Chapter Eight – How is the pricing decision made?
The price variable in the marketing mix is a critical element. Price can, by itself, communicate much about a product or service. For example, what would you think of buying an engagement ring at Bob’s Really Good, But Cheap, Jewelry Store, or for that matter, at a yard sale. Most consumers link price with quality and there are many organizations that carefully reinforce the quality of their product, using price as a surrogate cue (or substitute indicator) for quality. For example, check out the websites of marketers of prestige items and observe how the price variable is used to indicate quality). Check out BMW’s website and watch on of the movies there. (http://www.bmw.com/bmwe/index.shtml).
When the pricing decision is made, the organization must consider several factors. These factors are as follows:
a. Supply (or cost)
b. Demand (or revenue)
c. Perceptions in the marketplace
d. Competition and Competitors’ pricing strategies
e. Government Regulation
f. Company’s desired pricing position
Supply (or cost)
If there is an abundant supply of a product or service, it may not be a candidate for being approached as a product or service for sale. For example, we don’t consider air to breathe as being a commodity we must buy. Of course, that is only because there is a plentiful supply. Of course, in Colorado, many people find that the air supplied by the great outdoors is not sufficient in oxygen, thus, they must buy air that is rich in oxygen by renting oxygen tanks to enhance their respiratory systems. Native Americans had to locate close to a water supply, but didn’t worry about having to purify the water. Hence, time can change most everything, particularly how we perceive certain goods and services as candidates for commercial products. Just a few years ago, people consumed very little bottled water throughout most of the United States. Today, demand for bottled water is growing rapidly. So, think about the things you consume that you presently don’t pay for, and consider that commodity is a candidate for a product in the future (fresh air and open space, for example).
Demand (or revenue)
To justify commanding a positive price in the marketplace, there must be some demand for a product or service. We have seen above where many products traditionally considered as free, have given way to other identical or similar products for which there is now a strong consumer demand, and a price to pay. Thus, the nature of demand changes constantly for goods and services. Consider the amount of demand today for ‘ice boxes’ (products for keeping perishable food cool). These products were heavily demanded before the advent of the electric refrigerator. Thus, we often see that demand for a product can decrease or even disappear if substitute products are introduced that are perceived as being superior in their ability to provide the benefits being sought. For example, eight track audiotapes were popular for a few years in the late 1960’s and early 1970’s until a newer technology in the form of cassette tapes was introduced and vinyl records of recorded music have largely given way to the Compact Disk (CD) as the preferred medium. Will the internet and MP3 technology eclipse CD technology eventually?
Perceptions in the marketplace
Perceptions in the marketplace can set both a positive price and a normative price in the marketplace. A positive price simply describes how much something costs whereas a normative price describes what something ‘should cost’ based on an individual’s or a group’s opinion. For example, the positive price was so high for selected drugs used to treat AIDS that some groups protested that the normative price was simply too high gaining societal support and eventual price decreases from the manufacturers of these pharmaceuticals.
Also, consider the recent higher prices for gasoline and the various protests put forth by individuals and groups that the gasoline prices were “too high” and “not right.” These protests essentially were observing that gasoline had reach a price that was above the normative price for most people.
In the U.S., a branch of government often sets normative prices, particularly in the case where there is only one supplier (a monopoly). For example, most states have a public utilities commission or board that is responsible for overseeing the pricing practices of firms that provide the populace with utility service for natural gas, water, and electricity. However, there are notable exceptions to this rule. Normative prices do not have to be specific. Usually there are consumer expectations that help guide the normative price. For example, how many times have you heard that, ‘my water bill is too high!”
This interaction between positive price and normative price is an ongoing phenomenon and of particular interest to marketers who attempt to create and sustain customer satisfaction.
While the marketer does not usually have control over the normative price, s/he can usually control the positive price. Setting price can be a time-consuming process and we will discuss setting price later in this chapter. However, this discussion should have already made the reader aware of the importance of understanding whether by custom of the marketplace, there is already a normative price for a product or service above which a price may be considering ‘unfair’ or ‘price-gouging.’
Competition and Competitors’ pricing strategies
In the U.S., competition can have several impacts on the pricing decision.
First, if the firm is the only seller of a product considered essential to public welfare, the firm may have to function in a heavily regulated environment.
This type of environment is called a monopoly (one seller).
Second, a firm may function in an industry in which there is an established price leader that perennially sets a price that other firms follow, although this may not always be the case. This type of competitive structure is called an oligopoly (few sellers).
