BUS 100 chapter 12

✓ Describe two specific pricing strategies in each category.

1. Price skimming and penetration pricing are two strategies used for pricing new products. Price skimming is the strategy of charging the highest possible price for a product during the introduction stage of its life-cycle. At the opposite extreme, penetration pricing is the strategy of setting a low price for a new product to build market share quickly. 2. Differential pricing means charging different prices to different buyers for the same quality and quantity of product. Negotiated pricing occurs when the final price is established through bargaining between the seller and the customer. Secondary-market pricing means setting one price for the primary target market and a different price for another market. The price charged in the secondary market is often, but not always, lower. Periodic discounting is the temporary reduction of prices on a patterned or systematic basis. To alleviate the problem of customers holding off on purchases until a discount period, some organizations employ random discounting. They reduce their prices temporarily on a nonsystematic basis. 3. Psychological pricing strategies encourage purchases based on emotional responses rather than on economically rational ones. Odd-number pricing is the strategy of setting prices using odd numbers that are slightly below whole-dollar amounts. Nine and five are the most popular ending figures for odd-number prices. Many retailers (supermarkets in particular) practice multiple-unit pricing, setting a single price for two or more units, such as two cans for 99 cents, rather than 50 cents per can. Reference pricing means pricing a product at a moderate level and positioning it next to a more expensive model or brand in the hope that the customer will use the higher price as a reference price Bundle pricing is the packaging together of two or more products, usually of a complementary nature, to be sold for a single price. To reduce or eliminate frequent short-term price reductions, some organizations use an approach referred to as everyday low prices (EDLPs). In customary pricing, certain goods are priced primarily on the basis of tradition. 4. Product-line pricing means establishing and adjusting the prices of multiple products within a product line. Product-line pricing means establishing and adjusting the prices of multiple products within a product line. 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. Price lining is the strategy of selling goods only at certain predetermined prices that reflect definite price breaks. 5. Promotional Pricing Sometimes a firm prices a few products below the usual markup, near cost, or below cost, which results in price leaders. Special-event pricing involves advertised sales or price cutting linked to a holiday, season, or event. Comparison discounting sets the price of a product at a specific level and compares it with a higher price. The higher price may be the product's previous price, the price of a competing brand, the product's price at another retail outlet, or a manufacturer's suggested retail price.

✓ Describe the classifications of consumer products.

A convenience product is a relatively inexpensive, frequently purchased item for which buyers want to exert only minimal effort to procure. A shopping product is an item for which buyers are willing to expend considerably more effort on planning and purchasing. Buyers allocate ample time for comparing prices, product features, qualities, services, and warranties between different stores and brands. 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.

✓ Describe the major types of brands.

A manufacturer (or producer) brand, as the name implies, is a brand that is owned by the manufacturer. A store (or private) brand is a brand that is owned by an individual wholesaler or retailer. A generic product (or generic brand) is a product with no brand at all.

✓ How does a product line differ from a product mix?

A product line is a group of similar products that differ only in relatively minor characteristics. Generally, the products within a product line are related to each other in the way they are produced, marketed, or used. Product mix consists of all the products the firm offers for sale.

✓ Identify the general categories of products.

A product purchased to satisfy personal and family needs is a consumer product. A product bought by a business for resale, for making other products, or for use in a firm's operations is a business product.

✓ Define brand equity and describe the four major factors that contribute toward brand equity. What issues must be considered while choosing a brand name?

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. The four major factors that contribute to brand equity are brand awareness, brand associations, perceived brand quality, and brand loyalty. Brand awareness leads to brand familiarity—buyers are more likely to select a familiar brand. The symbolic associations of a brand connect it to a personality type or lifestyle. When consumers are unable to judge for themselves the quality of a product, they may rely on a brand's perceived level of quality. Finally, brand loyalty is a valued element of brand equity because it reduces both a brand's vulnerability to competitors and the need to spend tremendous resources to attract new customers. The quality of a product, they may rely on a brand's perceived level of quality. Finally, brand loyalty is a valued element of brand equity because it reduces both a brand's vulnerability to competitors and the need to spend tremendous resources to attract new customers. Loyalty also increases brand visibility and encourages retailers to carry the brand.

✓ Describe the three types of pricing associated with business products.

Geographic pricing strategies deal with delivery costs. The pricing strategy that requires the buyer to pay the delivery costs is called FOB origin pricing. When one unit in an organization sells a product to another unit, transfer pricing occurs. A discount is a deduction from an item's price.

✓ Describe the seven phases of new-product development.

