Product & Pricing Strategies

By Ashraf Ayoub

31st Mar’09

References: Business Today Book, 10th Edition by M.Mescon . C.Bovee. J.Thill

Developing Product Strategies

• Product: Good or service used as a bases of commerce

• Types of products– Tangible & intangible products– Consumer products– Organizational products

Tangible & Intangible Products

• Product Continuum: relative amounts of tangible & intangible components in a product

• How to market Service product? By compensate intangibility:

– by using tangible symbols or – by adding tangible components

• Services cannot be created in advance or kept in storage, services are time sensitive

• To shift consumer demand on service during slow periods, marketers offer discounts or promotions

Tangible Dominant

Intangible Dominant

GOODS IDEAL SERVICES

Edu

catio

n

Aut

omob

ileF

ast F

ood

Cru

ise

Con

sulti

ngIn

sura

nce

Sal

t

Sho

es

VC

R

The Product ContinuumProducts contain both tangible & Intangible components; predominantly

tangible products are categorized as goods. Whereas predominantly intangible products are categorized as service

Consumer Products Classification

• Convenience products:bought frequently without much conscious thought)• Shopping products:important products bought less frequently, requires

more thought & comparison shopping to check price, features, quality, & reputation

• Specialty products:brands people buyer specialty wants & seek out

regardless of price or location & rarely accept substitutes for

• Unsought products Products people do not think of buying

Organizational Products Categories

• Expense Items: inexpensive goods & services used within a year of purchase

• Capital items: more expensive & have longer useful life

Organizational Products Classification

• Raw materials (used in production final products)

• Components (part of manufacturer’s final products)

• Supplies (used in daily operations)• Installations (major capital projects)• Equipment (shorter lived than installations)• Business services (risk free services

complex services)

Product Life Cycle

• It’s a four basic stages through which a product progress

• Stages:– Introduction– Growth– Maturity– Decline

• Describes:– Product class (longest life cycle)– Product form (longest life cycle)– Product brand (shorter life cycle)

Sal

es V

olu

me

(un

its)

Introduction

The Product Life Cyclemost products & product categories move through a life cycle similar to the one represented by the curve in this diagram. However, the duration of each stage

varies widely from product to product

Growth Maturity Decline

Sales

Time0

Profits

Internet VCRCassette

tapesDVD

players

Product Life Cycle (cont.)

• Amount of time product remain in any stage depend on:– Customer needs– Customer Preferences– Economic conditions– Nature of product– Marketer strategy

Introduction Stage Characteristics

• Stage of products launch & demand stimulation

• Spend heavily on research & development to create new product

• Developing promotion to build awareness

• Establish distribution system to get product into marketplace

• Profits are little

Growth Stage Characteristics

• Rapid jump in sales• Increase in number of competitors &

distribution outlets• Struggle for market share• Introduction of new features• Maintain large promotional budgets• Maintain competitive prices• Reap handsome profits for who survive

Maturity Stage Characteristics

• Sales begin to level off or show slight decline• Competition increases• Market share is maximized (further expansion

difficult)• Mature Products kept alive to use profits in

funding new products development• To extend the stage life products characteristics

modified to improve quality & performance

Decline Stage Characteristics

• Sales & profits slip then fade away• Reasons: changing demographics, shifts in

taste, product competition, advances in technology

• Stage of decide whether keep product or discontinue & focus on newer products development

• Declining products could need innovation to survive (e.g.new bottles, limited edition line, deep discounts)

New Product Development Process

• Only 5% of new products are true innovation• To develop new products from familiar ones:

– Change packaging– Improve formula– Modify form or flavor

• Product development process: series of stages through which a product idea passes

• Prototyping: turning an idea into a working model• Innovative companies prototype ideas in couple of days• Reason of new products development: terrific new

concept, or following footsteps of competitors

Product Development Process

• Idea generation

• Idea screening

• Business analysis

• Prototype development

• Test marketing

• Commercialization

Process Development Processfor every hundred ideas generated, only one or two salable products may

emerge from the lengthy & expensive process of product development

1 idea

commercializationTest MarketingPrototype Development

Business AnalysisScreening of Ideas

1 00 ideas

Idea generation

• Come up with ideas satisfy unmet needs

• Idea Sources: Customers, Competitors, employees

Idea screening

• Cull few ideas appear worthy of further development

• Criteria:– Ability to use existing production facilities– Technical & marketing risk involved

