Managing Products and Pricing Strategies

1. Managing Products and Pricing Strategies

2. PRODUCT CLASSIFICATION • Product can be broadly classified on the basis of • (1) use, • (2) durability, • (3) tangibility.

3. Based on use, the product can be classified as: • (a) Consumer Goods; and • (b) Industrial Goods.

4. (a) Consumer goods: Goods meant for personal consumption by the households or ultimate consumers are called consumer goods. This includes items like soaps, groceries, clothes etc. Based on consumers’ buying behaviour the consumer goods can be further classified as : • (i) Convenience Goods; • (ii) Shopping Goods; and • (iii) Speciality Goods • (iv) Unsought Goods

5. Convenience Goods : Example: Butter, soft drink or a grocery item. These goods belong to the categories of convenience goods which are bought frequently without much planning or shopping effort and are also consumed quickly. Such goods are usually sold at convenient retail outlets.

6. Shopping Goods: These are goods which are purchased less frequently and are used very slowly like clothes, shoes, household appliances. In case of these goods, consumers make choice of a product considering its suitability, price, style, quality and products of competitors and substitutes, if any. In other words, the consumers usually spend a considerable amount of time and effort to finalise their purchase decision. It may be noted that shopping goods involve much more expenses than convenience goods

7. Speciality Goods : Because of some special characteristics of certain categories of goods people generally put special efforts to buy them. They are ready to buy these goods at prices at which they are offered and also put in extra time to locate the seller to make the purchase. The nearest car dealer may be ten kilometres away but the buyer will go there to inspect and purchase it. In fact, prior to making a trip to buy the product he/she will collect complete information about the various brands. Examples of speciality goods are cameras, TV sets, new automobiles, etc. • Unsought goods: Sudden problem to resolve, products to which consumers are unaware, products that people do not necessary think of purchasing. Umbrellas, Funeral Plots, Encyclopedia!!

8. Industrial Goods: Goods meant for consumption or use as inputs in production of other products or provision of some service are termed as ‘industrial goods’. These are meant for non-personal and commercial use and include (i) raw materials, (ii) machinery, (iii) components, and (iv) operating supplies (such as stationery etc). • The buyers of industrial goods are supposed to be knowledgeable, cost conscious and rational in their purchase an therefore, the marketers follow different pricing, distribution and promotional strategies for their sale.

9. It may be noted that the same product may be classified as consumer goods as well as industrial goods depending upon its end use. Take for example the case of coconut oil. When it is used as hair oil or cooking oil, it is treated as consumer goods and when used for manufacturing a bath soap it is termed as industrial goods. However, the way these products are marketed to these two groups are very different because purchase by industrial buyer is usually large in quantity and bought either directly from the manufacturer or the local distributor.

10. Based on Durability, the products can be classified as : (a) Durable Goods; and (b) Non-durable Goods. (a) Durable Goods : Durable goods are products which are used for a long period i.e., for months or years together. Examples of such goods are refrigerator, car, washing machine etc. Such goods generally require more of personal selling efforts and have high profit margins. In case of these goods, seller’s reputation and presale and after-sale service are important determinants of purchase decision

11. Non-durable Goods: Non-durable goods are products that are normally consumed in one go or last for a few uses. Examples of such products are soap, salt, pickles, sauce etc. These items are consumed quickly and we purchase these goods more often. Such items are generally made available by the producer through large number of convenient retail outlets. Profit margins on such items are usually kept low and heavy advertising is done to attract people towards their trial and use.

12. Based on tangibility, the products can be classified as: (a) Tangible Goods; and (b) Intangible Goods. (a) Tangible Goods : Most goods, whether these are consumer goods or industrial goods and whether these are durable or non-durable, fall in this category as they have a physical form, that can be touched and seen. Thus, all items like groceries, cars, raw-materials, machinery etc. fall in the category of tangible goods

13. Intangible Goods : Intangible goods refer to services provided to the individual consumers or to the organisational buyers (industrial, commercial, institutional, government etc.). Services are essentially intangible activities which provide want or need satisfaction. Medical treatment, postal, banking and insurance services etc., all fall in this category.

14. Allen & Hamilton has identified six categories of new products: 1. New-to-the-world products: New products that create an entirely new market. 2. New product lines: New products that allow a company to enter an established market for the first time. 3. Additions to existing product lines: New products that supplement a company’s established product lines (package sizes, flavors, and so on). 4. Improvements and revisions of existing products: New products that provide improved performance or greater perceived value and replace existing products. 5. Repositionings: Existing products that are targeted to new markets or market segments. 6. Cost reductions: New products that provide similar performance at lower cost.

