Transcript Chapter 12

Creating and Pricing Products
That Satisfy Customers
Chapter
12
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 1
4 P’s of the Marketing Mix
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 but soon sales
start to rise; development costs are high, profits low; few
competitors.
• Growth
– Sales increase rapidly as the product becomes well known;
competition enters.
• Maturity
– Sales are still increasing but at a slower rate; later in this
stage, sales and profits begin to slowly decline; competition is
intense.
• Decline
– Sales volume decreases sharply and profits continue to fall;
may have to discontinue product.
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 3
Product Life-Cycle
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Chapter 12 | Slide 4
How Do We Classify Products?

Product
• Everything one receives in an exchange,
including all tangible and intangible attributes
and expected benefits
• A product can be 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
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 5
Types of Consumer Products

Convenience product
• A relatively inexpensive, frequently purchased item for which
buyers want to exert only minimum effort
–

Example: a candy bar, loaf of bread
Shopping product
• An item for which buyers are willing to expend considerable effort
on planning and making the purchase
–

Example: a car, a home, a new computer
Specialty product
• An item that possesses one or more unique characteristics for
which a significant group of buyers is willing to expend
considerable purchasing effort
– Example: special outfit for a special occasion, a certain
Christmas gift for someone special
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 6
Product Line and Product Mix

Product line
• A group of similar products that differ only in relatively minor
characteristics
–

Example: Proctor and Gamble makes a line of shampoos-Ivory,
Head and Shoulders, Prell.
Product mix
• All of the products that a firm offers for sale
–
Example: Product and Gamble makes beauty products, health
products, and also household cleaning products. (very different
lines)
•
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
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 7
Managing the Product Mix

Managing existing products
• Product modification: the process of changing one or more
of a product’s characteristics such as quality, function,
aesthetics
–
Example: Adding airbags to vehicles made them safer
(function)
• 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
–

Example: Cheerios
Between 60-75% of all new products fail
Developing new products
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Chapter 12 | Slide 8
Top Ten New Products of the Decade
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Chapter 12 | Slide 9
Phases of New Product Development
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Chapter 12 | Slide 10
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 other “Ps”).

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.
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 11
Examples of Product Failures
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Chapter 12 | Slide 12
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……”Apple”
• Brand mark
–
The part of a brand that is a symbol or distinctive design
• Trademark
–
A brand name or brand mark that is registered with the U.S. Patent
and Trademark Office and is legally protected from use
by anyone else (see next slide)
• Trade name
–
The complete and legal name of an organization
– “Apple, Incorporated”
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Chapter 12 | Slide 13
Apple logo and name showing trademark symbol
(look closely)
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Chapter 12 | Slide 14
Branding (cont.)

Types of brands
• Manufacturer (producer) brand
– A brand that is owned by a manufacturer
–
“Apple” “Dole” “Nike”
• Store (private) brand
– A brand that is owned by an individual
wholesaler or retailer
–
Walmart’s “Great Value” or their “Equate”
• Generic brand
– A product with no brand at all
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 15
Branding (cont.)

Benefits of branding
• Because brands are easily recognizable,
they reduce the amount of time buyers must
spend shopping.
• Brands help consumers judge quality.
• Brands help 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.
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 16
Branding (cont.)

Benefits of branding (cont.)
• Brand loyalty
– The extent to which a customer is favorable toward
buying a specific brand
– Recognition, preference, and insistence
–
Insistence is the highest level of brand loyalty
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 17
Top Ten Most Valuable Brands in the World
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Chapter 12 | Slide 18
Branding (cont.)

Choosing a brand
• It should be easy to say, spell, and recall.
• It should suggest the product’s uses, special
characteristics, and major benefits.
• It should be distinctive enough to set it apart from
competing brands.

Protecting a brand
• It should be protected through registration.
• Guard against a brand name’s becoming a
generic term.
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 19
Branding (cont.)

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 products
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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Chapter 12 | Slide 20
Branding (cont.)

Branding strategies (cont.)
• Brand extensions
– A firm uses an existing brand to brand a new product
in a different product category
–
–
Example: Procter & Gamble names a new
product Ivory Body Wash
Caution must be taken in extending a brand too many
times or too far outside the original product category
–
Example: Kellogg’s extended its brand name
to a line of hip-hop street clothing that was a failure
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Chapter 12 | Slide 21
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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Chapter 12 | Slide 22
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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Chapter 12 | Slide 23
Labeling (cont.)

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, ingredients in common terms, 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 if the
product is found to be defective or otherwise unsatisfactory
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 24
Go Back to the “Let’s Brainstorm” Activity and
Discuss/decide the following:
“Brand” your product. Create a spoken
brand name, sketch out a logo, decide if
the brand should be trademarked or not
and why.
2. Decide on what kind of packaging you’ll
use and why.
3. Decide what kinds of information you’ll
need on the label and sketch out an
example of it.
1.
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Chapter 12 | Slide 25
Pricing Products

Every Product or Service has a Perfect Price
 Even this one….
• Driving a tank for fun
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Chapter 12 | Slide 26
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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Chapter 12 | Slide 27
Pricing Products (cont.)

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
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 28
Supply and Demand Curves
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Chapter 12 | Slide 29
Pricing Products (cont.)

Price and non-price competition
• Price competition
– An emphasis on setting a price equal to or lower than
competitors’ prices to gain sales or market share
• Non-price competition
– Competition based on factors other than price (such as
quality, customer service, packaging)
–

Example: Apple depends on customer loyalty, quality in
design and function, instead of price to sell the product
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
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 30
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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Chapter 12 | Slide 31
Pricing Objectives (cont.)

