Product Design
Pricing and Strategies
2
Section 5.1 – Product
Design - Objectives
Differentiate between a
product item and
product line
Classify products as
consumer goods or business
goods
Explain the seven steps in
developing a new product
Identify the stages in a
product’s life cycle
Introduction
Growth
Decline
Maturity
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Section 5.1 – Product
Design
Product Defined
Products are one the essential
components in the marketing
mix
Products can be tangible
(sporting equipment)
– Goods
Products can be intangible
(sporting events)
– Services
4
Section 5.1 – Product
Design
Product Item and Line
Product Item – a specific model or
size of a product
– Nike’s Zoom Kobe is a product item
Product Line - Group of closely related
products that are sold by a company
– Entire group of Nike athletic shoes would
be their product line
– Nike has 3 product lines: athletic
clothing, athletic footwear, sports
equipment
– Makes up Nike’s product mix
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Section 5.1 – Product
Design
Product Classifications
Products can be classified as consumer goods or business goods
Different marketing approaches should be used to reach the
different consumers
– Consumer Goods are purchased and used by the ultimate
consumer for personal use
• Sneakers bought by end consumer at Foot Locker
• Promotion might be television commercial
– Business Goods are purchased by organizations for use in their
operation
• Sneakers bought by Foot Locker to be sold to end consumer
• Promotion might be discounts for volume purchases.
6
Section 5.1 – Product
Design
Point of Difference
Products are designed to stand out in the
marketplace
Point of Difference is a unique product
characteristic or benefit that sets the
product apart from a competitor’s product
– Winning championships provide teams with
point of difference
– Companies with certain product brands
work to communicate their products
unique features and benefits to establish
point of difference
– Product planning is crucial to success of a
product
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Section 5.1 – Product
Design
The seven steps in new product development
Not all steps are followed each time
1. SWOT Analysis
2. Idea Generation
– Analysis of Company’s:
• Strengths
• Weaknesses
• External Opportunities
• Threats in Marketplace
– Helps to develop a product
that matches the company’s
objectives
– Generating new product ideas
• Consumers, Employees, R&D
Developments, Competitors
– After getting a new idea from
studying a competitor’s new
product a company should
write protocol
• A statement that identifies target
market, customer’s needs and
wants, and explains the new
product & what makes it unique
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Section 5.1 – Product
Design
Nike Pump Sneakers
Reebok Pump Sneakers
Section 5.1 – Product
Design
3. Screening and Evaluation
– Product idea is evaluated to see if
if company has technology
needed to make product & meets
company’s objectives
– Researchers work with focus
groups to evaluate product idea
• Focus Group is a panel of six
to 10 consumers who discuss
their opinions about a topic
under guidance of moderator
4. Business Analysis
– Financial aspects of making
and marketing the product are
reviewed
– Must determine what is
needed to take product idea
to market
– Legal factors are analyzed to
see if the product can be
patented or copyrighted for
protection against
competitors
Section 5.1 – Product
Design
5. Development
–
–
–
–
Development of actual product
Prototype is the first model of the product
Company tests if product can be produced for reasonable cost
Technical problems and standards for quality and safety are evaluated
6. Test Marketing
– Product tested in marketplace
– Product is offered for sale in small geographic area
– Marketers test all aspects of marketing mix (product, place, price, and
promotion)
– Results can help project sales and market share
– Some competitors may ruin test marketing by flooding test area with
special promotions or reducing its price
Section 5.1 – Product
Design
7. Commercialization
– Commercialization is a process that involves producing and
marketing a new product
– Product is offered in the marketplace for sale to final
consumer
– Full scale production during launch of new product
– Regional roll-outs allow companies to launch product in
certain geographic areas over a set time period
• Companies can build up production gradually and
evaluate marketing
– Gatorade Commercial
Section 5.1 – Product
Design
Product Life Cycle
The four stages in the product life cycle are:
Growth
Maturity
Product Life Cycle
Introduction
Decline
Not all products fit the life-cycle pattern.
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Section 5.1 – Product
Design
Product Life Cycle
Introduction
– Product is first introduced to the marketplace
– Marketing focus is on promoting consumer awareness and getting
customers to try new product
– Consumers are educated through advertising and promotion
– Product Pricing:
• Skimming is pricing set high to cover costs of research &
development
• Penetration is low pricing in order to quickly generated demand for
product
– Distribution of product into marketplace is major task at this stage
– Goal is to convince distributors to carry product
Section 5.1 – Product
Design
Product Life Cycle – cont.
