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*Chapter Fourteen

Developing and Pricing Goods and Services

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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*Product Development and the Total Product Offer

• According to the American Marketing Association, value is a foundation of marketing.

• Value -- Good quality at a fair price.

• Adapting products to new markets is an ongoing challenge.

• Product development is a key activity in any modern business.

DEVELOPING VALUELG1

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• Internet service

• Cell phone service

• Cable television

• Discount apparel

• Haircuts and coloring

• Fast-food

PRODUCTS “UNTOUCHABLE” by SPENDING CUTS

LG1

Product Development and the Total Product Offer

Source: www.bigresearch.com.

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• Luxury handbags

• Satellite radio

• Specialty apparel

• High-end cosmetics

• Facials

PRODUCTS “EXPENDABLE” by SPENDING CUTS

LG1

Product Development and the Total Product Offer

Source: www.bigresearch.com.

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• Let’s Dish and Dream Dinners provides a service where customers prepare meals then bring them home.

HOME COOKING in HALF the TIMESpotlight on Small Business

• The companies provide a place to meet, has supplies and relieves the stress and mess for its customers.

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*Developing a Total Product Offer

• Total Product Offer -- Everything consumers evaluate when deciding whether to buy something.

DEVELOPING a TOTAL PRODUCT

LG1

• Products are evaluated on many different dimensions, both tangible and intangible.

• Marketers must think like and talk to consumers to find out what’s important.

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*POTENTIAL COMPONENTS

of a TOTAL PRODUCT OFFERLG1

Developing a Total Product Offer

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*Product Lines & Product Mix

• Product Line -- A group of products that are physically similar or intended for a similar market.

• Product lines often include competing brands like:

- M&Ms

- Peanut M&Ms

- Mint M&Ms

- Dark Chocolate M&Ms

UNDERSTANDING PRODUCT LINES

LG1

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*Product Lines & Product Mix

• Product Mix -- The combination of all product lines offered by a manufacturer or service provider.

• Product mixes like Proctor & Gamble’s can be extensive:

- Laundry detergent

- Cosmetics

- Diapers

- Potato chips

- Bar soap

The PRODUCT MIX

LG1

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*Product Differentiation

• Product Differentiation -- The creation of real or perceived product differences.

• Marketers use a mix of pricing, advertising and packaging to create different images. Examples include:

- Bottled water

- Aspirin

- Fast-food

- Laundry detergent

- Shampoo

DIFFERENTIATING PRODUCTS

LG2

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*Marketing Different Classes of Consumer Goods and Services

• Convenience Goods and Services -- Products consumers purchase frequently with minimal effort.

• These include:

- Candy and snacks

- Gas

- Milk and eggs

CLASSIFYING CONSUMER GOODS and SERVICES LG2

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*Marketing Different Classes of Consumer Goods and Services

• Shopping Goods and Services -- Products consumers buy only after comparing value, quality, price, and styles. These include:

- Clothes and shoes

- Appliances and furniture

- Childcare

- Home remodeling

CLASSIFYING SHOPPINGGOODS and SERVICES LG2

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*Marketing Different Classes of Consumer Goods and Services

• Specialty Goods and Services -- Products with unique characteristics and brand identity.

• These include:

- Tiffany jewelry

- Rolex watches

- Lamborghini automobiles

- Ritz Carlton Hotels

CLASSIFYING SPECIALTYGOODS and SERVICES LG2

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*Marketing Different Classes of Consumer Goods and Services

• Unsought Goods and Services -- Products consumers aren’t aware of or haven’t thought of buying until they need them. These include:

- Car-towing services

- Funeral services

- Renter’s insurance

CLASSIFYING UNSOUGHTGOODS and SERVICES LG2

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• How would you classify these consumer products?- Beautyrest mattress

- Honda Accord

- McDonald’s Big Mac

- Rolls Royce automobiles

- Oreo Cookies

- Harvard University degree

IDENTIFYING CONSUMER GOODS CLASSIFICATIONS

LG2

Marketing Different Classes of Consumer Goods and Services

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• Pet Rock - For $3.95 you could buy a gift-wrapped rock with eyes and a training manual.

