Unit II: Setting Product and Pricing Strategy:

Concept, product hierarchy, new product development, diffusion process, Product Life
cycle, Product mix strategies.
Pricing Strategy: Pricing concepts for establishing value, Pricing Strategies-Value based,
Cost based, Market based, Competitor based, New product pricing – Price Skimming &
Penetration pricing.

Setting Product and Pricing Strategy:

What are Product Pricing Strategies? (With Examples)
Product Pricing Strategy
Strategy turns pricing into a deliberate process in which the company strategy dictates both the
set of product features, and the value customer’s associate with them. Pricing strategies may
include cost-plus and value-based pricing.
Sometimes setting a price seems so hard that you just want to put a dart board filled with
different prices up on the wall and see what number you hit. Ok, maybe that’s being cavalier
about a topic which makes the difference between a profitable product and one that doesn’t quite
hit the mark in the market. The truth is that product pricing isn’t about just pricing your product
but the strategy involved. You will be much more successful if you use product pricing strategies
as a starting point.
Strategy turns pricing into a deliberate process in which the company strategy dictates both the
set of product features, the value customers associate with them and the brand. In this scenario,
pricing is a natural outcome of the discussion, not a starting point. For example, does your
company create luxury products with a high-end brand? If so, product pricing strategy almost
dictates that you set your price very high to convey the fact that your brand is very exclusive and
that not everyone can afford it. For low cost brands, like Walmart, the product pricing strategy
indicates that you keep your price low and sell on volume.
Common Product Pricing Strategies – Choose Wisely
Cost Plus
Calculate what a product costs then add a markup. This internal method of focusing on pricing
doesn’t really take into account what the value is to the customer, but it’s a way to ensure the
profit that you desire for each unit of the product that is sold. This is not the best product pricing
strategy.
Value-based Pricing
The value-based pricing strategy focuses on what the product is worth to customers. Determining
value-based pricing can be complex. A general rule is that you break down each piece of the
additional value that you provide over and above today’s solutions and then calculate what the
total adds up to. Then you test it with various audiences to see what happens when customers are
faced with a buying decision at that price. If you get stuck, bring in a pricing expert.
Example of Cost Plus vs. Value-based Pricing
Here’s a simple value-based pricing example. You take a small child to a petting zoo, and she
wants to feed the goats. You put a quarter in the goat food dispenser. From a pricing perspective,
there is the cost of the goat food — about two cents. Then there is the amazing value you get
from watching your child grinning as she feeds the goats. You take pictures. It’s so cute. Okay,
what was that worth? $5? $10? You’re going to show this picture at her wedding reception 20
years from now, right? $100? The petting zoo charges you 25 cents. It’s a deal. The petting zoo
is most likely using cost-plus based pricing, when it could charge a much higher amount because
the value of that particular moment is very high for parents.
Now, think of your product and the problem it solves or what it provides to the customer. Does
the customer get to go home earlier at night? Does she not worry about her work so much? If you
sell security software to an IT manager who is then able to manage the software more easily and
work shorter hours, then the value to her may be very high. What value does your product
provide? It isn’t in a list of features; it’s in the benefits (often defined in emotional terms) that
your product provides to your customers. How much is each benefit worth compared to what the
customer does now?

