Rajagopal. Marketing Dynamics: Theory and Practice

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Marketing Dynamics: Theory and Practice

its market share intact. The above discussed situations are some of the probable market situations

which require strategic pricing for the mutual gains of the company and consumers.

Company can always protect its price and market share by various means. In case of escalating

costs of the resources, process, inputs, packaging and other components the company can strategically

respond to the high costs or increasing demand without raising the prices of its goods and services.

As such the company may look into the following possibilities:

• Shrinking the volume of the product

• Substituting low cost material in packaging

• Rationalizing the product process

• Reducing overheads and curtsey promotion

• Creating new economy brands of the goods and services

Best response to the market situations varies largely. Hence, a company should always develop

alternative strategies and analyze the marketing-mix in detail. The bundling pricing strategy is also an

important strategy being used by many companies in the competitive environment. This strategy may

be defined as an inclusion of extra margin in the price to cover a variety of cascading price functions

and services which are required to sell and maintain the products in the long run in the spatial and

temporal markets. This pricing strategy may be implemented to generate extra revenues to cover the

anticipated expenses of providing services and maintaining the product and to generate revenues for

supporting after-sales service personnel. The price bundling strategy also helps to establish a

contingency fund for unanticipated happenings and developing an ongoing relationship with the customer.

This strategy is ideally suited for technologically sophisticated products that are susceptible to

rapid technological obsolescence because these products are generally sold in systems and usually

require the following:

• Extra technical sales assistance,

• Custom design and engineering concept for the customer,

• Peripheral equipment and applications,

• Training of the customer’s personnel, and

• A strong service/maintenance department offering prompt responses and solutions to

customer problems.

Implementation of this strategy would yield results in keeping the asset in an acceptable condition

for resale or release and generate positive cash flow. The price bundling strategy would provide

instant information on changing customer needs and also helps in increasing the sales due to “total

package” concept of selling because customers feel they are getting their money’s worth.

OTHER PRICING MODALITIES

Export pricing is affected by the price destination which determines as who will pay the price-the

final consumer, independent distributors, a wholly owned subsidiary, a joint venture organization or

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someone else. The nature of the product whether it is raw or semi-processed material, components,

finished or largely finished products or services or intangible property like patents, trademarks, formulas

etc. also affect the export pricing in a country. Besides, the export pricing in a country is affected by

the currency used for billing which reveals the currency of the purchaser’s county, the seller’s home

country currency, or a leading international currency. The price destination is an important consideration

since different destinations present different opportunities and problems. For example, pricing to sell

to a government may require special procedures and concessions not necessary in pricing to other

customers.

Determination of transfer prices in multinational companies is an important issue because a

substantial proportion of international exchanges consists of transactions between a parent corporation

and its affiliates. The transfer pricing refers to the pricing of goods or services among units within

the corporation. It serves as a measure of the economic performance of profit centers within the

enterprise. It differs from market price, which measures exchanges between a company and the

outside world, for the net effect of transfer pricing is borne by the same organization. There has to be

a price paid for the products shipped between units of the same organization when the shipment

crosses national borders so that the correct duties and related fees can be paid. However, since the

transfer prices directly affect the amount of purchases in the cost accounting of a foreign subsidiary,

they have a direct influence on the subsidiary’s financial performance.

STRATEGY FOR PRICE LEADERSHIP

Price-leadership strategy prevails in competitive market environment. The leading firm then makes

pricing moves that are duly acknowledged by other members of the industry. Thus, this strategy

places the burden of making critical pricing decisions on the leading firm; others simply follow the

leader. The leader is expected to be careful in making pricing decisions. A faulty decision could cost

the firm its leadership because other members of the industry would then stop following its footsteps.

