product development & management: test 1

Two products x and y are identical, except for their "consistency." What is "consistency"? All else equal, why may the product with higher consistency be more successful?

"Consistency" refers to the change of a product's attributes over time or within a set of the same products at a moment in time (thus it refers to statistical variance). A customer may appreciate a lower variance in an attribute and not so much a high average of that attribute. "Consistency" is also about the level of an attribute when circumstances change. A product may have a lower variance (relative to other products) in an attribute for given circumstances, or it may show a lower variance in an attribute under changing circumstances.

What is an "experience" product? What relationship exists between experience products and advertising? (Hint: Consider that advertising implies a sunk cost for the advertiser -at least some of the money spent on advertising cannot be recouped or recovered. In turn, consider the behavior of customers toward experience products. Can't say more.)

"Experience" products are characterized by attributes that are known or realized through experience. For example, observation of medicine alone will not treat a disease (it just may be a placebo). Even if the medicine works for some customers who have tried it and reveal its virtues, it may not work for a particular customer. Advertising is a way to show commitment or make a promise. A customer may be less reluctant to try a medicine that is heavily advertised. Why? Consider that the investment in advertising is sunk if the medicine does not work and the producer wants to recoup that investment. High investments in advertising may signal commitment and enhance trust between producers and customers.

"If customers say they want attributes 1, 2 and 3 in a product in that order, then they are willing to pay more for 1 than for 2 or 3." Do you agree?

A customer may want attributes 1, 2 and 3 in a product, but they may not be willing to pay for 1, 2 and 3 in the same order. Product managers should not confuse customer "wants" with "willingness to pay." "Willingness to pay" depends on the alternatives open to customers. As an analogy, consider that customers may want attribute 1 more than any other attribute, but if it easy and cheap to find alternatives to attribute 1, they will not be willing to pay much for it.

A product manager sells religion while another sells cheap disposable pens. What makes their tasks different?

A disposable pen is a relatively observable product while religion is a credence product (or service). A credence product is a product based on faith or trust alone. This requires a different approach to selling credence products. For example, strategies will have to be in place to increase trust without any formal guarantees (as they are impossible or inappropriate -is money refunded if a church contributor does not end in heaven?). The attributes of the product offered by a religious organization (for example, spiritual comfort and salvation) will have to be "packaged" accordingly. For example, should part-time priests work, depending on demand for religious services, for the church in the same way as an electronics store hires extra employees for the Christmas season?

"We can't make profits if incremental customer value is zero." Do you agree? Why?

A firm may still make profits if incremental customer value of a product relative to an alternative is zero, because costs may be lower than the price

What is the key difference between final products and investment or intermediate products and how does it affect the management of these products?

A key difference between a final product and an investment or intermediate product is that the demand for intermediate products depends on final demand. Thus the demand for intermediate products is derived from the demand for the final product. This poses additional challenges to product managers producing intermediate products. For example, when demand for the final product falls, the demand for the intermediate product may fall more than proportionally, as customers prefer to draw from any accumulated stocks. Also, increased demand for the intermediate product may lag an increase in demand for the final product.

Take any product and analyze its "product concept" using the five "Cs." How would you improve the product after a five "Cs" analysis?

A manager should consider the product's positive and negative characteristics. A manager should consider that different customers may judge characteristics differently. A positive attribute for a group of customers may be a negative attribute for other products. Even if all customers judge an attribute to be positive, they may differ in their willingness to pay.

Why could a patent make a product inimitable but at the same more substitutable?

A patent protects the owner of the patent from imitation, but does not necessarily protect from substitution. Indeed, as patents are open to the public, patents may provide ideas that work around the original patents and find other possible alternatives. A patent may then provide inspiration to develop substitutes. This downside of patenting inventions may be more serious for "sleeper patents." "Sleeper patents" are patents that are kept in reserve for future use. For example, a firm may buy a patent to avoid its use by the inventor and other firms. The patent is then left unused as its use may cannibalize the owner's existing products. However, as in the case of any other patent, "sleeper patents" are public information. The benefit of having "sleeper patents" is that they cannot be used by others, but "sleeper patents" can be "worked around" and the resulting workarounds then substitute for the patent and can be patented also. A firm should thus manage sleeper patents carefully, as sleeper patents encourage the development of substitute patents.

Why would a product manager deliberately make a product more complex despite higher costs of doing so?

A reason (you may have others) for deliberately increasing product complexity is that a firm can impose competitive barriers by doing so. For example, adding certain inert ingredients in medicine may confuse competitors and delay their attempts to imitate the product as it hinders finding the active ingredient.

A manager expects a downturn in economic activity due to reduced discretionary income of customers. Is a reduction in discretionary income necessarily negative for the firm? If it is negative, propose at least two actions based on the three benefits that accrue to customers when they buy a product (positive benefits, cost reductions, and loss avoidance or prevention) to reduce the impact on demand of lower discretionary income.

A reduction in discretionary income may not be negative for the firm. This occurs when the product is "inferior" (a technical term that doesn't imply that the product is actually inferior in terms of quality). The relative importance of the three benefits of a product (positive benefits, cost reduction, and loss avoidance or prevention) changes as conditions change. What actions can a manager take on the basis of the three components of benefits? It is possible that customers assign a lower importance to positive benefits when economic conditions are deteriorating and discretionary income falls and assign a higher importance to cost reductions. Thus a manager should change the emphasis when communicating the product's attributes in the short run and even consider changing the product itself in the long run. For example, an ad for a car may assign more importance to cost reductions (like gas economy) than to positive benefits (distinctive options or design).

Suppose that a religious organization sells a credence service ("salvation"). Why do you think that a product manager for the religious congregation may suggest investing in a building that has few uses other than being a place of worship rather than in a building that has many alternative uses?

A specific asset has few alternative uses. The investment is more likely to have a higher sunk (or unrecoverable) component if the building has few alternative uses. By building a place of worship that has few alternative uses, the religious congregation is attempting to reduce reluctance by potential followers. The specificity in the building is trying to show commitment so as to generate trust. A product manager for the religious congregation will have an easier task of attracting followers if potential followers are less reluctant to join the congregation (Potential followers may think, "If they were trying to fool us, then they would not invest in a building with few uses.")

A product manager responsible for home appliances reads a report that predicts an increase in the price of aluminum in the short run as the demand for aluminum in other industries is expected to increase. Worried, the product manager asks a newly hired assistant purchasing manager, "What can we do, especially when aluminum is important and difficult to substitute in the product we make? The purchasing manager responds, "Do not worry. This situation will correct itself. In the short run, a higher price for aluminum will increases the incentive to recycle aluminum too. This added short term supply will allow the price to quickly return and even fall below its original level." Comment. What would you say to the assistant purchasing manager?

According to the assistant purchasing manager, the increase in the price of aluminum as demand for aluminum increases will increase the short run supply of recycled aluminum, and thus reduce the price of aluminum. The price may then "quickly return and even fall below its original level." The assistant purchasing manager is confusing a movement along the demand for aluminum with a shift in supply. The current supply curve of aluminum already considers the added quantity supplied when a higher demand makes recycling more attractive. Although the long run supply curve may be elastic in the long run as a higher price motivates producers to expand capacity and induces entry, the price will not return or fall below its original level in the short run because recycled aluminum increases supply as the short run supply already considers the added quantity supplied from of aluminum recyclers.

"We produce two distinct and independent products x and y sold to two types of separate customers A and B. Product x is profitable, product y is profitable, customer A is profitable and customer B is profitable. Well, we should not be surprised that each product for each customer is profitable when products are profitable and customers are profitable. We live in the best of all worlds!" Comment. Specifically, why may the firm lose an opportunity to increase its profit? Why may the firm not live in the "best of worlds"?

According to the statement, products x and y are profitable and customers A and B are profitable. The apparent conclusion is profit cannot increase. However, consider the following table showing profits by customer and by product: -Customer A Product x: -50 Product y: 90 Total profit: 40 -Customer B Product x: 80 Product y: -70 Total profit: 10 -Total profit Product x:30 Product y: 20 Total profit:50 In the case shown above, each product is profitable and each customer is profitable, but each product for each customer is not profitable. Suppose that products are independent in revenues and costs to show a possible opportunity to increase profits. The firm can increase its profit by $120 if it sells product y to customer A only and product x to customer B only. As the case illustrates, having profitable products and profitable customers does not imply that each product sold to each customer is profitable! Indeed, a product may appear to be unprofitable just because losses from selling the product to particular customers outweigh the gains from selling that same product to other customers. In the same vein, a customer may appear to be unprofitable because the losses selling a particular product to that customer outweigh the profits from selling another product to the same customer. Lesson for product managers: Identify the profitability of each product for each type of customer to correctly assess the profitability of products and the profitability of customers and find opportunities to increase profits!

A product manager should consider the organization's "critical processes" and "core competencies" behind products so as to define a "portfolio of products" or define new products. What does this mean? Explain and provide an example.

Although a product manager will, at the end, manage a product or a portfolio of products, a product manager should not forget that a portfolio of products should have some common denominator that explains the strength of the organization. For example, Honda produces a wide array of products but the common denominator is the expertise that Honda enjoys in engines and transmissions. It is this core competency and its underlying critical process that defines the common denominator in cars, motorcycles, generators, lawn mowers, boats and so forth. This has important implications for a product manager: For example, when developing new products, a product manager should emphasize the portfolio of critical processes and not so much the characteristics of products. As an illustration, Coca Cola may think that wine is a logical new product to add to its product lines because it may be thought that wine has commonalities with Coke and other related products, but Coca Cola may not have the critical process to produce wine.

A firm produces x and y is a close substitute of x. If y is eliminated, will x face lower substitutability?

Although product y is a substitute for product x, product x may have equally strong substitutes like product z. Thus the elimination of product y may not affect or affect only negligibly the substitutability of product x. This case shows the importance the importance of distinguishing between substitutability and "substitution distance." "Substitution distance" refers to the second best alternative or substitute for a product. In the previous example, the "substitution distance" is extensive if y is a good substitute for x, but z is distant from y. The distance will be short if y and z are both good substitutes for x. This idea has important implications for competitive strategy. For example, consider a firm that eliminates a close substitute y and is now confident that its product x faces fewer threats. Simply, another product z can now take the place of product y, without any significant change in the degree of substitutability of x. Eliminating the firm that produces y may just strengthen a worse enemy, the firm that makes the other close substitute z. Indeed, the firm may have done its main enemy, the producer of product z, a big favor by eliminating the producer of y! Lesson: Distinguish between substitutability and "substitution distance."

The product manager for a shipping company (like UPS) is puzzled by data showing that despite matching the main competitor's average shipping time of products sent by vendors to customers and charging a lower price relative to the competitor, demand for services provided is lower. On the basis of the product concept dimension of "consistency," can you offer an explanation?

Although the average shipping time is the same, the competitor may offer shipping with a lower variance. Customers are willing to pay more for shipping services offered by the competitor because the competitor provides a service with a lower variance. This also relates to conformity. The competitor firm may not only have a lower variance when it offers shipping service, but credibly promise and deliver what it promises.

Does the component of "characteristics" in the product concept consider only characteristics considered to be "good" by customers? Does the product concept also consider "bad" characteristics?

As much as possible, a product manager should consider all characteristics found in a product. Thus both "good" and "bad' characteristics should be identified. Moreover, a product manager should analyze characteristics for their independence. Does a "good" characteristic bring about a "bad" characteristic? For example, a pill may energize its user but may also lead to headache. What tradeoff exists? How can the product be improved by balancing its characteristics?