Market-share goals
• Pricing that will increase a firm’s proportion of total
industry sales

Status quo pricing
• Pricing because that’s normally what a product like
this has always been priced at
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Chapter 12 | Slide 32
Pricing Methods

Cost based pricing
 Breakeven based pricing
 Demand based pricing
 Competition based pricing
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Chapter 12 | Slide 33
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 like how
much it costs to produce it or market it; there is no incentive
here to reduce those costs-just raise the price instead. This
is not the best way to be profitable.
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 34
Pricing Methods (cont.)

Breakeven based pricing
• 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 (total sales)
–
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 (= Fixed Costs + Variable Costs)
–
The sum of the fixed costs and the variable costs
all together.
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 35
Breakeven Analysis
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Chapter 12 | Slide 36
Two Ways to Figure Out Breakeven Point

How much in sales dollars do we need to
break even?

How many units do we need to sell to break
even?
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 37
Calculating Breakeven Point
To determine how much in sales dollars you need:
1. Calculate Contribution Margin using this formula:
Total variable costs
1. Calculate Contribution
Annual sales
Margin:
All variable costs
2. Then calculate Breakeven Point: Annual sales
Total Fixed Costs
2. Breakeven: Sales Dollar
Contribution Margin
Volume:
Total Fixed Costs
 GIVEN THESE FIGURES:
Contribution Margin
 Variable costs: $337,000 (cost of goods sold)




Other variable costs: $42,750
Total Variable Costs: $379,750
Annual Sales: $495,000
Total Fixed costs: $78,100
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Chapter 12 | Slide 38
What about if…….

Contribution margin goes down but Total
Fixed Costs stay the same?
• Example A:
CM = .68
$78,100 = $114,852
.68

Example B:
CM = .20
$78,100 = $390,500
.20
Contribution margin goes down AND Total
Fixed Costs go up?

$100,000 = $500,000
.20
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 39
Calculating Breakeven Point
To determine how many units you need to sell:
1. Contribution per unit =
Selling price - Variable cost per unit
1. =Calculate
Example: Contribution per unit
$120-60 Contribution
= $60
Margin:
All variable costs
2. Then use this formula:
Annual sales
Total Fixed Costs
2. Breakeven: Sales Dollar
Contribution Per Unit
Example: $40,000 = 667 units Volume:
Total Fixed Costs
$60
Contribution Margin
 GIVEN THESE FIGURES:



Selling price: $120
Variable cost per unit: $60
Total Fixed costs: $40,000
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Chapter 12 | Slide 40
Pricing Methods (cont.)

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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Chapter 12 | Slide 41
Types of Pricing Strategies
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Chapter 12 | Slide 42
Choose one of these Pricing Strategies and be
able to explain why you chose it.





New Product Strategy
Differential Pricing Strategy
Psychological Pricing Strategy
Product line Pricing Strategy
Promotional Pricing Strategy
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Chapter 12 | Slide 43
Pricing Strategies: New Product Pricing

New-product pricing 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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Chapter 12 | Slide 44
Pricing Strategies: Differential Pricing

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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Chapter 12 | Slide 45
Pricing Strategies: Psychological Pricing

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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Chapter 12 | Slide 46
Pricing Strategies: Product-line Pricing

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
–
Selling goods only at certain predetermined prices that
reflect definite price breaks
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Chapter 12 | Slide 47
Pricing Strategies: Promotional Pricing

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
© 2013 South-Western, a part of Cengage Learning. All rights reserved.
Chapter 12 | Slide 48
Go Back to the “Let’s Brainstorm” Activity and
Add the following:
1.
2.
Price your product or service using one of the
strategies in the textbook (pg 350-358) or one taken
from the next slide. Be able to explain why you
chose that price.
Calculate your breakeven point to determine how
much sales you’ll need per year to break even (in
dollars) and then how many units you will have to
sell per year to break even. Given these figures:
Total variable costs: $300,000
Total fixed costs: $150,000
Annual sales last year: $500,000
Selling price last year: $20,000 per unit
Variable cost per unit: $1500
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Chapter 12 | Slide 49
Chapter Quiz
1. Western Day was a special day at the office.
Janice wanted to dress in the latest western
fashion, but she had limited funds. She visited
several shops before finding the right outfit.
For Janice, what type of product is the
clothing?
A.
B.
C.
D.
E.
Specialty product
Major equipment
Industrial product
Shopping product
Convenience product
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Chapter 12 | Slide 50
Chapter Quiz
2. Sales rise gradually as a result of promotion
and distribution activities, but initially, high
development and marketing costs result in
low profit or even a loss. This best describes
which stage of the product life-cycle?
A.
B.
C.
D.
E.
Maturity
Introduction
Decline
Growth
Steady
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Chapter 12 | Slide 51
Chapter Quiz
3. A customer who consistently buys Sony
televisions whenever he or she needs to
replace his or her TV set demonstrates
A.
B.
C.
D.
E.
the importance of trademarks.
the importance of trade names.
the importance of brand awareness.
brand loyalty.
brand equity.
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Chapter 12 | Slide 52
Chapter Quiz
4. Certain plastic water bottles that cannot be
recycled, while convenient for customers, are
a clear example that manufacturers are not
considering _______________ when
designing packaging.
A.
B.
C.
D.
E.
the needs of intermediaries
the needs of retailers
environmental consciousness
family needs
cost-effectiveness
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Chapter 12 | Slide 53
Chapter Quiz
5. When there is a shortage of citrus fruit, the
economic forces of supply and demand
would suggest that
price will stay constant.
price will decrease.
price will increase.
it will take a long time before the shortage is
felt in the market.
E. None of the above
A.
B.
C.
D.
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Chapter 12 | Slide 54