FM-AA-CIA-15 Rev.

0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

STUDY GUIDE FOR MODULE NO. 5

PART V: Shaping the Market Offerings
MODULE OVERVIEW

Job well done! You finished the first half of the course! The 5th module will be composed of 3 chapters or
learning contents which are listed below:

Chapter 12: Setting Product Strategy

 Product Characteristics and Classifications
 Product and Services Differentiation
 Design
 Packaging, Labeling, Warranties, and Guarantees

Chapter 13: Designing and Managing Services

 The Nature of Services
 Achieving Excellence in Services Marketing
 Managing Service Quality
 Managing Product-Support Services

Chapter 14: Developing Pricing Strategies and Programs

 Understanding Pricing
 Setting the Price
 Adapting the Price
Initiating and Responding to Price Changes

As you go along the module, try your best to read and answer the learning activities and quizzes to better
understand the lesson. You will be given enough time to accomplish and submit your outputs.

*Majority of the contents are drawn from [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi) and

other references at the end of the module as a guide.

MODULE LEARNING OBJECTIVES

At the end of the module, you should be able to:

1. Identify the characteristics of products, and how do marketers classify products

2. Learn how companies differentiate products
3. Understand product design importance and know the factors affect a good design
4. Learn and create how company build and manage its product mix and product lines
5. Determine how can companies combine products to create strong co-brands or ingredient brands
6. Apply how companies use packaging, labeling, warranties, and guarantees as marketing tools
7. Define and classify services, and differentiate it from goods
8. Identify the new services realities?
9. Determine how can we achieve excellence in services marketing
10. Identify how to improve service quality?
11. Learn how marketers improve customer-support services?
12. Understand consumers process and evaluate prices
13. Assess how should a company set prices initially for products or services
14. Determine ways how should a company adapt prices to meet varying circumstances and opportunitie
15. Determine when should a company initiate a price change?
16. Determine how a company respond to a competitor’s price change

LEARNING CONTENT 1: SETTING PRODUCT STRATEGY

PANGASINAN STATE UNIVERSITY 1

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

 PRODUCT CHARACTERISTICS AND CLASSIFICATIONS

A product is anything that can be offered to a market to satisfy a want or need, including physical goods,
services, experiences, events, persons, places,properties, organizations, information, and ideas.

Product Levels: The Customer-Value Hierarchy

In planning its market offering, the marketer needs to address five product levels. Each level adds more
customer value, and the five constitute a customer-value hierarchy.
 The fundamental level is the core benefit: the service or benefit the customer is really buying. A hotel
guest is buying rest and sleep. The purchaser of a drill is buying holes. Marketers must see
themselves as benefit providers.
 At the second level, the marketer must turn the core benefit into a basic product. Thus a hotel room
includes a bed, bathroom, towels, desk, dresser, and closet.
 At the third level, the marketer prepares an expected product, a set of attributes and conditions
buyers normally expect when they purchase this product. Hotel guests minimally expect a clean bed,
fresh towels, working lamps, and a relative degree of quiet.
 At the fourth level, the marketer prepares an augmented product that exceeds customer
expectations. In developed countries, brand positioning and competition take place at this level. In
developing and emerging markets such as India and Brazil, however, competition takes place mostly
at the expected product level.
 At the fifth level stands the potential product, which encompasses all the possible augmentations
and transformations the product or offering might undergo in the future. Here is where companies
search for new ways to satisfy customers and distinguish their offering.

Five Product Levels

Product Classifications

Durability and Tangibility

1. Nondurable goods are tangible goods normally consumed in one or a few uses, such as beer
and shampoo.
2. Durable goods are tangible goods that normally survive many uses: refrigerators, machine tools, and
clothing. Durable products normally require more personal selling and service, command a higher
margin, and require more seller guarantees.
3. Services are intangible, inseparable, variable, and perishable products that normally require more
quality control, supplier credibility, and adaptability. Examples include haircuts, legal advice, and
appliance repairs.

Consumer-Goods Classification
1. Convenience goods frequently, immediately, and with minimal effort
2. Shopping goods are those the consumer characteristically compares on such bases as suitability,
quality, price, and style.

PANGASINAN STATE UNIVERSITY 2

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

3. Specialty goods have unique characteristics or brand identification for which enough buyers are
willing to make a special purchasing effort.
4. Unsought goods are those the consumer does not know about or normally think of buying, such as
smoke detectors.

Industrial-Goods Classification

Materials and parts are goods that enter the manufacturer’s product completely.

Capital items are long-lasting goods that facilitate developing or managing the finished product.

Supplies and business services are short-term goods and services that facilitate developing or
managing the finished product.

 PRODUCT AND SERVICES DIFFERENTIATION

Product Differentiation

Form
Many products can be differentiated in form—the size, shape, or physical structure of a product. Consider the
many possible forms of aspirin. Although essentially a commodity, it can be differentiated by dosage size,
shape, color, coating, or action time.

Features
Most products can be offered with varying features that supplement their basic function.

Customization
Marketers can differentiate products by customizing them.

Performance quality
Most products occupy one of four performance levels: low, average, high, or superior. Performance quality is
the level at which the product’s primary characteristics operate.

Conformance quality
Buyers expect a high conformance quality, the degree to which all produced units are identical and meet
promised specifications.

Durability
Durability, a measure of the product’s expected operating life under natural or stressful conditions, is a
valued attribute for vehicles, kitchen appliances, and other durable goods.

Reliability
Buyers normally will pay a premium for more reliable products. Reliability is a measure of the probability that
a product will not malfunction or fail within a specified time period.

