Pride/Hughes/Kapoor Business, 10th Edition

Audio Review Transcript
Chapter 13 Creating and Pricing Products That Satisfy Customers

1. Explain what a product is and how products are classified

A product is everything one receives in an exchange, including all tangible and intangible attributes and expected benefits. A product may be a good, a service, or an idea. Notice that the definition of product is based on an exchange. The product is exchanged for money, which is the price of the product.
Products are classified in two general categories according to their ultimate use. Classification affects a product’s distribution, promotion, and pricing. . Consumer products are purchased to satisfy personal and family needs. Business products are bought for resale, for making other products, or for use in a firm’s operations. Consumer products are divided into three categories. A convenience product is a relatively inexpensive, frequently purchased item for which buyers want to exert minimal effort, such as newspapers or soft drinks. A shopping product is an item for which buyers are willing to expend considerable effort on planning and making the purchase, such as appliances and cell phones. A specialty product possesses one or more unique characteristics for which a significant group of buyers is willing to expend considerable purchasing effort, such as a unique car or an antique.
Business products can be divided in seven groups, depending on their characteristics and intended uses. (1) A raw material is a basic material that actually becomes part of a physical product. It usually comes from mines, forests, oceans, or recycled solid wastes. (2) Major equipment includes large tools and machines, such as lathes, cranes, and stamping machines, that are used for production purposes. (3) Accessory equipment is standardized equipment used in a firm’s production or office activities, such as small motors, calculators, and printers. (4) A component part is an item that becomes part of a physical product and is either a finished item ready for assembly, such as a clock or a tire, or a product that needs little processing before assembly, such as switches or computer chips. (5) A process material is used directly in the production of another product but is not readily identifiable in the finished product, such as glue or food preservatives. (6) A supply facilitates production and operations but does not become part of the finished product, such as paper, pens, toner, and cleaning agents. Finally, (7) a business service is an intangible product that an organization uses in its operations, such as financial, legal, and janitorial services. (LO 1 ends)

2. Discuss the product life cycle and how it leads to new product development

Every product progresses through a series of four stages in which its sales revenue and profit increase, reach a peak, and then decline. This series of stages is called the product life cycle. In the introduction stage, customer awareness and acceptance are low. Promotion and distribution activities help sales rise, but development and marketing costs result in low profits. In the growth stage, sales increase rapidly, competitors enter the market, and the price drops to reflect higher competition. Industry profits reach a peak and begin to decline during this stage. Management’s goal is to stabilize and strengthen the product’s position by building brand loyalty. In the maturity stage, the rate of sales increase has slowed considerably. As the sales curve peaks and begins to decline, product lines are simplified, markets are more segmented, and price competition increases. During the decline stage, sales volume and profits decrease sharply and the number of competitors declines. Marketers keep track of the life-cycle stage of products in order to estimate when a new product should be introduced to replace a declining one.  (LO 2 ends)

3. Define product line and product mix and distinguish between the two

            Marketers can sometimes extend the life cycle of a product by expanding the product line. A product line is a group of similar products that differ only in relatively minor characteristics, such as detergents or cereals. The products in a product line are related to each other in the way they are produced, marketed, and used. An organization’s product mix consists of all the products it offers for sale. A product mix may be called wide if it has a number of product lines; it may called deep if it has a high average number of products in each line. Generally, we describe a firm’s product mix as either broad or narrow. (LO 3 ends)

4. Identify the methods available for changing a product mix

Marketers may improve the product mix by changing an existing product, by deleting a product, or by developing a new product. Let’s start with changing existing products. This is usually accomplished in one of two ways. The first is product modification, which involves changing one or more of a product’s characteristics. To do this successfully, three conditions have to exist: (1) the product must be modifiable, (2) customers must be able to perceive the modification, and (3) the modification should make the product more consistent with customer needs, thus providing satisfaction. A firm may make quality modifications, by improving dependability or durability; functional modifications, by improving versatility, effectiveness, convenience, or safety; or aesthetic modifications, which change the taste, texture, sound, smell, or visual characteristics.
The second way to change an existing product is by a line extension, the development of a new product that is closely related to one or more products in the existing product line but designed specifically to meet somewhat different customer needs. To maintain an effective product mix, a firm sometimes has to eliminate some products from the product line, a process called product deletion. A weak product costs time, money, and resources, and may have a negative public image. Nevertheless, it is often difficult to do.
The third and most frequently used strategy is new product development. Introducing new products, however, is time-consuming, expensive, and risky; in fact, the failure rate for new products ranges between 60 and 75%. But a failure to introduce new products is a virtual recipe for disaster. New products are generally categorized as imitations, adaptations, or innovations.
New products are developed through a series of seven stages: (1) idea generation involves looking for ideas that will help the firm achieve its objectives; (2) screening eliminates ideas that don’t match organizational objectives; (3) concept testing presents the product idea to a small group of potential buyers to determine attitudes; (4) business analysis provides tentative ideas about a product’s financial performance; (5) during product development the firm finds out if it’s feasible to make the product and sell it at a reasonable price; (6) test marketing is the limited introduction of a product in several representative areas; and (7) commercialization is the completion of full-scale plans for manufacturing and marketing. (LO 4 ends)