For example, if in increasing prices, the leader is motivated only by self-interest; its price leadership

will not be emulated. Ultimately the leader will be forced to withdraw the increase in price. The

price-leadership strategy is a static concept. The major factors that influence the price leadership

include:

• Substantial share of the industry’s production capacity

• Large market share of the products and brands in the market

• Domination in the product class or consumer segment

• Cost effective production and distribution strategy

• Strong distribution system, perhaps including captive wholesale outlets

• Good customer relations

• An effective market information system that provides analysis of the realities of supply

and demand

• Sensitivity to the price and profit needs of the rest of the industry

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• A sense of timing to know when price changes should be made, and

• Effective product line financial controls, which are needed to make sound price leadership

decisions

In an environment where growth opportunities are adequate, companies would rather maintain

stability than fight each other by means of price wars. Thus, the leadership concept works out well in

this case. In the auto industry, General Motors is the leader, based on market share. Usually, the

leader is the company with the largest market share. The leadership strategy is designed to stave off

price wars and “predatory” competition that tend to force down prices and hurt all parties. The

leaders chastise companies that deviate from this form through discounting or shaving. Price deviation

is quickly disciplined.

NON-PRICE FACTORS

Factors other than price may be important in analyzing buying situations. Buyers may be willing to

pay a premium price to gain other advantages or, be willing to forgo certain advantages for lower

prices. Other important factors besides price that may be important are quality, uniqueness, availability,

convenience, service, and warranty. In an attempt to recover from intense price competition, fast

food chains are marketing value menus of higher-priced items. These value strategies include the

quality of the food, user friendly service, and attractive dining facilities. For example, McDonald’s

advertising message, “What you want is what you get,” emphasizes the concept of value. Value

mapping is a useful technique for analyzing how buyers perceive the offerings of different brands.

One approach is to first develop the map based on managers’ opinions, followed by obtaining value

perceptions from a sample of consumers.

Certain buying situations may reduce the importance of price in the buyer’s choice process. The

price of the product may be a minor factor when the amount is small compared to the importance of

the use. Examples include infrequently purchased electric parts for home entertainment equipment,

batteries for appliances, and health and beauty aids during a vacation. The need for important but

relatively inexpensive parts for industrial equipment is another situation that reduces the role of price

in the buyer’s purchase decision. Maintenance personnel to repair production equipment use quick

metal, an adhesive produced by Loctite Corporation. At less than $20 a tube, the price is not a major

concern since, one tube will keep an expensive production line operating until a new part is installed.

AN OVERVIEW ON PRICING STRATEGY

Pricing strategy is of high importance to the functional and policy management levels of a company.

Pricing decisions are primarily affected by factors, such as pricing objectives, cost, competition, and

demand that are difficult to articulate and analyze. There are two principal pricing strategies for new

products, skimming and penetration. Skimming is a high-price strategy; penetration strategy sets a

initial price to generate volume. Three strategies for established products were discussed about

maintaining the price, reducing the price, and increasing the price. A flexible pricing strategy provides

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leverage to the company in terms of borrowing the time and commitment both from market to market

and from product to product line-pricing strategy, which is directed toward maintaining a balance

among products offered. The leasing strategy constitutes an alternative to outright sale of the product.

The bundling strategy is concerned with aging products and associated services together. Price-

leadership strategy is required in competitive market environment to outperform the rivals, where

one company in an industry emerges as a leader and sets the pricing strategy to build market share.

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REFERENCES

Rajagopal, “Marketing Management: Text and Cases,” Delhi, Vikas Publishing House, 2000.

Simon, Hermann, and Martin Fasfnacht : “Price Bundling,” European Management Journal, Vol.11,

December 1993, pp. 403-411.

Simon, Hermann, and Eckhard Kughe :, “The European Pricing Time Bomb,” European Management

Journal, Vol.10, June 1992, pp. 136-145.

Gijbrechts, Els : “Prices and Pricing Research in Consumer Marketing: Some Recent Developments,”

International Journal of Research in Marketing, Vol. 10, No.2, June 1993, pp. 115-151.

Monroe, Kent B. : Pricing: Making Profitable Decisions, New York McGraw-Hill, 1990.

Nagle, Thomas T. : The Strategy and Tactics of Pricing, Englewood Cliffs, NJ: Prentice-Hall, 1987.

Rao, Vithala. “Pricing Models in Marketing ,” in Handbooks in Operation Research and

Management Science: Marketing, Joshua Eliashberg and Gary L. Lilien, eds. Amsterdam: North-

Holland, 1993, pp. 517-552.

