1. 1.1 Definition and Evolution of Markets.
the term market refers to the group of consumers or organizations that is interested in the product, has
the resources to purchase the product, and is permitted by law and other regulations to acquire the
product.
market development process:
1. Establish market development aims and targets.
2. Identify target market(s), sectors and niches.
3. Assess your existing sales organisation and develop it as necessary.
4. Source/utilise a suitable prospect database - ensure data is clean and up to date, and
strategic decision-makers are identified.
5. Develop and agree your strategic proposition(s) - with reference to USP's, UPB's,
competitors, positioning, product mix, margins, etc.
6. Design your communication(s) and method(s) to generate enquiries.
7. Design your response and sales processes and establish or provide required capabilities.
8. Design and provide your required monitoring, measurement and reporting systems.
9. Implement your sales development activity and reinforce it through coaching, training,
meetings, executive endorsement, etc.
10. Follow-up the activity: coach as required, review, monitor, seek customer and prospect
feedback (successful and unsuccessful) and report on performance.
11. Make changes and improvements and continue your activity at the appropriate stage.
What is a Market
In the words of Cournot, French Economist, ―Economists understand by the term market not any
particular market place in which things are bought and sold but the whole of any region in
which buyers and seller’s are in such free inter course with one another that the prices of same
goods & services tend to equality easily and quickly”. Thus Market is a real or imaginary place
where goods and services are traded.
Essentials of Market
1. Good or service to be traded.
2. Buyers and sellers
3. A place, be it with real boundaries or imaginary (like world market)
4. Contact between buyers and sellers
Markets, on the basis of goods or services traded between, can be classified as goods or
commodity market or it can be factor market for services. However, the popular basis of market
structure is the factors that form the environment of market.
Market Environment

2. The following are the main factors that form the environment of market and the markets are
usually classified on the basis of these factors.
1. The number of buyers and sellers.
2. The nature of product produced. Whether it is homogenous or differentiated ?
3. Price elasticity of demand.
4. Ease of entry into an industry.
5. Degree of control over price (Regulated or deregulated).
Classification of Market
On the basis of the above, the markets are classified to be
1. Perfect Competition
2. Imperfect Competition
1. Perfect Competition
1. Large no of sellers & buyers number
2. Homogeneous products perfectly
3. Free entry and exit.
4. Perfect knowledge of price cost (no control over price)
5. Perfectly price elastic demand imperfect competition.
2. Imperfect Competition
Monoplistic Competition
Oligopoly
Monoply
Monopolistic Competition
1. Large no of sellers and buyers
2. Differentiated products which are close substitute.
3. Free entry but firms can produce only close substitutes.
4. Some control our price.
5. Less than perfectly price elastic demand.
Oligopoly
1. Few producers
2. Homogenous (Pure Oligopoly) and differentiated but close substitutes (Differentiated Oligopoly)
3. Barriers to entry
4. Small control (Pure Oligopoly) large control (Differentiated Oligopoly) over price
5. P.E of D. small (Pure Oligopoly) large (Differentiated Oligopoly)

3. Monopoly
1. Single firm
2. Perfectly differentiated product without close substitute
3. Very strong barriers to entry
4. Extreme control over price
5. Near to in elastic price elasticity of demand
What is Marketing Strategic Planning
Marketing Strategic Planning means to plan all the activities of a business to ensure competitive
advantages and profitability. Marketing Strategic planning involves adapting the firm to take
advantage of opportunities in its constantly changing marketing environment.
Marketing Strategic planning engages a firm to take advantages from the available opportunities
in frequently changing marketing environment.
Steps in Marketing Strategic Planning
Following are the steps in marketing strategic planning
1. Defining The Company Mission
2. Setting Company Objective and Goals
3. Establishing Strategic Units (SBUs)
4. Performing Situational Analysis
5. Developing Marketing Strategy
6. Implementing Planning
7. Feed back
1. Defining the Company Mission Statement
Frist step in marketing strategic planning is defining the company mission statement. Mission
statement a statement of organization‘s purpose, what it wants to accomplish in the larger
environment. The mission statement should be base on the following facts that it should be:
Market oriented rather than product oriented
Realistic
Specific
Fit the market environment
Base on its distinctive competencies
Motivating
2. Company Objectives and Goals
After to define company‘s mission, the second step in marketing strategic planning is the
company objectives and goals for each level of management, and the managers will responsible

4. to achieve them. Marketing strategies are necessary to support these marketing objectives. If
increase its market shares, the company should increase its products availability and promotion.
To take place in new markets it should cut its prices. The company‘s mission is translated into a
set of objectives for the current period.
The objectives should be
Specific and stated
Achievable
For example ―To increase our market share to 10% in one year‖
3. Establishing Strategic Business Units
Most companies operate several businesses. A business must be viewed as a customer satisfying
process, not a goods producing process. A business can be defined in three dimensions Customer
Group, Customer Needs & Technology. Large companies manage variety of businesses for each
business a strategy is needed. For instance there are 49 Strategic Business Units of General
Electronic and there are three main characteristics of every SBU.
It is single business or collection of related business that can be planned separately the rest of
the company.
It has it own set of competitors.
It has a manager who is responsible for strategic planning and profit performance.
4. Performing Situation Analysis
Performing situation analysis is the fourth step of marketing strategic planning. In performing
situation analysis a business analyze both internal and external environment.
Internal Environment
Each Business needs to evaluate its internal environment (Strengths and weaknesses)
periodically. A company management or consultant review marketing, financial,
manufacturing and organizational competitors and evaluate each factor as a major or minor
strength and major or minor weakness.
External Environment
In External Environment the company analysis (opportunities & Threats), once the
company examine its opportunities & threats which facing a specific business unit, it
characterized it business in four outcomes business overall attractiveness.
1. An ideal business is high in opportunities and low in threats.
2. A speculative business in both major opportunities and threats.
3. A mature business is low in major opportunities and low in threats.

