Product & Price Decisions - PowerPoint Presentation

Product & Price Decisions Chp . 5-1 and 5-2

PRODUCT DECISIONS Sec. 5-1

Products are one of the essential components in the marketing mix! Can be: Goods – tangible (e.g. baseball bat) Services – intangible (e.g. baseball game)Ideas – e.g. demonstrating good sportmanship Product Design

Difference btwn product item and line. How is the product classified? What is the product’s point of difference (POD)? 3 Parts in Defining a Product

Product Item and Line Product Item – specific model or size of a product Product Line – group of closely related products that are sold by a company e.g. Entire Group of Nike athletic shoes would be called a product line. Nike has 3 product lines: athletic clothing, athletic footwear, and sports equipment. These product lines make up Nike’s product mix. LeBron 12 SE “What The” $250

Products can either be classified as consumer goods or business goods. Consumer goods – purchased and used by the ultimate consumer for personal use Business goods – purchased by organizations for use in their operation Same product could be both a consumer good and a business good. Product Classifications

What would a marketing approach look like for consumer goods and business goods? Are they the same? If not, how are they different? Pair up and come up with simple marketing approach for Nike sneakers as a consumer good and then as a business good. Share results. Product Classifications (cont.)

Organizations design their products to make them stand out in the marketplace. Point of difference – unique product characteristic or benefit that sets the product apart from a competitor’s product. Take a moment and think of 1 sports product/service and 1 entertainment product/service and identify the POD. Share with class. Examples: https://www.youtube.com/watch?v=yca_iz8rAAU https://www.youtube.com/watch?v=NimGxU4Qnhk https://www.youtube.com/watch?v=r5RKv0wuYwI One of the reasons for new product failures is the lack of a point of difference.Product planning is crucial to the success of a product! Point of Difference

There are typically 7 steps in new product development. However, not all steps are followed each time. Steps in New Product Development

Analysis of the company’s strengths (S) and weaknesses (W) , as well as external opportunities (O) and threats (T) in the marketplace (SWOT) . Create a SWOT chart now and list at least 1 thing for each of the following categories for the company Apple. Step #1 - SWOT Analysis

Involves generating new product ideas from: Consumers (e.g. customer complaints and/or merchandise returns) Employees (e.g. can provide ideas in special sessions) Research and development departments (e.g. use info. to create new ideas) Competitors (e.g. look to other similar businesses to see what new products they are launching) Step #2 – Idea Generation

If creating product based on competition a company should write a protocol . Protocol – statement that:identifies a target market s pecifies customers’ needs and wants e xplains the product and its POD Example: Nike decides to create a new golf shoe after learning that New Balance (a competitor) has just created a specially designed shoe for child golfers.Protocol: The target market for Nike would be children who need a reasonably priced, quality golf shoe. Nike’s POD could be bright colors in its shoe design and Tiger Woods’ endorsement of the new shoe.Step #2 – Idea Generation (cont.)

Find a partner and read the following info. and then write a protocol statement as a competitor would when creating a similar product. Don’t forget the 3 key parts. Under Armour decides to create a line of clothing catered to the cross fit athlete in response to a new similar clothing line by Reebok. Step #2 – Idea Generation (cont.)

Product idea is evaluated to see if the company has the technology needed to make the product and to see if it meets the company’s objectives. Researchers can also evaluate the product idea with consumers. Focus group – panel of 6 to 10 consumers who discuss their opinions about a topic under the guidance of a moderator. Focus group sessions provide feedback on the proposed product design . Step #3 – Screening and Evaluation

Financial aspects of making and marketing the product are reviewed. Company must determine what is needed to take this product idea to market. Product researchers analyze legal factors to see if the product can be patented or copyrighted for protection against competitors. Step #4 – Business Analysis

If product idea passes the business analysis, then the company can develop a prototype for the product. Prototype – first model of the product The company tests its production capabilities to see if the product can be produced at a reasonable cost. Complex technical problems, as well as standards for quality and safety, are also addressed. Step #5 - Development

Involves offering the product for sale in a small geographic area. Marketers test the marketing mix (4 P’s) Results can help in projecting sales and market share Competitors can actually ruin a test market by flooding the geographical area with special promotions or by reducing its prices during this phase. Do you think this is ethical? Why or why not? Step #6 – Test Marketing

Commercialization – process that involves producing and marketing a new product. Company offers the product in the marketplace for sale to the final consumer. Full-scale production during the launch Some use regional roll-outs (launching product in certain geographic areas over a specific time period a llows production to build up gradually and company to evaluate its marketing activities Step #7 - Commercialization

Represents the stages that a product goes through during its life in the marketplace. There are 4 stages. Product Life Cycle

Occurs when a product is first introduced into the marketplace. MARKETERS focus on: Promoting consumer awareness Getting customers to try the new product Spend millions to educate the consumer through advertising and promotion Convincing retailers to carry the new product (distribution) Use your phone and research Gatorade. When and where was it first introduced? Were consumers familiar with this product and what it could do? How do you think they educated consumers and who was their initial market? What type of product was its competition at first? What was its first and only flavor at the time? Stage #1 - Introduction

PRICING in Introduction stage: 2 strategies are usually employed: Skimming Pricing – Pricing a new product high to cover research and development costs Penetration Pricing – Pricing a new product low in comparison to a competitor’s product in order to quickly generate demand for product Stage #1 – Introduction (cont.)

