CHAPTER FIVE

PRODUCT, SERVICE AND

NEW PRODUCT STRATEGY
 Learning Objectives
Up on the completion of this unit a student will
able to
 Define product
 Describe the major characteristics of products
 Discuss the new product development stage
 Describe the product life cycle stage
 Discuss service strategies.
 5.1. What is Product?
 A product is anything that can be offered to a
market to satisfy a want or need.
 A product is anything that can be offered to a
market for attention, acquisition, use or
consumption that might satisfy a need.
 Consumers are buying more than a set of
physical attributes. Fundamentally, they are
buying want satisfaction. Thus a wise firm sells
product benefits rather than just products.
 3

What is a Product?

 A product is anything that can be

offered to a market to satisfy a
want or need, including physical
goods, services, experiences,
events, persons, places,
properties, organizations,
information, and ideas.
5.2.The Five Product levels
 Product Levels
 Marketers plan their market offering at five
levels:
1. The core product - This is the most basic level,
which answers the question, what is the buyer
really buying? The core product constitutes
the benefits received.
 It consists of problem solving services or core
benefits that consumers seek when they buy a
product. E.g. A hotel guest is buying “rest and
sleep”;
 Cont’d
2. The actual product: The marketer has to turn
the core benefit into a basic product.
 Thus, a hotel room includes a bed, bathroom,
towels, and closet.
 Actual product may have as many as five
characteristics that combine to deliver core
product benefits. They are
Quality level Design Packaging
Features A brand name
 Cont’d
3. Expected product, a set of attributes and
conditions that buyers normally expect when
they buy the product. Hotel guests expect a
clean bed, fresh towels, and so on.
4. Augmented product: products that exceeds
customer expectations. A hotel might include a
remote-control television set, fresh flowers.
 Includes the additional services and benefits
offered around the core and actual products
 Cont’d
5. Potential product, which encompasses all of
the possible augmentations and
transformations the product might undergo in
the future.
 Here, a company searches for entirely new
ways to satisfy its customers and distinguish
its offer.
 While augmented product describes what is
included in the product today, the potential
product points to its possible evolution.
 5.3. Product Classifications
5.3.1.Consumer-goods classification.
1. Convenience Goods: are consumer goods that the
consumer often buys frequently, immediately, and with
minimum shopping effort.
 The significant characteristics of consumer goods are:-
 The consumer has complete knowledge of the particular
product wanted, and the consumer is thus dominated
by habit
 usually inexpensive and bought by their brands
 Consumers exert minimum shopping effort
 Cont’d
 Convenience goods further classified as
Staples: consumer purchased on regular basis
E.g soaps, tooth paste, etc…
Impulse goods: purchased with out any planning
or search effort. E.g. magazines, candy
Emergency goods: purchased when a need is
urgent .
E.g. Umbrella during rainy season
 Cont’d
2. Shopping Goods: are goods that the consumer
selects and buys only after making
comparisons with respect to price, quality,
suitability and style.
 Costs more and purchased less frequently than
convenience goods.
 Examples include household furniture and
clothing, cars.
 Cont’d
3. Specialty Goods: are consumer goods with
unique characteristics and/or brand
identification for which a significant group of
buyers are willing to make a special purchasing
effort.
 The consumer has prior product knowledge.
 Specialty goods do not involve the buyer's
making shopping comparison; the buyer only
invests shopping time to reach the required
outlets.
 Cont’d
4. Unsought Goods: These are goods that the
consumer either does not know about or
knows about but does not think of buying
them. New products until they are promoted
through advertising and life insurance, and
encyclopedias are categorized under this
group.
 14

Consumer Goods Classification

Convenience Shopping

Specialty Unsought
 15

3.2.Industrial Goods Classification

 Industrial products are products

purchased for further processing or for
use in conducting a business
 Classified by the purpose for which the
product is purchased
– Materials and parts
– Capital items
– Supplies and services
5.3.2 Classification of Industrial Goods

1. Materials and parts include:

 Raw materials consist of farm products (wheat,
cotton, livestock, fruits, vegetables) and natural
products (fish, lumber, crude petroleum, iron ore).
 Manufactured materials and parts consist of
component materials (iron, yarn, cement, wires) and
component parts (small motors, tires, castings).
 Most manufactured materials and parts are sold
directly to industrial users.
 Cont’d
2. Capital items: are long-lasting goods that
facilitate developing or managing the finished
product. They include two groups:
 Installations (such as factories) and equipment
(such as trucks and computers), both sold
through personal selling.
3. Supplies and services include operating
supplies, repair and maintenance items, and
business services
 5.4.Product Mix

