Read Chapter 12 - Creating and Pricing Products That Satisfy Customers
Students,
Read Chapter 12 - Creating Pricing and Products
A product is everything that one receives in an exchange, including all tangible and intangible
attributes and expected benefits. A product can be a good, a service, or an idea. A good is a real, physical thing that we can touch. A service is the result of applying human or mechanical effort to a person or thing. An idea may take the form of philosophies, lessons, concepts, or advice.
CLASSIFICATION OF PRODUCTS. Different classes of products are directed at different target markets. A product’s classification largely determines what kinds of distribution, promotion, and pricing are appropriate in marketing it. Products can be grouped into two general categories:
- A product purchased to satisfy personal and family needs is a consumer product.
- A product bought for resale, for making other products, or for use in a firm’s operations is a business product.
Consumer Product Classifications. The traditional and most widely accepted system of classifying consumer products consists of three categories:
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.
Shopping products cost more than convenience products, and buyers allocate ample time for comparing prices, product features, qualities, services, and warranties between different stores and brands.
These products are expected to last for a fairly long time and thus are purchased less frequently than convenience items.
A specialty product possesses one or more unique characteristics for which a significant group of buyers is willing to expend considerable purchasing effort.
Buyers know exactly what they want and will not accept a substitute.
When seeking out specialty products, purchasers do not compare alternatives.
Teaching Tip: Use the “What’s My Class?” group activity here. Students will classify the products listed in the handout, which should take no more than five minutes.
Business Product Classifications. Based on their characteristics and intended uses, business products can be classified into the following categories:
A raw material is a basic material that becomes part of a physical product and usually comes from mines, forests, oceans, or recycled solid wastes.
Major equipment includes large tools and machines used for production purposes. Some major equipment is custom-made for a particular organization, but other items are standardized products.
Accessory equipment is standardized equipment that generally can be used in several ways within a firm’s production or office activities.
A component part becomes part of the 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.
A supply facilitates production and operations but does not become part of the
finished product.
A business service is an intangible product that an organization uses in its operations.
THE PRODUCT LIFE-CYCLE. Every product progresses through a product life-cycle, a series of stages in which its sales revenue and profit increase, reach a peak, and then decline. A firm must be able to launch, modify, and delete products from its offering in response to changes in product life-cycles. Depending on the product, life-cycle stages vary in length.
- Stages of the Product Life-Cycle. Generally, the product life-cycle is composed of four stages—introduction, growth, maturity, and decline. (See Figure 12-1.)
Introduction. In the introduction stage, consumer awareness and acceptance of the product are low.
Sales rise gradually as a result of promotion and distribution activities.
There are no competitors at this stage.
High development and market costs result in low profit or even in a loss.
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 “the first” to own the product.
The marketing challenge at this stage is to make potential customers aware of the product’s existence and its features, benefits, and uses.
Marketers must monitor early buying patterns and be prepared to modify the product promptly if necessary.
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 the product becomes well known.
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.
Management’s goal in the growth stage is to stabilize and strengthen the product’s position by encouraging brand loyalty.
To beat the competition, the company may further improve the product or
expand the product line.
Management may also compete by lowering prices if increased production
efficiency has resulted in sufficient savings.
Marketers can also emphasize customer service and prompt credit for defective products.
During this period, promotional efforts attempt to build brand loyalty among consumers.
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.
Product lines are simplified, markets are segmented more carefully, and price competition increases, which forces weaker competitors to leave the industry.
Refinements and extensions of the original product appear on the market.
Market share may be strengthened by redesigned packaging or style changes.
Pricing strategies are flexible; markdowns and price incentives are not uncommon.
Marketers may offer incentives and assistance to dealers to encourage them to support mature products.
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 those firms that specialize in marketing the product.
Production and marketing costs become the most important determinant of profit.
When a product adds to the success of the overall product line, the company may retain it; otherwise, management must determine when to eliminate it.
Management may raise the price to cover costs, reprice to maintain market share, or lower the price to reduce inventory.
Management will narrow distribution to the most profitable existing markets.
The company may choose to eliminate less-profitable versions of the product from the product line or may decide to drop the product entirely.
Using the Product Life-Cycle. Marketers must be aware of the life-cycle stage of each product for which they are responsible and estimate how long the product is expected to remain in that stage.
For example, if a product is expected to remain in the maturity stage for a long time, there is no rush to develop a replacement product.
In other situations, a company will attempt to extend a product’s life-cycle.
