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Creating and Pricing Products That Satisfy Customers

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  1. Creating and Pricing Products That Satisfy Customers Chapter 12

  2. 4 P’s of the Marketing Mix

  3. 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 but soon sales start to rise; development costs are high, profits low; few competitors. • Growth • Sales increase rapidly as the product becomes well known; competition enters. • Maturity • Sales are still increasing but at a slower rate; later in this stage, sales and profits begin to slowly decline; competition is intense. • Decline • Sales volume decreases sharply and profits continue to fall; may have to discontinue product.

  4. Product Life-Cycle

  5. How Do We Classify Products? • Product • Everything one receives in an exchange, including all tangible and intangible attributes and expected benefits • A product can be 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

  6. Types of Consumer Products • Convenience product • A relatively inexpensive, frequently purchased item for which buyers want to exert only minimum effort • Example: a candy bar, loaf of bread • Shopping product • An item for which buyers are willing to expend considerable effort on planning and making the purchase • Example: a car, a home, a new computer • Specialty product • An item that possesses one or more unique characteristics for which a significant group of buyers is willing to expend considerable purchasing effort • Example: special outfit for a special occasion, a certain Christmas gift for someone special

  7. Product Line and Product Mix • Product line • A group of similar products that differ only in relatively minor characteristics • Example: Proctor and Gamble makes a line of shampoos-Ivory, Head and Shoulders, Prell. • Product mix • All of the products that a firm offers for sale • Example: Product and Gamble makes beauty products, health products, and also household cleaning products. (very different lines) • 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

  8. 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 • Example: Adding airbags to vehicles made them safer (function) • 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 • Example: Cheerios • Deleting products • Between 60-75% of all new products fail • Developing new products

  9. Top Ten New Products of the Decade

  10. Phases of New Product Development

  11. 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 other “Ps”). • 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.

  12. Examples of Product Failures

  13. 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……”Apple” • 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 (see next slide) • Trade name • The complete and legal name of an organization • “Apple, Incorporated”

  14. Apple logo and name showing trademark symbol (look closely)

  15. Branding (cont.) • Types of brands • Manufacturer (producer) brand • A brand that is owned by a manufacturer • “Apple” “Dole” “Nike” • Store (private) brand • A brand that is owned by an individual wholesaler or retailer • Walmart’s “Great Value” or their “Equate” • Generic brand • A product with no brand at all

  16. Branding (cont.) • Benefits of branding • Because brands are easily recognizable, they reduce the amount of time buyers must spend shopping. • Brands help consumers judge quality. • Brands help 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.

  17. Branding (cont.) • Benefits of branding (cont.) • Brand loyalty • The extent to which a customer is favorable toward buying a specific brand • Recognition, preference, and insistence • Insistence is the highest level of brand loyalty

  18. Top Ten Most Valuable Brands in the World

  19. Branding (cont.) • Choosing a brand • It should be easy to say, spell, and recall. • It should suggestthe product’s uses, special characteristics, and major benefits. • It should be distinctive enough to set it apart from competing brands. • Protecting a brand • It should be protected through registration. • Guard against a brand name’s becoming a generic term.

  20. Branding (cont.) • 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 products • 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

  21. Branding (cont.) • Branding strategies (cont.) • Brand extensions • A firm uses an existing brand to brand a new product in a different product category • Example: Procter & Gamble names 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

  22. 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

  23. 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

  24. Labeling (cont.) • 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

  25. Go Back to the “Let’s Brainstorm” Activity and Discuss/decide the following: • “Brand” your product. Create a spoken brand name, sketch out a logo, decide if the brand should be trademarked or not and why. • Decide on what kind of packaging you’ll use and why. • Decide what kinds of information you’ll need on the label and sketch out an example of it.

