chapter 9 product and pricing strategies

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Chapter 9 Product and Pricing Strategies. Small Business Management 4660. 1. Product. 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. Core Product - PowerPoint PPT Presentation

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Stage 1: IntroductionSales slowly take off - begin to growBrand awarenessHeavy expenditure on marketing expenses - suppress profitsCompetition - low9-81. Product9-2GoodsServicesTangibleIntangibleImperishablePerishableHomogeneous- Same qualitiesHeterogeneous- Slightly different2Goods are:Tangible: you can count them, inventory them, demonstrate them, see them before you buySeparable: It doesnt matter who you buy it from, the product is the sameHomogenous: In theory, every bottle of Suave shampoo is the same, regardless of where you buy itNon-perishable: If you dont sell it today you can sell it tomorrow.Services are just the opposite.

Product ApproachTotal ProductEntire bundle of products, services and meanings e.g. extras (service, warranty, or delivery, brand - means to customer)E.g. Targus laptop bag9-4

AugmentedCore product plus features to differentiate it from competition

9-5Core ProductVery basic description of a product2. Stages of New Product DevelopmentBefore 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 Cycle9-7Figure 9.37The PLC can be used for either an industry or particular product.Characterizations of each stage are on the following slides.Stage 2: GrowthAcceptance increases rapidlyAdvertising and promotion - much less criticalGoal - maximize market sharePrices tend to drop production becomes more efficient9-9Stage 3: MaturityCompetition becomes fierce e.g. price competition begins to riseSales will level off and start to declineProfits follow suitAdvertising will suggest new uses for the product9-10Stage 4: DeclineDecline can be slow or fast, steady or unsteadyCaused by introduction of new technologyA shift in consumer preferencesSales and profits fall during this stage9-11

3. Why pricing is a difficult taskPricing isnt 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?9-13Two general ways of setting prices:Some arbitrary heuristics (discretion) E.g. 40% above costsContributes 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. DemandIf people dont want - low prices are the only way to encourage.If everyone wants - can charge anything.b. Value deliveredWilling to pay based on the value they believeIf perceived value is high - they will pay a lot.c. What competition is chargingIf 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 profitTotally ignores demand, value, competition and business strategy.

4. Price ElasticityA 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,hell want to pay less; if he perceives seller is reluctant to sell, hell pay more.

Expectations of future prices: If customers think prices are going to go up, youll pay more; if you think they are going down, youll pay less.Importance or valueIf its important to have, Ill pay more; if I dont really care, Ill pay less.

Price range of acceptability: Consumers set a range of prices, belowwhich 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.

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 TV5. Different Pricing Strategies2.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 99.99 sounds much cheaper than RM 100.

4.Partitioned pricing - setting a price formain component and pricing others components - installation, delivery, etc., separately.

E.g. Laptop software bag - mouse

Captive pricing occurs when customerspend usually a low price for a base systembut locked into certain expendables he/shemust purchase.

These expendables - makes most of theirprofits.E.g. Lexmark low-cost printer

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 loyaltyMoving excess inventoriesAlleviate temporary cash flow problemsSome 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 bookingBundling, 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 yourproducts, 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 its 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. RevisionThank You

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