1. Developing and Pricing Goods and Services
CHAPTER 14
Developing and Pricing Goods and Services
McGraw-Hill/Irwin
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.

2. LEARNING OBJECTIVES Describe a total product offer.
Identify the various kinds of consumer and industrial goods.
Summarize the functions of packaging.
Contrast brand, brand name, and trademark, and show the value of brand equity.
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3. LEARNING OBJECTIVES
Explain the steps in the new-product development process.
Describe the product life cycle.
Identify various pricing objectives and strategies.
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4. KATHY IRELAND Kathy Ireland Worldwide
Began selling crafts door-to- door 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!
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5. 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?
Company: Whitcomb Judson and the zipper
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6. DEVELOPING VALUE
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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.
See Learning Goal 1: Describe a total product offer.
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7. PRODUCTS CONSUMERS WON’T GIVE UP
LO 14-1
Internet service
Cell phone service
Cable television
Discount apparel
Haircuts and coloring
Fast-food
See Learning Goal 1: Describe a total product offer.
Products Consumers Won’t Give Up
This slide profiles some of the goods and services people do not eliminate during a recession.
Ask students: Why are the items listed on the slide considered “untouchables”?
To further the discussion, ask students: What items do you consider to be “untouchable” and why?
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8. PRODUCTS “EXPENDABLE” by SPENDING CUTS
LO 14-1
Luxury handbags
Satellite radio
Specialty apparel
High-end cosmetics
Facials
See Learning Goal 1: Describe a total product offer.
“Expendable” Spending Cuts
This slide shows the flipside of the previous slide and lists items that people are most likely to eliminate.
Ask students to get into groups and discuss: Why are these items “expendable,” but the items on the previous slide are “untouchable”?
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9. 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.
See Learning Goal 1: Describe a total product offer.
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10. 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.
See Learning Goal 1: Describe a total product offer.
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11. 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.
See Learning Goal 1: Describe a total product offer.
The total product offering includes tangible as well as intangible benefits.
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12. PRODUCT INNOVATION DURING the GREAT DEPRESSION
LO 14-1
Year
Product
1929
Electric Razors
1930
Car Radios
Supermarkets
1933
Chocolate Chip Cookies
Laundromats
See Learning Goal 1: Describe a total product offer.
Product Innovation During the Great Depression
The late twenties and thirties are associated with the Great Depression, but the period was also one of great product innovation.
The items on the slide were invented during the Great Depression.
Have students look at the items and ask: Why do you think these items were developed during a time when most Americans had very little discretionary income?
Have students work with a partner or small group to come up with specific reasons they think these products developed.
Source: BusinessWeek Small Biz.
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13. ANYTHING YOU CAN DO… Products Replacing Products
LO 14-1
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
See Learning Goal 1: Describe a total product offer.
Anything You Can Do…
This slides shows that companies that innovated and create new products don’t always remain the market leaders.
Point out that while Apple didn’t introduce cell phones, video recorders or game players, it has become the market leader by listening to consumers and improving these products to meet consumers’ wants and needs.
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14. POTENTIAL COMPONENTS of a TOTAL PRODUCT OFFER
LO 14-1
See Learning Goal 1: Describe a total product offer.
A product can be divided into the physical and the total product. Marketing managers must take the physical and add value to create the total product offer.
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15. 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
See Learning Goal 1: Describe a total product offer.
Photo Courtesy of: Coca-Cola Art Gallery
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16. 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
See Learning Goal 1: Describe a total product offer.
To give students a visual of the products offered by Proctor and Gamble, use their website at and click on the products tab.
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17. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
While earning his MBA, he raised capital to launch Fitness Anywhere. Now, a $50 million company!
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18. DIFFERENTIATING PRODUCTS
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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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
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19. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Location, brand awareness, and image are important in marketing these goods and services.
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20. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Brand name, price, and quality differences are important in marketing these goods and services.
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21. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Purchasers of the items listed on this slide are brand insistent and refuse to accept substitutes.
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22. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Specialty Goods Aren’t Just for Humans:
People are doting on their pets more than ever. These links show just a few things you could buy for your best friend.
Ask students: Would you ever purchase any of these for your pet? Do you have a pet product idea?
Source: Entrepreneur, accessed November 2014.
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23. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Unsought goods and services often rely on personal selling or specialty advertising - like the yellow pages.
Photo Credit: Paul Chenoweth
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24. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Identifying Consumer Goods Classifications
Beautyrest mattress - shopping good
Honda Accord - shopping good
McDonald’s Big Mac - convenience good
Rolls Royce automobiles - specialty good
Oreo Cookies - convenience good
Harvard University degree - specialty good
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25. 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.
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
Odd Product Ideas
Not all successful products necessarily make sense. Take for example the products mentioned on this slide.
To start a discussion on odd product offerings, ask students: What are some other examples of odd products that were successful or unsuccessful?
