Product and Pricing Strategies

1. Product and Pricing Strategies Chapter 9 T. A. Sgritta UNC Charlotte

2. Objectives • Key attributes of good products • Product development cycle • Costs related to a business • Pricing vs. market • Pricing relative to costs and volume

3. Product • Product or service • Tangibility • Inseparability • Heterogeneity • Perishability

4. The U.S. Auto Industry’s Profit Pool

5. Total Product • Core product • Augmented product • Total product • Product / industry

6. Total Product • Hardware • Software • Service

7. Key Issue in Mission/Marketing • Identifying the Target Market • Not “the people who want our product”

8. Product Marketing • Reason for product’s existence • Product branding (positioning)

9. Product Development Cycle • Idea generation (based on strengths) • Idea screening • Evaluation/Feasibility study (Schrello/others) • Product development (planning probably backward from the market – timing, price) • Commercialization

10. Product Development • Inside • Outside • Specialized firms • Vendors • Together with potential customers

11. Product Life Cycle • Introduction • Growth • Maturity • Decline

12. Unit Sales Profits STAGE INTRODUCTION GROWTH MATURITY DECLINE FACTOR Generic Strategies Differentiation Differentiation Differentiation Overall Cost Leadership Overall Cost Leadership Focus Market growth rate Low Very Large Low to Moderate Negative Number of segments Very Few Some Many Few Intensity of competition Low Increasing Very Intense Changing Emphasis on product design Very High High Low to Moderate Low Emphasis on process design Low Low to Moderate High Low Major functional area(s) of concern Research and Development Sales and Marketing Production General Management and Finance Overall objective Increase Market Awareness Create Consumer Demand Defend Market Share and Extend Product Life Cycles Consolidate, Maintain, Harvest, or Exit Stages of the Industry Life Cycle

13. Life Cycle Considerations • Services • Planning changes

14. Pricing • # 1 Rule: • Who sets the price? • Working backward

15. Profit = Market Price - Cost Profitability Formula

16. Costs • Variable costs • Fixed costs (capacity costs) • Investment costs (sunk costs)

17. Costs • Variable costs • Materials • DLVO • Variable overhead • Supplies (expendables), power, freight

18. Costs • Fixed costs • Rent/cost of property • Depreciation* • Administration • Four areas: • G & A • Marketing • Product development • Accounting/IT/Finance

19. Costs • Investment costs • Building (if owned) • Machinery (including office) • Past expenses for product development (?), intangibles, etc., if capitalized

20. Costs: • Keep all three categories separate!

21. Costs • Are fixed costs fixed? • Are variable costs equal for each (same) product or service produced?

22. Pricing Concept • Price elasticity

24. Pricing • Use demand curve and costs to figure optimum price

25. Considerations • Variable price not constant per unit (step functions) • Fixed costs are not constant (step functions) • Investment costs may vary

26. Consider ROI • ROI (Return on Investment) • Function of: • Investment turnover (net sales/investment) • And • Profit margin (income/sales) • Formula = profit = sales X profit investment investment sales

27. Other Considerations • Raising price is tough • Price and other org. aspects must match • Consider distribution (work backwards!)

28. Price Setting Factors • Company objectives • Marketing strategy • Channels of distribution • Competition • Legal & regulatory issues

29. Some Basic Pricing Strategies • Skimming • Premium pricing • Odd – even pricing • Price discount strategy • Examples Harris Teeter, Total Wine • Lost leaders • Others: partitioned, captive, lining

30. Price Lowering Strategies(without lowering price!) • Discounting • Off-Peak pricing • Bundling • Multiple/bonus • Coupons • Rebates • Loyalty • Referrals • Extended warranties