Transcript Chapter Fourteen

Chapter
Fourteen
Creating and Pricing
Products That Satisfy
Customers
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 items 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 items that facilitates production and
operations but does not become part of the
finished product
• Business service
– An intangible products 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
revenue and profit 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, 13th ed. Copyright © 2006 by Houghton
Mifflin Company, Adapted with permission.
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Using the Product Life Cycle
• The stage of the product life cycle affects the
marketing strategy for a product
– Introduction
• Make potential customers aware of product
• Adjust price, distribution, and promotion
quickly to maintain sales
– Growth
• Stabilize and strengthen product position
by encouraging brand loyalty
• Improve product or expand product line;
reduce price; broaden distribution
– Maturity
• Redesign packaging; encourage new
product uses; reconsider pricing strategy;
increase promotional efforts and personal selling
– Decline
• Retain or eliminate product
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Product Line and Product Mix
• Product line
– A group of similar products that
differ 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
• Deleting products
• Developing new products
– Imitations, adaptations, or
innovations
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Phases of New Product Development
Source: William M. Pride and O. C. Ferrell,
Marketing: Concepts and Strategies, 13th ed.
Copyright © 2006 by Houghton Mifflin Company,
Adapted by 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
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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
Kleenex® or tissue?
– 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
– 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 non-edible items such as shampoo and
detergent, safety precautions and instructions
• Express warranty
– A written explanation of the producer
responsibilities in the 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 given 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 wantsatisfying products
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Pricing at New Balance
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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 and Product
Differentiation at New Balance
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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 to not 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 on 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
whole-dollar 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 charges 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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