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1-1McGraw-Hill/IrwinUnderstanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights

Reserved.

Nickels McHugh McHughNickels McHugh McHugh

**Developing Developing and Pricing and Pricing

Products and Products and ServicesServices 14

CH

AP

TE

R*

* *

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Product DevelopmentProduct Development & Value Package& Value Package

• Value/Total Product OfferValue/Total Product Offer

• Product LineProduct Line

• Product MixProduct Mix

• Product DifferentiationProduct Differentiation

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Marketing Different ClassesMarketing Different Classes of Goods & Servicesof Goods & Services

• ConsumerConsumer• ConvenienceConvenience

• ShoppingShopping

• SpecialtySpecialty

• UnsoughtUnsought

• IndustrialIndustrial

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Importance Of PackagingImportance Of Packaging

• ProtectionProtection

• AttractionAttraction

• DescriptionDescription

• Explain BenefitsExplain Benefits

• Information on warranties, warnings, etc.Information on warranties, warnings, etc.

• Indication of price, value, and usesIndication of price, value, and uses

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BrandingBranding

• Brand & Brand & TrademarkTrademark

• CategoriesCategories• Manufacturers’Manufacturers’

• Dealer/PrivateDealer/Private

• Generic Generic

• KnockoffKnockoff

• EquityEquity

• LoyaltyLoyalty

• AwarenessAwareness

• AssociationAssociation

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Characteristics of a Characteristics of a Good Brand NameGood Brand Name

• Short, sweet, and easily pronounced, but flexible and expandable, and does not lend itself to abbreviation

• Unique within its industry and retain its age

• Legally available and defensible

• Good alliteration and linguistically cleanGood alliteration and linguistically clean

• Embraces company personality / brand Embraces company personality / brand portfolioportfolio

Source: The Brand Name Awards 2005

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Best/Worst/Weirdest Best/Worst/Weirdest Car Brand NamesCar Brand Names

BestBest WorstWorst WeirdestWeirdest

Lamborghini DiabloLamborghini Diablo Volkswagon ThingVolkswagon Thing FSR Tarpan HonkerFSR Tarpan Honker

Ford MustangFord Mustang Honda That’sHonda That’s Mazda Bongo Friendee/ Mazda Bongo Friendee/

BrawnyBrawny

Mitsubishi ColtMitsubishi Colt Nissan CedricNissan Cedric Isuzu TractorIsuzu Tractor

Pontiac FirebirdPontiac Firebird Toyota ToyopetToyota Toyopet Mitsubishi Delica Space Mitsubishi Delica Space

GearGear

Rolls-Royce Silver Rolls-Royce Silver

ShadowShadow

Corbin SparrowCorbin Sparrow Suzuki Joy PopSuzuki Joy Pop

Dodge Coronet Super BeeDodge Coronet Super BeeSource: FT Weekend, November, 2005

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Brand Characters: Brand Characters: Are They Real or Fake?Are They Real or Fake?

• Betty CrockerBetty Crocker

• Chef BoyardeeChef Boyardee

• Uncle BenUncle Ben

• Colonel SandersColonel Sanders

• Little DebbieLittle Debbie

FakeFake

RealReal

BothBoth

Real guy, fake rankReal guy, fake rank

RealReal

Source: Fast Company, August 2004

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10 Most Valuable Brands10 Most Valuable BrandsRankRank ProductProduct Brand Value Brand Value

(Billions)(Billions)

11 Coca-ColaCoca-Cola $67.00$67.00

22 MicrosoftMicrosoft 56.9356.93

33 IBMIBM 56.2056.20

44 GEGE 48.9148.91

55 IntelIntel 32.3232.32

66 NokiaNokia 30.1330.13

77 ToyotaToyota 27.9427.94

88 DisneyDisney 27.8527.85

99 McDonald’sMcDonald’s 27.5027.50

1010 Mercedes-BenzMercedes-Benz 21.8021.80Source: Business Week, August 7, 2006

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Top 10 Favorite Top 10 Favorite Mascots of AmericaMascots of America

• M&Ms figures / MarsM&Ms figures / Mars

• Doughboy / General Mills, Smucker’sDoughboy / General Mills, Smucker’s

• Duck / AflacDuck / Aflac

• Tony the Tiger / KelloggTony the Tiger / Kellogg

• Gecko / Berkshire Hathaway’s GeicoGecko / Berkshire Hathaway’s Geico

• Chester the Cheetah / Pepsi’s Frito-LayChester the Cheetah / Pepsi’s Frito-Lay

• Energizer Bunny / Energizer HoldingsEnergizer Bunny / Energizer Holdings

• Kool-Aid Man / Kraft FoodsKool-Aid Man / Kraft Foods

• Trix Rabbit / General MillsTrix Rabbit / General Mills

• Snap, Crackle and Pop / KelloggSnap, Crackle and Pop / KelloggSource: Forbes, January 9, 2006

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New-ProductNew-Product Development ProcessDevelopment Process

