Transcript Chapter Thirteen

Chapter Thirteen
Creating and Pricing Products
that Satisfy Customers
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Learning Objectives
1. Explain what a product is and how products are
classified.
2. Discuss the product life cycle and how it leads to
new product development.
3. Define product line and product mix and distinguish
between the two.
4. Identify the methods available for changing a
product mix.
5. Explain the uses and importance of branding,
packaging, and labeling.
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Learning Objectives (cont’d)
6. Describe the economic basis of pricing and the
means by which sellers can control prices and
buyers’ perceptions of prices.
7. Identify the major pricing objectives used by
businesses.
8. Examine the three major pricing methods that firms
employ.
9. Explain the different strategies available to
companies for setting prices.
10. Describe three major types of pricing associated
with business products.
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Classification of Products
• Product
– Everything one receives in an exchange, including
all tangible and intangible attributes and expected
benefits
– A good, service, or idea
• Consumer product
– A product purchased to satisfy personal and family
needs
• Business (industrial) product
– A product bought for resale, for making other
products, or for use in a firm’s operations
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Consumer Product Classifications
• Convenience product
– A relatively inexpensive, frequently purchased item for which
buyers want to exert only minimum effort
• Shopping product
– An item for which buyers are willing to expend considerable
effort on planning and making the purchase
• Specialty product
– An items that possesses one or more unique characteristics
for which a significant group of buyers is willing to expend
considerable purchasing effort
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Business Product Classifications
• Raw material
– A basic material that becomes part of a physical
product; usually comes from mines, forests, oceans, or
recycled solid wastes
• Major equipment
– Large tools and machines used for production
purposes
• Accessory equipment
– Standardized equipment used in a firm’s production or
office activities
• Component part
– An item that becomes a part of a physical product and
is either a finished item ready for assembly or a
product that needs little processing before assembly
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Business Product Classifications (cont’d)
• Process material
– A material that is used directly in the
production of another product but is not readily
identifiable in the finished product
• Supply
– An item that facilitates production and
operations but does not become part of the
finished product
• Business service
– An intangible product that an organization
uses in its operations
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The Product Life Cycle
• A series of stages in which a product’s sales revenues and
profits increase, reach a peak, then decline
– Introduction
• Customer awareness and acceptance are low
– Growth
• Sales increase rapidly as the product becomes well known
– Maturity
• Sales are still increasing but at a slower rate; later in this stage,
sales and profits begin to slowly decline
– Decline stage
• Sales volume decreases sharply and profits continue to fall
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Product Life Cycle
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 15th ed. (Mason, Ohio: SouthWestern/Cengage Learning, 2010). Adapted with permission.
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Using the Product Life Cycle
• Marketers should be aware of the life-cycle stage
of each product for which they are responsible
and should try to estimate how long the product is
expected to remain in that stage
– Both must be taken into account in making decisions
about the marketing strategy for a product
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Product Line and Product Mix
• Product line
– A group of similar products that differs only in
relatively minor characteristics
• Product mix
– All of the products that a firm offers for sale
– Width of the mix
• The number of product lines the mix contains
– Depth of the mix
• The average number of individual products
within each line
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Managing the Product Mix
• Managing existing product
– Product modification: quality, functionality, or
aesthetic characteristics
– Line extensions: development of a product closely
related to one or more products in the existing
product line but designed specifically to meet
somewhat different customer needs
• Deleting products
• Developing new products
– Imitations, adaptations, or innovations
– Consists of seven phases
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Phases of New Product Development
Source: William M. Pride and O. C. Ferrell,
Marketing: Concepts and Strategies, 15th ed.
(Mason, Ohio: South-Western/Cengage Learning,
2010). Adapted with permission.
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Why Do Products Fail?
• The product and its marketing program are not planned
and tested as completely as they should be
– For example, a firm tries to save product
development costs and only market-tests a product
and not its entire marketing mix
• The firm markets a new product before all the “bugs” are
worked out
• When problems show up in testing, a firm tries to
recover its costs by pushing ahead anyway
• A firm tries to market a product with inadequate
financing
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Examples of Product Failures
Source: www.newproductworks.com, accessed January 23, 2006; Robert M. McMath, “Copycat Cupcakes Don’t Cut It,” American
Demographics, January 1997, p. 60; Eric Berggren and Thomas Nacher, “Why Good Ideas Go Bust,” Management Review,
February 2000, pp. 32–36.
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Branding
• What is a brand?
