14-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 1414 Developing and Pricing Products (Goods and Services) 14-1

14-2 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Developing and Pricing Products This chapter explores two elements of the Marketing Mix 1.Product 2.Price

14-3 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Product

14-4 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. How Six Products Were First Marketed ProductTechnique Corn Flakes Mail Order Only Ragu Spaghetti Sauce Door-to-Door Tea Wrapped in Silk Bags Perforated Toilet Paper On The Street Noxzema Skin Cream As Sunburn Remedy Tabasco Sauce In Used Cologne Bottles

14-5 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Product Lines & The Product Mix

14-6 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Product Line -- A group of products that are physically similar or intended for a similar market. UNDERSTANDING PRODUCT LINES 14-6 Photo Courtesy of: Coca-Cola Art Gallery Product lines often include competing brands like:   Coca-Cola   Diet Coke   Coke Zero   Cherry Coke

14-7 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The PRODUCT MIX 14-7 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

14-8 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Mickey Mouse’s Product Mix  Theme parks & resorts  ABC Television Network  TV & radio stations  Film studios & production  Video programs & licensing  Consumer products  Publishing

14-9 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. DIFFERENTIATING PRODUCTS 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

14-10 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Classifying Classes of Goods & Services ConsumerConsumer –Purchased for personal consumption or use –Sometimes called B2C Goods Industrial (Business)Industrial (Business) –Purchased for use in production of other products –Sometimes called B2B Goods –Commercial goods

14-11 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Classifying Convenience Goods and Services Convenience Goods and Services -- Products consumers purchase frequently with minimal effort. These include:  Candy and snacks  Gas  Milk and eggs

14-12 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

14-13 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

14-14 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. CLASSIFYING UNSOUGHT GOODS and SERVICES Photo Credit: Paul Chenoweth 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

14-15 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Classifying Classes of Industrial Goods & Services Industrial Goods -- Products used in the production of other products and sold in the B2B market. Industrial goods include:  Capital items  Installations  Accessory equipment  Supplies  Service

14-16 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. CATEGORIES of GOODS and SERVICES 14-16

14-17 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Packaging

14-18 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Some Key Functions of Packaging 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

14-19 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. SOME KEY FUNCTIONS of PACKAGING ) 1) To attract buyers’ attention 2) 2) Protect the goods inside and be tamperproof 3) 3) Be easy to open 4) 4) Describe and give information about the product 5) 5) Explain the product’s benefits 6) 6) Provide warranty information and warnings 7) 7) Give an indication of price, value, and uses

14-20 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. USES of PACKAGING Good packaging can also make a product more attractive to retailers Companies often use packaging to change and improve their basic product. Examples include:   Microwave popcorn   Tuna pouches   McDonald’s green packaging

14-21 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Labeling Regulations Federal Fair Packaging and Labeling Act of 1966 aims at making labels more helpful to consumers by providing useful information. Food and Drug Administration requires food labels to tell how much fat, saturated fat, cholesterol, calories, carbohydrates, protein, trans fats, and vitamins are in each product serving.

14-22 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Branding

14-23 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

14-24 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Brand Categories 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.

14-25 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Brand Categories Generic Goods -- Non-branded products that sell at a discount compared to manufacturers’ or dealers’ brands. Knockoff Brands -- Illegal copies of national brands.

14-26 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Knock-Off Brands Original Swiss made Rolex replicas are as close to the real thing as a replica watch can be. Sometimes even the professional experts are unable to tell the difference from the original Rolex watch. All real Swiss Rolex Replicas should have the following: Full 1-year Warranty Solid 14k or 18k Gold on two-toned models Guaranteed triple-wrapped gold on all-gold models Genuine sapphire crystal - a type of glass that is many times better at resisting scratches than regular glass. The color of the gold looks exactly like a genuine Rolex watch If the retail dealer does not offer this, do not purchase from them! REPLICA \/\/atches BAZAAR!

14-27 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

14-28 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. BUILDING BRAND AWARENESS 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.

14-29 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 and handles all the elements of the brand’s marketing mix.

14-30 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. MOST VALUABLE BRANDS Source: Forbes, accessed November

14-31 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. MADE in AMERICA? Home Countries of America’s Favorite Brands 14-31

14-32 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Classic Product Failures Failure CompanyLoss EdselCorfamVideoDiscPCjr New Coke Premier Ford Motor Co. DuPontRCAIBMCoca-Cola R. J. Reynolds $250 M $100 M $500 M $ 40 M No $ Number

14-33 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Product Life Cycle

14-34 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Product Life Cycle Theoretical model of what happens to sales and profits for a product class over time Four Stages: – –Introduction – –Growth – –Maturity – –Decline

14-35 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Product Life Cycle

14-36 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Pricing

14-37 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Pricing Objectives $ $ROI $ $Building Traffic $ $Market Share $ $Sales $ $Creating Image $ $Social Objectives Cost-Based Demand-Based $ $Target Costing (Price-led costing) $ $Cost is input to development – not outcome Competition-Based – –Price Leadership – –Price Following Pricing in the Service Sector

14-38 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Break-Even Analysis

14-39 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Using Break-Even Analysis Break-Even Analysis -- The process used to determine profitability at various levels of sales. The Break-Even Point (BEP) is where Total Revenue equals Total Costs.

14-40 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. The Product Life Cycle X

14-41 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Break-Even Analysis Break-Even Point Definitions $ $Fixed Costs $ $Variable Costs $ $Total Cost

14-42 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Using Break-Even Analysis 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 Total Costs – Sum of Total Fixed Costs and Variable Costs

14-43 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Break-Even Analysis The Break-Even Point (BEP) equals the total fixed costs (FC) divided by the price of one unit (P) minus the variable cost of one unit (VC). Break-Even Point (units) = Total Fixed Cost (FC) Price (P) – Variable Cost (VC)

14-44 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Breakeven Chart Total Revenue or Total Cost Number of Units

14-45 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Break-Even Analysis Break-Even Point (units) = Total Fixed Cost (FC) Price (P) – Variable Cost (VC) (per unit) (per unit)

14-46 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Breakeven Analysis Total Revenue or Total Cost Number of Units Price = $25.00 VC/Unit = $15.00

14-47 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Break-Even Analysis Break-Even Point = $200,000__________ $25.00 – $15.00 = 20,000 Units

14-48 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Applying Break-Even Analysis

14-49 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Pricing Using Breakeven Analysis Problem Should we charge $2 or $3 per box? Costs Total Fixed Costs$400,000 Costs Total Fixed Costs$400,000 Variable Cost$1 per box Market Research Forecast Company can sell: 290,000 boxes at 210,000 boxes at 210,000 boxes at Breakeven point = total fixed cost price - variable cost price - variable cost (per unit) (per unit) (per unit) (per unit) $2 price: $400,000 = 400,000 units to breakeven $2 - $1 $3 price: $400,000 = 200,000 units to breakeven $3 - $1 Breakeven point = total fixed cost price - variable cost price - variable cost (per unit) (per unit) (per unit) (per unit) $2 price: $400,000 = 400,000 units to breakeven $2 - $1 $3 price: $400,000 = 200,000 units to breakeven $3 - $1 BreakevenAnalysis

14-50 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Pricing Strategies $ $Skimming $ $Penetration $ $EDLP $ $High-Low $ $Bundling $ $Psychological

14-51 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Pricing Market Forces Affect Pricing $ $Ultimately price is determined by: Supply And Demand In The Marketplace $ $Market Price