Repairability
Repairability measures the ease of fixing a product when it malfunctions or fails.

Style
Style describes the product’s look and feel to the buyer. It creates distinctiveness that is hard to copy.

Services Differentiation

Ordering ease refers to how easy it is for the customer to place an order with the company.

Delivery refers to how well the product or service is brought to the customer. It includes speed, accuracy, and
care throughout the process.

PANGASINAN STATE UNIVERSITY 3

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

Installation refers to the work done to make a product operational in its planned location.

Customer training helps the customer’s employees use the vendor’s equipment properly and efficiently.

Customer consulting includes data, information systems, and advice services the seller offers to buyers.
Technology firms such as IBM, Oracle, and others have learned that such consulting is an increasingly
essential—and profitable—part of their business.

Maintenance and repair programs help customers keep purchased products in good working order.

Returns. A nuisance to customers, manufacturers, retailers, and distributors alike, product returns are also an
unavoidable reality of doing business, especially with online purchases.
 Controllable returns result from problems or errors by the seller or customer and can mostly be
eliminated with improved handling or storage, better packaging, and improved transportation and
forward logistics by the seller or its supply chain partners.
 Uncontrollable returns result from the need for customers to actually see, try, or experience products
in person to determine suitability and can’t be eliminated by the company in the short run through any
of these means.

 DESIGN

Design is the totality of features that affect how a product looks, feels, and functions to a consumer. Design
offers functional and aesthetic benefits and appeals to both our rational and emotional sides.

The designer must figure out how much to invest in form, feature development, performance, conformance,
durability, reliability, repairability, and style. To the company, a well-designed product is easy to manufacture
and distribute. To the customer, a well-designed product is a pleasant to look at and easy to open, install, use,
repair, and dispose of. Each design, whether of packaging, point of sale,equipment, or any other consumer
touch point, should reflect:
 bold simplicity,
 real authenticity,
 the power of red, and
 a “familiar yet surprising” nature.

 PACKAGING, LABELING,WARRANTIES, AND GUARANTEES

Packaging includes all the activities of designing and producing the container for a product. Packages might
have up to three layers. Cool Water cologne comes in a bottle (primary package) in a cardboard box
(secondary package) in a corrugated box (shipping package) containing six dozen bottles in cardboard boxes.

Various factors contribute to the growing use of packaging as a marketing tool:

 Self-service. An increasing number of products are sold on a self-serve basis
 Consumer affluence. Rising affluence means consumers are willing to pay a little more for the
convenience, appearance, dependability, and prestige of better packages.
 Company and brand image. Packages contribute to instant recognition of the company or brand. In
the store, they can create a billboard effect.
 Innovation opportunity. Unique or innovative packaging such as resealable spouts can bring big
benefits to consumers and profits to producers.

Packaging must achieve a number of objectives:

 Identify the brand.
 Convey descriptive and persuasive information.
 Facilitate product transportation and protection.
 Assist at-home storage.
 Aid product consumption.

Labeling

PANGASINAN STATE UNIVERSITY 4

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

The label can be a simple attached tag or an elaborately designed graphic that is part of the package. It might
carry a great deal of information, or only the brand name. Even if the seller prefers a simple label, the law may
require more.

A label performs several functions.

1. identifies the product or brand
2. describe the product: who made it, where and when, what it
contains, how it is to be used, and how to use it safely.
3. promote the product through attractive graphics.

Warranties and Guarantees

Warranties are formal statements of expected product performance by the manufacturer. Products under
warranty can be returned to the manufacturer or designated repair center for repair, replacement, or refund.
Whether expressed or implied, warranties are legally enforceable. Extended warranties and service contracts
can be extremely lucrative for manufacturers
and retailers.

(Source: [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Pages 324-349)

LEARNING ACTIVITY 1

 For summary video discussion, you may review Chapter 12 lesson through this link:
https://slideplayer.com/slide/7887176/
https://www.youtube.com/watch?v=Oeet9O1knTk

 Case Study: Read the case article and answer the questions that follows. Send your answer on the
deadline set by your instructor.

>>Toyota

In 1936, Toyota admitted following Chrysler’s landmark Airflow and patterning its engine after
a 1933 Chevrolet engine. But by 2000, when it introduced the first hybrid electric-gasoline car, the
Prius, Toyota was the leader. In 2002, when the second-generation Prius hit showrooms, dealers
received 10,000 orders before the car was even available. GM followed with an announcement that it
would enter the hybrid market with models of its own.
Toyota offers a full line of cars for the U.S. market, from family sedans and sport utility
vehicles to trucks and minivans. It has products for different price points, from lower-cost Scions to
mid-priced Camrys to the luxury Lexus. Designing these different products means listening to different
customers, building the cars they want, and then crafting marketing to reinforce each make’s image.
After four years of carefully listening to teens, for instance, Toyota learned that the Scion’s
target age group of 16- to 21-year-olds wanted personalization. So it builds the car “mono-spec” at the
factory, with just one wellequipped trim level, and lets customers choose from over 40 customization
elements at dealerships, from stereo components to wheels and even floor mats. Toyota markets the
Scion at music events and has showrooms where “young people feel comfortable hanging out and not
a place where they just go stare at a car,” said Scion Vice President Jim Letz.
In contrast, the tagline for the Lexus global strategy is “Passionate Pursuit of Perfection.”
Dealerships offer white-glove treatment, though Toyota understands that each country defines
perfection differently. In the United States, perfection and luxury mean comfort, size, and
dependability. In Europe, luxury means attention to detail and brand heritage. Thus, although Toyota
maintains a consistent Lexus visual vocabulary, logo, font, and overall communication, the advertising
varies by country.
Another big reason behind Toyota’s success is its manufacturing. The firm is the master of
lean manufacturing and continuous improvement. Its plants can make as many as eight different
models at the same time, bringing huge increases in productivity and market responsiveness. And
Toyota relentlessly innovates. A typical Toyota assembly line makes thousands of operational
changes in the course of a single year. Toyota employees see their purpose as threefold: making