Suppose that a customer is planning to buy either an energy-saving light bulb or an incandescent bulb, and wants to save electricity costs. The energy-saving light bulb lasts six years while the incandescent bulb lasts one year. The price of the energy-saving light bulb is $5 while the price of an incandescent bulb is $.50. Over six years, a customer can use six incandescent bulbs or one energy-saving bulb. An energy-saving light bulb will lead to $2 per year in electricity costs while the incandescent bulb will lead to $11 per year in electricity costs. Ignoring the value of time and assuming (for simplicity) that the choice is between the incandescent bulbs and the energy-saving bulb and any other alternative generates zero net benefits how much is the customer willing to pay for the energy-saving light bulb? What is the customer value generated by the energy-saving light bulb, if any? Based on the previous information and conditions, what is the maximum price a customer is willing to pay for the energy-saving bulb?

As stated, the only difference in benefits stems from savings in electricity. Over six years the customer can use one energy-saving bulb or six incandescent bulbs. Over six years, the customer will spend 6*$.50=$3 on incandescent bulbs or $5 on one energy-saving light bulb. Over six years the customer will spend $66 in electricity using an incandescent bulb or only $12 using an energy-saving bulb. The customer will thus save $54 in electricity using an energy-saving bulb. The customer will spend $3 using six incandescent bulbs in six years. The willingness to pay for the energy-saving bulb is thus $57. The customer value generated by the energy-saving bulb is $52 over the lifetime (six years) of the energy-saving bulb, given that the price of the energy-saving light bulb is $5. Alternatively, $5 "buys" $57 in savings, and $52 is the net savings from buying an energy-saving bulb over six years. The maximum price that the producer of energy-saving bulbs can charge is $57. Why? If the price of the energy-saving bulb is $57, then the total cost of using an energy-saving bulb (including the cost of electricity) is $57+$12=$69. If the customer uses incandescent bulbs, then the total cost of using the incandescent bulbs (again including the cost of electricity) is $3+$66=$69.

A customer says that two units of product X are equivalent in benefits to one unit of product Y. If the price of product Y is $80 and the price of product X is $25, and the customer does not face any other costs when purchasing X or Y, how much is the customer willing to pay for each unit of X in this situation? How much is the customer value of each of the two units of X in this situation?

Based on the information provided by the customer, two units of X are equivalent in benefits to one unit of Y. However, the price of Y is $80 and the price of each unit of X is $25. Thus the net benefit when consuming Y is B-80, while the net benefit of two units of X is B-50. Thus two units of X generate $30 in customer value because (B-80)-(B-50)=$30. The willingness to pay for two units of X is $80 because two units of X are equivalent to one unit of Y and Y costs $80. The question is about the willingness to pay and customer value generated by each unit of X. In the situation described by this problem, each unit of X will thus generate $15 in customer value and the willingness to pay for each unit will be $40. f the price of each unit X were $40, two units of X would cost the same as one unit of Y and the net benefit would be (B-80) and customer value when consuming X would be zero.

The "characteristics" component in the product concept has to be related to the benefits a product makes possible. What does this mean?

Characteristics have to be related to the benefits of a product. However, characteristics may lead to functionality in certain circumstances and settings but in others. For example, a perfume of a certain size makes it easy to keep in a purse. This characteristic generates benefits in certain circumstances and settings. The product manager should thus relate the characteristics to the benefits in those circumstances and settings. A sturdy music player may be especially functional (serves a purpose which enables benefits) when some customers engage in sport activities, but not when used with a stereo in the living room. A computer with a detachable DVD drive has high functionality (and resulting benefits) by allowing more space or less weight when traveling, but becomes a nuisance if the customer easily forgets to carry it. A Montblanc pen may be dysfunctional because of its weight but functional as it prevents the owner from easily losing it. The weight of a Montblanc may be dysfunctional when going to a meeting, but be functional during the meeting while arguing in support of an idea, as it may facilitate convincingness. Notice that good attributes may be bad attributes depending on the circumstances (for example, as it is used in the customer's process)

A product manager makes a presentation stressing the "incredible benefits of a new product the firm is developing. "With this product we will beat the competitors. We have come far since we started this firm. However, it will be a costly fight because they are entrenched and will defend their position in the market. But still, I know we will prevail, we will succeed, we are not just a poor startup. We have a grand strategy!" The sales manager, also attending the meeting, says, "Your grand strategy is a naïve strategy. There are better options. You should understand our 'business map.' We should rather shake hands with our enemies." Comment. Specifically, defend the sales manager. Why may it be better to "shake hands"?

Collaboration rather than rivalry may generate more profits for this recently established firm as the firm risks a costly fight. Instead of introducing the new product and fighting competitors, the firm may profit more by selling the idea to one or many of its competitors. The sales manager asks the product manager to "understand the business map." The sales manager recognizes that in business, competition and collaboration are intertwined

What is the meaning of "consistency" behind the product concept?

Consistency refers to the variation of the product or service over time or within a group, set or batch of the same products at a moment in time. For example, a restaurant may serve a dish with changing quality over time, or quality may differ within a batch. Customers may prefer to have less variation in quality than an increase in average quality. McDonald's, for example, assigns a high priority to "consistency" in its product concept, because customers seemingly also assign a high priority to "consistency" when demanding fast food. Having a high quality hamburger one day and a low quality hamburger another day may negatively affect a customer's willingness to pay. Someone getting a high quality hamburger while others get a low quality hamburger at the same time may even make the "lucky" customers of the better quality hamburger less willing to pay for a hamburger next time, as it leads to ambiguity. Notice that consistency is also applicable when conditions change over time. For example, take a type of rechargeable batteries and compare it with another type of rechargeable batteries. Both may last the same on average, but one type may last longer in extreme conditions. Or take a calculator. It may perform in the same way under given circumstances, but not when subject to changing circumstances. A calculator may better sustain rough unexpected and extreme conditions. A calculator may not be designed or made for rough handling or misuse but may nevertheless sustain misuse. Summarizing: The consistency of a product not only refers to the low variance of its attributes, but also refers to the low variance in the product's performance over time as it is subject to changing circumstances.

After learning that customer spending (or customer expenditure) on a product increased, a product manager says in a meeting: "If customer spending is up, then consumption of the product and demand for the product has also increased." Do you agree?

Customer spending or expenditure can increase without an increase in demand or consumption. If demand is inelastic (that is, quantity demanded shows low sensitivity to changes in price), and product supply falls, then customer spending increases as the price increases. Important point: A product manager should distinguish a change in demand, a change in quantity demanded, a change in consumption, a change in expenditure or spending. A change in demand means that quantity demanded changes at different price levels, a change in quantity demanded is generated by changes in price only (and not changes in income, price of substitutes, price of complements, to name a few variables affecting demand), a change in consumption is the change in the number of units consumed, a change in spending or expenditure is the change in (P*X) where P is the price and x is consumption or quantity consumed. By not knowing the difference in these concepts, a product manager not only generates confusion but also risks making bad decisions.

Is "customer value" necessarily a result of improved or distinct attributes of a product relative to products produced by competitors? Why?

Customer value may be generated when a product has no distinct attributes relative to products produced by competitors, but the price is lower. It is incorrect to assume that customer value must be reflected in distinct product features or attributes.

What is the "customer value" generated by a product?

Customer value when consuming x is the excess of net benefits of x relative to the net benefits of the best feasible (and comparable) alternative. Consider a customer deciding to buy one unit of product x or one unit of a comparable product y. For simplicity, assume that both are substitutes and any money left generates zero net benefits. Suppose further that product x provides more benefits than product y. Will a customer buy x? Not necessarily. It depends on the prices of x and y. The maximum willingness to pay for x is the difference between the benefits of y and the price of y. Take incandescent light bulbs and energy saving light bulbs. The benefit minus the price of an energy saving light bulb may be low relative to the incandescent light bulb. Although an incandescent bulb may provide lower benefits the price of an incandescent light bulb may have a much lower price. Thus a customer may buy the product with the lower benefits because the difference between benefits and price is highest. A numerical example may better show the idea. Suppose that an energy saving bulb generates benefits of $10, while the price is $6. Thus $4 is the net benefit of the energy saving bulb. How can an incandescent bulb generate customer value? Suppose that an incandescent bulb generates much lower benefits, $5. How much is a customer then willing to pay for the incandescent bulb? Not more than $1, because the energy saving bulb generates a net benefit of ($10-$6)=$4. For example, if the price is $1.20, then the incandescent bulb would generate $3.80 in net benefits, less than the $4 in net benefits generated by the energy saving light bulb. If the producer charges 40 cents for the incandescent bulb, then the net benefit of the incandescent bulb will be $4.60, exceeding the net benefit of the alternative energy saving light bulb ($4) by 60 cents. Thus the customer value generated by an incandescent bulb would be 60 cents. This is the same as the highest willingness to pay for the incandescent bulb ($1) minus the price of the bulb (40 cents). Again, the highest willingness to pay for the incandescent bulb will be $1, because the alternative, the energy saving bulb generates $4 in net benefits (equal to the benefits of the energy saving bulb, $10, minus its price, $6) and the incandescent bulb generates $5 in benefits. A price of $1 for the incandescent bulb would make customer value equal to zero, because the benefit minus the price of each bulb would be the same. Please note that in the previous illustration it has been assumed that any "savings" derived from a lower priced product generate zero net benefits so as to better convey the idea behind "customer value." It is important to emphasize that any option should be compared to the best feasible and comparable alternative. That option has been constrained in the previous example. For example, customers can buy product x at a price of $1 instead of product y at a price of $3 and buy three units of x instead of one unit of y, or buy one unit of x and "save" $2 for product z. Customers can also save and borrow. Consider the following additional example under the same simplifying circumstances explained above. Suppose that product x generates lower benefits than an alternative product y. If the price of x equals the price of y, then a customer will prefer y. The net benefits generated by product x are insufficient to match the net benefits of product y, and thus has not created incremental net benefits, or, simply, customer value. A final note: The term "customer value" is used loosely in the literature. If customer value is meant to be the difference between the benefits generated by a product and its price, and alternatives exist, then it should be clear that only incremental value can be attributed to the product. In any case, managers should have the idea clear when discussing "customer value." It is a relative concept. The customer value generated by a product has to be seen in the context of other products. It is only the incremental value that deserves to be called "customer value."

A firm sells its products in two markets A and B. Sales of the same product in market A are double the sales in market B while the price paid by customers is the same. In a meeting, the product manager says, "It is clear that the typical customer in A is different than the typical customer in B. This opens a great opportunity to customize the product to these different customers." Do you agree? What would you say to the product manager?

Customers are not necessarily different in markets A and B when sales differ. Market A may have twice the number of identical customers.

Italo Inc. produces Italian foods, including a line of frozen dinners. A line of its pasta products uses vegetables including spinach. After the demand for spinach in the market falls as spinach is found contaminated with e-coli, the product manager at Italo responsible for the line of pasta products made with vegetables is worried that its pasta products will also be negatively affected. In a meeting, the product manager says, "Spinach producers will suffer and reduce their profit, but this will hurt us too." What would you say to the product manager? Specifically, why may contaminated spinach increase sales and profits of the products made by Italo?

Customers may be afraid about fresh spinach only, and not so much about processed products like spinach ravioli. The demand for frozen dinners that use spinach as an ingredient may increase as demand for fresh spinach falls. Also, costs of producing products that use spinach as an input may fall, as spinach producers reduce their price to sell their spinach. Important points: A product manager should understand how markets operate, understand the interdependencies of markets, and understand how an event (in this case, e-coli contamination of a input) affects the products under management.

