Chapter 12 (Creating and Pricing Products that Satisfy Customers) Flashcards
Product
A product is everything one receives in an exchange, including all tangible and intangible attributes and expected benefits; including a goods, services, or ideas
Goods, Services & Ideas.
A good is a real, physical thing that we can touch.
A service is a result of applying human or mechanical effort to change a person or thing.
An idea comes in the form of philosophies, lessons, concepts or advice.
What are the 2 general categories of products?
(1) Consumer (Business-to-Business)
2) Business (Industrial Products
Consumer Product & Business Product
A consumer product is a product purchased to satisfy personal and family needs. A business product is a product bought for resale, for making other products, or for use in a firm’s operations
What are the 3 categories in classifying consumer products?
(1) Convenience Product
(2) Shopping Product
(3) Specialty Product
Convenience Product
A convenience product is a relatively inexpensive, frequently purchased item for which buyers want to exert only minimal effort to acquire (i.e. chewing gum). The buyer spends little time in planning the purchase and comparing available brands or sellers.
Shopping Product
A shopping product is an item for which buyers are willing to expend considerably more effort on planning and purchasing. With cost > than convenience products, buyers allocate more time for comparing prices, product features, qualities, services and warranties between different stores and brands (i.e. appliances, furniture, mobile phones)
Specialty Product
A specialty product possesses one or more unique characteristics for which a group of buyers is willing to expend considerable purchasing effort. Buyers know exactly what they want and will not accept a substitute. For specialty products, purchasers do not compare alternatives (i.e. collectible items).
What are the 7 categories in classifying business products?
(1) Raw Materials
(2) Major Equipment
(3) Accessory Equipment
(4) Component Parts
(5) Process Materials
(6) Supplies
(7) Services
Raw Material
A raw material is a basic material that becomes part of a physical product. They usually come from mines, forests, oceans, or recycled solid waste. Raw materials are generally bought and sold according to grades and specifications.
Major Equipment
A Major equipment includes large tools and machines used for production purposes (i.e. cranes). Some major equipment is custom-made for an organization, while other items are standardized products that perform tasks for many types of organizations.
Accessory Equipment
Accessory equipment is standardized equipment used in a firm’s production or office activities (i.e. hand tools, fax machines, calculators). Compared to major equipment, these are usually less expensive and are purchased routinely with less negotiation.
Component Parts
A component part becomes part of a physical product that is either a finished item ready for assembly or a product that needs a little processing prior to assembly. Although it becomes an element of a larger product, it can often be identified (i.e. tires, computer chips).
Process Material
A process material is used directly in the production of another product. Unlike component parts, process materials are not readily identifiable in the finished product. Purchases are based off industry standards or specifications to the individual purchaser (i.e. industrial glue).
Supply
A supply facilitates production and operations but is not part of the finished product (i.e. paper, pencils, oils, cleaning agents)
Business Service
A business service is an intangible product that an organization uses in its operations. Includes financial, legal, online, janitorial, marketing research activities. Purchases decide whether to provide their business services internally or hire contractors from outside the organization.
Product Life-Cycle
The product life-cycle is a series of stages in which a product’s sales revenue and profit increase, reach a peak, then decline. Marketers use this information to launch, modify, and delete products in response to changes in product life-cycles.
What are the 4 stages of the product life-cycle?
(1) Introduction
(2) Growth
(3) Maturity
(4) Decline
Introduction Stage
In the introduction stage, customer awareness and acceptance of the product are low. Sales gradually rise in response to promotion and distribution activities, while development & marketing costs often result in low profit or a net loss. The marketing goal is to maintain sales growth and raise customer awareness of the product’s existence and its features. In this stage, marketers monitor early buying patterns and promptly modify the product. Price is based on customer response.
Growth Stage
In the growth stage, sales increase rapidly as consumer gain awareness of the product. Competing firms begin creating market competing products. Industry profits reach a peak and then decline in this stage. To meet the growing market, the originating firm offers modified versions of the product and expands distribution. Management and marketing’s goal is to stabilize and strengthen the product’s position by encouraging brand loyalty, promoting customer service, and improving/expanding the product line and cost.