• Industrial/technical products: feasibility study phase (define features, test workability)

• Consumer products: evaluate new ideas (by MKT consultants & Agencies)

• Concept testing: potential customers asked for thinking about new product idea

Business Analysis

• Review sales, costs, profit projections to match company’s objectives

• Investment worth?– Forecast sales of product– Assume various pricing strategies– Estimate the costs with different production

levels– Calculate potential profits– Decide if results meets company objectives

Prototype Development

• Develop product concept into physical product

• Create & test prototype as a product & its packaging

• Put marketing mix together• Evaluate feasibility of large scale

production• Specify resources to bring product to

market

Test Marketing

• Product-development stage in which a product is sold on a limited basis – a trial introduction

• Used if cost of marketing exceeds cost of development

• Potential risks: chance for competitors to find out newest ideas

Commercialization (Product Launch)

• Large-scale production & distribution of survived developed product

• Coordination of manufacturing, packaging, distribution, pricing, & promotion

• Classic mistake: promoting before adequate quantities supply

• Roll-out new products gradually from one geographic area to next (to spread launch cost over longer period, to refine strategy while rollout proceeds)

Brand Manager

• The person who develops & implements a complete strategy & marketing program for a specific product or brand

Product-Line & Product-Mix decisions

• Product Line: a series of related products offered by a firm

• Product mix: complete list of all products that a company offers for sale

• Within each product line company confronts decisions about number of goods or services to offer

Dimension Of Product Mix

• Dimensions:– Width: several product lines – Length: product line carries several items– Depth: products has number of versions

• To decide dimensions weigh the risks & reward with various approaches

• Focus on few selected items strategy: economical (low production costs, limited selling expenses, single sales force)

• Full line strategy: protection against shifts in technology, taste, & economic conditions

Product Line Expansion

• Introduce additional items in same product category under same brand (new flavors, forms, colors, ingredients, package size, products)

• Overextended brand name causes:– lose specific meaning– Sales of extension is expense of other items in the

line

• Expansion works best when take sales from competing brands & not when cannibilizes company’s other items

Product Positioning

• Product positioning: Place it occupies in consumer mind relative to competing products

• Consumers simplify the buying process by organizing products into categories based on perceived position of high-performance vehicles

• Products position is placed by customers or by marketers

• Product position is defined & chosen before developing marketing strategy

• Choose Position in selected markets that will give the product greatest advantage

Product Positioning Strategies

• On specific Product features or attributes (size or ease of use or styles)

• On service accompany product (convenient delivery or lifetime customer support)

• On products image (reliability or sophistication)

• On price (low cost or premium)• On category leadership (leading business)

Major Positioning Errors

• Under positioning: fail to position the product

• Over positioning: promoting too many benefits so no one stand out

• Confused positioning: mixing benefits that confuse buyer “such as sophisticated image & low cost”

Product Strategies For International Markets

• Consider following factors:– Which product to introduce in which country– Type of government– Market entry requirements– Tariffs & other trade barriers– Cultural & language differences– Consumer preferences– Foreign exchange rates– Differing business customs

• Decide whether to standardize or customize product

Standardized Product

• Selling the same product everywhere

Customize product

• To accommodate lifestyles & habits of target markets

• Degree of customization vary:– Change product name– Change packaging– Offer completely different product in different markets

• You can switch from standardized to customized strategy by adjusting marketing mix, when customers not all alike

Developing Brand & Packaging Strategies

Developing Brand & Packaging Strategies

• Brand: a name, term, sign, symbol, design, or combination of those used to identify the products of a firm & to differentiate them from competing products

• Brand Names: portion of a brand that can be expressed orally, including letters, words, or numbers

• Brand Mark: portion of a brand that cannot be expressed verbally

Developing Brand & Packaging Strategies (cont.)