15. The object is to eliminate unsound concepts prior to devoting resources to them. • Will the customer in the target market benefit from the product? • What is the size and growth forecasts of the market segment/target market? • What is the current or expected competitive pressure for the product idea? • What are the industry sales and market trends the product idea is based on? • Is it technically feasible to manufacture the product? • Will the product be profitable when manufactured and delivered to the customer at the target price.

16. Develop the marketing and engineering details • Investigate intellectual property issues and search patent data bases • Who is the target market and who is the decision maker in the purchasing process? • What product features must the product incorporate? • What benefits will the product provide? • How will consumers react to the product? • How will the product be produced most cost effectively? • Prove feasibility through virtual computer aided rendering, and rapid prototyping • What will it cost to produce it? • Testing the Concept by asking a sample of prospective customers what they think of the idea.

17. IDEA GENERATION • The new-product development process starts with the search for ideas. Top managers should define the product and market scope and the new product’s objectives. They should state how much effort should be devoted to developing breakthrough products, modifying existing products, and copying competitors’ products. New-product ideas can come from many sources: customers, scientists, competitors, employees, channel members, and top management. The marketing concept holds that customer needs and wants are the logical place to start the search for ideas

18. IDEA SCREENING • Any company can attract good ideas by organizing itself properly. The company should motivate its employees to submit their ideas to review committee, which sorts them into three groups: promising ideas, marginal ideas, and rejects. Each promising idea is researched by a committee member,who reports back to the committee

19. Types of Errors • In screening ideas, the company must avoid two types of errors. A DROP-error occurs when the company dismisses an otherwise good idea. It is extremely easy to find fault with other people’s ideas. If a company makes too many DROP-errors, its standards are too conservative.

20. A GO-error occurs when the company permits a poor idea to move into development and commercialization. We can distinguish three types of product failures. An absolute product failure loses money; its sales do not cover variable costs. A partial product failure loses money, but its sales cover all its variable costs and some of its fixed costs. A relative product failure yields a profit that is less than the company’s target rate of return. • The purpose of screening is to drop poor ideas as early as possible. The rationale is that product-development costs rise substantially with each successive development stage.

21. CONCEPT DEVELOPMENT AND TESTING • Attractive ideas must be refined into testable product concepts. A product idea is a possible product the company might offer to the market. A product concept is an elaborated version of the idea expressed in meaningful consumer terms.

22. MARKETING-STRATEGY DEVELOPMENT • After testing, the new-product manager must develop a preliminary marketing-strategy plan for introducing the new product into the market. The plan consists of three parts. The first part describes the target market’s size, structure, and behavior; the planned product positioning; and the sales, market share, and profit goals sought in the first few years. • The second part outlines the planned price, distribution strategy, and marketing budget for the first year. • The third part of the marketing-strategy plan describes the long-run sales and profit goals and marketing-mix strategy over time

23. PRODUCT DEVELOPMENT • If the product concept passes the business test, it moves to R&D or engineering to be developed into a physical product. Up to now it has existed only as a word description, a drawing, or a prototype. This step involves a large jump in investment that dwarfs the costs incurred in the earlier stages. At this stage the company will determine whether the product idea can be translated into a technically and commercially feasible product.

24. BUSINESS ANALYSIS • After management develops the product concept and marketing strategy, it can evaluate the proposal’s business attractiveness. Management needs to prepare sales, cost, and profit projections to determine whether they satisfy company objectives. If they do, the product concept can move to the product-development stage. As new information comes in, the business analysis will undergo revision and expansion.

25. Business Analysis • Estimate likely selling price based upon competition and customer feedback • Estimate sales volume based upon size of market. • Estimate profitability and break-even point.

26. PRODUCT DEVELOPMENT • If the product concept passes the business test, it moves to R&D or engineering to be developed into a physical product. Up to now it has existed only as a word description, a drawing, or a prototype. This step involves a large jump in investment that dwarfs the costs incurred in the earlier stages. At this stage the company will determine whether the product idea can be translated into a technically and commercially feasible product. If it cannot, the accumulated project cost will be lost except for any useful information gained in the process.

27. Consumer testing can take a variety of forms, from bringing consumers into a laboratory to giving them samples to use in their homes. • The rank-order method asks the consumer to rank the three items in order of preference. • The paired-comparison method calls for presenting pairs of items and asking the consumer which one is preferred in each pair. Thus the consumer could be presented with the pairs AB, AC, and BC and say that she prefers A to B, A to C, and B to C. Then we could conclude that A>B>C.

