Chapter 8
What are the stages of the product life cycle?
-Market introduction (the new product development phase we've been discussing -Market growth -Maturity -Decline
What are some of the growth strategies?
-Market penetration -Product development -Market development -Diversification
What are some trends to look out for?
Perhaps the most stunning demographic trend in America and Western Europe is the aging of the population (e.g., more elderly, fewer kids and teens). In 20 years, 20% of Europeans will be 65 years old or older. Sheer age carries both health and wealth concerns. Aging brings greater health care needs because the populace will experience predictably more rheumatoid arthritis, osteoporosis, prostate problems, etc. Supplemental health enhancement industries will also grow. For example, in the vain attempt to delay the aging process, witness the growth of botox and health spa consumption. And to help with those creaky old bones, people in the US are retiring to the sunbelt (Southern and Western states), which will have huge real estate and retail implications Among other large-scale demographic shifts are the facts that in the US, 1 in 7 people is Hispanic and that this subpopulation is growing faster than any others. The power of the Hispanic consumer is therefore a substantial trend: They control nearly $1 trillion in spending power, a number that cannot be ignored by any firm except the most niche or naïve of players Beyond simple demographics, numerous lifestyle trends should be salient when companies are considering new directions. For example, there are more wealthy Americans than ever before, accompanied by an expectation that the number is still rising. Baby boomers are in their peak earning years, and they're becoming empty nesters and hence will have more discretionary funds. Worldwide financial wealth is also tremendous; the top countries for numbers of millionaires are: the US (about 4.3 mm of them), Japan (2.5 mm), Germany (1.1 mm), China (0.9 mm), and the UK (0.5 mm). The top countries for numbers of billionaires are: the US (536), Germany (103), India (90), Russia (88), Hong Kong (55), Brazil (54), U.K. (53). There is also a growing concern for the environment and corporate social responsibility. For example, consumers are concerned about air pollution from transportation, and, in B2B land, industrial equipment by-products are a concern. Companies are learning that green marketing can be profitable; e.g., the use of agriculture for fuel would help both pollution and farmers. A final class of trends to watch would be cultural differences, across countries or even sometimes within them. For example, university students take their online access for granted, but consider these Internet penetration numbers: more than 80% in the US, Japan, Germany, the U.K., France, and Korea, but less than 50% in China, India, Indonesia, Vietnam, and Egyp Lastly, other countries to watch would certainly be the fast-growing economies of the BRIC (Brazil, Russia, India, China). Less prominent but perhaps even more promising (given that US and Western European companies are getting tired of the issues they have to deal with in India and China) are Egypt, Mexico, Poland, South Africa, South Korea, and Turkey.5
market potential (MP)
The first estimate in launch that is how many units might possibly be sold -We might start with secondary data (e.g., the size of the target potential by census demographics) or with other relevant in-house benchmarking data. For example, if the new product is somewhat like a current offering, as with a brand or line extension, then the company would know its numbers for the existing product
product life cycle
a popular metaphor in marketing to describe the evolution and duration of a product in the marketplace The stages are: -Market introduction (the new product development phase we've been discussing -Market growth -Maturity -Decline -Sales and profits behave predictably during the different phases (indeed, usually the phase in which a product exists is determined by these indicators), and the marketing actions that are thought to be optimal during each phase are also clearly prescrib
simulated test markets
are the popular means of premarket launch tests. -A customer is recruited (e.g., via email) to go to a website, where they are given a budget and have an opportunity to buy the new product, which is offered among competitors' or related products. -Virtual grocery store aisles are displayed (sometimes in 3-D or virtual reality, but often just in a 2-D view) that provide the same information the customer would see on a typical trip to the grocery. -There would be row after row of pictures of competitors' products, and the new product embedded, on the "shelf," as it would be when eventually launched. -The marketer is looking for how often the new product is selected in this quasi-realistic context.
market introduction
first phase in the product life cycle where a new product (good or service) is brought into the marketplace with heavy marketing spending (e.g., communications to spark awareness). -In addition to advertising to provide information and attempts at persuasion, promotion can include samples and coupons to spur trial. -Strategically, prices might start low (penetration), but they often start high (skimming) in part to recoup development costs and in part due to the fact that early on there is little competition. -Distribution is somewhat limited in these early phases, and all of these factors contribute to the typical result that sales are low and slow in the beginning.