Growth
– More competition in
marketplace if your product
has success
– Stay competitive at this
stage by improving product
or adding new features or
products to line
– Must increase distribution
outlets at this stage
• Ex. From convenience
stores to supermarkets
Section 5.1 – Product
Design
Product Life Cycle – cont.
Maturity
– Sales begin to slow down for the product category or just the
product
• Repeat customers may stop buying the product
• New buyers may be difficult to attract in this stage
– To keep product alive:
• Company may make changes to the product to distinguish it
from competitors’ products
• Marketers my focus on identifying new buyers
Section 5.1 – Product
Design
Product Life Cycle – cont.
Decline
– Sales and profits begin to drop
– Products move into decline when newer and more improved
models replace the older ones
• Ex. Technological advances
– Results of decline:
• Product dropped from product line
• Products in decline that are kept in product line get little or
no marketing support
– Only keep product is to satisfy requests from loyal customers
Section 5.1 – Product
Design
Product Life Cycle – cont.
Considerations
– Not all products fit the life-cycle pattern
– Consumer demand and continued sales
will allow products to stay in growth
stage
– Fads have a short life cycle
• Products that become popular quickly
and lose popularity quickly
– Products requiring a lot of information
to educate consumers will stay in
introduction stage for longer periods of
time
Section 5.1 – Product
Design
Management of the Product Life Cycle
Product managers manage a produce through its lifecycle by:
– Modifying the product
• Changing the product’s features, appearance, package, design or
quality in hopes to increase sales
–
Marketing the product
• Strategy to find new customers or to encourage current customers
to use more of the product
–
Repositioning the product
• Repositioning is changing a product’s image in relation to its
competitor’s image
• A change in any of the four P’s of the marketing mix can be enough
to reposition a product
Section 5.2 – Pricing and
Strategies - Objectives
Define price and the role
it plays in determining
profit.
Describe the factors that
affect pricing decisions.
Identify pricing
strategies.
20
Section 5.2 – Pricing and
Strategies
Pricing
– Price is defined as the value placed on the goods or services
being exchanged
• Price can be referred to as: Tuition, Fee, Toll, Fare, Rent,
Barter
– Important in a business because it helps determine a
company’s profit or loss
• To calculate Profit or Loss:
– Subtract the cost of goods sold and the company’s expenses
from the money it generated
– Price plays a significant role in the marketing mix
21
Determining Profit
Subtract the cost of goods sold and the company’s expenses
from the money it generated in sales revenue.
1,000
baseball
bats sold
($175x1,000)
=
$175,000
revenue
-
$90,000 to
purchase
the bats
($90x1,000)
-
$60,000
in business
expenses
=
$25,000
Profit
22
Section 5.2 – Pricing and
Strategies
Consumer Perception, demand, cost, product, life-cycle stage,
and competition influence the pricing strategies that businesses
use
Consumer Perception
Consumers believe that higher prices suggest higher quality
– Marketers use this perception to price goods and services
Image of a product is closely related to its price
High quality products priced low may not sell as much as it
would at a higher price
– Prestige pricing is pricing based on consumer perception
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Section 5.2 – Pricing and
Strategies
Consumer Perception – cont.
Odd-even pricing is another pricing strategy related to consumer perception
– Odd-even pricing is pricing goods with either an odd number or an even
number to match a product’s image
• Ex. An item priced with odd number, such as $25.99, suggests a
bargain
• Ex. An item priced with even number, such as $26, suggests a quality
item
Target pricing is another pricing strategy related to consumer perception
– Target pricing is pricing goods according to what the customer is willing
to pay
– Manufacturers estimate the target price to determine how much to
charge wholesalers and retailer for that item
– Manufacturers figure the retailer expected markup in order to set the
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price
Section 5.2 – Pricing and
Strategies
Demand
Related to price in many ways
If product is in high demand, and there is limited supply, its price
will be high
– Ex. Events with a limited number of seats will be able to charge a high
price for tickets
– Ex. Companies can create demand for an item by only producing a
limited edition of an item so it can be priced high
If there is a large supply of an item and demand is not great,
dealers may lower prices to increase demand
– Ex. Retailers may do this near the end of a season when there is a supply
of merchandise that has not sold at the regular price
25
Section 5.2 – Pricing and
Strategies
Demand – cont.
