Creating and Pricing Products That Satisfy Customers

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 12 | Slide 1

Creating and Pricing Products That Satisfy Customers

Chapter

12

4 P’s of the Marketing Mix


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 but soon sales

start to rise; development costs are high, profits low; few competitors.

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

competition enters.

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

stage, sales and profits begin to slowly decline; competition is intense.

• Decline– Sales volume decreases sharply and profits continue to fall;

may have to discontinue product.


Product Life-Cycle


How Do We Classify Products?

Product• Everything one receives in an exchange,

including all tangible and intangible attributes and expected benefits

• A product can be 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


Convenience product• A relatively inexpensive, frequently purchased item for which

buyers want to exert only minimum effort– Example: a candy bar, loaf of bread

Shopping product• An item for which buyers are willing to expend considerable effort

on planning and making the purchase– Example: a car, a home, a new computer

Specialty product• An item that possesses one or more unique characteristics for

which a significant group of buyers is willing to expend considerable purchasing effort

– Example: special outfit for a special occasion, a certain Christmas gift for someone special

Types of Consumer Products


Product line• A group of similar products that differ only in relatively minor

characteristics

– Example: Proctor and Gamble makes a line of shampoos-Ivory, Head and Shoulders, Prell.

Product mix• All of the products that a firm offers for sale

– Example: Product and Gamble makes beauty products, health products, and also household cleaning products. (very different lines)

• 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

Product Line and Product Mix


Managing existing products• Product modification: the process of changing one or more

of a product’s characteristics such as quality, function, aesthetics

– Example: Adding airbags to vehicles made them safer (function)

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

– Example: Cheerios

Deleting products– Between 60-75% of all new products fail

Developing new products

Managing the Product Mix

http://www.cheerios.com/products


Top Ten New Products of the Decade


Phases of New Product Development


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 other “Ps”).

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……”Apple”

• Brand mark– The part of a brand that is a symbol or distinctive 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 (see next slide)

• Trade name– The complete and legal name of an organization– “Apple, Incorporated”


Apple logo and name showing trademark symbol (look closely)


Types of brands• Manufacturer (producer) brand

– A brand that is owned by a manufacturer– “Apple” “Dole” “Nike”

• Store (private) brand– A brand that is owned by an individual

wholesaler or retailer– Walmart’s “Great Value” or their “Equate”

• Generic brand– A product with no brand at all

Branding (cont.)


Benefits of branding• Because brands are easily recognizable,

they reduce the amount of time buyers must spend shopping.

• Brands help consumers judge quality.• Brands help 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.)


Benefits of branding (cont.)• Brand loyalty

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

– Recognition, preference, and insistence

– Insistence is the highest level of brand loyalty

Branding (cont.)


Top Ten Most Valuable Brands in the World


Choosing a brand• It should be easy to say, spell, and recall.• It should suggest the product’s uses, special

characteristics, and major benefits.• It should be distinctive enough to set it apart from

competing brands. Protecting a brand

• It should be protected through registration.• Guard against a brand name’s becoming a

generic term.

Branding (cont.)


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 products

– 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

Branding (cont.)


Branding strategies (cont.)• Brand extensions

– A firm uses an existing brand to brand a new product in a different product category

– Example: Procter & Gamble names a new product Ivory Body Wash

– Caution must be taken in extending a brand too many times or too far outside the original product category

– Example: Kellogg’s extended its brand name to a line of hip-hop street clothing that was a failure

Branding (cont.)


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

Packaging


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


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, 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 precautions and instructions

Express warranty• A written explanation of the producer responsibilities if the

product is found to be defective or otherwise unsatisfactory

Labeling (cont.)


1. “Brand” your product. Create a spoken brand name, sketch out a logo, decide if the brand should be trademarked or not and why.

2. Decide on what kind of packaging you’ll use and why.

3. Decide what kinds of information you’ll need on the label and sketch out an example of it.

Go Back to the “Let’s Brainstorm” Activity and Discuss/decide the following:


Every Product or Service has a Perfect Price Even this one….

• Driving a tank for fun

Pricing Products

http://www.driveatank.com/pricing.html


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 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 satisfy customers’ needs

• Price helps customers allocate their own financial resources among various want-satisfying products

Pricing Products


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

Pricing Products (cont.)


Supply and Demand Curves


Price and non-price competition• Price competition

– An emphasis on setting a price equal to or lower than competitors’ prices to gain sales or market share

• Non-price competition– Competition based on factors other than price (such as

quality, customer service, packaging)

– Example: Apple depends on customer loyalty, quality in design and function, instead of price to sell the product

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 Products (cont.)


