Developing and

Pricing Products

Chapter 12

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 Introduction
In this chapter we
– identify important classifications of
products
– discuss the activities involved in
developing new products
– examine setting prices that appeal to
each target audience

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 The Value Package
 In order to develop the marketing mix and plan their strategies
effectively, marketers must consider what consumer really want
when they purchase products; marketers must begin by
understanding that every product is a value package that provides
benefits to satisfy the needs and wants of customers
Product Features
– tangible and intangible qualities that a company builds
into its products
 For example: a company build into product: a 12 horsepower
motor on a lawnmower. To attract buyers, this feature must
provide benefits; the lawnmower must also be easy to use and
cut grass neatly and effectively.

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 The Value Package
 Today customer regards a product as a bundle of attributes,
benefits and features, which, taken together, marketers call
the value package. Increasingly , buyers expect to receive
products with grater value - more benefits and features -
at reasonable cost—so firms must compete on the basis of
enhanced value packages. Consider, for example, the
possible attributes in a PC value package: ……… (page 409)
• Value Package
– A product is marketed as a bundle of value-adding
attributes including reasonable cost

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 Classifying Goods and Services
 Goods and services may be classified according to their
prospective buyers; buyers of consumer products or buyers
of organizational products
• Consumer
– person who purchases products for personal use
• Industrial Buyer
– a company or other organization that buys
products for use in producing other products
(goods or services)

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Classifying Goods and Services (cont.)
• Convenience Goods
– inexpensive physical goods that are consumed
rapidly and regularly
Such as milk and newspaper
• Convenience Services
– inexpensive services that are consumed rapidly
and regularly
Such as those offered by fast-food restaurant

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Classifying Goods and Services (cont.)
• Shopping Goods
– moderately expensive, infrequently purchased
physical goods
Such as appliances and mobile devices
• Shopping Services
– moderately expensive, infrequently purchased
services
Such as hotel or airline reservations

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Classifying Goods and Services (cont.)
• Specialty Goods
– expensive, rarely purchased physical goods
Such as wedding gowns
• Specialty Services
– expensive, rarely purchased services
Such as healthcare insurance

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Categories of Consumer Products

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Classifying Organizational Products
• Production Items
– goods or services that are used in the conversion
(production) process to make other products
• Expense Items
– industrial products purchased and consumed within a
year by firms producing other products or supplying
other services
• Capital Items
– expensive, long-lasting, infrequently purchased industrial
products, such as a building, or industrial services, such
as a long-term agreement for data warehousing services

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Organizational Products

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 The Product Mix
• Product Mix
– the group of products that a firm makes
available for sale
Black and Decker makes toaster, food blenders, electric
drills and a variety of other appliances and tools
• Product Line
– group of products that are closely related
because they function in a similar manner or are
sold to the same customer group who will use
them in similar ways
Unilever has variety of product line

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 Developing New Products
 To expand or diversify product lines --- in fact, just
to survive --- firms must develop and introduce
stream of new products. Faced with competition
and shifting customer preferences, no firm can
count on a single successful product to carry
forever. Even products that have been popular
decades need constant renewal to keep up with
changing technologies and consumer tastes
 Page 413 Levi’s Jeans’ case

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 Developing New Products
The New Product Development Process
 Product development is long and expensive process, and like
Merck & Co, many firms have research and development (R&D)
departments for exploring new product possibilities.
 Why do they devote so many resources to exploring product
possibilities, rejecting many seemingly good ideas along the way?
–First, high mortality rates for new ideas mean that only a few
new products reach the market
–Second, for many companies, speed to market with a product is
as important as care in developing it
• Speed to Market
– strategy of introducing new products to respond quickly
to customer or market changes

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 The Seven-Step Development Process
1. Product ideas
– typically come from consumers, the sales force,
R&D departments, suppliers, or engineering
personnel
2. Screening
– eliminate ideas that do not mesh with the firm’s
abilities or objectives
3. Concept testing
– companies use market research to get consumers’
input about benefits and prices. Conceptuality
having chances for possible commercialization

