Product and Price in Business

• Product and price are key elements of business
• Pay attention to the presentation for random questions

Product Defined

• A product is anything offered to a market to satisfy a want or need
• Products can be tangible or intangible

Types of Products

• Consumer products are for peronsal use examples including clothing
• Industrial products are used in the production of other goods for examples including machinery
• Services are intangible and provide value for examples including consulting

Product Life Cycle Stages

• Introduction is the first stage
• Growth is the second stage
• Maturity is the third stage
• Saturation is a substage within Maturity
• Decline is the fourth stage
• Revival is the stage after Decline

Price Defined

• Price represents the value exchanged for the benefits of owning or using a product or service
• Pricing assists to cover costs, determines profitability and influences consumer decisions

Factors Influencing Price

• Cost of production
• Market demand which includes customer willingness to pay and perceived costs
• Regulatory and legal requirements which include government regulations and taxes

Price elasticity

• Measures how demand changes when a price change occurs
• Elastic demand is when demand is sensitive to price changes
• Inelastic demand is when demand is not sensitive to price changes
• Factors influencing elasticity are:
  • Availability of substitutes
  • Necessity of the product from consumer's perspective
  • Proportion of income the product represents

Tangible Product Attributes

• Shape & Size attractiveness and fitness of product
• Colour and visual aesthetics
• Quality of materials for the product and price
• Suitability of packaging for the product and its intended customer

Intangible Product Attributes

• Brand image and suitability for the customer/market
• Perception of power, attractiveness, or wealth associated with the product
• Fashionability, trendiness, or lack thereof

Importance of Product Development

• Changing consumer tastes and preferences drive product development
• Increasing competition necessitates product improvements
• Technological advancement can increase a product's functionality
• New opportunities for growth come as a result
• Risk may be spread through product diversification
• A brand's image can be improved through new products
• Excess capacity can be used for new products

New Product Development (NPD)

• Entails the design, creation, and marketing of new goods and services

Success of a New Product

• Having desirable features that consumers are prepared to pay for is key
• Having a unique selling point helps product standout
• Being marketed effectively is essential

Product Differentiation and Unique Selling Point (USP)

• A unique selling point is what makes a product different and better than competitors
• Effective product differentiation creates a USP

Benefits of Effective USP

• Increases market visibility
• Generates free publicity through media coverage
• Increases consumer appeal
• Enhances sales
• Fosters customer loyalty
• Attracts investment

Brand vs. Product

• The product is the general term for what is being sold
• The brand is the distinguishing name or symbol used to differentiate manufacturer's products

Product Attributes

• Product is tangible
• Has physical appearance
• Defined by features and functions
• Subject to individual preferences

Brand Attributes

• Brand relates to identity association
• Is an abstract concept
• Creates an emotional connection
• Generates overall allegiance

Product Life Cycle vs Boston Matrix

• These are product portfolio analysis techniques

Product Life Cycle Defined

• Sales pattern of a product from market launch, through development, and to withdrawal

Product Life Cycle

• Introduction
  • Product is launched, tested, and developed
  • Sales are low in this early stage
• Growth
  • Product is effectively promoted
  • Higher sales are achieved as a result
  • Sales growth eventually slows
• Maturity
  • Sales stabilize and remain consistent
  • Product may be consumer durable
• Decline
  • Sales declines steadily
  • Extension strategies were failed
  • Product becomes unprofitable

Extension Strategies

• Lengthen existing products lifespan before the market requires replacement
• Accomplished via selling into new markets, and/or using updated packaging

Balanced Product Portfolio

• Achieved when declining products are replaced with newly developed, introduced products
• A balanced portfolio maintains steady cash flow

Boston Matrix

• A tool for businesses used to analyze product portfolios and make strategic decisions
• Classifies products based on market share and market growth rate
• Includes Cash Cows, Problem Child/Question Mark, Stars, and Dogs