PANGASINAN STATE UNIVERSITY 5

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

cars, making cars better, and teaching everyone how to make cars better. The company encourages
problem solving, always looking to improve the process by which it improves all other processes.
Toyota is integrating its assembly plants around the world into a single giant network. The
plants will customize cars for local markets and shift production quickly to satisfy any surges in
demand from markets worldwide. With a manufacturing network, Toyota can build a wide variety of
models much more inexpensively. That means it will be able to fill market niches as they emerge
without building whole new assembly operations. “If there’s a market or market segment where they
aren’t present, they go there,” said Tatsuo Yoshida, auto analyst at Deutsche Securities Ltd. And with
consumers increasingly fickle about what they want in a car, such market agility gives Toyota a huge
competitive edge.
In 2006, Toyota earned over $11 billion—more than all other major automakers combined. In
2007, it edged past General Motors to become the world’s largest carmaker. And, in 2008, it
manufactured 9.2 million vehicles, 1 million more than GM and almost 3 million more than
Volkswagen.
Over the years, Toyota’s automobiles have consistently ranked high in quality and reliability.
That all changed in 2009 and 2010, however, when Toyota experienced a massive recall of over 8
million of its vehicles. A variety of problems ranging from sticking accelerator pedals to sudden
acceleration to software glitches in the braking system affected many Toyota brands, including Lexus,
Prius, Camry, Corolla, and Tundra.
Not only had these mechanical defects caused numerous crashes, they were linked to the
deaths of over 50 people. Toyota’s President Akio Toyoda testified before Congress and offered an
explanation of what went wrong: “We pursued growth over the speed at which we were able to
develop our people and our organization. I regret that this has resulted in the safety issues described
in the recalls we face today, and I am deeply sorry for any accidents that Toyota drivers have
experienced.”
Analysts estimated the worldwide recall will cost Toyota $2 billion to $6 billion including repair
costs, legal settlements, and lost sales. Market share dropped 4 percent in the first three months of
the recall and was expected to drop even further as problems continued to unfold. Hoping to bring
consumers back to the Toyota brand, the company offered incentives such as two years of free
maintenance and zero-percent financing.
While Toyota rides the recall storm of 2010 and faces some challenging times, it can be
comforted by the fact that it continues to lead the industry in a wide range of areas including lean
manufacturing and environmentally friendly technologies.

Questions

1. Toyota has built a huge manufacturing company that can produce millions of cars each year for a
wide variety of consumers. Why was it able to grow so much bigger than any other auto
manufacturer?
2. Has Toyota done the right thing by manufacturing a car brand for everyone? Why or why not?
3. Did Toyota grow too quickly as Toyoda suggested? What should the company do over the next year,
5 years, and 10 years? How can growing companies avoid quality problems in the future?

Sources: Martin Zimmerman, “Toyota’s First Quarter Global Sales Beat GM’s Preliminary Numbers,” Los Angeles Times, April 24, 2007;
Charles Fishman, “No Satisfaction at Toyota,” Fast Company, December 2006–January 2007, pp. 82–90; Stuart F. Brown, “Toyota’s
Global Body Shop,” Fortune, February 9, 2004, p. 120; James B. Treece, “Ford Down; Toyota Aims for No. 1,” Automotive News,
February 2, 2004, p. 1; Brian Bemner and Chester Dawson, “Can Anything Stop Toyota?” BusinessWeek, November 17, 2003, pp. 114–
22; Tomoko A. Hosaka, “Toyota Counts Rising Costs of Recall Woes,” Associated Press, March 16, 2010; “World Motor Vehicle
Production by Manufacturer,” OICA, July 2009; Chris Isidore, “Toyota Recall Costs: $2 billion,” http://money.cnn.com, February 4, 2010;
www.toyota.com.

LEARNING CONTENT 2: DESIGNING AND MANAGING SERVICES

 THE NATURE OF SERVICES

Distinctive Characteristics of Services

Four distinctive service characteristics greatly affect the design of marketing programs:
 intangibility,
 inseparability,

PANGASINAN STATE UNIVERSITY 6

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

 variability, and
 perishability.

Intangibility

Unlike physical products, services cannot be seen, tasted, felt, heard, or smelled before they are bought. A
person getting cosmetic surgery cannot see the results before the purchase, and the patient in the
psychiatrist’s office cannot know the exact outcome of treatment.

To reduce uncertainty, buyers will look for evidence of quality by drawing inferences from the place, people,
equipment, communication material, symbols, and price. Therefore, the service provider’s task is to “manage
the evidence,” to “tangibilize the intangible.”

Service companies can try to demonstrate their service quality through physical evidence and presentation.
Suppose a bank wants to position itself as the “fast” bank. It could make this positioning strategy tangible
through any number of marketing tools:
1. Place—The exterior and interior should have clean lines. The layout of the desks and the traffic flow
should be planned carefully.Waiting lines should not get overly long.
2. People—Employees should be busy, but there should be a sufficient number to manage the
workload.
3. Equipment—Computers, copy machines, desks, and ATMs should look like, and be, state of the art.
4. Communication material—Printed materials—text and photos—should suggest efficiency and
speed.
5. Symbols—The bank’s name and symbol could suggest fast service.
6. Price—The bank could advertise that it will deposit $5 in the account of any customer who waits in
line more than five minutes.

