CHAPTER 14 Developing and Pricing Goods and Services

CHAPTER 14 Developing and Pricing Goods and Services Mc. Graw-Hill/Irwin Copyright © 2015 by the Mc. Graw-Hill Companies, Inc. All rights reserved.

LEARNING OBJECTIVES 1. Describe a total product offer. 2. Identify the various kinds of consumer and industrial goods. 3. Summarize the functions of packaging. 4. Contrast brand, brand name, and trademark, and show the value of brand equity. 14 -2

LEARNING OBJECTIVES 5. Explain the steps in the new-product development process. 6. Describe the product life cycle. 7. Identify various pricing objectives and strategies. 14 -3

KATHY IRELAND Kathy Ireland Worldwide • Began selling crafts door-todoor as a small child. • Toward the end of her modeling career, she started licensing her name to apparel products. • Now she is in the house wares business and bringing in more money than Martha Stewart! 14 -4

NAME that COMPANY You’ve been using my product for years, yet it took over 15 years for it to be accepted in the market. It finally became popular during World War I, and today you’ll find it on your pants, your travel bags, and your hoodie. Who am I and what do I make? 14 -5

DEVELOPING VALUE LO 14 -1 • 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. 14 -6

PRODUCTS CONSUMERS WON’T GIVE UP LO 14 -1 • Internet service • Cell phone service • Cable television • Discount apparel • Haircuts and coloring • Fast-food 14 -7

PRODUCTS “EXPENDABLE” by SPENDING CUTS LO 14 -1 • Luxury handbags • Satellite radio • Specialty apparel • High-end cosmetics • Facials 14 -8

BELLYING UP to SOCIAL MEDIA • Bocktown Beer and Grill is at the front of mobile media marketing. • It holds polls on Facebook and Twitter that let customers pick the beers on tap. • It also uses Tabbedout, a mobile app that allows customers to pay their bill without returning to the bar or giving their card to a server. 14 -9

DISTRIBUTED PRODUCT DEVELOPMENT LO 14 -1 • Distributed Product Development -- The handing off of various parts of your innovation process - often overseas. • The increase in outsourcing has resulted in using multiple organizations separated by cultural, geographic and legal boundaries. 14 -10

DEVELOPING a TOTAL PRODUCT LO 14 -1 • Total Product Offer -- Everything consumers evaluate when deciding whether to buy something. • 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. 14 -11

PRODUCT INNOVATION DURING the GREAT DEPRESSION Year Product 1929 Electric Razors 1930 Car Radios 1930 Supermarkets 1933 Chocolate Chip Cookies 1933 LO 14 -1 Laundromats Source: Business. Week Small Biz. 14 -12

ANYTHING YOU CAN DO… LO 14 -1 Products Replacing Products Starter Replacer’s Replacement Future Threat Friendster My. Space Facebook Quora Nokia Blackberry i. Phone Android Ti. Vo Blockbuster Netflix Apple TV Altavista Yahoo; Ask Google Blekko The Shop Around the Corner Borders Amazon Apple Polaroid Kodak Canon Smartphones Playstation Wii Xbox Kinect Playstation 4 14 -13

POTENTIAL COMPONENTS of a TOTAL PRODUCT OFFER LO 14 -14

UNDERSTANDING PRODUCT LINES LO 14 -1 • Product Line -- A group of products that are physically similar or intended for a similar market. • Product lines often include competing brands like: - Coca-Cola - Diet Coke - Coke Zero - Cherry Coke Photo Courtesy of: Coca-Cola Art Gallery 14 -15

The PRODUCT MIX LO 14 -1 • Product Mix -- The combination of all product lines offered by a manufacturer or service provider. • Product mixes like Procter & Gamble’s can be extensive: - Toothpaste - Cosmetics - Diapers - Batteries - Bar soap 14 -16

SEALING the DEAL • As a Navy Seal, Randy Hetrick found keeping his fitness levels up while in the field was difficult. • He created the TRX out of parachute harnesses. • While earning his MBA, he raised capital to launch Fitness Anywhere. Now, a $50 million company! 14 -17

DIFFERENTIATING PRODUCTS LO 14 -2 • 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 14 -18

CLASSIFYING CONSUMER GOODS and SERVICES LO 14 -2 • Convenience Goods and Services -- Products consumers purchase frequently with minimal effort. These include: - Candy and snacks - Gas - Milk and eggs 14 -19

CLASSIFYING SHOPPING GOODS and SERVICES LO 14 -2 • 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 14 -20

CLASSIFYING SPECIALTY GOODS and SERVICES LO 14 -2 • Specialty Goods and Services -- Products with unique characteristics and brand identity. These include: - Tiffany jewelry - Rolex watches - Lamborghini automobiles - Ritz Carlton Hotels 14 -21

