Marketing -Product and Price

7/31/2019 Marketing -Product and Price

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What is Price?

In general terms price is a component of an exchange or transaction that ta es place between two parties and refers to what must be given up by one party (i.e.,buyer) in order to obtain something offered by another party (i.e., seller). Yet this view of price provides a somewhat limited explanation of what price meansto participants in the transaction. In fact, price means different things to different participants in an exchange:

Buyers View For those ma ing a purchase, such as final customers, price refers to what must be given up to obtain benefits. In most cases what is given up isfinancial consideration (e.g., money) in exchange for acquiring access to a good or service. But financial consideration is not always what the buyer gives up.Sometimes in a barter situation a buyer may acquire a product by giving up their own product. For instance, two farmers may exchange cattle for crops. Also, aswe will discuss below, buyers may also give up other things to acquire the benefits of a product that are not direct financial payments (e.g., time to learn touse the product).

Sellers View - To sellers in a transaction, price reflects the revenue generated for each product sold and, thus, is an important factor in determining profit. For mar eting organizations price also serves as a mar eting tool and is a ey element in mar eting promotions. For example, most retailers highlight productpricing in their advertising campaigns.

Price is commonly confused with the notion of cost as in "I paid a high cost forbuying my new plasma television." Technically, though, these are different concepts. Price is what a buyer pays to acquire products from a seller. Cost concerns the sellers investment (e.g., manufacturing expense) in the product being exchanged with a buyer. For mar eting organizations see ing to ma e a profit the hopeis that price will exceed cost so the organization can see financial gain fromthe transaction.

Finally, while product pricing is a main topic for discussion when a company isexamining its overall profitability, pricing decisions are not limited to for-profit companies. Not-for-profit organizations, such as charities, educational institutions and industry trade groups, also set prices, though it is often not asapparent . For instance, charities see ing to raise money may set different targe

t levels for donations that reward donors with increases in status (e.g., name innewsletter), gifts or other benefits. While a charitable organization may not call it a price in their promotional material, in reality these donations are equivalent to price setting since donors are required to give a contribution in order to obtain something of value.

Importance of Price

When mar eters tal about what they do as part of their responsibilities for mareting products, the tas s associated with setting price are often not at the top of the list. Mar eters are much more li ely to discuss their activities related to promotion, product development, mar et research and other tas s that are viewed as the more interesting and exciting parts of the job.

Yet pricing decisions can have important consequences for the mar eting organization and the attention given by the mar eter to pricing is just as important asthe attention given to more recognizable mar eting activities. Some reasons pricing is important include:

Most Flexible Mar eting Mix Variable For mar eters price is the most adjustable of all mar eting decisions. Unli e product and distribution decisions, whichcan ta e months or years to change, or some forms of promotion which can be time consuming to alter (e.g., television advertisement), price can be changed very


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rapidly. The flexibility of pricing decisions is particularly important in times when the mar eter see s to quic ly stimulate demand or respond to competitor price actions. For instance, a mar eter can agree to a field salespersons requestto lower price for a potential prospect during a phone conversation. Li ewise amar eter in charge of online operations can raise prices on hot selling productswith the clic of a few website buttons.

Setting the Right Price Pricing decisions made hastily without sufficient research, analysis, and strategic evaluation can lead to the mar eting organization losing revenue. Prices set too low may mean the company is missing out on additional profits that could be earned if the target mar et is willing to spend more to acquire the product. Additionally, attempts to raise an initially low priced product to a higher price may be met by customer resistance as they may feel the mar eter is attempting to ta e advantage of their customers. Prices set too high can also impact revenue as it prevents interested customers from purchasingthe product. Setting the right price level often ta es considerable mar et nowledge and, especially with new products, testing of different pricing options.

Trigger of First Impressions - Often times customers perception of a productis formed as soon as they learn the price, such as when a product is first seenwhen wal ing down the aisle of a store. While the final decision to ma e a purchase may be based on the value offered by the entire mar eting offering (i.e., entire product), it is possible the customer will not evaluate a mar eters productat all based on price alone. It is important for mar eters to now if customersare more li ely to dismiss a product when all they now is its price. If so, pricing may become the most important of all mar eting decisions if it can be shown

that customers are avoiding learning more about the product because of the price.Important Part of Sales Promotion Many times price adjustments are part of s

ales promotions that lower price for a short term to stimulate interest in the product. However, as we noted in our discussion of promotional pricing in the Sales Promotion tutorial, mar eters must guard against the temptation to adjust prices too frequently since continually increasing and decreasing price can lead customers to be conditioned to anticipate price reductions and, consequently, withhold purchase until the price reduction occurs again.

