Product Development and Pricing Strategies

1. 13 Product Development andPricing Strategies Better Business1st Edition Poatsy · Martin chapter Slide presentation prepared by Pam Janson Stark State College of Technology © 2010 Pearson Education, Inc.

2. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. © 2010 Pearson Education, Inc.

3. Learning Objectives 1. What are the definitions of a product and a total product offer? 2. What is product differentiation, and what role does it play in product development? 3. What are the different classifications of consumer products and business-to-business products? 4. Why is branding beneficial to both buyers and sellers, and what are some different types of brands? 5. What steps take place during new product development, and what is the product life cycle? 6. What are some pricing objectives, and how do they relate to the marketing mix? 7. What are the three major approaches to pricing strategy, and what are some pricing tactics used to launch a new product, to adjust prices, and to impact price perceptions? © 2010 Pearson Education, Inc. Publishing as Prentice Hall

4. Total Product Offer Product levels • Core: basic • Actual: tangible • Augmented • core + actual + all real and perceived benefits © 2010 Pearson Education, Inc. Publishing as Prentice Hall

5. Product Differentiation • The process of distinguishing a product from its competition • With physical or intangible differences • Critical for a product’s success • Helps motivate customers to buy • Companies define a target market and create total product offerings • Consumer input helps © 2010 Pearson Education, Inc.

6. Product Lines and Product Mix • A product line is a group of similar products marketed to one general market • Product line length is the number of products in a product line • A product mix is the combination of all product lines offered for sale by a company • Product mix width refers to the number of different product lines a company offers © 2010 Pearson Education, Inc. Publishing as Prentice Hall

7. Consumer and B2B Products Consumer Business to Business Sometimes called industrial products Purchased by businesses for further processing, resale, or as supplies Traded in B2B markets • Purchased by households for personal consumption • Traded in consumer markets Can an item be a consumer product and a B2B product too? © 2010 Pearson Education, Inc. Publishing as Prentice Hall

8. Consumer Product Classifications Convenience goods Specialty goods Shopping goods Unsought goods © 2010 Pearson Education, Inc.

9. Consumer Product Classifications Convenience goods • Purchased frequently and habitually • Nondurable goods • Relatively low-priced • Bought based on location and brand-name image © 2010 Pearson Education, Inc.

10. Consumer Product Classifications Shopping goods • Purchased less frequently than comparison shopping • Durable goods • Moderate expense • Bought based on price, quality, and brand-name image © 2010 Pearson Education, Inc.

11. Consumer Product Classifications Specialty goods • Purchased very infrequently with great time and effort • Durable goods • No substitutes • Expensive • Bought on brand image © 2010 Pearson Education, Inc.

12. Consumer Product Classifications Unsought goods • Unplanned purchase • Purchased when needed • Requires personal or promotional selling • Price may not be an important consideration © 2010 Pearson Education, Inc.

13. Business-to-Business Product Classifications Raw and Processed Materials Specialized Professional Services Equipment Component Parts Maintenance, Repair, Operating © 2010 Pearson Education, Inc.

14. Business-to-Business Product Classifications Equipment • Also called capital items • Includes all physical facilities • Expensive and long-lasting • Purchase is negotiated • Suppliers offer financing, and maintenance after the sale © 2010 Pearson Education, Inc.

15. Business-to-Business Product Classifications Maintenance, Repair, Operating • “MRO” products • Facilitate production, but not part of finished good • Marketed on convenience © 2010 Pearson Education, Inc.

16. Business-to-Business Product Classifications Raw and Processed Materials • Basic inputs for finished goods • Often purchased in large quantities • Price is a major factor © 2010 Pearson Education, Inc.

17. Business-to-Business Product Classifications Component Parts • Assembled portions of the finished product • Purchase based on quality and brand-name recognition © 2010 Pearson Education, Inc.

18. Business-to-Business Product Classifications Specialized Professional Services • Help with a firm’s operations • Companies compare costs and quality of completing inhouse or outsourcing © 2010 Pearson Education, Inc.

19. Brands • Brand • Is a name, term, symbol, or design that distinguishes a company and its products from all others • Is an important product differentiation tool • Brand extension • Trademark • Knockoff brands © 2010 Pearson Education, Inc.

20. Branding • Brand loyalty • Brand recognition • Brand preference • Brand insistence • Brand equity • Brand awareness • Brand association © 2010 Pearson Education, Inc. Publishing as Prentice Hall

21. Branding Strategies • Generic brand • Manufacturer’s (or national) brand • Private brand • Family brand • Brand extension • Individual brand • Co-brand • Brand licensing © 2010 Pearson Education, Inc. Publishing as Prentice Hall

22. Packaging • Crucial to success of product, because customers typically see the packaging before they see the product • Packaging • Contains/protects product • Facilitates use/convenience • Promotes product • More emphasis on being environmentally friendly © 2010 Pearson Education, Inc. Publishing as Prentice Hall

23. The Importance of Labels • Labeling serves two functions: to inform and to persuade • Fair Packaging and Labeling Act of 1966 requires • The product identity • Name and place of business • Net quantity • Nutrition Labeling and Education Act of 1990 requires consistent nutrition and health claims • Labels promote the product’s features, benefits, and brand © 2010 Pearson Education, Inc.

