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Pricing Products Pricing Considerations, Approaches, and Strategy - DOC


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									Chapter 8 – Product and Services Strategy
What is a Product?
A Product is anything that can be offered to a market for attention, acquisition, use, or consumption
and that might satisfy a want or need.

 What is a Service?
A Service is a form of product that consist of activities, benefits, or satisfactions offered for sale that
are essentially intangible and do not result in the ownership of anything.
Examples include:

Nature and Characteristic of a Service
Intangibility - Can’t be seen, tasted, felt, heard, or smelled before purchase.

Inseparability - Can’t be separated from service providers.

Variability - Quality depends on who provides them and when, where and how.

Perishability - Can’t be stored for later sale or use.

Products, Services, & Experiences: The Product/Service Continuum
Levels of Product

Product Classifications Consumer Products

Industrial Products
Materials & Parts
Capital Items
Supplies & Services

Individual Product Decisions (Fig. 8.2)
                                            Product Attributes
Developing a Product or Service Involves Defining the Benefits that it Will Offer Such as:
______________________ - Ability of a Product to Perform Its Functions; Includes Level & Consistency

______________________ - Help to Differentiate the Product from Those of the Competition

______________________ - Process of Designing a Product’s Style & Function
Brand – a name, term, sign, symbol, or design, or a combination of these, that identifies the maker or seller of a
product or service

Why Brand?

Brand Equity - the set of assets (or liabilities) linked to the brand that add (or subtract) value

The Billion Dollar Brands

  Advantages of Branding

  Brand Equity

Major Branding Decisions (Fig. 8.3)
Brand Name Selection

Brand Sponsor

Brand Strategy

Branding Strategies
 Activity of designing and producing the container or wrapper for a product.
 Packaging is used to:




 Packing now has promotional value and marketers should:
           Establish a packaging concept,
           Develop specific elements of the package,
           Tie together elements to support the positioning and marketing strategy.

          Printed information appearing on or with the package.
          Performs several functions:



Product Mix Decisions
Product Mix - all the product lines & items offered

Width - number of different product lines

Length - total number of items in product lines

Depth - number of versions of each product
Chapter 9 – New Product Development (NPD) and Product Life Cycle
                          (PLC) Strategies
New products
    Last year food products alone accounted for more than 10,000 of the year’s 25,261 total new-product
       launches, according to Marketing Intelligence Service. That’s 486 product launches a week, or 69 per
    Interesting, considering the launch of a new shampoo can range in cost from $20 to $50 million dollars.

When is a New Product Really New?
                               - never been introduced before (i.e. inventions); functionally new

                                  - firm enters into new product category or offers a modification of an old one

                                  - how much consumer learning is involved to use product

                                  - generally, a product is “new” for only six months

New Product Strategy Development
    Involves defining the role of new products in achieving the firm’s overall objectives.
       Cross functional teams seem to produce best results in searching for new product and/or market

Causes of New Product Failures
One study estimated that as many as 80% of new consumer packaged products failed.
Only about 40% of new consumer products are around 5 years after introduction.

Why Do Products Fail?
   Rush to market
       Product design problems
       Product may have been pushed despite poor marketing research findings
       Costs of product development
       Consumer “need” was a fad, or short-lived
       Timing
Major Stages in New Product Development (Fig 9.1)

Idea Generation
       Idea Screening
                Concept Development and Testing
                       Marketing Strategy
                              Business Analysis
                                       Product Development
                                               Test Marketing

Strategies for Obtaining New Product Ideas

New Product Development Process
                                           Step 1. Idea Generation
        … the Systematic Search for New Product Ideas Obtained Internally From Employees and Also From:
                                             Step 2. Idea Screening
•   Many companies have systems for rating and screening ideas which estimate:
    •   Market Size
    •    Product Price
    •    Development Time & Costs
    •    Manufacturing Costs
    •    Rate of Return