Product hierarchy:
What Is Product Hierarchy? Definition and Hierarchy Levels
Product hierarchies help businesses organize products on a website, at a storefront or even in a
warehouse. Companies use product hierarchies to categorize their inventory and make it easier to
access, track and sell. Understanding this concept and how to implement it can help you apply
the hierarchy method more effectively in the workplace.
In this article, we define product hierarchy, examine its importance and potential benefits to
retail and other types of businesses and explain the levels commonly employed in product
hierarchies.
What is product hierarchy?
Product hierarchy is a method businesses use to categorize their inventory for easier record-
keeping. For example, a retail store might categorize its printers in the following way:
electronics-computer hardware-printers and scanners-laser printers-model number
Businesses may use a hierarchy for multiple products or services or their single core product or
service. A hierarchy can help the customer and the business better understand the structure of its
products and services and how to organize each one and help with product promotion and sales.
Why is a hierarchy important?
Product hierarchy is important because product organization can help businesses with inventory
control and customer experience. A more organized purchasing experience can help customers
quickly locate the products they need according to features and price while exploring competing
products. A hierarchy can also help a company with internal audits, ensuring that each product
exists within the proper parameters.
6 product hierarchy levels
There are typically six levels of product hierarchy. These include:
1. Need
The product need refers to its primary purpose for existing. Product need is the first organization
category and typically encompasses several classes or types of products. For example, fashion,
beauty and personal hygiene products might all be needed. While these kinds of products can
comprise thousands of individual options, their purpose helps unify them under a single title for
easier organization and customer recognition.
2. Family
A family of products typically refers to the core need each product satisfies for its customers. A
family can comprise several variations of products or services that fulfill the core needs. For
example, communication is a core need that computers and mobile devices can satisfy. The
family category helps organize products within a broader market and helps differentiate separate
methods for meeting the original core need of the customer.
3. Class
A product class is a category within a company's overarching services. For example, a vehicle
manufacturer might produce personal vehicles to meet the core product need for travel but
categorizes each vehicle by a different class. They might organize each vehicle by titles such as
SUVs, sedans and luxury vehicles. Product class helps a customer choose between certain
specifications. Any vehicle can help a customer travel, but they might need specific safety or
mechanical features only present in a particular vehicle class.
4. Line
Products within a product line typically have similar features or prices. These products exist
within a class of products and offer different options for customers. For example, a vehicle
manufacturer might produce a line of sedans with similar features and pricing but different
names. The product line gives customers additional options for similar features to fully
customize their purchase and get the exact product they want.
5. Type
A product type is an individual product that exists within a product line. This helps to further
differentiate similar products for more specific customer choices. For example, laptops are a
product line of personal computers, but they might offer different types, such as two-in-one
tablet/PC hybrids, compact notebooks and workbooks. Many product types have unique features
that impact the price of the item. Personal computers might have extra memory or a better CPU
within the same category.
6. Unit
A unit is a single product that has no other product types dependent on it. Companies refer to this
as the stock-keeping unit (SKU). Individual units help companies track the stock of each product
type under its class and is eventually what customers take with them after a purchase.
Individual SKUs share the same features and prices as the other SKUs within their product type.
Benefits of creating a hierarchy
Using a hierarchy offers many benefits to multiple stakeholders, including:
 A better user experience for customers: Product hierarchies help organize items and
services so customers can easily access the items they're looking for according to feature,
cost, department or unit.
 Scalable organization for the company: Product hierarchies can provide more scalable
organization for the company's products and services, meaning that as the company
grows and adds more products or services, the organizational system can grow, too.
 Improved search engine optimization for e-commerce platforms: Organizing
products with a hierarchy helps e-commerce sites better optimize pages for search
engines. Better optimization can improve site traffic and sales by enabling pages to
appear in the top results for specific keywords.
 Greater internal organization for the company and its products: A hierarchy helps a
company organize its products into different sections and identify key features that help
distinguish products and services from each other. Effective organization can reduce the
need for audits or reorganizing, saving the organization time and money.
 Improved website architecture, organization and traffic: A well-organized hierarchy
can help a website appear more professional and makes it easier for customers and leads
to locate the products they seek. With more web traffic, the chances of sales increase, and
in doing so increase the company's revenue.
 Enhanced marketing campaigns and customer recognition: Product hierarchies can
also help make products more recognizable and improve the company's product
marketing efforts. Customers learn to recognize company products by class and type,
which can help them remember the product when needed.
 Increased competitive advantage in individual markets: Product hierarchies can help
establish a significant advantage against competitors by focusing on key features, pricing
or the benefits of choosing the company's products. This can help influence customers to
make certain purchasing decisions.
New Product Development
What is new product development?
New Product Development refers to the complete process of bringing a new product to market.
This can apply to developing an entirely new product, improving an existing one to keep it
attractive and competitive, or introducing an old product to a new market.
The emergence of new product development can be attributed to the needs of companies to
maintain a competitive advantage in the market by introducing new products or innovating
existing ones. While regular product development refers to building a product that already has
a proof of concept, new product development focuses on developing an entirely new idea—from
idea generation to development to launch.
The 7 stages of new product development