Third, if the firm functions in a market where there are many competitors offering similar products, the firm may not have a choice about what level price to seek.
Fourth, the firm may compete in an industry or market in which although products are physically similar, sellers are able to draw differences in perception of such things as quality and prestige among products. This competitive model is called ‘monopolistic competition’ and is applicable for most everyday consumer purchases as well as business-to-business purchases in the U.S.
Most firms in the U.S. function in an environment that is highly regulated. For example, before starting a business, one must obtain various licenses directed at everything from local government taxation and zoning laws, to state government consumer protection laws, and finally, the grand-daddy of them all in regulation, the Federal Government which regulates all interstate commerce based on constitutional power and has major regulatory responsibility for the health and welfare of employees. However, the capitalistic system is unable in its present form to halt abuses to the environment by organizations and thus, most of this regulation, while onerous, is needed. This body of law still allows various environmental abuses such as the Summitville Mine disaster in the state of Colorado. In fact, if we explore the primary legislation that impacts pricing, we find that most of that regulation was brought about by pressure on congress exerted by businesses that were competing with other businesses. Only a small portion of these laws were passed to address the protection of consumers. So, the next time you hear businesses cry ‘Get the government off our backs’ realize the businesses are really saying ‘get the government off my back’ but ‘make sure the government protects me from unfair practices by my competition.’
Company’s desired pricing position
Based on a company’s business and marketing strategy, it should determine its pricing position. As we reviewed earlier in this chapter, some companies have a high price/exclusive/prestige position (check out the website for Rolls-Royce automobiles (http://www.rollsroyce.co.uk/rolls-royce/index.html) or Rolex Wristwatches, while others have a low price position (Wal-Mart, for example).
A company should choose its own price position, whether high/prestige or low/value and attempt to guide its constituencies (customers, supplies, employees, general public, and others) to the conclusion the company desires.
For example, a local store that sells ‘everything for a dollar’ (for example, see (http://www.dollargeneral.com/) will want to position itself quite differently than a marketer of exclusive products similar to Rolex watches (see http://www.rolex.com/).
The Pricing Decision
As pointed out above, the pricing decision is impacted by many different factors. Thus, the initial pricing decision can be time-consuming although there are exceptions. In pricing livestock, for example, the pricing decision can be quite simple. A cattle rancher may take his or her cattle to the local auction house once a year to ‘thin his/her herd of older cows and young calves.” In this case, the rancher will be forced to accept whatever price his/her cattle bring at the auction. In this case, the pricing decision is reduced to answering the question: “Can I accept the price being offered at the local auction?” If the answer to this question is ‘no,’ the rancher then has to decide whether to seek another auction or liquidate his/her herd. However, usually the pricing decision is much more complicated and should involve a careful consideration of all five factors listed above.
Cost and Demand Oriented Pricing Models
We may use cost or demand as a basis for setting pricing. Traditionally, this orientation is applied in microeconomic theory by creating demand curves based a summation of individual utility functions for buyers in the marketplace. Thus, we first assess buyers’ perception of how much they would expect to pay for a product or service based on the utility (or usefulness) they would expect to derive from product or service and combine these individual utility functions to create a demand curve for the product in question. While, this approach is straightforward theoretically, it often defies practical application. However, the general lesson we learn from the approach is an important one. That is, the price based on a demand-oriented model, can be based on the expected utility (benefits) that customers in the marketplace expect to receive from acquiring our product as compared to other available products.
Pricing models based on cost
Probably the oldest model used, this approach uses cost to the seller to determine a selling price. For example, for years a ‘keystone’ or ‘key-stoning’ pricing policy has been used by many retailers to set price. This approach simply doubles the cost and arrives at the selling price. Many other models used cost as a pricing basis, for example, internal rate of return pricing usually begins with cost determination and then computes different projected levels of return on investment for future time periods. This pricing method was adopted by General Motors early in the company’s history and was applied for decades with their products. Why not just use cost-pricing always? While the approach is simple and has the advantage of ‘guaranteeing’ some profit margin, the approach ignores the most important factor in pricing; demand. Thus, by using solely a cost-based approach the seller my miss opportunities for additional profit or set a price too high to realize adequate sales to even cover cost.
