MKTG 480: Chapter 8 - Product strategy and new product development

External

- An excellent source of ideas comes from individuals and organizations not directly connected with the company. - In some industries, such as Internet applications, small entrepreneurs drive innovation. - Google, Microsoft, and Apple all maintain dedicated staff whose job it is to identify and acquire new start-up organizations with great product ideas.

Distributors

- Distributors are a good source for new-product ideas particularly when they are the primary link between the customer and the company. - Small organizations generally do not have the resources for a national sales force and use distributors in many markets.

Pricing

- individual product pricing within the product line - "good, better, best" product line strategy - technology companies face special challenges as newer models have better features and lower prices

Product: The heart of marketing

- the product experience is at the core of delivering value to the customer - the customer experience at Starbucks extends beyond coffee to social interaction and lifestyle - if the product is wrong, great promotion, pricing or distribution can't save it

Stop-to-market mistakes

A good idea is eliminated prematurely - Most often companies are reluctant to talk about stop-to-market mistakes because it makes management uncomfortable and provides additional information about product development to competitors.

Product line

A group of products linked through usage, customer profile, price points, and distribution channels or needs satisfaction

Product Classifications

Business goods 1. materials 2. parts 3. MRO supplies 4. Capital goods - Businesses buy a vast array of products that can be classified into three broad areas based on two dimensions: (1) whether or not they are used in the manufacturing process (2) cost. - Goods incorporated into the company's finished product as a result of the manufacturing process are either materials or parts.

Laggards

Product avoiders want to evade adoption as long as possible. - Resistant to change, they will put off the purchase until there is no other option. - (16 percent)

Innovators

Product enthusiasts enjoy being the first to try and master a new product. - Individuals in this group are prime candidates for beta testing and represent a good source of feedback late in the product development process or early in the product launch phase - (2.5 percent)

Late Majority

Product followers are price-sensitive and risk-averse. - They purchase older generation or discontinued models with lower prices and fewer product features. - (34 percent)

Early adopters

Product opinion leaders seek out new products consistent with the personal self-image. - This group is not price-sensitive and is willing to pay the price premium for a product. At the same time, early adopters demand a high level of personalized service and product features. - (13 percent)

Early majority

Product watchers want to be convinced of the product's claims and value proposition before making a commitment. - This group is considered critical to long-term success as they take the product into the main stream. - (34.5 percent)

Product life cycle

The PLC is a useful tool because: (1) it provides a strategic framework for market analysis, (2) tracks historical trends, and (3) identifies future market conditions. - The PLC generally refers to a product category (bicycles) rather than a product item (specific brand). 1. sales revenue and profitability 2. timeline 3. caveats

Form

The most elemental method of differentiating a product is to change its form—size, shape, color, and other physical elements. - Many products considered very similar in functionality can be differentiated by variations in packaging or product delivery.

Evaluation

combine all information (word of mouth, reviews, advertising) and evaluate the product for trial purchase.

Parts

consist of equipment either fully assembled or in smaller pieces that will be assembled into larger components and, again, used in the production process. - In addition to the products that are used directly in the production process, companies purchase a number of products and services to support business operations. - These can generally be placed on a continuum from low-cost/frequent purchases to very high-cost/infrequent purchases

Tangibility

physical aspects of the product experience - products present opportunities (customers can see, touch, and experience the product) and also some challenges (customers may find the product does not match their personal tastes and preferences).

Customer's perspective

the customer's perspective is much more narrow and self directed - the customer is most interested in an answer to the fundamental questions: Is this new product new to me?

Repeat purchases

the number of products purchased by the same customer. - This can be important with frequently purchased products such as convenience goods that rely on frequent repeat purchases for success.

Replacement purchases

the number of products purchased to replace existing products that have become obsolete or have malfunctioned. - Estimates are made on the number of product failures in any given year based on the expected product life. - As more products are sold into a market through first-time and repeat purchases, the number of replacement sales will increase.

The diffusion of innovations

the process whereby a new product, service, or idea spreads through a population 1. innovators 2. early adopters 3. early majority 4. late majority 5. laggards

Capital Goods

which are major purchases in support of a significant business function.

