Developing new products and managing product lifecycle Flashcards
Product lifecycle?
1_Product development: begins when the company finds and develops a new product idea. During product development, sales are zero, and the company’s investment costs mount.
2_Introduction: is a period of slow sales growth as the product is introduced in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction.
3_Growth is a period of rapid market acceptance and increasing profits.
4_Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition.
- Decline is the period when sales fall off and profits drop.
Value-based pricing
Price is the sum of all the values that customers give up to gain the benefits of having or using a product or service.
-Good-value pricing
Offering just the right combination of
quality and good service at a fair price.
Effective customer-oriented pricing involves
understanding how much value consumers place on the benefits they receive from the product and setting a price that captures that value.
[Customer value-based pricing:
Setting prices based on buyers’ perceptions of value rather than on the seller’s cost.]
__Value-based pricing reverses this process. The company first assesses customer needs and value perceptions. It then sets its target price based on customer perceptions of value.
The targeted value and price drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins with analyzing consumer needs and value perceptions, and the price is set to match perceived value.
“GOOD VALUE” is not the same as “low price”.
Consumers will use these perceived values to evaluate a product’s price, so the company must work to measure them.
__In many cases, this has involved introducing less expensive versions of established brand name products or new lower-price lines.
__In other cases, good-value pricing involves redesigning existing brands to offer more quality for a given price or the same quality for less.
Some companies even succeed by offering less value but at very low prices.
An important type of good-value pricing at the retail level is called everyday low pricing
(EDLP).
Value-added pricing
Attaching value-added features and
services to differentiate a company’s
offers and charging higher prices.
Cost-Based pricing:
Cost-based pricing: Setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for effort and risk.
-Some companies, such as Walmart or Spirit Airlines, work to become the low-cost
producers in their industries. Companies with lower costs can set lower prices that result in
smaller margins but greater sales and profits.
-However, other companies—such as Apple,
BMW, and Steinway—intentionally pay higher costs so that they can add value and claim
higher prices and margins.
-The key is to manage the spread between costs and prices—how much the company makes for the customer value it delivers.
Although costs are an important consideration in setting prices, cost-based pricing is often product-driven. The company designs what it considers to be a good product, adds up the costs of making the product, and sets a price that covers costs plus a target profit. Marketing must then convince buyers that the product’s value at that price justifies its purchase. If the price turns out to be too high, the company must settle for lower markups or lower sales, both resulting in disappointing profits.
Design product–Determine prod. costs–set price based on cost–convince buyers of the product’s value.
A company’s costs take two forms: fixed and variable. Fixed costs (also known as
overhead) are costs that do not vary with production or sales level. For example, a
company must pay each month’s bills for rent, heat, interest, and executive salaries regardless
of the company’s level of output. Variable costs vary directly with the level of production.
Competition-based pricing:
Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices, and market offerings.
Consumers will base their judgments of a product’s value on the prices that competitors charge for similar products.
[In assessing competitors’ pricing strategies, a company should ask several questions.
First, how does the company’s market offering compare with competitors’ offerings in
terms of customer value? If consumers perceive that the company’s product or service
provides greater value, the company can charge a higher price. If consumers perceive less
value relative to competing products, the company must either charge a lower price or
change customer perceptions to justify a higher price.
Next, how strong are current competitors, and what are their current pricing strategies?
If the company faces a host of smaller competitors charging high prices relative to the value
they deliver, it might charge lower prices to drive weaker competitors from the market. If
the market is dominated by larger, lower-price competitors, a company may decide to target
unserved market niches by offering value-added products and services at higher prices.
Importantly, the goal is not to match or beat competitors’ prices. Rather, the goal
is to set prices according to the relative value. If a company creates greater value for
customers, higher prices are justified.]
New Product pricing strategies:
Pricing strategies usually change as the product passes through its life cycle. The introductory
stage is especially challenging. Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies: market-skimming pricing and market-penetration pricing.
_Market-skimming pricing
(price skimming)
Setting a high price for a new product
to skim maximum revenues layer by
layer from the segments willing to pay
the high price; the company makes
fewer but more profitable sales.
-Market skimming makes sense only under certain conditions. First, the product’s quality
and image must support its higher price, and enough buyers must want the product at
that price. Second, the costs of producing a smaller volume cannot be so high that they
cancel the advantage of charging more. Finally, competitors should not be able to enter the
market easily and undercut the high price
_Market-penetration pricing
Setting a low price for a new product
in order to attract a large number of
buyers and a large market share.
The high sales volume results in falling costs, allowing companies to cut their prices even further.
-Several conditions must be met for this low-price strategy to
work. First, the market must be highly price sensitive so that a low
price produces more market growth. Second, production and distribution
costs must decrease as sales volume increases. Finally, the low
price must help keep out the competition, and the penetration pricer
must maintain its low-price position. Otherwise, the price advantage
may be only temporary.
