Transcript No Slide Title

INTRODUCTION TO
BUSINESS
University of Management and Technology
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MGT100
Chapter 11:
Developing and Pricing
Products
Griffin, R. W. & Ebert, R. J.
Business (7th ed.)
© 2004 Prentice Hall.
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Learning Objectives
Upon successful completion, the student will be able to:
Identify a product and distinguish between consumer and
industrial products.
Explain the product mix.
Describe the new product development process.
Trace the stages of the product life cycle.
Explain the importance of branding, packaging, and labeling.
Discuss pricing decisions, and pricing strategies and tactics.
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What Is a Product?
A product can be any physical good or a service, or
combination of goods and services.
Products can have various features.
Features are the qualities or attributes that a company
builds into their product.
Features must provide benefits to buyers.
Products can be tangible or intangible.
Sugar is a tangible product: We can touch it.
Political ideas are intangible: We cannot touch them.
But both sugar and political ideas can be marketed.
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What Is a Product?
A value package is product offered for the purpose of
satisfying a want or need in a market exchange.
The value package includes all the attributes, features,
and benefits received by the buyer.
It is fundamental that buyers expect to received greater
value from what they purchase than the price they pay.
A buyer expects a 50¢ candy bar to provide nutritional
and psychological benefits worth more than 50¢.
A key challenge in marketing is to devise value
packages that buyers see as having value, but which
also can be produced and delivered at a profit.
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Classifying Goods and Services
We can classify products according to expected buyers:
Consumer buyers
Industrial buyers
Consumer buyers purchase goods and services for
themselves based on needs. They search for information,
evaluation alternatives, decide on a purchase, and evaluate
their choices post-purchase.
Industrial buyers are professionals who are trained in
methods of negotiating terms and prices.
Industrial buyers are often experts.
Oftentimes they specialize in a single line of items, for example,
they buy only pipes and fittings.
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Classifying Goods and Services
Consumer products are bought by the end-user who expects to
consume or use them.
There a three categories, based on the shopping approach:
Convenience goods and services are those inexpensive items
people buy frequently, without much thought.
Toothpaste, baking potatoes, writing pads, etc.
Shopping goods and services are important, usually expensive
purchases, made infrequently and which require more thought.
Washing machines, a good suit, etc.
Specialty goods and services are important and expensive.
Often the decision has been made in advance and the buyer has
determined there is no acceptable substitute.
 “I’m buying a Rolex!”
The search for value often entails extensive searching.
 “But I’m not paying retail!”
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Classifying Goods and Services
Industrial products are those that are sold to firms.
Industrial products are selected by buyers who base their
selection of goods and services on more objective criteria,
because they must justify purchases to their employers.
They may be classified based on cost and life span as:
Expense items that are relatively inexpensive goods and
services that are generally used within a year of purchase
Capital items that are more expensive goods that have a longer
useful life and usually are depreciated. For capital items buyers
educate themselves about the alternatives, similar to
consumers purchasing shopping goods
Items may also be classified by intended use such as raw
materials, component parts, supplies, equipment,
installations, and business services.
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The Product Mix
A product line is a group of products similar products
intended for a similar group of buyers who will use the
products in the same way.
General Mills’ snack food line includes Bugles, Fruit Roll-Ups,
Sweet Rewards snack bars, and Pop Secret popcorn.
A product mix consists of all the goods or services a
company chooses to offer for sale.
General Mills has a product mix including: cereals, baking
products, desserts, and main meals.
Adding new, but similar products will expand the product mix
and the product line.
Adding new, but dissimilar products will create a new product
line.
Companies often have multiple or diversified product lines.
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The New Product Development
Process
XP
Many companies begin with a single product.
Over time the company realizes they cannot meet
everyone’s needs with one product, so they begin to add
new product variations or new products.
Ultimately, most companies are in a process of continually
adding and dropping products.
The goal is to ensure that they will growth products to replace
products that are declining.
With increasingly fierce global competition and rapidly
shifting consumer tastes, all firms must engage in new
product development in order to survive in the long-term.
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The New Product Development
Process
XP
Product development is a long and expensive process.
New products have high mortality rates.
A few as 2% of new product ideas actually make it to market.
90% of new products fail when introduced to the market.
Speed to Market is critical.