New products defined: company perspective

1. new-to-the-world 2. reposition existing products 3. cost reduction

Develop the product

1. product testing: - alpha - beta 2. Test the market - consumer product market tests - business product market tests 3. product launch

Product Discrimination: Create a point of difference

1. form 2. features 3. performance quality 4. conformance quality 5. durability 6, reliability 7. repairability 8. style

New-to-the-world

- disruptive innovation are so innovative they create a fundamental change in the marketplaces (example: connected clothing) - sustaining innovations are newer, better dater versions of existing products or additional to existing product lines (example: diet coke, coke zero)

Identify product opportunities: generate new ideas

1. internal 2. external 3. customers 4. distributors

Marketing communications

- focus on a single product or the brand - allocation of budget: most popular products? entire line? new products:

Consumer goods

1. convenience goods 2. shopping goods 3. specialty goods 4. unsought goods

Product decisions affect other marketing mix elements

- Individual product pricing within the context of a broader product line requires a clear understanding of the price points for all the products in the line. - Often multiple price points are targeted at specific markets with unique features following a "good, better, best" product line strategy. - A key strategic decision for marketers is the degree to which marketing communications focuses on a single product item versus a product brand. - Usually, companies do both, but the emphasis on one approach versus the other makes a big difference in the communications strategy. - A second communications issue is the allocation of communications budget dollars across product items in a product line. - 3M focuses much of its Post-it marketing communications on the Post-it product line, emphasizing the brand. - Contrast that with Häagen-Dazs, which focuses on specific products (ice cream, sorbet, and yogurt) and specific product items within each product (chocolate, almond hazelnut swirl, pineapple coconut).

Customers

- Many companies encourage customer input directly online through e-mail and online discussion groups. - Ford, BMW, Mercedes-Benz, and others sponsor user group bulletin boards that discuss improvements to existing products. - While this will not likely lead to "new-to-the-world" products, it can lead to incremental or even substantial enhancements to existing products.

Internal

- Sources include employees from R&D, marketing, and manufacturing. - Key employees know both the capabilities of the company and the needs of the market. - Therefore, it is not surprising that internal sources are the single best source for new-product ideas. - As salespeople, customer service representatives, and others interact directly with customers, it is possible to identify new-product ideas. - Often these ideas are incremental changes to existing products that solve a particular problem; however, occasionally the customer challenge requires a truly innovative solution. - Working with academia helps support the research activities of many organizations.

Caveats

- The PLC is a helpful conceptual tool that works best when viewed as a framework for studying a product category. - It can be difficult to know with certainty what stage a product is in, particularly at transition points in the PLC. - Rather, the PLC enables marketing managers to assess historical trends in the category and track how the product has behaved over time.

Timeline

- The speed at which products within a category move through the PLC is not consistent, and there is a great deal of variability across product categories. - In some cases, a product moves through an entire cycle in a period of months and is replaced with the next product design. - Fads come and go quickly, often reaching only a limited number of individuals but creating a lot of buzz in the marketplace. - Often, women's fashion is seasonal with a product line being introduced in the spring, moving through its growth cycle in the summer and fall, then finally into decline by winter. - The cycle takes one selling season, in this case, one year. - With other products such as men's suits, it may take decades from introduction to decline. - Men's classic two-piece suits experience incremental changes every season, but the same basic design has been around for many years.

Sales revenue and profitability

- The top line charts the industry sales revenue for the product over time. - The sales revenue line increases dramatically in introduction and growth stages as the product moves through the consumer adoption process. - At some point, sales begin to decline. - However, a sales decline does not necessarily mean the death of the product. - Companies may create new products or market conditions may change, which can reinvigorate the product and start a new growth phase.

Define the product opportunity

- define and test the product concept - create a marketing strategy - analyze the product's business case

Four Ways to Classify products

1. By nature of the products - tangibility - durability 2. By who uses the products - consumers - businesses

Why do products fail?

