1. Small Business Marketing: Product and Pricing Strategies
Chapter 9
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2. Learning Objectives
LO1 Recognize the characteristics of goods and services. LO2 Define the total product. LO3 Differentiate the stages of new product development. LO4 Understand why pricing is an important but difficult task for small business. LO5 Understand how elasticity, margin, and value impact pricing setting. LO6 Apply different pricing strategies.
LO1 Recognize the characteristics of goods and services.
LO2 Define the total product.
LO3 Differentiate the stages of new product development.
LO4 Understand why pricing is an important but difficult task for small business.
LO5 Understand how elasticity, margin, and value impact pricing setting.
LO6 Apply different pricing strategies.
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3. 4 Ps of Marketing 4 Ps of Marketing
The four major components of a marketing effort—product, price, promotion, and placement.
Also called the marketing mix
Marketing’s goal is to lay out the best way to get sales, and set up the conditions so selling will be as successful as possible. The selling act and the marketing process need each other for the small business to be successful. Product, price, promotion, and placement mentioned above are called the 4 Ps of Marketing or the marketing mix. The next section of the book covers these 4 Ps as well as marketing plans, starting with product.
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4. Goods-Services Mix Figure 9.1
Most people think in terms of product or service. But few offering fall into those black and white categories.
Examples:
Pure good: Shampoo
Good dominated: A car (comes with warranties and service)
Hybrid: A restaurant– Which is more important, the food or the atmosphere and service?
Service Dominated: Your taxes. You get the service of having them done, but also the papers to send in and a copy to keep.
Pure service: Having your car washed.
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5. Product
Product
anything that is offered to the market to satisfy consumer wants, needs, and demands
goods, services, people, ideas
A product, in general terms, is anything that is offered to the market to satisfy consumer wants, needs, and demands. This can include goods (like Beyond Fleece’s clothing, a car, a can of green beans, a CD), services (haircut, divorce), people (political candidates, celebrities), and ideas (a political platform, an environmental message).
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6. Product Tangibility Perishability
An item’s capability of being touched, seen, tasted, or felt
Perishability
service exhibits perishability in that if it is not used when offered, it cannot be saved for later use.
Goods are:
Tangible: you can count them, inventory them, demonstrate them, see them before you buy
Separable: It doesn’t matter who you buy it from, the product is the same
Homogenous: In theory, every bottle of Suave shampoo is the same, regardless of where you buy it
Non-perishable: If you don’t sell it today you can sell it tomorrow. Services are just the opposite.
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7. Product Inseparability Heterogeneity
A quality of a service in which the service being done cannot be disconnected from the provider of the service.
Heterogeneity
A quality of a service in which each time it is provided it will be slightly different from the previous time.
Inseparability is a quality of a service in which the service being done cannot be disconnected from the provider of the service. Heterogeneity is a quality of a service in which each time it is provided it will be slightly different from the previous time.
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8. The Total Product Approach
The entire bundle of products, services, and meanings of your offering; includes extras like service, warranty, or delivery, as well as what the product means to the customer.
The total product includes the entire bundle of product and services that you offer, but is based not only on what you as the small business owner thinks about the product, but also about how customers think about it. An Alabama bottle-making company discovered that one of the top 10 reasons customers liked their 16- and 20-ounce screw-top plastic bottles was because, when filled with water and a enough rocks to sink the bottle, it makes a safer toilet tank space filler than bricks, which can break down when left in water for years.
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9. The Total Product Approach
Augmented product
core product plus features that tend to differentiate it from the competition
brand names, quality levels, packaging
Core product
basic description of what a product is
What you describe as your product or service is your augmented product and has features that differentiate it from the competition. These features can include brand names, quality levels, packaging, and specific features of your product Underneath the total product and the augmented product lies the core product , which is the basic description of what your company does.
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10. The Total Product Approach
Your product means more to the consumer than just the core component
Can help you get inside your customers’ heads and figure out the most cost-effective “bundle” of value and cost benefits
Knowing what your product “means” to consumers will help you set an appropriate price
Why is the total product in particular important for you as a small business owner? First of all, your product means more to a consumer than just the core component. Second, as a small business owner, using the total product approach can help you get inside your customers’ heads and figure out the most cost-effective “bundle” of value and cost benefits (see Chapter 7 ) to give your target market .
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11. Guidelines for Naming a Business
Entrepreneur’s name
Not very clear to customers what you do
How to handle name if you sell the company
Is your name appropriate: i.e. Payne for a dentist
The first thought for many entrepreneurs is to name the firm after themselves. While that is not necessarily a problem, it is also not very clear to potential customers what it is that you do.