The more rapidly a product moves from the laboratory to the
market, the more likely it is to survive and thrive.
A product that is 3 months behind the market leader loses 12%
of its lifetime profit potential
A product that is 6 months behind the leader loses 33%.
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The Seven-Step Development
Process
XP
The product development process defines a series of stages
through which a product idea passes on its way to market.
The early stages involve intense analysis of the marketplace,
the potential buyers, the company’s capabilities, and the
economic potential of the new idea.
A Market Opportunity Analysis may document these efforts,
serving as a tool to help make a go/no go decision.
A Marketing Plan is more in-depth and includes detailed plans
and financial analyses.
The later stages include prototyping and testing, leading up
to commercialization.
Effective prototyping may be the most valuable competitive
advantage an innovative organization can have.
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The Seven-Step Development
Process
XP
1. Product ideas. Development begins with ideas that satisfy
unmet needs. Customers, competitors, and employees
often are the best source of new-product ideas.
2. Screening. New ideas are judged using broad criteria, such
as whether existing facilities can be used and the risk
involved, to see if they are worthy of further study.
3. Concept testing. Companies use market research to get
consumers' input about product benefits and prices.
4. Business analysis. Based on consumer opinions, marketers
assess costs and benefits to determine if the company can
make enough profits over time to justify the initial
investment.
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The Seven-Step Development
Process
XP
4. Prototype development. Engineering or R&D take the
product concept and create a physical product. This step
can be extremely expensive, for example requiring tooling
and custom parts.
5. Product testing and test marketing. This stage involves
taking a product to market on a limited basis. This step
often requires extensive handcrafting and is expensive.
6. Commercialization. If the tests are postive, a product launch
is needed. The firm must ramp up production and arrange
distribution on a large scale so that products are made
available timely.
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Variations in the Process for
Services
XP
The development of services involves many of the same
stages as goods development: namely 2, 3, 4, 6, and 7.
There are some important differences in steps 1 and 5.
In step 1 the search for ideas includes definition of the
service package, identification of the tangible and intangible
features that characterize the service and its specifications.
In step 5, instead of a prototyping, services undergo a threepart service process design.
Process selection identifies each step in the service in detail.
Worker requirements state the employee behaviors,
knowledge, skills, and abilities, as well as interactions with
customers.
Facilities requirements specify all of the equipment that
supports service delivery.
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Product Life Cycle (PLC)
The product life cycle has four distinct stages in sales and
profits, and different marketing approaches are appropriate
to each.
The product life cycle can describe a product class
(gasoline-powered automobiles), a product form (sports
utility vehicles) or a brand (Ford Explorer).
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Stages in the PLC
Introduction is the first stage. Focus is on stimulating demand. This
stage usually requires large expenditures for R&D, promotion, and
distribution. Seldom is there any profit.
Growth is marked by a rapid jump in sales. Several competitors will
be attracted during this stage, and the war for market share begins.
Growth creates pressure to add new product features and spend
heavily on promotion, often driving weak competitors out.
Maturity occurs when sales begin to level off or show a slight
decline in unit terms. This may result in overcapacity and pricecutting. Mature products are the primary source of profits for most
companies, so they try to keep them alive.
Decline occurs when sales and profits begin to fall. Firms often
stop promoting the product and may reduce support. Declining
products contribute cash to help develop and market new products.
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Stages in the PLC
The figure (a), the
four phrases of the
PLC are applied to
several products
The figure (b) plots
the relationship of
the PLC to a
product’s typical
sales, costs, and
profits.
(a)
(b)
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Extending Product Life: An
Alternative to New Products
XP
Extending a product’s life is a cost-effective alternative to
developing new products.
Foreign markets offer three approaches to extending a product’s
life:
Product Extension—Market globally instead of relying on domestic
sales.
Coca Cola is marketed globally.
Product Adaptation—Modify the product to have greater appeal to
foreign buyers.
Japanese automakers put the steering wheel on the left for sale in the
U.S., while leaving it on the left domestically.
Reintroduction—Take products that are at the end of their life cycle in
one market and introduce them to a new market.
NCR reintroduced manual cash registers in Latin America, when there was
no longer a market for them in the U.S.
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Identifying Products
As we noted earlier, developing a product’s features is only
part of a marketer’s job. Marketers must also identify
products so that consumers recognize them.