When it comes to new product development, each journey to a finished product is different.
Although the product development process can vary from company to company, it's possible to
break it down into seven main stages. Let's have a look at them one by one.
1. Idea generation
Idea generation involves brainstorming for new product ideas or ways to improve an existing
product. During product discovery, companies examine market trends, conduct product research,
and dig deep into users' wants and needs to identify a problem and propose innovative solutions.
A SWOT Analysis is a framework for evaluating your Strengths, Weaknesses, Opportunities,
and Threats. It can be a very effective way to identify the problematic areas of your product and
understand where the greatest opportunities lie.
There are two primary sources of generating new ideas. Internal ideas come from different areas
within the company—such as marketing, customer support, the sales team, or the technical
department. External ideas come from outside sources, such as studying your competitors and,
most importantly, feedback from your target audience.
Some methods you can use are:
 Conducting market analysis
 Working with product marketing and sales to check if your product's value is being
positioned correctly
 Collecting user feedback with interviews, focus groups, surveys, and data analytics
 Running user tests to see how people are using your product and identify gaps and room
for improvement
Ultimately, the goal of the idea generation stage is to come up with as many ideas as possible
while focusing on delivering value to your customers.
2. Idea screening
This second step of new product development revolves around screening all your generated ideas
and picking only the ones with the highest chance of success. Deciding which ideas to pursue
and discard depends on many factors, including the expected benefits to your consumers, product
improvements most needed, technical feasibility, or marketing potential.
The idea screening stage is best carried out within the company. Experts from different teams
can help you check aspects such as the technical requirements, resources needed, and
marketability of your idea.
3. Concept development and testing
All ideas passing the screening stage are developed into concepts. A product concept is a detailed
description or blueprint of your idea. It should indicate the target market for your product, the
features and benefits of your solution that may appeal to your customers, and the proposed price
for the product. A concept should also contain the estimated cost of designing, developing, and
launching the product.
Developing alternative product concepts will help you determine how attractive each concept is
to customers and select the one that would provide them the highest value.
Once you’ve developed your concepts, test each of them with a select group of
consumers. Concept testing is a great way to validate product ideas with users before investing
time and resources into building them.
Concepts are also often used for market validation. Before committing to developing a new
product, share your concept with your prospective buyers to collect insights and gauge how
viable the product idea would be in the target market.
4. Marketing strategy and business analysis
Now that you’ve selected the concept, it’s time to put together an initial marketing strategy to
introduce the product to the market and analyze the value of your solution from a business
perspective.
 The marketing strategy serves to guide the positioning, pricing, and promotion of your
new product. Once the marketing strategy is planned, product management can evaluate
the business attractiveness of the product idea.
 The business analysis comprises a review of the sales forecasts, expected costs, and
profit projections. If they satisfy the company’s objectives, the product can move to the
product development stage.
5. Product development
The product development stage consists of developing the product concept into a finished,
marketable product. Your product development process and the stages you’ll go through will
depend on your company’s preference for development, whether it’s agile product development,
waterfall, or another viable alternative.
This stage usually involves creating the prototype and testing it with users to see how they
interact with it and collect feedback. Prototype testing allows product teams to validate design
decisions and uncover any flaws or usability issues before handing the designs to the
development team.
We always test the main features with usability testing, first, to choose the best flow, and second,
to iterate on the flow and make sure it’s clear for the users. After usability testing, we can
finalize the flow and prepare it for the developer handoff.