1. Company - inadequate value proposition - poor marketing communications - product does not meet customer expectations - failure to fully develop product 2. Customers - change in purchase priorities - higher expectations 3. Competitiors - aggressively attack new competition 4. Environment - changes in government regulation of legislation - changes in societal demands - economic changes

Defining the product at southwest airlines

1. Enhanced product - experiences exceed minimum expectations; frequent flyer programs; reserved seating 2. Core product - one time; safe; experience matches expectations 3. Essential benefit - moving from point A to point B

Three major activities in new product development are:

1. Identify product opportunities 2. Define the product opportunity 3. Develop the product opportunity

PLC

1. Introduction - objective: 1. build awareness 2. trial purchases - profitability: 1. low sales, typically high failure rate 2. high marketing and product costs 2. Growth - objective: 1. differentiate product from competitors promote rapid expansion - profitability: 1. sales grow at increasing rate 2. profits are healthier as operations are streamlined 3. Maturity - objective: 1. transition product from high growth to sales stability - profitability: 1. sales increase at a decreasing rate 2. cost minimization has reached full extent 4. Decline - objective: 1. determine future of the product - profitability: 1. long-run drop in sales 2. profit margins dramatically reduced

PLC: Market Conditions

1. Introduction - market segment: nonexistent - targeted consumers: innovators and early adopters - competitive environment: little competition - competitor reaction: followers release similar products to pioneer 2. Growth - market segment: new segment now established - targeted consumers: early adopters to majority - competitive environment: many competitors - competitor reaction: large companies acquire small ones 3. Maturity - market segment: market approaching saturation - targeted consumer: majority - competitive environment: marginal competitors drop out - competitor reaction: models emphasize style over function 4. Decline - market segment: changing tastes and substitute products erode share - targeted consumer: laggards - competitive environment: falling demand forces many out of market - competitor reaction: remaining firms focus on specialty

PLC: Maturity Phase

1. Product: product lines are widened or extended 2. price penetration: target high-end market, higher price 3. Price skimming: lower price due to competitive pressures if product is not well-differentiated 4. Promotion: decide between short-term sales promotion or investing more in the brand 5. distribution: has reached maximum distribution

Consumer product market tests

1. Where: The location of the market test is based on how well it reflects the potential target markets. - Most market tests involve somewhere between two and five cities to mitigate regional differences in purchases patterns (if there are any). 2. How long: Most test markets run less than a year. - The test should be long enough to include several purchase cycles. - With many consumer products, purchase cycles are relatively short (days or weeks) so there is less need for a long market test. 3. Data: Critical information needed to make necessary decisions must be identified. - Management frequently wants to know how long it takes for the product to move through the distribution system, tracking the product from manufacturing plant through to the point of sale. 4. Decision criteria: Metrics for further action must be identified. - At this stage it is difficult to pull a product, but if the product fails in the market test, management is faced with a difficult decision—drop the product or send it back for major redesign.

PLC: Decline Phase

1. product: consider expense in terms of ROI - Product lines are widened or extended. Work to further differentiate product from those of competitors. 2. Price penetration: low price to stimulate demand - Target high-end market with differentiated product and higher price point. 3. Price skimming: pressure from competitors and consumers 4. promotion: cost not justified by conditions 5. distribution: reduce channels - Product has reached its maximum distribution. - Channel members identify weak products and begin dropping out if necessary. 6. communications: Challenge of deciding between short-term sales promotions or investing more in the brand.

PLC: Introduction Phase

1. product: high-quality, innovative design providing new benefit to consumers. - features well received and understood by target consumers 2. Price: price skimming or penetration 3. Communications: inform and educate target audience about the product's features and benefits promotion focused on product awareness and to stimulate primary demand 4. Distribution: wide distribution network with limited product availability. - Create anticipation by promoting excitement and sense of scarcity. Limit distribution but increase product availability: Release to limited number of target markets with high availability. - Intensive personal selling to retailers and wholesalers.

PLC: Growth Phase

1. product: more features and better design, , learning from issues from first generation. - diversification of product and release of complementary products/services 2. Price penetration: new and improved models sold at high price points. - Existing models or earlier generations move down in price. 3. Price skimming: existing models or earlier generations move down in price 4. Promotion: link the brand with key product features and highlight differentiation between competitors. -Promotion emphasizes brand advertising and comparative ads. 5. distribution: broaden distribution networks to keep up with expanding market demand

Conduct business case analysis

1. total demand - new purchases - repeat purchases - replacement purchases 2. profitability analysis - long and short term analysis

SKU

A stock-keeping unit - Each combination of scent and size represents a unique product item in the Tide product line and is known by a stock-keeping unit (SKU). - An SKU is a unique identification number used to track a product through a distribution system, inventory management, and pricing.