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


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

industry sales

Status quo pricing• Pricing because that’s normally what a product like

this has always been priced at

Pricing Objectives (cont.)


Cost based pricing Breakeven based pricing Demand based pricing Competition based pricing

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 like how much it costs to produce it or market it; there is no incentive here to reduce those costs-just raise the price instead. This is not the best way to be profitable.

Pricing Methods


Pricing Methods (cont.)

Breakeven based pricing• 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 (total sales)– 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 (= Fixed Costs + Variable Costs)

– The sum of the fixed costs and the variable costs all together.


Breakeven Analysis


How much in sales dollars do we need to break even?

How many units do we need to sell to break even?

Two Ways to Figure Out Breakeven Point


Calculating Breakeven Point

GIVEN THESE FIGURES: Variable costs: $337,000 (cost of goods sold) Other variable costs: $42,750 Total Variable Costs: $379,750 Annual Sales: $495,000 Total Fixed costs: $78,100

1. Calculate Contribution Margin:

All variable costs Annual sales

2. Breakeven: Sales Dollar Volume:

Total Fixed CostsContribution Margin

To determine how much in sales dollars you need:1. Calculate Contribution Margin using this formula:

Total variable costs Annual sales

2. Then calculate Breakeven Point: Total Fixed CostsContribution Margin


Contribution margin goes down but Total Fixed Costs stay the same?• Example A: Example B:

CM = .68 CM = .20$78,100 = $114,852 $78,100 = $390,500.68 .20

Contribution margin goes down AND Total Fixed Costs go up? $100,000 = $500,000

.20

What about if…….


Calculating Breakeven Point

GIVEN THESE FIGURES: Selling price: $120 Variable cost per unit: $60 Total Fixed costs: $40,000

1. Calculate Contribution Margin:

All variable costs Annual sales

2. Breakeven: Sales Dollar Volume:

Total Fixed CostsContribution Margin

To determine how many units you need to sell:1. Contribution per unit =

Selling price - Variable cost per unitExample: Contribution per unit = $120-60 = $60

2. Then use this formula: Total Fixed CostsContribution Per Unit

Example: $40,000 = 667 units$60


Pricing Methods (cont.)

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


New Product Strategy Differential Pricing Strategy Psychological Pricing Strategy Product line Pricing Strategy Promotional Pricing Strategy

Choose one of these Pricing Strategies and be able to explain why you chose it.


New-product pricing 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: New Product Pricing


Pricing Strategies: Differential Pricing

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

Pricing Strategies: Psychological Pricing


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

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

Pricing Strategies: Product-line Pricing


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 Strategies: Promotional Pricing


1. Price your product or service using one of the strategies in the textbook (pg 350-358) or one taken from the next slide. Be able to explain why you chose that price.

2. Calculate your breakeven point to determine how much sales you’ll need per year to break even (in dollars) and then how many units you will have to sell per year to break even. Given these figures:

Total variable costs: $300,000Total fixed costs: $150,000Annual sales last year: $500,000Selling price last year: $20,000 per unitVariable cost per unit: $1500

Go Back to the “Let’s Brainstorm” Activity and Add the following:


Chapter Quiz

1. Western Day was a special day at the office. Janice wanted to dress in the latest western fashion, but she had limited funds. She visited several shops before finding the right outfit. For Janice, what type of product is the clothing?

A. Specialty productB. Major equipmentC. Industrial productD. Shopping productE. Convenience product


Chapter Quiz

2. Sales rise gradually as a result of promotion and distribution activities, but initially, high development and marketing costs result in low profit or even a loss. This best describes which stage of the product life-cycle?

A. MaturityB. IntroductionC. DeclineD. GrowthE. Steady


Chapter Quiz

3. A customer who consistently buys Sony televisions whenever he or she needs to replace his or her TV set demonstrates

A. the importance of trademarks.B. the importance of trade names.C. the importance of brand awareness.D. brand loyalty.E. brand equity.


Chapter Quiz

4. Certain plastic water bottles that cannot be recycled, while convenient for customers, are a clear example that manufacturers are not considering _______________ when designing packaging.

A. the needs of intermediariesB. the needs of retailersC. environmental consciousnessD. family needsE. cost-effectiveness


Chapter Quiz

5. When there is a shortage of citrus fruit, the economic forces of supply and demand would suggest that

A. price will stay constant.B. price will decrease.C. price will increase.D. it will take a long time before the shortage is

felt in the market.E. None of the above

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Creating and Pricing Products That Satisfy Customers