Product Development and Pricing Strategies © 2014 Pearson Education, Inc.13-1 chapter 13 Better Business 3rd Edition Solomon (Contributing Editor) · Poatsy · Martin

Product: It’s Probably More Than You Thought © 2014 Pearson Education, Inc  Product Products are any Good, Service and/or Idea that might satisfy a want or need Everything one receives in an exchange, including all tangible and intangible attributes and expected benefits – TOTAL PRODUCT OFFER Good – real, physical thing we can touch (football, washing machine, book) Service – result of applying human or mechanical effort to a person or thing (tax preparation, hair cuts) Idea – philosophies, lessons, concepts or advice (Campbell’s Soup recipes)  Bundle of Expected Benefits Products are nothing more than expected benefits that should satisfy consumer needs/wants  Consumer product A product purchased to satisfy personal needs  Business (industrial) product A product bought for resale, for making other products, or for use in a firm’s operations

Total Product Offer: Peeling Back The Layers of the Product © 2014 Pearson Education, Inc Core product – the primary benefit that satisfies the consumers need (ex. Soft drink->thirst quench) The actual product – the physical good or tangible aspect of the purchase that you can touch, see, hear, smell, or taste (ex. Soft drink- >soft drink can or soda flavor) Augmented product – consists of the core product and the actual product PLUS other real or perceived benefits that provided add’l value to a customer’s purchase (Ex. warrantees, free service, instruction manuals, help lines, product image)

Consumer and B2B Products Consumer Purchased by households for personal consumption Traded in consumer markets Purchased by households for personal consumption Traded in consumer markets Business to Business Sometimes called industrial products Purchased by businesses for further processing, resale, or as supplies Traded in B2B markets Sometimes called industrial products Purchased by businesses for further processing, resale, or as supplies Traded in B2B markets © 2014 Pearson Education, Inc. 13-4

Consumer Product Classifications © 2014 Pearson Education, Inc. 13-5

B2B Classifications © 2014 Pearson Education, Inc. 13-6

Product Differentiation and Planning: A Meaningful Difference © 2014 Pearson Education, Inc Ways to Compete: 1.Price 2.Product Differentiation – Creating real or perceived product differences; the attributes that make a good or service different from other products that compete to meet the same or similar customer needs How to Plan/Differentiate? a)Product Quality b)Features and Benefits c)Product Lines and Mix d)Branding e)Packaging/Labeling

Product Quality © 2014 Pearson Education, Inc. 8 Quality Level – how well a product performs its core functions Product Consistency – how reliably a product delivers its promised level of quality

Product Features and Customer Benefits ProductProduct Feature Customer Benefit Subway sandwiches Lower fatLooser pants GrouponGreat deals on valuable products and services More money for other needs Whole Foods Market Organic produce A healthier planet 5-Hour EnergyCaffeine, caffeine, caffeine More time to study © 2014 Pearson Education, Inc. 9 1.Product Features – The specific characteristics of a product 2.Customer Benefit – The advantage that a customer gains from specific product feature

Product Lines and Product Mix © 2014 Pearson Education, Inc Product Mix – the total number of product lines by a single firm Product Line – products that are closely related or similar and only differ in minor characteristics Width of the mix –The number of product lines the mix contains Length of the mix –The number of different products within an individual product line Depth of the mix –The average number of individual products within each line Cannibalization – A new product “eats” the sales of an existing line

Product Mix Strategies © 2014 Pearson Education, Inc. 11  Modifying Products Product modification: the process of changing one or more of a product’s characteristics 1.Quality Modification: dependability and durability (ex. Chevy’s 10-yr warranty) 2.Functional Modification: versatility, effectiveness, convenience or safety (ex. Larger grill surface, new speed on blender) 3.Aesthetic Modification: sensory appeal of product – taste, appearance, sound, smell (ex. Small “bottle” Cokes)  Deleting products  Developing new products Imitations Adaptations Innovations How to Make Product Modification Effective?  Product must be modifiable  Existing customers must perceive modification made  Modification makes product more consistent with customers’ desires

Developing New Products © 2014 Pearson Education, Inc. 12 Imitations: similar to and competitive with existing products of other firms Adaptations: variations of existing products intended for an established market Innovations: entirely new products

© 2014 Pearson Education, Inc Branding Brand - a product’s identity that sets it apart from other players in the same category Brand Equity – the extra money that consumers will spend to buy that brand Brand Name – a catchy, memorable name is a powerful part of strong brand Manufacturer (National) brands are brands that the manufacturer produces and markets, while Private (Store) brands are brands that retailers label and market. Brand Mark – the part of the brand that is a distinctive symbol or design

Branding Strategies © 2014 Pearson Education, Inc

Line Extensions and Brand Extensions © 2014 Pearson Education, Inc. 15 Line Extensions Similar products offered under the same brand name Brand Extensions A product in a new category under an existing brand name

Cobranding © 2014 Pearson Education, Inc. 16 Cobranding - established brands from different companies join forces to market the same product  Ford Explorer markets and Eddie Bauer model  Kohl’s markets Vera Wang clothing  Kmart markets Martha Stewart housewares

Benefits of Branding: Brand Loyalty © 2014 Pearson Education, Inc. 17  Benefits of branding Brand loyalty – The extent to which a customer is favorable toward buying a specific brand –3 Levels: 1.Brand Recognition (aware brand exists and recognizes it) 2.Brand Preference (prefer the brand but will choose a competing brand is preferred brand is unavailable) 3.Brand Insistence (prefer the brand and will not choose a comparable substitute) Additional Benefits – 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.