A firm produces different types of pasta sauces. In a market research experiment, customers are presented with two brands of pasta sauce, x and y. Without knowing the price, customers see x and y as substitutes, while y is considered of lower quality. Researchers then ask customers to "purchase" pasta sauce to make "spaghetti with sauce for a family of five" in the firm's "Kitchen Lab" (as researchers call the kitchen in the firm's premises used to conduct market research experiments). Expecting a purchase of either x or y, researchers are surprised to see that customers "purchase" one unit of x for $3 and one unit of y for $2. In a meeting to discuss the results of the experiment, a product manager says, "These results don't make sense. After saying that x and y are substitutes, and that y is inferior to x, customers ended up buying both! Customers either lied to us or are irrational." Comment. Make sense of the experimental results. Are customers irrational? Did they tell the truth when they said that A and B were substitutes?

Customers may be both rational and truthful when they buy both x and y. Customers consider x and y as substitutes when the price is the same, but consider x and y complements when the price of x is $3 and the price of y is $2 as they make spaghetti with sauce for a "family of five." At these prices, the best value is obtained by mixing one unit of x with one unit of y. Based on the results of the experiment, what other experiments do you suggest? (Consider, among many options, reducing the price of x, increasing the contents in each unit of x, lowering the quality of x, and under standing the customers' process as they prepare many different dishes, not just "spaghetti with sauce for a family of five." Additional experimental results will then help to design the best strategy.)

Several batteries of the same type, A and B, provide the same average power when tested. Why may their "consistency" (as a component of the product concept) differ? Provide examples.

Despite batteries A lasting the same as batteries B, product consistency of A and B differs if the variance of a batch of batteries A differs from the variance of a batch of batteries B at a given moment. attributes of A change over time (the variance of the attribute differs within A). For example, A is more effective in the first hours of use (but still ends with the same charge as B after the same number of hours of use). tolerance differs. For example, A performs well under cold conditions, but not under hot conditions. Conversely, B performs well under hot conditions, but not under cold conditions. Why are these details important? Simply, product managers have to understand the "product concept" so as to manage the product effectively. Imagine for a moment a product manager who does not understand the "product concept."

A firm produces soup and decides to replace ordinary salt in soup for sea salt. A market study shows that customers are willing to pay 10% more for a soup with sea salt than with the soup with ordinary salt. However, the price of sea salt is 50% higher than ordinary salt. Furthermore, tight supplies of sea salt raise the price of sea salt by 20% while keeping the price of ordinary salt unchanged. In a meeting, the product manager says, "It doesn't make sense to add or replace an ingredient that is 50% more expensive and has now even increased in price by 20% if customers are willing to spend only an additional 10% on the product. The idea of replacing ordinary salt with sea salt does not make sense, as customers are willing to pay much less for sea salt than its additional cost and, on top of all this, the price of sea salt has increased by more than the willingness to pay." What would you say to the product manager?

Drawing conclusions from percentage changes is tricky as is making wrong comparisons. The product manager is making both mistakes in this case. To show why the product manager's reasoning is wrong, suppose that a can of soup with ordinary soup as an ingredient sells for $1 and customers are willing to pay $1.10 for the soup with sea salt. Suppose further that the cost of the ordinary salt used in the soup is $.10 while of the cost of the sea salt is soup is $.15 cents before the increase in the price of sea salt. After the increase in the price of sea salt by 20%, the cost of sea salt per can will now be $.18. Disregarding other costs, the profit per can is $1.00-$.10=$.90 with ordinary salt and $1.10-$.18=$.92 with sea salt when sea salt is used and the price of sea salt is 20% higher. Profit per can thus increases by $.02 or about 2%. Profit per can increases despite a 20% increase in the price of an alternative and more expensive input (sea salt), and just a 10% increase in willingness to pay for the soup containing the alternative input.

Customers A and B identify the same bundle of attributes in a product. Does this mean that the product is value equally by both customers?

Even if customers A and B identify the same attributes, products A and B may provide different value to customers. Customers may not attach the same weight to attributes.

"A market research study asked customers up to how much they were willing to pay for 4 pounds of cereal and the answer was $10. Thus we can conclude that customers are not willing to pay more than $5 for two pounds of the same cereal. We won't be able to charge more than $5 for two pounds" Do you agree? Why?

False. A simple counterexample kills the statement: Suppose that quantity demanded is 1, 2, 3 and 4 pounds when the price is $4, $3, $2 and $1, respectively. The maximum willingness to pay for 4 pounds of cereal is $10, and the maximum willingness to pay for 2 pounds of cereal is $7 and not $5 as the statement says. The firm may be able to charge more than $5 for two pounds of cereal.

"If a customer says that products x and y are substitutes at a moment in time, then a logically consistent customer will consume either x or y but not both over a period of time." Do you agree? Why?

False. Consider that chicken and beef may be substitutes in some occasions but customers may choose to consume a mix of beef and chicken in other occasions. Customers may eat beef every day for several days, but then switch to a substitute like chicken as they get tired of eating beef, or eat a combination of chicken and beef. All else equal, their marginal valuation of beef falls as the quantity of beef increases. The same may occur with steak and potatoes. They may be complements in some occasions but substitutes in others. Or consider beers A and B. Customers may prefer to drink A first only to drink B afterwards.

"A product that is useless cannot be sold for a positive price." Do you agree? Why?

False. Consider that components may have value even if the product is useless. It may pay to buy the useless product, disassemble its components and then sell the components for a positive price. Consider also that a person may be willing to pay a positive price for a product even if the product is useless for that person because the product can be resold for a higher price to other persons who find the product useful.

If two products x and y are complements in consumption and x and z are also complements in consumption, then, logically, y and z are also complements in consumption." Do you agree? Why?

False. For example, burgers (x) and fries (y) may be complements and burgers (x) and salad (z) may be complements also, but fries (y) and salad (z) may be substitutes. Consider also that a customer may find that a burger and one serving of fries and one serving of salad is equivalent to a burger and two servings of fries. In such case, one additional serving of fries substitutes for one serving of salad.

A firm sells a product that is costly to transport in market A while its competitor sells the same product in market B. Suddenly, variable costs of production fall for firm B but not A. In a meeting, firm A's product manager says, "Transportation costs separate our markets. It is tremendously costly for B to transport their product to our market. Transportation costs isolate us well from our competitor. Well, that is our case also. We don't invade firm B's turf because transportation alone would consume all potential profits. Also, there are restrictions of all kinds that prevent firm B from operating in our market. So, in sum, firm B's lower costs do not worry me, as firm B will not dare to invade our turf because transportation costs have not changed. High transportation costs will still protect us." Do you agree? Why?

Firm B has not "invaded" firm A's market because of many costs, including transportation costs. If variable costs are now lower for firm B, then firm B will be more motivated to "invade" firm A's market even if transportation costs remain unchanged

A bakery sells 90% of its production to supermarkets and develops a new process to extend the shelf life of its bread by 300%. However, after doing so, the bakery faces a 30% reduction in sales. In a meeting with managers, the puzzled CEO says, "I can't believe this. Customers punish instead of rewarding us. We even kept the price of our bread unchanged. Bad things really happen to good companies! There is no explanation for this, except that customers are throwing out stale bread less often and this in turn affects the purchase of fresh bread. If so, we should increase the price to compensate for the reduction in demand." After listening to the remarks by the CEO, a consultant attending the meeting says, "I may be wrong but you might have overlooked the product concept dimension of 'conformity.' Looking at some market research data, I notice that even customers who threw away stale bread are reluctant to buy the new bread. And the reduction in sales is definitely not explained by customers who now continue buying the bread but don't throw away so much stale bread because of the added shelf life of the new bread." Now even more puzzled, the CEO responds, "I don't understand. Can you explain? How can 'conformity' play a role here when the objective quality of our product has not changed at all? This is not 'new bread' as you say. We are producing the same product with the same technical characteristics except for shelf life. Please justify your fat fees and explain." Please make sense of the consultant's words! What does "conformity" have to do with the reduction in sales?

First, the CEO seems to think that "conformity" refers to "technical specifications" when it does not. While "conformance" is about conforming to technical specifications, "conformity" is about deliverables and customer expectations. Quite a difference! Secondly, and more importantly, the bakery may have introduced the "new bread" (as the consultant calls the bread that has now a higher shelf life but is otherwise objectively identical to the bread with a shorter shelf life) without explaining to customers how the firm has been able to extend the life of the bread. The change in product characteristics (shelf life) may have changed expectations. For example, customers may now think that the bread has been chemically enhanced so it lasts longer while the bakery is not informing or persuading customers that the bread is as natural as before. The change in product attributes has then changed customer beliefs and generated reluctance. The bakery should act on the product concept dimension of "conformity" and explain that while the product now lasts longer, it has the same ingredients and composition as the bread previously consumed. Lesson: Perceptions may change even if the product itself does not change. The change in perceptions may change expectations and thus change the "product concept."

The product manager at a firm that produces luxury products convenes a meeting to discuss the effects of a reduction in discretionary income (income that customers can actually spend on goods and services) on the firm's products. In the meeting, the product manager says, "Fortunately, we produce luxury products. Luxury products in general are less susceptible to economic downturns, because luxury products have anyway high prices. Same with high income. That should tell us something: If customers already pay a high price now, and have high income, then they are already signaling that a reduction in income will not affect their purchases, as they are already well protected against economic downturns. It is good for us that rich people don't have the same petty money problems poor people have, ha-ha. All this is strengthened by the data that shows that the average income of rich customers will likely remain unchanged during the downturn." Comment. Specifically, are luxury products less susceptible to a reduction in discretionary income because, as the manager says, a high price and a high income are "already signaling that a reduction in income will not affect their purchases"? If indeed the average income of high income customers remains unchanged, does the demand by high income customers remain unchanged during the downturn? Why? What would you say to the product manager? Why should the product manager be worried about a fall in discretionary income?

First, the manager incorrectly thinks that high customer income and a high price lead to low income elasticity, and that high income customers are protected from economic downturns by their accumulated wealth and high income. (Income elasticity is defined as the percentage change in demand due to a percentage change in income.) The manager should distinguish levels (income and price) and changes in levels (and more precisely percentage changes in income and percentage changes in price). Simply, luxury products may have high income elasticity, despite the price of luxury products being high relative to less luxurious products. Secondly, consider substitutability: Relative to low income customers, high income customers can typically select products from a wider "opportunity set" of products, and thus may be able to switch more easily to other products when conditions change. Lower prices of less luxurious products may now attract customers who purchased luxurious products. Thirdly, the product manager should consider the nature of the downturn and its effect on the number of high income customers, not only the effect of a downturn on the average income of high income customers. The downturn may reduce the income and wealth of customers who recently became wealthy, and reduce the income and wealth of customers who were wealthy for a longer time. The product manager mentions that the impact on demand of lower discretionary income will be low because "the average income of rich customers will likely remain unchanged during the downturn." However, even if the average income of rich customers remains the same, the number of rich customers may fall, affecting demand for the product and the firm's profit. The product manager should place the downturn in the proper historical context, as the downturn may have been preceded by overly positive expansion that increased the number of high income customers. Finally, the product manager should consider the effect that lower discretionary income will have on the second hand market of its luxury products. Not only may lower discretionary income reduce the demand for new luxury products, but also increase sales of used luxury products in the second hand market. Consider, for example, that some customers may pawn luxury products to complement their current lower discretionary income. The pawn shop may then resell the luxury products used by customers as collateral when they are unable to make the required payments to the pawn shop. The sale of more used luxury products in the second hand market may then further depress the demand for luxury products. In addition, the sale of the firm's luxury products in some markets may negatively affect the reputation of the firm's brand name.