 A product mix (also called product assortment)

is the set of all products and items that a
particular marketer offers for sale.
 The product mix of an individual company can
be described in terms of width, length, depth,
and consistency.
 The width refers to how many different product
lines the company carries…… four lines in the
following table.
 Cont’d…
 The length refers to the total number of items in
the mix. 20 product
 The depth of a product mix refers to how many
variants of each product are offered.
 The consistency of the product mix refers to
how closely related the various product lines
are in end use, production requirements,
distribution channels, or some other way.
 Cont’d…
 E.g.: Procter and Gamble
Detergent toothpaste bar soap paper tissue
Ivory snow Gleen ivory Charmin
Tide Crest kirks Puffs
Cheer lava Banner
Dash Camay Summit
Dreft zest
Bold safeguard
Gain coast
 5.6. Branding
 The American Marketing Association defines a brand as a
name, term, sign, symbol, or design, or a combination of
these, intended to identify the goods or services of one
seller or group of sellers and to differentiate them from
those of competitors.
 In essence, a brand identifies the seller or maker. a brand
is essentially a seller’s promise to deliver a specific set of
features, benefits, and services consistently to the
buyers.
 The best brands convey a warranty of quality.
 Cont’d…
 Brands vary in the amount of power and value they
have in the marketplace.
 At one extreme are brands that are not known by most
buyers. Then there are brands for which buyers have a
fairly high degree of brand awareness.
 Beyond this are brands with a high degree of brand
acceptability.
 Next are brands that enjoy a high degree of brand
preference.
 Finally there are brands that command a high degree of
brand loyalty.
 Cont’d…
 Among the desirable qualities for a brand name are the
following:
1. It should suggest something about the product’s
benefits. Examples: Beauty-rest,
2. It should suggest product qualities
3. It should be easy to pronounce, recognize, and
remember. Examples: Amazon.com
4. It should be distinctive. Examples: Kodak, Yahoo!
5. It should not carry poor meanings in other countries
and languages.
 Branding options

 A manufacturing brand: created and owned by

the producer of a product or service. E.g. Sony
 A private brand: created and owned by the
reseller of a product or service.
 A licensed brand: company sells its product
under another brand name. e.g. Coca Cola
 Co-branding: two companies go together and
manufacture one product like the Sony
Erickson cellular phone.
 Cont’d…
 Brand name: The part of a brand, which consists of
words, letters and/or numbers which can be vocalized.
Example OMO, Toyota, Coca-Cola, Pepsi
 Brand mark: The part of a brand which can be
recognized but one cannot utter able. It can appear in
the form of a symbol, design, distinctive coloring or
lettering.
 Trade mark: A brand or part of a brand that has been
given legal protection so that the owner has exclusive
rights to its use.
 5.7.Packaging & Labeling
 Packaging includes the activities of designing
and producing the container for a product.
 The container is called the package, and it
might include up to three levels of material.
 The package may include:
– The primary package (what the product is in – a tube
full of toothpaste);
– The secondary package (the box the tube came in);
– The shipping package (a card box case)
 Cont’d
 Labels identify the product or brand, describe attributes,
and provide promotion
 Every physical product must carry a label, which may be
a simple tag attached to the product or an elaborately
designed graphic that is part of the package.
 Labels perform several functions.
1. Identifies the product or brand
2. The label might also grade the product,
3. The label might describe the product: who made it, where it was
made, …..
4. Finally, the label might promote the product through attractive
graphics.
5.8.New product development
 New-Product Development Process
a) Idea Generation
Idea generation is the systematic search for new-
product ideas
 Sources of new-product ideas may come from
either of:
– Internal sources refer to the company’s own formal
research and development, management and staff, and
intrapreneurial programs
– External sources refer to sources outside the
company such as customers, competitors, distributors,
suppliers, and outside design firms
 b)Idea Screening

 Identify good ideas and drop poor

ideas
 R-W-W Screening Framework:
– Is it real?
– Can we win?
– Is it worth doing?
 c) Concept Development and Testing

 Product idea is an idea for a possible product

that the company can see itself offering to the
market
 Product concept is a detailed version of the idea
stated in meaningful consumer terms.
 Product image is the way consumers perceive an
actual or potential product
 Concept testing refers to testing new-product
concepts with groups of target consumers
d)Marketing Strategy Development

