumed to be substitutes and consequently form a market if, when one of them is deleted from the choice set, customers are likely to buy one of the remaining products rather than a product outside the original set. . Substitution in use involves estimating the degree of competitiveness by looking at those product characteristics that are judged to be similar in terms of the context of use. First, consumers list all possible uses and contexts for a target product or brand. Next, either the original consumers (ie respondents) or a fresh sample of respondents list other products or brands that provide the same benefits or uses.The respondents then rate the appropriateness of these products for different contexts or use occasions. This method clearly has the potential to
product groups
product deletion
substitution
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produce a large number of generic competitors or even budget competitors. EXHIBIT 7 .1 Perceptual map of cars
perceptual map
Beautiful
. BMW 740i
Great cars
. Lexus . BMW 328 . Audi A8 . Volvo 850 . Merc S320 . Land Cruiser . Land Rover
Great experience
. Merc E320 Sensible
Activity 7.1
Study study unit 7 and then do the following activity: Use the information on the perceptual map in exhibit 7.1 and indicate the following: . the most sensible car . the most beautiful car . the two cars perceived as most similar to the BMW 328
Take a look at what we have written and compare it with your answer: . the most sensible car: Merc E320 . the most beautiful car: BMW 740i
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Study unit 7: Competitive analysis
. the two cars perceived as the most similar to the BMW 328: Lexus and Audi A8
SELF-TESTQUESTIONS
Y have now reached the end of topic 2, which was aimed at giving you an ou overview of the meaning of the product and basic marketing decisions.Y ou should now test your knowledge of the topic by answering the following questions: (1) Which aspects in the market must be studied as background for product management? (2) Which aspects of consumer behaviour are important for product management? (3) How can a business determine its competitors? (4) List the main components of a marketing plan. (5) Explain the connection between a marketing plan and product management. (6) Explain the levels of competition. (7) What does the consumer really buy when he or she buys a product? (8) Describe the consumer-based methods that can be used to identify competitors. Have done ........................................................................................ You should now have a clear understanding of the background against which the product decisions can be taken. This consists of the marketing plan based on the practical reality of consumers and competitors. In the next topic we will look at how a business develops new products. Will do ...............................................................................................
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topic 3
NEW PRODUCT DEVELOPMENT CONTENTS

GETTING AN OVERVIEW The new product development process
Study unit 8 INTRODUCTION TO NEW PRODUCT DEVELOPMENT

8.1 Reasons for new product development 8.2 The meaning of new products
Study unit 9 THE NEW PRODUCT DEVELOPMENT PROCESS

9.1 Overview of the new product development process
Study unit 10 INITIALISING NEW PRODUCT DEVELOPMENT

10.1 Structuring the business for new product development 10.2 Formulating a new product strategy
Study unit 11 GETTING IDEAS

11.1 11.2 Introduction Sources of new product ideas
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CONTENTS
Study unit 12 SCREENING NEW PRODUCT IDEAS

12.1 Introduction 12.2 Effective screening
Study unit 13 CONCEPT DEVELOPMENT AND TESTING

13.1 The meaning of concept development 13.2 Concept testing
Study unit 14 PROFITABILITY ANALYSIS

14.1 The meaning of profitability analysis 14.2 The basic financial concepts 14.3 Financial analysis for new product development
Study unit 15 PRODUCT DEVELOPMENT AND TESTING

15.1 Introduction 15.2 Product development 15.3 Product testing
Study unit 16 COMMERCIALISATION

16.1 Introduction 16.2 Test marketing 16.3 Launching the product
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OVERVIEW
GETTING ANOVERVIEW
We are all probably aware of the huge number of new products that appear on the market every year. In the field of technology especially new products appear on the market virtually every month of the year. Cell phones, TV satellite dishes, computer programmes and motor cars are all examples of such products. If a business does not actively look for new product opportunities, these opportunities are likely to be grabbed by someone else who can meet new consumer needs with new technology. The following map will show you the different steps in the new product development process.
Initialising new product development Gathering ideas Screening ideas
Concept development and testing Business analysis Product development and testing Test marketing and commercialisation
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Study unit 8: Introduction to new product development
. . . . . . . . . .
Why is new product development important? What is included in the concept ``new product''? What are the steps in the new product development process? How can a business structure itself for new product development? What is included in new product development strategy? How can we find out whether a new product idea is feasible? Where do new product ideas originate? How should a new product concept be developed and tested? How can we do a financial analysis for new product development? What does the commercialisation of a new product involve?
. . . . . . . . .
the importance of, and reasons for, new product development the concept ``new product'' new product developing process new product strategy screening of new product ideas concept analysis and testing business analysis product development and testing commercialisation of the new product
study unit 8
INTRODUCTION TONEW PRODUCT DEVELOPMENT

8.1 REASONS FOR NEW PRODUCT DEVELOPMENT
The economic, technological, institutional, social, political, physical, international market and competitive environment are continuously changing. Think, for example, about the changes in electronics, computers and cars. New needs and desires also develop in the consumer market. These changes can offer new opportunities or threats, depending on the way the business is able, and willing to, react. One way to keep in pace with these changes is to develop new products to meet the challenges and demands of the changes. The continuous development and marketing of new products and services have become vital to the growth of the modern business.
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Topic 3: NEW PRODUCT DEVELOPMENT
8.2 THE MEANING OF NEW PRODUCTS

meaning of new products
New products can be defined as those products or product attributes which are new to the business.The target market regards these products in one or more respects as being significantlydifferent from existingcompetitive products. New products differ in their potential impact on the firm. Some involve new processes or technologies; others do not. Similarly, from the marketing point of view, some new products will be seen as offering very new benefits, while others will be viewed as only modest improvements over existing products. To understand why the process of managing new-product development varies in different situations, we need to understand just how new a product is to the firm and to the market. A product that is new to the business is not necessarily seen as new by the target market the reverse also applies.
8.2.1 Newness to the firm

From the firm's point of view, a new product can fall into any of the four categories: product modification, product line development, entry into a related category, and entry into an entirely new category. . Product modification means improving the quality of an existing product. . Product line development is the addition of new products . Entry into a related category, for example, Kodak's digital cameras in addition to their optical cameras and films. . Entry into an entirely new category is a diversification strategy discussed in topic 1. For example, when Panasonic decided to start manufacturing bicycles.
8.2.2 Newness to the market

The market experiences the following degrees of newness (from ``most new'' to ``least new''): breakthrough innovations, pioneering innovations, adaptive innovations, and imitative new products. . Breakthrough innovations are innovations that involve major changes in technology, that is, changes that lead to the creation of new product categories. Microwave ovens is an example. . Pioneering innovations are improvements that are so significant that existing products in the category are made obsolete or major new subcategories are created. The introduction of the cellular phone is an example here. . Adaptive innovations are innovations that involve improvements to established products that may be distinctive, but which do not add major new benefits to the product. The introduction of the new twistoff bottle cap on some beer bottles or a redial facility on a telephone are examples here. The Toyota Venture minibus was recently equipped with a 2,2 litre engine, which was an adaptive improvement.
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Study unit 9: The new product development process
. Imitative new products are basically copies of existing products produced by other firms. Firms that develop such products usually try to compete with established brands either by underpricing the competition or by offering improved reliability. As the degree of market newness increases, it becomes more difficult to predict market acceptance, and marketing tasks become more complex. Generally, this means that the marketing activities associated with the product development process will be more complex.
Activity 8.1
Study section 8.2 above and then do the following activity: Superb Woodcraft, a manufacturer and marketer of kitchen cupboards, wants to expand its business by introducing new products on the market in the same line of business that will enable it to use existing machinery. What options are open to Superb Woodcraft?
Superb Woodcraft does not operate in a business where it can easily introduce a product that is really new to the market; the product will only be new to the business. From the firm's point of view, a new product can fall into any of the four categories: (1) Product modification. By improving the quality of products by using better hinges and rollers on doors and drawers and by offering a new computer-aided design service. (2) Product line development. By adding melamine kitchens to its present range of solid wood kitchens. (3) Entry into a related category. By adding study furniture and bars to its product range. (4) Entry into an entirely new category. For example by considering the manufacturing of wooden toys.
study unit 9
THE NEW PRODUCT DEVELOPMENT PROCESS

9.1 OVERVIEWOF THE NEW PRODUCT DEVELOPMENT PROCESS
The new product development process is a series of activities which the
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business uses to generate new product ideas, evaluate them and develop them into new products. The product development process consists of the following steps: . . . . . . . . establishing an organisational structure for product development collecting product ideas screening product ideas product concept development and testing profitability analysis physical product development test marketing commercialisation commercialisation
Before we discuss these steps in detail, we need to make some preliminary remarks on the decision-making process in product development. For the individual business, product development deals with the creation of new products. Product development is the systematic process which has to be followedin order to achieve the following: create new products with the fewest possible sacrifices and risks, which will bring the business the highest possible benefits, and which will fulfil the target market's highest possible expectations.
overview of development process
Here is a brief overview of the new product development process. Each phase involves taking decisions in several important management areas: (1) Initialising the product development process. This step includes organising of the business to handle product development and the allocation of relevant tasks plus the specification of a product development strategy. (2) Generation of ideas this is done through various means, such as brainstorming, ``think tanks'', employee suggestions, technological discoveries, consumer research, looking at what the competition is doing or using independent specialists. (3) Screening this involves analysing basic suitability of the product in terms of the company's expertise and experience, financial resources required, short- and long-term market demand, likely return on investment (ROI), availability of raw materials, legal aspects such as patents, company objectives, policies and overall strategy. (4) Concept development and testing once screened, an idea is turned into a more clearly specified concept; this concept is then tested for its fit with company capability and its ability to meet consumer expectations. (5) Profitability analysis this means the detailed evaluation of the idea, including further testing of concept and ROI, marketing research, competition comparisons, full analysis of resource and production requirements and overall risk factor. (6) Product development and testing complete research and development, make models/prototypes and revise if necessary.This is supplemented by marketing planning, production scheduling, financial calculations, market research and the manufacturing of the product.
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Study unit 9: The new product development process
(7) Test marketing and commercialisation introducing the product on a limited scale to one particular segment or region that is representative of the total potential market; test marketing is the final `ìnsurance policy'' against failure. Commercialization and launch finalisation of product, ROI and marketing plan, production and marketing plan commence, product introduced into the total market on a market-by-market basis or nationally, supported by sales effort, promotion and distribution channels. Of every100 ideas, it has been estimated that only five arrive at the launch stage and of these only one will be successful.This means a failure rate of 99 percent. The extremely low success rate for new product ideas means that, at each phase of the development process, an organisation needs to actively ensure that only the products with the highest probability of success are allowed to progress.The ones more likely to fail must be dropped before the business devotes too much time and effort to them.This ruthlessness is necessary if a company is to minimise the risk factor in a competitive business environment. Nevertheless, organisations still experience considerable difficulty in convincing re-sellers to stock new products. One way of giving a new product the best chance of succeeding in the market is the careful creation and nurturing of a distinctive personality or brand.This gives the product a visible product advantage.
Activity 9.1
Study `Òverview of the stages of the new product development process'' in Baker and Hart (1999:154157) and study unit 9 above. Then do the following activity: You are a well-known marketing expert. A marketing magazine contacts you for your comments on the following problem. Many new products in the RSA fail and even cause financial problems for those businesses. The magazine wants to know if you can offer any advice to people who suddenly get a bright idea and immediately want to start manufacturing and marketing ``their invention''.
Of course, this problem invites many comments. But, to keep to the topic of product development, have you mentioned the following? . New product ideas must be screened and evaluated before they can be commercialised. Consumers' acceptance of the product concept must first be analysed and then a business analysis done before even a product prototype is tested. . One must rather start with numerous ideas and evaluate them all to select the best alternative.
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study unit 10
INITIALISINGNEW PRODUCT DEVELOPMENT

10.1 STRUCTURING THE BUSINESS FOR NEW PRODUCT DEVELOPMENT
(Study ``Managing people in NPD'' Baker & Hart 1999:178 ^185.) Product development does not take place automatically in a business the whole process must be managed. No tasks can be managed properly unless the business allocates tasks and responsibilities to specific individuals. In the case of product development, planning the set-up of the new product development project is a prerequisite. This means that the business's organisational structure must at least allow for product development. The establishment of an effective organisation (with emphasis on the allocation of authority and responsibility) in which product development can be stimulated, planned, coordinated and controlled, is vital for successful product development.
Activity 10.1
Study ``Structures used by the industry'' in Baker and Hart (1999:182185) and indicate the different structuring possibilities that can be used to structure a business for new product development.
I hope you noticed that the following are a few organisational possibilities for allocating responsibility in the area of new product development.These responsibilities can be allocated as follows: . . . . . . the technical department the product manager or new-product manager special task forces a multidisciplinary team new-product venture teams or new product committees new-product divisions
An ideal organisational structure for product development which applies to all businesses and all circumstances simply does not exist.The structure which suits a particular business best is determined, among other things, by the size of the business, the nature of the industry and products, the available technology, the management skills and expertise, and the business's financial capability.
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Study unit 10: Initialising new product development
There is no point structuring the business for new product development without providing individuals or sections with clear guidelines about, for example, what the business expects of the new product and what its goals are. Such guidelines can be given as new product strategy.
10.2 FORMULATING A NEW PRODUCT STRATEGY

(Study Ch 8, ``New product strategy'' in Baker & Hart 1999:190 ^205 as indicated.)
10.2.1 The importance of a product innovation strategy

The marketing environment is constantly changing and the rate of change is increasing. Many of these changes offer a business lucrative opportunities if they can be successfully exploited. On the other hand, these changes pose important threats if they are ignored.
Activity 10.2
Study ``The need for product innovation strategy'' in Baker and Hart (1999:191194) and then briefly indicate the following: . the specifications that should be included in the new product strategy . the reasons for and benefits of these specifications
components of new product strategy
I hope you included the following in new product strategy: . potential markets . competitive advantages of product development. . level of risk acceptance These guidelines have the following advantages: . Strengthens top management's commitment to new product development. . The area of product development effort is clearly demarcated and emphasised. . Creates an integrated, balanced effort to new product development. . Contributes to appropriate organisational structuring.
10.2.2 Alternative new product development strategies

The business must consider alternative strategies.One basic strategic decision is whether to be reactive or proactive. A reactive product strategy responds to initiating pressures as these occur. A proactive strategy explicitly allocates resources to identify and seize opportunities and preempt possible adverse events. A reactive approach is to wait until the com-
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petition introduces a product and then copy this product if it is successful. A proactive strategy preempts competition by being first on the market with a product competitors find difficult to match (Urban, Hauser & Dholakia 1987:15^17). . Reactive strategies
reactive strategies
There are a few reactive strategies that a business can consider when reacting to changes in the marketing environment. A defensive strategy guards against competition from new, successful products by changing its existing products. An imitative strategy is based on quickly copying a new product before the marketer is assured of its success. In the case of the second-but-better strategy the business waits until the competitor's product is launched and then copies and improves on the product. The responsive strategy means deliberately reacting to consumers' requests. . Proactive strategies
proactive strategies
In this case the organisation initiates the change. A proactive strategy may be based on future-oriented research and development effort to develop technically superior products. Another proactive approach is based on the idea that success can be achieved by considering the consumer first. The marketing strategy here is based on discovering a consumer need and then developing a product that will meet this need. One of the most proactive forms of product development is the entrepreneurial approach. Here, a certain person (an entrepreneur) has an idea and strives to make this ``dream'' a reality. Acquisition is when the business buys other firms which have developed products that are new to the buying firm and perhaps the market. . Selecting a new product strategy To select the appropriate strategy we must understand the situations that influence this decision. We must look at the growth opportunities, the probable protection for innovation, the scale of the market, the strength of the competition, and the business's position in a vertical system. Growth opportunities It is important to see new product development against the background of the business's growth opportunities. There are four different growth opportunities, as you can see from the chart below.
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Study unit 10: Initialising new product development
Existing products
New products
Existing markets
Market penetration
Product development
New markets
Market development
Diversification
market penetration
One growth opportunity is by using existing products and markets.This is the strategy of market penetration. It involves using existing products to gain a high market share of existing markets. This growth strategy is not based on product innovation, but on selling and promotion. If existing products and markets are to be the primary growth vehicles, and the organisation has a good distribution network, and production and growth-rate aspirations are realistic, then a reactive product strategy may be most successful. In this case, product development will be used only to defend existing products by reacting to competitive and environmental pressures. However, if the business wants growth or has a policy of innovating, and has a strong research and development and marketing base, a proactive strategy may be the most suitable.This would be true for most businesses in the other three growth categories. In many of today's markets, saturation occurs so frequently that firms are increasingly looking at new markets. In this case an existing product can be marketed in new markets.This is consequently called the market developing strategy.This is an example of where the``new''product is not new to the business, but to the market. The usual new product development strategy is to enter existing markets with new products. This strategy is consistent with the notion of ``building on our strength'' and expanding in areas of existing skill and knowledge in distribution and production (for example). Pick 'n Pay is an example here it has recently started a new emphasis on fresh food and preprepared foods.
market development
diversification
Some companies may choose to diversify into new markets with new products. Again, Pick 'n Pay is an example here. It has recently introduced a new small supermarket concept called Right Value into different new markets. Pep has also diversified by entering new overseas markets with new products aimed at markets in other parts of Africa and the UK.
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Protection of innovation Another major factor in deciding between reactive and proactive strategies is the amount of protection a new product can obtain. Although patents are becoming difficult to defend, if the product can be patented, the innovating organisation can be more certain that its developmental investment will be repaid. Scale of market In large markets, where economies of scale in production, distribution, or marketing exist, being first with a real innovation may establish market dominance and give the firm a competitive advantage. This is particularly true if the firm continues to innovate.On the other hand, in small markets it is more difficult to be proactive since development resources cannot be returned so easily. Competition A reactive strategy, based on imitation, may be feasible if the following apply: the time to get a product on the market is short, there are few entry costs, the innovation is not protected by patents, and the business can quickly achieve economies of scale.The relative size of the competitors is also important. A small firm may be particularly vulnerable to competitive reaction and thus must be very preemptive in its innovation plans. Similarly, a large firm must be proactive in protecting its lead or image. Position in vertical system In some vertical systems, one firm in the distribution chain may be proactive, while others may be reactive to that firm's innovation. In many industrial markets, the supplier of the materials or even the final user may develop the product. In consumer industries, the producer is usually the innovator. Whether a firm is proactive depends upon the stance of other firms in the distribution channel and on its relative power within that channel. Some firms actually gain power as well as profits by innovation.
Activity 10.3
Study the alternative growth strategies above and read ``Managing R&D'' in Baker and Hart (1999:200205) and make a list of conditions under which reactive and proactive strategies are appropriate.
Y list should look more or less like the following: our Reactive strategies are appropriate for organisations that: . . . . . require concentration on existing products or markets can achieve little protection for innovation are in markets too small to recover developmental costs are in danger of being overwhelmed by competitive imitation are in distribution chains dominated by another innovator
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Study unit 11: Getting ideas
Organisations with the following characteristics should use proactive strategies: . . . . . . . overall growth policy willingness to enter new products and markets capability of achieving patent or market penetration ability to enter high-volume or high margin markets resources and time necessary to develop new products competition unable to rapidly enter with a second-but-better strategy reasonable power in the distribution channel
study unit 11
GETTING IDEAS
(Study the relevant sections in ch 9 of Baker & Hart 1999:208 ^238.)
11.1 INTRODUCTION
The purpose of activities at the idea generation and concept development stage is to create ideas for possible new products and to refine those ideas into precise concepts that can be used to specify product design details and marketing plans. Ideas for new products may come from a variety of internal and external sources. The most obvious internal source is the Research and Development department. Other internal sources are sales personnel, production managers, and personnel who have first-hand contact with consumers. External sources include looking at new competitive products, comments from retail or wholesale distributors and input from consultants or advertising agencies.Universities and government agencies may be good sources also, especially when new technology is involved. Most importantly, market-oriented firms look to their consumers and potential consumers for new-product ideas. Consumers provide ideas by describing the problems they have with existing products or describing how they modify a product to make it work better. The business must actually gather as many product ideas as possible. Most of these ideas will (during some stage of the product development process) be eliminated by the filtering effect, as indicated in figure 8.1 in Baker and Hart (1999:192).
Activity 11.1
Study the following sections in Baker and Hart (1999:208211): `Ìntroduction, The objective of idea generation and what is a new product idea''. Now answer the following question:
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Does any new product idea qualify to be included in the collection of new product ideas to be evaluated?
To qualify for inclusion in the collection of new product ideas, a new product idea must meet the following requirements: (1) It must be a hypothetical suggestion that links a potential ``bundle of attributes'' to a potential market. (2) It must therefore correspond with the business's objectives and strategic plan. (3) Idea development is inevitably linked to opportunities and constraints that define what can be realistically achieved.
11.2 SOURCES OF NEW PRODUCT IDEAS 1 1.2.1 Identifying the sources of new product information
Cyril Crawford, the product manager of Lightning Communications, has made a proposal to top management to structure the business for new product development. His proposal has been accepted and a multidisciplinary project team has been established to handle the new product development project. During one of their first meetings the electronics technician and a sales representative both came up with an interesting idea, but their initial enthusiasm was soon quenched and followed by a long silence and pen-chewing.
Activity 11.2
Read the paragraph above and study ``Sources of information for new product ideas'' in Baker and Hart (1999:212219). Suppose now that you, as a marketing consultant, are also present at the meeting and are asked to break the deadlock. List the different sources of information that you can consult. Break these sources down into internal and external sources and indicate which of those two groups you would consult first and say why.
The sources of information for new product ideas are explained on pages 212 to 219 of Baker and Hart (1999) and summarised in figure 9.2 on page 219. Y will notice that the sources of information can be classified into ou internal and external sources. It is a good idea to consult the internal sources first, because these are more readily available and in most cases cheaper to consult than external sources. Internal sources can also provide insight and guidelines about consulting external sources. But consultation must go beyond internal sources.
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1 1.2.2 Techniques for activating sources of information
(Study ``Techniques for activating sources of information'' in Baker & Hart 1999:219^235.)
1 .2.2.1 Techniques and their classification 1

