Product and Pricing Strategies

Product and Pricing Strategies
This chapter, the second of four on the marketing function, gives you a close look at two elements of the marketing mix: product and price. The exploration of price starts with a rundown of the major types of products, the life cycle that most products progress through from introduction to the point at which they’re removed from the market, and the process companies use to create new products. Following that, you’ll learn about the techniques used to identify products: branding, packaging, and labeling. The final product discussion involves the decisions companies make when managing multiple families of products. The chapter wraps up with a look at pricing strategies. © Prentice Hall, 2007 Excellence in Business, 3e

Product Characteristics Excellence in Business, 3e
Types of Products Stages As the central element in every company’s exchanges with its customers, products naturally command considerable attention when managers plan new offerings and manage the marketing mixes for their existing offerings. To understand the nature of these decisions, it’s important to recognize the various types of products and the stages that products go through during their “lifetime” in the marketplace. © Prentice Hall, 2007 Excellence in Business, 3e

Excellence in Business, 3e
The Product Continuum Goods Products Ideas Services Salt Shoes VCR Auto Fast Food Cruise Consulting Education Insurance Tangible Dominant Intangible Although some products are predominantly tangible and others are mostly intangible, most products fall somewhere between those two extremes. The product continuum indicates the relative amounts of tangible and intangible components in a product. Education is a product at the intangible extreme, whereas salt and shoes are at the tangible extreme. © Prentice Hall, 2007 Excellence in Business, 3e

Augmenting the Basic Product
Core Benefits Actual Product Brand Name Features Quality Level Design Packaging Augmented Product Installation Warranty Upgrades Accessories Delivery and Credit After-Sale Service Deciding how much or how little to expand on the core product is one of the most important product strategy decisions that managers need to make. In many markets, competitors offer a wide range of possibilities, from “bare-bones” offerings to products with all the “bells and whistles,” as marketers like to say. The slide above shows some of the ways marketers can augment, or enhance, a basic product with additional services and accessories. © Prentice Hall, 2007 Excellence in Business, 3e

Characteristics of Service Products
Intangible Quality Perishable Nature Service products have some special characteristics that affect the way they are marketed. As we have seen, intangibility is one fundamental characteristic. You can’t usually show a service in an ad, demonstrate it before customers buy, mass produce it, or give customers anything tangible to show for their purchase. Services marketers often compensate for intangibility by using tangible symbols or by adding tangible components to their products. Another unique aspect of service products is perishability. Because services cannot usually be created in advance or held in storage until people are ready to buy, services are time sensitive. For this reason, many services try to shift customer demand by offering discounts or promotions during slow periods. © Prentice Hall, 2007 Excellence in Business, 3e

Consumer Products Specialty Products Convenience Unsought Shopping Products that are primarily sold to consumers are known as consumer products. Consumer products can be classified into four subgroups, depending on how people shop for them: Convenience products are the goods and services that people buy frequently, without much conscious thought, such as toothpaste, dry cleaning, film developing, and photocopying. Shopping products are fairly important goods and services that people buy less frequently: a stereo, a computer, a refrigerator, or a college education. Such purchases require more thought and comparison shopping to check on price, features, quality, and reputation. Specialty products include particular brands that the buyer especially wants and will seek out, regardless of location or price. Specialty products do not have to be expensive, but they are products that customers go out of their way to buy and rarely accept substitutes for. Unsought goods are products that people do not normally think of buying, such as life insurance, cemetery plots, and new products they must be made aware of through promotion. © Prentice Hall, 2007 Excellence in Business, 3e

Industrial Products Expense Items Capital Items Short-Term Long-Term In contrast to consumer products, industrial products are generally purchased by firms in large quantities and are used for further processing or in conducting a business. Two categories of industrial products are expense items and capital items. Expense items are relatively inexpensive goods and services that organizations generally use within a year of purchase. Examples are pencils and printer cartridges. Capital items, are more expensive organizational products and have a longer useful life. Examples include desks, photocopiers, and computers. Pencils Printer Cartridges Computers Copy Machines © Prentice Hall, 2007 Excellence in Business, 3e

Products and Their Uses
Raw materials Components Supplies Installations Equipment Business services Aside from dividing products into expense and capital items, industrial buyers and sellers often classify products according to their intended use. Raw materials such as iron ore, crude petroleum, lumber, and chemicals are used in the production of final products. Components such as spark plugs and printer cartridges are similar to raw materials; they also become part of the manufacturers’ final products. Supplies such as pencils, nails, and light bulbs that are used in a firm’s daily operations are considered expense items. Installations such as factories, power plants, airports, production lines, and semiconductor fabrication machinery are major capital projects. Equipment includes less-expensive capital items such as desks, telephones, and fax machines that are shorter lived than installations. Business services range from simple and fairly risk-free services such as landscaping and cleaning to complex services such as management consulting and auditing. © Prentice Hall, 2007 Excellence in Business, 3e

