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Chapter 13 Crea+ng and Pricing Products That Sa+sfy Customers
① Explain what a product is and how products are classified.
② Discuss the product life cycle and how it leads to new product development.
③ Define product line and product mix and dis+nguish between the two.
④ Iden+fy the methods available for changing a product mix.
⑤ Explain the uses and importance of branding, packaging, and labeling.
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⑥ Describe the economic basis of pricing and the means by which sellers can control prices and buyers’ percep+ons of prices.
⑦ Iden+fy the major pricing objec+ves used by businesses.
⑧ Examine the three major pricing methods that firms employ.
⑨ Explain the different strategies available to companies for seRng prices.
⑩ Describe three major types of pricing associated with business products.
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Classifica+on of Products • Product
– Everything one receives in an exchange, including all tangible and intangible aTributes and expected benefits
– A good, service, or idea • Consumer product
– A product purchased to sa+sfy personal and family needs • Business (industrial) product
– A product bought for resale, for making other products, or for use in a firm’s opera+ons
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Consumer Product Classifica+ons • Convenience product
– A rela+vely 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 characteris+cs for which a significant group of buyers is willing to expend considerable purchasing effort
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Business Product Classifica+ons • 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 produc+on purposes
• Accessory equipment – Standardized equipment used in a firm’s produc+on or office
ac+vi+es • 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 liTle processing before assembly
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Business Product Classifica+ons (cont’d)
• Process material – A material that is used directly in the produc+on of another product but is not readily iden+fiable in the finished product
• Supply – An item that facilitates produc+on and opera+ons but does not become part of the finished product
• Business service – An intangible product that an organiza+on uses in its opera+ons
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The Product Life Cycle • A series of stages in which a product’s sales revenue and
profit increase, reach a peak, then decline – IntroducFon
• Customer awareness and acceptance are low
– Growth • Sales increase rapidly as the product becomes well known
– Maturity • Sales are s+ll 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 con+nue to fall
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FIGURE 13-1
Product Life Cycle
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Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 16th ed. (Mason, Ohio: South-Western/Cengage Learning, 2012). Adapted with permission.
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 esFmate how long the product is expected to remain in that stage – Both must be taken into account in making decisions about the marke+ng strategy for a product
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Product Line and Product Mix
• Product line – A group of similar products that differs only in rela+vely minor characteris+cs
• 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
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Managing the Product Mix • Managing exisFng products
– Product modifica+on: the process of changing one or more of a product’s characteris+cs such as quality, func+on, aesthe+cs
– Line extensions: development of a product closely related to one or more products in the exis+ng product line but designed specifically to meet somewhat different customer needs
• DeleFng products • Developing new products
– Imita+ons, adapta+ons, or innova+ons – Consists of seven phases
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FIGURE 13-2
Phases of New Product Development
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Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 17th ed. (Mason, Ohio: South-Western/Cengage Learning, 2014). Adapted with permission.
Why Do Products Fail? • The product and its markeFng 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 en+re marke+ng mix
• The firm markets a new product before all the “bugs” are worked out
• When problems show up in tesFng, a firm tries to recover its costs by pushing ahead anyway
• A firm tries to market a product with inadequate financing
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Branding • What is a brand?
– A name, term, symbol, design, or any combina+on of these that iden+fies a seller’s products as dis+nct 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 dis+nc+ve 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 organiza+on
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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
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Branding (cont’d)
• Benefits of branding – Because brands are easily recognizable, they reduce the amount of +me 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 promo+onal efforts because promo+on of each branded product indirectly promotes others with the same brand
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Branding (cont’d)
• Benefits of branding (cont’d) – Brand loyalty
• The extent to which a customer is favorable toward buying a specific brand
• Recogni+on, preference, and insistence – Brand equity
• The marke+ng and financial value associated with a brand’s strength in a market
• Brand-‐name awareness, brand associa+on, perceived quality, and brand loyalty
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Branding (cont’d)
• Choosing a brand – It should be easy to say, spell, and recall – It should suggest, in a posi+ve way, the product’s uses, special characteris+cs, and major benefits
– It should be dis+nc+ve enough to set it apart from compe+ng brands
• ProtecFng a brand – Should be protected through registra+on – Guard against a brand name’s becoming a generic term
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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 promo+on 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
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Branding (cont’d)
• Branding strategies (cont’d) – Brand extensions
• A firm uses an exis+ng brand to brand a new product in a different product category
– For example, Procter & Gamble named a new product Ivory Body Wash
• Cau+on must be taken in extending a brand too many +mes 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
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Packaging • All of the acFviFes involved in developing and
providing a container with graphics for a product • FuncFons of packaging
– Protect the product and maintain its func+onal form – Offer consumer convenience – Promote the product by communica+ng its features, uses, benefits, and