 Marketing strategy development refers to

the initial marketing strategy for
introducing the product to the market
 Marketing strategy statement includes:
– Description of the target market
– Value proposition
– Sales and profit goals
 e)Business Analysis

 Business analysis involves a review of the

sales, costs, and profit projections to find
out whether they satisfy the company’s
objectives
 f) Product Development

 Product development involves the

creation and testing of one or more
physical versions by the R&D or
engineering departments
 Requires an increase in investment
 g) Test Marketing

 Test marketing is the stage at which

the product and marketing program
are introduced into more realistic
marketing settings
 Provides the marketer with
experience in testing the product and
entire marketing program before full
introduction
 h) Commercialization

 Commercialization is the introduction

of the new product
– When to launch
– Where to launch
– Planned market rollout
 5.9. The Product Life Cycle
 Factors, which affect the length of a product life cycle, include
customer preferences, seasons, technological changes,
competition…
 Introduction: A period of slow sales growth as the product is
introduced in the market. Profits are nonexistent in this stage
because of the heavy expenses incurred with product introduction.
 Growth: A period of rapid market acceptance and substantial profit
improvement.
 Maturity: A period of a slowdown in sales growth because the
product has achieved acceptance by most potential buyers. Profits
stabilize or decline because of increased competition.
 Decline: The period when sales show a downward drift and profits
erode
 38

Stages of Product Lifecycle

 Product Life-Cycle Strategies
Introduction Stage

 Slow sales growth

 Little or no profit
 High distribution and promotion
expense
 Product Life-Cycle Strategies
Growth Stage
 Sales increase
 New competitors enter the market
 Price stability or decline to increase volume
 Consumer education
 Profits increase
 Promotion and manufacturing costs gain
economies of scale
 Product Life-Cycle Strategies

Maturity Stage

 Slowdown in sales
 Many suppliers
 Substitute products
 Overcapacity leads to competition
 Increased promotion and R&D to support
sales and profits
 Product Life-Cycle Strategies

Maturity Stage Modifying Strategies

 Market modifying
 Product modifying
 Marketing mix modifying
 Product Life-Cycle Strategies
Decline Stage

 Maintain the product

 Harvest the product
 Drop the product
 5.10.Managing Services
 A service is any act or performance that one
party can offer to another that is essentially
intangible and does not result in the ownership
of anything.
 Its production may or may not be tied to a
physical product.
 Characteristics of Services
 Intangibility: cannot be seen, tasted, felt, heard, or
smelled before they are bought.
 Inseparability: Services are typically produced and
consumed simultaneously.
 Variability: Because services depend on who provides
them and when and where they are provided, they are
highly variable.
 Perishability: Services cannot be stored.
 46

Five determinants of service Quality

 Reliability—The ability to perform the promised
service dependably and accurately.
 Responsiveness—Willingness to help customers and
provide prompt service.
 Assurance—The knowledge and courtesy of
employees and their ability to convey trust and
confidence.
 Empathy—The provision of caring, individualized
attention to customers.
 Tangibles—The appearance of physical facilities,
equipment, personnel, and communication materials.
 47

THE END
 CHAPTER SIX
PRICING STRATEGY
 6.0.Learning Goals
Up on the completion of this unit a student will
able to
 Identify factors affecting pricing decision
 Contrast the three general approach to setting
price
 Describe the major strategies for setting the
price of new products.
 6.1.Definition
 Price is the sum of all the values that consumers
exchange for the benefits of having or using the
product or service.
 Price can be defined as the monetary expression of the
value of a product.
 In the buyer market price is the amount of money that
consumer is willing to pay for the benefits of having or
using the product.
 In a seller market price is the amount of money charged
by the seller in exchange for a product.
 Cont’d
 All for-profit organizations and many nonprofit
organizations set prices on their goods or services.
 Whether the price is called rent (for an apartment),
tuition (for education), fare (for travel), or interest
(for borrowed money) the concept is the same.
 In the entire marketing mix, price is the one element
that produces revenue; the others produce costs.
 Price is also one of the most flexible elements: It
can be changed quickly.
 Cont’d
 Price is the only element of the marketing mix that produces
revenue; the other elements produce costs.
 Price is not just a number on a tag. It comes in many forms and
performs many functions.
 Synonyms for Price:
– Rent Tuition Fee
– Fare Rate Toll
– Premium Honorarium Royalty
– Bribe Dues Salary
– Commission Wage Tax
 6.2.SETTING THE PRICE