Idea generation involves looking for product ideas that will help a firm to achieve its objectives. During screening, ideas that do not match organizational resources and objectives are rejected. The largest number of product ideas is rejected during the screening phase. Concept testing is a phase in which a product idea is presented to a sample of potential buyers through a written or oral description (and perhaps drawings) to determine their attitudes and initial buying intentions. Business analysis generates tentative ideas about a potential product's financial performance, including profitability. During this stage, the firm considers how the new product, if it were introduced, would affect the firm's overall sales, costs, and profits. In the product development phase, the company must find out if it is technically feasible to produce the product and if the product can be made at a low enough cost for the company to generate a profit. Test marketing is the limited introduction of a product in several towns or cities that are representative of the intended target market. Its aim is to determine buyers' probable reactions. Marketers experiment with advertising, pricing, and packaging in different test markets and measure the extent of brand awareness, brand switching, and repeat purchases that result from alterations in the marketing mix. During commercialization, the organization completes plans for full-scale manufacturing and marketing and prepares project budgets. In the early part of the commercialization phase, marketing management analyzes the results of test marketing to determine necessary changes in the marketing mix. During commercialization, the organization completes plans for full-scale manufacturing and marketing and prepares project budgets. In the early part of the commercialization phase, marketing management analyzes the results of test marketing to determine necessary changes in the marketing mix.

✓ Give an advantage and a disadvantage for each method.

Markup pricing is easy to apply and is used by many businesses (mostly retailers and wholesalers). However, it has two major flaws. The first is the difficulty of determining the best markup percentage. If the percentage is too high, the product may be overpriced for its market and too few units will be sold to cover the cost of producing and marketing it. If the markup percentage is too low, the seller forgoes profit it could have earned by assigning a higher price. The second problem with markup pricing is that it separates pricing from other business functions. demand-based pricing. This method results in a higher price when product demand is strong and a lower price when demand is weak. A firm may favor a demand-based pricing method called price differentiation if it wants to use more than one price in the marketing of a specific product. demand-based pricing places a firm in a better position to attain higher profit levels, assuming that buyers value the product at levels sufficiently above the product's cost. To use demand-based pricing, however, management must be able to estimate demand at different price levels, which may be difficult to assess accurately. In using competition-based pricing, an organization considers costs and revenue secondary to competitors' prices. Competition-based pricing can help to attain a pricing objective to increase sales or market share. Competition-based pricing may also be combined with other cost approaches to arrive at a profitable level.

✓ Differentiate price competition and non-price competition.

Price competition occurs when a seller emphasizes a product's low price and sets a price that equals or beats competitors' prices. Non-price competition is competition based on factors other than price. It is used most effectively when a seller can make its product stand out through distinctive product quality, customer service, promotion, packaging, or other features.

Identify the five categories of pricing strategies.

Pricing strategies fall into five categories: new-product pricing, differential pricing, psychological pricing, product-line pricing, and promotional pricing.

✓ Which ones usually will result in a firm having lower prices?

Survival

✓ What is the aim of test marketing?

Test marketing is the limited introduction of a product in several towns or cities that are representative of the intended target market. Its aim is to determine buyers' probable reactions.

✓ What are the major functions of packaging?

The basic function of packaging materials is to protect the product and maintain its functional form. Another function of packaging is to offer consumer convenience. A third function of packaging is to promote a product by communicating its features, uses, benefits, and image.

✓ Differentiate between FOB origin and FOB destination pricing.

The pricing strategy that requires the buyer to pay the delivery costs is called FOB origin pricing. FOB destination indicates that the price does include freight charges, and thus the seller pays these charges.

✓ Explain the five types of discounts for business products.

Trade discounts are taken off the list prices that are offered to marketing intermediaries, or middlemen. Quantity discounts are discounts given to customers who buy in large quantities, which makes sellers' per-unit selling cost lower for larger purchases. Cash discounts are offered for prompt payment. A seasonal discount is a price reduction to buyers who purchase out of season. This discount encourages off-season sales and ensures steady production throughout the year. An allowance is a reduction in price to achieve a desired goal.

✓ How does knowledge of the product life-cycle relate to the introduction of new products?

When making marketing strategy decisions, managers must be aware of the lifecycle stage of each product for which they are responsible and to estimate how long the product is expected to remain in that stage. A firm risks speeding the decline of an existing product by releasing a replacement before the earlier product has reached the decline stage. In other situations, a company will attempt to extend a product's life-cycle. Extending its life can be an important tool in maintaining a product's profitability.

✓ Can a product line be a product mix?

Yes. If the production width is 1.

✓ What factors must be considered when pricing products?

an organization must determine whether it will compete based on price alone, or on a combination of factors.

✓ List and explain the three kinds of pricing methods.

cost-based pricing, the seller first determines the total cost of producing (or purchasing) one unit of the product. The seller then adds an amount to cover additional costs (such as insurance or interest) and profit.

✓ Explain the various types of pricing objectives.

A firm may have to price its products to survive—either as an organization or as a player in a particular market. Profit Maximization: Firms that wish to set profit goals should express them as either specific dollar amounts, or percentage increases, over previous profits. The return on investment (ROI) is the amount earned as a result of a financial investment. Some firms set an annual percentage ROI as a quantifiable means to gauge the success of their pricing goal. In pricing their products, some firms are guided by a desire to maintain the status quo. This is especially true in industries that depend on price stability. If such a firm can maintain its profit or market share simply by matching the competition—charging about the same price as competitors for similar products—then it will do so.

