new product development & pricing strategies

Hamdard UniversityHamdard UniversityHamdard UniversityHamdard University..

2007 - 2010 1Hamdard University Students

�� Muneeb Iqbal Muneeb Iqbal

�� Adnan Adnan

�� Dr OwaisDr Owais

Shahid NavedShahid Naved�� Shahid NavedShahid Naved

�� Ali ShahAli Shah

�� Haris VakeelHaris Vakeel


NewNew ProductProductDevelopmentDevelopment

&&&&

Pricing strategiesPricing strategies


NewNewProductProductDevelopmentDevelopmentDevelopmentDevelopment


DefinitionDefinitionDevelopment of original products, product improvements, product modification, and new brands modification, and new brands through the firms own R&D efforts.


New Product DevelopmentNew Product Development

�� New Products can be obtained via New Products can be obtained via

acquisition or developmentacquisition or development

�� New products suffer from high failure New products suffer from high failure �� New products suffer from high failure New products suffer from high failure

ratesrates

�� Several reasons account for failureSeveral reasons account for failure



ImprovingImproving andand updatingupdatingproductproduct lineslines isis crucialcrucial forfor thethesuccesssuccess forfor anyany organizationorganization..successsuccess forfor anyany organizationorganization..

SWOTSWOT AnalysisAnalysis..



FailureFailure forfor anan organizationorganizationtoto changechange couldcould resultresult inin aadeclinedecline inin salessales andand withwithdeclinedecline inin salessales andand withwithcompetitorscompetitors racingracing aheadahead..



ProductsProducts gogo throughthrough thethe

stagesstages ofof theirtheir lifecyclelifecyclestagesstages ofof theirtheir lifecyclelifecycle

andand willwill eventuallyeventually havehave

toto bebe replacedreplaced..



The The EIGHTEIGHTThe The EIGHTEIGHTStagesStages



�� Idea generationIdea generation

�� Idea ScreeningIdea Screening

�� Concept Concept

Development and Development and

�� Business AnalysisBusiness Analysis

�� Product DevelopmentProduct Development

�� Test MarketingTest Marketing

�� CommercializationCommercializationDevelopment and Development and

TestingTesting

�� Marketing Strategy Marketing Strategy

and Developmentand Development

�� CommercializationCommercialization


Stage 1Stage 1..Idea generationIdea generation

NewNew productproduct ideasideas havehaveNewNew productproduct ideasideas havehave

toto comecome fromfrom somewheresomewhere..

ButBut wherewhere dodo organizationsorganizations

getget theirtheir ideasideas forfor NPD?NPD?


Idea generation sourcesIdea generation sources

�� Intelligence & Creativity.Intelligence & Creativity.

�� Within the company i.e. employees.Within the company i.e. employees.�� Within the company i.e. employees.Within the company i.e. employees.

�� Competitors.Competitors.

�� Customers.Customers.

�� Distributors, Suppliers and others. Distributors, Suppliers and others.


Stage 2.Stage 2.Idea ScreeningIdea Screening

ThisThis processprocess involvesinvolves

shiftingshifting throughthrough thethe ideasideas

generatedgenerated aboveabove andandgeneratedgenerated aboveabove andand

selectingselecting onesones whichwhich areare

feasiblefeasible andand workableworkable toto

developdevelop..2007 - 2010 14Hamdard University Students

Stage 3Stage 3..Concept Development and Concept Development and

TestingTesting

TheThe organizationorganization maymay havehave

comecome acrossacross whatwhat theythey believebelievecomecome acrossacross whatwhat theythey believebelieve

toto bebe aa feasiblefeasible idea,idea, however,however,

thethe ideaidea needsneeds toto bebe takentaken toto thethe

targettarget audienceaudience..


Concept Development and Concept Development and

TestingTesting

�� What do they think about the idea? What do they think about the idea?

�� Will it be practical and feasible? Will it be practical and feasible? Will it be practical and feasible? Will it be practical and feasible?

�� Will it offer the benefit that the Will it offer the benefit that the organization hopes it will?organization hopes it will?