• Well known brand name, generates more sales than unknown name

• Trademark: brand that has been given legal protection so that its owner has exclusive rights to its use

• Too widely using brand name, it no longer qualified for production under trademark laws

License

• Sell rights to specific well-known names & symbols & then manufactures use licensed labels to help sell products

Winning At The Name Game

• Elements of good name:– Speak directly to target customers– Motivate consumers to buy– Stick in consumer’s mind– Be distinctive to prevent unauthorized use– Be distinguishable from competition

Winning At The Name Game (cont.)

• Tips for choosing names:– Name selection (frustrating, time consuming, &

fraught with legal difficulties)– Be sure to

• Find a flexible name for your company (describes what you do now, in future, & allows to roll-out range of products)

• Check for potential cultural conflicts• Keep it legible (easy to spell, pronounce, & read)• Keep it meaningful, friendly, & personalized (creates

emotional bond between consumer & company• Know the law (might to consult an attorney))• Get professional help

Brand categories

• National brands: brands owned by the manufacturers & distributed nationally

• Private brands: brands that carry the label of a retailer or a wholesaler rather than a manufacturer

• Generic products: Products characterized by a plain label, with no advertising and no brand name

• Generic products cost up to 40% less than brand-name products (because uneven quality, plain packaging, lack of promotion)

Brand Equity & Loyalty

• Brand equity: notion of value of a brand

• Brand loyalty: commitment to a particular brand

• Strong brands command premium price in marketplace

• Building on recognition of existing brand, cuts costs & risks of introducing new products

Degrees Of Brand Loyalty

• Brand awareness: level of brand loyalty at which people are familiar with a product; they recognize it

• Brand preference: level of brand loyalty at which people habitually buy a product if it is available

• Brand insistence: level of brand loyalty at which people will accept no substitute for a particular product

Approached To Build Brands

• Create brands for products targeting different customer segments

• Operate under one brand everywhere in world

• Put separate brand identities to each business chain

Family Branding

• Using a brand name on a variety of related products

Brand Name Stretching

• Limits of stretch to accommodate new products & still fit perception depends on what brand stands for

• Overextended brand:– Alienate loyal customers– Put it in danger of losing identity

Co-branding

• Partnership between two or more companies to closely link their brand names together for a single product

• Help companies reach new audiences & tap equity of particularly strong brands

• Help in changing product image

Packaging & Labeling Your Products

• Packaging:– Protect product from damage or tampering– Make product convenient for customers to purchase– Makes products easier to display– Facilitates sale of smaller products– Provide convenience (e.g. foods: ready to eat out of wrapper)– Essential part of some products (e.g. toothpaste)– Important role in Marketing strategy

• Package shape, composition & design:– Attract consumers attention– Promote product’s benefits

– Innovative packaging give product powerful marketing boost while poorly designed packaging may drive customers away

Labeling

• Labeling is integral part of packaging & serves to identify a brand

• Label types:– Separate element attached to package– Printed part of container

• Label uses:– Gives grading information about product, or about ingredients,

operating procedures, shelf life, or risks– Labeling of foods, drugs, cosmetics & health products regulated

under federal laws which requires disclosure about benefits, dangers & other issues consumers need

– Communicate with consumers– Tool for monitoring performance & inventory of manufacturers &

retailers

Universal Product Codes (Upcs)

• A bar code on a product’s package that provides information read by optical scanners

Developing Pricing Strategies

Developing Pricing Strategies

Price:• is only element in marketing mix produces

revenues, all other elements represent cost

• determines the amount of income generated from sales of product

• differentiate product from competitors• If too much generate fewer sales• If too little sacrifice profits

Break-even Analysis

• Break-even analysis: method of calculating the minimum volume of sales needed at a given price to cover all costs

• Variable costs: business costs that increase with the number of units produced

• Fixed Costs: business costs that remain constant regardless of the number of units

• Break-even point: sales volume at a given price that will cover all of a company costs

Break Even Analysis (cont.)