SPECIALTY GOODS AREN’T JUST for HUMANS LO 14 -2 • Would you buy these for your dog? - Wine with custom labels featuring Fido - Doggy day camp and in-home pet care - A bound journal of your pets exploits - Luxury shampoos and hair-care products - A sound system to eliminate pet-unfriendly frequencies - A “dog beer” at the Pawbar - Monthly gifts from Bark. Box Source: Entrepreneur, www. entrepreneur. com, accessed November 2014. 14 -22

CLASSIFYING UNSOUGHT GOODS and SERVICES LO 14 -2 • 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 Photo Credit: Paul Chenoweth 14 -23

IDENTIFYING CONSUMER GOODS CLASSIFICATIONS LO 14 -2 • How would you classify these consumer products? - Beautyrest mattress - Honda Accord - Mc. Donald’s Big Mac - Rolls Royce automobiles - Oreo Cookies - Harvard University degree 14 -24

ODD PRODUCT IDEAS that WERE SUCCESSFUL LO 14 -2 • 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 (even President shaped) clay figures that grew sprouts. 14 -25

CLASSIFYING INDUSTRIAL GOODS and SERVICES LO 14 -2 • Industrial Goods -- Products used in the production of other products and sold in the B 2 B market. • Industrial goods include: - Installations - Capital items - Accessory equipment - Supplies - Service 14 -26

CATEGORIES of INDUSTRIAL GOODS and SERVICES LO 14 -27

TEST PREP • 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. 14 -28

USES of PACKAGING LO 14 -3 • Companies often use packaging to change and improve their basic product. Examples include: - Microwave popcorn - Tuna pouches - Mc. Donald’s green packaging • Good packaging can also make a product more attractive to retailers. 14 -29

SOME KEY FUNCTIONS of PACKAGING LO 14 -3 1) To attract buyers’ attention 2) Protect the goods inside and be tamperproof 3) Be easy to open 4) Describe and give information about the product 5) Explain the product’s benefits 6) Provide warranty information and warnings 7) Give an indication of price, value, and uses 14 -30

LO 14 -3 BUNDLING • Bundling -- Grouping two or more products together and pricing them as a unit. • Virgin Airlines bundles door-to-door limo service and inflight massage with some tickets. • Financial institutions bundle advice with purchases. Photo Credit: Joey Day 14 -31

UNDERSTANDING BRANDING LO 14 -4 • Brand -- Name, symbol, or design that identifies the goods or services and distinguishes them from competitors’ offerings. • Trademark -- A brand that has exclusive legal protection for both its brand name and design. 14 -32

PLAYING the NAME GAME • With a couple hundred countries on the cyber-platform, choosing the right name is a global issue. • Every once in a while, a successful name is created by accident. Häagen-Dazs means nothing! • What would you rename Very Vegetarian if given the chance? Would you want to ask an expert? 14 -33

The NAME GAME Product Name Why? Blackberry The “B” sounds relaxing and the “Y” sounds friendly. Oreo The bookending “O”s mirror the shape of the cookie. Viagra V is for vigor, vitality, virile and victory. Wii The double ii symbolizes two players as does the pronunciation. Source: Bloomberg Businessweek, www. businessweek. com, accessed November 2014. 14 -34

KEY BRAND CATEGORIES LO 14 -4 • 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. Photo Credit: Joe Mudd 14 -35

KEY BRAND CATEGORIES LO 14 -4 • Generic Goods -- Nonbranded products that sell at a discount compared to manufacturers’ or dealers’ brands. • Knockoff Brands -- Illegal copies of national brands. 14 -36

ESTABLISHING BRAND EQUITY and LOYALTY LO 14 -4 • Brand Equity – The value of the brand name and associated symbols. • Brand Loyalty -- The degree to which consumers are satisfied and are committed to further purchases. 14 -37

MOST VALUABLE BRANDS Brand Value (in $millions) Apple $124. 2 Microsoft $63. 0 Google $56. 6 Coca-Cola $56. 1 IBM $47. 9 Mc. Donald’s $39. 9 GE $37. 1 Samsung $35. 0 Toyota $31. 3 Louis Vuitton LO 14 -4 $29. 9 Source: Forbes, www. forbes. com, accessed November 2014. 14 -38

ORIGINS of AUTOMOBILE SYMBOLS LO 14 -4 • Volvo - Symbol for iron • Lamborghini - Company founder’s zodiac sign was Taurus • Volkswagen - Product of an office contest • Porsche - Coat of arms for city and state headquarters Source: World Features Syndicate. 14 -39

BUILDING BRAND AWARENESS LO 14 -4 • 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. 14 -40

