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Chapter 14 - Developing and Pricing Goods And Services
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Name: ___________________________
Date: ___________________________
critical thinking exercise 14-2
MOST VALUABLE GLOBAL BRANDS
As stated earlier, Interbrand, a research consulting firm, annually calculates the world’s most val-
uable global brands. For 2014, Apple was the top brand. Many years before that, thought, it was Coca-
Cola.
Go to the Interbrand website (www.interbrand.com)ix and search for the current year’s ranking.
(Sometimes the Web address for a location changes. You might need to search to find the exact location
mentioned.) Complete the table below.
Rank
Brand
Value
($ millions)
Country
of Origin
Sector
1
2
3
4
5
6
7
8
9
10
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Name: ___________________________
Date: ___________________________
critical thinking exercise 14-3
SILKY SKIN SOLUTION
Your company has just made the scientific breakthrough of the century. It has invented a wrinkle
cream that really works. One application results in smooth, wrinkle-free skin without costly and painful
plastic surgery. There are other products that claim they eliminate wrinkles, but they only conceal them
for an hour or two. Your cream works so well it needs to be used only once a month to keep skin silky.
The cream is relatively inexpensive to produce with a total production cost of 20 cents per ounce. The
cream could, therefore, be priced at either a competitive level or below it. The firm is not sure which poli-
cy is the best to follow.
When your Silky Skin Solution is promoted, your firm wants to have as many tubes as possible
on the retailers’ shelves. Thus, the firm plans to offer its wholesalers a much larger discount than is nor-
mal.
If the product is handled correctly, the return on investment should be between 40 and 70% after
taxes. It would be the most profitable product in your firm.
Assume that you are the product manager for Silky Skin Solution. Don’t forget to justify your
answers.
1. What pricing policy will you follow?
2. What marketing approach will you use?
3. How will you treat your wholesalers?
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notes on critical thinking exercise 14-3
1. What pricing policy will you follow?
To recover the research and development costs, the price of the product should be set fairly high.
2. What marketing approach will you use?
You could probably use testimonials from users and from doctors in your advertising. You could
try to get the widest distribution possible in all drugstores and supermarkets. Sampling would be a good
3. How will you treat your wholesalers?
could give them incentives and bonuses to get the product out quickly.
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Name: ___________________________
Date: ___________________________
critical thinking exercise 14-4
BREAK-EVEN ANALYSIS
You just inherited a million dollars from your grandfather. You always had a talent for cooking
and have long dreamed of opening an expensive gourmet restaurant. You are happy living near your col-
lege’s campus and would like to open a four-star restaurant across the street from school.
Of course, the restaurant would have certain fixed costs; for example, management salaries, utili-
ties, interest, license fees, and property taxes. The only variable costs would be the food, beverages, and
preparation costs. The fixed costs are estimated at $440,000 per year while the average variable cost per
meal is estimated at $15. These meals would be sold for an average of $27 each.
1. Perform a break-even analysis of your proposed business.
2. How many units will you have to sell each year to break even?
3. How many units will you have to sell each evening (use a 365-day year) to break even?
4. Considering your community, does it seem likely that there is a large enough market for gourmet
food for the restaurant to operate at or beyond the break-even point?
5. How much profit will the restaurant earn on sales of 40,000 meals?
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notes on critical thinking exercise 14-4
1. Perform a break-even analysis of your proposed business.
2. How many units will you have to sell each year to break even?
The break-even point can be calculated using a formula or using a break-even chart. The break-
even chart shows the point at which the total cost curve intersects with total revenue.
0 10,000 20,000 30,000 40,000 50,000
Total Revenue ($27) $0 $270,000 $540,000 $810,000 $1,080,000 $1,350,000
Fixed Costs $440,000 $440,000 $440,000 $440,000 $440,000 $440,000
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Total fixed costs (FC) .
Price of 1 unit — Variable costs of 1 unit
3. How many units will you have to sell each evening (use a 365-day year) to break even?
4. Considering your community, does it seem likely that there is a large enough market for gourmet
food for the restaurant to operate at or beyond the break-even point?