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12. Guidelines for Naming a Business
Be careful about infringing on trademarks
Something that describes firm or product and is easy to remember: “Discount Furniture”
Creative spellings are eye-catching; don’t go overboard
Beware of selecting a name too narrow to allow the firm to grow
● Be careful about infringing on trademarks. Even names relatively close can cause you trouble. Dr. Peter wouldn’t work for a soft drink, but it could be used for other products.
● Something that describes your firm or product and is easy to remember is ideal. While plain old “Discount Furniture” certainly fills that bill, “Cheap Seats” is a little more catchy and memorable. Be careful, though: This technique isn’t appropriate for every type of business. “Divorce Depot” or “Bankruptcy Barn” probably won’t convince potential clients that you’re a serious, competent attorney.
● Creative spellings are eye-catching, but don’t go overboard; “Myk’s Otto Groj” is certainly different, but Mike’s customers won’t have an easy time finding him in the phone book or on the Internet when they need their cars repaired. Product brand names, too, are often evocative of the benefits they offer—Vaseline Intensive Care—but they may also be simple names—Dove, Zest, and so on. The same guidelines about being relatively easy to spell (not too creative) and to pronounce apply here as well.
● Beware of selecting a name that’s too narrow to allow your firm to grow. “Just Jams and Jelly” might work right now, but what happens when you expand into candy, juices, pies, and the like?
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13. Stages of New Product Development
Figure 9.2
An old Far Side cartoon describes an early (as in the cave dweller era) business failure. The product? Porcupine on a stick. Although meant as a joke, it should remind any entrepreneur that every product idea needs to go through the development process (illustrated in Figure 9.2 ) before it gets introduced.
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14. New Product Development Process
Me-too products
Products essentially similar to something already on the mark
This process may take a few hours for simple products that are similar to existing products (commonly referred to as me-too products ) or may take years and years of preparation and testing, such as introducing a new pharmaceutical product. For me-too products, steps may even be skipped.
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15. Areas for Idea Screening
Product—innovativeness and uniqueness
Market—customer need and market size, and
Intellectual property
People behind the idea,
Additional resources needed to bring the idea to market
Profitability of the idea
Idea screening is the process of selecting the most promising ideas to be further evaluated for feasibility. From the Idea To Product (I2P) model the initial three areas are (1) product—innovativeness and uniqueness, (2) market—customer need and market size, and (3) intellectual property. Even with promising results in all three areas, in order for your firm to be able to take the idea all the way, you need to assess three additional areas: (4) the people behind the idea, (5) the additional resources needed to bring the idea to market, and (6) the profitability of the idea.
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16. Idea Screening Comparison
Exhibit 9.1
Typically, the smartest idea is to generate multiple ideas and compare them head-to-head to help clarify what characteristics are important and which idea has the greatest potential. This comparison approach is shown in Exhibit 9.1 and is very simple. The ideas are listed across the top of the grid, and the important factors are listed vertically. Each idea is given a numerical score for each of the factors, and the scores are totaled.
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17. Idea Evaluation Idea evaluation
exhaustive process of specifying the details of each idea’s technological feasibility, its cost, how it can be marketed, and its market potential
Basic evaluation tool is the feasibility analysis
Idea evaluation is an exhaustive process of specifying the details of each idea’s technological feasibility, its cost, how it can be marketed, and its market potential. Additionally, you should consider how the idea fits with the mission and goals of your business. A basic tool for idea evaluation is the feasibility analysis
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18. Commercialization Commercialization
the process of making the new product available to consumers
Commercialization is the process of making the new product available to consumers. In reality, most businesses creating a new product will not face problems with this step
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19. Pricing
Optimum price
refers to the highest price that would produce your desired level of sales (or revenues) in your target market.
Simply put, your fundamental goal should be setting the optimum price, the price that would generate the most income possible for the product or service you are selling over the course of a year. If your sales are less than you expect, you will end up asking yourself, “Are my prices too high?” On the other hand, if sales are exceeding expectations, you will end up asking, “Are my prices too low?
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20. Key Factors for Determining Optimum Price
Demand for the product or service
Value delivered to the customer
Prices set by competing firms
Your business strategy and product placement
There are four key factors for determining an optimum price:
1. Demand for the product or service: Where demand is high, you can charge a premium. Where it is low, you need to consider lowering prices to keep cash flowing into the business.
2. Value delivered to the customer: You can buy hair-coloring kits at the supermarket for $8.00, and a single use of professional products would not cost more, but having a professional do the job with professional products and expertise can easily cost 10 times as much—and many people gladly pay it.
3. Prices set by competing firms: If a liter of Coke costs a dollar, few are likely to pay $2 for a liter of Pepsi.
4. Your business strategy and product placement: A company that prides itself on an environmentally conscious approach to manufacturing probably would not choose to use cheaper, unrecycled components, even if it helped profits.
