New Product Development & Pricing Strategies.

Hamdard UniversityHamdard UniversityHamdard UniversityHamdard University
..
2007 - 2010 1Hamdard University Students

Muneeb IqbalMuneeb Iqbal
AdnanAdnan
Dr OwaisDr Owais
Shahid NavedShahid NavedShahid NavedShahid Naved
Ali ShahAli Shah
Haris VakeelHaris Vakeel

NewNew ProductProduct
DevelopmentDevelopment
&&&&
Pricing strategiesPricing strategies

NewNew ProductProduct
DevelopmentDevelopmentDevelopmentDevelopment

DefinitionDefinition
Development of original products,
product improvements, product
modification, and new brandsmodification, and new brands
through the firms own R&D efforts.

New Product DevelopmentNew Product Development
New Products can be obtained viaNew Products can be obtained via
acquisition or developmentacquisition or development
New products suffer from high failureNew products suffer from high failureNew products suffer from high failureNew products suffer from high failure
ratesrates
Several reasons account for failureSeveral reasons account for failure

ImprovingImproving andand updatingupdating
productproduct lineslines isis crucialcrucial forfor thethe
successsuccess forfor anyany organizationorganization..successsuccess forfor anyany organizationorganization..
SWOTSWOT AnalysisAnalysis..

FailureFailure forfor anan organizationorganization
toto changechange couldcould resultresult inin aa
declinedecline inin salessales andand withwithdeclinedecline inin salessales andand withwith
competitorscompetitors racingracing aheadahead..

ProductsProducts gogo throughthrough thethe
stagesstages ofof theirtheir lifecyclelifecyclestagesstages ofof theirtheir lifecyclelifecycle
andand willwill eventuallyeventually havehave
toto bebe replacedreplaced..

TheThe EIGHTEIGHTTheThe EIGHTEIGHT
StagesStages

Idea generationIdea generation
Idea ScreeningIdea Screening
ConceptConcept
Development andDevelopment and
Business AnalysisBusiness Analysis
Product DevelopmentProduct Development
Test MarketingTest Marketing
CommercializationCommercializationDevelopment andDevelopment and
TestingTesting
Marketing StrategyMarketing Strategy
and Developmentand Development
CommercializationCommercialization

Stage 1Stage 1..Idea generationIdea generation
NewNew productproduct ideasideas havehaveNewNew productproduct ideasideas havehave
toto comecome fromfrom somewheresomewhere..
ButBut wherewhere dodo organizationsorganizations
getget theirtheir ideasideas forfor NPD?NPD?

Idea generation sourcesIdea generation sources
Intelligence & Creativity.Intelligence & Creativity.
Within the company i.e. employees.Within the company i.e. employees.Within the company i.e. employees.Within the company i.e. employees.
Competitors.Competitors.
Customers.Customers.
Distributors, Suppliers and others.Distributors, Suppliers and others.

Stage 2.Stage 2.Idea ScreeningIdea Screening
ThisThis processprocess involvesinvolves
shiftingshifting throughthrough thethe ideasideas
generatedgenerated aboveabove andandgeneratedgenerated aboveabove andand
selectingselecting onesones whichwhich areare
feasiblefeasible andand workableworkable toto
developdevelop..2007 - 2010 14Hamdard University Students

Stage 3Stage 3..Concept Development andConcept Development and
TestingTesting
TheThe organizationorganization maymay havehave
comecome acrossacross whatwhat theythey believebelievecomecome acrossacross whatwhat theythey believebelieve
toto bebe aa feasiblefeasible idea,idea, however,however,
thethe ideaidea needsneeds toto bebe takentaken toto thethe
targettarget audienceaudience..

Concept Development andConcept Development and
TestingTesting
What do they think about the idea?What do they think about the idea?
Will it be practical and feasible?Will it be practical and feasible?Will it be practical and feasible?Will it be practical and feasible?
Will it offer the benefit that theWill it offer the benefit that the
organization hopes it will?organization hopes it will?
Have they overlooked certainHave they overlooked certain
issues?issues?

