Pride I Hughes I Kapoor
Chapter
14
Creating and
Pricing Products
that Satisfy
Customers
PowerPoint Presentation by Charlie Cook
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Seventh Edition
Product Life Cycle
Money
Introduction
Growth
Maturity
Decline
Industry sales
volume
Industry profits
Time
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 2000e.
Copyright © 2000 by Houghton Mifflin Company, Adapted with permission.
Copyright © by Houghton Mifflin Company. All rights reserved.
Figure 14.1
14–2
Product Line and Product Mix
• Product line
– A group of similar products that differ only in relatively minor
characteristics.
• Product mix
– All of the products that a firm offers for sale.
– Width of the mix—the number of product lines the mix contains.
– Depth of the mix—the average number
of individual products within each line.
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14–3
Managing the Product Mix
• Options for improving the product mix:
– Modify an existing product’s quality, functionality, or aesthetic
characteristics to compete more effectively.
– Review the mix and delete (eliminate) products if other
competitors dominate the product’s market segment.
– Develop a new product that is an imitation, an adaptation, or an
innovation to compete with existing products.
– Expand the product mix to take
advantage of excess marketing
and production capacity.
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14–4
Phases of New-Product Development
1
Idea generation
2
Screening
3
Concept testing
4
Business analysis
Source: William M. Pride and O. C. Ferrell, Marketing: Concepts and Strategies, 2000e.
Copyright © 2000 by Houghton Mifflin Company, Adapted by permission.
Copyright © by Houghton Mifflin Company. All rights reserved.
5
Product
development
6
Test marketing
7
Commercialization
Figure 14.2
14–5
Why Do Products Fail?
• Products fail in the market because firms:
– Try to save product development costs and only market-test a
product and not its entire market mix.
– Rush a product that does not have all the “bugs” worked out to
market.
– Go ahead with the full-scale marketing of a product with the
knowledge that the product still has problems that were
uncovered in the developmental stage.
– Attempt to market a product without
having adequate financing.
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14–6
Examples of Product Failures
Company
Product
3M
Floptical storage disk
AT&T
Personal Digital Assistant
Time-Warner Inc.
TV-Cable Week
General Mills
Betty Crocker MicroRave Singles
NeXT Inc.
Optical drive personal computer
General Motors Corp.
Cadillac Allante luxury sedan
BIC Corp.
$5 glass flask perfume
Anheuser-Busch Companies
Bud Dry and Michelob Dry Beer
Colgate-Palmolive Co.
Fab 1-Shot laundry detergent
PepsiCo, Inc.
Pepsi A.M. cola
Heinz
Salsa Ketchup
NutraSweet
Simplesse fat substitute
RJR Nabisco, Inc.
Premier smokeless cigarettes
Sources: Ted Anthony, “Where’s Farrah Shampoo?”, Marketing News, March 6, 1996, p. 13; Jeffery D, Swaddling
and Mark W. Zobel, “Beating the Odds,” Marketing Management, Winter/Spring 1996, pp. 20–33; Robert M. McMath,
“Copycat Cupcakes Don’t Cut It,” American Demographics, January 1997, p. 60, and Eric Berggren and Thomas
Nacher, “Why Good Ideas Go Bust,” Management Review, February 2000, pp. 32–36.
Copyright © by Houghton Mifflin Company. All rights reserved.
Table 14.1
14–7
Branding, Packaging, and Labeling (cont’d)
• Types of brands
– Manufacturer (producer) brand—a brand that is owned by a
manufacturer.
– Store (private) brand—a brand that is owned by an individual
wholesaler or retailer.
– Generic brand—a product with no brand at all.
• Benefits of branding
– Brand loyalty—the extent to which a customer is favorable
toward buying a specific brand. There are three loyalty levels:
• Brand recognition, brand preference, and brand loyalty.
– Brand equity—the marketing and financial value associated with
a brand’s strength in a market due to:
• Brand-name awareness, brand association, perceived quality, and
brand loyalty.
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14–8
Branding, Packaging, and Labeling (cont’d)
• Choosing and Protecting a Brand
– Several issues should be considered when selecting a brand
name:
• It should be easy to say, spell, and recall.
• It should suggest, in a positive way, the product’s uses, special
characteristics, and major benefits.
