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14-1
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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
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