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Part 4 PRODUCT AND PRICE DECISIONS

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1 Part 4 PRODUCT AND PRICE DECISIONS

2 10: Product, Branding, and Packing Concepts
11: Business Markets and Buying Behavior 12: Developing and Managing Prices 13: Marketing Channels and Supply-Chain Management 14: Retailing, Direct Marketing, and Wholesaling

3 Chapter 11 Developing and Managing Goods and Services
Professor Jason C. H. Chen, Ph.D. School of Business Administration Gonzaga University Spokane, WA 99258

4 Learning Objectives Understand how companies manage existing products through line extensions and product modifications Describe how businesses develop a product idea into a commercial product Know the importance of product differentiation and the elements that differentiate one product from another Explain product positioning and repositioning

5 Learning Objectives Understand how product deletion is used to improve product mixes Understand the characteristics of services and how these characteristics present challenges when developing marketing mixes for service products Be familiar with organizational structures used for developing and managing products

6 Managing Existing Products
Organizations can benefit by capitalizing on existing products Weaknesses and gaps can be identified by assessing the composition of the current product mix Analysis can lead to improvement of the product mix through: Line __________ Product ____________ extensions modifications

7 Line Extensions A line extension is development of a product closely related to existing products but designed specifically to meet different customer needs. Less _____ and less _____ than introducing a new product Line extensions may: Focus on a different market segment Increase sales within the same market segment Success of a line extension is enhanced when a: Parent brand has a high-quality brand ______ Good fit between the line extension and its parent exists risky costly image

8 Product Modifications
A product modification means changing one or more characteristics of a product Differs from a line extension because the original product ______ from the product line Improves a firm’s product mix under certain conditions Product must be modifiable Customers must recognize the modification Modification should be consistent with customers’ desires drops

9 Types of Product Modifications
Changes relating to a product’s dependability and durability (increase leg room in the seating area) _________ modifications Quality Changes that affect a product’s versatility, effectiveness, convenience, or safety (Bing search from M/S to make searching more “social”. ___________ modifications Functional Changes the sensory appeal of a product (pros: product _____________; cons: ___________value; eg., Louis Vuitton) Aesthetic modifications differentiation subjective

10 Developing New Products
Developing new products enhances product mix and adds depth to a product line A new product can be: An innovative product that has never been sold by any organization A modified product that existed previously A product a specific company has not marketed previously Viewed as new when it is brought to one or more markets from another market Introducing new products can be expensive and risky New product failures often occur and can create major financial problems for an organization However, _________ to introduce new products is also risky Companies can lose market share with failure to innovate and keep up with competitive products Failing

11 Figure 11.1 - Phases of New-Product Development
Idea generation Idea generation Screening New-product development process is a seven-phase process for introducing products A product can be viewed as new when it is brought to one or more markets from another market (e.g., Daimler brought its Smart Car to US had been out in Europe for years) Screening Concept testing Concept testing Business analysis Business analysis Product development Product development Test making Test marketing Commercialization Commercialization

12 1. Idea Generation Ideas can come from several sources Internal
Marketing managers Researchers Sales personnel Engineers Other organizational personnel External Customers Competitors Advertising agencies Management consultants Research organizations 3M post-it Notes came from an employee – a church choir member, he used slips of paper to mark songs in his hymnal.

13 2. Screening Screening means selecting ideas with greatest potential for further review Ideas are analyzed to determine whether they match the organization’s objectives and resources Keeping the product idea in focus and on track by understanding consumer needs and wants is the key to success A checklist is often used encouraging evaluators to be systematic Most new products are rejected during this phase

14 3. Concept Testing Concept testing is presenting potential buyers with a product idea To determine their attitudes and initial buying intentions regarding the product Low-cost procedure The result of concept testing can help marketers understand which attributes and benefits are most important to potential customers

15 4. Business Analysis Business analysis involves evaluating a product idea to determine its potential contribution to the firm’s sales, costs, and profits Marketers ask a series of questions Results supply the specifics needed to estimate potential sales, costs and profits Analysis based on estimates (for return on investment) ___________ analysis Payback analysis Breakeven For example, when HP launched its TouchPad tablet computer, the business analysis did not signal to the company that the competitive environment and profit margins would cause the firm to withdraw this product shortly after its launch.

