1. Product and Pricing Strategies
Business in Action
Eighth Edition
Chapter 14
Product and Pricing Strategies
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2. Learning Objectives (1 of 2)
14.1 Identify the main types of consumer and organizational products, and describe the four stages in the life cycle of a product Describe six stages in the product development process Define brand, and explain the concepts of brand equity and brand loyalty.

3. Learning Objectives (2 of 2)
14.4 Identify four ways of expanding a product line, and discuss two risks that product-line extensions pose List the factors that influence pricing decisions, and explain break-even analysis Identify nine common pricing methods.

4. Exhibit 14.1 The Product Continuum
Products contain both tangible and intangible components; predominantly tangible products are categorized as goods, whereas predominantly intangible products are categorized as services.

5. Exhibit 14.2 Augmenting the Basic Product
Product decisions also involve how much or how little to augment the core product with additional goods and services.

6. Consumer Products (1 of 2)
Convenience products
Everyday goods and services that people buy frequently, usually without much conscious planning
Shopping products
Fairly important goods and services that people buy less frequently with more planning and comparison
Products that are primarily sold to individuals for personal consumption are known as consumer products. They can be classified into four subgroups, depending on how people shop for them:
Everyday goods and services that people buy frequently, usually without much conscious planning, are known as convenience products.
Shopping products are fairly important goods and services that people buy less frequently, such as computers and college educations. Because the stakes are higher and the decisions more complex, such products require more thought and comparison shopping.

7. Consumer Products (2 of 2)
Specialty products
Particular brands that the buyer especially wants and will seek out, regardless of location or price
3. Specialty products are particular brands that the buyer especially wants and will seek out, regardless of location or price, such as Suzuki violin lessons or Bang & Olufsen home entertainment gear.
4. When it comes to some products, such as life insurance, cemetery plots, and items that are new to the marketplace, consumers aren’t looking for them. The marketing challenges for these unsought products include making consumers aware of their existence and convincing people to consider them.

8. Industrial and Commercial Products (1 of 2)
Expense items
Inexpensive goods generally used within a year of purchase
Capital items
More expensive organizational products with a longer useful life, ranging from office and plant equipment to entire factories
Expense items are relatively inexpensive goods that are generally used within a year of purchase, such as printer cartridges and paper. Capital items are more expensive products with a longer useful life. Examples include computers, vehicles, production machinery, and even entire factories.

9. Industrial and Commercial Products (2 of 2)
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 semiconductors and fasteners 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, and airports are major capital projects.
• Equipment includes items such as desks, computers, and factory robots.
• Business services range from landscaping and cleaning to complex services such as management consulting and auditing.

10. The Product Life Cycle Product life cycle
Four stages through which a product progresses: introduction, growth, maturity, and decline
Most products undergo a product life cycle, passing through four distinct stages in sales and profits: introduction, growth, maturity, and decline (shown in Exhibit 14.3 on the next slide). The marketing challenge changes from stage to stage, sometimes dramatically. The product life cycle can describe a product class (such as gasoline-powered automobiles), a product form (such as sport utility vehicles), or a brand or model (such as Ford Explorer). Product classes and forms tend to have the longest life cycles, specific brands somewhat shorter life cycles, and individual products even shorter cycles.

11. Exhibit 14.3 The Product Life Cycle
Most products and product categories move through a life cycle similar to the one represented by the curve in this diagram, with new innovations pushing existing products along the time axis. However, the duration of each stage varies widely from product to product. Automobiles have been in the maturity stage for decades, but faxing services barely made it into the introduction stage before being knocked out of the market by low-cost fax machines that every business and home office could afford—which were themselves pushed along the curve by digital document formats.

12. The New-Product Development Process (1 of 3)
A formal process of generating, selecting, developing, and commercializing product ideas
Many of today’s products appear on the market as a result of a rigorous, formal product development process—a method of generating, selecting, developing, and commercializing product ideas. (See Exhibit 14.4 on the next slide.)

13. Exhibit 14.4 The Product Development Process
The product development process aims to identify the product ideas most likely to succeed in the marketplace. The process varies widely by company, of course; entrepreneurs and start-ups sometimes begin with a single product idea and take it all the way through to commercialization.

14. The New-Product Development Process (2 of 3)
Prototypes
Pre-production samples of products used for testing and evaluation
Test marketing
The stage of product development in which a product is sold on a limited basis to gauge its market appeal
For physical goods, the firm creates and tests a few samples, or prototypes, of the product, including its packaging. These units are rigorously analyzed for usability, durability, manufacturability, customer appeal, and other vital criteria, depending on the type of product. In addition, the company begins to plan for large-scale manufacturing (for tangible goods) or scalability (for digital services, for example), then identifies the resources required to bring the product to market.
During test marketing, the firm introduces the product in selected markets and monitors consumer reactions. Test marketing gives the marketer experience with marketing the product before going to the expense of a full introduction.

15. The New-Product Development Process (3 of 3)
Commercialization
Large-scale production and distribution of a product
The final stage of development is commercialization, the large-scale production and distribution of 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, media relations, and customer communication.