5. 4. A troubled business is low in opportunities and high in threats.
5. Marketing Strategy
Strategy is the fifth setp of marketing strategic planning. Strategy is a game plan for getting the
objectives. Every business must plan a strategy and achieve its objectives. Consisting of all
marketing strategy and compatible technology strategy and sourcing strategy.
Types of Marketing Strategy
Overall Cost Leadership
In this strategy the business work hard for low production and distribution cost. So it price
lower and win market share.
Differentiation
The businesses try to achieve superior performance in an important customers benefits
area valued by large part of market.
Focus
Here business focuses one or more narrow market segments. The firm gets to know these
segments either cost leadership or differentiation within the target segment.
6. Implementing Planning
A clear strategy may be useless if the firm fails to implement it carefully. In this stage managers
will work a lot and get work from their subordinates. Successful marketing implementation
depends on who well the company blends its people, organization structure, decision and reward
system, and company culture into a cohesive action program that supports its strategies. The
company‘s formal organization structure plays an important role in implementation marketing
strategy. The best example is Mckinesy 7s framework for successful implementation.
7. Feedback of Marketing Strategic Planning
After implementing its strategy the firm needs to track the result and monitor new developments
in external and internal environment.
1.3 Functions of Marketing.
Basic Functions of Marketing
The marketing process performs certain activities as the goods or services move from producer
to consumer. Every firm does not perform all these activities or jobs. However, any company

6. that wants to operate its marketing system successfully must carry them out. The following
marketing tasks have been recognized for a long time.
1. Selling
It is core of marketing. It is concerned with the persuasion of prospective buyers to actually
complete the purchase of an article. Setting pays an important part in realizing the ultimate aim
of earning profit. Selling is enhanced by means of personal selling, advertising, publicity and
sales promotion.
2. Buying
It involves what to buy, what quality, how much, from whom, when and at, what price. People in
business buy to increase sales or to decrease costs. Purchasing agents are much influenced by
quality, service and price. The products that the retailers buy for resale are determined by the
need and preferences of their customers.
3. Transportation
Transport is the physical means whereby goods are moved from the places where they are
produced to those they are needed for consumption. Transportation is essential from the
procurement of raw materials to the delivery of finished products to the customers places.
Marketing relies mainly on railroads, tracks, waterways, pipelines and air transport. The type of
transportation is chosen on several consideration such as suitability, speed and cost.
4. Storage
It involves the holding of goods in proper condition from the time they are produced until they
are needed by consumers (in case of finished products) or by the production department (in case
of raw materials and stores). Storing protects the goods from deterioration and helps in carrying
over surplus for feature consumption or use in production. Goods may be stored in various
warehouses situated at different places. Storing assumes greater importance when production is
seasonal or consumption may be seasonal. Retail firms are called ―stores‖.
5. Standardization and Grading
The other activities that facilitate marketing are standardization and grading. Standardization
means establishment of certain standards or specifications for products based on intrinsic
physical qualities of any commodity. This may involved quantity (weight or size) or it may
involve quality (colour, shape, appearance, material, taste, sweetness etc). Government may also
set some standards e.g., in case of agricultural products. A standard conveys a uniformity of the
products.
―Grading means classification of standardized products into certain well-defined classes or
groups.‖ It involves the division of products into clauses made up of unit processing similar
characteristics of size and quality. Grading is very important for ―raw material‖ (such as fruits
and cerials), mining products‖ (such as coal, iron-ore and mangenese) and ―forest products‖
(such as timber). Branded consumer products may bear grade levels, – A B C.
6. Financing
It involves the use of capital to meet financial requirements of the agencies dealing with various

7. activities of marketing. The services of providing the credit and money needed to meet the cost
of getting merchandise into the hands of the final user is commonly referred to as finance,
function in marketing. In marketing, finances are needed for working capital and fixed capital,
which may be secured from three sources – onward capital, bank loans and advances, and trade
credit (provided by the manufactures to wholesaler and by the wholesaler to the retailers).
7. Risk Taking
Risk means lose due to some unforeseen circumstances in future. Risk-bearing in marketing
refers to the financial risk inherent in the ownership of goods held for an anticipated demand,
including the possible losses due to a fall in price and the losses from spoilage, depreciation,
obsolescence, fire and floods or any other loss that may occur with the passage of time. From
production of goods to its selling stage, many risks are involved due to changes in marker
conditions, natural causes and human factors. Changes in fashions or interventions also cause
risks. Legislative measures of the government may also cause risks.
8. Market Information
The only sound foundation, on which marketing decisions may be based, is correct and timely
market information. Right facts and information reduce the aforesaid risks and thereby result in
cost reduction. Business firms collect, analyze and interpret facts and information from internal
sources, such as records, sales people and findings of the market research department. They also
seek facts and information from external sources, such as business publications, government
reports and commercial research firms. Retailers need to know about sources of supply and also
about customers buying motives and buying habits. Manufacturers need to know about retailers
and about advertising media. Firms in both these groups need information about competitors
activities and about their markets. Even ultimate consumers need market information about
availability of products, their quality standards, their prices, and also about the after-sale service
facility Common sources for consumers are sales people, media advertisements, colleagues etc.
It may be noted that in addition to the mentioned jobs, the marketing manager is also involved in
product planning, pricing of products, selection of distribution channels, framing of marketing
objectives, environmental scanning, target market selection, market programming and
developing marketing strategy.
Modern Concepts of Marketing.
1. Nature
2. Foundation
3. Importance
4. Limitation

8. 1. Nature
customer orientation
Consumer Orientation is the focus on meeting the needs of one's customers, internal or external. This
service establishes specific customer satisfaction standards and actively monitors client satisfaction,
taking steps to clarify and meet customer needs and expectations (both expressed and unexpressed). At
lower levels the service involves courteous and timely responsiveness to the requests of customers,
while at the higher levels, it involves developing the relationship of partner and trusted advisor.
Marketing research
Marketing Research is a systematic method of collecting, recording and analysing of data which is used
to solve marketing problems.
A company faces many marketing problems. It faces problems about consumers, product, market
competition, sales promotion, etc. Marketing research helps to solve these problems. Marketing
research is a systematic process. It first collects data (Information) about the Marketing problem.
Then it records this data. Then it analysis (studies) this data. Then it draws conclusions about this
data. After that, it gives suggestions (advice) for solving the marketing problem. So, Marketing
research helps to solve the marketing problems quickly, correctly and systematically.
Marketing research collects full information about the consumers. It finds out the needs and
expectations of the consumers. So the company produces the goods according to the needs and
expectations of the consumers. Marketing research helps the company to make its production and
marketing policies. It helps the company to introduce new products in the market. It helps to
identify new markets. Marketing research also collects full information about the competitors.
The company uses this information to fight competition. It also helps the marketing manager to
take decisions.
Marketing research is a special branch of Marketing Management. It is the soul of Marketing
management. It is of recent origin and widely used by manufacturers, exporters, distributors and
service organisations.
Marketing research is very systematic, scientific, objective and organised. It has a wide scope. It
includes product research, consumer research, packaging research, pricing research, etc.
Marketing research is a continuous process. It has a few limitations. However, a company cannot
survive and succeed without Marketing research.