Market development
is the path we take when we're settled on our product mix and we think there are more segment opportunities to target. -This path can be dramatic when we launch our brand internationally, but it is also more often subtle (e.g., trying to appeal to a slightly younger or older crowd, trying to appeal to men if the product mostly sells to women, etc.). -The product may remain the same, but, to reach the new target, we might need to expand our channels and modify our promotional communications to create a new image for that new target.
market penetration
means we're hunkering down and trying to sell more—the same stuff to the same customers. \ -If the customers are not completely tapped, this is certainly the easiest of all the four strategies. -We don't have to make anything new, and we know how to reach these customers. -Companies strive for more sales (via this strategy) by suggesting new ways to use the product, by opening more stores, or by improving the marketing mix (more intriguing advertising, better pricing, better reward program, better in-store service, better store ambience, etc.).
The coefficient of innovation (p)-
the likelihood that someone will buy or adopt the new product due to information obtained from the marketer.
The coefficient of imitation (q)
the likelihood that someone will buy or adopt the new product due to word-of-mouth information obtained from another consumer (e.g., an innovator).
tipping point
the point at which the product or idea catches on and moves like wildfire throughout the marketplace. -Point oof inflection oon the cumulative diffusion graph
True or false? Companies, like people, are ever evolving. The primary way that companies make changes is by offering so-called new and improved goods and services to customers.
true
True or false? Finally, the length of product-category life cycles tends to be longer than those of individual brands. That is, a particular movie might not live a long life, but the category of movies is 100 years old. Or the macro level category of sports is a healthy and very mature product, but one could point to NASCAR as an example of a recent, young subproduct with explosive growth.
true
True or false? The lengths of product life cycles vary a lot. Researchers point to the short lifespan of movies (years and millions of dollars spent in development for only a few weeks in theaters).
true
forecasting
Upon completion of the test marketing, the marketing manager takes the customer data and tries to predict the product's likely success -If the predictions of sales are not promising, this stage is the last opportunity for the company to abort before launching (and likely failing). If the predictions are promising, the company will proceed to commercialize. -The forecasting numbers are useful throughout the organization—to accounting and finance for budgeting purposes, to the sales force for setting goals, to production and logistics for planning regarding equipment, storage, and transportation, etc. -Forecasting can be highly technical, but here's a simple formula to get a sense of the basic logic. The goal is to estimate the sales potential ($SP), which is not the same as estimated sales but more like a ceiling.
Describe product testing, design, and development:
-At this stage in the new product development process, the company has a number of ideas that it thinks might work, and it's time to get customers' feedback as to which ideas sound the most promising. -The form of the marketing research at this stage is usually focus groups and, increasingly, web surveys (especially for technical target audiences). The particular marketing research techniques used aren't half as important as the fact that any marketing research is conducted at all. -first of several during which marketing research can save a company from a bad idea, yield information to tweak a halfbaked idea, or result in encouragement that the company is pursuing an idea with true potential -The aim is to get background information that can inform the product development or the positioning of the product via communications materials developed subsequently -Competitors' products can be provided also, as a point of discussion, to get the customers to react to tangible, existing goods. Descriptions and photos (of proposed and existing products) can also be shown via Web surveys. -In either a focus group or an online study, a conjoint procedure can be run. In a conjoint study, different combinations of attributes are put together and compared. -Insights from customer feedback are often quite eye-opening. In-house experts assume they know what's best and are frequently surprised by customers' reactions. -Another round of refined-concept testing might occur if ambiguities remain, or if sufficient changes were made that the reactions to the initial concept are likely to be no longer relevant. When the company is confident it has a handle on which product to develop, it begins to do so. Usually only a single prototype is developed, rather than multiple prototypes, in part because development can be expensive but also, more humanly, because the issue is about narrow attention spans.