16. Product Identities (1 of 2)
Brand
A name, term, sign, symbol, design, or combination of those used to identify the products of a firm and to differentiate them from competing products
Creating an identity for products is one of the most important decisions marketers make. That identity 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.

17. Product Identities (2 of 2)
Brand equity
The value that a company has built up in a brand
Brand loyalty
The degree to which customers continue to purchase a specific brand
Branding helps a product in many ways. It gives customers 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.
Customers who buy the same brand again and again are evidence of the strength of brand loyalty, or a commitment to a particular brand. Brand loyalty can be measured in degrees.

18. Brand Name Selection (1 of 2)
The portion of brands that can be expressed orally, including letters, words, or numbers
Brand marks
The portion of brands that cannot be expressed verbally
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” symbol are brand marks, the portion of a brand that cannot be expressed verbally.

19. Brand Name Selection (2 of 2)
Logo
A graphical and/or textual representation of a brand
Trademarks
Brands that have been given legal protection so that their owners have exclusive rights to their use
The term logo (from logotype) once referred to the typesetting treatment of a brand name but is now used more variably to refer to the nonverbal brand mark, the visual treatment of the brand name, or a combination of the two. 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.

20. Exhibit 14.5 Product Identities
The Chevrolet “bowtie” logo, which recently celebrated its 100th anniversary, is instantly recognizable on the company’s cars and trucks.

21. Brand Ownership (1 of 2) National brands
Brands owned by manufacturers and distributed nationally
Private brands
Brands that carry the label of a retailer or a wholesaler rather than a manufacturer
Brand names may be associated with a manufacturer, a retailer, a 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. Die-Hard batteries and Kenmore appliances are private brands sold by Sears.

22. Brand Ownership (2 of 2) Co-branding
A partnership between two or more companies to closely link their brand names together for a single product
License
An agreement to produce and market another company’s product in exchange for a royalty or fee
Co-branding occurs when two or more companies team up to closely link their names in a single product, usually to leverage the brand associations and awareness of one product onto the other. Companies can also license, or offer to sell, the rights to well-known brand names and symbols. Mainstream movies, for example, often hit the market with an array of licensing deals with fast-food chains and other consumer products companies.

23. Product-Line and Product-Mix Strategies (1 of 2)
Brand managers
Managers who develop and implement the marketing strategies and programs for specific products or brands
In larger companies with more products to manage, individual products or groups of products are usually assigned to brand managers, known in some companies as product managers or product-line managers.

24. Product-Line and Product-Mix Strategies (2 of 2)
A series of related products offered by a firm
Product mix
The complete portfolio of products that a company offers for sale
A product line is a group of products from a single manufacturer that are similar in terms of use or characteristics. The General Mills snack-food product line, for example, includes Bugles, Cascadian Farm organic snacks, and Nature Valley Granola Bars.
An organization with several product lines has a product mix—a collection of diverse goods or services offered for sale. The General Mills product mix includes cereals, baking products, desserts, snack foods, and entrees. (See Exhibit 14.6 in your chapter for more information.)

25. Exhibit 14.7 Expanding a Product Line
Companies use one or more of these product-line expansion methods to pursue new opportunities.

26. Strategic Considerations in Pricing
Marketing objectives
Government regulations
Customer perceptions
Market demand
Competition

27. Cost Structure Fixed costs
Business costs that remain constant regardless of the number of units produced
Variable costs
Business costs that increase with the number of units produced
Every company has a particular cost structure that determines how much it must spend to create and market its products. Some costs remain the same regardless of production and sales volume. Such fixed costs include rent or mortgage payments, insurance premiums, real estate taxes, and salaries. These are costs incurred just to “keep the doors open,” without creating or selling anything. In contrast, variable costs, including raw materials, supplies consumed during production, shipping, and sales commissions, vary with changes in production and sales volume. Obviously, the more a company can lower its cost structure, the more flexibility it has in setting prices and ensuring desirable levels of profit.

28. Break-Even Analysis (1 of 2)
A method of calculating the minimum volume of sales needed at a given price to cover all costs
The cost to create and sell each product is a combination of fixed and variable costs. A critical calculation in setting prices is break-even analysis, determining the number of units a firm must sell at a given price to recoup both fixed and variable costs—to “break even,” in other words. 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.

29. Break-Even Analysis (2 of 2)
Break-even point
Sales volume at a given price that will cover all of a company’s costs
You can determine the break-even point in number of units with this simple calculation.

30. Exhibit 14.8 Break-Even Analysis (1 of 2)
The break-even point is the point at which revenues just cover costs. After fixed costs and variable costs have been met, any additional income represents profit. This graph shows that at $20 per haircut, the break-even point is 4,000 haircuts.

