Ch.

14 Developing and Pricing Goods and Services

LO 14–1 Describe a total product offer.

value
Good quality at a fair price. When consumers calculate the value of a product,
they look at the benefits and then subtract the cost to see if the benefits
exceed the costs.

distributed product development

Handing off various parts of your innovation process—often to companies
overseas.

total product offer

Everything that consumers evaluate when deciding whether to buy something;
also called a value package.

POTENTIAL COMPONENTS OF A TOTAL PRODUCT OFFER

Product Lines and the Product Mix

product line
A group of products that are physically similar or are intended for a similar market.
 They usually face similar competition. In one product line, there may be several
competing brands.
 For example, Diet Coke, Diet Coke with Splenda, Diet Coke with Lemon, Diet Coke
with Lime, Diet Vanilla Coke, and Diet Cherry Coke.

product mix
The combination of product lines offered by a manufacturer.
 Procter & Gamble (P&G) has many brands in its laundry detergent product line,
including Tide, Era, Downy, and Bold.

LO 14–2 Identify the various kinds of consumer and industrial goods.

product differentiation
The creation of real or perceived product differences.

 Actual product differences are sometimes quite small, so marketers must use a
creative mix of branding, pricing, advertising, and packaging (value enhancers) to
create a unique, attractive image.

Marketing Different Classes of Consumer Goods and Services

convenience goods and services

Products that the consumer wants to purchase frequently and with a minimum of effort.
 One store that sells mostly convenience goods is 7-Eleven.
 Location, brand awareness, and image are important for marketers of convenience
goods and services.

shopping goods and services

Those products that the consumer buys only after comparing value, quality, price, and style
from a variety of sellers.
 Target is one store that sells mostly shopping goods. Because many consumers
carefully compare such products, marketers can emphasize price differences, quality
differences, or some combination of the two.

specialty goods and services

Consumer products with unique characteristics and brand identity. Because these products
are perceived as having no reasonable substitute, the consumer puts forth a special effort to
purchase them.

unsought goods and services

Products that consumers are unaware of, haven’t necessarily thought of buying, or find that
they need to solve an unexpected problem.
  The best way to promote convenience goods is to make them readily available and
create the proper image.
 Specialty goods rely on reaching special market segments through advertising.

Marketing Industrial Goods and Services

industrial goods
Products used in the production of other products. Sometimes called business goods or B2B
goods.

Many goods could be classified as consumer goods or industrial goods, based on their uses.
For example, a computer that a person uses at home for personal use would clearly be a
consumer good. But that same computer used in a commercial setting, such as a hospital,
would be classified as an industrial good.

LO 14–3 Summarize the functions of packaging.

 Many companies have used packaging to change and improve their basic product.
 For example: squeezable ketchup bottles that stand upside down; square paint cans
with screw tops and integrated handles; plastic bottles for motor oil that eliminate
the need for funnels; single-use packets of spices
 Innovative packaging can make a great product look even better. Just ask the owners
of Thelma’s Treats, a bakery in Des Moines, Iowa, that packs all its delicious cookies
into boxes resembling old-fashioned ovens.

Packages must perform the following functions:

1. Attract the buyer’s attention.
2. Protect the goods inside, stand up under handling and storage, be tamperproof, and
deter theft.
3. Be easy to open and use.
4. Describe and give information about the contents.
5. Explain the benefits of the good inside.
6. Provide information on warranties, warnings, and other consumer matters.
7. Give some indication of price, value, and uses.

bundling
Grouping two or more products together and pricing them as a unit.
LO 14–4 Contrast brand, brand name, and trademark, and show the value of brand
equity.

brand
A name, symbol, or design (or combination thereof) that identifies the goods or services of
one seller or group of sellers and distinguishes them from the goods and services of
competitors.

trademark
A brand that has exclusive legal protection for both its brand name and its design.

Brand Categories

manufacturers’ brands
The brand names of manufacturers that distribute products nationally.

dealer (private-label) brands

Products that don’t carry the manufacturer’s name but carry a distributor or retailer’s name
instead.

generic goods
Nonbranded products that usually sell at a sizable discount compared to national or private-
label brands.

knockoff brands
Illegal copies of national brand-name goods.