Knowing which sources of information to consult for new product ideas is one thing knowing how to extract relevant information from these sources is another. There are different techniques for getting the most out of internal and external sources.
Activity 11.3
Study ``techniques for activating internal sources only'' in Baker and Hart (1999:221222) and then answer the following question. The multidisciplinary new product committee is in a hurry to start collecting new product ideas, even at their initial meeting. They know now that, at the moment, they only have access to some internal sources. What techniques can be used to extract relevant information from the internal sources? Which one do you recommend for immediate application?
Y should have noticed that the techniques are classified into ou . techniques for internal sources . techniques for internal and external sources . techniques for external sources Given their low cost and easy accessibility, we will first analyse internal sources.Y will, however, note that virtually all techniques can be applied ou to internal sources, but there are some that can only be applied to internal sources, such as job rotation, company suggestion schemes and invention groups. None of these can be applied immediately and quickly. We therefore need to look at the other techniques too, such as brainstorming, product-centred techniques, market-based techniques and scenario-based techniques. There are two techniques that can be applied immediately without much effort in the conference room, namely brainstorming and attribute analysis and analogy (the last being part of the product-centred technique). However, please note that some people have doubts about the value of brainstorming for new product ideas. The product-centred technique is a good starting point for making a summary of existing product features, functions and benefits (for further analysis). So we will start by discussing the product-centred technique before looking at brainstorming. To get some hands-on experience of this, please do the following activity.
brain storming product-centred technique
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Activity 11.4
Study ``Product centred techniques'' in Baker and Hart (1999:225228) and then answer the following question. Take a product (preferably a fax machine, given the example below) and analyse it in tabular format to emphasise its features, functions and benefits.
The following is an example from the Web page of Samsung explaining one of its fax machines in terms of attribute analysis. If your analysis looks very different, compare it with our table below and do this activity again. FEATURES ADVANTAGES (functions) Quality of documents is improved and assured Easier programming of machine and function settings Improve quality of printing and scanning of documents BENEFIT
32 LEVEL GRA SCALE Y
Newspaper and fine print is improved at the receiving fax machine Clearly see numbers and letters on display (date, time, receiving mode, etc) Assures quality and clarity of documents by adjusting the background contrast automatically Convenient and less timeconsuming Newspapers, diagrams, photos, fine print, etc. resolution is improved at receiving fax machine Can program machine to fax at a certain time during the day (off-peak dialing)
LCD DISPLA Y 16 DIGITS X 1 LINE AUTOMATIC BACKGROUND CONTROL
10 ONE-TOUCH AND 80 SPEED DIAL NUMBERS RESOLUTION LEVELS NORMAL/FINE/SUPER FINE DELA YED TRANSMISSION
Fax and telephone numbers used often can be stored in memory Quality of document is improved at receiving machine
Take pages into memory for delayed faxing of documents
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market based techniques
It is a good idea if the product-centred techniques can be supplemented by market-based techniques. All market-based techniques have a common goal as far as generating ideas is concerned: they help to build up a picture of the way in which products relate to one another from a consumer's point of view. For the purposes of this module study only gap analysis (together with non metric mapping). Remember, also, that a gap seen on the perceptual map is not always an opportunity, but can also represent a gap in consumer preferences. For example, a combination of low quality at a high price.
Activity 11.5
Study ``gap analysis'' and ``non-metric mapping'' in Baker and Hart (1999:228230) and the perceptual map below and answer the questions that follow.
EXHIBIT1 1.1 Positioning map with multiple attributes ofrestaurants in northern Johannesburg
Whole family* MIKE'S KITCHEN . Affordable* *Value *Crowded *Convenient . PORTERHOUSE LONGHORN* REDWOODS . Personal service* Wide variety* Exceptional food* LEIPOLDTS . Good wine list* Exclusive food* . LINGER LONGER . BOUGANVILLIA . ZOO LAKE Expensive* . THREE SHIPS
Source: Jacobs (1986:3)
Answer the following questions: . Compare Mike's Kitchen with Zoo Lake Restaurant. . Which restaurant will you take your family to for one of your children's ninth birthday? Would you take a prospective client to the same place? This perceptual map may seem a little strange because it does not have
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named axes, but is multidimensional. Y will also notice that various feaou tures that are associated with the different restaurants are indicated on the map.The following information can be obtained from this map: . The extent to which the restaurants differ. According to the consumer's perception, the greater the distance between the restaurants on the positioning map, the more they differ. . Characteristics responsible for differences. All the characteristics are applicable to all the restaurants.The extent to which the consumer, however, associates a restaurant with a specific characteristic, is indicated by the distances between the restaurant and the characteristic on the perceptual map.The closer a restaurant is to a specific characteristic, the more strongly the consumer associates it with the specific characteristic.For example, Mike's Kitchen is perceived as an affordable, value-for-money family restaurant. Zoo Lake restaurant, on the other hand, is seen as very expensive but offers more exotic or unusual food than Mike's Kitchen. It is therefore clear that you will almost certainly take your family to Mike's Kitchen and the prospective client to the Zoo Lake Restaurant.
study unit 12
SCREENINGNEW PRODUCT IDEAS

12.1 INTRODUCTION
Although this step in product development is specifically known as the screening of product ideas, it does not mean that the other steps in the process ignore screening. Indeed, once product ideas have been collected, the entire product development process consists of a number of successive screenings. It can be visualised as a funnel along which ideas pass through filters of increasing fineness, as will become even clearer later on. As you know, as many new-product ideas as possible are sought during the development stage.From initial screening through to test marketing, unacceptable ideas are filtered out using a finer ``sieve'' each time, so that only the best product ideas are eventually developed into final products. Market development must then be done for these final products. This screening process is based on an internal investigation of resources. During this process, each product idea is evaluated in terms of certain qualitative business objectives and the business' functional skills and shortcomings (such as in management, personnel, production, financing and marketing).
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Study unit 12: Screening new product ideas
Various methods and checklists have been developed for the initial screening of product ideas. Despite all the care taken in the previous step, screening is an important stage in the new-product development process. At this stage, there are no precise product specifications, and materials and costs can only be estimated. Also, market potential is a question of ``gut feel'' rather than measurement. It is, therefore, tempting to think that the screening stage is pretty useless. However, managers have limited resources and they are not going to devote them all to new product ideas. Managers must therefore find ways of comparing one new product idea with another, in order to devote resources to those with the greatest potential and thus reduce development expenditure.
12.2 EFFECTIVE SCREENING

Study `Èffective screening'' in Baker & Hart [1999:250 ^252]. How can screening be made effective? This is an important question, because the business needs to be able to identify feasible ideas and reject others. But at this stage how do they know which ideas are feasible, that is, before a concept has been developed and the costs calculated?
Activity 12.1
Study `Èffective screening'' in Baker and Hart (1999:250252) and then indicate the basic factors to be considered if screening is to be effective.
Does your list include some or all of the following? . Screening must be done against the background of the new product strategy. . The business's strengths and weaknesses must be considered in terms of the following: the market, technology, competition, opportunities and threats. Van der Walt et al (1996:205) recommend the following approach: Factors to be considered in the evaluation of product ideas: . Qualitative objectives for example, to combat competition, to establish product differentiation, to maintain sales stability and to enhance the business image . Business capabilities that can be found in many of the business functions such as marketing, finances and personnel
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study unit 13
CONCEPT DEVELOPMENT AND TESTING

13.1 THE MEANING OF CONCEPT DEVELOPMENT
(Study the following sec in Baker & Hart1999: `Ìntroduction'' [pp 261^264] and ``What is a new product concept?'' [pp 267^269].) As a result of new technological developments, Lightning Communications are interested in developing and marketing a low-cost new generation cordless telephone that can be totally voice operated.This new telephone will include an AM/FM radio and an alarm clock and voice mail capabilities. This is a product idea. But consumers do not buy product ideas, but product concepts. Product ideas are often too general to be effectively communicated across an organiation and product designers and those designing marketing plans find working with product concepts more helpful. A product concept is a statement ofthe benefits to be offered bya new product and the product attributes that will provide those benefits. The statement must also specify the target audience. For the new generation cordless telephone, a product concept may look like this: . a compact, convenient, multifunction cordless telephone designed for the SOHO (small office home office) user or . a space saving multifunction bedside telephone, appealing to older people and people with bad eyesight (voice operated) The business must develop different product concepts and compare and test each of them.
product idea
product concept
Activity 13.1
Study `Ìntroduction'' in Baker and Hart (1999:261264). James Knight, an electronic engineer with Lightning Electronics, says that there's no time to do concept development and testing, but that Lightning Electronics must immediately proceed with production and marketing of any of the new product ideas, since they all have obvious advantages and benefits. How should Cyril Crawford answer James? That is, how should he indicate the advantages and benefits of concept development and testing?
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Study unit 13: Concept development and testing
The objective of concept development and testing is to estimate market (consumer) reaction to the product ideas before committing substantial research and development funds to the project. Concept testing should give answers to questions such as: is the concept clear and easy to understand? Does the planned product have definite advantages over similar products offered by competitors? Will consumers buy the product? Will the product satisfy a real consumer need? What suggestions have been made for further improvement of the product? This and other information enables the business to improve existing product concepts and to select the best ones for further development.
13.2 CONCEPT TESTING

(Study the following sections in Baker & Hart 1999: ``The purpose of concept testing'' [pp 264 ^266]; ``What is a new product concept?'' [pp 267^ 269]; and ``The process of concept testing'' [pp 269^283].) The initial test for most new products involves finding out customer reactions to the product concept. The main purposes of a concept test are to (1) (2) (3) (4) choose the most promising from the alternatives get an initial idea of the concept's commercial prospects find out who is most interested in the concept indicate what direction further development work should take
Samples are often based on convenience (ie how easy it is to contact the sample group). Common sample sources include community groups, employees and central locations (eg shopping centres).The most common approach is to present consumers with a verbal or written statement of the product idea and then record their reactions. The data gathered are both diagnostic (why do you like/not like the product?) and predictive (would you buy it at a cost of RXX^ 00?). Including a concrete ``would you buy'' question is crucial if the results are to be at all useful for predicting the product's market potential.The data collection procedures fall into the following three major categories. (1) Surveys. Surveys are useful for getting large samples for projecting the product's market potential. On the other hand, it is often difficult to effectively convey a concept in a survey, especially a postal or telephone survey. (2) Focus groups.The strength of focus groups is their diagnostic power; focus groups can be used to get detailed consumer feedback about the product concept. But their small sample size makes them inaccurate for predicting actual sales. (3) Demonstrations or presentations. A popular way to present a concept is to gather a group of consumers, present them with a ``story'' about the new product, and record their reactions.The following are some typical questions:
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(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Do they understand the concept? Do they believe the concept? Is the concept significantly different from other products? If it is, is the difference beneficial? Do they like or dislike the concept? Why? What could be done to make the product more acceptable? How would they like to see the product (colour, size, etc)? Would they buy it? What price would they expect to pay for it? What would their usage be in terms of volume, purpose, source of purchase and so forth?
Activity 13.2
Study ``The process of concept testing'' in Baker and Hart (1999:269283) and then do the following activity: James, the electronic engineer, is now satisfied that concept testing might be necessary, but first wants you, a marketing consultant, to give them an overview of the whole process before he makes up his mind. Present your answer to him in the following way: Name the three main phases of concept testing. Write these down as headings and then briefly indicate the variables that apply to each heading.
Does your answer convey the following structure? . Defining objectives assessment of purchase intent improving the product concept market profiling points of comparison target markets
. types of concept presentation including verbal presentation, different types of drawings, photographs, a storyboard or a model . methods of gathering data including quantitative and qualitative techniques
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Study unit 14: Profitability analysis
study unit 14
PROFITABILITYANAL YSIS
(Study ch 12 in Baker & Hart 1999:294 ^307 .)
14.1 THE MEANING OF PROFITABILITY ANAL YSIS

Lightning Communications Electronics wants to be profitable and do not want to invest in something that will not produce an adequate return or, worse still, a loss.The firm therefore needs to estimate the profit potential of the different product concepts. This can be done by a business analysis. The basic purpose of the business analysis stage is to determine the financial implications of the new-product introduction. Firms usually establish specific financial criteria for this analysis. Examples of such criteria include setting a minimum acceptable return on investment or specifying a minimum time period for repayment of investment.
14.2 THE BASIC FINANCIAL CONCEPTS

It is clear that the product development team must have access to some basic information to be able to analyse the possible financial implications of marketing the new product. These aspects include information about expected sales volumes and fixed and variable costs. Some of this information can be illustrated on a break-even graph; a break-even graph illustrates the sales volume needed for the product to start making a profit.
Activity 14.1
Study ``Basic financial concepts'' in Baker and Hart (1999:296 300) and then do the activity below: The new multifunction telephone project of Lightning Communication Electronics is going to require a large investment. The firm's top executive is concerned that this investment will not earn enough money and/or will not be recovered in the foreseeable future, therefore placing an unbearable burden on the company. Explain the tests that can be used to analyse this investment.
There are two tests that can be used to compare alternative investment opportunities:
payback discounted cash flow
. Payback analysis. This is done by calculating how long it will take the estimated income per year to accumulate to match the development cost. . Discounted cash flow. The same figures are used as in the payback analysis, but the time value of money is also taken into consideration.
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The opportunity cost and the required rate of return is also taken into account. Maximising profitability is the primary objective of a profit-seeking business and this can be achieved only by taking into account consumer needs. This overriding objective is usually expressed in quantitative terms. The business can, for example, strive to attain a rate of return of 25 percent on investment, and regard this figure as the maximum profitability which is achievable within a specific time and under specific conditions. The required rate of return will depend, among other things, on the alternative investment opportunities and risk comparison of these opportunities. The rate of return on assets employed . Income (sales) 7 Costs = Profit . net profit 6 sales % sales assets employed = Net profit after tax % assets employed = Rate of return on assets employed
14.3 FINANCIAL ANAL YSIS FORNEW PRODUCT DEVELOPMENT

(Study ``Financial techniques for new product development'' in Baker & Hart 1999:301^307 .) Some members of the new product team are doubtful about the reliability of the figures discussed in section 14.2. They say that these figures are based on pure guesswork and are not accurate enough for proper decision-making. This can be overcome by using financial analysis techniques that can help to alleviate any uncertainties. Any new venture involves some measure of uncertainty. No business can, for example, predict future sales with complete accuracy. Instead, all businesses have to rely on a sales forecast that will predict the sales in terms of units or money.This sales forecast forms the basis of all profit calculations, profitability and cash flow discussed in section 14.2 above. The basis of these forecasts may depend on previous, similar experience or on knowledge of similar products in the industry. There are many uncertain variables in the future marketing environment, an environment which, by its very nature, is uncertain. A sensitivity analysis can be used to analyse the profit and profitability consequences of allocating different values to these variables. Of course, this is where computers come into their own.
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Study unit 15: Product development and testing
One of the things that must also be kept in mind is the product line effect known as ``cannibalisation of brands'' . When Coca-Cola launches a new sport drink it will probably compete with its own brands of sport and carbonated drinks and take away some of the sales and market share of these brands.
study unit 15
PRODUCT DEVELOPMENT AND TESTING

15.1 INTRODUCTION
The product concept/s that pass the profitability analysis stage of product planning then move to the next stage that is, product development and testing. During this stage the concept is transformed into one or more prototypes. The prototype is the actual product, produced by research and development (R&D) rather than by an established manufacturing process. Since product development is largely a technical activity, the focus here will be more on the input product development information to R&D, and marketing's input in the design of product testing.
15.2 PRODUCT DEVELOPMENT

R&D must be provided with guidelines in order to develop the product. These guidelines will concentrate on what the product will do rather than how should it be designed. Product specifications should indicate product planners' expectations of benefits, including its essential physical and operating characteristics.This enables R&D to determine the best physical structure for delivering these benefits.
15.3 PRODUCT TESTING

(Study ``Major decisions in constructing a product test'' in Baker & Hart 1999:318 ^324 up to and including `Ìdentification of testers''.) If something is tested, it must be tested for a reason.For example, how far a ruler can bend before it breaks or how far aToyota Camry can drive on a single tank of fuel or what the consumers' preferences are for different brands of beer.These are the objectives of testing.
Activity 15.1
Study ``Major decisions in constructing a product test'' in Baker and Hart (1999:318324) up to and including `Ìdentification of testers'' and then perform the following activity:
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Sparkling Beverages plan to launch a new energy sports drink and want to test the consumers' acceptance of the new drink and their preference for different brands. It has been established that the consumers are quite brand loyal towards these drinks. How would you approach product testing this new brand?
Have you set objectives for the research? Are you going to evaluate overall impression (holistic approach) or evaluate different features? Think about reasons why people would want to drink the new sports drink. Flavour, energy, thirst quenching, low calories, brand image? What decisions have you made about the content and form presentation? A blindfolded test can reveal the consumers' real opinions about the product's subjective characteristics such as flavour and thirst quenching, and can also help to evaluate consumers' acceptance of the brand name. People involved in various sports and physical activities must be included as testers, along with people from the general public.
study unit 16
COMMERCIALISATION
16.1 INTRODUCTION
The product is now ready to be marketed, but there are still risks due to uncertainties in the market consumers have not had a first-hand encounter with the actual, physical product in the real competitive market. To reduce this risk the marketer can do a trial run by means of test marketing.
16.2 TEST MARKETING

(Study ``Test marketing'' in Baker & Hart1999:344 ^348 up to and including ``Basic steps''.) Sparkling Beverages is hesitant about launching their new energy sports drink Spark-up on a large scale owing to the enormous amount of investment money required. They have therefore decided to make use of test marketing. They realise that test marketing brings its own drawback in terms of time and making the business's intentions known to its competitors. They have now decided that Upington is the ideal market to test the new product. Test marketing is used to get a clearer understanding of likely market reaction to the new product and its marketing mix.This is because
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Study unit 16: Commercialisation
test marketing involves a small-scale trial in a sub-market believed to be representative of the larger regional or national market.
Activity 16.1
Study ``Test marketing'' in Baker and Hart (1999:344348) up to and including ``Basic steps'' and then perform the following activity: Read the following quotation: While test marketing is frequently regarded as common practice in today's increasingly competitive marketplace, time to market has become a major issue and many new products move directly from the physical testing stage into the marketplace. Do you regard this as advisable? Give a brief explanation of the basic benefits of test marketing.
Although it can be done, it is inadvisable to enter the market without the benefit of doing a small-scale test of the marketing mix and marketing plan. Test marketing basically provides the following two benefits: . Provides forecasts of national sales. . Provides an opportunity to evaluate all the marketing instruments (ie the whole marketing mix) as these work together.
16.3 LAUNCHING THE PRODUCT 16.3.1Where to start market penetration

market penetration
acceptance
During this discussion of the product development process we have come to realise just how time-consuming this whole process is; this highlights the importance of speeding up the development process. Equally important is the launch itself and the achievement of rapid market penetration. There is a high correlation between rapid market penetration and being able to pre-identify good consumer prospects (early adopters) in the initial launch phase. Ways must be found to identify early adopters. This can be done by looking at the acceptance of the new product's characteristics and, then, looking at this in terms of the case of acceptance of innovations by individual and organisations innovation. Effective communication is seen to be key to the whole process and we reviewed some of the more salient aspects of effective communication earlier on in this study guide.
Activity 16.2
Study ``Breaking into the market'' in Baker and Hart (1999:357 366), but ignore any references to the industrial market. Saturn Electronics is ready to launch a revolutionary new pocket
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computer (the Pocket Buddy) that will be totally new to all markets. They realise that it will take considerable time before the majority of consumers are sufficiently technology educated and oriented to grasp the benefits and use of the Pocket Buddy as part of a new lifestyle. They also know that they must focus first on the small percentage of innovative people and then on the early adopters. But who are they? What are their characteristics? Saturn Electronics has asked you, the marketing consultant, the following questions: . . Which factors determine the potential purchaser's speed of reaction to a new product idea? What are the general characteristics of the innovators who must be targeted with information about the new product?
The potential purchaser's speed of reaction is influenced by the characteristics of the new product and the way in which the potential user perceives these characteristics.
rate of acceptance of new products
There are five characteristics of the new product that can influence the rate at which individual buyers adopt it: (1) relative advantage, (2) compatibility, (3) complexity, (4) divisibility (trialability), and (5) observability and communicability. (1) Relative advantage. The greater a product's perceived degree of superiority over previous products in terms of price, convenience, ease of use, and so on, the greater its relative advantage and the faster its adoption rate. (2) Compatibility. A product's compatibility is its consistency with prospective consumers' cultural values and habitual way of life. This includes the perceived risk (personal and social consequences) of using the product. Low-foaming detergents were accepted slowly because consumers associated plenty of suds with cleaning power. Directions on the labels recommending one-half cup of detergent were contradictory to what consumers expected: a full cup. On the other hand, Sizzlean, a breakfast strip that is leaner than bacon, offers the benefit of less calories while also being compatible with traditional ways of preparing breakfast. (3) Complexity. A product's complexity is the relative difficulty consumers have in understanding or using the product. Highly complex products take longer acceptance time. Examples here are sophisticated microwave ovens, food processors,VCR's, and home computers. (4) Divisibility. A product's divisibility (or trialability) is the ease with which consumers can use the product on a trial basis. A free sample, a low-cost trial sample, a test drive, or a no-charge, two-week, inhome trial could all help reduce buyers' uncertainty about the product's performance. (5) Observability. A product's observability is the degree to which the
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Study unit 16: Commercialisation
benefits or other results of using the product are visible to others. Farmers can observe the yield of a new hybrid corn seed, and the sound quality of compact disc players can be compared with that of other sound systems. The more observable the benefit, the less risk the buyer encounters and the easier the marketing task. The degree of communicability increases if the other factors, mentioned above, are difficult. For example, if it is not clear what the product's benefits are, and if the product is not easily accessible for trial purposes, the product will be accepted slowly. The characteristics of innovators include the following: venturesome (willing to take risks), younger, wealthy, well-informed about the technological developments applicable to Pocket Buddy, high social status and cosmopolitan (global perspective, looking beyond the local community).
16.3.2 Informing the market about the new product

(Study ``The role of communication'' and ``Devising a communication strategy'' in Baker & Hart 1999:369^372.) Saturn Electronics must now identify the opinion leaders (who are more sensitive to product information) in their market and target their communication to these opinion leaders.The opinion leaders are watched closely by the rest of the market, who tend to imitate their lifestyle and purchasing decisions.
SELF-TESTQUESTIONS
(1) Describe the reasons for the importance of new product development. (2) Describe the meaning of the concept ``new product''. (3) Name the steps in the new product development process. (4) Indicate how the structuring of the business can improve new product development. (5) Describe the meaning and content of new product development strategy. (6) Describe how the feasibility of a new product idea is tested. (7) Describe the sources of new product ideas. (8) Describe the development and testing of the new product concept. (9) Describe the financial analysis for new product development. (10) Discuss the commercialisation of a new product. Have done ........................................................................................ By now, you should have a clear understanding of the importance of new product developing and the whole product development process.The next topic deals with the development of a product strategy. In the next topic we will deal with the principles of product and brand strategy. Will do ...............................................................................................
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topic 4
PRODUCT STRATEGY CONTENTS

GETTING AN OVERVIEW Study unit 17 PRODUCT AND BRAND STRATEGY IN PERSPECTIVE
17.1 The meaning of product strategy 17.2 Brand strategy
Study unit 18 BRAND EQUITY