5. Explain the uses and importance of branding, packaging, and labeling

Whether introducing a new product or trying to revitalize an older one, marketers must make three important strategic decisions: branding, packaging, and labeling. Let’s start with branding. A brand is a name, term, symbol, design, or any combination of these that identifies one seller’s product as distinct from those of other sellers. A brand name is the part of the brand that can be spoken, including letters, numbers, words, or pronounceable symbols. The brand mark is the part of a brand that is a symbol or distinctive design, like the Nike “swoosh.” A trademark is a brand name or brand mark that is registered with the US Patent and Trademark Office and is thus legally protected from use by anyone except its owner. Finally, a trade name is the complete and legal name of an organization.
Brands may be owned by a manufacturer or a store. A manufacturer (or producer) brand is owned by a manufacturer, such as Exxon gasoline. A store (or private) brand is owned by an individual wholesaler or retailer. Kenmore is store brand owned by Sears.
A final type of brand is a generic product or generic brand, a product with no brand at all. Generics are in a plain package that simply specifies its contents.
A major benefit to the brand owner is the creation of brand loyalty, the extent to which a customer is favorable toward buying a specific brand. Brand loyalty varies in strength from recognition to preference to insistence, but due primarily to discounts and short-term promotions, brand loyalty is being eroded.      Brand equity is the marketing and financial value associated with a brand’s strength in a market. Although difficult to measure, it represents the value of a brand to the organization, such as Coca-Cola.
The final strategic decision firms have to make about branding is whether to use individual branding, in which a firm uses a different brand for each of its products, such as Ivory, Camay, and Zest; or family branding, in which it uses the same brand for all or most of its products, such as Xerox. A combination of individual and family branding is a brand extension, which is using an existing brand to brand a new product in a different category, such as Ivory Body Wash. Branding strategies are used to associate (or not associate) particular products with existing products, producers, or intermediaries.    After branding decisions are made, marketers turn to packaging. Packaging is all the activities involved in developing and providing a container with graphics for a product. Packaging can make a product more versatile, safer, or easier to use. Its shape, appearance, and printed message can influence purchasing decisions. The functions of packaging include protecting the product, appealing to consumer convenience, and communicating its features.
Now let’s turn to the third and last strategic decision, labeling. Labeling is the presentation of information on a product or its package. The label is the part that contains the information, including the brand name and mark, the size, content, claims, directions, and safety precautions. Labels may also carry the details of express warranties. An express warranty is a written explanation of the responsibilities of the producer in the event that a product is found to be defective or otherwise unsatisfactory. (LO 5 ends)

6. Describe the economic basis of pricing and the means by which sellers can control prices and buyers’ perceptions of prices

Now that we have discussed the first part of the marketing mix, product, let’s turn to the second part, which is pricing. The price of a product is the amount of money a seller is willing to accept in exchange for a product, at a given time and under given circumstances.
Supply is the quantity of a product that producers are willing to sell at each of various prices. Demand is the quantity of a product that buyers are willing to purchase at each of various prices. When the price of a product matches the demand of a product, the prices are at equilibrium.
Before a price is set, a firm must decide whether it will compete on the basis of price, which means setting a price equal to or lower than competitors’ prices to gain market share; or whether it will use nonprice competition, which is based on factors other than price such as quality, service, promotion, or packaging. Product differentiation is the process of developing and promoting differences between one’s product and all similar products. The idea is that the firm can create customer loyalty for its product using nonprice competition. (LO 6 ends)

7. Identify the major pricing objectives used by businesses

Before setting prices, a firm must set its pricing objectives. Objectives include survival, profit maximization, target return on investment, market-share goals, or status-quo pricing.  (LO 7 ends)

