Product decisions Pricing decisions

What is a Product?
A Product is anything that can be offered to a market for attention, acquisition, use, or consumption and that might satisfy a want or need. Includes:

Physical Objects Services Events Persons Places Organizations Ideas Combinations of the above

Product Differentiation
Identifying a product from its competitors product is called product differentiation. A company differentiate the Product by features, performance, style and design. Generally companies can differentiate their products on such attributes as Consistency Durability Reliability Repairability
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What is Branding?
A Brand is a name, term, sign, symbol or design, or a combination of these, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors Helps:

To identify products that might benefit them Tell the buyer something about product quality, features and benefits Provide legal protection for unique product features Helps the seller to segment markets.
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This Land-O-Lakes ad shows the depth of the brand.

Branding
Consistency Consistency Quality & Value Quality & Value

Attributes Attributes

Advantages Advantages of of Brand Names Brand Names Brand Brand Equity Equity

Identification Identification

High Brand High Brand Loyalty Loyalty Name Awareness Name Awareness

Strong Brand Strong Brand Association Association

Perceived Quality Perceived Quality

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Major Branding Decisions

Brand Name Selection Brand Name Selection
Selection Selection Protection Protection

Manufacturers Brand Manufacturers Brand Private Brand Private Brand Licensed Brand Licensed Brand Co-branding Co-branding

Brand Sponsor Brand Sponsor

Brand Strategy Brand Strategy

Line Extensions Line Extensions Brand Extensions Brand Extensions Multibrands Multibrands New Brands New Brands

Four Brand Strategies

Product Category Existing Existin g New

Brand Name

Line Extension Dannon Yogurt Flavors

Brand Extension Barbie Electronics

New

Multibrands New Brands Seiko Lasalle & Pulsar Windex (by acquisition)
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Brand Strategy
Line Extension

Existing brand names extended to new forms, sizes, and flavors of an existing product category. Existing brand names extended to new or modified product categories. New brand names introduced in the same product category. New brand names in new product categories.
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Brand Extension

Multibrands

New Brands

New Product Decisions

Product Quality Product Features
Product style and Design

Branding & Packaging

Labeling & Product Support Services
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What is a Price?
The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service. Fixed price- setting one price for all buyers Dynamic price-charging different prices depending on individuals customers and situations.

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Price
Price is the sum of all the values that consumers exchange for the benefits of having or using the product or service. Price has been the major factor affecting buyer choice; nonprice factors have become increasingly important in buyer-choice behavior. Price is the only element in the marketing mix that produces revenues; all others represent costs.
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Factors Affecting Price Decisions

Internal Factors Internal Factors
Marketing Objectives Marketing Objectives Marketing Mix Strategy Marketing Mix Strategy Costs Costs Organizational Organizational considerations considerations

External Factors External Factors Pricing Pricing Decisions Decisions

Nature of the market Nature of the market and demand and demand Competition Competition Other environmental Other environmental factors (economy, factors (economy, resellers, government) resellers, government)

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Internal Factors Affecting Pricing Decisions: Marketing Objectives

Survival Low Prices to Cover Variable Costs and Some Fixed Maximization Current Profit Costs to Stay in Business. Choose the Price that Produces the Maximum Current Profit, Etc.

Marketing Objectives

Market Share Leadership Low as Possible Prices to Become the Market Share Leader. Product Quality Leadership High Prices to Cover Higher Performance Quality and R & D.
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Internal Factors Affecting Pricing Decisions: Marketing Objectives

Other specific objectives include:

Set prices low to prevent competition from entering the market, Prices might be reduced temporarily to create excitement or draw more customers.

Nonprofit and public organization may have other pricing objectives such as:

University aims for partial cost recovery, Hospital may aim for full cost recovery, Theater may price to fill maximum number of seats. 14

Internal Factors Affecting Pricing Decisions: Marketing Mix

Product Design

Nonprice Positions

Price

Distribution

Promotion
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Types of Cost Factors that Affect Pricing Decisions

Costs that dont vary with sales or production levels. Executive Salaries, Rent

Fixed Costs (Overhead)

Variable Costs
Costs that do vary directly with the level of production. Raw materials

Total Costs Total Costs Sum of the Fixed and Variable Costs for a Given Sum of the Fixed and Variable Costs for a Given Level of Production Level of Production
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Cost
The company wants to charge a price that both covers all its costs for producing, distributing and selling the product and delivers a fair rate of return for its effort and risk.