Describe the timing of launch:
-New product development can move along fairly speedily for straightforward brand or line extensions in the context of a mature consumer packaged goods company. -In other settings, the development process can seem torturously slow. -For example, pharmaceutical testing begins on animals2 (for months to years), and then the drug is tried on 20-100 healthy patients (for months) to check basic safety (e.g., side effects). Next, the drug is tested on several hundred patients with the particular disease (from three months to two years) to continue to check safety and to add checks on efficacy. Finally, hundreds to thousands of people (healthy and sick) are observed (for one to four years) to check safety and efficacy and to tweak dosage. -Time is indeed money, and, to recoup the cost of this extended testing and investment, pharmaceuticals spend $20 billion annually on promotional efforts, e.g., providing retail samples to doct
What are the factors that influence cusoters acceptance of new products and that influence the diffusion of innovation?
-Consumer acceptance tends to be higher when the new product: >>>>Has a clear relative advantage over existing products. >>>>Is compatible with the customer's lifestyle. >>>>Is not overly complex, or the complexity is masked by a user-friendly interface. >>>>Is easily tried or sampled in order to facilitate initial assessment. -The customer is important from the beginning, when marketing identifies the target and conducts market analyses to begin to project sales forecasts (e.g., estimating size, growth, customers' unmet needs, trends, etc.). -Competitor analysis is integral to the mission planning in that the differentiating benefits of the new product (sustainable competitive advantages in the value proposition) must be clear. -Most companies offer multiple product lines, so they're constantly balancing the strategic needs of products at different points in their life cycles. Different stages in the life cycle require different investments; e.g., periods of growth need cash, while periods of slower growth might generate cash to be reinvested to maintain share. For new service innovations, some of the R&D investment is the training of employees before the service is launched as operational.
Describe the new product development process
-Get an idea, develop it, put it out in the market. -A decision may seem appropriate, and then, in subsequent stages, the earlier decision becomes untenable. It may seem obvious in the abstract that we shouldn't continue to push forward with something that is already known to be problematic. Unfortunately, that happens a lot (e.g., people tout sunk costs, want to meet preannounced launch dates for PR or investors, don't want to create political waves). Clearly it's better to revisit decisions and get things straightened out, even if it may feel disappointing to go backward temporarily or to seem to be slowing down.
Describe philosophies of product development
-Ideally new product development involves conversations and interactions with the customer, but companies differ in how much they draw from customers relative to how much they emphasize their own assertions -Top down vs bottom up approach
Describe idea creation and market potential:
-Ideas can come from anywhere -If necessity is the mother of invention, one source of new products is marketers' observations of the world around them. This nonsystematic, qualitative form of marketing research helps marketers identify customer's problems that might be solved with products the firm could offer. -Ideas can come from observing social (or cultural or economic) trends, from listening to customers, your sales force, or your frontline service workers. -The typical method of idea generation begins with good old-fashioned, coffee-fueled brainstorming meetings. -After many ideas have been generated and sketched out, the next step is in-house winnowing and refinement. This is the phase during which we acknowledge, "Okay, maybe some ideas are in fact bad ideas." Ideas are screened for their plausibility in construction and provision, their compatibility with corporate and marketing goals, and their likelihood of success with customers. >>>>At this point, the expertise of the designers, engineers, chemists, etc., are being balanced with the marketers' knowledge of the target customer segment(s) and management's guidance about the firm's identity. (e.g., Rolex doesn't want to make an affordable watch, and Disney needs to stay wholesome.)
