Chapter 14 Developing and Pricing Goods and Services

Chapter 14 Developing and Pricing Goods and Services Mc. Graw-Hill/Irwin Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Chapter Fourteen LEARNING GOALS 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

Chapter Fourteen LEARNING GOALS 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

Profile MARY BARRA General Motors • Senior vice president of global product development, Barra is GM’s highest-ranking woman. • With a team of over 36, 000 members, she manages global strategic product alliances. • GM is working to gain market share in highly competitive segments like small fuel efficient cars. 14 -4

Chapter Fourteen NAME that COMPANY It’s no secret that the airline industry is extremely competitive and many airlines have cut basic services like free baggage and food. In order to set itself apart from its competitors, this company takes a different path by offering door -to-door limousine service and in-flight massages. Name that company! 14 -5

Product Development and the Total Product Offer DEVELOPING VALUE LG 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

Product Development and the Total Product Offer LG 1 PRODUCTS CONSUMERS WON’T GIVE UP • Internet service • Cell phone service • Cable television • Discount apparel • Haircuts and coloring • Fast-food Source: www. bigresearch. com. 14 -7

Product Development and the Total Product Offer LG 1 PRODUCTS “EXPENDABLE” by SPENDING CUTS • Luxury handbags • Satellite radio • Specialty apparel • High-end cosmetics • Facials Source: www. bigresearch. com. 14 -8

Distributed Product Development LG 1 DISTRIBUTED PRODUCT DEVELOPMENT • 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 -9

Developing a Total Product Offer LG 1 DEVELOPING a TOTAL PRODUCT • 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 -10

Developing a Total Product Offer LG 1 PRODUCT INNOVATION DURING the GREAT DEPRESSION Year Product 1929 Electric Razors 1930 Car Radios 1930 Supermarkets 1933 Chocolate Chip Cookies 1933 Laundromats Source: Business. Week Small Biz. 14 -11

Developing a Total Product Offer ANYTHING YOU CAN DO… Products Replacing Products LG 1 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 Cell Phones Playstation Wii Xbox Kinect Apple TV Source: Newsweek, February 21, 2011. 14 -12

Developing a Total Product Offer LG 1 POTENTIAL COMPONENTS of a TOTAL PRODUCT OFFER 14 -13

QUALITY and SUSTAINABILITY (Thinking Green) • Trident Seafoods assures fish sustainability by staying well within catch limits. • One part of its sustainability practices is to use all of the fish. That results in fish oil and byproducts used in fertilizer and fishmeal. Photo Courtesy of: Lisa Brunette 14 -14

Product Lines & Product Mix LG 1 UNDERSTANDING PRODUCT LINES • 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

Product Lines & Product Mix The PRODUCT MIX LG 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

Product Differentiation DIFFERENTIATING PRODUCTS LG 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 -17

Marketing Different Classes of Consumer Goods and Services LG 2 CLASSIFYING CONSUMER GOODS and SERVICES • Convenience Goods and Services -- Products consumers purchase frequently with minimal effort. These include: - Candy and snacks - Gas - Milk and eggs 14 -18

Marketing Different Classes of Consumer Goods and Services LG 2 CLASSIFYING SHOPPING 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 14 -19

Marketing Different Classes of Consumer Goods and Services LG 2 CLASSIFYING SPECIALTY 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 14 -20

Marketing Different Classes of Consumer Goods and Services LG 2 SPECIALTY GOODS AREN’T JUST for HUMANS • 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 Source: Entrepreneur, June 2010. 14 -21

Marketing Different Classes of Consumer Goods and Services LG 2 CLASSIFYING UNSOUGHT 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 Photo Courtesy of: Paul Chenoweth 14 -22

Marketing Different Classes of Consumer Goods and Services LG 2 IDENTIFYING CONSUMER GOODS CLASSIFICATIONS • 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 -23

Marketing Different Classes of Consumer Goods and Services LG 2 ODD PRODUCT IDEAS that WERE SUCCESSFUL • 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 -24

Marketing Industrial Goods and Services LG 2 CLASSIFYING INDUSTRIAL GOODS and SERVICES • 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 -25

Progress Assessment 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. 14 -26

Packaging Changes the Product USES of PACKAGING LG 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 -27

