What Is a Product?

We define a product as anything that can be offered to a market for attention, acquisition, use, or
consumption that might satisfy a want or need. Products include more than just tangible objects,
such as cars, computers, or cell phones. Broadly defined, “products” also include services,
events, persons, places, organizations, ideas, or a mixture of these. Throughout this text, we use
the term product broadly to include any or all of these entities.
Levels of Product and Services

The core product represents the central meaning of the product and conveys its essence. This is
centrally related to the key benefits expected by customers. For example, in considering a
holiday some people like to ‘get away from it all’ to relax; others want to ‘have a ball’.
The tangible product is related to the core product to the extent that it places flesh on the bones
of the former. For the holiday described above, this would involve the way in which the holiday
was designed to suit customer requirements; including the activities, accommodation, transport
arrangements and the brochure.
The augmented product includes those add-on extras which are not an intrinsic part of the
product but which may be used to enhance the product benefits. For the holiday company such
extras might include the placement of a bottle of champagne and roses in the hotel room for
those who seek to get away from it all.

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Product and Service Classifications
Products and services fall into two broad classes based on the types of consumers that use them:
consumer products and industrial products. Broadly defined, products also include other
marketable entities such as experiences, organizations, persons, places, and ideas.
A. Consumer Products
Consumer products are products and services bought by final consumers for personal
consumption. Marketers usually classify these products and services further based on how
consumers go about buying them. Consumer products include convenience products, shopping
products, specialty products, and unsought products. These products differ in the ways
consumers buy them and, therefore, in how they are marketed.
Convenience products are consumer products and services that customers usually buy
frequently, immediately, and with minimal comparison and buying effort. Examples include
laundry detergent, candy, magazines, and fast food. Convenience products are usually low
priced, and marketers place them in many locations to make them readily available when
customers need or want them.
Shopping products are less frequently purchased consumer products and services that customers
compare carefully on suitability, quality, price, and style. When buying shopping products and
services, consumers spend much time and effort in gathering information and making
comparisons. Examples include furniture, clothing, used cars, major appliances, and hotel and
airline services.
Specialty products are consumer products and services with unique characteristics or brand
identification for which a significant group of buyers is willing to make a special purchase effort.
Examples include specific brands of cars, high-priced photographic equipment, designer clothes,
and the services of medical or legal specialists. A Lamborghini automobile, for example, is a
specialty product because buyers are usually willing to travel great distances to buy one.
Unsought products are consumer products that the consumer either does not know about or
knows about but does not normally consider buying. Most major new innovations are unsought
until the consumer becomes aware of them through advertising. Classic examples of known but
unsought products and services are life insurance, preplanned funeral services, and blood
donations to the Red Cross. By their very nature, unsought products require a lot of advertising,
personal selling, and other marketing efforts.

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 B. Industrial Products
Industrial products are those purchased for further processing or for use in conducting a business.
The three groups of industrial products and services include materials and parts, capital items,
and supplies and services.
Materials and parts include raw materials and manufactured materials and parts. Raw materials
consist of farm products (wheat, cotton, livestock, fruits, vegetables) and natural products (fish,
lumber, crude petroleum, iron ore). Manufactured materials and parts consist of component
materials (iron, yarn, cement, wires) and component parts (small motors, tires, castings). Most
manufactured materials and parts are sold directly to industrial users.
Capital items are industrial products that aid in the buyer’s production or operations, including
installations and accessory equipment. Installations consist of major purchases such as buildings
(factories, offices) and fixed equipment (generators, drill presses, large computer systems,
elevators). Accessory equipment includes portable factory equipment and tools (hand tools, lift
trucks) and office equipment (computers, fax machines, desks). They have a shorter life than
installations and simply aid in the production process.