Steps in the Price Setting Process

We view price setting as a series of decisions the mar eter ma es in order to de

termine the price direct and indirect customers pay to acquire the product. Direct customers are those who purchase products directly from the mar eter. For example, consider the direct pricing decisions that ta e place when a new novel issold:

Publisher of the boo must decide at what price they will charge their immediate customers in the channel of distribution such as online boo sellers (e.g.,Amazon.com).

Boo sellers must decide at what price they will sell the boo to their immediate customers which are typically final consumers (e.g., website shopper).

As we see with the boo seller example, many companies also sell indirectly to the final customer through a networ of resellers such as retailers. For mar eters

selling through resellers the pricing decision is complicated by resellers needto earn a profit and the mar eters need to have some control over the products price to the final customer. In these cases setting price involves more than only worrying about what the direct customer is willing pay since the mar eter must also evaluate pricing to indirect customers (e.g., resellers customers). Clearly sales can be dramatically different than what the mar eter forecasts if the selling price to the final customer differs significantly from what the mar eter expects. For instance, if the mar eting organization has forecasted to sell 1,000,000novels if the price to the final customer is one price and resellers decide toraise the price 25% higher than that price the mar eters sales may be much lower


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then forecasted.

With an understanding that mar eters must consider many factors (see the PricingDecisions tutorial) when setting price, we now turn to the process by which price is set. We present this as a five-step approach. As we noted earlier, while not all mar eters follow these steps, what is presented does cover the methods used by many mar eters.

The steps we cover include:1. Examine Company and Mar eting Objectives2. Determine an Initial Price3. Set Standard Price Adjustments4. Determine Promotional Pricing5. State Payment Options

Promotional Pricing: Dynamic Pricing

The concept of dynamic pricing has received a great deal of attention in recentyears due to its prevalent use by Internet retailers. But the basic idea of dynamic pricing has been around since the dawn commerce. Essentially dynamic pricingallows for the point-of-sale (i.e., at the time and place of purchase) price adjustments to ta e place for customers meeting certain criteria established by the seller. The most common and oldest form of dynamic pricing is haggling; the give-and-ta e that ta es place between buyer and seller as they settle on a price.

While the word haggling may conjure up visions of transactions ta ing place among vendors and customers in a street mar et, the concept is widely used in business mar ets as well where it carries the more reserved label of negotiated pricing.

Advances in computer hardware and software present a new dimension for the use of dynamic pricing. Unli e haggling, where the seller ma es price adjustments based on a person-to-person discussion with a buyer, dynamic pricing uses sophisticated computer technology to adjust price. It achieves this by combining customerdata (e.g., who they are, how they buy) with pre-programmed price offerings that are aimed at customers meeting certain criteria. For example, dynamic pricingis used in retail stores where customers use of loyalty cards triggers the storescomputer to access customer information. If customers characteristics match requi

rements in the software program they may be offered a special deal such as 10% off if they also purchase another product. Dynamic pricing is also widely used inairline tic et purchasing where type of customer (e.g., business vs. leisure traveler) and date of purchase can affect pricing.

On the Internet, mar eters may use dynamic pricing to entice first time visitorsto ma e a purchase by offering a one-time discount. This is accomplished by comparing information stored in the mar eters computer database with identifier information gathered as the person is visiting a website. One way this is done is for a website to leave small data files called "coo ies" on a visitors computer when they first access the mar eters website. A coo ie can reside on the visitors computer for some time and allows the mar eter to monitor the users behavior on thesite such as how often they visit, how long they spend on the site, what webpag

es they access and much more. The mar eter can then program special software, often called campaign management software, to send visitors a special offer such as a discount. For instance, the mar eter may have a discount offered if the visitor has come to the site at least five times in the last six months but has never purchased.

Pricing Decisions

What do the following words have in common? Fare, dues, tuition, interest, rent,and fee. The answer is that each of these is a term used to describe what one m


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nsiderable period of time.External Factors - There are a number of influencing factors which are not c

ontrolled by the company but will impact pricing decisions. Understanding thesefactors requires the mar eter conduct research to monitor what is happening in each mar et the company serves since the effect of these factors can vary by maret.

Price Adjustments: Geographic Pricing

Products requiring mar eters to pay higher costs that are affected by geographicarea in which a product is sold may result in adjustments to compensate for thehigher expense. The most li ely cause for charging a different price rests withthe cost of transporting a product from the suppliers distribution location to the buyers place of business. If the supplier is incurring all costs for shippingthen they may charge a higher price for products in order to cover the extra transportation costs. For instance, shipping products by air to Hawaii may cost a Los Angeles, California manufacturer a much higher transportation cost than a shipment made to San Diego.

