Marketing tactics - price

What is a product line?

A product line is a group of products that are closely related because they function in a similar manner, are sold to the same type of outlets or fall within the same price ranges. Example Colgate, They have different dental product lines, including toothpaste, toothbrushes, dental floss and mouthwash.

Product line width

The number of different product lines a company offers. Imagine a company sells, toothpaste, toothbrushes, mouthwash and dental floss. This therefore has 4 product lines.

Product line depth

The number of variations within a particular product line. For example, Colgate’s toothpaste line might include maximum cavity protection, herbal toothpaste, total 12 pro breath and triple action.

Product line length

Total number of individual products across all product lines.

Product mix consistency

How closely related the different product lines are.

Adjustments to a product line

Companies don’t necessarily keep their product lines the same forever. They can make adjustments depending on their objectives. Example, product line stretching, product line filling, product line shrinking.

What is line stretching?

It involves lengthening the product line. A company decides to expand its product offering to reach customers it wasn’t previously targeting.

Product line filling

Adding more items within an existing product line, thereby increasing product depth. It already has a product line, but it introduces additional variations within that same line. A company does this to offer consumers more variety, increase market share, create a competitive advantage and ultimately increase profits. This does introduces cannibalization. This is when a new product decreases consumer demand for the company’s existing products.

Product line shrinking

This involves removing products from product lines when they are unprofitable or when the company needs to reduce costs. This is done to reduce costs, eliminate unprofitable products, focuses on a more specific market segment and concentrate resources on products that perform better.

Key drivers of new product development (why companies decide to develop new products in the first place)?

1. Consumers changing needs and desires. Consumers preferences and expectations change over time. Companies need to adapt by developing products that satisfy these changing needs.

2. Existing technology becoming obsolete.

3. A product reaching the end of its life cycle. products go through 5 stages, development, introduction, growth, maturity and decline.

4. Attempting to gain competitive advantage when competition is intense.

5. An existing product is declining in popularity.

6. A company’s desire to pursue specific corporate strategy objectives.

Why do many products fail?

They overestimate the market size, poor design, incorrectly positioned and incorrect pricing strategy.

New product adoption

This explains how consumers respond to a new product and how a product gradually gains acceptance in the market.

Roger’s Adoption Curve

Innovators

These are consumers who absolutely love trying new things, They actively seek out new products, they enjoy being the first to own or use something. They have a high tolerance for risk and uncertainty. They are generally a relatively small group.

Early adopters

These consumers are also relatively quick to adopt new products, but they are slightly more cautious than innovators. They are willing to try new things, but they generally want to understand the product first.

Early majority

These consumers are more cautious. They generally wait until a new product has gained some momentum before purchasing it.

Late majority

These consumers are generally more skeptical about new products.

Laggards

These consumers are generally the slowest to adopt new products.

Factors influencing new product adoption

1. Relative advantage

2. Compatibility

3. complexity

4. trialability

5. communicability

Relative advantage

The degree to which a new product appears better than existing products. Consumers want to know, what makes this new product better than what I already have?

Compatibility

The degree to which a new product fits the values and experiences of potential customers.

Complexity

The degree to which a new product is easy to understand or use.

Trialability/Divisibility

The degree to which a new product may be tried on a limited basis.

Communicability

The degree to which the results of using a product can be observed or described to others.

Credible sourcing

It means providing info about a new product through sources that consumers consider trustworthy, reliable and believable. It reduces uncertainty, builds trust, encourages adoption.

How a company can encourage consumers to adopt a new product more quickly?

1. Effective marketing communication. (Paid media referring to exposure that a company pays for. ) Examples, billboards, radio ads, social media ads.

2. Opportunities for trial/sampling.

3. Specials and discounts.

4. Opinion leaders as endorsers. An opinion leader is someone whose opinions and recommendations can influence the purchasing decisions of other consumers.

Role of pricing

1. its is crucial for positioning.

2. The marketplace is shaped by competitors pricing.

3. Major factor in decision making.

4. Price shapes perceptions.

Objectives of pricing

Gain profits, cover costs, build demand, develop a user base, support a positioning strategy and support a competitive strategy.

Examples of pricing considerations

Taxes, tariffs, international political effects, natural disasters/ disease outbreaks, exchange rates and raw material price fluctuations.

Pricing philosophies

Cost based, value based and competitor based.

Cost based pricing

Involves calculating all the costs associated with producing, distributing, selling and supporting a product and then adding a mark-up to determine the selling price. The company works out how much it costs to provide the product and adds ana amount to make a profit.

Advantages vs disadvantages of cost based pricing

Adv: relatively straightforward to calculate, ensures that costs are considered, allows the company to build a profit margin into the price.

Disadv: may overlook what consumers are willing to pay, may overlook competitor’s prices, can result in a price that doesn’t reflect the product’s perceived value.

Competitor based pricing

It involves setting the price of a product based on what existing competitors charge.

Advantages vs disadvantages of competitor based pricing

Adv: helps the company remain competitive, provides a useful reference point when determining prices, helps businesses understand the pricing environment.

Disadv: The company can become too focused on competitors instead of consumers. It may start copying competitors without considering its own strategy. It can lead to price wars, where competitors continuously lower their prices. Focusing too heavily on competitors can lead to marketing myopia, because the company loses sight of the consumer.

Value based pricing

It involves setting a price according to the perceived value of the product or service in the minds of consumers, rather than simply using production costs as the starting point.

2 types of value based pricing

Good-value pricing and value added pricing

Good value pricing

Involves creating the right balance between quality, service and a fair price.

Value added pricing

This involves adding benefits to a product or service to justify charging a higher price.

Break even pricing

Setting prices such that you are able to break-even with your predicted sales.

Target profit pricing

Setting prices to reach a specified profit goal given your predicted sales.

Competitive phenomena that impacts price

Monopoly?

Pure competition? (information?)

Oligopoly?

Number of competitors increasing?

Number of substitute offers?

Switching costs (expense incurred by customer when switching to a different product)

Steps in setting price

1. Select pricing objectives

2. Identify target market’s evaluation or price and ability to purchase.

3. determine demand

4. analyze competitor’s prices.

5. select pricing policy

Why are firms sometimes forced to reduce prices?

There is excess capacity, there is a falling demand in the face of increased competition and maybe market penetration is occurring.

Why are firms sometimes forced to increase prices?

If successful, it can greatly increase profits, cost inflation and over demand.

How do competitors react to price changes?

They are most likely to react when there are a small number of firms involved, when the product is standardized and when buyers are well informed.

Why did the competitor change the price? Is the price cut permanent or temporary? How long can they sustain the drop? What is the effect on market share and profits? Will other competitors respond?

What to do if your competitor drops their price?

Reduce price to match competition. Maintain price but raise the perceived value (through communications). Improve quality and increase price. Launch a lower-price “fighting” brand.