Generating Brand Equity and Loyalty

brand equity
The value of the brand name and associated symbols.

brand loyalty
The degree to which customers are satisfied, like the brand, and are committed to further
purchases.
 • Companies try to boost their short-term performance by offering coupons and price
discounts to move goods quickly.
brand awareness
How quickly or easily a given brand name comes to mind when a product category is
mentioned.

Perceived quality is an important part of brand equity. A product that’s perceived as

having better quality than its competitors can be priced accordingly. The key to creating
a perception of quality is to identify what consumers look for in a high-quality product,
and then to use that information in every message the company sends out. Factors
influencing the perception of quality include price, appearance, and reputation.

Creating Brand Associations

• The name, symbol, and slogan a company uses can assist greatly in brand recognition
for that company’s products.
• or example, how ads for Mercedes-Benz associate its company’s cars with successful
people who live luxurious lives.
• The person responsible for building brands is known as a brand manager or product
manager.
brand association
The linking of a brand to other favorable images.

Brand Management

brand manager
A manager who has direct responsibility for one brand or one product line; called a product
manager in some firms.

• One reason many large consumer-product companies created this position was to
have greater control over new-product development and product promotion.
• Some companies have brand-management teams to bolster the overall effort.
• In B2B companies, brand managers are often known as product managers.
LO 14–5 Explain the steps in the new-product development process.

Generating New-Product Ideas

• Most ideas for new industrial products
come from employee suggestions
rather than research and
development.

product screening
A process designed to reduce the number of new-
product ideas being worked on at any one time.
• Screening applies criteria to determine
whether the product fits well with
present products, has good profit
potential, and is marketable.

product analysis
Making cost estimates and sales forecasts to get a
feeling for profitability of new-product ideas.
• Products that don’t meet the
established criteria are withdrawn
from consideration.

Product Development
If a product passes the screening and analysis phase,
the firm begins to develop it further, testing many
different product concepts or alternatives.

concept testing
Taking a product idea to consumers to test their
reactions.

commercialization
Promoting a product to distributors and retailers to
get wide distribution, and developing strong
advertising and sales campaigns to generate and maintain interest in the product among
distributors and consumers.
LO 14–6 Describe the product life cycle.

product life cycle

A theoretical model of what happens to sales and profits for a product class over time; the
four stages of the cycle are introduction, growth, maturity, and decline.

• This cycle is a theoretical model of what happens to sales and profits for a
product class over time. However, not all individual products follow the life
cycle, and particular brands may act differently.

LO 14–7 Identify various pricing objectives and strategies.

Pricing is so important to marketing and the development of total product offers that it has
been singled out as one of the four Ps in the marketing mix, along with product, place, and
promotion.

A firm may have several pricing objectives over time, and it must formulate these objectives
clearly before developing an overall pricing strategy. Popular objectives include the
following:
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.

Cost-Based Pricing
Producers often use cost as a primary basis for setting price. They develop elaborate cost
accounting systems to measure production costs (including materials, labor, and overhead),
add in a margin of profit, and come up with a price.

Demand-Based Pricing
target costing
Designing a product so that it satisfies customers and meets the profit margins desired by
the firm.
• Target costing makes the final price an input to the product development
process, not an outcome of it.

Competition-Based Pricing
competition-based pricing
A pricing strategy based on what all the other competitors are doing. The price can be set at,
above, or below competitors’ prices.

price leadership
The strategy by which one or more dominant firms set the pricing practices that all
competitors in an industry follow.

Break-Even Analysis
break-even analysis
The process used to determine profitability at various levels of sales.

total fixed costs

All the expenses that remain the same no matter how many products are made or sold.

variable costs
Costs that change according to the level of production.

Other Pricing Strategies

skimming price strategy
Strategy in which a new product is priced high to make optimum profit while there’s little
competition.

penetration strategy
Strategy in which a product is priced low to attract many customers and discourage
competition.

everyday low pricing (EDLP)

Setting prices lower than competitors and then not having any special sales.

high–low pricing strategy

Setting prices that are higher than EDLP stores, but having many special sales where the
prices are lower than competitors’.

psychological pricing
Pricing goods and services at price points that make the product appear less expensive than
it is.