The Product Life Cycle Introduction Growth Maturity Decline In-Flight Internet Service Digital Music Players DVD Players VCRs Sales Sales Volume (units) Regardless of a product’s classification, few products last forever. Most products go through a product life cycle, passing through four distinct stages in sales and profits: introduction, growth, maturity, and decline. As the product passes from stage to stage, various marketing approaches become appropriate. The first stage in the product life cycle is the introductory stage, during which producers launch a new product and stimulate demand. After the introductory stage comes the growth stage, marked by a rapid jump in sales and, usually, an increase in the number of competitors and distribution outlets. As competition increases, so does the struggle for market share. During the maturity stage, the longest in the product life cycle, sales begin to level off or show a slight decline. Most products are in the maturity stage of the life cycle where competition increases and market share is maximized-making further expansion difficult. Although maturity can be extended for many years, most products eventually enter the decline stage, when sales and profits slip and then fade away. Declines occur for several reasons: changing demographics, shifts in popular taste, product competition, and advances in technology. When a product reaches this point in the life cycle, the company must decide whether to keep it and reduce the product’s costs to compensate for declining sales or discontinue it and focus on developing newer products. Another option is to give the product a makeover—that is, changing the packaging, improving the formula, or modifying the form or flavor, in hopes of injecting new life into the brand. +  Profits Time © Prentice Hall, 2007 Excellence in Business, 3e

Product Makeovers Reinvigorated Designs Refreshed Marketing Efforts Marketers don’t need to accept a product’s decline as inevitable, however. Numerous products have been pulled back from the brink with reinvigorated designs and refreshed marketing efforts. © Prentice Hall, 2007 Excellence in Business, 3e

New Product Development Excellence in Business, 3e
Screening of ideas Business analysis Prototype development Test marketing Commercialization Companies that do develop new products generally use a product-development process—a series of stages through which a product idea passes. © Prentice Hall, 2007 Excellence in Business, 3e

Idea Generation Customers Competitors Employees The first step in the product-development process is to come up with ideas that will satisfy unmet needs. Customers, competitors, and employees are often the best source of new-product ideas. © Prentice Hall, 2007 Excellence in Business, 3e

Idea Screening Consumer Products Concept Testing Industrial Products Feasibility Study From the mass of ideas suggested, the company culls a few that appear to be worthy of further development, applying broad criteria such as whether the product can use existing production facilities and how much technical and marketing risk is involved. In the case of industrial or technical products, this phase is often referred to as a “feasibility study,” in which the product’s features are defined and its workability is tested. In the case of consumer products, marketing consultants and advertising agencies are often called in to help evaluate new ideas. In some cases, potential customers are asked what they think of a new product idea—a process known as concept testing. © Prentice Hall, 2007 Excellence in Business, 3e

Business Analysis Forecast Sales Estimate Costs Project Profits A product idea that survives the screening stage is subjected to a business analysis. During this stage the company reviews the sales, costs, and profit projections to see if they meet the company’s objectives. For instance, one question the company must answer is whether the company can make enough money on the product to justify the investment. To answer this question, the company forecasts the probable sales of the product, assuming various pricing strategies. In addition, it estimates the costs associated with various levels of production. Given these projections, the company calculates the potential profit that will be achieved if the product is introduced. If the product meets the company’s objectives, it can then move to the product-development stage. © Prentice Hall, 2007 Excellence in Business, 3e

Prototype Development
Packaging Marketing Mix Production Resources At this stage the firm actually develops the product concept into a physical product. The firm creates and tests a few samples, or prototypes, of the product, including its packaging. During this stage, the various elements of the marketing mix are put together. In addition, the company evaluates the feasibility of large-scale production and specifies the resources required to bring the product to market. © Prentice Hall, 2007 Excellence in Business, 3e

Test Marketing Introduce the Product Monitor Customer Reactions During test marketing, the firm introduces the product in selected areas of the country and monitors consumer reactions. Test marketing gives the marketer experience with marketing the product before going to the expense of a full introduction. Fisher-Price’s Play Lab is the centerpiece of the company’s success. © Prentice Hall, 2007 Excellence in Business, 3e