9. Market planning
Marketing is the process of developing and implementing a plan to identify, anticipate and
satisfy consumer demand, in such a way as to make a profit. The two main elements of this plan
are market research to identify and anticipate customer requirements and the planning of an
appropriate marketing mix to meet these requirements. Market research involves gathering and
recording information about consumers, market, product, and the competition in an organised
way. The information is then analysed and used to inform marketing decisions. There are three
main ways of gathering information for market research:
1.From internal information already held by an organisation, e.g. details of existing customers
and their spending habits.
2. External primary information - i.e. information collected at first hand by interviewing
customers and potential customers to get their views about a company, products and services.
3. External secondary information - using published sources of information e.g. those produced
by marketing organisations about products, markets and brands.
Marketing planning can then be used:
1. To assess how well the organisation is doing in its markets.
2. To identify current strengths and weaknesses in these markets.
3. To establish marketing objectivesto be achieved in these markets.
4. To establish a marketing mix for each market designed to achieve organisational objectives.
Service organisations like the Inland Revenue and Abbey will carry out marketing to find out
about the sort of service that their customers and clients require in order to create an appropriate
marketing plan. Manufacturing organisations like Cadbury Schweppes, Corus, Audi and Nissan
will carry out product research in order to create an appropriate marketing plan for their products
(as well as associated services).
A simple definition of market research is 'keeping those who provide goods and services in touch
with the needs and wants of those who buy the goods and services.'
Integrated Marketing
Integrated marketing occurs when the marketer devises marketing activities and assembles marketing
programs to create, communicate, and deliver value for consumers such that the whole is
greater than the sum of its parts. Two key themes are that (1) many different marketing activities
can create, communicate, and deliver value and (2) marketers should design and implement any
one marketing activity with all other activities in mind.When a hospital buys an MRI from General
Electric s Medical Systems division, for instance, it expects good installation, maintenance, and
training services to go with the purchase.
Service Marketing
Introduction

10. The world economy nowadays is increasingly characterized as a service economy. This is
primarily due to the increasing importance and share of the service sector in the economies of
most developed and developing countries. In fact, the growth of the service sector has long been
considered as indicative of a country‘s economic progress.
Economic history tells us that all developing nations have invariably experienced a shift from
agriculture to industry and then to the service sector as the main stay of the economy.
This shift has also brought about a change in the definition of goods and services themselves.
No longer are goods considered separate from services. Rather, services now increasingly
represent an integral part of the product and this interconnectedness of goods and services is
represented on a goods-services continuum.
Definition and characteristics of Services
The American Marketing Association defines services as - ―Activities, benefits and satisfactions
which are offered for sale or are provided in connection with the sale of goods.‖
The defining characteristics of a service are:
Intangibility: Services are intangible and do not have a physical existence. Hence services
cannot be touched, held, tasted or smelt. This is most defining feature of a service and that which
primarily differentiates it from a product. Also, it poses a unique challenge to those engaged in
marketing a service as they need to attach tangible attributes to an otherwise intangible offering.
1. Heterogeneity/Variability: Given the very nature of services, each service offering is unique and
cannot be exactly repeated even by the same service provider. While products can be mass
produced and be homogenous the same is not true of services. eg: All burgers of a particular
flavor at McDonalds are almost identical. However, the same is not true of the service rendered
by the same counter staff consecutively to two customers.
2. Perishability: Services cannot be stored, saved, returned or resold once they have been used.
Once rendered to a customer the service is completely consumed and cannot be delivered to
another customer. eg: A customer dissatisfied with the services of a barber cannot return the
service of the haircut that was rendered to him. At the most he may decide not to visit that
particular barber in the future.
3. Inseparability/Simultaneity of production and consumption: This refers to the fact that
services are generated and consumed within the same time frame. Eg: a haircut is delivered to
and consumed by a customer simultaneously unlike, say, a takeaway burger which the customer
may consume even after a few hours of purchase. Moreover, it is very difficult to separate a
service from the service provider. Eg: the barber is necessarily a part of the service of a haircut
that he is delivering to his customer.
Types of Services
1. Core Services: A service that is the primary purpose of the transaction. Eg: a haircut or the
services of lawyer or teacher.

11. 2. Supplementary Services: Services that are rendered as a corollary to the sale of a tangible
product. Eg: Home delivery options offered by restaurants above a minimum bill value.
Difference between Goods and Services
Given below are the fundamental differences between physical goods and services:
Goods Services
A physical commodity A process or activity
Tangible Intangible
Homogenous Heterogeneous
Production and distribution are separation from Production, distribution and consumption are
their consumption simultaneous processes
Can be stored Cannot be stored
Transfer of ownership is possible Transfer of ownership is not possible
Services marketing
Services marketing is a sub field of marketing, which can be split into the two main areas of
goods marketing (which includes the marketing of fast moving consumer goods (FMCG) and
durables) and services marketing. Services marketing typically refers to both business to
consumer (B2C) and business to business (B2B) services, and includes marketing of services like
telecommunications services, financial services, all types of hospitality services, car rental
services, air travel, health care services and professional services. The range of approaches and
expressions of a marketing idea developed with the hope that it be effective in conveying the
ideas to the diverse population of people who receive it.
Services are economic activities offered by one party to another. Often time-based, performances
bring about desired results to recipients, objects, or other assets for which purchasers have
responsibility. In exchange for money, time, and effort, service customers expect value from

12. access to goods, labor, professional skills, facilities, networks, and systems; but they do not
normally take ownership of any of the physical elements involved.[1]
There has been a long academic debate on what makes services different from goods. The
historical perspective in the late-eighteen and early-nineteenth centuries focused on creation and
possession of wealth. Classical economists contended that goods were objects of value over
which ownership rights could be established and exchanged. Ownership implied tangible
possession of an object that had been acquired through purchase, barter or gift from the producer
or previous owner and was legally identifiable as the property of the current owner.
Adam Smith‘s famous book, The Wealth of Nations, published in Great Britain in 1776,
distinguished between the outputs of what he termed ―productive‖ and ―unproductive‖ labor. The
former, he stated, produced goods that could be stored after production and subsequently
exchanged for money or other items of value. But unproductive labor, however‖
honorable,...useful, or... necessary‖ created services that perished at the time of production and
therefore didn‘t contribute to wealth. Building on this theme, French economist Jean-Baptiste
Say argued that production and consumption were inseparable in services, coining the term
―immaterial products‖ to describe them.
Characteristics of Services

13. Classification of Services
It is required to design & apply marketing techniques to
completely satisfy the customer & increase profits & identify
new emerging services.
Classifications can be done on following basis:
• Classification by Industry
• Classification by Target Effect
• Skill level of service provider (Professional/
Nonprofessional)
• Labor intensiveness (People-based/Equipment-based)
• Degree of customer contact (High / Low)
Goal of the service provider (Profit /Nonprofit)
Classification By Industry
a. Entertainment industry
b. Education
c. Telecommunications
d. Finance & Insurance
e. Transportation

14. f. Public utilities
g. Government services
h. Health
i. Hospitability Industry
j. Business services
k. Telecommunications
l. Trading
Problems in Service Marketing
Sometimes, service-oriented industries are easier to run than product-oriented industries. For
example, a tennis coach might experience no expenses, while a seller of tennis rackets will at
least need to buy space to store and sell the tennis rackets. However, those in service industries
run into a variety of problems inherent to services that can be difficult to overcome.
1. Simultaneous Production and Consumption
o Services are different from products in that services are produced and consumed
at the same time, while products are produced and then can be consumed at a later
date. For example, dance shoes are made by manufacturers and can sit on a shelf
and then sit in a closet for any length of time before they are finally put on. These
dance shoes are products. However, if a professional dancer produces a dance for
an audience, the dancer performs the dance and the audience consumes the dance
at the same time. For the service, the producer must be present to provide the
service. For the dance shoes, the producer could be somewhere else, but the
consumer can still use the product, the dance shoes.
Inconsistency
o Those selling products can make sure that their products are consistent. For
example, a restaurant can use the exact same process and ingredients to create a
meal that has a consistent flavor. However, services are inconsistent. Those
serving the food can have varying degrees of efficiency and friendliness,
depending on the skills and personality of the servers. Therefore, both business
owners and business customers cannot predict the quality of delivered services.