It would be difficult in almost any community to sell many meals at $27 each, but in a college
5. How much profit will the restaurant earn on sales of 40,000 meals?
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Name: ___________________________
Date: ___________________________
critical thinking exercise 14-5
COMPARISON SHOPPING ONLINE
It is possible to compare prices for products on many sites. But how do you know that the lowest-
price product will be delivered on time and as expected? One way is to go to a website that compares both
prices and retailer reputation.
One such site is BizRate.com. BizRate collects feedback from customers immediately after they
buy. Customers rate which stores are good, why they are good, and how their service varies.
Go to the BizRate.com website at www.bizrate.com.x Search for price information for digital
cameras. (Sometimes the address for a location changes. You might need to search to find the exact loca-
tion mentioned.)
1. Which features of the product are important in comparing the cameras?
2. How important would the brand name be in your product selection?
3. Choose one camera model and compare prices for various vendors. Is there a relationship be-
tween price and customer satisfaction?
4. In which classification of product would you put digital cameras?
5. Would you use a website such as BizRate.com to buy a digital camera? A DVD player?
DVDs?
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bonus
cases
bonus case 14-1
PANERA EXPANDS PAY-WHAT-YOU-CAN EXPERIMENT
When it comes to corporate philanthropy, many companies don’t go much further than cutting a
check. While it is certainly generous to give money to a good cause, donating to charities and food banks
simply wasn’t enough for Ronald Shaich, chair of the bakery-café chain Panera Bread. He wanted to lend
assistance to those in need in a way that was integrated within the day-to-day operations of one of his
stores.
In the end he decided to use one of his locations in Clayton, Missouri, for a radical experiment:
let the customers decide how much they want to pay for food. The idea is that those who have money to
spend would pay full price, or even more if they so chose, while cash-strapped customers would pay
whatever they could afford. The net revenue that is left over after the company covers its overhead costs
would be given to charity. In essence, Shaich’s nonprofit plan is a large-scale version of a community
kitchen, where people who need a discount or even free food can get it if they need it. The only difference
is that Panera is a successful restaurant operation with more than 1,400 locations across the country, not
exactly your normal nonprofit.
Shaich says the honor system experiment started out shaky, with one teenager walking out with
$40 worth of food after putting just few dollars on his credit card. But after one month in operation, most
of the customers abide by the goals of the program. About 60 to 70% of customers pay full price, while
15% leave a little more and a further 15% either pay less or nothing at all. Within its first month the non-
profit Panera grossed $100,000, but Shaich won’t reveal the margin between total costs and revenue. Still,
the company must be happy enough with the results since it plans to open two more nonprofit locations
within the next few months. Like the affluent but accessible Clayton location, the next two nonprofit
Paneras will be located in upscale neighborhoods that can be easily reached by poorer customers, but still
retain a wealthier core population that can pay full price.xi
discussion questions for bonus case 14-1
1. What seems to be the strength of Panera’s nonprofit locations plan?
2. Do you suspect competitors will follow Panera’s lead?
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notes on discussion questions for bonus case 14-1
1. What seems to be the strength of Panera’s nonprofit locations plan?
Most would have to agree that the concept is certainly unique. Also, it lifts the burden of those
2. Do you suspect competitors will follow Panera’s lead?
It’s too early to tell yet. Panera experimented with only one store, and while the results were posi-
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bonus case 14-2
THE VALUE OF A PRODUCT OFFER
The heart of a successful marketing program is a product offer that people want and need. But
what do we mean when we say “product offer”? Is a service part of a product offer? Yes. Is an idea part
of a product offer? Sure, people try to market (and sell) ideas. A product offer, then, is not necessarily
something tangible nor is it always visible. Let’s see if we can clarify what the term product offer means
to a marketer.
First of all, notice that the same physical good (for example, a car) is worth different amounts to
different people. How can that be? Clearly, a product offer’s value is not determined by the good (e.g.,
car) itself but by the perceptions of the consumer; otherwise all physical goods would have the same val-
ue to different consumers. So the consumer determines a product offer’s value.
