Ch 05

Product DesignProduct Design

Pricing and StrategiesPricing and Strategies

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Chapter Objectives

Differentiate between a product item and product line.

Classify products as consumer goods or business goods.

Explain the seven steps in developing a new product.

Identify the stages in a product’s life cycle.

Define price and the role it plays in determining profit.

Describe the factors that affect pricing decisions.

Identify pricing strategies.

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Product Defined

A specific model of athletic shoe would be called a product itemproduct item.

product item specific model or size of a product

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The entire group of a manufacturer’s athletic shoes would be called a product line.

Product Defined

Products can be classified as consumer goodsconsumer goods or business goodsbusiness goods.

consumer goods goods purchased and used by the ultimate consumer for personal use

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business goods goods purchased by organizations for use in their operations

Products need to have a point of differencepoint of difference.

point of difference a unique product characteristic or benefit that sets it apart from a competitor

Steps in New Product Development

The seven steps in new product development are:

focus group a panel of six to ten consumers who discuss opinions about a topic under the guidance of a moderator

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1. SWOT analysis (strengths, weaknesses, opportunities, and threats)

2. Idea generation

3. Screening and evaluation– Focus groupFocus group

continued

Steps in New Product Development

commercialization process that involves producing and marketing a new product

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4. Business analysis

5. Development

continued

6. Test marketing

7. CommercializationCommercialization

Product Life Cycle

The four stages in the product life cycle are:

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Introduction

Growth Maturity

DeclineProduct Life Cycle

Not all products fit the life-cycle pattern.

Product Life Cycle--Introduction

Focus on promoting consumer awareness

Millions of dollars spent on educating through consumer through advertising and promotion

Skimming pricing: cover research and development

Penetration pricing: Most preferred method. Price lower than competition.

Distribution in marketplace important.

Convince retailers to carry product

Product Life Cycle—Growth

More competitors may enter market if product is successful (Gatorade then Powerade)

New features may be added to product (more flavors)

Add distribution outlets – From convenience and supermarket stores– To vending machines, fountain service, snack bars

Product Life Cycle—Maturity

When sales begin to slow down

Repeat customers may stop buying

Changes may be made to product to keep alive

New target market may be identified

Product Life Cycle—Decline

Sales/profits drop

Technological advances can cause an entire category of products to decline

Replaced by newer and improved models

Company may stop production

May keep to satisfy loyal customers, limit production

Product Life Cycle Considerations

Fads have a very short life cycle. – Koosh balls– Boom boxes

New sports drink may not stay in introduction stage

Management of the Product Life Cycle

The three ways to manage the product life cycle are:

repositioning changing a product’s image in relation to a competitor’s image

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Modifying the product.

Marketing the product.

RepositioningRepositioning the product.

Explain the seven steps involved in developing a new product.

Name the four stages in the product life cycle.

What three things can be done to manage a product through its life cycle?

1.

2.

3.

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Pricing

PricePrice is important in a business because it helps determine a company’s profit or loss.

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price the value placed on goods or services being exchanged

Price plays a significant role in the marketing mix.

Determining Profit

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1,000baseballbats sold

$175 each

$175,000revenue= -

$90,000 topurchasethe bats

$90 each

-$60,000

in businessexpenses

=$25,000Profit

Subtract the cost of goods sold and the company’s expenses from the money it generated in sales revenue.

Pricing & Marketing Mix

The product must be priced correctly to fit the target market’s pocketbook.

• Rollerblade inline skate company carries a wide range of inline skates.

• Lower priced skates are sold at WalMart & Target for value oriented customers.

• Higher priced, more advanced skates are sold in specialty shops to cater to serious skaters.

What affects price decisions?

Consumer perception

Demand

Cost

Product life cycle stage

Competition

Consumer Perception

What is the relationship of price and quality in a consumer’s mind?

• Many consumers believe that the higher the price, the better the quality.

• Markets will price goods/services to attract customers who have that perception.

• Image of a product is closely related to the price.• A very good quality product may sell better at a

higher price.

Pricing Considerations and Strategies

Three types of pricing strategies are:

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prestige pricing pricing based on consumer perception

Prestige pricingPrestige pricing

Odd-even pricingOdd-even pricing

Target pricingTarget pricing

odd-even pricing pricing goods with either an odd number or even number to match a product’s image

target pricing pricing goods according to what the customer is willing to pay

Pricing Considerations and Strategies

Other pricing considerations include:

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markup difference between the retail or wholesale price and the cost of an itemDemand

Cost– MarkupMarkup– Cost-plus pricingCost-plus pricing

Newness of the product

cost-plus pricing pricing products by calculating all costs and expenses and adding desired profit

non-price competition competition between businesses based on quality, service, and relationships

Competition– Non-price competitionNon-price competition

Pricing Objectives and Strategies

Pricing objectives and strategies include:

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market share the percentage of the total sales of all companies that sell the same type of product

Profit objective

Market shareMarket share objective

Special pricing– Price liningPrice lining

– Bundle pricingBundle pricing

– Loss-leader pricingLoss-leader pricing

– Yield-management pricingYield-management pricing

price lining selling all goods in a product line at specific price points

bundle pricing selling several items as a package for a set price

loss-leader pricing pricing an item at cost or below cost to draw customers into the store

yield-management pricing pricing items at different prices to maximize revenue when limited capacity is involved– Tiered pricing

Price Adjustments and Regulations

Manufacturers will offer discounts in the following situations:

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Buying in large quantities

Buying prior to the buying season

Allowances are reductions taken from the quoted price. One type of allowance is a trade-in.

Price Adjustments and Regulations

The Sherman Anti-Trust Act prohibits price fixingprice fixing and predatory pricing.

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price fixing an illegal practice whereby competitors conspire to set the same price

Price discrimination was originally prohibited by the Clayton Act and later by the Robinson-Patman Act.

How is pricing related to profit and the marketing mix?

List five factors that affect price decisions.

What are two common pricing objectives and special pricing strategies?

1.

2.

3.

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Explain the difference between product item and product line.

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Name the ways products can be defined and classified.

A product item is a specific model or size of a product; a product line is a group of closely related products that are sold by a company.

1. Products can be classified as consumer goods or business goods. Products are goods, services, or ideas that satisfy consumer needs; products can be tangible (goods) or intangible (services). 

2.

Explain the seven steps used in developing a new product.

SWOT analysis, idea generation, screening and evaluation, business analysis, development, test marketing, and commercialization are the seven steps.

3.

Checking Concepts

continued

1.

2.

3.

Identify the four stages in a product’s life cycle.

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Define price.

Explain how price determines a company’s profit.

The stages are introduction, growth, maturity, and decline.

4. Price is defined as the value placed on goods or services being exchanged.

5. Every item sold carries a price. The number of items sold times the price equals sales revenue. The amount of profit equals costs subtracted from price.

6.

Identify the factors that may influence pricing strategies.

Pricing strategies are influenced by consumer perception, demand, cost, product life cycle stage, and competition.

7.

Checking Concepts

continued

4.

5.

6.

7.

Markup is the difference between the retail or wholesale price and the cost of an item. Cost-plus pricing involves calculating all costs and expenses and adding desired profit to arrive at a price. In a sense, markup is the profit component in cost-plus pricing.

8.

8. Define and compare markup and cost-plus pricing.

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Critical Thinking

Checking Concepts

8.

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End ofEnd of