Inseparability

Whereas physical goods are manufactured, then inventoried, then distributed, and later consumed, services
are typically produced and consumed simultaneously. A haircut can’t be stored—or produced without the
barber. The provider is part of the service.

Variability

Because the quality of services depends on who provides them, when and where, and to whom, services are
highly variable. Some doctors have an excellent bedside manner; others are less empathic. three steps
service firms can take to increase quality control.
1. Invest in good hiring and training procedures.
2. Standardize the service-performance process throughout the organization.
3. Monitor customer satisfaction.

Perishability

Services cannot be stored, so their perishability can be a problem when demand fluctuates. Public
transportation companies must own much more equipment because of rush-hour demand than if demand
were even throughout the day.

Strategies to produce a better match between service demand and supply.

On the demand side:

o Differential pricing will shift some demand from peak to off-peak periods. Examples include
low matinee movie prices and weekend discounts for car rentals.
o Nonpeak demand can be cultivated.McDonald’s pushes breakfast service, and hotel

PANGASINAN STATE UNIVERSITY 7

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

promote minivacation weekends.

o Complementary services can provide alternatives to waiting customers, such as cocktail
lounges in restaurants and automated teller machines in banks.
o Reservation systems are a way to manage the demand level. Airlines, hotels, and
physicians employ them extensively.

On the supply side:

o Part-time employees can serve peak demand. Colleges add part-time teachers when
enrollment goes up; stores hire extra clerks during holiday periods.
o Peak-time efficiency routines can allow employees to perform only essential tasks during
peak periods. Paramedics assist physicians during busy periods.
o Increased consumer participation frees service providers’ time. Consumers fill out their
own medical records or bag their own groceries.
o Shared services can improve offerings. Several hospitals can share medical-equipment
purchases.
o Facilities for future expansion can be a good investment. An amusement park buys
surrounding land for later development.

 ACHIEVING EXCELLENCE IN SERVICES MARKETING

Marketing Excellence

External marketing describes the normal work of preparing, pricing, distributing, and promoting the service to
customers.

Internal marketing describes training and motivating employees to serve customers well. The most important
contribution the marketing department can make is arguably to be “exceptionally clever in getting everyone
else in the organization to practice marketing.”

Interactive marketing describes the employees’ skill in serving the client. Clients judge service not only by its
technical quality (Was the surgery successful?), but also by its functional quality (Did the surgeon show
concern and inspire confidence?).

Best Practices of Top Service Companies

 Strategic Concept
Top service companies are “customer obsessed.” They have a clear sense of their target customers
and their needs and have developed a distinctive strategy for satisfying these needs.
 Top-Management Commitment
Companies such as Marriott, Disney, and USAA have a thorough commitment to service quality. Their
managements look monthly not only at financial performance, but also at service performance.
 High Standards
The best service providers set high quality standards.
 Profit Tiers
Firms have decided to raise fees and lower services to those customers who barely pay their way,
and to coddle big spenders to retain their patronage as long as possible.
 Monitoring Systems
Top firms audit service performance, both their own and competitors’, on a regular basis.

 MANAGING SERVICE QUALITY

The service quality of a firm is tested at each service encounter. If employees are bored, cannot answer
simple questions, or are visiting each other while customers are waiting, customers will think twice about
doing business there again.

PANGASINAN STATE UNIVERSITY 8

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

10 lessons for improving service quality across service industries.

1. Listening—Service providers should understand what customers really want through continuous
learning about the expectations and perceptions of customers and noncustomers (for instance, by
means of a service-quality information system).
2. Reliability—Reliability is the single most important dimension of service quality and must be a service
priority.
3. Basic service—Service companies must deliver the basics and do what they are supposed to do—
keep promises, use common sense, listen to customers, keep customers informed, and be
determined to deliver value to customers.
4. Service design—Service providers should take a holistic view of the service while managing its many
details.
5. Recovery—To satisfy customers who encounter a service problem, service companies should
encourage customers to complain (and make it easy for them to do so), respond quickly and
personally, and develop a problem-resolution system.
6. Surprising customers—Although reliability is the most important dimension in meeting customers’
service expectations, process dimensions such as assurance, responsiveness, and empathy are most
important in exceeding customer expectations, for example, by surprising them with uncommon
swiftness, grace, courtesy, competence, commitment, and understanding.
7. Fair play—Service companies must make special efforts to be fair, and to demonstrate fairness, to
customers and employees.
8. Teamwork—Teamwork is what enables large organizations to deliver service with care and
attentiveness by improving employee motivation and capabilities.
9. Employee research—Marketers should conduct research with employees to reveal why service
problems occur and what companies must do to solve problems.
10. Servant leadership—Quality service comes from inspired leadership throughout the organization; from
excellent service-system design; from the effective use of information and technology; and from a
slow-to-change, invisible, all-powerful, internal force called corporate culture.

 MANAGING PRODUCT-SUPPORT SERVICES

No less important than service industries are product-based industries that must provide a service bundle.
Manufacturers of equipment—small appliances, office machines, tractors, mainframes, airplanes—all must
provide product-support services. Product-support service is becoming a major battleground for competitive
advantage.

