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14-1 McGraw-Hill/Irwin Understanding Business, 7/e © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 14 14 Developing Developing and Pricing and Pricing Products Products and and Services Services 14-1

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McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-114-1McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter

14141414Developing Developing and Pricing and Pricing

Products and Products and ServicesServices

14-1

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-214-2McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-314-3McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Product DevelopmentProduct Development & Value Package& Value Package

• Value- Total Value- Total Product OfferProduct Offer

• Product LineProduct Line

• Product MixProduct Mix

• Product Product DifferentiationDifferentiation

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-414-4McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

How Six ProductsHow Six Products Were First MarketedWere First Marketed

ProductProduct TechniqueTechnique

Corn FlakesCorn Flakes Mail Order OnlyMail Order Only

Ragu Spaghetti SauceRagu Spaghetti Sauce Door-to-DoorDoor-to-Door

TeaTea Wrapped in Silk BagsWrapped in Silk Bags

Perforated Toilet PaperPerforated Toilet Paper On The StreetOn The Street

Noxzema Skin CreamNoxzema Skin Cream As Sunburn RemedyAs Sunburn Remedy

Tabasco SauceTabasco Sauce In Used Cologne BottlesIn Used Cologne Bottles

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-514-5McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Mickey Mouse’sMickey Mouse’s Product MixProduct Mix

Theme parks Theme parks & resorts& resorts

ABC ABC Television Television NetworkNetwork

TV & radio TV & radio stationsstations

Film studios Film studios & production& production

Video Video programs & programs & licensinglicensing

Consumer Consumer productsproducts

PublishingPublishing

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-614-6McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Marketing ClassesMarketing Classes of Goods & Servicesof Goods & Services

• ConsumerConsumer- ConvenienceConvenience

- ShoppingShopping

- SpecialtySpecialty

- UnsoughtUnsought

• IndustrialIndustrial

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-714-7McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PackagingPackaging

1)1) ProtectProtect2)2) AttractAttract3)3) DescribeDescribe4)4) ExplainExplain5)5) WarrantiesWarranties6)6) Price, Value, UsesPrice, Value, Uses

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-814-8McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

BrandingBranding

• Brand & Brand & TrademarkTrademark

• CategoriesCategories- Manufacturers’Manufacturers’

- KnockoffKnockoff

- Dealer/PrivateDealer/Private

- GenericGeneric

• EquityEquity

• LoyaltyLoyalty

• AwarenessAwareness

• AssociationAssociation

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-914-9McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Most PowerfulMost Powerful Internet BrandsInternet Brands

CategoryCategory BrandBrandBooks & MusicBooks & Music

Amazon.comAmazon.com

Buy.comBuy.com

BrokerageBrokerageCharles Schwab, Charles Schwab,

Ameritrade, E*TradeAmeritrade, E*Trade

Search EngineSearch EngineGoogle, Yahoo, Google, Yahoo,

MSN, AOLMSN, AOL

TravelTravelExpedia, Travelocity, Expedia, Travelocity,

Fodors, PricelineFodors, PricelineSource: Business 2.0, July 2002, p. 86.

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1014-10McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Brands ConsumersBrands Consumers Consider Most ReliableConsider Most Reliable

• CRAFTSMAN TOOLSCRAFTSMAN TOOLS• WATERFORD CRYSTALWATERFORD CRYSTAL• ROLL-ROYCE MOTOR CARSROLL-ROYCE MOTOR CARS• DISCOVERY CHANNELDISCOVERY CHANNEL• WD-40 LUBRICANTWD-40 LUBRICANT• BOSE STEREO/SPEAKER SYSTEMSBOSE STEREO/SPEAKER SYSTEMS• CRAYOLA CRAYONS/MARKERSCRAYOLA CRAYONS/MARKERS• HERSHEY KISSESHERSHEY KISSES

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1114-11McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

A Good Brand Name...A Good Brand Name...

Speaks directly to product’s target customers

Attracts/motivates consumers to try it

Is memorable/sticks in customers’ minds

Is distinctive enough to protect it legally

Speaks directly to product’s target customers

Attracts/motivates consumers to try it

Is memorable/sticks in customers’ minds

Is distinctive enough to protect it legally

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1214-12McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Soft Drink BrandsSoft Drink Brands That Didn’t Make ItThat Didn’t Make It

Juicy Fruit with Juicy Fruit with Lemon LimeLemon Lime

Lemon Lemon MerengueMerengue

Cream Wizard Cream Wizard Wintergreen Wintergreen

Crow CloveCrow Clove

Kentucky No Nip Kentucky No Nip Cherry JulepCherry Julep

Satan’s PunchSatan’s Punch

Green Tangerine Green Tangerine SourerSourer

Key Lime Key Lime CreamCream

Source: St. Louis Post-Dispatch

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1314-13McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Renaming BrandsRenaming Brands

OLD NAMEOLD NAME NEW NAMENEW NAME

BELL ATLANTICBELL ATLANTIC VERIZONVERIZON

BELL SOUTHBELL SOUTH CINGULARCINGULAR

AMERICAN BRANDSAMERICAN BRANDS FORTUNE BRANDSFORTUNE BRANDS

CIBACIBA NOVARTISNOVARTIS

VALUJETVALUJET AIR TRONAIR TRON

Source: Forbes Magazine, December 21, 2002

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1414-14McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

HersheyHershey Caramels Caramels

AmwayAmway No-rinse No-rinse car car wash wash

HeinzHeinz Horseradish Horseradish

AvonAvon Little Dot Little Dot perfume perfume

setset

3M3M Sandpaper SandpaperSource: World Features Syndicate

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1514-15McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

New-Product DevelopmentNew-Product DevelopmentIdea Idea

GenerationGeneration

ScreeningScreening

AnalysisAnalysis

DevelopmentDevelopment

TestingTestingCommercializeCommercialize

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1614-16McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Sales & Profits Sales & Profits During the PLCDuring the PLC

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1714-17McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

PricingPricing

• ObjectivesObjectives$ ROIROI$ TrafficTraffic$ Market ShareMarket Share$ SalesSales$ ImageImage$ SocialSocial

• Cost-BasedCost-Based• Value- ServiceValue- Service

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

• StrategiesStrategies- SkimSkim- PenetrationPenetration- EDLPEDLP- High-LowHigh-Low

• Market ForcesMarket Forces

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1814-18McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-1914-19McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Breakeven ChartBreakeven Chart

$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

McGraw-Hill/IrwinUnderstanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.14-2014-20McGraw-Hill/Irwin

Understanding Business, 7/e

© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Pricing UsingPricing Using Breakeven AnalysisBreakeven Analysis

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

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

Variable CostVariable Cost $ 1 per box$ 1 per box

Market Market Research Research ForecastForecast

Company can sell: 290,000 boxes at $2 @Company can sell: 290,000 boxes at $2 @

210,000 boxes at $3 @210,000 boxes at $3 @

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