Maturity Stage
In the maturity stage, the rate of sales increase has slowed. Later, the sales curve peaks and begins to decline, thus the industry profits. Product lines are simplified, markets are more segmented, and price competition increases, forcing weaker competitors to leave. During this stage, market share may be strengthened by redesigning packaging or style. Pricing strategies are flexible, and marketers focus on offering incentives and new promotional efforts.
Maturity Stage
In the maturity stage, the rate of sales increase has slowed. Later, the sales curve peaks and begins to decline, thus the industry profits. Product lines are simplified, markets are more segmented, and price competition increases, forcing weaker competitors to leave. During this stage, market share may be strengthened by redesigning packaging or style. Pricing strategies are flexible, and marketers focus on offering incentives and new promotional efforts.
Decline Stage
In the decline stage, sales volume decrease sharply and profits continue to fall. The number of competing firms decline, and the survivors have specialized in marketing the product. Production and marketing costs are the most important determinant of profit. Management begins to determine when to eliminate declining products in the product line. Few changes are made in the product itself, management focuses on narrowing distribution to the existing markets.
Product Line
A product line is a group of similar products that differ only in relatively minor characteristics. Generally, products within a product line are related in production, marketing and use. (*Note: Due to lesser cost, organizations tend to introduce new products within an existing product line instead of starting a new one).
Product Mix
Includes: width & depth
A product mix consists of all the products the firm offers for sale. The width of the product mix is the # of product lines. The depth of the mix is the # of individual products within each line. Width and depth are estimates. (*Note: a marketer must develop, adjust and maintain an effective product mix, responding to customer product preferences, market competition)
What are the 3 ways to improve product mix?
(1) Change an existing product (product modifications & line extensions)
(2) Delete a product
(3) Develop a new product
Product Modification
Product modifications refer to changing a product’s characteristics.
What are the 3 conditions for product modification?
(1) the product is modifiable
(2) existing customers can perceive the modification
(3) the modification makes the product more consistent with customers’ desires
What are the 3 primary ways for product modification?
(1) Quality modification are changes to a product’s dependability and durability, usually achieved by alterations in the material and production process..
(2) Functional modifications are changes in a product’s versatility, effectiveness, convenience or safety, usually requires product redesign.
(3) Aesthetic modifications change the sensory appeal of the product in taste, texture, sound, smell or visual characteristics to improve product appeal.
Line Extension
A line extension is the development of a new product that is closely related to an existing product in the product line. However, it is designed specifically to meet a different customer need. Many so-called new products are line extensions, which are less-expensive and produce lower-risk.
Product Deletion
Product Deletion is the elimination of a product from a product line
What are the challenges & strategies for product deletion?
Challenges for product deletion include the loss of cost used (for bringing the product to market) and emotional attachment.
The Strategy for product deletion is to conduct a systematic review of the product’s impact on the overall effectiveness in a product mix. This review analyzes the product’s sales in a given period, and includes estimates of future sales, costs and profits.
What are the pros and cons in developing a new product?
Pros: if successful, new products improve a firm’s survival, profit, and competitive advantage
Cons: developing and introducing new products are time-consuming, expensive and risky
What are the 3 categories of product deletion?
Categories of product deletion is based on degree of similarity to existing products:
(1) Imitations: products designed to compete with existing products of outside firms
(2) Adaptations: variations of existing products intended for an established market (i.e. product refinements & extensions)
(3) Innovations: entirely new products; gives rise to new industries or revolutionizes existing ones (*note: innovations are the riskiest new product to develop and launch and is the least common)
What are the 7 Phases of Developing a New Product?
(1) Idea Generation
(2) Screening
(3) Concept Testing
(4) Business Analysis
(5) Product Development
(6) Test Marketing
(7) Commercialization
Idea Generation
Idea generation involves looking for product ideas that will help the firm achieve its objectives. Although some organizations get ideas by chance, most organizations maximize product-mix effectiveness by developing systematic approaches for generating new-product ideas. Ideas can be generated from all the firm’s stakeholders.
Screening
In screening, ideas that do not match organizational resources and objectives are rejected. In this, management decides if the firm has resources & expertise to develop and market the proposed product.
Concept Testing
Concept testing is a phase in which a product idea is presented to a sample of potential buyers through a written or oral description. Concept is a low-cost method to test initial reactions to a product before investing considerable resources in product research & development. Concept-testing is also used to modify the product to adhere to initial customer response.