Also, notice that product offers have value that goes beyond tangible features. For example, a car
may have status value. A painting may have additional value simply because it is rare. A product offer’s
value, therefore, is determined by the consumers’ tastes and desire to be different as well as the physical
characteristics.
From a marketing standpoint, therefore, a product offer includes an intangible sense of value that
the consumer perceives when evaluating the product offer. In simpler terms, a product offer is what the
consumer thinks it is. If a consumer thinks a product offer is valuable, it is valuable to him or her. And if
a consumer thinks a product offer has no value, it has no value until the consumer is convinced it does.
The consumer, not the producer, determines a product offer’s value.
There is no such thing as a “better” product offer in marketing. There are only product offers that
consumers think are better. Many marketers make the mistake of making a better-quality product with the
hope that consumers will buy the better quality. But a product has no quality until consumers perceive it.
Since consumers can’t see quality, they are not moved to buy by better quality unless it can be shown.
Ford, Chrysler, and other American automobile producers are saying that “Quality is Job 1” and other
such slogans, but until consumers perceive that quality, it does not exist (from a marketing perspective).
Many consumers still believe that the Japanese make better-quality cars, whether or not that is true in re-
ality.
To make a product offer better, make consumers think it is better. It does no good to improve a
product unless consumers can be convinced that the improvement is there. This sounds confusing, but it
becomes clear when we look at an example:
Which is a better product, a BMW Z4 Roadster or a Ford Focus? Be careful and think before you
answer. (Take a poll of the class by having them raise their hands. Almost everyone will say that BMW is
a better product.) If BMW is a better product, why do more people buy Ford Focuses? Someone must
think that Ford Focuses are better products. (No,” your students will say. “They know that BMW is bet-
ter; they simply cannot afford one.”)
Another point, then, is that cost is obviously an important part of what a consumer looks at when
evaluating a product. We could say that a consumer looks at benefits of a product and then subtracts cost
to get value. When evaluating a BMW versus a Focus, therefore, a consumer’s evaluation process might
look like this:
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Benefits of a BMW Benefits of a Focus
Comfort Price
Status Mileage
Quality
Durability
Reliability
Value of a BMW $35,000 Value of a Focus $18,000
Cost of a BMW −$50,000 Cost of a Focus −$16,000
Net value −$15,000 Net value $2,000
In this case, the Focus would be the better product because it had more value to the consumer.
That is why more consumers buy Focuses than BMWs. “But wait a minute,” you say. “A BMW is still a
better car.” Yes, but the car is not the product. The product is the car as seen through the eyes of the con-
sumer who is evaluating not just the car and its quality, but price as well.
The answer to the question “Which is the better product, a BMW or a Ford Focus?” is that it all
depends. To some people, a BMW is a better product because they put more value on comfort, status, and
so forth. To others, the Ford Focus is a better product because they put more value on price and mileage.
Neither is a better product inherently, although we largely would agree that the BMW is a better car.
discussion questions for bonus case 14-2
1. What is the product of a community college? (Be careful; the product is not what the school of-
fers, but what the school offers as seen through the eyes of students.)
2. Which is the better product, what you get at a community college, or what you get at Harvard?
3. How can you make a product better?
4. Is a better-quality product perceived as a better product by consumers?
notes on discussion questions for bonus case 14-2
1. What is the product of a community college? (Be careful; the product is not what the school of-
fers, but what the school offers as seen through the eyes of students.)
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2. Which is the better product, what you get at a community college, or what you get at Harvard?