                                      Step 3. Concept Development
    1. Develop New Product Ideas into Alternative Detailed Product Concepts

    2. Concept Testing - Test the New Product Concepts with Groups of Target Customers
    3. Choose the One That Has the Strongest Appeal to Target Customers
                                          Step 4. Marketing Strategy
Part One Describes Overall:             Part Two Describes First-Year:         Part Three Describes Long-Term:
Target Market                           Product’s Planned Price                Sales & Profit Goals
Planned Product Positioning             Distribution                           Marketing Mix Strategy
Sales & Profit Goals                    Marketing Budget
Market Share

                                         Step 5. Business Analysis
Business Analysis - Review of Product Sales, Costs, and Profits Projections to See if they Meet Company

                                         Step 6. Product Development

                                           Step 7. Test Marketing
Test Marketing is the Stage Where the Product and Marketing Program are Introduced into More Realistic
Market Settings.

 ________________________ - Full marketing campaign in a small number of representative cities.

 ________________________ - A few stores that have agreed to carry new products for a fee.

 ________________________ - Test in a simulated shopping environment to a sample of consumers.

                                           Step 8. Commercialization
                 Commercialization is the Introduction of the New Product into the Marketplace.


                                    Speeding Up New Product Development
                      Sequential                                  Simultaneous

            Product Development Costs
Consumer vs. Industrial
 Product Life Cycle
               Product Life Cycle (Fig. 9.2)

        Sales and
        Profits ($)                                         Sales


        Product       Introduction      Growth   Maturity      Decline
    Investments ($)

  Sales and Profits Over the Product’s Life From Inception
                         to Demise
                                                               Problems Using the PLC
The PLC Concept Can Help in Developing Good Marketing Strategies for Different Stages of the Product Life Cycle, However
Some Problems Can Arise:



Characteristic                       Introduction               Growth             Maturity    Decline








Chapter 10 – Pricing Products: Pricing Considerations & Approaches
Which is Price??

Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service.

                                       Factors Affecting Price Decisions ( Fig. 10.1)
 Internal Factors                                                External Factors
 •   Marketing Objectives                                         •   Nature of the market and demand
 •   Marketing Mix Strategy                                       •   Competition
 •   Costs                                                        •   Other environmental factors
 •   Organizational considerations                                    •   Economy
                                                                      •   Resellers
                                                                      •   Government

                          Internal Factors Affecting Pricing Decisions: Marketing Objectives
                                   - Low Prices to Cover Variable Costs and Some Fixed Costs to Stay in Business.

                                                    - Choose the Price that Produces the Maximum Current Profit, Etc.

                                                         - Low as Possible Prices to Become the Market Share Leader.

                                                       - High Prices to Cover Higher Performance Quality and R & D.

 Other specific objectives include:

 Nonprofit and public organization may have other pricing objectives such as:
   University aims for _____________________
   Hospital may aim for _____________________
   Theater may price to _____________________

                          Internal Factors Affecting Pricing Decisions: Marketing Mix
Customers Seek Products that Give Them the Best Value in Terms of Benefits Received for the Price Paid.
                                 Types of Cost Factors that Affect Pricing Decisions
    Fixed Costs (Overhead) –

    Variable Costs -

    Total Costs -

Different Levels of Production – costs vary with different levels of production and production capability - (in)
efficiency impacts the eventual cost.

Function of Production Experience - As a firm gains experience in production, it learns how to do it better.

The experience curve (or the learning curve) indicates that average cost drops with accumulated production

                                      External Factors Affecting Pricing Decisions



                               Market and Demand Factors Affecting Pricing Decisions
                                  - Many Buyers and Sellers Who Have Little Effect on the Price

                                  - Many Buyers and Sellers Who Trade Over a Range of Prices

                                  - Few Sellers Who Are Sensitive to Each Other’s Pricing/ Marketing Strategies

                                  - Single Seller

                               Demand Curves and Price Elasticity of Demand
    A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at
                                    Different Prices that Might be Charged.

