Product Layers
A product includes three layers: core product (basic benefit), actual product (tangible features), and augmented product (additional services and benefits).
Examples of Product Layers
For Ferrari, Apple Watch, Canvas, and Peloton, list core, actual, and augmented product features.
Classification of Consumer Products
Convenience products: low-priced priced, widely available, bought with minimal effort. Shopping products: Consumers compare alternatives, attributes, and quality. Specialty products: Have unique characteristics and inspire strong brand loyalty. Unsought products: Consumers have little interest or awareness until a need arises. (insurance)
Classification by Type of Product
Classify the following as convenience, shopping, specialty, or unsought: Funeral plan, milk, shoes, travel insurance, bananas, bourbon, golf clubs.
Design Thinking
Design thinking combines logic, imagination, intuition, and systemic reasoning. Steps: Empathize, Define, ideate, Prototype, Test, Iterate, Implement.
Types of Innovation
Continuous innovation: new modifications to existing products. Dynamically continuous innovation: significant modifications, moderate learning needed. Discontinuous innovation: major changes in how people live; significant adaptation required.
Product Adoption and Diffusion
Product adoption: When consumers begin to buy and use a new product. Diffusion: How use of a product spreads throughout a population.
Factors Influencing Adoption
Relative Advantage: Degree to which a product is perceived as better than what is already on the market. Compatibility: Alignment with adopter’s values, experiences, and needs. Complexity: Level of understanding or using the product. Trialability: Ease of trying before full commitment. Observability: Visibility of product benefits to others.
Layers of a Product
Core Product: the fundamental benefit the product provides. Actual Product: tangible, physical product good or service. Augmented Product: Extra features like custom options, delivery, and financing options.
Price as a Signal of Value
Price is an assignment of value. Consumers use price as a heuristic to assess product quality.
Pricing and Product Perception
Higher prices are often perceived as indicators of higher quality. Setting prices too low may delay profitability and attract the wrong customers. Setting prices too high may limit sales and alienate buyers.
Understanding Demand
The law of demand: As price increases, quantity demanded decreases. Elastic demand: Price has a substantial effect on demand. Inelastic demand: Price has little effect on demand.
Cross-Elasticity of Demand
Substitutes: If the price of one rises, demand for the other rises. Complements: If the price of one rises, demand for the other decreases.
Determining Costs
Variable costs change with the number of units produced. Fixed costs remain the same regardless of production. Break-even analysis determines how many units must be sold to cover all costs.
Pricing Environment
Economic influences: economic growth, inflation, and consumer spending. Non-economic: Competition, Government regulation, international environment.
Pricing Strategies
Cost-plus pricing: Price = cost + profit. Target costing: Product designed to meet a target profit. Skimming: High initial price to attract early adopters. Penetration pricing: Low initial price to gain market shares. Trial pricing: Low temporary price to encourage customers to try the product.
Pricing Tactics
Two-part pricing: Combines a fixed fee and a variable fee. Payment pricing: Allows for financing or installment payments. Subscription pricing: Fixed fee for limited access. Price bundling: Combines items for a reduced price. Captive pricing: Low base price, higher prices for required products or services. Decoy pricing: Introduces a third option to steer choices.
Channel Member Pricing
Trade/functional discounts: Based on distribution role. Quantity discounts: Reward for bulk orders. Cash discounts: For fast or immediate payments. Seasonal discounts: Based on time of year.
Psychological Pricing
Fair/customary prices: Based on consumer expectations. Internal reference prices: Set prices used for comparison. Odd-even pricing: Prices ending in odd numbers appear lower. Price lining: Multiple price points within a product category. Prestige pricing: High prices signal superiority and exclusivity.
Legal and Unethical Pricing Practices
Bait-and-switch: Advertising a cheap item, but offering a more expensive one. Loss leader: Selling at a loss to attract customers. Misleading merchandising: False claims about price or product information.
Steps in Price Planning Process
- Set pricing objectives. 2. Estimate Demand. 3. Determine Costs. 4. Examine the pricing Environment. 5. Choose a pricing Strategy. 6. Develop pricing tactics.
Pricing Objectives
Profit objectives: Focus on maximizing or reaching target market. Sales or market share: Stimulate bundle pricing and expand market. Competitive effect: Alter competitor’s introduction. Customer satisfaction: Build long-term customer satisfaction. Image enhancement: Establish product’s perceived quality image.
A distribution channel
A series of firms or individuals involved in moving a product from the producer to the final consumer.
A direct channel
Goes straight from the producer to the end customer.
