Chapter 14: Product and Price

Chapter 14: Product and Price

Layout of Chapter:

1.                  What are Products?

2.                  Product Line and Product Mix.

3.                  Managing Product Mix

4.                  Creating Product Identification.

5.                  Pricing

6.                  Pricing Objectives.

7.                  Factors in Pricing Decisions.

8.                  Pricing Methods.

9.                  Pricing Strategies.

1.                  What are Products?

Products could be a good, service, or idea. It consists of all the tangible and intangible characteristics provided in an exchange between a seller and a buyer.

Products can be (a) Consumer Products; or (b) Industrial Products

(a) Consumer Products:

A good or service used for personal or family consumption.

Marketers classify consumer products in the following three categories according to consumers’ buying behaviour:

·         Convenience product: Inexpensive goods and services that consumers buy often, without much thought or effort. E.g. milk, chocolate, bread, magazines, soft drinks, gasoline, etc.

·         Shopping product: An item that buyers will spend time, effort, and energy to find and purchase. Buyers compare shops for these; thus they are known as shopping products. E.g. Goods such as TV / VCR, DVD player, Furniture and services such as, legal advice, tax preparations, etc.

·         Specialty product: A product with one or more unique features that a group of buyers will spend considerable time and effort to purchase. E.g. Lexus car, Rolex watch, Armani suit etc.

(b) Industrial products:

A good or service used by an organization in producing other goods or services or in carrying out its operations. Such as, raw materials, supplies, accessories etc.

2.                  Product Line and Product Mix

Product line: A group of related goods or services marketed by a firm is called a product line. For example, Lever Brothers has different toothpastes in its oral care product line. Product line can be shallow (with only one or two products- Coca-Cola, Vanilla Coke) or deep (a whole line of four-wheel vehicles; Toyota’s Lexus, Land Cruiser, Corolla, Corona, Starlet, Hi-Ace etc.).

Product mix: The total group of products a firm offers for sale, or all of the firm’s product lines.  For example, PRAN group has got a whole range of different products to offer to consumers.  Product mix can be narrow (Maggi Noodles, Maggi Soup) or wide (PRAN juice, sauce, chanachur, Daal bhaja, kashundi, ghee, PRAN cola, Biscuits, etc).

3.                  Managing the product mix

Developing New Products:

New products are vital for a firm’s long-term success. For instance, Toyota’s new product ‘Lexus’ was launched in September 1989 and stormed the world car market.

New product development process:

·         Generating ideas

·         Screening ideas

·         Business Analysis

·         Product Development        

·         Test Marketing

·         Commercialization

New product development process is expensive and time consuming but it is helpful in avoiding costly mistakes.

New products fail for many reasons, including lack of research, design problems, or poor timing in the product’s introduction.

On the other hand, a firm that can bring out a product faster than its competitors enjoys a huge advantage. It can be very profitable for companies to speed up the new product development process.

The Product Life Cycle:

Like living things, products go through several stages of life, known as the Product Life Cycle.

The theoretical life of a product consists of four stages:

·               Introduction        : New products are made available to customers.

·               Growth   : Sales increases rapidly, and generate profit.

·               Maturity   : Sales at peak but profit starts to decline.

·               Decline   : Sales fall rapidly; firms cut promotion cost to get profit and sell to the profitable markets only.

Extending Product Life Cycle:

Firms can extend the life cycle of a product in several ways –

·               Increasing the frequency of use. E.g. Toothbrush ads, citing dentists’ recommendation, have advised consumers to buy a new toothbrush more often, every two or three months.

·               Identifying new users. E.g. Nintendo has promoted its video systems to adults to expand beyond its major category of users, teenage boys.

·               Finding new uses.  E.g. use of Savlon to germ-free the house.

·               Product modification. (The changing of one or more of a product’s features as a strategy to extend its life cycle). It can be done in three ways:

' Quality modification: Altering raw-materials or changing production process. E.g. adding longer life to a battery.

' Functional modification: Redesign a product to provide additional features or benefits. E.g. Windows 95 to Win98 to Win2000/ XP.

' Style modification: Changing how a product looks, sounds, smells, or feels results in style modification. Denim jeans have been pre-washed, stone-washed and acid-washed to alter colour and reduce their characteristic stiffness.

4.                  Creating Product Identification

Organizations distinguish their products in three important ways:

      Branding: a name, sign, symbol, design, or combination of these used to identify a product and distinguish it from competitors’ offerings is called a brand. e.g., Sony, Kodak, Honda, Levi’s, Nike, etc.

      Packaging: Designing a product container that will identify the product, protect it and attract the attention of buyers. e.g., attractive packaging used by medicine companies.