Stage 4Stage 4..Marketing Strategy andMarketing Strategy and
DevelopmentDevelopment
AA proposedproposed marketingmarketing strategystrategy willwill
bebe writtenwritten layinglaying outout thethe marketingmarketingbebe writtenwritten layinglaying outout thethe marketingmarketing
mixmix strategystrategy ofof thethe product,product, thethe
segmentation,segmentation, targetingtargeting andand
positioningpositioning strategystrategy salessales andand
profitsprofits thatthat areare expectedexpected..

Stage 5Stage 5..Business AnalysisBusiness Analysis
TheThe businessbusiness analysisanalysis stagestage lookslooks moremore
deeplydeeply intointo thethe cashcash flowflow thethe productproductdeeplydeeply intointo thethe cashcash flowflow thethe productproduct
couldcould generate,generate, whatwhat thethe costcost willwill be,be,
howhow muchmuch marketmarket sharesshares thethe productproduct
maymay achieveachieve andand thethe expectedexpected lifelife ofof
thethe productproduct..

Stage 6Stage 6..Product DevelopmentProduct Development
ThisThis stagestage isis aa prototypeprototype finallyfinally
producedproduced.. TheThe prototypeprototype willwill clearlyclearlyproducedproduced.. TheThe prototypeprototype willwill clearlyclearly
runrun throughthrough allall thethe desireddesired tests,tests, andand
bebe presentedpresented toto thethe targettarget audienceaudience toto
seesee ifif changeschanges needneed toto bebe mademade..

Stage 7Stage 7..Test MarketingTest Marketing
TestTest marketingmarketing meansmeans testingtesting thethe
productproduct withinwithin aa specificspecific areaarea.. TheThe
productproduct willwill bebe launchedlaunched withinwithin aaproductproduct willwill bebe launchedlaunched withinwithin aa
particularparticular regionregion soso thethe marketingmarketing mixmix
strategystrategy cancan bebe monitoredmonitored andand ifif
needed,needed, bebe modifiedmodified beforebefore nationalnational
launchlaunch..

Stage 8Stage 8..CommercializationCommercialization
ThereThere areare certaincertain factorsfactors thatthat needneed
toto bebe takentaken intointo considerationconsiderationtoto bebe takentaken intointo considerationconsideration
beforebefore aa productproduct isis launchedlaunched
nationallynationally..

CommercializationCommercialization
TheThe factorsfactors areare timing,timing, howhow thethe
productproduct willwill bebe launched,launched, wherewhereproductproduct willwill bebe launched,launched, wherewhere
thethe productproduct willwill bebe launched,launched, willwill
therethere bebe aa nationalnational rollroll outout oror willwill itit
bebe regionregion byby region?region?

PricingPricingPricingPricingStrategiesStrategies

Pricing StrategiesPricing Strategies

Penetration PricingPenetration Pricing

Penetration PricingPenetration Pricing
Price set to ‘penetrate the market’Price set to ‘penetrate the market’
‘Low’ price to secure high volumes‘Low’ price to secure high volumes
Typical in mass market productsTypical in mass market products –– chocolatechocolate
bars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.bars, food stuffs, household goods, etc.
Suitable for products with long anticipated lifeSuitable for products with long anticipated life
cyclescycles
May be useful if launching into a new marketMay be useful if launching into a new market

Market SkimmingMarket Skimming

Market SkimmingMarket Skimming
High price, Low volumesHigh price, Low volumes
Skim the profit from theSkim the profit from the
marketmarket
Suitable for products thatSuitable for products that
have short life cycles orhave short life cycles orhave short life cycles orhave short life cycles or
which will face competitionwhich will face competition
at some point in the futureat some point in the future
(e.g. after a patent runs out)(e.g. after a patent runs out)
Examples include:Examples include:
Playstation, jewellery, digitalPlaystation, jewellery, digital
technology, new DVDs, etc.technology, new DVDs, etc.
Plasma screens: Currently at
high prices but for how long?

