MODULE THREE: DESIGNING CUSTOMER VALUE

Characteristics and classifications of products, Product

and service differentiation, Product mix, hierarchy, line
etc, Nature and characteristics of services, Excellence in
services Pricing strategies: Pricing environment, Steps in
price setting, Methods of pricing, Initiating and
responding to price changes.
Shaping the Market Offerings

Products and Services

Product is anything that
can be offered to a
market to satisfy a want
or need, including
physical goods, services,
experiences, events and
ideas.
 Shaping the Market Offerings Concept 1:

Products are anything offered

to a market
They satisfy wants and needs!

They can be:

Tangible Durable Consumer

Intangible Non-Durable Industrial

 Shaping the Market Offerings Concept 1:

A product has different levels

of values
Customer Value can be the:

1. Core benefit
2. Basic Product
3. Expected Product
4. Augmented Product
5. Potential Product
 Levels of a Product
1. Core Product:
This is the basic product and the focus is on the purpose for
which the product is intended. For example, a warm coat
will protect you from the cold and the rain.

2. Generic Product
This represents all the qualities of the product. For a warm
coat this is about fit, material, rain repellent ability, high-
quality etc.

3. Expected Product
This is about all aspects the consumer expects to get when
they purchase a product. That coat should be really warm
and protect from the weather and the wind and be
comfortable when riding a bicycle.
4. Augmented Product
This refers to all additional factors which sets the product
apart from that of the competition. And this particularly
involves brand identity and image. Is that warm coat in
style, its colour trendy and made by a well-known fashion
brand? But also factors like service, warranty and good
value for money play a major role in this.

5. Potential Product
This is about augmentations and transformations that the
product may undergo in the future. For example, a warm
coat that is made of a fabric that is as thin as paper and
therefore light as a feather that allows rain to automatically
slide down.
 Product Classifications

• Can be done in a variety of perspectives

 Consumer-Goods Classification
– Classified on the basis of shopping habits
 Durability and Tangibility
 Industrial-Goods Classification
– Classified in terms of their relative cost and how
they enter the production process.
 Consumer Product
Classification
• Convenience Goods
– Inexpensive, frequently purchased.
– Little effort needed to purchase them.
– Staples, Impulse and emergency goods.
• Shopping Goods
– Not as frequently as convenience products
– Costly
– Consumer does research before purchase.
• Specialty Goods
– Unique features
– Consumer is prepared to pay a premium price.
• Unsought Goods
– Those good that consumers do not know or
– Doesn’t think of buying.
 Durability and Tangibility

• Nondurable Goods
– Tangible goods consumed in one or few uses
– Purchased frequently
– Strategy : availability , low priced , heavily
advertised
• Durable Goods
– Tangible goods that survive many uses
– Require more personal selling and service
– Higher margins and requires seller guarantee
• Services
– Intangible product
– Requires more quality control and credibility
 Industrial-Goods
Classification
• Materials and Parts

Raw Farm
Material Product
s
Manufactured
s
Natural
materials and
parts
Product
s
• Materials and Parts

Raw Farm
Material Product
s
Manufactured
s
Natural
materials and
parts
Product
s
• Materials and Parts

Raw Compon
Material ent
s material
Manufactured Compon
s
materials and
parts
ent
Parts
• Materials and Parts

Raw Compon
Material ent
s material
Manufactured Compon
s
materials and
parts
ent
Parts
• Capital Items
– Installations
– Equipment
• Supplies
– Maintenance and repair items
– Operating supplies
• Business Services
– Maintenance and repair services
– Business advisory services
 Product Differentiation
To be branded, products must be differentiated.
Products can be differentiated on the basis of:
1. Form (appearance)

2. Features (additional benefits)

3. Customization (customer requirements)

 Shaping the Market Offerings Concept 2:

Make your products standout!

4. Performance Quality (operation function)

5. Conformance Quality (production consistency)

6. Durability (operating life)

 Shaping the Market Offerings Concept 2:

Make your products standout!

