Creating And Pricing Products


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Creating and Pricing Products

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  • Examples: Convenience products - milk, newspapers, soda, chewing gum Shopping products - furniture and appliances Specialty products - Rolex watch, Jaguar automobile
  • Examples: Convenience products - milk, newspapers, soda, chewing gum Shopping products - furniture and appliances Specialty products - Rolex watch, Jaguar automobile
  • Quality Selection Unique product or service design Safety, reliability, ease of use Unique packaging Unbreakable, easily disposable containers, convenience, advertising on package, instructions on package, nutrition information on package Unique branding - Brands represented by trademark and symbol Family branding - branding of all or most products produced by a company Individual branding - assignment of a unique brand name to different products or groups of products Producer brands - reflect the manufacturer of the product - Black & Decker, Frito Lay, Fisher Price Store brands - reflect the retail store where the products are sold - Sears, JC Penney Generic brands - products that are not branded by the producer/manufacturer or the store
  • Break-Even Quantity = Fixed cost (price- variable cost per unit) In this example, fixed cost is $4000, contribution margin = (price-variable cost per unit) is $1.80 -$ .60 = $1.20 so the Break-even quantity is 3,333 hot dogs
  • Break-Even Quantity = Fixed cost (price- variable cost per unit) In this example, fixed cost is $4000, contribution margin = (price-variable cost per unit) is $1.80 -$ .60 = $1.20 so the Break-even quantity is 3,333 hot dogs
  • Business customers - credit terms - 2/10 net 30 means 2% discount if paid in ten days, entire balance due in 30 days
  • Creating And Pricing Products

    1. 1. Creating and Pricing Products Yohan Wismantoro [email_address] e-Business Strategy Management Department Dian Nuswantoro University
    2. 2. Creating and Pricing Products
    3. 3. Learning Goals <ul><li>Identify the main factors that affect a product’s target market </li></ul><ul><li>Identify the steps involved in creating a new product </li></ul><ul><li>Explain the common methods used to differentiate a product </li></ul><ul><li>Identify the main phases of a product life cycle </li></ul><ul><li>Identify the factors that influence the pricing decision </li></ul>
    4. 4. Marketing
    5. 5. Creating and Pricing Products
    6. 6. Background on Products <ul><li>Products include physical goods and services that satisfy customer needs </li></ul><ul><ul><li>Convenience products </li></ul></ul><ul><ul><ul><li>Widely available </li></ul></ul></ul><ul><ul><ul><li>Purchased frequently </li></ul></ul></ul><ul><ul><ul><li>Easily accessible </li></ul></ul></ul><ul><ul><li>Shopping products </li></ul></ul><ul><ul><ul><li>Not purchased frequently </li></ul></ul></ul><ul><ul><ul><li>Consumers shop around to compare quality and price </li></ul></ul></ul><ul><ul><li>Specialty </li></ul></ul><ul><ul><ul><li>Consumers must make a special effort to purchase </li></ul></ul></ul>
    7. 7. Background on Products <ul><li>Product line </li></ul><ul><ul><li>A set of related products or services offered by a single firm – expands over time to meet consumer needs </li></ul></ul><ul><ul><ul><li>Coke, Diet Coke, Caffeine-free Diet Coke, Sprite </li></ul></ul></ul><ul><ul><ul><li>Pepsi, Diet Pepsi, Mountain Dew, All-Sport </li></ul></ul></ul><ul><li>Product mix </li></ul><ul><ul><li>Assortment of products offered by a firm </li></ul></ul><ul><ul><ul><li>Quaker State: motor oil, windshield washer fluid, brake fluid, and other automotive products </li></ul></ul></ul><ul><ul><ul><li> books, electronics, toys, music, kitchen items, drugs, health and beauty products </li></ul></ul></ul>
    8. 8. Product of IBM Exhibit 12.1
    9. 9. Diversifying the Product Mix <ul><li>When the primary product is subject to wide swings in demand, firms diversify their product mix so they are not dependent on one product </li></ul><ul><ul><li>Diversify within existing production capabilities (related product diversification) </li></ul></ul><ul><ul><li>Example firms - Walt Disney Company, Donna Karan,, IBM </li></ul></ul>
    10. 10. Identifying a Target Market <ul><li>Consumers who buy a particular product may have specific traits in common and similar needs </li></ul><ul><li>Firms try to identify these traits and target marketing towards people with those traits (target market) </li></ul><ul><ul><li>Consumer markets - products purchased by individuals </li></ul></ul><ul><ul><li>Industrial markets - products purchased by firms </li></ul></ul>
    11. 11. Size of Target Market <ul><li>As consumer preferences change, the size of a particular target market can also change. </li></ul><ul><li>Size of target market depends on: </li></ul><ul><ul><li>Demographics </li></ul></ul><ul><ul><li>Geography </li></ul></ul><ul><ul><li>Economic factors </li></ul></ul><ul><ul><li>Social values </li></ul></ul>
    12. 12. business online
