Creating Value Through Products
Product decisions are a central part of marketing. The chapter begins with value, described as good quality at a fair price. A business must understand what customers consider valuable and then develop an offering that meets those expectations.
Product development is an ongoing activity. Companies may adapt existing products, create new ones, or use distributed product development, handing off parts of the innovation process to other organizations, sometimes in other countries. This can bring specialized expertise and efficiency, but it also requires coordination across geographic, cultural, and legal boundaries.
The Total Product Offer
A total product offer is everything consumers evaluate when deciding whether to buy something. Customers consider more than the physical item. Price, quality, brand image, packaging, service, convenience, reputation, and other tangible and intangible benefits can all become part of the offer.
This is why two physically similar products can be viewed very differently in the marketplace. Marketers need to think from the customer's perspective and learn which features and benefits matter most.
Product Lines, Product Mixes, and Differentiation
A product line is a group of products that are physically similar or intended for a similar market. A company may offer several variations within one line to appeal to different preferences.
A product mix is the combination of all product lines offered by a manufacturer or service provider. Large organizations can have broad product mixes serving many different needs and markets.
Product differentiation is the creation of real or perceived differences between competing products. Businesses can differentiate through features, quality, service, packaging, advertising, branding, or price. Even products that perform similar functions can develop very different images in customers' minds.
Classes of Consumer Goods and Services
Consumer products can be classified according to how customers normally shop for them. The classification affects decisions about distribution, promotion, branding, and price.
Convenience Goods and Services
Convenience goods and services are purchased frequently with minimal effort. Examples include snacks, gasoline, milk, bread, and eggs. Convenient locations, brand awareness, and a familiar image can be especially important.
Shopping Goods and Services
Shopping goods and services are purchased after consumers compare value, quality, price, or style. Clothing, furniture, appliances, childcare, and home remodeling are examples. Customers are willing to invest more time comparing alternatives.
Specialty Goods and Services
Specialty goods and services have unique characteristics or a strong brand identity. Customers may insist on a particular brand and reject substitutes. Luxury jewelry, premium watches, high-end automobiles, and luxury hotels are examples used in the chapter.
Unsought Goods and Services
Unsought goods and services are products consumers may not know about or may not think about buying until a need arises. Towing services, funeral services, and renter's insurance are examples. Because consumers may not actively seek them, personal selling and specialized promotion can be important.
Industrial Goods
Industrial goods are products used to produce other products and are sold in the business-to-business market. They can include installations, capital items, accessory equipment, supplies, and services. The same physical product can sometimes be a consumer good or an industrial good depending on who buys it and why.
Packaging and Bundling
Packaging does more than hold a product. It can attract attention, protect the contents, provide information, improve convenience, support branding, and help distinguish the product from competitors. Changes in packaging can sometimes improve the usefulness or appeal of an otherwise familiar product.
Bundling groups two or more products together and prices them as a unit. Bundles can increase perceived value, simplify a purchase, encourage customers to buy complementary products, or help a company differentiate its offer.
Brands, Trademarks, and Brand Equity
A brand is a name, symbol, or design that identifies a seller's goods or services and distinguishes them from competing offerings. A trademark is a brand that receives exclusive legal protection for its name and design.
Generic goods are unbranded products that typically sell at a discount compared with manufacturer or dealer brands. Knockoff brands, by contrast, are illegal copies of established national brands.
Why Strong Brands Matter
Brand equity is the value associated with a brand name and its symbols. Strong brand equity can make customers more willing to recognize, trust, consider, and purchase an offering.
- Brand loyalty is the degree to which customers are satisfied with a brand and committed to future purchases.
- Brand awareness is how quickly or easily a brand comes to mind when someone thinks about a product category.
- Brand association links a brand with favorable images, people, places, or ideas.
- A brand manager is responsible for a particular brand and coordinates the elements of its marketing mix.
As awareness and preference strengthen, some customers may reach brand insistence, meaning they are unwilling to accept substitutes.
Developing New Products
New products involve risk, so businesses use a development process to reduce weak ideas and concentrate resources on the most promising opportunities.