BUILDING BRAND ASSOCIATIONS LO 14 -4 • Brand Association -- Linking a brand to other favorable images, like celebrities or a geographic area. • Brand Manager -- Person responsible for a particular brand handles all the elements of the brand’s marketing mix. 14 -41

MADE in AMERICA? LO 14 -4 Home Countries of America’s Favorite Brands Brand Country Budweiser Belgium and Brazil Alka-Seltzer Germany Good Humor Ice Cream UK and Holland 7 -11 Japan Gerber Switzerland Firestone Japan John Hancock Life Canada Frigidaire Sweden Holiday Inn UK 14 -42

TEST PREP • What 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? 14 -43

BRINGING NEW PRODUCTS to the MARKET LO 14 -5 • 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. 14 -44

The NEW-PRODUCT DEVELOPMENT PROCESS LO 14 -5 14 -45

HOW to BRING NEW PRODUCTS to MARKET LO 14 -5 1. Build up slowly - When starting up, don’t go too fast. 2. Design for a single function - Pick one function and make it the best you can. 3. Package it perfectly - “Unboxing” your new buy is the best part. Make it exciting to open. 4. Become a status symbol - Make it something to show off. Source: Fast Company, www. fastcompany. com, accessed November 2014. 14 -46

BRINGING NEW PRODUCTS to the MARKET LO 14 -5 • Concept Testing -- Takes a product idea to consumers to test reactions. • Commercialization -Promoting the product to distributors and retailers and developing the promotional campaign. 14 -47

MAKING the RIGHT CUT • Mod. Cloth sells the work of over 600 independent designers. • Their customer engagement programs help them retain customer loyalty. • Users can submit their own designs, vote on pieces to sell, and seek out style help 24/7. 14 -48

SAME PRODUCTS, MERRIER FEEL • LO 14 -5 Starbucks – Holiday lattes, like gingerbread and eggnog launch in October. • Clif Bar – Your winter hike can include snacks like pecan pie and pumpkin pie. • Kraft – The famous mac and cheese gets the snowman treatment during the holidays. • Pringles – Pop a can of cinnamon and sugar chips by the fire. Source: Bloomberg Businessweek, www. businessweek. com, accessed November 2014. Photo Credit: Joel Kramer 14 -49

The FOUR STAGES of a PRODUCT LIFE CYCLE LO 14 -6 • Product Life Cycle -- A theoretical model of what happens to sales and profits for a product over time. • Product Life Cycle Stages: 1. Introduction 2. Growth 3. Maturity 4. Decline 14 -50

SALES and PROFITS DURING the PRODUCT LIFE CYCLE LO 14 -6 14 -51

PROFITS BEYOND the GRAVE LO 14 -6 Top Earning Deceased Celebrities in 2014 Celebrity Earnings Year of Death Michael Jackson $140 million 2009 Elvis Presley $55 million 1977 Charles Shultz $40 million 2000 Elizabeth Taylor $25 million 2011 Bob Marley $20 million 1981 Marilyn Monroe $17 million 1962 John Lennon $12 million 1980 Albert Einstein $11. 5 million 1955 Bettie Page $9 million 2008 Source: Forbes, www. forbes. com, accessed November 2014. 14 -52

The PRODUCT LIFE CYCLE and the MARKETING MIX LO 14 -6 14 -53

PRODUCT LIFE CYCLE STAGES & SALES, PROFIT, and COMPETITION LO 14 -6 14 -54

TEST PREP • 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 theory of the product life cycle? 14 -55

PRICING OBJECTIVES LO 14 -7 1) Achieving a target return on investment or profit 2) Building traffic 3) Achieving greater market share 4) Creating an image 5) Furthering social objectives both short-run and long-run 14 -56

PRICING STRATEGIES LO 14 -7 • Cost-based pricing measures cost of producing a product including materials, labor, and overhead. • Target Costing – Designing a product that satisfies customers and meets the firm’s targeted profit margins. • Competition-Based Pricing -- A strategy based on what the competition is charging for its products. 14 -57

USING BREAK-EVEN ANALYSIS LO 14 -7 • 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. 14 -58

HOW to FIND the BREAK-EVEN POINT LO 14 -7 • The break-even point equals the total fixed costs (FC) divided by the price of one unit (P) minus the variable cost of one unit (VC). BEP = FC/P - VC • If you have a fixed cost of $200, 000, a variable cost of $2 per item, and you sell your product for $4 each, what would be your BEP? 14 -59

PRICING ALTERNATIVES LO 14 -7 • 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. 14 -60

PRICING STRATEGIES of RETAILERS LO 14 -7 • High-Low Pricing -- Using regular prices that are higher than EDLP stores 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. 14 -61

TEST PREP • List two short-term and two long-term pricing objectives. Can the two be compatible? • What are the limitations of a cost-based pricing strategy? • What is psychological pricing? 14 -62