PRODUCT LINE AND 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.
A firm’s product mix consists of all the products that the firm offers for sale. Two
“dimensions” are often applied to a firm’s product mix.
The width of the mix is a measure of the number of product lines it contains.
The depth of the mix is a measure of the average number of individual products within each line.
These measures are general—no exact numbers correspond to these categories.
MANAGING THE PRODUCT MIX. To provide products that satisfy a firm’s target market(s) and achieve the organization’s objectives, a marketer must develop, adjust, and maintain an effective product mix. As customers’ product preferences and attitudes change, their desire for a product may diminish or grow. A marketer may have to introduce a new product, modify an existing one, or eliminate a product from the mix because one or more competitors have grown more dominant in the market segment. A marketer may also expand the firm’s product mix to take advantage of excess marketing and production capacity. There are three major ways to improve a product mix: change an existing product, delete a product, or develop a
new product.
Managing Existing Products
Product Modifications. Product modification refers to changing one or more of a product’s characteristics. For this approach to be effective, several conditions must be met.
The product must be modifiable.
Existing customers must be able to perceive that a modification has been made, assuming that the modified item is still directed at the same target
The modification should make the product more consistent with customers’ desires so that it provides greater satisfaction.
Existing products can be altered in three primary ways.
Quality modifications are changes that relate to a product’s dependability and durability.
Functional modifications affect a product’s versatility, effectiveness, convenience, or safety.
Aesthetic modifications change the sensory appeal of a product by altering its taste, texture, sound, smell, or visual characteristics.
Line Extensions. A line extension is the development of a product closely related to one or more products in the existing product line but designed specifically to meet somewhat different customer needs.
Line extensions are more common than new products because they are a less-expensive, lower-risk alternative for increasing sales.
A line extension may focus on a new market segment or be an attempt to increase sales within the same market segment by more precisely satisfying that segment’s needs, hopefully taking market share from competitors.
Deleting Products. To maintain an effective product mix, a firm often has to eliminate some products. This is called product deletion.
A weak and unprofitable product costs a company time, money, and resources that could be used to modify other products or develop new ones.
Some firms drop weak products only after they have become severe financial
burdens.
A better approach is to conduct a systematic review of the product’s impact on the overall effectiveness of the firm’s product mix.
This review should analyze a product’s contribution to the firm’s sales for a given period.
It should include estimates of future sales, costs, and profits of the product. This review should help a firm determine whether changes in the marketing strategy might improve the product’s performance.
Developing New Products. Developing and introducing new products is frequently time consuming, expensive, and risky. Although developing new products is risky, failing to introduce new products can be just as hazardous. Successful new products can produce benefits for an organization, including survival, profits, a sustainable competitive advantage, and a favorable public image.
New products are generally grouped into three categories based on their degree of similarity to existing products. Imitations are designed to compete with existing products of other firms. Adaptations are variations of existing products that are intended for an established market. Innovations are entirely new products. As shown in Figure 12-2, the process of developing a new product consists of seven phases.
Idea Generation. Idea generation involves looking for product ideas that will help a firm to achieve its objectives.
Firms trying to maximize product-mix effectiveness develop systematic
approaches for generating new-product ideas.
Sometimes, large firms with superior experience and resources may mentor small firms and help them generate ideas to help their businesses grow.
Business incubators exist all over the country that pair new businesses with established ones so that the new business can learn about marketing and branding from experts.
Screening. During screening, ideas that do not match organizational resources and objectives are rejected.
Managers consider whether the organization has personnel with the correct expertise to develop and market the proposed product.
Management may reject a good idea because the company lacks the necessary skills and abilities to make the product a success.
The largest number of product ideas is rejected during the screening phase.
Concept Testing. In this phase, a sample of potential buyers is presented with a product idea through a written or an oral description to determine their attitudes and initial buying intentions.
Concept testing is a low-cost means for an organization to determine consumers’ initial reactions to an idea before investing considerable resources in product research and development (R&D).
Business Analysis. Business analysis generates a tentative idea about a potential product’s financial performance, including profitability.
During this stage, the firm considers how the new product, if introduced, would affect the firm’s overall sales, costs, and profits.
Product Development. In this 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.
If a product idea makes it to this point, it is transformed into a working model, or prototype.
If a product moves through this step, then it is ready for test marketing.
Test Marketing. Test marketing is the limited introduction of a product in several towns or cities representative of the intended target market.
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.
Commercialization. During commercialization, plans for full-scale manufacturing and marketing must be refined and completed, and budgets for the project must be prepared.