Pricing models based on demand
Witness salaries paid to professional athletes. How are these ‘prices’ for athletic talent determined? Usually, based on demand and what others will similar skills can expect to receive in a free market. Prices can also set using demand for the product or service as a guide. For example, if an analysis of demand indicates that buyers, based on the benefits they would derive from it, would expect to pay $30,000 dollars for a new kind of testing device, this at least gives the seller some guidance in setting price. This approach is known as ‘the expected price approach’ and, theoretically, is the basis for setting price based on demand in Microeconomics. Of course, this approach requires a time consuming analysis and it not as simple as just setting the price based on cost. However, if a seller focuses only on cost to set a price, s/he might be either setting price so high there will be no demand, or foregoing considerable profits.
For example, if demand is very high there are times when we can virtually ignore cost structures. For example, if a professional athlete has a remarkable season of performance, s/he can sometimes demand an incredibly high salary based on his/her performance the previous season.
In some cases, there may be ‘an expected price.’ The expected price is a price that consumers would anticipate being reasonable for the benefits derived from using the product. There may also be a ‘customary price’ for a product or service. The customary price is a price level that consumers are used to paying based history or normal expectations. For example, if consumer testers try out a new, revolutionary vacuum cleaner, when asked they indicate that they would pay normally anticipate paying $500 or less for the product, although the seller cost structure would mean losing money at a price of less than $500.
Prestige pricing is often applied by organizations that attempt to create a sense of exclusivity for their product or service. This pricing approach assumes that the product or service faces a market structure characterized by ‘monopolistic competition.’ Thus, prospective buyers perceive a difference in products based on the distinction or reputation of particular brands. Many product categories this factor to set price. For example, wristwatches, liquor, and automobiles all have a ‘prestige’ segment created through the perception of exclusivity and distinction. Of course, in order to create and sustain such a market position, the organization must commit to a long-term strategy
Understanding Price Elasticity of Demand
Price elasticity of demand is a method used in microeconomics to understand how quantity demanded moves in conjunction with price changes. That is, if prices are raised, what happens to quantity demanded? We would usually argue that quantity demanded goes down. However, can you think of a situation in which raising prices will result in more of the product or service being demanded?
It is imperative that the marketer have a clear understanding of how quantity will respond to price changes. Thus, a basic understanding of price elasticity of demand is called for. Price elasticity of demand can be computed by applying a simple formula for “e” the elasticity of demand as shown below:
Price elasticity formula in words:
Price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price.
Price elasticity formula in symbols:
e = % ∆q/ % ∆p
Where: e = elasticity of demand
q = quantity demanded
p = price
The elasticity coefficient of elasticity, ‘e,’ has a domain from greater than a positive one, to less than a negative one. When ‘e’ is greater than one, elasticity is termed ‘elastic demand.’ When ‘e’ is less than one, we characterize demand as ‘inelastic demand.’ When we have an elasticity coefficient equal to one, demand is said to be unitary demand.
We will present examples at the conclusion of this chapter.
The firm must arrive at a price that will provide it with sufficient profitability while being palatable to the marketplace. Of course, the ultimate price is related to all five factors that we discussed above. A very simple way to look at setting price is to consider the ‘markup.’ Markup can be computed on cost or selling price.
We would use the same simple formula for each approach to computing selling price: Selling price equals Cost plus Markup or SP = C + MU, where, SP = selling price, C = cost, and MU = percentage markup.
Using Markup on cost to determine selling price
In this approach to setting price, we first determine the markup and then add it to the cost to find the selling price. That is, we simply multiply the cost by the percentage of markup.
For example, let us assume that the owner of a small gift shop desires to gain an average forty percent markup based on a percentage of cost on a of the products she sells in her shop. She will use the formula, SP = C + .4 (or forty percent of cost) to determine the selling price of items in her gift shop (for example, if a children’s book costs the owner $14, her selling price will be SP = $14 + .4($14) or $14 + $5.60 = $19.60.
Using Markup on selling price to determine selling price
Some students ask “How can I determine markup based on selling price if I don’t know the selling price!” Good question! We simply define the markup on the selling price in algebraic terms, initially. This approach is not as intuitive and applies simple algebra to first define and then determine the selling price. Please note, that this approach may not make as much sense to you initially if you are not comfortable with basic algebra. But please don’t despair; once you understand this approach you will be able to remember it.