16 5. Product Development Product development is determining if producing a product is technically feasible and cost effective Idea is converted into a test _________ Overall functioning of the prototype is tested Determining the quality to be built into the product This phase is lengthy and expensive so a small number of product ideas are put into development prototype

17 6. Test Marketing Test marketing is a limited introduction of a product in geographic areas chosen to represent the intended market Aims to determine the extent to which potential customers will buy the product Exposes a product in a natural marketing environment to measure its sales performance Measures the extent of brand _________ Risks Expensive and Competitors may try to ________ awareness interfere Clearly, not all products that are test-marketed are launched. At times, problems discovered during test marketing cannot be resolved.

18 7. Commercialization Plans for full-scale manufacturing and marketing are refined and settled, and budgets are prepared Marketers analyze results of test marketing Necessary changes to the marketing mix are made Decisions on warranties, repairs and replacement parts are made Rollout - Product is introduced in stages Starting in one geographic area and gradually expanding into adjacent areas

19 Stages of Commercialization
Introduction in test cities Market coverage of the states where the test cities are located Marketing efforts be extended into adjacent states Remaining states be covered in stage

20 Figure 11.2 - Stages of Expansion into a National Market During Commercialization

21 PRODCUT DIFFERENTIATION THROUGH QUALITY, DESIGN, AND SUPPORT SERVICES

22 Product Differentiation
Product differentiation is a process of creating and designing products that are perceived as different from other products Three aspects to be considered when creating and offering products for sale Product quality Product design and features Product support services

23 Product Quality Quality refers to the overall characteristics of a product that allow it to perform as expected in satisfying customer needs Concept of quality varies between consumer and business markets Dimensions of quality _______ of quality: Amount of quality a product possesses (customer satisfaction was ranked) ___________ of quality: Degree to which a product has the same level of quality over time (FedEx delivers more than 99 percent of overnight packages on time) Level Consistency

24 Product Design and Features
How a product is conceived, planned and produced. Good design (more than just appearance) is one of the best competitive advantages any brand can possess. Styling: Physical appearance of a product Product design Specific design characteristics that allows a product to perform certain tasks By adding or subtracting features, a company can differentiate its products from their competitors. Product features For a brand to have a __________ competitive advantage, marketers must determine the product designs and features that customers desire. sustainable

25 Product Support Services
Customer services: Human or mechanical efforts or activities a company provides Adds value to a product Differentiates a company’s products from competitors’ Profoundly affects customer satisfaction Consumers infer a higher level of quality from the availability of add-on services Examples include: Delivery/Installation Financing Customer training Warranties/Guarantees Repairs Layaway plans Convenient hours Adequate parking Toll-free numbers Websites

26 PRODUCT POSITIONING AND REPOSITIONING

27 Product Positioning Product positioning refers to the decisions and activities intended to create and maintain a certain concept of the firm’s product in customers’ minds Product is positioned so that it appears to have the characteristics that the target market most desires Perceptual maps (Fig. 11.3) are created by questioning a sample of consumers about their perceptions of products, brands and organizations with respect to two or more dimensions For example, how customers perceive selected pain relievers in regard to price and type of pain for which the products are used) .

28 Figure 11.3 - Hypothetical Perceptual Map of Pain Relievers

29 Bases for Positioning Head-to-head Avoid competition
Product’s performance characteristics are equal to those of competitive brands and if the product is priced lower (PepsiCo vs. Coca-Cola); or even the price is higher (Samsung vs. Apple) Head-to-head Brand has unique characteristics that are important to some buyers (Volvo positioned itself for its safety) Product’s performance characteristics do not differ significantly from those of competing brands. Avoid competition Product attributes and features (iPhone’s attributes such as its unique shape, easy-to-use touchscreen and its access to iTunes) Specifically based Price Quality level Benefits Other bases

30 Repositioning Evaluating the positions of existing products
Brand’s market share and profitability may be strengthened 2013 Ford Fusion was repositioned as a sporty-looking, sporty-handling, mid-sized care with gas savings. Repositioning can be accomplished by: Physically changing the product, price, or distribution Changing product image through promotional efforts Aiming at a different target market. When introducing a new product into a product line, one or more existing brands may have to be repositioned to minimize cannibalization of established brands and thus ensure a favorable reposition for the new brand.