Why Do Products Fail? Despite this rigorous process for developing product ideas, the majority of new products end up as failures: Table 12-1
Products mainly fail because the product and its marketing program are not planned and tested as thoroughly as they should be. For example:
A firm may market-test a product before the kinks are worked out or may not test its entire marketing mix.
When problems show up in the testing stage, a firm may try to recover its product development costs by pushing ahead with full-scale marketing anyway.
Some firms try to market new products with inadequate financing.
BRANDING, PACKAGING, AND LABELING. Three important features of a product (particularly a consumer product) are its brand, package, and label.
What Is a Brand? A brand is a name, term, symbol, design, or any combination of these that identifies a seller’s products as distinct from those of other sellers.
A brand name is the part of a brand that can be spoken. It may include letters, words, numbers, or pronounceable symbols.
A brand mark is the part of a brand that is a symbol or distinctive design.
A trademark is a brand name or brand mark that is registered with the U.S. Patent and Trademark Office and is thus legally protected from use by anyone except its owner.
A trade name is the complete and legal name of an organization.
Types of Brands. Brands are often classified according to who owns them.
A manufacturer (or producer) brand is a brand that is owned by the manufacturer.
A store (or private) brand is one that is owned by an individual wholesaler or
Some companies that manufacture private brands also produce their own manufacturer brands.
Many private-branded grocery products are produced by companies that specialize in making private-label products.
A generic product (sometimes called a generic brand) is a product with no brand at all. Its plain package carries only the name of the product.
Benefits of Branding. Buyers and sellers both benefit from branding.
Benefits to the buyer include the following:
Because brands are easily recognizable, they reduce the amount of time buyers spend shopping as they can quickly identify the brands they prefer.
Brands also help reduce the perceived risk of purchase.
Customers may receive psychological rewards from owning a brand that symbolizes status
Brands help sellers as well as buyers.
Branding helps a firm introduce a new product that carries a familiar brand name.
Branding aids sellers in their promotional efforts because promotion of each branded product indirectly promotes other products of the same brand.
One of the chief benefits of branding is the creation of brand loyalty, the extent to which a customer is favorable toward buying a specific brand. There are three levels of brand loyalty:
Brand recognition is the level of loyalty at which customers are aware that a brand exists and will purchase it if their preferred or familiar brands are unavailable. This is the weakest form of brand loyalty.
Brand preference is the level of brand loyalty in which a customer prefers one brand over competing brands.
Brand insistence is the strongest and least common level of brand loyalty. Brand-insistent customers will not buy substitutes.
Brand equity is the marketing and financial value associated with a brand’s strength in a market. Four major factors contribute to brand equity: brand awareness, brand associations, perceived brand quality, and brand loyalty:Table 12-2
Brand awareness leads to brand familiarity—buyers are more likely to select a familiar brand over an unfamiliar one.
The symbolic associations of a brand connect 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.
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. It also increases brand visibility and encourages retailers to carry the brand.
Choosing and Protecting a Brand. A number of issues should be considered when
selecting a brand name.
The name should be easy for customers to say, spell, and recall.
The brand name should suggest, in a positive way, the product’s uses, special characteristics, and major benefits, and should be distinctive enough to set it apart from competing brands.
It is important to select a brand that can be protected through registration, reserving it for exclusive use by that firm.
To protect its exclusive right to the brand, the company must ensure that the selected brand will not be considered an infringement on any existing brand already registered with the U.S. Patent and Trademark Office.
A firm does not want a brand name to become a generic term that refers to a general public category. Generic terms cannot be protected as exclusive brand names.
To ensure that a brand name does not become a generic term, the firm should spell the name with a capital letter and use it as an adjective to modify the name of the general product class, as in Jell-O Brand Gelatin
Branding Strategies. The basic branding decision for any firm—producer or seller—is how to brand its products.
A producer may market its products under its own brands, private brands, or both.
A retail store may carry only producer brands, its own brands, or both.
Once either type of firm decides to brand, it chooses one of two branding strategies.
Individual branding is the strategy in which a firm uses a different brand for each of its products.
Family branding is the strategy in which a firm uses the same brand for all or most of its products.
Brand Extensions. A brand extension occurs when an existing brand is used to brand a new product in a different product category.
A brand extension should not be confused with a line extension. A line extension refers to using an existing brand on a new product in the same product category, such as a new flavor or new sizes.
Packaging consists of all those activities involved in developing and providing a container with graphics for a product.
