Creating and Pricing Products that Satisfy Customers

Creating and Pricing Products that Satisfy Customers
Chapter Thirteen Creating and Pricing Products that Satisfy Customers Copyright © Cengage Learning. All rights reserved

Copyright © Cengage Learning. All rights reserved
Product: Everything that one receives in an exchange Has tangible attributes: (packages and warrantees) Intangible Components: status of ownership May be a good, service, or idea Copyright © Cengage Learning. All rights reserved

Classification of Products
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 © Cengage Learning. All rights reserved

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 Convenience Product Example: tissue paper, groceries Shopping Product: coats, clothes, electronics (requires some research) Specialty Product: getting a mortgage so much paperword and credit checks Give examples. Copyright © Cengage Learning. All rights reserved

Business Products 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 Accessories Standardized equipment used in a firm’s production or office activities Component part An item 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 Give examples of each. Copyright © Cengage Learning. All rights reserved

Process material A material that is used directly in the production of another product but is not readily identifiable in the finished product Business service An intangible product that an organization uses in its operations Copyright © Cengage Learning. All rights reserved

Product Life Cycle Give Examples What does this chart show us? Intro: Awareness and acceptance of product are low Sales rise gradually Low profit…operate in red Growth: Product becomes well known High competition is present Stabilize and Strengthen product position in the market Customer Service and prompt credit/ warrantees for defective products Maturity: The rate of increase has slowed Product lines are simplified Refined and extensions of the original product Promotional efforts and aggressive personal selling is needed. Decline: Sales decrease sharply and profits fall Competitors leave the market to pursue other goods to sell (more relevant) Management needs to determine to change their views on a product or else the will be left behind (ie. Kodak and Digital) too late to adjust What is the relationship between the life cycle and industry profits? Why should businesses care about this product life cycle? Estimate how long product will remain in that stage If product is to remain in the mature stage, the managers should think about developing a new product Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 15th ed. (Mason, Ohio: South-Western/Cengage Learning, 2010). Adapted with permission. Copyright © Cengage Learning. All rights reserved

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 Compact: Decline Online CPU: Growth Aspirin & Cigarettes : Mature Laptops: Mature to Decline due to increased phone and tablet usage Copyright © Cengage Learning. All rights reserved

Managing the Product Mix
Managing existing product Product modification: quality, functionality, or aesthetic characteristics 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 Developing new products Imitations, adaptations, or innovations Consists of seven phases Deleting products: eliminate obsolete and ineffective products Imitate a competitive product Adapt to the changing environment by modifying products Innovation: create something totally new that no one else is doing. Why is this the best in developing new products? Copyright © Cengage Learning. All rights reserved

Phases of New Product Development
Idea generation Looking for product ideas to help firm achieve objectives Screening: ideas that do not match organizational objectives are rejected Concept testing: a sample for customers to see and experiment Analysis: examining the potential financial performance of a product Development: products made at costs low enough to justify a reasonable price Test marketing: the limited introduction of a product Commercialization: plans for full scale manufacturing and marketing…refined and completed budgets are established Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 15th ed. (Mason, Ohio: South-Western/Cengage Learning, 2010). Adapted with permission. Copyright © Cengage Learning. All rights reserved

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 © Cengage Learning. All rights reserved

Examples of Product Failures
Source: accessed January 23, 2006; Robert M. McMath, “Copycat Cupcakes Don’t Cut It,” American Demographics, January 1997, p. 60; Eric Berggren and Thomas Nacher, “Why Good Ideas Go Bust,” Management Review, February 2000, pp. 32–36. Copyright © Cengage Learning. All rights reserved

What is a brand? Brand: a name, term, symbol, or design, or any combination of these that identifies a seller’s products as distinct from the other sellers. Copyright © Cengage Learning. All rights reserved

Branding 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 Logo 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 © Cengage Learning. All rights reserved

Market Value of Best Global Brands 2008
$ Billons Source: Best Global Brands 2008, Interbrand/BusinessWeek, September 18, 2008, Copyright © Cengage Learning. All rights reserved

Who Owns 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 Give examples Copyright © Cengage Learning. All rights reserved

Consumers’ Perceptions of Store and Manufacturers’ Brands
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 13th ed. Copyright © 2006 by Houghton Mifflin Company, Adapted by permission. Data from “Store Brands at the Turning Point,” Consumer Research Network. Copyright © Cengage Learning. All rights reserved

What are the benefits of branding?
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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 © Cengage Learning. All rights reserved

Benefits of branding Would you like to see a picture of my pride and joy? 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 Brand Loyalty Components: Brand Recognition: the weakest level of brand loyalty Preference: customer prefers one brand over another Insistence: customers strongly prefer one brand over all (I only buy Oreos) Copyright © Cengage Learning. All rights reserved