For more examples of odd products that were not successful go to
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26. 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
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
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27. CATEGORIES of INDUSTRIAL GOODS and SERVICES
LO 14-2
See Learning Goal 2: Identify the various kinds of consumer and industrial goods.
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28. 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.
Some value enhancers that may be included in the total product offering include: brand name, warranty, service, store surroundings, and speed of delivery.
Product line refers to the group of products that are physically similar or intended for a similar market. These products may face similar competition. For example, you can purchase a Diet Coke, Diet Coke with Splenda etc. The product mix is the total of the product lines offered by a particular company. The text uses the example of Procter & Gamble.
The four classes of consumer goods and services include:
Convenience goods and services - candy, gum and milk
Shopping goods and services - clothes, shoes and appliances
Specialty goods and services - fur coats, imported chocolates and business consultants
Unsought goods and services - burial service, insurance and emergency drain cleaning
Capital items are expensive products that last a long time. Accessory equipment consists of capital items that are not quite as long-lasting or expensive as installations and include computers, copy machines, and various tools.
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29. 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
See Learning Goal 3: Summarize the functions of packaging.
Good packaging can also make a product more attractive to retailers.
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30. SOME KEY FUNCTIONS of PACKAGING
LO 14-3
To attract buyers’ attention
Protect the goods inside and be tamperproof
Be easy to open
Describe and give information about the product
Explain the product’s benefits
Provide warranty information and warnings
Give an indication of price, value, and uses
See Learning Goal 3: Summarize the functions of packaging.
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31. BUNDLING
LO 14-3
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.
See Learning Goal 3: Summarize the functions of packaging.
Photo Credit: Joey Day
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32. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
Recognized trademarks include the Nike Swoosh, the Pillsbury Doughboy, and Apple’s Apple.
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33. 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?
See Learning Goal 7: Identify various pricing objectives and strategies.
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34. 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.
See Learning Goal 7: Identify various pricing objectives and strategies.
The Name Game
Product names are not decided on lightly.
Many companies seek professional advice regarding corporate identity.
Source: Bloomberg Businessweek, accessed November 2014.
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35. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
Manufacturers’ brand examples - Ford, Microsoft, Xerox
Dealer brand example - Kenmore from Sears
Photo Credit: Joe Mudd
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36. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
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37. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
Brand equity is the combination of factors (awareness, loyalty, perceived quality, images, and emotions) that people associate with a brand name.
Examples: Coca-Cola and Ziploc have strong brand equity.
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38. MOST VALUABLE BRANDS Brand Value (in $millions) Apple $124.2 Microsoft
LO 14-4
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
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
Most Valuable Brands
This slide lists the 10 most valuable brands according to Forbes.
As you can see, six of the most valuable brands are tech companies.
Source: Forbes, accessed November 2014.
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39. 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
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
Origins of Automobile Symbols
This slide presents the origins of car symbols.
Ask the students: How important is the name and symbol of a product? What aspects should be considered in the naming process? (Most students should suggest that the name of your product is very important, because it represents your company, tells the customers what the product is, and it should mean something.)
Given that there are so many models of cars in so many different countries, naming cars becomes a very complex process. Should only one name be used in all countries or different names for the same model in different countries?
Source: World Features Syndicate.
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40. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
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41. 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.
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
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42. MADE in AMERICA? Home Countries of America’s Favorite Brands
LO 14-4
Brand
Country
Budweiser
Belgium and Brazil
Alka-Seltzer
Germany
Good Humor Ice Cream
UK and Holland
7-11
Japan
Gerber
Switzerland
Firestone
John Hancock Life
Canada
Frigidaire
Sweden
Holiday Inn UK
See Learning Goal 4: Contrast brand, a brand name, and trademark and show the value of brand equity.
Made in America?
This slide lists 9 of the U.S.’ favorite brands that are now owned by companies in other countries.
Ask students if they’re surprised these all-American products aren’t actually “American” anymore or if they know of other products that can be placed on this list.
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43. 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?
The functions packaging performs include: (1) attract the buyer’s attention, (2) protect the goods inside, (3) be easy to open, (4) describe and give information, (5) explain the benefits of the good inside, (6) provide information on warranties, warnings and other consumer matters, and (7) give some indication of price, value, and uses.
Brand names consist of a word, letter or group of words or letters that set it apart from other goods and services. A trademark is a brand that has exclusive legal protection for both its brand name and design.
A manufacturers’ brand represents manufacturers that distribute their products nationally such as Xerox or Dell. A dealer brand is often referred to as a private label and will not carry the manufacturers name, but rather carries the name of the distributor instead. For example, Kenmore is a dealer brand sold via Sears. A generic brand is the name of an entire product category.
Brand equity is the value of the brand name and associated symbols. The elements of brand equity include: brand loyalty, brand awareness, and brand association.
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44. 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.
See Learning Goal 5: Explain the role of brand managers and the steps of the new-product development process.