    13. 13. E-Marketing <ul><li>Use of the Internet to design, price, distribute, and promote products </li></ul><ul><ul><li> uses e-marketing to differentiate from other book retailers </li></ul></ul><ul><ul><li>Some firms use e-marketing to complement brick and mortar stores </li></ul></ul><ul><ul><li>Firms can use e-marketing to target foreign markets </li></ul></ul><ul><ul><li>Firms can receive orders online at lower costs, and use the Internet to expand distribution efforts </li></ul></ul>
    14. 14. Changes in Consumer Characteristics in Last 20 Years (from 1982 to 2002) <ul><li>U.S. population has increased with higher proportions of: </li></ul><ul><ul><li>People age 65 or older </li></ul></ul><ul><ul><li>Households with income over $60,000 </li></ul></ul><ul><ul><li>Minority households with income over $60,000 </li></ul></ul><ul><ul><li>High school students who enter college </li></ul></ul><ul><ul><li>Minority high school students who enter college </li></ul></ul>Exhibit 12.2
    15. 15. Creating New Products <ul><li>Most new products are improvements of existing products and not new inventions </li></ul><ul><li>Existing products may become obsolete or less useful than in the past </li></ul><ul><ul><li>No longer in fashion (fashion obsolescence) </li></ul></ul><ul><ul><li>More advanced technology replaces product (technological obsolescence) </li></ul></ul>
    16. 16. Marketing Research <ul><li>Accumulation and analysis of data in order to make a particular marketing decision </li></ul><ul><ul><li>Useful for making product decisions </li></ul></ul><ul><ul><li>Identify products that consumers want </li></ul></ul><ul><ul><li>Identify deficiencies in current products and make improvements </li></ul></ul><ul><ul><li>Test new and revised products for consumer reaction </li></ul></ul><ul><ul><li>One limitation of marketing research is that tastes might change too rapidly to capture in surveys </li></ul></ul>
    17. 17. E-Marketing and Marketing Research <ul><li>Use Internet and/or customer service email system to get customer feedback </li></ul><ul><ul><li>Companies can get information quickly </li></ul></ul><ul><ul><li>Use feedback to improve products and services </li></ul></ul><ul><ul><li>Contact customers directly </li></ul></ul><ul><ul><li>Send out samples and request email feedback </li></ul></ul><ul><ul><li>Use of online surveys reduces costs and time involved in getting customer feedback </li></ul></ul>
    18. 18. Research and Development (R&D) <ul><li>Firms invest funds in R&D activities in order to design new products or improve existing products </li></ul><ul><ul><li>Expect the benefits of R&D expenditures to outweigh the costs </li></ul></ul><ul><ul><li>Technological development can give firm an advantage over its competitors </li></ul></ul><ul><ul><li>Some firms use alliances to share costs of R&D </li></ul></ul>
    19. 19. Small Business Survey What Are the Keys to Creating Successful Products?
    20. 20. Patent Protection <ul><li>A firm that creates a new product may not always be able to prevent competitors from copying the idea </li></ul><ul><li>To protect their ideas, firms apply for patents </li></ul><ul><ul><li>Allow exclusive rights to the production and sale of a specific product </li></ul></ul><ul><ul><li>Patent applications are tedious, and may require 20-40 page description of the product </li></ul></ul><ul><ul><li>Approval process can take several months and is quite expensive - especially internationally </li></ul></ul>
    21. 21. Creating New Products <ul><li>Develop a product idea </li></ul><ul><ul><li>Identify customer needs that are not being satisfied by existing products </li></ul></ul><ul><ul><li>Monitor consumer behavior or survey people about their behavior </li></ul></ul><ul><li>Assess the feasibility of the product idea </li></ul><ul><ul><li>Estimate costs and benefits </li></ul></ul><ul><li>Design and test the product </li></ul><ul><li>Distribute and promote the product </li></ul><ul><li>Post-audit the product </li></ul><ul><ul><li>Compare actual costs and benefits with estimates </li></ul></ul>
    22. 22. Steps Involved in Creating or Revising a Product Exhibit 12.3
    23. 23. Product Differentiation <ul><li>Effort a firm makes to distinguish its product and services from competitors and make it more desirable by customers </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Selection </li></ul></ul><ul><ul><li>Unique product or service design </li></ul></ul><ul><ul><li>Unique packaging </li></ul></ul><ul><ul><li>Unique branding </li></ul></ul><ul><ul><ul><li>Family versus individual branding </li></ul></ul></ul><ul><ul><ul><li>Producer versus store brands versus generic brands </li></ul></ul></ul><ul><ul><li>Co-branding - recent trend </li></ul></ul>
    24. 24. Benefits of Branding <ul><li>Exposes a company’s name to the public </li></ul><ul><li>If company is respected, new products might be trusted because of the brand name </li></ul><ul><li>Assist in entering new product and geographic markets </li></ul><ul><li>Helps to differentiate when there are only a few brands available </li></ul><ul><li>Helps gain access to shelf space </li></ul>
    25. 25. Methods Used to Differentiate Products Exhibit 12.4 Method Achieve Superiority by: Unique design Higher level of product safety, reliability, or ease of use. Unique packaging Packaging to get consumers’ attention or to improve convenience. Unique branding Using the firm’s image to gain credibility, or using a unique brand name to imply prestige.
