Creating and Pricing Products That Satisfy Customers

Introduction to Products

• Product Definition: A product is everything one receives in an exchange, encompassing all tangible and intangible attributes as well as experienced benefits. It can take three forms:

  • Good: A real, physical thing that can be touched. Example: A Marie biscuit.

  • Service: The result of applying human or mechanical effort to a person or thing. Example: A barber giving a haircut.

  • Idea: These may take the form of philosophies, lessons, concepts, or advice.

Classification of Products

• Products are grouped into two general categories based on their intended use:

  1. Consumer Product: A product purchased to satisfy the personal and family needs of an individual.

  2. Business Product: A product bought for resale, for making other products, or for use in a business’s operations.

Consumer Product Classifications

• Consumer products are further divided into four distinct categories:

  1. Convenience Product: A relatively inexpensive, frequently purchased item for which buyers want to expend only minimal effort. Examples: bread, petrol, newspapers.

  2. Shopping Product: An item for which buyers are willing to expend considerable effort on planning and making the purchase. Examples: appliances, bicycles, mobile phones.

  3. Specialty Product: An item that possesses one or more unique characteristics for which a significant group of buyers is willing to expend considerable purchasing effort. Examples: sports cars, original artwork.

  4. Unsought Product: Items that customers do not expect to purchase, usually bought only when a sudden problem or need arises.

Business Product Classifications

• Business products are categorized by their use and characteristics:

  • Raw Material: A basic material that actually becomes part of a physical product. These usually originate from mines, forests, oceans, or recycled solid wastes.

  • Major Equipment: Large tools and machines used for production purposes. Examples: cranes, stamping machines.

  • Accessory Equipment: Standardized equipment used in a business’s production or office activities. Examples: hand tools, scanners, calculators.

  • Component Part: An item that becomes part of a physical product and is either a finished item ready for assembly or a product requiring little processing before assembly. Examples: tyres, computer chips.

  • Process Material: A material used directly in the production of another product but is not readily identifiable in the finished product. Examples: industrial glue, food preservatives.

  • Supply: An item that facilitates production and operations but does not become part of a finished product. Examples: paper, pencils.

  • Business Service: An intangible product that an organization uses in its operations. Examples: financial services, legal services.

Product Line and Product Mix

• Product: Refers to a singular item.

• Product Line: A group of similar products that differ only in relatively minor characteristics. Example: Procter & Gamble manufactures and markets several shampoos, including Pantene and Head & Shoulders.

• Product Mix: All the products that a business offers for sale. There are two primary dimensions to a product mix:

  1. Width: The number of different product lines the mix contains.

  2. Depth: The average number of individual products within each specific line.

Managing Existing Products

• Product Modification: The process of changing one or more of a product’s characteristics. Example: The food industry responding to clean label demands.

• Types of Modifications:

  1. Quality Modifications: Changes relating to dependability and durability, typically achieved through alterations in materials or production processes.

  2. Functional Modifications: Changes affecting a product’s versatility, effectiveness, convenience, or safety, usually requiring a redesign.

  3. Aesthetic Modifications: Changes to the sensory appeal of a product (taste, texture, sound, smell, or visual characteristics).

• Line Extension: The development of a new product that is closely related to existing products in a line but designed to meet different customer needs. Example: Woolworths’ single-serving peanut butter snack sachets.

Deleting Products

• Product Deletion: The elimination of one or more products from a product line to maintain an effective mix.

• Rationale for Deletion:

  • Weak and unprofitable products cost the company time, money, and resources that could be used for modification or new development.

  • A weak product’s unfavorable image can negatively impact the customer perception and sales of other products sold by the business.

Developing New Products

• Overview: Developing and introducing new products is time-consuming, expensive, and risky. For most businesses, more than $50\%$ (half) of new products fail.

• Categories of New Products:

  1. Imitations: Products designed to compete with existing products of other businesses.

  2. Adaptations: Variations of existing products intended for an established market.

  3. Innovations: Entirely new products.

• Process: The development of a new product consists of seven phases (the transcript identifies the existence of these phases as a structured process).

• Reasons for Failure: Products fail mainly because the product and its marketing program were not planned and tested as thoroughly as they should have been.

Branding Fundamentals

• Brand: A name, term, symbol, design, or combination used to identify a seller’s products as distinct from competitors.

• Brand Name: The part of a brand that can be spoken.

• Brand Mark: The part of a brand that is a symbol or distinctive design. Example: The Nike swoosh.

• Trademark: A brand name or brand mark registered with the Companies and Intellectual Property Commission (CIPC), providing legal protection from unauthorized use.

• Trade Name: The complete and legal name of an organization.

Types of Brands

• Manufacturer (or Producer) Brand: A brand owned by a manufacturer. Examples: Bokomo Weet-Bix (food), Defy (appliances), Engen (petrol), Honda (cars), and Levi’s (clothing).

• Store (or Private) Brand: A brand owned by an individual wholesaler or retailer. Examples: House Brand (Checkers), No Name (Pick n Pay).