15. Services Can't Be Stocked
o Service industries have a much more difficult time managing supply and demand
than product industries. If a mattress salesman cannot sell a mattress today, she
can always sell it tomorrow. However, a hotel owner who doesn't book a hotel
room today will forever lose the profit he would have earned from that hotel room
today.
Unpredictable Service Quality
o Since customers cannot see the service ahead of time, they cannot always tell if
they will like the service. For example, a customer will know that a wrench works
after trying it out, but the customer won't know if the plumber will successfully
fix the broken toilet until after the plumber arrives and tries to fix it.
Professionalism Required
o Customers have an easier time trusting businesses selling products than
businesses selling services. If a business sells a hairbrush, customers can tell that
they're getting a hairbrush even if the vendor selling the hairbrush behaves
unprofessionally. But a hairstylist must always appear professional or customers
may not trust the hairstylist's ability to cut hair well. Therefore, service providers
must commit themselves toward behaving professionally on a much more
consistent basis.
Levels Of service
World class service: - These are also called luxury hotels , they target top business executives,
entertainment celebrities , high- ranking political figures, and wealthy clientele as their primary markets .
They provide upscale restaurants and lounges , concierge services and also private dining facilities .
Guestrooms are oversized , heated and plush bath towels , large soaps bars , shampoo , shower caps and all
amenities . Housekeeping services are given two times a day including turn-down service . Above all
luxury hotels give personalized service to the guest and have a relatively high ration of staff members to
guests.
Mid-Range Service: - Hotels offering mid-range service appeal ti the largest segment of the travelling
public . This kind of hotels does not provide elaborate service and have a adequate staffing . They also
provide uniformed service , food and beverage room service, in room entertainment's and also Wi-Fi .
Property may offer a speciality restaurant , coffee shop and lounge that cater to visitors as well as hotel
guests . Type of guests who like to stay at these hotels are business people , individual travellers ,and
families . Rates are lower than luxury hotels as they provide fewer services , smaller rooms and a smaller
range of facilities and recreational activities .

16. Economy / Limited Service: These hotels provide clean , comfortable , safe , inexpensive rooms and meet
the basic need of guests . Economy hotels appeal primarily to budget minded travellers who wants a room
with minimum services and amenities required for comfortable stay, without unnecessary paying additional
cost for costly services . The cliental of these hotels include families with children , travelling business
people , backpackers , vacationers retirees etc. These type of hotels might not offer food and beverage
facilities .
FEATURES OF HOTEL INDUSTRY
The hospitality industry consists of companies within the food services,
accommodations, recreation, and entertainment sectors.
The hospitality industry is a several billion dollar industry that mostly depends on
the availability of leisure time and disposable income. A hospitality unit such as a
restaurant, hotel, or even an amusement park consists of multiple groups such as facility
maintenance, direct operations (servers, housekeepers, porters, kitchen workers,
bartenders, etc.), management, marketing, and human resources.
Usage rate is an important variable for the hospitality industry. Just as a factory
owner would wish to have his or her productive asset in use as much as possible (as
opposed to having to pay fixed costs while the factory isn't producing), so do restaurants,
hotels, and theme parks seek to maximize the number of customers they "process".
In viewing various industries, "barriers to entry" by newcomers and competitive
advantages between current players are very important. Among other things, hospitality
industry players find advantage in old classics (location), initial and ongoing investment
support (reflected in the material upkeep of facilities and the luxuries located therein), and
particular themes adopted by the marketing arm of the organization in question (such as a
restaurant called the 51st fighter group that has a WW2 theme in music and other
environmental aspects). Very important is also the characteristics of the personnel working
in direct contact with the customers. The authenticity, professionalism, and actual concern
for the happiness and well-being of the customers that is communicated by successful
organizations is a clear competitive advantage
This significant growth of the tourism industry is the direct result of changes in
international consumer behaviors as well as economic prosperity and political stability
within the region. Historically, the supply of lodging facilities within the region has proved
to be both inadequate in terms of product quality as well as insufficient in quantity for
meeting the increasing levels of demand.
These elements of supply and demand have created a favorable investment climate
for development within the region, resulting in a real estate boom in both tourism and
residential development. The growth in residential real estate development has been
primarily driven by foreign demand for vacation and retirement homes in both urban and
resort destinations within the region. Investment and development has been further
supported by the variety of financial incentives for investment in tourism projects offered
by national governments as well as the availability of local capital for the financing of
large projects.
The first goal is to find ways to operate the hotel according to the idea of a ―triple
bottom line,‖ which embodies profitable operation combined with attention to the people

17. who use and work in the hotel and a focus on careful stewardship of resources. While that
goal is important, even more vital is to use the hotel‘s position as an industry leader in the
nation‘s capital to demonstrate to the hotel industry, customers, and vendors that
sustainable operation is the best strategy to ensure successful hotel operation. The
sustainability initiative goes beyond such well-known ideas as reusing guest linens,
recycling waste materials, and changing to compact fluorescent lamps.
THREE LEVELS OF A PRODUCT
Introduction
In the book "Principle Of Marketing" Philip Kotler et al devised a very interesting concept of
benefit building for products. Kotler suggested that if you view a product on three levels it will
help you extract all the benefits that your product offers. This strategy has various names
including Total Product Concept, Augmented Product and Three Levels Of a Product.
Level One: Core Product
Level one is the most basic level and simply looks at what people set out to buy and what
benefits the producer would like their product to offer buyers. For example a camera is expected
to take pictures but there may be other benefits that the producer wants the buyer to enjoy such
as a wide lens, face recognition and high definition videos. So prior to designing any product
designers should list the core benefits the product needs to provide.