Product mixProduct mix
PricingPricing
Strategy for setting a product’s price changesStrategy for setting a product’s price changes
when the product is a part of product mixwhen the product is a part of product mix
Five product mix pricing situationsFive product mix pricing situations
1.1. Product line pricingProduct line pricing
2.2. Optional product pricingOptional product pricing
3.3. Captive product pricingCaptive product pricing
4.4. ByBy--product pricingproduct pricing
5.5. Product bundle pricingProduct bundle pricing

Product LineProduct Line
PricingPricing
Companies usually develop product linesCompanies usually develop product lines
rather than single productrather than single product
It is setting price steps between productIt is setting price steps between product
line itemsline itemsline itemsline items
For example Sony offers not just one typeFor example Sony offers not just one type
of television but several lines of televisionsof television but several lines of televisions
each containing many modelseach containing many models
Thus men’s clothing stores might carryThus men’s clothing stores might carry
men’s suits at three price levelsmen’s suits at three price levels

Optional ProductOptional Product
PricingPricing
Offering to sell optional or accessoryOffering to sell optional or accessory
products along with their main productproducts along with their main product
For example a car buyer may choose toFor example a car buyer may choose toFor example a car buyer may choose toFor example a car buyer may choose to
order power windows cruise control, and aorder power windows cruise control, and a
CD changer.CD changer.

Captive ProductCaptive Product
PricingPricing
Companies that make product that must be usedCompanies that make product that must be used
along with the main product are using Captivealong with the main product are using Captive
Product Pricing.Product Pricing.
For Example: HFor Example: H--P makes very low margin on itsP makes very low margin on its
printers but very high margin on printer cartridgesprinters but very high margin on printer cartridgesprinters but very high margin on printer cartridgesprinters but very high margin on printer cartridges
and other supplies.and other supplies.
In case of services this strategy is called twoIn case of services this strategy is called two--partpart
pricing. the price of the service is broken into a fixedpricing. the price of the service is broken into a fixed
fee plus a variable usage rate.fee plus a variable usage rate.
Thus a telephone company charges a monthly rateThus a telephone company charges a monthly rate
(the fixed fee) plus charges for calls beyond some(the fixed fee) plus charges for calls beyond some
minimum numbersminimum numbers

ByBy--ProductProduct
PricingPricing
Setting a price for By Products in order toSetting a price for By Products in order to
make the main product price moremake the main product price more
competitive.competitive.competitive.competitive.

Product BundleProduct Bundle
PricingPricing
Sellers often combines several of theirSellers often combines several of their
products and offer the bundle at a reducedproducts and offer the bundle at a reduced
price.price.
Price bundling can promote the sale ofPrice bundling can promote the sale ofPrice bundling can promote the sale ofPrice bundling can promote the sale of
products consumers might not otherwise buy,products consumers might not otherwise buy,
but the combine price may be low enough tobut the combine price may be low enough to
get them to buy the bundle.get them to buy the bundle.
Thus theatres and sports teams sell seasonThus theatres and sports teams sell season
tickets at less than the cost of single tickets.tickets at less than the cost of single tickets.

Value PricingValue Pricing

Value PricingValue Pricing
Price set in accordancePrice set in accordance
with customerwith customer
perceptions about theperceptions about the
value of thevalue of the
product/serviceproduct/serviceproduct/serviceproduct/service
Examples include statusExamples include status
products/exclusiveproducts/exclusive
productsproducts Companies may be able to set prices
according to perceived value.

Price AdjustmentPrice Adjustment
Segmented PricingSegmented Pricing
Geographic PricingGeographic Pricing
International PricingInternational Pricing
Psycological PricingPsycological PricingPsycological PricingPsycological Pricing
Promotional PricingPromotional Pricing
Discount PricingDiscount Pricing
AllowanceAllowance

Segmented PricingSegmented Pricing
In segmented pricing, the company sells aIn segmented pricing, the company sells a
product or service at two ore more prices evenproduct or service at two ore more prices even
though the difference in prices is not basedthough the difference in prices is not based
on difference in cost.on difference in cost.
1.1. Customer Segment Pricing.Customer Segment Pricing.
2.2. Product Form Pricing.Product Form Pricing.
3.3. Location Pricing.Location Pricing.
4.4. Time Pricing.Time Pricing.