�� Have they overlooked certain Have they overlooked certain issues?issues?


Stage 4Stage 4..Marketing Strategy and Marketing Strategy and

DevelopmentDevelopment

AA proposedproposed marketingmarketing strategystrategy willwill

bebe writtenwritten layinglaying outout thethe marketingmarketingbebe writtenwritten layinglaying outout thethe marketingmarketing

mixmix strategystrategy ofof thethe product,product, thethe

segmentation,segmentation, targetingtargeting andand

positioningpositioning strategystrategy salessales andand

profitsprofits thatthat areare expectedexpected..


Stage 5Stage 5..Business AnalysisBusiness Analysis

TheThe businessbusiness analysisanalysis stagestage lookslooks moremore

deeplydeeply intointo thethe cashcash flowflow thethe productproductdeeplydeeply intointo thethe cashcash flowflow thethe productproduct

couldcould generate,generate, whatwhat thethe costcost willwill be,be,

howhow muchmuch marketmarket sharesshares thethe productproduct

maymay achieveachieve andand thethe expectedexpected lifelife ofof

thethe productproduct..


Stage 6Stage 6..Product DevelopmentProduct Development

ThisThis stagestage isis aa prototypeprototype finallyfinally

producedproduced.. TheThe prototypeprototype willwill clearlyclearlyproducedproduced.. TheThe prototypeprototype willwill clearlyclearly

runrun throughthrough allall thethe desireddesired tests,tests, andand

bebe presentedpresented toto thethe targettarget audienceaudience toto

seesee ifif changeschanges needneed toto bebe mademade..


Stage 7Stage 7..Test MarketingTest Marketing

TestTest marketingmarketing meansmeans testingtesting thetheproductproduct withinwithin aa specificspecific areaarea.. TheTheproductproduct willwill bebe launchedlaunched withinwithin aaproductproduct willwill bebe launchedlaunched withinwithin aaparticularparticular regionregion soso thethe marketingmarketing mixmixstrategystrategy cancan bebe monitoredmonitored andand ififneeded,needed, bebe modifiedmodified beforebefore nationalnationallaunchlaunch..


Stage 8Stage 8..CommercializationCommercialization

ThereThere areare certaincertain factorsfactors thatthat needneed

toto bebe takentaken intointo considerationconsiderationtoto bebe takentaken intointo considerationconsideration

beforebefore aa productproduct isis launchedlaunched

nationallynationally..


CommercializationCommercialization

TheThe factorsfactors areare timing,timing, howhow thethe

productproduct willwill bebe launched,launched, wherewhereproductproduct willwill bebe launched,launched, wherewhere

thethe productproduct willwill bebe launched,launched, willwill

therethere bebe aa nationalnational rollroll outout oror willwill itit

bebe regionregion byby region?region?


PricingPricingPricingPricing StrategiesStrategies


Pricing StrategiesPricing Strategies


Penetration PricingPenetration Pricing


Penetration PricingPenetration Pricing�� Price set to ‘penetrate the market’Price set to ‘penetrate the market’

�� ‘Low’ price to secure high volumes‘Low’ price to secure high volumes

�� Typical in mass market products Typical in mass market products –– chocolate chocolate bars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.

�� Suitable for products with long anticipated life Suitable for products with long anticipated life cyclescycles

�� May be useful if launching into a new marketMay be useful if launching into a new market


Market SkimmingMarket Skimming


Market SkimmingMarket Skimming�� High price, Low volumesHigh price, Low volumes

�� Skim the profit from the Skim the profit from the

marketmarket

�� Suitable for products that Suitable for products that

have short life cycles or have short life cycles or have short life cycles or have short life cycles or

which will face competition which will face competition

at some point in the future at some point in the future

(e.g. after a patent runs out)(e.g. after a patent runs out)

�� Examples include: Examples include:

Playstation, jewellery, digital Playstation, jewellery, digital

technology, new DVDs, etc.technology, new DVDs, etc.

Plasma screens: Currently athigh prices but for how long?