Product and Service Decisions

Marketers make product and service decisions at three levels: individual product decisions,
product line decisions, and product mix decisions. We discuss each in turn.
1. Individual Product and Service Decisions
a. Product and Service Attributes. Developing a product or service involves defining the benefits
that it will offer. These benefits are communicated and delivered by product attributes such as
quality, features, and style and design. Product quality is one of the marketer’s major positioning
tools. Style simply describes the appearance of a product. Styles can be eye catching or yawn
producing. Branding, labelling packaging and customer support services are also put into
consideration.
2. Product Line Decisions
Beyond decisions about individual products and services, product strategy also calls for building
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 customer groups, are marketed through the same types

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of outlets, or fall within given price ranges. For example, Nike produces several lines of athletic
shoes and apparel, and Marriott offers several lines of hotels.
3. Product Mix Decisions
An organization with several product lines has a product mix. A product mix (or product
portfolio) consists of all the product lines and items that a particular seller offers for sale.
Colgate’s product mix consists of four major product lines: oral care, personal care, home care,
and pet nutrition. Each product line consists of several sublines. For example, the home care line
consists of dishwashing, fabric conditioning, and household cleaning products. Each line and
subline has many individual items.

Categories of new product:

1. Major innovations.
2. Product improvements.
3. Product additions.
4. Repositioned products.

NEW-PRODUCT DEVELOPMENT

Given the rapid changes in consumer tastes, technology, and competition, companies must
develop a steady stream of new products and services. A firm can obtain new products in two
ways. One is through acquisition—by buying a whole company, a patent, or a license to produce
someone else's product. The other is through new-product development in the company's own
research and development department. By new products we mean original products, product
improvements, product modifications, and new brands that the firm develops through its own
research and development efforts.

The eight major steps in this process include:

a) Idea generation

New-product development starts with idea generation—the systematic search for new-product
ideas. A company typically has to generate many ideas in order to find a few good ones. Major

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sources of new-product ideas include internal sources, customers, competitors, distributors and
suppliers, and others. Using internal sources, the company can find new ideas through formal
research and development. It can pick the brains of its executives, scientists, engineers,
manufacturing, and salespeople. The company can analyze customer questions and complaints to
find new products that better solve consumer problems.

b) Idea Screening

The purpose of idea generation is to create a large number of ideas. The purpose of the
succeeding stages is to reduce that number. The first idea-reducing stage is idea screening, which
helps spot good ideas and drop poor ones as soon as possible. Product development costs rise
greatly in later stages, so the company wants to go ahead only with the product ideas that will
turn into profitable products. Many companies require their executives to write up new-product
ideas on a standard form that can be reviewed by a new-product committee. It makes some rough
estimates of market size, product price, development time and costs, manufacturing costs, and
rate of return.

c) Concept Development and Testing

An attractive idea must be developed into a product concept. It is important to distinguish

between a product idea, a product concept, and a product image. A product idea is an idea for a
possible product that the company can see itself offering to the market. A product concept is a
detailed version of the idea stated in meaningful consumer terms. A product image is the way
consumers perceive an actual or potential product. Concept testing calls for testing new-product
concepts with groups of target consumers. The concepts may be presented to consumers
symbolically or physically for some concept tests, a word or picture description might be
sufficient.

d) Marketing strategy Development

The next step is marketing strategy development, designing an initial marketing strategy for
introducing this car to the market. The marketing strategy statement consists of three parts. The
first part describes the target market; the planned product positioning; and the sales, market
share, and profit goals for the first few years. The second part of the marketing strategy statement
outlines the product's planned price, distribution, and marketing budget for the first year. The

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third part of the marketing strategy statement describes the planned long-run sales, profit goals,
and marketing mix strategy:

e) Business Analysis

Once management has decided on its product concept and marketing strategy, it can evaluate the
business attractiveness of the proposal. Business analysis involves a review of the sales, costs,
and profit projections for a new product to find out whether they satisfy the company's
objectives. If they do, the product can move to the product development stage.