Customer Segment Pricing :Customer Segment Pricing :
Different customers pay different prices for the sameDifferent customers pay different prices for the same
product or services.product or services.
For Example: Museums charge different fee forFor Example: Museums charge different fee for
students and senior citizens.students and senior citizens.
Product Form Pricing :Product Form Pricing :Product Form Pricing :Product Form Pricing :
Different version of the products are pricedDifferent version of the products are priced
differently but not according to difference in theirdifferently but not according to difference in their
costs.costs.
For Instance, Black & Decker prices its mostFor Instance, Black & Decker prices its most
expensive iron at $54.98 which is $12 more than theexpensive iron at $54.98 which is $12 more than the
price of its next most expensive iron.price of its next most expensive iron.

Location Pricing :Location Pricing :
Company charges different prices for differentCompany charges different prices for different
locations even though the cost of offering eachlocations even though the cost of offering each
location is the same.location is the same.
For Instance Theatres varies their seat prices becauseFor Instance Theatres varies their seat prices because
of audience preferences for certain locations.of audience preferences for certain locations.
Time Pricing :Time Pricing :
A firm varies its price by the season, the month, the day, andA firm varies its price by the season, the month, the day, and
even the hour. Public utilities vary their prices to commercialeven the hour. Public utilities vary their prices to commercial
users by time of day and weekend versus weekdays.users by time of day and weekend versus weekdays.
For Instance: the telephone company offers lower offFor Instance: the telephone company offers lower off--peakpeak
charges, and resorts give seasonal discounts.charges, and resorts give seasonal discounts.

Geographic PricingGeographic Pricing
FOB PricingFOB Pricing
Uniform Delivery PricingUniform Delivery Pricing
Zone PricingZone Pricing
Reference Base PricingReference Base PricingReference Base PricingReference Base Pricing
Freight Absorption PricingFreight Absorption Pricing

International PricingInternational Pricing
Uniform PricingUniform Pricing
Pricing according to market objectivePricing according to market objective

Psycological PricingPsycological Pricing
SaleSale
Price Ending in 9Price Ending in 9
Sign posting/Loss LadderSign posting/Loss Ladder
Price Matched GuaranteePrice Matched GuaranteePrice Matched GuaranteePrice Matched Guarantee

Psychological PricingPsychological Pricing

Psychological PricingPsychological Pricing
Used to play on consumer perceptionsUsed to play on consumer perceptions
Classic exampleClassic example -- £9.99 instead of £10.99!£9.99 instead of £10.99!
Links with value pricingLinks with value pricing –– high value goodshigh value goods
priced according to what consumers THINKpriced according to what consumers THINKpriced according to what consumers THINKpriced according to what consumers THINK
should be the priceshould be the price

Loss LeaderLoss Leader

Loss LeaderLoss Leader
Goods/services deliberately sold below cost toGoods/services deliberately sold below cost to
encourage sales elsewhereencourage sales elsewhere
Typical in supermarkets, e.g. at Ramadan, sellingTypical in supermarkets, e.g. at Ramadan, selling
bottles Pepesi of 2 liter at Rs. 20 in the hope thatbottles Pepesi of 2 liter at Rs. 20 in the hope thatbottles Pepesi of 2 liter at Rs. 20 in the hope thatbottles Pepesi of 2 liter at Rs. 20 in the hope that
people will be attracted to the store and buypeople will be attracted to the store and buy
other thingsother things
Purchases of other items more than covers ‘loss’Purchases of other items more than covers ‘loss’
on item soldon item sold
e.g. ‘Free’ mobile phone when taking one.g. ‘Free’ mobile phone when taking on
contract packagecontract package2007 - 2010 48Hamdard University Students

Promotional PricingPromotional Pricing
Special event PricingSpecial event Pricing
Cash rebateCash rebate
Low intrest FinancingLow intrest Financing
Long Warranty/Free MaintanceLong Warranty/Free MaintanceLong Warranty/Free MaintanceLong Warranty/Free Maintance
DiscountDiscount