Packaging Functions.The basic function of packaging materials is to protect the product and maintain its functional form.
Another function of packaging is to offer the consumer convenience, such as individual-serving boxes.
A third function of packaging is to promote a product by communicating its features, uses, benefits, and image.
Package Design Considerations. Many factors must be weighed in package design.
One major consideration is cost.
Marketers must decide whether to package a product in single or multiple units.
Marketers should consider how much consistency is desirable among an organization’s package designs. To promote an overall company image, a firm may decide that all packages must be similar or include a distinct design. This approach, called family packaging, is often used only for lines of products, as with Campbell’s soups and Planters nuts.
Packages also play an important promotional role. Firms can create desirable images and associations by choosing particular colors, designs, shapes, and textures. The package performs another promotional function when it is designed to be safer or more convenient to use.
Packaging must meet the needs of intermediaries. Wholesalers and retailers consider whether a package is easy to transport, handle, and store.
Firms must consider the issue of environmental responsibility when developing packages. Companies must balance consumers’ demand for convenience against the need to preserve the environment.
Labeling. Labeling is the presentation of information on a product or its package. The label is the part of the package that contains information, including the brand name and mark, the registered trademark symbol, the package size and contents, product claims, directions for use and safety precautions, ingredients, the name and address of the manufacturer, and the Universal Product Code (UPC) symbol, which is used for automated checkout and inventory control.
A number of federal regulations specify information that must be included in the
labeling for certain products.
Such regulations are aimed at protecting customers from misleading product claims and the improper (and thus unsafe) use of products.
Labels may also carry the details of written or express warranties. An express warranty is a written explanation of the responsibilities of the producer in the event that the product is found to be defective or otherwise unsatisfactory.
PRICING PRODUCTS. A product is a set of attributes and benefits that has been designed to satisfy its market while earning a profit for its seller. Pricing is an integral part of this equation.
The Meaning and Use of Price. The price of a product is the amount of money that the seller is willing to accept in exchange for the product, at a given time and under given circumstances.
Each interested buyer makes a personal judgment regarding the utility of the product, often in terms of some dollar value.Price serves the function of allocator.
It allocates goods and services among those who are willing and able to buy them.
It allocates financial resources (sales revenue) among producers according to how well they satisfy customers’ needs.
It helps customers allocate their own financial resources among various want-satisfying products.
Price and Non-Price Competition. Before a product’s price can be set, an organization must determine whether it will compete based on price alone, or on a combination of factors.
Price competition occurs when a seller emphasizes the low price of a product and sets a price that equals or beats competitors’ prices.
To use this approach effectively, a seller must have the flexibility to change prices often, rapidly, and aggressively in response to competitors’ price changes.
Price competition allows a marketer to set prices based on product demand or in response to changes in the firm’s finances
Non-price competition is 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. A method of non-price competition, product differentiation, is the process of developing and promoting differences between one’s product and all similar products.
Buyers’ Perceptions of Price. In setting prices, managers should consider the price sensitivity of the target market.
Buyers will tolerate a narrow range of prices for certain items and a wider range for others.
The firm should also take note of buyers’ perceptions of a given product in relation to competing products. A premium price may be appropriate if a product is considered superior to others in its category. On the other hand, a lower price may be necessary if buyers have even a slightly negative product perception.
Sometimes, buyers equate price and quality. Managers involved in pricing decisions should determine whether this outlook is widespread in the target market.
PRICING OBJECTIVES. Before setting prices for a firm’s products, management must determine pricing objectives that are in line with organizational and marketing objectives.
A firm may have to price its products to survive—either as an organization or as a player in a particular market.
This usually means that the firm will cut its price to attract customers, even if it must operate at a loss.
Such a goal cannot be pursued on a long-term basis, for consistent losses would cause the business to fail.
Profit Maximization. Many firms may state that their goal is to maximize profit, but this goal is impossible to define (and thus impossible to achieve).
What, exactly, is the maximum profit?
Firms that wish to set profit goals should express them as either specific dollar amounts or percentage increases over previous profits.
Target Return on Investment. The return on an 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.
Market-Share Goals. A firm’s market share is its proportion of total industry sales. Some firms attempt, through pricing, to maintain or increase their share of the market.
Status-Quo Pricing. In pricing their products, some firms are guided by a desire to maintain the status quo. This is especially true in industries where price stability is
If a firm can maintain its profit or market share simply by matching the
competition, then it will do so.