28. The monadic-rating method asks the consumer to rate liking of each product on a scale. Suppose a seven-point scale is used, where 1 signifies strongly dislike, 4 indifference, and 7 strongly like. Suppose the consumer returns the following ratings: A 6, B 5, C 3. We can derive the individual’s preference order (i.e.,A>B>C)

29. MARKET TESTING • After management is satisfied with functional and psychological performance, the product is ready to be dressed up with a brand name and packaging, and put to a market test. The new product is introduced into an authentic setting to learn how large the market is and how consumers and dealers react to handling, using, and repurchasing the product. Not all companies undertake market testing. A company officer at Revlon, Inc., stated: “In our field—primarily higher-priced cosmetics not geared for mass distribution— it would be unnecessary for us to market test. When we develop a new product, say an improved liquid makeup, we know it’s going to sell because we’re familiar with the segments.

30. COMMERCIALIZATION • If the company goes ahead with commercialization, it will face its largest costs to date. The company will have to contract for manufacture or build or rent a full-scale manufacturing facility. Plant size will be a critical decision. The company can build a smaller plant than called for by the sales forecast, to be on the safe side. That is what Quaker Oats did when it launched its 100 Percent Natural breakfast cereal. The demand so exceeded the company’s sales forecast that for about a year it could not supply enough product to the stores.

31. In commercializing a new product, market-entry timing is critical. Suppose a company has almost completed the development work on its new product and learns that a competitor is nearing the end of its development work. The company faces three choices: 1. First entry: The first firm entering a market usually enjoys the “first mover advantages” of locking up key distributors and customers and gaining reputational leadership. But, if the product is rushed to market before it is thoroughly debugged, the product can acquire a flawed image. 2. Parallel entry: The firm might time its entry to coincide with the competitor’s entry. The market may pay more attention when two companies are advertising the new product. 3. Late entry: The firm might delay its launch until after the competitor has entered. The competitor will have borne the cost of educating the market. The competitor’s product may reveal faults the late entrant can avoid. The company can also learn the size of the market.

32. THE CONSUM E R - ADOPTION PROCESS • How do potential customers learn about new products, try them, and adopt or reject • them? (Adoption is an individual’s decision to become a regular user of a product.) The consumer-adoption process is later followed by the consumer-loyalty process, which is the concern of the established producer. • Years ago, new-product marketers used a mass-market approach in launching products. They would distribute a product everywhere and advertise it to everyone on the assumption that most people are potential buyers. This approach had two main drawbacks: • It called for heavy marketing expenditures, and it involved many wasted exposures to people who are not potential consumers. • These drawbacks led to a second approach, heavy-user target marketing, where the product is initially aimed at heavy users

33. STAGES IN THE ADOPTION PROCESS • An innovation refers to any good, service, or idea that is perceived by someone as new. The idea may have a long history, but it is an innovation to the person who sees it as new. Innovations take time to spread through the social system. Rogers defines the innovation diffusion process as “the spread of a new idea from its source of invention or creation to its ultimate users or adopters.”43 The consumer-adoption process focuses on the mental process through which an individual passes from first hearing about an innovation to final adoption. Adopters of new products have been observed to move through five stages: 1. Awareness: The consumer becomes aware of the innovation but lacks information about it. 2. Interest: The consumer is stimulated to seek information about the innovation. 3. Evaluation: The consumer considers whether to try the innovation. 4. Trial: The consumer tries the innovation to improve his or her estimate of its value. 5. Adoption: The consumer decides to make full and regular use of the innovation.

34. PRICING STRATEGIES SETTING THE PRICE ADAPTING THE PRICE INITIATING & RESPONDING TO THE PRICE CHANGES

35. OBJECTIVES • How should a company price a new good or service? • How should the price be adapted to meet varying circumstances and opportunities? • When should the company initiate a price change, and how should it respond to competitive price changes?

36. PRICING The factors usually taken into account while determining the price of a product can be broadly described as follows: (a) Cost: No business can survive unless it covers its cost of production and distribution. In large number of products, the retail prices are determined by adding a reasonable profit margin to the cost. Higher the cost, higher is likely to be the price, lower the cost lower the price. (b) Demand: Demand also affects the price in a big way. When there is limited supply of a product and the demand is high, people buy even if high prices are charged by the producer. But how high the price would be is dependent upon prospective buyers’ capacity and willingness to pay and their preference for the product. In this context, price elasticity, i.e. responsiveness of demand to changes in price should also be kept. (c) Competition: The price charged by the competitor for similar product is an important determinant of price. A marketer would not like to charge a price higher than the competitor for fear of losing customers. Also, he may avoid charging a price lower than the competitor. Because it may result in price war which we have recently seen in the case of soft drinks, washing powder, mobile phone etc. (d) Marketing Objectives: A firm may have different marketing objectives such as maximisation of profit, maximisation of sales, bigger market share, survival in the market and so on. The prices have to be determined accordingly. For example, if the objective is to maximise sales or have a bigger market share, a low price will be fixed. (e) Government Regulation: Prices of some essential products are regulated by the government under the Essential Commodities Act. Hence, it is essential that the existing statutory limits, if any, are also kept in view while determining the prices of products by the producers.