31 Product Deletion Product deletion means eliminating a product from the product mix Systematic review allows an organization to improve a product or delete a product Declining products reduce profitability and drain resources A dying product may lose favor with customers and negative feelings may transfer to a company’s other products Three ways of product deletion _______-out: Allows a product to decline without a change in marketing strategy _____-out: Exploits any strengths left in the product It is commonly taken for technologically obsolete products such as older models of computer and CD players. Often, the price is reduced to get a sales spurt. Immediate drop: Used when losses are too great Phase Run

32 Product Deletion Process
Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

33 MANAGINING SERVICES

34

35 Service An intangible product that involves a deed, a performance, or an effort that cannot be physically possessed A service is not the same as customer service Homesourcing A practice whereby customer contact jobs are outsourced into workers’ homes Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

36 Services as Products Services are of increasing importance to U.S. economy Represent 70% of U.S. GDP Long-term economic growth and lifestyle changes have encouraged service sector expansion Business services have grown as the business environment becomes more complex Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

37 Characteristics of Services
Service is not physical and cannot be touched _____________ Intangibility Shared responsibility between the customer and service provider in giving and receiving the service Inseparability of production and consumption Unused service capacity of one time period cannot be stored for future use (important topic for Revenue Management) ____________ Perishability

38 Characteristics of Services
Variation in quality Heterogeneity Interactions that result in satisfied customers who use a service repeatedly over time Client-based relationships Level of interaction between provider and customer needed to deliver the service Customer contact

39 Customer Contact The level of interaction between provider and customer needed to deliver the service The look of facilities plays an important role in high-contact industries Well-trained, satisfied employees are essential Level of Contact High Health Care Real Estate Spa Services Low Tax Filing Auto Repair Dry Cleaning Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

40 Development of Services
The characteristics of services create marketing challenges and opportunities Services generally come in a bundle: _____ Service – The basic service experience a customer expects to receive (tutoring) ______________ Services – One or more supportive services used to differentiate the service bundle from competitors’ (outlines, handouts and online practice questions) Heterogeneity allows for customization, which creates a competitive advantage Core Supplementary

41 Pricing of Services Pricing should consider consumer price sensitivity, nature of the transaction, and costs Prices can be based on performance of specific tasks, time, and level of demand Services can be offered at one price, separately, or a combination of the two How about perishable products/services: Customers rely on price as an indicator of quality Marketers must decide whether to bundle options and how to price bundles

42 Distribution of Services
Marketers deliver services in a variety of ways At the service provider’s facility (health-care) At customer’s home or business (carpet cleaning) With no face-to-face contact (at “arm’s length”) Electric, Internet, Cable TV, Phone services They can be costly but essential in keeping customers satisfied and maintaining market share) Marketing channels for services are usually short and direct Some services use intermediaries (travel and insurance agents) Inventory management is a serious concern for services

43 Promotion of Services Tangible cues are a typical way to promote services Intangibility results in promotion-related challenges Advertisements for services show pictures of facilities, equipment, and service personnel Personal selling can help customers visualize the service experience Word-of-mouth communication is important

44 Organizing to Develop and Manage Products
Responsible for a product, a product line, or several distinct products that make up an interrelated group within a multiproduct organization. Product manager Responsible for a single brand Brand manager Responsible for all aspects of developing a product Research and development Production and engineering Finance and accounting Marketing Venture team Both product and brand managers operate cross-functionally to coordinate the activities, information, and strategies involved in marketing an assigned product.

45 Video Case 11.1 DO AXE PRODUCTS MAKE MEN MORE DESIRABLE?

46 Do AXE Products Make Men More Desirable?
Discussion Point Do AXE Products Make Men More Desirable? To effectively manage the brand, Unilever has regularly developed new products AXE’s product features are both tangible and psychological Love them or hate them, AXE commercials leave an indelible impression Take a look at the website Copyright © 2014 South-Western, Cengage Learning. ALL RIGHTS RESERVED.

47 Summary AXE is the number one male grooming brand in both the United States and Canada. The company’s advertisements feature women who are very attracted to men who wear AXE body spray. AXE believes the provocative ads are important because they get the attention of men years old, the company’s target demographic. AXE has extended their product line to include other grooming products such as shower gel to continue to meet the needs of young men. However, the ads and the products also appeal to pre-teens who want to feel more confident, which could damage AXE’s “sexy” perception.