Selling price can also be determined as a markup based on a percentage of selling price as described in our discussion of ‘key stoning’ above. In this case, we apply the same simple formula. However, now we must draw on simple algebra and define the selling price as the unknown and the markup as a function of the selling price. That is, while our formula is identical to the computation using cost as a basis for markup (SP = C + MU), now markup itself becomes an unknown, as well. That is, if we use the same gift shop and price structure as our example above, the cost is $14, and the markup is .4 of the selling price rather than the price, or .4SP. Therefore, the solution to our problem would be SP = C + MU, or SP = C + .4SP. That is, now the markup is determined as a percentage of selling price rather than a percentage of cost. Solving for the selling price under this approach, we would find the following.
Substituting in the formula: SP = C + MU, we find that, SP = $14 + .4SP or the selling price is equal to $14 plus .4 times the selling price. Now, grouping the terms with ‘SP’ together to solve the equation, we subtract .4 from both sides. On the right side of the equation, $14 + .4SP minus .4SP equals $14. On the least side of the equation, SP minus .4SP equals .6SP (Remembering that “SP is understood to be ‘1SP.’, that is, 1SP minus .4SP =.6SP. Now our equation reads ‘.6SP = $14.’
Recalling that we can simplify the equation ‘.6SP = $14’ further, remove the ‘.6’ by dividing both sides by ‘.6’. On the left side of the equation, .6SP divided by .6SP is equal to simply SP). So the equation now reads ‘SP = 14 divided by .6.’ Thus selling price is equal to $14 divided by .6 or $23.33. Now, substitute the selling price of $23.33 into our formula to check your answer.
This simple approach to using selling price as a basis for markup is used by many retailers and if one ever wants to market a product to retailers (or wholesalers, for that matter) one should understand this approach to arriving at selling price.
Chapter Eight Glossary
Positive price – the present cost or marked price of a product
Normative price – a price that is considered ‘fair’ by an individual or group
Company’s desired pricing position – an organization should reach its own conclusion based environmental factors, where it should set price and communicate that position to its constituencies.
Cost-oriented pricing – procedures used to arrive at a product’s or a service’s price using the organization’s cost of producing the product or service.
Demand-oriented pricing - procedures used to arrive at a product’s or a service’s price using the demand structure in the marketplace.
Price elasticity of demand – the relative change in demand that occurs in response to a relative change in price
Prestige pricing – the process of setting a price based on the perceived exclusivity or reputation of the company name or brand name of the product or service
Chapter Nine – How do producers get their products and services to their target customers?
This area of the marketing mix is usually called ‘distribution’ simply because its main concern is to distribute goods and services to the target customers.
Organizations typically use a large number of strategies to get their goods and services to target customers rather than only one. Critical to understanding and managing distribution are the concepts of time and place utility. Time utility can be defined as having the product available when the customer would prefer to acquire it and place utility is having the product available where the customer would prefer to acquire it. While the internet can provide the ultimate in time utility for some products or services (for example, e-mail), for many products, it does not provide sufficient time utility. Buying a book over the internet still requires that the book be delivered to the buyer before ‘consumption of the product’. Therefore, it is generally faster to buy a book from a local retailer than to obtain the same book through the internet. However, the development of the market for e-books may change this situation. For example, this e-book is delivered to the user instantly anytime the user desires to access it. The action on the part of the reader is to gain ability to log on to the internet and go to our website (http://www.principlesofmarketing.com).
A marketer may adopt a broadcast strategy in which products are sent out to customers in as wide a manner as possible. This strategy is usually not efficient or effective for most firms, particularly small firms due to the cost. The strategy is typically adopted by many organizations that have not done sufficient research to understand the specific characteristics their target customer and how the customer would generally prefer to obtain the product or service in question. For example, organizations that are production-oriented concentrate primarily on manufacturing their products efficiently (with the underlying assumption that there will be a demand for the product). Sales-oriented organizations focus on promotion and personal selling and are not typically concerned with the ideal product solution that the customer is seeking. Technology oriented firms assume that customers are seeking the most advanced technology, thus these firms focus on the most advanced way of doing things whether the customer is seeking this solution or not. All of the organizations above often adopt these respective orientations because they have insufficient knowledge of customers or concern for customers to engage in a focused distribution strategy.