– A name, term, symbol, design, or any combination of
these that identifies a seller’s products as distinct from
those of other sellers
– Brand name
• The part of a brand that can be spoken
– Brand mark
• The part of a brand that is a symbol or distinctive design
– Trademark
• A name or brand mark that is registered with the U.S.
Patent and Trademark Office and is legally protected
from use by anyone else
– Trade name
• The complete and legal name of an organization
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Branding (cont’d)
• Types of Brands
– Manufacturer (producer) brand
• A brand that is owned by a manufacturer
– Store (private) brand
• A brand that is owned by an individual
wholesaler or retailer
– Generic brand
• A product with no brand at all
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Branding (cont’d)
• Benefits of branding
– Because brands are easily recognizable, they
reduce the amount of time buyers must spend
shopping
– Brands help consumers judge quality
– Branding helps a firm introduce a new product
with the same brand name
– Branding aids in promotional efforts because
promotion of each branded product indirectly
promotes others with the same brand
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Branding (cont’d)
• Benefits of branding (cont’d)
– Brand loyalty
• The extent to which a customer is favorable
toward buying a specific brand
• Recognition, preference, and insistence
– Brand equity
• The marketing and financial value associated
with a brand’s strength in a market
• Brand-name awareness, brand association,
perceived quality, and brand loyalty
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Branding (cont’d)
• Choosing a brand
– It should be easy to say, spell, and recall
– It should suggest, in a positive way, the product’s
uses, special characteristics, and major benefits
– It should be distinctive enough to set it apart from
competing brands
• Protecting a brand
– Should be protected through registration
– Guard against a brand name’s becoming a generic
term
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Branding (cont’d)
• Branding strategies
– Individual branding
• A firm uses a different brand for each of its products
• For example, Procter & Gamble uses Ivory, Camay,
Zest, Safeguard, etc., for its line of bar soaps
• A problem with one product will not affect another
product
• Different brands can be directed at different market
segments
– Family branding
• A firm uses the same brand for all or most of its products
• For example, Xerox uses family branding for all its
product mixes
• The promotion of any one item helps all other products
• A new product has a head-start when its brand name is
already known and accepted by customers
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Packaging
• All of the activities involved in developing and providing a
container with graphics for a product
• Functions of packaging
– Protect the product and maintain its functional form
– Offer consumer convenience
– Promote the product by communicating its features, uses,
benefits, and image
• Design considerations
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–
–
–
–
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Cost
Single or multiple units
Consistency among package designs (family packaging)
Promotional role
Needs of intermediaries
Environmental responsibility
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Labeling
• The presentation of information on a product or its
package
• May include
–
–
–
–
–
–
–
–
–
Brand name and mark
Trademark symbol
Package size and contents
Product claims
Directions
Safety precautions
Ingredients
Name and address of manufacturer
Universal Product Code (UPC) symbol for automated
checkout and inventory control
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Labeling (cont’d)
• Must include
– For garments, name of manufacturer, country of
manufacture, fabric content, cleaning instructions
– Nutrition labeling in standard format for any food
product for which a nutritional claim is made
– For food, number of servings, serving size, calories per
serving, calories derived from fat, and amounts of
specific nutrients
– For nonedible items such as shampoo and detergent,
safety precautions and instructions
• Express warranty
– A written explanation of the producer responsibilities in
the product is found to be defective or otherwise
unsatisfactory
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Pricing Products
• Meaning and use of price
– The amount of money a seller is willing to accept
in exchange for a product at a given time and
under certain circumstances
– Price allocates goods and services among those
who are willing and able to buy them
– Price allocates financial resources (sales
revenue) among producers according to how well
they satisfy customers’ needs
– Price helps customers allocate their own financial
resources among various want-satisfying
products
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Pricing Products (cont’d)
• Supply and demand affects prices
– Supply
• The quantity of a product that producers are willing to sell at
each of various prices
• Quantity supplied by producers increases as the price
increases
– Demand
• The quantity of a product that buyers are willing to purchase
at each of various prices
• Quantity demanded increases as the price decreases
– Equilibrium
• Where the supply and demand curves intersect and quantity
and price for buyers and sellers are equal
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Supply and Demand Curves
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Pricing Products (cont’d)
• Price and nonprice competition
– Price competition
• An emphasis on setting a price equal to or lower than
competitors’ prices to gain sales or market share
– Nonprice competition
• Competition based on factors other than price
• Buyers’ perceptions of price
– Buyers will accept different ranges of prices for different
products
– A premium price may be appropriate if a product is
considered superior or has inspired strong brand loyalty