Simon, Hermann : Price Management, Amsterdam: North-Holland, 1989.

Haywood Klien : “Illinois Bell Faces New Environment as Era of Competitive Pricing Nears,” The

Wall Street Journal, 31 December 1981: Vol. 9.

Robert J. Dolan : “How Do You Know When the Price is Right?” Harvard Business Review,

September-October 1995: 174-183.

Stuart U. Rich : “Price Leaders: Large Strong but Cautious about Conspiracy,” Marketing News, 25

June 1982: Vol. 11.

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Case 4.1

THE AIR CARGO COMPETITION

The Runway

DHL was commissioned in 1969 to serve American Exporters with cost effective and quick

delivery of documents across the countries in the world. It had first started sending documents by air

to Honolulu from San Francisco. Over the years the DHL has spread its wings in 223 countries

having its headquarters at Brussels. The DHL operates in India as the Express Division of Airfright

Ltd. (AFL) established in 1945, having about US$ 90 million turnover

in the international market.

AFL is knows as leader shipment services in the US$ 89 million organized sector express industry, of

which the international business segment is estimated to be US$ 58 million while the rest belongs to

the domestic market. DHL has invested about US$27 million in information and communication,

infrastructure, and manpower during the past four years in India to set-up its roots with a vision to

capture the growing international business in the country. In this service marketing sector the DHL

has laid greater emphasis on infrastructure and logistics management in India for improving the

service conditions of the company. Despite some operational odds the DHL stands first in the country

among the existing cargo operators. It has marked a growth of 30 percent in the Indian market on an

average per annum since 1992-93 and has marked the turnover of US$ 48 million during 1995-96.

The closest competitors of DHL which stand at the second and third positions in the market are Blue

Dart with a turnover of US$ 25.6 million and Elbee with a turnover of US$ 21.8 million respectively.

AFL was commissioned to serve to the import needs of TATA for expanding industrial network in

India. In 1978 AFL and DHL were in the international alley by signing the contract for 10 years and

later renewed it in 1988 for an indefinite period.

Taking Off

Business move of DHL has been designed to cater a special category of exporters in India. This

courier company began selling services and later shifted its focus on packages with the development

of fax and e-mail devices to international destinations. This category may be explicitly called as small

exporters operating in large number. DHL spends about US$ 490 million annually on air freighting of

goods weighing nearly 3,00,000 tones of each 500 kilogram consignment on an average to and from

India. Of this the potential express fright segment estimated about ten thousand tones assembled of

about 2,00,000 pieces of 50 Kilogram each in the jumbo packs. The jumbo box was later designed

lighter to weigh 25 kilogram as it was an ideal weight for an individual to lift without exerting himself.

6 The financial data originally reported in the company documents are in Indian currency and accounting

system. These figures have been converted into the US dollars for the convenience of understanding.

Such conversions may give the approximate values.

7 Kohli Vanita : The Flying Elephant, Advertising and Marketing, 8 (12), September 30, 1996, p 36

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Obviously, the data reveals that the DHL serves to the businessmen of small and medium category

looking for an international market link. The idea of jumbo packaging boxes was conceived from an

Australian experience but had been branded as jumbo by the office of DHL located at Singapore and

could establish its brand identity in the market. Further in view of the need of Indian cargo customers,

the jumbo junior boxes weighing up to 10 kilograms were introduced in May 1996 and their booking

has been doubled as compared to the jumbos. However, in international markets the smaller packaging

makes handling slightly complex due to time constraints and custom formalities. The DHL observed

that the Indian parcel market is highly segmented and needs a down the line business approach at

low cost.