18.1 The meaning of brand equity 18.2 Building brand equity 18.3 Measuring brand equity
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Overview
GETTING ANOVERVIEW
The product is at the heart of brand equity. Products must be designed, manufactured, marketed, sold, delivered, and serviced in a way it creates a positive brand image and builds up strong, favourable, and unique brand associations in consumers' minds. Product strategy entails choosing both tangible and intangible benefits (ie benefits the consumer wants) to be embodied in the product and the surrounding marketing activities. A range of possible associations can become linked to the brand, some more functional and product-related and others more symbolic. Customers perceived quality is a particularly important brand association that often influences consumer decisions. The following diagram will show you how the different concepts of brand strategy are related:
Product strategy SBU1

product 1 product 2 product 3
Product strategy SBU2

product 4 product 5 product 6
Brand strategy product 1
Brand equity product 4
. . . . . . . . . .
What is meant by product strategy? What is meant by a brand, branding and brand names? What is branding? What are the advantages of brands to consumers and marketers? How are new brands accepted by consumers? What are the basic branding decisions that can be taken? What is brand equity? How can brand equity be built? How can brand equity be measured? What is the value chain?
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Topic 4: PRODUCT STRATEGY
. . . . . . .
product strategy brand brand strategy branding brand equity brand acceptance value chain
study unit 17
PRODUCTAND BRAND STRATEGY INPERSPECTIVE

17.1 THE MEANING OF PRODUCT STRATEGY
A product strategy is the strategy developed for the product offering (specific product, line or mix) by a single strategic business unit (SBU). For instance an SBU in a large pharmaceutical company may be responsible for handling the antidepressant drugs product line of the firm.The product strategy consists of the following decisions (Cravens 1987:362): . deciding how to position a product offering (specific product, line or mix) to optimally serve its target market(s) . setting strategic objectives for the product offering . developing a branding strategy . developing and implementing strategies for new and existing products
product strategy
A product strategy begins with deciding how to position each product or combination of products against the products of competitors.This involves deciding on the quality, price, and product features to be offered.This decision establishes key guidelines for new product development and product improvement activities.We need to recognise how important it is to interrelate product positioning, product objectives, branding, and product management when choosing a product strategy. Also, note how these decisions are aimed at the chosen target market. Early in the development of a product strategy, management must decide what it expects the products to accomplish. For example, if management wants the business unit to be perceived as the most innovative firm in the market, then this strategic objective should be reflected in the unique attributes embedded in the product. Product objectives may be formulated to achieve a variety of purposes for the business or business unit, for instance market penetration, profit contribution, establishing a reputation for quality, and offering a complete product line to distributors.Often a combination of product objectives is used.
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Study unit 17: Product and brand strategy in perspective
Marketing has three major contributions to an organisation's product strategy:
. Market analysis is needed at all stages of product planning.This analysis provides information for matching new product ideas with consumer needs and wants. A market analysis is needed to find out and describe unmet needs, and to evaluate the performance of existing products. . Marketing's second contribution concerns product specifications. Increasingly, top management is looking to Marketing for the establising characteristics and performance features to be incorporated in new products. Information about customers' needs and wants must be translated into detailed product specifications. . Marketing's third contribution to the product strategy is the selection of target market and product positioning strategies. Since the choice of product specifications and the positioning of the product in the market place are very much interrelated, marketing strategists must incorporate an analysis of product positioning alternatives early into the marketing planning process. It is important to make the distinction between a brand and a product. A product is anything that can be offered to a market that might satisfy a need or want. A brand is also a product, but one that adds other dimensions to distinguish the product in some way from other competing products. By creating perceived differences among products through branding, the consumer may develop brand loyalty and the value added by the marketer in this process can translate into financial profit for the business.
17.2 BRAND STRATEGY 17 .2.1 The meaning of branding

What is your name? Think about a few friends and/or colleagues. Do you know their names? Do you see a picture of them in your mind when you mention these names? When I hear the name Charles, I can think of a few people with that same name and each one is associated with different qualities, personality traits, and life circumstances. I have a certain attitude towards each of these people.When I hear the name Prince Charles, however, I immediately recall the familiar lines of his face and remember that he was married to Princess Diana.
branding and brand strategy
Branding is giving a name and an accompanying distinguishing character to a particular product item.The brand strategy is then the strategy that will be applied to a particular product in order to establish this identity for the product. Each product has a name that carries a certain meaning and associations. The brand name is nothing else but the name of the brand used to identify it and to distinguish it from other brands.This distinguising name can be conveyed by a brand name and/or a trade-mark.
brand name
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Topic 4: PRODUCT STRATEGY trade-mark
Trade-mark and packaging decisions are particularly important elements of product decisions. T rade-mark decisions are those product decisions which specifically deal with the identification and distinction of product items, product lines and product ranges in the product mix. Of course, trade mark decisions are not taken in isolation, but are closely linked to packaging decisions and marketing communication decisions. TheT rade Marks Act of1993 covers a wide spectrum of topics of which the marketer must have some knowledge. A discussion of this Act, however, falls outside the scope of this module. The T rade Marks Act distinguishes between a mark and a trade-mark. A mark is defined as any sign capable of being represented graphically, including a device, name, signature, word, letter, numeral, shape, configuration, pattern, ornamentation, colour or container for goods or any combination of these. In other words, a trade-mark is basically a mark which is allocated to the products manufactured and marketed by a specific business in order to distinguish them from similar competitive products. Trade-marks can be registered in terms of Act194 of1993. Such registration protects the exclusive right to the use of a particular trade-mark for a period of ten years. This protection can be extended from time to time A brand name has two meanings. It indicates the name under which a product is traded (such as Sony or Panasonic) or the word(s) in the trademark (such as Coca-Cola or Kelloggs). The allocation of a trade-mark or a name to a product is known as branding.
17 .2.2 The importance of brands

17 .2.2.1 Importance to consumers
Brands can have the following advantages for consumers. . They make it easier to identify products at the point of purchase. . They assure consumers of a uniform, reliable quality standard. . They offer consumers a measure of protection because they usually identify the manufacturer/supplier. . Since the product is known, spare parts can be obtained with relative ease. . They give consumers greater freedom of choice in where they buy the product. Panado tablets will, for example, be the same at all pharmacies. . They lead to improved products owing to attempts by the business to keep up with competition and to market products that are differentiated in terms of better features. . They simplify the purchasing transaction because consumers are familiar with the trade-marks. . They warn consumers against repeat purchases if their first purchase and use of the product is disappointing.
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17 .2.2.2 Importance to marketers
. The brand often forms the cornerstone of the marketing communication and merchandising decisions, and the whole product image is structured around the brand name. In particular, products which are marketed on a self-service basis rely heavily on brand appeal. Brand products, have to be pre-sold through advertising so that the consumer will recognise and select these products from among all the competing products on retailers' shelves. . Branding can help the manufacturer or ``middleman'' to improve market share. . Branding hampers price comparisons between competing products because products are no longer equal in all respects. Brands therefore make it easier to use non-price competitive strategies (eg product differentiation) although, of course, price competition can never be eliminated completely. . In some ways, trade-marks make product diversification easier. A new product item can, for example, be added more easily to a known branded product line compared with one which has no trade-mark. T rading up and trading down come to mind here.
17 .2.3 Different branding decisions

branding decisions
There are two basic decisions regarding branding: . The marketer must decide whether to develop manufacturer brands or dealer brands (or both) . As far as the business's own brands are concerned, either family brands or individual brands must be decided on.
17 .2.3.1 Manufacturer brands or dealer brands

manufacturers' brands dealer brands
The manufacturer may put its own brands or those of intermediaries on its products. A combination is also possible, where some of the products carry manufacturer brands and others carry dealer brands. Most of the brands in South Africa are manufacturer brands, but the use of dealer brands, such as: Pot O' Gold of the OK Bazaars, Choice and the no-name brands of Pick'n Pay and Spar are becoming more significant in the market. Generally speaking, the manufacturer prefers manufacturer brands for the following reasons: . They often form the cornerstone of the advertising strategy. . They help to control market share. . They make it harder to do price comparisons with competitive products. . They make product differentiation and diversification easier. One of the implications of manufacturer brands is that the manufacturer has to bear the costs of market development. Manufacturers do not always
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have the necessary funds at their disposal, and may completely or partly manufacture all their products (or some of them) under dealer brands. In the case of dealer brands, the manufacturer involved remains basically unknown. If conflict develops between the manufacturer and the intermediary, the intermediary simply goes to another manufacturer, leaving the first manufacturer virtually without a market for its products. Thus both manufacturer brands and dealer brands hold certain advantages and risks for the producer. The use of manufacturer brands or dealer brands, or a combination of both, is limited by present and future marketing and other circumstances confronting the business. Either a manufacturer brand or a dealer brand dominates this situation might fluctuate over time. Some remarks on generic brands are necessary. The use of generic brands means that products are literally stripped of trade names and the so-called ``no-name brands'' come into being. The product is then identified only by its generic name or name of the product type.``No-name'' brands or generic brands are found frequently among products such as tinned food, washing powders, and even toiletries (eg toilet soap). In South Africa generic brands often appear as a special form of dealer brand. Retail chain stores such as Pick 'n Pay, Shoprite/Checkers and Spar are well known for their ``no-name brands'' or generic brands. Generally speaking, generic products are normally available in relatively few packaging sizes. They are often not of the highest quality. They tend to have simple packaging with labels indicating only the generic name of the products (eg rice, washing powder, salted meat and peanut butter). Generic products are not advertised aggressively and the greatest inducement to buy them is their relatively low price.They are often displayed as a separate group on the retailer's shelves.They are mainly directed at priceconscious and judicious consumers who are sometimes happy to accept a lower quality product.
17 .2.3.2 Family brands or individual brands

individual brands
Businesses preferring manufacturer brands have at least four brand options: . Individual brands. This approach is followed by South African Breweries Ltd for its beer products. Examples here are: Lion Lager, Lion Ale, Castle Lager,Castle Milk Stout,Carling Black Label, Amstel, Shaft, Hansa Pilsener, Rogue and Guinness. . A family brand for all products.This approach is followed by the Barlows group for its Kelvinator household products, such as deep-freezers, refrigerators, stoves, washing machines and tumble dryers. . A family brand for separate product lines. This brand approach is followed by OK Bazaars Ltd. Some examples are: Pot O'Gold food and related products; Caress toiletries; Dolores ladies', girls' and infants'wear, Curzon men's and boys'clothing; and Homecraft furniture, bedding and household linen.
family brands
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. The business name combined with individual product names. The Kellogg's Company follows this brand approach. For example: Kellogg's Raisin Bran; Kellogg's All-Bran Flakes; Kellogg's Hi-Bulk Bran; Kellogg's Corn Flakes; and Kellogg's Rice Crispies. Individual brands have certain advantages for the business: they do not involve the images of other products or that of the business itself. Also, the failure of a particular product is much less likely to damage the image of other products or the image of the business. An individual brand strategy requires a new name for each new product, thus offering the business an opportunity for originality. Individual brands make it easier for the business to pursue an aggressive advertising campaign for individual products. The advertising message can also be tuned to focus on the specific characteristics of the product and its target market. Of course, individual brands are relatively expensive to market since a separate advertising effort (among other things) is required for each product. Family brands also have certain advantages for the marketer: . The cost of introducing a new product under a family brand strategy should be lower than that of individual brands because high advertising expenditures are not necessary to obtain brand recognition and brand preference. . The new product can also benefit from the popularity of existing products. Family brands are a good marketing idea when: (1) the products in the product mix have a high consistency; (2) the products are more or less of the same quality; (3) the products are marketed through the same channels; and (4) the products lend themselves to the same marketing communication methods. There are, however, exceptions to this rule. Consider, for instance, the brand strategy which South African Breweries follows for beer products. Like manufacturer and dealer brands, individual and family brands hold certain advantages and risks for the business. Here, also, the choice is influenced by present and expected marketing and other circumstances.
17 .2.4 The selection of a brand name for the product

As stated earlier, the brand name of a product is the name under which the product is marketed. The brand name is part of the brand and usually consists of a single word (Parker pens). Additional words (Peter Stuyvesant cigarettes) and even phrases (Good and Clean and Fresh washing powder) are also sometimes used as trade names. Consumers normally use the brand name to indicate their specific choice amongst competitive products (Nescafe coffee instead of Frisco, Ricoffy or Koffiehuis). The brand
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name forms part of the product image and should therefore be distinguishable, meaningful and a symbol and strengthener of the product concept. The impact of specific brand names can be so strong that some consumers identify the generic product with them (Vaseline for petroleum jelly, Slasto for slate, Elastoplast for adhesive plaster and Cutex for nail polish). The following guidelines can be used when selecting a ``good'' brand name: . It tells something about the product its uses, ingredients, benefits and utilities (Naturelite, Appletiser, Wet Wipes, Budget Rent-a-Car). . It is pronounced, spelled and remembered easily by the target market (Omo,Vim, Ford, Royco). . It is versatile and applicable to a product line or even the entire product mix (Defy, National, Kraft). . It is original and distinctive (Mustang, Satin Leaf). . It creates a unique image of exclusiveness even if it is sometimes difficult to pronounce (Je t'aime, Elseve, UEggs, Camouflage, Musk Audace). . It suggests high quality (Elite choice butter, Golden Crown margarine).
17 .2.5 Phases in brand acceptance

acceptance process of brands
Consumers differ when it comes to becoming familiar with and accepting a specific brand.The consumer may be unaware of the brand or mayrecognise it. He or she could reject it, or find it acceptable or preferable or can even insist on a specific brand. From the consumer's knowledge of, and attitude towards, the specific brand, we can derivefive phases in brand acquaintance and acceptance.These phases are: . Brand unawareness means that consumers view a specific product as being the same (generic) as other similar products because they do not recognise the brand. Some examples are probably brooms, pins, eggs, tomatoes and hair brushes. . Brand recognition exists as soon as consumers have seen the brand and/or have heard about it, understand the brand and remember it. In other words, when they can identify it amongst other, similar products. Brand recognition is possibly the first phase in brand acceptance or rejection. Unknown new products are often introduced through free samples and discount coupons to move the product from the unknown to the known category. Brand recognition increases the probability of repetitive purchases should the consumer be satisfied with the first trial. If not, the product is rejected. . Brand rejection literally means that consumers find it unacceptable. Even if they recognise the product they will not buy it probably because of poor brand image. Y the marketer can nevertheless try et to alter consumers' attitude by changing the product and/or the other elements of the marketing strategy (eg marketing communication and prices). The product can possibly be relaunched in another target market. Efforts to rectify a poor product image can be difficult, expensive
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Study unit 18: Brand equity
and time-consuming. Brand rejection, however, never leads to brand acceptance unless something extraordinary happens. . Brand acceptance exists as soon as consumers consider a specific brand as one alternative and find it acceptable compared with similar products.That is, when the brand at least complies with minimum product expectations. . Brand preference follows brand acceptance. Based on previous experience with the product, consumers may prefer it to those of competitors. Having said this, a consumer may be prepared to accept PepsiCola or Fanta if their preferred brand, Coca-cola, is unobtainable. A business with products in the brand preference stage normally enjoys a favourable competitive position in the industry. . Brand insistence is the final stage in brand acceptance. Consumers refuse all substitute brands and search for the specific product until they find it. Such a brand has then become a speciality product in the eyes of the consumer. It is unlikely that a marketer can accomplish complete brand insistence for all its products in all its target markets. A marketing strategy aimed at making sure the right products are available in the right places at the right times in the right quantities and at the right prices for the right consumers will probably be more successful than a strategy aimed at establishing brand insistence among a small market segment.
study unit 18
BRAND EQUITY
18.1 THE MEANING OF BRAND EQUITY
Nowadays, many marketers and authors refer to a concept called brand equity which is the value of a brand name for the firm. Managing a product's , brand name is one of the most important strategic tasks facing the product manager. Like other valuable items owned by a firm such as manufacturing equipment, buildings, and the like, a brand name is an asset, and a potentially valuable one. Brand names are also important in the global war against counterfeiters and imitations.These imitation brands often mislead customers into thinking that the product is the well-known global brand. This happened in South Africa with well-known sports shoes such as Nike and watches such as Rolex. Brand equity can be defined as follows: Brand equity is a set of assets (and liabilities) linked to a brand's name and symbol that adds to (or subtracts from) the value provided by a product or service to the firm's customers.
brand equity
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Topic 4: PRODUCT STRATEGY dimensions of brand equity
The assets and liabilities underlying brand equity fall into five categories also regarded as the dimensions of brand equity . Brand awareness.The simplest form of brand equity is familiarity. A familiar brand gives the customer a feeling of confidence (risk reduction), and hence is more likely to be both considered and purchased.There is also convincing evidence that, on average, customers prefer brands they know. . Brand loyalty. The strongest measure of a brand's value is the loyalty (repeat buying, word of mouth and even brand insistence) it generates among consumers. . The strongest form of loyalty is attachment or insistence. In this case, the customer persistently selects a brand owing to the consumer's previous experience with the brand and/or the consumer's positive brand perception. This level of loyalty insulates a brand from competitive pressures such as advertising and price promotions by competitors and leads to higher profit margins. . Perceived quality. A known brand often conveys an aura of quality (either good or bad). BMW and Mercedes are usually associated with high quality and reliability. In some cases, a brand becomes synonymous with a particular product category (eg Xerox, Kleenex, Cutex). Furthermore, a brand often has strong price associations that influence quality perceptions (consumers will expect a Pep product to be low in price, and a Parker pen to be rather expensive). In other words, many products and brands are strongly associated with a certain quality. . Brand association. While quality associations are very important, other, more subjective and emotional associations are also an important part of brand value. These include personality associations such as a sexy or chirpy, lively or responsive car. Or a friendly bank or restaurant. Brand equity creates value for both customers and the business. Customers can use brand names to simplify the complexity of the buying situation when they have to deal with large amounts of product information. The concept of brand equity raises three important issues for product managers. . It is critical to the long-term success of a product to build brand equity by paying attention to the five dimensions of brand equity. . The question of product-line extension becomes pertinent: how far can a successful brand name be stretched? The business must consider the consequences to its brand equity and total brand image by adding upmarket products or, alternatively, putting low-priced products under the same brand name. . The product manager must view the management and sustaining of brand equity as an important task.
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18.2 BUILDING BRAND EQUITY 18.2.1 Some general guidelines
If anything of quality is to be manufactured, a certain value must be added to such an item.Even a person must perform certain actions to enhance his or her image and value in the eyes of others. David Aaker provides ten guidelines for building strong brands or brand equity. Here are a few of the most important of these guidelines. . Brand identity. Each brand should have an identity or a personality. This identity can be modified for different market segments. . Value proposition. Each brand should have a unique value proposition that must be conveyed to the consumer. . Brand position. The brand's position should provide clear guidance to those responsible for the communications programme. . Consistency over time. Product managers should have a goal of maintaining a consistent identity and position over time. . T racking.The brand's equity should be tracked over time, including its awareness levels, perceived quality, brand loyalty and brand associations among consumers. . Brand responsibility. Someone who must create brand identity and positions, and who must coordinate the marketing of the product, should be in charge of the brand.
18.2.2 Using synergy of the marketing instruments for brand building

There must be synergy between the different marketing instruments (product, price, promotion and distribution) in order to create and build brand equity.There are numerous marketing decisions and combinations of decisions that will help create brand equity and we will emphasise some key aspects of these below:
18.2.2.1 Product decisions

The product itself is at the heart of brand equity since it is the product that primarily influences what consumers experience with a brand, what they hear about a brand, and what the firm tell customers about the brand through its marketing communications. Designing and delivering a product that optimally satisfies consumer needs and wants is a prerequisite for successful marketing.To create brand loyalty, consumers'experiences with the product must at least meet, if not surpass, their expectations. Numerous studies have shown that high-quality brands tend to perform better financially (eg yielding higher returns on investment). In this section, we will discuss how consumers form their opinions (perceptions) of product quality and how their attitudes toward brands develop;
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we shall then look at the implications of both for the product strategy.We begin by examining perceived quality.
. Perceived quality
perceived quality
We all have different opinions of different brands. Johnny may prefer Ciro coffee,Charl may prefer the House of Coffees and Shaun only drinks Ricoffy. They each attribute certain characteristics to these coffees, such as strength, aroma, value for money, exotic flavour, good fragrance and so on. All these add up to they way they perceive the quality of these brands. Perceived quality is defined as consumers'perception of the overall quality or superiority of a product or service relative to compettive alternatives and in terms of the product's intended purpose. In other words, perceived quality is based on consumers' perceptions of what they think constitutes a quality product and how well the brand rates according to these perceptions. Achieving a satisfactory level of perceived quality has become more difficult; this is because, over the years, continual product improvements have encouraged consumers to have extremely high expectations in terms of product quality. The specific attributes or benefits that become associated with favourable evaluations and perceptions of product quality vary from product category to category.The following general dimensions of product quality can nevertheless be identified for all products: performance, features, conformance to standards, reliability, durability, serviceability, style and design. Given the importance of product quality, a number of firms have used concepts such as ``total quality management'' (TQM) to direct their efforts to maximising product quality. Proponents of TQM possess a number of general beliefs such as the following: . Quality must be perceived by customers. . Quality must be reflected in every company activity, not just in company products. . Quality requires total employee commitment. . Quality requires high quality partners. . Quality can always be improved. . Quality improvement sometimes requires quantum leaps. . Quality does not always cost more. . Quality is necessary, but may not be sufficient. . A quality drive cannot save a poor product. TQM principles have provided some useful structure and guidance to marketing managers interested in improving product quality. Some companies now even concentrate their efforts on``return on quality'' (ROQ) by focusing only on improving quality on those dimensions that produce tangible customer benefits, lower costs levels, or increased sales. The following is a suggested guideline for implementing a ``return on quality'' strategy (Griesling 1994:54 ^59):
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Start with an effective quality programme.Companies that do not have the basics (eg process and inventory controls and other building blocks) will find a healthy return on quality elusive. Calculate the cost ofcurrent qualityinitiatives.Cost of warranties, problem prevention, and monitoring activities all must be counted. Determine what key factors retain customers and what drives them away. Conduct detailed surveys among consumers. Forecast market changes, especially quality and new product initiatives by competitors. Focus on quality efforts most likely to improve customer satisfaction at a reasonable cost.Work out the link between each rand spent on quality and its effect on customer retention and increasing market share. Roll out successful programmes after pilot-testing the most promising efforts and cutting the ones that do not have a bigimpact.Closely monitor results. Build word of mouth promotion by publicising success stories. Improve programmes continually. Measure results against anticipated gains. Beware of the competition's initiative and don't hesitate to revamp programmes accordingly. Quality never rests.
. Perceived value
perceived value
We all expect good quality to cost more. We do not expect to pay the same for aToyota Lexus as for a Opel Corsa, but they might both be offering value for money! Consumers often combine quality perceptions with cost perceptions to arrive at a value-for-money assessment. In considering consumer value perceptions, it is important to realise that costs are not just restricted to the actual monetary price, but may reflect opportunity costs of time, energy, and consumer psychological involvement in the purchase decision. The business should take a broad view of value creation. Harvard's Michael Porter has proposed the value chain as a strategic tool for identifying ways to create more customer value. He views firms as a collection of activities that are performed to design, produce, market, deliver, and support products. The value chain identifies five primary value-creating activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and four support activities that occur throughout these primary activities (firm infrastructure, human resources management, technology development, and procurement). According to Porter, firms can achieve competitive advantages by improving performance and reducing costs in any or all of these value-creating activities. He also emphasises the importance of effectively managing core business processes and cross-functional integration and cooperation. Businesses can create competitive advantages by cooperating with other members of the value chain to enhance the value provided to customers (these are the suppliers into, as well as distributors out of, the busines's value chain).
value chain
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Activity 18.1
Study section 18.2.2.1 ``Product decisions'' above and then do the following activity: You are the marketing manager of a business machine chain store. Your newly appointed product manager is convinced that you produce good quality products at reasonable prices and that nothing else matters as far as the consumer's value perception is concerned. Do you agree? Give reasons for your answer.
What the product manager said is partly true, but product quality really depends on more than product performance. For example, product quality may also be influenced by factors such as the speed, accuracy, and care of product delivery and installation; the promptness, courtesy, and helpfulness of customer service personnel; the quality of repair service; and so on. Furthermore, as already pointed out (topic 1), brand attitudes may not necessarily be based only on functional benefits and product-related concerns, but may also depend on more abstract non-product factors such as symbolism or personality. These `àugmented'' aspects of a product are often crucial to a brand as has been indicated earlier in topic 1.
. Enhancing consumption experiences

consumption experiences
The consumer wants to enjoy his or her shopping experience (this is not just true for the``shopoholic'') and also the consumption or use of the product. Both purchase and consumption issues should be reflected in product strategies aimed at achieving the desired brand image. Perhaps the strongest and potentially most favourable associations, however, result from actual product usage. Perhaps in response to that oversight, one notable trend in marketing is the growing importance of post purchase marketing, which are marketing activities that occur after a customer has purchased a product. Innovatively designed, thoroughly tested, carefully produced, and effectively communicated products are without question the most important considerations in enhancing consumption experiences and building brand equity. Nevertheless, there are a number of other ways of improving consumption experiences. For example, instruction manuals for many products are, too often, an afterthought, put together by engineers who use technical jargon and unclear language. As a result, consumers' initial product experiences may be frustrating or, even worse, unsuccessful. Furthermore, in many cases, even if consumers can work out how to make the product perform its basic functions, consumers may not fully appreciate many more advanced features that is, features that are highly desirable and potentially unique to the brand. In other words, if a consumer cannot set the clock on his or her VCR, what difference does it make if it has14-day in advance program-
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mability? To enhance consumers'consumption experiences, it is important to develop user manuals that clearly and comprehensively describe both what the product potentially can do for consumers and how consumers can use these product benefits. The term``postpurchase marketing''describes a mindset that reminds businesses that they need to build lasting relationships with their customers to extend the lifetimes of their products.Creating stronger relationships with consumers can be as simple as creating a well-designed customer service department that is easily reached on a toll-free 800 phone number or by designing a user-friendly web site on the internet. Those marketers who will be most successful at building customer-based brand equity will take all the steps needed to make sure they fully understand their customers and to ensure that they know exactly how to deliver superior value after the purchase.
Activity 18.2
Study `Ènhancing consumption experiences'' above and then do the following activity: Daewoo wants to enhance the brand equity of their cars by performing a better after sales service in particular and by putting more into the post marketing effort in general. What would you suggest they do in this regard?
At the very least, Daewoo must continually find out from consumers if they are still enjoying the ownership and use of their Daewoo vehicles and, if not, why they find their vehicles disappointing. Only then will the business be able to rectify problems and prevent them from recurring. They must also place a quality emphasis on their after sales service and try to enhance the consumers' value perception of their products at the same time. This will help to improve Daewoo's ``word-of-mouth reputation'' and give credibility to the company's marketing claims.
18.2.2.2 Using price to build brand equity