PRICING METHODS. Once a firm has developed its pricing objectives, it must select a pricing method and strategy to reach that goal. Two factors are important to firms engaged in setting prices. The first is recognition that the market, and not the firm’s costs, ultimately
determines the price at which a product will sell. The second is awareness that costs and
expected sales can be used only to establish a price floor, the minimum price at which the firm can sell its products without incurring a loss.
Cost-Based Pricing. Using cost-based pricing, the simplest method of pricing, the seller determines the total cost of producing (or purchasing) one unit of a product. The seller then adds an amount to cover additional costs (such as insurance or interest) and profit.
The amount that is added is called the The total of the cost plus the markup is the product’s selling price.
Markup pricing is easy to apply and is used by many businesses, but it has two major flaws:
The first is the difficulty of determining the best markup percentage. If it is too high, the product may be overpriced for its market; if it is too low, the seller foregoes profit it could have earned by assigning a higher price.
The markup pricing separates pricing from other business functions. The product is priced after production quantities are decided on, after costs are
incurred, and almost without regard for the market or the marketing mix.
Cost-based pricing can also be calculated through the use of breakeven analysis.
The breakeven quantity 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 received from sale of a product.
The costs involved in operating a business can be broadly classified as either fixed or variable.
A fixed cost is a cost incurred no matter how many units of a product are produced or sold.
A variable cost is a cost that depends on the number of units produced.
The total cost of producing a certain number of units is the sum of the fixed costs and the variable costs attributed to those units.
Figure 12-3 graphs the total revenue earned and the total cost incurred by the sale of various quantities of a hypothetical product.
Demand-Based Pricing. Rather than basing the price of a product on its cost, companies sometimes use a pricing method based on the level of demand for the product: demand-based pricing.
This method results in a higher price when product demand is strong and a lower price when demand is weak.
To use this method, a marketer estimates the amounts of a product that customers will demand at different prices and then chooses the price that should generate the highest total revenue. The effectiveness of this method depends on the firm’s ability to estimate demand accurately.
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.
The use of dynamic pricing—which raises prices during periods of high demand—is growing, especially for nontraditional car ride-sharing services like Uber and Lyft.
Price differentiation can be based on such considerations as time of the purchase, type of customer, or type of distribution channel.
For price differentiation to work, the company must be able to segment a
market on the basis of different strengths of demand and then keep the segments separate enough so that segment members who buy at lower prices cannot sell to buyers in segments that are charged a higher price.
Compared with cost-based pricing, 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.
Competition-Based Pricing. In using competition-based pricing, an organization
considers costs and revenues secondary to competitors’ prices.
A firm that uses competition-based pricing may choose to sell below competitors’ prices, slightly above competitors’ prices, or at the same level.
Competition-based pricing may be combined with other cost approaches to arrive at profitable levels.
PRICING STRATEGIES. A pricing strategy is a course of action designed to achieve pricing objectives. The extent to which a business uses any of the following strategies depends on its pricing and marketing objectives, the markets for its products, the degree of product differentiation, the life-cycle stage of the product, and other factors. (See Figure 12-4.)
New-Product Pricing. The two primary types of new-product pricing strategies are price skimming and penetration pricing. An organization can use either one, or even both, over a period of time.
Price Skimming. Price skimming is the strategy of charging the highest possible price for a product during the introduction stage of its life-cycle.
This strategy helps to recover the high costs of R&D quickly.
A skimming policy may also hold down demand for the product, which is helpful if the firm’s production capacity is limited during the introduction stage.
Penetration Pricing. Penetration pricing is the strategy of setting a low price for a new product.
The seller hopes that building a large market share will discourage competitors from entering the market.
A disadvantage of penetration pricing is that it places a firm in a less flexible position on pricing. It is more difficult to raise prices significantly than it is to lower them.
Differential Pricing. Differential pricing means charging different prices to different buyers for the same quality and quantity of product. Differential pricing can take several forms, including negotiated pricing, secondary-market pricing, periodic discounting, and random discounting.
Negotiated Pricing. Negotiated pricing occurs when the final price is established through bargaining between the seller and the customer. Even when there is a predetermined stated price or a price list, manufacturers, wholesalers, and retailers may negotiate to establish the final sales price. Customers commonly negotiate for cars, homes, and used equipment.
Secondary-Market Pricing. 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. Periodic discounting is the temporary reduction of prices on a patterned or systematic basis. From the marketer’s point of view, a problem with periodic discounting is that customers can predict when the reductions will occur and may delay their purchases until they can take advantage of the lower prices.