8. Examine the three major pricing methods that firms employ

Once a firm develops its pricing objectives, it must select a method to reach that goal. There are two things to keep in mind at this time, (1) that the market, not costs, determines the ultimate price of a product, and (2) that costs plus expected sales establish a price floor, the minimum price at which a firm can sell its product without incurring a loss. Firms sometimes have to price products to survive, which usually requires cutting prices to attract customers. Return on investment (ROI) is the amount earned as a result of the investment in developing and marketing the product. The firm sets an annual percentage ROI as the pricing goal. Some firms use pricing to maintain or increase their market share. In industries in which price stability is important, firms often price their products by charging about the same as competitors.
There are three pricing methods. Cost-based pricing is the simplest. The seller determines the cost of producing one unit of the product, and then an additional amount, called a markup, is added to the cost of the product to set its basic selling price. It is often difficult, and somewhat arbitrary, to know what the best markup should be. Cost-based pricing can be facilitated by determining the breakeven quantity, which is the number of units that must be sold for the total revenue (from all units sold) to equal the total cost (of all units sold). Total revenue is the total amount received from the sales of a product. The total costs are the sum of the fixed costs, which are incurred no matter how many units of a product are produced or sold, plus the variable costs, which depend on the number of units produced.
Another pricing method is demand-based pricing, which results in higher prices when demand is high and lower prices when demand is low. Long-distance companies use this method. A related method is price differentiation, where a firm uses more than one price level. Vacation resorts use this method. The third method, competition-based pricing, is when an organization considers costs and revenue secondary to competitors’ prices. This method is commonly used when products are very similar and when price is the primary variable in the marketing strategy. (LO 8 ends)

9. Explain the different strategies available to companies for setting prices

A pricing strategy is a course of action designed to achieve pricing objectives. The two strategies most commonly used for new products are price skimming, where the firm charges the highest-possible price for a product during the introduction stage of its life cycle; and penetration pricing, where the firm sets a low price for a new product. Price skimming helps recover development costs faster, though it may reduce demand. The purpose of penetration pricing is to build market share and help discourage competitors from entering the market.
For products already on the market, organizations have a variety of pricing strategies available to them. Differential pricing means charging different prices to different buyers for the same quantity and quality of a product. To be successful, the market must have multiple segments with different price sensitivities. The four differential pricing strategies include negotiated pricing, which happens when the final price is established through bargaining; secondary-market pricing, which is setting one price for the primary target market and a different price for another market; periodic discounting, the temporary reduction of prices on a patterned or systematic basis; and random discounting, the temporary reduction of prices on an unsystematic basis.
Psychological pricing strategies encourage purchases based on emotional rather than rational responses. These strategies include odd-number pricing, using odd numbers that are slightly below whole dollar amounts; multiple-unit pricing, setting a single price for two or more units; reference pricing, pricing a product at a moderate level and positioning it next to a more expensive model or brand; bundle pricing, packaging together two or more complementary products and selling them for a single price; everyday low prices (EDLP), setting a low price for products on a consistent basis; and customary pricing, pricing on the basis of tradition.
Product-line pricing means establishing and adjusting the prices of multiple products within a product line. Strategies include captive pricing, which is when the price of the basic product in the product line is low, but the price on the items required to operate it are higher; premium pricing, when the highest quality or most versatile version of similar products in a product line carries the highest price; and price lining, which is  the strategy of selling goods only at predetermined prices that reflect definite price breaks.
The last group of strategies are promotional pricing strategies. Promotion and price frequently work together and must support each other in the marketing mix. The three promotional pricing strategies include price leaders, which are products priced below the usual markup, near cost, or below cost; special-event pricing, which involves advertised or price cutting linked to a holiday, season, or event; and comparison discounting, which is setting a price at a specific level and comparing it with a higher price. (LO 9 ends)
10. Describe the three major types of pricing associated with business products

Setting prices for business products can be different from setting prices for consumer products. Geographic pricing strategies deal with delivery costs. FOB origin pricing requires the buyer to pay these costs, whereas FOB destination means that the price includes the delivery costs, which are thus paid for by the seller. Transfer pricing is the price charged for sales between one unit in an organization and another unit in the same firm. The third business pricing strategy is the discount, a deduction from the price of an item. A trade discount is a discount from the list price, a quantity discount is given to customers who buy in large quantities, a cash discount is offered for prompt payment of an invoice, a seasonal discount is offered to buyers who purchase out of season, and an allowance, such as a trade-in allowance, is granted for turning in used equipment when purchasing new equipment. (LO 10 ends)