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13
Product Development and
Pricing Strategies
Better Business
1st Edition
Poatsy · Martin © 2010 Pearson Education, Inc.
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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?
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Total Product Offer
Product levels
o Core: basic
o Actual: tangible
o Augmented
• core + actual + all real and perceived benefits
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Product Differentiation
• The process of distinguishing a product from its competition
o With physical or intangible differences
• Critical for a product’s success
o Helps motivate customers to buy
• Companies define a target market and create total product offerings
o Consumer input helps © 2010 Pearson Education, Inc.
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Product Lines and
Product Mix
• A product line is a group of similar products marketed to one general market
o 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
o Product mix width refers to the number of different product lines a company offers
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Consumer and B2B Products
Consumer
• Purchased by households for personal consumption
• Traded in consumer markets
Business to Business
• Sometimes called industrial products
• Purchased by businesses for further processing, resale, or as supplies
• Traded in B2B markets
Can an item be a consumer product and a B2B product too?
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Consumer Product
Classifications
Convenience goods
Specialty goods
Shopping goods
Unsought goods
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Consumer Product
Classifications
Convenience goods
• Purchased frequently and habitually
• Nondurable goods
• Relatively low‐priced
• Bought based on location and brand‐name image
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Consumer Product
Classifications
Shopping goods
• Purchased less frequently than comparison shopping
• Durable goods
• Moderate expense
• Bought based on price, quality, and brand‐name image
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Consumer Product
Classifications
Specialty goods
• Purchased very infrequently with great time and effort
• Durable goods
• No substitutes
• Expensive
• Bought on brand image
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Consumer Product
Classifications
Unsought goods
• Unplanned purchase
• Purchased when needed
• Requires personal or promotional selling
• Price may not be an important consideration
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Business-to-Business
Product Classifications
Raw and Processed
Materials
Equipment
Component Parts
Maintenance,
Repair, Operating
Specialized
Professional
Services
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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
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Business-to-Business
Product Classifications
Maintenance, Repair, Operating
• “MRO” products
• Facilitate production, but not part of finished good
• Marketed on convenience
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Business-to-Business
Product Classifications
Raw and Processed Materials
• Basic inputs for finished goods
• Often purchased in large quantities
• Price is a major factor
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Business-to-Business
Product Classifications
Component Parts
• Assembled portions of the finished product
• Purchase based on quality and brand‐
name recognition
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Business-to-Business
Product Classifications
Specialized Professional Services
• Help with a firm’s operations
• Companies compare costs and quality of completing inhouse or outsourcing
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Brands
• Brand o Is a name, term, symbol, or design that distinguishes a company and its products from all others
o Is an important product differentiation tool
• Brand extension
• Trademark
o Knockoff brands
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Branding
• Brand loyalty
o Brand recognition
o Brand preference
o Brand insistence
• Brand equity
• Brand awareness
• Brand association
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Branding Strategies
•
•
•
•
Generic brand
Manufacturer’s (or national) brand
Private brand
Family brand
o Brand extension
• Individual brand
• Co‐brand
• Brand licensing
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Packaging
• Crucial to success of product, because customers typically see the packaging before they see the product
• Packaging
o
o
o
o
Contains/protects product
Facilitates use/convenience
Promotes product
More emphasis on being environmentally friendly
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The Importance of Labels
• Labeling serves two functions: to inform and to persuade
• Fair Packaging and Labeling Act of 1966 requires o The product identity
o Name and place of business
o Net quantity
• Nutrition Labeling and Education Act of 1990 requires consistent nutrition and health claims
• Labels promote the product’s features, benefits, and brand
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New
Product
Development
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The Product Development
Life Cycle
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Marketing Decisions Affect
a Product’s Life Cycle
Marketing Decision
Example
Extend life of an existing product
Automobile discounts, rebates, and low‐interest loans
Create new uses
Arm & Hammer baking soda as a refrigerator deodorizer
Create new markets
Home Depot and Lowe’s do‐it‐yourself training
Extend technology
Jell‐O gelatin to puddings and other snacks
Repackage
Coca‐Cola 6‐oz bottles to 8‐oz cans
Reposition
“This isn’t your father’s Oldsmobile” campaign
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Pricing Objectives
1.
2.
3.
4.
5.
6.
7.
8.
Maximizing profits
Achieving greater market share Maximizing sales
Building traffic
Status quo pricing
Survival
Creating an image
Achieving social objectives
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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
o Easy to calculate and administer
o Requires minimum information
• Disadvantages
o Ignores consumer price expectations and competitors’ prices
o Provides little incentive to keep costs low
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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
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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
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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
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Competition-Based Pricing
• Prices based on what the competition charges
Type of Competition
Pricing Strategy
Monopolistically
competitive
markets
• Firms with successful product differentiation strategies
charge higher prices
• Some firms may charge lower prices to get an edge on
the competition.
Oligopolies
• Do not compete on price to avoid price wars,
competing on product differentiation instead
• Periodically, a price leader may emerge and others will
drop their prices
Monopoly
• No competition, so has greatest price-setting ability
•May see predatory pricing, the practice of charging very
low prices with the intent to destroy the competition
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Pricing Strategies
• When launching a new product
o Price skimming
o Penetration pricing
• Everyday low pricing (EDLP)
• Strategies to impact price perceptions
o Prestige (premium) pricing
o Psychological pricing
o Loss leader pricing
o Reference pricing
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Adjusting Prices
• Discounts
o Quantity
o Cash
o Seasonal
o Allowances (trade‐in)
• Rebates
• Bundling
• Dynamic pricing
© 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Chapter Summary
1.
2.
3.
4.
5.
6.
7.
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
35
Beyond the Book
© 2010 Pearson Education, Inc. Publishing as Prentice Hall
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Simple Brand
Success Stories
Product / Company
Brand Message
HBO
“It’s not TV, it’s HBO.”
Titleist
“We want every consumer, regardless of their
skill level, to think of Titleist, first and foremost,
as the number-one ball in golf.”
Forbes magazine
“Capitalist tool.”
Advil
“Advanced medicine for pain.”
Visa
“Everywhere you want to be.”
Staples
“Easy” button
Netflix
Convenience
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Collaborative Product Design:
Next Generation Car
• Society for Sustainable Mobility
o Open Source Green Vehicle Project
o $30,000 seven‐passenger SUV with 100 mpg
o 150 engineers designing
• MIT Design Summit
o International open source student project
o Building a 200‐mpg, four‐seater hybrid for India • Sabic Innovative Plastics
o C,mm,n (pronounced “common”) open source car project
o Managed by three technical universities in the Netherlands
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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
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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
o Just below what the industry sees as the pain threshold for the mass market
o 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 o 6 million were sold as of mid‐June 2008
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