Have you tried explaining that it's just a name for a female dog? Ask them to substitute "female dog" whenever they feel like saying b*tch. It's pretty silly. Actually, in today's American society, most curse words are pretty silly if you really stop to think about them (do you have access to a good dictionary? make your kids look up those words). A b*stard was a child born outside of wedlock, who couldn't inherit anything under the law of primogeniture (at least in England, if I'm remembering my history correctly), even if they were the firstborn male. Completely obsolete here, today, where there are lots of children born to unmarried parents. A son-of-a-b*tch was related to the previous two--if a man were behaving so dishonorably as to be compared to a lowly dog, then he wasn't worthy of being treated with respect.
Obviously, I'd advocate education first, so the kids thoroughly understand the words themselves. Then I'd move on to context: stubbing your toe merits xyz, but abc is overkill/unacceptable. Give lots of situational examples, and if you're comfortable with it, have you and your kids saying the actual curse words (rather than substitutions), to help them get it out of their systems, and hopefully realize that if the parental units know and use the words, the words really can't be that cool. If they're young enough to enjoy it, work on coming up with silly nonsense words that sound impressive but aren't traditional curse words. With some kids, that leads to tons of giggles. It usually helps if you act horrified whenever you hear the "new" curse words.
If that doesn't work for your family, I'd probably try consequences next. What happens when kids curse at Grandma? She gets upset? They don't get cake? They have to pay money for every curse word they're heard using? Are they sent to their rooms (not allowed to hang around family if they can't behave nicely)? What could happen if they swear at their teachers? Sent to the principal's office? Detention? Suspension? What could happen if they curse at a police officer? Ticket? Fine? Jail? Part of the consequences is also a change in perception. Most people, when they hear little kids swear, tend to think less of the kids and maybe their parents, too. So as the kids demonstrate lack of respect (most people don't enjoy the aural assault), they're more likely to be on the receiving end of lack of respect.
And if your kids are still using more curse words than you'd like, make up some house rules (no swearing, ever; only xyz and abc are allowed; or, swearing okay in your bedroom with the door closed, but not in the public areas), post them where they're easily seen and referred to (along with the penalty), and impose the consequences consistently.