Random Discounting. To alleviate the problem of customers holding off on purchases until a discount period, some organizations use random discounting, in which they temporarily reduce its prices on a nonsystematic basis. Marketers also use random discounting to attract new customers.
Psychological Pricing. Psychological pricing strategies encourage purchases based on emotional responses rather than on economically rational ones.
Odd-Number Pricing. Odd-number pricing is the setting of prices at odd numbers that are slightly below whole-dollar amounts. Nine and five are the most popular ending figures for odd-number prices.
Multiple-Unit Pricing. Many retailers 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. Reference pricing means pricing a product at a moderate level and positioning it next to a more-expensive model or brand hoping that the customer will use the higher price as a reference price (i.e., a comparison price).
Bundle Pricing. Bundle pricing is the packaging together of two or more products, usually of a complementary nature, to be sold for a single price.
Everyday Low Prices (EDLPs). To reduce or eliminate the use of frequent short-term price reductions, some organizations use an approach referred to as everyday low prices (EDLPs).
A marketer sets a low price for its products on a consistent basis, rather than setting high prices and frequently discounting them.
A company that uses EDLPs benefits from reduced promotional costs, reduced losses from frequent markdowns, and more stability in sales.
However, customers may not trust the EDLP and assume the deal is merely a marketing gimmick.
Customary Pricing. In customary pricing, certain goods are priced primarily on the basis of tradition (i.e., chewing gum or candy bars).
Product-Line Pricing. Product-line pricing means establishing and adjusting the prices of multiple products within the product line. This method can provide marketers with flexibility in price setting.
Captive Pricing. When captive pricing is used, the basic product in a product line is priced low, but the price on 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 in the line are priced to appeal to more price-sensitive shoppers, or to those who employ product-specific features.
Price Lining. Price lining is the strategy of selling goods only at certain predetermined prices that reflect definite price breaks. For example, a shop may sell men’s ties only at $22 and $37. This strategy is used in clothing or accessory stores.
Promotional Pricing. Price is often coordinated with promotions, and they are sometimes so interrelated that the pricing policy is promotion-oriented.
Price Leaders. Sometimes, a firm prices a few products below the usual markup, near cost, or below cost, which results in price leaders. This pricing is used to attract customers by giving them especially low prices on a few items, hoping that customers will purchase regularly priced items as well, which will offset the reduced revenues from the price leaders.
Special-Event Pricing. To increase sales volume, many organizations coordinate price with advertising or sales promotions for seasonal or special occasions. Special-event pricing involves advertised sales or price cutting linked to a holiday, season, or event.
Comparison Discounting. 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.
Because this pricing strategy can lead to deceptive pricing practices, the Federal Trade Commission has established guidelines for comparison discounting.
If the higher price against which the comparison is made is the price formerly charged for the products, sellers must have made the previous price available to customers for a reasonable period of time.
If sellers present the higher price as the one charged by other retailers in the same trade area, they must be able to demonstrate the veracity of the claim.
When they present the higher price as the manufacturer’s suggested
retail price, then the higher price must be similar to the price at which a reasonable proportion of the product was sold
PRICING BUSINESS PRODUCTS. Setting prices for business products can be different from setting prices for consumer products because of factors such as the size of purchases, transportation considerations, and geographic issues.
Geographic Pricing. Geographic pricing strategies deal with delivery costs.
The pricing strategy that requires the buyer to pay the delivery costs is called “FOB origin pricing.” It stands for “free on board at the point of origin,” which means that the buyer must pay the transportation costs from the warehouse to the buyer’s place of business.
“FOB destination” indicates that the price does include freight charges and thus the seller pays these charges.
Transfer Pricing. When one unit in an organization sells a product to another unit, transfer pricing
The price is determined by calculating the cost of the product.
A transfer price can vary depending on the types of costs incurred in the calculations, and the choice of the costs to include depends on the company’s management strategy and the nature of the units’ interactions.
A discount is a deduction from an item’s price. Producers and sellers offer a wide variety of discounts to their customers:
Trade discounts are taken off from the list price that is offered to marketing intermediaries, or middlemen.
Quantity discounts are discounts given to customers who buy in large quantities.
Cash discounts are offered for prompt payment.
A seasonal discount is a price reduction to buyers who purchase out of season.
An allowance is a reduction in price to achieve a desired goal.
Table 12-3 describes some of the reasons for using these discounting techniques and some examples.