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Organization considerations
In small companies- top management decides pricing In large companies- pricing is handled by divisional or product line managers In industrial markets- sales people may be allowed to negotiate with customers within certain price ranges. Some times top management sets pricing objectives and policies which has to approved by lower level/sales people
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External Factors Affecting Pricing Decisions

Market and Demand Competitors Costs, Prices, and Offers Other External Factors
Competitor Costs
This ad by LCI International accuses its competitors of using unfair practices in pricing, hiding fees incurred by rounding up. Why is LCI focusing on this practice? Hidden fees, defined as cramming by the FCC, are the number one source of billing complaints among long-distance customers.

Economic Conditions Reseller Needs Government Actions Social Concerns

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Market and Demand Factors Affecting Pricing Decisions

Pricing in Different Types of Markets
Many Buyers and Sellers Many Buyers and Sellers Who Have Little Who Have Little Effect on the Price Effect on the Price

Pure Competition Pure Competition

Pure Monopoly Pure Monopoly

Single Seller Single Seller

Many Buyers and Sellers Few Sellers Who Are Many Buyers and Sellers Few Sellers Who Are Who Trade Over a Sensitive to Each Others Who Trade Over a Sensitive to Each Others Pricing/ Marketing Pricing/ Marketing Range of Prices Range of Prices Strategies
Strategies
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Monopolistic Monopolistic Competition Competition

Oligopolistic Oligopolistic Competition Competition

Demand Curves and Price Elasticity of Demand

A Demand Curve is a Curve that Shows the Number of Units the Market Will Buy in a Given Time Period at Different Prices that Might be Charged. Price Elasticity Refers to How Responsive Demand Will be to a Change in Price.
Price Elasticity of Demand = % Change in Quantity Demanded % Change in Price
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Price Elasticity of Demand

Price
P2 P1 Q2 Q1

A. Inelastic Demand Demand Hardly Changes With a Small Change in Price.

Price

Quantity Demanded per Period B. Elastic Demand Demand Changes Greatly With a Small Change in Price. P
2

P1 Q2 Q1

Quantity Demanded per

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Major Considerations in Setting Price

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Cost-Based Pricing
Certainty About Costs

Price Competition Is Minimized Much Fairer to Buyers & Sellers

p x e n U e t c e d t a u t i S l a n o i

Pricing is Simplified

Cost-Plus Ethical Pricing is an Approach That Adds a Standard Markup to the Attitudes Costof the of Others Product.
o t c a F s r

Simples t Pricing Method

Ignores Current Demand & Competitio n

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Breakeven Analysis or Target Profit Pricing

Tries to Determine the Price at Which a Firm Will Break Even or Make a Certain Target Profit.
Cost in Dollars (millions)
12 10 8 6 4 2 Total Revenue
Target Profit ($2 million)

Total Cost Fixed Cost

200

400

600

800

1,000
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Sales Volume in Units (thousands)

Cost-Based Versus ValueBased Pricing

(Adding a std markup to the cost of the product)

Cost-Based Pricing Product Product Cost Cost Price Price Value Value Customers Customers

(Setting price based on buyers perception of value rather than on the sellers cost)

Value-Based Pricing Customer Customer Value Value Price Price Cost Cost Product Product

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Competition-Based Pricing
Setting Prices

Going-Rate
Company Sets Prices Based on What Competitors Are Charging.

? Company Sets Prices Based on ? What They Think Competitors Will Charge
Sealed-Bid
.

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New Product Pricing Strategies

Market Skimming Market Skimming
Setting a High Price for Setting a High Price for a New Product to a New Product to Skim Maximum Skim Maximum Revenues from the Revenues from the Target Market. Target Market. Results in Fewer, But Results in Fewer, But More Profitable Sales. More Profitable Sales.

Use Under These Conditions:

Products Quality and Image Must Support Its Higher Price. Costs Cant be so High that They Cancel the Advantage of Charging More. Competitors Shouldnt be Able to Enter Market Easily and Undercut the High Price.
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New Product Pricing Strategies

Use Under These Conditions:

Market Penetration Market Penetration

Market Must be Highly Price-Sensitive so a Low Price Produces More Market Growth. Production/ Distribution Costs Must Fall as Sales Volume Increases. Must Keep Out Competition & Maintain Its Low Price Position or Benefits May Only be Temporary.

