2.05C SELECT PRODUCT-MIXING STRATEGIES

Purpose of Product- Mix Pricing Strategies

• Pricing is a critical element of the marketing mix and companies must make strategic choices about how to price their products to best achieve their business goals.

• The product mix is the collection of products and services that a company chooses to offer its market.

• Pricing strategies range from being the cost leader to being a high-value, luxury option for consumers.

Factors affecting the choice of Product Mix Strategies• The level Of Competition -When trying to adopt a product pricing strategy or

determine the right price for your product, the issue of competition is a factor that must be trashed out effectively. The more intense the competition in your industry is, the more flexible your product pricing strategy and policy will have to be.

• The perceived value of your product - The reason perceived value is a critical factor to consider in a product pricing strategy is because customers often associate low price with low quality. Meaning, if your product is priced too low, the customers tend to feel the materials used in producing the goods is inferior and so therefore, the product is of low quality. So before fixing a price for your product, make sure you strike a balance between the price of your product and its perceived value.

Factors affecting the choice of Product Mix Strategies (Continued)• Product development cost-a cost incurred from research and

experimentation, a cost that’s usually incurred when bringing an innovative product to the market. If you are a business owner, you should know that newly introduced products usually command a high price. This high introductory price is based on two reasons:• The first reason for the high product price is due to lack of competition. Since

the product is the first of its kind in the market place, there will be less or no competition thereby giving room for the company to fix price.

• The second reason is this; a high price will enable the manufacturer recover the heavy investments channeled into the research and development of the product.

• Economic trend - This is another unavoidable factor that can influence the pricing of your product. I don’t even need to stress much on this. As an entrepreneur, you should know that economic factors such as taxation rate, labor cost, inflation rate, currency exchange rate, government’s fiscal and monetary policy will definitely influence your adopted product pricing strategy either positively or negatively.

Factors affecting the choice of Product Mix Strategies (Continued)• Level of market demand-This is the fifth factor that can greatly affect

your product pricing strategy. Just like economic factor, I feel this point is self explanatory. In business economics, if demand exceeds supply, there tends to be a mad rush for the few available products, thus inflating the price of the product and vice versa. Some companies even go as far as creating artificial scarcity in order to gain a stronger hold on the industrial price level.

• Demographics - The demographics of the targeted customers will indisputably influence the pricing of your product. Demographic factors to consider before taking a stand on your product price include:

• The age bracket of the customers you are targeting• Your business location and customer’s location• Educational status of your targeted market

• demographics is all about who your targeted customer is. Let me share an illustration with you. • Assuming your product is a portable bag specifically designed for students. If the region you are

targeting has a population of maybe 100,000 out of which 90% are students. • The result is that your product price will be affected positively. But if the case is reversed and

you have a population where only 10% are students; you know what to expect.

Product-Mix Pricing Strategy• Price-setting logic must be modified when, the product is

part of a product mix. • In this case, the firm searches for a set of prices that maximizes

profits on the total mix. • Pricing is difficult because the various products have demand and

cost interrelationships and are subject to different degrees of competition.

• We can distinguish six situations involving product-mix pricing: product-line pricing, optional-feature pricing, captive-product pricing, two-part pricing, by-product pricing, and product-bundling pricing.

Product-Line Strategy• Companies normally develop product lines rather than

sin-gle products and introduce price steps. In many lines of trade, sellers use well-established price points for the products in their line. • A men’s clothing store might carry men’s suits at three price levels:

Rs800, Rs.1500, and Rs.4500. • Customers will associate low-, average-, and high-quality suits with

the three price points.

• The seller’s task is to establish perceived-quality differences that justify the price differences.

Option-Product Strategy• Many companies offer optional products, features, and

services along with their main product. • The automobile buyer can order electric window controls,

defoggers, light dimmers, and an extended warranty.• Pricing is a sticky problem; automobiles companies must decide

which items to include in the price and which to offer as options. • Restaurants face a similar pricing problem. Customers can often

order liquor in addition to the meal. Many restaurants price their liquor high and their food low. The food revenue covers costs, and the liquor produces the profit.

• This explains why servers often press hard to get customers to order drinks. Other restaurants price their liquor low and food high to draw in a drinking crowd.

Captive-Product Strategy• Some products requires the use of ancillary, or captive,

products. • Manufacturers of razors and cameras often price them low and set

high markups on razor blades and film, respectively. • A cellular service operator may give a cellular phone free if the

person commits to buying two years of phone service.

Two-Part Pricing Strategy• Service firms often engage in two-part pricing, consisting

of a fixed fee plus a variable usage fee.• Telephone users pay a minimum monthly fee plus charges for calls

beyond the minimum number.• Amusement parks charge an admission fee plus fees for rides over

a certain minimum. • The service firm faces a problem similar to captive -product pricing-

namely, how much to charge for the basic service and how much for the variable usage.

• The fixed fee should be low enough to induce purchase of the service; the profit can then be made on the usage fees.

By-Product Strategy• The production of certain goods- meats, petroleum

products, and other chemicals-often results in by-products. • If the by-products have value to a customer group, they should be

priced on their value. • Any income earned on the by-products will make it easier for the

company to charge a lower price on its main product if competition forces it to do so.

Product-Bundle Strategy• Sellers often bundle products and features. Pure bundling

occurs when a firm only offers its products as a bundle. • In mixed bundling, the seller offers goods both individually and in

bundles. When offering a mixed bundle, the seller normally charges less for the bundle than if the items were purchased separately. • An auto manufacturer might offer an option package at less than the

cost of buying all the options separately. • A theater company will price a season subscription at less than the cost

of buying all the performances sepa-rately.

• Because customers may not have planned to buy all the components, the savings on the price bundle must be substantial enough to induce them to buy the bundle.

Procedures for Selecting Product-Mix Pricing Strategies• Product Strategy - Whether the firm's market offering is a tangible good like a

kitchen appliance or an intangible service like health care, product strategy defines its features, functions, benefits and image. In choosing among different strategic alternatives, the marketer must be responsive to customers' preferences and alert to the competition. • For example, a refrigerator or stove with a luxury image might be made of costly

stainless steel and provide a wider range of temperatures than other brands. A physician's office could compete with other settings for family health care by offering home-like furniture and toys.

• Promotion Strategy- Marketers may choose among various tools like advertising, sales promotion, personal selling and public relations to communicate the benefits of their product and convince people to buy. Promotion strategy is related to the nature of the product. • For example, personal selling is effective in promoting expensive, high-involvement

offerings like cars or houses, while discount coupons and other types of sales promotion work well for low-cost, frequently purchased items like soap or cereal. Advertising is important when introducing a new product or building brand visibility.

Procedures for Selecting Product-Mix Pricing Strategies• Price Strategy - The price of a product is a measure of its value to

consumers. While price-setting is usually linked to profit goals, it also has several strategic dimensions. • For example, a high price can convey luxury and status. A low price can

discourage competition. Price strategy is especially important when introducing a new product or entering a new market, because consumers may decide whether or not to try an unfamiliar brand based largely on how much it costs.

• Place Strategy- Place -- also known as distribution -- is a set of strategic choices related to convenience and accessibility. More specifically, it is about making products available to target buyers where and when they prefer to shop. Low-cost, frequently purchased items like toiletries and packaged foods are typically distributed through the largest possible network of wholesalers and retailers. But specialty goods, like fine jewelry or Belgian chocolate, may be limited to a small number of outlets to reinforce the exclusivity of the brand.

2.05c Activity• Select Product-Mix Strategies for your products and

explain why you selected each one. Create a word document with this information and place in your folder and drop the assignment in my drop box.