“It all depends.” Community colleges have many benefits and lower cost. Harvard has many dif-
ferent benefits and a much higher cost. The value of both institutions depends on the needs and wants of
3. How can you make a product better?
By making people think it’s better. If consumers think that a product is better, it is better from a
4. Is a better-quality product perceived as a better product by consumers?
Not usually, because it usually comes with a higher cost as well. Most people seem to prefer
moderate quality at moderate prices. This is true in cars, clothes, and most other goods and services. Con-
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bonus case 14-3
THE TOY STORY ISN’T OVER JUST YET
More than a decade ago, Disney’s computer animation arm Pixar introduced the world to Woody
and Buzz Lightyear, the stars of its Toy Story franchise. After three movies and billions of dollars in box
office sales, the probability of a reunion of the animated pair in another feature-length film appears highly
unlikely. Pixar operates independently of the rest of the Disney creative machine and is famously devoted
to the artistic integrity of its inventions.
Still, the Toy Story properties, especially Woody and Buzz, remain a hot commodity for Disney
after the release of Toy Story 3. The company estimates toys and other products from the last film will
generate $7.3 billion in retail sales, making it the fourth most profitable merchandise franchise of 2010.
With sales exceeding even Mattel’s Barbie line, Disney isn’t ready to keep its golden cowboy and space
ranger off the big screen for good just yet.
In lieu of another feature film, Disney plans to keep the Toy Story brand fresh in consumers’
minds through a series of short films produced by Pixar’s satellite studio in Vancouver, British Columbia.
The first Toy Story “toon” can be seen at the beginning of Cars 2, the company’s second-largest block-
buster franchise. Preceding showings of its films with a short is well-worn territory for Pixar. Along with
wholly original creations, the company has also produced a slew of quick cartoons featuring characters
from Cars and Monster’s Inc. In the case of the former, new videos and short clips have been prevalent
online and on Disney’s television networks since 2007. Disney officials credit the consistent appearance
of Cars characters in new adventures as a key contributor to the franchise’s 11% rise in merchandise sales
for 2010. Toy Story is an even more lucrative enterprise, leading many to speculate that the 2011 summer
short film will not be the last time the public sees Woody and Buzz in action.xii
discussion questions for bonus case 14-3
1. With no new Toy Story feature movies planned, can Woody and Buzz remain hot?
2. What’s the marketing advantage of animated characters like Woody and Buzz?
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notes on discussion questions for bonus case 14-3
1. With no new Toy Story feature movies planned, can Woody and Buzz remain hot?
There’s no doubt that they can. Disney classic movies and characters are always being made
2. What’s the marketing advantage of animated characters like Woody and Buzz?
Unlike the rest of us, Woody and Buzz never get old. Consider that Mickey Mouse was created in
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endnotes
i Source. David Sevitt and Alexandra Samuel, “How Pinterest Puts People in Stores,” Harvard Business Review,
July-August 2013.
ii Source: Anne Marie Chaker, “Do These Count as Vegetables?” The Wall Street Journal, September 25, 2013.
iii Source: Sarah Nassauer, “The Psychology of Small Packages,” The Wall Street Journal, April 16, 2013.
iv Source: Kevin Kelleher, “Barcodes Get One Better,” Business 2.0, October 2004.
v Source: Alexandra Sifferlin, “Is Your Food Expired? Don’t Be So Quick to Toss It,” Time, September 18, 2013.
vi Source: Ellen Byron and Paul Ziobro, “Whoa Baby, Prices Are Jumping for Diapers, Other Family Basics,” The
Wall Street Journal, April 26, 2011.
vii Source: Jessica Ramirez, “Coca-Cola’s Holy Grail,” Newsweek, November 6, 2006.
viii Source: Ramin Setoodeh, “Mummy, Let’s Ride Again,” Newsweek, October 17 2005.
ix The Internet is a dynamic, changing information source. Web links noted in this manual were checked at the time
of publication, but content may change over time. Please review the website before recommending it to your stu-
dents.
x The Internet is a dynamic, changing information source. Web links noted in this manual were checked at the time
of publication, but content may change over time. Please review the website before recommending it to your stu-
dents.
xi Source: Christopher Leonard, “Panera to Open More Pay-What-You-Wish Restaurants,” Associated Press, June
27, 2010.
xii Source: Ronald Grover, “Disney’s Toy Branding Strategy,” Bloomberg Businessweek, June 2, 2011.