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Pricing Objectives
• Survival
– Pricing the firm’s products (perhaps at a loss) in
order to attract customers to establish the firm in a
market
• Profit maximization
– Pricing with the intent to reap profits as large as
possible from a market—usually an unattainable
goal
• Target return on investment (ROI)
– Pricing that allows the firm to attain its profit goal,
which is a percentage of the investment the firm
has made
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Pricing Objectives (cont’d)
• Market share goals
– Pricing that will increase a firm’s proportion of total
industry sales
• Status quo pricing
– Pricing the firm’s products so as not to disturb the
stability of prices in the industry
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Pricing Methods
• Cost-based pricing
– The seller determines the total cost of producing one
unit of the product then adds an amount to cover
additional costs and profit (markup)
– Markup may be calculated as a percentage of total
costs
– Flaws
• Difficulty of determining an effective markup percentage;
price may be too high, resulting in lost sales, or price
may be too low, resulting in lost profit
• Separates pricing from other business functions that
impact marketing decisions
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Pricing Methods
• Breakeven analysis
– Breakeven quantity
• The number of units that must be sold for total revenue (from
all units sold) to equal the total cost (of all units sold)
– Total revenue
• The total amount received from sales of a product
– Fixed cost
• A cost incurred no matter how many units are produced or
sold
– Variable cost
• A cost that depends on the number of units produced
– Total cost
• The sum of the fixed costs and the variable costs attributed to
a product
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Breakeven Analysis
• What is the lowest level of production and sales at which a
company can break even on a particular product?
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Pricing Methods (cont’d)
• Demand-based pricing
– Based on the level of customer demand for the product
– Product prices are high when demand is high and low
when demand is weak
– Price differentiation
• Setting different prices in segmented markets based on
segment characteristics (e.g., time of purchase, type of
customer, or distribution channel)
• Competition-based pricing
– Based on meeting the challenge of competitors’ prices
in markets where products are quite similar or price is
an important customer consideration
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Types of Pricing Strategies
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Pricing Strategies
• New-product strategies
– Price skimming
• Charging the highest possible price for a
product during the introduction stage of its
life cycle
– Penetration pricing
• Setting a low price for a new product to
quickly build market share and discourage
competitors
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Pricing Strategies (cont’d)
• Differential pricing
– Charging different prices to different buyers for the
same quality and quantity of product
– The market must consist of multiple segments with
different price sensitivities
– Negotiated pricing
• Establishing a final price through bargaining
– Secondary-market pricing
• Setting one price for the primary target market and a
different price for another market
– Periodic discounting
• Temporary reduction of prices on a patterned or
systematic basis
– Random discounting
• Temporary reduction of prices on an unsystematic basis
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Pricing Strategies (cont’d)
• Psychological pricing
– Odd-number pricing
• Setting prices using odd numbers that are slightly below wholedollar amounts
– Multiple-unit pricing
• Setting a single price for two or more units
– Reference pricing
• Pricing a product at a moderate level and positioning it next to a
more expensive model or brand
– Bundle pricing
• Packaging two or more complementary products and selling them
for a single price
– Everyday low prices (EDLPs)
• Setting a low price for products on a consistent basis
– Customary pricing
• Pricing on the basis of tradition
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Pricing Strategies (cont’d)
• Product-line pricing
– Establishing and adjusting the prices of
multiple products within a product line
– Captive pricing
• Pricing the basic product in a product line low,
but pricing related items at a higher level
– Premium pricing
• Pricing the highest-quality or most versatile
products higher than other models in the
product line
– Price lining
• Setting a limited number of prices for selected
groups or lines of merchandise
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Pricing Strategies (cont’d)
• Promotional pricing
– Price leaders
• Products priced below the usual markup, near
cost, or below cost
– Special-event pricing
• Advertised sales or price cutting linked to a
holiday, season, or event
– Comparison discounting
• Setting a price at a specific level and
comparing it with a higher price
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Pricing Business Products
• Geographic pricing
– Deals with delivery costs
– FOB (free-on-board) origin pricing
• The seller’s pricing is exclusive of delivery costs;
the buyer pays the transportation costs
– FOB destination pricing
• The seller includes transportation costs in the
product pricing
• Transfer pricing
– Prices charged in sales between an
organization’s units
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Pricing Business Products (cont’d)
• Discounting
– Trade discounts
• Discounts offered to intermediaries or middlemen
– Quantity discounts
• Discounts for large volume purchases
– Cash discounts
• Discounts for prompt payment
– Seasonal discounts
• Price reductions for buyers who purchase out of season
– Allowances
• Price reductions to achieve certain goals such as returning
used equipment or increasing sales of a particular item
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