image • Design consideraFons
– Cost – Single or mul+ple units – Consistency among package designs (family packaging) – Promo+onal role – Needs of intermediaries – Environmental responsibility
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Labeling • The presentaFon of informaFon on a product
or its package • May include
– Brand name and mark – Trademark symbol – Package size and contents – Product claims – Direc+ons – Safety precau+ons – Ingredients – Name and address of manufacturer – Universal Product Code (UPC) symbol for
automated checkout and inventory control
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Labeling (cont’d) • Must include
– For garments, name of manufacturer, country of manufacture, fabric content, cleaning instruc+ons
– Nutri+on labeling in standard format for any food product for which a nutri+onal 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 precau+ons and instruc+ons
• Express warranty – A wriTen explana+on of the producer responsibili+es if the product is
found to be defec+ve or otherwise unsa+sfactory
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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 +me 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 sa+sfy customers’ needs
– Price helps customers allocate their own financial resources among various want-‐sa+sfying products
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Pricing Products (cont’d) • Supply and demand affects prices
– Supply • The quan+ty of a product that producers are willing to sell at each of various prices
• Quan+ty supplied by producers increases as the price increases
– Demand • The quan+ty of a product that buyers are willing to purchase at each of various prices
• Quan+ty demanded increases as the price decreases – Equilibrium
• Where the supply and demand curves intersect and quan+ty and price for buyers and sellers are equal
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Pricing Products (cont’d) • Price and non-‐price compeFFon
– Price compeFFon • An emphasis on seRng a price equal to or lower than compe+tors’ prices to gain sales or market share
– Non-‐price compeFFon • Compe++on based on factors other than price (such as quality, customer service, packaging)
• Buyers’ percepFons 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
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Pricing Objec+ves • Survival
– Pricing the firm’s products (perhaps at a loss) in order to aTract customers to establish the firm in a market
• Profit maximizaFon – Pricing with the intent to reap profits as large as possible from a market—usually an unaTainable goal
• Target return on investment (ROI) – Pricing that allows the firm to aTain its profit goal, which is a percentage of the investment the firm has made
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Pricing Objec+ves (cont’d)
• Market-‐share goals – Pricing that will increase a firm’s propor+on of total industry sales
• Status quo pricing – Pricing the firm’s products so as not to disturb the stability of prices in the industry
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Pricing Methods • Cost-‐based pricing
– The seller determines the total cost of producing one unit of the product then adds an amount to cover addi+onal costs and profit (markup)
– Markup may be calculated as a percentage of total costs
– Flaws • Difficulty of determining an effec+ve markup percentage; price may be too high, resul+ng in lost sales, or price may be too low, resul+ng in lost profit
• Separates pricing from other business func+ons that impact marke+ng decisions
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Pricing Methods • Breakeven analysis
– Breakeven quanFty • 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 maTer 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 aTributed to a product
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FIGURE 13-4
Breakeven Analysis What is the lowest level of producFon and sales at which a company can break even on a parFcular product?
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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 differen+a+on • SeRng different prices in segmented markets based on segment characteris+cs (e.g., +me of purchase, type of customer, or distribu+on channel)
• CompeFFon-‐based pricing – Based on mee+ng the challenge of compe+tors’ prices in markets where products are quite similar or price is an important customer considera+on
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Pricing Strategies
• New-‐product strategies – Price skimming
• Charging the highest possible price for a product during the introduc+on stage of its life cycle
– PenetraFon pricing • SeRng a low price for a new product to quickly build market share and discourage compe+tors
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Pricing Strategies (cont’d) • DifferenFal pricing
– Charging different prices to different buyers for the same quality and quanFty of product
– The market must consist of mulFple segments with different price sensiFviFes
– NegoFated pricing • Establishing a final price through bargaining
– Secondary-‐market pricing • SeRng one price for the primary target market and a different price for another market
– Periodic discounFng • Temporary reduc+on of prices on a paTerned or systema+c basis
– Random discounFng • Temporary reduc+on of prices on an unsystema+c basis
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Pricing Strategies (cont’d) • Psychological pricing
– Odd-‐number pricing • SeRng prices using odd numbers that are slightly below whole-‐dollar amounts
– MulFple-‐unit pricing • SeRng a single price for two or more units
– Reference pricing • Pricing a product at a moderate level and posi+oning 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) • SeRng a low price for products on a consistent basis
– Customary pricing • Pricing on the basis of tradi+on
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Pricing Strategies (cont’d) • Product-‐line pricing
– Establishing and adjus+ng the prices of mul+ple products within a product line
– CapFve 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-‐versa+le products higher than other models in the product line
– Price lining • Selling goods only at certain predetermined prices that reflect definite price breaks
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Pricing Strategies (cont’d)
• PromoFonal pricing – Price leaders
• Products priced below the usual markup, near cost, or below cost
– Special-‐event pricing • Adver+sed sales or price cuRng linked to a holiday, season, or event
– Comparison discounFng • SeRng a price at a specific level and comparing it with a higher price
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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 transporta+on costs
– FOB desFnaFon pricing • The seller includes transporta+on costs in the product pricing
• Transfer pricing – Prices charged in sales between an organiza+on’s units
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