Commercialization Production Distribution Manufacturing Packaging Pricing Promotion The final stage of development is commercialization, the large-scale production and distribution of those products that have survived the testing process. This phase (also referred to as a product launch) requires the coordination of many activities—manufacturing, packaging, distribution, pricing, and promotion. A classic mistake is letting marketing get out of phase with production by promoting the product before the company can supply it in adequate quantity. Many companies roll out their new products gradually, going from one geographic area to the next. This plan enables them to spread the costs of launching the product over a longer period and to refine their strategy as the rollout proceeds. © Prentice Hall, 2007 Excellence in Business, 3e

Product Identities Recognizing Products The Product Brand Marketing Products Specifying Products Valuing Products Unique Name, Symbol or Design Creating an identity for products is one of the most important decisions marketers make. That identify is encompassed in the brand, which can have meaning at three levels: (1) a unique name, symbol, or design that sets the product apart from those offered by competitors, (2) the legal protections afforded by a trademark and any relevant intellectual property, and (3) the overall company or organizational brand. Branding helps a product in many ways. It provides customers with a way of recognizing and specifying a particular product so that they can choose it again or recommend it to others. It provides consumers with information about the product. It facilitates the marketing of the product. And it creates value for the product. This notion of the value of a brand is also called brand equity. Legal Protections Company or Organization Brand © Prentice Hall, 2007 Excellence in Business, 3e

Branding of Products Equity Name Selection Sponsorship Brand Loyalty Brand Awareness Brand Names Brand Marks National Brands Private Brands Brand Equity. This is the notion of the value of a brand. Customers who buy the same brand again and again are evidence of the strength of brand loyalty, or commitment to a particular brand. Brand loyalty can be measured in degrees. The first level is brand awareness, which means that people are likely to buy a product because they are familiar with it. The next level is brand preference, which means people will purchase the product if it is available, although they may still be willing to experiment with alternatives if they cannot find the preferred brand. The third and ultimate level of brand loyalty is brand insistence, the stage at which buyers will accept no substitute. Brand Name Selection. Botox Cosmetic, Jeep, Levi’s 501, and iPod are brand names, the portion of a brand that can be spoken, including letters, words, or numbers. McDonald’s golden arches and the Nike “swoosh” symbols examples of a brand mark, the portion of a brand that cannot be expressed verbally. The choice of a brand name and any associated brand marks can be a critical success factor. A well-known brand name, for instance, can generate more sales than an unknown name. As a result, manufacturers zealously protect their names. Brand names and brand symbols may be registered with the Patent and Trademark Office as trademarks, brands that have been given legal protection so that their owners have exclusive rights to their use. Nonetheless, when a name becomes too widely used, it no longer qualifies for protection under trademark laws. Cellophane, kerosene, linoleum, escalator, zipper, shredded wheat, and raisin bran are just a few of the many brand names that have passed into public domain, much to their creators’ dismay. Brand Sponsorship. Brand names may be associated with a manufacturer, retailer, wholesaler, or a combination of business types. Brands offered and promoted by a national manufacturer, such as Procter & Gamble’s Tide detergent and Pampers disposable diapers, are called national brands. Private brands are not linked to a manufacturer but instead carry a wholesaler’s or a retailer’s brand. As an alternative to branded products, some retailers also offer generic products, which are packaged in plain containers that bear only the name of the product. Co-branding occurs when two or more companies team up to closely link their names in a single product. Sometimes companies, such as Warner Brothers, license or sell the rights to specific well-known names and symbols—such as Looney Tunes cartoon characters—and then manufacturers use these licensed labels to help sell products. Brand Preference Brand Insistence Trademarks Public Domain Generic Products Co-Branding and Licensing © Prentice Hall, 2007 Excellence in Business, 3e

Packaging and Labeling
Strategy Inventory Control The Product Information Appeal Display Differentiation Function Another way that marketers create an identity for their products is through packaging. In some cases, packaging is an essential part of the product itself, such as microwave popcorn or toothpaste in pump dispensers. Besides function, however, packaging plays an important role in a product’s marketing strategy. Packaging makes products easier to display, facilitates the sale of smaller products, serves as a means of product differentiation, and enhances the product’s overall appeal and convenience. Labeling is an integral part of packaging. Whether the label is a separate element attached to the package or a printed part of the container, it serves to identify a brand. Labels also provide grading information about the product and information about ingredients, operating procedures, shelf life, or risks. Labels do more than communicate with consumers. They are also used by manufacturers and retailers as a tool for monitoring product performance and inventory. Universal Product Codes (UPCs), those black stripes on packages, give companies a cost-effective method of tracking the movement of goods. © Prentice Hall, 2007 Excellence in Business, 3e