    26. 26. Product Life Cycle <ul><li>Typical phases over the lifetime of products </li></ul><ul><ul><li>Introduction - create awareness of product </li></ul></ul><ul><ul><li>Growth - reinforce product features </li></ul></ul><ul><ul><li>Maturity - competition increases </li></ul></ul><ul><ul><li>Decline - reduced demand </li></ul></ul><ul><li>Marketing decisions may be influenced by the stage in the product life cycle </li></ul>
    27. 27. Product Life Cycle Phases Exhibit 12.5
    28. 28. Pricing Strategies <ul><li>Attempt to set prices that will maximize the firm’s value </li></ul><ul><ul><li>Price charged impacts revenues and profitability </li></ul></ul><ul><li>Pricing considerations </li></ul><ul><ul><li>Production costs per unit + mark-up (cost-based pricing) </li></ul></ul><ul><ul><li>Supply of inventory </li></ul></ul><ul><ul><li>Competitors’ prices </li></ul></ul>
    29. 29. Pricing Strategies <ul><li>Consider competitors’ prices </li></ul><ul><ul><li>Penetration pricing </li></ul></ul><ul><ul><ul><li>Lower price than competitors to penetrate the market </li></ul></ul></ul><ul><ul><ul><li>Most effective when demand is price elastic </li></ul></ul></ul><ul><ul><li>Defensive pricing </li></ul></ul><ul><ul><ul><li>Reduce price to defend or retain market share </li></ul></ul></ul><ul><ul><li>Predatory pricing </li></ul></ul><ul><ul><ul><li>Lower price to drive out competitors </li></ul></ul></ul><ul><ul><li>Prestige pricing </li></ul></ul><ul><ul><ul><li>Use high price to signal top-of-the-line product </li></ul></ul></ul>
    30. 30. Pricing Example <ul><li>Hot dog vendor in New Orleans </li></ul><ul><ul><li>Rent hot dog cooker for $4000 a year (a fixed cost that doesn’t depend on volume of hot dogs sold) </li></ul></ul><ul><ul><li>Cost for hot dogs, buns, ketchup, etc. are $.60 per hot dog (variable costs that depend on volume of hot dogs) </li></ul></ul><ul><ul><li>Other vendors charge $2.00 each, you charge $1.80 </li></ul></ul><ul><ul><li>Forecast that you can sell 20,000 hot dogs if you have a competitive price </li></ul></ul><ul><ul><li>Identify the break-even quantity </li></ul></ul>
    31. 31. Estimation of Costs and Revenue at Various Quantities Produced Exhibit 12.6a
    32. 32. Estimation of Costs and Revenue at Various Quantities Produced (cont’d) Exhibit 12.6b
    33. 33. Breakeven Quantity Example
    34. 34. Other Pricing Decisions <ul><li>Offering special discounts </li></ul><ul><ul><li>Senior citizens, students, online buyers </li></ul></ul><ul><li>Periodic sale prices </li></ul><ul><ul><li>Some customers will only buy products if they are on sale </li></ul></ul><ul><li>Credit terms for specific customers </li></ul><ul><ul><li>Business customers (2/10 net 30) </li></ul></ul><ul><ul><li>Credit card payments </li></ul></ul><ul><ul><li>Retailer credit card </li></ul></ul>
    35. 35. Chapter Summary <ul><li>Demographic trends, geography, economic factors, and changes in social value impact size of target market </li></ul><ul><li>Creation of new products involves a number of steps from developing the idea to a post-audit </li></ul><ul><li>Companies use unique product design, packaging, and branding to differentiate </li></ul><ul><li>Cost of production, inventory supply, and competitors’ prices influence pricing decisions </li></ul>