DicountDicount
Cash DiscountCash Discount
Quantity DiscountQuantity Discount
Trade/ Functional discountTrade/ Functional discount
Seasonal DiscountSeasonal DiscountSeasonal DiscountSeasonal Discount

AllowanceAllowance
Trade in AllowanceTrade in AllowanceTrade in AllowanceTrade in Allowance

Going Rate (Price Leadership)Going Rate (Price Leadership)

Going Rate (Price Leadership)Going Rate (Price Leadership)
In case of price leader, rivals haveIn case of price leader, rivals have
difficulty in competing on pricedifficulty in competing on price –– too hightoo high
and they lose market share, too low andand they lose market share, too low and
the price leader would match price andthe price leader would match price and
force smaller rival out of marketforce smaller rival out of market
May follow pricing leads of rivals especiallyMay follow pricing leads of rivals especiallyMay follow pricing leads of rivals especiallyMay follow pricing leads of rivals especially
where those rivals have a clear dominancewhere those rivals have a clear dominance
of market shareof market share
Where competition is limited, ‘going rate’Where competition is limited, ‘going rate’
pricing may be applicablepricing may be applicable –– banks, petrol,banks, petrol,
supermarkets, electrical goodssupermarkets, electrical goods –– find veryfind very
similar prices in all outletssimilar prices in all outlets

Tender PricingTender Pricing

Tender PricingTender Pricing
Many contracts awardedMany contracts awarded
on a tender basison a tender basis
Firm (or firms) submitFirm (or firms) submit
their price for carryingtheir price for carrying
A European consortium led by Airbus
recently won a contract to supply
refuelling services to the RAF – priced
at £13 billion!
their price for carryingtheir price for carrying
out the workout the work
Purchaser then choosesPurchaser then chooses
which represents bestwhich represents best
valuevalue
Mostly done in secretMostly done in secret

Price DiscriminationPrice Discrimination

Price DiscriminationPrice Discrimination
Charging a differentCharging a different
price for the sameprice for the same
good/service in differentgood/service in different
marketsmarkets
Prices for rail travel differ for the same
journey at different times of the day
Requires each market toRequires each market to
be impenetrablebe impenetrable
Requires different priceRequires different price
elasticity of demand inelasticity of demand in
each marketeach market

Destroyer Pricing/PredatoryDestroyer Pricing/Predatory
PricingPricing

Destroyer Pricing/PredatoryDestroyer Pricing/Predatory
PricingPricing
Deliberate price cuttingDeliberate price cutting
or offer of ‘freeor offer of ‘free
gifts/products’ to forcegifts/products’ to force
rivals (normally smallerrivals (normally smaller
and weaker) out ofand weaker) out of
Microsoft – have been accused of predatory
pricing strategies in offering ‘free’ software as
part of their operating system – Internet
Explorer and Windows Media Player - forcing
competitors like Netscape and Real Player out
of the market.
and weaker) out ofand weaker) out of
business or prevent newbusiness or prevent new
entrantsentrants
AntiAnti--competitive andcompetitive and
illegal if it can be provedillegal if it can be proved

Absorption/Full Cost PricingAbsorption/Full Cost Pricing

Full Cost PricingFull Cost Pricing –– attempting to set price toattempting to set price to
cover both fixed and variable costscover both fixed and variable costs
Absorption Cost PricingAbsorption Cost Pricing –– Price set to ‘absorb’Price set to ‘absorb’
some of the fixed costs of productionsome of the fixed costs of production
Absorption/Full Cost PricingAbsorption/Full Cost Pricing
some of the fixed costs of productionsome of the fixed costs of production

Marginal Cost PricingMarginal Cost Pricing

Marginal costMarginal cost –– the cost of producing ONEthe cost of producing ONE
extra or ONE fewer item of productionextra or ONE fewer item of production
MC pricingMC pricing –– allows flexibilityallows flexibility
Particularly relevant in transport where fixedParticularly relevant in transport where fixed
costs may be relatively highcosts may be relatively high
costs may be relatively highcosts may be relatively high
Allows variable pricing structureAllows variable pricing structure –– e.g. on ae.g. on a
flight from London to New Yorkflight from London to New York –– providingproviding
the cost of the extra passenger is covered, thethe cost of the extra passenger is covered, the
price could be varied a good deal to attractprice could be varied a good deal to attract
customers and fill the aircraftcustomers and fill the aircraft