Describe the diffusion of innovation:
-In addition to the marketing actions underlying the product life cycle, marketers have also developed a theory about what customers are doing during these phases as well. The concept is that new products are like, well, contagious diseases. If a person with a cold is in a room full of people and sneezes, think about who will get sick the soonest: the people closest to Sneezy. -A similar phenomenon is thought to occur when a new product is introduced. The friend in your circle who likes new high-tech gadgets will get a new electronics toy (business instrument) and show it to all his friend -A similar phenomenon is thought to occur when a new product is introduced. The friend in your circle who likes new high-tech gadgets will get a new electronics toy (business instrument) and show it to all his friend
Describe how marketing develops new products for customers:
-In marketing-oriented companies, customer feedback is sought at most phases in the process. -As is true of most marketing phenomena, consumer packaged goods companies (and those that provide some simple services) excel in the iteration between thinking up what the company can create and testing that with customers. -Go through new product development process Marketing management is involved throughout. In the early stage of idea generation, a knowledge of customer needs and wants interact with corporate and marketing strategies to see what potential new products makes sense for the firm. -Ideally, all the marketing components (e.g., pricing, packaging, channels) are treated holistically from the beginning of the process through to launch; thus, as the product concept is refined, so are decisions about retail outlets, price points, etc., in order to offer the customer a consistently positioned produc
Describe the model of diffusion
-Marketers have forecast sales using this logic. In the equation in Figure 8.6, we are trying to forecast nt, the number of units we will sell during time period t. The prediction is a function of several components: Nt - 1 represents the number of units we have sold so far (cumulative sales in units). M is the max on the likely market potential. The term on the right, (M - Nt - 1), means, how we are doing so far: What's the difference between what we could sell (M) and what we've sold so far (Nt - 1)? -Traditionally the pieces that interest marketers are the parameters p and q. -There are two different ways the diffusion model has been used. First, we can observe early sales data, fit the model, and make predictions about the future. For example, once sales begin, we'll have numbers for nt and Nt - 1 (t can be yearly data, quarterly, weekly, hourly, etc.). We conduct market sizing exercises (Chapter 4) to obtain an estimate for M. We then solve for estimates of p and q. Alternatively, we can use past results on products similar to ours and plug in those numbers to make predictions about the future even before launching the product.3 -The imitation effect (q) is usually bigger (p:q is about 1:10), and, if you consider the massive size of the majority in Figure 8.5, it's easy to see why. The percentage of innovators and early adopters (the customers who are driving p) is about 10-15% of the market, whereas the remainder of the market (the majority, etc.) is 85-90%, and they're driving q. Marketers can speed up innovators (make p bigger) by introducing price decreases early, or they can speed up imitators (make q bigger) by introducing price decreases later.
Describe the diffusion of innovation graph
-The model itself is pretty simple. Marketers posit a normal curve (see Figure 8.4) and partition the customer base into groups. The so-called innovators are the first 3-5% who like to try new ideas and are willing to take risks. They tend to be relatively educated and confident in assessing information about a product on their own. (Note that you might be an innovator with electronics and not movies, or vice versa, and that some people are innovators across multiple categories. -You tend to be an innovator in the product categories in which you have greater involvement unless you have an overwhelming risk-aversion streak that just dampens everything.) -The early adopters are the next group (10-15%); these are even more influential as opinion leaders, primarily because they are a bigger group. This group is so influential that the loss of one of these early adopters costs the firm more than the loss of later adopters. -The early majority (34%) are more risk averse than the first two groups. They're waiting to hear that the early adopters have had favorable experiences with the new product. -The late majority (34%) are even more cautious, often older and more conservative, and wish to buy only proven products. -the final group, the laggards or non-adopters (5-15%), are the most risk averse, skeptical of new products, and stereotypically lower in income (and so perhaps cannot afford to be risky with their purchases). Sometimes the product category has no relevance to them (e.g., your grandfather probably doesn't appreciate the features on your new phone).