Many product companies have a stronger Web presence than they had before. They must ensure that they

PANGASINAN STATE UNIVERSITY 9

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

offer adequate—if not superior—service online as well.

Identifying and Satisfying Customer Needs

Traditionally, customers have had three specific worries about product service:
 They worry about reliability and failure frequency. A farmer may tolerate a combine that will break
down once a year, but not two or three times a year.
 They worry about downtime. The longer the downtime, the higher the cost. The customer counts on
the seller’s service dependability—the seller’s ability to fix the machine quickly or at least provide a
loaner.
 They worry about out-of-pocket costs. How much does the customer have to spend on regular
maintenance and repair costs?

(Source: [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Pages 354-378)

LEARNING ACTIVITY 2

 For summary video discussion, you may review Chapter 13 lesson through this link:
https://www.youtube.com/watch?v=MeYAVcP3mHQ

 Search the success story of The Ritz Carlton Hotel and also browse their website. After you read and
observe the website, answer the following questions:

Questions
1. How does The Ritz-Carlton match up to competitive hotels? What are the key
differences?
2. Discuss the importance of the “wow stories” in customer service for a luxury hotel like
The Ritz-Carlton.

LEARNING CONTENT 3: DEVELOPING PRICING STRATEGIES AND PROGRAMS

 UNDERSTANDING PRICING

Price is not just a number on a tag. It comes in many forms and performs many functions. Rent, tuition, fares,
fees, rates, tolls, retainers, wages, and commissions are all the price you pay for some good or service.

Throughout most of history, prices were set by negotiation between buyers and sellers. Bargaining is still a
sport in some areas. Setting one price for all buyers is a relatively modern idea

A Changing Pricing Environment

Pricing practices have changed significantly. At the turn of the 21st century, consumers had easy access to
credit, so by combining unique product formulations with enticing marketing campaigns, many firms
successfully traded consumers up to more expensive products and services.

Here is a short list of how the Internet allows sellers to discriminate between buyers, and buyers to
discriminate between sellers.

Buyers can:
 Get instant price comparisons from thousands of vendors. Customers can compare the prices
offered by multiple bookstores by just clicking mySimon.com.
 Name their price and have it met. On Priceline.com, the customer states the price he or she wants
to pay for an airline ticket, hotel, or rental car, and Priceline looks for any seller willing to meet that
price.Volume-aggregating sites combine the orders of many customers and press the supplier for a
deeper discount.
 Get products free. Open Source, the free software movement that started with Linux, will erode

PANGASINAN STATE UNIVERSITY 10

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

margins for just about any company creating software.

 SETTING THE PRICE

Step 1: Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the
easier it is to set price.

Five major objectives are:

1. SURVIVAL
Companies pursue survival as their major objective if they are plagued with overcapacity, intense
competition, or changing consumer wants. As long as prices cover variable costs and some fixed
costs, the company stays in business.
2. MAXIMUM CURRENT PROFIT
Many companies try to set a price that will maximize current profits. They estimate the demand and
costs associated with alternative prices and choose the price that produces maximum current profit,
cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost
functions; in reality, these are difficult to estimate.
3. MAXIMUM MARKET SHARE
Some companies want to maximize their market share. They believe a higher sales volume will lead
to lower unit costs and higher long-run profit. They set the lowest price, assuming the market is price
sensitive.
4. MAXIMUM MARKET SKIMMING
Companies unveiling a new technology favor setting high prices to maximize market skimming.
Market skimming makes sense under the following conditions:
o A sufficient number of buyers have a high current demand;
o the unit costs of producing a small volume are high enough to cancel the advantage of
charging what the traffic will bear;
o the high initial price does not attract more competitors to the market;
o the high price communicates the image of a superior product.
5. PRODUCT-QUALITY LEADERSHIP
A company might aim to be the product-quality leader in the market. Many brands strive to be
“affordable luxuries”—products or services characterized by high levels of perceived quality, taste,
and status with a price just high enough not to be out of consumers’ reach.

Step 2: Determining Demand

Each price will lead to a different level of demand and have a different impact on a company’s marketing
objectives.

Price Sensitivity
The demand curve shows the market’s probable purchase quantity at alternative prices. It sums the reactions
of many individuals with different price sensitivities.

Customers are less price sensitive when

o there are few or no substitutes or competitors;
o they do not readily
o notice the higher price;
o they are slow to change their buying habits;
o they think the higher
o prices are justified; and
o price is only a small part of the total cost of obtaining, operating, and
o servicing the product over its lifetime.

Estimating Demand Curves

 Surveys can explore how many units consumers would buy at different proposed prices.
 Price experiments can vary the prices of different products in a store or charge different prices for

PANGASINAN STATE UNIVERSITY 11

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

the same product in similar territories to see how the change affects sales. Another approach is to use
the Internet.
 Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships.

Price Elasticity of Demand

Marketers need to know how responsive, or elastic, demand is to a change in price. If demand changes
considerably, demand is elastic. The higher the elasticity, the greater the volume growth resulting from a 1
percent price reduction. If demand is elastic, sellers will consider lowering the price. A lower price will produce
more total revenue. This makes sense as long as the costs of producing and selling more units do not
increase disproportionately. Price elasticity depends on the magnitude and direction of the contemplated price
change. It may be negligible with a small price change and substantial with a large price change. It may differ
for a price cut versus a price increase, and there may be a price indifference band within which price changes
have little or no effect.

Step 3: Estimating Costs

Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company
wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair
return for its effort and risk. Yet when companies price products to cover their full costs, profitability isn’t
always the net result.

