small business marketing: product and pricing strategies chapter 9 © 2014 by mcgraw-hill education....

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Small Business Marketing:

Product and Pricing Strategies

Chapter 9

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objectives

LO1 Recognize the characteristics of goods and services.LO2 Define the total product.LO3 Differentiate the stages of new product

development.LO4 Understand why pricing is an important but difficult

task for small business.LO5 Understand how elasticity, margin, and value

impact pricing setting.LO6 Apply different pricing strategies.

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4 Ps of Marketing

4 Ps of Marketing The four major components of a marketing effort

—product, price, promotion, and placement. Also called the marketing mix

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Goods-Services Mix

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Figure 9.1

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Product

Product anything that is offered to the market to satisfy

consumer wants, needs, and demands goods, services, people, ideas

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Product

Tangibility An item’s capability

of being touched, seen, tasted, or felt

Perishability service exhibits

perishability in that if it is not used when offered, it cannot be saved for later use.

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Product

Inseparability A quality of a

service in which the service being done cannot be disconnected from the provider of the service.

Heterogeneity A quality of a

service in which each time it is provided it will be slightly different from the previous time.

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The Total Product Approach

Total product The entire bundle of products, services, and

meanings of your offering; includes extras like service, warranty, or delivery, as well as what the product means to the customer.

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The Total Product Approach

Augmented product core product plus features that tend to

differentiate it from the competition brand names, quality levels, packaging

Core product basic description of what a product is

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The Total Product Approach

Your product means more to the consumer than just the core component

Can help you get inside your customers’ heads and figure out the most cost-effective “bundle” of value and cost benefits

Knowing what your product “means” to consumers will help you set an appropriate price

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Guidelines for Naming a Business

Entrepreneur’s name Not very clear to customers what you do How to handle name if you sell the company Is your name appropriate: i.e. Payne for a dentist

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Guidelines for Naming a Business

Be careful about infringing on trademarksSomething that describes firm or product and

is easy to remember: “Discount Furniture”Creative spellings are eye-catching; don’t go

overboardBeware of selecting a name too narrow to

allow the firm to grow

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Stages of New ProductDevelopment

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Figure 9.2

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New Product Development Process

Me-too products Products essentially

similar to something already on the mark

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Areas for Idea Screening

1. Product—innovativeness and uniqueness2. Market—customer need and market size, and 3. Intellectual property4. People behind the idea,5. Additional resources needed to bring the

idea to market6. Profitability of the idea

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Idea Screening Comparison

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Exhibit 9.1

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Idea Evaluation

Idea evaluation exhaustive process of specifying the details of

each idea’s technological feasibility, its cost, how it can be marketed, and its market potential

Basic evaluation tool is the feasibility analysis

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Commercialization

Commercialization the process of making the new product available

to consumers

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Pricing

Optimum price refers to the highest price that would produce

your desired level of sales (or revenues) in your target market.

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Key Factors for Determining Optimum Price

Demand for the product or serviceValue delivered to the customerPrices set by competing firmsYour business strategy and product placement

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The Fundamentals of Pricing: Margin Pricing and Elasticity

Markup pricing A price-setting

method where an amount is added to the cost of a product to set the retail price and provide a profit.

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The Fundamentals of Pricing: Margin Pricing and Elasticity

Margin The amount of

profit, usually stated as a percentage of the total price.

Markup The amount an

entrepreneur adds to costs to provide a profit

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Computing Margin and Markup

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Exhibit 9.2

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The Fundamentals of Pricing: Margin Pricing and Elasticity

Elasticity From economics, the idea that the market’s

demand for a product or service is sensitive to changes in its price.

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Price Elasticity

Inelastic product product for which there are few substitutes and

for which a change in price makes very little difference in quantity purchased

Elastic product product for which there are any number of

substitutes and for which a change in price makes a difference in quantity purchased

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Pricing Elasticity

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Figure 9.3

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The Fundamentals of Pricing: Value

The value delivered to the customer is second in order of importance to the pricing decision

In addition to demand and value provided, you must consider the prices set by your competition

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The Fundamentals of Pricing—Contextual Factors

Decide what is the right priceExamine existing market prices for similar

products and servicesConsider your business costs

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The Fundamentals of Pricing—Contextual Factors

Your Company Objectives

Marketing Strategy

Channels of Distribution

Competition

Legal and Regulatory Issues

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Pricing Psychology: How Customers Perceive Prices

Internal reference price a consumer’s mental image of what a product’s

price should beExternal reference price

an estimation of what a price should be based on advice, advertisements, or comparison shopping

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Pricing Strategies

Skimming Setting a price at the highest level the market will

bear, usually because there is no competition at the time.

Prestige or premium pricing Setting a price above that of the competition so

as to indicate a higher quality or that a product is a status symbol.

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Pricing Strategies

Odd-even pricing Setting a price that ends in the number 5, 7, or 9.

Partitioned pricing Setting the price for a base item and then

charging extra for each additional component.

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Pricing Strategies

Captive pricing Setting the price for an item relatively low and

then charging much higher prices for the expendables it uses.

Price lining The practice of setting (usually) three price

points: good quality, better quality, best quality.

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Price-Lowering Techniques

Periodic or random discounting Sales conducted at either predictable or non-

predictable intervals.Off-peak pricing

Charging lower prices at certain times to encourage customers to come during slack periods

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Price-Lowering Techniques

Bundling Combining two or more products in one unit and

pricing it less than if the units were sold separately.

Multiple or bonus pack Combining more than one unit of the same

product and pricing it lower than if each unit were sold separately.

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Price-Lowering Techniques

Coupons, Rebates, Loyalty and Referral Programs

Referral discount A discount given to a

customer who refers a friend to the business

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Pricing Strategy Wrap-up

Temporary reduction in price won’t tarnish your product image

Consumers also feel smart about buying something at a better price

They will feel they got a great deal

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