Business Analysis
Business Analysis generates tentative ideas about a potential product’s financial performance, including profitability. The firm considers the new-product’s potential affect in sales, costs and profits. Marketing usually compose preliminary sales and cost projections with the help of Research & Development and Production.
Product Development
In Product Development, the company assesses if the product’s production is technically feasible and if the product will generate a net profit. If the product passes this point, the product is transformed to a working model or prototype.
Test Marketing
Test Marketing is the limited introduction of a product in a controlled location that is representative of the intended target market. Its aim is to determine buyers’ probable reactions. In this stage, marketers experiment with advertising, pricing and packaging and measure brand awareness, brand switching and repeat purchases.
Commercialization
Commercialization: the organization completes plans for full-scale manufacturing & marketing and prepares project budgets. Marketing analyzes test marketing results for any necessary changes in the marketing mix (distribution, promotion, pricing)
What are some questions asked in concept-testing?
Which benefits of the proposed product are especially attractive to you?
Which features of the proposed product are of little to no interest to you?
What are the primary advantages of the proposed product in comparison to similar existing products?
On estimate, how often would you buy this proposed product?
How could this proposed product be improved?
Why do New-Products fail?
The main reason a new-product fails is due to inadequate attention to the product & marketing program.
Brand
Includes: brand name, brand mark, trademark, trade name
A brand is a name, term, symbol, design or any combination that identifies a seller’s products and distinguishes it from competitor products. A brand name is the part of the brand that can be spoken. A brand mark is the part of the brand that is a symbol or design. A trademark is a brand name or brand mark that is registered with the U.S. Patent and Trademark Office, thus legally protected from outside use. A trade name is the complete and legal name of the organization.
What are the 2 types of brands?
Brand classification is based on who owns them:
(1) Manufacturer (Producer) Brand
(2) Store (Private) Brand
Manufacturer Brand & Store Brand
A manufacturer (producer) brand is a brand that is owned by the manufacturer. A store (private) brand is a brand that is owned by an individual wholesaler or retailer
What is the most important element in a branded product?
Consumer confidence is the most important element in the success of a branded product. Customers more likely repurchase products that provide satisfaction, performance and quality.
Generic Product
A generic product or generic brand is a product with no brand at all; its packaging only carries the name of the product.
Brand Loyalty
Brand loyalty is the extent to which a customer is favorable toward buying a specific brand.
What are the 3 levels of brand loyalty?
(1) Brand Recognition
(2) Brand Preference
(3) Brand Insistence
Brand Recognition
Brand recognition is the level of brand loyalty at which the customer is aware of the brand’s existence and will purchase it if their preferred or familiar brand is unavailable.
Brand Preference
Brand preference is the level of brand loyalty at which the customer prefers one brand over competing brands. However, if the preferred brand is unavailable, the customer is willing to substitute another brand.
Brand Insistence
Brand insistence is the strongest and least common level of brand loyalty where the customer will not buy substitutes.
Brand Equity
Brand equity is the marketing and financial value associated with a brand’s strength in a market. Although difficult to measure, brand equity represents the value of a brand to an organization.
What are the 4 major factors for Brand Equity?
(1) Brand awareness
(2) Brand association
(3) Perceived brand quality
(4) Brand loyalty
What are the brand name considerations?
(1) Name is easy to say, spell and recall
(2) Name suggests, in a positive way, the product’s features
(3) Name can be legally protected for exclusive use
What is the life of a registered trademark?
Registration protects trademarks domestically for ten years, and then can be renewed indefinitely.
Infringement
For a brand, infringement is when a brand causes consumers to be confused, mistaken or deceived about the source of the product due to an existing brand
What are the 2 Branding Strategies?
(1) Individual Branding
(2) Family Branding
Individual Branding
Individual Branding is the strategy in which a firm uses a different brand for each of its products. Advantages include when there’s a problem with one product, it will not affect the name of the firm’s other products, and different brands can be directed towards different markets
Family Branding
Family Branding is the strategy in which a firm uses the same brand for all or most of its products. Advantages include successful promotion for one item that carries the family brand can help all other products within the same brand. In addition, a new product has a head-start with a recognized brand name.