Transportation expense is not the only cost that may raise a products price. Special taxes or tariffs may be imposed on certain products by local, regional or international governments which a seller passes along in the form of higher prices.

PRODUCT

Product Components: Core Benefits

Consider what we have tal ed about many times in this tutorial; people ma e buying decisions that satisfy their needs. While many needs are addressed by the consumption of a product or service, some needs are not. For instance, customers may need to be perceived highly by other members of their group or need a productthat is easy to use or need a ris -free purchase. In each of these cases, and many more, the core product itself is the benefit the customer receives from usingthe product.

In some cases these core benefits are offered by the product itself (e.g., floor

cleaner) while in other cases the benefit is offered by other aspects of the product (e.g., the can containing the floor cleaner that ma es it easier to spreadthe product). Consequently, at the very heart of all product decisions is determining the ey or core benefits a product will provide. From this decision, therest of the product offering can be developed.

Adoption of New Products

The PLC is tied closely to the concept of Diffusion of Innovation, which explains how information and acceptance of new products spread through a mar et. As wediscussed in the Managing External Forces tutorial, innovation is anything new that solves needs by offering a significant advantage over existing methods (e.g., other products) customers use. Innovation can encompass both highly advanced t

echnology products, such as new computer chips, and non-technological products,such as a new soft drin . In fact, the seminal wor of the Diffusion of Innovation concept occurred in the 1950s when researchers in the agricultural industry observed how new corn seeds were adopted by farmers in Midwest U.S. states.

For mar eters a ey concept to emerge from research on new product diffusion isthe identification of adopter categories into which members of a mar et are li ely to fall. These categories include:

Innovators Represent a small percentage of the mar et that is at the forefro


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nt of adopting new products. These people are often viewed as enthusiasts and are eager to try new things, often without regard to price. While a good test ground for new products, mar eters find that Innovators often do not remain loyal asthey continually see new products.

Early Adopters This group contains more members than the Innovator category.They share Innovators enthusiasm for new products though they tend to be more practical about their decisions. They also are eager to communicate their experiences with the Early Majority (next group) and because of their influence they areimportant to the future success of the product (i.e., act as opinion leaders).

Early Majority This represents the beginning of entry into the mass mar et.The Early Majority account for up to one-third of the overall mar et. The EarlyMajority li e new things but tend to wait until they have received positive opinions for others (i.e., early adopters) before purchasing. Adoption by the EarlyMajority is ey if a new product is to be profitable. On the other hand, many new products die quic ly because they are not accepted beyond early trials by Innovators and Early Adopters and never reach mass mar et status.

Late Majority Possibly as large as the Early Majority, this group ta es a wait-and-see approach before trying something new. Mar eters are li ely to see their highest profits once this group starts to purchase.

Laggards This is the last group to adopt something new and, in fact, may only do so if they have no other choice. Depending on the mar et this group can belarge though because of their reluctance to accept new products mar eters are not inclined to direct much attention to them.

Product Decisions

Mar eting starts with the product since it is what an organization has to offerits target mar et. As weve stressed many times in this tutorial, organizations attempt to provide solutions to a target mar ets problems. These solutions includetangible or intangible (or both) product offerings mar eted by an organization.

In addition to satisfying the target mar ets needs, the product is important because it is how organizations generate revenue. It is the thing that for-profit companies sell in order to realize profits and satisfy sta eholders and what non-profit organizations use to generate funds needed to sustain itself. Without a well-developed product strategy that includes input from the target mar et, a mar eting organization will not have long-term success.

Product DecisionsIn this part of the Principles of Mar eting Tutorials we ta e aclose loo at the ey concepts all mar eters should consider when faced with product decisions. In the Managing Products tutorial we will extend the discussionto loo at the ey issues in managing product decisions.

Product Features and Functional Benefits

Customers derive functional benefits from features that are part the consumableproduct. For instance, a plasma television includes such features and benefits as:Feature Functional Benefitscreen size

screen resolution

surround sound

remote control offers greater detail and allows for more distant viewing

viewing provides clear, more realistic picture

immerses all senses in the viewing experience


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allows for greater comfort while viewing

These features are called functional because they result in a benefit the user directly associates with the consumable product. For mar eters functional benefits are often the result of materials, design and production decisions. How the product is built can lead to benefits such as effectiveness, durability, speed, ease-of-use, and cost savings to name just few.

Categories of Consumer Products

In addition to categorizing by type of offering, most products intended for consumer use can be further categorized by how frequently and where they are purchased.