Packaging Changes the Product LG 3 SOME KEY FUNCTIONS of PACKAGING 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 -28

The Growing Importance of Packaging BUNDLING LG 3 • 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 Courtesy of: Joey Day 14 -29

Branding and Brand Equity UNDERSTANDING BRANDING LG 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 -30

The NAME GAME (Reaching Beyond Our Borders) • With a couple hundred countries on the cyberplatform, choosing the right name is a global issue. • Every once in a while, a successful name is created by accident. Google was supposed to be called Googol. • What would you rename Very Vegetarian if given the chance? Would you want to ask an expert? 14 -31

WHAT’S in a NAME? 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, October 21, 2010. 14 -32

Branding and Brand Equity KEY BRAND CATEGORIES LG 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 Courtesy of: Joe Mudd 14 -33

Branding and Brand Equity KEY BRAND CATEGORIES LG 4 • Generic Goods -- Nonbranded products that sell at a discount compared to manufacturers’ or dealers’ brands. • Knockoff Brands -- Illegal copies of national brands. 14 -34

Generating Brand Equity and Loyalty LG 4 ESTABLISHING BRAND EQUITY and LOYALTY • 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 -35

Generating Brand Equity and Loyalty MOST VALUABLE BRANDS LG 4 Brand Value Apple $57. 4 billion Microsoft $56. 6 billion Coca-Cola $55. 4 billion IBM $43 billion Google $39. 7 billion Mc. Donald’s $35. 9 billion GE $33. 7 billion Marlboro $29. 1 billion Intel $28. 6 billion Nokia $27. 4 billion Source: Forbes, August 30, 2010. 14 -36

Generating Brand Equity and Loyalty LG 4 ORIGINS of AUTOMOBILE SYMBOLS • 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 -37

Generating Brand Equity and Loyalty BUILDING BRAND AWARENESS LG 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 -38

Creating Brand Associations & Brand Management LG 4 BUILDING BRAND ASSOCIATIONS • 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 -39

Progress Assessment PROGRESS ASSESSMENT • 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 -40

The New Product Development Process LG 5 The NEW PRODUCT DEVELOPMENT PROCESS 14 -41

Product Screening & Analysis LG 5 BRINGING NEW PRODUCTS to the MARKET • 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 -42

Product Development and Testing LG 5 BRINGING NEW PRODUCTS to the MARKET • 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 -43

DON’T COME to ME, I’LL COME to YOU (Spotlight on Small Business) • The popularity of food trucks has risen, but it’s no longer just hot dogs and hamburgers: - Clover Food Truck in Boston/Cambridge offers a rotating menu of local organic foods. - Sugar Philly Truck in Philadelphia offers crème brulee hot off the truck. - Dim and Den Sum in Cleveland has some of the best food truck art in America. - Koi Fusion PDX in Portland is one of the few mobile eateries in that town. 14 -44

The Product Life Cycle LG 6 The FOUR STAGES of a PRODUCT LIFE CYCLE • 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 -45

The Product Life Cycle LG 6 SALES and PROFITS DURING the PRODUCT LIFE CYCLE 14 -46

The Product Life Cycle LG 6 PROFITS BEYOND the GRAVE Top Earning Deceased Celebrities in 2010 Celebrity Earnings Year of Death Michael Jackson $275 million 2009 Elvis Presley $60 million 1977 J. R. R. Tolkien $50 million 1973 Charles Shultz $33 million 2000 John Lennon $17 million 1980 Stieg Larsson $15 million 2004 Dr. Seuss $11 million 1991 Albert Einstein $10 million 1955 George Steinbrenner $8 million 2010 Source: Forbes, www. forbes. com, accessed July 2011. 14 -47

Progress Assessment 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 theory of the product life cycle? 14 -48

Competitive Pricing PRICING OBJECTIVES LG 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 -49

Competitive Pricing PRICING STRATEGIES LG 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 -50

Break-Even Analysis USING BREAK-EVEN ANALYSIS LG 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 -51

Other Pricing Strategies PRICING ALTERNATIVES LG 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 -52

Other Pricing Strategies LG 7 PRICING STRATEGIES of RETAILERS • 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 -53

Progress Assessment 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 strategy? • What’s psychological pricing? 14 -54