"We will reduce the average quality of the product we produce. This should not pose problems because surveys show that customers in general feel that we over-delivered and under-promised. Thus we are creating value to customers. We can take advantage of this cushion by lowering quality and saving money in the process, as we give customers more than competitors for basically the same price." If indeed the firm has indeed over-delivered and under-promised, should the firm now reduce the product's average quality?

First, the manager says that customers in general perceive that the firm has under-promised and over-delivered. Thus some customers may obtain less value than others. For some customers, the firm is not over-delivering and under-promising. Customers who obtain more value than others may not be the customers who add much profit to the firm. Many customers may feel the firm over-delivers and under-promises but may buy nevertheless few units of the product. Thus a reduction in quality may have significant effects on profits even if most customers feel that the firm over-delivers and under-promises. Secondly, even if all customers perceive that the firm over-delivers and under-promises, the manager should nto discount the role of perceptions. Customers will compare the new lower quality product with the old higher quality product. Although the firm has "over-delivered" and "under-promised," customers may perceive lower value and reduce the purchases of the product. This reaction may occur mainly in the short run, as customers make a better objective assessment of the value of the product relative to competitor products in the long run.

After reading a report that predicts an increase in unit sales of a product, a product manager says, "Good, as this prediction implies that demand for the product will increase." What would you say to the product manager?

Higher unit sales do not imply higher demand. Indeed, sales can increase while demand falls. Why? Supply can increase much more than the reduction in demand. The end result is higher unit sales and a lower price.

A large plant nursery, faced with tough competition, hires a consultant to improve its marketing. The consultant looks at the line of fall bulbs soon to be sold at the nursery and over the internet and says, "We have to start by looking at the 'product concept.' You have bulbs right now that are not distinguishable from bulbs sold by competitors. You import the bulbs from Holland, and competitors do too. You have a catalog of bulbs that is indistinguishable from catalog of other nurseries. Hey, let's look at the product concept and see how the different offerings can be improved and expanded." Please do just that. Take the five dimensions of the product concept (check the slide!) and find ways to improve the nursery's product offering.

How does the "product concept" slide help the nursery compete? Some initial ideas follow (you may have many others, of course -the objective of this exercise is to use the "product concept" tool-): Characteristics: The bulbs arriving from Holland may not be attractive or may be of different size. Customers may value cleaner bulbs or bulbs of equal size. As in the case of potatoes, consider sorting bulbs in novel ways. Also, why not, over the long term, develop new varieties of bulbs? Why not coat bulbs with an organic pesticide, fungicide or fertilizer? Also...your turn! Conformity: Why not promise replacement of any bulb that does not bloom? (Although a full guarantee may be unwise -it does not reward responsible use of bulbs by customers- conformity relates to the implicit or explicit promise made by the manufacturer). Also...your turn! Consistency: It may pay to sort bulbs based on consistency in blooming (instead of bulbs blooming at different times, bulbs bloom at the same time, creating a more spectacular arrangement, or bloom independently of environmental conditions). Also...your turn! Complementarity: Bulbs may be complemented with a bulb planter, a pot, special planting material, or a booklet showing ways to arrange bulbs in a planter. Also...your turn! Convenience: If bulbs are shipped to some customers, why not use their zip code to send the bulbs at the right moment so that bulbs be immediately planted, saving customers the cost of guessing or the cost of storing the bulbs? Also, your turn! Notice that these are initial ideas only. We can continue the exercise above and use the product concept slide for many more ideas. Ideas need to be screened for appropriable value. Not all enhancements are valuable for customers. Not all valuable enhancements can be appropriated. The five "Cs" have to be balanced. A product manager should not fall for increasing the five "Cs." Increasing the five "Cs" may reduce profits. Initial ideas using the five "Cs" have to be tested on the basis of the provision of benefits (positive benefits, cost reduction, and loss avoidance), outcomes, and the provision of solutions to customer problems.

A firm is considering expanding or keeping its line of products for the next three years. In a business planning meeting, the product manager says (this happens often): "We have a core expertise and products should follow that core expertise. It would be silly to make new products in which we do not have a core process in place." Comment. (Hint: Consider the experience of Polaroid and its "stick to the knitting" strategy.)

Identifying the critical process of an organization does not necessarily mean that a firm should only develop products consistent with the core. Consider the case of Polaroid's core expertise in instant cameras. It continued producing instant cameras based on its core expertise despite clear signals that digital photography was the trend of the future. Its success with instant cameras also made it more difficult to switch gears, given the incremental costs and benefits of continuing production of instant cameras. A product manger should not fall into the (common) trap of ignoring new products because they do not relate to the core expertise. Instead, the product manager should analyze business opportunities and analyze how opportunities fit the core expertise, and the costs and benefits of developing or extending a new core expertise. Questions to be asked include: What do customers want in the future? What do non-customers want? How can we attract non-customers? How does the firm's core process fit the products customers want in the future? What investments are required to develop and expand our core expertise to satisfy future demand for established and new products by current customers? What investments are required to develop and expand our core expertise to satisfy non-customers? How long will it take to develop a new expertise?

True or false and why: A money back guarantee reduces the reluctance of customers to pay for "credence" products (Hint: Consider the extreme case of a religious congregation selling "salvation.")

In the extreme, a credence product relies solely on a promise, and reluctant customer cannot confirm its validity. Religious services illustrate the problem: If salvation is part of the total product or service offered by a religion, who on earth can really certify that the religion delivers salvation (as religion is based on faith)? A "money-back" guarantee will not work, as there is no way to measure or act on "salvation." What may a religious congregation do to attract customers to its "credence" products or services?

Why is a durable product likely to be more sensitive (elastic) to changes in its price in the short run than in the long run?

In the short run, when the price of a durable product rises, customers can hold on longer to the durable product they own. For example, customers can postpone the purchase of a new car because they can hold on longer to their old car when the price of new cars increases. The durability of the product and the concomitant behavior by customers adds to the complexity of managing durable products.

Do increases in product attributes desired by customers necessarily increase total and average costs? For example, if a firm increases the speed of delivery of the product it makes and thus increases the quality of the overall product (in its dimension of "convenience"), do costs necessarily increase?

Increases in product "Cs" do not necessarily increase total and average costs. For example, if a firm increases the speed of delivery desired by customers (thus enhancing the "C" of convenience) then the firm may face lower labor costs. The firm then enjoys the best of worlds: Customers are willing to pay more for the product while costs fall!

Provide examples for "indirect competitors." Why may indirect competitors also be collaborators in some situations?

Indirect competitors include producers of distant substitutes and producers of different products that are close substitutes, among others. Producers of complements are also indirect competitors as they affect (for example, through their pricing strategy) the demand of a product. Also, competitors may be complementors or collaborators when their actions help the firm. For example, Canon competes with HP, but HP uses Canon cartridges in its own printers. Ford and GM have a common distributor that delivers parts to both Ford and GM car dealers. Key idea: A manager has to identify when a competitor is a rival and when it is a collaborator (or helper). Competitors can be collaborators at the same time.

A newly hired product manager at a restaurant argues that prices should be reduced "because for the same money, any customers can get a bunch of groceries from the local supermarket, and any customer will notice that for each dollar spent on food at the restaurant, the ingredients themselves are a very small fraction of the price." What would you say to this manager?

Is the restaurant selling "food"? If customers are reluctant to visit the restaurant because of "high prices" (relative to the cost of the ingredients), is the restaurant adequately convincing or persuading customers that food is a minor component of the "bundle of attributes" offered by the restaurant?

A new product will add attributes 1 and 2 to an existing product. In a meeting, the product manager says, "A survey shows that customers on average are willing to pay the same for attribute 1 and attribute 2. Thus attributes 1 and 2 are equally appreciated. A slight increase in the price will in turn allow covering the cost of adding attributes 1 and 2." Comment. Specifically, why may the product manager be up for a surprise if all customers like attribute 1 but not all customers like attribute 2?

It appears that if willingness to pay is the same for attributes 1 and 2, attributes 1 and 2 are equivalent in their effects and the price can rise to accommodate the extra cost. However, the product manager ignores the different effects attributes 1 and 2 will have on customers. If attribute 1 is liked by all customers, then all customers will gain from the attribute if the increase in price is below their willingness to pay. However, if attribute 2 is not liked by some customers but the price rises, then some customers will most likely buy less or stop buying the product. Some customers may even reduce their willingness to pay for the product as they consider the attribute as negative. Lesson: When adding attributes to a product, the product manager should distinguish attributes liked by all customers relative to attributes liked by some customers, considered neutral by others, or even disliked by still other customers. Also, added attributes may not attract existing customers but attract new customers.

A firm produces a product that is complemented by another. Why is the producer of a complement product both a competitor and a collaborator of the firm?

It is easy to understand why the producer of a complement product collaborates with the firm as the complement product allows selling more of the firm's product. In turn, the firm does not produce the complement as the producer of the complement can produce the complement at a lower cost. However, why is the producer of the complement also the firm's indirect competitor? The reason is that the firm and the producer of the complement do not coordinate their strategies. For example, as the firm increases its output, the demand for the complement increases also, prompting the producer of the complement to change the price of the complement, in turn affecting the optimal profit-maximizing output of the firm. In turn, the firm reacts by changing its output and the price of the product. The interest of the firm and the interest of the producer of the complement are not aligned. A way to solve this problem is by coordinating output and prices with the producer of the complement. In the extreme, the firm may purchase the producer of the complement or produce the complement also and "internalize" the problem.

John, a product manager at a local brewing company, is enjoying some beers at a local bar on a Friday evening with his friend Bill. Bill is surprised when John asks for a bottle of low quality beer after drinking two bottles of high quality beer. Bill says to John, "Drinking those first fine beers must have distorted your mind, because you now switched to ordinary beer. And you are product manager at a brewing company! I guess you should not drink when drinking makes you irrational, ha-ha." What would you say to Bill?

John may well be acting rationally when he asks for ordinary beer after drinking fine beer. His satisfaction with each additional beer decreases as he drinks more of the fine beer. At some point switching to ordinary beer provides more customer value than drinking additional fine beer, given the higher price of fine beer.

A product manager employed by a large appliance maker is planning to introduce a new carpet cleaner for residential use. In a meeting, the product manager identifies the process of cleaning carpets by carpet cleaning contractors as the biggest threat that the product will face. The product manager says, "Not only products can be substitutes for a product. Services can be substitutes too. For example, taxi services compete with the sale of cars. This is exactly the threat that we have identified when producing the new carpet cleaner for homes." What would you say or ask the product manager? Specifically, what strategy should the product manager consider when the service provided by carpet cleaning contractors threatens the carpet cleaner?

Many questions could be asked but based on the statement made by the product manager. However, the product manager should be asked about the possible production of a carpet cleaner for contractors. Why not have a carpet cleaner for homes and a carpet cleaner for industrial use? Although selling industrial carpet cleaners to contractors may reduce the demand for residential carpet cleaners, the profit when selling both may be higher than when the firm only targets residential users. In this way the manager is acting against the substitution of the product by the carpet cleaning process offered by contractors. If you can't beat them, join them!