Brand Extension
A brand extension occurs when an organization uses one of its existing brands to brand a new product in a different product category.
Packaging
Packaging consists of all the activities involved in developing and providing a container with graphics for a product. Packaging influences versatility, safety, simplicity, and purchasing decisions.
What are the functions of packaging?
(1) To protect the product and maintain its functional form
(2) Offer customer convenience
(3) Visual Promotion
What are the package design considerations?
(1) Cost
(2) # of Units in Package
(3) Package Design Consistency
(4) Package’s Promotional Role
(5) Needs of Intermediaries
(6) Environmental Responsibility
Labeling
Labeling is the presentation of information on a product or its package. The label is the part of the package that contains:
Brand name, brand mark & registered trademark symbol
Package size & contents
Product claims
Directions for use & Safety Precautions
Ingredients
Name & Address of Manufacturer
Universal Product Code (for automated checkout & inventory control)
Express Warranties
Express Warranty
An express warranty is a written explanation of the producer’s responsibilities in the event that a product is found to be defective or unsatisfactory
Price
The price of a product is the amount of money a seller is willing to accept in exchange for the product at a given time and under given circumstances. At times the price
What function does price serve?
Price serves the function of the allocator.
(1) Price allocates sales revenue among producers according to customer satisfaction.
(2) It allocates goods and services among those who are willing and able to buy them.
(3) Price helps customers to allocate their own financial resources among want-satisfying products
Price Competition
Price competition occurs when a seller emphasizes a product’s low price and sets a price that equals or beats the competitors’ prices. Prices are easily malleable based on product demand or changes in firms’ finances.
Non-price competition
Includes: product differentiation
Non-price competition is a competition based on factors other than price. Effective for distinctive products and establishes brand loyalty. A method of non-price competition, product differentiation is the process of developing and promoting differences between one’s product and all similar products.
What are the 5 Pricing Objectives?
(1) Survival
(2) Profit Maximization
(3) Target Return on Investment: ROT (return on investment) is the amount earned as a result of a financial investment
(4) Market-Share Goals: market share is the proportion of total industry sales
(5) Status-Quo Pricing: stick to the status quo!
What are the 2 important factors in setting prices?
(1) The recognition that the market, not the firm’s costs, ultimately determine the product’s price
(2) Awareness that costs and expected sales can only be used to establish a price floor (the minimum product price without incurring a loss)
What are the 3 pricing methods?
(1) Cost-Based Pricing
(2) Demand-Based Pricing
(3) Competition-Based Pricing
Cost-Based Pricing
Includes: breakeven quantity, fixed cost, variable cost
ost-based Pricing: Based on the cost of producing one unit of the product, plus the markup (additional costs & profit) to determine the product’s basic selling price. Flaws include difficulty determining the best markup percentage and the tendency to separate pricing from other business functions
The breakeven quantity is the number of units that must be sold for the total revenue to equal the total cost.
The fixed cost is the cost incurred no matter how many units of a product is produced and sold.
The variable cost is a cost that depends on the number of units produced.
Demand-Based Pricing
Includes: Price Differentiation
Demand-based Pricing: the pricing method based on the level of demand for the product. The marketer chooses the product price that generates the highest total revenue.
Price differentiation is the pricing strategy that charges altered prices for a specific product based on time of purchase, type of customer, or type of distribution channel
Competition-Based Pricing
In competition-based pricing, a firm focuses on competitors’ prices.
Pricing Strategy
A pricing strategy is a course of action designed to achieve pricing objectives.
What are the 2 types of new-product pricing strategies?
(1) Price Skimming
(2) Penetration Pricing
Price Skimming
Price Skimming is the strategy of charging the highest possible price for a product during the introduction stage of its life-cycle; helpful for recovering high R&D costs & slowing down demand of the product if the production capacity is limited during the introduction stage
Penetration Pricing
Penetration Pricing is the strategy of setting a low price for a new product to build market share quickly and also aims to discourage competitors from entering the market. However, it is more difficult to raise prices afterwards.
Differential Pricing
Differential Pricing is the pricing strategy of charging different prices to different buyers for the same quality and quantity of the product.
What are the 4 types of Differential Pricing?