Product mix Product mix

PricingPricing�� Strategy for setting a product’s price changes Strategy for setting a product’s price changes

when the product is a part of product mixwhen the product is a part of product mix

�� Five product mix pricing situationsFive product mix pricing situations

1.1. Product line pricingProduct line pricing

2.2. Optional product pricingOptional product pricing

3.3. Captive product pricingCaptive product pricing

4.4. ByBy--product pricingproduct pricing

5.5. Product bundle pricingProduct bundle pricing


Product Line Product Line

PricingPricing�� Companies usually develop product lines Companies usually develop product lines

rather than single productrather than single product

�� It is setting price steps between product It is setting price steps between product line itemsline itemsline itemsline items

�� For example Sony offers not just one type For example Sony offers not just one type of television but several lines of televisions of television but several lines of televisions each containing many models each containing many models

�� Thus men’s clothing stores might carry Thus men’s clothing stores might carry men’s suits at three price levelsmen’s suits at three price levels


Optional Product Optional Product

PricingPricing

�� Offering to sell optional or accessory Offering to sell optional or accessory products along with their main productproducts along with their main product

�� For example a car buyer may choose to For example a car buyer may choose to �� For example a car buyer may choose to For example a car buyer may choose to order power windows cruise control, and a order power windows cruise control, and a CD changer.CD changer.


Captive Product Captive Product

PricingPricing�� Companies that make product that must be used Companies that make product that must be used

along with the main product are using Captive along with the main product are using Captive Product Pricing.Product Pricing.

�� For Example: HFor Example: H--P makes very low margin on its P makes very low margin on its printers but very high margin on printer cartridges printers but very high margin on printer cartridges printers but very high margin on printer cartridges printers but very high margin on printer cartridges and other supplies.and other supplies.

�� In case of services this strategy is called twoIn case of services this strategy is called two--part part pricing. the price of the service is broken into a fixed pricing. the price of the service is broken into a fixed fee plus a variable usage rate.fee plus a variable usage rate.

�� Thus a telephone company charges a monthly rate Thus a telephone company charges a monthly rate (the fixed fee) plus charges for calls beyond some (the fixed fee) plus charges for calls beyond some minimum numbersminimum numbers


ByBy--Product Product

PricingPricing

�� Setting a price for By Products in order to Setting a price for By Products in order to make the main product price more make the main product price more competitive.competitive.competitive.competitive.


Product BundleProduct Bundle

PricingPricing�� Sellers often combines several of their Sellers often combines several of their

products and offer the bundle at a reduced products and offer the bundle at a reduced price.price.

�� Price bundling can promote the sale of Price bundling can promote the sale of �� Price bundling can promote the sale of Price bundling can promote the sale of products consumers might not otherwise buy, products consumers might not otherwise buy, but the combine price may be low enough to but the combine price may be low enough to get them to buy the bundle. get them to buy the bundle.

�� Thus theatres and sports teams sell season Thus theatres and sports teams sell season tickets at less than the cost of single tickets.tickets at less than the cost of single tickets.


Value PricingValue Pricing


Value PricingValue Pricing�� Price set in accordance Price set in accordance

with customer with customer

perceptions about the perceptions about the

value of the value of the

product/serviceproduct/serviceproduct/serviceproduct/service

�� Examples include status Examples include status

products/exclusive products/exclusive

products products Companies may be able to set prices according to perceived value.


Price AdjustmentPrice Adjustment

�� Segmented PricingSegmented Pricing

�� Geographic PricingGeographic Pricing

�� International Pricing International Pricing

Psycological PricingPsycological Pricing�� Psycological PricingPsycological Pricing

�� Promotional PricingPromotional Pricing

�� Discount PricingDiscount Pricing

�� Allowance Allowance


Segmented PricingSegmented Pricing

�� In segmented pricing, the company sells a In segmented pricing, the company sells a

product or service at two ore more prices even product or service at two ore more prices even

though the difference in prices is not based though the difference in prices is not based

on difference in cost.on difference in cost.

