Small Business Management 4660

1. Product 9-2 GoodsServices TangibleIntangible ImperishablePerishable Homogeneous - Same qualities Heterogeneous - Slightly different

Pure Good A Good Dominated Product Hybrid A Service- Dominated Product Pure Service

Product Approach Total Product Entire bundle of products, services and meanings e.g. extras (service, warranty, or delivery, brand - means to customer) E.g. Targus laptop bag 9-4

Augmented Core product plus features – to differentiate it from competition 9-5 Core Product Very basic description of a product

2. Stages of New Product Development Before a product is introduced – go through a series of steps known - new product development. Take years or a few hours or days. More innovative product will take longer - me- too products may even skip steps of the process.

Product Life Cycle 9-7 Figure 9.3

Stage 1: Introduction Sales slowly take off - begin to grow Brand awareness Heavy expenditure on marketing expenses - suppress profits Competition - low 9-8

Stage 2: Growth Acceptance increases rapidly Advertising and promotion - much less critical Goal - maximize market share Prices tend to drop – production becomes more efficient 9-9

Stage 3: Maturity Competition becomes fierce e.g. price competition begins to rise Sales will level off and start to decline Profits follow suit Advertising will suggest new uses for the product 9-10

Stage 4: Decline Decline can be slow or fast, steady or unsteady Caused by introduction of new technology A shift in consumer preferences Sales and profits fall during this stage 9-11

3. Why pricing is a difficult task Pricing isn’t just COST + PROFIT - based on the consumer psychology behind decision. Why are prices so important? Major factor in determining perceptions - quality and desirability. Central to competitive strategy. Directly related to gross revenues and sales volumes. Easiest part of the 4Ps to change.

Changing prices - however, is one of the most difficult tasks a small business faces. If sales: Lower - worry about prices - too high. Higher – lower prices - customers think quality has dropped? How will competition react to - changing prices? 9-13

Two general ways of setting prices: Some arbitrary heuristics (discretion) E.g. 40% above costs Contributes to business goals. E.g. 10,000 – (20% - Advanced Marketing Power) – (20% - Platinum)

Sellers - wish for highest price – allowing emotions – influencing factor in pricing decisions. A better strategy - to use optimum price: Other ways: a. Demand If people don’t want - low prices are the only way to encourage. If everyone wants - can charge anything.

b. Value delivered Willing to pay based on the value they believe If perceived value is high - they will pay a lot. c. What competition is charging If you charge more – customer cannot perceive a higher value – he/she will buy competitive product, all else equal. E.g. carbonated drink

d. Business strategy. Prides itself on an environmental conscious product – would not choose cheaper components even if, it helped profits.

e. Determined by mark-up. Taking all costs and adding a percentage for profit Totally ignores demand, value, competition and business strategy.

4. Price Elasticity A product has LOW elasticity - NO substitutes OR where customers will not accept substitutes. Inelastic products - protected from economic downturns. When prices rise or fall - quantity sold varies little. E.g. Petrol, electricity, and water.

A product with HIGH elasticity - many substitutes OR not a necessity. Elastic products - not protected from economic downturns. When prices rise on elastic products - tend to buy fewer and switch to substitute products. When prices fall - switch back from the substitutes.

PRICING psychology - pricing perception varies from customer and time. Some of frequently observed pricing psychology phenomena are: Internal reference price: Have a mental image of what a product should cost based on past experiences - what he/she remembers reading or hearing.

External reference price: Perception of what a product should cost - based on outside influences – what friends have said, comparison shopping, ads, salesmen, etc. Perception of quality: Pay more if they perceive the quality is higher - may be manipulated by packaging - other externalities.

Motivation of the seller: If a customer perceives - Seller must sell, he’ll want to pay less; if he perceives – seller is reluctant to sell, he’ll pay more. Expectations of future prices: If customers think prices are going to go up, you’ll pay more; if you think they are going down, you’ll pay less.

Importance or value If it’s important to have, I’ll pay more; if I don’t really care, I’ll pay less. Price range of acceptability: Consumers set a range of prices, below which they believe quality is questionable – think they are being taken advantage of.

Things to consider: In setting up the price - two competitive advantages: Product can be cheaper or better (quality, features, distribution, etc.). Being better is sustainable - always going to be someone who can beat your price. Customers attracted to low prices, will not be loyal - will switch products just as soon as something cheaper comes along.

1. Price skimming - charging the highest price market will bear. First one in the market - often used to recoup start- up expenses before competition sets in. E.g. Plasma TV 5. Different Pricing Strategies

2.Prestige or premium pricing - setting prices high and supporting it with the rest of marketing strategy - to create the impression - product has high quality (premium) or a status symbol to own (prestige). 3.Odd-even pricing means ending price with a 9, 7 or 5. RM sounds much cheaper than RM 100.

4.Partitioned pricing - setting a price for main component and pricing others components - installation, delivery, etc., separately. E.g. Laptop – software – bag - mouse

5. Captive pricing occurs when customer spend usually a low price for a base system but locked into certain expendables he/she must purchase. These expendables - makes most of their profits. E.g. Lexmark low-cost printer

6. Price lining - an attempt to please a wider target market by setting multiple price points for closely related products – often “good” quality, “better” quality, and “best” quality. Can work on products from shampoo to clothing to appliances. High, middle, low-end

While having low prices is not recommended - it makes sense to temporarily reduce price, or to give the impression of lower prices. Why? Attracting more business. Building loyalty Moving excess inventories Alleviate temporary cash flow problems

Some price lowering techniques include: Periodic or random discounting - having a sale on a regular cycle (periodic) or not (random)

Off-peak pricing works especially well for seasonal products OR for services trying to reduce perishability – lower prices are charged in order to get people to change their buying patterns. (The alternative, peak pricing is used during periods of high demand.) E.g. Golf booking

Bundling, multiple-packs or bonus-packs - methods to give the customer more at a lower cost. To get customers to try slower moving products or services, or new products or services. A psychological bonus - more people use of your products, more likely they are to internalize this brand as “their brand” and become more loyal customers.

Coupons, rebates and loyalty programs reduce prices and promote sales. Coupons encourage people to switch brands or try new products. Rebates - great incentive to buy - rebate redemption rates are extremely low. Even if not redeemed, customers think it’s a good deal.

Loyalty programs get the customers to return multiple times - good at creating customer allegiance. When a customer has purchased a certain number of products, he/she gets something for free – feel - made a good deal.

Referral discounts - a great way to get businesses established and an inexpensive method of advertising. A customer recommends business to a friend - friend buys something, original customer gets a discount, something for free or some other incentives.

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