We all tend to associate a high price with good quality.We will now discuss the different kinds of price perceptions that consumers might form and the different pricing strategies that the firm might adopt to build brand equity. The last part of this module is devoted to price decisions; in this part of the module, we intend to focus only on those aspects of pricing that build brand equity.
. Consumer price perceptions

The pricing strategy dictates how consumers categorise the price of the
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brand (eg low-, medium-, or high-priced) and how firm or flexible consumers see that price (eg frequently or infrequently discounted). Consumers may also have price perceptions of brands that are more to do with product meaning. In many categories, consumers may infer product quality on the basis of its price. Related to this, as noted above, consumers may also combine their perceptions of the quality of the product with their perceptions of the price of the product to assess its perceived value. Consumer associations of perceived value are often an important factor in their decisions. Accordingly, many marketers have adopted value-based pricing strategies to better meet consumer wishes (see below). Consumers' perceptions of value should obviously exceed the cost to the business of making and selling the product.Consumers are willing to pay a premium for certain brands because of what those brands represent to them. Based on tangible or intangible considerations, consumers place a value on the unique aspects of a brand that, they believe, justify its higher price. From a branding perspective, it is important to understand all the price perceptions that consumers have for that brand. As part of this understanding, it is necessary to find out quality and value judgments and any price premiums that exist.
. Setting prices to build brand equity

When developing their pricing strategy, firms are increasingly placing greater importance on consumer perceptions and preferences. Many firms are now employing a``value pricing''approach to set prices and an`èveryday low pricing'' approach to determine discount long-term pricing policies.
. c value pricing
The objective here is to find out the right blend of product quality, product costs, and product prices that fully satisfy consumers' needs and wants and the firm's profit targets. As might be expected, there are a number of opinions about what constitutes the keys for success when adopting a value-based pricing approach. In general, an effective value pricing strategy should strike the proper balance between the following: Product design and delivery. The key here is to add value to the product to improve the product's overall quality image. Product costs. The key here is to reduce product cost as much as possible. Product prices.The key here is to understand exactly how much value consumers perceive in the brand and thus to what extent they will be willing to pay a premium for the product.
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18.2.2.3 Using distribution decisions to build brand equity
Building brand equity on the basis of distribution involves designing and managing direct and indirect channels to strengthen brand awareness and improve the strength, desirability, and uniqueness of brand associations. Direct channels can improve brand equity by allowing consumers to better understand the breadth and variety of products associated with the brand and to better understand any distinctive characteristics these products have. Indirect channels can influence brand equity through the actions taken and support given to the brand by intermediaries such as retailers. Brand equity is also improved because associations these intermediaries might have may be transferred to the brand itself.
18.2.2.4 Using marketing communication decisions to build brand equity

Marketing communication decisions can be used to inform, persuade, and remind consumers, directly or indirectly, about the brands and their qualities. Although advertising is often a central element of a marketing communications programme, it is usually not the only one as far as building brand equity is concerned. One important purpose of all marketing communications is to contribute to brand equity. According to the customer-based brand equity model, marketing communications can contribute to brand equity by creating awareness of the brand and/or linking strong, favourable, and unique associations to the brand in consumers' minds. In addition to realising the desired brand awareness, marketing communication programmes can also provide incentives that elicit customer responses that make up customer-based brand equity.For example, an advertising campaign can be evaluated by determining how well it contributes to brand aware-ness or creating, maintaining, or strengthening certain brand associations? The flexibility of marketing communications partly depends on the number of different ways that it can contribute to brand equity. T key implicawo tions emerge here: . All possible communication options should be evaluated in terms of their ability to influence brand equity. Each communication option can be judged in terms of the effectiveness and efficiency by which it influences brand awareness and by which it creates, maintains, or strengthens favourable and unique brand associations. Different communication options have different strengths and can accomplish different objectives.Thus, it is important to employ a``mix''of different communication options, each playing a specific role in building or maintaining brand equity. . The marketing communication programme should be put together in a way that ensures the whole is greater than the sum of the parts. In other words, the coordination among certain communication options should be nothing short of superb, so that the effects of any one communication option are automatically improved by the presence of the others.
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The use of marketing communications to promote and build brand image is a vast topic, that falls outside the scope of this module.
18.3 MEASURING BRAND EQUITY

How can a marketer determine what state of brand equity the firm's products enjoys? Marketing or product managers can measure overall brand value through a variety of means. Basically, measuring brand value requires answering the question ``How much more value does the product have with the brand name attached?'' This module will not probe deeply into the marketing research issues related to this problem, but will only provide a general guideline for measuring brand equity. When developing a new product, the marketer can determine the value of a brand name relative to others used in the experimental design by simply using a brand name as an attribute, and using the different brand names in themarket or using fictitious brand names. Consumer opinion can be eliceted in a number of ways, but while the opinion measure itself is a measure of brand strength, a high correlation between positive opinion and purchasing measures obviously gives the business some reassurance that the brand strength is being converted into actual buying behaviour. Many consulting firms, advertising agencies, and other interested parties have developed their own approaches to measuring the value of brands and, as a result, have arrived at rankings of relative brand equities.
Activity 18.3
Study section 18.2 above and then perform the following activity: Daewoo motor manufacturers wants to build brand equity by emphasising the quality and value for money of their total product offering. What would you regard as the key concept in building this brand image and equity?
The basic issue here is consumer perception. A perception of quality and value for money must be created in the mind of the consumer. However, this cannot be a fictitious perception, but something based on the truth if the programme is to be credible in the long run. Not only must the product itself convey the image, but the image must also be conveyed by the distribution network and the price structure. It must also be conveyed effectively by the marketing communication programme.
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SELF-TESTQUESTIONS
Y have now reached the end of topic 5, which was aimed at giving you an ou overview of the meaning of product and brand strategy and the creation of brand equity. Y should now test your knowledge of the topic by doing ou the following: (1) T to explain the difference between a product and a brand. ry (2) What are the advantages of brands for the consumer and the marketer? (3) Describe the different brand decisions available to the marketer and illustrate your answer by means of appropriate practical examples. (4) Describe the phases in brand acceptance. (5) Explain the meaning of brand equity. (6) Describe the different possible ways of building brand equity. (7) Describe the measurement of brand equity. (8) What is the value chain and how can it be used to help build brand equity? Have done ........................................................................................ You should now have a clear understanding of the meaning of product strategy, branding and brand equity.The next topic deals with the management of the product over its life cycle. Will do ...............................................................................................
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topic 5
MANAGING THE PRODUCT OVER ITS LIFE CYCLE CONTENTS

GETTING AN OVERVIEW
Study unit 19 THE PRODUCT LIFE CYCLE IN PERSPECTIVE

19.1 The meaning of the product life cycle 19.2 The different forms of the PLC curve
Study unit 20 USING THE PRODUCT LIFE CYCLE

20.1 Using the PLC to plan profitability 20.2 Using the PLC to plan an optimal product mix 20.3 Using the PLC to plan marketing strategy
Study unit 21 STRATEGIC PLANNING OVER THE PRODUCT LIFE CYCLE

21.1 Encouraging growth in the product life cycle 21.2 Strategies in mature and declining markets
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Overview
GETTING ANOVERVIEW
Numerous products appear on the market virtually every day. For each of these products, this is the introductory phase of its life cycle.The marketers of each of these products is not satisfied just knowing that the product is on the market, but want the product's sales to grow to a level beyond the break-even point and thus be profitable. This objective can only be reached in a growth situation, because the growth phase of the product life cycle is the most profitable phase. It is therefore essential that the marketer knows how to bring about growth in the product life cycle. However, the marketer also needs to know what to do when faced with mature and declining markets. The following illustration will provide a better perspective of the content of this chapter: The principles of the product life cycle
Application of the product life cycle
Strategic planning over the product life cycle
. . . . . .
What is meant by the product life cycle? What are the stages of the product life cycle (PLC)? What are the characteristics of each of the phases of the PLC? What are the strategic considerations in each phase of the PLC? How can growth be created in the PLC? How should the marketer approach a mature or declining market? . How can a marketer be sure that a product should be eliminated? . . . . . . . the product life cycle stages in the product life cycle different forms of the product life cycle creating growth survival strategies product deletion strategic marketing over the product life cycle
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Topic 5: MANAGING THE PRODUCT OVER ITS LIFE CYCLE
study unit 19
THE PRODUCT LIFE CYCLE INPERSPECTIVE

19.1 THE MEANING OF THE PRODUCT LIFE CYCLE
We have all seen products appear, become popular and then disappear from the market; we feel this is quite natural. We even expect some fashion products to have a very short introductory period, gain rapid popularity and disappear very quickly from the scene.
product life cycle
The product life cycle has four stages of introduction, growth, maturity and decline; essentially an analytical and planning tool. It is not a forecasting technique.
Activity 19.1
Study `Ìntroduction'', ``The product life cycle'', and ``The seven stages of the product life cycle'' in Baker and Hart (1999:92101) and then do the following activity. Tread-by-Tread, a shoe manufacturer and marketer, makes the following comments about the product life cycle: . The product life cycle is not applicable to them, because people will always wear shoes. Shoe sales will therefore always increase as the population increase and as people become more affluent. . The PLC lacks predictive utility and is therefore useless as a forecasting device. How would you answer Tread-by-Tread's negative remarks?
Baker and Hart (1999) do not clearly explain this part of the work, but T read-by-T read's first question can be answered by referring to the difference between product class, product form and the brand. The three dimensions in terms of which a product life cycle can be described are: . the life cycle of the product class (eg shoes in general) . the life cycle of the product form (eg casual, formal and sport shoes) . the life cycle of each brand (eg Cats,Grasshoppers,Tread-by-T read, Hush Puppies, Dr Martins, Jordan, Asics, Nike and many others) The life cycle for the product class, shoes, is likely to increase continually. There can, however, be changes in the product form's life cycle, such as a decline in preference of formal shoes and an increase in preference for casual and sport shoes. While the life cycle for sport shoes (product
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Study unit 19: The product life cycle in perspective
form) is increasing, the sales of a certain brand such as Hi-Tec might be dropping. That, of course, will be a cause for alarm for the manufacturer of this brand. As far as the second question is concerned, the PLC is essentially an analytical and planning tool and not a forecasting technique. It is difficult or even impossible to predict a product's life cycle, but there are signs that indicate to the business that the brand is in a certain stage of its life cycle.The PLC can be used to describe the phases through which any product might pass without necessarily being able to to tell the marketer how long any of these phases is likely to last. Our support for the concept of PLC is based on the view that it defines the underlying growth and decay process and thus enables the marketer to isolate and possibly use factors which may accelerate or slow down different phases of the process. In other words, it provides us with a diagnostic and analytical framework that gives the marketer the opportunity to influence the cycle through managerial intervention.
19.2 THE DIFFERENT FORMS OF THE PLC CURVE

different shapes of the PLC
The sales and profit curves in textbooks usually reveal the traditional sshaped curve of a product's life cycle. But not all products have this type of life cycle. Product life cycles differ widely in terms of duration and the shape of their curves, as indicated below: EXHIBIT19.1 Different forms ofthe product life cycle
Source: Van der Walt et al (1996).
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. The traditional product life cycle curve includes, in a clearly distinguishable form, the periods of introduction, growth, maturity and decline. The classic product life cycle curve describes the marked increase in sales in the initial phase and the reaching of a plateau phase during which sales volumes stagnate owing to a lack of new consumers and sales outlets. . The fashion fad is seen in the life cycle curve of a product which, after rapidly gaining popularity, loses it with equal rapidity. Examples of such products are pet rocks and the soccer memorabelia of countries who took part in the 1998 world soccer tournament. . The extended fashion fad takes a similar course as the fashion fad, except that after the initial success sales stabilise at a lower level, rather than going into rapid decline. An example of this type of life cycle is found in aerobic exercise classes. After initial strong growth there was a decline, but aerobic classes have nonetheless remained popular. . The seasonal or fashion curve is the result of a product maintaining good sales during successive periods. School clothes are a good example of this kind of product. Sales of these clothes are good at the beginning of the year; then they decline, and then sales revive once again at the beginning of the winter season. The revival curve indicates a product which has been regarded as old-fashioned, and which has then suddenly regained popularity. An example of this is the mini-skirt, which originally became popular in the early sixties, then died out, and which is now popular again. EXHIBIT 20.1 Summary of important characteristics and accompanying marketing considerations in each phase ofthe plc Stages in the product life cycle Introduction phase Growth phase Maturity phase (maturity growth and saturation) Decline phase
Consumer resistance Production problems
Rapid sales growth Increase in direct competition Technical product improvements Rationalisation of production methods lower tending prices High profits Scramble for outlets
Flattening and levelPermanent decrease ling-off in sales growth in sales Product differentiation, product line extension and improved service very important Profit and profit margins of retailers decrease Narrowing and elimination of product line Cut in marketing expenses Prices decline, stabilise and then tend upwards
Bottle-necks in physical distribution Slow sales growth little direct competition High production costs Lack of profits
More intensive competition and decrease in Drastic decline in the number of competitors number of competitors
Strategic considerations in each phase
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Study unit 20: Using the product life cycle
Objective: Creation of primary demand Distribution decisions vary Limited market coverage High price and aggressive marketing communication High price plus little marketing communication or Low price plus aggressive marketing communication or Low price plus little marketing communication
Objective: Creation of selective demand Product strategy relatively unimportant After-sales service very important Distribution decisions very important, market coverage extends, and intensifies Physical distribution decisions very important Price decisions important, prices tend lower Marketing communication decisions very important for creation of selective demand.
Objective: Fight competition and extend market share Retain existing product and other Decisions instruments or Retain existing product and review other decisions instruments Alter existing product and other decisions instruments
Possible objective: Maintain market share Continue with unchanged marketing strategy or Possible objective: Start a second growth phase in target market Review existing marketing strategy or Possible objective: Product elimination Drop the product
. The fiasco curve occurs when a product fails right from the outset. Brooke Bond launched a product in the early eighties called ``Snackpot'', which was sold in plastic packaging as an instant pasta dish. Although the idea was a good one, consumers were not interested in the product.
study unit 20
USING THE PRODUCT LIFE CYCLE

20.1 USING THE PLC TO PLAN PROFITABILITY
Any business wants to maximise its profits and profitability. The PLC analysis indicates areas of maximum profitability.
Activity 20.1
Study `Òperationalizing the PLC'' in Baker and Hart (1999:110115) and then indicate the most profitable phase of the PLC.
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The most profitable phase of PLC is the growth phase. Any decisions must always be made with the objective of moving the sales of the product into a growth phase or to keep it there.
20.2 USING THE PLC TO PLAN ANOPTIMAL PRODUCT MIX

optimal product mix
The product life cycle concept is especially useful for marketing management because it enables marketing management to make decisions for each phase in the life cycle of the individual product items in the product ranges that constitute the product mix consisting of various product ranges. The product mix must be planned in such a way that, while the sales of some of the products drop, the turnover of other products in the product mix show powerful growth. This is vital if the business wants to sustain a rising total sales curve. An integrated marketing strategy during the life cycle phases of each product will be directed at ensuring that this rising trend continues.
20.3 USING THE PLC TO PLAN MARKETING STRATEGY

The characteristics of each of the phases of the PLC provide some guidance about the possible marketing decisions that can be taken in those phases. Y will notice in this summary that, to get the product into a new growth ou phrase (the most profitable phase), product decisions become especially important in the maturity and decline phases of the PLC. Given the special importance of growth for product management, we will focus a bit more on ways of stimulating growth.
study unit 21
STRATEGIC PLANNING OVER THE PRODUCT LIFE CYCLE

21.1 ENCOURAGING GROWTH IN THE PRODUCT LIFE CYCLE
growth strategies
Growth introduces vitality to an organisation by providing challenges and rewards. It is, in fact, difficult to even survive with a no-grow scenario because competitors will attack and vulnerable areas (eg brands, products, sales areas, target markets) will experience decline. A host of stra-
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Study unit 21: Strategic planning over the product life cycle
tegies can lead to growth, most of which are included and explained in Ansoff's product/market matrix illustrated in exhibit 21.1. EXHIBIT 21.1 Ansoff's product market matrix Existing products Existing markets Market penetration Increasing market share Increasing product usage Increasing the frequency of use Increasing the quantity used New applications for existing product uses New markets Market development Expanding geographically Expanding into new segments Diversification Related diversification Enhancing skills and resources Brand name Unrelated diversification New products Product development Product feature addition Product line expansion Developing new generation technologies New products for existing markets
Activity 21.1
Study section 21.1 above and ``The diagnostic routine: analysis and revitalisation'' in Baker and Hart (1999:442447) and then do the following activity: You are the marketing manager of cold drinks. The manufacturer of these products has discovered that sales are levelling off. The manufacturer is looking for ways to create growth with existing products in existing markets; this is because there is no real possibility for expanding into other product markets as a result of various limiting factors. Give a description of the practical possibilities open to the marketing manager.
Have you thought of the following ways of increasing sales? . packing together larger bottles or small bottles in shrink wrapping and selling at a discount price.
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. new flavours . introducing the cold drinks as mixers . combining product efforts with promotion efforts (eg using competitions for which inside seals of bottle caps are used) . improving the distribution in the existing market
21.2 STRATEGIES IN MATURE AND DECLINING MARKETS 21.2.1 Introduction

Many businesses in the years preceding the year 2000 are functioning in mature or declining markets this is especially true in South Africa. This emphasises the fact that a business cannot just accept that product deletion is inevitable in declining markets. Nowadays, businesses are looking for ways of surviving. Product elimination is one way, but definitely a last resort after careful deliberation.
21.2.2 Basic survival strategies declining and mature markets

mature markets
survival strategies
In the maturity and decline phase of the life cycle, profits decrease drastically and sales figures stagnate and start to drop. However, it is still necessary to plan and implement market strategies to ensure the businesses survival.The strategy in declining markets is mainly based on a comparison between the business position and the industry environment, as illustrated in exhibit 21.2. It is, however, sometimes difficult to make these estimates, but fortunately there are some practical guidelines to help us.
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EXHIBIT 21.2 Comparison between business position and industry environment Business position in key segments Strong Weak
Favourable
Maintain/invest
Harvest or divest
Industry environment
Unfavourable
Harvest or divest
Divest
The business can implement the following survival strategies: invest/ maintenance, harvest/milking, and divestment/exit. Each of these survival strategies aims at preventing serious financial losses or ruin.
maintenance investment
harvest
. Maintenance/invest strategy. This strategy involves judiciously spending funds that are sufficient to retain production facilities, product quality and consumer loyalty. The focus is on protecting the image of the business until new growth possibilities occur. This is especially true in the case of a cash cow that is generating sufficient cash flow. The dangers of a maintenance strategy is that the business can continue using this strategy for too long, and miss promising opportunities while funds are wasted trying to maintain the existing strategy. It is therefore advisable to look for opportunities to invest the money in other growth opportunities. . Harvest strategy. The objective here is to bring in cash as quickly as possible. All further investment in the product is stopped and costs are cut to the bone.The cash is invested elsewhere and the product is allowed to die a slow death. This is the obvious strategy if there is still a strong demand for the product in smaller market segments and if there is still some consumer loyalty. One of the problems with this strategy is that it has a dampening effect on management self-confidence, morale and enthusiasm. Competition can intensify during a harvest strategy that carries on too long, and thus force the product off the market prematurely.
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Topic 5: MANAGING THE PRODUCT OVER ITS LIFE CYCLE divestment
. Divestment. Divestment is recommended if cash flow dries up and the business starts showing losses, especially if there is a dominant competitor forcing prices down and only a few loyal customers remain. It is often difficult to make divestment decisions.The following obstacles hinder this kind of decision making: Operational facilities and equipment are so specialised that they cannot be used for anything else (high exit barriers). Long-term contracts that are difficult to break (eg Checkers has had great difficulties in getting out of long-lease agreements on some of its supermarkets). The divestment decision can damage the business's reputation. Management's pride and the business's image will be badly affected by this perceived ``failure''. The product or service may have emotional meaning for the business itself or for a small group of consumers that are still loyal to the product.
Activity 21.2
Study section 21.2.2 above and ``The importance of product deletion'' and ``Triggers in product deletion'' in chapter 17 of Baker and Hart (1999) and then do the following activity. Cool Cream is an ice cream manufacturer and marketer that is experiencing a decline in the sales of five litre tubs of full-cream ice cream. The business wants to know whether it should consider deleting the product. What are the possible causes for bad product performance in this case?
As illustrated in exhibit 21.2 and the accompanying discussion Cool Cream must compare the business strength in the segments with the industry's environment. If Cool Cream's sales in the five-litre tub segment are still strong compared with competitors, all options are actually open to the business.This makes it necessary to look at the position in the industry as a whole. If Cool Cream finds that the industry is also unfavourable, it can try to harvest or divest. The cause/s for the decline in sales may be as follows: . Poor performance triggers: a decline in market potential or poor product quality may apply here. . Strategic triggers: no one is clearly applicable here. . External triggers: competitive activity or third-party decisions may apply here.
21.2.3 Product deletion