• Garbage Pail Kids - Perhaps the grossest trading cards ever produced.

• Mood Rings - Wildly popular as the changing colors of the ring supposedly measured your mood.

• Chia Pets - Animal shaped clay figures that grew sprouts.

ODD PRODUCT IDEAS that WERE SUCCESSFUL

LG2

Marketing Different Classes of Consumer Goods and Services

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*Marketing Industrial Goods and Services

• Industrial Goods -- Products used in the production of other products and sold in the B2B market.

• Industrial goods include:

- Installations

- Capital items

- Accessory equipment

- Supplies

- Service

CLASSIFYING INDUSTRIAL GOODS and SERVICES

LG2

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*Packaging Changes the Product

• Companies often use packaging to change and improve their basic product. Examples include:

- Microwave popcorn

- Tuna pouches

- McDonald’s green packaging

COMPANY USES of PACKAGING

LG3

• Good packaging can also make a product more attractive to retailers.

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*Packaging Changes the Product

• To attract buyers’ attention

• Protect the goods inside and be tamperproof

• Describe and provide information about the product

• Explain the product’s benefits

• Provide warranty information and warnings

• Give an indication of price, value, and uses

SOME KEY FUNCTIONS of PACKAGING

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*Branding and Brand Equity

• Brand -- Name, symbol, or design that identifies the goods or services and distinguishes them from competitors’ offerings.

UNDERSTANDING BRANDING

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• Trademark -- A brand that has exclusive legal protection for both its brand name and design.

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*Branding and Brand Equity

• Manufacturers’ Brands – Brand names of manufacturers that distribute products nationally.

• Dealer (Private-Label) Brands -- Products that carry a retailer’s or distributor’s brand name instead of a manufacturer’s.

KEY BRAND CATEGORIES

LG4

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*Branding and Brand Equity

• Generic Goods -- Non-branded products that sell at a discount compared to manufacturers’ or dealers’ brands.

• Knockoff Brands -- Illegal copies of national brands.

KEY BRAND CATEGORIES

LG4

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*Generating Brand Equity and Loyalty

• Brand Equity – The combination of factors (awareness, loyalty, perceived quality, images, and emotions) that people associate with a brand name.

• Brand Loyalty -- The degree to which consumers are satisfied and are committed to further purchases.

ESTABLISHING BRAND EQUITY and LOYALTY

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• Volvo - Symbol for iron

• Lamborghini - Company founder’s was a Taurus

• Volkswagen - Product of an office contest

• Porsche - Coat of arms for city and state headquarters

ORIGINS of AUTOMOBILE SYMBOLS

LG4

Generating Brand Equity and Loyalty

Source: World Features Syndicate. 14-24

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*Generating Brand Equity and Loyalty

• Brand Awareness -- How quickly or easily a given brand name comes to mind when someone mentions a product category.

• Consumers reach a point of brand preference when they prefer one brand over another.

• When consumers reach brand insistence, they will not accept substitute brands.

BUILDING BRAND AWARENESS

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*Generating Brand Equity and Loyalty

• Brand Association -- Linking a brand to other favorable images, like celebrities or a geographic area.

• Brand Manager -- Person responsible for a particular brand and handles all the elements of the brand’s marketing mix.

BUILDING BRAND ASSOCIATIONS

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10 Most Valuable BrandsRankRank ProductProduct Brand Value Brand Value

(Billions)(Billions)

11 Coca-ColaCoca-Cola $67.00$67.00

22 MicrosoftMicrosoft 56.9356.93

33 IBMIBM 56.2056.20

44 GEGE 48.9148.91

55 IntelIntel 32.3232.32

66 NokiaNokia 30.1330.13

77 ToyotaToyota 27.9427.94

88 DisneyDisney 27.8527.85

99 McDonald’sMcDonald’s 27.5027.50

1010 Mercedes-BenzMercedes-Benz 21.8021.80Source: Business Week, August 7, 2006

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Best/Worst/Weirdest Car Brand Names