7. Reliability (chance to malfunction)

8. Reparability (ease of fixing)

9. Style (look and feel)

Design: best way to
differentiate product from
competitors.
 services Differentiation

1. Ordering Ease

2. Delivery

3. Installation
 Shaping the Market Offerings Concept 2:

Make your services

exceptional!
4. Customer Training

5. Customer Consulting

6. Maintenance and Repair

Products and Brand Relationship

Each product can be related to other

products to ensure that a firm is offering and
marketing the optimal set of products

The Product Hierarchy:

The product hierarchy stretches from basic

needs to particular ITEMS that satisfy those
needs. There are six levels of the product
hierarchy:
 Six levels of the product hierarchy

1. Need (basic need)

2. Family (all products that satisfy the need)

3. Class (category of products)

Product Hierarchy:

4. Line (similar function and channel)

5. Type (form of the product)

6. Item (actual item)

1 Need family – the core need that underlies
the existence of a product family. Example :
security .

2 product family – all the product classes

that can satisfy a core need with reasonable
effectiveness. Example : savings and income
.
3 product class – a group of products within
recognized as having a certain functional
coherence . Also known as product category.
Example : financial instruments.
4 product line- a group of product within a product
class that are closely related because they perform a
similar function, are sold to the same customer
groups, are marketed through the same outlets or
channels, or fall within given price ranges. A product
line may be composed of different brands or a single
family brand or individual brand that has been line
extended. Example : life insurance.
5 product type – a group of items within a product line
that share one of several possible forms of the
product, example :term life insurance .
6 Item (also called stock keeping unit or product
variant): a distinct unit within a brand or product line
distinguishable by size , price, appearance, or some
other attribute, Example: ICICI prudential renewable
life insurance.
 Product systems and mixes

product system is a product system

is a group of diverse but related
items that function in a compatible
manner .
For example , PalmOne handheld and
Smartphone product lines come
with attachable products including
headsets, cameras keyboards,
presentation projectors, e-books,
MP3 players, and voice recorders .
 What is product-mix ?

• Set of all product offered for sale by

a company.
• It consist of various product line.
• Any company’s product mix has four
dimension :
1. Width
2. Length
3. Depth
4. Consistency
• Width : Number of different product
lines carries by the company.
• Length : Total number of items in the
product mix of the company.
• Depth : Assortment of size, colour and
models offered in each item of a
product line.
• Consistency : It refers to the
relationship of various product line
either in their end use, production
requirement, distribution
channel or other way.
 of
Hindustan
Unilever
Limited
Home &
Beverage
Personal
s
Care
Personal
Laundry Tea Coffee
Wash

Lux Lifebuoy Rin Wheel Lipton Bru

Surf Brooke
Liril Hamam
excel Bond

Breeze Dove

Pears Rexona

Hair
Skin Care
Care

Sunsilk

Clinic +

Deodora
Oral Care
nts

Pepsode
Close-up Axe Rexona
nt

Fair &
Ponds
Lovely

Vaseline
 Product mixes are characterized by

Width (product lines)

Soap Shampoo Deodorant Ice Cream

Length
(brands)

Depth (variants)

Consistency (relatedness of products)

PRODUCT-MIX DECISION

A. PRODUCT LINE ANALYSIS

Taking decision regarding whether

adding new product line or not,
lengthen the existing product line or
not, analysis of product line is useful.
 50
45
40
35
% 30
contribut 25 sales
ion to 20 profit
sales 15
and 10
5
profit 0
1 2 3 4 5

Product item
B. MARKET PROFILE

Product line manager must review the

position of its company’s product
line against competitors lines.
Product map
is used to show the position of their
items against competitors items.
 C B

HIGH
D B C

X X A
D
MED
B

C X B A
D
LOW

LOW(90) MEDUM HIGH EXTRA

(120) (150) HIGH(180)
 Methods of Extending
Product-Line
• Line stretching : every company’s
product line covers a certain part of
the total possible range, when
company lengthen its product line
beyond current range known as line
stretching.
1. Down-Market Stretch
2. Up-Market Stretch
3. Two-way Stretch
• Line Filling : A firm can lengthen its
product line by adding more items
with in the present range.
 LINE MODERNIZING, FEATURING AND
PRUNING

• Product line need to be modernized.

In rapidly changing product markets,
modernization is continuous.
• The product line manager typically
select one or few items in the line
to feature.
• Product line manager periodically
review the line for deadwood that is
depressing profit.
 Product Mix Pricing
Marketers must modify their price setting logic when the
product is part of a product mix.
Here the firm searchers for a set of prices that
maximizes profits on the total mix. There are six
situations calling for this pricing:
1. Product line pricing
2. Optional feature pricing
3. Captive product pricing
4. Two-part pricing
5. By-product pricing
6. Product bundle pricing
11-7
 Product Mix Pricing Strategies

Pricing Strategies

• Product line pricing takes into

account the cost differences
between products in the line,
customer evaluation of their
features, and competitors’ prices

• Optional features pricing takes into

account optional or accessory
products along with the main
product
11-8
 Product Mix Pricing Strategies

Pricing Strategies

• Captive product pricing involves

products that must be used along
with the main product

• Two-part pricing is where the price

is broken into:
• Fixed fee
• Variable usage fee

11-9
 Co-Branding and Ingredient
Branding
Co branding is the utilization of two or more brands to
name a new product. The ingredient brands help each
other to achieve their aims. The overall
synchronization between the brand pair and the new
product has to be kept in mind.