Study `Ànalysis of deletion candidates'' in Baker and Hart (1999:442^ 445)
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and `Èvaluation of deletion candidates: deciding to drop the product'' in Baker and Hart (1999:447^ 453).
product deletion
The first question is: under what conditions will the marketer probably decide to divest and delete the product or brand? Product deletion is seriously considered when profits shrink and/or when sales volume fall. Each of these candidates must be analysed further to make sure deletion really is appropriate.
Activity 21.3
Study `Èvaluation of deletion candidates: deciding to drop the product'' in Baker and Hart (1999:447453) and then do the following activity: Indicate the factors that must be considered before Cool Cream decides to delete their five litre tubs.
There are numerous internal and external factors to be evaluated. These are summarised in table 8.5 in Baker and Hart (1999:448).
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SELF-TESTQUESTIONS
Y have reached the end of topic 5, which gave you an overview of the ou product life cycle. You should now test your knowledge of the topic by doing the following: (1) Describe the characteristics and strategic considerations of each of the phases of the product life cycle. (2) Describe the ways in which growth can be created in the product life cycle. (3) Describe the strategies which can be applied in mature and declining markets. (4) Discuss the factors that should be considered before a business decides to delete a product. Have done ........................................................................................ Y should now have a clear understanding of the product life cycle and ou the applicable strategies. In the next section we will deal with management of multiple products in the business. Will do ...............................................................................................
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topic 6
MULTIPLE PRODUCT MANAGEMENT CONTENTS

GETTING AN OVERVIEW Study unit 22 THE PRODUCT PORTFOLIO
22.1 Introduction 22.2 The need for a balanced product portfolio 22.3 Analysis of the product portfolio
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Study unit 22: The product portfolio
GETTING ANOVERVIEW
When only one product is marketed the situation is relatively simple, but when a business is involved in the marketing of various products, marketing decisions become more complex.On the other hand, this situation also brings with it new opportunities and possibilities due to the collective impact of a balanced product portfolio. In this study unit, we use a simple technique, the BCG-matrix, to explain how the product portfolio is balanced and how applicable marketing strategies are formulated. The following diagram provides an overall view of the topic as a whole:
The meaning of the product portfolio
Balancing the product portfolio
Analysis of the product portfolio
. What is a product portfolio? . What is meant by a balanced product portfolio and why is it important? . Which techniques can be used to analyse the product portfolio? . What are the components of the BCG-matrix? . How can the BCG-matrix be used to analyse the product portfolio and develop a marketing strategy?
. product portfolio . balanced product portfolio . the BCG-matrix
study unit 22
THE PRODUCT PORTFOLIO

22.1 INTRODUCTION
Many businesses, such as Coca-Cola, Panasonic, Lever Brothers, Nestle and Black & Decker, manufacture and market a wide range of products. This complicates product management, for example, in terms of organisa-
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Topic 6: MULTIPLE PRODUCT MANAGEMENT
tional setup, control and many other aspects. On the other hand, it can also provide the business with new opportunities.
product portfolio
The total range of products offered by the business is referred to as the business's product portfolio.This is the same thing as the product mix, which we discussed in topic 1.
22.2 THE NEED FOR A BALANCED PRODUCT PORTFOLIO

Businesses are only too aware that even the most successful products cannot last forever. For this reason they generally attempt to build a balanced product portfolio, which consists of a range of products which are all at different stages in their life cycles. If firms relied solely on their established products they could face cash flow problems in the future, when those ``mature'' products inevitably begin to decline. Conversely, an over-reliance on ``young'' products could prove equally dangerous because of the heavy financial burdens which new products require. The survival rate of newlylaunched products is in any case notoriously low and many do not last long enough to repay the business's investment. A balanced product portfolio, which consists of some established products that generate cash now, and some growth products that will generate cash in the future, enables firms to, in effect, avoid the risks associated with having `àll your eggs in one basket''. Portfolio analysis can also help firms to identify those products which are going to need extra resources to improve their performance, and those which are performing so badly that they need to be dropped altogether.The following diagram illustrates the idea behind balancing the product portfolio. EXHIBIT 22.1 Balancing the product portfolio
Product 1
Product 2
Product 3
Product portfolio: different products with potentials, phases in the life cycle, profitability, market share, and growth performance. Balance portfolio by analysing and categorising products according to market share and growth. Maximise the total impact and profitability of the total product portfolio.
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22.3 ANAL YSIS OF THE PRODUCT PORTFOLIO
Not all products in a business are equally successful in terms of things such as market share, cash flow, profitability and growth. These factors are important considerations in analysing the product portfolio. One of the earliest and most influential methods of portfolio analysis is that devised by the Boston Consulting Group and popularly known as the BCG Matrix. This technique enables firms to assess whether they have a balanced range of products by classifying products on the basis of two key factors relative market share and market growth. EXHIBIT 22.2 The BCG growth share matrix
market share market growth
Source: Based on Stefanou (1993)
Activity 22.1
Study ``The BCG growth-share matrix'' in Baker and Hart (1999:131137). Sweet Sensation is a manufacturer and marketer of a range of sweets. They are totally confused about decisions regarding the wide variety of products they market. They've heard about the successful application of the BCG Matrix and want to know from you, the newly appointed product manager, if the application of the BCG Matrix can help them to plan a better cash flow. Give a brief answer explaining the role of cash flow in the BCG Matrix.
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Have you noticed that each category has been given a descriptive title which summarises the ability of the product to generate cash (cash flow is usually a more accurate indication of healthy performance than profits)? The categories relate directly to the stages in the life cycle of a typical product. For example, a ``problem child'' is a product introduced recently which has not yet established itself, hence the doubt about its future. If it passes through the growth stage successfully, it may become a ``star'' and then a``cash cow'' as it reaches maturity.Once it passes into decline it becocash flow
mes a ``dog''. Cash flow can be illustrated by the following BCG Matrix diagram. EXHIBIT 22.3 Cash flow and the product portfolio
STAR Good cash flow little surplus cash
PROBLEM CHILD Negative cash flow
CASH COW Strong positive cash flow
DOG Weak cash flow
Activity 22.2
Study ``The BCG growth-share matrix'' in Baker and Hart (1999:131137). Sweet Sensation now understands the implication of the BCG Matrix for cash flow, but now wants you to advise them on the strategies that can be followed to ``move'' the products to the most favourable positions.
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The BCG Matrix of Sweet Sensation looks like this:
STAR Mellow melts Crunchy choc CASH COW Choc Sensations Sweet Release
PROBLEM CHILD Sweet raver Lip smacker DOG Tangy Toffee Enjoy Mints
The following diagram provides a good summary of what has been said so far about the BCG Matrix: CATEGORY RELATIVE INFLOW OF CASH High RELATIVE OUTFLOW OF CASH High STRATEGIC APPROACH Build or maintain market share Hold share and build profits Build sales volume Harvest or divest
STAR
CASH COW PROBLEM CHILD DOG
High Low Low
Low High Low
SELF-TESTQUESTIONS
Y have now reached the end of topic 6, which focused on the manageou ment of multiple products in the business and the balancing of the product portfolio. (1) What is a product portfolio? (2) What are the benefits of a balanced product portfolio? (3) How can the BCG growth/share matrix be used to analyse and balance the product portfolio? (4) Explain the role of cash flow in balancing the product portfolio by means of the BCG Matrix.
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Have done ........................................................................................ Y should now have a clear understanding of the meaning of a product ou portfolio, the importance of a balanced product portfolio and the use of the BCG Matrix for balancing the product portfolio.
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Part II
PRICE DECISIONS
TOPIC 7
Price and its importance
topic 7
PRICE AND ITS IMPORTANCE CONTENTS

GETTING AN OVERVIEW
Study unit 23 THE NATURE AND IMPORTANCE OF PRICE

23.1 23.2 23.3 23.4 23.5 Introduction What price is Price/value relationship The importance of price to marketing managers Price in the marketing mix
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OVERVIEW
GETTING ANOVERVIEW
The price one pays for any product or service is not always easily determined.The marketer must ensure that the price which is set will cover the costs of the product, that is manufacturing, transporting, financing, storing, and so on, and, allow for a profit. If the company does not make a profit, it will not survive over the long run. Price setting is therefore an important task for marketing management and it is crucial that marketing management is aware of its importance. The nature of price and its importance is illustrated in the following map:
The nature of price . What price is . Price/value relationship
;
The importance of price to: . Marketing managers
;
Price in the marketing mix
. What is price? . What is meant by price/value relationship? . What is meant by value? . Why is price important to marketing managers? . Which trends influence price decisions? . What is the role of price in the marketing mix? . price defined . price/value relationship . the importance of price to marketing managers . the role of price in the marketing mix
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Topic 7: PRICE AND ITS IMPORTANCE
study unit 23
THE NATURE AND IMPORTANCE OF PRICE

23.1 INTRODUCTION
(Study study unit 23 below.) As a consumer you will no doubt be aware of the importance of price in your buying decision. Hidden extras and additional fees are the cause of many a transaction being lost. Let's look at the following scenario. Ricardo went into a store to buy a bed. He and his wife spent time examining the styles of headboards, choosing the mattress itself, and then selecting the linen. At the end the cost came to R650. A sales clerk helpfully presented the range of options and then began writing up the order. At the end she mentioned a R60 finishing charge and a R75 delivery fee. Ricardo then flew into a temper. To be charged for extras that equalled more than ten percent of the original purchase seemed totally unacceptable to him.The store lost the sale, not over the final price, but over a pricing strategy that failed to meet this customer's needs. Is there something wrong with charging an additional fee for additional value delivered? No but it's all in the presentation. Nobody likes surprises when it comes to paying money. In this case, a pricing strategy that offered one price for the total product and discounts for services waived would make more customers happy. An employee who had the power to negotiate the price with Ricardo might have saved the sale. This store needs to reexamine its pricing strategies. Poor pricing strategies can cost companies dearly.This is why you need to familiarise yourself with the concepts and strategies of the trade. In this study unit we will discuss the nature and importance of price.
23.2 WHAT PRICE IS

The price paid for goods and services is called many things.When renting a flat or home, rent is paid, charges on your overdraft are called interest, and the company you work for pays you a salary or commission. On the other hand, if you buy a beer or a pair of shoes, you pay a price. It should be clear to you from these examples that price comes in many forms and ways. Price can be defined as that what is given up in exchange for a particular product or service. Generally speaking, price refers to the money which is exchanged for the product or service, but it can also be the time lost due to a person having to wait for something all day long; or it may be the exchange of one type of product for another (mealies for pumpkins) this is called barter.
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Study unit 23: The nature and importance of price
For most products and services, money is exchanged, although the amount is not always the same as the list or quoted price. Let's look at an example:
Lauren decides to buy a new Mazda Astina 1.8. The best price of the dealer is R106 000. As she will be paying cash and her father has bought a few cars from this dealer previously, the dealer is willing to offer a discount of 10% on the list price. Furthermore, Lauren will be trading in her Ford for R21 000, and she wants to put in an Alpine radio and CD player, which is not standard, for R5 000. The price for her car would then be as follows: Price = List price 7 discounts and allowances + extra costs = R106 000 7 (R10 600 + R21 000) + R5 000 = R79 400,00. The above example is referred to as the price equation. Figure 23.1 illustrates how the price equation applies to a variety of different products and services. FIGURE 23.1 Price of different purchases PRICE EQUATION ITEM PURCHASED New car bought by an individual PRICE Final price = = LIST PRICE List price 7 DISCOUNTS AND ALLOWANCES 7 Quantity discount Cash discount Trade-ins + EXTRA FEES + Financing charges Special accessories
Private Schooling
Tuition
Published tuition fees
+ Special activity 7 Scholarship fees Other financial aid Discounts for number of credits taken 7 Allowance for collateral 7 Quantity discount Cash discount Season discount Functional or trade discount + Premium for uncertain creditworthiness + Penalty for payment
Bank loan obtained by a small business Merchandise bought from a wholesaler by a retailer
Capital loan and interest Invoice price
Amount of loan sought List price
Source: Adapted from Berkowitz (1994:351)
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23.3 PRICE/VALUE RELATIONSHIP

Customers often use price as an indicator of value. A high price is generally associated with premium value, while a low price is associated with a lower quality product. Value can be defined as the ratio of perceived benefits to price (Value = Perceived benefits/Price).This relationship shows that, for a given price, as perceived benefits increase, value increases (Berkowitz et al 1994). Value is the key to pricing.Value is not just related to what the product costs to make, but also to the quality delivered to the consumer at a certain cost.The price asked affects the image of the product.Underpricing a product that delivers premium value can be just as destructive as over-pricing a low-value item. Y have to communicate value ou to your audience so effectively that price seems reasonable in relation to the product. It must be remembered that value involves the consumer's judgment of the worth and desirability of a product or service relative to substitutes that satisfy the same need. This is defined as a reference value. For example, although Amstel Lager is more expensive than other local beers, some consumers ``value'' it higher than other beers because Amstel contains less kilojoules.
23.4 THE IMPORTANCE OF PRICE TO MARKETING MANAGERS

Prices are the key to revenues which, in turn, are the business's key to profits. Revenue is determined by the price charged to customers multiplied by the number of units sold.Revenue is used to pay for every business activity: production, finance, sales, distribution, and so on. What's left over (if anything) is profit. Managers usually strive to charge a price that will earn a fair profit (Lamb et al 1998:574). To earn a profit, managers must choose a price that is not too high or too low, in other words, a price that equals the perceived value to target consumers. If, in consumers' minds, a price is set too high, the perceived value will be less than the cost, and sales opportunities will be lost. It is not easy to set a final price for a product. Y may have sold some ou items yourself in the past (a radio, a car, a chair), in which case you probably know that it is not easy to set a price. People generally ask themselves if it is not too high or low, and if it sells quickly you immediately think `Ì should have asked more!''. T rying to set the correct price is possibly one of the marketing manager's most stressful tasks.This situation is made more difficult owing to trends in the consumer market. These trends include, amongst others, the following:
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Study unit 23: The nature and importance of price
. Economic fluctuations. There are recessions, depressions, inflationary periods and so on that make consumers more price sensitive. . New products. Consumers are confronted by an avalanche of new products every day. This has made consumers more cautious about buying and consumers now tend to evaluate the prices of new products with the prices/value of existing products. . Private and generic brands.The increased availability of these brands has put a downward pressure on prices. . Price cutting. In order to maintain or even increase market share many companies cut prices.The past couple of years have seen motor vehicle manufacturers in particular cutting prices. . Internet. Consumers are increasingly using the Internet to make better decisions. . Global competition. The opening up of world markets has led to many companies opening offices/outlets in South Africa, thereby increasing competition.
23.5 PRICE IN THE MARKETING MIX

As you are aware, the marketing mix consist of the 4 Ps product, place, promotion and price.The marketing manager needs to consider all four of these elements to make the best decision for the company. Price is a critical element since the price has a direct effect on a company's profit. Furthermore, price has a direct effect on quantities sold, and indirectly also affects costs. Pricing decisions therefore influence both total revenue and total costs; this makes pricing one of the most important decisions the marketer has to face. The importance of price in the marketing mix is discussed in the next six study units (24 ^29). These study units discuss the six steps involved in the price-setting process.These steps are shown in figure 23.2.
Activity 23.1
Study study unit 23 and then answer the following question. A new car is advertised at a price of R195 000, and includes airbags, a three-year service plan, and a buyback plan of 60 percent at the end of the three-year period. How does this scenario relate to the price/value relationships?
Did you understand that customers often use price as an indicator of value? The fact that the price is high implies that the customer expects the features that were listed. Was it clear to you that value can be seen as the perceived benefits to price? This relationship shows that, for a given price (R195 000), the benefits increased (air bags, three-year service plan, and 60% buy back), as does total value.
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FIGURE 23.2 Steps in setting price

STEP 1 (SU 24) STEP 2 (SU 25) STEP 3 (SU 26) STEP 4 (SU 27) Identify pricing constraints and objectives Estimate demand and revenue Determine cost, Select an apvolume, and proximate price profit relation- level ships . Demand. Marginal based analysis, methods relation to . Cost-based profit methods . Break-even analysis, relation to profit . Profit-based methods . Competition based methods STEP 5 (SU 28) Set list or quoted price (Basic price) . One price or flexible prices . Covering cost plus profit . Incremental costs and revenue . Company customer, and competitive effects STEP 6 (SU 29) Make special adjustments to list or quoted price (Set final price) . Discounts . Allowances . Geographical adjustments
. Constraints . Demand like demand estimation for product . Sales class and revenue brand, newestimation ness, costs, and competi- . Price elasticity tion estimation . Objectives such as profit, market share, and survival
Source: Adapted from Berkowitz, et al (1994:353)
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topic 8
STEPS IN THE SETTING OF PRICE CONTENTS

GETTING AN OVERVIEW Study unit 24 IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES
24.1 24.2 24.3 Introduction Pricing constraints Identifying pricing objectives
Study unit 25 ESTIMATING DEMAND AND REVENUE

25.1 25.2 25.3 25.4 25.5 Introduction The nature of demand How demand and supply establish prices Elasticity of demand Fundamentals in estimating revenue
Study unit 26 DETERMINING COST, VOLUME AND PROFIT RELATIONSHIP

26.1 26.2 26.3 Introduction Marginal analysis and profit maximisation Break-even analysis
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OVERVIEW
Study unit 27 SELECTING AN APPROXIMATE PRICE LEVEL

27.1 27.2 27.3 27.4 27.5 Introduction Demand-based methods Cost-based methods of setting price Profit-based methods of pricing Competition-based methods
Study unit 28 SETTING THE LIST OR QUOTED PRICE

28.1 28.2 28.3 28.4 28.5 Introduction One price versus flexible price policy Pricing to cover cost plus profit Balancing incremental costs and revenues Company, customer and competitive effects
Study unit 29 ADJUSTMENTS TO THE LIST OR QUOTED PRICE

29.1 29.2 29.3 29.4 29.5 29.6 29.7 29.8 Introduction Discount and allowance pricing Segmented pricing Psychological pricing Promotional pricing Value pricing Geographical pricing International pricing
Study unit 30 PRICE CHANGES

30.1 Introduction 30.2 Initiating price changes 30.3 Responding to price changes
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OVERVIEW
GETTING ANOVERVIEW
The importance of price in the marketing mix must not be underestimated.There are various steps involved in price setting which the marketer has to consider.The marketer must identify the price constraints facing the company, and the objectives the business wants to attain. Secondly, the marketer must estimate the demand for the product and the expected revenue, after which the marketer must consider the costs, sales volumes and potential profit. Fourthly, a price level must be set based on demand, cost, profit or competition, after which a list or quoted price must be set. Finally, special adjustments must be made to the price which may include discounts, allowances or geographical adjustments. The steps in price setting are indicated in the map below.
"
Identify price constraints and objectives
Make special adjustments to list or quoted price

~
Estimate demand and revenue
Set list or quoted price
Determine cost, volume, and profit relationship
Select an approximate price level
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OVERVIEW
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is meant by pricing constraints? What is a price objective? Which different pricing constraints can be identified? How can demand be defined? What strategies are available to companies in the four different types of competitive markets? Into which three different categories can price objectives be divided? How can demand and supply establish prices? What is meant by elasticity of demand? Which factors influence elasticity of demand? Explain the fundamental revenue concepts. Explain the fundamental cost concepts. What is meant by marginal analysis? What does profit maximisation mean? What is meant by break-even analysis? How would you go about selecting an appropriate price level? What are the different methods of selecting an approximate price level? What is meant by ``demand-based methods''? What is meant by ``cost-based methods''? What is meant by ``profit-based methods''? What are competition-based methods? Discuss the different demand-based methods of pricing. Discuss the various cost-based methods of pricing. Discuss the different profit-based methods of pricing. Discuss the various competition-based methods of pricing. What is meant by a flexible price policy? How would you balance incremental costs and revenues? What is meant by the effect of pricing on the company, the customer and on competitors? Explain product adjustment strategies. What is meant by discount and allowance pricing? What is meant by segmented pricing? What is meant by psychological pricing? What is promotional pricing? What is value pricing? What is geographical pricing? What is international pricing? What is meant by initiating price changes? How should a company respond to price changes?
. price constraints . pricing objectives . demand and supply
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Study unit 24: Identify pricing constraints and objectives
. . . . . . . . . . . . .
elasticity of demand fundamentals in estimating revenue determining cost, volume and profit relationship marginal analysis and profit maximisation break-even analysis selection of an approximate price level demand-based methods of price setting cost-based methods of price setting profit-based methods of price setting competition-based methods of price setting setting the list or quoted price adjustment to the list or quoted price price changes
study unit 24
IDENTIFY PRICING CONSTRAINTS AND OBJECTIVES

(Study study unit 24 below.)
24.1 INTRODUCTION
All companies find price setting a difficult task and it is important that constraints on prices be identified, and objectives set. Imagine you went to your local cafe and paid R9,50 for a packet of Benson and Hedges cigarettes, and then you found out that the cafe on the next corner charged only R4,50.Do you think the cafe charging R9,50 will sell a lot of cigarettes? Of course not. A constraint on pricing is therefore competition. If there were no other shop selling cigarettes within, say, 50 or 100km, then the cafe owner might get away with charging these types of prices. This example illustrates the fact that marketers must be aware of those factors, internal and external, which influence prices.
24.2 PRICING CONSTRAINTS