We use the terms goods to refer to tangible products (those that can be seen and touched, for example a new pair shoes) and the term services to refer to intangible products (for example a visit to the dentist), those that cannot be seen or touched during the process of providing the service. Although traditionally services have been delivered through a ‘direct’ marketing channel or directly from the seller to the buyer, as technology develops, many services are now be delivered directly to the customer. Previously, these services required personal contact between seller and buyer. For example, investment decisions (in stocks, bonds, or other investment options) historically required a face-to-face meeting between the investor and his investment advisor. Today, many people manage their investments through the internet and never work face-to-face with another human being. Financial services offered by banks are similar in that, since the introduction of the Automatic Teller Machine (ATM), it is not necessary for customers of banks to meet face-to-face with bank representatives. As the practice of “direct deposit” and other electronic forms of banking grow, there will less and less need for personal interactions between financial institutions and their customers. This is not to the say that there will no longer be a need for ‘bricks and mortar’ banks, because some segments of customers will still feel it necessary to visit personally with the bank’s representations.
Focused Distribution Strategy – “Five Rights don’t make a Wrong”
A focused distribution strategy is driven by customers’ needs, and thus is created in relation to when and how customers would prefer to buy a product or service. Thus, the organization seeks to deliver the ‘right product with the right service, to the right customer, at the right time and right place. For example, if we market a product that customers would prefer to buy any time of day or night and any day of the week, we would strive to make the product available to customers on an around-the-clock basis. For example, emergency medical care for people and their pets might constitute such a product (service). Note that many Wal-Mart stores adopted this approach to ensure that Wal-Mart products are available whenever customers might seek them and that Walgreen drugstores have adopted the same strategy. Over the last few decades people in the U.S. have grown to expect that some types of stores will ‘always be open’ and thus many leading market-oriented organizations have responded to that expectation and many others have not. Of course, not all customers for most products have the same wants and needs, thus, the demand for all products and services does not occur on this basis. For many marketers, the idea of being open to serve customers virtually all of the time is not a viable strategy. Again, ‘five rights don’t make a wrong’ thus the only viable way to know what the target market wants is to understand them well enough to answer the ‘five rights.’
This distribution strategy requires that the firm commit to learning about and caring about its customers. This has to be a strategic or long-lived commitment with adequate resources devoted to accomplish the task. Many firms advertise that they have this commitment, but in reality, few do.
Options for focused distribution
In the U.S., there are usually many options available to create and effectively manage distribution. We say, “usually,” because the distribution function (‘Place’) tends to be the least flexible component of the four P’s in the marketing mix. Thus, while distribution options usually exist, frequently some creativity is required to identify and weave these options together into an effective system that provides high satisfaction levels to customers.
Options for focused distribution in the consumer market
Earlier, we defined a consumer as someone who buys for ‘their own, personal non-business use.” This definition clearly identifies most shoppers at K-Mart as consumers, for example. However, if we consider “Sam’s Club” and other similar organizations, a portion of their sales come from those who are buying for businesses or institutions. Why does this matter? As indicated in an earlier chapter, the buying behavior of consumers and those representing organizations differ considerably. Organizational purchases are often more planned and driven by predefined specifications, whereas consumer purchases include a larger portion of unplanned purchases.
Although there are literally dozens of different alternatives for distributing products and services to consumers, the alternatives fall into two basic options: (1) direct distribution and (2) the use a one or more marketing intermediaries.
Direct distribution is an approach in which the producer also manages distributing the product to the consumer. Examples of direct distribution include Mary Kay cosmetics (website: http://www.marykay.com/) and Motel Six (website: http://www.motel6.com/). Mary Kay operates on a direct distribution system that depends on the performance of a large network Mary Kay Consultants who are independent contractors to Mary Kay. This workforce is close to a million women who operate as independent business organizations. This website will be of interest to most women in business if only in its educational attributes regarding organizational mission and culture.
Motel 6 delivers its services directly to customers via an individual or company that has agreed to certain guidelines articulated in a franchising agreement. The service component plays the major role in each of these businesses which is not surprising, because most services are distributed directly from the producer of the service to the consumer of the service. A notable exception is the delivery of travel services in which at least some component of the service (finding an appropriate flight and booking it) is sometimes delivered via a marketing intermediary (travel agent). However, as more and more people locate and book travel arrangements through internet providers (for example, Travelocity (http://www.travelocity.com) and Cheaptickets (http://www.cheaptickets.com/),
there is becoming less demand for personal contact with travel agencies except in case of more complicated travel plans and travel plans for inexperienced travelers.
For tangible goods (products), Goodyear Tire Stores (http://www.goodyeartires.com/about/employ/open/retail-06.html) operates a network of over 750 company-owned retail outlets in the U.S., thus company has chosen to own and operate its own retail stores and thus engage in direct distribution.
