CHAPTER 14
Developing
and Pricing
Goods and
Services
McGraw-Hill/Irwin
Copyright © 2015 by the McGraw-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
Laundromats
Source: BusinessWeek Small Biz.
LO 14-1
14-12
ANYTHING YOU CAN DO…
LO 14-1
Products Replacing Products
Starter
Replacer
Replacer’s
Replacement
Future Threat
Friendster
MySpace
Facebook
Quora
Nokia
Blackberry
iPhone
Android
TiVo
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 14-1
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 BarkBox
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
- McDonald’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 B2B
market.
• Industrial goods
include:
- Installations
- Capital items
- Accessory equipment
- Supplies
- Service
14-26
CATEGORIES of INDUSTRIAL
GOODS and SERVICES
LO 14-2
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
- McDonald’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
McDonald’s
$39.9
GE
$37.1
Samsung
$35.0
Toyota
$31.3
Louis Vuitton
$29.9
Source: Forbes, www.forbes.com, accessed November 2014.
LO 14-4
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 and 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
• ModCloth 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 the 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