Product Strategies Product Line Product Mix Product Expansion In addition to developing product identities, a company must decide how many and what kind of products it will offer. To stay competitive, most companies continually add and drop products to ensure that declining items will be replaced by growth products. Companies that offer more than one product also need to pay close attention to how those products are positioned in the marketplace relative to one another. International Markets © Prentice Hall, 2007 Excellence in Business, 3e

Product Line and Product Mix
Width Length Depth Goods or Services Risks or Rewards Strengths and Weaknesses Long-Term Strategy Managerial Depth Financial Resources Retail Channel A product line is group of products from a single manufacturer that are similar in terms of use or characteristics. An organization with several product lines has a product mix—a collection of goods or services offered for sale. Three important dimensions of a company’s product mix are width, length, and depth, and each dimension presents its own set of challenges and opportunities. A product mix is wide if it has several different product lines. A company’s product mix is long if it carries several items in its product lines A product mix is deep if it has a number of versions of each product in a product line. When deciding on the dimensions of a product mix, a company must weigh the risks and rewards associated with various approaches. The decisions are also influenced by such factors as a company’s long-term strategy, competitive strengths and weaknesses, managerial depth, and financial resources. Retailers often have considerable influence in manufacturers’ product lines decisions as well. In general, the more revenue a manufacturer represents, the better treatment it receives in the retail channel—particularly with regard to the all-important issue of shelf space. © Prentice Hall, 2007 Excellence in Business, 3e

Product Expansion Add Items in a Product Category Under the Same Brand Name Add New Products with the Same Product Name Apply a Successful Brand Name to a New Category you can expand your product line and mix in a number of ways. One approach is to introduce additional items in a given product category under the same brand name—such as new flavors, forms, colors, ingredients, or package sizes. Another approach is to expanding a product line is to add new products with the same product name—a strategy known as family branding. In a brand extension, a company applies a successful brand name to a new category in the hopes that the recognition and reputation of the brand will give it a head start in the new category. Another option is translating a successful brand in a different product format, such as videogames that are based on movies. Translate a Successful Brand in a Different Product Format © Prentice Hall, 2007 Excellence in Business, 3e

International Markets
Government Standardization Exchange Rates Entry Requirements Language Tariffs and Trade Barriers Consumer Preferences In the course of developing strategies for marketing products internationally, companies must consider a variety of factors. First, they must decide on which products and services to introduce in which countries. When selecting a country, they must take into consideration the type of government, market entry requirements, tariffs and other trade barriers, cultural and language differences, consumer preferences, foreign-exchange rates, and differing business customs. Then they must decide whether to standardize the product, selling the same product everywhere, or to customize the product to accommodate the lifestyles and habits of local target markets. Keep in mind that the degree of customization can vary. A company may change only the product's name or packaging, or it can modify the product’s components, size, and functions. Culture Customization Business Customs © Prentice Hall, 2007 Excellence in Business, 3e

Product Positioning Features Services Image Price Category Size, ease of use, style Convenience, customer support Reliability, sophistication Low cost or premium Leading online seller Marketers can follow several positioning strategies. They can position their products on specific product features or attributes (such as size, ease of use, style), on the services that accompany the product (such as convenient delivery or lifetime customer support), on the product’s image (such as reliability or sophistication), on price (such as low cost or premium), on category leadership (such as the leading online bookseller), and so on. © Prentice Hall, 2007 Excellence in Business, 3e

Product Positioning Errors
Under Positioning Over Confused When choosing the number of distinguishing variables to promote, companies try to avoid three major positioning errors: underpositioning (failing to ever really position the product at all); overpositioning (promoting too many benefits so that no one actually stands out); and confused positioning (mixing benefits that confuse the buyer such as sophisticated image and low-cost). © Prentice Hall, 2007 Excellence in Business, 3e

Developing Pricing Strategies
Quality Perceptions Marketing Objectives Consumer Demand Government Regulations A company’s pricing decisions are determined by manufacturing and selling costs, competition, and the needs of wholesalers and retailers who distribute the product to the final customer. In addition, pricing is influenced by a firm’s marketing objectives, government regulations, consumers’ perceptions, and consumer demand. Marketing objectives. The first step in setting a price is to match it to the objectives you set in your strategic marketing plan. Government regulations. Government plays a big role in pricing in many countries. To protect consumers and encourage fair competition, the U.S. government has enacted various price-related laws over the years. Quality perceptions. Another consideration is the perception of quality that your price will elicit from your customers. Consumer demand. Whereas a company’s costs establish a floor for prices, demand for a product establishes a ceiling. © Prentice Hall, 2007 Excellence in Business, 3e

