Chapter  13  Crea+ng  and  Pricing  Products            That  Sa+sfy  Customers  

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  dis+nguish  between  the  two.  

④ Iden+fy  the  methods  available  for  changing  a  product  mix.  

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

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

⑦ Iden+fy  the  major  pricing  objec+ves  used  by  businesses.  

⑧ Examine  the  three  major  pricing  methods  that  firms  employ.  

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

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

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Classifica+on  of  Products  •  Product  

–  Everything  one  receives  in  an  exchange,  including  all  tangible  and  intangible  aTributes  and  expected  benefits  

–  A  good,  service,  or  idea  •  Consumer  product  

–  A  product  purchased  to  sa+sfy  personal  and  family  needs  •  Business  (industrial)  product  

–  A  product  bought  for  resale,  for  making  other  products,  or  for  use  in  a  firm’s  opera+ons  

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Consumer  Product  Classifica+ons  •  Convenience  product  

–  A  rela+vely  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  characteris+cs  for  which  a  significant  group  of  buyers  is  willing  to  expend  considerable  purchasing  effort  

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Business  Product  Classifica+ons  •  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  produc+on  purposes  

•  Accessory  equipment  –  Standardized  equipment  used  in  a  firm’s  produc+on  or  office  

ac+vi+es  •  Component  part  

–  An  item  that  becomes  a  part  of  a  physical  product  and  is  either  a  finished  item  ready  for  assembly  or  a  product  that  needs  liTle  processing  before  assembly  

13 • 5

Business  Product  Classifica+ons  (cont’d)  

•  Process  material  –  A  material  that  is  used  directly  in  the  produc+on  of  another  product  but  is  not  readily  iden+fiable  in  the  finished  product  

•  Supply  –  An  item  that  facilitates  produc+on  and  opera+ons  but  does  not  become  part  of  the  finished  product  

•  Business  service  –  An  intangible  product  that  an  organiza+on  uses  in  its  opera+ons  

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The  Product  Life  Cycle  •  A  series  of  stages  in  which  a  product’s  sales  revenue  and  

profit  increase,  reach  a  peak,  then  decline  –  IntroducFon  

•  Customer  awareness  and  acceptance  are  low  

–  Growth  •  Sales  increase  rapidly  as  the  product  becomes  well  known  

– Maturity  •  Sales  are  s+ll  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  con+nue  to  fall  

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FIGURE 13-1

Product  Life  Cycle  

13 • 8

Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 16th ed. (Mason, Ohio: South-Western/Cengage Learning, 2012). Adapted with permission.

Using  the  Product  Life  Cycle  •  Marketers  should  be  aware  of  the  life-­‐cycle  stage  of  each  

product  for  which  they  are  responsible  and  should  try  to  esFmate  how  long  the  product  is  expected  to  remain  in  that  stage  –  Both  must  be  taken  into  account  in  making  decisions  about  the  marke+ng  strategy  for  a  product  

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Product  Line  and  Product  Mix  

•  Product  line  – A  group  of  similar  products  that  differs  only  in  rela+vely  minor  characteris+cs  

•  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  

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Managing  the  Product  Mix  •  Managing  exisFng  products  

–  Product  modifica+on:  the  process  of  changing  one  or  more  of  a  product’s  characteris+cs  such  as  quality,  func+on,  aesthe+cs  

–  Line  extensions:  development  of  a  product  closely  related  to  one  or  more  products  in  the  exis+ng  product  line  but  designed  specifically  to  meet  somewhat  different  customer  needs      

•  DeleFng  products  •  Developing  new  products  

–  Imita+ons,  adapta+ons,  or  innova+ons  –  Consists  of  seven  phases  

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FIGURE 13-2

Phases  of  New  Product  Development  

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Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 17th ed. (Mason, Ohio: South-Western/Cengage Learning, 2014). Adapted with permission.

Why  Do  Products  Fail?  •  The  product  and  its  markeFng  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  en+re  marke+ng  mix  

•  The  firm  markets  a  new  product  before  all  the    “bugs”  are  worked  out  

•  When  problems  show  up  in  tesFng,  a  firm  tries    to  recover  its  costs  by  pushing  ahead  anyway  

•  A  firm  tries  to  market  a  product  with    inadequate  financing  

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Branding  •  What  is  a  brand?  

