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Pricing and Strategies

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2 Pricing and Strategies
Product Design Pricing and Strategies 2

3 Section 5.1 – Product Design - Objectives
Differentiate between a product item and product line Classify products as consumer goods or business goods Explain the seven steps in developing a new product Identify the stages in a product’s life cycle Growth Maturity Decline Introduction 3

4 Section 5.1 – Product Design
Product Defined Products are one the essential components in the marketing mix Products can be tangible (sporting equipment) Goods Products can be intangible (sporting events) Services 4

5 Section 5.1 – Product Design
Product Item and Line Product Item – a specific model or size of a product Nike’s Zoom Kobe is a product item Product Line - Group of closely related products that are sold by a company Entire group of Nike athletic shoes would be their product line Nike has 3 product lines: athletic clothing, athletic footwear, sports equipment Makes up Nike’s product mix 5

6 Section 5.1 – Product Design
Product Classifications Products can be classified as consumer goods or business goods Different marketing approaches should be used to reach the different consumers Consumer Goods are purchased and used by the ultimate consumer for personal use Sneakers bought by end consumer at Foot Locker Promotion might be television commercial Business Goods are purchased by organizations for use in their operation Sneakers bought by Foot Locker to be sold to end consumer Promotion might be discounts for volume purchases. 6

7 Section 5.1 – Product Design
Point of Difference Products are designed to stand out in the marketplace Point of Difference is a unique product characteristic or benefit that sets the product apart from a competitor’s product Winning championships provide teams with point of difference Companies with certain product brands work to communicate their products unique features and benefits to establish point of difference Product planning is crucial to success of a product 7

8 Section 5.1 – Product Design
The seven steps in new product development Not all steps are followed each time SWOT Analysis Analysis of Company’s: Strengths Weaknesses External Opportunities Threats in Marketplace Helps to develop a product that matches the company’s objectives Idea Generation Generating new product ideas Consumers, Employees, R&D Developments, Competitors After getting a new idea from studying a competitor’s new product a company should write protocol A statement that identifies target market, customer’s needs and wants, and explains the new product & what makes it unique 8

9 Section 5.1 – Product Design
Nike Pump Sneakers Reebok Pump Sneakers

10 Section 5.1 – Product Design
Screening and Evaluation Product idea is evaluated to see if if company has technology needed to make product & meets company’s objectives Researchers work with focus groups to evaluate product idea Focus Group is a panel of six to 10 consumers who discuss their opinions about a topic under guidance of moderator Business Analysis Financial aspects of making and marketing the product are reviewed Must determine what is needed to take product idea to market Legal factors are analyzed to see if the product can be patented or copyrighted for protection against competitors

11 Section 5.1 – Product Design
Development Development of actual product Prototype is the first model of the product Company tests if product can be produced for reasonable cost Technical problems and standards for quality and safety are evaluated Test Marketing Product tested in marketplace Product is offered for sale in small geographic area Marketers test all aspects of marketing mix (product, place, price, and promotion) Results can help project sales and market share Some competitors may ruin test marketing by flooding test area with special promotions or reducing its price

12 Section 5.1 – Product Design
Commercialization Commercialization is a process that involves producing and marketing a new product Product is offered in the marketplace for sale to final consumer Full scale production during launch of new product Regional roll-outs allow companies to launch product in certain geographic areas over a set time period Companies can build up production gradually and evaluate marketing Gatorade Commercial

13 Section 5.1 – Product Design
Product Life Cycle The four stages in the product life cycle are: Growth Maturity Product Life Cycle Decline Introduction Not all products fit the life-cycle pattern. 13

14 Section 5.1 – Product Design
Product Life Cycle Introduction Product is first introduced to the marketplace Marketing focus is on promoting consumer awareness and getting customers to try new product Consumers are educated through advertising and promotion Product Pricing: Skimming is pricing set high to cover costs of research & development Penetration is low pricing in order to quickly generated demand for product Distribution of product into marketplace is major task at this stage Goal is to convince distributors to carry product