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21. The Fundamentals of Pricing: Margin Pricing and Elasticity
Markup pricing
A price-setting method where an amount is added to the cost of a product to set the retail price and provide a profit.
The method shown in Exhibit 9.2 is an example of what is called markup pricing and is probably the most widely used of the many pricing methods out there. Knowing your costs and the markup —what you would like (or need) to make from each sale—gets to the fundamentals of pricing and relating prices to your business. The computations also tell you what your margin of profit is, and that number is one asked by bankers and is one of the numbers you can often find in industry statistics, so it is a good number to know.
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22. The Fundamentals of Pricing: Margin Pricing and Elasticity
The amount of profit, usually stated as a percentage of the total price.
Markup
The amount an entrepreneur adds to costs to provide a profit
Margin is the amount of profit, usually stated as a percentage of the total price.
Markup is the amount an entrepreneur adds to costs to provide a profit.
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23. Computing Margin and Markup
Exhibit 9.2
Imagine you were selling custom-designed T-shirts and your first thought was to price them at $20 each, based on what you’ve paid for similar T-shirts in the past. Exhibit 9.2 shows you the costs. To get to your $542 in sales you would need to be able to sell 28 T-shirts a day—more than three T-shirts every hour! This assumes you are selling online or in-person wherever you are so you don’t have to add costs for rent, displays, and the other things that go with a storefront.
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24. The Fundamentals of Pricing: Margin Pricing and Elasticity
From economics, the idea that the market’s demand for a product or service is sensitive to changes in its price.
If the idea of dropping the price to increase sales makes sense to you, congratulations! You understand what the economists call price elasticity.
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25. Price Elasticity Inelastic product Elastic product
product for which there are few substitutes and for which a change in price makes very little difference in quantity purchased
Elastic product
product for which there are any number of substitutes and for which a change in price makes a difference in quantity purchased
Something that is essential to how you live and does not have many substitutes or alternatives is called an inelastic product. Housing, basic food, basic
clothing, basic transportation, and utilities are examples. The T-shirts you are planning to sell go beyond basic clothing and fall into the category of an elastic product, which has a lot of substitutes—cheaper T-shirts, used T-shirts, other types of shirts, digging deeper in your closet, and so on.
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26. Pricing Elasticity Figure 9.3
Figure 9.3 shows the difference in elasticity for your elastic product of T-shirts and for the inelastic product of gasoline. The difference in the slopes of the lines can help you think about the impact of dropping or raising the price. Remember to keep in mind how the general economy is doing for your customers. If money is tight, they will respond to price increases for elastic products much more negatively, because that is where their needs are more flexible, or elastic.
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27. The Fundamentals of Pricing: Value
The value delivered to the customer is second in order of importance to the pricing decision
In addition to demand and value provided, you must consider the prices set by your competition
The value delivered to the customer is second in order of importance to the pricing decision In addition to demand and value provided, you must consider the prices set by your competition
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28. The Fundamentals of Pricing—Contextual Factors
Decide what is the right price
Examine existing market prices for similar products and services
Consider your business costs
The discussion up to here has covered why pricing is so important and the major factors that determine prices. Issues of the effects of demand and value upon pricing were analyzed. All this is necessary information for you to be able to set prices. However, it does not explain the “nuts and bolts” of how to use the information to actually set a price. Of course, one reason that this discussion is necessarily general and not specific is that the details of determining the “right” price differs among industries and businesses. Still, some practices are valid across industries.
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29. The Fundamentals of Pricing—Contextual Factors
Your Company Objectives
Marketing Strategy
Channels of Distribution
Competition
Legal and Regulatory Issues
More commonly, firms set prices to maximize profits or to increase market share. Increasing market share usually means pricing toward the low end of the competition in order to take market share from the competition Your price must be consistent with the rest of your marketing strategy. If you are advertising high quality or prestige but price your product lower than the competition, your customers will be confused at best, or at worst simply not believe your ads. Everyone who handles your product will be expecting to make something from it. If you are using a traditional retailer, your product may go through several middlemen (see Chapter 11 for more information) before getting on the shelf. Just as yours is, your competitor’s products are a “bundle of satisfactions.” How does their product bundle match up to yours? There’s a plethora of items that can fall under legal and regulatory issues.
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30. Pricing Psychology: How Customers Perceive Prices
Internal reference price
a consumer’s mental image of what a product’s price should be
External reference price
an estimation of what a price should be based on advice, advertisements, or comparison shopping
Consumers have what are known as internal and external reference prices. Basically these are expectations about what a price should be, based on their own knowledge ( internal reference pricing ) or from gathering information from outside sources ( external reference pricing ).
