Pricing and Strategies Product Design Pricing and Strategies 2

Chapter 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. Define price and the role it plays in determining profit. Describe the factors that affect pricing decisions. Identify pricing strategies. 3

Product Defined A specific model of athletic shoe would be called a product item. product item specific model or size of a product The entire group of a manufacturer’s athletic shoes would be called a product line. 4

Product Defined Products can be classified as consumer goods or business goods. consumer goods goods purchased and used by the ultimate consumer for personal use business goods goods purchased by organizations for use in their operations Products need to have a point of difference. point of difference a unique product characteristic or benefit that sets it apart from a competitor 5

Steps in New Product Development The seven steps in new product development are: focus group a panel of six to ten consumers who discuss opinions about a topic under the guidance of a moderator SWOT analysis (strengths, weaknesses, opportunities, and threats) Protocol is a statement that identifies a target market, specifies customers needs and wants, and explains the new product and what makes it unique Idea generation Screening and evaluation Focus group continued 6

Steps in New Product Development continued Business analysis commercialization process that involves producing and marketing a new product Financial aspects of making and marketing the product are reviewed. What it takes to put the product on the self. Development prototype First model of the product. Can the product be produced at reasonable coast? Standards in quality and safety Test marketing Offering the product for sale in a small geographic area. Marketers test all aspects of the marketing mix Commercialization 7

Product Life Cycle The four stages in the product life cycle are: Growth Maturity Product Life Cycle Decline Introduction Not all products fit the life-cycle pattern. 8

Steps in New Product Development Continued Introduction Skimming Prices Penetration Prices Skimming Prices: Higher price to cover research and development costs Penetration pricing: Price a new product low to generate demand

Management of the Product Life Cycle The three ways to manage the product life cycle are: repositioning changing a product’s image in relation to a competitor’s image Modifying the product. Marketing the product. Repositioning the product. 10

Explain the seven steps involved in developing a new product. 1. Explain the seven steps involved in developing a new product. Name the four stages in the product life cycle. What three things can be done to manage a product through its life cycle? 2. Quick Check Answers The steps are 1) SWOT analysis, 2) idea generation, 3) screening and evaluation, 4) business analysis, 5) development, 6) test marketing, and 7) commercialization. introduction, growth, maturity, and decline Modify the product; market the product; and reposition the product. 3. 11

Pricing Price is important in a business because it helps determine a company’s profit or loss. price the value placed on goods or services being exchanged Price plays a significant role in the marketing mix. 12

Determining Profit = = - - Subtract the cost of goods sold and the company’s expenses from the money it generated in sales revenue. = $25,000 Profit 1,000 baseball bats sold $175,000 revenue = - $90,000 to purchase the bats $90 each - $60,000 in business expenses $175 each 13

Pricing Considerations and Strategies Three types of pricing strategies are: prestige pricing pricing based on consumer perception odd-even pricing pricing goods with either an odd number or even number to match a product’s image Prestige pricing Odd-even pricing Odd 25.99 Bargin Even 100 more expensive Target pricing target pricing pricing goods according to what the customer is willing to pay 14

Pricing Considerations and Strategies markup difference between the retail or wholesale price and the cost of an item Other pricing considerations include: Demand cost-plus pricing pricing products by calculating all costs and expenses and adding desired profit Cost Markup Cost-plus pricing Demand: Elastic- Change in price will affect DEMAND Markup: Cover expenses make profit Newness of the product non-price competition competition between businesses based on quality, service, and relationships Competition Non-price competition 15

Markup: Cover expenses… make profit Elastic: Change in price will affect Demand Inelastic: Product is a necessity no substitutions, price increase is not relative to income, there are other time restraints

