Product and Pricing Strategies

Product and Pricing Strategies

Product Characteristics

Fundamentals

Decisions

Pricing

This chapter discusses some of the important product decisions marketers must make to compete effectively in the global marketplace. We begin the chapter by explaining product fundamentals, such as product types, product life cycles, and the new product development process. Next we explore a variety of decisions companies must make with respect to product identities, brand sponsorship, product lines and mixes, positioning, and international markets. We conclude the chapter by explaining popular pricing strategies.

The Product Continuum

Although some products are predominantly tangible and others are mostly intangible, most products fall somewhere between those two extremes. The product continuum indicates the relative amounts of tangible and intangible components in a product. Education is a product at the intangible extreme, whereas salt and shoes are at the tangible extreme.

Characteristics of Service Products

Intangible Quality

Perishable Nature

Service products have some special characteristics that affect the way they are marketed. As we have seen, intangibility is one fundamental characteristic. You cant usually show a service in an ad, demonstrate it before customers buy, mass produce it, or give customers anything tangible to show for their purchase. Services marketers often compensate for intangibility by using tangible symbols or by adding tangible components to their products.

Another unique aspect of service products is perishability. Because services cannot usually be created in advance or held in storage until people are ready to buy, services are time sensitive. For this reason, many services try to shift customer demand by offering discounts or promotions during slow periods.

Consumer Products

Convenience Products

Shopping Products

Specialty Products

Unsought Goods

Products that are primarily sold to consumers are known as consumer products. Consumer products can be classified into four subgroups, depending on how people shop for them:

Convenience products are the goods and services that people buy frequently, without much conscious thought, such as toothpaste, dry cleaning, film developing, and photocopying.

Shopping products are fairly important goods and services that people buy less frequently: a stereo, a computer, a refrigerator, or a college education. Such purchases require more thought and comparison shopping to check on price, features, quality, and reputation.

Specialty products include particular brands that the buyer especially wants and will seek out, regardless of location or price. Specialty products do not have to be expensive, but they are products that customers go out of their way to buy and rarely accept substitutes for.

Unsought goods are products that people do not normally think of buying, such as life insurance, cemetery plots, and new products they must be made aware of through promotion.

Industrial Products

In contrast to consumer products, industrial products are generally purchased by firms in large quantities and are used for further processing or in conducting a business. Two categories of industrial products are expense items and capital items. Expense items are relatively inexpensive goods and services that organizations generally use within a year of purchase. Examples are pencils and printer cartridges. Capital items, are more expensive organizational products and have a longer useful life. Examples include desks, photocopiers, and computers.

Products and Their Uses

• Raw materials
• Components
• Supplies
• Installations
• Equipment
• Business services

Aside from dividing products into expense and capital items, industrial buyers and sellers often classify products according to their intended use.

Raw materials such as iron ore, crude petroleum, lumber, and chemicals are used in the production of final products.

Components such as spark plugs and printer cartridges are similar to raw materials; they also become part of the manufacturers final products.

Supplies such as pencils, nails, and light bulbs that are used in a firms daily operations are considered expense items.

Installations such as factories, power plants, airports, production lines, and semiconductor fabrication machinery are major capital projects.

Equipment includes less-expensive capital items such as desks, telephones, and fax machines that are shorter lived than installations.

Business services range from simple and fairly risk-free services such as landscaping and cleaning to complex services such as management consulting and auditing.

The Product Life Cycle

Regardless of a products classification, few products last forever. Most products go through a product life cycle, passing through four distinct stages in sales and profits: introduction, growth, maturity, and decline. As the product passes from stage to stage, various marketing approaches become appropriate.

The first stage in the product life cycle is the introductory stage, during which producers launch a new product and stimulate demand.

After the introductory stage comes the growth stage, marked by a rapid jump in sales and, usually, an increase in the number of competitors and distribution outlets. As competition increases, so does the struggle for market share.

During the maturity stage, the longest in the product life cycle, sales begin to level off or show a slight decline. Most products are in the maturity stage of the life cycle where competition increases and market share is maximized-making further expansion difficult.

Although maturity can be extended for many years, most products eventually enter the decline stage, when sales and profits slip and then fade away. Declines occur for several reasons: changing demographics, shifts in popular taste, product competition, and advances in technology. When a product reaches this point in the life cycle, the company must decide whether to keep it and reduce the products costs to compensate for declining sales or discontinue it and focus on developing newer products. Another option is to give the product a makeoverthat is, changing the packaging, improving the formula, or modifying the form or flavor, in hopes of injecting new life into the brand.

