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Creating and Pricing Products that Satisfy Customers

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1 Creating and Pricing Products that Satisfy Customers
Chapter Fourteen Creating and Pricing Products that Satisfy Customers

2 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

3 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

4 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

5 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

6 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

7 Product Life Cycle Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 12th ed. Copyright © 2003 by Houghton Mifflin Company, Adapted with permission.

8 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

9 Class Exercise For the products below, determine what stage of product life cycle the product is currently in and the marketing implications involved. Compact disc players Online computer services Aspirin Cigarettes Laptop computers

10 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

11 Managing the Product Mix
Changing Existing Product Product modification: quality, functionality, or aesthetic characteristics Deleting Products Developing New Products Imitations, adaptations, or innovations

12 Phases of New Product Development
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 12th ed. Copyright © 2003 by Houghton Mifflin Company, Adapted by permission.

13 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

14 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

15 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

16 Consumers’ Perceptions of Store and Manufacturers’ Brands
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 12th ed. Copyright © 2003 by Houghton Mifflin Company, Adapted by permission. Data from “Store Brands at the Turning Point,” Consumer Research Network.

17 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

18 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

19 Branding (cont’d) Choosing a Brand Protecting a Brand
Kleenex® or tissue? 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

20 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

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

22 Criticisms of Packaging
Functional problems Difficult to open, breakage, inconvenience Safety Tampering, sharp edges, breakable glass, health hazards of plastic and aerosol containers Deception Shape, design, colors may alter appearance of size; confusing size designations Cost Packaging costs passed on to consumers

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

24 Labeling (cont’d) Must include Express warranty
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 responsibilities of the producer in the event that the product is found to be defective or otherwise unsatisfactory

25 Using the Internet The U.S. government gateways to consumer information about products, safety, pricing, fraud, and many other issues of interest are available through a variety of online publications and links.

26 Pricing Products The 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

27 Pricing Products (cont’d)
Can Firms Control Their 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

28 Supply and Demand Curves

29 Pricing Products (cont’d)
Prices in the Real Economy Producers try to gain control over price by differentiating their products Differentiation The process of developing and promoting differences between one’s product and all similar products Producers also try to gain control over price through advertising Firms may reduce prices to obtain a competitive edge

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

31 Debate Issue: Is price competition more effective than nonprice competition?
YES Many customers today are very price conscious. With so many homogeneous products on the market, price is a major means of distinguishing a product from competitive brands. When price competition is used, firms attempt to keep their costs low. NO Price competition breeds price-sensitive customers with little brand loyalty. Product features and quality are more distinguishing in setting a product apart from its competitors. Nonprice variables should be desirable to buyers as well as difficult to imitate.

32 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

33 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

34 Factors That Affect Pricing Decisions
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 12th ed. Copyright © 2003 by Houghton Mifflin Company, Adapted by permission.

35 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

36 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

37 Breakeven Analysis What is the lowest level of production and sales at which a company can break even on a particular product?

38 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

39 Types of Pricing Strategies

40 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

41 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

42 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

43 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

44 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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