•Example:
Aircraft flying from Bristol to EdinburghAircraft flying from Bristol to Edinburgh –– Total Cost (including normalTotal Cost (including normal
profit) = £15,000 of which £13,000 is fixed cost*profit) = £15,000 of which £13,000 is fixed cost*
Number of seats = 160, average price = £93.75Number of seats = 160, average price = £93.75
MC of each passenger = 2000/160 = £12.50MC of each passenger = 2000/160 = £12.50
If flight not full, better to offer passengers chance of flying at £12.50 and fillIf flight not full, better to offer passengers chance of flying at £12.50 and fill
the seat than not fill it at all!the seat than not fill it at all!
*All figures are estimates only*All figures are estimates only

Contribution PricingContribution Pricing

Contribution = Selling PriceContribution = Selling Price –– VariableVariable
(direct costs)(direct costs)
Prices set to ensure coverage of variablePrices set to ensure coverage of variable
costs and a ‘contribution’ to the fixed costscosts and a ‘contribution’ to the fixed costs
Contribution PricingContribution Pricing
costs and a ‘contribution’ to the fixed costscosts and a ‘contribution’ to the fixed costs
Similar in principle to marginal cost pricingSimilar in principle to marginal cost pricing
BreakBreak--even analysis might be useful in sucheven analysis might be useful in such
circumstancescircumstances

Target PricingTarget Pricing

Setting price to ‘target’ a specified profit levelSetting price to ‘target’ a specified profit level
Estimates of the cost and potential revenue atEstimates of the cost and potential revenue at
different prices, and thus the breakdifferent prices, and thus the break--even have toeven have to
be made, to determine the markbe made, to determine the mark--upup
Target PricingTarget Pricing
be made, to determine the markbe made, to determine the mark--upup
MarkMark--up = Profit/Cost x 100up = Profit/Cost x 100

CostCost--Plus PricingPlus Pricing

Calculation of the average cost (AC) plus a markCalculation of the average cost (AC) plus a mark
upup
AC = Total Cost/OutputAC = Total Cost/Output
CostCost--Plus PricingPlus Pricing

Influence of ElasticityInfluence of Elasticity

Any pricing decision must be mindful ofAny pricing decision must be mindful of
the impact of price elasticitythe impact of price elasticity
The degree of price elasticity impacts onThe degree of price elasticity impacts on
the level of sales and hence revenuethe level of sales and hence revenue
the level of sales and hence revenuethe level of sales and hence revenue
Elasticity focuses on proportionateElasticity focuses on proportionate
(percentage) changes(percentage) changes
PED = % Change in QuantityPED = % Change in Quantity
demanded/% Change in Pricedemanded/% Change in Price

Price Inelastic:Price Inelastic:
% change in Q < % change in P% change in Q < % change in P
e.g.e.g. a 5% increase in price would be met by aa 5% increase in price would be met by a
fall in sales of something less than 5%fall in sales of something less than 5%
fall in sales of something less than 5%fall in sales of something less than 5%
Revenue would riseRevenue would rise
A 7% reduction in price would lead to a rise inA 7% reduction in price would lead to a rise in
sales of something less than 7%sales of something less than 7%
Revenue would fallRevenue would fall

Price Elastic:Price Elastic:
% change in quantity demanded > % change in% change in quantity demanded > % change in
priceprice
e.g.e.g. A 4% rise in price would lead to sales fallingA 4% rise in price would lead to sales falling
e.g.e.g. A 4% rise in price would lead to sales fallingA 4% rise in price would lead to sales falling
by something more than 4%by something more than 4%
Revenue would fallRevenue would fall
A 9% fall in price would lead to a rise in sales ofA 9% fall in price would lead to a rise in sales of
something more than 9%something more than 9%
Revenue would riseRevenue would rise

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