Types of Costs and Levels of Production

 Fixed costs, also known as overhead, are costs that do not vary with production level or sales
revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on regardless
of output.
 Variable costs vary directly with the level of production. For example, each hand calculator produced
by Texas Instruments incurs the cost of plastic, microprocessor chips, and packaging. These costs
tend to be constant per unit produced, but they’re called variable because their total varies with the
number of units produced.
 Total costs consist of the sum of the fixed and variable costs for any given level of production.
 Average cost is the cost per unit at that level of production; it equals total costs divided by
production. Management wants to charge a price that will at least cover the total production costs at a
given level of production.
.

Target Costing

Costs change with production scale and experience. They can also change as a result of a concentrated effort
by designers, engineers, and purchasing agents to reduce them through target costing.

Step 4: Analyzing Competitors’ Costs, Prices, and Offers

Within the range of possible prices determined by market demand and company costs, the firm must take
competitors’ costs, prices, and possible price reactions into account. If the firm’s offer contains features not
offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the
competitor’s price. If the competitor’s offer contains some features not offered by the firm, the firm should
subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less
than the competitor.

Step 5: Selecting a Pricing Method

 MARKUP PRICING. The most elementary pricing method is to add a standard markup to the
product’s cost. Construction companies submit job bids by estimating the total project cost and adding
a standard markup for profit
 TARGET-RETURN PRICING. In target-return pricing, the firm determines the price that yields its

PANGASINAN STATE UNIVERSITY 12

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

target rate of return on investment. Public utilities, which need to make a fair return on investment,
often use this method.
 PERCEIVED-VALUE PRICING. An increasing number of companies now base their price on the
customer’s perceived value. Perceived value is made up of a host of inputs, such as the buyer’s
image of the product performance, the channel deliverables, the warranty quality, customer support,
and softer attributes such as the supplier’s reputation, trustworthiness, and esteem
 GOING-RATE PRICING. In going-rate pricing, the firm bases its price largely on competitors’ prices.
 AUCTION-TYPE PRICING. Auction-type pricing is growing more popular, especially with scores of
electronic marketplaces selling everything from pigs to used cars as firms dispose of excess
inventories or used goods. These are the three major types of auctions and their separate pricing
procedures:
o English auctions (ascending bids) have one seller and many buyers.
o Dutch auctions (descending bids) feature one seller and many buyers, or one buyer and
many sellers.
o Sealed-bid auctions let would-be suppliers submit only one bid; they cannot know the other
bids. overall satisfaction, more positive future expectations, and fewer perceptions of
opportunism.

Step 6: Selecting the Final Price

Pricing methods narrow the range from which the company must select its final price. In selecting that price,
the company must consider additional factors, including the impact of other marketing activities, company
pricing policies, gain-and-risk-sharing pricing, and the impact of price on other parties.

Impact of Other Marketing Activities

The final price must take into account the brand’s quality and advertising relative to the competition
 Brands with average relative quality but high relative advertising budgets could charge premium
prices. Consumers were willing to pay higher prices for known rather than for unknown products.
 Brands with high relative quality and high relative advertising obtained the highest prices. Conversely,
brands with low quality and low advertising charged the lowest prices.
 For market leaders, the positive relationship between high prices and high advertising held
most strongly in the later stages of the product life cycle.

 ADAPTING THE PRICE

Companies usually do not set a single price but rather develop a pricing structure that reflects variations in
geographical demand and costs, market-segment requirements, purchase timing, order levels, delivery
frequency, guarantees, service contracts, and other factors. As a result of discounts,allowances, and
promotional support, a company rarely realizes the same profit from each unit of a product that it sells. Here
we will examine several price-adaptation strategies: geographical pricing,price discounts and allowances,
promotional pricing, and differentiated pricing.

Geographical Pricing (Cash, Countertrade, Barter)

In geographical pricing, the company decides how to price its products to different customers in different
locations and countries. Should the company charge higher prices to distant customers to cover the higher
shipping costs, or a lower price to win additional business? How should it account for exchange rates and the
strength of different currencies?

Another question is how to get paid. This issue is critical when buyers lack sufficient hard currency to pay for
their purchases. Many buyers want to offer other items in payment, a practice known as countertrade.
 Barter. The buyer and seller directly exchange goods, with no money and no third party involved.
 Compensation deal. The seller receives some percentage of the payment in cash and the rest in
products.
 Buyback arrangement. The seller sells a plant, equipment, or technology to another country and

PANGASINAN STATE UNIVERSITY 13

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

agrees to accept as partial payment products manufactured with the supplied equipment.
 Offset. The seller receives full payment in cash but agrees to spend a substantial amount of the
money in that country within a stated time period.

Price Discounts and Allowances

Most companies will adjust their list price and give discounts and allowances for early payment, volume
purchases, and off-season buying. Companies must do this carefully or find that their profits are much lower
than planned.