15 Section 5.1 – Product Design
Product Life Cycle – cont. Growth More competition in marketplace if your product has success Stay competitive at this stage by improving product or adding new features or products to line Must increase distribution outlets at this stage Ex. From convenience stores to supermarkets

16 Section 5.1 – Product Design
Product Life Cycle – cont. Maturity Sales begin to slow down for the product category or just the product Repeat customers may stop buying the product New buyers may be difficult to attract in this stage To keep product alive: Company may make changes to the product to distinguish it from competitors’ products Marketers my focus on identifying new buyers

17 Section 5.1 – Product Design
Product Life Cycle – cont. Decline Sales and profits begin to drop Products move into decline when newer and more improved models replace the older ones Ex. Technological advances Results of decline: Product dropped from product line Products in decline that are kept in product line get little or no marketing support Only keep product is to satisfy requests from loyal customers

18 Section 5.1 – Product Design
Product Life Cycle – cont. Considerations Not all products fit the life-cycle pattern Consumer demand and continued sales will allow products to stay in growth stage Fads have a short life cycle Products that become popular quickly and lose popularity quickly Products requiring a lot of information to educate consumers will stay in introduction stage for longer periods of time

19 Section 5.1 – Product Design
Management of the Product Life Cycle Product managers manage a produce through its lifecycle by: Modifying the product Changing the product’s features, appearance, package, design or quality in hopes to increase sales Marketing the product Strategy to find new customers or to encourage current customers to use more of the product Repositioning the product Repositioning is changing a product’s image in relation to its competitor’s image A change in any of the four P’s of the marketing mix can be enough to reposition a product

20 Section 5.2 – Pricing and Strategies - Objectives
Define price and the role it plays in determining profit. Describe the factors that affect pricing decisions. Identify pricing strategies. Demand 20

21 Section 5.2 – Pricing and Strategies
Price is defined as the value placed on the goods or services being exchanged Price can be referred to as: Tuition, Fee, Toll, Fare, Rent, Barter Important in a business because it helps determine a company’s profit or loss To calculate Profit or Loss: Subtract the cost of goods sold and the company’s expenses from the money it generated Price plays a significant role in the marketing mix 21

22 Determining Profit = = - -
Subtract the cost of goods sold and the company’s expenses from the money it generated in sales revenue. = $25,000 Profit 1,000 baseball bats sold ($175x1,000) $175,000 revenue = - $90,000 to purchase the bats ($90x1,000) - $60,000 in business expenses 22

23 Section 5.2 – Pricing and Strategies
Consumer Perception, demand, cost, product, life-cycle stage, and competition influence the pricing strategies that businesses use Consumer Perception Consumers believe that higher prices suggest higher quality Marketers use this perception to price goods and services Image of a product is closely related to its price High quality products priced low may not sell as much as it would at a higher price Prestige pricing is pricing based on consumer perception 23

24 Section 5.2 – Pricing and Strategies
Consumer Perception – cont. Odd-even pricing is another pricing strategy related to consumer perception Odd-even pricing is pricing goods with either an odd number or an even number to match a product’s image Ex. An item priced with odd number, such as $25.99, suggests a bargain Ex. An item priced with even number, such as $26, suggests a quality item Target pricing is another pricing strategy related to consumer perception Target pricing is pricing goods according to what the customer is willing to pay Manufacturers estimate the target price to determine how much to charge wholesalers and retailer for that item Manufacturers figure the retailer expected markup in order to set the price 24

25 Section 5.2 – Pricing and Strategies
Demand Related to price in many ways If product is in high demand, and there is limited supply, its price will be high Ex. Events with a limited number of seats will be able to charge a high price for tickets Ex. Companies can create demand for an item by only producing a limited edition of an item so it can be priced high If there is a large supply of an item and demand is not great, dealers may lower prices to increase demand Ex. Retailers may do this near the end of a season when there is a supply of merchandise that has not sold at the regular price 25