Product screening reduces the number of ideas a firm continues to pursue. Product analysis examines cost estimates and sales forecasts to estimate potential profitability. Concept testing takes an idea to potential consumers to learn how they react before a full launch.
After development and testing, commercialization brings the product into the marketplace. This includes working with distributors and retailers and developing the promotional campaign needed to support the launch.
The Product Life Cycle
The product life cycle is a theoretical model describing what happens to a product's sales and profits over time. Its four stages are:
- Introduction — the product enters the market. Sales are developing, and the company may face substantial development and promotional costs.
- Growth — sales increase as more customers accept the product. Profits often rise during this stage.
- Maturity — sales growth slows as the market becomes established and competition is strong.
- Decline — sales and profits fall as customer preferences, technology, or competing products change.
The model helps marketers think about how product, promotion, distribution, and pricing decisions may need to change as an offering moves through the market.
Pricing Objectives
Businesses can price products for different reasons. Pricing objectives may include achieving a target return or profit, building customer traffic, gaining market share, creating a particular image, or supporting social objectives. A price should therefore be evaluated in relation to the organization's larger goals.
Approaches to Setting Prices
Cost-based pricing begins with the costs of producing the product, including materials, labor, and overhead. Target costing works from the market in the other direction: the firm designs a product that satisfies customers while still meeting its targeted profit margin.
Competition-based pricing uses competitors' prices as an important reference point. A company still needs to understand its own costs and value proposition, but competitor prices help show what customers are being asked to pay for alternatives.
Break-Even Analysis
Break-even analysis helps determine profitability at different sales levels. The break-even point occurs where total revenue equals total cost, so there is neither a profit nor a loss.
Total fixed costs remain the same regardless of how much is produced or sold within the relevant range. Variable costs change as production or sales volume changes.
A useful unit break-even relationship is:
Break-even units = Fixed Costs ÷ (Selling Price per Unit − Variable Cost per Unit)
For the chapter example, a product selling for $19.99 with a $7.00 variable cost provides $12.99 toward fixed costs with each unit sold. With $2,000 in monthly fixed costs, the business must sell about 154 units to cover those costs.
Pricing Strategies
Skimming Pricing
A skimming price strategy sets a relatively high introductory price to recover costs and earn higher profits while competition is limited. It can fit innovative products when some customers are willing to pay more for early access.
Penetration Pricing
A penetration price strategy introduces a product at a relatively low price in hopes of attracting many buyers and discouraging competitors from entering the market.
Everyday Low Pricing
Everyday low pricing (EDLP) keeps prices consistently lower rather than depending heavily on temporary sales. Customers are encouraged to expect a reliably low price.
High-Low Pricing
High-low pricing uses regular prices that are higher than those of EDLP sellers but periodically reduces prices through special sales and promotions.
Psychological Pricing
Psychological pricing uses price points intended to make a product seem less expensive or otherwise influence how customers perceive the price. A price ending in .99 is a familiar example.
Putting Product and Price Decisions Together
Product and pricing decisions should not be made independently. The total product offer, target customer, brand image, product life-cycle stage, costs, competitors, and organizational objectives all influence what customers will consider a fair and attractive price.
The strongest product strategy combines genuine customer value with a clear market position. Businesses must decide what they are offering, why customers should prefer it, how the brand supports that promise, and what price allows the organization to deliver the offer sustainably.
Common Mistakes to Avoid
- Thinking customers evaluate only the physical product rather than the total product offer.
- Confusing a product line with the company's complete product mix.
- Assuming product differentiation must involve a physical difference; perceived differences can matter too.
- Confusing convenience, shopping, specialty, and unsought goods.
- Treating a brand and a trademark as identical concepts.
- Launching every product idea without screening, analysis, and customer testing.
- Assuming sales and profits remain constant throughout the product life cycle.
- Setting a price without considering costs, competitors, customers, and organizational objectives.
- Confusing fixed costs with variable costs when performing break-even analysis.
- Using skimming and penetration pricing as though they pursue the same launch objective.