Chapter 12: Developing and Pricing Products
Chapter Overview
By now, students have grasped that the marketing mix—or the Four Ps—is built around the
characteristics and needs of the target market. This chapter brings the Four Ps another step
forward by discussing product and pricing.
As the chapter unfolds, many variables surrounding both the consumer and organizational
markets are discussed, as well as a focus on distinguishing features between products and
services and the importance of branding and packaging.
Specifically, the chapter identifies the various pricing objectives that govern pricing decisions
and the price-setting tools used in making these decisions. It discusses pricing strategies and
identifies the pricing tactics that can be used for setting prices.
Learning Objectives
12-1. Explain the definition of a product as a value package and classify goods and services.
12-2. Describe the new product development process.
12-4. Identify the various pricing objectives that govern pricing decisions, and describe the
price-setting tools used in making these decisions.
LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE
Activity
Description
Time Limit
1. Ice-Breaker: Why Do
They Charge More?
Students consider pricing strategies behind
some well-known competing brands.
30 min.
2. Up for Debate: Getting
a Stimulus Boost with
Pricing
Students are divided into teams to discuss
the pros and cons of varying the pricing
strategies for a product.
30 min.
CHAPTER OUTLINE
Learning Objective 12-1:
Explain the definition of a product as a value package and classify goods and services.
What Is a Product?
In order to develop the marketing mix and plan their strategies effectively, marketers must
consider what consumers buy when they purchase products; marketers must begin by
understanding product features and benefits.
A. The Value Package
Product features are the tangible and intangible qualities that are built into products; product
benefits include what products can do emotionally or physically for consumers. Today’s
consumer regards a product as a bundle of attributes, benefits and features, that taken
together, are the value package.
B. Classifying Goods and Services
Goods and services may be classified according to their prospective buyers; buyers may be
classified as buyers of consumer products or buyers of organizational products.
1. Classifying Consumer Products. Convenience goods (such as milk and newspapers)
and convenience services are consumed rapidly and regularly. They are inexpensive and
are purchased often and with little output of time and effort. Shopping goods and
shopping services (such as appliances and mobile devices) are more expensive and are
purchased less often than convenience products. Consumers often compare brands,
2. Classifying Organizational Products. Production items are goods or services that are
used directly in the production process. Expense items are goods and services consumed
within one year by other suppliers of services or producers of goods. Capital items are
permanent, long-lasting goods and services that have expected lives of more than one
year.
C. The Product Mix
The product mix is the total assortment of all goods and/or services that a marketer makes
available for sale, whether consumer goods, industrial goods, or both.
1. Product Lines. A group of products that are closely related because they function in a
KEY TEACHING TIPS
Remind students that a value package is a combination of all the product features and
benefits—all bundled together—that are found to be attractive to the consumer.
Make sure students understand the distinction between a product mix (the total
assortment of all goods and services available from a marketer) and a product line (a
group of products that function in a similar manner or are sold to the same customer
group who will use them in similar ways).
HOMEWORK
Product Features and Benefits
Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as
homework. This assignment encourages students to consider the product benefits and how they
are used to attract the chosen target market.
At-Home Completion Time: 30 minutes
Learning Objective 12-2:
Describe the new product development process.
Developing New Products
To expand or diversify to survive, marketers must develop and successfully introduce streams of
new products. Competition and shifting consumer preferences cause marketers to continually
monitor and frequently change their offerings.
A. The New Product Development Process
Product development is a long, complex process. New products usually involve carefully
planned and sometimes risky commitments of time and resources.
B. Product Mortality Rates. Estimates indicate that it takes 50 new product ideas to generate
one product that reaches that marketplace; only a few of the survivors become successful.
Speed to Market. The quicker a product enters the marketplace, the more likely it is to
survive. Introducing new products ahead of competitors allows companies to become market
leaders.
C. The Seven-Step Development Process
To increase their chances of developing a successful new product, many firms adopt some
version of a seven-step process for developing physical goods.
1. Product ideas. Product development begins with a search for ideas for new products.
Ideas typically come from consumers, the sales force, R&D departments, suppliers, or
engineering personnel.
2. Screening. This stage is designed to eliminate ideas that do not mesh with the
5. Prototype development. Once the firm has determined the potential profitability of a
product, engineering, R&D, or design groups produce a prototype. Expenses increase at
this stage.
6. Product testing and test marketing. Applying lessons from the prototype, the company
goes into limited production.
7. Commercialization. If test marketing proves positive, the company begins full–scale
production and marketing.
D. Variations in the Process for Services
The development of services involves many of the same stages. Basically, steps 2, 3, 4, 6,
and 7 are the same. There are, however, important differences in steps 1 and 5: Service
ideas. The search for service ideas includes defining the service value package, identifying
the tangible and intangible features that characterize the service, and stating service
KEY TEACHING TIP
New product development is time intensive, expensive, and risky. Being the first to
market with a product is only valuable if sound research indicates demand for a product
or service with the value package being offered.
Most new products fail, and far more never even get the chance. Stress that high
mortality rates indicate that out of many new ideas, only a few products reach the market.
QUICK QUESTIONS
Can you think of any recent examples of a product that benefited from its speed to
market?
Learning Objective 12-3:
Describe the stages of the product life cycle (PLC) and methods for extending a product’s
life.
A. The Product Life Cycle
Every product passes through a series of stages during its commercial life.
1. Stages in the Product Life Cycle. The product life cycle is a natural process in which
products are born, grow, mature, decline, and die. The stages include: introduction,
B. Extending Product Life: An Alternative to New Products
1. Product Extension. In product extension, an existing product is marketed globally
instead of just domestically.