✓ Based on their characteristics, business products can be classified into what categories?

A raw material is a basic material that becomes part of a physical product. Major equipment includes large tools and machines used for production purposes. Accessory equipment is standardized equipment used in a firm's production or office activities. A component part becomes part of a physical product and is either a finished item ready for assembly or a product that needs little processing prior to assembly. A process material is used directly in the production of another product. Unlike a component part, a process material is not readily identifiable in the finished product. (i.e food preservative) A supply facilitates production and operations but does not become part of a finished product. (pencil) A business service is an intangible product that an organization uses in its operations. (financial services)

✓ Why is it important to delete certain products? The largest number of product ideas is rejected during which stage?

A weak and unprofitable product costs a company time, money, and resources that could be used to modify other products or develop new ones. A weak product's unfavorable image can negatively impact the customer perception and sales of other products sold by the firm. The largest number of product ideas is rejected during the screening phase.

✓ Why is it important to consider the buyer's sensitivity to price when pricing products?

Because Members of one market segment may be more influenced by price than members of another. Consumer price sensitivity can also vary between products. Buyers will tolerate a narrow range of prices for certain items and a wider range for others.

✓ How do brands help customers in product selection? How do brands help companies introduce new products? Explain the three levels of brand loyalty.

Because branding identifies each product, customers can easily repurchase products that provide satisfaction, performance, and quality. Moreover, they can just as easily avoid or ignore unsatisfactory products. A brand can be a way of expressing oneself and identifying with certain lifestyle characteristics and values. Brands also help to reduce the perceived risk of purchase. Finally, customers may receive a psychological reward from owning a brand that symbolizes status. Branding helps a firm to introduce a new product that carries a familiar brand name because buyers already know the brand. Branding aids sellers in their promotional efforts because promotion of each branded product indirectly promotes other products of the same brand. Brand recognition is the level of loyalty at which customers are aware that the brand exists and will purchase it if their preferred or familiar brands are unavailable. Brand preference is the level of brand loyalty at which a customer prefers one brand over competing brands. However, if the preferred brand is unavailable, the customer is willing to substitute another brand. Brand insistence is the strongest and least common level of brand loyalty. Brand-insistent customers will not buy substitutes.

✓ Explain the four stages of the product life-cycle.

Introduction In the introduction stage, customer awareness and acceptance of the new product are low. Sales rise gradually. There are no competitors at this stage. High development and marketing costs result in low profit, or even in a loss, initially. The price can be high as the firm recoups research and development expenses and ramps up production. Customers are primarily people who want to be at the forefront of owning the new product. The marketing challenge at this stage is to make potential customers aware of the product's existence and its features, benefits, and uses. A new product is seldom an immediate success. Marketers must monitor early buying patterns and be prepared to modify the product promptly if necessary. The firm should attempt to price the product to attract the market segment that has the greatest desire and ability to purchase it. Plans for distribution and promotion should suit the targeted market segment. All ingredients of the marketing mix may need to be adjusted quickly to maintain sales growth during the introduction stage. In the growth stage, sales increase rapidly as consumers gain awareness of the product. Other firms have begun to market competing products. The competition and decreased unit costs (owing to mass production) result in a lower price, which reduces the profit per unit. Industry profits reach a peak and begin to decline during this stage. To meet the needs of the growing market, the originating firm offers modified versions of the product and expands distribution. Sales are still increasing at the beginning of the maturity stage, but the rate of increase has slowed. Later on, the sales curve peaks and begins to decline, as do industry profits. Product lines are simplified, markets are segmented more carefully, and price competition increases, which forces weaker competitors to leave the industry. Marketers continue to introduce refinements and extensions of the original product to the market. During a product's maturity stage, its market share may be strengthened by redesigned packaging or style changes. During a product's maturity stage, its market share may be strengthened by redesigned packaging or style changes. New promotional efforts and aggressive personal selling may be necessary during this period of intense competition. During the decline stage, sales volume decreases sharply and profits continue to fall. The number of competing firms declines, and the only survivors in the marketplace are firms that specialize in marketing the product. Production and marketing costs become the most important determinant of profit.

✓ How does a change in price affect the demand and supply of a product?

Lowering price increases the demand for a particular product compare to it competitior. Price competition allows a marketer to set prices based on product demand or in response to changes in the firm's finances.

✓ What are the ways to improve a product mix? Describe two approaches to use existing products to strengthen a product mix.

There are three major ways to improve a product mix: change an existing product, delete a product, or develop a new product. Quality modifications are changes that relate to a product's dependability and durability and are usually achieved by alterations in the materials or production process. Functional modifications affect a product's versatility, effectiveness, convenience, or safety. They usually require redesign of the product. Aesthetic modifications change the sensory appeal of a product by altering its taste, texture, sound, smell, or visual characteristics.