• Generic Product (or Generic Brand): A product that features no brand at all.

Benefits of Branding

• For Buyers:

  • Reduces shopping time due to easy recognition.

  • Reduces perceived risk of purchase.

  • Provides potential psychological rewards (symbolizing status).

• For Sellers:

  • Aids in introducing new products carrying a familiar name.

  • Enhances promotional efforts; promoting one branded product indirectly promotes others under the same brand.

Brand Loyalty and Equity

• Brand Loyalty: The extent to which a customer is favorable toward buying a specific brand.

• Levels of Brand Loyalty:

  1. Brand recognition

  2. Brand preference

  3. Brand insistence

• Brand Equity: The marketing and financial value associated with a brand’s strength in a market.

• Factors Contributing to Brand Equity:

  1. Brand awareness

  2. Brand associations

  3. Perceived brand quality

  4. Brand loyalty

Choosing, Protecting, and Extending Brands

• Choosing a Brand: The name should be easy to say, spell, and recall. It should positively suggest the product’s uses, characteristics, and benefits, and be distinctive from competitors.

• Protecting a Brand: Registration reserves the brand for exclusive use. To prevent a brand from becoming a generic term, businesses should use capital letters and use the brand name as an adjective modifying a general product class.

• Branding Strategies:

  • Individual Branding: Using a different brand for each product. Advantage: Problems with one product do not affect others; brands can target different market segments.

  • Family Branding: Using the same brand for most products. Advantage: Promotion for one item helps others; new products gain a "head start" due to brand familiarity.

• Brand Extension: Using an existing brand to brand a new product in a different category. Example: Exclusive Books and Seattle Coffee Co. Caution is required not to extend too far or too many times, as it may weaken the brand.

Packaging and Labelling

• Packaging: All activities involved in developing and providing a container with graphics for a product.

• Functions of Packaging:

  • Protect the product.

  • Maintain the product's functional form.

  • Offer consumer convenience.

  • Promote the product via communication of features, uses, benefits, and image.

• Design Considerations: Cost, single vs. multiple units, consistency with other designs, promotional role, and environmental responsibility.

• Labelling: The presentation of information on a product or its package. A label includes:

  • Brand name and brand mark.

  • Registered trademark symbol $\circledR$.

  • Package size and contents.

  • Product claims.

  • Directions for use and safety precautions.

  • Ingredients.

  • Name and address of manufacturer.

  • Bar code.

  • Details of express warranties.

• Express Warranty: A written explanation of the producer’s responsibilities if a product is defective or unsatisfactory.

The Function and Perception of Price

• Price Definition: The amount of money a seller is willing to accept in exchange for a product at a given time and circumstance.

• Price as an Allocator:

  • Allocates goods/services to those willing and able to buy.

  • Allocates financial resources (sales revenue) to producers who satisfy needs.

  • Helps customers allocate their own resources among competing products.

• Competition Types:

  • Price Competition: Emphasizing prices equal to or lower than competitors to gain market share. Requires flexibility to change prices rapidly.

  • Non-price Competition: Competition based on quality, service, promotion, or packaging. Relies on Product Differentiation (developing/promoting differences between products).

• Buyer Perception:

  • Managers must consider price sensitivity. Sensitivity varies by market segment and product types.

  • Buyers tolerate narrow price ranges for some items and wider ranges for others.

  • Buyers may equate higher price with higher quality (price-quality equation).

Pricing Objectives

• While profit is a key objective, others include:

  • Survival

  • Profit Maximization

  • Target Return on Investment (ROI): Defined as the amount earned as a result of a financial investment.

  • Market-Share Goals: Market share is the proportion of total industry sales.

  • Status Quo Pricing

Pricing Methods

• Key Factors: The market (not costs) determines the selling price, while costs and expected sales establish the Price Floor (minimum price to avoid loss).

• Three Pricing Methods:

  1. Cost-based Pricing:

     • Determine total cost of producing/purchasing one unit.

     • Add a Markup (the amount added to the cost to determine selling price).

     • Selling Price $=$ Cost $+$ Markup.

     • Costs are classified as Fixed Cost (incurred regardless of units sold) or Variable Cost (depends on units produced).

     • Calculated through Breakeven Analysis.

  2. Demand-based Pricing: Based on the level of demand. Higher price when demand is strong; lower price when weak. Marketers estimate demand at various levels to choose the price that generates highest total revenue.

  3. Competition-based Pricing: Costs and revenues are secondary to competitors' prices. Used when products are similar and price is a crucial variable. A business may sell below, slightly above, or at the same level as competitors.

Pricing Business Products

• Geographic Pricing: Deals with delivery costs.

  • FOB (Free On Board) Origin Pricing

  • FOB Destination

• Discounting: A deduction from the price of an item.

  • Trade Discounts

  • Quantity Discounts

  • Cash Discounts

  • Seasonal Discounts

  • Allowances