Product Mix

All the products offered by a company

Conformance quality

An important issue for consumers is conformance, which is the product's ability to deliver on features and performance characteristics promised in marketing communications. - The challenge for marketers and manufacturing is that every product must deliver on those promises. - A product is said to have high conformance quality when a high percentage of the manufactured products fulfill the stated performance criteria. - If someone opened a Coke and there was no "fizz," it wouldn't be a Coke.

Durability

Consumer research and purchase patterns affirm that people find durability, the projected lifetime of the product under specific operating conditions, an important discriminating product characteristic and are willing to pay a premium for products that can demonstrate greater durability.

Performance quality

Essentially, companies should build products to the performance quality level that their target audience is willing to pay for. - Often this means a company will build products at multiple performance levels to meet demand at various price points. - Keep in mind that the key is to deliver value to the customer.

Convenience goods

Frequently purchased, relatively low-cost products for which customers have little interest in seeking new information or considering other options and rely heavily on prior brand experience and purchase behavior. Includes subgroups of staples, impulse products, emergency goods. - staples, impulse, emergency

Create the marketing strategy

In the middle is the target market and the following are around it: 1. budget 2. promotion 3. place 4. price 5. product - First, defining the target market is helpful to the product developers. - In addition to the basic market information (size, geography, and demographics), product developers appreciate knowing how the product will be used (context, environment) and psychographics of the market (the market's activities, interests, and opinions). - Marketers also assess the market share potential at critical points in time (how much market share can the new product get after one year). - At this point, tentative pricing, distribution, and marketing communications strategies are created that will be adapted as the product gets closer to rollout. - Often, as part of the initial marketing communications, appropriate publications will include articles about a new product. - Finally, marketing managers begin to develop budgets for the product launch and estimates of the marketing communications budget, manufacturing capacity, and logistical needs.

Repairability

Increasingly, consumers and businesses evaluate the repairability, ease of fixing a problem with the product, as part of the product evaluation process. - As a result, companies have built better diagnostics into their products to help isolate, identify, and repair products without the need for the costly repairs of a professional service.

Style

One of the most difficult discriminators to accurately assess and build into a product is the look and feel of the product, or style. - It is easy for someone to say a particular product has style, but designing it into a product can be a challenge. - More than any other discriminator, style offers the advantage of being difficult to copy.

Business product market test

Products designed for business markets are tested differently than their consumer product counterparts. - Essentially, the tests are smaller in scope and involve fewer individuals and companies; however, they are no less important in the new-product development process. - Because business markets are smaller, beta testing often includes only a few key customers with a long-standing company relationship. - If, on the other hand, the company has independent distributors, it identifies a limited number for the market test and provides additional support to them as the product is being tested.

Unsought goods

Products that consumers do not seek out and, indeed, often would rather not purchase at all. Insurance, for example. - insurance

Shopping goods

Products that require consumers to do more research and compare across product dimensions such as color, size, features, and price. - furniture, clothes, appliances

Identify product opportunities: evaluate ideas

Screen and evaluate ideas 1. go-to-market mistake 2. stop-to-market mistake

Product launch

The product launch is critical to the long-term success of the product. Products that start poorly seldom recover from a poor launch. - The pressure to create excitement, particularly for consumer products, leading to consumer trial purchase is a primary reason companies spend millions of dollars on a product launch. - Many marketing communication dollars are front-loaded at the product launch with the goal of creating sufficient product interest that will turn into repeat and replacement purchases later.

Specialty goods

a unique purchase made based on a defining characteristic for the consumer. - The characteristic might be a real or perceived product feature such as Apple iPhone's easy user interface or brand identification like Porsche's reputation for building sports cars. - Whatever the attribute(s), consumers apply decision rules that frequently minimize the number of different product choices and focus less on price. - They are also more willing to seek out the product; however, expectations about product service, salesperson expertise, and customer service are higher. - unique characteristics iPhone

Reposition existing products

add new market segments - cell phones from business usage to adults to teens

Features

added or subtracted from a product to differentiate it from competitors. - However, while delivering consumer value is the primary driver in making product decisions, a company must balance the features customers want with what they will pay at a given quality level.