3. Reintroduction. Reintroduction means reviving, for new markets, products that are
becoming obsolete in older ones.
1. Branding Products
Brand names are symbols for characterizing products and distinguishing them from one
another; branding is the process of using symbols, names, logos, and colors to
2. Types of Brand Names
b. Licensed Brands. These are brand-name products that carry the name of an
organization or individual. Marketers exploit brands because of their public appeal,
image and status that customers hope to gain by associating with them.
c. Private Brands. These are brand-name products that a wholesaler or retailer has
commissioned from a manufacturer. These products can only be found in the stores of
that wholesaler or retailer.
D. Packaging Products
A product’s package serves several purposes; the packaging can serve as an in–store
advertisement, a display for the brand name, an identifier of product features and benefits,
and can reduce the risk of damage and increase the difficulty of stealing.
KEY TEACHING TIPS
Reinforce that the product life cycle is a series of stages through which a product passes
during its commercial life; the duration of a product’s life cycle varies.
Remind students that both product placements and viral marketing help marketers gain
brand awareness.
Make sure students understand that branding is the process of using symbols, names,
logos, and colors to communicate the qualities of a particular product made by a
particular producer.
QUICK QUESTIONS
What happens in the decline stage of the product life cycle?
How does successful branding lead to brand awareness?
Why is viral marketing sometimes more successful than traditional media options?
What is the difference between national, licensed, and private brands?
What are some purposes of packaging?
Learning Objective 12-4:
Identify the various pricing objectives that govern pricing decisions and describe the price-
setting tools used in making these decisions.
Determining Prices
In pricing, managers decide what the customer pays and the seller receives in exchange for a
product.
A. Pricing to Meet Business Objectives
Pricing objectives are the goals that sellers hope to achieve in pricing products for sale.
Marketers’ pricing strategies are influenced by a variety of factors. Some companies have
1. Profit-Maximizing Objectives. Some companies that set prices to maximize profits,
2. Market Share (Market Penetration) Objectives. Some firms want to dominate the
market or secure high market share and, therefore, have market share pricing objectives.
3. Pricing for E-Business Objectives. Because the Web provides a more direct link between
producer and customer, buyers often avoid the added costs of wholesalers and retailers.
Marketing costs as well as selling prices for e-businesses can be somewhat lower because
of the unique marketing capabilities of the Internet. The ease of online comparison
shopping can lead to cost efficiencies.
B. Price-Setting Tools
Marketers must estimate the potential impact before deciding on final prices. Tools used for
this purpose are cost-oriented pricing and breakeven analysis.
1. Cost-Oriented Pricing. Cost-oriented pricing considers the need to cover production costs
and the cost of the merchandise. Selling price = Seller’s costs + Profit. Markup is the
2. Breakeven Analysis: Cost-Volume-Profit Relationships. Using cost-oriented pricing, a
firm will cover variable costs—costs, such as materials bought to make the product, that
change with the number of units of a product produced and sold. It will also make some
money to pay fixed costs—costs, such as annual rent, that must be paid regardless of the
number of units produced and sold.
Breakeven analysis assesses costs versus revenues for various sales volumes. It shows, at any
particular selling price, the financial result—the amount of loss or profit—for each possible
volume of sales. The breakeven point is how many of a product must be sold so that total
KEY TEACHING TIPS
Reinforce that pricing enables managers to decide what the firm will get in exchange for
its products; pricing objectives are the goals they hope to achieve in pricing products.
Make sure students understand that cost-oriented pricing considers profit and a firm’s
need to cover production costs and the costs of the merchandise.
Breakeven analysis can be a tough concept for students so you may want to reinforce the
concept and the formula:
Review the shirt example in the textbook.
QUICK QUESTION
How do marketers achieve profit–maximizing objectives and market-share objectives?
Use In-Class Activity 1: Ice-Breaker: Why Do They Charge More?
Time Limit: 30 minutes
HOMEWORK
Pricing
Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials
as homework. This assignment encourages students to consider the pricing objectives behind
familiar products.
At-Home Completion Time: 30 minutes
Learning Objective 12-5:
Discuss pricing strategies that can be used for different competitive situations and identify
the pricing tactics that can be used for setting prices.
Pricing Strategies and Tactics
Pricing strategies are planning activities that affect the marketing mix. Pricing tactics are ways
that managers implement a firm’s pricing strategies. It is much easier to change pricing than to
change products or distribution channels.
A. Pricing Strategies
1. Pricing Existing Products. A firm can price existing products above, below, or at or
near market price. Marketers that price products above market rely on the assumption that
2. Pricing New Products. If a marketer can differentiate a product from all others, the
marketers may implement price skimming, in which price is initially set high to earn
3. Fixed versus Dynamic Pricing for Online Business. Dynamic pricing works because
4. Bundling. A bundling strategy groups several products together to be sold as a single
unit, rather than individually. Cable or satellite TV/phone/internet packages are one
example of a bundle. A discount on insurance by purchasing multiple policies (for home
and car) is another way a bundle serves to benefit both the company and the consumer.
B. Pricing Tactics
Price lining involves offering all items in certain categories at a limited number of prices. A
store predetermines three or four price points at which a particular type of product will be
sold. Price lining involves setting each price level with a specific type of customer in mind
and then packaging and promoting products accordingly. Psychological pricing takes
advantage of the fact that customers are not completely rational when making buying
decisions. One type of psychological pricing, odd-even pricing, is based on the theory that
customers prefer prices that are not stated in even dollar amounts. Discounts are price
reductions designed to stimulate sales.
C. International Pricing. Sometimes products must be priced for what customers in other
countries can afford. This may involve developing products to fit that pricing. Another