Chapter Fourteen Creating and Pricing Products That Satisfy Customers

Chapter Fourteen

Creating and Pricing Products That Satisfy

Customers

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Learning Objectives

1. Explain what a product is and how products are classified.

2. Discuss the product life cycle and how it leads to new product development.

3. Define product line and product mix and distinguish between the two.

4. Identify the methods available for changing a product mix.

5. Explain the uses and importance of branding, packaging, and labeling.


Learning Objectives (cont’d)

6. Describe the economic basis of pricing and the means by which sellers can control prices and buyers’ perceptions of prices.

7. Identify the major pricing objectives used by businesses.

8. Examine the three major pricing methods that firms employ.

9. Explain the different strategies available to companies for setting prices.

10.Describe three major types of pricing associated with business products.


Classification of Products

• Product– Everything one receives in an exchange,

including all tangible and intangible attributes and expected benefits

– A good, service, or idea

• 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


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


Business Product Classifications

• 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• Accessory equipment

– Standardized equipment used in a firm’s production or office activities

• Component part– An items 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


Business Product Classifications (cont’d)

• Process material– A material that is used directly in the

production of another product but is not readily identifiable in the finished product

• Supply– An items that facilitates production and

operations but does not become part of the finished product

• Business service– An intangible products that an organization

uses in its operations


The Product Life Cycle

• A series of stages in which a product’s sales revenue and profit increase, reach a peak, then decline– Introduction

• Customer awareness and acceptance are low

– Growth• Sales increase rapidly as the product becomes

well known

– Maturity• Sales are still increasing but at a slower rate;

later in this stage, sales and profits begin to slowly decline

– Decline stage• Sales volume decreases sharply and profits

continue to fall


Product Life Cycle

Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 13th ed. Copyright © 2006 by Houghton Mifflin Company, Adapted with permission.


Using the Product Life Cycle

• The stage of the product life cycle affects the marketing strategy for a product– Introduction

• Make potential customers aware of product• Adjust price, distribution, and promotion

quickly to maintain sales

– Growth• Stabilize and strengthen product position

by encouraging brand loyalty• Improve product or expand product line;

reduce price; broaden distribution

– Maturity• Redesign packaging; encourage new

product uses; reconsider pricing strategy; increase promotional efforts and personal selling

– Decline• Retain or eliminate product


Product Line and Product Mix

• Product line– A group of similar products that

differ only in relatively minor characteristics

• Product mix– All of the products that a firm

offers for sale– Width of the mix

• The number of product lines the mix contains

– Depth of the mix• The average number of individual

products within each line


Managing the Product Mix

• Managing existing product– Product modification: quality,

functionality, or aesthetic characteristics

• Deleting products• Developing new products

– Imitations, adaptations, or innovations


Phases of New Product Development

Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 13th ed. Copyright © 2006 by Houghton Mifflin Company, Adapted by permission.


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


Examples of Product Failures


Branding

• What is a brand?– 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

– Brand mark• 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


Branding (cont’d)

• Types of 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


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


Branding (cont’d)

• Benefits of branding (cont’d)– 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


Kleenex® or tissue?

Branding (cont’d)

• Choosing a brand– It should be easy to say, spell, and

recall– It should suggest, in a positive way,

the product’s uses, special characteristics, and major benefits

– It should be distinctive enough to set it apart from competing brands

• Protecting a brand– Should be protected through

registration– Guard against a brand name’s

becoming a generic term


Branding (cont’d)

• Branding strategies– Individual branding

• A firm uses a different brand for each of its products• For example, Procter & Gamble uses Ivory, Camay,

Zest, Safeguard, etc., for its line of bar soaps• A problem with one product will not affect another

product• Different brands can be directed at different market

segments– Family branding

• A firm uses the same brand for all or most of its products

• For example, Xerox uses family branding for all its product mixes

• The promotion of any one item helps all other products

• A new product has a head start when its brand name is already known and accepted by customers


Packaging

• All of the activities involved in developing and providing a container with graphics for a product

• Functions of packaging– Protect the product and maintain its functional form– Offer consumer convenience– Promote the product by communicating its features, uses,

benefits, and image• Design considerations

– Cost– Single or multiple units– Consistency among package designs

(family packaging)– Promotional role– Needs of intermediaries– Environmental responsibility


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


Labeling (cont’d)

• 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 non-edible items such as shampoo and detergent, safety precautions and instructions

• Express warranty– A written explanation of the producer

responsibilities in the the product is found to be defective or otherwise unsatisfactory


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 given 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


Pricing at New Balance


Pricing Products (cont’d)

• Supply and demand affects prices– Supply

• The quantity of a product that producers are willing to sell at each of various prices

• Quantity supplied by producers increases as the price increases

– Demand• The quantity of a product that buyers are

willing to purchase at each of various prices• Quantity demanded increases as the price

decreases

– Equilibrium• Where the supply and demand curves

intersect and quantity and price for buyers and sellers are equal


Supply and Demand Curves


Pricing and Product Differentiation at New Balance


Pricing Products (cont’d)

• Price and nonprice competition– Price 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

• Buyers’ perceptions of price– Buyers will accept different ranges of

prices for different products

– A premium price may be appropriate if a product is considered superior or has inspired strong brand loyalty


Pricing Objectives

• 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


Pricing Objectives (cont’d)

• Market share goals– Pricing that will increase a firm’s proportion of total

industry sales

• Status quo pricing– Pricing the firm’s products so as to not disturb the

stability of prices in the industry


Pricing Methods

• 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 on marketing decisions


Pricing Methods

• Breakeven analysis– 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)

– 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 Analysis

• What is the lowest level of production and sales at which a company can break even on a particular product?


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


Types of Pricing Strategies


Pricing Strategies

• New-product 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


Pricing Strategies (cont’d)

• Differential pricing– 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



• Psychological pricing– 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

– Everyday low prices (EDLPs)• Setting a low price for products on a consistent basis

– Customary pricing• Pricing on the basis of tradition



• Product-line pricing– 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



• Promotional pricing– 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

– Comparison discounting• Setting a price at a specific level and

comparing it with a higher price


Pricing Business Products

• Geographic pricing– Deals with delivery costs

– 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

• Transfer pricing– Prices charges in sales between an

organization’s units


Pricing Business Products (cont’d)

• 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

Documents

Chapter Fourteen Creating and Pricing Products That Satisfy Customers