Promotional Pricing

Companies can use several pricing techniques to stimulate early purchase:

 Loss-leader pricing. Supermarkets and department stores often drop the price on wellknown brands
to stimulate additional store traffic. This pays if the revenue on the additional sales compensates for
the lower margins on the loss-leader items.
 Special event pricing. Sellers will establish special prices in certain seasons to draw in more
customers. Every August, there are back-to-school sales.
 Special customer pricing. Sellers will offer special prices exclusively to certain customers. Road
Runner Sports offers members of its Run America Club “exclusive” online offers with price discounts
twice those for regular customers.
 Cash rebates. Auto companies and other consumer-goods companies offer cash rebates to
encourage purchase of the manufacturers’ products within a specified time period. Rebates can help
clear inventories without cutting the stated list price.
 Low-interest financing. Instead of cutting its price, the company can offer customers lowinterest
financing. Automakers have used no-interest financing to try to attract more customers.
 Longer payment terms. Sellers, especially mortgage banks and auto companies, stretch loans over
longer periods and thus lower the monthly payments. Consumers often worry less about the cost (the
interest rate) of a loan, and more about whether they can afford the monthly payment.
 Warranties and service contracts. Companies can promote sales by adding a free or low-cost
warranty or service contract.
 Psychological discounting. This strategy sets an artificially high price and then offers the product at
substantial savings; for example, “Was $359, now $299.” Discounts from normal prices are a
legitimate form of promotional pricing; the Federal Trade Commission and Better Business Bureaus
fight illegal discount tactics. Promotional-pricing strategies are often a zero-sum game. If they work,
competitors copy them and they lose their effectiveness. If they don’t work, they waste money that
could have been put into other marketing tools, such as building up product quality and service or
strengthening product image through advertising.

Differentiated Pricing
Companies often adjust their basic price to accommodate differences in customers, products, locations,
and so on.
 Price discrimination occurs when a company sells a product or service at two or more prices
that do not reflect a proportional difference in costs. In first-degree price discrimination, the seller
charges a separate price to each customer depending on the intensity of his or her demand. In
second-degree price discrimination, the seller charges less to buyers of larger volumes. In third-
degree price discrimination, the seller charges different amounts to different classes of buyers, as in
the following cases
 Customer-segment pricing. Different customer groups pay different prices for the same product or
service.
 Product-form pricing. Different versions of the product are priced differently, but not proportionately
to their costs.
 Image pricing. Some companies price the same product at two different levels based on image
differences. A perfume manufacturer can put the perfume in one bottle, give it a name and image, and
price it at $10 an ounce. The same perfume in another bottle with a different name and image and
price can sell for $30 an ounce.
 Channel pricing. Coca-Cola carries a different price depending on whether the consumer purchases
it in a fine restaurant, a fast-food restaurant, or a vending machine.

PANGASINAN STATE UNIVERSITY 14

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

 Location pricing. The same product is priced differently at different locations even though the cost of
offering it at each location is the same.
 Time pricing. Prices are varied by season, day, or hour.

 INITIATING AND RESPONDING TO PRICE CHANGES

Companies often need to cut or raise prices.

Initiating Price Cuts

Several circumstances might lead a firm to cut prices. One is excess plant capacity: The firm needs
additional business and cannot generate it through increased sales effort, product improvement, or
other measures. Companies sometimes initiate price cuts in a drive to dominate the market through
lower costs

Cutting prices to keep customers or beat competitors often encourages customers to demand
price concessions, however, and trains salespeople to offer them. A price-cutting strategy can lead
to other possible traps:
 Low-quality trap. Consumers assume quality is low.
 Fragile-market-share trap. A low price buys market share but not market loyalty. The same
customers will shift to any lower-priced firm that comes along.
 Shallow-pockets trap. Higher-priced competitors match the lower prices but have longer staying
power because of deeper cash reserves.
 Price-war trap. Competitors respond by lowering their prices even more, triggering a price war.

Initiating Price Increases

A successful price increase can raise profits considerably. 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 circumstance provoking price increases is cost inflation. Rising costs unmatched by productivity gains
squeeze profit margins and lead companies to regular rounds of price increases. Companies often raise their
prices by more than the cost increase, in anticipation of further inflation or government price controls, in a
practice called anticipatory pricing.

Another factor leading to price increases is overdemand. When a company cannot supply all it customers, it
can raise its prices, ration supplies, or both. It can increase price in the following ways, each of which has a
different impact on buyers.
 Delayed quotation pricing. The company does not set a final price until the product is finished or
delivered.
 Escalator clauses. The company requires the customer to pay today’s price and all or part of any
inflation increase that takes place before delivery.
 Unbundling. The company maintains its price but removes or prices separately one or more
elements that were part of the former offer, such as free delivery or installation.
 Reduction of discounts. The company instructs its sales force not to offer its normal cash and
quantity discounts.

Responding to Competitors’ Price Changes

How should a firm respond to a competitor’s price cut? The company must consider the product’s stage in the
life cycle, its importance in the company’s portfolio, the competitor’s intentions and resources, the market’s
price and quality sensitivity, the behavior of costs with volume, and the company’s alternative
opportunities.

If the competitor raises its price in a homogeneous product market, other firms might not match it if the
increase will not benefit the industry as a whole. Then the leader will need to roll back the increase.
In nonhomogeneous product markets, a firm has more latitude. It needs to consider the following

PANGASINAN STATE UNIVERSITY 15

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

issues:
(1) Why did the competitor change the price? To steal the market, to utilize excess capacity, to meet changing
cost conditions, or to lead an industry-wide price change?
(2) Does the competitor plan to make the price change temporary or permanent?
(3) What will happen to the company’s market share and profits if it does not respond? Are other companies
going to respond?
(4) What are the competitors’ and other firms’ responses likely to be to each possible reaction?

Brand leaders also face lower-priced store brands. Three possible responses to low-cost competitors are:
(1) further differentiate the product or service,
(2) introduce a low-cost venture, or
(3) reinvent as a low-cost player. The right strategy depends on the ability of the firm to generate more
demand or cut costs.