A pricing constraint can be defined as those factors which limit the range of prices a company can set. Some constraints most companies have to deal with are the following (Berkowitz et al 1994): . Demand for the product class, product and brand.The number of
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Topic 8: STEPS IN THE SETTING OF PRICE
potential buyers for the product class (eg shoes), product (sports shoes) and brand (Nike) clearly influences the price a seller can charge. So does whether the item is a luxury such as fashion shoes or a necessity such as bread or a roof over your head. (We will discuss the nature of demand in detail later on.) . Newness of the product: stage in the product life cycle.The newer a product and the earlier it is in its life cycle, the higher the price that can usually be charged for it.When the Kreepy Krauly was introduced, it was the first automatic pool cleaner. The newness of the product coupled with patent protection meant that the manufacturer could charge a premium price. However, once its patent expired, competitors (eg Baracuda) emerged, which affected Kreepy Krauly's pricing latitude. . Single product versus a product line.When Sony introduced its CD player, not only was it unique and in the introductory stage of its product life cycle, but it was also the only CD player Sony sold.This meant the company had a great deal of pricing latitude.Today, there is a number of CD player products on the market, and so the price of individual models has to be consistent with the others (based on the features provided) and companies who make CD players have to set meaningful price differentials; that is, price differentials that communicate value to consumers. . Cost of producing and marketing the product. In the long run, a company's price must cover all the costs of producing and marketing the product. If the price doesn't at least cover costs, the company will fail. . Cost of changing prices and time period they apply. If the defence force asks Denel to provide spare engines for their military canons (G6), Denel can easily set a new price for its engines, since only one buyer (the defence force) has to be informed of this change in price.But if Makro or Dions decides that its catalogues are advertising computers at prices that are too low, after thousands of catalogues have been mailed to customers, it has a major problem. Dions and Makro cannot easily inform thousands of potential buyers that the price has changed, so Makro and Dion must consider the cost of changing prices carefully.The time period for which new prices apply also has to be determined carefully when these two companies develop the price list for its catalogue items. In actual practice, research indicates that most companies change the price for their major products once a year. . Pricing in different types of markets. (The following information is based on Kotler et al 1997:347 The seller's pricing freedom varies with .) different types of markets. Economists recognise four types of markets, each of which presents a different pricing challenge. Under pure competition, the market consists of many buyers and sellers who trade in a uniform commodity such as wheat, copper, or mealies. No single buyer or seller has much effect on the going market price. A seller
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cannot charge more than the going price because buyers can obtain as much as they need at the going price. Nor would sellers charge less than the market price, simply because they can sell all they want at this price. Under monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than a single market price. A range of prices occurs because sellers can change their offers to buyers. Either the physical product can be varied in quality, features, or style, or the accompanying services can be varied. Buyers see differences in sellers' products and will pay different prices for them. Sellers try to develop different offers for different customer segments and, in addition to price, freely use branding, advertising, and personal selling to distinguish their offers from competitors. For example, Koo, Holbrooks and several other national brands compete with many local brands, all differentiated by price and nonprice factors. Because there are many competitors, each company is less affected by competitors' marketing strategies than is the case in oligopolistic markets. Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other's pricing and marketing strategies. The product can be uniform (steel, aluminium) or nonuniform (cars, furniture). In this case, there are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitors' strategies and moves. If a car company slashes its price by 10 percent, buyers will switch to this supplier. The other manufacturers must respond by lowering their prices or increasing their services. An oligopolist is never sure that it will gain anything permanent through a price cut. In contrast, if an oligopolist raises its price, its competitors might not follow this lead. The oligopolist will then have to retract its price increase or risk losing customers to competitors. In a pure monopoly, the market consists of one seller.The seller may be a government monopoly (postal service) or a private, nonregulated monopoly (SAB). Pricing is handled differently in each case. A government monopoly can pursue a variety of pricing objectives. It might set a price below cost because the product is important to buyers who cannot afford to pay full cost. Or the price might be set either to cover costs or to produce good revenue. It can even be set quite high to slow down consumption. In a regulated monopoly, the government permits the company to set rates that will yield a ``fair return'', that is, one that will let the company maintain and expand its operations as needed. Non-regulated monopolies are free to set the price at what the market will bear. However, they do not always charge the full price for a number of reasons: the desire not to attract competition, the desire to penetrate the market faster by using a low pricing strategy, or the fear of government regulation. Figure 24.1 shows that the type of competition dramatically influences the latitude of price competition and, in turn, the nature of product differentiation and extent of advertising.
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FIGURE 24.1 Strategies available to companies in four types of competitive markets TYPE OF COMPETITIVE MARKET Strategies available Pure monopoly (One seller who sets the price for a unique product) None: sole seller sets price None: no other producers Little: purpose is to increase demand for product class Oligopoly (Few sellers who are sensitive to each other's prices) Some: price leader or follower of competitors Monopolistic competition (Many sellers who compete on nonprice factors) Some: compete over range of prices Pure competition (Many sellers who follow the market price for identical, commodity products) Almost none: market sets price None: products are identical Little: purpose is to inform prospects that seller's products are available
Price competition
Product differentiation Extent of advertising
Various: depends Some: differenon industry tiate products from competitors' Some: purpose is Much: purpose is to inform but to differentiate firm's products avoid price from competitors' competition
Source: Berkowitz et al (1994:355). Marketing. 4th Edition. Homewood,Ill: Irwin. (p 355) Source
. Competitors'costs, prices and offers Another factor influencing a company's pricing decisions is competitors' costs and prices and possible competitor reactions to the company's own pricing moves. A consumer who is considering the purchase of a Canon camera will evaluate Canon's price and value against the prices and values of comparable products made by Nikon, Minolta, Pentax, and others. In addition, the company's pricing strategy may affect the nature of the competition it faces. If Canon follows a high-price, high-margin strategy, it may attract competition. A low-price, low margin strategy, however, may eliminate competitors or drive them out of the market. A company needs to benchmark its costs against its competitors' to learn whether it is operating at a cost advantage or disadvantage. It also needs to learn the price and quality of each competitor's offer.This can be done in several ways. It can send out comparison shoppers to price and compare the products of its competitors. It can get competitors' price lists and buy competitors'equipment and take it apart. It can ask buyers how they view the price and quality of each competitor's product. Once the company is aware of competitors' prices and offers, it can use these as a starting point for its own pricing. If its products are similar to its competitors, it will have to price close to them or lose sales. If its pro-
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ducts are not as good as competitors, the company will not be able to charge as much. . Other external factors
When setting prices, the company also must consider other factors in its environment. Economic conditions can have a strong impact on the companies pricing strategies. Economic factors such as boom or recession, inflation, and interest rates all affect pricing decisions, because they affect both the costs of producing a product and consumer perceptions of the product's price and value. The company also must consider what impact its prices will have on other parties in its environment. How will resellers react to various prices? The company should set prices that give resellers a fair profit, encourage their support, and help them to sell the product effectively.The government is another important external influence on pricing decisions. Laws and regulations set by government influences prices. Finally, social concerns may have to be taken into account. In setting prices, a company's short-term sales, market share, and profit goals may have to be tempered by broader societal considerations.
24.3 IDENTIFYING PRICING OBJECTIVES

(The information here is based on Lamb et al 1998:575^579.) To survive in today's highly competitive marketplace, companies need pricing objectives that are specific, attainable and measurable. Realistic pricing goals then require periodic monitoring to determine the effectiveness of the company's strategy. For convenience, pricing objectives can be divided into three categories: profit oriented, sales oriented, and status quo.
24.3.1 Profit-oriented pricing objectives

Profit-oriented objectives include profit maximisation, satisfactory profits, and target return on investment. We shall briefly discuss each of these objectives.
24.3.1 Profit maximisation .1

Profit maximisation means setting prices to maximise total revenue relative to total costs. Profit maximisation does not always signify unreasonably high prices, however. Both price and profits depend on the type of competitive environment a company faces, such as being in a monopoly position (being the only seller) or selling in a much more competitive situation. Sometimes managers say that their company is trying to maximise profits in other words, trying to make as much money as possible. Although this goal may sound impressive to stockholders, it is not sufficient for plan-
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ning purposes.The statement ``We want to make all the money we can'' is vague and lacks focus.
24.3.1 Satisfactory profits .2

Satisfactory profits are a reasonable level of profits. Rather than maximising profits, many companies strive for profits that are satisfactory to the stockholders and management in other words, the company tries to achieve a profit level that is consistent with the risk level the company faces. In a high-risk industry, a satisfactory profit may be 35 to 40 percent. In a low-risk industry, it might be 10 to 12 percent. To maximise profits, a small-business owner might have to keep his or her store open seven days a week. But the owner might not want to work that hard and might be satisfied with less profit. Look at the spaza shops in the townships. Many open at 6 in the morning but close at 10 or 1 at night. By 1 doing this, they may be trying to maximise profits, or simply make enough profit to survive.
24.3.1 Target return on investment (ROI) .3

The most common profit objective is target return on investment (ROI), sometimes called the company's return on total assets. ROI measures management's overall effectiveness in generating profits with its available assets.The higher the company's return on investment, the better off the company is. Return on investment is calculated as follows: Return on investment = Net profits after taxes Total assets
Assume that in 1999 Tsabalala Inc had assets of R4,5 million, net profits of R550 000 and a target ROI of 10 percent.This was the actual ROI: ROI = 550,000 4,500,000
= 12,2 percent As you can see, the ROI for Tsabalala Inc exceeded its target, which indicates that the company prospered in 1999. Comparing the 12,2 percent ROI with the industry average provides a more meaningful picture, however. Any ROI needs to be evaluated in terms of the competitive environment, risks in the industry, and economic conditions. Generally speaking, companies seek ROIs in the 10 to 30 percent range. In some industries, such as the grocery industry, a return of under 5 percent is common and acceptable. A company with a target ROI can predetermine its desired level of profitability. The marketing manager can use the standard, such as 10 percent ROI, to determine whether a particular price and marketing mix are feasi-
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Study unit 25: Estimating demand and revenue
ble. In addition, however, the manager must weigh the risk of a given strategy even if the return is acceptable.
24.3.2 Sales-oriented pricing objectives

Sales-oriented pricing objectives are based either on market share or on rand or unit sales. Marketing managers should be familiar with these pricing objectives. Each is briefly discussed below.
24.3.2.1 Market share

Market share is a company's product sales as a percentage of total sales for that industry. Sales can be indicated in rands or in units of product. It is very important to know whether market share is expressed in revenue or units, because the results may be different. Many companies believe that maintaining or increasing market share is an indicator of the effectiveness of their marketing mix. Indeed, larger market shares often do mean higher profits, thanks to greater economies of scale, market power, and the ability to compensate top-quality management. Market share and return on investment are, however, strongly related. However, many companies with low market share survive and even prosper. To succeed with a low market share, companies need to compete in industries with slow growth and few product changes for instance, industrial component parts and supplies.
24.3.2.2 Sales maximisation

Rather than striving for market share, sometimes companies try to maximise sales.The objective of maximising sales ignores profits, competition, and the marketing environment as long as sales are increasing. If a company is strapped for funds or faces an uncertain future, it may try to generate a maximum amount of cash in the short run.When using this objective, management's task is to calculate which price-quantity relationship generates the greatest cash revenue. Sales maximisation can also be effectively used on a temporary basis to sell off excess inventory. It is not uncommon, for example, to find Christmas cards, ornaments and so on discounted at 50 to 70 percent off retail prices after the holiday season.
24.3.2.3 Status quo pricing objectives

Status quo pricing seeks to maintain existing prices or to meet the competition's prices. This third category of pricing objectives has the major advantage of requiring little planning. It is essentially a passive policy. Often, companies competing in an industry with an established price leader simply meet the competition's prices. These industries usually have fewer price wars than those with direct price competition.
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study unit 25
ESTIMATINGDEMANDAND REVENUE
25.1 INTRODUCTION
After marketing managers establish pricing objectives, they must set specific prices to reach these objectives. If pricing objectives are mainly sales oriented, it is demand considerations that usually dominate.Other factors, such as distribution and promotion strategies, perceived quality, and stage of the product life cycle, can also influence price.
25.2 THE NATURE OF DEMAND

(Study study unit 25) (The information in this section is based on Lamb et al 1998.) Demand is the quantity of a product that will be sold in the market at various prices for a specified period.The quantity of a product that people will buy depends on its price.The higher the price, the fewer goods or services consumers will demand. Conversely, the lower the price, the more goods or services they will demand. This trend is illustrated in exhibit 25.1(A) which graphs the weekly demand for Atchar at a local retailer at various prices.This graph is called a demand curve. The vertical axis of the graph shows the different prices charged for Atchar, measured in rands per package.The horizontal axis measures the quantity of Atchar that will be demanded each week at each price.For example, at a price of R2,50, 50 packages will be sold each week; at R1,00, consumers will demand 120 packages as the demand schedule in exhibit 25.1(B) indicates. The demand curve in exhibit 25.1(A) slopes downward and to the right, which indicates that the demand for Atchar increases as the price is lowered. In other words, if the manufacturers flood the market with Atchar, their hopes of selling all of it will only be realised by selling it at a lower price. One reason lower prices lead to bigger sales is that lower prices attract new buyers. Supply is the quantity of a product that will be offered to the market by a supplier or suppliers at various prices for a specified period. Exhibit 25.2(A) illustrates the resulting supply curve for Atchar. Unlike the falling demand curve, the supply curve for Atchar slopes upward and to the right. At higher prices, Atchar manufacturers will obtain more resources (mangoes, flavourings, salt) and produce more Atchar. If the price consumers are willing to pay for Atchar increases, producers can afford to buy more ingredients. Output tends to increase at higher prices because manufacturers can sell more packages of Atchar and earn greater profits.The supply schedule in exhibit 25.2 (B) shows that, at R2, suppliers are willing to place 1 packages of 10 Atchar on the market, but that they will offer140 packages at a price of R3.
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EXHIBIT 25.1(A) Demand Curve for Atchar (A) Demand curve

3.25 3.00 2.50 Price (R) 2.00 1.50 1.00 .50 0 20 40 60 80 100 120 D D
140
Quantity supplied per week
(B) Demand schedule

Price per package of Atchar R3,00 2,50 2,00 1,50 1,00 Packages of Atchar supplied per week 35 50 65 85 120
EXHIBIT 25.2(A) Supply Curve for Atchar (A) Supply curve

3.25 3.00 Prys (R) 2.50 2.00 1.50 1.00 .50 0 20 40 60 80 100 120 140 S S
Quantity supplied per week
(B) Supply schedule

Price per package of Atchar R3,00 R2,50 R2,00 R1,50 R1,00 Packages of Atchar supplied per week 140 130 110 85 25
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25.3 HOW DEMAND AND SUPPL ESTABLISH Y PRICES

At this point, let's combine the concepts of demand and supply to see how competitive market prices are determined. So far, the premise is that if the price is X, then consumers will purchaseYamount of Atchar. How high or low will prices actually go? How many packages of Atchar will be produced? How many packages will be consumed? The demand curve cannot predict consumption, nor can the supply curve, by itself, forecast production. Instead, we need to look at what happens when supply and demand interact, as shown in exhibit 25.3. At a price of R3, the public will demand only 35 packages of Atchar. But suppliers stand ready to place 140 packages on the market at this price (data from the demand and supply schedules). If they do, they will create a surplus of 105 packages of Atchar. How does a dealer eliminate a surplus? The dealer lowers the price. At a price of R1, there will be a demand of120 packages, but only 25 will be placed on the market.This will then create a shortage of 95 units. If a product is in short supply and consumers want it, how do they entice the dealer to part with one unit? They offer more money that is, they pay a higher price. Now let us look at a price of R1,50. At this price, there is a demand for 85 packages and 85 are supplied. When demand and supply are equal, a state called price equilibrium is achieved. A temporary price below equilibrium say R1,00 results in a shortage, because at that price the demand for Atchar is greater than the available supply. Shortages put an upward pressure on price. But as long as demand and supply remain the same, temporary price increases or decreases tend to return to equilibrium. At equilibrium, there is no inclination for prices to rise or fall. An equilibrium price may not be reached immediately. Prices may fluctuate during a trial-and-error period as the market for a good or service moves toward equilibrium. But, sooner or later, demand and supply will properly balance each other.
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EXHIBIT 25.3 Equilibrium price for Atchar
8
S
3.25 3.00 2.50 Price (R) 2.00 1.50 1.00 .50 0 20 S
D Surplus (sellers reduce prices . . . . . . Shortage (consumers bid up prices) 40 60 80 100 D
D
120 140
Quantity demanded per week
25.4 ELASTICITYOF DEMAND

To appreciate demand analysis, you need to understand the concept of elasticity. Elasticity of demand refers to consumers' responsiveness or sensitivity to changes in price. Elastic demand occurs when consumers buy more or less of a product when the price changes. Conversely, inelastic demand means that an increase or a decrease in price will not significantly influence the demand for the product. Elasticity over the range of a demand curve can be measured by using this formula: Elasticity (E) = Percentage change in quantity demanded of good A Percentage change in price of good A If E is greater than 1, demand is elastic. If E is less than 1, demand is inelastic. If E is equal to 1, demand is unitary. Unitary elasticity means that an increase in sales exactly offsets a decrease in prices so that total revenue remains the same. Elasticity can be measured by observing these changes in total revenue: If price goes down and revenue goes up, demand is elastic. If price goes down and revenue goes down, demand is inelastic.
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If price goes up and revenue goes up, demand is inelastic. If price goes up and revenue goes down, demand is elastic. If price goes up or down and revenue stays the same, elasticity is unitary. Exhibit 25.4(A) shows a very elastic demand curve. Decreasing the price of a AIWA Hi-fi from R300 to R200 increases sales from 18,000 units to 59,000 units. Revenue increases from R5,4 million (R300 6 18 000) to R1 million (R200 6 59,000). In other words, the price decrease results 1,8 in a large increase in sales and revenue. Exhibit 25.4(B) shows a completely inelastic demand curve. If the Gauteng Province dropped its used-car vehicle inspection fee from R20 to R10, it will inspect more or less the same number of cars annually. Decreasing the price (inspection fee) by 50 percent did not cause people to buy more used cars. Demand is completely inelastic for inspection fees, which are required by law. It therefore also follows that Gauteng could double the original fee to R40 and double the province's inspection revenues. People won't stop buying used cars if the inspection fee increases (within a reasonable range). EXHIBIT 25.4 Elasticity of demand for AIWA Hi-fi and Car Inspections (A) AIWA Hifi 300 D 20 (B) Car inspections D
Price (R)
200
Price (R)
10
100 D 0 18,00 Quantity 59,00 0 40,00 Quantity
25.4.1 Factors that influence elasticity

Several factors influence elasticity of demand, including the following: . Availability of substitutes: if many substitute products are available, the consumer can easily switch from one product to another; this makes demand elastic.The reverse is also true. . Price relative to purchasing power: if a price is so low that it is an inconsequential part of an individual's budget, demand will be inelastic. For example, if the price of salt doubles, consumers will not stop putting salt and pepper on their eggs, simply because salt is cheap anyway.
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Study unit 26: Determining cost, volume and profit relationship
. Product durability: consumers often have the option of repairing durable products rather than replacing them, thus prolonging their useful life. For instance, if a person plans to buy a new washing machine, but then the price of new washing machines suddenly increases, he or she might decide to fix the old washing machine and use it for another year. In other words, people are sensitive to the price increase, and demand is elastic. . A product's other uses: the greater the number of different uses for a product, the more elastic demand tends to be. If a product has only one use, as may be true of a new medicine, the quantity purchased probably will not vary as price varies. A person will consume only the prescribed quantity, regardless of price.On the other hand, a product such as steel has many possible applications. As its price falls, it becomes more economical to use steel in a wider variety of applications, thereby making demand relatively elastic.
25.5 FUNDAMENTALS IN ESTIMATING REVENUE

Demand and supply curves are crucial in helping marketers to estimate revenue. Demand curves lead to three related revenue concepts critical to price decisions: total revenue, average revenue and marginal revenue. Figure 25.1 shows the fundamental revenue concepts. FIGURE 25.1 Fundamentalrevenue concepts Total revenue (TR) is the total money received from the sale of a product. If: TR P Q then: TR = P 6 Q Average revenue (AR) is the average amount of money received for selling one unit of the product, or simply the price of that unit. Average revenue is the total revenue divided by the quantity sold: AR = TR Q = P = Total revenue = Unit price of the product = Quantity of the product sold
Marginal revenue (MR) is the change in total revenue obtained by selling one additional unit: MR = Change in TR 1 unit increase in Q = TR Q
Source: Berkowitz et al (1994:360). Marketing. 4th edition. Homewood, Ill: Irwin. (p 360)
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study unit 26
DETERMINING COST, VOLUME AND PROFIT RELATIONSHIP

26.1 INTRODUCTION
The third step in the price-setting process involves determining the cost, volumes and expected profit. PEP stores, Ellerines, Pick 'n Pay and all others need to be aware of their costs of the goods they sell, and the volumes they expect to sell, since this will determine the profit they make at the end of the financial year. The profit equation described in study unit 23 showed that Profit equalled Total Revenue minus Total Cost. To understand the role and behaviour of costs is critical for all marketing decisions, but particularly for pricing decisions. Four cost concepts are important in pricing decisions, that is: total cost, fixed cost, variable cost and marginal cost. Each of these is discussed in this study unit. Figure 26.1 shows the fundamental cost concepts. FIGURE 26.1 Fundamental cost concepts T otal cost (TC) is the total expense incurred by a firm in producing and marketing the product.Total cost is the sum of fixed cost and variable cost. Fixed cost (FC) is the sum of the expenses of the firm that are stable and do not change with the quantity of product that is produced and sold. Examples of fixed costs are rent on the building, executive salaries, and insurance. Variable cost (VC) is the sum of the business's expenses that varies directly with the quantity of product produced and sold. For example, as the quantity sold doubles, the variable cost doubles. Examples are the direct labour and direct materials used in producing the product and the sales commissions that are tied directly to the quantity sold. As mentioned above: TC = FC + VC Variable cost expressed on a unit basis is called unit variable cost (UVC).
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Study unit 26: Determining cost, volume and profit relationship
Marginal cost (MC) is the change in total cost that results from producing and marketing one additional unit: Change inTC TC = MC = 1 unit increase in Q Q
Source: Berkowitz et al 1994: Marketing. 4th edition. Homewood, Ill: Irwin. (p 364)
26.2 MARGINAL ANAL YSIS AND PROFIT MAXIMISATION

(This next section is based on Berkowitz et al 1994.) A basic idea in business, economics, and indeed everyday life is marginal analysis. In personal terms, marginal analysis means that people will continue to do something as long as the incremental return exceeds the incremental cost. This same idea holds true in marketing and pricing decisions. In this setting, marginal analysis means that as long as revenue received from the sale of an additional product (marginal revenue) is greater than the additional cost of producing and selling it (marginal cost), a company will expand its output of that product. Marginal analysis is central to the concept of maximising profits. In figure 26.2A, marginal revenue and marginal cost are graphed. Marginal cost starts out high at lower quantity levels, decreases to a minimum owing to production and marketing efficiencies, and then rises again as a result of inefficiencies of overworked labour and equipment. Marginal revenue follows a downward slope. In figure 26.2B, total cost and total revenue curves corresponding to the marginal cost and marginal revenue curves are graphed. Total cost initially rises as quantity increases, but increases at the slowest rate at the quantity where marginal cost is lowest. The ``message'' of marginal analysis, then, is to operate up to the quantity and price level where marginal revenue equals marginal cost (MR = MC). Up to the output quantity at which MR = MC, each increase in total revenue resulting from selling one additional unit exceeds the increase in the total cost of producing and marketing that unit. Beyond the point at which MR = MC, however, the increase in total revenue from selling one more unit is less than the cost of producing and marketing that unit. At the quantity at which MR = MC, the total revenue curve lies farthest above the total cost curve and the two are in parallel.
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FIGURE 26.2 Profit Maximisation pricing