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45. The NEW-PRODUCT DEVELOPMENT PROCESS
See Learning Goal 5: Explain the role of brand managers and the steps of the new-product development process.
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46. HOW to BRING NEW PRODUCTS to MARKET
LO 14-5
Build up slowly - When starting up, don’t go too fast.
Design for a single function - Pick one function and make it the best you can.
Package it perfectly - “Unboxing” your new buy is the best part. Make it exciting to open.
Become a status symbol - Make it something to show off.
See Learning Goal 5: Explain the role of brand managers and the steps of the new-product development process.
How to Bring New Products to Market
This list was created by Tony Fadell, developer of the iPod, and touches on what he learned while at Apple.
Ask students: Why are elements like building up slowly and designing for a single function important? Do you want your products to be multifunctional or do one thing?
Source: Fast Company, accessed November 2014.
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47. 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.
See Learning Goal 5: Explain the role of brand managers and the steps of the new-product development process.
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48. 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.
See Learning Goal 6: Describe the product life cycle.
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49. 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.
See Learning Goal 5: Explain the role of brand managers and the steps of the new-product development process.
Just because a product is loved and familiar does not mean it can’t be fresh.
Holiday versions of favorite items help grocery stores in their strongest quarter (October-December).
Photo Credit: Joel Kramer
Source: Bloomberg Businessweek, accessed November 2014.
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50. 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:
Introduction
Growth
Maturity
Decline
See Learning Goal 6: Describe the product life cycle.
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51. SALES and PROFITS DURING the PRODUCT LIFE CYCLE
LO 14-6
See Learning Goal 6: Describe the product life cycle.
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52. PROFITS BEYOND the GRAVE Top Earning Deceased Celebrities in 2014
LO 14-6
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
See Learning Goal 6: Describe the product life cycle.
Profits Beyond the Grave
This slide explores the top earnings of deceased celebrities.
Ask students: Albert Einstein is associated with all things “brainy.” His earnings weren’t generated by sales of any products he invented, so how did his estate bring in $10 million in 2012? (Einstein’s name appears on such things as Baby Einstein products, Chrysler’s Ram brand truck ads, and a collection of A.J. Morgan “geek chic glasses. A new brain videogame for Nintendo DS retails for about $50.
Ask students: What do you think the future earnings of Michael Jackson will be?
Source: Forbes, accessed November 2014.
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53. The PRODUCT LIFE CYCLE and the MARKETING MIX
LO 14-6
See Learning Goal 6: Describe the product life cycle.
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54. PRODUCT LIFE CYCLE STAGES & SALES, PROFIT, and COMPETITION
LO 14-6
See Learning Goal 6: Describe the product life cycle.
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55. 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?
The six steps in the new-product development process include: Idea generation, development, product screenings, testing, product analysis, and commercialization.
During the product screening process the number of new-product ideas a firm is working on is reduced, so that it may focus on the most promising ideas. Product analysis occurs after screening and involves making cost estimates and sales forecasts to get a feeling for the profitability of new- product ideas.
The two steps in commercialization involve promoting the product to distributors and retailers, and the development of strong advertising and sales campaigns.
The product life cycle is a theoretical model which explains what happens to sales and profit for a product over a particular period of time. This model has four stages: introduction, growth, maturity, and decline.
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56. PRICING OBJECTIVES Achieving a target return on investment or profit
LO 14-7
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
See Learning Goal 7: Identify various pricing objectives and strategies.
One strategy many students have experienced but might not fully understand is the loss leader strategy. This strategy is often used around the Thanksgiving holiday when grocery stores offer to sell customers turkeys for much less than their actual cost in an effort to attract consumers into the store. This leads to more traffic and sales of more products.
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57. 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.
See Learning Goal 7: Identify various pricing objectives and strategies.
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58. 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.
See Learning Goal 7: Identify various pricing objectives and strategies.
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59. 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?
See Learning Goal 7: Identify various pricing objectives and strategies.
Answer: 100,000 items.
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60. 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.
See Learning Goal 7: Identify various pricing objectives and strategies.
When Apple introduced the iPhone, they used a skimming price strategy. Walmart has effectively used everyday low pricing or EDLP to dominate the retail sector.
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61. 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.
See Learning Goal 7: Identify various pricing objectives and strategies.
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62. 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?
Short-term pricing objectives include loss leaders and is designed to build traffic as well as achieving greater market share. Long-term pricing objectives include achieving a target return on investment and creating a certain image. It is important that marketing managers set pricing objectives in context of other marketing decisions, since the pricing objectives may differ greatly.
The limit of a cost-based pricing system is that in the long run it is not the producer that establishes price but rather the market place. To effectively establish price, the producer must take into account competitor prices, marketing objectives, actual cost, and the expected cost of product updates.
Psychological pricing involves setting the price of goods or services at price points that make the product appear less expensive. For example, a TV may be priced at $999, since it sounds less expensive than $1,000.
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