Competitive Strategy

Courier services are more time loyal than brand loyal. In fact the price is paid for the time and

guarantee of delivery of the goods and documents than any other consideration. The DHL saw the

need of Indian exporters for dispatching samples, small shipments, time and fashion sensitive goods

and found that if they were not delivered on time the business hand in distress. Hence the price was

the consideration but DHL took in view of high volume low margin to hook-up the Indian courier

market. DHL has put the service charges reasonably lower as compared to the other international

courier agencies. The profit margin of DHL is realized from two areas- firstly, from the old customers

and secondly from the volume of cargo. The US based DHL office uses the same infrastructure to

move a packet of 100 kilogram as it would do for sending a document. Hence, the packets weighing

500 gm and above have the built-in cost of infrastructure and handling. DHL’s focus area is South-

East Asia while there are other courier services existing for the European countries and USA.

In terms of size and network the DHL India is ahead of competitors but its revenues are lower

as compared to its counterparts in the international market. DHL operates in 223 countries while

FedEx (Federal Express, international partner of Blue Dart Express) does its business in 211 countries

of Europe and the US. Similarly the UPS, a division of Elbee operates in 200 countries with major

focus in the US. The revenue is highest of UPS $21 billion followed by FedEx ($9.4 billion) and DHL

($4 billion) in 1995. The employee turnover of DHL is about $ 3.68 million as compared to $2.36

million of Elbee. DHL believes in wider area of operation to establish brand image and business roots

in the international market. The right price is the price which no competitors can cross down. The

DHL strategy is based on service efficiency at lower expenses in the international market. The door

delivery service is another advantage which added to the performance of the company and the

Jumbo Box became a high value brand in India.

Perspectives

There are two prominent areas to be developed in the cargo and courier services- door delivery

and uninterrupted logistics. The communication network should be built strongly through the latest

available techniques like internet and super highways. DHL pools the need of warehousing for

smooth distribution of cargo to the individual destinations and provides logistic support through its

Express Logistics Centers (ELCs). It would be possible in developing nations because of availability

of labor at low cost for the logistics functions like assembling, sorting, billing and delivery. However,

a different strategy needs to be looked for the developed countries due to high labor costs. In the

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context of liberalization, there exists greater threat of new entrants in this field by 2000 AD. Hence,

the strong concept selling in the target markets would help growing the brand image and public

opinion.

Issues for Discussion

Above case illustrates the international portfolio of a company, which has segmented its market

and clientele. It has been enjoying the significant market share within its area of operation but is not

far away from the threat of international giants in the field of service marketing. Despite the efforts

of DHL to be the first in the row of cargo and courier companies, there remain some issues for

discussion in-depth. They are:

• Is the pricing strategy adopted by DHL sustainable in long run ?

• What should be the strategy-mix for expanding the market to other customer segments

spread over globally?

• What should be the size of cargo and documents for global delivery approach?

• Why should DHL operate in domestic market in India when it could exploit more

opportunities in the international market?

• What should be strategy for concept selling and mass advertisement?

• How can DHL become the brand leader in the international market?

• How can the communication and logistics networking are done? Can this type of

strategic alliance work efficiently?

A manager should also think of the prolific areas of investing money in future from the corporate

angle. The time and cost involvement in handling more global accounts and its impact on the profit

bowl are the major concerns before the company.

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Case 4.2

‘CRIMSON NECTAR’ BLOWS-UP IN BOARDROOM :

A Case of Building Marketing Policy of a New Generation Product

Innovation by definition will not be accepted at first. It takes repeated attempts, endless

demonstrations, monotonous rehearsals before innovation can be accepted and internalized by

an organization. This requires “courageous patience.”

Warren Bennis

Decision to develop new products and push them in the market is usually based on either

ambition or anxiety. Ambitious companies note that sales of solutions win fatter margins than

sales of products and generate longer and more lucrative customer contracts, provide access to

new markets, and even help procure a more favorable press. Anxious ones fear rapidly

commoditizing core-product markets, pricing pressure from increasingly savvy buyers, and the

appearance of aggressive new intermediaries. The companies need to look more carefully before

leaping into solutions. They ought to be sure that what they are offering really is a solution—that

they have correctly assessed the degree of integration, customization, or both, required to turn a

bundle of products into a truly integrated package. These two elements—customization and

integration—are more than just the glue that holds the package together: the way the elements

are integrated and the extent of customization define the added value for buyers and earn the

added financial benefits for sellers. The health drink like Crimson Nectar may achieve commercial

integration but offers no more than some incremental convenience to the customer, and certainly

not the customization or the technical integration needed to deliver value beyond what is to be

had by purchasing a hamburger, fries, and a soft drink individually. The restaurant thus can’t

charge a premium for its offering; on the contrary, it must provide a discount. Setting up a new

business unit to provide a growth strategy for this new market lengthened the sales cycle and

was expensive: selling, general, and administrative costs may rise to 14 percent, from 9 percent.

