THE MARKETING PROCESS

1. The marketing process involves

a. Analyzing marketing opportunities
b. Choosing target markets
c. Formulating marketing strategies
d. Planning the marketing program and mix
e. Managing the marketing effort

The underlying premise of Theory of Constraints is that organizations can

be measured and controlled by variations on three measures: throughput,
operating expense, and investment. Throughput is money (or goal units)
generated through sales. Investment is money the system invests in order
to sell its goods and services. Operating expense is all the money the
system spends in order to turn the investment into throughput.

The five focusing steps

Theory of Constraints is based on the premise that the rate of goal achievement is
limited by at least one constraining process. Only by increasing flow through the
constraint can overall throughput be increased. [1]

Assuming the goal of the organization has been articulated (e.g., "Make money now
and in the future") the steps are:

1. Identify the constraint (the resource or policy that prevents the

organization from obtaining more of the goal)
2. Decide how to exploit the constraint (get the most capacity out of the
constrained process)
3. Subordinate all other processes to above decision (align the whole
system or organization to support the decision made above)
4. Elevate the constraint (make other major changes needed to break the
constraint)
5. If, as a result of these steps, the constraint has moved, return to Step 1.
Don't let inertia become the constraint. [3]

The five focusing steps aim to ensure ongoing improvement efforts are centered
around the organization's constraints. In the TOC literature, this is referred to as the
"Process of Ongoing Improvement" (POOGI).

Constraints

A constraint is anything that prevents the system from achieving more of its goal.
There are many ways that constraints can show up, but a core principle within TOC is
that there are not tens or hundreds of constraints. There is at least one and at most a
few in any given system. Constraints can be internal or external to the system. An
internal constraint is in evidence when the market demands more from the system
than it can deliver. If this is the case, then the focus of the organization should be on
discovering that constraint and following the five focusing steps to open it up (and
potentially remove it). An external constraint exists when the system can produce
more than the market will bear. If this is the case, then the organization should focus
on mechanisms to create more demand for its products or services.

Types of (internal) constraints

• Equipment: The way equipment is currently used limits the ability of

the system to produce more salable goods / services.
• People: Lack of skilled people limits the system. Mental models held
by people can cause behaviour that becomes a constraint.
• Policy: A written or unwritten policy prevents the system from making
more.

The concept of the constraint in Theory of Constraints differs from the constraint that
shows up in mathematical optimization. In TOC, the constraint is used as a focusing
mechanism for management of the system. In optimization, the constraint is written
into the mathematical expressions to limit the scope of the solution (X can be no
greater than 5).

Please note: Organizations have many problems with equipment, people, policies, etc.
(A breakdown is just that - a breakdown - and is not a constraint in the true sense of
the TOC concept) The constraint is the thing that is preventing the organization from
getting more Throughput (typically, revenue through sales).

Buffers

Buffers are used throughout Theory of Constraints. They often result as part of the
EXPLOIT and SUBORDINATE steps of the five focusing steps. Buffers are placed
before the governing constraint, thus ensuring that the constraint is never starved.
Buffers are also placed behind the constraint to prevent downstream failure to block
the constraint's output. Buffers used in this way protect the constraint from variations
in the rest of the system and should allow for normal variation of processing time and
the occasional upset (Murphy) before and behind the constraint.

Buffers can be a bank of physical objects before a work center, waiting to be

processed by that work center. Buffers ultimately buy you time, as in the time before
work reaches the constraint and are often verbalized as time buffers. There should
always be enough (but not excessive) work in the time queue before the constraint and
adequate offloading space behind the constraint.

Buffers are not the small queue of work that sits before every work center in a Kanban
system although it is similar if you regard the assembly line as the governing
constraint. A prerequisite in Theory of Constraints is that with one constraint in the
system, all other parts of the system must have sufficient capacity to keep up with the
work at the constraint and to catch up if time was lost. In a balanced line, as espoused
by Kanban, when one work center goes down for a period longer than the buffer
allows, then the entire system must wait until that work center is restored. In a TOC
system, the only situation where work is in danger, is if the constraint is unable to
process (either due to malfunction, sickness or a "hole" in the buffer - if something
goes wrong that the time buffer can not protect).

Buffer management therefore represents a crucial attribute of the Theory of

Constraints. There are many ways to do it, but the most often used is a visual system
of designating the buffer in three colours: Green (OK), Yellow (Caution) and Red
(Action required). Creating this kind of visibility enables the system as a whole to
align and thus subordinate to the need of the constraint in a holistic manner. This can
also be done daily in a central operations room that is accessible to everybody.

[edit] Plant types

There are four primary types of plants in the TOC lexicon. Draw the flow of material
from the bottom of a page to the top, and you get the four types. They specify the
general flow of materials through a system, and they provide some hints about where
to look for typical problems. The four types can be combined in many ways in larger
facilities.

• I-Plant: Material flows in a sequence, such as in an assembly line. The

primary work is done in a straight sequence of events (one-to-one). The
constraint is the slowest operation.
• A-Plant: The general flow of material is many-to-one, such as in a
plant where many sub-assemblies converge for a final assembly. The primary
problem in A-plants is in synchronizing the converging lines so that each
supplies the final assembly point at the right time.
• V-Plant: The general flow of material is one-to-many, such as a plant
that takes one raw material and can make many final products. Classic
examples are meat rendering plants or a steel manufacturer. The primary
problem in V-plants is "robbing" where one operation (A) immediately after a
diverging point "steals" materials meant for the other operation (B). Once the
material has been processed by A, it cannot come back and be run through B
without significant rework.
• T-Plant: The general flow is that of an I-Plant (or has multiple lines),
which then splits into many assemblies (many-to-many). Most manufactured
parts are used in multiple assemblies and nearly all assemblies use multiple
parts. Customized devices, such as computers, are good examples. T-plants
suffer from both synchronization problems of A-plants (parts aren't all
available for an assembly) and the robbing problems of V-plants (one
assembly steals parts that could have been used in another).

For non-material systems, one can draw the flow of work or the flow of processes and
arrive at similar basic structures. A project, for example is an A-shaped sequence of
work, culminating in a delivered project.
[edit] Applications

The focusing steps, or this Process of Ongoing Improvement has been applied to
Manufacturing, Project Management, Supply Chain / Distribution generated specific
solutions. Other tools (mainly the "Thinking Process") also led to TOC applications in
the fields of Marketing and Sales, and Finance. The solution as applied to each of
these areas are listed below.

[edit] Operations

Within manufacturing operations and operations management, the solution seeks to

pull materials through the system, rather than push them into the system. The primary
methodology use is Drum-Buffer-Rope (DBR)[4] and a variation called Simplified
Drum-Buffer-Rope (S-DBR)[5].

Drum-Buffer-Rope is a manufacturing execution methodology, named for its three

components. The drum is the physical constraint of the plant: the work center or
machine or operation that limits the ability of the entire system to produce more. The
rest of the plant follows the beat of the drum. They make sure the drum has work and
that anything the drum has processed does not get wasted.

The buffer protects the drum, so that it always has work flowing to it. Buffers in DBR
have time as their unit of measure, rather than quantity of material. This makes the
priority system operate strictly based on the time an order is expected to be at the
drum. Traditional DBR usually calls for buffers at several points in the system: the
constraint, synchronization points and at shipping. S-DBR has a buffer at shipping
and manages the flow of work across the drum through a load planning mechanism.

The rope is the work release mechanism for the plant. Orders are released to the shop
floor at one "buffer time" before they are due. In other words, if the buffer is 5 days,
the order is released 5 days before it is due at the constraint. Putting work into the
system earlier than this buffer time is likely to generate too-high work-in-process and
slow down the entire system.

Supply chain / logistics

Please help improve this article by expanding it. Further information

might be found on the talk page. (January 2009)

The solution for supply chain is to move to a replenishment to consumption model,

rather than a forecast model.

• TOC-Distribution
• TOC-VMI (vendor managed inventory)

[edit] Finance and accounting

The solution for finance and accounting is to apply holistic thinking to the finance
application. This has been termed throughput accounting.[6] Throughput accounting
suggests that one examine the impact of investments and operational changes in terms
of the impact on the throughput of the business. It is an alternative to cost accounting.

The primary measures for a TOC view of finance and accounting are: Throughput (T),
Operating Expense (OE) and Investment (I). Throughput is calculated from Sales (S) -
Totally Variable Cost (TVC). Totally Variable Cost usually considers the cost of raw
materials that go into creating the item sold.

[edit] Project management

Critical Chain Project Management (CCPM) is utilized in this area.[7] CCPM is based
on the idea that all projects look like A-plants: all activities converge to a final
deliverable. As such, to protect the project, there must be internal buffers to protect
synchronization points and a final project buffer to protect the overall project.

[edit] Marketing and sales

While originally focused on manufacturing and logistics, TOC has expanded lately
into sales management and marketing. Its role is explicitly acknowledged in the field
of sales process engineering[8]. For effective sales management one can apply Drum
Buffer Rope to the sales process similar to the way it is applied to operations (see
Reengineering the Sales Process book reference below). This technique is appropriate
when your constraint is in the sales process itself or you just want an effective sales
management technique and includes the topics of funnel management and conversion
rates.[citation needed]

[edit] The TOC thinking processes

Main article: Thinking Processes (Theory of Constraints)

The Thinking Processes are a set of tools to help managers walk through the steps of
initiating and implementing a project. When used in a logical flow, the Thinking
Processes help walk through a buy-in process:

1. Gain agreement on the problem

2. Gain agreement on the direction for a solution
3. Gain agreement that the solution solves the problem
4. Agree to overcome any potential negative ramifications
5. Agree to overcome any obstacles to implementation

TOC practitioners sometimes refer to these in the negative as working through layers
of resistance to a change.

Recently, the Current Reality Tree (CRT) and Future Reality Tree (FRT) have been
applied to an argumentative academic paper [9].

[edit] Development and practice

TOC was initiated by Dr. Eliyahu M. Goldratt, who is still the main driving force
behind the development and practice of TOC. There is a network of individuals and
small companies loosely coupled as practitioners around the world. TOC is sometimes
referred to as "Constraint Management". TOC is a large body of knowledge with a
strong guiding philosophy of growth.

[edit] Criticism

Criticisms that have been leveled against TOC include:

[edit] Claimed Suboptimality of Drum-Buffer-Rope

While TOC has been compared favorably to linear programming techniques[10], D.

Trietsch from University of Auckland argues that DBR methodology is inferior to
competing methodologies. [11][12] Linhares, from the Getulio Vargas Foundation, has
shown that the TOC approach to establishing an optimal product mix is unlikely to
yield optimum results, as it would imply that P=NP [13].

[edit] Unacknowledged debt

Duncan (as cited by Steyn) [14] says that TOC borrows heavily from systems dynamics
developed by Forrester in the 1950s and from statistical process control which dates
back to World War II. And Noreen Smith and Mackey, in their independent report on
TOC, point out that several key concepts in TOC "have been topics in management
accounting textbooks for decades." [15]

People claim[citation needed] Goldratt's books fail to acknowledge that TOC borrows from
more than 40 years of previous Management Science research and practice,
particularly from PERT/CPM and JIT. A rebuttal to these criticisms is offered in
Goldratt's "What is the Theory of Constraints and How Should it be Implemented?",
and in his audio program, "Beyond The Goal". In these, Goldratt discusses the history
of disciplinary sciences, compares the strengths and weaknesses of the various
disciplines, and acknowledges the sources of information and inspiration for the
Thinking Processes and Critical Chain methodologies. Articles published in the now-
defunct Journal of Theory of Constraints referenced foundational materials. Goldratt
published an article[citation needed] and gave talks[16] with the title "Standing on the
Shoulders of Giants" in which he gives credit for many of the core ideas of Theory of
Constraints. Goldratt has sought many times to show the correlation between various
improvement methods. However, many Goldratt adherents often denigrate other
methodologies as inferior to TOC[citation needed].

Definition of Value-Added Activity?

A value added activity, simply put is any activity the customer would be happy to pay
for. in a factory process its anything that transforms raw materials towards that of the
final saleable product.... Determining the 'Value-Added' Activities of a Process .

Wnat is Value added concept?

It is the idea that at each stop along a chain of production or supply, something
contributes (adds) utility (value) to a good or service that results in the value of the
finished good being more... When looking at the value of the product or service, the
goal is to have the value of the end-product or service exceed the cost of producing
the product or providing the service. The cost of the product or service includes all
resources used to produce it (e.g., raw materials, labour, storage, transportation, and
overhead costs).

We need to examine each activity within the process and determine the value-added
assessment of the activity. The value added by an activity, in an accounting sense, is
simply:

(Value of the product after the activity)

minus (Value of the product prior to the activity).

The value added by an activity should be a positive value. Ideally, the value added by
the activity is equal to or greater than the costs incurred during the activity.

Value from the customer's point of view is independent of the cost to produce the
product or provide the service. It is based on the customer's expectations, as identified
by the effectiveness indicators for the process.

Value Add of the Activity

The value-add assessment of the activity identifies an activity as one of the following:

· a real-value-add (RVA) activity,

· a business-value-add (BVA) activity,
· a non-value-add (NVA) activity,

An activity is classified as RVA if it is effective. In other words, if the activity

directly contributes to satisfying the customer's expectations, it is a RVA activity.
Any activity which improves the customer's perception of the product or service is a
RVA activity. Production type activities are RVA activities (e.g., taking customer
orders, receiving materials, assembling materials, shipping).

BVA activities are those activities which satisfy business requirements, but add no
value from the customer's viewpoint (e.g., preparing financial reports, maintaining
human resources records, and ordering business supplies).

NVA activities are activities which do not enhance the customer's image of the
product or service and do not support the business process. If the activity could be
removed from the process, with no effect on the end-product or service, it is an NVA
activity. NVA activities, also referred to as waste activities, often indicate deficiencies
in the process design. These types of activities include storage, transportation,
approval, and inspection type activities.

How to Assess Value

When looking at activities in a process, we must determine if the activity is effective

and efficient. We must also determine if the activity can be improved to provide a
better product or service for the customer. Refer to the effectiveness indicators
selected for the process to determine how the activity rates on the effectiveness
indicator scale. Look at the efficiency indicators of the activity. Wide variances in the
efficiency (cost or times) of the activity can indicate problems in the activity. Analyze
the cost and times collected for the activity to determine the value added by the
activity versus the cost of the activity.

Begin by examining the process flowchart for the business process. Any triangles
(storage), round-ended rectangles (delays), large circles (inspection), fat arrows
(transport), or zigzagged arrows (transmission) should be examined very carefully. Do
these activities add value to the customer or to the business? How can they be
removed and still have the process flow smoothly? Activities can be grouped into four
categories:

STORAGE ACTIVITIES

What are Storage Activities

Storage activities are any step within the process where the product or work in
progress is delayed or is put into storage, either temporarily or long term. Storage
activities are identified as triangles on a process flowchart. Delays are identified as
round-ended rectangles on a process flowchart.

Value of Storage Activities

Storage activities add no value to the product in the customer's eyes. Storage activities
are not required to support the business process. The storage of the product (either
finished or work-in-progress) indicates problems in the design of the process, and the
organization's ability to anticipate supply and demand for the product.

Exceptions

Exceptions are cases where storage improves the product. For example, the storage of
wine improves the taste of the product and therefore, this storage activity adds value
to the product.

How to Eliminate Storage

To eliminate or reduce the storage activities in the process, the process must be
designed such that:

· production output can be varied, based on demand,

· bottlenecks in the process are eliminated,

· rework of defective components is eliminated,

· various departments involved in the process can synchronize their activities within
the related departments,

· unscheduled down-time of equipment is avoided,

· suppliers deliver on time.

TRANSPORTATION ACTIVITIES

What are Transportation Activities

Transportation activities are any step within the process where the product or work in
progress must be moved from one area or location to another. Transport activities are
identified as fat arrows on a process flowchart. Transmission activities are identified
as zigzagged arrows on a process flowchart.

Value of Transportation Activities

The transport of the product, within a business process, adds nothing to the product in
the customer's view and is not necessary to support the business process. The
movement of work-in-progress is probably due to inefficient process design. The goal
in designing the process is to minimize the amount of movement required in the
process.

Exceptions

The delivery of the product to the customer, when expected and/or required by the
customer, is a value-added activity. The customer may be an internal customer (e.g.,
the showroom or store) or an external customer (e.g., end consumer of the goods).

How to Eliminate Transportation

The transportation activities in the process can be minimized or eliminated by:

· combining activities in the process,

· locating people closer together physically,
· automating some manual activities in the process.

A geographic flowchart of the business process may help uncover inefficiencies in the
physical design of the business process.

INSPECTION ACTIVITIES

What are Inspection Activities

Inspection activities are any step within the process where the product or work in
progress is stopped for review, inspection or approval. Inspection activities are
identified as large circles on a process flowchart.
Value of Inspection Activities

Organizations may view inspection type activities as valuable activities. However,

from the customer's viewpoint it is wasteful. The activity only verifies that the
product meets the specification. The need to inspect the product indicates the
organization's inability to produce a good product. Inspection activities may indicate a
flaw in the design of the business process.

Most approval processes are also considered wasteful from the customer's point of
view. This is especially true of activities that review and then approve another
person's work (e.g., supervisor approval required for a cashier to accept a customer
cheque over a specified threshold).

Exceptions

Exceptions are cases where a contract specifies inspection. Vendors may specify that
the supplier must verify the critical components of their product.

How to Eliminate Inspection

Inspection activities within the process can be eliminated through better quality
inputs. If the supplier can supply defect-free material, the need for inspection is
reduced.

Proper training of employees can eliminate the need for inspection. Employees who
understand how to do the job and are properly trained to do the job, make a better
quality product, thereby decreasing the need to inspect their work.

Processes can be designed to reduce or eliminate errors. If it is impossible to make

errors, there is no need to inspect the product. Often when errors occur in a process,
inspection steps are added to the process to review the output. When the process is
corrected to prevent the error from occurring, often the review step remains.

Empowering the Employee

Employee empowerment can reduce the number of review and approval activities in
the business process and increase the effectiveness of the business process. By
pushing the decision-making power down to lower levels within the company,
employees dealing directly with the customers have the authority to make important
decisions concerning customer service. The benefits of moving decision-making
activities from managers to workers include fewer delays, lower overhead costs,
better customer response, and satisfied and motivated employees.

When approval is a value-add activity within the business process, it should only be
necessary to obtain one approval. Each review activity and each approval signature
must add value to the product or service. If a second approval signature is required,
there must be a financial justification for the approval. For example, the approval
policy may be designed to require one or more approvals for expenditures over certain
threshold amounts. This ensures that:
· Proper attention is given to the approval by all parties required to sign. If an approval
or multiple approvals are required for all expenditures, the approving person(s) may
not pay close attention to the approval decisions, due to the volume of paperwork that
must be completed on a regular basis.

· Small expenditures are processed in a timely manner, without introducing delays in

the business process (e.g., it should not be necessary to get approval to order a pen or
stationery).

· There is limited risk, to the organization, of unauthorized spending of large sums of

money.

PRODUCTION ACTIVITIES

What are Production Activities

Production activities are the make and do steps within the process. Production
activities are identified primarily as rectangles on a process flowchart. They also
include decisions in the process, represented as diamonds on the process flowchart.

Value of Production Activities

Many production activities contribute to the value of the product or support the
business process. Any real-value-add (RVA) or business-value-add (BVA) activity is
a value-add activity. In value-add activities, there may be possibilities for improving
the efficiency and effectiveness of the activity.

Exceptions

There are some production activities that are non-value-add (NVA) activities, such as
rework. These activities exist because an error is introduced into the process at some
earlier point and must now be corrected.

How to Eliminate Production Waste

Some indicators of problems in the process that may contribute to NVA activities or
inefficiencies in value-add activities, are:

· the amount of setup time required,

· the amount of storage space required,
· the distance work-in-progress must be moved by employees,
· the amount of rework done,
· the amount of unscheduled down-time,
· the extreme high or low values in efficiency measures of the activity or process
(cycle time or cost).

Rework activities can be eliminated if the root cause of the rework can be found and
corrected. If the error was never introduced into the process, there would be no need
to correct it.
Often there is a great deal of time spent on BVA activities. Can these activities be
done more efficiently, perhaps by a cheaper resource or through automation? Are
these activities really necessary for the process? Do they indicate a flaw in the design
process? For example, activities in the process for coordinating departments,
expediting work, and maintaining records, point to a need to redesign the process.

The functional flowchart may also provide some insight into the process. NVA
activities are common in business processes that cross departments within the
organization. The business process may incur delays due to poor communication
between departments or unbalanced production lines.

Tips and Hints

The aim for productivity improvement is to reduce the BVA activities and to
eliminate the NVA activities. Often attempts are made to improve the efficiency of
the waste activity rather than to eliminate the waste. For example, rather than
improving the inspection activity so that it can be completed more efficiency, the
process should be re-designed to eliminate the need to inspect the product.

By removing waste activities, the cost of the product to the organization is reduced,
because the unnecessary resources are not used. The cycle time of the process is also
reduced when waste activities are removed. Reducing the cycle time of the process
improves customer service, because the product is available to the customer sooner.

When looking for ways to reduce BVA activities and to eliminate NVA activities, be
creative and innovative. The current environment should not be considered a
constraint.

Star - Wal mart (high market share and everyone wants cheap **** aka high growth
business)

Question Mark - Browsers Garage (small garage) - small market share, but big
demand for car repairs and car safety check-ups

Cash Cow - a business that is not growing but makes lots of profit in the meantime
(Pepsi)

Dog - a business with low market growth rate and small market share (small town
theatre maybe)

Target cost pricing

These concepts are supported by the four basic steps of Target Costing: (1) Define
the Product (2) Set the Price and Cost Targets (3) Achieve the Targets ..

Target costing is a pricing method used by firms. It is defined as "a cost management
tool for reducing the overall cost of a product over its entire life-cycle with the help of
production, engineering, research and design". A target cost is the maximum amount
of cost that can be incurred on a product and with it the firm can still earn the required
profit margin from that product at a particular selling price.

In the traditional cost-plus pricing method materials, labor and overhead costs are
measured and a desired profit is added to determine the selling price.

What is target costing?

Target costing involves setting a target cost by subtracting a desired profit margin
from a competitive market price.[1] [2]

A lengthy but complete definition is "Target Costing is a disciplined process for

determining and achieving a full-stream cost at which a proposed product with
specified functionality, performance, and quality must be produced in order to
generate the desired profitability at the product’s anticipated selling price over a
specified period of time in the future." [3]

This definition encompasses the principal concepts: products should be based on an

accurate assessment of the wants and needs of customers in different market
segments, and cost targets should be what result after a sustainable profit margin is
subtracted from what customers are willing to pay at the time of product introduction
and afterwards. These concepts are supported by the four basic steps of Target
Costing: (1) Define the Product (2) Set the Price and Cost Targets (3) Achieve the
Targets (4) Maintain Competitive Costs.

To compete effectively, organizations must continually redesign their products ( or

services) in order to shorten product life cycles. The planning, development and
design stage of a product is therefore critical to an organization's cost management
process. Considering possible cost reduction at this stage of a product's life cycle
(rather than during the production process) is now one of the most important issues
facing management accountants in industry.

Here are some examples of decisions made at the design stage which impact on the
cost of a product.

1. The number of different components

2. Whether the components are standard or not
3. The ease of changing over stoo

Japanese companies have developed target costing as a response to the problem of

controlling and reducing costs over the product life cycle.

Market-Based Pricing
Market-based pricing emphasizes price as a variable element of the marketing mix. Its
concern is how it can affect the company’s position in the marketplace. Value is
included in this notion of price, and the underlying marketing theme is to set prices at
‘what the market will bear’.
Profit maximization is natural in marketing, but it is not feasible to do this on all
products/services amongst all customer groups. Companies can employ many pricing
tactics that might promote sales yet reduce margins in the short term. The general
objective might be profit maximization, but the company’s product mix should be
examined in terms of individual items, and price tactics applied individually, rather
than singular pricing decisions applying to the complete range. Prices should adopt a
customer focus, and this will determine whether the product is bought or not.
Although the assumption behind market-based pricing techniques is that prices are a
major factor in achieving competitiveness, this can also be attained through non-price
competition. Market share can be improved through customer care, the delivery of
value for money, quality and high levels of service (response, delivery and after-sales
service).
The main market-based pricing techniques are described below.

Penetration pricing
Penetration pricing involves setting prices at a sufficiently low level to make them
attractive to the mass market. The aim is to achieve high initial sales, which are
maintained during the life cycle of the product. An associated aim is to deter
competitors. Penetration pricing is particularly appropriate for products where unit
cost reductions can be achieved through initial mass production.
Setting-up costs are usually high and initial development costs are recovered over a
long period. The task of marketing is to ensure that customers retain interest during
the life of the product.

Skimming
A skimming approach adopts a high-price strategy, charging what the market will
bear. The aim is to ’skim the cream off the market’. This policy is particularly
attractive to a company with a new and unique product. When the cream has been
skimmed, prices can be progressively reduced.

Perceived value pricing

Perceived value pricing determines prices from assumptions made about the beliefs
that consumers have of the value of the product to them. These assumptions may be
founded on market research aimed at establishing in buyers’ minds values about the
basic product and the various special features in the product that appeal to them.
If the company charges more than the buyer-recognized value, sales will suffer.
Revenue may also fall below attainable levels if prices are lower than the perceived
value.

Psychological pricing
Many consumers use price as an indicator of quality. Prestige pricing uses higher
prices to promote the idea of value and status.
Price levels can be set just below a round figure, for example £9.99 rather than
£10.00. These pricing points, as they are called, persuade people to think that the price
is in a lower range than they expected.
Value for money can be emphasized by the effective presentation of discounts and
free offers. The perceived value of offering one item free if four items are purchased
may have a greater impact than a 20 per cent discount offered over the whole five
purchases.

Promotion strategies.
A successful product or service means nothing unless the benefit of such a service can be
communicated clearly to the target market. An organisations promotional strategy can consist
of:

Advertising: Is any non personal paid form of communication using any form of mass
media.

Public relations: Involves developing positive relationships with the organisation media
public. The art of good public relations is not only to obtain favorable publicity within the
media, but it is also involves being able to handle successfully negative attention.

Sales promotion: Commonly used to obtain an increase in sales short term. Could involve
using money off coupons or special offers.

Personal selling: Selling a product service one to one.

Direct Mail: Is the sending of publicity material to a named person within an organisation.
There has been a massive growth in direct mail campaigns over the last 5 years. Spending on
direct mail now amounts to £18 bn a year representing 11.8% of advertising expenditure
( Source: Royal Mail 2000). Organisations can pay thousands of pounds for databases,
which contain names and addresses of potential customers.

Direct mail allows an organisation to use their resources more effectively by allowing them to
send publicity material to a named person within their target segment. By personalising
advertising, response rates increase thus increasing the chance of improving sales. Listed
below are links to organisation who's business involves direct mail.