PRINCIPLES of

MARKETING
Quarter 2
Weeks 1-2

Product Development and Pricing

Strategies
Most Essential Learning Competencies
l define a product and differentiates the product, services, and
experiences (ABM_PM11-IIa- e-16)
l identify and describe the factors to consider when setting prices
and new product pricing and its general pricing approaches
(ABM_PM11-IIa- e-17)
After going through this module, you are expected to:
l define product
l differentiated products as goods, services or experiences;
l understand the importance of price; and
l identify and describe factors to consider when setting prices, new
product-pricing and general pricing approaches.
In this module, we will be talking about:
• difference of products as goods, service, or
experiences;
• characteristics of services;
• classification of consumer products;
• product development process;
• the product life cycle;
• factors affecting pricing decisions; and
• pricing strategies.
Products: Goods, Services or Experiences

• A product is “anything that can be offered to a market for

attention, acquisition, use or consumption that might
satisfy a want or need (Kotler and Armastrong, 2014).

• Product is the object of the exchange process, which the

company is willing to provide for its customers in exchange
for something of equivalent or greater value. Products may
be tangible or intangible.
Tangible products are those with visible or measurable
characteristics and referred to as goods (i.e. candies or
clothing).

Intangible products are products that do not have physical

presence. These products take the form of ideas, services
and experiences.
 Product Examples
Goods Table, chairs, laptop, pen,
paper, bags
Services Automotive repair, dress
shop, beauty parlor
Events Concert, fun run, seminar
Persons Celebrities, artists
Places Tourist spots, mall
Organizations Nonprofit organizations,
associations
ideas Advertisement for a product
Services are intangible products that can invlove activities that do not result in
ownership and are provided by one entity or person for another entity or person.
Service have four characteristics: intangibility, perishability, variability and
inseparability.

Characteristics of Services
1. Intangibility. Services are intangible, which means that they cannot be seen,
heard, smelled, touched, or tasted and the buyer cannot claim ownership once it has
been availed of. When you avail of a haircut, the service is done with your hair. The
hairstylists works on your preferred hairstyle, but you have no ownership of tangible
goods related to the service.
2. Perishability. Services cannot be stored for future use unlike goods that can
be inventoried. Goods which are not sold on a certain day can be sold on the next
day, such as remaining stocks of noodles, rugs, or drinks. However, services that
are not availed of on a day are gone forever. For example, if a hotel with a 50-room
capacity has only 30 rooms occupied on a certain day, the services for the 20
unoccupied rooms for that day were practically gone.
3. Variability. Services are hard to replicate to all customers.
There will always be variations of differences because not all
customers are the same. In a concert, for example, where the
singer or artist is the service provider, each audience will listen
and view the same act or performance, but will have varying
interpretations or feelings of the performance. Some audience
will appreciate the performance and are already contented
while others may want more.
4. Inseparability. The consumer has to be present when the
service is being rendered. When availing of hair color, or hair
cut or massage form a spa, the customer has to be in the spa
in order to receive the service. This is also referred to as
simultaneous consumption and production.
 For some brands, experiences is a part of the
company’s offerings. Customer experience can be point
for differentiation. A popular coffee shop, for example,
does not only sell coffee--it gives consumers a cozy
ambiance for a hearty conversation with friends or a
casual yet professional venue for business meetings
and negotiations. The presences of couches and
soothing music makes up the market offerings in order
to give a pleasurable experience to customers.
Levels of Product
According to Philip Kotler, an economist and a marketing guru, a product is
more than just its tangible value, that is, it has abstract value, and that
customers will choose a product based on their perceived value of it.
According to him, there are 5 levels of a product:
Level 1. Core Benefit is the very reason a customer buys a
product. For example, a person buys a bar soap to
cleanse his or her body.

Level 2. Generic Product is the no-frills version of the

product. For example a soap is simple a hard bar that
produces bubbles when we use it.