New Product Development

Idea generation

Idea screening

Business analysis

Prototype development

Test marketing

Commercialization

Companies that do develop new products generally use a product-development processa series of stages through which a product idea passes.

Idea Generation

Customers

Competitors

Employees

The first step in the product-development process is to come up with ideas that will satisfy unmet needs. Customers, competitors, and employees are often the best source of new-product ideas.

Idea Screening

Industrial Products → Feasibility Study

Consumer Products → Concept Testing

From the mass of ideas suggested, the company culls a few that appear to be worthy of further development, applying broad criteria such as whether the product can use existing production facilities and how much technical and marketing risk is involved. In the case of industrial or technical products, this phase is often referred to as a feasibility study, in which the products features are defined and its workability is tested. In the case of consumer products, marketing consultants and advertising agencies are often called in to help evaluate new ideas. In some cases, potential customers are asked what they think of a new product ideaa process known as concept testing.

Business Analysis

Forecast Sales

Estimate Costs

Project Profits

A product idea that survives the screening stage is subjected to a business analysis. During this stage the company reviews the sales, costs, and profit projections to see if they meet the companys objectives. For instance, one question the company must answer is whether the company can make enough money on the product to justify the investment. To answer this question, the company forecasts the probable sales of the product, assuming various pricing strategies. In addition, it estimates the costs associated with various levels of production. Given these projections, the company calculates the potential profit that will be achieved if the product is introduced. If the product meets the companys objectives, it can then move to the product-development stage.

Prototype Development

Packaging

Marketing Mix

Production

Resources

At this stage the firm actually develops the product concept into a physical product. The firm creates and tests a few samples, or prototypes, of the product, including its packaging. During this stage, the various elements of the marketing mix are put together. In addition, the company evaluates the feasibility of large-scale production and specifies the resources required to bring the product to market.

Test Marketing

Introduce the Product

Monitor Customer Reactions

During test marketing, the firm introduces the product in selected areas of the country and monitors consumer reactions. Test marketing gives the marketer experience with marketing the product before going to the expense of a full introduction. Fisher-Prices Play Lab is the centerpiece of the companys success.

Commercialization

The final stage of development is commercialization, the large-scale production and distribution of those products that have survived the testing process. This phase (also referred to as a product launch) requires the coordination of many activitiesmanufacturing, packaging, distribution, pricing, and promotion. A classic mistake is letting marketing get out of phase with production by promoting the product before the company can supply it in adequate quantity. Many companies roll out their new products gradually, going from one geographic area to the next. This plan enables them to spread the costs of launching the product over a longer period and to refine their strategy as the rollout proceeds.

Product Identities

Branding

Packaging

Labeling

Creating an identity for your products is an important part of developing effective product strategies. Companies create product identities by assigning their products a brand identitya unique name or design that sets the product apart from those offered by competitors, and by designing and producing an attractive package and label for the product.

Branding Products

Jeep, Levis 501, Apple, and Acrobat are brand names, the portion of a brand that can be spoken, including letters, words, or numbers. McDonalds golden arches symbol is an example of a brand mark, the portion of a brand that cannot be expressed verbally. A trademark is a brand that has been given legal protection so that its owner has exclusive rights to its use.

Brands offered and promoted by a national manufacturer, such as Procter & Gambles Tide detergent and Pampers disposable diapers, are called national brands.

Private brands are not linked to a manufacturer but instead carry a wholesalers or a retailers brand. DieHard batteries and Kenmore appliances are private brands sold by Sears. As an alternative to branded products, some retailers also offer generic products, which are packaged in plain containers that bear only the name of the product.

Co-branding is another way to strengthen brands and products. Co-branding occurs when two or more companies team up to closely link their names in a single product. . Two examples of successful co-branding include Kelloggs Pop Tarts made with Smuckers jam and Nabisco Cranberry Newtons filled with Ocean Spray cranberries.

Product Line Selection

A product line is a group of products that are similar in terms of use or characteristics. Knowing that no product has an unlimited life cycle, to keep sales strong, companies use the following product-line expansion methods:

Line filling. Developing items to fill gaps in the market that have been overlooked by competitors or have emerged due to customer demand.

Line extension. Creating a new variation of an existing product.

Brand extension. Putting the brand for an existing product category into a new category.