• Doesn’t dictate price to charge

• Provides some insight into number of units to sell at a given price to make profit

• Useful when calculating the effect of special pricing promotion

• Allows to try different prices & see results by using spreadsheet software

Break-even Point

• Break-even point=

fixed costs

selling price per unit – variable costs per unit

Factors Affecting Pricing Decisions

Pricing determined by:

• Manufacturing

• Selling costs

• Competition

• Needs of distributers (wholesalers & retailers)

Pricing Influenced By:

• Marketing objectives

• Government regulations

• Consumer perceptions

• Consumer demand

Price & Marketing objectives

• Match price to objectives in strategic marketing plan • Common objectives

– increase market share– increase sales– improve profits– project a particular image– combat competition

• Slashed prices boost sales & fend-off lower-priced rival brands

• Premium pricing with other marketing mix give luxury position

Price & Government regulations

• To protect consumers & encourage fair competition

• Classes of pricing regulated:– Price fixing (agreement among companies

supplying the same products as to prices they will charge)

– Price discrimination (unfairly offering attractive discounts to some customers not to others)

– Deceptive pricing (pricing schemes consider misleading)

Pricing & Consumer perceptions

• Customers will elicit perception of quality from price

• Rough price range usually in customers mind

• Unexpectedly low price triggers fear the item is low quality

• Unexpectedly high price make buyers question is product worth

Pricing & Consumer demand

• Costs establish floor for price• Demand establish ceiling for price• Theoretically:

– if price too high demand fall & Producers reduce prices to stimulate demand

– if price too low demand increases & producers motivated to raise prices

– When prices climb & profits improve producers boost output until supply & demand balance

Price elasticity

• Some products insensitive to changes in price & Some products highly responsive

• Price elasticity: a measure of the sensitivity of demand to changes in price

Pricing Methods

• Cost-based & Priced-based pricing

• Price skimming

• Penetration pricing

Cost-based Pricing

• Cost-based pricing (cost plus pricing):– Starting with cost of production– Then add markup to the cost of product

• Simple but little sense– Ignores demand & competitors prices, & not

lead to best price– Ensure certain profit but sacrifice profit

opportunity

Priced-based Pricing

• Maximize profit by establishing optimal price for product

• How to optimize the price?– Based on analysis of product’s competitive advantage– User’s perception of item– Market targeted

• When price established, focus on keeping costs at level allows healthy profit

• Few businesses fail from over pricing• Many businesses fail from underpricing

Price Skimming

• Skimming: charging a high price for a new product during the introductory stage & lowering the price later

• Price vary depending on stage in product life cycle• During introductory phase objective to recover

development costs ASAP, so price is high & the drop later when product no longer novelty & competition heats up

• Makes sense under 2 conditions:– Product quality & image support higher price– Competitors cannot enter market with competing products &

undercut price

Penetration Pricing

• Penetration Pricing: introducing a new product at a low price in hopes of building sales volume quickly

• Advantages: – discouraging competition because the low price– Limits profit for everyone– Helps expanding entire product category by attracting customers

who don’t buy at higher, skim-pricing levels– If you compete pioneers in category, this strategy helps in taking

customers away from pioneer

• Makes sense when market highly price sensitive, so low price generates additional sales & company maintain low-price position long to keep out competition

Price Adjustment Strategies

• Price discounts

• Bundling

• Dynamic Pricing

Price Discounts

• Discount Pricing: offering a reduction in price• Depend on type of customer targeted & type of

item offered• Discount boost sales but can touch off price

wars between competitors• Price war encourage customers to focus only on

pricing not on value or benefits• Price war can hurt entire industry for years• To offset loss of revenue stock shelves with

more profitable items otherwise if you couldn't compete you close up business

Examples

• Wholesaler or retailer Discount: to encourage orders

• Customer cash discount: to reward customers who pay cash or pay promptly

• Quantity discount: to Large volumes buyer• Seasonal discount: to who buy out of season• Value pricing: charging affordable price for high

quality offering (for certain times or certain customer segment)

Bundling

• Definition: Combining several products & offering the bundle at a reduced price

• Promote sales of products consumers might not otherwise buy

• Make products harder for consumers to make price comparison

Dynamic Pricing

• Definition: Charging different prices depending on individual customers & situations

• By using internet technology• Enables to move slow-selling merchandise instantly• Allows to experiment with different pricing levels• Tactics:

– Auction pricing (buyers bid against each other & the highest bid buy)

– Group buying (buyers obtain volume discount by joining buying groups)

– Name-your-price (buyers specify how much to pay & sellers choose whether to sell)