Three important tools for this task are
Branding
Packaging
Labeling
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Branding Products
Companies seek to create a brand identity by using a unique
name or design that sets the product apart from those
offered by competitors.
Jeep, Levi’s 501, and KitchenAid are brand names.
McDonald’s golden arches and the Nike swoosh are emblems
(brand marks).
Brand equity is the idea that a brand may have value as an
intangible asset.
A brand provides customers a way of recognizing and
specifying a particular product.
Brand loyalty is a commitment to a particular brand.
Brand awareness means people recognize the brand when
considering a particular product category.
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Branding Products
The table shows the rankings of the top global brands according to
estimates of each brand’s dollar value.
The World’s 10 Most Valuable Brands
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Branding Products
Trademarks are brands that have been given legal protection
so that its owner has the exclusive rights to its use.
Sometimes companies license brands or symbols to help
sell products.
However, if a name becomes too widely used it can lose its
protection under trademark laws.
Cellophane, kerosene, linoleum, and zipper were once brand
names that have become generic terms.
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Types of Brand Names
National brands are products that are widely distributed in a
nation.
Tide, Pampers, Crisco, and Marlboro are national brands.
Licensed brands are established when an organization gives
a manufacturer the right to put their name on products.
The logo “2002 Winter Olympics—Salt Lake City” generated
enormous revenues for the International Olympic Committee,
who licensed it to manufacturers internationally.
Private brands are established when a wholesaler or retailer
purchases products from manufacturers and put a private
name on the products.
Sears’ Craftsman tools and Kenmore appliances are
manufacturered under contract by other companies.
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Types of Brand Names
Family branding uses a brand name on a variety of related
products. This method builds on an established name, which
cuts both the costs and risks associated with introducing
new products.
Cobranding occurs when two or more companies team up to
closely link their names together in a single product.
“Intel Inside” is affixed to computer cases from various
manufacturers that employ Intel processors.
Breyer’s coffee ice cream was reintroduced with Starbuck’s
coffee to create a co-brand.
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Packaging and Labeling Products
Packaging is an essential part of the product itself.
Packaging protects the product from damage or tampering,
contains the product, promotes product benefits,
communicates with buyers, and may add convenience.
Packaging may assist the retailer in attracting attention to
the product and in preventing theft.
Graphic designers work to make packages that attract the eye
of shoppers.
The bubble package, for instance, makes theft of small
products more difficult.
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Packaging and Labeling Products
Labeling is an integral part of packaging.
Labeling of food, drugs, and cosmetics is regulated under
the federal Food, Drug, and Cosmetic Act of 1938, which
monitors the accuracy of information on labels.
The Fair Packaging and Labeling Act of 1966 requires that
labels carry the product name, the name and address of the
manufacturer or distributor, and the net quantity.
The Nutrition Education and Labeling Act of 1990 requires
the use standard terms and amounts when they specify
serving sizes, calories, fat content, and other required
information.
Electronic bar codes on labels, known as Universal Product
Codes (UPCs), help track sales and inventory.
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Pricing
Pricing is the process of determining what a company will
charge in exchange for its products.
Pricing is one of the most critical decisions a company
makes because it is the only variable that generates income.
Pricing may help differentiate your product from your
competitors.
Higher prices are generally associated with higher quality.
Change in price can quickly affect sales.
Remember the law of supply and demand.
Higher prices reduce demand for your product and may
stimulate demand for substitute products.
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Pricing to Meet Business
Objectives
XP
Profit-Maximizing. Setting prices to sell the number of units
that will generate the highest possible profits.
Market Share. Market share is the percentage of the total
market sales earned by a specific company or product. A
business may be willing to price lower, accepting minimal or
no profits in hopes of increasing market share.
Also known as market penetration pricing.
Other Pricing Objectives. Prices can be set to meet other
business objectives as well.
Loss containment and survival pricing may become a
company's main objectives during difficult economic times.
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Price-Setting Tools
Cost-oriented pricing considers the firm's desire to make a
profit and takes into account the need to cover production
costs.
Companies that use cost-oriented pricing start with the cost of
producing a product or service and then add a markup to
provide a profit.
Markup is the amount added to an item's cost to sell it at a
profit.
