1. Creating and Pricing Products That Satisfy Customers
Chapter Fourteen
Creating and Pricing Products That Satisfy Customers

2. Learning Objectives
Explain what a product is and how products are classified.
Discuss the product life cycle and how it leads to new product development.
Define product line and product mix and distinguish between the two.
Identify the methods available for changing a product mix.
Explain the uses and importance of branding, packaging, and labeling.
Copyright © Houghton Mifflin Company. All rights reserved.

3. Learning Objectives (cont’d)
Describe the economic basis of pricing and the means by which sellers can control prices and buyers’ perceptions of prices.
Identify the major pricing objectives used by businesses.
Examine the three major pricing methods that firms employ.
Explain the different strategies available to companies for setting prices.
Describe three major types of pricing associated with business products.
Copyright © Houghton Mifflin Company. All rights reserved.

4. Classification of Products
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
Copyright © Houghton Mifflin Company. All rights reserved.

5. 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
Copyright © Houghton Mifflin Company. All rights reserved.

6. 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
Copyright © Houghton Mifflin Company. All rights reserved.

7. 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
Copyright © Houghton Mifflin Company. All rights reserved.

8. 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
Copyright © Houghton Mifflin Company. All rights reserved.

9. 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.
Copyright © Houghton Mifflin Company. All rights reserved.

10. 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
Copyright © Houghton Mifflin Company. All rights reserved.

11. Product Line and Product Mix
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
Copyright © Houghton Mifflin Company. All rights reserved.

12. Managing the Product Mix
Managing existing product
Product modification: quality, functionality, or aesthetic characteristics
Deleting products
Developing new products
Imitations, adaptations, or innovations
Copyright © Houghton Mifflin Company. All rights reserved.

13. 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.
Copyright © Houghton Mifflin Company. All rights reserved.

14. 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
Copyright © Houghton Mifflin Company. All rights reserved.

15. Examples of Product Failures
Copyright © Houghton Mifflin Company. All rights reserved.

16. 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
Copyright © Houghton Mifflin Company. All rights reserved.

17. 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
Copyright © Houghton Mifflin Company. All rights reserved.

18. 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
Copyright © Houghton Mifflin Company. All rights reserved.

19. 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
Copyright © Houghton Mifflin Company. All rights reserved.

20. Branding (cont’d) Choosing a brand Protecting 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
Kleenex® or tissue?
Copyright © Houghton Mifflin Company. All rights reserved.

21. 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
Copyright © Houghton Mifflin Company. All rights reserved.

22. 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
Copyright © Houghton Mifflin Company. All rights reserved.

23. 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
Copyright © Houghton Mifflin Company. All rights reserved.

24. 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
Copyright © Houghton Mifflin Company. All rights reserved.

25. 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 want-satisfying products
Copyright © Houghton Mifflin Company. All rights reserved.

26. Pricing at New Balance
Copyright © Houghton Mifflin Company. All rights reserved.

27. 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
Copyright © Houghton Mifflin Company. All rights reserved.

28. Supply and Demand Curves
Copyright © Houghton Mifflin Company. All rights reserved.

29. Pricing and Product Differentiation at New Balance
Copyright © Houghton Mifflin Company. All rights reserved.

30. 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
Copyright © Houghton Mifflin Company. All rights reserved.

31. Pricing Objectives Survival Profit maximization
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
Copyright © Houghton Mifflin Company. All rights reserved.

32. 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
Copyright © Houghton Mifflin Company. All rights reserved.

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 that impact on marketing decisions
Copyright © Houghton Mifflin Company. All rights reserved.

34. Pricing Methods Breakeven analysis Breakeven quantity Total revenue
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
Copyright © Houghton Mifflin Company. All rights reserved.

35. Breakeven Analysis
What is the lowest level of production and sales at which a company can break even on a particular product?
Copyright © Houghton Mifflin Company. All rights reserved.

36. 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
Copyright © Houghton Mifflin Company. All rights reserved.

37. Types of Pricing Strategies
Copyright © Houghton Mifflin Company. All rights reserved.

38. 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
Copyright © Houghton Mifflin Company. All rights reserved.

39. 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
Copyright © Houghton Mifflin Company. All rights reserved.

40. 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
Copyright © Houghton Mifflin Company. All rights reserved.

41. 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
Copyright © Houghton Mifflin Company. All rights reserved.

42. 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
Copyright © Houghton Mifflin Company. All rights reserved.

43. 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
Copyright © Houghton Mifflin Company. All rights reserved.

44. 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
Copyright © Houghton Mifflin Company. All rights reserved.