CHAPTER 14 Developing and Pricing Goods and Services McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc All rights reserved 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 14-2 LEARNING OBJECTIVES Explain the steps in the new-product development process Describe the product life cycle 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 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 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: Introduction Growth Maturity 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 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 ... DEPRESSION Source: BusinessWeek Small Biz LO 14-1 14-12 ANYTHING YOU CAN DO… LO 14-1 Products Replacing Products 14-13 POTENTIAL COMPONENTS of a TOTAL PRODUCT OFFER LO 14-1 14-14 UNDERSTANDING PRODUCT... 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