1.1. Customer Segment Pricing.Customer Segment Pricing.

2.2. Product Form Pricing.Product Form Pricing.

3.3. Location Pricing.Location Pricing.

4.4. Time Pricing.Time Pricing.


Customer Segment Pricing :Customer Segment Pricing :

�� Different customers pay different prices for the same Different customers pay different prices for the same

product or services.product or services.

�� For Example: Museums charge different fee for For Example: Museums charge different fee for

students and senior citizens.students and senior citizens.

Product Form Pricing :Product Form Pricing :Product Form Pricing :Product Form Pricing :

�� Different version of the products are priced Different version of the products are priced

differently but not according to difference in their differently but not according to difference in their

costs. costs.

�� For Instance, Black & Decker prices its most For Instance, Black & Decker prices its most

expensive iron at $54.98 which is $12 more than the expensive iron at $54.98 which is $12 more than the

price of its next most expensive iron.price of its next most expensive iron.


Location Pricing :Location Pricing :

�� Company charges different prices for different Company charges different prices for different locations even though the cost of offering each locations even though the cost of offering each location is the same.location is the same.

�� For Instance Theatres varies their seat prices because For Instance Theatres varies their seat prices because of audience preferences for certain locations.of audience preferences for certain locations.

Time Pricing :Time Pricing :

�� A firm varies its price by the season, the month, the day, and A firm varies its price by the season, the month, the day, and even the hour. Public utilities vary their prices to commercial even the hour. Public utilities vary their prices to commercial users by time of day and weekend versus weekdays.users by time of day and weekend versus weekdays.

�� For Instance: the telephone company offers lower offFor Instance: the telephone company offers lower off--peak peak charges, and resorts give seasonal discounts.charges, and resorts give seasonal discounts.


Geographic PricingGeographic Pricing

�� FOB PricingFOB Pricing

�� Uniform Delivery PricingUniform Delivery Pricing

�� Zone PricingZone Pricing

Reference Base PricingReference Base Pricing�� Reference Base PricingReference Base Pricing

�� Freight Absorption PricingFreight Absorption Pricing


International PricingInternational Pricing

�� Uniform PricingUniform Pricing

�� Pricing according to market objectivePricing according to market objective


Psycological PricingPsycological Pricing

�� Sale Sale

�� Price Ending in 9Price Ending in 9

�� Sign posting/Loss LadderSign posting/Loss Ladder

Price Matched GuaranteePrice Matched Guarantee�� Price Matched GuaranteePrice Matched Guarantee


Psychological PricingPsychological Pricing


Psychological PricingPsychological Pricing�� Used to play on consumer perceptionsUsed to play on consumer perceptions

�� Classic example Classic example -- £9.99 instead of £10.99!£9.99 instead of £10.99!

�� Links with value pricing Links with value pricing –– high value goods high value goods priced according to what consumers THINK priced according to what consumers THINK priced according to what consumers THINK priced according to what consumers THINK should be the priceshould be the price


Loss LeaderLoss Leader


Loss LeaderLoss Leader�� Goods/services deliberately sold below cost to Goods/services deliberately sold below cost to

encourage sales elsewhereencourage sales elsewhere

�� Typical in supermarkets, e.g. at Ramadan, selling Typical in supermarkets, e.g. at Ramadan, selling bottles Pepesi of 2 liter at Rs. 20 in the hope that bottles Pepesi of 2 liter at Rs. 20 in the hope that bottles Pepesi of 2 liter at Rs. 20 in the hope that bottles Pepesi of 2 liter at Rs. 20 in the hope that people will be attracted to the store and buy people will be attracted to the store and buy other thingsother things

�� Purchases of other items more than covers ‘loss’ Purchases of other items more than covers ‘loss’ on item soldon item sold

�� e.g. ‘Free’ mobile phone when taking on e.g. ‘Free’ mobile phone when taking on contract packagecontract package2007 - 2010 48Hamdard University Students

Promotional PricingPromotional Pricing

�� Special event PricingSpecial event Pricing

�� Cash rebateCash rebate

�� Low intrest FinancingLow intrest Financing

Long Warranty/Free MaintanceLong Warranty/Free Maintance�� Long Warranty/Free MaintanceLong Warranty/Free Maintance