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31. Pricing Strategies Skimming Prestige or premium pricing
Setting a price at the highest level the market will bear, usually because there is no competition at the time.
Prestige or premium pricing
Setting a price above that of the competition so as to indicate a higher quality or that a product is a status symbol.
Skimming is charging the highest price the market will bear. This technique is usually only possible if you are absolutely the first product or service of your type in the market, and only if it’s something people really want. Companies sometimes use this strategy in order to recoup research and development costs or heavy marketing expenses. Generally prestige pricing is for an item considered a status symbol, such as a Rolex watch or a Mercedes automobile. Premium pricing is used for nonstatus symbol types of products, such as toothpaste, shampoo, or laundry detergent. The idea behind both is the same.
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32. Pricing Strategies Odd-even pricing Partitioned pricing
Setting a price that ends in the number 5, 7, or 9.
Partitioned pricing
Setting the price for a base item and then charging extra for each additional component.
Odd-even pricing simply means setting a price that ends with a 9, 7, or 5. For example, don’t charge $100; charge $99.99 (or $99.97 or $99.95). Numbers that are multiples of 10 are a psychological hurdle for consumers.
Partitioned pricing is alluded to in the computer example in the text —setting a base price and charging extra for all other components. You set the price for the main component—a computer for $999—but just about everything else you need is extra
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33. Pricing Strategies Captive pricing Price lining
Setting the price for an item relatively low and then charging much higher prices for the expendables it uses.
Price lining
The practice of setting (usually) three price points: good quality, better quality, best quality.
For certain products and services, captive pricing works well. In captive pricing, you sell something, usually a base system, at a relatively low price, but the expendables it uses are relatively expensive.
Price lining is an attempt to appeal to several different markets. In this situation, you might have three models of your product or service price to appeal to the high-, mid-, and low-end market. You might have a computer with all the bells and whistles priced at or near the top of the competitive price range, a bare-bones, stripped down version priced at or near the bottom, and a third model at a midrange price with midrange features. This way you appeal to customers with different budgets and different needs.
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34. Price-Lowering Techniques
Periodic or random discounting
Sales conducted at either predictable or non-predictable intervals.
Off-peak pricing
Charging lower prices at certain times to encourage customers to come during slack periods
Periodic discounting refers to sales that happen regularly, such as the January White Sale or the special on Christmas cards on December 26. You may need to do one of these to keep up with your competition, since savvy customers often expect these sales. An alternative is random discounting where you run a sale unexpectedly What do happy hours and using your cell phone late at night have in common? Both can be examples of off-peak pricing . Services have busy periods and slow periods. Restaurants give wait staff split shifts with time off between lunch and dinner, but not every service can do this. By putting on a sale
during slack periods, you may cover part of the cost of staying open.
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35. Price-Lowering Techniques
Bundling
Combining two or more products in one unit and pricing it less than if the units were sold separately.
Multiple or bonus pack
Combining more than one unit of the same product and pricing it lower than if each unit were sold separately.
This works equally well for services or products. Let’s say a haircut is $25 and coloring is $50. For this week, if you do both, you’ll pay only $60. The beauty salon has “ bundled ” haircuts and coloring for a price lower than the two would cost separately. This technique is particularly effective for promoting the sales of a second product or service that might not be doing as well or is newly introduced. A variation of this is selling multiple or bonus packs , such as buying five bottles of hand lotion for the price of three—the kind of packaging that has made Sam’s Club so famous. People are creatures of habit, and the more you can get them to use your product, the more likely they are to internalize it—it becomes their brand.
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36. Price-Lowering Techniques
Coupons, Rebates, Loyalty and Referral Programs
Referral discount
A discount given to a customer who refers a friend to the business
These three related methods are used to reduce prices and promote sales. Most coupons are delivered in newspapers (80 percent), 52 but magazines, mail, on packages, handbills, door hangers, Internet, and in person are all other ways of delivery. The higher the value of the coupon, the more likely it is to be redeemed.
variation on the loyalty discount is the referral discount , in which a current customer refers a new customer to use the service or buy the product. The older customer then gets a discount for referring the new business.
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37. Pricing Strategy Wrap-up
Temporary reduction in price won’t tarnish your product image
Consumers also feel smart about buying something at a better price
They will feel they got a great deal
So, goal number one in pricing is to set the price as high as you think you can, using your competition and customers’ responses as a check. If the higher price was working, but has tapered off, consider pursuing goal number two—use the pricing strategies given in Table 9.1 to drive more sales. Customers recognize sales for what they are, a temporary reduction in price, and these won’t tarnish your product image. Even if the competition matches a sale or offers some other promotion
to match your offering, it’s not as aggressive an action as a price war.
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