–  A  name,  term,  symbol,  design,  or  any  combina+on    of  these  that  iden+fies  a  seller’s  products  as  dis+nct  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  dis+nc+ve  design  

–  Trademark  •  A  brand  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  organiza+on  

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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  

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Branding  (cont’d)  

•  Benefits  of  branding  – Because  brands  are  easily  recognizable,  they  reduce  the  amount  of  +me  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  promo+onal  efforts  because  promo+on  of  each  branded  product  indirectly  promotes  others  with  the  same  brand  

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Branding  (cont’d)  

•  Benefits  of  branding  (cont’d)  – Brand  loyalty  

•  The  extent  to  which  a  customer  is  favorable  toward  buying  a  specific  brand  

•  Recogni+on,  preference,  and  insistence  – Brand  equity  

•  The  marke+ng  and  financial  value  associated  with  a  brand’s  strength  in  a  market  

•  Brand-­‐name  awareness,  brand  associa+on,  perceived  quality,  and  brand  loyalty  

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Branding  (cont’d)  

•  Choosing  a  brand  –  It  should  be  easy  to  say,  spell,  and  recall  –  It  should  suggest,  in  a  posi+ve  way,  the  product’s  uses,  special  characteris+cs,  and  major  benefits  

–  It  should  be  dis+nc+ve  enough  to  set  it  apart  from  compe+ng  brands  

•  ProtecFng  a  brand  –  Should  be  protected  through  registra+on  – Guard  against  a  brand  name’s  becoming  a    generic  term  

13 • 18

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  promo+on  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  

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Branding  (cont’d)  

•  Branding  strategies  (cont’d)  – Brand  extensions  

•  A  firm  uses  an  exis+ng  brand  to  brand  a  new  product    in  a  different  product  category  

–  For  example,  Procter  &  Gamble  named  a  new    product  Ivory  Body  Wash  

•  Cau+on  must  be  taken  in  extending  a  brand  too  many  +mes  or  too  far  outside  the  original  product  category  

–  For  example,  Kellogg’s  extended  its  brand  name    to  a  line  of  hip-­‐hop  street  clothing  that  was  a  failure  

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Packaging  •  All  of  the  acFviFes  involved  in  developing  and    

providing  a  container  with  graphics  for  a  product  •  FuncFons  of  packaging  

–  Protect  the  product  and  maintain  its  func+onal  form  –  Offer  consumer  convenience  –  Promote  the  product  by  communica+ng  its  features,  uses,  benefits,  and  

image  •  Design  consideraFons  

–  Cost  –  Single  or  mul+ple  units  –  Consistency  among  package  designs  (family  packaging)  –  Promo+onal  role  –  Needs  of  intermediaries  –  Environmental  responsibility  

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Labeling  •  The  presentaFon  of  informaFon  on  a  product    

or  its  package  •  May  include  

–  Brand  name  and  mark  –  Trademark  symbol  –  Package  size  and  contents  –  Product  claims  –  Direc+ons  –  Safety  precau+ons  –  Ingredients  –  Name  and  address  of  manufacturer  –  Universal  Product  Code  (UPC)  symbol  for    

automated  checkout  and  inventory  control  

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Labeling  (cont’d)  •  Must  include  

–  For  garments,  name  of  manufacturer,  country  of  manufacture,  fabric  content,  cleaning  instruc+ons  

–  Nutri+on  labeling  in  standard  format  for  any  food  product  for  which  a  nutri+onal  claim  is  made  

–  For  food,  ingredients  in  common  terms,  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  precau+ons  and  instruc+ons  

•  Express  warranty  –  A  wriTen  explana+on  of  the  producer  responsibili+es  if  the  product  is  

found  to  be  defec+ve  or  otherwise  unsa+sfactory  

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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  +me  and  under  certain  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  sa+sfy  customers’  needs  

–  Price  helps  customers  allocate  their  own  financial  resources  among  various  want-­‐sa+sfying  products  

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Pricing  Products  (cont’d)  •  Supply  and  demand  affects  prices  

–  Supply  •  The  quan+ty  of  a  product  that  producers  are  willing    to  sell  at  each  of  various  prices  

•  Quan+ty  supplied  by  producers  increases  as  the    price  increases  

–  Demand  •  The  quan+ty  of  a  product  that  buyers  are  willing  to  purchase  at  each  of  various  prices  

•  Quan+ty  demanded  increases  as  the  price  decreases  –  Equilibrium  

•  Where  the  supply  and  demand  curves  intersect  and  quan+ty  and  price  for  buyers  and  sellers  are  equal  

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FIGURE 13-3

Supply  and  Demand  Curves  

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Pricing  Products  (cont’d)  •  Price  and  non-­‐price  compeFFon  

–  Price  compeFFon  •  An  emphasis  on  seRng  a  price  equal  to  or  lower  than  compe+tors’  prices  to  gain  sales  or  market  share  

–  Non-­‐price  compeFFon  •  Compe++on  based  on  factors  other  than  price  (such  as  quality,  customer  service,  packaging)  

•  Buyers’  percepFons  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  

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Pricing  Objec+ves  •  Survival  

–  Pricing  the  firm’s  products  (perhaps  at  a  loss)  in  order  to  aTract  customers  to  establish  the  firm  in  a  market  

•  Profit  maximizaFon  –  Pricing  with  the  intent  to  reap  profits  as  large  as  possible  from  a  market—usually  an  unaTainable  goal  