Marginal cost Unit price and cost Marginal revenue Quantity B Total revenue and cost
3
Total cost Profit

3
Loss
Total revenue Loss Quantity
26.3 BREAK-EVEN ANAL YSIS

Break-even analysis is a technique that analyses the relationship between total revenue and total cost to determine profitability at various output levels. The break-even point (BEP) is the quantity at which total revenue and total cost are equal and beyond which profit occurs. In terms of the definitions in figure 26.1: BEPquantity = Fixed cost Unit price Unit variable cost
Calculating a break-even point. Consider, for example, a wheat farmer who wishes to identify how many bushels of wheat he must sell to cover his fixed cost at a given price. Suppose the farmer had a fixed cost (FC) of R2,000 (for real estate taxes, interests on a bank loan, and other fixed expenses) and a unit variable cost (UVC) of R1 per bushel (for labour, seed, herbicides and pesticides). If the price (P) is R2 per bushel, his breakeven quantity is 2 000 bushels: BEPQuantity = FC P ^ UVC = R2 000 R2 ^ R1 = 2 000 bushels
Figure 26.3 shows that the break-even quantity at a price of R2 per bushel is 2 000 bushels, since at this quantity total revenue equals total cost. At less than 2 000 bushels the farmer incurs a loss, and at more than 2 000 bushels he makes a profit. Figure 26.4 shows a graphic presentation of the break-even analysis, called a break-even chart.
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Study unit 27: Selecting an approximate price level
FIGURE 26.3 Calculating a break-even point

Quantity Priceper bushel (P) T otal Revenue (TR) (P 6 Q) Unit variable costs (UVC) T otal Fixedcost variable (FC) costs (TVC) (UVC 6 Q) R0 1,000 2,000 3,000 4,000 5,000 6,000 R2,000 2,000 2,000 2,000 2,000 2,000 2,000 T otal cost (TC) (TVC+FC)
8
Profit (TR^TC)
0 1,000 2,000 3,000 4,000 5,000 6,000
R2 2 2 2 2 2 2
R0 2,000 4,000 6,000 8,000 10,000 12,000
R1 1 1 1 1 1 1
R2,000 3,000 4,000 5,000 6,000 7 ,000 8,000
R2,000 71,000 0 1,000 2,000 3,000 4,000
FIGURE 26.4 Break-even analysis chart
12 Total revenue or total costs (thousands) 10 8 Break-even point Total cost (Fixed costs + Variable costs) Loss Fixed costs
Total revenue
6 4
Variable costs
1,000 2,000 3,000 4,000 5,000 6,000 Quantity of wheat raised and sold per year (bushels)
(Break-even analysis is also discussed in study unit 27 as a method of selecting an approximate price level.)
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study unit 27
SELECTING AN APPRO XIMATE PRICE LEVEL

27.1 INTRODUCTION
It is not always easy to exactly know what price to charge for a product or service. If somebody were to ask you to paint a wall for them, you might look and quote a price of, say, R250.This price may be too high or low, but it at least gives you a starting point. If the client doesn't accept and says it is too expensive you know the price is too high. On the other hand, if the client accepts your offer eagerly, this suggests that your price might be too low. Marketing management must approach price setting in a similar way. One of the keys a marketing manager can use to set a final price for a product is to find an `àpproximate price level'' to use as a reasonable starting point. Four common approaches to helping find this approximate price level are: (1) demand-based, (2) cost-based, (3) profit-based, and (4) competition-based methods (fig 27 Although these methods are dis.1). cussed separately below, some of them overlap, and an effective marketing manager will consider several in searching for an approximate price level. FIGURE 27 .1 Methods of selecting an approximate price level
Selecting an approximate price level
;
Demand-based methods Skimming and penetration Prestige Price lining Odd-even Demand backward Bundle
;
Cost-based methods Standard markup Cost plus percentage of cost Cost plus fixed fee Experience curve Break-even analysis
;
Profit-based methods Target profit Target return on sales Target return on investment
;
Competition-based methods Customary Above, at, or below market Loss leader Sealed bid
Source: Berkowitz et al (1994.) Marketing. 4th Edition. Homewood, Ill: Irwin. (p 377)
Each of these categories is discussed below.
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27.2 DEMAND-BASED METHODS
These methods place greater emphasis on customer tastes and preferences than on factors such as profit, cost and competition.
27 .2.1 Skimming and penetration pricing

These two methods are generally found in the introduction phase of a new product. A company introducing a new or innovative product can use skimming pricing, that is, selling the highest initial price that customers are willing to pay.This method is possible if: . . . . the demand for the product is price inelastic or relatively price inelastic few potential competitors exist prices are used to segment the market the costs and demand are unknown (if the price is set too high, it can always be reduced at a later stage) . the consumer knows little about the new product . the investment must be recovered as quickly as possible (Van der Walt 1996:451) The first CD players on the market in South Africa cost more than R3 000. The same or similar CD players now cost less than half this amount. Penetration pricing takes place when a company sets an initial low price on a new product to appeal to the mass market. This strategy is possible if: . the price elasticity of the demand is relatively high . savings in production costs are possible with a higher production volume . a market exists which will not or cannot accept high prices . there is a strong possibility of potential competition In1998, a new security company, BBR, launched a penetration strategy in the highly competitive security market. Their alarm systems monitoring prices and reaction force prices were up to 50% less than their competitors.The main aim of this strategy was to penetrate the market which they successfully did.
27 .2.2 Prestige pricing

Consumers may use price as a measure of the quality or prestige of an item; in this case, if the price is reduced to below some point, demand for the item actually falls.Prestige pricing involves setting a high price so that status-conscious consumers will find the product attractive and buy it (fig-
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ure 27 .2(A)).The demand curve slopes downward and to the right between points A and B, but turns back to the left between points B and C, since demand is actually reduced between points B and C. From A to B buyers see the lowering of price as a bargain and buy more; from B to C they become dubious about the quality and prestige and buy less. A marketing manager's pricing strategy here is to stay above price Po (the initial price). Rolls-Royce cars, diamonds, perfumes, fine china, and crystal have an element of prestige pricing appeal; if the prices of these products were lowered, the sales volume may actually drop. FIGURE 27 .2 Demand curves for two types of demand-based methods A Prestige pricing A P0 B P1 P2 P3 Quantity B Price lining
Price
C Quantity
27 .2.3 Price lining

A company selling a line of products may often price these products at a number of different specific pricing points; this is called price lining. For example, Foschini may price a line of women's dresses at R59, R79 and R99. As shown in figure 27 .2B, this assumes that demand is elastic at each of these price points, but inelastic between these price points. In some instances all the items might be purchased for the same cost and then marked up at different percentages (based on colour, style and expected demand) to achieve these price points. In other instances, manufacturers design products for different price points and retailers apply approximately the same markup percentages to achieve the three or four different price points offered to consumers.
27 .2.4 Odd-even pricing

Makro offers an electrical drill for R499,95, Furniture City prices a fivepiece living room set at R2 499; and Pick 'n Pay sells Windolene glass cleaner on sale for R1,99. Why not simply price these items at R500, R2 500, and R1, respectively? These retailers are using odd-even pricing, which
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Price
involves setting prices a few rand or cents under an even number. The assumption is that consumers see the drill as priced at ``something over R400'' rather than `àbout R500''. In theory, demand increases if the price drops from R500 to R499,95. There is some evidence to suggest this does happen. However, consumers may interpret these prices as meaning lower quality.
27 .2.5 Demand-backward pricing

Manufacturers sometimes estimate the price that consumers would be willing to pay for a relatively expensive item (eg a shopping good). They then work backward through the margins that may have to be paid to retailers and wholesalers to determine what price they can charge wholesalers for the product.This demand-backward pricing may result in the manufacturer deliberately adjusting the quality of the product's component parts to achieve the target price.
27 .2.6 Bundle pricing

Bundle pricing is the marketing of two or more products in a single ``package'' price.For example, RCI offers vacation packages that include airfare, car rental, and accommodation. Bundle pricing is based on the idea that consumers value the package more than the individual items. This is due to the benefits consumers receive from not having to make separate purchases and from the enhanced satisfaction one item gives them owing to the presence of another in the total package. Bundle pricing often provides buyers with a lower total cost and sellers with lower marketing costs. For example, Incredible Connection sells a ``bundle'' of an internet subscription and modem as a package for R999. Priced separately, the internet subscription and the modem (ie the items in the bundle) would cost a buyer R1 700.
27.3 COST-BASED METHODS OF SETTING PRICE

Sometimes companies minimise or ignore the importance of demand and decide to price their products largely or solely on the basis of costs. Prices determined strictly on the basis of costs may be too high for the target market, which means that sales will be low or even zero. On the other hand, cost-based prices may be too low, which means the company will earn a lower return than it should. However, as a general rule, costs should be part of any price determination, if only to tell marketing management the floor below which a good or service must not be priced (in the long run).
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27 Standard markup pricing .3.1

(The information here is based on Berkowitz et al 1994.) Supermarkets and other retail stores have such a large number of products that estimating the demand for each product as a means of setting price is simply impossible. They therefore use standard markup pricing, which entails adding a fixed percentage to the cost of all items in a specific product class. This percentage markup varies depending on the type of store (eg furniture, clothing, or grocery) and the product involved. High-volume products usually have smaller markups than low-volume products. Supermarkets have different markups for staple items and discretionary items. The markup on staple items such as sugar, flour and dairy products varies from 10 percent to 23 percent, whereas markups on discretionary items such as snack foods and sweets ranges from 27 percent to 47 percent. These markups must cover all the store's expenses, pay for overhead costs, and contribute something to profits. These markups may seem very high, but for supermarkets they result in only a 1 percent profit on sales revenue and that is only if the store is operating efficiently. To illustrate markup pricing, suppose a kettle manufacturer had the following costs and expected sales: Variable cost Fixed cost Expected unit sales R10 R300 000 50 000
The manufacturer's cost per kettle is then given by:

Unit cost = Variable Cost + Fixed Costs R300,000 = R10 + = R16 Unit Sales 50 000
Now suppose the manufacturer wants to earn a 20 percent markup on sales.The manufacturer's markup price is given by: Markup price = Unit cost 1 Desired return on sales) = R16 1- .2 = R20
The manufacturer would charge dealers R20 a kettle and make a profit of R4 per unit.The dealers, in turn, will mark up the kettle. If dealers want to earn 50 percent on sales price, they will mark up the kettle to R40 (R20 + 50% of R40). This number is equivalent to a markup on costs of 100 percent (R20/R20). Does using standard markups to set prices make sense? Generally, no. Any pricing method that ignores both demand and competitor prices is not likely to give the best price. Suppose the kettle manufacturer charged R20, but only sold 30 000 kettles instead of 50 000. The unit cost would then have been higher since the fixed costs are spread over fewer units, and the realised percentage markup on sales would be lower. Markup pricing only works if that price actually brings in the expected level of sales. Still, markup pricing remains popular for many reasons. First, sellers are more certain about costs than about demand. By tying the price to cost,
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sellers simplify pricing they do not have to make frequent adjustments as demand changes. Second, when all companies in the industry use this pricing method, prices tend to be similar and price competition is thus minimised. Third, many people feel that cost-plus pricing is fairer to both buyers and sellers. Sellers earn a fair return on their investment, but do not take advantage of buyers if and when buyers' demand increases.
27 .3.2 Cost plus percentage-of-cost pricing

Some manufacturing, architectural and construction companies use a variation of standard markup pricing. In cost plus percentage-of-cost pricing, they add a fixed percentage to the production of construction cost.This is often used to price one or few-of-a-kind items. For example, when an architectural firm charges a fee of 13 percent of the construction costs of a house. In other words, for a house whose construction cost was R100 000 and the architect's fee was 13 percent of that construction cost (R13 000), the final price will be R1 000. 13
27 .3.3 Cost plus fixed-fee pricing

When buying highly technical, few-of-a-kind products such as aircraft or space satellites, the government has found that its contractors are reluctant to specify a formal, fixed price for the procurement.The government therefore uses cost plus fixed-fee pricing, which means that a supplier is reimbursed for all costs (regardless of what they turn out to be) but is allowed only a fixed fee as profit, which is independent of the final cost of the project. For example, suppose that the Defence Force agreed to pay Denel R500 million as the cost of the first Rooivalk Helicopter and agreed to a R100 million fee for providing that helicopter. Even if Denel's costs increased to R1billion for the helicopter, its fee would remain R100 million. The rising cost of legal fees has prompted some law firms to adopt a version of this pricing method. Rather than billing clients on an hourly basis, lawyers and their clients agree on a fixed fee based on expected costs plus a profit for the law firm.
27 .3.4 Experience curve pricing

The method of experience curve pricing is based on the learning effect, which means that the unit cost of many products and services declines by 10 percent to 30 percent each time a company's experience at producing and selling them doubles.This reduction is regular or predictable enough to make it possible to mathematically estimate the average cost for each unit. For example, if the company estimates that costs will fall by 15 percent each time volume doubles, then the cost of the 100th unit produced and sold will be about 85 percent of the cost of the 50th unit, and the 200th unit will be 85 percent of the 100th unit.
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27 .3.5 Break-even analysis

Break-even analysis can be used in the pricing process because it estimates whether the business will be able to break even or cover all its costs by selling at a particular price. Break-even analysis can be used to determine the sales volume needed at a certain price to cover costs.The level of sales at which total revenue equals total costs is called the break-even point. At this point the company does not make a profit or a loss, but stands on the line between both.This was discussed in detail in section 26.3. Break-even analysis is a useful tool for evaluating alternatives. It is, however, a cost-oriented approach, which suffers the same limitations as other cost-oriented methods. Specifically, it does not consider the effect of price on consumer demand in other words, it ignores the demand curve.
27.4 PROFIT-BASED METHODS OF PRICING

(The information given here is based on Berkowitz et al. p 385) Management may choose to balance both revenues and costs, in order to determine price using profit-based methods. These methods may either involve a target of a specific rand volume of profit, or this target profit may be expressed as a percentage of sales or investment.
27 Target profit pricing .4.1

A company may set an annual target of a special rand volume of profit; this is called target profit pricing. Suppose a picture framing store owner wishes to use target profit pricing to establish a price for a typical framed picture and assumes the following: . . . . Variable cost is a constant R22 per unit. Fixed cost is a constant R26 000. Demand is insensitive to price up to R60 per unit. A target profit of R7 000 is sought at an annual volume of 1 000 units (framed pictures).
The price can be calculated as follows: Profit Profit R7 ,000 R7 000 1,000P P = = = = = = Total revenue 7 Total cost (P 6 Q) 7 [FC + (UVC 6 Q)] (P 6 1 000) 7 [R26 000 + (R22 6 1 000)] 1 000P 7 (R26 000 + R22 000) R7 000 + R48,000 R55
Note that a critical assumption here is that this higher, average price of a framed picture will not cause the demand to fall.
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27 .4.2 Target return-on-sales pricing
A difficulty with target profit pricing is that, although it is simple and the target involves only a specific rand volume, no benchmark of sales or investment is used to show how much of the company's effort is needed to achieve the target. Companies such as supermarket chains often use target return-on-sales pricing to set typical prices that will give the company a profit that is a specified percentage (1 percent, say) of the sales volume. Suppose the owner decides to use target return-on-sales pricing for the frame shop and makes the same first three assumptions shown previously. The owner now sets a target of 20 percent return on sales at an annual volume of 1 250 units.This gives:
Target return on sales = 20% = 0.20 = Target profit Total revenue TR 7 TC TR P 6 Q 7 [FC + (UVC 6 Q)] TR
0.20 = P 6 1,250 7 [R26 000 + (R22 6 1,250)] P 6 1,250 P = R53,50
So at a price of R53,50 per unit and an annual quantity of 1 250 frames: TR = P 6 Q = R53,50 6 1,250 = R66,875 TC = FC + (UVC 6 Q) = 26,000 + (22 6 1,250) = R53 500 Profit = TR 7 TC = R66 875 7 R53,500 = R13 375 As a check: Target return on sales = Target profit = R13,375 Total revenue R66 875 = 20%
27 .4.3 Rate-of-return pricing (ROI)

(The information given here is based onVan der Walt et al 1996:445^ 447 .) Rate-of-return or target-return pricing is similar in principle to markup pricing, but somewhat more sophisticated in practice. This cost-oriented approach brings one more cost element into the pricing decision, that is, the cost of capital tied up in producing and distributing the product. The objective is to set a price yielding a target rate of return on investment. This pricing approach is common in motor companies that price their cars to achieve a target of 15 to 20 percent return on investment. Operationally, this pricing approach demands that managers (1) estimate the unit sales volume of the product, (2) determine unit costs (variable costs plus overhead attributable to the product), (3) estimate the amount of capital involved in producing and selling the product, and (4) select a target rate of return on investment. Management can then determine the price as follows:
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Topic 8: STEPS IN THE SETTING OF PRICE Target return price Desired % return 6 capital invested in product Unit sales
= Unit cost +
RATE-OF-RETURN PRICING For example, suppose a small-appliance manufacturer has invested R1million in facilities and equipment to produce and distribute its coffee makers and wants to make a 20 percent return on that investment.The target return price for each coffee maker would be: Target return price = R20 + 0,2 6 R1 000 000 50 000 units = = R24 When these estimates are accurate, the target-return method results in a more rational pricing decision than the simpler mark-up method. Usually, however, this method does not explicitly consider the interaction between alternative prices and demand. R20 + R200 000 50 000
27.5 COMPETITION-BASED METHODS

Some companies prefer to base their prices on what competitors are doing rather than on a demand, cost or profit basis. This does not imply that they charge the same as competitors they may add a premium or they may discount their prices.
27 Customary pricing .5.1

For some products customary pricing is used.This happens when tradition, a standardised channel of distribution, or other competitive factors, dictate the price. For example, cold drinks offered through standard vending machines have a customary price of R3,00 and a significant departure from this price may result in a loss of sales for the supplier.
27 .5.2 Above-, at-, or below-market pricing

For most products it is difficult to identify a specific market price for a product or product class. Still, marketing managers often have a subjective feel for the competitors' price or the market price. Using this benchmark, they then may deliberately select a strategy of above-, at-, or below-market pricing. In the case of watch manufacturers, Rolex takes pride in emphasising that it makes one of the most expensive watches you can buy a clear example of above-market pricing.
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Study unit 28: Setting the list or quoted price
Large discount stores such as Dions and Game generally use at-market pricing.These shops often establish the going market price in the minds of their competitors. In contrast, a number of companies use a strategy of below-market pricing. Manufacturers of all generic products, and retailers who offer their own private brands of products ranging from spaghetti to shampoo, deliberately set prices for these products about 8 percent to 10 percent below the prices of nationally branded competitive products. In South Africa, One Price Stores, which has hundreds of stores, is probably the ultimate in both low price and simplicity; all of its products are priced at R5.
27 .5.3 Loss-leader pricing

Many retail stores deliberately sell a product below its customary price to attract consumers to the store this is a special type of promotion known as loss-leader pricing. For example, a Makro killer price for a table may be priced for R99, which is below cost.The purpose of this loss-leader pricing is not to increase sales of tables, but to attract customers to the store in the hope they will buy other products as well, particularly discretionary items carrying large markups.
27 .5.4 Sealed-bid pricing

When the government wants to buy school books it would probably use sealed-bid pricing.The government informs a large number of prospective companies of the specifications these books must meet. The companies are then invited to submit a bid or tender that includes a specific price for the quantity ordered. The bid must be submitted by a specific time to a specific location. Several days later the bids are opened in public and read aloud, and the lowest bidder who meets the specification is awarded the contract.
study unit 28
SETTING THE LISTOR QUOTED PRICE

(Study study unit 28 below.) (The information here is based on Berkowitz et al 1994:389-392.)
28.1 INTRODUCTION
The first four steps already discussed (study units 24 -27) result in an approximate price level for the product that appears reasonable. But the
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manager still has to set a list or quoted price that takes into account all relevant factors.We shall discuss the various alternatives below.
28.2 ONE PRICE VERSUS FLEXIBLE PRICE POLICY

Management must decide whether to follow a one-price or flexible-price policy. A one-price policy involves setting the same price for similar customers who buy the same product and the same quantities of that product under the same conditions. In contrast, a flexible-price policy offers the same product and quantities to similar customers, but at different prices. When you buy a Coca-Cola for R3,00 from a vending machine or, to take a different example, a Home Gym from a discount store, you are offered the product at a single price.Y can buy it or not, but there is no variation in ou the price under the seller's one-price policy. But in the case of a house, the seller generally uses a flexible-price policy, and you might negotiate a purchase at a price that lies within a range of prices. Flexible prices give sellers greater discretion in setting the final price in the light of demand, cost, and competitive factors.
28.3 PRICING TO COVER COST PLUS PROFIT

In the long run, prices must cover all costs and contribute some profit to the company or that company will go out of business.This may not be true in the short run, or may not even apply to prices of specific products in a product line. Prices of chickens as loss leaders in a supermarket do not cover costs but, as we explained above, retailers use loss leaders because customers buy other high-margin products to offset this loss. Gillette Safety razors and Barbie Dolls may be priced below cost to stimulate sales of related items for example, Gillette blades and Barbie's clothes; both of these related items carry high profit margins. Bear in mind that many companies go under because, in the long run, their revenues cannot cover their costs and provide adequate profit.
28.4 BALANCING INCREMENTAL COSTS AND REVENUES

When a price is changed or new advertising or selling programmes are planned, the effect of these on the quantity sold must be considered.This assessment, called marginal analysis, involves a continuing, concise tradeoff of incremental costs against incremental revenues. Do marketing and business managers really use marginal analysis? Y they es, do, but they often do not use phrases such as marginal revenue, marginal cost, and elasticity of demand. Think about these managerial questions: . How many extra units do we have to sell to pay for that Radio advertisement of R10 000?
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Study unit 29: Adjustments to the list or quoted price
. How much savings on unit variable cost do we have to achieve to keep the break-even point the same if we invest in a R10 000 labour-saving machine? . Should we hire three more salespeople or not?
All these questions are a form of managerial or incremental analysis, even though these exact words are not used. Figure 28.1 shows the power and some limitations of marginal analysis a marketing decision.The frame store owner must decide that either a simple advertising campaign will more than pay for itself in additional sales or not undertake the campaign. The frame store owner could decide to increase the average price of a framed picture to cover the cost of the campaign, but the principle still applies; the store owner must decide whether an increase in price and other marketing actions will generate incremental revenues which more than offset incremental costs. The example in figure 28.1 shows both the main advantage and difficulty of marginal analysis. The advantage is its commonsense usefulness; the difficulty is obtaining the data needed to make decisions.The owner can measure the cost quite easily, but the incremental revenue generated by the advertisements is difficult to measure. She could partly solve this problem by offering a R2-off coupon in the advertisement, to see how many sales the advertisement generated. FIGURE 28.1 The power of marginal analysis in real world decisions Suppose the owner of a picture framing store is considering buying a series of magazine advertisements to reach her up-scale target market. The cost of the advertisements is R1,000, the average price of a framed picture is R50, and the unit variable cost (materials plus labour) is R30. This is a direct application of marginal analysis that an astute manager uses to estimate the incremental revenue or incremental number of units that must be obtained to at least cover the incremental cost. In this example, the number of extra picture frames that must be sold is obtained as follows: Incremental number of frames Extra fixed cost Price 7 Unit variable cost R1 000 of advertising = R507R30 = 50 frames =
So unless there are some other benefits of the ads, such as long-term goodwill, she should only buy the advertisments if she expects them to increase picture frame sales by at least 50 units.
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28.5 COMPANY ,CUSTOMER AND COMPETITIVE EFFECTS