Level 3. Expected product is ta set of attributes that a

buyer normally expects to get when buying the product.
Customers expect soap to have a packaging and some
scent.
Level 4. Augmented product includes attributes and
characteristics that set the product apart from its
competitors. These attributes can be its
competitive advantage or unique selling proposition
(USP). Soaps, for example, can have whitening or
moisturizing benefits.

Level 5. Potential product includes all the possible

improvements or transformations that the product
may potentially undergo in the future.
Classification of Consumer Products
Marketers classify products based on
(1) durability and tangibility,
(2) consumers’ shopping habits and
(3) industrial use.
Classification Based on Durability and Tangibility
1. Nondurable goods are tangible goods that are
bought frequently because they are consumed in one
or a few uses, such as milk tea, softdrinks and
shampoo.
2. Durable goods are tangible goods that are not
bought frequently because they are used for a long
time, such as furniture, clothes and appliances.
3. Services are intangible products that are offered to
the market such as haircut, car repair, and medical
consultation.
Classification Based on Consumers’ Shopping Habits
1. Convenience products are products that are puchased
frequently, immediately and with minimal effort. These are
the items that you normally get from the supermarket during
your grocery shopping.

2. Shopping products are products that consumers

compare based on suitability, quality, price and style. When
you shop for shoes, you would normally go around the
department store or go to several shop to find the specific
pair of shoes that you want. You want shoes that fit perfectly,
have a good quality and style, and match your budget.
3. Specialty products are products that have unique
characteristics or brand identification which buyers consider
as important for them to make a special purchasing effort. A
popular brand of cellphone with high brand quality, for
example, has consumers camping outside stores worldwide
days before the official launch for its new phone model.
Similarly, car enthusiasts want to get ahead of everyone else
when a new model of their favorite car comes out.

4. Unsought products are products that consumers do not

normally think about. College students do not normally think
of getting a life insurance plan, more so a memorial plan.
Classifications Based on Industrial Use
1. Materials and parts make up the raw materials and
manufactured materials and parts that are sold directly to
industrial users. For example, corn, salt, and seasonings are
the raw materials for chichacorn.

2. Capital items are long-lasting goods that aid in the buyer’s

production or operation. Equipment and machinery used in
processing products in a plant are example of capital items.

3. Supplies and business services are short-term goods and

services supplied to businesses to facilitate business
operations, such as office supplies and business services.
Product Decisions
Companies need to make product decisions for their goods and
services. Product decisions involves in three levels:
1. Individual Product Decisions. Marketers are expected to create
products that will sell well in the market. In doing so, they need to
decide on the following:

Ø Product attributes- different characteristics of a product that make

up its essence. These includes the product quality, product features and
product style and design.
Ø Branding, or the identity of the product. The brand is a name, term,
sign, symbol, design, or a combination of these that identifies the maker
or seller of a product or service.
Ø Packaging is the first thing that a consumer sees in a product. Traditionally, the
main purpose of packaging is to hold and protect the product. Now packaging has
become an important marketing tool in communicating the brand, features and
quality of the product.

Ø Labeling. Labels are a means to identify the product and to communictae the
name and other pertinent information about the product. The label may include
information such as name, volume/weight, product description, nutritional
information, ingredients, and contact information of the manufacturer/distributor.