Line stretching. Adding higher-priced or lower-priced items to extend a product lines appeal to new economic groups.

An organization with several product lines has a product mix, a collection of goods or services offered for sale. Three important dimensions of a companys product mix are width, length, and depth. A companys product mix is wide if it has several different product lines. A companys product mix is long if it carries several items in its product lines. A product mix is deep if it has a number of versions of each product in a product line.

Product Positioning

Features: size, ease of use, style

Services: convenience, customer support

Image: reliability, sophistication

Price: low cost or premium

Category: leading online seller

Marketers can follow several positioning strategies. They can position their products on specific product features or attributes (such as size, ease of use, style), on the services that accompany the product (such as convenient delivery or lifetime customer support), on the products image (such as reliability or sophistication), on price (such as low cost or premium), on category leadership (such as the leading online bookseller), and so on.

Product Positioning Errors

Under Positioning

Over Positioning

Confused Positioning

When choosing the number of distinguishing variables to promote, companies try to avoid three major positioning errors: underpositioning (failing to ever really position the product at all); overpositioning (promoting too many benefits so that no one actually stands out); and confused positioning (mixing benefits that confuse the buyer such as sophisticated image and low-cost).

International Strategies

In the course of developing strategies for marketing products internationally, companies must consider a variety of factors. First, they must decide on which products and services to introduce in which countries. When selecting a country, they must take into consideration the type of government, market entry requirements, tariffs and other trade barriers, cultural and language differences, consumer preferences, foreign-exchange rates, and differing business customs. Then they must decide whether to standardize the product, selling the same product everywhere, or to customize the product to accommodate the lifestyles and habits of local target markets. Keep in mind that the degree of customization can vary. A company may change only the product's name or packaging, or it can modify the products components, size, and functions.

Developing Pricing Strategies

Marketing Objectives

Government Regulations

Customer Perceptions

Consumer Demand

A companys pricing decisions are determined by manufacturing and selling costs, competition, and the needs of wholesalers and retailers who distribute the product to the final customer. In addition, pricing is influenced by a firms marketing objectives, government regulations, consumers perceptions, and consumer demand.

Marketing objectives. The first step in setting a price is to match it to the objectives you set in your strategic marketing plan.

Government regulations. Government plays a big role in pricing in many countries. To protect consumers and encourage fair competition, the U.S. government has enacted various price-related laws over the years.

Consumer perceptions. Another consideration is the perception of quality that your price will elicit from your customers.

Consumer demand. Whereas a companys costs establish a floor for prices, demand for a product establishes a ceiling.

Cost-Based Pricing

Many companies simplify the pricing task by using cost-based pricing (also known as cost plus pricing). They price by starting with the cost of producing a good or a service and then add a markup to the cost of the product to produce a profit. How does a company determine the amount of profit it will earn by selling a certain product? Break-even analysis is a tool companies use to determine the number of units of a product they must sell at a given price to cover all manufacturing and selling costs, or to break even.

In break-even analysis, you consider two types of costs. Variable costs change with the level of production. These include raw materials, shipping costs, and supplies consumed during production. Fixed costs, by contrast, remain stable regardless of the number of products produced. These costs include rent payments, insurance premiums, and real estate taxes. The total cost of operating the business is the sum of a firm's variable and fixed costs. The break-even point is the minimum sales volume the company must achieve to avoid losing money. Sales volume beyond the break-even point will generate profits; sales volume below the break-even amount will result in losses.

Break-Even Point Haircuts at $20 Each

For example, if you wanted to price haircuts at $20 and you had fixed costs of $60,000 and variable costs per haircut of $5, you would need to sell 4,000 haircuts to break even:

Break-even point (in units) $60,000 = 4,000 units

$20 - $5

Break-Even Point Haircuts at $30 Each

Of course, $20 isn't your only pricing option. Why not charge $30 instead? When you charge the higher price, you need to give only 2,400 haircuts to break even (see graph above). However, before you raise your haircut prices to $30, bear in mind that a lower price may attract more customers and enable you to make more money in the long run.

Break-even analysis doesn't dictate what price you should charge; rather, it provides some insight into the number of units you have to sell at a given price to make a profit. This analysis is especially useful when you are trying to calculate the amount to markup a price to earn a profit.

Cost-based pricing, while simple, makes little sense. First, any pricing that ignores demand and competitor prices is not likely to lead to the best price. Second, although cost-based pricing may ensure a certain profit, companies using this strategy tend to sacrifice profit opportunity.