"The concept of 'value' is clear: 'Value' is the difference between benefit and cost as seen by the customer." Do you agree? Why?

More precisely, "value" refers to incremental competitive value. The difference between benefits and costs, as seen by the customer, is not enough. For example, x may provide benefits of $10 to a customer for a price of $8. However, a competitive product may provide a benefit of $14 for the same price. All else equal, the product that sells for $8 will not provide value in this case if customers can buy the product that delivers a benefit of $14. It actually will make customers lose, relative to the competitive product. Thus the term "value" should be used with care, especially in the area of product management. It is not just "the difference between benefits and costs" as laypersons may think.

"'Concentration' refers to concentration on key customers. Those key customers are, of course, customers who buy a lot and explain much of our current profits. Those are the customers that deserve our attention, and thus concentrated effort." Do you agree? Why?

No. A firm may instead concentrate on potential customers or customers currently buying few units and not contributing significantly to current profits. Concentration on customers that appear marginal today may be the profitable customers of tomorrow. "Concentration" does not imply that a firm should focus or concentrate its resources on today's most profitable customers. By doing so, the firm may be ignoring potential profits in the future.

Does higher substitutability imply a higher number of substitute products?

No. A product may just need one alternative product to make it substitutable. More than one product may not make a product more substitutable.

"Ok, I agree that generating customer value does not necessarily increase our profits, but it is definitely true that we can't make profits by reducing customer value. Even a firm monopolizing a product has an incentive to provide value so that customers increase their demand for the product." Do you agree? Why?

No. In some cases, strategies that reduce customer value increases profit. An illustration helps: A firm faces two types of customers A and B, but B is willing to pay less than A. The firm would like to charge different prices to A and B. Suppose that markets cannot be separated. Thus B may buy for less and resell the product to A, making a quick profit at the expense of the firm. A solution may be to produce two versions of the product. One version targets A while the other targets B. The version that targets B may be inferior in quality (so as to exclude B from purchasing it). Overall customer value is lower than in the case when the same high quality product is offered to both A and B, but the firm is able to extract more "consumer surplus" from customers and make more profit. Lesson: Beware of commonly heard romantic statements like "The firm increases its profit when it delivers more value to customers."

True or false and why: A non-durable product is a perishable product.

Not the same. A perishable product is subject to natural decomposition (as in the case of bananas), while a non-durable product is subject to decomposition due to customer use (as when toothpaste lasts two weeks because it is used up). Durable products are also subject to some sort of natural decomposition (a car will not last forever even if not used) but the distinction perishable/non-durable attempts to capture the degree of natural decomposition of a product independent of human action.

Asked about the benefits accruing to customers of Volvo cars, three customers answer that a Volvo car "reduces the time spent going from here to there," "impresses my friends and makes me make more friends" and "reduces my health insurance premiums." Please identify the benefits using the "product concept" slide.

One customer focuses on positive benefits, while the other two focus separately on cost reduction and loss avoidance (or prevention).

A firm plans to increase the number of products. The firm currently produces x and now will produce y. Products x and y are independent in consumption and thus do not affect each other. However, a consultant suggests that both x and y should be under the command of one single product manager, because of "process complementarities." In a meeting, the consultant explains: "We have two options, A and B. Under option A, each manager would manage a product in separate departments and would rely on a full time assistant manager for support. Thus each of the two departments would have two workers, for a total of four workers. Under option B, both products would be under the command of one manager, and the manager would have two assistants, for a total of three workers. Clearly, integrating both products under one manager saves one worker. Now, I recognize there are downsides: Control is easier if each product is managed by a separate manager. Costs can more easily be assigned to each department when each manager runs a separate product. Each manager can then be evaluated based on profits generated in each department. However, the option of having one manager manage both products is better given the economies of scope in organization." Comment. Specifically, what option is the consultant ignoring?

Option C: Hire separate managers for products x and y, but have one assistant serve both managers. The existence of economies of scope in organizing the product management function does not mean that both products x and y should be under the command of one manager. A "transfer price" can define the costs of using the services provided by the assistant. The advantages of this option is that the firm can then hire more focused managers for each product and better control the process, as each manager would be responsible for a product. The downside is that hiring two product managers will cost more than hiring one. In any case, this option may be the best but is being ignored by the consultant.

Micromotion is small producer of miniature electrical motors used in several electronic products. Recently, large producers of electric motors decided to establish an association that would provide producers with a customized stamp to be placed in every product made by members of the association. Micromotion is also a member of the association. The stamp would act as a guarantee that products made by member firms meet or exceed certain quality standards. In a meeting with the CEO, the product manager says, "This is great news. The stamp acts as 'seal of approval' or guarantee that our products have the right quality. We are so proud that our products even exceed the quality of our competitors and we have established a reputation in the market. It is good that we decide to become a member of this association." However, the product manager is surprised when the CEO of Micromotion says, "I disagree. You still have a lot to learn as product manager. I haven't lost hair for nothing. My impression is that they want to leave us out. Remember that we have been threatened by the big players in the industry in the past, despite being a member of the association. Each firm will have to pay a lot of money just to receive the right to buy the stamp. On top of this, they will charge a fee for each stamp, and each stamp will have to go on the product. Supposedly this money will go to a fund that will finance special electronics projects to improve quality further. This all is fishy!" Interpret the CEO's words. How can a stamp of approval hurt Micromotion despite Micromotion being a member of the association? (Hint: Consider that the association is coordinating the strategies of producers, but most members are large while Micromotion is a small firm that has been "threatened by the big players in the industry.")

Possible explanation for the CEO's concern (based on the conversation between the CEO and the product manager): Large firms will be in a better position to absorb the fixed cost of the stamp, as they produce more. This acts against Micromotion. Micromotion will see its cost rise by more than competitors. Also, a stamp will go on each unit of the product, allowing competitors to know how much Micromotion produces and how its sales grow over time. Although the stamp may also bring benefits for Micromotion, the firm is already producing a product with higher quality and has "established a reputation in the market" according to the product manager. Thus the stamp as a quality guarantee is less important for Micromotion and costs may outweigh the stamp's benefits. It appears that the large firms established the association to control in their favor the products made by Micromotion.

A product manager manages a durable product and reads a report predicting an increase in the demand for durable products (for example, game consoles). However, despite an increase in demand for the durable product, the product manager is surprised that sales of the firm and its competitors barely change even as the price remains unchanged. Do you have an explanation? (Hint: Consider that the supply of a durable product is composed of used and new units.)

Possible explanation: As demand rises, most of extra quantity supplied comes from used units of the durable product. Thus few extra units are produced. The fact that durable products are both used and new makes the management of durable products different than the management of non-durable products.

Rolecks is a reputable and expensive watch while Victoria is a common and lower priced watch. Both Rolecks and Victoria perform similarly. In a meeting, the product manager of Rolecks informs the CEO that Rolecks and Victoria watches increase their demand when Rolecks invests more in advertising. However, customers buying Rolecks watches do not buy Victoria watches. The CEO says to the product manager, "I am puzzled. Higher advertising of our Rolecks watches increases demand for our watches and demand for Victoria watches, and if demand for Rolecks watches moves in the same direction as Victoria watches they are then complements, but you say customers of Rolex watches do not buy Victoria watches. Demand goes in the same direction when we advertise our watches, so products are complementary in consumption with theirs, but our customers do not buy Victoria watches. What is going on?" Provide an explanation.

Possible explanation: When Rolecks advertises its watches, it attracts customers to Victoria watches. Victoria watches may be similar to Rolecks watches but are much cheaper. Unable to afford Rolex watches, customers buy Victoria watches. Advertising for Rolecks watches increases (shifts) both the demand for Rolecks watches and the demand for Victoria watches. The product manager observes higher demand for Rolecks watches and higher demand for Victoria watches when Rolecks advertises its watches. It appears thus appears that Rolecks customers are also demanding Victoria watches, but this is not so. Rolecks is creating free publicity for Victoria watches. For customers of Rolecks watches, Rolex watches are not necessarily complements with Victoria watches.

A product manager at a firm is considering renting the firm's product instead of selling it to reduce the effects of "self-induced" competition. Can renting reduce the effect of possible "self-induced" competition?

Renting is a strategy to consider for minimizing or even eliminating the effect of "self-induced" competition. Renting keeps control over the asset and its potential re-use and disposal. However, it does not come without cost. For example, customers will be less willing to pay for the product as they lose benefits from alternative uses of the product after the rental period and higher customer transaction costs. Producers will face new organizational costs, transaction costs and production costs when renting instead of selling. The firm may also not have the required expertise to rent.

"Customers do not like surprises. Customers want to know what the outcome is going to be when they buy a product. Thus we should provide all the information we have about the product to customers." Comment. Specifically, is it (always) true that the customer should not be "surprised" with incomplete information as the statement suggests?

Some customers may appreciate the element of "surprise. For example, customers may expressly want to be surprised when they demand decoration services. Similarly, customers may not want to be told about the ending of a movie and appreciate a "surprise" ending. In some stores, providing customers with an unexpected gift may enhance the store's image. Thus some information asymmetry, as when the producer knows more about the product than the customer, may be profitable. A firm has to find the best level of "conformity." "Conformity" does not mean that a product manager has to reduce all possible information asymmetry.

A product manager working for a producer of printers and copiers is assigned responsibility for printers and consumables for business use in a certain sales region. Consider that the product manager could instead be responsible for printers and copiers for home use, or be responsible for printers (but not consumables) for home use in more than one region, or be responsible for printers for home use and copiers for business use in a certain region, to name a just a few combinations. What factors explain the scope of tasks and focus of a product manager? Provide at least four key factors in the decision to organize the product management function.

Some reasons, among others: Customer heterogeneity: Customers are heterogeneous and require different expertise or knowledge about the market Product interdependence: Products are relatively independent of each other. The sale of business products does not affect home products. The sale of consumables for printers depends on the sale of printers. The sale of printers may interact with the sale of copiers. Size of the market: The firm is sufficiently large and operates in a market sufficiently large to support greater levels of specialization (specialization of tasks depends on the size of the market). Environmental dynamism: The environment is relatively stable (for example, no major changes in market segmentation criteria are expected -remember that task specialization is typically falls, or task generalization increases, when the environment is more unstable, because the organization wants, in such a case, more flexibility to adjust, select or change the environment).

Certain products require "sunk investments" by customers. What does this mean? What are the costs and the benefits of managing products with a sunk cost component?

Sunk means "unrecoverable." For example, if a customer spends $100 for a product but only can recover $90 if the product is returned, then $10 is sunk. In the case of "Rogaine" (a hair-growing preparation), any benefit from using the product is lost when the customer stops using it. The possible benefit for the firm generating the sunk investments to customers is an increase in customer loyalty (the customer may be less willing to switch, as only incremental costs and benefits matter). For example, a producer of photocopying machines will lose fewer customers when the price of toner rises after customers have purchased a photocopying machine that can only use a certain type of toner. A pharmaceutical firm can avoid competition from future producers of substitute medicine, if the medicine has a sunk cost component, whereby customers lose the benefits provided by the medicine if they switch. The problem with sunk investments made by customers when consuming products is customer reluctance. Given that sunk investments reduce customer flexibility to switch, customers may be less prone to spend much for the product. The point is to balance costs and benefits when introducing products with sunk cost components. Notice that sunk cost investments made by customers are not necessarily bad for customers. Both customer and producer may benefit when sunk costs are present. Why?