(1) Negotiated Pricing
(2) Secondary-Market Pricing
(3) Periodic Discounting
(4) Random Discounting
Negotiated Pricing
Negotiated Pricing occurs when the final price is established through bargaining between the seller and the customer
Secondary-Market Pricing
Secondary-Market Pricing means setting one price for the primary target market and a different, often lower, price for a secondary market (i.e. geographically-isolated domestic markets, or market for off-peak times)
Periodic Discounting
Periodic Discounting is the temporary reduction of prices on a patterned or systematic basis (i.e. seasonal & holiday sales)
Random Discounting
Random Discounting: prices are reduced temporarily on a nonsystematic basis to discourage purchase delays (in anticipation of periodic discounts)
Psychological Pricing
Psychological pricing strategies encourage purchases based on emotional responses rather than economically rational ones
What are the 7 types of psychological pricing?
(1) Odd-Number Pricing
(2) Multiple-Unit Pricing
(3) Reference Pricing
(4) Bundle Pricing
(5) Everyday Low Prices (EDLPS)
(6) Customary Pricing
(7) Promotional Pricing
Odd-Number Pricing
Odd-number pricing is the strategy of setting prices using odd numbers that are slightly below whole dollar amounts (i.e. $4.99)
Multiple-Unit Pricing
Multiple-unit pricing is the practice of setting a single price for two or more units
Reference Pricing
Reference Pricing means pricing a product at a moderate level and positioning it next to an expensive brand in the hope that the customer uses the higher price as a reference price, viewing the moderate price more favorably
Bundle Pricing
Bundle Pricing is the packaging together of two or more products, usually of complementary nature, to be sold for a single price (i.e. shampoo & conditioner)
EDLPS
Everyday Low Prices (EDLPS) is used to reduce or eliminate frequent short-term price reductions; marketers set a low price for its products on a consistent basis to increase customer confidence
Customary Pricing
In Customary Pricing, certain goods are priced primarily on the basis of tradition.
Product-Line Pricing
Product-Line Pricing means establishing and adjusting the prices of multiple products within a product line.
What are the 3 strategies of product-line pricing?
(1) Captive Pricing
(2) Premium Pricing
(3) Price Lining
Captive Pricing
Captive Pricing is when the basic product in a product line is priced low, but the price on the items required to operate or enhance it are higher.
Premium Pricing
Premium Pricing occurs when the highest-quality product or the most-versatile version of similar products in a product line is assigned the highest price. Other products are priced to appeal to more price-sensitive or product-specific shoppers.
Price lining
Price lining is the strategy of selling goods only at certain predetermined prices that reflect definite price breaks
Promotional Pricing
Promotional Pricing the process of coordinating price with promotions
What are the 3 types of promotional pricing?
(1) Price Leaders
(2) Special-Event Pricing
(3) Comparison Discounting
Price Leaders
Price Leaders are products priced below the usual markup, near cost, or below cost
Special-Event Pricing
Special-Event Pricing involves advertised sales or price cutting linked to a holiday, season or event
Comparison Discounting
Comparison Discounting involves setting the price at a specific level and comparing it with a higher price (i.e. product’s previous price, competing brand, or market price). *Note: due to deceptive pricing practices, the Federal Trade Commission established guidelines for comparison discounting
What are the 3 Types for Pricing with Business Products?
(1) Geographic Pricing
(2) Transfer Pricing
(3) Discounting
Geographic Pricing
Includes: FOB origin & FOB destination
Geographic Pricing deal with delivery costs. FOB origin requires the buyer to pay the delivery costs. FOB destination requires the price is handled by the seller, and freight charges are included in the product price
Transfer Pricing
Transfer Pricing is the prices charged when one unit in an organization sells a product to another unit
Discounting
Includes: trade discounts, quantity discounts, cash discounts, seasonal discounts, & allowances
Discounting is the deduction from an item’s price. Trade discounts are taken off the list prices that are offered to marketing intermediaries. Quantity discounts are discounts given to customers who buy in large quantities. Cash discounts are offered for prompt payment (i.e. 2/10, net 30: the buyer receives a 2% discount if paid within 10 days, payment within 30 days). A seasonal discount is a price reduction to buyers who purchase out of season. An allowance is a reduction in price to achieved a desired goal.
