Creating And Pricing Products

1

Creating and Pricing Products

Yohan [email protected]

e-Business StrategyManagement Department

Dian Nuswantoro University

55Part V: MarketingPart V: Marketing

Creating and Pricing Creating and Pricing ProductsProducts


Copyright © 2004 South-Western. All rights reserved. 12–3

Learning GoalsLearning Goals• Identify the main factors that affect a product’s target market

• Identify the steps involved in creating a new product

• Explain the common methods used to differentiate a product

• Identify the main phases of a product life cycle

• Identify the factors that influence the pricing decision


MarketingMarketing




Background on ProductsBackground on Products•Products include physical goods and services that satisfy customer needs– Convenience products

Widely available Purchased frequently Easily accessible

– Shopping products Not purchased frequently Consumers shop around to compare quality and price

– Specialty Consumers must make a special effort to purchase


Background on ProductsBackground on Products•Product line

– A set of related products or services offered by a single firm–expands over time to meet consumer needs Coke, Diet Coke, Caffeine-free Diet Coke, Sprite Pepsi, Diet Pepsi, Mountain Dew, All-Sport

•Product mix– Assortment of products offered by a firm

Quaker State: motor oil, windshield washer fluid, brake fluid, and other automotive products

Amazon.com: books, electronics, toys, music, kitchen items, drugs, health and beauty products


Product of IBMProduct of IBM

Exhibit 12.1


Diversifying the Product Diversifying the Product MixMix

•When the primary product is subject to wide swings in demand, firms diversify their product mix so they are not dependent on one product– Diversify within existing production

capabilities (related product diversification)– Example firms - Walt Disney Company,

Donna Karan, Amazon.com, IBM


Identifying a Target Identifying a Target MarketMarket

•Consumers who buy a particular product may have specific traits in common and similar needs

•Firms try to identify these traits and target marketing towards people with those traits (target market)– Consumer markets - products purchased by

individuals– Industrial markets - products purchased by

firms


Size of Target MarketSize of Target Market•As consumer preferences change, the size of a particular target market can also change.

•Size of target market depends on:– Demographics– Geography– Economic factors– Social values


business onlinebusiness online ee -- businessbusiness


E-MarketingE-Marketing• Use of the Internet to design, price, distribute, and promote products

– Amazon.com uses e-marketing to differentiate from other book retailers

– Some firms use e-marketing to complement brick and mortar stores

– Firms can use e-marketing to target foreign markets

– Firms can receive orders online at lower costs, and use the Internet to expand distribution efforts


Changes in Consumer Changes in Consumer Characteristics in Last 20 Years Characteristics in Last 20 Years

(from 1982 to 2002)(from 1982 to 2002)

•U.S. population has increased with higher proportions of:– People age 65 or older– Households with income over $60,000– Minority households with income over

$60,000– High school students who enter college– Minority high school students who enter

college

Exhibit 12.2


Creating New ProductsCreating New Products•Most new products are improvements of existing products and not new inventions

•Existing products may become obsolete or less useful than in the past– No longer in fashion (fashion obsolescence)– More advanced technology replaces product

(technological obsolescence)


Marketing ResearchMarketing Research• Accumulation and analysis of data in order to make a particular marketing decision

– Useful for making product decisions

– Identify products that consumers want

– Identify deficiencies in current products and make improvements

– Test new and revised products for consumer reaction

– One limitation of marketing research is that tastes might change too rapidly to capture in surveys


E-Marketing and Marketing E-Marketing and Marketing ResearchResearch

• Use Internet and/or customer service email system to get customer feedback

– Companies can get information quickly

– Use feedback to improve products and services

– Contact customers directly

– Send out samples and request email feedback

– Use of online surveys reduces costs and time involved in getting customer feedback


Research and Development Research and Development (R&D)(R&D)

•Firms invest funds in R&D activities in order to design new products or improve existing products– Expect the benefits of R&D expenditures to

outweigh the costs– Technological development can give firm an

advantage over its competitors– Some firms use alliances to share costs of

R&D


Small Business SurveySmall Business SurveyWhat Are the Keys to Creating Successful Products?