A newly hired CEO surprises managers attending a meeting by saying: "This firm has heard for too long the voice of the customer and that's why it is such dire situation. We don't make profits! That's why the owners hired me, to put order in this stable! They hired me to redesign processes by employing a broad perspective. Managers here have been accustomed to treat the customer as their master. In the few days I've been here I've heard hundreds of time that we are here for the customers or that we should produce products that they like, and so forth. Well, enough with all that nonsense that does not apply to this firm that I am responsible for commanding. We need urgent process redesign here! We have to look at the process and its outcome in a holistic way. Instead of giving customers what they want, be it green, blue, and red or whatever, I propose giving customers a product that they don't want! Let's understand the whole process and not focus on just parts of the whole!" After a moment of silence, the marketing manager says, "Well, I am anyway leaving the firm tomorrow so I will speak freely. You must be out of your mind sir. You are throwing out basic tenets in business, not just basic principles in marketing. The facts don't lie: Market research has shown over and over again that customers like our products. You say we provide them with 'green, blue and red or whatever' products, but doing so satisfy their preferences for variety. Let me inform you that each of these products you refer to as 'green, blue and red or whatever' is profitable and fetches a premium price. You say that we should eliminate all these products and replace them with a new product that customers 'don't want,' using your words." Comment. Please defend the seemingly indefensible proposal presented by the CEO who appears to "throw out break basic tenets in business" (as the marketing manager says). Specifically, why may a product that "customers do not want" allow for much more profits than producing "green, blue, red or whatever" products that "fetch premium prices"?

The CEO's position really appears as indefensible. The firm is currently producing a variety of products that customers like. Products also fetch "premium prices" and "each product is profitable" according to the marketing manager. However, despite this evidence, the CEO proposes to replace existing products with a new product "that customers do not want." Is the CEO out of his mind, as the marketing manager says? How can the CEO be right? The cost of the new product that "customers do not want" is crucial for the CEO's surprising proposal. The product currently made by the firm may fetch "premium prices" but also involve high costs. The fact that each product is profitable does not mean much if products are substitutes. For example, three products can be profitable on their own but two products may generate more profit than two products if customers can substitute one product for another. When the CEO says that the firm should produce a product that customers do not want, the CEO is referring to a product that is inferior in preference to products currently produced. It may be a product without many attributes that characterize current products. How could customers accept it? The answer is that the price may be sufficiently low to move customers to compromise. The message is "In exchange for not providing you with so many attributes, I will sell the product at a much lower price." Despite the lower price, the new product may generate much more profits as costs fall also. The reduction in costs may compensate for a lower price. A lower price in turn may allow for the production of a much larger quantity. The low costs may also protect the firm from competitors as it exploits economies of scale. Not only production costs play a role in the CEO's proposal. For example, producing a variety of products also leads to extra costs of inventories, warehousing, distribution, or transportation. In turn, a larger product variety increases cost reporting complexity. Managers may not be receiving accurate measures of each product's profitability. In turn many costs generated by having a variety of products may be hidden and not reported by the traditional accounting system at all.

Describe the "business map." Who participates in the business map?

The business map is the "universe" in which a product exists. It considers direct competitors and complementors (collaborators), indirect competitors and complementors, and potential competitors and complementors. Who are "competitors and complementors"? Competitors can be both rivals and collaborators at the same and different moments (for example, McDonald's sale of hamburgers is helped by the presence of a nearby Burger King under certain circumstances -more restaurants in an area may act as a "magnet" for customers and lead to "cluster economies."). Direct competitors produce close substitutes in consumption. For example, Aquafina is a close substitute of Dasani. Be aware that the product may be apparently similar, but similarity alone does not make the product necessarily a "close substitute." For example, a Toyota and a Lexus may apparently be similar (both are even produced by basically the same company), but customers buying a Lexus may not consider a Lexus to be a substitute for a Toyota (Why?). Indirect competitors produce more distant substitutes. Consider that a customer evaluating the purchase of a luxury car rather spend the money on a yacht. Or consider that a customer may decide to buy one drink and one large hamburger instead of two drinks and one small hamburger. A hamburger is not a drink but both products interact in the purchase decision. They are complements to some extent, but they can also be substitutes. A hamburger is not consumed "like a drink" but it nevertheless affects the demand for hamburgers. An indirect competitor may also produce an alternative process. For example, a water filter allows a customer to produce the equivalent of commercial purified and bottle water at home. The producer of a filter is thus an indirect competitor. So is the customer of a filter, up to a certain point, as the customer produces an alternative to commercial water through a domestic process facilitated by the producer of a water filter. A producer of a complement is also an indirect competitor. For example, if a firm produces tables and another firm produces chairs, and both are sold together, then an increase in the price of chairs makes the bundle more expensive reducing the demand for tables. The producer of chairs is figuratively producing the equivalent of tables! An indirect competitor is also the producer of an input. If a firm produces leather shoes and a supplier produces leather, then the producer of leather is an indirect competitor or rival in the sense that an increase in the price of leather affects the sale of leather shoes. The producer of leather is also a potential competitor, as the producer of leather may consider entering the market of leather shoes and make leather shoes. Potential competitors include firms that are not related to the firm today but may be related to the firm in the future because of technological convergence (consider the "marriage" of the phone with the computer). Potential competitors are also workers in the firm. They may start their own related businesses on their own, "steal" process secrets, or provide valuable information to competitors by working for competitors. The firm itself may also its own potential competitor! This is what is labeled "self-induced competition." For example, if a producer of aluminum sells aluminum and the aluminum is recycled, then recyclers become also "aluminum producers." If a firm produces a branded shampoo in a container, and the container when empty is recycled by "pirate" producers of shampoo, then "pirate" producers are indirectly helped or induced by the firm producing the branded shampoo. There are many other indirect and potential competitors. Please identify other competitors and complementors that have not been mentioned

During a very early meeting on a very cold day, two managers have the same cup of coffee on their table. A layperson sees only "coffee on their table." What may a product manager instead "see" on their table? (Hint: What "job" do customers want to get done with a cup of coffee?) What challenges do product managers face when attempting to identify a product as "more than just coffee"?

The coffee is objectively the same, but the product (the coffee) allows for a different "job." Thus a product manager should not just see "coffee" but the "job" it "performs." Although the objective product is the same, benefits are not necessarily the same. The product is the same but it leads to different outcomes and solutions for customers. The product is the same but it may address different problems faced by customers. For example, one of the managers may have purchased the coffee for the caffeine ("I will be under pressure in this meeting, as I have to defend a proposal"). The other manager may have purchased coffee because "it warms the hands in a cold day and I was freezing before entering the meeting a few minutes ago." Thus "a product is a product, but is not a product" (Please check the important slide "What is a product?") Concerning the challenges faced by product managers when they attempt to "see more than coffee" in this case, consider that it is not easy to find out what customers pursue when they demand a product. It is perhaps relatively easy to identify possible reasons why two executives have different reasons to take a cup of coffee to a meeting. The challenge is to measure the importance of factors affecting the decision to demand coffee. Even if an executive in this case brings coffee to a meeting mainly for the caffeine, the reason for doing so may change. Consider that after product managers identify benefits for different types of customers, benefits or their relative importance may have changed again. Thus identifying possible benefits behind products is only one step in the definition of the "product concept." Many questions remain: What customers receive which benefits? How do benefits change? Why don't non-customers perceive or act on potential benefits?

An assistant to the product manager is assigned the task of providing product information on packaging. Given the size of the product (and its packaging), the assistant product manager is not constrained by the amount of information that can be placed on the product's packaging. After completing the task, the assistant manager presents his report to the product manager with the text and accompanying bullets of information to be placed on the product's packaging. Later, the assistant product manager receives the following message from the product manager: "Good work, but skip all the information about positive attributes found in our product that can also be found in competitor's products. Also, of course, skip all the information that describes what the product is not. We want to stress the distinctiveness of our product. We don't want to mention the attributes that are also found in other products, and certainly we don't want to mention what the product is not or the 'jobs' our product cannot do. That would be self-defeating." Comment. Specifically, what are the costs of not including information about product attributes that are also found in competitive products? What are the costs of not including a list of 'jobs that the product cannot do" (as the product manager says)?

The cost of not including information about attributes found also in competitive products is that customers may conclude that those attributes are absent or likely absent in the product if the firm does not provide information. It may appear obvious to the product manager that the firm's product has the attributes that are not expressly mentioned in the packaging, but it may not be obvious to customers. The firm may thus miss potential customers simply because it doesn't provide information about standard attributes. What about not providing information about negative attributes, including information about what the product is not, or not providing information about the "jobs that the product cannot do" (using the product manager's words)? Not including that information may reduce product conformity, increase the gap between expected deliverables and realized outcomes, and change expectations, thus hurting sales. (Perhaps the product manager and the assistant product manager should switch jobs!)

Product x provides $50 in benefits while a comparable alternative product y provides $60 in benefits. The price of product x is $20 while the price of product y is $50. However, a customer does not purchase x, despite x providing higher net benefits (benefits minus the price) than y. Why? (Again assume that any other product leads to net benefits of zero.)

The customer can buy x, y or any other product. If the customer does not buy x despite its superiority relative to y, then simply the customer considers other products superior. The customer may even decide to save the money. Despite the superiority of x over y, the customer has no demand for either product, because an alternative like buying another product or saving the money is even better.

What is the difference between "observable" and "experience" products? What can the product manager do to counteract the challenges posed by "experience" products?

The difference is that the attributes of experience products can only be known by experiencing the products over time, while the attributes of observable products are easy to recognize. If only experience allows customers to know if a product is "good," customers may be reluctant to try the product or may not be willing to pay much for it. What can the product manager do? The product manager may provide extra guarantees (like a money-back guarantee), distribute free samples, pay for certification from reputable evaluators (such as United Laboratories), or inform customers about test results of independent reviewers.

"A product has a more elastic demand when there are more products that can substitute for it." Do you agree?

The existence of just one alternative product may be enough to make the demand for a product elastic or the product quite substitutable. Having three or five products instead of one may thus lead to the same substitutability. Customers may thus be able to "escape" a higher price by just having one alternative product at their disposal. However, having more than one substitute product may help when different customers do not consider a given alternative product a valid substitute. Having more products perceived as substitutes by different customers will then make the demand for a product more elastic. However, it is important to emphasize again that just one product may be sufficient to generate substitutability. Additional substitute products may then be unnecessary to further increase the degree of substitutability.

A product manager should create, communicate, channel, and capture customer value. Relate these tasks to "Miracle Movers," a set of sliders resembling coasters that facilitates moving heavy objects. Specifically, why may the firm create and communicate value to customers through the product, but face difficulties when capturing that value?

The firm may have problems capturing the value. The product, although patented, can easily be substituted with regular coasters that can also act as sliders. An infomercial may show the product in action, but instead of promoting purchases, the infomercial may inspire customers to achieve the same outcome without buying the sliders. Customers may simply use regular coasters they already have at home to move heavy objects. The difficulty in capturing the value created by the idea and product may lead to less profit or even losses, as the infomercial educates them how to perform certain tasks and provides ideas for using commonly available substitutes.

What is the difference between the four key "product decisions"?

The four product decisions are "type of products," "product lines," "line extensions," and "brands." Every firm has to decide what products to produce or offer. Those products have to be ordered in product lines, according to some criterion like, for example, their commonality (for example, a store may sell refrigerators and washing machine as part of a "white line," TVs and stereos as part of "brown line", and computers and printers as part of a "gray line.") The criterion may not be commonality of product features but commonality of customers (a product manager has to consider different possible criteria). "Line extension" refers to the breadth of the product offering (for example, a store may just offer "good, better and best" TVs, another may offer every possible sizes or quality of TVs). "Brands" refers to the brands that will be attached to the products. For example, a company may sell the same product under two distinct brands, or a firm may produce a product but use another company's brand name when selling it to certain customers.

