Chapter 12: Creating and Pricing Products That Satisfy Customers PDF

Chapter 12 Creating and Pricing Products That Satisfy...

Chapter 12 Creating and Pricing Products That Satisfy Customers © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LEARNING OBJECTIVES 12-1 Explain what a product is and how products are classified. 12-2 Discuss the product life cycle and how it leads to new-product development. 12-3 Define product line and product mix and distinguish between the two. 12-4 Identify the methods available for changing a product mix. 12-5 Explain the uses and importance of branding, packaging and labelling. 12-6 Describe the economic basis of pricing and the means by which sellers can control prices and buyers’ perceptions of prices. 12-7 Identify the major pricing objectives used by businesses. 12-8 Examine the three major pricing methods that businesses employ. 12-9 Explain the different strategies available to companies for setting prices. 12-10 Describe three major types of pricing associated with business products. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Introduction Product – everything one receives in an exchange, including all tangible and intangible attributes and experienced benefits; it may be a good, a service, or an idea A good is a real, physical thing that we can touch. o Example: a Marie biscuit A service is the result of applying human or mechanical effort to a person or thing. o Example: a barber giving a haircut An idea may take the form of philosophies, lessons, concepts, or advice. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Classification of Products Products can be grouped into two general categories: 1. Consumer product – a product purchased to satisfy personal and family needs 2. Business product – a product bought for resale, for making other products, or for use in a business’s operations © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Consumer Product Classifications Three categories of consumer products: 1. Convenience product – a relatively inexpensive, frequently purchased item for which buyers want to exert only minimal effort o Examples: bread, petrol, newspapers 2. Shopping product – an item for which buyers are willing to expend considerable effort on planning and making the purchase o Examples: appliances, bicycles, mobile phones 3. 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 o Examples: sports cars, original artwork © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Product Classifications (slide 1 of 2) Categories of business products: Raw material – a basic material that actually becomes part of a physical product; usually comes from mines, forests, oceans, or recycled solid wastes Major equipment – large tools and machines used for production purposes o Examples: cranes, stamping machines Accessory equipment – standardised equipment used in a business’s production or office activities o Examples: hand tools, scanners, calculators Component part – an item that becomes part of a physical product and is either a finished item ready for assembly or a product that needs little processing before assembly o Examples: tyres, computer chips © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Product Classifications (slide 2 of 2) Categories of business products (continued): Process material – a material that is used directly in the production of another product but is not readily identifiable in the finished product o Examples: industrial glue, food preservatives Supply – an item that facilitates production and operations but does not become part of a finished product o Examples: paper, pencils Business service – an intangible product that an organisation uses in its operations o Examples: financial services, legal services © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Product Life Cycle Product life cycle – a series of stages in which a product’s sales revenue and profit increase, reach a peak, and then decline © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 12-1 Product Life Cycle © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Stages of the Product Life Cycle (slide 1 of 2) Four stages of the product life cycle: 1. Introduction o Customer awareness and acceptance of the new product are low. o Sales rise gradually as a result of promotion and distribution activities. o There are no competitors. o High development and marketing costs result in low profit, or even in a loss, initially. 2. Growth o Sales increase rapidly as consumers gain awareness of the product. o Other businesses begin to market competing products. o The competition and decreased unit costs result in a lower price, which reduces the profit per unit. o Industry profits reach a peak and begin to decline. o Promotional efforts attempt to build brand loyalty among © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. customers. Stages of the Product Life Cycle (slide 2 of 2) Four stages of the product life cycle (continued): 1. Maturity o Sales are still increasing at the beginning of this stage, but the rate of increase has slowed. o Later, the sales curve peaks and begins to decline, as do industry profits. o Weaker competitors leave the market. o Marketers introduce refinements and extensions of the original product to the market. 2. Decline o Sales volume decreases sharply and profits continue to fall. o The number of competitors declines, and the only survivors in the marketplace are businesses that specialise in marketing the product. o Production and marketing costs become the most important determinant © 2021 Cengage of profit. Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product Line and Product Mix Product line – a group of similar products that differ only in relatively minor characteristics Example: Procter & Gamble manufactures and markets several shampoos, including Pantene and Head & Shoulders. Product mix – all the products a business offers for sale Two dimensions are often applied to a business’s product mix. 1. The width of the mix is the number of product lines it contains. 2. The depth of the mix is the average number of individual products within each line. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Managing Existing Products Product modification – the process of changing one or more of a product’s characteristics Example: The food industry responding the clean label demands. Existing products can be modified in three ways. 1. Quality modifications – changes that relate to a product’s dependability and durability and are usually achieved by alterations in the materials or production process 2. Functional modifications – affect a product’s versatility, effectiveness, convenience, or safety, and usually require redesign of the product 3. Aesthetic modifications – change the sensory appeal of a product by altering its taste, texture, sound, smell, or visual characteristics Line extension – development of a new product that is closely related to one or more products in the existing product line but designed specifically to meet somewhat different customer needs Example: Woolworths’ single-serving peanut butter snack sachets © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Deleting Products To maintain an effective product mix, an organisation often has to eliminate some products. Product deletion – the elimination of one or more products from a product line A weak and unprofitable product costs a company, time, money and resources that could be used to modify other products or develop new ones. A weak product’s unfavourable image can negatively impact the customer perception and sales of other products sold by the business. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Developing New Products Developing and introducing new products is frequently time consuming, expensive and risky. For most businesses, more than half of new products will fail. New products are grouped into three categories by their degree of similarity to existing products. 1. Imitations – products designed to compete with existing products of other businesses 2. Adaptations – variations of existing products that are intended for an established market. 3. Innovations – entirely new products The process of developing a new product consists of seven phases. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 12-2 Phases of New-Product Development © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Do Products Fail? New products fail mainly because the product and its marketing programme have not been planned and tested as thoroughly as they should have been. Example: Amazon’s Fire cell phone failed largely because it didn’t have any features that stood out in a competitive field of innovative mobile phones, and the phone was priced at the upper end of the market. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TABLE 12-1 Examples of Product Failures © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What Is a Brand? 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 Brand mark – the part of a brand that is a symbol or distinctive design Example: the Nike swoosh Trademark – a brand name or brand mark that is registered with the Companies and Intellectual Property Commission (CIPC) and thus is legally protected from use by anyone except its owner Trade name – the complete and legal name of an organisation © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Brands Manufacturer (or producer) brand – a brand that is owned by a manufacturer Examples: Many foods (Bokomo Weet-Bix), major appliances (Defy), petrol (Engen), cars (Honda), and clothing (Levi’s) are sold as manufacturers’ brands. Store (or private) brand – a brand that is owned by an individual wholesaler or retailer Examples: House Brand (Checkers), No Name (Pick n Pay) Generic product (or generic brand) – a product with no brand at all © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Benefits of Branding (slide 1 of 2) Because brands are easily recognisable, they reduce the amount of time buyers spend on shopping. Brands help to reduce the perceived risk of purchase. Customers may receive a psychological reward from owning a brand that symbolises status. Branding helps a business to introduce a new product that carries a familiar brand name because buyers already know the brand. Branding aids sellers in their promotional efforts because promotion of each branded product indirectly promotes other products of the same brand. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Benefits of Branding (slide 2 of 2) Brand loyalty – extent to which a customer is favourable towards buying a specific brand Three levels of brand loyalty: 1. Brand recognition 2. Brand preference 3. Brand insistence o Brand equity – marketing and financial value associated with a brand’s strength in a market The four major factors that contribute to brand equity are: 4. Brand awareness 5. Brand associations 6. Perceived brand quality 7. Brand loyalty © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TABLE 12-2 Top Ten Most Valuable Brands in the World, 2019 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Choosing and Protecting a Brand Choosing a brand: The brand name should be easy for customers to say, spell and recall. The brand name should suggest, in a positive way, the product’s uses, special characteristics and major benefits, and should be distinctive enough to set it apart from competing brands. Protecting a brand: A business should select a brand that can be protected through registration, reserving it for exclusive use by that business. o So as not to become a generic term that refers to a general product category (which cannot be legally protected as an exclusive brand name), the business should spell the name with a capital letter and use it as an adjective to modify the name of the general product class. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Branding Strategies Individual branding – the strategy in which a business uses a different brand for each of its products Advantages: o A problem with one product will not affect the good name of the business’s other products. o The different brands can be directed towards different market segments. Family branding – the strategy in which a business uses the same brand for all or most of its products Advantages: o Successful promotion for any one item that carries the family brand can help all other products with the same brand name. o A new product has a head start when its brand name is already known and accepted by customers. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Brand Extensions Brand extension – using an existing brand to brand a new product in a different product category Example: Exclusive Books and Seattle Coffee Co. Marketers must be careful not to extend a brand too many times or extend too far outside the original product category, as either action may weaken the brand. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Packaging Packaging – all the activities involved in developing and providing a container with graphics for a product Packaging Functions Protect the product Maintain the product’s functional form Offer consumer convenience Promote a product by communicating its features, uses, benefits and image Packaging Design Considerations Cost Single or multiple units Consistency among package designs The promotional role Environmental responsibility © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Labelling Labelling – the presentation of information on a product or its package Label – the part of a package that contains information, including: The brand name and mark The registered trademark symbol® The package size and contents Product claims Directions for use and safety precautions Ingredients The name and address of the manufacturer The bar code Labels may also carry the details of written, or express, warranties. Express warranty – a written explanation of the producer’s responsibilities in the event that a product is found to be defective or otherwise unsatisfactory © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Meaning and Use of Price Price – the amount of money a seller is willing to accept in exchange for a product at a given time and under given circumstances Price serves the function of allocator. It 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 to allocate their own financial resources among various want-satisfying products. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 Used most effectively when a seller must have the flexibility to change prices often, rapidly and aggressively in response to competitors’ price changes Allows a marketer to set prices based on product demand or in response to changes in the business’s finances Non-price competition – competition based on factors other than price Used most effectively when a seller can make its product stand out through distinctive product quality, customer service, promotion, packaging, or other features Product differentiation – the process of developing and promoting differences between one’s product and all similar products © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Buyers’ Perceptions of Price Managers should consider the price sensitivity of the target market. Members of one market segment may be more influenced by price than members of another. Consumer price sensitivity can also vary between products. Buyers will tolerate a narrow range of prices for certain items and a wider range for others. Management should be aware of consumers’ price limits and the products to which they apply. Sometimes buyers equate price and quality. Managers involved in pricing decisions should determine whether this outlook is widespread in the target market. If it is, a higher price may improve a product’s image, making it more desirable. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing Objectives One objective of pricing is to make a profit, but one or more of the following factors may be just as important: Survival Profit maximisation Target return on investment o Return on investment (ROI) – the amount earned as a result of a financial investment Market-share goals o Market share – the proportion of total industry sales Status quo pricing © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing Methods Two important factors in setting prices: 1. Recognition that the market, and not the business’s costs, ultimately determines the price at which a product will sell 2. Awareness that costs and expected sales can be used only to establish a price floor o Price floor – the minimum price at which the business can sell its product without incurring a loss o Three kinds of pricing methods: 1. Cost-based pricing 3. Demand-based pricing 4. Competition-based pricing © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost-based Pricing (slide 1 of 2) Method: 1. The seller determines the total cost of producing (or purchasing) one unit of the product. 2. The seller adds an amount to cover additional costs and profit. o Markup – the amount a seller adds to the cost of a product to determine its basic selling price 3. The total of the cost plus the markup is the product’s selling price. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost-based Pricing (slide 2 of 2) The costs involved in operating a business can be broadly classified as either fixed or variable. Fixed cost – a cost incurred no matter how many units of a product are produced or sold Variable cost – a cost that depends on the number of units produced Cost-based pricing can be calculated through breakeven analysis. Breakeven quantity – the number of units that must be sold for the total revenue (from all units sold) to equal the total cost (of all units sold) o Total revenue – the total amount received from the sales of a product o Total cost – the sum of the fixed costs and the variable costs attributed to a product © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 12-3 Breakeven Analysis © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Demand-based Pricing Demand-based pricing is based on the level of demand for a product. Demand-based pricing results in a higher price when product demand is strong and a lower price when demand is weak. To use this method, a marketer estimates the amount of a product that customers will demand at different prices and then chooses the price that should generate the highest total revenue. Compared with cost-based pricing, demand-based pricing places a business in a better position to attain higher profit levels, assuming that buyers value the product at levels sufficiently above the product’s cost. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Competition-based Pricing In using competition-based pricing, an organisation considers costs and revenue secondary to competitors’ prices. The importance of this method increases if competing products are similar and the organisation is serving markets in which price is the crucial variable of the marketing strategy. A business that uses competition-based pricing may choose to sell: Below competitors’ prices Slightly above competitors’ prices At the same level as competitors’ prices © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FIGURE 12-4 Types of Pricing Strategies © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. New-Product Pricing Price skimming – the strategy of charging the highest possible price for a product during the introduction stage of its life-cycle Penetration pricing – the strategy of setting a low price for a new product © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Differential Pricing 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 Example: annual holiday sales, seasonal sales Random discounting – temporary reduction of prices on an unsystematic basis © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Psychological Pricing Odd-number pricing – the strategy of setting prices using odd numbers that are slightly below whole-dollar amounts Example: charging R24.99 for an item, rather than R25 Multiple-unit pricing – the strategy of setting a single price for two or more units Example: two cans for R39, rather than R20 a can Reference pricing – pricing a product at a moderate level and positioning it next to a more expensive model or brand Bundle pricing – packaging together two or more complementary products and selling them for a single price Example: telecommunications companies selling service bundles of cable, internet, and phone service for one price Everyday low prices (EDLPs) – setting a low price for products on a consistent basis Customary pricing – pricing on the basis of tradition © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product-line Pricing Captive pricing – pricing the basic product in a product line low, but pricing related items at a higher level Example: A razor handle is generally priced quite low, but the razor blades are usually very expensive. Premium pricing – pricing the highest-quality or most- versatile products higher than other models in the product line Examples: small kitchen appliances, beer, ice cream Price lining – the strategy of selling goods only at certain predetermined prices that reflect definite price breaks Example: A shop may sell men’s ties only at R145 and R225. © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Pricing Business Products Three types of pricing for business products: 1. Geographic pricing – deals with delivery costs o FOB origin pricing o FOB destination 2. Transfer pricing – prices charged in sales between an organisation’s units 2. Discounting o Discount – a deduction from the price of an item - Trade discounts - Quantity discounts - Cash discounts - Seasonal discounts - Allowances © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. TABLE 12-3 Discounts Used for Business Markets © 2021 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.