1.1.Idea GenerationIdea Generation

2.2.ScreeningScreening

3.3.AnalysisAnalysis

4.4.DevelopmentDevelopment

5.5.TestingTesting

6.6.CommercializeCommercialize

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First Products ProducedFirst Products Produced by Five Major Companiesby Five Major Companies

• Hershey - Caramels Hershey - Caramels

• Amway - No-rinse car washAmway - No-rinse car wash

• Heinz - HorseradishHeinz - Horseradish

• Avon - Little Dot perfume setAvon - Little Dot perfume set

• 3M3M - Sandpaper - Sandpaper

Source: World Features Syndicate

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People Behind People Behind Product InnovationProduct Innovation

• Liquid Paper – an American SecretaryLiquid Paper – an American Secretary

• Paper Clip – a Norwegian Patent ClerkPaper Clip – a Norwegian Patent Clerk

• Fax Machine – a Scottish Clock MakerFax Machine – a Scottish Clock Maker

• Lewis Waterman Fountain Pen – an Lewis Waterman Fountain Pen – an American Insurance SalesmanAmerican Insurance Salesman

• Pencil Sharpener – French MathematicianPencil Sharpener – French Mathematician

• Ballpoint pen – a Hungarian JournalistBallpoint pen – a Hungarian Journalist

• Eraser Head – English Chemist Eraser Head – English Chemist

Source: World Features Syndicate

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Best ProductBest Product Innovation of Innovation of ALLALL Time Time

0% 10% 20% 30% 40% 50% 60% 70%

Automobile

Light Bulb

Telephone

Television

Aspirin

Source: American Demographics

% of Consumers’ Choice% of Consumers’ Choice

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Consumers Attitudes Consumers Attitudes about New Productsabout New Products

Source: USA Today

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Will buy as needed Take a "wait andSee" approach

Will buy early

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Why People Purchase Why People Purchase New ProductsNew Products

0% 10% 20% 30% 40% 50% 60%

Recommendation

TV commercial

Store display

Free sample

Fliers, newspaper coupons

Source: USA Today

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Sales & Profits Sales & Profits During the PLCDuring the PLC

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PricingPricing• ObjectivesObjectives

• ROIROI• TrafficTraffic• Market ShareMarket Share• ImageImage• SocialSocial

• Cost-BasedCost-Based

• Demand-BasedDemand-Based

• Competition-Competition-BasedBased

• Break-EvenBreak-Even• Fixed CostFixed Cost• Variable CostVariable Cost

• StrategiesStrategies• SkimmingSkimming• PenetrationPenetration• EDLPEDLP• High-LowHigh-Low• BundlingBundling• PsychologicalPsychological

• Market ForcesMarket Forces

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What They CostWhat They Cost When First IntroducedWhen First Introduced

1927 1927 Transatlantic CallTransatlantic Call $ 75/3 min.$ 75/3 min.

19471947 Microwave OvenMicrowave Oven $ $ 3,0003,000

19641964 FAX unit rentalFAX unit rental $ $ 850/month850/month

19701970 Pocket CalculatorPocket Calculator $ 150$ 150

19741974 VCR TapeVCR Tape $ $ 5050

Source: World Features Syndicate

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$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

0

10,0

00

20,0

00

30,0

00

40,0

00

50,0

00

Fixed CostTotal CostTotal Revenue

Tota

l R

even

ue o

r Tota

l C

ost

Tota

l R

even

ue o

r Tota

l C

ost

Number of UnitsNumber of Units

Breakeven ChartBreakeven Chart

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Pricing UsingPricing Using Breakeven AnalysisBreakeven Analysis

ProblemProblem Should we charge $2 or $3 per unit?Should we charge $2 or $3 per unit?

CostsCosts Total Fixed CostsTotal Fixed Costs $400,000$400,000

Variable CostVariable Cost $ 1 per unit$ 1 per unit

Market Market Research Research ForecastForecast

Company can sell: 290,000 boxes at $2 / unitCompany can sell: 290,000 boxes at $2 / unit

210,000 boxes at $3 / unit210,000 boxes at $3 / unit

Breakeven point = Breakeven point = total fixed costtotal fixed cost price - variable cost price - variable cost (per unit) (per unit) (per unit)(per unit)

$2 price = $2 price = $400,000$400,000 = 400,000 units to = 400,000 units to breakevenbreakeven

$2 - $1$2 - $1

$3 price = $3 price = $400,000$400,000 = 200,000 units to = 200,000 units to breakevenbreakeven

$3 - $1$3 - $1

Breakeven point = Breakeven point = total fixed costtotal fixed cost price - variable cost price - variable cost (per unit) (per unit) (per unit)(per unit)

$2 price = $2 price = $400,000$400,000 = 400,000 units to = 400,000 units to breakevenbreakeven

$2 - $1$2 - $1

$3 price = $3 price = $400,000$400,000 = 200,000 units to = 200,000 units to breakevenbreakeven

$3 - $1$3 - $1

BreakevenBreakeven

AnalysisAnalysis

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Advanced Advanced Breakeven AnalysisBreakeven Analysis

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Example of aExample of a UPC BarcodeUPC Barcode

12 34567 89012 8

Example only: not a valid UPC barcode