f) Product Development

So far, for many new-product concepts, the product may have existed only as a word description,
a drawing, or perhaps a crude mock-up. If the product concept passes the business test, it moves
into product development. Here, R&D or engineering develops the product concept into a
physical product. It will show whether the product idea can be turned into a workable product.
The R&D department will develop and test one or more physical versions of the product concept.

g) Test Marketing

If the product passes functional and consumer tests, the next step is test marketing, the stages at
which the product and marketing program are introduced into more realistic market settings. Test
marketing gives the marketer experience with marketing the product before going to the great
expense of full introduction. It lets the company test the product and its entire marketing
program—positioning strategy, advertising, distribution, pricing, branding and packaging, and
budget levels. The amount of test marketing needed varies with each new product. When the
costs of developing and introducing the product are low, or when management is already
confident about the new product, the company may do little or no test marketing.

h) Commercialization

Test marketing gives management the information needed to make a final decision about
whether to launch the new product. If the company goes ahead with commercialization—
introducing the new product into the market—it will face high costs. The company will have to
build or rent a manufacturing facility. The company launching a new product must first decide
on introduction timing Next, the company must decide where to launch the new product—in a

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single location, a region, the national market, or the international market. Few companies have
the confidence, capital, and capacity to launch new products into full national or international
distribution.

PRICE

What Is a Price?
In the narrowest sense, price is the amount of money charged for a product or a service.
More broadly, price is the sum of all the values that customers give up to gain the benefits of
having or using a product or service. Price still remains one of the most important elements that
determines a firm’s market share and profitability.
Price is the only element in the marketing mix that produces revenue; all other elements
represent costs. Price is also one of the most flexible marketing mix elements. Unlike product
features and channel commitments, prices can be changed quickly. At the same time, pricing is
the number-one problem facing many marketing executives, and many companies do not handle
pricing well.
Major Pricing Strategies
The price the company charges will fall somewhere between one that is too high to produce any
demand and one that is too low to produce a profit. Figure 10.1 summarizes the major
considerations in setting price. Customer perceptions of the product’s value set the ceiling for
prices. If customers perceive that the product’s price is greater than its value, they will not buy
the product.

1. Customer Value-Based Pricing

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In the end, the customer will decide whether a product’s price is right. Pricing decisions, like
other marketing mix decisions, must start with customer value. When customers buy a product,
they exchange something of value (the price) to get something of value (the benefits of having or
using the product). Effective, customer-oriented pricing involves understanding how much value
consumers place on the benefits they receive from the product and setting a price that captures
this value.
Customer value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the
key to pricing. Value-based pricing means that the marketer cannot design a product and
marketing program and then set the price. Price is considered along with all other marketing mix
variables before the marketing program is set.

2. Cost-Based Pricing
Whereas customer-value perceptions set the price ceiling, costs set the floor for the price that the
company can charge. Cost-based pricing involves setting prices based on the costs for
producing, distributing, and selling the product plus a fair rate of return for its effort and risk. A
company’s costs may be an important element in its pricing strategy.
Types of Costs
A company’s costs take two forms: fixed and variable. Fixed costs (also known as overhead)
are costs that do not vary with production or sales level. For example, a company must pay each
month’s bills for rent, heat, interest, and executive salaries—whatever the company’s output.
Variable costs vary directly with the level of production. Each PC produced by HP involves a
cost of computer chips, wires, plastic, packaging, and other inputs.
Although these costs tend to be the same for each unit produced, they are called variable costs
because the total varies with the number of units produced. Total costs are the sum of the fixed
and variable costs for any given level of production. Management wants to charge a price that
will at least cover the total production costs at a given level of production. The company must
watch its costs carefully. If it costs the company more than its competitors to produce and sell a
similar product, the company will need to charge a higher price or make less profit, putting it at a
competitive disadvantage.
3. Competition-Based Pricing

