FOB5e_ch12_student.pptx

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12
Creating and
Pricing Products
That Satisfy
Customers

Learning Objectives
12-1 Explain what a product is and how products
are classified.
12-2 Discuss the product life cycle and how it
leads to new product development.
12-3 Define product line and product mix and
distinguish between the two.
12-4 Identify the methods available for changing a
product mix.
12-5 Explain the uses and importance of
branding, packaging, and labeling.

Learning Objectives (continued)
12-6 Describe the economic basis of pricing and
the means by which sellers can control
prices and buyers’ perceptions of prices.
12-7 Identify the major pricing objectives used by
businesses.
12-8 Examine the three major pricing methods
that firms employ.
12-9 Explain the different strategies available to
companies for setting prices.
12-10 Describe three major types of pricing
associated with business products.

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

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

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

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

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

Stages of the Product Life- Cycle

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

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

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

Generally, marketers
follow these seven
steps to develop a
new product
Phases of New Product Development
Source: William M. Pride and O. C. Ferrell,
Marketing, 18th ed. (Mason, OH: South-
Western/Cengage Learning, 2016). Adapted with
permission.

Why Do Products Fail?
 The product and its marketing program are not planned
and tested as completely as they should be
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

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

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

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

Brand Loyalty and Equity
 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

Choosing and Protecting a Brand
 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

Branding Strategies
 Individual branding
• A firm uses a different brand for each of its products
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
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

Brand Extensions
 A firm uses an existing brand to brand a new
product in a different product category
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
Example: Kellogg’s extended its brand name
to a line of hip-hop street clothing that was a failure

Packaging
 All of the activities involved in developing and
providing a container with graphics for a
product
 Functions of packaging
• Protect the product
• Maintain its functional form
• Offer consumer convenience
• Promote the product

Package Design Considerations
 Cost
 Single or multiple units
 Consistency among package designs
 Promotional role
 Needs of intermediaries
 Environmental responsibility

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

Labeling (continued)
 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

The 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

Pricing Products
 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

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
 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

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

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

Breakeven Analysis Example

Demand-Based and
Competition-Based Pricing
 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

Pricing Strategies
A pricing strategy is a course of action designed
to achieve pricing objectives

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

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

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

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

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

Geographic and Transfer Pricing
of 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

Discounting of Business Products
A discount is a deduction from the price of an item

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