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Breakeven Analysis
Breakeven analysis enables a company to determine how
many units of a product it would have to sell at a given price
in order to cover all costs, or break even.
To survive over the long term, the company must charge a price
that achieves greater than break even sales.
Break-even analysis takes into account two types of costs:
Fixed costs, which are not affected by the number of products
sold and include such items as offices, advertising, utilities, etc.
Variable costs depend directly on the volume of product
produced which include raw materials, production labor, and
shipping and handling.
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Breakeven Analysis
The total cost of operating the business is the sum of the
fixed and variable costs.
The breakeven point is the minimum quantity of a product
that must be sold before the seller covers variable and fixed
costs and makes a profit.
Sales above the breakeven point are a profit.
Sales below the breakeven point are a loss.
Total Fixed Costs
Breakeven Point (in units) 
Sales Price - Variable Costs
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Breakeven Analysis
If the store sells
fewer than 14,286
CDs, it loses
money for the
year.
If sales go over
14,286, profits
grow by $7 for
each CD.
If the store sells
exactly 14,286
CDs, it will cover
all its costs but
earn zero profit.
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Pricing Existing Products
Pricing has a direct impact on revenues, making it extremely
important to overall marketing plans.
It is also a very flexible marketing tool, easier to change than
products or distribution channels.
A firm has three options for pricing existing products:
Pricing above prevailing market prices for similar products, playing on
the common assumption that higher price means higher quality.
Pricing below market prices, which can succeed if a firm can offer
acceptably quality while keeping costs below competitors'. Also known
as penetration pricing, this strategy invites price wars.
Pricing at or near market prices based on the assumption that this
amount is that people will pay for similar products. Also called market
pricing, this approach tends to reduce price wars in an industry.
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Pricing New Products
When introducing new products, companies must often
choose between two pricing policy option: very high prices or
very low prices.
Price Skimming—setting an initial high price to cover new
product costs and generate a profit.
Penetration Pricing—setting an initial low price to establish a
new product in the market
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Pricing Tactics
In general, when people go shopping they have a price
range in mind. If the price the encounter is unexpectedly low
they fear low quality; if it is too high, they may decide it is not
a good value.
Price Lining is a tactic that offers all items in certain
categories at a limited number of prices. $19.99, $29.99,
$39.99
Psychological Pricing is a tactic that takes advantage of the
fact that consumers do not always respond rationally to
stated prices.
Odd-Even Pricing—is stating prices in amounts other than whole
dollars, resulting in prices such as $9.99 instead of $10.
Discount pricing offers temporary price reductions as an incentive for
buyer to purchase in larger quantities.
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Pricing Tactics
Pricing decisions also involve ethical and legal
considerations.
Price fixing occurs when companies supplying the same type
of product agree on the formulas they use to set prices.
Price fixing is illegal.
Price discrimination is the practice of offering different prices
to some customers but not to others. It may be legal if the
company can show there is a difference in costs.
Products being shipped to Hawaii are more expensive.
Deceptive pricing is when there are schemes that are
mislead the buyer as to the true price. Deceptive pricing is
illegal.
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Summary
Product features are the the tangible and intangible qualities
a company builds into its products.
New products have a life cycle that corresponds to the
following stages:
Introduction
Growth
Maturity
Decline
9 of 10 new products will fail.
Speed to market helps increase the likelihood of product
success.
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Summary
The product life span may be extended using foreign
markets:
Product extension
Product adaptation
Reintroduction
Branding is an effort to give a product an identity.
The brand name, packaging, and labeling contribute to
branding.
The goal in developing brands is to generate brand
awareness and brand loyalty.
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Summary
Pricing decision reflect the pricing objectives set by its
management.
Pricing strategies include:
Profit maximization
Market share maximization
Other considerations include the need to survive in a
competitive marketplace, social and ethical concerns, and
even a firm’s image.
Cost-oriented pricing recognizes the need to cover the
variable costs of producing a product (costs that change with
the number of units produced or sold).
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Summary
Price-setting tools are chosen to meet a seller’s pricing
objectives.
Breakeven analysis is a useful approach.
Breakeven Point (in units) 
Total Fixed Costs
Sales Price - Variable Costs
Guided by pricing strategies, managers set prices using
tactics such as:
Price lining
Psychological pricing
Discounting
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