6. Test marketing
At this stage, it's essential to stay in touch with customers and gather research data to understand
what works and resonates with the target audience and what doesn’t. Results can also be used to
write the copy and the messaging around the launch.
Test marketing involves releasing the finished product to a sample market to evaluate its
performance under the predetermined marketing strategy.
There are two testing methods you can employ:
 Alpha testing is software testing used to identify bugs before releasing the product to the
public
 Beta testing is an opportunity for actual users to use the product and give their feedback
about it
The goal of the test marketing stage is to validate the entire concept behind the new product and
get ready to launch the product.
7. Product launch
A successful product launch is about setting your key results as early as possible, understanding
how to track them, and then figuring out how to use the learnings to make changes or adapt.
At this point, you’re ready to introduce your new product to the market. Ensure your product,
marketing, sales, and customer support teams are in place to guarantee a successful launch and
monitor its performance.
To better understand how to prepare a go-to-market strategy, we spoke to Ganna Kryklii, Senior
Product Marketing Manager at Typeform. Here are some essential elements to consider.
 Customers: Understand who will be making the final purchasing decisions and why they
will be purchasing your product. Create buyer personas and identify their roles,
objectives, and pain points.
 Value proposition: Identify what makes you different from the competition and why
people should choose to buy your product
 Messaging: Determine how you will communicate your product’s value to potential
customers
 Channels: Pick the right marketing channels to promote your products, such as email
marketing, social media, SEO, and more
You will need to constantly track and measure the success of your product launch and make
adjustments if it doesn't achieve the desired goals.

Diffusion Process: In business, diffusion is the process by which a new idea or new product is
accepted by the market. The rate of diffusion is the speed with which the new idea spreads from
one consumer to the next. Adoption is the reciprocal process as viewed from a consumer
perspective rather than distributor; it is similar to diffusion except that it deals with the
psychological processes an individual goes through, rather than an aggregate market process.
Diffusion marketing implications
Throughout the diffusion marketing process, brands use different types of promotions and
advertising methods to appeal to various customer segments. For example, a company that
launches a new virtual reality headset may promote it to innovators and early adopters by
featuring this product in high-tech magazines. Once this product becomes more commonplace,
the company may choose to promote it through retail outlets instead to appeal to laggards and
people in the late majority group.
The types of marketing professionals companies use to appeal to each customer segment may
also vary throughout the diffusion process. Here are some of the most common diffusion
marketing implications associated with different marketing professionals, groups and
departments:
 Brand managers: These professionals are close to the market, which can help increase
consumer trust, but they may have a short-term perspective and limited time if they
represent multiple brands.
 New product managers: Companies who want to focus on new product development
often work with new product managers who can add professionalism to their
organization.
 New product committees: Working with a new product committee can add credibility
and insight into the product design process, which can make marketing easier.
 New product departments: Large companies with extensive portfolios often have an
entire department dedicated to new products, which allows them to focus on design,
development, production and promotions.
 Venture teams: While venture teams are the most expensive to work with, they can
encourage entrepreneurial development, which may result in breakthrough innovations.

Product Life cycle:

What Is the Product Life Cycle?
The term product life cycle refers to the length of time from when a product is introduced to
consumers into the market until it's removed from the shelves. This concept is used by
management and by marketing professionals as a factor in deciding when it is appropriate to
increase advertising, reduce prices, expand to new markets, or redesign packaging. The process
of strategizing ways to continuously support and maintain a product is called product life cycle
management.
KEY TAKEAWAYS
 A product life cycle is the amount of time a product goes from being introduced into the
market until it's taken off the shelves.
 There are four stages in a product's life cycle—introduction, growth, maturity, and
decline.
 A company often incurs higher marketing costs when introducing a product to the market
but experiences higher sales as product adoption grows.
 Sales stabilize and peak when the product's adoption matures, though competition and
obsolescence may cause its decline.
  The concept of product life cycle helps inform business decision-making, from pricing
and promotion to expansion or cost-cutting.

Product mix strategies:

What is a Product Mix Strategy?
A successful product mix strategy enables a company to focus efforts and resources on the
products and product lines within its offerings that have the greatest potential for growth, market
share, and revenue.
Product Line vs. Product Mix?
First, it’s important to note how the product line and the product mix differ.
A product line refers to a product category or brand marketed by a company. Products within a
product line all perform a similar function, offer similar benefits, target similar customers, are
similarly priced, and follow similar distribution channels. Important product line attributes
include line stretching, line filling, line modernization, and line featuring.
A product mix is the total number of product lines and individual products or services offered
by a company. Additionally referred to as product assortment or product portfolio. Product
mixes vary from company to company. Some have multiple product lines with lots of products in
each line. But others are much more limited.
A product mix strategy has four dimensions:

Width Total number of product lines a company offers.