Convenience Products These are products that appeal to a very large mar et segment. They are generally consumed regularly and purchased frequently. Examplesinclude most household items such as food, cleaning products, and personal careproducts. Because of the high purchase volume, pricing per item tends to be relatively low and consumers often see little value in shopping around since additional effort yields minimal savings. From the mar eters perspective the low priceof convenience products means that profit per unit sold is very low. In order toma e high profits mar eters must sell in large volume. Consequently, mar etersattempt to distribute these products in mass through as many retail outlets as p

ossible.Shopping Products These are products consumers purchase and consume on a less frequent schedule compared to convenience products. Consumers are willing to spend more time locating these products since they are relatively more expensivethan convenience products and because these may possess additional psychologicalbenefits for the purchaser, such as raising their perceived status level withintheir social group. Examples include many clothing products, personal services,electronic products, and household furnishings. Because consumers are purchasing less frequently and are willing to shop to locate these products, the target mar et is much smaller than that of convenience goods. Consequently, mar eters often are more selective when choosing distribution outlets to sell their products.

Specialty Products These are products that tend to carry a high price tag re

lative to convenience and shopping products. Consumption may occur at about thesame rate as shopping products but consumers are much more selective. In fact, in many cases consumers now in advance which product they prefer and will not shop to compare products. But they may shop at retailers that provide the best value. Examples include high-end luxury automobiles, expensive champagne, and celebrity hair care experts. The target mar ets are generally very small and outletsselling the products are very limited to the point of being exclusive.

In addition to the three main categories above, products are classified in at least two additional ways:

Emergency Products These are products a customer see s due to sudden eventsand for which pre-purchase planning is not considered. Often the decision is one

of convenience (e.g., whatever wor s to fix a problem) or personal fulfillment(e.g., perceived to improve purchasers image).

Unsought Products These are products whose purchase is unplanned by the consumer but occur as a result of mar eters actions. Such purchase decisions are madewhen the customer is exposed to promotional activity, such as a salespersons persuasion or purchase incentives li e special discounts offered to certain onlineshoppers. These promotional activities often lead customers to engage in ImpulsePurchasing.

Categories of New Products


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New products can fall into one of several categories. These categories are defined by the type of mar et the product is entering (i.e., newly created, existingbut not previously targeted, existing and targeted ) and the level of product innovation (i.e., radically new, new, upgrade).

Creates New Mar et with Radically New Product or Product Line This categoryis represented by new brea through products that are so revolutionary they create an entirely new mar et. Recent examples include digital music players, such asApples iPod, that have spawned new delivery methods (downloadable music) and newmedia (podcasting). Highly innovative products are rare so very few new products fall into this category.

Enters Existing But Not Previously Targeted Mar et with New-Product or Product Line In this category a mar eter introduces a new product item or product line to an existing mar et which they did not previously target. Often these products are similar to competitors products already available in the mar et but with some level of difference (e.g., different features, lower price, etc.). Microsoftsentry into the video gaming system mar et with their Xbox is an example.

Stays in Existing and Previously Targeted Mar et by Enhancing Existing Product or Product Line Under this development category the mar eter attempts to improve its current position in the mar et by either improving or upgrading existingproducts or by extending a product line by adding new products. This type of new product is seen in our earlier example of Procter and Gambles Tide product linewhich contains many product variations of the basic Tide product.

New Product Development Process

Because introducing new products on a consistent basis is important to the future success of many organizations, mar eters in charge of product decisions oftenfollow set procedures for bringing products to mar et. In the scientific area that may mean the establishment of ongoing laboratory research programs for discovering new products (e.g., medicines) while less scientific companies may pull together resources for product development on a less structured timetable.

In this section we present a 7-step process comprising the ey elements of new product development. While some companies may not follow a deliberate step-by-step approach, the steps are useful in showing the information input and decision m

a ing that must be done in order to successfully develop new products. The process also shows the importance mar et research plays in developing products.

We should note that while the 7-step process wor s for most industries, it is less effective in developing radically new products. The main reason lies in the inability of the target mar et to provide sufficient feedbac on advanced productconcepts since they often find it difficult to understand radically different ideas. So while many of these steps are used to research brea through ideas, themar eter should exercise caution when interpreting the results.

Categories of Business Products

As discussed in the Business Buying Behavior tutorial, the amount spent on busin

ess purchasing far exceeds consumer purchasing. Products sold within the b-to-bmar et fall into one of the following categories:

Raw Materials These are products obtained through mining, harvesting, fishing, etc., that are ey ingredients in the production of higher-order products.

Processed Materials These are products created through the processing of basic raw materials. In some cases the processing refines original raw materials while in other cases the process combines different raw materials to create something new. For instance, several crops including corn and sugar cane can be processed to create ethanol which has many uses including as a fuel to power car and t


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Marketing -Product and Price