Consumer adoption and diffusion process

an individual moves through five stages before adopting a product 1. awareness 2. interest 3. evaluation 4. trial 5. adoption

Materials

are natural (lumber, minerals such as copper) or farm products (corn, soybeans) that become part of the final product.

MRO Supplies

are the everyday items that a company needs to keep running. - (maintenance, repair, operating)

Product Characteristics

defining the product - essential benefit - core product - enhanced product

Go-to-market mistake

firms fails to keep a band product idea from moving into product development - Expensive mistakes often initiate a review of the screening process to figure out how the product made it through the development process. - When the product fails to hit targeted benchmarks for success, the review may focus on errors in marketing strategy, target market adjustments, or competitive response to the product launch.

new purchases

first-time sales. - With new products, these sales are called trial purchases. - This is also calculated as the trial rate (how many individuals in a particular target market have tried the product).

Enhanced Product

includes additional features, designs, and innovation that exceed expectations - frequent flyer program, fun and entertaining flight attendants

Cost reduction

introduce lower-cost products with fewer features or scaled-back warranty or service

Product

is anything that delivers value to satisfy a need or want and includes physical merchandise, services, events, people, places, organizations, information or ideas - product versus product item - It is important to differentiate between a product and a product item. - A product is a brand such as Post-it notes or Tide detergent. - Within each product a company may develop a number of product items, each of which represents a unique size, feature, or price. - Tide powder detergent offers 12 "scents," including fragrance-free, in a variety of sizes designed to reach a variety of target markets

Alpha testing

is done by internally by engineers, product specialists, and other employees.

Beta testing

is done by potential customers.

Innovation dissuasion process

is how long it takes a product to move from first purchase to last purchase - the last set of users to adopt the product

Essential benefit

is the fundamental need met by the product - getting from point A to point B on an Southwest airlines

Reliability

is the percentage of time the product works without failure or stop- page. - Businesses and consumers consistently report this is an important discriminator in their purchase decision; however, a product can be too reliable. - While it is possible to build computers that will last for years and cost a premium, most computer manufacturers do not build them because computer technology changes so quickly and product improvements happen so fast that people will not pay the premium for a computer that will last for many years.

Core product

is the physical, tangible elements - one kind of aircraft, low fares, good websites

Awareness

know of the product, but insufficient information to move forward through the adoption process.

Identify product opportunities: prioritize ideas

prioritize ideas that pass initial screening and evaluation 1. Time to market - how long will it take to develop and get the product to market 2. ROI - what is the expected return for the dollars invested in the project 3. New product fit with overall company product portfolio

Define and test the product concept

product definition objectives: 1. define the value proposition 2. identify the target market and purchase frequency 3. delineate the product characteristics: look, feel, physical characteristics, features - Product definition has three objectives. - First, it defines the product's value proposition: what customer needs are being addressed and, in broad terms, at what price. - Second, the definition briefly identifies the target market(s) and the purchase frequency. - Third, the definition delineates the product's characteristics (look, feel, physical elements, and features of the product). - As the product moves through development, the physical characteristics become more defined and particular features, often at different price points, are included in the prototypes. - 45 Target customers are useful in defining the product concept. Companies present models, limited prototypes, and verbal or written descriptions of the product concept to customers, individually or in focus groups. - Computer graphics are also used to depict elements of the product and even functionality. - For example, in the development of new jet airliners, Boeing and Airbus develop sophisticated simulations that allow passengers to virtually sit in the airplane. - In this way, customers get a more realistic perspective at a fraction of the cost to develop a full-scale working prototype.

Durability

product usage - references the length of product usage. Nondurable products are usually consumed in a few uses and, in general, cost less than durable products. - Examples of consumer nondurables include personal grooming products such as toothpaste, soap, and shampoo, while business non- durables include office supplies such as printer ink, paper, and other less expensive, frequently purchased items. - Because these products are purchased frequently and are not expensive, companies seek a wide distribution to make them as readily available as possible, create attractive price points to motivate purchase, and heavily advertise these products. Durable products have a longer product life and are often more expensive.

Trial

purchase the product for the purpose of making a value decision.

Adoption

purchase the product with the intent of becoming a dependable user.

Interest

receive additional information (advertising, word of mouth) and motivated to seek out added information for further evaluation.