Length Total number of products in a company’s product mix.

Depth Total number of product variations in a product line.

Consistency ___ Indicates how product lines relate to one another.

A company can have multiple product lines with lots of products in each line, but it can only
have one product mix.
Key Product Mix Strategies
There are four key product mix strategies:
1. Expansion: A company increases the number of product lines or depth (i.e., product
variations) within lines.
2. Contraction: A company narrows its product mix to eliminate lower-performing
products or lines or to simplify remaining products or lines.
3. Change an Existing Product: A company improves a current product rather than
creating a completely new product.
4. Product Differentiation: Without modifying the product in any way, a
company positions it as a superior choice to a competitive product.
Additional product mix strategies include:
 Deepening Depth: A company keeps existing lines but expands them.
 Developing New Uses for Existing Products: A company finds and communicates new
uses for current products without disturbing lines or products.
 Trading Up: A company adds a higher-cost product to an existing line to improve brand
image and increase demand for its lower-cost products.
 Trading Down: A company adds a lower-cost product to an existing line of higher-cost
products.

Pricing Strategy:
Choosing the right pricing strategy
1. Cost-plus pricing
Many businesspeople and consumers think that cost-plus pricing, or mark-up pricing, is the only
way to price. This strategy brings together all the contributing costs for the unit to be sold, with a
fixed percentage added onto the subtotal.
Dolansky points to the simplicity of cost-plus pricing: “You make one decision: How big do I
want this margin to be?”
The advantages and disadvantages of cost-plus pricing
Retailers, manufacturers, restaurants, distributors and other intermediaries often find cost-
plus pricing to be a simple, time-saving way to price.
Let’s say you own a hardware store offering a large number of items. It would not be an effective
use of your time to analyze the value to the consumer of each nut, bolt and washer.
Ignore that 80% of your inventory and instead look to the value of the 20% that really
contributes to the bottom line, which may be items like power tools or air compressors.
Analyzing their value and prices becomes a more worthwhile exercise.
The major drawback of cost-plus pricing is that the customer is not taken into consideration. For
example, if you’re selling insect-repellent products, one bug-filled summer can trigger huge
demands and retail stockouts. As a producer of such products, you can stick to your usual cost-
plus pricing and lose out on potential profits or you can price your goods based on how
customers value your product.
2. Competitive pricing
“If I’m selling a product that’s similar to others, like peanut butter or shampoo,” says Dolansky,
“part of my job is making sure I know what the competitors are doing, price-wise, and making
any necessary adjustments.”
That’s competitive pricing strategy in a nutshell.
You can take one of three approaches with competitive pricing strategy:
Co-operative pricing
In co-operative pricing, you match what your competitor is doing. A competitor’s one-
dollar increase leads you to hike your price by a dollar. Their two-dollar price cut leads to the
same on your part. By doing this, you’re maintaining the status quo.
Co-operative pricing is similar to the way gas stations price their products for example.
The weakness with this approach, Dolansky says, “is that it leaves you vulnerable to not making
optimal decisions for yourself because you’re too focused on what others are doing.”
Aggressive pricing
“In an aggressive stance, you’re saying ‘If you raise your price, I’ll keep mine the same,’” says
Dolansky. “And if you lower your price, I’m going to lower mine by more. You’re trying to
increase the distance between you and your competitor. You’re saying that whatever the other
one does, they better not mess with your prices or it will get a whole lot worse for them.”
Clearly, this approach is not for everybody. A business that’s pricing aggressively needs to be
flying above the competition, with healthy margins it can cut into.
The most likely trend for this strategy is a progressive lowering of prices. But if sales volume
dips, the company risks running into financial trouble.
Dismissive pricing
If you lead your market and are selling a premium product or service, a dismissive pricing
approach may be an option.
In such an approach, you price as you wish and do not react to what your competitors are doing.
In fact, ignoring them can increase the size of the protective moat around your market leadership.
Is this approach sustainable? It is, if you’re confident that you understand your customer well,
that your pricing reflects the value and that the information on which you base these beliefs is
sound.
