A simple looking but important task in the marketing of goods relates to designing the label to be put on the package. The label may vary from a simple tag attached to the product (such as in case of local unbranded products like sugar, wheat, pulses, etc.) indicating some information about the quality or price, to complex graphics that are part of the package, like the ones on branded products (say the graphic of Boat and Patwar on the package of a popular brand of After Shave Lotion or of a lady offering a pen to solicit the views of the users, on the label of a detergent powder). Labels are useful in providing detailed information about the product, its contents, method of use, etc. The various functions performed by a label are as follows:
- Describe the Product and Specify its Contents: Let us look at some of the labels of the products used by us in our day to day life. The label on the package of a local tea company describes the company as ‘ Mohini Tea Company, an ISO 9001:200C Certified Company’; a popular brand of Prickly Heat Powder describes how the product provides relief from prickly heat and controls bacterial growth and infection, giving caution forbidding its application on cuts and wounds. Package of fast food products like ready to eat Dosa, Idli or Noodles, describes the procedure of cooking these products; the Package of a toothpaste brand lists the ‘Ten Teeth and Gum Problems’, which the product claims to fight with its Complete Germicheck Formula’; the Package of a brand of Coconut Oil describes the product as pure coconut oil with Heena, Amla, Lemon and specifies how these are good for Hair. Thus, one of the most important functions of labels is to describe the product, its usage, cautions in use, etc. and specify its contents.
- Identification of the Product or Brand: The other important function performed by labels is to help in identifying the product or brand. For example, the brand name of and product, say Biscuits or Potato Chips imprinted on its package helps us to identify, from a number of packages, which one is our favorite brand. Other common identification information provided by the labels include name and address of the manufacturer, net weight when packed, manufacturing date, maximum retail price, and Batch number.
- Grading of Products: Another important function performed by labels is to help to grade the products into different categories. Sometimes marketers assign different grades to indicate different features or quality of the product. For example, a popular brand of Hair Conditioners comes in different categories for different hair, say for ‘normal hair’ and for other categories. Different type of tea is sold by some brands under Yellow, Red and Green Label categories.
- Help in Promotion of Products: An important function of the label is to aid in the promotion of the products. A carefully designed label can attract attention and give reason to purchase. We see many product labels providing promotional messages, for example, the pack of a popular Amla Hair Oil states, ‘Baalon mein Dum, Life mein Fun’. The label on the package of a brand of Detergent Powder says, ‘Keep cloth look good and your machine in top condition’. Labels play an important role in sales promotional schemes launched by companies. For example the label on the package of a Shaving Cream mentions, ‘40% Extra Free’ or package of a toothpaste mentioning, ‘Free Toothbrush Inside’, or ‘Save Rs15’.
- Providing Information Required by Law: Another important function of labeling is to provide the information required by law. For example, the statutory warning on the package of Cigarette or Pan Masala, ‘Smoking is Injurious to Health’ or ‘Chewing Tobacco is Injurious to Health’. Such information is required on processed foods, drugs and tobacco products. In case of hazardous or poisonous material, appropriate safety-warning needs to be put on the label. Thus, labels perform a number of important functions relating to communicating with the potential buyers and promoting the sale of the products. When a product is bought, some money is paid for it. This money represents the sum of values that consumers exchange for the benefit of having or using the product and is referred to as the price of the product. Similarly, money paid for the services such as fare for the transport service, premium for an insurance policy, and fee to a doctor for his medical advice represent the price of these services. Price may, therefore, be defined as the amount of money paid by a buyer (or received by a seller) in consideration of the purchase of a product or a service. Pricing occupies an important place in the marketing of goods and services by a firm. No product can be launched without a price tag or at least some guidelines for pricing. Pricing is often used as a regulator of the demand for a product. Generally, if the price of a product is increased, its demand comes down, and vice-versa. Pricing is considered to be an effective competitive weapon. In the conditions of perfect competition, most of the firms compete with each other on the basis of this factor. It is also the single most important factor affecting the revenue and profits of a firm. Thus, most marketing firms give high importance to the fixation of price for their products and services.
Factors Affecting Price Determination
There is a number of factors that affect the fixation of the price of a product. Some of the important factors in this regard are discussed below:
- Product Cost: One of the most important factors affecting the price of a product or service is its cost. This includes the cost of producing, distributing and selling the product. The cost sets the minimum level or the floor price at which the product may be sold. Generally, all marketing firms strive to cover all their costs, at least in the long run. In addition, they aim at earning a margin of profit over and above the costs. In certain circumstances, for example, at the time of introducing a new product or while entering a new market, the products may be sold at a price, which does not cover all the costs. But in the long run, a firm cannot survive unless at least all its costs are covered. There are broadly three types of costs: viz., Fixed Costs, Variable Costs, and Semi Variable Costs. Fixed costs are those costs, which do not vary with the level of activity of a firm say with the volume of production or sale. For example, the rent of a building or salary of a sales manager remains the same whether 1000 units or 10 units are produced in a week. Those costs which vary in direct proportion with the level of activity are called variable costs. For example, the costs of raw material, labor and power are directly related to the number of goods produced. Let us say if the cost of wood for manufacturing one chair comes to Rs.100 the cost of wood for 10 chairs would be Rs. 1000. Obviously, there will be no cost of wood if no chair is produced. Semi variable costs are those costs that vary with the level of activity but not in direct proportion with it. For example, compensation of a salesperson may include a fixed salary of say Rs. 10,000 plus a commission of 5 percent on sales. With an increase in the volume of sales, the total compensation will increase but not in direct proportion with the change in the volume of sales. Total Costs are the sum total of the fixed, variable and semi-variable costs for the specific level of activity, say the volume of sales or quantity produced.
- The Utility and Demand: While the product costs set the lower limits of the price, the utility provided by the product and the intensity of demand of the buyer sets the upper limit of price, which a buyer would be prepared to pay. In fact, the price must reflect the interest of both the parties to the transaction—the buyer and the seller. The buyer may be ready to pay up to the point where the utility from the product is at least equal to the sacrifice made in terms of the price paid. The seller would, however, try to at least cover the costs. According to the law of demand, consumers usually purchase more units at a low price than at a high price. The price of a product is affected by the elasticity of demand for the product. The demand is said to be elastic if a relatively small change in price results in large changes in the quantity demanded. Here numerically, the price elasticity is greater than one. In the case of inelastic demand, the total revenue increases when the price is increased and goes down when the price is reduced. If the demand for a product is inelastic, the firm is in a better position to fix higher prices.
- The extent of Competition in the Market: This is affected by the nature and the degree of competition. The price will tend to reach the upper limit in case there is a lesser degree of competition while under conditions of free competition, the price will tend to be set at the lowest level. Competitors’ prices and their anticipated reactions must be considered before fixing the price of a product. Not only the price but the quality and the features of the competitive products must be examined carefully, before fixing the price.
- Government and Legal Regulations: In order to protect the interest of the public against unfair practices in the field of price-fixing, the Government can intervene and regulate the price of commodities. The government can declare a product as an essential product and regulate its price. For example, the cost of a drug manufactured by a company having a monopoly in the production of the same comes to Rs 20 per strip of ten and the buyer is prepared to pay any amount for it, say Rs 200. In the absence of any competitor, the seller may be tempted to extort the maximum amount of Rs 200 for the drug and intervene to regulate the price. Usually, in such a case, the Government does not allow the firms to charge such a high price and intervene to regulate the price of the drug. This can be done by the Government by declaring the drug as an essential commodity and regulating its price.
- Pricing Objectives: Pricing objectives are another important factor affecting the fixation of the price of a product or a service. Generally the objective is stated to be maximise the profits. But there is a difference in maximising profit in the short run and in the long run. If the firm decides to maximize profits in the short run, it would tend to charge the maximum price for its products. But if it is to maximize its total profit in the long run, it would opt for a lower per-unit price so that it can capture a larger share of the market and earn greater profits through increased sales. Apart from profit maximization, the pricing objectives of a firm may include: (a) Obtaining Market Share Leadership: If a firms objective is to obtain larger share of the market; it will keep the price of its products at lower levels so that greater number of people are attracted to purchase the products; (b) Surviving in a Competitive Market: If a firm is facing difficulties in surviving in the market because of intense competition or introduction of a more efficient substitute by a competitor, it may resort to discounting its products or running a promotion campaign to liquidate its stock; and (c) Attaining Product Quality Leadership: In this case, normally higher prices are charged to cover high quality and high cost of Research and Development. Thus, the price of a firm’s products and services is affected by the pricing objective of the firm.
- Marketing Methods Used: Price fixation process is also affected by other elements of marketing such as distribution system, quality of salesmen employed, quality and amount of advertising, sales promotion efforts, the type of packaging, product differentiation, credit facility and customer services provided. For example, if a company provides free home delivery, it has some flexibility in fixing prices. Similarly, the uniqueness of any of the elements mentioned above gives the company competitive freedom in fixing prices of its products.