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Competition-based pricing involves setting prices based on competitors’ strategies, costs,
prices, and market offerings. Consumers will base their judgments of a product’s value on the
prices that competitors charge for similar products.
In assessing competitors’ pricing strategies, the company should ask several questions.
First, how does the company’s market offering compare with competitors’ offerings in terms of
customer value? If consumers perceive that the company’s product or service provides greater
value, the company can charge a higher price. If consumers perceive less value relative to
competing products, the company must either charge a lower price or change customer
perceptions to justify a higher price.
Next, how strong are current competitors, and what are their current pricing strategies?
Under pure competition, the market consists of many buyers and sellers trading in a uniform
commodity, such as wheat, copper, or financial securities. No single buyer or seller has much
effect on the going market price. In a purely competitive market, marketing research, product
development, pricing, advertising, and sales promotion play little or no role.
Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to
each other’s pricing and marketing strategies. Because there are few sellers, each seller is alert
and responsive to competitors’ pricing strategies and moves.
In a pure monopoly, the market consists of one seller. The seller may be a government monopoly
(Postal Service), a private regulated monopoly (a power company), or a private non-regulated
monopoly.

Price-adjustment strategies.
1. Discount and allowance pricing: Most firms adjust their basic price to reward customers for
certain responses, such as cash payment, early payment of bills, volume purchases and off-
season buying. Some of those adjustments are described below:
 Cash discounts – A cash discount is a price reduction to buyers who pay their bills
promptly. The discount must be granted to all buyers meeting these terms.
 Quantity discounts – A quantity discount is a price reduction to buyers who buy large
volumes. It must be offered to all customers and must not exceed the seller’s cost savings
associated with selling large quantities. Discounts provide an incentive to the customer to
buy more from one given seller, rather than from many different sources.

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  Functional discounts – A functional discount (also called trade discount) is offered by the
seller to trade channel members who perform certain functions, such as selling, storing
and record keeping.
 Seasonal discounts – A seasonal discount is a price reduction to buyers who buy out of
season. It allows the seller to keep productions steady during the entire year.
 Allowances – They are another type of reductions from the list price. Trade-in allowances
are price reductions given for turning in an old item when buying a new one. Promotional
allowances are payments or price reductions to reward dealers for participating in
advertising and sales-support programs.
2. Discriminatory pricing: Firms will often adjust their basic prices to allow for differences in
customers, products and locations. In discriminatory pricing, the firm sells a product or service at
two or more prices, even though the difference in prices is not based on differences in costs.
Discriminatory pricing takes many forms as indicated below:
 Customer-segment pricing – Different customers pay different prices for the same
product or service.
 Product-form pricing - Different versions of the product are priced differently, but not
according to differences in their costs.
 Location pricing – Different locations are priced differently, even though the cost of
offering in each location is the same.
 Time pricing - Prices vary by the season, month, day and even hour.
3. Psychological pricing: It applies the belief that certain prices or price ranges make products
more appealing to buyers than others. In using psychological pricing, sellers consider the
psychology of prices and not simply the economics.
 Pricing based on perceptions – The relationship between price and quality perceptions
indicate that consumers perceive higher-priced products as having higher quality. When
consumers cannot judge quality because they lack the information or skill, prices
becomes an important quality signal.
 Reference pricing – Reference prices are those prices that buyers carry in their minds and
refer to when looking at a given product. It might be formed by noting current prices,
remembering past prices or assessing the buying situation. Sellers can influence or use
these consumers’ reference prices when setting price.