More competitors enter the marketplace if they see that a new product is successful. MARKETERS focus on: Improving the product by adding new features or new products in a line Adding distribution outlets Who joined the race for the sports-drink market as Gatorade became popular? What new flavors, package sizes, and types of containers did Gatorade add? What new distribution outlets did Gatorade include? Stage #2 - Growth

Stage when sales begin to slow down for the product category or just the product. MARKETERS must focus on: Making changes to the product to distinguish it from competitors’ products Focusing on identifying new buyers What does the maturity stage look like for Gatorade? Stage #3 - Maturity

When sales and profits begin to drop. One main reason can be a product not keeping up with technological advances. MARKETERS must focus on: Dropping a product from its product line Keeping a product but in limited production if there are loyal customers who will still buy it Name a product that hit the decline stage? What was the reason? Stage #4 - Decline

Not all products fit the life-cycle pattern. Fads – have a very short life cycle and lose popularity as quickly as it gained it. Gatorade – Pepsi purchased Quaker Oats (owner of the Gatorade brand) in 2001, Gatorade sales have continued to increase from $85 million in 1983 to over $2 billion in 2003. What have they grown to today? What stage would you say Gatorade is in? Product Life-Cycle Considerations

3 ways managers need to manage a product through its life cycle: Modify the product Modify the market Reposition the product Management of the Product Life Cycle

Requires changing a product’s characteristics. Changes can be made to the product’s features, appearance, package design, or quality in hopes of increasing sales. How did Gatorade “modify” their product over the years? #1 – Product Modification

Strategy to find new customers or to encourage current customers to use more of the product. How did Gatorade “modify” their market over the years? #2 – Market Modification

Involves changing a product’s image in relation to its competitor’s image. A change in any of the 4 P’s of the marketing mix can be enough to reposition a product. Example: New Balance decided to redesign its athletic shoes for older people who have wider feet and often have foot problems. By repositioning its athletic shoes for this “niche” market, NB no longer had to compete directly with Nike and Reebok. They now promoted to podiatrists to in hopes they would recommend the shoe to their patients. #3 - Repositioning

PRICING DECISIONS Sec. 5-2

Businesses use price in the exchange process for their goods and services. They go by different names. Fill in the blanks: You pay ___________ for college. You pay ___________ on a loan. Professionals such as doctors and lawyers charge a ____. Bridges and roads charge a ______. When you take a bus or a train you pay a _______. You pay ______ for an apartment. Price is defined as the value placed on the goods or services being exchanged. Pricing and Strategies

Price is important in a business b/c it helps determine a company’s profit or loss. By multiplying (x) the number of items sold by it sales price ($), you get sales revenue – items x price = revenue To determine if a profit or loss is earned, subtract (-) the cost of goods sold and expenses from the revenue revenue – cogs-expenses = profit or loss Let’s try one: Louisville Slugger sells 1,000 baseball bats at $175 each. What is the revenue? They purchased the bats for $90 each. What is the cogs? They also have additional expenses of $60,000. Did they make a profit or suffer a loss? Pricing and Profit

Price plays a significant role in the marketing mix. Major question – What is a person willing to pay for the product or service? Therefore, marketing efforts must price the product correctly to fit target market’s pocketbook. Find a partner and think of a company that carries a wide range of a certain product in their product line. Explain how they customize their prices to fit different consumers’ needs and possibly offer the products at different places. Pricing and Marketing Mix

There are 5 main things that affect the price of a product or service: Consumer perception Demand Cost Product life-cycle stage Competition Pricing Considerations and Strategies in the Sports Industry

Knowing the relationship between price and quality in a consumer’s mind. Many consumers believe the higher the price, the better the quality of an item – so some products are priced higher on purpose to attract those consumers. Can you name a product where this occurs? Pricing strategies used: Prestige pricing is pricing based on consumer perception Odd-even pricing is pricing goods with either an odd number or an even number to match a product’s image Which one do you think suggests a bargain? – Odd or Even Which one do you think suggests higher quality? – Odd or EvenTarget pricing is pricing goods according to what the customer is willing to pay (manufacturers work backwards)Consumer Perception

If a product is in high demand, and there is a limited supply, its price will be high. Companies may even create this exact situation by producing a limited edition of an item so they can price it high on purpose (e.g. a limited edition of baseball cards for a popular player or special occasion may be priced higher than one that is produced in very large quantities) What is considered the most valuable baseball card? Why is this card so valuable? Demand

If there is a large supply of an item and demand is not high, businesses may lower prices to increase demand for that item (e.g. when retailers slash prices for seasonal items if they haven’t sold by end of that season). General rule – demand will be lower for a higher-priced item. If that same product were priced lower, more people would be able to afford it and demand might increase. Demand (cont.)

Supply-and-demand theory is based on elastic demand , which means that a change in price will affect demand. With a partner, complete the worksheet on supply and demand. Demand (cont.)