 A firm must set a price for the first time when it

 develops a new product,
 introduces its regular product into a new
distribution channel or geographical area, and
 enters bids on new contract work.
 A six-step procedure

1. Selecting the pricing objective;

2. Determining demand;
3. Estimating costs;
4. Analyzing competitors’ costs, prices, and
offers;
5. Selecting a pricing method; and
6. Selecting the final price
Step 1: Selecting the Pricing
Objective
Five major Pricing objectives
 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.
 Cont’d

 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.
 In all cases, the company wants current
financial results rather than long-run
performance.
 Cont’d
 Maximum market share. Firms choose this objective
because they believe that higher sales volume will lead
to lower unit costs and higher long-run profit.
 With this market-penetration pricing, the firms set the
lowest price, assuming the market is price sensitive.
This is appropriate when
1. The market is highly price sensitive, so a low price
stimulates market growth;
2. Production and distribution costs fall with
accumulated production experience;
3. A low price discourages competition.
 Cont’d
 Product-quality leadership. setting high prices
 This objective makes sense under the following
conditions:
1. A sufficient number of buyers have a high current
demand;
2. the unit costs of producing a small volume are not so
high
3. the high initial price does not attract more competitors
4. the high price communicates the image of a superior
product.
Step 2: Determining Demand
 Each price will lead to a different level of
demand and, therefore, will have a different
impact on a company’s marketing objectives.
 Normally, demand and price are inversely
related: The higher the price, the lower the
demand.
 The first step in estimating demand is to
understand what affects price sensitivity.
 Cont’d
There is less price sensitivity when:
 The product is more distinctive,
 Buyers are less aware of substitutes,
 Buyers cannot easily compare the quality of
substitutes,
 The expenditure is a lower part of buyer’s total income,
 The expenditure is small compared to the total cost of
the end product,
 Cont’d

 Part of the cost is borne by another party,

 The product is used in conjunction with assets
previously bought,
 The product is assumed to have more quality,
prestige, or exclusiveness, and
 Buyers cannot store the product.
 Step 3: Estimating Costs
 While demand sets a ceiling on the price the
company can charge for its product, costs set
the floor.
 Every company should charge a price that
covers its cost of producing, distributing, and
selling the product and provides a fair return
for its effort and risk.
 Types of costs
 A company’s costs take two forms—fixed and variable.
 Fixed costs (also known as overhead) are costs that do
not vary with production or sales revenue.
 variable costs vary directly with the level of production.
 Total costs consist of the sum of the fixed and variable
costs for any given level of production.
 Average cost is the cost per unit at that level of
production; it is equal to total costs divided by
production.
Step 4: Analyzing Competitors’
Costs, Prices, and Offers
 If the firm’s offer is similar to a major
competitor’s offer, then the firm will have to
price close to the competitor or lose sales.
 If the firm’s offer is inferior, it will not be able to
charge more than the competitor charges.
 If the firm’s offer is superior, it can charge more
than does the competitor
 Step 5: Selecting a Pricing
Method
 The three Cs—the customers’ demand schedule, the
cost function, and competitors’ prices—are major
considerations in setting price.
 First, costs set a floor to the price.
 Second, competitors’ prices and the price of
substitutes provide an orienting point.
 Third, customers’ assessment of unique product
features establishes the ceiling price.
6.3.General Pricing Approaches

1. the cost-based approach(markup orcost-plus

pricing, break-even analysis, and target profit
pricing);
2. the buyer based approach(value-based
pricing); and
3. the competition-based approach(going-rate
and sealed-bid pricing)
Cost Based Pricing Strategies
1. Markup Pricing or Cost plus Pricing
– The most elementary pricing method is to add a standard markup to the
product’s cost.
– Construction companies do this when they submit job bids by estimating
the total project cost and adding a standard markup for profit.
– Similarly, lawyers and accountants typically price by adding a standard
markup on their time and costs.
2. Target-Return Pricing
– In target-return pricing, the firm determines the price that would yield its
target rate of return on investment (ROI).
– Target pricing is used by many firms, including General Motors, which
prices its automobiles to achieve a 15–20 percent ROI.
Value Based Pricing Strategies
1.Perceived-Value Pricing
– An increasing number of companies base price on customers’ perceived
value.
– Firms see the buyers’ perceptions of value, not the seller’s cost, as the key
to pricing.
– Then they use the other marketing-mix elements, such as advertising, to
build up perceived value in buyers’ minds.
2. Value Pricing
– Value pricing is a method in which the company charges a fairly low price
for a high quality offering.
– Value pricing says that the price should represent a high-value offer to
consumers.
– This is a major trend in the computer industry, which has shifted from
charging top dollar for cutting-edge computers to offering basic computers
at lower prices.
Competition Based Pricing Strategies