26 Section 5.2 – Pricing and Strategies
Demand – cont. Elastic Demand Supply and demand theory suggesting that a change in price will affect demand Ex. Demand will be lower for higher priced items because fewer people can afford them Inelastic Demand Price has no effect on demand Occurs when: A product is a necessity There is no substitutes Price increases is not significant relative to the customer’s income There are time restraints 26

27 Section 5.2 – Pricing and Strategies
Cost In order to make a profit, businesses need to price an item higher than the cost they paid for it Two pricing strategies related to cost: Markup is the difference between the retail or wholesale price and the cost of an item Must be high enough to cover expenses and ensure profits Product – line pricing is a markup strategy involving setting different markup percentages for each product so that the average mark-up is achieved for the entire line of goods Cost-Plus Pricing is pricing products by calculating all costs and expenses and adding desired profit Cost of making item or providing the service is determined first and the amount of money to ensure a profit is tacked onto that amount 27

28 Section 5.2 – Pricing and Strategies
Newness of the Product Skimming or Penetration pricing techniques are used when introducing a new product into a marketplace Skimming – pricing high to recover costs Penetration – Pricing low to create immediate demand for product Competition Find out what their competitors are charging for the same items they are selling before setting price Lower prices to draw customers away from competitors Non-price competition techniques can be used to draw customers away from competitors through better quality, services, or relationships Can charge higher prices if they provide these better than competition 28

29 Section 5.2 – Pricing and Strategies
Pricing Objectives and Strategies Pricing objectives are the goals that a company wants to achieve through pricing Businesses often have additional goals that affect pricing Two common pricing objectives involve increasing profit and improving market share 29

30 Section 5.2 – Pricing and Strategies
Profit Objective Market Share Objective May have objectives to earn higher profits Company cannot charge more for its product even if costs and expenses increase Alternatives to raising prices: User Fees Reduction of unneeded features or size of product Company may want a higher market share Market share is the percentage of the total shares of all companies that sell the same type of product Company may lower the price of its product to increase its market share

31 Section 5.2 – Pricing and Strategies
Nike Elite Tournament 8-Panel Men’s Basketball - $45 Special Pricing Strategies Price Lining Selling all goods in a product line at specific points $29.99 $39.99 $49.99 Benefits: Makes it easier for consumer to make purchasing decisions Easier to take markdowns Inventory control simplified Nike Elite Competition 8-Panel Men’s Basketball - $30 Men’s Dominate Basketball - $15

32 Section 5.2 – Pricing and Strategies
Special Pricing Strategies - cont Bundle Pricing Selling several items as a package for a set price Products purchased individually would cost more than the package price Benefits Customer benefit from lower price Business benefits due to higher sales and more products sold $1.49 / bottle $14.88 / 20 Pack ($.74 / bottle)

33 Section 5.2 – Pricing and Strategies
$119.99 (Regularly $144.99) Special Pricing Strategies - cont Loss-leader Pricing Pricing an item at cost or below cost to draw customers into store Benefits: Customers will buy other products while at the store Total purchases for the shopping visit will more than cover the money lost on the loss leader $14.99 $64.99

34 Section 5.2 – Pricing and Strategies
Special Pricing Strategies - cont Yield-Management Pricing Pricing items at different prices to maximize revenue when limited capacity is involved Ex. Pricing tiers at sports arena or stadium Tiered Pricing is when teams charge more for tickets to home games against more competitive opponents that might draw more attendance

35 Section 5.2 – Pricing and Strategies
Price Adjustments and Regulations To maintain integrity of published prices, marketers will make price adjustments through discounts or allowances When offering discounts or allowances must make sure not pricing regulations are broken Discounts` Discounts provided for volume purchasing Offer trade discounts to wholesalers & retailers Allowances Reductions taken from the quoted price Ex. Reduction due to trade-in allowance Regulatory Factors Pricing is subject to gov’t regulations Sherman Anti-Trust act prohibits price fixing and predatory pricing Price Fixing is when competitors conspire to set same price Predatory Pricing is setting prices low to drive competitors out of business Robinson-Patman Act protects against price discrimination Price Discrimination is charging different prices to similar buyers

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