Chapter 9Product and Pricing Strategies Small Business Management 4660
Product Approach Total Product • Entire bundle of products, services and meanings • e.g. extras (service, warranty, or delivery, brand - means to customer) • E.g. Targus laptop bag
Core Product • Very basic description of a product • Augmented • Core product plus features – to differentiate it from competition
2. Stages of New Product Development • Before a product is introduced – go through a series of steps known - new product development. • Take years or a few hours or days. • More innovative product will take longer - me-too products may even skip steps of the process.
Product Life Cycle Figure 9.3
Stage 1: Introduction • Sales slowly take off - begin to grow • Brand awareness • Heavy expenditure on marketing expenses - suppress profits • Competition - low
Stage 2: Growth • Acceptance increases rapidly • Advertising and promotion - much less critical • Goal - maximize market share • Prices tend to drop – production becomes more efficient
Stage 3: Maturity • Competition becomes fierce e.g. price competition begins to rise • Sales will level off and start to decline • Profits follow suit • Advertising will suggest new uses for the product
Stage 4: Decline • Decline can be slow or fast, steady or unsteady • Caused by introduction of new technology • A shift in consumer preferences • Sales and profits fall during this stage
3. Why pricing is a difficult task • Pricing isn’t just COST + PROFIT - based on the consumer psychology behind decision. • Why are prices so important? • Major factor in determining perceptions - quality and desirability. • Central to competitive strategy. • Directly related to gross revenues and sales volumes. • Easiest part of the 4Ps to change.
Changing prices - however, is one of the most difficult tasks a small business faces. • If sales: • Lower - worry about prices - too high. • Higher – lower prices - customers think quality has dropped? • How will competition react to - changing prices?
Two general ways of setting prices: • Some arbitrary heuristics (discretion) E.g. 40% above costs • Contributes to business goals. E.g. 10,000 – (20% - Advanced Marketing Power) – (20% - Platinum)
Sellers - wish for highest price – allowing emotions – influencing factor in pricing decisions. • A better strategy - to use optimum price: • Other ways: a. Demand • If people don’t want - low prices are the only way to encourage. • If everyone wants - can charge anything.
b. Value delivered • Willing to pay based on the value they believe • If perceived value is high - they will pay a lot. c. What competition is charging • If you charge more – customer cannot perceive a higher value – he/she will buy competitive product, all else equal. E.g. carbonated drink
d. Business strategy. • Prides itself on an environmental conscious product – would not choose cheaper components even if, it helped profits.
e. Determined by mark-up. • Taking all costs and adding a percentage for profit • Totally ignores demand, value, competition and business strategy.
4. Price Elasticity • A product has LOWelasticity - NO substitutes OR where customers will not accept substitutes. • Inelastic products - protected from economic downturns. • When prices rise or fall - quantity sold varies little. • E.g. Petrol, electricity, and water.
A product with HIGH elasticity - many substitutes OR not a necessity. • Elastic products - not protected from economic downturns. • When prices rise on elastic products - tend to buy fewer and switch to substitute products. • When prices fall - switch back from the substitutes.
PRICING psychology - pricing perception varies from customer and time. • Some of frequently observed pricing psychology phenomena are: • Internal reference price: Have a mental image of what a product should cost based on past experiences - what he/she remembers reading or hearing.
External reference price: Perception of what a product should cost - based on outside influences – what friends have said, comparison shopping, ads, salesmen, etc. • Perception of quality: Pay more if they perceive the quality is higher - may be manipulated by packaging - other externalities.
Motivation of the seller: If a customer perceives - Seller must sell, he’ll want to pay less; if he perceives – seller is reluctant to sell, he’ll pay more. • Expectations of future prices: If customers think prices are going to go up, you’ll pay more; if you think they are going down, you’ll pay less.
Importance or value If it’s important to have, I’ll pay more; if I don’t really care, I’ll pay less. • Price range of acceptability: Consumers set a range of prices, below which they believe quality is questionable – think they are being taken advantage of.
Things to consider: In setting up the price - two competitive advantages: Product can be cheaper or better (quality, features, distribution, etc.). • Being better is sustainable - always going to be someone who can beat your price. • Customers attracted to low prices, will not be loyal - will switch products just as soon as something cheaper comes along.
5. Different Pricing Strategies • Price skimming - charging the highest price market will bear. First one in the market - often used to recoup start-up expenses before competition sets in. E.g. Plasma TV
2. Prestige or premium pricing - setting prices high and supporting it with the rest of marketing strategy - to create the impression - product has high quality (premium) or a status symbol to own (prestige). 3. Odd-even pricing means ending price with a 9, 7 or 5. RM 99.99 sounds much cheaper than RM 100.
4. Partitioned pricing - setting a price for main component and pricing others components - installation, delivery, etc., separately. E.g. Laptop – software – bag - mouse
Captive pricing occurs when customer spend usually a low price for a base system but locked into certain expendables he/she must purchase. These expendables - makes most of their profits. E.g. Lexmark low-cost printer
Price lining - an attempt to please a wider target market by setting multiple price points for closely related products – often “good” quality, “better” quality, and “best” quality. Can work on products from shampoo to clothing to appliances. High, middle, low-end
While having low prices is not recommended - it makes sense to temporarily reduce price, or to give the impression of lower prices. • Why? • Attracting more business. • Building loyalty • Moving excess inventories • Alleviate temporary cash flow problems
Some price lowering techniques include: • Periodic or random discounting - having a sale on a regular cycle (periodic) or not (random)
Off-peak pricing works especially well for seasonal products OR for services trying to reduce perishability – • lower prices are charged in order to get people to change their buying patterns. (The alternative, peak pricing is used during periods of high demand.) E.g. Golf booking
Bundling, multiple-packs or bonus-packs - methods to give the customer more at a lower cost. • To get customers to try slower moving products or services, or new products or services. • A psychological bonus - more people use of your • products, more likely they are to internalize this • brand as “their brand” and become more loyal • customers.
Coupons, rebates and loyalty programs reduce prices and promote sales. • Coupons encourage people to switch brands or try new products. • Rebates - great incentive to buy - rebate redemption rates are extremely low. • Even if not redeemed, customers think it’s a good deal.
Loyalty programs get the customers to return multiple times - good at creating customer allegiance. When a customer has purchased a certain number of products, he/she gets something for free – feel - made a good deal.
Referral discounts - a great way to get businesses established and an inexpensive method of advertising. • A customer recommends business to a friend - friend buys something, original customer gets a discount, something for free or some other incentives.