1. Going-Rate Pricing
– In going-rate pricing, the firm bases its price largely on competitors’ prices.
– The firm might charge the same, more, or less than its major competitor(s)
charges.
– In oligopolistic industries that sell a commodity such as steel, paper, or
fertilizer, firms normally charge the same price.
2. Sealed-Bid Pricing
– Competitive-oriented pricing is common when firms submit sealed bids for
jobs.
– In bidding, each firm bases its price on expectations of how competitors
will price rather than on a rigid relationship to the firm’s own costs or
demand.
– Sealed-bid pricing involves two opposite pulls.
– The firm wants to win the contract—which means submitting the lowest
price—yet it cannot set its price below cost.
 6.4.Adapting the Price
6.4.1.Price Discounts and Allowances
 Most companies will adjust their list price and
give discounts and allowances for early
payment, volume purchases, and off-season
buying.
– Cash Discounts: A cash discount is a price
reduction to buyers who pay their bills promptly. A
typical example is ―2/10, net 30,‖ which means that
payment is due within 30 days and that the buyer
can deduct 2 percent by paying the bill within 10
days.
 Cont’d
 Quantity Discounts: A quantity discount is a price
reduction to those buyers who buy large volumes. A
typical example is “$10 per unit for less than 100 units;
$9 per unit for 100 or more units.”
 Functional Discounts: Functional discounts (also called
trade discounts) are offered by a manufacturer to trade-
channel members if they will perform certain functions,
such as selling, storing, and record keeping.
 Seasonal Discounts: A seasonal discount is a price
reduction to buyers who buy merchandise or services
out of season.
 Cont’d
 Allowances: Allowances are extra payments
designed to gain reseller participation in special
programs.
 Trade-in allowances are price reductions
granted for turning in an old item when buying
a new one. Trade-in allowances are most
common in durable goods categories.
 Promotional allowances are payments or price
reductions to reward dealers for participating in
advertising and sales support programs.
 6.4.2.Promotional Pricing
 Companies can use any of seven promotional
pricing techniques to stimulate early purchase
 However, smart marketers recognize that
promotional-pricing strategies are often a zero-
sum game.
 Loss-leader pricing: Stores drop the price on
well known brands to stimulate additional store
traffic.
 Cont’d

 Special-event pricing: Sellers establish special

prices in certain seasons to draw in more
customers.
 Warranties and service contracts
 Psychological discounting: “Was $359, now
$299.”
 6.4.3.Discriminatory Pricing
 Customer-segment pricing: Different customer
groups pay different prices for the same good or
service.
 Location pricing: The same product is priced
differently at different locations.
 Time pricing: Prices are varied by season, day, or
hour.
 6.4.5.Product-Mix Pricing
1. Product-line pricing. Many sellers use well-
established price points (such as $200, $350,
and $500 for suits) to distinguish the products
in their line.
2. Optional-product pricing: offering to sell
optional or accessory products along with
their main product.
 Cont’d
3. Captive-product pricing: Companies that make products
that must be used along with a main product are using
captive product pricing.
 Examples of captive products are razor blades, camera
film, video games, and computer software.
4. Two-part pricing, which is practiced by many service
firms, consists of a fixed fee plus a variable usage fee.
5. Product bundle pricing: sellers often combine several of
their products and offer the bundle at a reduced price.
6.4.6.New-Product Pricing Strategies

1. Market-Skimming Pricing: Many companies that

invent new products initially set high prices to
"skim" revenues layer by layer from the market.
 It makes sense only under certain conditions
I. The product's quality and image must support its
higher price, and enough buyers must want the
product at that price.
II. Competitors should not be able to enter the
market easily and undercut the high price.
 Cont’d
2. Market-Penetration Pricing is setting a low initial price
in order to penetrate the
market quickly and deeply—to attract a large number
of buyers quickly and win a large market
share.
 The high sales volume results in falling costs, allowing
the company to cut its price even further.
I. The market must be highly price sensitive
II. Production and distribution costs must fall as sales volume
increases.
III. The low price must help keep out the competition.
 80

THE END