BestBest WorstWorst WeirdestWeirdest

Lamborghini DiabloLamborghini Diablo Volkswagon ThingVolkswagon Thing FSR Tarpan HonkerFSR Tarpan Honker

Ford MustangFord Mustang Honda That’sHonda That’s Mazda Bongo Friendee/ Mazda Bongo Friendee/

BrawnyBrawny

Mitsubishi ColtMitsubishi Colt Nissan CedricNissan Cedric Isuzu TractorIsuzu Tractor

Pontiac FirebirdPontiac Firebird Toyota ToyopetToyota Toyopet Mitsubishi Delica Space Mitsubishi Delica Space

GearGear

Rolls-Royce Silver Rolls-Royce Silver

ShadowShadow

Corbin SparrowCorbin Sparrow Suzuki Joy PopSuzuki Joy Pop

Dodge Coronet Super BeeDodge Coronet Super BeeSource: FT Weekend, November, 2005

Viral Ads

• Business Week Viral Ads

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*The New Product Development Process

The NEW PRODUCT DEVELOPMENT PROCESS

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• Product Screening -- Reduces the number of new products a firm is working on to focus on the most promising.

• Product Analysis -- Focuses on the cost estimates and sales forecasts to get an idea of potential profitability.

BRINGING NEW PRODUCTS to the MARKET

LG5

The New Product Development Process

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• Concept Testing -- Takes a product idea to consumers to test reactions.

BRINGING NEW PRODUCTS to the MARKET

LG5

The New Product Development Process

• Commercialization -- Promoting the product to distributors and retailers and developing the promotional campaign.

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Product Life Cycle (PLC)

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*The Product Life CycleSALES and PROFITS DURING

the PRODUCT LIFE CYCLELG6

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*PROFITS BEYOND the GRAVE

Top Earning Deceased Celebrities LG6

Celebrity Earnings Year of Death

Elvis Presley $52 Million 1977

Charles Schultz $33 Million 2000

Heath Ledger $20 Million 2008

Albert Einstein $18 Million 1955

Aaron Spelling $15 Million 2006

Dr. Seuss $12 Million 1991

John Lennon $9 Million 1980

The Product Life Cycle

Source: Forbes, www.forbes.com/deadcelebs.

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*Competitive Pricing

• Achieving a target return on investment or profit

• Building traffic

• Achieving greater market share

• Creating an image

• Furthering social objectives both short-run and long-run

PRICING OBJECTIVES

LG7

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*Competitive Pricing

• Cost-based pricing measures cost of producing a product including materials, labor, and overhead.

• Target Costing -- Making the final price of a product an input in the product development process by estimating the selling price consumers will pay.

• Competition-Based Pricing -- A strategy based on what the competition is charging for its products.

PRICING STRATEGIES

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• Choco-Logo saw its costs increase dramatically in one year.

• The company cut back by using less expensive packaging and reducing the size of a box of chocolates.

WHEN SELLING SWEETS GOES SOUR

(Reaching Beyond Our Borders)

• Pricing is a process that’s never simple. You need to maintain high quality while cutting costs.

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*Break-Even Analysis

• Break-Even Analysis -- The process used to determine profitability at various levels of sales. The break-even point is where revenues equals cost.

• Total Fixed Costs -- All costs that remain the same no matter how much is produced or sold.

• Variable Costs -- Costs that change according to the level of production.

USING BREAK-EVEN ANALYSIS

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$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

0

10,0

00

20,0

00

30,0

00

40,0

00

50,0

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Fixed CostTotal CostTotal Revenue

Tota

l R

even

ue o

r Tota

l C

ost

Tota

l R

even

ue o

r Tota

l C

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Number of UnitsNumber of Units

Breakeven Chart

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Pricing Using Breakeven Analysis

ProblemProblem Should we charge $2 or $3 per unit?Should we charge $2 or $3 per unit?