Packaging Packaging: All the activities involved in developing and providing a container for a product Protect and maintain a product’s functional form as well as promotion. More packages are becoming environmentally friendly What are the purposes of packaging? What are some things about packaging that people complain about? Copyright © Cengage Learning. All rights reserved

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 Copyright © Cengage Learning. All rights reserved

Labeling What are some of the things that should be considered when labeling? Labeling is the presentation of information on a product or its packaging Federal regulations: FDA and ingredient labels Written warrantees Copyright © Cengage Learning. All rights reserved

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 © Cengage Learning. All rights reserved

Labeling 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 nonedible items such as shampoo and detergent, safety precautions and instructions Express warranty A written explanation of the producer responsibilities in the product is found to be defective or otherwise unsatisfactory Copyright © Cengage Learning. All rights reserved

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 Based on supply and demand. Copyright © Cengage Learning. All rights reserved

Price is affected by Supply & Demand

Supply and Demand Curves

Price and nonprice 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 Give examples of products that compete only on price Copyright © Cengage Learning. All rights reserved

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. Copyright © Cengage Learning. All rights reserved

Pricing Objectives Give examples of products or services. 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 Status Quo pricing: If a firm can maintain its profits or market share solely on meeting the competition…competitors will charge the same price for products Copyright © Cengage Learning. All rights reserved

Factors That Affect Pricing Decisions
What are some of the things that affect a price? Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 13th ed. Copyright © 2006 by Houghton Mifflin Company, Adapted by permission. Copyright © Cengage Learning. All rights reserved

Factors That Affect Pricing Decisions
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 13th ed. Copyright © 2006 by Houghton Mifflin Company, Adapted by permission. Copyright © Cengage Learning. All rights reserved

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 marketing decisions Copyright © Cengage Learning. All rights reserved

Breakeven analysis 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 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) Copyright © Cengage Learning. All rights reserved

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 Why does it cost more to book a cruise during the summer? Why do you often get prices from several car dealers? Copyright © Cengage Learning. All rights reserved

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 Give examples of products Copyright © Cengage Learning. All rights reserved

Differential Pricing Strategies
Give examples of product 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 © Cengage Learning. All rights reserved

Psychological Pricing Strategies
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 Give examples of products Copyright © Cengage Learning. All rights reserved

Product-line Pricing Strategies
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 Give examples of products Copyright © Cengage Learning. All rights reserved

Can Brands Loose Potential?

Promotional Pricing Strategies
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 Give examples of products Copyright © Cengage Learning. All rights reserved

Pricing Business Products
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 How is FOB Origin different from FOB Destination? Copyright © Cengage Learning. All rights reserved

Pricing Business Products
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 © Cengage Learning. All rights reserved

Chapter Quiz All of the following are characteristics of the growth stage of the product life cycle except a rapid increase in sales. the introduction of competing products. decreased unit prices but overall increase in total profits. the introduction of modified versions of its products by the original firm. a decline in the number of competing firms. If Samsonite decided to use better zippers on its luggage that would make the luggage more durable, it would be making __________ modifications. aesthetic functional texture quality market Copyright © Cengage Learning. All rights reserved

Chapter Quiz (cont’d) The Nike “swoosh” is a brand. generic symbol. label. brand mark. Universal Product Code. In setting prices, managers should consider the __________ of people in the target market. demographics ages price sensitivity philosophy occupations Copyright © Cengage Learning. All rights reserved

Chapter Quiz (cont’d) The pricing strategy that requires the buyer to pay the greatest portion of the delivery costs is called railhead pricing. parcel post. express delivery cost. FOB origin pricing. C.O.D. pricing. Copyright © Cengage Learning. All rights reserved

Answers to Chapter Quiz
All of the following are characteristics of the growth stage of the product life cycle except a rapid increase in sales. the introduction of competing products. decreased unit prices but overall increase in total profits. the introduction of modified versions of its products by the original firm. a decline in the number of competing firms. (Correct) If Samsonite decided to use better zippers on its luggage that would make the luggage more durable, it would be making __________ modifications. aesthetic functional texture quality (Correct) market Copyright © Cengage Learning. All rights reserved

Answers to Chapter Quiz (cont’d)
The Nike “swoosh” is a brand. generic symbol. label. brand mark. (Correct) Universal Product Code. In setting prices, managers should consider the __________ of people in the target market. demographics ages price sensitivity (Correct) philosophy occupations Copyright © Cengage Learning. All rights reserved

Answers to Chapter Quiz (cont’d)
The pricing strategy that requires the buyer to pay the greatest portion of the delivery costs is called railhead pricing. parcel post. express delivery cost. FOB origin pricing. (Correct) C.O.D. pricing. Copyright © Cengage Learning. All rights reserved

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