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  Odd pricing – In odd pricing, marketers set prices at odd numbers just under round
numbers. An odd ending conveys the notion of a discount or bargain to the customer. E.g.
a phone sold at 19,999 Kshs.
4. Value pricing: During slow-growth times, many firms adjust their prices to bring them into
line with economic conditions and with the resulting fundamental shift in consumer attitudes
toward quality and value. Value pricing is offering just the right combination of quality and good
service at a fair price. In many cases, value pricing has involved redesigning existing brands in
order to offer more quality for a given price or the same quality for less.
5. Promotional pricing: In promotional pricing, a lower-than-normal price is used as a
temporary ingredient in a firm’s selling strategy. Some promotional pricing arrangements form
part of recurrent marketing initiatives. Promotional pricing takes several forms and some of them
are described below.
 Loss-leader pricing – It happens when retailers drop price on well-known brands to
stimulate store traffic in the hope that customers will buy other items also, at normal
mark-ups
 Special-event pricing – Sellers use special-event pricing in certain seasons to draw in
more customers. The seasonal need of the customers is capitalized on by the sellers using
this pricing strategy.
 Cash rebates – Manufacturers will sometimes offer cash rebates to consumers who buy
the product from dealers within a specified time.
 Low-interest financing, longer payment times, longer warranties – all these represent the
promotional incentives offered by the sellers to the buyers. Since they provide some
flexibility and also bring down the perceived risks (in case of longer warranties), buyers
are motivated to make the buying decision.
 Psychological discounting – The seller may simply offer discounts from normal prices to
increase sales and reduce inventories. For the buyer, the motivation to buy below normal
prices may be compelling.
6. Geographical pricing: Geographical considerations strongly influence prices when costs
must cover shipping heavy, bulky, low-unit-cost materials. Buyers and sellers can distribute
transportation expenses in several ways: (1) The buyer pays all transportation charges; (2) The
seller pays all transportation charges; or (3) the buyer and the seller share the charges. This

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choice has particularly important effects for a firm seeking to expand its geographic coverage to
distant markets. The seller’s pricing can implement several alternatives for handling
transportation costs.
 FOB-origin pricing – It means that the goods are placed free on board (FOB) a carrier, at
which point the title and responsibility pass to the customer, who pays the freight from
the factory to the destination. Though it looks fair, the disadvantage is that the firm will
be a high-cost firm to distant customers.
 Uniform delivered pricing – It is the exact opposite of FOB pricing. The company
charges the same price plus freight to all customers, regardless of their location. An
advantage is that it is fairly easy to administer and it lets the firm advertise its price
nationally.
 Zone pricing – It falls between FOB-origin pricing and uniform delivered pricing. The
company sets up two or more zones. All customers within a given zone pay a single total
price; the more distant the zone, the higher the price.
 Basing-point pricing – The seller selects a given city as a ‘basing point’ and charges all
customers the freight cost from that city to the customer location, regardless of the city
from which the goods actually are shipped.
 Freight-absorption pricing – The seller who is anxious to do business with a certain
customer or geographical area might use freight-absorption pricing. This strategy
involves absorbing all or part of the actual freight charges in order to get the desired
business.
7. International pricing: A wide variety of internal and external conditions can affect a
marketer’s global pricing strategies. Internal influences include the firm’s goals and marketing
strategies, the costs of developing, producing and marketing its products, the nature of the
products and the firm’s competitive strengths. External influences include general conditions in
international markets, especially those in the firm’s target markets, regulatory limitations, trade
restrictions, competitors’ actions, economic events, customer characteristics and the global status
of the industry. In general, a firm can implement one of three export pricing strategies, as
described below.

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  Standard worldwide price – Exporters often set standard worldwide prices, regardless of
their target markets. This strategy can succeed if foreign marketing costs remain low
enough that they do not impact overall costs, or if their prices reflect average unit costs.
 Dual pricing – It distinguishes prices for domestic and export sales. Some exporters
practice cost-plus pricing to establish dual prices that fully allocate their true domestic
and foreign costs to product sales in those markets. Others opt for flexible cost-plus
pricing schemes that allow marketers to grant discounts or change prices according to
shifts in the competitive environment or fluctuations in the international exchange rate.
 Market-differentiated pricing – It makes even more flexible arrangements to set prices
according to local marketplace conditions. Effective market-differentiated pricing
depends on access to quick, accurate market information.

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