18. Level 2: Actual Product
Level two is about translating the list of core product benefits into a product that people will buy.
There may be competitor products offering the same benefits so the aim at this stage is to design
a product that will persuade people to purchase your product. Kotler states that this can involve
deciding on the quality level, product and service features, styling, branding and packaging. For
example Apple's iPhone design has enabled it to become a smart phone market leader so that by
September 2012 it was able to launch the iPhone 5, the 5th version of this product. There are
other smart phones on the market but Apple has managed to design a product which people pre-
order and camp overnight outside Apple's retail stores so that they can be the first ones to buy the
product.
Level 3: Augmented product
Level three involves deciding the additional non tangible benefits that a product can offer.
Competition at this level is based around after sales service, help lines, warranties, free/cheap
delivery and so on. In other words it is things that the product does not do but customers may
find them useful. Non tangible benefits such as product warranties offer customers peace of mind
and demonstrate the manufacturer has faith in the quality of its product. In fact the ubiqtous use
of some augmented benefits have turn some level three benefits into a customer expectation for
example customers expect cars to have manufacturer warranties.
NEW PRODUCT DEVELOPMENT OR LAUNCH
INTRODUCTION
MEANING OF NEW PRODUCT LAUNCH
STAGES IN NEW PRODUCT LAUNCH
The term product is used frequently in marketing. Consumers
purchase different products which are useful and agreeable to them. A
product can be defined as bundle of attributes that satisfies a consumer
demand.
A product has utility. In addition , it has various features such as
physical attributes, brand, design, color, shape, size and so on. Many
things have to be considered before development or launch of a new
product.
A perfect product personality includes following components:
Basic constituent. {Physical aspect of the product.}
The associated feature. {Features, merits, uses etc.}
The brand name given to the product.
The package used for the product.
The label attached to the product.
New product launch means introducing a new product into the
market.
In other words it is adding a new product in the existing product line of
the company.

19. New product launch is an important aspect of product policy and
product management. For expansion of business time to time launch of
new product is very necessary.
Generating new product ideas of product with promising marketing
prospects.
Idea Screening.
Concept Testing.
Business Analysis.
Marketing Analysis.
Actual development of a new product
Test marketing
Commercialization.
NEW PRODUCT LAUNCH
NATURE Plus Hair Shampoo will be launched in India. Under the
brand name of HLL( Hindustan Liver Limited). The main aim would be to
make it India's largest selling shampoo, offering the five most important
hair health benefits: strengthens weak hair, prevents hair breakage,
softens rough dry hair, shine for thick and healthy hair, and contains
antidandruff
ingredient.
We have to decide a product launch for this shampoo so following
measures have to be taken.
The five most important hair health benefits: strengthens weak
hair, prevents hair breakage, softens rough dry hair, shine for thick and
healthy hair, and contains anti-dandruff ingredient.
The packaging of the product should be in such a way that it should
be very eye catching and attractive
Plus here indicates that it contains scientific as well as ayurvedic
variant.
After all new ideas and concept the product should be prepared by
RND department and it should be tested. It should be carried out in
various tests whether the Shampoo is really effective or no. It should
have all the features mentioned. It does not has any side effects. The
most important is it should has a long .
The total expenditure should be calculated. The market structure,
the company’s market share, company’s goodwill and image plays vital
role in such a plan of action. ( New Product Launch.)
The total budget should be made and proper testing of the product
should be made. So being a branded company in this field they have a
good image in the market and also a very vast product line in market.
1. New ideas and a latest concept.
2. Testing of the product.

20. 3. Business Analysis
shelf- life
.
31 % of the shampoo sales of Hindustan Lever Limited
1. P & Gs rejoice shampoo
2. Cavin care's Chik shampoo
In the Rs 1,000 crore shampoo market, HLL is a clear leader
hogging 65% of the market share with Nature plus contributing 31% .HLL
enjoys a price advantage over its competitors. With low prices HLL
believes that “it can neutralize significant part of cost of this initiative
overtime while fortifying our market position”.
The average medium class person can be easily targeted by the
product as the cost of the product is very low.
The Product Life Cycle
A product's life cycle (PLC) can be divided into several stages characterized by the revenue
generated by the product. If a curve is drawn showing product revenue over time, it may take one
of many different shapes, an example of which is shown below:
Product Life Cycle Curve

21. The life cycle concept may apply to a brand or to a category of product. Its duration may be as
short as a few months for a fad item or a century or more for product categories such as the
gasoline-powered automobile.
Product development is the incubation stage of the product life cycle. There are no sales and the
firm prepares to introduce the product. As the product progresses through its life cycle, changes
in the marketing mix usually are required in order to adjust to the evolving challenges and
opportunities.
Introduction Stage
When the product is introduced, sales will be low until customers become aware of the product
and its benefits. Some firms may announce their product before it is introduced, but such
announcements also alert competitors and remove the element of surprise. Advertising costs
typically are high during this stage in order to rapidly increase customer awareness of the
product and to target the early adopters. During the introductory stage the firm is likely to incur
additional costs associated with the initial distribution of the product. These higher costs coupled
with a low sales volume usually make the introduction stage a period of negative profits.
During the introduction stage, the primary goal is to establish a market and build primary
demand for the product class. The following are some of the marketing mix implications of the
introduction stage:
Product - one or few products, relatively undifferentiated
Price - Generally high, assuming a skim pricing strategy for a high profit margin as the
early adopters buy the product and the firm seeks to recoup development costs quickly. In
some cases a penetration pricing strategy is used and introductory prices are set low to
gain market share rapidly.
Distribution - Distribution is selective and scattered as the firm commences
implementation of the distribution plan.
Promotion - Promotion is aimed at building brand awareness. Samples or trial incentives
may be directed toward early adopters. The introductory promotion also is intended to
convince potential resellers to carry the product.
Growth Stage
The growth stage is a period of rapid revenue growth. Sales increase as more customers become
aware of the product and its benefits and additional market segments are targeted. Once the
product has been proven a success and customers begin asking for it, sales will increase further
as more retailers become interested in carrying it. The marketing team may expand the
distribution at this point. When competitors enter the market, often during the later part of the
growth stage, there may be price competition and/or increased promotional costs in order to
convince consumers that the firm's product is better than that of the competition.
During the growth stage, the goal is to gain consumer preference and increase sales. The
marketing mix may be modified as follows:

22. Product - New product features and packaging options; improvement of product quality.
Price - Maintained at a high level if demand is high, or reduced to capture additional
customers.
Distribution - Distribution becomes more intensive. Trade discounts are minimal if
resellers show a strong interest in the product.
Promotion - Increased advertising to build brand preference.
Maturity Stage
The maturity stage is the most profitable. While sales continue to increase into this stage, they do
so at a slower pace. Because brand awareness is strong, advertising expenditures will be reduced.
Competition may result in decreased market share and/or prices. The competing products may be
very similar at this point, increasing the difficulty of differentiating the product. The firm places
effort into encouraging competitors' customers to switch, increasing usage per customer, and
converting non-users into customers. Sales promotions may be offered to encourage retailers to
give the product more shelf space over competing products.
During the maturity stage, the primary goal is to maintain market share and extend the product
life cycle. Marketing mix decisions may include:
Product - Modifications are made and features are added in order to differentiate the
product from competing products that may have been introduced.
Price - Possible price reductions in response to competition while avoiding a price war.
Distribution - New distribution channels and incentives to resellers in order to avoid
losing shelf space.
Promotion - Emphasis on differentiation and building of brand loyalty. Incentives to get
competitors' customers to switch.
Decline Stage
Eventually sales begin to decline as the market becomes saturated, the product becomes
technologically obsolete, or customer tastes change. If the product has developed brand loyalty,
the profitability may be maintained longer. Unit costs may increase with the declining production
volumes and eventually no more profit can be made.
During the decline phase, the firm generally has three options:
Maintain the product in hopes that competitors will exit. Reduce costs and find new uses
for the product.
Harvest it, reducing marketing support and coasting along until no more profit can be
made.
Discontinue the product when no more profit can be made or there is a successor product.
The marketing mix may be modified as follows:

23. Product - The number of products in the product line may be reduced. Rejuvenate
surviving products to make them look new again.
Price - Prices may be lowered to liquidate inventory of discontinued products. Prices may
be maintained for continued products serving a niche market.
Distribution - Distribution becomes more selective. Channels that no longer are profitable
are phased out.
Promotion - Expenditures are lower and aimed at reinforcing the brand image for
continued products.
Limitations of the Product Life Cycle Concept
The term "life cycle" implies a well-defined life cycle as observed in living organisms, but
products do not have such a predictable life and the specific life cycle curves followed by
different products vary substantially. Consequently, the life cycle concept is not well-suited for
the forecasting of product sales. Furthermore, critics have argued that the product life cycle may
become self-fulfilling. For example, if sales peak and then decline, managers may conclude that
the product is in the decline phase and therefore cut the advertising budget, thus precipitating a
further decline.
Nonetheless, the product life cycle concept helps marketing managers to plan alternate marketing
strategies to address the challenges that their products are likely to face. It also is useful for
monitoring sales results over time and comparing them to those of products having a similar life
cycle.
SETTING PRICES
Having decided what to be and offer and to
whom, the next most important decision is
price. Pricing is a critical decision because it
determines, first, whether or not the intended
customers will purchase, and second, whether
they will be satisfied with the value offered
and, thus, be willing to return. Third, it determines
whether the hotel will be financially
healthy enough to maintain itself and reward
its employees so customers can once again be
satisfied when they do return.
Three factors must come into consideration
in pricing—the Three Cs of pricing, if you
will: costs, competition, and customers‘ comfort
zones. In F&B, costs drive pricing of
menu items and beverages. Drucker (1999,
115–6) says American industry has too much
cost-driven pricing, and that it needs more
price-driven costing. Doesn‘t F&B have the opportunity
to build and test menus to discover
where price points should be set, and is not the
chef challenged to manage ingredients and portion
size to deliver the cost and margin structure
desired? Yet the cost-driven practice continues.

24. In rooms, competition is most often the
dominant factor. Costs play a role, but
changes in variable cost of an occupied room
are generally small and rooms‘ contribution
margins are large, typically 65 percent or bet-
310 Chapter 7 _ Marketing and Associated Activities
ter. Moreover, hotel accounting does not
measure discounts from a standard price, as
do almost all other industries. So there is no
visible cost in reducing price to meet competitors.
Remember: Any damn fool can cut
his price, and some damn fool always will.
Must everyone follow? No. The key is to get
in the head of the customer. The truly controlling
factor is customer comfort zones, and
all too often hotel management leave money
on the table because they don‘t know what
those comfort zones are. At what price does
the offer attract and deliver value? That is the
key question in setting prices.
Price setting requires talent and skill in
data gathering and analysis, accounting and
building pro formas, interpreting and drawing
inferences, and decision making. Do not let
salespeople set prices; do not let controllers
set prices. Only one person—the GM—can
pull together the inputs of sales, control, operations,
reservations, and the rest, and make
this crucial judgment call. Also, build at least
three price scenarios and have the controller
and marketing director agree on occupancy
impacts. Then run a GOP pro forma on each.
Out of that exercise will come a sense of the
best pricing approach to take. Setting prices is
the one task the GM cannot delegate, for he
or she must live with and be accountable for
all that results from this critical decision.
PRICING TIP
Include staffers in contact with customers
in pricing discussions. A ski resort
owner-operator asked me to review his proposed
price schedules. I asked to have included
in our meeting a senior reservation
agent, a bellman, a bartender, and a front
desk agent. After probing them on what they
heard from customers about value, we increased
four of the seven proposed room type
prices, to the owner-operator’s delight.
HOTEL PRICING STRATEGY

25. Pricing is the tool that matches supply and demand. Price influences the demand
for a product, which in turn determines volume sales. Therefore, setting an appropriate
price is one of the most critical factors in demand management and in generating
revenue. Price is the only element of the marketing mix that is not a cost,
because price generates revenue. Pricing decisions contribute to product and brand
image, and product and pricing decisions are therefore inseparable.
Stages in setting prices
Kotler (2000) proposed a generic pricing model that recommends eight stages in
setting prices:
1 Select pricing objectives
2 Assess the target market‘s ability to afford the purchase price and consumers‘
perception of the price/product offer
3 Determine the potential demand, including the price elasticity of demand
4 Analyze the demand, cost, volume, price and profit relationships; businesses
need to understand their fixed and variable costs
5 Research competitors‘ price/product offer
6 Select a pricing strategy
7 Select appropriate pricing methods
8 Set specific prices for rooms, food, beverages, conference and leisure products,
and for special product-price bundles.
Pricing strategies
Having established the price objectives, hospitality companies need to consider
pricing strategies, which must be linked to the quality standards offered by the
operation. In hotels, consumers often associate star ratings with quality standards.
Alternative pricing strategies include the market leader and market follower
options but there are also unsustainable pricing strategies, which are ultimately selfdefeating.
Market leader strategies
Well-established hotel companies, with a loyal customer base and a strong brand
image, can adopt market leader strategies where the prices are aligned with service
quality. These strategies are suitable for:
_ The most exclusive, luxurious, 5-star hotels in the world; they deliver the highest
quality customer experience, and can justify charging premium and prestige prices
_ Traditional 3 star, well maintained hotels, in good locations and with a high level
of loyal customers and repeat business, offering appropriate value for money and
competing effectively with a mid-market pricing strategy
_ Budget hotels and motels charging relatively low prices for a product offering
fewer facilities and delivering value for money.
Market follower strategies
New entrants and less established hotel brands, seeking to build market share by
penetration pricing, adopt a market follower strategy. A market follower strategy
offers similar quality but pitches prices lower than the market leader in order to be
more competitive, attract customers and grow market share. These strategies are
suitable for:
_ High quality 4/5 star properties, seeking to grow market share by exceptional
value pricing
_ Mid-market hotels competing against more established properties; or aggressive
chains, and individual properties, seeking to increase room occupancy and build
market share by offering exceptional value pricing.
Unsustainable strategies
Unfortunately, some hotels implement over-priced strategies, which are unsustainable