Describe beta testing
-a beta version of the product is made available for trial and consumption. Ideally, the product is used in the consumer's home or in as similar a setting as possible to simulate a real-world purchase decision and evaluation, for more accurate forecasting later. -While the product is being developed, so should be the marketing materials. Their early development and refinement will help make consistent the positioning information being absorbed by the custome -The marketing manager now has evidence of customer potential, and the product has been repeatedly refined.It's time to try the product in the market on a small scale, before a more expensive full-scale commercial rollout. -Thus far, the marketing research has been comprised of fairly tightly controlled stimuli: A product and ad and price are shown to a set of customers, and their reactions are noted. Even if competitors knew of the new product development efforts, they cannot interfere with the tests being conducted. Yet, when customers are sitting in a focus group or answering questions online, they know they're doing something out of context (it feels weird); their behavior isn't likely quite the same as what it will be in the natural marketplace environment (e.g., at a grocery store, at the mall, or at Amazon).
Why do companies seek to improve their products?
-a simple point of corporate pride -to be consistent with an image of being innovative -as an effort to better satisfy current customers or -attract new customers -to stave off competition
electronic test markets
A sample of metropolitan areas is selected, and, within each market, some households are designated to be test and others to be control. -All the local context is therefore equated (local TV stations, newspapers, local stores, local brands, cultural interests, etc.). -So whatever differences exist between the households' purchasing is more cleanly attributable to some households having exposure to ads (e.g., via cable transmissions not sent to the control households) or having access to the product (e.g., in stores closer to their homes), etc. -Given the tighter constraints, the validity of the electronic test market dominates that of the area test market.
describe launch:
Through forecasting, Upon completion of the test marketing, the marketing manager takes the customer data and tries to predict the product's likely success
area test markets
are a neat idea in which some 40-50 small metropolitan areas throughout the United States are known to marketing research firms as having characteristics (e.g., demographics, socioeconomic status) that are representative of the country as a whole. -A few (two or three) of these areas are randomly sampled to be test markets, in which the product is made available for purchase (and the remaining areas serve as control markets). -Ads are run in the test markets, deals are made with the local retail chains, etc. Sales are observed through the test period (three to 12 months) and compared to sales in the control markets in order to give the company a sense of how well the product is likely to sell. -Area test markets aren't used that frequently any more, mostly because they're expensive. They require setup that, while small-scale, nevertheless requires manufacturing, machines, personnel training, etc. -They also signal to competitors, who are living and observantly watching in those test markets, just what might be coming down the pike, and many a lawsuit has been filed over a product that has been scooped by a competitor. -Finally, each of those areas, while chosen for being fairly representative of the broader target population, can have their own local flavors and oddities that can bias the results in unpredictable ways; i.e., if sales are high in one area but low in another
Conjoint procedure
different combinations of attributes are put together and compared. -great because it gets at customers' trade-offs. It's not unusual for customers to say they want the best of everything and—oh, by the way—at a really cheap price. -So a conjoint allows the detection of what price a customer is willing to pay for the loaded laptop, or, if the customer isn't willing to pay a high price, what features all-of-a-sudden become less important. That is, what features are they willing to trade off?
bottom up development
ideas spring from the customers themselves, and the company then pursues them in development -its opposite should be called bottom-up (or outside-in), but these days it's referred to as "co-creation" (with the customer) -The truth is, in the real world, neither extreme occurs—i.e., where the engineers or IT guys are consulted and the customers are not, or vice versa. So the difference between these styles is just a matter of when and how frequently feedback from customers and business partners is sought.
Product development
is for the company that wishes to be innovative. New or modified products are offered to the current customer base to keep them happy. -These new products may be as dramatic as brand and line extensions, but often they are modest extensions (e.g., larger sizes, new flavors, different packaging, etc.).
diversification
is the toughest. We're going after new customers with new products. -If you think of the 2 × 2 matrix in Figure 8.7 as a game board and the company starts in the upper left corner (market penetration), moving to the right (product development) or down (market development) isn't that difficult. -From either of those places, it is easier to move to diversification. -But it's just too big a jump for most companies to go from "doing what we know how to do for the customers who like us" (upper left) to "doing something we don't have a clue about for customers we don't know and who don't know us" (lower right). Baby steps: Go right or down. Then go down or right.