Example of co-branding - Citibank co-branded with

MTV to launch a co-branded debit card. This card is
beneficial to customers who can avail benefits at
specific outlets called MTV Citibank club.
 Types of Co-branding
Co-branding is of two types: Ingredient co-branding and Composite
co-branding
• Ingredient co-branding implies using a renowned brand as an
element in the production of another renowned brand. This deals
with creation of brand equity for materials and parts that are
contained within other products. The ingredient/constituent
brand is subordinate to the primary brand. For instance - Dell
computers has co-branding strategy with Intel processors. The
brands which are ingredients are usually the company’s biggest
buyers or present suppliers.
• Composite co-branding refers to use of two renowned brand
names in a way that they can collectively offer a distinct
product/ service that could not be possible individually. The
success of composite branding depends upon the favourability of
the ingredient brands and also upon the extent on
complementarities between them.
What is a Service?

A service is any act of performance

that one party can offer another that
is essentially intangible and does not
result in the ownership of anything;
its production may or may not be
tied to a physical product.
 Service Sectors

Private
Government
nonprofit

Business Retail
Manufacturing
 Shaping the Market Offerings Concept 4:

Your service is also your

product!
Services- act or performance, intangible, does not
result in ownership

Characteristics:
1. Intangibility
2. Inseparability
3. Variability
4. Perishability/Storability
 Shaping the Market Offerings Concept 4:

Service Mix
Services and products can be mixed in different ways:

Purely Tangible Hybrid Major Pure

tangible good with service service
good accompany with
ing minor
services goods/
services
 Importance of services

Customers are now more empowered!

They are part of the production process.

Employee satisfaction are as important as customer

satisfaction.
 Service Differentiation
Make yourself stand out through:

1. Customer relationship
2. Marketing excellence
3. Differentiation of service
4. Managing customer expectations
5. Quality of service
Developing Pricing
Strategies and Programs
Gillette Commands a
Price Premium
Synonyms for Price

• Rent • Special
• Tuition assessment
• Fee • Bribe
• Fare • Dues
• Rate • Salary
• Toll • Commission
• Premium • Wage
• Honorarium • Tax
 Pricing
 You pay rent for your apartment,
tuition for your education, and a fee to
your dentist or physician.
 The airline, railways, taxi and bus
companies charge you a fare; the local
utilities call their price a rate; and the
local bank charges you interest for the
money you borrow.
 The guest lecturer is paid an
honorarium and the government official
takes a bribe to pass a file which was
his job anyway.
 Price brings in the revenues

• This is the only element in the

marketing mix that brings in the
revenues. All the rest are costs

• Price communicates the value

positioning of the product.
 Pricing

A firm must set a price for the first

time when
• It develops a new product
• It introduces its regular product into
a new distribution channel or
geographical area
• It enters bids on new contract work (
as in Industrial Sale )
 Pricing

A company must set its price in

relation to the value delivered and
perceived by the customer
Pricing

Company
Lower
Higher misses
perceived
price potential
value
profits
 Pricing

Company
Lower fails to
Lower price perceived harvest
value potential
profits
Price = Cost + Profit
 DETERMINANTS OF PRICING DECISION

EXTERNAL
FACTORS
INTERNAL OTHER
FACTORS OBJECTIVES
Consumer Psychology
and Pricing

Reference Prices

Price-quality inferences

Price endings

Price cues
Steps in Setting Price

Select the price objective

Determine demand

Estimate costs

Analyze competitor price mix

Select pricing method

Select final price

Step 1: Selecting the Pricing
Objective

• Survival
• Maximum
current profit
• Maximum
market share
• Maximum
market
skimming
• Product-
quality
leadership
 2. Determining Demand

Each price will lead to a different

level of demand and have a different
impact on a company’s marketing
objectives.
Demand and price are inversely
related i.e.
Higher the price, lower the demand
Company needs to consider :-
• Price sensitivity
• Price elasticity of demand
 What is price elasticity?