�� DiscountDiscount


DicountDicount

�� Cash DiscountCash Discount

�� Quantity DiscountQuantity Discount

�� Trade/ Functional discountTrade/ Functional discount

Seasonal DiscountSeasonal Discount�� Seasonal DiscountSeasonal Discount


AllowanceAllowance

Trade in AllowanceTrade in Allowance�� Trade in AllowanceTrade in Allowance


Going Rate (Price Leadership)Going Rate (Price Leadership)


Going Rate (Price Leadership)Going Rate (Price Leadership)�� In case of price leader, rivals have In case of price leader, rivals have

difficulty in competing on price difficulty in competing on price –– too high too high and they lose market share, too low and and they lose market share, too low and the price leader would match price and the price leader would match price and force smaller rival out of marketforce smaller rival out of market

�� May follow pricing leads of rivals especially May follow pricing leads of rivals especially �� May follow pricing leads of rivals especially May follow pricing leads of rivals especially where those rivals have a clear dominance where those rivals have a clear dominance of market shareof market share

�� Where competition is limited, ‘going rate’ Where competition is limited, ‘going rate’ pricing may be applicable pricing may be applicable –– banks, petrol, banks, petrol, supermarkets, electrical goods supermarkets, electrical goods –– find very find very similar prices in all outletssimilar prices in all outlets


Tender PricingTender Pricing


Tender PricingTender Pricing�� Many contracts awarded Many contracts awarded

on a tender basison a tender basis

�� Firm (or firms) submit Firm (or firms) submit

their price for carrying their price for carrying

A European consortium led by Airbus recently won a contract to supply refuelling services to the RAF – priced at £13 billion!

their price for carrying their price for carrying

out the workout the work

�� Purchaser then chooses Purchaser then chooses

which represents best which represents best

valuevalue

�� Mostly done in secretMostly done in secret


Price DiscriminationPrice Discrimination


Price DiscriminationPrice Discrimination�� Charging a different Charging a different

price for the same price for the same

good/service in different good/service in different

marketsmarkets

Prices for rail travel differ for the same journey at different times of the day

�� Requires each market to Requires each market to

be impenetrablebe impenetrable

�� Requires different price Requires different price

elasticity of demand in elasticity of demand in

each marketeach market


Destroyer Pricing/Predatory Destroyer Pricing/Predatory

PricingPricing


Destroyer Pricing/Predatory Destroyer Pricing/Predatory

PricingPricing�� Deliberate price cutting Deliberate price cutting

or offer of ‘free or offer of ‘free

gifts/products’ to force gifts/products’ to force

rivals (normally smaller rivals (normally smaller

and weaker) out of and weaker) out of

Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market.

and weaker) out of and weaker) out of

business or prevent new business or prevent new

entrantsentrants

�� AntiAnti--competitive and competitive and

illegal if it can be provedillegal if it can be proved


Absorption/Full Cost PricingAbsorption/Full Cost Pricing


�� Full Cost Pricing Full Cost Pricing –– attempting to set price to attempting to set price to cover both fixed and variable costscover both fixed and variable costs

�� Absorption Cost Pricing Absorption Cost Pricing –– Price set to ‘absorb’ Price set to ‘absorb’ some of the fixed costs of productionsome of the fixed costs of production

Absorption/Full Cost PricingAbsorption/Full Cost Pricing

some of the fixed costs of productionsome of the fixed costs of production


Marginal Cost PricingMarginal Cost Pricing


�� Marginal cost Marginal cost –– the cost of producing ONE the cost of producing ONE extra or ONE fewer item of productionextra or ONE fewer item of production

�� MC pricing MC pricing –– allows flexibility allows flexibility �� Particularly relevant in transport where fixed Particularly relevant in transport where fixed

costs may be relatively highcosts may be relatively high

Marginal Cost PricingMarginal Cost Pricing

costs may be relatively highcosts may be relatively high�� Allows variable pricing structure Allows variable pricing structure –– e.g. on a e.g. on a

flight from London to New York flight from London to New York –– providing providing the cost of the extra passenger is covered, the the cost of the extra passenger is covered, the price could be varied a good deal to attract price could be varied a good deal to attract customers and fill the aircraftcustomers and fill the aircraft


