1. * * Chapter Fourteen Developing and Pricing Goods and Services Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. * * 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 TATA The Tata Group Tata expanded in 2008 by purchasing Jaguar and Range Rover from Ford. 14-2

3. * * 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 VALUE LG1 14-3

4. * * 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.www.bigresearch.com 14-4

5. * * 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.www.bigresearch.com 14-5

6. * * Let’s Dish and Dream Dinners provides a service where customers prepare meals then bring them home. HOME COOKING in HALF the TIME Spotlight on Small Business The companies provide a place to meet, has supplies and relieves the stress and mess for its customers. 14-6

7. * * 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. 14-7

8. * * PRODUCT INNOVATION DURING the GREAT DEPRESSION LG1 Developing a Total Product Offer Source: BusinessWeek Small Biz. YearProduct 1929Electric Razors 1930Car Radios 1930Supermarkets 1933Chocolate Chip Cookies 1933Laundromats 14-8

9. * * POTENTIAL COMPONENTS of a TOTAL PRODUCT OFFER LG1 Developing a Total Product Offer 14-9

10. * * 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 14-10

11. * * 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 14-11

12. * * 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 14-12

13. * * 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 14-13

14. * * 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 SHOPPING GOODS and SERVICES LG2 14-14

15. * * 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 SPECIALTY GOODS and SERVICES LG2 14-15

16. * * 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 UNSOUGHT GOODS and SERVICES LG2 14-16

17. * * 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 14-17

18. * * 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 14-18

19. * * 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 14-19

20. * * 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 14-20

21. * * 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. 14-21

22. * * 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 LG3 14-22

23. * * Branding and Brand Equity Brand -- Name, symbol, or design that identifies the goods or services and distinguishes them from competitors’ offerings. UNDERSTANDING BRANDING LG4 Trademark -- A brand that has exclusive legal protection for both its brand name and design. 14-23

24. * * 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 14-24

25. * * 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 14-25

26. * * 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 LG4 14-26

27. * * 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. 14-27

28. * * 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) 14-28

29. * * 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 LG4 14-29

30. * * 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 LG4 14-30

31. * * 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 14-31

32. * * The New Product Development Process The NEW PRODUCT DEVELOPMENT PROCESS LG5 14-32

33. * * 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 14-33

34. * * 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. 14-34

35. * * The Product Life Cycle Product Life Cycle -- A theoretical look at what happens to sales and profits for a product over time. Product Life Cycle Stages: 1. Introduction 2. Growth 3. Maturity 4. Decline The FOUR STAGES of a PRODUCT LIFE CYCLE LG6 14-35

36. * * The Product Life Cycle SALES and PROFITS DURING the PRODUCT LIFE CYCLE LG6 14-36

37. * * PROFITS BEYOND the GRAVE Top Earning Deceased Celebrities LG6 CelebrityEarningsYear of Death Elvis Presley$52 Million1977 Charles Schultz$33 Million2000 Heath Ledger$20 Million2008 Albert Einstein$18 Million1955 Aaron Spelling$15 Million2006 Dr. Seuss$12 Million1991 John Lennon$9 Million1980 The Product Life Cycle Source: Forbes, www.forbes.com/deadcelebs.www.forbes.com/deadcelebs 14-37

38. * * 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 14-38

39. * * 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 14-39

40. * * 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 LG7 14-40

41. * * 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. 14-41

42. * * 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 LG7 14-42

43. * * 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 LG7 14-43

44. * * 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 LG7 14-44

45. * * 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 14-45