Ø Product Support services are an important contribution to a customer’s overall

brand experience and satisfaction. High-end stores provide training to their staff so
they can extend exemplary service to their customers. (e.g. High-end pet supplies
store hires sales staff with a degree in veterinary medicine so they can easily interact
with pet owners and discuss with them products that are fit for the needs of different
pets.)
2. Product line decisions. A product line is a group of products
that are closely related due to the following reasons: they have
similar functions, they are sold to the same customers groups
and in the same types of outlets, or they fall within a given price
range. For example, a brand of car offers different models that
cater to different lifestyles--a car for everyday use, a luxury car,
a sports car, and a hybrid car.
3. Product Mix Decisions. A company may include several
product lines in its portfolio, which makes up the product mix.
Each product line consists of several sublines. For example, a
popular beverage company has the following product lines:
softdrinks, juice, bottled water and energy drink. All of which are
sold in different flavors and in different packaging.
New Product Development Process
Offering a new product in the market requires proper planning. In the new
product development process, eight steps are needed to bring a new product
to the market.
1. Idea generation is the first step toward new-product development. Companies generate
a lot of ideas, which may come from internal or external sources. Internal sources
include the company’s research and development department, or its employees.
External sources include customers, competitors, suppliers and others.

2. Idea screening reduces the number of ideas generated in the first step by dropping poor
ideas by pursuing goods ones. Marketers will have to evaluate if they are profitable, if
customers will buy them and if differentiation can be done in a competitive environment.

3. Concept development and testing comes when a good idea has been found viable. A
product concept is a detailed version of the idea. The marketer develops several product
concepts based on an idea and determines how attractive each concept is to the market.
During concept testing, the product concepts are presented to consumers. Consumers
are asked to evaluate each concept, and are asked about their intention to by the
product. Consumers are asked to evaluated each concept, and are asked about their
intention to buy the product. Based on consumer’s feedback, the company may decide
to pursue the concept with the strongest appeal.
4. Marketing Strategy development. The marketing strategy is composed of
three parts. The first part focuses on the target market; planned value
proposition; and the sales, market share, and profit goals for the first few
years. The second part discusses in detail the product’s planned price,
distribution and marketing budgeting. The third part outlines the planned
long-term sales, profit goals, and marketing mix strategy.

5. Business analysis evaluates the attractiveness of the proposal based on

costs, sales and profit projections.

6. Product development sees the product concept transform into the physical
form of the product. It evaluates if the concept can be indeed be developed
into the actual product. The company invests in creating one or several
prototypes of the concept. A prototype is a working, fully functioning version
of the product concept. The product’s effectiveness and safety are also
evaluated in this stages.
7. Test marketing happens after the concept test and product test have been
successful. The product and its proposed marketing program are tested by
introducing them to a realistic marketing setting. Test marketing can be done
via controlled test markets, where a new product along with its marketing
strategies are tested in controlled stores, or via simulated test markets, where
the new product and its marketing strategies are brought in laboratory stores
or simulated online shopping environments and the behavioral responses to
the produce are measured.

8. Commercialization introduces the new product to the market and implements

the proposed marketing strategies. In this stage, decisions to be made include
timing, where considerations include economic states, competitor activities,
and seasonability of the product; and expanse of distribution, whether to
launch nationwide right away or start in key cities first then slowly roll out the
rest of the country.
Product Life Cycle (PLC)
In the introduction stage, the product is released in the market but sales are
slow. In this stage, the objective of the company is to create awareness of the
product’s existence. The company spends heavily on marketing activities that
introduce the product to the market. This may be in the form of advertising or
different marketing efforts to get the attention of the consumers.

The growth stage is where the product starts picking up sales. The sales
increase as the product becomes known in the market. The market share grows
along with the increase in sales. As more consumers buy the product, they may
voluntarily do positive word-of-mouth if the benefits of the product are good.
Profits increase while the marketing costs are spread over greater output and the
cont per unit of production decreases as the company manufactures a bigger
volume of the product.
The maturity stages is where the product has reached its potential, so the sale
level off and slow down. Brands in this stage need to innovate their products in
order to keep the interest of the consumers and to defend the brand against
competitors. The company may run campaigns to increase consumption,
implement improvements for the product, or modify the marketing mix.