• This determines the changes in

demand with unit change in price
• If there is little or no change in
demand, it is said to be price
inelastic.
• If there is significant change in
demand, then it is said to be price
elastic.
 Demand is likely to be less
elastic when
• There are few or no substitutes
• Buyers readily do not notice the
higher price
• Buyers are slow to change their
buying habits
• Buyers think that the higher prices
are justified
Figure 14.2 Inelastic
and Elastic Demand
 Table 14.3 Factors Leading to
Less Price Sensitivity
• The product is more distinctive
• Buyers are less aware of substitutes
• Buyers cannot easily compare the quality of
substitutes
• The expenditure is a smaller part of buyer’s
total income
• The expenditure is small compared to the
total cost of the end product
• Part of the cost is paid by another party
• The product is used with previously
purchased assets
• The product is assumed to have high quality
and prestige
• Buyers cannot store the product
Step 3: Estimating Costs

Types of Costs
Accumulated
Production
Activity-Based
Cost Accounting
Target Costing
Cost Terms and Production
• Fixed costs
• Variable costs
• Total costs
• Average cost
• Cost at
different levels
of production
Figure 14.4 Cost per Unit as a
Function of Accumulated
Production
9 Lives Uses Target Costing
Step 5
Methods/Approaches to pricing

APPROACHES-
THREE TYPES

COMPETITION
COST BASED BUYER BASED
BASED
METHOD METHOD
METHOD
 COST BASED METHODS

a) Cost-plus Pricing/Markup pricing: Here the

anticipated profit on product being sold is added to
cost of production per unit of the product.
b) Break-even Analysis and Target return Pricing: This
is another cost-oriented pricing approach. Here the
firm tries to determine the price that will produce the
profit it is seeking. It is known as target pricing.
Normally some companies keep 10 to 20 percent
profit on its investment. Target pricing uses the
concept of break-even chart.
Figure 14.6 Break-Even Chart
 BUYER BASED PRICING

Certain Companies base their pricing on the product’s

perceived value. They see the buyer’s perception of
value, not the seller’s cost, as the key to pricing. Here,
seller use non-price variables in the marketing mix to
build up perceived value in the buyer’s minds.
For example a cup of coffee in a self service restaurant
is charged at Rs.5/-, in a restaurant with service at
Rs.8/-, in a family restaurant at Rs.12/-, in a posh area
a/c room at Rs.15 and in 3 star hotel at Rs.20 and in 5
star hotel may be Rs.25/-. So each successive
restaurant can charge more because of the value added
by the atmosphere.
 COMPETITION BASED METHODS

a) Going-rate Pricing: In this case company bases its

price largely on competitors prices, with less attention
paid to its own costs or demand.
b) Sealed-bid Pricing: Pricing to bid for jobs is sealed bid
pricing. The firm bases its price on expectations of how
competitors will price rather than on a rigid relation to
the firm’s costs or demand. The purpose is to win the
contract and therefore pricing, is lower than others.
However firm cannot set the price below a certain
level.
E.g.: Indian Oil Corporation
 Step 6: Selecting the Final Price

• Impact of other
marketing
activities
• Company pricing
policies
• Gain-and-risk
sharing pricing
• Impact of price on
other parties
Price-Adaptation Strategies

Geographical Pricing

Discounts/Allowances

Promotional Pricing

Differentiated Pricing
 Price-Adaptation Strategies

Countertrade Discounts/
• Barter Allowances
• Compensation • Cash discount
deal • Quantity discount
• Buyback • Functional
arrangement discount
• Offset • Seasonal
discount
• Allowance
Promotional Pricing Tactics
• Loss-leader pricing
• Special-event
pricing
• Cash rebates
• Low-interest
financing
• Longer payment
terms
• Warranties and
service contracts
• Psychological
discounting
Differentiated Pricing
• Customer-
segment pricing
• Product-form
pricing
• Image pricing
• Channel pricing
• Location pricing
• Time pricing
• Yield pricing
Initiating and Responding to
price changes

Companies often need to cut

or raise prices.
 Initiating Price cuts

• Excess plant capacity

• Competition
• Aggressive pricing
Increasing Prices

Delayed quotation pricing

Escalator clauses

Unbundling

Reduction of discounts
 Indirect price increases

• Shrinking pack size for same price

• Substituting less expensive raw
materials
• Reducing product features
• Removing product services
• Using less expensive packaging
material
• Reducing the no. of packs and sizes
offered
• Creating new economy brands
 Responding to competitor
price changes
• Maintain price
• Maintain price and add value
• Reduce price
• Increase price and quality
• Launch a low price fighter
 ANY QUESTIONS?
THANK YOU
FOR CO-OPERATION