The product management function is typically organized along "product scope" or "product lines." What does this mean? If a firm has products x and y that can be offered to customers A and B, what "product lines" can the firm offer?

The key is to understand the marketing orientation when deciding product scope or product lines. For example, a manager may be in charge of customers A, while another manager may be in charge of customers B, but both managers manage products x and y. They would be product managers for both x and y, but maintain a "customer orientation." Alternatively, a manager may be in charge of product x and serve both customers A and B, while another manager may be responsible for product y and manage both customers A and B. They would be product managers for x and y, but follow a "product orientation." Notice how the offering of "product lines" would differ. In general, the organization of the product management function depends, among other factors, on differences among products and differences among customers. For example, if different professional expertise is required to serve customers A and B (consider home and business customers), then it may be beneficial to have a separate manager for each type of customers. The same applies if the products require different expertise. Please give some thought to the marketing orientation decision when organizing the product management function.

A product manager manages a product that competes with three other products made by an equal number of competitors. Suddenly, the "main rival" faces higher taxes on its product. The tax applies only to the "main competitor" and not to the firm or its other competitors. "This is good news for us. This rival, now taxed, steals a lot of business from us. That business will now go to us." Why may the product manager be up for a surprise? (Hint: Consider the "other competitors.")

The manager expects the firm to benefit greatly when its "main rival" is subject to the tax, and the tax falls only to the "main rival." However, what about the reaction of other competitors? At the end, the tax on the "main rival" may mainly benefit other competitors, and not so much the firm. This product manager should understand the firm's "business map"!

"My goal as a product manager is to create value for customers, because a firm that generates customer value is also profitable." Do you agree?

The manager's view of value creation is "romantic" and not sufficient for success. A product manager has to appropriate or capture at least some of the value generated to customers to make profits. Even a non-profit organization will have to face reality: There is no "free lunch," as decisions and actions have economic costs. A firm may create customer value but not able to appropriate it. Also, the customer benefits created by a product may be dwarfed by an alternative product that generates more benefits. When given the choice between two or more products leading to the same outcomes, customers will select the product with the highest benefits relative to the price paid.

A firm is planning to develop a plastic "singing plant pot" with a moisture meter. Low moisture will trigger a song. In a meeting, the marketing manager suggests designing a sturdy terracotta-colored pot in the shape of a traditional clay pot, because "research shows that the traditional 'can' shape sells the most in gardening stores, and thus customers prefer that pot shape to other shapes." Do you agree with the marketing manager?

The marketing manager confuses sales with demand and customer preferences. The traditionally "can" shaped pot (as the marketing manager calls the traditional pot) may sell the most because it is cheap to produce and has a low price in stores and not because customers prefer it to other possible shapes. The marketing manager should explore other shapes for pots that can make the product more attractive and distinctive.

What is the difference between "product scope" or "product lines" and "product coverage" or "line extensions"?

The marketing orientation of the firm defines its product scope or product lines. For example, a firm may have a customer orientation when it organizes its products, and the same product may be offered differently to different types of customers. The firm may have a product orientation when it organizes its products and group products based on their similarity. Product scope (product lines) is about breadth while product coverage (product line extensions) is about depth. Product coverage or product line extensions refer to the number of different products within each line. For example, by increasing product coverage or extending the product line, a firm may offer more products in different sizes or offer different product versions within the same line, and thus satisfy diverse groups of customers or customer segments.

A customer is planning to buy one unit of product x or one unit of product y. To simplify, assume that any other alternative to x and y generates zero net benefits. Product x generates customer benefits of $60 while a substitute y generates customer benefits of $80 and is priced at $55. What is the willingness to pay for that unit of x? How much customer value does the producer of x generate if the price of x is $20?

The net benefit of y when buying one unit of y is $80-$55=$25. Thus willingness to pay for x is $60-$25=$35. If the price of x is $25, then customer value is $35-$25=$10. Warning: Please note that calculations assume that any alternative to x and y lead to a net benefit of zero (and the opportunity cost of x and y is thus zero). More complex situations may assume that several units can be purchased for the same amount spent or that savings from buying a cheaper product can be used to buy another product z. Going beyond the simple case above, a product manager will have to consider all options so as to identify the best feasible and comparable alternative when customers consider buying one or several units of x.

A product manager defines a line of air-conditioners produced by a firm as the "cool-air line." Would you perhaps suggest a change in the name of the air-conditioner line?

The outcome of the product is more than "cool air." What about a "comfort" line of air-conditioners? Although a product manager may choose any name for the line of air-conditioners, the point behind this question is to visualize a product as offering benefits (a product allows for certain outcomes, addresses certain customer problems, and provides certain solutions and solution options).

"I don't think it is necessary to include the complement with our product, especially when the complement is priced low. Customers can buy it separately if they so wish." Comment. Specifically, should the price of the complement be the criterion to decide if a product should include or not the complement with the firm's product?

The price should not be the criterion, although it is a factor in the decision to include the complement with the product or bundle the product with its complement. Consider that the price of the complement may be low, but customers may face a high cost in time and effort getting the complement. Even if the complement is easy to buy from the firm or external parties, the customer may urgently need the complement for using the product as intended. The lack of a low priced complement then acts as bottleneck to the customer's process, reducing sales and profits. Also, the argument that customers can easily buy the complement as the price the low can be reversed: If the price of the complement is low, then the cost of adding it to the product is also low, even if some customers appreciate the complement while other don't. Thus a low price of the complement may facilitate adding it to the product.

A marketing manager over time has accumulated expertise in "over-hyping" books ranging from self-help books to marketing books by employing "a whole assortment of marketing gimmicks and tricks" (using the manager's words). The manager is now planning his own book, tentatively titled (and subtitled) "Hyperbolic Marketing: How Hype and Mind Manipulation Can Increase Profits Now." What would you say to the marketing manager and potential author? (Specifically, consider possible customer reluctance.)

The problem is that author may fall victim to his own hyperbole! Some potential customers may find the title incongruent with the author's intentions. The author is writing about how hyperbole and "mind manipulation" (perhaps he should use the term "mind framing") can increase profits. Some customers may perceive that the author is reporting about his experience in scamming customers by exaggerating product attributes. Some customers may be reluctant to buy his book as they fear becoming the newest victims of Hyperbolic Marketing! However, the book may attract other customers who expect that reading "Hyperbolic Marketing" will still compensate them for their victimization.

"I learned in marketing courses that we should encourage customers to buy products with their hearts, not their minds." Comment. What is the cost of having customers decide their purchase on the basis of emotion? (Hint: Consider volatility or variation in demand.)

The problem is that purchases based on emotion instead of rationality may be more volatile and unpredictable. A firm that relies on emotion to sell its products may then experience more changes in demand. More changes in demand may then increase costs. Relying on rationality may instead lead to more predictable sales and lower costs. A product manager should evaluate if promoting emotional decisions instead of rational decisions increases variability and thus costs. It is wrong to assume that loyalty is correlated with emotional decisions. Even worse, a firm may have difficulty changing its product strategy if customers rely on emotion to make their purchase decisions. Changes in emotion may be more difficult to predict.

A product manager suggests offering products together: "Products that are complements in consumption so that the revenue when offering both exceeds the revenue when offering them separately should be offered together if all customers value the complementation. Doing so will increase profits. For example, salty peanuts and cold drinks should be provided together if revenues from serving salty peanuts and cold drinks are higher when providing them together. Indeed, one of the products could be provided for free or at a reduced price and margin as it increases the consumption of the other." What would you say to the manager? Specifically, why may profits fall when two complements are offered together, despite revenues increasing when offered together?

The product manager ignores the impact on costs. Costs may rise by a larger amount than revenues. The increase in revenues may no compensate for the increase in costs. Also, the manager ignores the effect the combined sale of products has on other products. Using the same example presented by the product manager, consider that sales of high-margin dishes may suffer if a restaurant serves salty peanuts and cold drinks so as to encourage the consumption of cold drinks when offering salty peanuts. For example, more salty peanuts may reduce the appetite for the restaurant's dishes, and thus reduce profits overall.

"Sales volume of our product is falling. This, of course, is bad for us and good for competitors. Our loss is their gain. If we sell less, then they sell more. We have to design strategies to beat our rivals. Obviously, if we lose sales, they are implementing superior strategies and we could learn from them. That simple." Do you agree? Specifically, do lower sales by a firm reflect more sales by competitors? Is an increase in sales by competitors a consequence of superior strategies pursued by competitors? Why?

The product manager incorrectly assumes that a reduction in sales at the firm level reflects higher sales by competitors. Different cases are possible, reflecting different scenarios: The firm loses sales and competitors also lose sales, the firm loses sales and competitors do not lose sales, or the firm loses sales and competitors increase their sales. A firm may lose sales because of mistakes made, not because of the strategies followed by competitors. Competitors in turn may increase their sales because of successful strategies or despite mistakes made when implementing their strategies. (You may on your own think of many different possibilities.) Now, why is this important? Strategies will differ depending on the situation and the first step is for the product manager to understand as much as possible the situation it faces: Losing sales when every firm is losing sales is different to only one firm losing sales Strategies applicable to situations when all producers lose sales are not the same to strategies when only a firm loses sales because competitors are invading its turf.

A firm sells its products in two markets A and B. Sales of the same product in market A are twice the sales in market B while the price paid by customers is the same. After being informed that the number of customers is the same in markets A and B, the product manager says, "Aha, we are facing different customers here. The typical customer in A buys more than the typical customer in B. The only explanation is that the product is not equally substitutable. Customers in market A simply face fewer substitutes if the buy twice as much as customers in market B! This opens opportunities for different strategies, like charging different prices to customers in A and B." Do you agree? What would you say to the product manager?

The product manager is confusing strength of demand with substitutability. Simply, a stronger demand does not imply lower substitutability. Specifically, if demand is twice as large at every price level in markets A and B the price elasticity of demand will be the same in both markets. The fact that demand is twice as large in market A at each price level does not imply that price elasticities are different. Now, even if price elasticity is the same when demand in A is twice as large as in B, the product manager may indeed pursue different pricing strategies in each market to extract customer value. An individual demand that is twice as high at each price level allows for more extractable customer value.

"Market research shows how our product beats similar products made by competitors. We clearly generate more customer value. Poor competitors, they don't have a chance if we generate more customer value. We should always remember a key idea in marketing: The firm that generates more customer value wins in the marketplace." What would you say to the product manager? Specifically, why is the product manager up for a possible surprise? Why may the "poor competitors" actually win? Is the "key idea in marketing" mentioned by the product manager correct?

The product manager is up for a possible surprise as customer value is seen in isolation of the firm's costs and profits and the costs and profits of competitors. Simply, a firm can generate customer value without earning profits. Also, even if the firm earns profits now while generating customer value, profits may be eroded by the ability of competitors to reduce the price given their possible lower costs. Finally, the product manager should not pity the competitors. Competitors may be selling the product to other customers currently not served by the firm and who are paying more for the same product or paying more for similar products with slightly different attributes. Even slightly different attributes may lead some customers to increase their willingness to pay, and competitors may be exploiting that market. First lesson for the product manager: Customer value should not be equated to profits. Second lesson for the product manager: Even if profits accompany the generation of customer value, customer value may be eroded by the same competitors now not generating the customer value. Third lesson for the product manager: Competitors may be more profitable than the firm because they exploit a more lucrative group of customers and are better positioned in a given market. Fourth lesson for the product manager: Solve all the problems in the problem sets!