On the flip side, this confidence may be misplaced, which is dismissive pricing’s Achilles’ heel.
By ignoring competitors, you may be vulnerable to surprises in the market.
3. Price skimming
Companies use price skimming when they are introducing innovative new products that have no
competition. They charge a high price at first, then lower it over time.
Think of televisions. A manufacturer that launches a new type of television can set a high price
to tap into a market of tech enthusiasts (early adopters). The high price helps the business recoup
some of its development costs.
Then, as the early-adopter market becomes saturated and sales dip, the manufacturer lowers the
price to reach a more price-sensitive segment of the market.
Dolansky says the manufacturer is “betting that the product will be desired in the marketplace
long enough for the business to execute its skimming strategy.” This bet may or may not pay off.
Risks of price skimming
Over time, the manufacturer risks the entry of copycat products introduced at a lower price.
These competitors can rob all sales potential of the tail-end of the skimming strategy.
There is another earlier risk, at the product launch. It’s there that the manufacturer needs to
demonstrate the value of the high-priced “hot new thing” to early adopters. That kind of success
is not a given.
If your business markets a follow-up product to the television, you may not be able to capitalize
on a skimming strategy. That’s because the innovative manufacturer has already tapped the sales
potential of the early adopters.
4. Penetration pricing
“Penetration pricing makes sense when you’re setting a low price early on to quickly build a
large customer base,” says Dolansky.
For example, in a market with numerous similar products and customers sensitive to price, a
significantly lower price can make your product stand out. You can motivate customers to switch
brands and build demand for your product. As a result, that increase in sales volume may bring
economies of scale and reduce your unit cost.
A company may instead decide to use penetration pricing to establish a technology standard.
Some video console makers (e.g., Nintendo, PlayStation, and Xbox) took this approach, offering
low prices for their machines, Dolansky says, “because most of the money they made was not
from the console, but from the games.”
Penetration pricing makes sense when you’re setting a low price early on to quickly build a large
customer base.
Eric Dolansky
Associate Professor of Marketing, Brock University
Misconceptions of penetration pricing
“Businesspeople think ‘If I sell more, I'll be more successful,’” says Dolansky. “That’s only true
if your margins are sufficiently high. It’s important to remember that penetration pricing serves a
strategic need, that there is a reason why you benefit from greater volumes in and of themselves,
so that selling more units helps attain your goal of making the most profit.”
The risks of penetration pricing
 Your customers may expect constant low prices.
 Price-sensitive customers can be disloyal.
 A price war with your competitors may ensue.
Ask yourself if you can sustain this pricing for the long term without endangering your business.
5. Value-based pricing
In value-based pricing, the perceived value to the customer is primarily based on how well it’s
suited to the needs and wants of each customer.
Dolansky says a company applying value-based pricing can gain an advantage over its
competitors in a couple of ways:
 The price is a better fit with the customer’s perspective.
 The pricing brings more profit, allowing you to acquire more resources and grow your
business.
When a price doesn’t work, the answer isn’t just to lower it, but to determine how it can better
match customer value. That may mean altering the product to better suit the market.
In an ideal world, all entrepreneurs would use value-based pricing, Dolansky says. But
entrepreneurs who sell a commodity-like service or product, such as warehousing or plain
white t-shirts, are more likely to compete on low costs and low prices.
For entrepreneurs offering products that stand out in the market—for example, artisanal
goods, high-tech products or unique services—value-based pricing will help better convey the
uniqueness they’re offering.
How do you set a value-based price? Dolansky provides the following advice for entrepreneurs
who want to determine a value-based price.
 Pick a product that is comparable to yours and find out what the customer pays for it.
 Find ways that your product is different from the comparable product.
 Place a financial value on these differences, add everything that is positive about your
product and subtract any negatives.
 Make sure the value to the customer is higher than your costs.
 Justify the price to customers, which might include reaching out to them.
 For an established market, its current price range will help educate you on customers’
price expectations.
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