37. Steps in setting pricing • Selecting the pricing objective • Determining demand • Estimating cost • Analyzing competitor’s cost, price and offer • Selecting a pricing method • Selecting the final price

38. SETTING THE PRICE • Step 1: Selecting the Pricing Objective • A company can pursue any of five major objectives through pricing: ➤ Survival. This is a short-term objective that is appropriate only for companies that are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company will be able to remain in business. ➤ Maximum current profit. To maximize current profits, companies estimate the demand and costs associated with alternative prices and then choose the price that produces maximum current profit, cash flow, or return on investment

39. Maximum market share - higher sales volume lead to lower unit cost - higher long run profit-set lowest price due to price sensitive customer. • Maximum market skimming - Setting a high price for a product to maximize revenues. • Product quality leadership-high prices to cover higher performance quality

40. Determining Demand • Inelastic Demand- demand hardly changes with a small change in price. • Elastic Demand - demand changes greatly with a small change in price

41. Estimating total cost • Estimating total cost= Fixed cost+Variable cost (for a given level of production)

42. Analyzing competitor’s cost, price and offer • The firm take the competitor’s costs, price and possible price reaction into account. • The firm first consider the nearest competitor’s price • The firm’s positive differentiations feature

43. Selecting a pricing method 1. Cost based pricing 2. Competition based pricing 3. Demand based pricing 4. Objective based pricing

44. Selecting final price • Psychological Pricing • The influence of other marketing -mix elements • Company pricing policies • Impact of price on other parties

45. Factors affecting Pricing Decisions • As stated earlier price is the consideration in terms of money paid by consumers for the bundle of benefits he/she derives by using the product/ service. In simple terms, it is the exchange value of goods and services in terms of money. The factors usually taken into account while determining the price of a product can be broadly described as follows: • (a) Cost: No business can survive unless it covers its cost of production and distribution. In large number of products, the retail prices are determined by adding a reasonable profit margin to the cost. Higher the cost, higher is likely to be the price, lower the cost lower the price. • (b) Demand: Demand also affects the price in a big way. When there is limited supply of a product and the demand is high, people buy even if high prices are charged by the producer. • But how high the price would be is dependent upon prospective buyers’ capacity and willingness to pay and their preference for the product. In this context, price elasticity, i.e. responsiveness of demand to changes in price should also be kept in view.

46. Competition: The price charged by the competitor for similar product is an important determinant of price. A marketeer would not like to charge a price higher than the competitor for fear of losing customers. Also, he may avoid charging a price lower than the competitor. Because it may result in price war which we have recently seen in the case of soft drinks, washing powder, mobile phone etc. • Marketing Objectives: A firm may have different marketing objectives such as maximisation of profit, maximisation of sales, bigger market share, survival in the market and so on. The prices have to be determined accordingly. For example, if the objective is to maximise sales or have a bigger market share, a low price will be fixed. • Government Regulation: Prices of some essential products are regulated by the government under the Essential Commodities Act. For example, prior to liberalisation of the economy, cement and steel prices were decided by the government. Hence, it is essential that the existing statutory limits, if any, are also kept in view while determining the prices of products by the producers.

47. Methods of Price Fixation Methods of fixing the price can be broadly divided into the following categories. 1. Cost based pricing 2. Competition based pricing 3. Demand based pricing 4. Objective based pricing

48. Cost Based Pricing Under this method, price of the product is fixed by adding the amount of desired profit margin to the cost of the product. If a particular soap costs the marketer Rs. 8 and he desires a profit of 25%, the price of the soap is fixed at Rs 8 + (8x25/100) = Rs. 10. While calculating the price in this way, all costs (variable as well as fixed) incurred in manufacturing the product are taken into consideration

49. Competition Based Pricing In case of products where market is highly competitive and there is negligible difference in quality of competing brands, price is usually fixed closer to the price of the competing brands. It is called ‘young rate pricing’ and is a very convenient method because the marketers do not have to worry much about demand and cost and effect the change as per the changes by the industry leaders.

50. Demand Based Pricing At times, prices are determined by the demand for the product. Under this method, without paying much attention to cost and competitors prices, the marketers try to ascertain the demand for the product. If the demand is high they decide to take advantage and fix a high price. If the demand is low, they fix low prices for their product. At times they resort to differential prices and charge different prices from different groups of customers depending upon their perceived values and capacity to pay. Take the case of cinema halls where the rates of tickets differ for the different sets of rows in the hall