Principles of Marketing Chapter 8: Developing New Products And Managing The Product Life-Cycle

New Product Development Pertains to: Not only the development of original products, But also improvements, modifications, and new brands Involves great amounts of: (all data reported below pertain to the CPG market & sourced from the American Association of Advertising Agencies’ “Research Matters” report on June 6, 2007)  Risk Only 10% new in ‘04 had sales of $20 million in ’05 Over 80% of new fail due to lack of differentiation As of ‘07, 49% of line extensions, and 74% of more innovative NPD resulted in failure  And expense Total average marketing cost (only) for a major product launch as of ’05 was $68.3 million (includes adv.; slotting fees; in-market testing; etc.) Advertising spending alone in 2007 was over $500 million for Vista and $50 million for Cadbury Schweppes’ Accelerade sports drink Dr. James Carver – Auburn University

NPD’s Most Common Outcome: Failure Food Industry:  Average $20-$30 billion lost annually Reasons for: Overestimation of market size. Product design problems. Incorrectly positioned, priced, or advertised. Pushed by high level executives despite poor marketing research findings. Excessive development costs. Competitive reaction. Dr. James Carver – Auburn University

NPD Process Steps involved: 1. Idea screening 2. Concept development and testing 3. Marketing strategy development 4. Business analysis 5. Product development 6. Test marketing 7. Commercialization Dr. James Carver – Auburn University

Idea Generation Ideas can come from:  Internal sources: Company employees at all levels.  External sources: Customers Competitors Distributors Suppliers Outsourcing (design firms, product consultancies, online collaborative communities) Dr. James Carver – Auburn University

Idea Screening Idea screening:  Process used to spot good ideas and drop poor ones. Executives provide a description of the product along with estimates of market size, product price, development time and costs, manufacturing costs, and rate of return. Evaluated against a set of company criteria for new products. Dr. James Carver – Auburn University

Concept Development & Testing Concept development and testing:  Product idea: Idea for a possible product that the company can see itself offering to the market.  Product concept: Detailed version of the new-product idea stated in meaningful consumer terms.  Concept testing: Testing new-product concepts with groups of target consumers to find out if the concepts have strong consumer appeal. Dr. James Carver – Auburn University

Marketing Strategy Development Marketing strategy development:  Part One: Describes the target market, planned value proposition, sales, market share, and profit goals.  Part Two: Outlines the product’s planned price, distribution, and marketing budget.  Part Three: Describes the planned long-run sales and profit goals, marketing mix strategy. Dr. James Carver – Auburn University

Business Analysis Involves a review of the sales, costs, and profit projections to assess fit with company objectives.  If results are positive, project moves to the product development phase. Dr. James Carver – Auburn University

Product Development Product development:  Where a concept transforms into a physical good  Requires a large jump in investment. Prototypes are made.  Must have correct physical features and convey psychological characteristics.  Prototypes are then subjected to physical tests. Dr. James Carver – Auburn University

Test Marketing Involves:  The product and marketing program being introduced in a more realistic market setting. Not necessary for all products, but can decrease risk “If it plays in Peoria…”  An old marketing adage about test marketing  But no longer the “top dog”  Top 5 cities: (Acxiom(R) Corporation’s “Mirror on America” study) 1. Albany, NY 2. Rochester, NY 3. Greensboro, NC 4. Birmingham, AL 5. Syracuse, NY Dr. James Carver – Auburn University

Commercialization Is a function:  Timing When to introduce the product  Where (to introduce) A single location, state, region, nationally, internationally  Etc.  Everything builds into a market rollout plan Dr. James Carver – Auburn University

The Product Life Cycle (PLC)* Dr. James Carver – Auburn University IntroductionGrowth Sales ($) Sales Maturity Profits Decline Time

Problems with the PLC When used carefully, the PLC may help develop good marketing strategies.  However, in practice, it is difficult to:  Forecast sales level, length of each stage, and shape of PLC.  Develop marketing strategy because strategy is both a cause and result of the PLC.  As a result, the PLC is more of a descriptive tool for general strategy and life of a product, but not a predictive (i.e., theoretical) tool Dr. James Carver – Auburn University

General Characteristics and Strategies Given Stage Intro:  Characteristics: Sales are low; profits are generally negative till end; customers tend to be innovators; and competition is low  Strategic Problem Faced: Get out of “Intro” as fast as you can, so  Create product awareness and trial Dr. James Carver – Auburn University

General Characteristics and Strategies Given Stage Growth:  Characteristics: Fastest rise in sales and profits; profits peak here; customers tend to be early adopters; and competition is growing because of success  Strategic Problem Faced: Maximize one’s market share and monitor the entry and effects of competitors, while simultaneously ensuring product availability to hold stage as long as possible. Dr. James Carver – Auburn University

General Characteristics and Strategies Given Stage Maturity:  Characteristics: Sales peak here; profit growth is now in decline (but still positive); customers tend to be the middle majority; and competition is stable and beginning to decline  Strategic Problem Faced: Maintain market share and maximize profits available as they’re shrinking; look to begin a new PLC*  As one cannot return to earlier stages* Dr. James Carver – Auburn University

General Characteristics and Strategies Given Stage Decline:  Characteristics: Sales are declining; profits are still declining; customers tend to be laggards; and competition is declining still  Strategic Problem Faced: Reduce expenditures and milk the brand Consider dropping underperforming models or entirely  Dropping will affect resellers and customers May be needed by resellers to “complete” image or “drive” traffic Dr. James Carver – Auburn University