Given the above examples, one might believe that most large companies choose to deliver goods to their customers through direct distribution. However, this is not the case and most products in the U.S. are distributed through marketing intermediaries such as wholesalers and manufacturers representatives. Why are producers who use direct distribution in the minority? Because there are many marketing intermediaries (called ‘middlemen’ in the past) that provide better service and are much better equipped to provide distribution services than the producer. For example, if you operated a fishing fleet in Alaska, your primary concern and abilities would be related to operating a fleet of boats, and locating and catching fish. Clearly, a wise person would spend his/her time focusing on this aspect of the business. Whereas, there would, no doubt, be an organization that has as its primary concern and abilities, the processing of the fish brought into port every day. Although, as a fishing operation one organization could do both fishing, and processing, it might not have the resources to peform both activities. Thus, in most industries, there are different firms engaged in the different endeavors it requires to produce and deliver the product to the consumer’s door.
In the grocery industry, companies like Sysco (http://www.sysco.com/) and the Fleming companies (http://www.fleming.com) provide everything from training classes in merchandising to recipes for new dishes to their customers, as well as distributed products from producers to retail grocers.
The above example would represent a distribution channel in which both wholesalers and retailers are needed as marketing intermediaries. Note that a ‘retailer’ is technically a marketing intermediary, so that when a retailer advertises s/he ‘cuts out the middleman,’ it is unlikely that claim is true because, technically the retailer IS a middleman!
In summary, the above discussion should help you conclude that while marketing intermediaries are not always use, that provide essential services which usually add value to products that we, as consumers desire to purchase. The key to the value of a marketing intermediary is that the marketing intermediary provides services with which we as consumers cannot do without. The only time when a marketing intermediary is not needed is when we as consumers are willing to perform some of the services that the marketing intermediary performs. For example, if we are willing to drive to Rocky Ford, Colorado, to buy our cantaloupes, we have performed a service usually reserved for a marketing intermediary. In fact, in this case, there probably will be at least two intermediaries involved, the transportation company that moves the melons from Rocky Ford to your home town, and the retailer who grades the melons and places them for display in his/her grocery store. So, the next time you go to the grocery, realize that the reason you are able to buy exotic products from all around the world depends largely on the services of marketing intermediaries.
They don’t necessarily make distribution more expensive but they do often make it much better, providing consumers with more place and time utility.
As the reader can see, there are many different options to distribution, but the main option other than the direct channel, is the option that includes the use of marketing intermediaries, of which there are many different kinds.
Options for focused distribution in the organizational market
Although there are instances in which the distribution channel to provide satisfaction to an organizational market is identical to the distribution that will provide maximum satisfaction to a consumer market such as Sam’s Club in the U.S., these two types of markets usually make use of different kinds of marketing intermediaries, at least in title. For example, manufacturers’ representatives are used widely in organizational markets than they are in consumer markets. A manufacturers’ representative is an independent organization that represents a group of different producers. The manufacturers’ representative will usually have as clients several different producers that manufacture products used in the same industry or application. For example, a manufacturers’ representative in the building materials industry might work for several different producers of structural materials for building homes. Examine the following URL address to find the websites of different categories of manufacturers’ representatives.
Industrial distributors are marketing intermediaries that service organizations by providing them with products and services in a convenient manner. There are literally tens of thousands of these firms in the U.S. alone. However, the firms are often ‘hidden’ from consumers since most are located in industrial districts within cities. See the following website for an example of an industrial distributor:
Different types of products in consumer markets
It is helpful to study the type of behavior in which consumers engage to better understand their wants and needs when it comes to product or service delivery. For consumer products, researchers have identified several different types of products based on consumer behavior. We will describe four of these types of consumer products: Unsought goods, convenience goods, shopping goods, and specialty goods. It is helpful to consider three characteristics when attempting to place a product or service in one of these categories. First, we must realize that we classify goods and services on what behavior we would expect from most consumers, thus, pizza would be classified as a convenience good because most consumers buy it in that manner. That is, when most people buy pizza, the purchase decision if not a high involvement purchase surrounded by considerable perceived risk. While you might say: “I only eat the pizza baked by my favorite local pizza place: Rubino’s Pizza,” you should realize that the pertinent question is not how you personally buy pizza, but how most consumers buy pizza. We would observe the effort put into the purchase including how much time is spent on the purchase and how often the product is purchased. We also consider the price and the personal significance of the purchase, because these directly impact how much time you are willing to spend on the making the purchase. Situational effects are also important to consider, including time pressure and occasion of the purchase because each of these factors affect the personal significance of the purchase.