24. New Product Development © 2010 Pearson Education, Inc.

25. The Product Development Life Cycle © 2010 Pearson Education, Inc. Publishing as Prentice Hall

26. Marketing Decisions Affect a Product’s Life Cycle © 2010 Pearson Education, Inc. Publishing as Prentice Hall

27. Pricing Objectives • Maximizing profits • Achieving greater market share • Maximizing sales • Building traffic • Status quo pricing • Survival • Creating an image • Achieving social objectives © 2010 Pearson Education, Inc. Publishing as Prentice Hall

28. Pricing Strategies: Cost-Based Pricing • Charging a price in relation to the costs of providing a good or service • Simple and popular pricing strategy • Advantages • Easy to calculate and administer • Requires minimum information • Disadvantages • Ignores consumer price expectations and competitors’ prices • Provides little incentive to keep costs low © 2010 Pearson Education, Inc. Publishing as Prentice Hall

29. Cost-Based Pricing Example You make 100 units of a product at a total cost of $2,000 Per unit cost is $2,000 / 100 = $20 To make a unit profit margin, or markup, of 20%: .20 x $20 = $4 You need to charge: $20 + $4 = $24 Total revenue = 100 x $24 = $2,400 Profit = $2,400 – $2,000 = $400 © 2010 Pearson Education, Inc. Publishing as Prentice Hall

30. Cost-Based Pricing: Break–Even Analysis • Total costs = Total fixed costs + total variable costs • Break-even volume of production = Total fixed costs / (Price – Average variable costs) • Example Total fixed costs = $600, selling price = $24, and average variable costs = $14 Break-even volume = $600 / ($24 - $14) = 60 units © 2010 Pearson Education, Inc. Publishing as Prentice Hall

31. Demand-Based Pricing • Sometimes called value-based pricing • Pricing a good or service based on the demand for the product or its perceived value • Target costing: estimates value • Price discrimination: Charging different prices for different customers © 2010 Pearson Education, Inc. Publishing as Prentice Hall

32. Competition-Based Pricing • Prices based on what the competition charges © 2010 Pearson Education, Inc. Publishing as Prentice Hall

33. Pricing Strategies • When launching a new product • Price skimming • Penetration pricing • Everyday low pricing (EDLP) • Strategies to impact price perceptions • Prestige (premium) pricing • Psychological pricing • Loss leader pricing • Reference pricing © 2010 Pearson Education, Inc. Publishing as Prentice Hall

34. Adjusting Prices • Discounts • Quantity • Cash • Seasonal • Allowances (trade-in) • Rebates • Bundling • Dynamic pricing © 2010 Pearson Education, Inc. Publishing as Prentice Hall

35. Chapter Summary • What are the definitions of a product and a total product offer? • What is product differentiation, and what role does it play in product development? • What are the different classifications of consumer products and business-to-business products? • Why is branding beneficial to both buyers and sellers, and what are some different types of brands? • What steps take place during new product development, and what is the product life cycle? • What are some pricing objectives, and how do they relate to the marketing mix? • What are the three major approaches to pricing strategy, and what are some pricing tactics used to launch a new product, to adjust prices, and to impact price perceptions? © 2010 Pearson Education, Inc. Publishing as Prentice Hall

36. Beyond the Book © 2010 Pearson Education, Inc. Publishing as Prentice Hall

37. Simple Brand Success Stories © 2010 Pearson Education, Inc. Publishing as Prentice Hall

38. Collaborative Product Design:Next Generation Car • Society for Sustainable Mobility • Open Source Green Vehicle Project • $30,000 seven-passenger SUV with 100 mpg • 150 engineers designing • MIT Design Summit • International open source student project • Building a 200-mpg, four-seater hybrid for India • Sabic Innovative Plastics • C,mm,n (pronounced “common”) open source car project • Managed by three technical universities in the Netherlands © 2010 Pearson Education, Inc. Publishing as Prentice Hall

39. The Olympics and Product Innovation • Basketball uniforms with zoned temperature venting • Nike’s Zoom Victory running shoes weigh 93 grams (3.28 ounces) • Adidas’ Lone Star’s racing spikes lean to the left (on a track there are no right turns) • Speedo’s LZR Racer swimsuit compresses the body at key points and the panels shed water and are welded, not stitched together • Nike’s tae kwon do boot is made of the loudest leather possible to ensure judges hear strikes © 2010 Pearson Education, Inc. Publishing as Prentice Hall

40. Pricing and the Apple iPhone 3G • Feature-wise, the new iPhone mostly addresses the shortcomings of the old one • It is much cheaper, starting at $199 • Just below what the industry sees as the pain threshold for the mass market • Mobile operators, such as AT&T, subsidize the new handsets to make the low price possible, but will increase monthly usage fees • Apple’s goal is to sell 10 million iPhones by the end of 2008 • 6 million were sold as of mid-June 2008 © 2010 Pearson Education, Inc. Publishing as Prentice Hall