As the final list or quoted price is set, management must assess the effects on the company, customers and competitors. . Company effects. In the case of a company with several products, management's decision on the price of a single product must also take into account the impact of consumer demand for other products in the line. IBM has an enviable record of accurately assessing the impact of a price change in a mainframe computer on the substitutes (its other mainframe computers) and complements (its peripheral equipment) in its product line.On the other hand, IBM has often struggled to position its personal computers by price points when it adds new models to its line. . Customer effects. In setting price, retailers rely heavily on factors that satisfy the perceptions or expectations of ultimate consumers (eg the customary prices for a variety of consumer products).Retailers have found that they should not price their own brands 20 to 25 percent below manufacturers' brands. When they do, consumers often view the lower price as signalling lower quality and avoid these products. To gain the support and cooperation of resellers in the channel, manufacturers and wholesalers must select prices that will result in profits for these resellers. . Competitive effects. Most competitors spot management's pricing decisions immediately; these competitors may retaliate with price changes of their own. A manager who therefore sets a final list or quoted price must anticipate potential price responses from competitors. Regardless of whether it is a price leader or follower, a company will want to avoid cutthroat price wars which harm everybody.
study unit 29
ADJUSTMENTS TOTHE LISTORQUOTED PRICE

29.1 INTRODUCTION
Companies usually adjust their basic prices to account for customer differences and changing situations.When you go to some stores, and you buy a large number of items you can usually ask for a discount and get it. Some medical doctors are nowadays offering a 50 percent discount to patients if they settle directly with the doctor and claim back from their medical aid.
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There are a number of price-adjustment strategies that a company can follow; these are discussed in the following sections. Table 29.1 summarises these strategies. TABLE 29.1 Price adjustment strategies STRATEGY Discount and allowance pricing DESCRIPTION Reducing prices to reward customer responses such as paying early or promoting the product. Adjusting prices to allow for differences in customers, products or locations. Adjusting prices for psychological effect. Temporarily reducing prices to increase short-run sales. Adjusting prices to offer the right combination of quality and service at a fair price. Adjusting prices to account for the geographic location of customers. Adjusting prices for international markets.
Segmented pricing
Psychological pricing Promotional pricing Value pricing
Geographical pricing International pricing
29.2 DISCOUNTAND ALLOWANCE PRICING

(The information here is based on Kotler & Armstrong 1997:269-373.) Most companies adjust their basic price to reward customers for certain responses. Examples are early payment of accounts, volume purchases, and off-season buying. These price adjustments called discounts and allowances take many forms.
29.2.1 A cash discount

A cash discount is a price reduction to buyers who pay their accounts promptly. A typical example is ``2/10, net 30,' which means that although ' payment is due within 30 days, the buyer can deduct 2 percent if the account is paid within 10 days. The discount must be granted to all buyers meeting these terms. Such discounts are customary in many industries; they help to improve the sellers' cash situation and reduce bad debts and credit-collection costs.
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29.2.2 A quantity discount

A quantity discount is a price reduction offered to buyers who buy large volumes. A typical example might be ``R10 per unit for less than 100 units, R9 per unit for 100 or more units.' Discounts provide an incentive to the ' customer to buy more from one seller, rather than buy from a number of sources. Generally speaking, quantity discounts are of two kinds: noncumulative and cumulative. Noncumulative quantity discounts are based on the size of an individual purchase order. They encourage large individual purchase orders, not a series of orders. Cumulative quantity discounts apply to the accumulation of purchases of a product over a given time period, usually a year.Cumulative quantity discounts encourage a single customer to repeat buy far more than noncumulative quantity discounts.
29.2.3 A functional discount

A functional discount, also called a trade discount, is offered by the seller to trade channel members who perform certain functions such as selling, storing, and record keeping. Manufacturers may offer different functional discounts to different trade channels because of the different services they provide, but manufacturers must offer the same functional discounts within each trade channel.
29.2.4 A seasonal discount

A seasonal discount is a price reduction to buyers who buy merchandise or services out of season. For example, lawn and garden equipment manufacturers will offer seasonal discounts to retailers during the Autumn and Winter to encourage early ordering in anticipation of the heavy spring and summer selling seasons. Hotels and airlines will offer seasonal discounts in their slower selling periods. Seasonal discounts allow the seller to keep production steady during an entire year.
29.2.5 Allowances
Allowances are another type of reduction on the list price. For example, trade-in allowances are price reductions given for turning in an old item when buying a new one. Trade-in allowances are particularly common in the motor industry, but are also given for other durable goods. Promotional allowances are payments or price reductions to reward dealers for participating in advertising and sales support programmes.
29.3 SEGMENTED PRICING

Companies will often adjust their basic prices to allow for differences in customers, products and locations. In segmented pricing, the company sells a product or service at a number of different prices, even though the
146
difference in prices is not based on differences in costs. Segmented pricing takes several forms:
29.3.1 Customer-segment pricing

Different customers pay different prices for the same product or service. Museums, for example, will charge a lower admission for students and senior citizens. At most rugby stadiums, scholars pay a reduced fee.
29.3.2 Product-form pricing

Different versions of the product are priced differently, but not according to differences in their costs. For instance, Ryobi prices its most expensive drill at R1 700, which is R1 400 more than the price of its least expensive drill.The top model has extra features, but these extra features cost Ryobi only a few more rands to make.
29.3.3 Location pricing

Different locations are priced differently, even though the cost of offering each location is the same. For instance, theatres vary their seat prices because of audience preferences for certain seats.
29.3.4 Time pricing

Prices vary by the season, the month, the day, and even the hour. Telkom offers lower `òff-peak'' charges and swimming pool builders offer lower prices in winter. For segmented pricing to be an effective strategy, certain conditions must exist.The market must be segmentable, and the segments must show different degrees of demand. Members of the segment paying the lower price should not be able to turn around and resell the product to another segment paying the higher price.Competitors should not be able to undersell the company in that segment being charged the higher price, nor should the costs of segmenting and watching the market exceed the extra revenue obtained from the price difference.
29.4 PSYCHOLOGICAL PRICING

Price says something about the product. For example, many consumers use price to judge quality. A R100 bottle of perfume may contain only R3 worth of scent, but some people are willing to pay the R100 because this price indicates something special to them. When using psychological pricing, sellers consider the psychology of prices and not simply the economics. For example, one study of the relationship between price and quality perceptions of cars found that consumers perceive higher-priced cars as being of higher quality. By the same token, higher-quality cars are perceived to be even higher priced than they actually
147
are.When consumers can judge the quality of a product by examining it or by referring to past experience of the product, they are relying on price less to judge quality. But when consumers cannot judge quality because they lack the information or skill, price becomes an important quality signal. Another aspect of psychological pricing is reference prices these are the prices that buyers have in their minds and refer to when looking at a given product. The reference price might be formed by noting current prices, remembering past prices, or assessing the buying situation. Sellers can influence or use these consumers' reference prices when setting price. For example, a company could display its product next to more expensive ones to imply that it belongs in the same class. Department stores often sell women's clothing in separate departments differentiated by price: clothing found in the more expensive department is assumed to be better quality. Even small differences in price can suggest product differences. Consider a hi-fi priced at R300 compared with one priced at R299,95.The actual price difference is only 5 cents, but the psychological difference can be much greater. For example, some consumers will see the R299,95 as a price in the R200 range rather than the R300 range.The R299,95 is more likely to be seen as a bargain price, while the R300 price suggests better quality. Some psychologists argue that each digit has symbolic and visual qualities that should be considered in pricing.Thus, 8 is round and even and creates a soothing effect, whereas 7 is angular and creates a jarring effect in consumers' minds.
29.5 PROMOTIONAL PRICING

In the case of promotional pricing, companies will temporarily price their products below list price and sometimes even below cost. Promotional pricing takes several forms. Supermarkets and department stores will price a few products as loss leaders to attract customers to the store in the hope that they will buy other items at normal markups. Sellers will also use special even pricing in certain seasons to draw more customers. Thus, linens are promotionally priced every January to attract weary Christmas shoppers back into stores. Some manufacturers offer lowinterest financing, longer warranties, or free maintenance to reduce the consumer's ``price''. This practice has recently become a favourite of the motor industry. Or the seller may simply offer discounts from normal prices to increase sales and reduce inventories.
29.6 VALUE PRICING

During the recessionary, slow-growth 1990s, many companies adjusted their prices to bring them into line with economic conditions and the fundamental shift that occurred in consumer attitudes toward quality and value. Increasingly, marketers have adopted value pricing strategies offering just the right combination of quality and good service at a fair
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Study unit 30: Price changes
price. In many cases this has involved the introduction of less expensive versions of established, brand name products. Holiday Inn opened several Holiday Express budget hotels; fast-food restaurants such as McDonald's offer ``value menus''.
29.7 GEOGRAPHICAL PRICING

(The information here is based onVan der Walt et al 1996:457 .) The geographical location of the buyer in relation to the marketer means that decisions have to be taken about who should be responsible for transport costs. Geographical price differences or price differentials are as follows: free-on-rail pricing, freight-absorption pricing, uniform regional pricing and base-point pricing.
29.7 Free-on-rail pricing .1

According to free-on-rail pricing (free on board) the marketer quotes prices for delivery at the marketer's location.The buyer pays the full transport costs of the products from the marketer's location.This geographical pricing decision means that, all other factors being equal, the marketer has a price disadvantage compared with marketers located nearer the buyer.
29.7 Freight-absorption pricing .2

A disadvantage of free-on-rail pricing is that it can help to create monopolies. To prevent this, some businesses follow freight-absorption pricing. Here, the marketer quotes uniform prices irrespective of the buyer's location.The total transport costs are usually estimated, and an average transport cost for each order is included in the cost price of the product.
29.7 Uniform regional pricing .3

Uniform regional pricing is a combination of a free-on-rail pricing approach and freight-absorption pricing. Prices within a particular region are therefore uniform, but vary between regions because of transport costs (freeon-rail pricing). A typical example of uniform regional pricing in South Africa is the price of petrol.
29.7 Base-point pricing .4

A base-point price corresponds, to some extent, with a free-on-retail price, except that the seller quotes prices that include the transport costs from a certain place (base point).The seller often uses more than one base point; these base points may be located at the same places as the factories (although not necessarily so). Both individual businesses or an entire industy can use base-point pricing. Some of the advantages which participants gain from an industry basepoint price are: price competition based on differences in transport costs
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is eliminated; and the market's geographical extent is not limited by transport costs. Possible disadvantages are that the elimination of price competition can result in higher and rigid prices, and consumer resistance can develop if the consumer discovers that the consumer is paying transport costs from a place other than the place of origin.
29.8 INTERNATIONAL PRICING

Companies that market their products internationally must decide what prices to charge in the different countries in which they operate. In some cases, a company can set a uniform worldwide price. For example, Boeing sells its jetliners at about the same price everywhere, whether in the United States, Europe, or South Africa. However, most companies adjust their prices to reflect local market conditions and cost considerations. The price that a company should charge in a specific country depends on many factors, including economic conditions, competitive situations, laws and regulations, and the wholesaling and retailing system in that country. Consumer perceptions and preferences may also vary from country to country, which will mean charging different prices. Or the company may have different marketing objectives in different countries, and this, too, will require changes in pricing strategy. Costs play an important role in setting international prices. Travellers abroad are often surprised to find that goods that are relatively inexpensive at home may carry outrageously higher price tags in other countries. A pair of Levis selling for $30 in the United States goes for about $63 in Tokyo and $88 in Paris. A McDonald's Big Mac sells for a modest $2,25 in the USA and R9,95 in South Africa. Conversely, a Gucci handbag going for only $60 in Milan, Italy, fetches $240 in the United States. Such price escalation may result from differences in selling strategies or market conditions. In most instances, however, it is simply a result of the higher costs of selling in foreign markets.
study unit 30
PRICE CHANGES
(The information here is based on Kotler & Armstrong 1997:377-381.)
30.1 INTRODUCTION
Study units 24 to 29 have taken you through the steps of developing a price structure and pricing strategies. But companies often face situations in
150
which they must initiate price changes or respond to competitors' price changes.
30.2 INITIATING PRICE CHANGES

In some cases, the company may find it desirable to initiate either a price cut or a price increase. In both cases, it must anticipate possible buyer and competitor reactions.
30.2.1 Initiating price cuts

Several situations may lead a company to consider cutting its price. One such circumstance is excess capacity. In this case, the company needs more business and cannot get it through increased sales effort, product improvement, or other measures. It may drop its ``follow-the-leader pricing'' charging about the same price as their leading competitor and aggressively cut prices to boost sales. But as the airline, construction equipment, and other industries have learned in recent years, cutting prices in an industry loaded with excess capacity may lead to price wars as competitors try to hold on to market share. SAA tried this strategy in 1998 with success. A company may also cut prices in a drive to dominate the market through lower costs. Either the company starts with lower costs than its competitors or it cuts prices in the hope of gaining market share that will cut costs even more (ie as a result of larger volume). Bausch & Lomb used an aggressive low-cost, low-price strategy to become an early leader in the competitive soft contact lens market.
30.2.2 Initiating price increases

On the other hand, many companies have had to raise prices in recent years. They do this knowing that the price increases may be resented by customers, dealers, and even their own sales force. Y a successful price et increase can greatly increase profits. For example, if the company's profit margin is 3 percent of sales, a 1 percent price increase will increase profits by 33 percent if sales volume is unaffected. A major factor in price increases is cost inflation.Rising costs squeeze profit margins and lead companies to implement regular rounds of price increases. Companies often raise their prices by more than the cost increase in anticipation of further inflation. Another factor leading to price increases is over demand: when a company cannot supply all its customers' needs, it can raise its prices, ration products to customers, or both. Companies can increase their prices in a number of ways to keep up with rising costs. Prices can be raised almost invisibly by dropping discounts and adding higher-priced units to the line. Or prices can be raised openly. Where possible, of course, the company should consider ways to meet higher costs or demand without raising prices. For example, it can make
151
the product physically smaller instead of raising the price, as chocolate bar manufacturers often do. (Have you noticed that the number of matches in a box has declined over the years?) Or it can substitute less expensive ingredients, or remove certain product features, packaging, or services.
30.2.3 Buyer reactions to price changes

Whether the price is raised or lowered, the action will influence buyers, competitors, distributors, and suppliers. Customers do not always interpret prices in a straightforward way. They may view a price cut in several ways.For example, what would you think if BMW were suddenly to cut its 3-series prices by 50%? Y might think that these cars were about to be ou replaced by new models or that they have some defect and are not selling well.Y might think that BMW is in financial trouble and may not stay in ou this business long enough to supply future parts. Y might believe that ou quality has been drastically reduced. Or you might think that the price will come down even further and that it will pay you to wait and see. Similarly, a price increase, which would normally lower sales, may have some positive meanings for buyers. What would you think if BMW raised the price of its latest 3-series model? On the one hand, you might think that the item is very ``hot'' and may be unobtainable unless you buy it soon.Or you might think that the car is unusually good value.On the other hand, you might think that BMW is greedy and charging what the market will bear.
30.2.4 Competitor reactions to price changes

A company considering a price change has to worry about the reactions of its competitors as well as its customers. Competitors are most likely to react when the number of companies involved is small, when the product is uniform, and when the buyers are well informed. How can the company work out the likely reactions of its competitors? If the company faces one large competitor, and if the competitor tends to react in a set way to price changes, it will be easy to anticipate the competitor's reaction. But if the competitor treats each price change as a fresh challenge and reacts according to self-interest, the company will have to work out just what is motivating the competitor to make this price change. The problem is complex because, like the customer, the competitor can interpret a company price cut in many ways. It might think the company is trying to grab a larger market share, that the company is doing poorly and trying to boost its sales, or that the company wants the whole industry to cut prices to increase total demand. When there are several competitors, the company must guess the probable reaction of each competitor. If all competitors behave alike, this amounts to no more than analysing only a typical competitor. In contrast, if the competitors do not behave alike perhaps because of differences in
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size, market shares, or policies then separate analyses are necessary. However, if some competitors match the price change, there is good reason to expect that the rest will do the same.
30.3 RESPONDING TO PRICE CHANGES

Here we reverse the question and ask how a company should respond to a competitor's price change. The company needs to consider several issues: why did the competitor change the price? Was it to gain more market share, to use excess capacity, to meet changing cost conditions, or to create a price change in the industry as a whole? Is the price change temporary or permanent? What will happen to the company's market share and profits if it does not respond to the competitor's price change? Are other companies going to respond? What are the competitor's and other companies responses to each possible reaction likely to be? Besides these issues, the company must do a broader analysis. It has to consider its own product's stage in the life cycle, the product's importance in the company's product mix, the intentions and resources of the competitor, and possible consumer reactions to price changes. However, the company cannot always make an extended analysis of its alternatives at the time of a price change.The competitor may have spent much time preparing for its price change, but the company may have to react within hours or days. About the only way to cut down reaction time is to plan ahead for both possible competitor's price changes and possible responses. Figure 30.1shows the ways a company might assess and respond to a competitor's price cut.Once the company has determined that the competitor has cut its price and that this price reduction is likely to harm company sales and profits, it might simply decide to hold its current price and profit margin. The company might believe that it will not lose too much market share, or that it will lose too much profit if it reduced its own price. It might decide that it should wait and respond when it has more information on the effects of the competitor's price change.For now, it might be willing to hold on to good customers, while giving up poorer ones to the competitor. The arguments against this holding strategy, however, is that the competitor may get stronger and more confident as its sales increase, and that the company might end up waiting too long before acting. If the company decides that effective action can and should be taken, it might make respond in any one of four ways.First, it could reduce its price to match the competitor's price. It may decide that the market is price sensitive, and that it would lose too much market share to the lowerpriced competitor. Or it might worry about the difficulty of recapturing lost market share later on. Alternatively, the company might maintain its price, but raise the perceived quality of its product or service. It could improve its communications, or stress the relative quality of its product over that of the lowerprice competitor. Another option is for the company to improve its qual-
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BIBLIOGRAPHY
ity and increase price; in other words, move its brand into a higher price position. The higher quality justifies the higher price which, in turn, preserves the company's higher margins. FIGURE 30.1 Assessing and responding to competitors' price changes Has competitor cut price?
No
~ ~
"
Hold current price; continue to monitor competitor's price
Yes No Reduce price Raise perceived quality No Yes Improve quality and increase price Launch lowprice ``fighting brand''
Will lower price negatively affect our market share and profits?
!
Yes
Can/should effective action be taken?
Source: Kotler P & Armstrong, (1997: Principles of marketing. New Y ork: Prentice Hall)
Finally, the company might launch a low-price ``fighting brand''. Often, one of the best responses is to add lower-price items to the line or to create a separate lower-price brand.This is necessary if the particular market segment being lost is price sensitive and will not respond to higher quality products. Pricing strategies and tactics form an important element of a company's marketing mix. In setting prices, companies must carefully consider a great many internal and external factors before choosing a price that will give them the greatest competitive advantage in selected target markets. However, companies are usually not free to charge whatever prices they wish. Several laws restrict pricing practices, and pricing decisions are influenced by a number of ethical considerations.
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Berkowitz et al.1994. Marketing. 4th edition. Homewood, Ill: Irwin. Kotler, P & Armstrong,G.1997 Principles of marketing. 7th edition. New Jer. sey: Prentice Hall. Lamb, CW, Hair, JF & McDaniel, C.1998. Marketing. 4th edition. Ohio: ITP. Stefakou, R.1993. Success in marketing. London: John Murray. Van der Walt et al. 1996. Marketing management. 3rd Edition. Cape Town: Juta.
BIBLIOGRAPHY
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# 2000 University of South Africa All rights reserved Printed and published by the University of South Africa Muckleneuk,

Pretoria MNM303- 6/1/2000 -2002 3B2

PRICE DECISIONS PART II

Getting a feel for this module

THE MEANING OF PRODUCTAND PRODUCT MANAGEMENT CONTENTS

Study unit 2 PRODUCT/BRAND MANAGEMENT

Study unit 3 PRODUCT CLASSIFICATION

Study unit 4 PRODUCT DECISIONS

Study unit 1: The product concept

1.2 THE COMPONENTS OF THE PRODUCT CONCEPT

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

Study unit 2: Product/brand management

2.2 THE PRODUCTOR BRAND MANAGER

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

3.2 INDUSTRIAL PRODUCTS

3.3 COMMERCIAL SERVICES

3.4 CONSUMER PRODUCTS

Study unit 3: Product classification

3.4.1 Convenience products

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

3.4.2 Shopping products

Study unit 3: Product classification

3.4.3 Speciality products

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

4.2 DECISIONS REGARDING THE PRODUCT MIX

Study unit 4: Product decisions

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

4.3 PRODUCT DIVERSIFICATION AND PRODUCT SPECIALISATION

4.4 SIMPLIFICATION AND PRODUCT STANDARDISATION

Study unit 4: Product decisions

4.5 PRODUCT DIFFERENTIATION

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

4.7 PACKAGING 4.7 The traditional roles of packaging .1

Study unit 4: Product decisions

4.7 The contemporary roles of packaging .2

4.7 Demands from the marketplace on packaging .3

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

4.7 Some important components of packaging .4

4.7 .4.2 Colour

Study unit 4: Product decisions

4.7 .4.3 Packaging materials

4.7 The extended communication role of packaging .4.4

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

4.7 Evaluating packaging .5

Study unit 4: Product decisions

4.7 Different forms of packaging .6

4.7 Packaging ofthe product mix .6.1

4.7 .6.2 Reusable packaging

4.7 .6.3 Multiple packaging

Topic 1: THE MEANING OF PRODUCT AND PRODUCT MANAGEMENT

4.7 .6.4 Kaleidoscopic packaging

PLANNING FOR PRODUCT MANAGEMENT CONTENTS

Study unit 5 THE MARKETING PLAN

Study unit 6 CONSUMER ANALYSIS

Study unit 7 COMPETITIVE ANALYSIS

The marketing plan for the market

Product decisions in the market (other topics)

Study unit 5: The marketing plan

THE MARKETING PLAN

Topic 2: PLANNING FOR PRODUCT MANAGEMENT

5.2.2 The executive summary

5.2.3 Background assessment