(Source: [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Pages 382-410)

LEARNING ACTIVITY 3

 For summary video discussion, you may review Chapter 14 lesson through this link:
https://slideplayer.com/slide/5296274/
https://www.youtube.com/watch?v=gaQ0pXPESRc

 Prepare for a long quiz covering Study Guide/Module 5. Wait for the link to be sent by your instructor.
Carefully read and follow any instructions before proceeding.

Do not Cheat. Look up, someone is watching you.

 You will be divided into 6 groups for the start of making your Marketing Plan as your Final
Requirement for the course.

SUMMARY

Product is the first and most important element of the marketing mix. Product strategy
calls for making coordinated decisions on product mixes, product lines, brands, and
packaging and labeling.
In planning its market offering, the marketer needs to think through the five levels of the
product: the core benefit, the basic product, the expected product, the augmented
product, and the potential product, which encompasses all the augmentations and
transformations the product might ultimately undergo.
Products can be nondurable goods, durable goods, or services. In the consumer-goods
category are convenience goods (staples, impulse goods, emergency goods), shopping
goods (homogeneous and heterogeneous), specialty goods, and unsought goods. The
industrial-goods category has three subcategories: materials and parts (raw materials
and manufactured materials and parts), capital items (installations and equipment), and
supplies and business services (operating supplies, maintenance and repair items,
maintenance and repair services, and business advisory services).
Brands can be differentiated on the basis of product form, features, performance,
conformance, durability, reliability, repairability, style, and design, as well as such
service dimensions as ordering ease, delivery, installation, customer training, customer
consulting, and maintenance and repair.
Design is the totality of features that affect how a product looks, feels, and functions. A
well-designed product offers
(Source: [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Pages 349, Chapter Summary)
A service is any act or performance that one party can offer to another that is essentially intangible
and does not result in the ownership of anything. It may or may not be tied to a physical product.
Services are intangible, inseparable, variable, and perishable. Each characteristic poses challenges
and requires certain strategies. Marketers must find ways to give tangibility to intangibles, to increase

PANGASINAN STATE UNIVERSITY 16

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

the productivity of service providers, to increase and standardize the quality of the service provided,
and to match the supply of services with market demand.
Marketing of services faces new realities in the 21st century due to customer empowerment, customer
coproduction, and the need to satisfy employees as well as customers.
In the past, service industries lagged behind manufacturing firms in adopting and using marketing
concepts and tools, but this situation has changed. Achieving excellence in service marketing calls
not only for external marketing but also for internal marketing to motivate employees, as well as
interactive marketing to emphasize the importance of both “high tech” and “high touch.”
Top service companies excel at the following practices: a strategic concept, a history of top-
management commitment to quality, high standards, profit tiers, and systems for monitoring service
performance and customer complaints. They also differentiate their brands through primary and
secondary service features and continual innovation.
Superior service delivery requires managing customer expectations and incorporating self-service
technologies. Customers’ expectations play a critical role in their service experiences and evaluations.
Companies must manage service quality by understanding the effects of each service encounter.
Even product-based companies must provide postpurchase service. To offer the best support, a
manufacturer must identify the services customers value most and their relative importance. The
service mix includes both presale services (facilitating and value-augmenting services) and postsale
services (customer service departments, repair and maintenance services).
(Source: [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Page 378, Chapter Summary)
Despite the increased role of nonprice factors in modern marketing, price remains a
critical element of marketing. Price is the only element that produces revenue; the others
produce costs. Pricing decisions have become more challenging, however, in a changing
economic and technological environment.
In setting pricing policy, a company follows a six-step procedure. It selects its pricing
objective. It estimates the demand curve, the probable quantities it will sell at each
possible price. It estimates how its costs vary at different levels of output, at different
levels of accumulated production experience, and for differentiated marketing offers. It
examines competitors’ costs, prices, and offers. It selects a pricing method, and it selects
the final price.
Companies usually set not a single price, but rather pricing structure that reflects
variations in geographical demand and costs, market-segment requirements, purchase
timing, order levels, and other factors. Several price-adaptation strategies are available:
(1) geographical pricing, (2) price discounts and allowances, (3) promotional pricing, and
(4) discriminatory pricing.
Firms often need to change their prices. A price decrease might be brought about by
excess plant capacity, declining market share, a desire to dominate the market through
lower costs, or economic recession. A price increase might be brought about by cost
inflation or overdemand. Companies must carefully manage customer perceptions when
raising prices.
Companies must anticipate competitor price changes and prepare contingent responses.
A number of responses are possible in terms of maintaining or changing price or quality.
The firm facing a competitor’s price change must try to understand the competitor’s
intent and the likely duration of the change. Strategy often depends on whether a firm is
producing homogeneous or nonhomogeneous products. A market leader attacked by
lower-priced competitors can seek to better differentiate itself, introduce its own low-cost
competitor, or transform itself more completely.
(Source: [Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Page 410, Chapter Summary)

REFERENCES

[Phillip_Kotler]_Marketing_Management_14th_Edition(BookFi), Chapter 12-14

https://slideplayer.com/slide/7887176/
https://www.youtube.com/watch?v=Oeet9O1knTk
https://www.youtube.com/watch?v=MeYAVcP3mHQ
https://slideplayer.com/slide/5296274/
https://www.youtube.com/watch?v=gaQ0pXPESRc

PANGASINAN STATE UNIVERSITY 17

 FM-AA-CIA-15 Rev. 0 10-July-2020

Study Guide in PROF 102 – Marketing Management Module No. 5

PANGASINAN STATE UNIVERSITY 18