Other Pricing Strategies

Price-Based

Skimming

Penetration

Optimization

Most manufacturers design a product, and then try to figure out how to make it for a price. But recent thinking holds that cost should be the last item analyzed in the pricing formula, not the first. Companies that use priced-based pricing can maximize their profit by first establishing an optimal price for a product or service. The product's price is based on an analysis of a product's competitive advantages, the users' perception of the item, and the market being targeted. Once the desired price has been established, the firm focuses its energies on keeping costs at a level that will allow a healthy profit.

A product's price seldom remains constant and will vary depending on the product's stage in its life cycle. During the introductory phase, for example, the objective might be to recover product development costs as quickly as possible. To achieve this goal, the manufacturer might charge a high initial pricea practice known as skimmingand then drop the price later, when the product is no longer a novelty and competition heats up.

Rather than setting a high initial price to skim off a small but profitable market segment, a company might try to build sales volume by charging a low initial price, a practice known as penetration pricing. This approach has the added advantage of discouraging competition, because the low price (which competitors would be pressured to match) limits the profit potential for everyone.

Optimal pricing uses computer software to generate the ideal price for every item, at each individual store, at any given time. Researches show that many retailers routinely under price or overprice the merchandise of their shelves. They generally set a price by marking up from cost, or by benchmarking against the competitions prices, or simply by hunch.

Price Adjustment Strategies

Discount Pricing

Bundling

Dynamic Pricing

Once a company has set a products price, it may choose to adjust that price from time to time to account for changing market situations or changing customer preferences. Three common price adjustment strategies are price discounts, bundling, and dynamic pricing.

When you use discount pricing, you offer various types of temporary price reductions, depending on the type of customer being targeted and the type of item being offered.

Sometimes sellers combine several of their products and sell them at one reduced price. This practice, called bundling, can promote sales of products consumers might not otherwise buyespecially when the combined price is low enough to entice them to purchase the bundle.

Dynamic pricing is the opposite of fixed pricing. Using Internet technology, companies continually reprise their products and services to meet supply and demand. Dynamic pricing not only enables companies to move slow selling merchandise instantly but also allows companies to experiment with different pricing levels. Because price changes are immediately posted to electronic catalogs or websites, customers always have the most current price information.

KEY TERMS

Brand - a name, term, sign, symbol, design, or combination of those used to identify the products of a firm and to differentiate them from competing products

Brand awareness - level of brand loyalty at which people are familiar with a product; they recognize it

Brand insistence - level of brand loyalty at which people will accept no substitute for a particular product

Brand loyalty - commitment to a particular brand

Brand manager - the person who develops and implements a complete strategy and marketing program for a specific product or brand

Brand mark - portion of a brand that cannot be expressed verbally

Brand names - portion of a brand that can be expressed orally, including letters, words, or numbers

Brand preference - level of brand loyalty at which people habitually buy a product if it is available

Break-even analysis - method of calculating the minimum volume of sales needed at a given price to cover all costs

Break-even point - sales volume at a given price that will cover all of a company's costs

Bundling - combining several products and offering the bundle at a reduced price

Co-branding - partnership between two or more companies to closely link their brand names together for a single product

Commercialization - large-scale production and distribution of a product

Discount pricing - offering a reduction in price

Dynamic pricing - charging different prices depending on individual customers and situations

Family branding - using a brand name on a variety of related products

Fixed costs - business costs that remain constant regardless of the number of units produced

Generic products - products characterized by a plain label, with no advertising and no brand name

License - agreement to produce and market another company's product in exchange for a royalty or fee

National brands - brands owned by the manufacturers and distributed nationally

Penetration pricing - introducing a new product at a low price in hopes of building sales volume quickly

Price elasticity - a measure of the sensitivity of demand to changes in price

Private brands - brands that carry the label of a retailer or a wholesaler rather than a manufacturer

Product life cycle - four basic stages through which a product progresses: introduction, growth, maturity, and decline

Product line - a series of related products offered by a firm

Product mix - complete list of all products that a company offers for sale

Skimming - charging a high price for a new product during the introductory stage and lowering the price later

Test marketing - product development stage in which a product is sold on a limited basis-a trial introduction

Trademark - brand that has been given legal protection so that its owner has exclusive rights to its use

Universal Product Codes (UPCs) - a bar code on a product's package that provides information read by optical scanners

Variable costs - business costs that increase with the number of units produced