Benefits of Branding: Brand Equity Brand equity: The overall value of a brand’s strength in market place –Brand awareness: The extent to which a particular brand name is familiar within a particular product category –Brand association: Involves connecting a brand with other positive attributes, including image, product features, usage situations, organizational associations, brand personality, and symbols © 2014 Pearson Education, Inc

Benefits of Branding: How to Choose and Protect? © 2014 Pearson Education, Inc. 19  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 It should be protected through registration (i.e. TRADEMARK) Guard against a brand name’s becoming a generic term. Kleenex ® or tissue?

Packaging © 2014 Pearson Education, Inc Protect the Product Provide Information Facilitate Storage Suggest Product Uses Promote the Brand Attract Buyer Attention

The Importance of Labels © 2014 Pearson Education, Inc Inform Persuade

The Product Life Cycle © 2014 Pearson Education, Inc

Marketing Decisions Affect a Product’s Life Cycle Marketing DecisionExample Lower the priceAutomobile discounts, rebates, and low-interest loans Create a new useArm & Hammer baking soda as a refrigerator deodorizer Find a new marketHome Depot and Lowe’s do-it-yourself training Use new labels or different container types Coca-Cola 6-oz bottles to 8-oz cans Create a new vision“This isn’t your father’s Oldsmobile” campaign © 2014 Pearson Education, Inc

Product Pricing & Pricing Objectives © 2014 Pearson Education, Inc  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 Objectives –Increase sales, profit, and/or market share –Increase store traffic –Create image/quality –Combat competition How do you determine price? –Cost-Based Mark-Up on Cost Break-Even Analysis –Demand Based ↑D, ↑P ↓D, ↓P –Competition Based Set a price based on what your competition is doing

Pricing Strategies: Cost-Based Pricing Charging a price in relation to the costs of providing a good or service. Advantages –Easy to calculate and administer –Requires minimum information Disadvantages –Ignores consumer price expectations and competitors’ prices –Provides little incentive to keep costs low © 2014 Pearson Education, Inc

Cost-Based Pricing Example You make 100 units of a product at a total cost of $2,000 Per unit cost is $2,000 / 100 = $20 To make a unit profit margin, or markup, of 20%:.20 x $20 = $4 You need to charge: $20 + $4 = $24 Total revenue = 100 x $24 = $2,400 Profit = $2,400 – $2,000 = $400 © 2014 Pearson Education, Inc

Demand-Based Pricing Pricing a good or service based on the demand for the product or its perceived value Target costing: estimates value Price discrimination: Charging different prices for different customers © 2014 Pearson Education, Inc

Competition-Based Pricing © 2014 Pearson Education, Inc Type of CompetitionPricing Strategy Perfectly competitive markets Firms charge prices equivalent to those of all other firms Monopolistically competitive markets Firms with successful product differentiation strategies charge higher prices Some firms may charge lower prices to get an edge on the competition. Oligopolies Do not compete on price to avoid price wars, competing on product differentiation instead Periodically, a price leader may emerge and others will drop their prices Monopoly No competition, so has greatest price-setting ability May see predatory pricing, the practice of charging very low prices with the intent to destroy the competition

Pricing Strategies When launching new products –Price skimming –Penetration pricing Strategies to impact price perceptions –Prestige (premium) pricing –Psychological pricing –Loss leader pricing –Reference pricing © 2014 Pearson Education, Inc

Cost-Based Pricing: Break–Even Analysis Example Total fixed costs = $600, selling price = $24, and average variable costs = $14 Break-even volume = $600 / ($24 - $14) = 60 units © 2014 Pearson Education, Inc Total fixed costs (Price – Average variable costs)

Adjusting Prices © 2014 Pearson Education, Inc

Common Pricing Strategies © 2014 Pearson Education, Inc. 32 New Product Pricing  Price Skimming: Charge highest possible price during introduction stage  Penetration Pricing: Setting low price for new product to build market share Differential Pricing - Charging different prices to different buyers for same quality and quantity  Negotiated: Final price comes from bargaining  Periodic Discounting: Temporary price reduction on patterned/systematic basis  Random Discounting: Temporary price reduction on unsystematic basis Psychological Pricing  Odd-Number: use odd numbers just below whole-dollar amounts  Multiple-Unit: single price for 2+ units (aka BOGO)  Reference: price at moderate level and positioning it near a more expensive model  Bundle: package 2+ products and selling for single price  EDLP: consistently low price

Chapter Summary 1.How is a product distinguished from a total product offer? 2.What is product differentiation, and what role does it play in product development? 3.What are the different classifications of consumer products and business-to-business products? 4.Why is branding beneficial to both buyers and sellers, and what are some different types of brands? 5.What steps take place during new product development, and what is the product life cycle? 6.What are some pricing objectives, and how do they relate to the marketing mix? 7.What are the major pricing strategies? © 2014 Pearson Education, Inc

© 2014 Pearson Education, Inc