Chapter Fifteen

1. PRIDE HUGHES KAPOOR INTRODUCTION TO BUSINESS ELEVENTH EDITION Chapter Fifteen Creating and Pricing Products That Satisfy Customers 15 | 1

2. Learning Objectives • Explain what a product is and how products are classified. • Discuss the product life cycle and how it leads to new product development. • Define product line and product mix and distinguish between the two. • Identify the methods available for changing a product mix. • Explain the uses and importance of branding, packaging, and labeling. 15 | 2

3. Learning Objectives (cont’d) • Describe the economic basis of pricing and the means by which sellers can control prices and buyers’ perceptions of prices. • Identify the major pricing objectives used by businesses. • Examine the three major pricing methods that firms employ. • Explain the different strategies available to companies for setting prices. • Describe three major types of pricing associated with business products. 15 | 3

4. Classification of Products • Product • Everything one receives in an exchange, including all tangible and intangible attributes and expected benefits • 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 15 | 4

5. Consumer Product Classifications • Convenience product • A relatively 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 characteristics for which a significant group of buyers is willing to expend considerable purchasing effort 15 | 5

6. Business Product Classifications • 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 production purposes • Accessory equipment • Standardized equipment used in a firm’s production or office activities • 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 little processing before assembly 15 | 6

7. Business Product Classifications (cont’d) • Process material • A material that is used directly in the production of another product but is not readily identifiable in the finished product • Supply • An item that facilitates production and operations but does not become part of the finished product • Business service • An intangible product that an organization uses in its operations 15 | 7

8. 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 • Growth • Sales increase rapidly as the product becomes well known • Maturity • Sales are still 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 continue to fall 15 | 8

9. Product Life Cycle Figure 15.1 Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 16th ed. (Mason, Ohio: South-Western/Cengage Learning, 2012). Adapted with permission. 15 | 9

10. 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 estimate how long the product is expected to remain in that stage • Both must be taken into account in making decisions about the marketing strategy for a product 15 | 10

11. Product Line and Product Mix • Product line • A group of similar products that differs only in relatively minor characteristics • 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 15 | 11

12. Managing the Product Mix • Managing existing products • Product modification: the process of changing one or more of a product’s characteristics such as quality, function, aesthetics • 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 • Deleting products • Developing new products • Imitations, adaptations, or innovations • Consists of seven phases 15 | 12

13. Phases of New Product Development Figure 15.1 Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 16th ed. (Mason, Ohio: South-Western/Cengage Learning, 2012). Adapted with permission. 15 | 13

14. Top Ten New Products of the Decade Table 15.1 Source:Advertising Age, December 14, 2008, p. 16. 15 | 14

15. 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 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 15 | 15

16. Examples of Product Failures Table 15.2 Source:www.newproductworks.com, accessed January 23, 2006; Robert M. McMath, “Copycat Cupcakes Don’t Cut It,” American Demographics, January 1997, p. 60; Eric Berggren and Thomas Nacher, “Why Good Ideas Go Bust,” Management Review, February 2000, pp. 32–36. 15 | 16

17. 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 • 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 • Trade name • The complete and legal name of an organization 15 | 17

18. 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 15 | 18

19. Branding (cont’d) • Benefits of branding • Because brands are easily recognizable, they reduce the amount of time 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 promotional efforts because promotion of each branded product indirectly promotes others with the same brand 15 | 19

20. Branding (cont’d) • Benefits of branding (cont’d) • Brand loyalty • The extent to which a customer is favorable toward buying a specific brand • Recognition, preference, and insistence • Brand equity • The marketing and financial value associated with a brand’s strength in a market • Brand-name awareness, brand association, perceived quality, and brand loyalty 15 | 20

21. Top Ten Most Valuable Brands in the World Table 15.3 Source: “Best Global Brands,” Intebrand, http://www.interbrand.com/best_global_brands.aspx (accessed October 15, 2009). 15 | 21

22. Branding (cont’d) • Choosing a brand • It should be easy to say, spell, and recall • It should suggest, in a positive way, the product’s uses, special characteristics, and major benefits • It should be distinctive enough to set it apart from competing brands • Protecting a brand • Should be protected through registration • Guard against a brand name’s becoming a generic term 15 | 22

23. 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 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 15 | 23

24. Branding (cont’d) • Branding strategies (cont’d) • Brand extensions • A firm uses an existing brand to brand a new product in a different product category • For example, Procter & Gamble named 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 • For example, Kellogg’s extended its brand name to a line of hip-hop street clothing that was a failure 15 | 24

25. Packaging • 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 15 | 25

26. Labeling • 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 15 | 26

27. Labeling (cont’d) • 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 15 | 27

28. 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 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 15 | 28

29. Pricing Products (cont’d) • 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 15 | 29

30. Supply and Demand Curves Figure 15.3 15 | 30

31. Pricing Products (cont’d) • 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) • 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 15 | 31

32. Pricing Objectives • 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 15 | 32

33. Pricing Objectives (cont’d) • Market-share goals • Pricing that will increase a firm’s proportion of total industry sales • Status quo pricing • Pricing the firm’s products so as not to disturb the stability of prices in the industry 15 | 33

34. 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 that impact marketing decisions 15 | 34

35. Pricing Methods • Breakeven analysis • 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 • 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 • The sum of the fixed costs and the variable costs attributed to a product 15 | 35

36. Breakeven Analysis What is the lowest level of production and sales at which a company can break even on a particular product? Figure 15.4 15 | 36

37. 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 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 15 | 37

38. Types of Pricing Strategies Figure 15.5 15 | 38

39. Pricing Strategies • New-product 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 15 | 39

40. Pricing Strategies (cont’d) • 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 15 | 40

41. Pricing Strategies (cont’d) • 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 15 | 41

42. Pricing Strategies (cont’d) • 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 15 | 42

43. Which Online Content Are People Willing to Pay For? Source: Data from Nielsen survey of 27,548 consumers in 54 countries; as cited in USA Today, February 23, 2010, p. A.1 15 | 43

44. Pricing Strategies (cont’d) • 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 15 | 44

45. 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 transportation costs • FOB destination pricing • The seller includes transportation costs in the product pricing • Transfer pricing • Prices charged in sales between an organization’s units 15 | 45

46. Pricing Business Products (cont’d) • Discounting • A discount is a deduction from the price of an item 15 | 46

47. Discounts Used for Business Markets Table 15.4 Source: William M. Pride and O. C. Ferrell, Foundations of Marketing, (Mason, OH: South-Western/Cengage Learning, 2011), p. 279. 15 | 47