                                  =                        -----------------------------------

                                             Price / Demand Relationship
                                Major Considerations in Setting Price (Fig. 10.5)
Price Ceiling -

Price Floor -

                                                Cost Considerations
  Types of Mark-Up Pricing
     o Cost-plus pricing - a pricing method in which the producer (seller) determines its costs and then adds a
         specified profit amount or percentage to the selling price.
     o Break-even Analysis & Target Profit Pricing – setting price to break even on the costs of making and
         marketing a product: or setting price to make a target profit

                                              Cost-Based Pricing
Cost-Plus Pricing is an Approach That Adds a Standard Markup to the Cost of the Product.

                  Breakeven Analysis                                       Target Return Pricing

                               Cost-Based Versus Value-Based Pricing (Fig. 10.7)

                                           Competition-Based Pricing
Setting prices based on the prices that competitors charge for similar products
______________________________ - Company Sets Prices Based on What Competitors Are Charging.
_________________________ - Company Sets Prices Based on What They Think Competitors Will Charge.
Chapter 11 – Pricing Products: Pricing Strategies
Dynamic Pricing Strategies
New Product Pricing Strategies
Market Skimming - Setting a High Price for a New Product to “Skim” Maximum Revenues from the Target Market.


Use Under These Conditions:
 Product’s Quality and Image Must Support Its Higher Price.
 Costs Can’t be so High that They Cancel the Advantage of Charging More.
 Competitors Shouldn’t be Able to Enter Market Easily and Undercut the High Price.

Market Penetration - Setting a Low Price for a New Product in Order to “Penetrate” the Market Quickly and Deeply.


Use Under These Conditions:
 Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth.
 Production/ Distribution Costs Must Fall as Sales Volume Increases.
 Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

Product Mix-Pricing Strategies:
Product Line Pricing
Involves setting price steps between various products in a product line based on:


     Optional-Product Pricing - Pricing optional or accessory products sold with the main product.

     Captive-Product Pricing - Pricing products that must be used with the main product.

     By-Product Pricing - Pricing low-value by-products to get rid of them and make the main product’s price more competitive.

     Product-Bundling - combining several products and offering the bundle at a reduced price.

Discount and Allowance Pricing
Adjusting Basic Price to Reward Customers for Certain Responses

Cash Discount -

Quantity Discount -

Functional Discount -

Seasonal Discount -

Trade-in Allowance -

Promotional Allowance –
Segmented Pricing
Selling Products at Different Prices Even Though There is No Difference in Cost

Customer – Segment -

Product Form -

Location Pricing -

Time Pricing -

Psychological Pricing
 Considers the psychology of prices and not simply the economics.
 Customers use price less when they can judge quality of a product.
 Price becomes an important quality signal when customers can’t judge quality; price is used to say something about a

Psychological Pricing Methods
     Prestige Pricing - setting prices artificially high to evoke an image of prestige or quality

      Odd-Even Pricing - Ending prices with a certain number to influence customers

      Customary Pricing - setting prices on the basis of tradition.

      Price Lining - setting a limited number of prices for selected lines of merchandise.

Promotional Pricing
Temporarily Pricing Products Below List Price to Increase Short-Term Sales Through:

Other Price Adjustment Strategies
                 - Adjusting Prices to Account for the Geographical Location of Customers.

                     - Adjusting Prices for International Markets.

Initiating Price Changes
Price Cuts –

Price Increases –

Assessing/Responding to Competitor’s Price Changes (see Fig. 11.1)
Public Policy Issues in Pricing


Pricing Across Channel Levels
_________________________ - Ensure sellers offer the same price/terms to a given level of trade
_________________________ - Manufacturer can’t require dealers to charge a specified retail price for its product
_________________________ - Occurs when a seller states prices or prices savings not available to consumers

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