There are 4 situations when price will have NO effect on demand:When a product is a necessity When there are no substitutes for a product When the price increase is not significant relative to the customer’s income When there are time restraints When any of these 4 situations occur, this becomes inelastic demand .With a partner, come up with an example of each of these situations.Demand (cont.)

The price of an item must be higher than the cost a business paid for it . In addition, businesses have to forecast the amount of profit desired. Pricing strategies used: Markup Pricing – used by wholesalers and retailers who buy goods for resale Markup – difference between the retail or wholesale price and the cost of an item Sports retailer buys sneakers for $25 (cost). They then sell those shoes for $49.99 per pair. The dollar markup is $24.99 ($49.99 retail price - $25 cost = $24.99 markup. Can also be shown as a %. Markup on retail is 50% ($24.99 markup/$49.99 retail price). Finally markup can be calculated based on cost which would be 100% ($24.99 markup/$25 cost). Cost

Let’s try this on our own. Footlocker purchased a pair of Nike sneakers for $30. They turn around and sell those same sneakers for $110. What is the dollar markup? What is the markup % based on retail price? What is the markup % based on cost? Cost (cont.)

Pricing strategies used ( cont ).: Product-line Pricing – used when marking up the entire line of products where you set different markup %’s for each product so that the average markup is achieved for the entire line of goods (e.g. markup for 1 item in line may only be 20% but for another model may be 75% so when averaged, total markup may be 50%) Cost-plus Pricing – used by manufacturers and service providers by calculating all costs and expenses and then adding desired profit (e.g. food service vendors at stadiums – calculate salaries, cost of food supplies, rent, etc. and then add intended profit to come up with price) Cost (cont.)

The objectives of the business and newness of the product determines strategy used. Pricing strategies used: Skimming Pricing – pricing item very high to recover the costs of development Penetration Pricing – pricing below the competition to create immediate demand for the product Product Life-Cycle Stage

2 ways to compete – price or non-price: Price – lowering prices to draw customers away from competitors Non-price competition – competition based on 3 non-price factors 1) quality, 2) service, 3) relationships With a partner, come up with 3 products or services for each of the non-price scenarios. Explain why they can get away with charging a higher price than their competition for each scenario. Competition

Price leader – businesses that dominate the market can often dictate the price charged for a product. Other businesses follow this lead. Price taker – businesses have to charge the market price. This is often the case where there are many small firms competing against each other. Price Leaders and Takers

Pricing objectives are the goals that a company wants to achieve through pricing. 2 common pricing objectives involve increasing profit and improving market share. Pricing Objectives

A company may have an objective to earn a higher profit. Even though costs and expenses go up, businesses can’t always raise the price of the product so to get around this they sometimes add a surcharge ( eg . ticket prices for sports or concerts) or they reduce some of the unneeded features or size of a product. Profit Objective

A company may have an objective to gain a higher market share. Market share – the percentage of the total sales of all companies that sell the same type of product. For example, Gatorade may have an 80% market share which means that its sales represent 80% of all sports drinks sold by all sports-drink companies. How could a company increase their market share? Market Share Objective

There are 4 more additional pricing strategies that businesses can employ to bring in more money. Pricing Lining Bundle Pricing Loss-leader Pricing Differential Pricing Special Pricing Strategies

Price Lining – selling all goods in a product line at specific price points. Benefit to both customer & business b/c: It’s easier for customers to make purchasing decisions It’s easier to take later markdowns and inventory control is simplified Price Lining $9.99 $29.99 $19.99 Wilson Wilson Wilson

Bundle Pricing – selling several items as a package for a set price. Products individually would cost more than the package price so cheaper to buy bundle. Benefit to both customer & business b/c: Lower price Sales are generally higher and more product is sold Bundle Pricing

Loss-leader Pricing – pricing an item at cost or below cost to draw customers into the store. Even though store breaks even or takes a loss on this product, customers are more likely to purchase other items while they are there and this amount will likely cover money lost on loss-leader item. Loss-leader Pricing $25.99 (regularly $69.99)

Yield-management pricing – pricing items at different prices to maximize revenue when limited capacity is involved. For example, teams may price its seats differently to maximize revenue: Priced higher due to location of seats or time they are purchased. Tiered-pricing – providing your service or product at different price points Differential Pricing

To maintain the integrity of a published price, marketers will often make price adjustments by offering discounts or allowances. Types of discounts: Buying in large quantities Buying prior to the buying season Functional or trade discounts to wholesalers and retailers Cash discounts for paying invoices early Types of allowances (reductions taken from quoted price): Trade-ins Reductions for damaged items Price Adjustments

Pricing is subject to some government regulations. One law in particular, The Sherman Anti-Trust Act prohibits the illegal practices of price fixing and predatory pricing. Price fixing – an illegal practice whereby competitors conspire to set the same prices. Predatory pricing – setting a very low price in order to drive competitors out of business. Two laws, The Clayton Act and The Robinson-Patman Act prohibits price discrimination.Price discrimination – the practice of charging different prices to similar buyers.This is legal as long as it does not lessen competition.Pricing Regulations