A product manager finds that all customers consider that product x would provide a higher net benefit than a substitute y. However, the product manager is puzzled that some customers buy y but not x while other customers don't buy x or y. The product concludes that customers are inconsistent when they prefer x to y but don't actually buy x. Are customers inconsistent?

The product manager should explore possible reasons for customers preferring x over y but buying y: First, customers may not have the income to buy x, and transaction costs may prevent customers from buying x with credit. Secondly, even if they have the income to buy x or y, the prices of x and y may not be the same. Customers may say they prefer x to y but their actual purchase depends on the prices of x and y. Thirdly, even if x and y sell for the same price and x is preferred to y, x may be inferior to other goods that the product manager is not considering. Customers may prefer x to y when they have to choose between x and y, but may choose y and z when confronted with x, y, and z and z interacts with x and y. Fourthly, customers may not buy x and y if another product z is superior to both x and y, despite x being superior to y. Consider also that z may stand for "savings" or the option of not spending money at all. Fifthly, customers may not buy x today because they expect lower prices of x and higher prices for y tomorrow. Although y is inferior to x when y and x is used, customers may be buying y for speculative reasons. You may have other reasons. Lesson: be careful when drawing conclusions from surveys of customer preferences.

A newly hired product manager says in an informal meeting, "Our organization exists because of its loyal customers. My goal as a product manager is to continue satisfying customer requirements and broaden our customer base. I exhort you to continue generating value by providing customers with distinctive benefits while reducing their costs." Comment. Do you agree with the product manager's statement? (Consider that the previous product manager quit after failing to increase product profitability, despite attracting more customers by "creating value.")

The product manager's exhortation may be fine as a way to stress that customers are key to the firm's profitability. However, the point is not just to "generate value" to customers. By doing just that, the previous product manager may have wasted a chance to increase profits. The point is that creating value to customers does not necessarily lead to profits. In the extreme, while customers are extremely satisfied, the firm goes bankrupt.

A restaurateur convenes a meeting with his waiters and waitresses and tells them to open bottles of soft drinks and beer or serve them in glasses as they are placed on the table. The restaurateur explains, "Patrons will not wait for the food to arrive to enjoy their beer. It won't pay to wait either as the beer will lose its carbonation. In this way, they will drink more, and, as we all know, our margins -and your tips—are higher when patrons consume drinks. This is more so when we cater to habitual patrons and not so much to transients. So, please, avoid closed containers of any kind, open any bottles the moment they are served, serve drinks quickly after the order is placed, and even better, serve drinks in glasses so any artificial carbonation is lost before main dishes are served. This allows us to charge more for drinks, and again, this is good for you too. More tips! How do you like this trick, ha-ha?" Comment. Specifically, what may derail the restaurateur's product strategy?

The restaurateur assumes that patrons, and especially habitual patrons that especially go to the restaurant, will not recognize the "trick" (as the restaurateur calls the strategy) and will go along with consuming more drinks. However, the restaurateur may put the reputation of the restaurant at risk. Patrons may wait before enjoying their drinks knowing that the prices of drinks are relatively high and thus possibly reduce the quality of the overall experience. Even worse, the product concept of "conformity" may fall. Simply, patrons may feel that they are being manipulated and pushed to consume more when drinks are served open and quickly. They may resent expressly telling waiters and waitresses that they should serve drinks with the main dish or that they should not open bottles when placed on the table. The restaurateur is ignoring the consequences of his "trick." It may be more profitable instead to reduce the price and earn less on each drink, and have customers order more drinks on their own, without hidden pressures from waiters and waitresses. In the end, and by ignoring the broader process that includes the patrons' own sub-process, the restaurateur's "trick" may hurt his business. The restaurateur should take a course in product management!

"We signal higher quality when we raise the price. A firm doesn't signal quality by reducing the price, even less so if the price falls temporarily." Comment. Specifically, can a firm signal higher quality when it reduces the price?

The statement is false. A lower price can also signal quality. For example, consider a restaurant that deliberately generates excess demand when it reduces its prices. The restaurant will be filled to capacity, and eventually the restaurant will not make a profit in the short run. However, full use of capacity in addition to customers waiting for a table may signal potential customers that the restaurant is "good." Customers may then communicate the message that the restaurant is "of high quality" as the price of the food relative to its quality is low. The restaurant may then decide to increase capacity or raise prices, or both. The deliberate low price that generated excess demand advertises through word of mouth (and visible lines in the front of the restaurant) that the restaurant is "good." Thus lower prices, and not only higher prices, may signal quality.

After data shows an unchanging price but higher dollar sales for the main product produced by a firm, the product manager proudly says in a meeting "This clearly shows the superiority of our product relative to products made by competitors. The willingness to pay for our product is higher than the willingness to pay for products made by competitors. Need proof? If our product were inferior to products made by competitors, our dollar sales would have decreased." Comment. Specifically, why may the product be inferior to competitor products despite an increase in dollar sales?

The superiority of the firm's product may be an illusion. While the product manager is proud to present his story or explanation, higher sales may be the result of strong competitors becoming weaker. The products made by competitors may be superior (in the sense that customers are willing to pay more for products made by competitors), but certain circumstances like a reduction in supply by competitors may have temporarily increased demand for the firm's product. In any case, the superiority of a product or firm cannot be determined by sales alone. The sudden superiority of a firm is not necessarily a consequence of the firm getting better but rather competitors getting weaker. Should the product manager necessarily get credit for competitors becoming weaker? On top of this, why doesn't the product manager focus on short term and long term profits? Higher dollar sales do not necessarily translate into higher profits

"When analyzing a product as a bundle of attributes, we should find the attributes in a product that add value to customers. Also, we should try to increase attributes, as an increase in attributes will enhance the overall product." Comment. Specifically, when a product manager tries to identify "attributes" in a product, should the product manager focus only on "attributes that add value to customers"? Can "attributes" be negative? If an attribute increases, do other attributes necessarily remain unaffected? Can an increase in an attribute reduce other attributes? Can a product's attributes be "good" and "bad" depending on the circumstances? Why? Present examples.

The term "attribute" considers both good and bad attributes, not just what "adds value to customers." It is a common mistake to interpret "attribute" as "good." An attribute may be good under certain circumstances and settings only. Also, higher levels of a good attribute may lead to higher levels of a bad attribute, or to lower levels of another good attribute. For example, adding more features in a music player may reduce its ease of use. The product manager should recognize the tradeoffs in attributes. The increase in an attribute may bring about a decrease in other attributes. The term "attribute" does not imply that an increase in an attribute leaves other attributes unchanged.

"We have to promote shared gains with customers. How do we accomplish that? By reducing customer costs! For example, if we make a product easier to store or easier to open then customers will be willing to pay more. Then we can increase the price and increase sales." Comment.

This product manager needs to take our course. Even if customers reduce their costs when a product is better packaged and the firm can appropriate through higher sales or higher prices some of the benefits generated to customers, it may not pay to do so. The product manager should "see the whole picture" and measure the effects on the product line in general. If a product in a product line is made "easier to store or easier to open," then other products in the same line may be negatively affected. Suppose the firm in question produces apple juice in different containers, large and small. By making a large container of apple juice "easier to store or easier to open," the firm may reduce its ability to charge different prices and segment markets. Overall, profits may fall as customer costs fall, even if the firm can appropriate more from customers experiencing lower costs when consuming the enhanced product in the product line.

During the presentation of a new product, a product manager says, "Customers value a product more the more a product has attributes. Also, customers value more a product the higher the level of its attributes." Comment. What would you say to the product manager?

This product manager should take a good course in product management! Consider the following: Customers may not appreciate the attributes. Products have both positive and negative attributes. Customers assign less value to a product when attributes are negative. Also, if unappreciated attributes are costly to provide and lead to a higher price, customers will be discouraged to demand the other positive attributes. Positive attributes may generate hidden negative attributes. For example, adding more features to a music player may make the use of the product confusing and cumbersome. The value assigned to a positive attribute in relation to its level is not necessarily linear. Beyond a given level of an attribute, customers may assign a negative value to the attribute. Also, an increase in a positive attribute may increase a correlated negative attribute and reduce the value assigned to the combination.

"If a high priced product like ours signals high quality, then we can conclude that a higher quality comes with a higher price." Comment. Do you agree?

Twisted logic! If a high price signals quality, then high quality does not necessarily come with a higher price.

Direct, indirect or potential competition can be "self-induced." What is "self-induced" competition? Present two examples of "self-induced" competition and two strategies to minimize its effects. Can inducing competition be profitable for the firm?

Two examples: Alcoa produces aluminum from aluminum ore, aluminum is purchased by producers of soda and beer cans, and recyclers start "producing" their own aluminum from recycled aluminum. Heinz produces ketchup for restaurant use, and restaurants refill the empty containers with their own ketchup or different ketchup. In both cases, Alcoa and Heinz have created competitors by their actions. Recyclers will affect the pricing strategies of Alcoa and generate "noise" in Alcoa's decisions. How can firms minimize the negative impact of self-induced competition? In the case of Alcoa, it may pay to enter the recycling business ("cannibalize your own product before others do it"). In the case of Heinz, it may pay to produce a single-use container or a container that "self-destructs" after some time (this actually exists, certain types of plastic may become brittle, or lose their shape or color over time). "Self induced" competition can be profitable for the firm. For example, a firm may be planning to establish a standard with a product and wants competitors to adopt the standard. By providing the technology to competitors so they can produce some products also, the firm may sell more of other products. At the same time it induces competition, it may enlarge the market. Another example is when a small producer develops a successful new product but lacks the resources to communicate the attributes of the new product to customers and thus expand the market. By allowing a large company access to the technology behind the new product, and having the large company communicate the attributes of the new product, the small firm may benefit. Of course, other possible options like selling the firm to the larger firm may be better. The key idea, however, is that self-induced competition is not necessarily bad. Competition and collaboration may occur at the same time.

A firm produces two digital cameras, the AX100 and the AY200. Demand for the AX200 camera fluctuates more over time and is thus more volatile or unstable than demand for the AY100. In a meeting, the product manager says, "It is clear that the AY200 camera entails more risk. Demand for the AY200 is more unstable and more volatility means more risk." Do you agree? Is the AY200 a more risky product because it is subject to more volatility?

Volatility should not be confused with risk. Although the AY200 camera may indeed have unstable demand, demand may still be predictable. For example, the firm may know that customers will continue demanding certain number of cameras today and another certain number of cameras tomorrow, while it may have difficulty predicting the fall in demand of its stable AX100 camera.

During a meeting with a consultant, a product manager says to the consultant, "I don't know how to find the output that leads to the highest profit, but I know, the output level that minimizes average costs, based on information provided by both the production manager and our the accountant. Will I maximize profits if I just produce where average cost is at its minimum?" The consultant responds, "Yes, because, logically enough, you maximize profits where you minimize average costs." Do you agree? Why?

You better not agree with the consultant. The profit maximizing output is not necessarily the output that minimizes average costs. Simply, beyond a certain point, profits fall as the firm reduces the price to increase output in the quest for the cost-minimizing output. Alternatively, beyond a certain output level the higher volume by reducing the price does not compensate for the lower price-over-average cost margin.