Elastic Demand
– Supply and demand theory suggesting that a change in price will affect
demand
– Ex. Demand will be lower for higher priced items because fewer people
can afford them
Inelastic Demand
– Price has no effect on demand
– Occurs when:
• A product is a necessity
• There is no substitutes
• Price increases is not significant relative to the customer’s income
• There are time restraints
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Section 5.2 – Pricing and
Strategies
Cost
In order to make a profit, businesses need to price an item
higher than the cost they paid for it
Two pricing strategies related to cost:
– Markup is the difference between the retail or wholesale price and the
cost of an item
• Must be high enough to cover expenses and ensure profits
• Product – line pricing is a markup strategy involving setting different
markup percentages for each product so that the average mark-up is
achieved for the entire line of goods
– Cost-Plus Pricing is pricing products by calculating all costs and expenses
and adding desired profit
• Cost of making item or providing the service is determined first and
the amount of money to ensure a profit is tacked onto that amount 27
Section 5.2 – Pricing and
Strategies
Newness of the Product
Skimming or Penetration pricing techniques are used when
introducing a new product into a marketplace
– Skimming – pricing high to recover costs
– Penetration – Pricing low to create immediate demand for product
Competition
Find out what their competitors are charging for the same items they
are selling before setting price
– Lower prices to draw customers away from competitors
– Non-price competition techniques can be used to draw customers away
from competitors through better quality, services, or relationships
• Can charge higher prices if they provide these better than
competition
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Section 5.2 – Pricing and
Strategies
Pricing Objectives and
Strategies
Pricing objectives are the goals
that a company wants to achieve
through pricing
Businesses often have additional
goals that affect pricing
Two common pricing objectives
involve increasing profit and
improving market share
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Section 5.2 – Pricing and
Strategies
Profit Objective
May have objectives to earn
higher profits
Company cannot charge
more for its product even if
costs and expenses increase
Alternatives to raising
prices:
– User Fees
– Reduction of unneeded
features or size of product
Market Share Objective
Company may want a
higher market share
– Market share is the
percentage of the total shares
of all companies that sell the
same type of product
Company may lower the
price of its product to
increase its market share
Section 5.2 – Pricing and
Strategies
Special Pricing Strategies
Price Lining
– Selling all goods in a product line at
specific points
• $29.99
• $39.99
• $49.99
Nike Elite Tournament
8-Panel Men’s
Basketball - $45
Nike Elite Competition
8-Panel Men’s
Basketball - $30
– Benefits:
• Makes it easier for consumer to
make purchasing decisions
• Easier to take markdowns
• Inventory control simplified
Men’s Dominate
Basketball - $15
Section 5.2 – Pricing and
Strategies
Special Pricing Strategies - cont
Bundle Pricing
– Selling several items as a package
for a set price
– Products purchased individually
would cost more than the package
price
– Benefits
• Customer benefit from lower price
• Business benefits due to higher sales
and more products sold
$1.49 / bottle
$14.88 / 20 Pack
($.74 / bottle)
Section 5.2 – Pricing and
Strategies
Special Pricing Strategies - cont
Loss-leader Pricing
– Pricing an item at cost or below
cost to draw customers into store
– Benefits:
• Customers will buy other products
while at the store
• Total purchases for the shopping visit
will more than cover the money lost
on the loss leader
$119.99
(Regularly $144.99)
$14.99
$64.99
Section 5.2 – Pricing and
Strategies
Special Pricing Strategies - cont
Yield-Management Pricing
– Pricing items at different prices to
maximize revenue when limited
capacity is involved
• Ex. Pricing tiers at sports arena or
stadium
• Tiered Pricing is when teams charge
more for tickets to home games
against more competitive opponents
that might draw more attendance
Section 5.2 – Pricing and
Strategies
Price Adjustments and Regulations
To maintain integrity of published prices, marketers will make price
adjustments through discounts or allowances
When offering discounts or allowances must make sure not pricing
regulations are broken
Discounts`
Discounts provided for volume
purchasing
Offer trade discounts to
wholesalers & retailers
Allowances
Reductions taken from the quoted
price
– Ex. Reduction due to trade-in
allowance
Regulatory Factors
Pricing is subject to gov’t regulations
Sherman Anti-Trust act prohibits price
fixing and predatory pricing
– Price Fixing is when competitors
conspire to set same price
– Predatory Pricing is setting prices low
to drive competitors out of business
Robinson-Patman Act protects against
price discrimination
– Price Discrimination is charging
different prices to similar buyers