•  Target  return  on  investment  (ROI)  –  Pricing  that  allows  the  firm  to  aTain  its  profit  goal,  which  is  a  percentage  of  the  investment  the  firm  has  made  

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Pricing  Objec+ves  (cont’d)  

•  Market-­‐share  goals  – Pricing  that  will  increase  a  firm’s  propor+on  of  total  industry  sales  

•  Status  quo  pricing  – Pricing  the  firm’s  products  so  as  not  to  disturb  the  stability  of  prices  in  the  industry  

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Pricing  Methods  •  Cost-­‐based  pricing  

–  The  seller  determines  the  total  cost  of  producing    one  unit  of  the  product  then  adds  an  amount  to    cover  addi+onal  costs  and  profit  (markup)  

– Markup  may  be  calculated  as  a  percentage  of    total  costs  

–  Flaws  •  Difficulty  of  determining  an  effec+ve  markup  percentage;  price  may  be  too  high,  resul+ng  in  lost  sales,  or  price  may  be  too  low,  resul+ng  in  lost  profit  

•  Separates  pricing  from  other  business  func+ons  that  impact  marke+ng  decisions  

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Pricing  Methods  •  Breakeven  analysis  

–  Breakeven  quanFty  •  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  maTer  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  aTributed  to  a  product  

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FIGURE 13-4

Breakeven  Analysis  What  is  the  lowest  level  of  producFon  and  sales  at  which  a  company  can  break  even  on  a  parFcular  product?  

13 • 32

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  differen+a+on    •  SeRng  different  prices  in  segmented  markets  based  on  segment  characteris+cs  (e.g.,  +me  of  purchase,  type  of  customer,  or  distribu+on  channel)  

•  CompeFFon-­‐based  pricing  –  Based  on  mee+ng  the  challenge  of  compe+tors’  prices  in  markets  where  products  are  quite  similar  or  price  is  an  important  customer  considera+on  

13 • 33

FIGURE 13-5

Types  of  Pricing  Strategies  

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Pricing  Strategies  

•  New-­‐product  strategies  – Price  skimming  

•  Charging  the  highest  possible  price  for  a  product  during  the  introduc+on  stage  of  its  life  cycle  

– PenetraFon  pricing  •  SeRng  a  low  price  for  a  new  product  to  quickly  build  market  share  and  discourage  compe+tors  

13 • 35

Pricing  Strategies  (cont’d)  •  DifferenFal  pricing  

–  Charging  different  prices  to  different  buyers  for  the  same  quality  and  quanFty  of  product  

–  The  market  must  consist  of  mulFple  segments  with  different  price  sensiFviFes  

–  NegoFated  pricing  •  Establishing  a  final  price  through  bargaining  

–  Secondary-­‐market  pricing  •  SeRng  one  price  for  the  primary  target  market  and  a  different  price  for  another  market  

–  Periodic  discounFng  •  Temporary  reduc+on  of  prices  on  a  paTerned  or  systema+c  basis  

–  Random  discounFng  •  Temporary  reduc+on  of  prices  on  an  unsystema+c  basis  

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Pricing  Strategies  (cont’d)  •  Psychological  pricing  

–  Odd-­‐number  pricing  •  SeRng  prices  using  odd  numbers  that  are  slightly  below  whole-­‐dollar  amounts  

–  MulFple-­‐unit  pricing  •  SeRng  a  single  price  for  two  or  more  units  

–  Reference  pricing  •  Pricing  a  product  at  a  moderate  level  and  posi+oning  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)  •  SeRng  a  low  price  for  products  on  a  consistent  basis  

–  Customary  pricing  •  Pricing  on  the  basis  of  tradi+on  

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Pricing  Strategies  (cont’d)  •  Product-­‐line  pricing  

–  Establishing  and  adjus+ng  the  prices  of  mul+ple  products  within  a  product  line  

–  CapFve  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-­‐versa+le  products  higher  than  other  models  in  the  product  line  

–  Price  lining  •  Selling  goods  only  at  certain  predetermined  prices  that  reflect  definite  price  breaks  

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Pricing  Strategies  (cont’d)  

•  PromoFonal  pricing  – Price  leaders  

•  Products  priced  below  the  usual  markup,  near  cost,  or  below  cost  

– Special-­‐event  pricing  •  Adver+sed  sales  or  price  cuRng  linked  to  a  holiday,  season,  or  event  

– Comparison  discounFng  •  SeRng  a  price  at  a  specific  level  and  comparing  it  with  a  higher  price  

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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  transporta+on  costs  

–  FOB  desFnaFon  pricing  •  The  seller  includes  transporta+on  costs    in  the  product  pricing  

•  Transfer  pricing  –  Prices  charged  in  sales  between  an    organiza+on’s  units  

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Pricing  Business  Products  (cont’d)  

•  DiscounFng  – A  discount  is  a  deduc+on  from  the  price  of  an  item  

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