Is it a healthy sign for a company to go ahead with the new products? This case discusses

further on this issue.

8 This case has been developed by Dr. Rajagopal, Professor of Marketing, Business Division, ITESM,

Mexico City Campus, Mexico 14380 DF (E-mail :

rajagopal@itesm.mx )

This case has been written as the basis for class discussion rather than to illustrate either effective or

ineffective handling of an administrative situation of the company. November 2003.

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CONSUMPTION TRENDS OF NON-ALCOHOLIC BEVERAGES

Despite comprising 20% of the non-alcoholic beverage market, fruit juices and juice drinks lag behind

carbonated beverages and bottled water. Those two segments, however, are facing changes

themselves, changes that could propel the fruit juice and juice drinks category. Water and fruit juices

have the perception of healthfulness. Recent bottled waters have incorporated new flavors and

functions, blurring the line between fruit juices, isotonic and water beverages. The growth in bottled

water segment and decline in carbonated beverages segments could mean a promising future for

juices. Common wisdom has led the bottled water segment to new heights, as consumers have

embraced the message of drinking eight 8-oz. servings of water daily. An extension of this philosophy

could easily boost the juice and juice drinks market.

Nonetheless, sales of fruit juices and juice

drinks dropped 2%—from US $10.8 billion in 2001 to US $10.5 billion in 2002. Juices account for

60% of sales, the remainder going to juice drinks. They have a high penetration of the U.S. consumer

market, so the potential for future growth appears to be limited. In fact, Mintel projects less than 1%

growth from 2002 to 2007, though this could be higher by “increasing per capita value” through more

product introductions, and convincing consumers that juices are a convenient beverage. Heineken ,

the world’s No.3 brewer, with US $11 billion a year in sales, can no longer take for granted the

strengths that have made its squat green bottle the envy of the business. It has been observed that

the US $367 billion world beer market is changing. Beer consumption is declining in the USA and

Europe. Advertising and packaging are becoming more daring, in a bid to capture the young 20’s

segment. However, in the times of changing preference to the non-alcoholic beverages the success

of enhancing the scope of alcoholic beverages like beer is no longer guaranteed.

Consumers having preference for carbonates beverages across the globe are moving to healthier

drinks such as bottled water and fruit/vegetable juices and manufacturers are looking into other

alternatives to sustain growth in carbonates. Non-cola carbonates are perceived as healthier than

cola variants, and flavoured non-cola carbonates sourced from local fruits such as Guaraná (one of

the Brazilian exotic fruits) have become a growth point for major manufacturers in Latin America.

Investment in developing and marketing exotic fruit flavoured drinks has been the natural move for

soft drinks manufacturers, already constricted by the dominance of Coca-Cola and PepsiCo within

the cola carbonates market. While the Brazilians are crazy about Guaraná, the Venezuelans’ own

local non-cola carbonates success story is a carbonated malt drink. Venezuelans consume a “malta”,

or malt, as an alternative to other cold beverages - malts are considered as nutritious and refreshing

option since their main ingredients are derived from plants. Total malt carbonates brands together

account for more than 70% of off-trade sales of other non-cola carbonates in Venezuela. Malt

products are mainly produced by local beer producers. Domestic beer companies manufacture malts

because they are able to produce and distribute these products with significant economies of scale

using the same umbrella brands for both their beer and malt offerings. Furthermore, as advertising of

alcoholic drinks is not allowed on broadcast media such as radio and public television, beer producers

tend to use malta as a way to increase recognition and awareness of their beer brands. Malta brands

9 Mintel International Group : Report on “Fruit Juice & Juice Drinks Market” , Chicago , 2002 Web site: