Principles of functioning of financial markets, how everything works

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The structure of the financial market and its functions

World financial market: structure, functions, market participants

What is the world financial market and what is its architecture? What are financial market participants, their interaction and functions in the system? Economic indicators of financial markets.

Why do we need to study theory? The term “financial market” cannot be called a necessary one, a novice trader should learn first of all. But nevertheless, it is necessary to understand the structure of the financial market. The knowledge of how the financial market is arranged and how its participants interact with each other can suggest traders new investment opportunities, help reduce costs and minimize risks. Without knowing the theory, it is impossible to become a professional practical trader. Spend 10 minutes of your time on this review. I hope that it will be useful and helpful for you!

When reading about financial markets and how you can earn money from them, do you know what you are actually dealing with? Banks, insurance funds, pension funds – the list of structures that make up the financial market is long enough. The article will provide better understanding of the financial market is structured and operates. From this article, you will learn:

What types of financial markets exist

Who participate in financial markets and how they interact with each other

What instruments (assets) are the subject of interaction between market participants.

What functions financial markets perform

Trader’s keystones or all in due time

If someone tells you that understanding the “financial market” term, its structure and functions are essential to every trader, don’t believe them. That’s not right. However, we cannot say that this information is unnecessary. In the beginning we don’t study an A to Z of Forex. We endeavor to acquire necessary skills independently. Only when we’ve accumulated some experience by trial and error, we turn ourselves to general knowledge. It may be a webinar, a trading course, educational articles or A to Z books about Forex. According to the level of our expertise, we choose this or that kind of information. If a novice benefits from reading about 2 types of market analysis – fundamental and technical, – a more experienced trader will be interested in learning about the underpinnings of the underpinnings, that huge thing the currency market – his/her workplace- is a part of. As they say, all in due time.

The structure of the financial market

All the national and international markets make up the financial market. It incorporates banks, pension/insurance/currency funds and many other economic institutions that help accumulate and redistribute money.

Being a complex system, the financial market has a multilevel structure including 5 market segments:

1. Foreign exchange market (Forex) or Currency market

It is the market in which the subject of its participants interaction is the currency and everything that is related to its equivalent. Derivative instruments may also serve as trading instruments (for example, currency CFDs). Depending on the form, the settlement there can be cash and non-cash; according to the transaction term, the market can be current (spot) and derivatives currency markets. Derivatives market contracts can be:

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  • Forward contracts. A forward contract is customized between two parties at an agreed price; intermediaries of the transaction are commercial banks, there are no guarantees.
  • Futures feature pricing, based according to the movement of currency exchange rates , intermediary is an exchange, guarantees are the reserve deposit.
  • Options and currency swaps.

Currency transactions can be performed both on the exchange and on the over-the-counter market (Forex Interbank Market, Forex).

2. Credit market

This market suggests a redistribution of spare funds from those who have them to those who do not have them. Unlike the investment market, the credit market is more complex (it has a three-tier structure) and has tighter requirements for participants to fulfill their obligations.

Credit market Levels:

  • The central bank and commercial banks. Here, the central bank acts as a regulator. By means of loans, the central bank regulates the money supply, supports banks, facing temporary troubles, keeps the liquidity of banking system and covers the cash gaps.
  • Commercial banks and their clients
  • Credit relations between legal entities

3. Insurance market

It is a separate segment, as insurance companies are one of the main investors at the global level. Providing various kinds of insurance services, they accumulate capital, which they can temporarily invest in deposits, metals, and the stock market.

4. Investment market

It is a system based on free competition and partnerships between agents of investment activity. It has much in common with the stock market, where the funds are invested in securities, but it can also take the form of capital investments, fixed assets, etc. Simply put, the investment market provides investing money in any asset for the purpose of subsequent earnings over a period of time due to an increase in an asset price or dividend payments.

5. Stock market: securities

  • It suggests a complex interaction between the market participants in terms of issuance and turnover of securities. Securities can be traded on both stock exchanges and beyond them. On the exchanges, you can trade only enlisted assets, i.e. which meet certain requirements. Assets can be:
  • Stocks. They can be common stocks and preferred stocks. Holders of common stock typically have voting privileges, whereas holders of preferred stock may not. However, preferred stockholders receive a fixed dividend from the company, while common shareholders may or may not receive one, depending on the decisions of the board of directors.
  • Bonds. Bonds can be (issuer – company), municipal (issuer – local authorities), state, international (for example, Eurobonds). Bonds can also be preferential (the holder will be among the first to receive money during the liquidation of the company) and subordinated (more profitable, but riskier). There is a gradation on the coupon rate and yield to maturity.
  • Indices – consolidated instruments consisting of a basket of securities, which reflect average price statistics for the sector or for the industry in general.
  • Derivatives. They are derived instruments, which make up a multi-level system of securities.
  • ETF securities. An ETF is an index fund whose shares (units) are traded on an exchange. The fund’s investment structure can be anyone, ranging from securities of companies in a particular sector to a diversified portfolio, including stocks, gold, etc. Unlike shares of investment funds, you can perform any operations with ETF shares, as well as with securities.

As you see, the currency market only accounts for one-fifth of the financial market.

There is another, more general, but the more exact classification of the world market: the currency market, the stock market and the commodity market. The first one includes all operations with any currency (including cryptocurrency), the second one includes everything related to securities, the third one provides trading metals, oil, goods and services, including non-conventional investments (antiques, art, etc.). All three markets are connected by credit, investment and other relationships.

The Forex market often combines different financial markets. For example, you can trade various CFDs, such as metals, oil, shares and stock indexes at LiteForex, thus starting your career in the financial markets.

Functions of the financial market

The financial market plays an important role in our modern civilized society. It aims to mobilize capital, distribute it between industries, control and maintain the reproduction process and improve the efficiency of the economic system in general. Main functions of the financial market, carried out by its participants are following:

  • Facilitate efficient relationships between all market participants, ranging from private individuals and individual investors, to large institutional investors.
  • Supervise and regulate the processes held in the financial system: regulation of the money supply, compliance control for established rules by market participants, licensing, development of legal provisions.
  • Mobilize the capital and allocate it so that it is used most efficiently and generates added value
  • Minimize risks, including fraud prevention (anti-money-laundering). Ensure transparent pricing and avoiding price manipulation.
  • Provide market liquidity
  • Ensure privacy and transparency of the transactions made
  • Provide necessary information

The activities of the financial market are based on national banks’ liabilities to control currency rates and set interest rates. Stock and currency markets, as well as commercial banks, are directly connected with the development of the financial assets market. The securities market is the most interesting segment of the financial market in terms of investment profitability.

Participants of the financial market

Each of us is a financial market participant in a way. Each of us works somewhere, making an own contribution in GDP rate, buys something, so indirectly affecting inflation rate and the level of consumer prices. Someone becomes an investor, buying a foreign currency or collectible coins, or investing in bank deposits, investment companies, using loans.

But still, economic science classifies the participants of the financial market, based on its segment. It suggests that the financial market, in a simplified form, is a relationship between two categories of participants: sellers and buyers. The third category include intermediaries who are directly involved in transactions, providing assistance, facilitation and guarantees. The same agent of the financial market can act simultaneously as the seller, and the buyer, and the intermediary.

1. Currency market:

  • Sellers. The major sellers are the state and banks. The state that sells a currency through authorized bodies performs a regulatory function in this way. Sellers are also companies engaged in foreign economic activity (selling foreign-currency earnings) and individuals.
  • Buyers. All agents, being sellers, can act as buyers.
  • Intermediaries. This category may include commercial

2. Credit market:

  • Borrowers. At the international level, borrowers are states and the ratio of external debt to GDP is considered one of the key statistical indicators of the state of the country’s economy. At the country level, borrowers are individuals and companies, local governments, etc. A good example of a multi-level structure of the credit market is the US mortgage system, where banks issued securities for mortgages to accumulate new capital for subsequent lending.
  • Lenders. These market participants possess spare capitals and wish to increase it: individuals, investing their funds in deposits that will be subsequently directed to lending, buyers of debt securities (insurance, pension, investment funds). In a way, any investor can be called a lender, since he/she gives spare money in order to gain interest rates and invest the income in development. The state can be also referred to as a lender, which creates liquidity and distributes the money to borrowers through the central bank.
  • Intermediaries. They are all who participate organization of the money distribution: banks, brokers, dealers, managing investment companies. Insurance and pension funds can be also attributed to intermediaries, accumulating and distributing capital.

The credit market is closely related to investment and stock markets. For example, corporate bonds are both a tool for raising money and security at the same time. Government bonds are one of the favourite investment options with the lowest risk for investment funds.

3. Insurance market:

  • Insurers. These are companies, appropriately licensed to provide insurance services. There are insurance companies of open type (provide services to all market participants), captive insurers (being wholly owned and controlled by its insureds) and reinsurance risk management companies.
  • Insureds. Individuals, companies, institutions, buying insurance services to minimize the risks.
  • Intermediaries. There are no intermediaries, transactions are carried out directly between the insurer and the insured.

All markets are closely intertwined. As it has been mentioned above, insurance companies are also participants in the investment market. It also includes insurance instruments (for example, various swaps) used by agents of the stock market as well.

4. Investment market. Everyone, who invests money in a particular asset, is an investor. The intermediaries can be banks, exchanges, different kinds of funds and so on.

5. Stock market:

  • Securities issuers. These include companies and organizations that issue certain securities: stocks, bonds, etc. When issuing, issuers agree that they must fulfill all the requirements specified (agreed) at the time of issue.
  • Investors. They are all those who buy securities in order to generate income. There are strategic (buying a majority stake) and minority (making up a portfolio, buying the securities in order to only generate income).
  • Intermediaries. Stock exchanges, banks, underwriters, ranking agencies, auditors and other participants, engaged in facilitation for issuance and placement of securities.

The classification, described above, can be grouped in the following way:

  • The state and the central banks (regulating and supervising organizations). Managing the biggest volume of the capital, these agents mostly perform supervising and regulation function.
  • Regulators (regulatory and supervisory institutions). Establishments that don’t take direct part in transactions (that is why they can’t be referred to intermediaries), but the perform a controlling function. The supervisory function is also carried out by the central bank and the state government, but it can also be a separate institution, like a self-regulatory organization (SRO).
  • Financial Services Companies (organizations providing financial market services and financial intermediaries). These are institutions involved in organizational work: currency, stock and commodity exchanges, brokers, underwriters, auditors, depositories, registrars, clearing and consulting companies.
  • Banks (financial intermediaries). They are intermediaries involved in the capital distribution, market regulation and supervision for the established rules compliance.
  • Legal entities (lenders, investors, borrowers). The most extensive group of participants: companies engaged in the placement of clients’ pension savings, investment services, insurance companies, hedge funds, trust management companies, brokers, dealers, individual lending organizations, companies engaged in any type of financial activity, participating the in money turnover.
  • Individuals (lenders, borrowers, investors): traders, speculators, individual asset managers, long-term investors, and just ordinary people, as it was mentioned at the beginning of the part.

Important indicators of the financial market – a note for trader

For efficient trading and a perfect grasp of Forex affairs, a trader needs to know the indicators that help assess the situation in the financial market. These indicators include periodic releases of macro- and microeconomic data on the market state intended for more accurate forecasts and productive analysis. GDP, unemployment and inflation levels, currency or securities growth or fall rates also belong to those indicators. As a rule, experienced traders actively use economic calendars freely provided by brokers. I recommend you take up this habit if you haven’t yet. There is a brief description of some most important indicators, recorded in the economic calendar and some tips on how to analyze them:

  • Interest rate. It is one of the major economic tools to manage the money supply, thereby adjusting the inflation. It the interest rate gives loans to commercial banks. A higher interest rate increases interest rates for credits and deposits and so encourages consumers to invest. This, in its turn, reduces the inflation rate. The influence of raising the interest rate depends on a country’s economy. For advanced economies (for example, the USA), a higher interest rate increases the exchange rate of the national currency. In less developed countries, raising the interest rate can be seen as a try to curb stagnation and so increase investors’ interest.
  • Non-Farm Payrolls. Report on the change in the number of jobs in the US non-farm sector. It is considered to be one of the most news reports, but its impact on the US dollar rate lasts a relatively short time (a few hours). It is released on the first Friday of the month at 1.30 p.m. GMT. In theory, the US dollar exchange rate will be influenced if the Non-Farm actual data deviates by more than 40,000 from the forecasts. In practice, much depends on the accompanying statistics and investors’ sentiment.
  • Consumer Price Index (CPI). It measures changes in the price level of a market basket of consumer goods and services purchased by households in the country. Changes in the CPI are used to assess price changes associated with the cost of living The index for the current year is analyzed, compared to benchmark (reference) indicator. The statistical base for calculation is recommended by IMF, EBRD, UN, but there is no single approach, each country has its own peculiarities of calculation. The calculation methodology can be based on Lowe index, Paasche and Laspeyres price indices. If the index declines it means that consumer purchasing power (real demand) also declines and can partially suggest higher inflation growth rate.

I think everything is clear about such indicators as GDP, inflation, unemployment: the better the indicator, the more positive is the sentiment of investors in the currency and stock markets.

An important point: the economic calendar is only an information complementary tool and it can in no way serve as the major tool to base trading strategies on. At the time of the news release, the market is especially volatile; therefore, the calendar is often used the other way around in order to exit trades.

If you are still willing to try trading on economic news, I offer you a few tips:

  • Compare the actual value with the forecast. If, for example, the GDP growth was 2%, compared to the forecast of 2.5%, it will have a negative influence on the market. Keep in mind, that the data can be revised.
  • Assess the chances for an event and investors’ expectations. For example, if the Fed is expected to hike the federal funds rate at the upcoming meeting, investors will consider it in advance and they won’t be any strong swings at the moment of the news release.
  • Compare the news importance with other factors. For example, while in quiet times, the release of statistics on US crude oil stockpile has a quite strong influence on the foreign exchange rates, as well as other trading instruments, then, during the peak of the US-China trade war, these data were hardly noticed.

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An Introduction to the Financial Markets

Make Financial Markets Work for You

What are the financial markets? It can be confusing because they go by many terms. They include capital markets, Wall Street, and even simply “the markets.” Whatever you call them, financial markets are where traders buy and sell assets. These include stocks, bonds, derivatives, foreign exchange, and commodities. The markets are where businesses go to raise cash to grow. It’s where companies reduce risks and investors make money.

  • Financial markets create liquidity that allows businesses to grow and entrepreneurs to raise money for their ventures.
  • They reduce risk by having information publicly available to investors and traders.
  • These markets calm the economy by instilling confidence in investors.
  • Investor confidence stabilizes the economy.

Types of Financial Markets

Most people think about the stock market when talking about financial markets. They don’t realize there are many kinds that accomplish different goals. Markets exchange a variety of products to help raise liquidity. Each market relies on each other to create confidence in investors. The interconnectedness of these markets means when one suffers, other markets will react accordingly.

The Stock Market

This market is a series of exchanges where successful corporations go to raise large amounts of cash to expand. Stocks are shares of ownership of a public corporation that are sold to investors through broker-dealers. The investors profit when companies increase their earnings. This keeps the U.S. economy growing. It’s easy to buy stocks, but it takes a lot of knowledge to buy stocks in the right company.

To a lot of people, the Dow is the stock market. The Dow is the nickname for the Dow Jones Industrial Average. The DJIA is just one way of tracking the performance of a group of stocks. There is also the Dow Jones Transportation Average and the Dow Jones Utilities Average. Many investors ignore the Dow and instead focus on the Standard & Poor’s 500 index or other indices to track the progress of the stock market. The stocks that make up these averages are traded on the world’s stock exchanges, two of which include the New York Stock Exchange (NYSE) and the Nasdaq.

The market depends on the perceptions, actions, and decisions of both buyers and sellers concerning the profitabilities of the companies being traded.

Mutual funds give you the ability to buy a lot of stocks at once. In a way, this makes them an easier tool to invest in than individual stocks. By reducing stock market volatility, they have also had a calming effect on the U.S. economy. Despite their benefits, you still need to learn how to select a good mutual fund.

The Bond Market

When organizations need to obtain very large loans, they go to the bond market. When stock prices go up, bond prices go down. There are many different types of bonds, including Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the U.S. economy functioning smoothly.  

It’s important to understand the relationship between Treasury bonds and Treasury bond yields. When Treasury bond values go down, the yields go up to compensate. When Treasury yields rise, so do mortgage interest rates. Even worse, when Treasury values decline, so does the value of the dollar. This makes import prices rise, which can trigger inflation.  

Treasury yields can also predict the future. For example, an inverted yield curve heralds a recession.

The Commodities Market

A commodity market is where companies offset their futures risks when buying or selling natural resources. Since the prices of things like oil, corn, and gold are so volatile, companies can lock in a known price today.   Since these exchanges are public, many investors also trade in commodities for profit only. For example, most investors have no intention of taking shipment of large quantities of pork bellies.

Oil is the most important commodity in the U.S. economy. It is used for transportation, industrial products, plastics, heating, and electricity generation. When oil prices rise, you’ll see the effect in gas prices about a week later. If oil and gas prices stay high, you’ll see the impact on food prices in about six weeks.   The commodities futures market determines the price of oil.

Futures are a way to pay for something today that is delivered tomorrow. They increase a trader’s leverage by allowing him or her to borrow the money to purchase the commodity.

The futures market removes some of the volatility in the U.S. economy. It allows businesses to control the future costs of the critical commodities they use every day.

Leverage can create outsize gains if traders guess right. It also magnifies the losses if traders guess wrong. If enough traders guess wrong, it can have a huge impact on the U.S. economy, actually increasing overall volatility.

Another important commodity is gold. It’s bought as a hedge against inflation. Gold prices also go up when there is a lot of economic uncertainty in the world. In the past, every dollar could be traded in for its value in gold. When the U.S. went off the gold standard, it lost this relationship to money. Still, many people look at gold as a safer alternative to cash or currency.


Derivatives are complicated financial products that base their value on underlying assets.   Sophisticated investors and hedge funds use them to magnify their potential gains. In 2007, hedge funds increased in popularity due to their supposed higher returns for high-end investors. Since hedge funds invest heavily in futures, some argued they decreased the volatility of the stock market and, therefore, the U.S. economy. The hedge fund investments in subprime mortgages and other derivatives caused the 2008 global financial crisis.

Even before this, hedge funds had demonstrated their risky nature. In 1997, the world’s largest hedge fund at the time, Long Term Capital Management, practically brought down the U.S. economy.

Forex Trading

Forex trading is a decentralized global market in which currencies are bought and sold. About $6.6 trillion were traded per day in April 2020, and 88% involved the U.S. dollar. Almost one-fourth of the trades are done by banks for their customers to reduce the volatility of doing business overseas. Hedge funds are responsible for another 11%, and some of it is speculative.  

This market affects exchange rates and, thus, the value of the dollar and other currencies. Exchange rates work on the basis of demand and supply of a nation’s currency, as well as of that nation’s economic and financial stability.

Functions of Financial Markets

Financial markets create an open and regulated system for companies to acquire large amounts of capital.   This is done through the stock and bond markets. Markets also allow these businesses to offset risk. They do this with commodities, foreign exchange futures contracts, and other derivatives.

Since the markets are public, they provide an open and transparent way to set prices on everything traded. They reflect all available knowledge about everything traded. This reduces the cost of obtaining information because it’s already incorporated into the price.

The sheer size of the financial markets provides liquidity. In other words, sellers can unload assets whenever they need to raise cash. The size also reduces the cost of doing business. Companies don’t have to go far to find a buyer or someone willing to sell.

Principles of marketing

Welcome to Principles of Marketing, made up of many business majors.

Marketing is defined as “the total of activities involved in the transfer of goods from the producer or seller to the consumer or buyer, including advertising, shipping, storing, and selling.”

An alternate definition is paraphrased from memory of an introductory business text is: Marketing is all activities conducted to prepare for sales. Sales is all activities required to close the deal. Shipping and customer satisfaction would be included in sales to avoid the customer from reversing or unclosing the deal.

Thus Marketing can be categorized as a branch of business as well as a social science. We buy goods (thus becoming the buyer/consumer) from a vendor (or producer/seller), creating a transaction. In the past, marketing involved traveling salesmen, while in modern times, marketing is more likely to involve television, the internet, and other forms of media bombardment.

As we progress in this age of technology it is vital for us to understand marketing and its place in the world. Understanding and applying the principles will be beneficial to the businessperson and the layperson.


What is Marketing? [ edit ]

Marketing refers to channeling the gap between service and product providers to service and product seekers. Also known as a way of satisfying needs. The Marketing Mix or the “4 Ps” are:

The concept of the “4 Ps” has been replaced by the concept of the “7 Ps” they are

These are employed to satisfy a target market or target demographic (the pool of potential customers).

  • Product: Procter and Gamble introduces a new toothpaste designed to taste good and fight cavities. Logo and packaging designed in bright colors to appeal to kids of elementary school age to encourage more tooth brushing.
  • Price: $2.00, and discounted by means of coupons
  • Promotion: television and radio commercials, magazine and newspaper ads, and a website; these use bright colors and happy music, perhaps an animated cartoon character for a fun and family-friendly attitude
  • Place (or distribution): Supermarkets, drugstores, discount stores such as Wal-Mart, the Internet has become an increasingly important place to conduct online shopping.
  • Mothers with kids who make toothpaste buying decisions for the family (advertising could be shown on children’s programming, promoting kids to ask parents to buy the toothpaste)

Creating utility [ edit ]

The American Heritage Dictionary defines utility as “the quality or condition of being useful”. Utility is further defined as any quality and/or status that provides a product with the capability to satisfy the consumer’s wants and needs. Marketing is responsible for creating most of a product’s inherent utility.

There are four basic types of utility:

  • Form utility: production of the good or service, driven by the marketing function. For example, Procter and Gamble turns raw ingredients and chemicals into toothpaste.
  • Place utility: making the product available where customers will buy the product. Procter and Gamble secures shelf space for the toothpaste at a wide variety of retailers including supermarkets and drugstores.
  • Time utility: making the product available when customers want to buy the product. The U.S. drugstore chain Walgreens has many locations open 24 hours a day, and since the 1990’s has placed most of their newer stores at major intersections.
  • Possession utility: once you have purchased the product, you have rights to use the product as intended, or (in theory) for any use you would like.

The fifth type of utility is often defined along with the above four types:

  • Image utility: the satisfaction acquired from the emotional or psychological meaning attached to products. Some people pay more for a toothpaste perceived to be more effective at fighting cavities and whitening teeth.

The exchange process [ edit ]

The exchange process is the process by which two or more parties give something of value to each other to satisfy the perceived needs. The marketer (a company like Procter and Gamble) offers goods and services desired by the market (the pool of potential customers). In return, the market (the customer) gives back something of value to the marketer, generally money. Both ends receive something of value in the exchange process. The marketer makes money and the customer receives goods, services, or ideas that satisfy their needs. The exchange process is the origin of marketing. The process creates utility.

For an exchange to occur:

  • Both parties must have something of value to exchange.
  • Both parties need to be able to communicate. Procter and Gamble (P&G), for example, must have money to purchase advertising space.
  • Both parties must be able to exchange. The toothpaste, in some cases, must be approved by the FDA in order for it to be sold. The customer must be able to buy the product with his or her money and have access to a retail store where the product is sold to be able to buy it.
  • Both parties must want to exchange.
  • At least two parties are needed for an exchange to occur.

Marketing Management Process [ edit ]

This consists of:

  • analyzing market opportunities,
  • selecting target markets,
  • designing marketing strategies,
  • planning marketing programs,
  • organizing, implementing and controlling the marketing effort.
  1. Analyzing marketing opportunities
    • Defining the market
    • Consumer assessment
    • Environmental assessment
    • Company resource assessment
    • Demand analysis and sales forecast
  2. Identifying Market Segments and Selecting Target Markets
    • Marketers set priorities for business opportunities, concentrating on market segments within which they expect to achieve the best overall economic return from their product or service. Market segmentation and target marketing are the processes used to isolate these opportunities. Market segmentation is the process of grouping customers based on their similarities
    • Market segmentation allows a company to:
      • Understand the different behavioral patterns and decision-making processes of different groups of consumers
      • Select the most attractive segments or customers the company should target
      • Develop a strategy to target the selected segments based on their behavior
  3. Developing marketing strategies
    • Positioning
    • Develop new product, test, and launch
    • Modification in the stages of product life cycle
    • Strategy choice depends on the strategy pursued by the firm
    • Consider changing global opportunities and challenges
  4. Planning marketing programs
    • Transforming strategy into programs
    • Managing Product Lines, Brands, and Packaging
    • Managing Service Businesses and Ancillary Services
    • Designing Pricing Strategies and Programs
    • Selecting and Managing Marketing Channels
    • Managing Retailing, Wholesaling, and Physical-Distribution Systems
    • Designing Communication and Promotion Mix Strategies
    • Designing Effective Advertising Programs
    • Designing Direct-Marketing, Sales-Promotion, and Public-Relations Programs
    • Managing the Salesforce
  5. Managing marketing efforts
    • Organizing resources
    • Implementation
    • Control – Annual control, Profitability control, Strategic control

Product Management [ edit ]

Product development means offering new or improved products for the present market. By knowing what the present market’s needs are, a firm may see ways to add or modify product features, create several quality levels, or add more types or sizes to better satisfy customers while seeking, also, to expand.

Product Management deals with bringing together all the strings that transform an idea into a product. “Product” does not refer to tangible goods only, intangible products like software also come under the category. A Product Manager (PdM) usually works with a number of teams and co-ordinates with various channels throughout the product development lifecycle. It all begins with an idea of a product. Now, this idea can either be a market/customer requirement or something completely new. There are usually three channels from where an idea can come from:

  1. Market / Customer – Sales teams talk to the customers and try to get their requirements. Product experts envision requirements that might be required in the future or that give the product a competitive edge.
  2. Product Roadmap – Product Roadmap is a prioritized list of features that need to be built for a specific product. The priority of features keep on changing and it is the sole responsibility of a PdM to make the decision which features should be taken up for development.
  3. Innovation – Innovation cells in firms deal with coming up with new ideas to make their product more exciting and competitive.

Once an idea is decided to be taken up for development, the PdM then elaborates on the feature requirements and develops documents like Product Requirements Document (PRD), Functional Specification Document (FSD), etc. These documents are shared with all the stakeholders who are required to sign-off the requirements/specifications. Once that is done, the lifecycle moves to the development stage. The PdM works very closely with the development and quality assurance teams and ensures that the teams are completely aware of what is to be developed and how users would interact with the product. After development is complete and quality checked, the product is ready to be released. Usually, this release does not go to the customers directly, it goes to the sales teams who, in turn, provide demonstrations to the potential customers. After sufficient validations and demonstrations of the features in “Sandbox”, the enhanced/new product is released to market.

The Product Life Cycle [ edit ]

Understanding the product life cycle is key to understanding how to market a product. Many marketing campaigns are won and lost because of knowledge of the product lifecycle. If understood, the product lifecycle will tell you how to market a product and how much money to spend.

The product life cycle is divided into four parts:

These parts of the cycle follow the curve you would normally expect, a long slow initial acceptance, a period of rapid growth, a long length of time where the product has fully saturated the market, and its eventual decline in obsolescence.

The introduction phase of the product lifecycle is the easiest to market, but the most resource and cost intensive. The target market is the early adopter. The problem in the early adopter is the most difficult consumer to convince. The early adopter seeks status. They crave new products, not because of usefulness, but sexiness. They want to feel this product they are buying into will bring them some amount of prestige among their constituents.

The question then is, how do you market to them? Ad and event intensive sales are probably the most useful. Ads should focus less on the feature-benefits and more on the emotional aspect of the product. One company that makes this distinction very clear in their advertisements is Apple Computers. When advertising for their personal computing products, they use the PC vs. Mac ads. These ads are entertaining and grab your attention, but focus mainly on the feature-benefit aspects of a product. The iPhone ads are very low on feature-benefits and high on the coolness factor.

Growth is the period when everyone knows your product, but they aren’t sure if they want to use it or not. Here it is important to stop focusing on the coolness of a product and start focusing on the features and benefits of a product. At this point, the early adopters have shown the world how cool the product is and how cool they are for having one. The rest of your market wants to know why it is they should get one. If they don’t see a real benefit, then they will move on to the next product.

Maturity is the least expensive segment of a product’s lifecycle. When a product has generally been accepted, and the market has reached its final penetration, it has reached this point. Your marketing techniques should focus on maintaining customers and customer satisfaction. Your advertisements can focus on what you can do for them while they keep using your product.

Decline is the most difficult segment for most companies. Decline requires a lot of soul-searching. If a company continues in the status quo, the product will decline and the company will continue to spend money on it. This is the recipe for disaster. A company has one of two paths it can take. Either, you can rebuild the product, or you must discontinue the product.

If the company wishes to revitalize a product, it usually does so in one of two ways. The first is nostalgia marketing. You remind the consumer about the product and that it was always there. The second is to refresh the product. You can create new promotional material, new packaging, new advertising or new features.

The process of rebuilding a product’s market is often not feasible because of obsolescence. If this is the case, the company shouldn’t just discontinue the product and leave the customer without replacement options. A well-designed marketing plan should inform customers of the end of the products life cycle, and move them onto another of the companies replacement products.

New Product Development [ edit ]

Every company must develop new products. New product development shapes the company’s future. A company can add new products through acquisition or development.

The acquisition route can take three forms:

  1. The company can buy other companies.
  2. It can acquire patents from other companies.
  3. It can buy a license or franchise from another company.

The development route can take two forms:

  1. The company can develop new products in its own laboratories; or
  2. It can contract with independent researchers or new-product development firms to develop specific new products.

Competition is strong and dynamic in most markets. So it essential for a firm to keep developing new products as well as modifying its current products-to meet changing customer needs and competitors’ actions.

Booz, Allen, and Hamilton have identified six categories of new products:

  1. New-to-the-world products
  2. New-product lines. New products that allow a company to enter an established market for the first time.
  3. Additional to existing product lines: New products that supplement a company’s established product lines (package sizes, flavor and so on.)
  4. Improvements and revisions to existing products: New products that provide improved performance or greater perceived value and replace existing products.
  5. Repositioning existing products that are targeted to new markets or market segmentation.
  6. Cost reduction: new products that provide similar performance at lower cost

An Organized New-Product Development Process is Critical Identifying and developing new-product ideas and effective strategies to go with them is often the key to a firm’s success and survival. New-product development demands effort, time and talent-and still the risks and costs of failure are high.

A new product may fail for many reasons. Most often, companies fail to offer a unique benefit or underestimate the competition. Specific reasons are: A high-level executive pushes a favorite idea thru’ in spite of negative market research findings.

  • The idea is good but the market size is over-estimated.
  • The product is not well designed.
  • The product is incorrectly positioned in the market, not advertised effectively or over-priced.
  • Development costs are higher than expected.
  • Competitors fight back harder than expected.

Several other factors hinder new-product development:

  • Shortage of important ideas in certain areas
  • Fragmented markets
  • Social and governmental constraints
  • Costliness of the development process
  • Capital shortages
  • Faster required development time
  • Shorter product life cycle

New Product Development Process [ edit ]

Is the idea worth considering?

Ideas might come from:

  • R & D
  • Top management employees
  • Customers
  • Competitors
  • Distributors
  • Suppliers
  • Research institutes

Is the product idea compatible with company objectives and strategies? Is the product idea compatible with company:

  • Strengths
  • Weaknesses
  • Objectives
  • Market trends
  • Rough ROI (Return on Investment) estimate

Ideas are evaluated against criteria; most are eliminated. Errors:

Concept Development and Testing

Can the company find a good concept for the product that consumers say they would try? Concept: Who will use the product? What primary benefit should the product provide? When will people consume? Concept testing is the way of testing new product concepts with a group of target consumers to find out if the concepts have strong consumer appeal. Concept testing can be presented symbolically or physically. New ideas are computer designed and developed. The company wants to obtain:

  • Reactions from customers
  • Rough estimates of cost
  • Sales and profits

Marketing Strategy Development

Can we find a cost-effective, affordable marketing strategy? Preliminary market strategy plan describe: • The target market, product positioning, and sales, share, and profit goals for the first few years. • Product price, distribution, and marketing budget for the first year. • Long-run sales and profit goals and the marketing mix strategy.

Evaluating proposal’s business attractiveness – Will this product meet the profit goal of the company? Management prepares sales, cost, and profit projections. As new information comes in, the analysis will undergo revision and expansion.

R&D or reengineering – developing physical product Prototype development and testing

Not all companies undertake market testing. New-to-the-market products, high risk, high investment cost influence market testing.

  • Have product sales met expectations?
  • Should the company send the idea back for product development (stage 6)?
  • How much market testing should be done?
  • What kind(s) of market testing?
  • How many test cities? Which cities?
  • Length of test?
  • What information?
  • What action to take?

Are product sales meeting expectations? Contracting to manufacture or build or rent a full-scale manufacturing facility. The company launching a new product must first decide on introduction timing, geographic strategy, target market prospects and introductory market strategy. When? (introduction timing) – First entry – Parallel entry – Late entry (due to the many problems) – Where? (geographic strategy) – single location, – a region, – the national market or – the international market To Whom? (target market prospects) – Determining initial distribution and promotion – Early adopters, heavy users, and opinion leaders How? (introductory market strategy) – Developing action plan for introducing the product – Critical path scheduling (CPS) can be used

MANAGING PRODUCT LIFE CYCLE Stages of Product Life Cycle • Introduction • Growth • Maturity • Decline

Introduction • Price: High • Quality: Low • Number of versions: Few • Number of competitors: Few • Intensity of Competition: Little • Advertising: High to introduce • Distribution: Little

Growth • Price: High and dropping • Quality: Low and growing • Number of versions: Few and increasing • Number of competitors: Few and growing • Intensity of Competition: Growing • Advertising: Still high to expand • Distribution: Growing

Maturity • Price: Dropping and stabilizing • Quality: High • Number of versions: Many • Number of competitors: Many/dropping • Intensity of Competition: High • Advertising: Stable • Distribution: Maximum

Decline • Price: Dropping • Quality: High • Number of versions: Dropping • Number of competitors: Dropping • Intensity of Competition: Depends • Advertising: Dropping • Distribution: Losing

Product and Product Mix [ edit ]

Product Planning refers to the systematic decision making related to all aspects of the development and management of a firms products including branding and packaging. A product is anything that can be offered to a market to satisfy a want or need. Each product includes a bundle of attributes capable of exchange and use. Products that are marketed include physical goods, services, experiences, events, persons, places, organizations, properties, information, and ideas. The marketing manager needs to understand how markets develop over time, in order better to plan and manage products, their life-cycles, and their marketing strategies.

Differences between Goods and Services o Goods are tangible. You can see them, feel them, touch them etc. o Services are intangible. The result of human or mechanical efforts to people or objects o Sales of goods and services are frequently connected, i.e. a product will usually incorporate a tangible component (good) and an intangible component.

Product Levels A product has five levels.

  1. Core benefits – The essential service or benefit that the buyer is buying. E.g. getting clean, rest and sleep, etc.
  2. Basic (generic) products – The basic product recognized as such. E.g. soap; room components – bed, bathroom, etc.
  3. Expected products – The set of attributes and conditions that the buyer normally expects in buying the product. E.g. smell, shape; clean bed, towel, quietness, etc.
  4. Augmented products – Additional services and benefits that the seller adds to distinguish the offer from competitors. E.g. anti-bacterial, moisturizing; fresh flowers, rapid services, etc.
  5. Potential product – The set of possible new features and service that might eventually be added to the offer that exceeds customer expectations. E.g. Vitamins; candy on the pillow, etc.

Product Classifications [ edit ]

  1. Durability and tangibility
    • Non-durable goods
    • Durable goods
    • Services
  2. Consumer goods classification – classified according to shopping habits:
    • Convenience goods
    • Shopping goods
    • Specialty goods
    • Unsought goods
  3. Industrial goods classification
    • Material and parts:
      • Raw material
      • Manufactured materials and parts
    • Capital items:
      • Installations
      • Equipment
    • Supplies and business services

Managing the Product Mix [ edit ]

If an organization is marketing more than one product it has a product mix. o Product item — A single product o Product line — All items of the same type o Product mix — Total group of products that an organization markets

In a dynamic marketing environment, the product mix is not static. The effects of changing technology, evolving competition and changes in customer needs mean that is most important for an organization to find ways of keeping its product ranges fresh and interesting. This opens up a number of management problems, requiring planned procedures and strategies in order to: o Retain and maintain existing products so that they continue to meet their objectives o Modify and adapt existing products to take advantage of new technology, emerging opportunities or changing market conditions. o Delete old products that are close to the end of their working lives and no longer serve their purpose o Introduce a flow of new products to maintain or improve sales and profit levels and to form a firm foundation for tomorrow’s market. Too many products could put an organization at risk, as a product launch is resource intensive with no guarantee of success. At the other extreme, too many declining products could threaten the future of the business as sales and profits start to fall.

Elements of a Product Mix Depth measures the # of products that are offered within each product line. Width measures the # of product lines a company offers.

Product decisions Marketers make product decisions at three levels: o Individual product decisions o Product line decisions o Product mix decisions

1. Individual product decisions are focused on the development and marketing of: o Product attributes o Branding o Packaging o Labelling o Product support services.

2. The product line is comprised of a group of products that are closely related because: o They function in a similar manner o Are sold to the same groups o Are marketed through the same types of outlet o Fall within given price ranges The product line length involves the number of items in the product line. It is greatly influenced by the company objectives and the resources. Product line growth needs to be planned carefully and is extended in two ways: ‘stretching’ and ‘filling’.

Product line stretching Downward stretch: Company initially located at the top end of the market and then ‘stretches’ downwards to pre-empt a competitor or respond to an attack. Example: The launch of C-Class by Mercedes-Benz. Upward stretch: Companies stretching upwards to add prestige to their existing range of products. Toyota with the Lexus. Can be risky due to customer perception and the inability of salespeople to trade up and negotiate to the new level. Two-way stretch: Extending product lines upwards and downwards to address different segments of the market.

Product line filling: Increasing the product line by adding more items within the present range of the line. Reasons for product filling:

  • Extra profits
  • Satisfying dealers
  • Using excess capacity
  • Being the leading full-line company
  • Plugging holes to keep out the opposition

Care needs to be taken that the line filling does not lead to cannibalization and customer confusion.

3. Product mix decisions Product mix or product assortment consists of all the product lines and items that a particular seller offers for sale to buyers. Dimensions of the product mix Breadth or width – Wide product mix containing many different product lines. E.g Unilever producing cooking oil, toilet soap, cosmetics etc. Length – Total number of products in the product lines Depth – Different versions, such as the size of packaging and different formulations. Consistency – How closely related the various product lines are in end use, production requirements, distribution channels etc

Product mix strategies • A company can add new product lines, thus widening the product mix. • A company can lengthen the existing product lines to become more of a full line company. • It can add more product versions of each product and deepen its product mix. • The company can pursue more product line consistency, or less, depending on whether it wants to have a strong reputation in a single field or in several fields.

Branding [ edit ]

Branding is an important element of the tangible product and, particularly in consumer markets. It is a means of linking items within a product line or emphasizing what they stand for e.g. Coca-Cola. Brand mark: is specifically the element of the visual brand identity that does not consist of words, but of design and symbols eg, McDonalds symbol (M)

The benefits of branding

  1. The consumer
    1. Easier product identification
    2. Communicates features and benefits
    3. Helps products evaluation
    4. Establishes product’s position in the market
    5. Reduces risk in purchasing
  1. The manufacturer
    1. Helps creates loyalty
    2. Defends against competition
    3. Creates differential advantage
    4. Allows premium pricing
    5. Helps targeting/positioning
    6. Increases power over retailer
  1. The retailer
    1. Benefits from brand marketing support
    2. Attracts customer
    3. Helps differentiate the product from competitors

Types of brands: –

There are many forms of branding but primarily there are manufacturer, distributor, price and generic brands

Brand Equity: – a) is an asset b) a degree of brand-name recognition perceived brand quality, strong mental and emotional associations, and other assets such as patents, trademarks, and channel relationship. c) is a measure of a number of different components, including the beliefs, images and core associations consumer have about a particular brand.Brand equity is the positive differential effect that knowing the brand by the buyer has on the seller.

Packaging and Labeling [ edit ]

Packaging [ edit ]

Packaging includes the activities of designing and producing the container for a product. The package may include up to three levels of materials. E.g. Old Spice aftershave

  1. Bottle – primary package
  2. Cardboard box – secondary package
  3. Corrugated box – shipping package

Packaging is any container or wrapping in which the product is offered for sale and can consist of a variety of materials such as glass, paper, metal or plastic depending on what is to be contained. Packaging is an important part of the product that not only serves a functional purpose but also acts as a means of communicating product information and brand character. The packaging is often the consumer’s first point of contact with the actual product and so it is essential to make it attractive and appropriate for both the products and the customers need.

Due to the growth of mass merchants and self-service, manufacturers have come to realize the value of packaging as a marketing tool. Today it is a vital part of a firm’s product-development strategy; a package may even be an integral part of the product itself. Packaging has become a potent marketing tool. Well-designed packages can create convenience and promotional value.

Developing an effective package for a new product requires several decisions. The first task is to establish the packaging concept: defining what the package should basically be or do for the particular product. Decisions must include the following elements: size, shape, materials, color, text and brand mix.

The packaging elements must also be harmonized with decisions on pricing and other marketing elements. Once the packaging is designed, it must be tested.

Factors that have contributed to packaging growing use as a marketing tool:- • Self-service: An increasing number of products are sold on a self-service basis. The package attract attention, describe the product’s features, create consumer confidence and make a favorable overall impression • Consumer affluence: Rising consumer affluence means consumers are willing to pay a little more for the convenience, appearance dependability and prestige of better packages. • Company and brand image: Packages contribute to the instant recognition of the company or brand. It differentiates a product from competitors by its design, color, shapes, and methods. • Innovation opportunity: Innovative packaging can bring large benefits to consumers and profits to producers. Packaging can be a major element of new-product planning. • Promotional tool: It serves as a promotional tool and is the final form of promotion the consumer sees prior to making a purchase decision. • Reminder: A package also serves as a reminder after a purchase is made.

Although packaging is expensive, developing effective packaging may cost several hundred thousand dollars and take several months to complete. Companies must pay attention to growing environmental and safety concerns about packaging. Shortages of paper, aluminum, and other materials suggest that marketers should try to reduce packaging.

Labeling [ edit ]

Labeling is a particular area within the packing field that represents the outermost layer of the product. Labels have a strong functional dimension, in that they include warnings and instructions, as well as information required by law on best industry practice. Labels state, at the very least, the weight or volume of the product. A barcode and the name and contact address of the producer. Consumer demand has also led to the inclusion of far more product information, such as ingredients, nutritional information and the environmental friendliness of the product. Information about the extent to which the packing is made of recycled materials is also much more common now. Sellers must label products. The label may be a simple tag attached to the product or an elaborately designed graphic that is part of the package. The label might carry only the brand name or a great deal of information. Even if the seller prefers a simple label, the law may require extra information. Label feels that it can be most trusted and loyal to the customer end (Example a baby girl photo on the Parle-G biscuit is printed in the minds of customer and on the product pack).

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