Boston Matrix Considerations

• Market share measures if product has a low or high market share
• Market growth measures whether the number of potential customers is increasing
• By categorizing products, businesses allocate targeted resources, improve cash flow, and develop aligned marketing strategies

Cash Cows

• Products with high market share in mature (no longer growing) market
• Generate significant positive cash flow with low growth potential
• Require minimal investment
• Marketing targets maintaining market share and stable profitability
• Considered valuable assets used to fund development of new products

Stars

• High market share products located in high-growth market
• Company invests in stars sustaining or increase their market share
• Generate significant cash flow, with continued growth potential
• Marketing efforts focused on building brand recognition and market share
• Classified valuble assets, business should maximize their potential

Question Mark

• Products with low market share in high-growth markets
• Have potential to become stars if company invests in development
• Often show a negative cash flow
• Marketing builds market share and brand recognition

Dog products

• Have low market share in a low-growth market
• Generate little revenue, without growth potential
• Often divested to concentrate efforts on more profitable products
• Minimal or non-existant marketing

Boston Matrix Impact

• Relevant in analyzing product portfolios
• Used in planning action to be taken with existing products
• Used in planning the introduction of new products

Possible Decisions

• Building which involves investing heavily in marketing to grow market share, especially for Stars or promising Question Marks
• Holding used to focus on maintaining the demand with efficient marketing and cost management
• Milking used by generating positive cash flow from established products and then reinvesting
• Divesting used by stopping or selling unprofitable Dogs to reallocate resources to markets with more potential

Limitations of Boston Matrix Analysis (BMA)

• Simplifies reality by considering market share and growth
• Assumes high profits result from high market share
• Considers limited factors that might influence success such as competition, consumer factors or technology

Pricing Methods

• Several methods are available, broadly classified into 2 categories

Cost-based methods of pricing

- Methods where companies add an amount for profit to the calculated cost of producing or supplying of each unit
- Includes:
    - Mark-up pricing
    - Cost-plus pricing
    - Contribution-cost pricing
    - Loss leaders

Competition-based methods of pricing

• Methods used where business pricing decisions are based on price-setting of its competitors
• Includes:
  • Price discrimination
  • Dynamic pricing
  • Competitive Pricing

Mark-Up Pricing

• Mark-up pricing involves adding a percentage of the cost price as a mark-up to calculate the selling price
• This method is often popular among retailers

Mark-Up Pricing Formula

• Markup % is equal to Selling Price less Cost, divided by Cost and multiplied by 100

Cost-Plus Pricing

• Calculates the total cost of producing a product and adding a fixed percentage / amount
• Is often used by manufacturers

Cost-Plus Pricing Formula

• Selling Price is equal to Total Cost per Unit plus (1 + Markup Percentage)

Contribution-Cost (Marginal-Cost) Pricing

• Strategy where business set prices of a product/service based on marginal cost
• Marginal cost is defined as additional cost incurred producing one more unit of product

Loss Leaders

• Selling a product at a price below its cost attracting customers to the store / website
• Goal is to stimulate purchase of additional items sold at regular/higher margins
• Initial loss is offset

Loss Leaders Benefits

• Increased Customer Traffic
• Higher Sales Volume
• Customer Loyalty

Loss Leaders Risks

• Eroded Profit Margins
• Increased Competitor Response
• Increased Bargain Hunters

Competitive Pricing

• Product is in line with/just below the competitors price capturing more of the market

Competitive Pricing Advantages

• Can attract more/new customers
• Increased sales

Competitive Pricing Disadvantages

• Potential of losses
• Business potentially selling items at very low prices and making a limited profit
• Higher quality products sold at higher above competitors

Price Discrimination

• A business strategy where a seller charges different prices based on:
  • Age
  • Income
  • Gender
  • Location
  • Quantity
  • Season

Dynamic Pricing

• Strategy where businesses set flexible prices for products based on current market demands and competition
• Prices are changing in real-time responding to the change in supply and demand