  26. Pricing Products • Every Product or Service has a Perfect Price • Even this one…. • Driving a tank for fun

  27. 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

  28. Pricing Products (cont.) • 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

  29. Supply and Demand Curves

  30. Pricing Products (cont.) • 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) • Example: Apple depends on customer loyalty, quality in design and function, instead of price to sell the product • 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

  31. 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

  32. Pricing Objectives (cont.) • Market-share goals • Pricing that will increase a firm’s proportion of total industry sales • Status quo pricing • Pricing because that’s normally what a product like this has always been priced at

  33. Pricing Methods • Cost based pricing • Breakeven based pricing • Demand based pricing • Competition based pricing

  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 like how much it costs to produce it or market it; there is no incentive here to reduce those costs-just raise the price instead. This is not the best way to be profitable.

  35. Pricing Methods (cont.) • Breakeven based pricing • 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 (total sales) • 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 (= Fixed Costs + Variable Costs) • The sum of the fixed costs and the variable costs all together.

  36. Breakeven Analysis

  37. Two Ways to Figure Out Breakeven Point • How much in sales dollars do we need to break even? • How many units do we need to sell to break even?

  38. Calculating Breakeven Point • To determine how much in sales dollars you need: • Calculate Contribution Margin using this formula: Total variable costs Annual sales 2. Then calculate Breakeven Point: Total Fixed Costs Contribution Margin • GIVEN THESE FIGURES: • Variable costs: $337,000 (cost of goods sold) • Other variable costs: $42,750 • Total Variable Costs: $379,750 • Annual Sales: $495,000 • Total Fixed costs: $78,100 Calculate Contribution Margin: All variable costs Annual sales 2. Breakeven: Sales Dollar Volume: Total Fixed Costs Contribution Margin

  39. What about if……. • Contribution margin goes down but Total Fixed Costs stay the same? • Example A: Example B: CM = .68 CM = .20 $78,100 = $114,852 $78,100 = $390,500 .68 .20 • Contribution margin goes down AND Total Fixed Costs go up? • $100,000 = $500,000 .20

  40. Calculating Breakeven Point • To determine how manyunitsyou need to sell: • Contribution per unit = • Selling price - Variable cost per unit • Example: Contribution per unit = $120-60 = $60 2. Then use this formula: Total Fixed Costs Contribution Per Unit Example: $40,000 = 667 units $60 • GIVEN THESE FIGURES: • Selling price: $120 • Variable cost per unit: $60 • Total Fixed costs: $40,000 Calculate Contribution Margin: All variable costs Annual sales 2. Breakeven: Sales Dollar Volume: Total Fixed Costs Contribution Margin

  41. Pricing Methods (cont.) • 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

  42. Types of Pricing Strategies

  43. Choose one of these Pricing Strategies and be able to explain why you chose it. • New Product Strategy • Differential Pricing Strategy • Psychological Pricing Strategy • Product line Pricing Strategy • Promotional Pricing Strategy

  44. Pricing Strategies: New Product Pricing • New-product pricing 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

  45. Pricing Strategies: Differential Pricing • 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

  46. Pricing Strategies: Psychological Pricing • 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

  47. Pricing Strategies: Product-line Pricing • 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

  48. Pricing Strategies: Promotional Pricing • 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

  49. Go Back to the “Let’s Brainstorm” Activity and Add the following: • Price your product or service using one of the strategies in the textbook (pg 350-358) or one taken from the next slide. Be able to explain why you chose that price. • Calculate your breakeven point to determine how much sales you’ll need per year to break even (in dollars) and then how many units you will have to sell per year to break even. Given these figures: Total variable costs: $300,000 Total fixed costs: $150,000 Annual sales last year: $500,000 Selling price last year: $20,000 per unit Variable cost per unit: $1500

  50. Chapter Quiz • Western Day was a special day at the office. Janice wanted to dress in the latest western fashion, but she had limited funds. She visited several shops before finding the right outfit. For Janice, what type of product is the clothing? • Specialty product • Major equipment • Industrial product • Shopping product • Convenience product