market growth
second phase in the product life cycle in which Sales accelerate and profits rise at first. -Customer awareness is stronger, and there may be some buzz in the marketplace. -Distribution channel coverage is greater, so access also contributes to stronger sales. -The firm might be able to begin increasing prices (resulting in higher margins and greater profits). -Competitors either kill each other off, or they begin to specialize a little, identifying emergent segments to which their products can be tailored and targeted. -The initial firm can sustain the competition if it had had enough foresight to have launched a product with some reasonable edge of a competitive advantage and if the product can be slightly altered to maintain distinctiveness (and supporting possible price maintenance for interested segments). -At this stage, advertising is intended to persuade customers that the brand is superior to all competitors' brands.
market decline
the final phase oof the product life cycle where sales nd profits are both dropping, and new products are replacing older generations. -The firm needs to decide what to do with the old product. >>>>Sometimes it is divested. If this route is taken, the decision should be made as early as possible because the best sales price is obtained if it is sold off early, while the product still looks attractive to another firm. Unfortunately, early timing for divestment is difficult to judge; often companies aren't sure the product has quite hit the decline stage, and they aren't willing to give up on it. So they hold onto it until it is typically too late to be sold off, i.e., it is no longer a desirable investment for another firm. >>>>An old product can be "harvested." The firm reduces supportive and marketing expenditures in order to extract more profits. They're merely milking the product, and they know that demand will continue to drop. Perhaps the happiest prognosis for a dying product is when a firm wishes to rejuvenate it, as in "new and improved!" The product is refurbished to have new beneficial features that the target customer might desire.
purchase intention (PI)
the likelihood that the target segment will buy the product. -This number comes from the most recent marketing research that was conducted. Let's say that, among the customers sampled from the target population, the average stated purchase intention was p = 0.7. It is important to know that customers predictably overstate their purchase intentions. -Companies with databases of past new product launches can look to compare the PI vs. realized sales and adjust accordingly. -For companies without such experience or data, research has suggested ratcheting the estimate downward by a factor of ¾. Thus, if the data said p = 0.7, the estimate to be used in the forecasting would be PI = ¾ (0.7) = 0.525.
charge price (Pr)-
the price the company intends to charge (Pr) -$SP=MP×PI×Pr -the components in the equation aren't entirely independent; PI is likely to increase a smidge as Pr drops.
marketing maturity
third stage in the product life cycle in which Advertising continues to try to convince customers of a brand's relative advantages and serves as a reminder to buy in the product category. -Products may proliferate to a fuller product line in order to satisfy more segments of customers. Industry sales have leveled off, so competition is intensifying; there is more competition than in any other stage in the life cycle -The stiff competition has induced higher marketing costs and likely lower prices; thus, while sales are stronger than ever, profits have declined. -In addition, the pie is no longer growing in size, so strong competitors gain market share or increase their sales only by taking it away from other competitors. Hence, weaker firms begin to fall out of the marketplace. -In addition, because firms are going after each other, their product offerings often begin to homogenize to the point that customers see fewer distinguishing characteristics. -Instead of swirling into price drops with competition, it's smart to try to find new benefits and to either increase or at least maintain current prices.
Top-down development
when a company thinks up a new idea, develops it, and doesn't involve the customer until somewhat later in the process -often favored in companies with technical expertise (e.g., engineering and medical) -The process of developing new products depends first on a company's culture. Some companies take a nearly exclusively top-down approach, beginning with idea generation, proceeding to design and development and then to commercialization. -Marketing is essentially an afterthought, something to help with the final launch phase to introduce the product to customers. -found frequently among companies with strong engineering orientations, pharmaceutical and biomedical firms, financial services, and many hightechnology companies. -The internal R&D team has expertise that the end users lack. -It's not necessarily a simple process, or a particularly quick one (e.g., drugs spend years in development). Furthermore, the process can be top-down for poor reasons, such as a CEO with a pet project who won't let it go. -sometimes also called "inside-out" because the idea comes from within the company. Feedback from the outside (customers, suppliers, etc.) is sought later in the process. As long as any feedback is obtained from customers, this can be a perfectly fine approach