CostsCosts Total Fixed CostsTotal Fixed Costs $400,000$400,000

Variable CostVariable Cost $ 1 per unit$ 1 per unit

Market Market Research Research ForecastForecast

Company can sell: 290,000 boxes at $2 / unitCompany can sell: 290,000 boxes at $2 / unit

210,000 boxes at $3 / unit210,000 boxes at $3 / unit

Breakeven point = Breakeven point = total fixed costtotal fixed cost price - variable cost price - variable cost

(per unit) (per unit) (per unit)(per unit)

$2 price = $2 price = $400,000$400,000 = 400,000 units to = 400,000 units to breakevenbreakeven

$2 - $1$2 - $1

$3 price = $3 price = $400,000$400,000 = 200,000 units to = 200,000 units to breakevenbreakeven

$3 - $1$3 - $1

Breakeven point = Breakeven point = total fixed costtotal fixed cost price - variable cost price - variable cost

(per unit) (per unit) (per unit)(per unit)

$2 price = $2 price = $400,000$400,000 = 400,000 units to = 400,000 units to breakevenbreakeven

$2 - $1$2 - $1

$3 price = $3 price = $400,000$400,000 = 200,000 units to = 200,000 units to breakevenbreakeven

$3 - $1$3 - $1

BreakevenBreakeven

AnalysisAnalysis

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*Other Pricing Strategies

• Skimming Price Strategy -- Pricing new products high to recover costs and make high profits while competition is limited.

• Penetration Price Strategy -- Pricing products low with the hope of attracting more buyers and discouraging other companies from competing in the market.

• Everyday Low Pricing (EDLP) -- Setting prices lower than competitors with no special sales.

PRICING ALTERNATIVES

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*Other Pricing Strategies

• High-Low Pricing -- Using regular prices that are higher than EDLP except during special sales when they are lower.

• Psychological Pricing -- Pricing products at price points that make a product seem less expensive than it is.

PRICING STRATEGIES of RETAILERS

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People Behind Product Innovation

• Liquid Paper – an American Secretary– Liquid Paper History

• Paper Clip – a Norwegian Patent Clerk• Fax Machine – a Scottish Clock Maker• Pencil Sharpener – French Mathematician?

– John Lee Love

• Ballpoint pen – a Hungarian Journalist– Ballpoint pen

• Eraser Head – English Chemist Source: World Features Syndicate

Review Only

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*Profile

• Ratan Tata introduced the $2,500 “People’s Car” in 2008.

• Tata Motors is part of the growing auto market in India - possibly the future’s largest market.

RATAN TATAThe Tata Group

• Tata expanded in 2008 by purchasing Jaguar and Range Rover from Ford.

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*PRODUCT INNOVATION DURING

the GREAT DEPRESSIONLG1

Developing a Total Product Offer

Source: BusinessWeek Small Biz.

Year Product

1929 Electric Razors

1930 Car Radios

1930 Supermarkets

1933 Chocolate Chip Cookies

1933 Laundromats

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• Timberland (U.S.A.) is putting a carbon label on its products.

• Tesco (U.K.) puts carbon labels on all products - including grocery bags.

• China and India, though, are building coal-powered plants and expanding car-use.

• The focus on climate change varies from country to country.

COULDN’T YOU MAKE a SMALLER FOOTPRINT?

(Thinking Green)

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*Progress Assessment

• List two short-term and two long-term pricing objectives. Can the two be compatible?

• What are the limitations of a cost-based pricing system?

• What’s psychological pricing?

PROGRESS ASSESSMENT

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*Progress Assessment

• What value enhancers may be included in a total product offer?

• What’s the difference between a product line and a product mix?

• Name the four classes of consumer goods and services and give examples of each.

• Describe three different types of industrial goods.

PROGRESS ASSESSMENT

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*Progress Assessment

• What six functions does packaging now perform?

• What’s the difference between a brand name and a trademark?

• Explain the difference between a manufacturers’ brand, a dealer brand, and a generic brand.

• What are the key elements of brand equity?

PROGRESS ASSESSMENT

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*Progress Assessment

• What are the six steps in the new-product development process?

• What’s the difference between product screening and product analysis?

• What are the two steps in commercialization?

• What’s the theory of the product life cycle?

PROGRESS ASSESSMENT

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