26. as a long-term proposition. These companies charge rates higher than the quality
160 Hospitality Marketing
can justify. Some of these hotels might have myopic management who unknowingly
have become over-priced. As customers recognize the poor value for money,
the reputation of the business will rightly suffer. Either the company will have to
adopt a more appropriate balanced strategy, or be forced in to either selling or
liquidating the business.
_ Old-established, grand 3/4 star hotels, which are no longer as luxurious as they
used to be, and whose facilities no longer match the price charged; these properties
are trading on an historic image as they gradually decline; they will eventually
either have to re-invest in their facilities or reduce their prices
_ Once glorious, now shabby hotels, possibly in good locations, which only generate
passing trade and charging high prices; this rip-off value will lead to a poor
reputation, and limited – if any – repeat and recommended business
_ Mid-market hotels with falling standards but still maintaining a medium pricing
strategy, which does not represent value for money
_ Budget operations, which have gradually increased prices to pay for ‗amenity
creep‘ items, and are no longer competitively priced.
Finally, some hotels can adopt an unsustainable price/quality strategy, where the
price offered is too low to support the product/quality offer indefinitely.
_ High-quality 4/5 star properties charging unsustainable prices either because of
low season or due to a decline in the destination‘s popularity
_ Mid-market hotels operating in highly competitive environments and offering
budget hotel prices without reducing quality standards.
Companies need to adopt a pricing strategy, which takes into account their relative
quality compared to the competition. Table 7.1 provides several examples of hospitality
products combined with price objectives, strategies and tactics.
Pricing objectives:
It is necessary that the marketing manager decide the objective of pricing before actually setting
price. According to experts, pricing objectives are the overall goals that describe the role of price
in an organizationà ‚  ’ s long-range plans. The objectives help the marketing manager
as guidelines to develop marketing strategies. The following are the important pricing objectives.
Market penetration
Market skimming
Target rate of return
Price stabilization
Meet of follow competition
Market share
Profits maximization
Cash flow
Product line promotion
Survival
Market penetration objective:
In the initial stages of entering the market, the entrepreneurs may set a relatively low price. This
is mainly to secure a large share of the market. In a highly price sensitive market, the
businessman may continue to sell his products even without profit. He is interested in growth

27. rather than in making a profit. In the market penetration objective, the unit cost of production and
distribution will decrease when the volume of sales attain a particular target. In brief, market
penetration objective is an attempt to secure a large share of the market by deliberately setting
the low prices.
Market skimming objective:
Market skimming means utilizing the opportunities in the market to reap the benefits of high
sales, increased profits and low unit costs. Some of the entrepreneurs study the buyers needs and
try to provide the suitable goods, but charge them high prices. This objective is realized in those
markets where the magnitude of competition is very low. The entrepreneurs, in this situation,
make profits over a short period. The market-skimming objective would not be meaningful,
when the consumer refuses to purchase the goods at the prices fixed by the producers. This
pricing objective would be suitable in the markets where the consumers feel that costly goods are
of the superior quality.
Target rate of return objective:
Rate of return is normally measured in relation to investment and sales. The producers enjoying
some protection may prefer to earn a target rate on investment. This would be possible where the
entrepreneur enjoys a franchise or a monopolistic situation. But in the long run, every
businessman attempts to secure an adequate return on investment through price setting. Mostly,
middleman like wholesalers, retailers will price their merchandise to earn a particular rate of
return on sales.
Price stabilization objective:
Frequent changes in the prices of product will harm the long-term interests of the companies.
Hence, they aim at stabilization of prices. They do not exploit a short supply position to earn the
maximum. During the periods of good business, they try to keep prices from rising and during
the periods of depression, they keep prices from falling too low. Thus, they take a long-term
view in achieving price stability.
Meet or follow competition objective:
Pricing is often done to meet or even prevent competition. If a company is a price leader, it is
better to follow it to ward off the possibility of competition.
Market share objective:
A company may either have the objective of maintaining the present market share or increase its
share depending upon its stature. Particularly, big business houses adopt such pricing that it
enables them to retain their market share. If they raise their market share, they may draw the
attention of the government and if they shed their share, they may lose revenues. Contrary to
this, small business houses are found interested in raising their share in the market so as to reap
the benefit of large-scale production. In few cases, firms may sell the products even at a lower

28. cost to capture the market. However, such practice may lead to financial crisis. As a matter of
fact, this is an objective to be adopted by new firms cautiously.
Profit maximization objective:
Profit maximization does not mean profiteering. There is nothing wrong in this policy if
practiced over the long run. As a matter of fact, many of the enterprises strive to maximize their
profits. Maximization of profits should be on the total output and not on a single item. In such
case, consumers do not get dissatisfied since a particular group is not called for paying a high
price. While adopting this pricing objective, the marketers should attempt to project their image
in the market through sales promotion techniques. The marketers should watch the reactions of
the consumers. Profit maximization through price hikes should be sparingly used.
Cash flow objective:
One of the important objectives of pricing is to recover invested funds within a stipulated period.
Most of the time you will find different prices for the cash and credit transactions. Generally, you
find lower prices for the cash sales and high prices for the credit sales. But this pricing objective
could be implemented with good results only when the firm has monopoly in the market.
Product line promotion objective:
Product line means a group of products that are related either because they satisfy similar needs
of different market segments or because they satisfy different but related needs of a given market
segment. While framing the product line, the marketer may also include such goods, which are
not popular. The intention of the marketer is to push through all the goods without any
discrimination. Thus, the ultimate objective is to increase the overall demand of the goods. In
this pricing objective, equal prices are adopted for the entire product line.
Survival objective:
Perpetual existence of the business over a period is the indication of the sound financial position
of the enterprise. All organizations will have to meet expected and unexpected, initial and
external economic losses. These enterprises have to pool up the resources to meet all the
contingencies through appropriate pricing strategies. Price is use to increase sale volume to level
up the ups and downs that come to the organization.
Pricing Policy
CHAPTER SUMMARY
The simplest way to set price is through uniform pricing. At the profit-maximizing uniform price, the
incremental margin percentage equals the reciprocal of the absolute value of the price elasticity of
demand. The most profitable pricing policy is complete price discrimination, where each unit is

29. priced at the benefit that the unit provides to its buyer. To implement this policy, however, the
seller must know each potential buyer’s individual demand curve and be able to set different prices
for every unit of the product.
The next most profitable pricing policy is direct segment discrimination. For this policy, the seller
must be able to directly identify the various segments. The third most profitable policy is indirect
segment discrimination. This involves structuring a set of choices around some variable to which
the various segments are differentially sensitive. Uniform pricing is the least profitable way to set a
price.
A commonly used basis for direct segment discrimination is location. This exploits a difference
between free on board and cost including freight prices. A commonly used method of indirect
segment discrimination is bundling. Sellers may apply either pure or mixed bundling.
KEY CONCEPTS
ard (FOB)
red pricing
ination cost including freight (CF)
segment bundling
ation cannibalization
direct segment discrimination
© 2001, I.P.L. Png & C.W.J. Cheng 1 Chapter 9: Pricing Policy

