Lecture 7 - Product II/Pricing PDF

COMM223 Marketing Management Lecture 7 – Product II/Pricing  Agenda New product development – Why new product – Stages of new product development Product life cycle Pricing – What is price – Major pricing strategies – Factors influencing price de...

COMM223 Marketing Management Lecture 7 – Product II/Pricing  Agenda New product development – Why new product – Stages of new product development Product life cycle Pricing – What is price – Major pricing strategies – Factors influencing price decision Internal factors External factors – New product pricing  Where are we now … Company Company Analysis Competitor Analysis Consumer Analysis Marketing Management Competitor Consumer Product Promotion Price Distribution Product - Market  Why New Products? Two Major Challenges: – Developing new products to replace aging ones – Life-cycle strategies Adapt to changing tastes, technologies, and competition, as products pass through the life-cycle stages. Importance also based on: – Growth for companies – Remaining competitive – Keeping up with technological change – Changing consumer tastes – Following market trends  New Product Development: Definition Defining NPD: – The development of original products, product improvements, modifications, and new brands, through the firm’s own R&D efforts Two Sources of New Products: 1. Acquisition: company, patent, license 2. New product development 3M Company – 60,000 employees and 60,000 products – 200-300 new products every year  New Product Development Expensive and risky with high failure rates – 60% for new consumer packaged products – 66% for new product concepts are never launched – Possible reasons Market size was overestimated Priced too high Actual product was not designed as Advertised poorly well as it should have been Costs of NPD were higher than expected Incorrectly positioned in the market Competitors fighter harder than expected The challenge is to overcome the high rate of new product failure Major Stages in New Product Development Stages of the New Product Development Process Stage 1: Idea Generation – The systematic search for new product ideas – Internal sources: brainstorming, employees from all departments, R & D – External sources: customers, competitors, distributors, suppliers, and others. – Crowdsourcing: inviting broad communities of people – customers, employees, independent scientists and researchers, and even the public at large – into the new product innovation process  Intuit, a marketer of financial software, asks for new product ideas from customers Stages of the New Product Development Process Stage 2: Idea Screening – The purpose is to identify good ideas and drop poor ones to avoid spending any more money on developing them – Criteria used: Is it real? real need and desire for the product Can we win? Competitive advantage; resources Is it worth doing? Fit company’s growth strategy; sufficient profit potential Stages of the New Product Development Process Stage 3: Concept Development and Testing – Concept development creates a detailed version of the idea stated in meaningful consumer terms. – Concept testing: testing new product concepts with a group of target consumers to find out if the concepts have strong consumer appeal. Stages of the New Product Development Process Stage 4: Marketing Strategy Development – Designing an initial marketing strategy for a new product based on the product concept. 1st statement describes the target market, product positioning, and sales, market share, and profit goals for the first few years. 2nd statement outlines the product’s price, distribution, and marketing budget for the first year. 3rd statement describes the long-run sales and profit goals, and the marketing mix strategy. Stages of the New Product Development Process Stage 5: Business Analysis – Review of the sales, costs, and profit projections for a new product to determine if they will satisfy company objectives Stage 6: Product Development – Developing the product concept into a physical product to ensure that it can be done Requires large investment Building a prototype Testing for safety, durability, and acceptability Stages of the New Product Development Process Stage 7: Test Marketing – Testing the product and marketing program in realistic market settings – The amount of test marketing needed varies with each new product – Gives the marketer an experience with marketing a product before full introduction – Testing takes time, and costs can be high. – Alternatives to standard test markets Controlled test markets Simulated test markets – Reasons for using alternative test markets Reducing the costs Speeding up the process Stages of the New Product Development Process Stage 8: Commercialization – Introducing a new product into the market – Large investment required – Considerations for launching a new product When to launch Where to launch – Single location, region, national market, or international market  Managing New-Product Development Customer-centered new product development – Focusing on finding new ways to solve customer problems and create more customer-satisfying experiences Team-based new product development: – Various company departments work closely together, overlapping the steps in the product development process to save time and increase effectiveness. Systematic new product development – Innovation management systems collect, review, evaluate, and manage new product ideas.  