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

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. LEARNING GOALS Chapter Fourteen 14-2

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

Profile Senior vice president of global product development, Barra is GM’s highest-ranking woman. MARY BARRA General Motors 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

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! NAME that COMPANY Chapter Fourteen 14-5

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 14-6

Internet service Cell phone service Cable television Discount apparel Haircuts and coloring Fast-food PRODUCTS CONSUMERS WON’T GIVE UP Source: LG1 Product Development and the Total Product Offer 14-7

Luxury handbags Satellite radio Specialty apparel High-end cosmetics Facials PRODUCTS “EXPENDABLE” by SPENDING CUTS Source: LG1 Product Development and the Total Product Offer 14-8

Distributed Product Development Distributed Product Development -- The handing off of various parts of your innovation process - often overseas. DISTRIBUTED PRODUCT DEVELOPMENT The increase in outsourcing has resulted in using multiple organizations separated by cultural, geographic and legal boundaries. LG1 14-9

Developing a Total Product Offer Total Product Offer -- Everything consumers evaluate when deciding whether to buy something. DEVELOPING a TOTAL PRODUCT 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. LG

PRODUCT INNOVATION DURING the GREAT DEPRESSION Source: BusinessWeek Small Biz. LG1 Developing a Total Product Offer 14-11

ANYTHING YOU CAN DO… Products Replacing Products Source: Newsweek, February 21, LG1 Developing a Total Product Offer 14-12

POTENTIAL COMPONENTS of a TOTAL PRODUCT OFFER LG1 Developing a Total Product Offer 14-13

Trident Seafoods assures fish sustainability by staying well within catch limits.Trident Seafoods 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. QUALITY and SUSTAINABILITY (Thinking Green) Photo Courtesy of: Lisa Brunette 14-14

Product Lines & Product Mix Product Line -- A group of products that are physically similar or intended for a similar market. UNDERSTANDING PRODUCT LINES LG1 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 Mix -- The combination of all product lines offered by a manufacturer or service provider. Product mixes like Procter & Gamble’s can be extensive:Procter & Gamble  Toothpaste  Cosmetics  Diapers  Batteries  Bar soap The PRODUCT MIX LG1 Product Lines & Product Mix 14-16

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 LG

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 LG

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 Marketing Different Classes of Consumer Goods and Services 14-19

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 Marketing Different Classes of Consumer Goods and Services 14-20

Would you buy these for your dog?  Wine with custom labels featuring Fidocustom labels  Doggy day camp and in-home pet care Doggy day camp  A bound journal of your pets exploitsbound journal  Luxury shampoos and hair-care products Luxury shampoos  A sound system to eliminate pet-unfriendly frequenciessound system  A “dog beer” at the PawbarPawbar SPECIALTY GOODS AREN’T JUST for HUMANS LG2 Marketing Different Classes of Consumer Goods and Services Source: Entrepreneur, June

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

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 14-23

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.Garbage Pail Kids 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.Chia Pets ODD PRODUCT IDEAS that WERE SUCCESSFUL LG2 Marketing Different Classes of Consumer Goods and Services 14-24

Marketing Industrial Goods and Services Industrial Goods -- Products used in the production of other products and sold in the B2B market. CLASSIFYING INDUSTRIAL GOODS and SERVICES LG2 Industrial goods include:  Installations  Capital items  Accessory equipment  Supplies  Service 14-25

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 14-26

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 USES of PACKAGING Good packaging can also make a product more attractive to retailers. LG

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 SOME KEY FUNCTIONS of PACKAGING LG3 Packaging Changes the Product 14-28

The Growing Importance of Packaging Bundling -- Grouping two or more products together and pricing them as a unit. BUNDLING Virgin Airlines bundles door-to-door limo service and inflight massage with some tickets. Financial institutions bundle advice with purchases. LG3 Photo Courtesy of: Joey Day 14-29

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

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. Google was supposed to be called Googol. What would you rename Very Vegetarian if given the chance? Would you want to ask an expert? The NAME GAME (Reaching Beyond Our Borders) 14-31

WHAT’S in a NAME? Source: Bloomberg Businessweek, October 21,

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 Branding and Brand Equity Photo Courtesy of: Joe Mudd 14-33

Generic Goods -- Nonbranded products that sell at a discount compared to manufacturers’ or dealers’ brands. Knockoff Brands -- Illegal copies of national brands. KEY BRAND CATEGORIES LG4 Branding and Brand Equity 14-34

Generating 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. ESTABLISHING BRAND EQUITY and LOYALTY LG

MOST VALUABLE BRANDS Source: Forbes, August 30, LG4 Generating Brand Equity and Loyalty 14-36

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 ORIGINS of AUTOMOBILE SYMBOLS Source: World Features Syndicate. LG4 Generating Brand Equity and Loyalty 14-37

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 Generating Brand Equity and Loyalty 14-38

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 Creating Brand Associations & Brand Management 14-39

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? PROGRESS ASSESSMENT 14-40

The New Product Development Process The NEW PRODUCT DEVELOPMENT PROCESS LG

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 Product Screening & Analysis 14-42

Concept Testing -- Takes a product idea to consumers to test reactions. BRINGING NEW PRODUCTS to the MARKET Commercialization -- Promoting the product to distributors and retailers and developing the promotional campaign. LG5 Product Development and Testing 14-43

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. Clover Food Truck  Sugar Philly Truck in Philadelphia offers crème brulee hot off the truck. Sugar Philly Truck  Dim and Den Sum in Cleveland has some of the best food truck art in America. Dim and Den Sum  Koi Fusion PDX in Portland is one of the few mobile eateries in that town. Koi Fusion PDX DON’T COME to ME, I’LL COME to YOU (Spotlight on Small Business) 14-44

The 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 The FOUR STAGES of a PRODUCT LIFE CYCLE LG

SALES and PROFITS DURING the PRODUCT LIFE CYCLE LG6 The Product Life Cycle 14-46

PROFITS BEYOND the GRAVE Top Earning Deceased Celebrities in 2010 Source: Forbes, accessed July LG6 The Product Life Cycle 14-47

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 14-48

Competitive Pricing 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 PRICING OBJECTIVES LG

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. PRICING STRATEGIES LG7 Competitive Pricing 14-50

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 LG

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 LG

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. PRICING STRATEGIES of RETAILERS LG7 Other Pricing Strategies 14-53

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? PROGRESS ASSESSMENT 14-54