Pricing Objectives and Strategies market share the percentage of the total sales of all companies that sell the same type of product Pricing objectives and strategies include: price lining selling all goods in a product line at specific price points Profit objective bundle pricing selling several items as a package for a set price Market share objective loss-leader pricing pricing an item at cost or below cost to draw customers into the store Special pricing Price lining Bundle pricing Loss-leader pricing Yield-management pricing Tiered Pricing- Some teams such as the Mets use tiered pricing charging more for tickets to home games against more competitive opponents that will draw higher attendance yield-management pricing pricing items at different prices to maximize revenue when limited capacity is involved Tiered Pricing charging more money for a good when the demand is higher Tiered pricing 17

Price Adjustments and Regulations Manufacturers will offer discounts in the following situations: Buying in large quantities -Sam’s Club Buying prior to the buying season Allowances are reductions taken from the quoted price. One type of allowance is a trade-in. 18

Price Adjustments and Regulations The Sherman Anti-Trust Act prohibits price fixing and predatory pricing. price fixing an illegal practice whereby competitors conspire to set the same price predatory pricing setting a low price in order to drive competitors out of business Price discrimination was originally prohibited by the Clayton Act and later by the Robinson-Patman Act. price discrimination a practice of charging different prices to similar buyers 19

How is pricing related to profit and the marketing mix? 1. How is pricing related to profit and the marketing mix? List five factors that affect price decisions. What are two common pricing objectives and special pricing strategies? 2. Quick Check Answers Price helps determine a company’s profit or loss; it’s related to the marketing mix because it must be directed to the target market. Price is one of the Four Ps of the marketing mix. consumer perception, demand, cost, product life cycle stage, and competition Answers may include profit objectives and market share objectives; price lining, bundle pricing, loss-leader pricing, and yield-management pricing. 3. 20

Checking Concepts Explain the difference between product item and product line. 1. Products can be classified as consumer goods or business goods. Products are goods, services, or ideas that satisfy consumer needs; products can be tangible (goods) or intangible (services).  2. SWOT analysis, idea generation, screening and evaluation, business analysis, development, test marketing, and commercialization are the seven steps. 3. A product item is a specific model or size of a product; a product line is a group of closely related products that are sold by a company. 1. 2. Name the ways products can be defined and classified. Checking Concepts Answers A product item is a specific model or size of a product; a product line is a group of closely related products that are sold by a company. Products can be classified as consumer goods or business goods. Products are goods, services, or ideas that satisfy consumer needs; products can be tangible (goods) or intangible (services).  SWOT analysis, idea generation, screening and evaluation, business analysis, development, test marketing, and commercialization are the seven steps. 3. Explain the seven steps used in developing a new product. continued 21

Checking Concepts 4. Identify the four stages in a product’s life cycle. Price is defined as the value placed on goods or services being exchanged. 5. Pricing strategies are influenced by consumer perception, demand, cost, product life cycle stage, and competition. 7. Every item sold carries a price. The number of items sold times the price equals sales revenue. The amount of profit equals costs subtracted from price. 6. The stages are introduction, growth, maturity, and decline. 4. 5. Define price. Explain how price determines a company’s profit. 6. Checking Concepts Answers The stages are introduction, growth, maturity, and decline. Price is defined as the value placed on goods or services being exchanged. Every item sold carries a price.  The number of items sold times the price equals sales revenue. The amount of profit equals costs subtracted from price. Pricing strategies are influenced by consumer perception, demand, cost, product life cycle stage, and competition. 7. Identify the factors that may influence pricing strategies. continued 22

Checking Concepts Critical Thinking 8. Markup is the difference between the retail or wholesale price and the cost of an item. Cost-plus pricing involves calculating all costs and expenses and adding desired profit to arrive at a price. In a sense, markup is the profit component in cost-plus pricing. 8. 8. Define and compare markup and cost-plus pricing. Checking Concepts Answers Markup is the difference between the retail or wholesale price and the cost of an item.  Cost-plus pricing involves calculating all costs and expenses and adding desired profit to arrive at a price.  In a sense, markup is the profit component in cost-plus pricing. 23

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