Product Life-Cycle Strategies Product life cycle (PLC): the course of a product’s sales and profits over its life The PLC can describe a product class, form, or brand Not all products follow this exactly Competition and rate of technology change can influence the length of a PLC Useful for planning purposes Alternative product life cycles  Pricing – What is price – Major pricing strategies – Factors influencing price decision Internal factors External factors – New product pricing  Where are we now … Company Company Analysis Competitor Analysis Consumer Analysis Marketing Management Competitor Consumer Product Promotion Price Distribution Product - Market  What Is a Price? Price: the amount of money charged for a product or service, or the sum of values exchanged for the benefits of having or using the product or service Price is the only Pricing best practices: marketing mix element – Develop a 1% pricing mindset that produces revenue – Consistently deliver more value – Price strategically, not opportunistically – Know your competition – Make pricing a process Source: Paul Hunt, Strategic Pricing Division, The Advantage Group, Toronto, Ontario  Pricing: An Important but Difficult Decision Price and the Marketing Mix – Only element to produce revenues – Most flexible element – Can be changed quickly Common Pricing Mistakes – Reducing prices too quickly to get sales – Pricing based on costs, not customer value Major Considerations in Setting Price  Pricing Strategy: Cost-Based Pricing Based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk Types of costs: – Fixed costs (overhead) – Variable costs – Total costs  Pricing Strategy: Cost-Based Pricing Cost-plus pricing: adding a standard markup to the cost of the product Simplest pricing method: Unit cost – Figure out the unit cost price = ---------------------- – Add a standard markup (1- desired return) Pros Cons  Pricing Strategy: Cost-Based Pricing Cost-Plus Pricing Example - Variable costs: $20 - Fixed costs: $ 500,000 - Expected sales: 100,000 units - Desired Sales Markup: 20% Variable Cost + Fixed Costs/Unit Sales = Unit Cost $20 + $500,000/100,000 = $25 per unit Unit Cost/(1 – Desired Return on Sales) = Markup Price $25 / (1 -.20) = $31.25  Pricing Strategy: Cost-Based Pricing Break-even pricing (target return pricing) Setting price to break even on the costs of making and marketing a product, or setting price to make a target return  Break-even and Target Return Pricing Used primarily when judging feasibility of a market action. Sensitivity analysis  Pricing Strategy: Customer Value-Based Pricing Based on buyers’ perceptions of value rather than on the seller’s cost Price is considered before the marketing program is set. Measuring perceived value can be difficult. Cost-Based versus Value-Based Pricing  Pricing Strategy: Customer Value-Based Pricing Two types of value-based pricing Good-value pricing – Offering just the right combination of quality and good service at a fair price – Everyday low pricing (EDLP) vs. high-low pricing Value-added pricing – Attaching value-added features and services to differentiate a company’s offers and charging higher prices  Pricing Strategy: Competition-Based Pricing Competition-based pricing: Setting prices based on competitors’ strategies, costs, prices, and market offerings Company should ask several questions to assess competitors’ pricing strategies: – How does the company’s market offering compare with competitors’ offerings in terms of customer value? – How strong are current competitors? – What are their current pricing strategies?  Competition-Based Pricing Caterpillar dominates the heavy equipment industry despite charging premium prices. $420 the Caterpillar’s price if equivalent to the 000 competitor’s bulldozer $50 000 the value added by Caterpillar’s superior reliability and durability $40 000 the value added by Caterpillar’s lower lifetime operating costs $40 000 the value added by Caterpillar’s superior service $20 000 the value added by Caterpillar’s longer parts warranty $570 the value-added price for Caterpillar’s bulldozer 000 −$70 discount 000 $500 final price 000  Factors Affecting Pricing Decisions Internal factors – Overall marketing strategy, objectives, and mix – Organizational considerations External factors – Market and demand – Economy – Impact on other parties in its environment  Factors to Consider When Setting Price Internal Factors Market positioning – Marketing influences pricing strategies, strategy objectives, and mix Other pricing – Organizational objectives: considerations – Survival – Current profit maximization – Market share leadership – Product quality leadership  Factors to Consider When Setting Price Internal Factors Pricing must be carefully coordinated with the other – Marketing marketing mix elements strategies, Positioning may be based objectives, and mix on price. – Organizational – Target costing starts considerations with an ideal selling price, then targets costs that ensure the price is met. Nonprice positions can be created to differentiate the marketing offer.  Factors to Consider When Setting Price Internal Factors Management decides – Marketing who should set prices. Varies depending on the strategies, objectives, and mix size and type of company – Small companies—Top – Organizational management considerations – Large companies— Divisional or product managers – Industries with price as the key factor—Pricing departments  Factors to Consider When Setting Price External Factors Types of markets – Nature of market and – Pure competition demand – Monopolistic competition – Economy – Oligopolistic competition – Other environmental – Pure monopoly elements Price-demand relationship – Demand curve – Price elasticity of demand  The Price-Demand Relationship Demand curve: a curve that shows the number of units the market will buy at different possible prices in a given time period Price elasticity of demand: – Calculated as the % change in quantity demanded divided by the % change in price; values >1 elastic and