In the last stage, decline, sales and profits go down. The product loses its
popularity and the company may choose to maintain, harvest or drop the product
from its portfolio. Sales decline for a lot of reason. There are some products that
were popular before, but because o technological advancement, they became
obsolete. New products have replaced their function: for example, use of file
cameras is declining because of the popularity of digital cameras and high-quality
camera phones.
Lesson
Pricing Strategies
2
What is Price?
Price is the sum of all values that customers give
up to gain the benefits of having or using a
product (Kotler and Armstorng, 2014). Money is
the most common payment of price exchange for
a product. Price is the only element in the
marketing mix that generates revenue, as all the
other elements incur costs.
Factors Affecting Pricing Decisions
1. Product Cost. The costs involved in manufacturing goods or offering services
have a direct impact on the product’s price. Cost may include product development,
research, testing, packaging, raw materials, promotion, distribution and others. For
company to be profitable, the revenues from the sales of the product must be
greater than its total cost.
2. Competitors. Consumer sometimes based their purchase decision solely on the
price of the product. If a competitor offers the same product with the same benefits
at a lower price, the consumer would patronize the competitor’s product. This
often leads to a price war or the market situation where in companies cut down
prices below that of the competitor’s offering. To avoid losses for the players in the
market, some industries set industry-standard prices. This way, companies will not
be forced to bring down the price of their products to the point that they will incur
losses.
3. Overall Marketing Strategy. Companies must first decide on the
overall marketing strategy for their product. Clarifying the product’s
positioning as well as identifying its customers will easily lay down the
price decisions for the product. For example, a company who wants to
offer a premium line of organic personal care products (shampoo,
soap, lotion) must understand first its target market and the benefits
that they look for in organic products in order to choose the best
pricing strategy. Organic products entail higher costs because of the
raw material that are used in producing them. Since higher costs
equal higher selling prices, the company should at least study whether
the consumers will be able to pay for such prices.
4. Economic Conditions. Economic boom, recessions,
inflation, or changes in interest rates affect consumer
spending, as well as the company’s costs of producing and
selling a product.
Government Laws and Regulations. The government may
sometimes impose price changes through laws and
regulations. When the Sin Tax Reform Law or Republic Act
10351 was approved in the Philippines, it imposed taxes on
alcohol and tobacco products, thereby significantly increasing
the prices of these products. To read more about the Sin Tax
Reform Law, visit
http://www.gov.ph/2012/12/19/republic-act-no-10351
Product Pricing Strategies
Product pricing strategies are strategies directly related to the product.
A. Product Mix Pricing Strategies. If a product is part of product mix, there are
strategies to use to maximize profits, address the demand curve, and competition.
Listed below are the strategies.
i. Product line pricing is a strategy used when a company has more than one product
in a line and would like to created different value levels in the minds of the consumer.
For example, shirts as product line may have different kinds: crew neck shirt, polo
shirt, and sleeveless shirts. The company in this case offers this shirts with different
prices like: P300.00 for sleeveless shirts; P600.00 for crew neck shirts and P850.00
for polo shirts.
ii. Optional product pricing is a strategy used when a company sells a base product at
a low price but sells complementary accessories at a higher price.
An example of this is an airline company offering low price tickets but charges high for
accessories like check-in baggage and in-flight snacks.
iii. Captive product pricing is a strategy used when a company sells
products that must be used with the main product.
For instance, a printer company offers low price printers but charges high
for ink cartridges.
iv. By-product pricing is a strategy used when a company prices products
that have no value for the company so that disposal and storage will not
add to the cost of the product.
An example is wood shaving from carpentry shops sold to pet stores for
beddings of hamsters or saw dusts sold to garden use as a mix for their
garden soil.
v. Product bundle pricing is a strategy when a company sells several
products into one combined product at a reduced price.
An example of this strategy is the value meal being offered by fast food
outlets
An example of this strategy is the value meal being offered by fast food outlets.
B. New Product Pricing Strategies. New product pricing strategies are used for
products in the introduction stage of the PLC
i. Market penetration is a strategy where a company initially offers lower than regular
market prices to enter a market. Once sales and market share objectives are
achieved, the company will then increase the price.
An example of this is introductory product offers of a new brand of television in the
market.
ii. Market skimming is a strategy where a company is the first one to market a new
high-end product or an innovative product. Its objective is to have maximum
revenue from the market before competitors catch on. When the objective is
achieved, the company can lower the price.
An example here is the offering of “smart” watches by technology and telephone
companies.
General Pricing Approaches
In pricing a product, the price that a company will charge will generally not be lower than the
cost and not higher than the consumer’s perception of the product’s value
A. Cost-based pricing. This pricing approach is based on the cost of producing, distributing, and
promoting the product. There are two cost-based pricing approaches:
i. Cost plus pricing is pricing a product by first determining the cost and then adding a markup. The
equation will look like this:
Markup Price = Unit Product Cost
Desired Return on Sale
Note: Desired return on sale will be based on the business objective.
Let us say for example you are producing sugar cookies and found out that the cost of the product
(after adding all the ingredients and other costs) is Php23.50
Markup Price = 23.50 = 29.37
.80