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The Seven-Step Development Process
(cont.)
4. Business analysis
– marketers compare production costs and
benefits to see whether the product meets
minimum profitability goals.
5. Prototype development
– engineering, R&D, or design groups produce a
prototype

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 The Seven-Step Development Process
(cont.)
6. Product testing and test marketing
–The company goes into limited production and
then test the product to see if it meets
performance requirement. If it does, it may be sold
on a trial basis in limited areas to test consumer
reaction
7. Commercialization
– the company begins full-scale production and
marketing

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Variations in the Process for Services
 The development of services involves many of the same stages.
Basically, step 2, 3, 4, 6, and 7 are the same. There are, however,
important differences in step 1 and 5
Step 1 – Service ideas
The search for service ideas includes defining the service value
package, identifying the tangible and intangible features that
characterize the service, and stating service specifications.
Step 5 – Service process design
Instead of prototype development, services require three-part
service process design that includes 1) Process Selection
(identifying each step of the service, including the sequence and
timing), 2) Worker Requirement (stating employee behaviors,
skills, capabilities), 3) Facility Requirement that designate all
equipment that support delivery of the service.

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 Product Life Cycle
• Product Life Cycle (PLC)
– series of stages in a product’s commercial life
• Stages in the PLC
– Introduction
– Growth
– Maturity
– Decline

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 Product Life Cycle
 When a product reaches the market, it enters the product life
cycle (PLC). Depending on the product’s ability to attract and keep
customers, its PLC may be a matter of months, years, or decades.
Strong mature product (such as Rinso) have had long productive
life.
• Introduction
A product reaches the market; marketers focus on making
potential customers aware of the product and its benefits.
Extensive development, production, and sales costs erase profits
• Growth
Sales start to climb rapidly. Marketers lower price slightly and
continue promotional expenditures to increase sales. The product
starts to show a profit and other firms move rapidly to introduce
their own versions

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 Product Life Cycle
• Maturity
This is typically the longest stage in the PLC for many products.
Sales growth peaks and starts to slow. Increased competition
forces price-cutting, increasing the cost of advertising and
promotional expenditures, and lower profit. Toward the end of
the stage, sales start to fall.
Decline
Sales and profits continue to fall as new products in the
introduction stage take away sales. Firms end or reduce
promotional support, but may let the product linger to provide
some profits

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Four Phases of the PLC

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Profits in the PLC

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 Extending Product Life
• Product Extension
– marketing an existing product globally instead of
just domestically
• Product Adaptation
– modifying an existing product for greater appeal
in different countries
• Reintroduction
– reviving obsolete or older products for new
markets

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 Identifying Products
 Developing product’s features is only part of a marketer’s
job. Marketers must also identify products so that
consumers recognize them. Two important tools for this task
are branding and packaging
 Brand names are symbols for characterizing product and
distinguishing them from one another
• Branding
– process of using symbols to communicate the qualities of
a product made by a particular producer
• Brand Awareness
– extent to which a brand name comes to mind when a
consumer considers a particular product category

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World’s 10 Most Valuable Brands

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 Identifying Products (cont.)
• Product Placement
– promotional tactic for brand exposure in which
characters in television, film, music, magazines, or video
games use a real product with its brand visible to viewers
 Product placement are especially effective for TV because
digital video recorders (DVR) remain popular. Viewers can
use their DVR to skip commercial breaks in recorded shows,
but product placements with in the programs are
unavoidable

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 Identifying Products (cont.)
• National Brand
–Brand-name product produced by. Widely distributed
by, and carrying the name of manufacturer
• Licensed Brands
– brand-name product for whose name the seller has
purchased the right from an organization or
individual
• Private Brand (or Private Label)
– brand-name product that a wholesaler or retailer
has commissioned from a manufacturer