Patent ProtectionPatent Protection• A firm that creates a new product may not always be able to prevent competitors from copying the idea

• To protect their ideas, firms apply for patents

– Allow exclusive rights to the production and sale of a specific product

– Patent applications are tedious, and may require 20-40 page description of the product

– Approval process can take several months and is quite expensive - especially internationally


Creating New ProductsCreating New Products• Develop a product idea

– Identify customer needs that are not being satisfied by existing products

– Monitor consumer behavior or survey people about their behavior

• Assess the feasibility of the product idea– Estimate costs and benefits

• Design and test the product• Distribute and promote the product• Post-audit the product

– Compare actual costs and benefits with estimates


Steps Involved in Creating or Steps Involved in Creating or Revising a ProductRevising a Product

Exhibit 12.3


Product DifferentiationProduct Differentiation• Effort a firm makes to distinguish its product and services from competitors and make it more desirable by customers– Quality– Selection– Unique product or service design– Unique packaging– Unique branding

Family versus individual branding Producer versus store brands versus generic brands

– Co-branding - recent trend


Benefits of BrandingBenefits of Branding• Exposes a company’s name to the public

• If company is respected, new products might be trusted because of the brand name

• Assist in entering new product and geographic markets

• Helps to differentiate when there are only a few brands available

• Helps gain access to shelf space


Methods Used to Methods Used to Differentiate ProductsDifferentiate Products

Exhibit 12.4

Method Achieve Superiority by:

Unique design Higher level of product safety, reliability, or ease of use.

Unique packaging Packaging to get consumers’ attention or to improve convenience.

Unique branding Using the firm’s image to gain credibility, or using a unique brand name to imply prestige.


Product Life CycleProduct Life Cycle•Typical phases over the lifetime of products– Introduction - create awareness of product– Growth - reinforce product features– Maturity - competition increases– Decline - reduced demand

•Marketing decisions may be influenced by the stage in the product life cycle


Product Life Cycle PhasesProduct Life Cycle Phases

Exhibit 12.5


Pricing StrategiesPricing Strategies•Attempt to set prices that will maximize the firm’s value– Price charged impacts revenues and

profitability

•Pricing considerations– Production costs per unit + mark-up (cost-

based pricing)– Supply of inventory– Competitors’ prices


Pricing StrategiesPricing Strategies•Consider competitors’ prices

– Penetration pricing Lower price than competitors to penetrate the

market Most effective when demand is price elastic

– Defensive pricing Reduce price to defend or retain market share

– Predatory pricing Lower price to drive out competitors

– Prestige pricing Use high price to signal top-of-the-line product


Pricing ExamplePricing Example• Hot dog vendor in New Orleans

– Rent hot dog cooker for $4000 a year (a fixed cost that doesn’t depend on volume of hot dogs sold)

– Cost for hot dogs, buns, ketchup, etc. are $.60 per hot dog (variable costs that depend on volume of hot dogs)

– Other vendors charge $2.00 each, you charge $1.80

– Forecast that you can sell 20,000 hot dogs if you have a competitive price

– Identify the break-even quantity


Estimation of Costs and Revenue Estimation of Costs and Revenue at Various Quantities Producedat Various Quantities Produced

Exhibit 12.6a


Estimation of Costs and Revenue at Estimation of Costs and Revenue at

Various Quantities Produced Various Quantities Produced (cont’d)(cont’d)

Exhibit 12.6b


Breakeven Quantity Breakeven Quantity ExampleExample

Per Unit Costs Variable-Price

Costs FixedBEQ

.60-$1.80

$4,000BEQ

dogshot 3,334BEQ


Other Pricing DecisionsOther Pricing Decisions•Offering special discounts

– Senior citizens, students, online buyers

•Periodic sale prices– Some customers will only buy products if

they are on sale

•Credit terms for specific customers– Business customers (2/10 net 30)– Credit card payments– Retailer credit card


Chapter SummaryChapter Summary• Demographic trends, geography, economic factors, and changes in social value impact size of target market

• Creation of new products involves a number of steps from developing the idea to a post-audit

• Companies use unique product design, packaging, and branding to differentiate

• Cost of production, inventory supply, and competitors’ prices influence pricing decisions

Education

Creating And Pricing Products