      Labeling: The display of important information on a product package. Manufacturers communicate with buyers through labeling. The label is the part of the package that identifies the brand and provides essential product information regarding contents, size, weight, quantity, ingredients, directions for use, shelf life, and any health hazards or dangers of improper use.

5.                  Pricing

Price is the value buyers exchange for a product in a marketing transaction. E.g. tuition fees for the students.

Money usually is the value exchanged for a product that satisfies a consumer need. But sometimes money isn’t involved at all; the parties exchange goods or services instead – e.g. a retail store and a radio station may work out a deal to trade merchandise for free radio ads.

Such trading, called bartering, is the oldest form of exchange and is used in all societies.

Pricing decision is crucial for business. After noticing a product, buyers generally look at the price tag.

6.                  Pricing objectives

Before establishing prices, marketing managers must decide their pricing objectives. Survival is the most fundamental objective; other are increase sales and market share, boost profits, achieve a return on their investment, and maintain their present position in the industry.

Ø      Market share: a firm’s market share is its percentage of the total industry sales in the geographical area where it sells its products. A firm may reduce price to capture a larger share of the market.

Ø      Profit: maximize profit.

Ø      Return on investment: ROI is the amount of profit earned, expressed as a percent of the total investment.

Ø      Status-Quo: Firms wishing to maintain their present situation in the industry may establish status-quo pricing objectives.

7.                  Factors in Pricing Decisions

Price cannot be determined with considering several factors that affect price. Following factors affect price:

Ø      Price Competition: Policy of using price to differentiate a product in the market place. Firms competing based on price competition generally set prices equal to or lower than competitor’s prices.

Ø      Non-price Competition: a policy of emphasizing aspects other than price, such as quality, service, or promotion, to sell products. This strategy is useful in building brand loyalty. e.g., Rolex watch, Mercedes car etc.

Ø      Supply and Demand: The price of a product is also influenced by the economic forces of supply and demand.

– Supply: the quantity of a product that producers will sell at various prices.

– Demand: the quantity of a product that consumers will purchase at various prices.

Where demand and supply curve intersects each other, the point is called equilibrium, where supplier is willing to supply at that price.

Ø      Consumer Perceptions of Price: Buyers generally believe price is closely related to quality. For products such as jewelry or perfume, a higher price signals higher quality to the target market.

8.                  Pricing Methods

 A systematic procedure for determining prices on a regular basis; considering costs, product demand, or competitors’ prices. 

If it is about pricing items in a general store it will be fairly simple. But if it is needed to calculate the price of a bridge or a highly advanced software would be complex.

Three common pricing methods are:

i) Cost-oriented pricing:  A method whereby a firm determines a product’s total cost, then adds a markup to that cost to achieve the desired profit margin.

Markup: a percentage added to the total cost of the product to cover marketing expenses and allow a profit. For example, the total cost of producing one greeting card is TK. 100/= and the markup is 20 percent above costs. Then the price of a greeting card would be TK. 120/=

The major difficulty in using a cost-oriented pricing method is determining the actual markup percentage.

ii) Demand-oriented pricing: A method based on the level of demand for the product.

Breakeven analysis: A determination of how many product units must be sold at various prices for a firm to recover costs and begin making a profit.

Breakeven quantity: The point at which the cost of making a product equals the revenue made from selling the product.

Fixed cost: $100,000. Price per unit: $ 40. Variable cost per unit: $20

 = 5,000 units

iii) Competition oriented pricing: A method whereby a firm sets prices on the basis of its competitors’ prices rather than its own costs and revenues.

9.                  Pricing Strategies

After selecting pricing method, firms develop strategy for setting and adjusting prices.

i)              Pioneer Pricing – Setting a price for a new product. It can be done in following two ways –

      Price Skimming: Charge highest possible price to recover the cost quickly. E.g. computers, CD players, DVD players, City Cell mobile etc.

      Penetration Pricing: Set prices low to capture the large amount of sales/market share quickly. E.g. cosmetics, detergents etc.

ii)             Psychological Pricing: A policy that encourages purchase decision on an emotional rather than rational basis.

      Odd-Even Pricing: Bata shoes Tk. 99.95/-

      Customary Pricing: Pricing products based on custom.

      Prestige pricing: diamond jewelry, perfume

      Price lining: Men’s shirts for $24, $30, or $36.

iii)           Professional Pricing: Charging a standard fee for a particular service. E.g. Doctors, Lawyers, Accountants etc. 

iv)           Price Discounting: Offer deductions. E.g. Cash discounts, quantity discounts.