Cost-Based Pricing Break-Even Analysis Break-Even Point $$ Profits $$ More Than $$ Losses $$ Less Than Fixed costs Selling price per unit-Variable costs per unit Many companies simplify the pricing task by using cost-based pricing (also known as cost plus pricing). They price by starting with the cost of producing a good or a service and then add a markup to the cost of the product to produce a profit. How does a company determine the amount of profit it will earn by selling a certain product? Break-even analysis is a tool companies use to determine the number of units of a product they must sell at a given price to cover all manufacturing and selling costs, or to break even. In break-even analysis, you consider two types of costs. Variable costs change with the level of production. These include raw materials, shipping costs, and supplies consumed during production. Fixed costs, by contrast, remain stable regardless of the number of products produced. These costs include rent payments, insurance premiums, and real estate taxes. The total cost of operating the business is the sum of a firm's variable and fixed costs. The break-even point is the minimum sales volume the company must achieve to avoid losing money. Sales volume beyond the break-even point will generate profits; sales volume below the break-even amount will result in losses. © Prentice Hall, 2007 Excellence in Business, 3e

Break-Even Point Haircuts at $20 Each
For example, if you wanted to price haircuts at $20 and you had fixed costs of $60,000 and variable costs per haircut of $5, you would need to sell 4,000 haircuts to break even: Break-even point (in units) = $60,000 = 4,000 units $20 - $5 © Prentice Hall, 2007 Excellence in Business, 3e

Break-Even Point Haircuts at $30 Each
Of course, $20 isn't your only pricing option. Why not charge $30 instead? When you charge the higher price, you need to give only 2,400 haircuts to break even (see graph above). However, before you raise your haircut prices to $30, bear in mind that a lower price may attract more customers and enable you to make more money in the long run. Break-even analysis doesn't dictate what price you should charge; rather, it provides some insight into the number of units you have to sell at a given price to make a profit. This analysis is especially useful when you are trying to calculate the amount to markup a price to earn a profit. Cost-based pricing, while simple, makes little sense. First, any pricing that ignores demand and competitor prices is not likely to lead to the best price. Second, although cost-based pricing may ensure a certain profit, companies using this strategy tend to sacrifice profit opportunity. © Prentice Hall, 2007 Excellence in Business, 3e

Other Pricing Strategies
Price-Based Optimization Skimming Penetration Most manufacturers design a product, then try to figure out how to make it for a price. But recent thinking holds that cost should be the last item analyzed in the pricing formula, not the first. Companies that use priced-based pricing can maximize their profit by first establishing an optimal price for a product or service. The product's price is based on an analysis of a product's competitive advantages, the users' perception of the item, and the market being targeted. Once the desired price has been established, the firm focuses its energies on keeping costs at a level that will allow a healthy profit. Optimal pricing uses computer software to generate the ideal price for every item, at each individual store, at any given time. Research shows that many retailers routinely underprice or overprice the merchandise of their shelves. They generally set a price by marking up from cost, or by benchmarking against the competition’s prices, or simply by hunch. A product's price seldom remains constant and will vary depending on the product's stage in its life cycle. During the introductory phase, for example, the objective might be to recover product development costs as quickly as possible. To achieve this goal, the manufacturer might charge a high initial price—a practice known as skimming—and then drop the price later, when the product is no longer a novelty and competition heats up. Rather than setting a high initial price to skim off a small but profitable market segment, a company might try to build sales volume by charging a low initial price, a practice known as penetration pricing. This approach has the added advantage of discouraging competition, because the low price (which competitors would be pressured to match) limits the profit potential for everyone. © Prentice Hall, 2007 Excellence in Business, 3e

Price Adjustment Strategies
Discount Pricing Bundling Dynamic Pricing Once a company has set a products’ price, it may choose to adjust that price from time to time to account for changing market situations or changing customer preferences. Three common price adjustment strategies are price discounts, bundling, and dynamic pricing. When you use discount pricing, you offer various types of temporary price reductions, depending on the type of customer being targeted and the type of item being offered. Sometimes sellers combine several of their products and sell them at one reduced price. This practice, called bundling, can promote sales of products consumers might not otherwise buy—especially when the combined price is low enough to entice them to purchase the bundle. Dynamic pricing is the opposite of fixed pricing. Using Internet technology, companies continually reprice their products and services to meet supply and demand. Dynamic pricing not only enables companies to move slow selling merchandise instantly but also allows companies to experiment with different pricing levels. Because price changes are immediately posted to electronic catalogs or websites, customers always have the most current price information. © Prentice Hall, 2007 Excellence in Business, 3e

Product and Pricing Strategies

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