The markup price is P29.37 per unit has been computed. We need to consider our peso
denomination when tagging a price. Thus it will be better to price it at P29.50.
ii. Break-even pricing is pricing a product where there is no loss or gain. Referring to
the above example, the break-even price is Php23.50

B. Competition-based pricing. This pricing approach benchmarks on competitors’

price. This is a simple way of making a pricing decision without doing market
research. The company does not risk losing market share to competition since it
offers substitute products with relatively the same price.
An example would be soda brands pricing 1-liter bottles from P30.00-P35.00

C. Value-based pricing. This pricing approach is setting a price based on the

perceived value of the product. This means coming up with a price that your
customers are willing to pay. Another term for this is opportunity pricing.
An example would be handbags that would be priced as much as Php50,000.00 or
more.
Price Adjustment Strategies
Among the three support Ps, price is the most flexible. This means that price
can be easily changed without much effort. Changing or adjusting the price
should be done with caution since price is the only support P that generates
sales (the equation being Quantity Sold X Price =Sales).
Identified below are the different price adjustment strategies:
a. Discount and allowance pricing. Discount pricing is straight reduction in price
on purchase. An example of discount pricing is practiced by airline companies
where they reward customers who buy within the promo period and would like to
travel within the travel period.
Allowance pricing is for B2B transactions where in a promotional allowance is
offered to a retailer for feature a product in some way. This is done to cover the cost
of distributing the manufacturer’s products. An example is a credit feature of an
online retailer. The feature indicates credit card rewards points if used to purchase
from that online retailer.
b. Segmented pricing. Companies set different prices for a
product to consider behavioral and psychological factors even if
there is on significant difference in production and distribution
cost.
ü Market segments. An example for market segmented pricing
is the discounts given by cinemas for senior citizens, students
and the like.
ü Different location. An example for location segmented
pricing is the different pricing of concert tickets where prices are
high when seated VIP section.
ü Different time. An example for time segmented pricing is the
different time pricing of matinee, gala, and regular shows.
c. Psychological Pricing. This is defined as setting
prices using the customer’s emotional response to
encourage sales.
ü Reference pricing. This refers to how much
consumers anticipated paying for a product in relation to
competition and advertisements
ü Odd-even pricing. This is psychological pricing
method that considers that belief that certain prices or
price ranges are more attractive to buyers. Example:
instead of Php100.00, Php99.95
d. Promotional pricing. Promotional pricing is adjusting
prices to entice customers to buy during the discounted
price offering period.
ü Special event pricing. Special events, like Christmas,
give a reason for promotional pricing.
ü Low-interest financing. Financing schemes
especially during lean times, after Christmas, after school
enrollments are offered for promotional pricing,. An
example 0% interest installment schemes that credit
cards offer.
e. Geographical pricing. This is pricing
based on geographic location. For
example, gasoline prices in Manila are
different from the prices in the province.