31. Exhibit 14.8 Break-Even Analysis (2 of 2)
Charging $30 yields a break-even point at only 2,400 haircuts.

32. Pricing Methods (1 of 5) Cost-based pricing
A method of setting prices based on production and marketing costs, rather than conditions in the marketplace
Value-based pricing
A method of setting prices based on customer perceptions of value
Some companies simplify the pricing task by using cost-based pricing, also known as cost-plus pricing, in which they start with the cost of producing a good or a service and then add a markup to arrive at the selling price. Cost-based pricing is simple, but it suffers from a major weakness: it doesn’t consider any external factors such as customer demand or competitive prices. The price could be too high for market conditions, leaving the company uncompetitive, or it could be too low, generating less profit than it could otherwise.
In contrast to cost-based pricing, value-based pricing establishes a price on a product’s potential or perceived value in the marketplace. In other words, rather than starting with cost and then figuring out a price, this method starts with a target price and works backward to identify a cost structure that will yield acceptable profit margins.

33. Pricing Methods (2 of 5) Optimal pricing
A computer-based pricing method that creates a demand curve for every product to help managers select a price that meets specific marketing objectives
Optimal pricing attempts to minimize the errors and guesswork of other methods by using computer software to generate the ideal price for every item, at each individual store, at any given time. A price-optimization program feeds reams of data from checkout scanners, seasonal sales figures, competitors, and other sources into probability algorithms to come up with an individual demand curve for each product in each store. From that, retailers can identify which products are the most price sensitive. Then they can adjust prices up or down according to each store’s priorities—profit, revenue, or market share. Some systems also let store managers conduct “what if ” analyses based on past sales data, helping them see the potential effect of proposed price changes.

34. Pricing Methods (3 of 5) Skim pricing
Charging a high price for a new product during the introductory stage and lowering the price later
Penetration pricing
Introducing a new product at a low price in hopes of building sales volume quickly
During the introductory phase of the product life cycle, a company may opt to take advantage of strong demand before competitors can enter the market and exert downward pressure on prices. To achieve this goal, the company can charge a high initial price—a practice known as skim pricing—with the intention of dropping the price later. Early adopters are often willing to pay a premium to get their hands on new products as soon as possible..
Companies use penetration pricing to build sales volume by charging a low initial price. 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. (If the intent of penetration is to drive competitors out of business, though, companies open themselves up to charges of illegal predatory pricing.)

35. Pricing Methods (4 of 5) Loss-leader pricing
Selling one product at a loss as a way to entice customers to consider other products
Auction pricing
The seller doesn’t set a firm price but allows buyers to competitively bid on the products being sold
As part of a larger marketing plan, some companies occasionally resort to loss-leader pricing, setting a price on one product so low that they lose money on every sale but recoup that loss by enticing customers to try a new product or buy other products. For instance, grocery stores can use milk and other staples as loss leaders to encourage shoppers to visit.
In an auction, the seller doesn’t set a firm price but allows buyers to competitively bid on the products being sold. Auctions used to be confined to a few market sectors such as fine art, agricultural products, and government bonds, but that all changed when eBay turned selling and buying via auctions into a new national pastime.

36. Pricing Methods (5 of 5) Participative pricing
Allowing customers to pay the amount they think a product is worth
Freemium pricing
A hybrid pricing strategy (free+premium) of offering some products for free while charging for others, or offering a product for free to some customers while charging others for it
One of the most unusual pricing strategies is participative pricing, sometimes known as “pay what you want,” in which customers literally get to pay as much as they think a product is worth. Although it might sound like a strategy for financial disaster, with participative pricing, buyers sometimes pay more than the company would normally charge.
Even more radical than participative pricing is no price at all. However, giving away goods and services can make a lot of sense in the right situation, such as when a new company is trying to make a name for itself in the marketplace. Another use of free pricing is when some customers are charged enough to provide free goods and services for other customers, a tactic known as freemium pricing (free + premium).

37. Price Adjustment Tactics (1 of 2)
Discounts
Temporary price reductions to stimulate sales or lower prices to encourage certain behaviors such as paying with cash
Bundling
Offering several products for a single price that is presumably lower than the total of the products’ individual prices
After they’ve established initial price points, companies need to stay on the lookout for potential advantages that can be gained by adjusting prices up or down over time. They can offer a variety of discounts, such as temporary price reductions to stimulate sales, reductions for paying early or paying in cash, or volume discounts for buying in bulk.
Sometimes sellers combine several of their products and sell them at one reduced price. This practice, called bundling, can also promote sales of products consumers might not otherwise buy—especially when the combined price is low enough to entice them to purchase the bundle.

38. Price Adjustment Tactics (2 of 2)
Dynamic pricing
Continually adjusting prices to reflect changes in supply and demand
Finally, companies can constantly re-price their products in response to supply and demand fluctuations, a tactic known as dynamic pricing. 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 distributed via computer networks, customers always have the most current price information. Airlines and hotels have used this type of continually adjusted pricing for years, a technique often known as yield management.

39. Applying What You’ve Learned (1 of 2)
Identify the main types of consumer and organizational products, and describe the four stages in the life cycle of a product.
Describe six stages in the product development process.
Define brand, and explain the concepts of brand equity and brand loyalty.

40. Applying What You’ve Learned (2 of 2)
Identify four ways of expanding a product line, and discuss two risks that product-line extensions pose.
List the factors that influence pricing decisions, and explain break-even analysis.
Identify nine common pricing methods.

41. Copyright