Therefore, we define a convenience good as a product or service that is purchased with:
1. minimal amount of time expended under
2. normal consumption conditions (for example, not a special occasion or of particular personal significance) and that is
3. purchased frequently.
One can see that with convenience goods, time and place utility are extremely important because the most available supplier of the product may be the one that is chosen solely on location of the supplier (for example, gasoline for your lawnmower).
Shopping goods are those products that are purchased less frequently for which the average consumer is willing to spend some extra time in the shopping process. For example, when buying a new CD player for her car, a consumer may want to compare several different brands and stores before she decides on which CD player to buy. Thus with shopping goods the consumer will usually compare different brands and suppliers before s/he makes a purchase decision. The added time the consumer is willing to spend will vary directly with the cost of the new product and the personal significance (perceived risk or situational impacts) of the purchase.
Specialty goods are products that we purchase for which we have a definite preference for the supplier. This preference may be based on prestige of the supplier (for example, Rolex wristwatches http://www.rolex.com/) or a long-standing involvement with the product (for example, Krispy Kreme Donuts: http://www.krispykreme.com/kkcollect.html also http://www.bluebell.com/).
Unsought goods are those products that consumers will not normally buy during regular shopping activities. For example, the family doesn’t usually decide to spend a nice spring day shopping for burial plots and funeral services. While we all have need for these products and services, they are not necessarily pleasurable to consider buying, thus we in one way or another avoid buying certain products and services during our normal shopping activities. For example, if you own an automobile, think back to the last time you bought a battery for your car. Most of us only buy a battery when we believe our present battery most be replaced, thus, the good is unsought in normal shopping activities. Intangible goods, such as life insurance also fit into this category.
(for example, look at http://www.northwesternmutual.com/ , http://www.prudential.com and http://www.sci-corp.com/ ).
Marketers of unsought goods choose intriguing appeals, usually based on perceived risk, either of personal risk (for example, assuaging grief of family members) or financial risk (dramatizing the consequences of financial loss).
Different types of products in organizational markets
In organizational marketing, researchers have classified products, not on behavior observed among organizational buyers and decision makers, but on the intended use of the product or service. Thus the types of organizational products we identify are based on what purpose the organization has for the product or service being acquired. For example, a local gift shop may need to buy a new neon sign for its window to draw the attention of passers-by. The gift shop is buying the neon sign, not to resell, but to use in the conduct of its business, thus the intended use is to promote the gift shop and increase its sales.
The following are brief descriptions of the different types of good and services in organizational markets:
i. Raw materials - products that are in their natural form like salmon from the sea or coal from the earth.
ii. Process materials – products that have undergone some change in form utility, for example, trees that have been cut into boards in a lumber mill.
iii. Component parts – products do not undergo any change in form utility and appear in the final product in identical form, for example, spark plugs or windshield wipers in a new automobile.
iv. Major equipment – products for which the basic processes of the organization depend, for example, jet planes for a commercial airline carrier or ovens for a bakery.
v. Accessory equipment – products that are used to facilitate and maintain basic production and operations of the firm. For example, a hand drill used by a tent manufacturer.
vi. Supplies – these products are similar to convenience goods in the consumer products typology in that they are of minor cost and are consumed frequently. Examples would include oil and grease for maintaining major equipment.
vii. Business services – intangible portions of the company’s basic processes that enhance and protect its operations for example security services and cleaning services
Chapter Nine Glossary
Broadcast strategy – a distribution strategy based on delivering the product or service to customers on as a wide a basis as possible. Often as a result of inadequate knowledge about customer needs and wants and characteristics
Focused strategy – a distribution strategy based on delivering the product or service based on performance of upstream marketing activities to determine the ‘five rights’ of the organization’s product or service.
Direct distribution – an approach used by some organizations in which the organization itself is responsible for delivering its products and services to the customer.
Marketing intermediary – an independent organization that assists producers in delivering their products and services to their customers
Manufacturers’ representative – a type of marketing intermediary that serves several non-competing producers of complementary products by accessing and maintaining relationships with a wide variety of customers in business-to -business markets
Industrial distributor – a type of marketing intermediary in business-to-business that services organizations by providing them with products and services usually in a specific product category such as electrical or plumbing supplies.
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