Setting a Low Price for Setting a Low Price for a New Product in Order a New Product in Order to Penetrate the to Penetrate the Market Quickly and Market Quickly and Deeply. Deeply. Attract a Large Number Attract a Large Number of Buyers and Win a of Buyers and Win a Larger Market Share. Larger Market Share.

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Product Mix-Pricing Strategies:

Product Line Pricing
Involves setting price steps between various products in a product line based on:

Cost differences between products, Customer evaluations of different features, and competitors prices.
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Product Mix- Pricing Strategies

Optional-Product

Pricing optional or accessory products sold with the main product. i.e camera bag. Pricing products that must be used with the main product. i.e. film.

Captive-Product

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Product Mix- Pricing Strategies

By-Product

Pricing low-value by-products to get rid of them and make the main products price more competitive. i.e. sawdust, Zoo Doo

Product-Bundling

Combining several products and offering the bundle at a reduced price. i.e. theater season tickets.

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Discount and Allowance Pricing

A d j u F
C Q F u u n a s h a n

t i n g B a s i c P r i o r C e r t a i n R e s
D t i t y n i s cS o eu ans to n a l A D l l

D T i sr ac do eu - n I n t

c t i o

a P l r D o i ms c o o t ui o n n t a l
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Segmented Pricing
S T
C P u

l l i n h o u
s r o t o d u m

g g

P h
e c t rL

r o d u c T h e r e
-o Sc

ae t g i om n re m P
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- T F i mo

Psychological Pricing
Considers the psychology of prices and not simply the economics. Customers use price less when they can judge quality of a product. Price becomes an important quality signal when customers cant judge quality; price is used to say something about a product.
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$22 . 00 Sale $14 .99

Valu e

Promotional Pricing
Loss Leaders Loss Leaders Special-Event Pricing Special-Event Pricing Cash Rebates Cash Rebates Low-Interest Financing Low-Interest Financing Temporarily Pricing Products Below List Price to Increase Short-Term Sales Through:

Longer Warranties Longer Warranties Free Merchandise Free Merchandise Discounts Discounts
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Other Price Adjustment Strategies

Adjusting Prices to Account

Geographical Pricing

International Pricing

for the Geographical Location of Customers. i.e. FOB-Origin, UniformDelivery, Zone Pricing, Basing Point, & Freight-Absorption. Adjusting Prices for International Markets. Price Depends on Costs, Consumers, Economic Conditions, Competitive

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Initiating Price Changes

Why? Excess Capacity Falling Market Share Dominate Market Through Lower Costs

Why? Cost Inflation Overdemand: Company Cant Supply All Customers Needs
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Reactions to Price Changes

Price Cuts Are Seen by Buyers Competitors Reactions When: As: Number of Firms is Number of Firms is Being Replaced by Being Replaced by Small Small Newer Models Newer Models Current Models Are Current Models Are Not Selling Well Not Selling Well Company is in Company is in Financial Trouble Financial Trouble Quality Has Been Quality Has Been Reduced Reduced Price Comes Down Price Comes Down Further Further
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Product is Uniform Product is Uniform Buyers are Well Buyers are Well Informed Informed

Assessing/Responding to Competitors Price Changes

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Public Policy Issues in Pricing

Manufacturer A Manufacturer A

Retailer 1 Retailer 1
Retail price maintenance. Discriminatory Price-fixing Price-fixing Pricing Predatory Pricing Deceptive Pricing

Price-fixing Price-fixing Predatory pricing Predatory pricing

Consumers Consumers

Predatory Pricing

Manufacturer B Manufacturer B

Retailer 2 Retailer 2
Deceptive Pricing
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Public Policy Issues in Pricing

Pricing Within Channel Levels Pricing Within Channel Levels

Price Price Fixing Fixing

Predatory Predatory Pricing Pricing

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Pricing Across Channel Levels

Price Price Discrimination Discrimination Ensure Sellers Ensure Sellers Offers the Offers the Same Price Same Price Terms to a Terms to a Given Level Given Level Of Trade Of Trade Resale Price Resale Price Maintenance Maintenance Manufacturer Manufacturer Cant Require Cant Require Dealers to Dealers to Charge a Charge a Specified Retail Specified Retail Price for Its Price for Its Product Product Deceptive Deceptive Pricing Pricing Occurs When a Occurs When a Seller States Seller States Prices or Prices Prices or Prices Savings that Savings that Available Available To Consumers To Consumers

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