• It should be distinctive enough to set it apart from competing
brands.
– A brand name should be protected through registration.
– A firm must guard against a brand name’s becoming a generic
term.
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14–9
Branding, Packaging, and Labeling (cont’d)
• Branding strategies
– Individual branding—a firm uses a different brand for each of its
products.
– Family branding—a firm uses the same brand for all or most of
its products.
• Packaging
– All of the activities involved in developing and providing a
container with graphics for a product.
– Functions of packaging:
• Protect the product and maintain its functional form.
• Provide for consumer convenience in use of the product.
• Promote the product by communicating its features, uses, and
benefits.
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14–10
Pricing Methods
• Cost-based pricing
– Markup pricing—the amount a seller adds to the cost of a
product to determine its basic selling price.
• Markup pricing can overprice or underprice a product for its
market, causing either lost sales or forgone profits.
• Markup pricing separates pricing from other business functions
that impact on marketing decisions.
• Breakeven analysis
– Breakeven quantity—the number of units that must be sold for
total revenue (from all units sold) to equal the total cost (of all
units).
• Fixed costs—costs that are incurred no matter how many units are
sold or produced.
• Variable costs—costs that vary with or depend on the number of
units produced.
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14–11
Breakeven Analysis
Breakeven in units =
$120,000
Costs/Revenues
Breakeven analysis
answers the question of
what is the lowest level
of production and sales
at which a company can
break even (incur no
loss and not yet have
made a profit) on a
particular product.
Total fixed costs
Unit selling price – Unit variable costs
Profit
Total
revenue
Total
cost
$80,000
Breakeven
quantity
$40,000
Fixed costs
Loss
0
Variable
costs
500
667
1000
Quantity in units
Figure 14.4
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14–12
Pricing Methods (cont’d)
• Demand-based pricing
– Pricing of a product that is based on the level of customer
demand for the product. Product prices are high when demand is
high and low when demand is weak.
– Price differentiation—setting different prices in segmented
markets based on segmental characteristics (e.g., time of
purchase, type of customer, or distribution channel).
• Competition-based pricing
– Product pricing that is based on meeting the challenge of
competitors’ prices in markets where products are quite similar
or price is an important customer consideration.
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14–13
Types of Pricing Strategies
• Companies have a variety of pricing strategies available to
them.
PRICING STRATEGIES
New-Product
Pricing
Differential
Pricing
• Price skimming
• Negotiated pricing
• Penetration
• Secondary-market
pricing
pricing
• Periodic
discounting
• Random
discounting
Psychological
Pricing
• Odd-number
pricing
• Multiple-unit
pricing
• Reference pricing
Product-Line
Pricing
Promotional
Pricing
• Captive pricing
• Premium pricing
• Price leaders
• Special-event
• Price lining
pricing
• Comparison
discounting
• Bundle pricing
• Everyday low
prices
• Customary pricing
Figure 14.5
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14–14
Pricing Strategies
• New-product strategies
– Price skimming—charging the highest-possible price for a
product during the introduction stage of its life cycle.
– Penetration pricing—setting a low price for a new product to
quickly build market share and discourage competitors.
• Differential pricing
– Negotiated pricing—bargaining to establish a final price.
– 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.
– Random discounting—temporary reduction of prices on an
unsystematic basis.
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14–15
Pricing Strategies (cont’d)
• Psychological pricing
– Odd-number pricing—setting unit prices using odd numbers that
are slightly below whole dollar amounts.
– Multiple-unit pricing—setting a single price for two or more units
of a product.
– Reference pricing—pricing a product at a moderate level and
positioning it next to a more expensive model or brand.
– Bundle pricing—packing two or more complementary products
and selling them for a single price.
– Everyday low prices (EDLP)—setting a low price for products on
a consistent basis.
– Customary pricing—pricing on the basis of tradition.
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14–16
Pricing Strategies (cont’d)
• Product-line pricing
– Captive pricing—pricing the basic product in a product line low,
but pricing related items at a higher level.
– Premium pricing—pricing the highest-quality or most versatile
products higher than other models in the product line.
– Price lining—setting a limited number of prices for selected
groups or lines of merchandise.
• 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.
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14–17