30. GENERAL CHAPTER OBJECTIVES
1. Analyze uniform pricing and understand its limitations relative to price discrimination.
2. Understand that cost-plus pricing fails to maximize profit.
3. Analyze complete price discrimination and its informational requirements.
4. Analyze direct segment discrimination and its implementation and informational requirements.
5. Explain how location can be used as a basis for direct segment discrimination.
6. Analyze indirect segment discrimination and its implementation and informational requirements.
7. Explain how bundling serves to effect indirect segment discrimination.
8. Explain how the discriminating variable should be set.
9. Appreciate the hierarchy of pricing policies in terms of profitability and information requirement:
(i) complete price discrimination; (ii) direct segment discrimination; (iii) indirect segment
discrimination; and (iv) uniform pricing.
NOTES
1. Uniform pricing.
(a) Uniform pricing: a pricing policy where a seller charges the same price for every unit of the
product.
(b) Profit maximizing price (incremental margin percentage rule): a price where
the incremental margin percentage (i.e., price less marginal cost divided by the price) is
equal to the reciprocal of the absolute value of the price elasticity of demand. This is the
rule of marginal revenue equals the marginal cost.
i. Price elasticity may very along a demand curve, marginal cost changes with scale
of production. The above procedure typically involves a series of trials and errors
with different prices.
ii. Intuitive factors that underlie price elasticity: direct and indirect substitutes,
buyers’ prior commitments, search cost.
(c) Price adjustments following changes in demand and cost.
i. To maximize profits, a seller should consider both demand and costs.

31. ii. A seller should adjust its price to changes in either the price elasticity or the
marginal cost.
iii. It must consider the effect of the price change on the quantity demanded.
iv. If demand is more elastic (price elasticity will be a larger negative number), the
seller should aim for a lower incremental margin percentage, and not necessarily
a lower price, and likewise,
© 2001, I.P.L. Png & C.W.J. Cheng 2 Chapter 9: Pricing Policy

32. v. If demand is less elastic, the seller should aim for a higher incremental margin
percentage, and not necessarily a higher price.
vi. A seller should not necessarily adjust the price by the same amount as a change
in marginal cost.
(d) Special notes.
i. Only the incremental margin percentage (i.e., price less marginal cost divided by
the price) is relevant to pricing.
(1). Contribution margin percentage (i.e., price less average variable cost
divided by the price) is not relevant to pricing.
(2). Variable costs may increase or decrease with the scale of production,
and hence, marginal cost will not be the same as average variable cost.
ii. Setting price by simply marking up average cost will not maximize profit.
Problems of cost plus pricing:
(1). In businesses with economies of scale, average cost depends on scale,
but scale depends on price. It is a circular exercise.
(2). Cost plus pricing gives no guidance as to the markup on average cost.
(e) Limitations of uniform pricing (incremental margin percentage rule).
i. The inframarginal buyers do not pay as much as they will be willing to pay. A
seller could increase its profit by taking some of the buyer surplus.
ii. Economically inefficient quantity of sales. By providing the product to everyone
whose marginal benefit exceeds marginal cost, the seller could earn more profit.
2. Price discrimination. Pricing policy where a seller sets different incremental margins on
various units of the same or similar product.
(a) To earn a higher incremental margin from buyers with higher benefit, and a smaller margin
from buyers with lower benefit.
3. Complete price discrimination: the pricing policy where a seller prices each unit of output
at the buyer’s benefit and sells a quantity where the marginal benefit equals the marginal cost.
(a) All the buyer surplus is extracted. Every buyer is charged the maximum she is willing for pay
for each unit.

33. (b) Economically efficient quantity: all the opportunity for additional profit through changes in
sales is exploited.
(c) Extracts a higher price for units that would be sold under uniform pricing and extends
sales by selling additional units that would not be sold.
© 2001, I.P.L. Png & C.W.J. Cheng 3 Chapter 9: Pricing Policy

34. (d) Requires information about each potential buyer’s entire individual demand curve.
4. Direct segment discrimination: The pricing policy where a seller charges a different
incremental margin to each identifiable segment (with uniform pricing within each segment). A
segment is a significant group of buyers within a larger market.
(a) Profit maximizing price: set prices so that the incremental margin percentage of each
segment equals the reciprocal of the absolute value of that segment’s price elasticity of
demand; i.e., applies the rule for uniform pricing to determine the profit maximizing
prices for each segment.
(b) When marginal cost is increasing, any change in price for one segment that affects sales will
affect (a) marginal cost, and (b) the incremental margin percentage for the other
segment. Accordingly, the seller must conduct the trial and errors search for the prices to
both segments at the same time.
(c) A seller can discriminate on the basis of a buyer’s location.
i. Free on board (FOB) price is a price that does not include delivery.
(1). FOB pricing ignores the differences between the price elasticities of
demand in various markets.
(2). The differences among prices at various locations equal the differences
in costs of delivery.
ii. Delivered pricing is the pricing policy where the seller’s price includes delivery. A
cost including freight (CF) price is one that includes delivery.
(1). The seller can implement direct segment discrimination, aim for
different incremental margin percentages in each market, and obtain
higher profit.
(2). The differences among prices at various locations are the result of the
different incremental margin percentages and the different marginal
costs of supplying the various markets, and may be larger or smaller
than the costs of delivery.
(d) Requirements.
i. Must directly identify the members of each segment. The identifiable buyer
characteristic must be fixed.
ii. Must prevent buyers from reselling the product among themselves.

35. (1). Generally, resale of services is more difficult than resale of goods, hence
there is more price discrimination in services than goods.
© 2001, I.P.L. Png & C.W.J. Cheng 4 Chapter 9: Pricing Policy

36. (2). Sellers can limit resale of goods by restricting warranty service to the
location of purchase.
(e) Limitations. For each segment, same limitations as uniform pricing.
5. Indirect segment discrimination: Pricing policy where a seller (who cannot directly
identify the customer segments) structures a choice for buyers so as to earn different
incremental margins from each segment.
(a) Profit maximizing price.
i. There is no simple rule to find the profit maximizing prices.
ii. Buyers might substitute among the various choices. Accordingly, the seller must
analyze how changes in the price of one product affect the demand for other
choices, and set the prices of all products at the same time. The seller must not
price any product in isolation.
(b) Requirements.
i. Buyers must be differentially sensitive to some variable that the seller can
control. The seller then uses this variable to structure a set of choices that will
discriminate among the segments.
ii. Buyers must not be able to circumvent the differentiating variable. The seller
must strictly enforce all conditions of sale to prevent switching.
iii. Cannibalization occurs when the sales of one product reduce the demand
for another with a higher incremental margin.
(1). Mitigate cannibalization by degrading the quality of the low margin
product.
(c) Less profitable than direct price discrimination.
i. Products provide less benefit than those with direct discrimination.
ii. Involves relatively higher costs.
iii. Leakage: indirect discrimination relies on various segments to voluntarily
identify themselves through the structured choice. But consumers in one
segment may buy the item aimed at another segment