Marginal Cost PricingMarginal Cost Pricing•Example:

�� Aircraft flying from Bristol to Edinburgh Aircraft flying from Bristol to Edinburgh –– Total Cost (including normal Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*profit) = £15,000 of which £13,000 is fixed cost*

�� Number of seats = 160, average price = £93.75Number of seats = 160, average price = £93.75�� MC of each passenger = 2000/160 = £12.50MC of each passenger = 2000/160 = £12.50�� If flight not full, better to offer passengers chance of flying at £12.50 and fill If flight not full, better to offer passengers chance of flying at £12.50 and fill

the seat than not fill it at all! the seat than not fill it at all! �� *All figures are estimates only*All figures are estimates only


Contribution PricingContribution Pricing


�� Contribution = Selling Price Contribution = Selling Price –– Variable Variable

(direct costs)(direct costs)

�� Prices set to ensure coverage of variable Prices set to ensure coverage of variable

costs and a ‘contribution’ to the fixed costscosts and a ‘contribution’ to the fixed costs

Contribution PricingContribution Pricing

costs and a ‘contribution’ to the fixed costscosts and a ‘contribution’ to the fixed costs

�� Similar in principle to marginal cost pricingSimilar in principle to marginal cost pricing

�� BreakBreak--even analysis might be useful in such even analysis might be useful in such

circumstancescircumstances


Target PricingTarget Pricing


�� Setting price to ‘target’ a specified profit levelSetting price to ‘target’ a specified profit level

�� Estimates of the cost and potential revenue at Estimates of the cost and potential revenue at different prices, and thus the breakdifferent prices, and thus the break--even have to even have to be made, to determine the markbe made, to determine the mark--upup

Target PricingTarget Pricing

be made, to determine the markbe made, to determine the mark--upup

�� MarkMark--up = Profit/Cost x 100up = Profit/Cost x 100


CostCost--Plus Pricing Plus Pricing


�� Calculation of the average cost (AC) plus a mark Calculation of the average cost (AC) plus a mark upup

�� AC = Total Cost/OutputAC = Total Cost/Output

CostCost--Plus PricingPlus Pricing


Influence of ElasticityInfluence of Elasticity


�� Any pricing decision must be mindful of Any pricing decision must be mindful of the impact of price elasticity the impact of price elasticity

�� The degree of price elasticity impacts on The degree of price elasticity impacts on the level of sales and hence revenuethe level of sales and hence revenue


the level of sales and hence revenuethe level of sales and hence revenue

�� Elasticity focuses on proportionate Elasticity focuses on proportionate (percentage) changes(percentage) changes

�� PED = % Change in Quantity PED = % Change in Quantity demanded/% Change in Pricedemanded/% Change in Price


�� Price Inelastic:Price Inelastic:

�� % change in Q < % change in P% change in Q < % change in P

�� e.g.e.g. a 5% increase in price would be met by a a 5% increase in price would be met by a fall in sales of something less than 5% fall in sales of something less than 5%


fall in sales of something less than 5% fall in sales of something less than 5%

�� Revenue would riseRevenue would rise

�� A 7% reduction in price would lead to a rise in A 7% reduction in price would lead to a rise in sales of something less than 7%sales of something less than 7%

�� Revenue would fallRevenue would fall


�� Price Elastic:Price Elastic:

�� % change in quantity demanded > % change in % change in quantity demanded > % change in priceprice

�� e.g.e.g. A 4% rise in price would lead to sales falling A 4% rise in price would lead to sales falling


�� e.g.e.g. A 4% rise in price would lead to sales falling A 4% rise in price would lead to sales falling by something more than 4%by something more than 4%

�� Revenue would fallRevenue would fall

�� A 9% fall in price would lead to a rise in sales of A 9% fall in price would lead to a rise in sales of something more than 9%something more than 9%

�� Revenue would riseRevenue would rise2007 - 2010 74Hamdard University Students

new product development & pricing strategies

Education