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 Identifying Products (cont.)
• Packaging
– Physical container in which a product is sold, advertised,
or protected
 A product’s package serves several purposes; the packaging
can serve as an in-store advertisement, a display for the
brand name, an identifier of product features and benefits,
and can reduce the risk of damage and increase the
difficulty of stealing

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 Pricing to Meet Business
Objectives
• Pricing
– process of determining what a company will
receive in exchange for its products
• Pricing Objectives
– the goals that sellers hope to achieve in pricing
products for sale
– profit-maximizing, market share

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 Pricing to Meet Business
Objectives (cont.)
• Profit-Maximizing Objectives
– the seller’s pricing decision is critical for
determining the firm’s revenue, which is the
result of the selling price times the number of
units sold

– Marketers attempt to set prices to sell the

number of units that will generate the highest
possible profits
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 Pricing to Meet Business
Objectives (cont.)
• Market Share (or Market Penetration)
– company’s percentage of the total industry sales
for a specific product type
 Some firms want to dominate the market or secure high
market share and, therefore, they are willing to accept
minimal profit or even losses at beginning , to get buyers to
try products by setting low prices for new products.
 In the long run a business must make a profit to survive

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 Price-Setting Tools
• Cost-Oriented Pricing
– pricing that considers the firm’s desire to make a
profit and its need to cover production costs

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 Price-Setting Tools
Markup
– amount added to an item’s purchase cost to sell it at a
profit
 A T-shirt store manager would price shirts by calculating cost of
making them available to shoppers. Thus, price would include the
cost of store rent, employee wages, utilities, product displays,
insurance, and the T-shirt purchase price.
 If the purchase price is $8 per shirt and the store sell shirts for $8,
the store won’t make any profit. Nor will it make profit if it sells
shirts $8.50 each, or even $10, or $11.
 To be profitable, the company must charge enough to cover
product and other costs. Say; a reasonable mark up of $7 is added
to the purchase price.

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 Breakeven Analysis: Cost-Volume-
Profit Relationships
• Variable Cost
– cost that changes with the quantity of a product
produced and sold
• Fixed Cost
– cost that is incurred regardless of the quantity of
a product produced and sold
• Breakeven Analysis
– for a particular selling price, assessment of the
seller’s costs versus revenues at various sales
volume
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 Breakeven Analysis: Cost-Volume-
Profit Relationships (cont.)
• Breakeven Point
– sales volume at which the seller’s total revenue
from sales equals total costs (variable and fixed)
with neither profit nor loss

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Breakeven Analysis

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 Pricing Existing Products
 The pricing tools help managers set prices on specific goods;
but they do not help them decide on pricing philosophies
for diverse competitive situations.
 Pricing strategy---> pricing as a planning activity
 Pricing tactics...---> ways in which managers implement a
firm’s pricing strategy
 Three options for pricing existing products
1. Pricing above prevailing market prices for similar products
to take advantage of the common assumption that higher
price means higher quality
2. Pricing below market prices while offering a product of
comparable quality to higher-priced competitors
3. Pricing at or near market prices
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 Pricing New Products
Price Skimming
– Setting an initially high price to cover new product costs
and generate a profit
 This strategy works only if marketers can convince
customers that new product is truly different from existing
products and there is no foreseeable competition on the
horizon. Apple’s introduction of the iPod is a good example.
Penetration Pricing
– Setting an initially low price to establish a new product in
the market.
 Low price creates customer interest and stimulate trial
purchase. Penetration strategy is the best strategy when
introducing a product that has or expects to have
competitor quickly
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 Pricing Strategy
• Bundling Strategy
– grouping several products together to be sold as
a single unit at a reduced price, rather than
individually

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 Pricing Tactics
• Price Lining
–Setting a limited number of prices for certain categories of
product
• Psychological Pricing
– pricing tactic that takes advantage of the fact that
consumers do not always respond rationally to stated
prices
• Odd-Even Pricing
– psychological pricing tactic based on the premise that
customers prefer prices not stated in even dollar amounts
• Discount
– price reduction offered as an incentive to purchase

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