Chapter 09

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Small Business Marketing

Product and Pricing Strategies

Learning Objectives

LO1 Know the characteristics of goods and servicesLO2 Define the total productLO3 Learn the stages of new product developmentLO4 Learn the product life cycleLO5 Understand why pricing is an important but

difficult task for small businessLO6 Understand price elasticities, pricing

psychology, and other price influencers and their impact on pricing

LO7 Understand different pricing strategies

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4 Ps of Marketing

4 Ps of Marketing– The four major components of a

marketing effort—product, price, promotion, and placement.

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Goods-Services Mix

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Figure 9.1

Product

Product– anything that is offered to the market to

satisfy consumer wants, needs, and demands

– goods, services, people, ideas

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Product

Tangibility– capability to be

touched, seen, tasted, or felt

Inseparability– service cannot be

disconnected from the provider

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Product

Heterogeneity– each time the

service is provided, it will be slightly different

Perishability– cannot be saved

for later use

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The Total Product Approach

Total product – The entire bundle of products, services,

and meanings of your offering; includes extras like service, warranty, or delivery, as well as what the product means to the customer.

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The Total Product Approach

Augmented product– core product, plus

features that tend to differentiate it from the competition

– brand names, quality levels, packaging

Core product– basic description

of what a product is

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The Total Product Approach

Your product means more to the consumer than just the core product

Don’t waste time and money designing features for your product or service that your target market doesn’t want

Knowing what your product “means” to consumers will help you set an appropriate price

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Branding

Guidelines for naming a business– Entrepreneur’s name

• Not very clear to customers what you do• How to handle name if you sell the company• Is your name appropriate: i.e. Payne for a

dentist

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Branding

Guidelines for naming a business– Be careful about infringing on

trademarks– Describes firm or product and is easy to

remember: “Discount Furniture”– Creative spellings are eye-catching;

don’t go overboard– Beware of selecting a name too narrow

to allow the firm to grow

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Stages of New ProductDevelopment

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Figure 9.2

The Product Life Cycle

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Figure 9.3

The Product Life Cycle

Stage 1: Introduction– Sales slowly take off and then begin to

grow– Very important to build brand awareness– Heavy introductory marketing expenses

will suppress profits– Competition is generally low

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The Product Life Cycle

Stage 2: Growth– Acceptance of the product increases rapidly– Advertising and promotion are much less

critical– Goal in this time is to maximize market

share– Prices tend to drop as production becomes

more efficient

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The Product Life Cycle

Stage 3: Maturity– Sales will level off and start to decline– Profits follow suit– Competition becomes fierce; price

competition begins to rise– Advertising will suggest new uses for the

product

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The Product Life Cycle

Stage 4: Decline– Decline can be slow or fast, steady or

unsteady– May come from introduction of new

technology– May also be caused by a shift in

consumer preferences– Sales and profits fall during this stage

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Service Life Cycle

9-19Figure 9.4

Service Life Cycle

Services go through same four stages:– Easier to extend life cycle, and virtually

eliminate the decline stage of a service– Services are often much easier to

change “on the run” Services, in effect, begin new life

cycles with each tweaking

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Why Price Is Important

1. Price is a major factor in determining customers’ perceptions of quality and desirability

2. Because of this, price is central to competitive strategy

3. Price is directly related to your company’s gross revenue and sales volume

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Pricing from the Seller’s Point of View

Seller’s wish to obtain highest price possible for whatever they are selling

Optimum price– refers to the highest price that would

produce your desired level of sales (or revenues) in your target market.

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Optimum Price

Optimum price is based on: Demand for the product or service Value delivered to the customer Prices set by competing firms Your business strategy and product

placement

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Question

A product for which there are any number of substitutes and for which a change in price makes a difference in quantity purchased is called

A.Inelastic ProductsB.Elastic ProductsC.AcceptabilityD.External reference price

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Price Elasticity

Inelastic product– product for which there are few substitutes

and for which a change in price makes very little difference in quantity purchased

Elastic product– product for which there are any number of

substitutes and for which a change in price makes a difference in quantity purchased

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Pricing Elasticity

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Figure 9.5

Pricing Psychology

Internal reference price– a consumer’s mental image of what a

product’s price should be External reference price

– an estimation of what a price should be based on advice, advertisements, or comparison shopping

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Price Setting

Decide what is the right price Examine existing market prices for

similar products and services Consider your business costs

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Price Setting

Considerations for pricing– Company objectives– Marketing strategy– Channels of distribution– Competition– Legal and regulatory issues

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Pricing Strategies

Skimming– Setting a price at the highest level the

market will bear, usually because there is no competition at the time.

Prestige or premium pricing– Setting a price above that of the

competition so as to indicate a higher quality or that a product is a status symbol.

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Question

What is the strategy called when a price ends with 9, 7, or 5?

A.Price LiningB.Partitioned PricingC.Premium PricingD.Odd-even Pricing

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Pricing Strategies

Odd-even pricing– Setting a price that ends in the number

5, 7, or 9. Partitioned pricing

– Setting the price for a base item and then charging extra for each additional component.

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Pricing Strategies

Captive pricing – Setting the price for an item relatively

low and then charging much higher prices for the expendables it uses.

Price lining– The practice of setting (usually) three

price points: good quality, better quality, best quality.

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Price-Lowering Techniques

Periodic or random discounting– Sales conducted at either predictable or

non-predictable intervals. Off-peak pricing

– Charging lower prices at certain times to encourage customers to come during slack periods

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Price-Lowering Techniques

Bundling – Combining two or more products in one

unit and pricing it less than if the units were sold separately.

Multiple or bonus pack– Combining more than one unit of the

same product and pricing it lower than if each unit were sold separately.

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Price-Lowering Techniques

Coupons, Rebates, Loyalty and Referral Programs

Referral discount – A discount given to a customer who

refers a friend to the business

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Pricing Strategy Wrap-up

Temporary reduction in price won’t tarnish your product image

Consumers also feel smart about buying something at a better price

They will feel they got a great deal

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