48 1. How has AXE managed its product mix?
AXE’s product mix must satisfy its target market—men between the ages of 18 and 24. When they first entered the American market, the company needed to get young men to purchase body spray. Once AXE body spray was successful, the company engaged in line extensions and product modifications in order to keep existing customers and attract new ones. AXE’s products help young men develop an “AXE Lifestyle.”

49 2. How has AXE used line extensions to increase its reach among consumers?
AXE uses line extensions in several ways. It release new scents every year, and it has introduced hairstyling, aftershave, skin care, and shower gel products. AXE has also developed products for women that compliment its men’s products.

50 3. Why are younger generations attracted to AXE products?
During preadolescence many young men become more conscientious of their appearance and how attractive they are to the opposite sex. AXE provides a way for them to feel more confident about their body image.

51 PORTER’S FIVE COMPETITIVE FORCES MODEL
Threats NEW MARKET ENTRANTS SUBSTITUTE PRODUCTS & SERVICES Switching cost Access to distribution channels Economies of scale Redefine products and services Improve price/performance Selection of suppler Threat of backward integration Buyer selection Switching costs Differentiation Cost-effectiveness Market access Differentiation of product or service THE FIRM INDUSTRY COMPETITORS According to Porter, there are five competitive forces in any industry, and the attractiveness of the industry depends on the strength of each force (Porter, 1985). Under the perspective of market structure, Porter’s competitive forces model (Porter, 1985; Applegate et al., 1999) has been broadly adopted as the underpinning for investigating the effect of information technology on the relationships between suppliers, customers, and other potential threats. Contemporary strategic planning frameworks -- 1) too narrow and pessimistic -- 2) they are based on projections of market share and market growth COMPETITIVE FORCES that SHAPE strategy -- depends on the type of the industry The ability to manage complexity and responsiveness has become a powerful source of competitive advantage. Internal Forces: 1.customer focus, 2.communication, 3.core competencies, 4.complexity, 5.Quality Due to characteristics of the instability of the markets in e-Commerce, Downes and Mui (1998) show that there are three forces that must be added to Porter’s five forces model: globalization, digitalization, and deregulation. digitalization – the improvement and cost reductions in digital technology have had significant impact in business for many years now. The Internet has simply accelerated much of what was already happening and spread it into other industries across the world (esp. the information-based industries). Deregulation and liberalization – it opened up new opportunities for many firms, and recent years have seen an increase in the number of related diversifications. (e.g., UK companies in the energy sector have branched out into related markets such as other forms of energy or telecommunications, making use of their physical distribution networks). Globalization – an international level of many industries and liberalization of many markets (e.g., Eastern Europe) have opened up new foreign markets for Western firms while bringing Western firms into competition with multinationals based in other countries., Such international competition is likely to accelerate following political moves, such as the signing of the General Agreement on Trade and Tariffs by the leading industrial nations which promise to reduce barriers to international trade. Concept of “glocalization” where organizations must be a part of the local environmental setting. That is to think global and act according to local customs to survive and thrive in local conditions. SUPPLIERS CUSTOMERS Bargaining power N Dr. Chen, The Trends of the Information Systems Technology TM -51

52 Generic Strategies Framework
Michael Porter describes how businesses can build a sustainable competitive advantage “fundamental basis of above-average performance in the long run is sustainable competitive advantage.” He identified three primary strategies for achieving competitive advantage: ______ leadership - lowest-cost producer _____________ - product/service is with unique feature _______ - limited scope; occupy narrow market niche where the products/services can stand out by virtue of their cost leadership or differentiation. Cost Differentiation Focus

53 Competitive Advantage Focus
Figure 1.2: Porter’s Generic Strategy Framework – 3 Strategies for achieving Competitive Advantage Competitive Advantage Uniqueness Perceived by Customer Lower Cost Position Industrywide (Broad Target) Overall Cost Leadership Differentiation Competitive Scope Three generic strategies Cost leadership differentiation (internal differentiation [e.g., stock option, bonus, salary increase] is good for building performance culture within the organization) From PRODUCT differentiation to SERVICE differentiation (BLUE OCEAN) Focus (focused strategy is to develop a new market niches for specialized products/services where a target area better than its competitors) means an appropriate position/market a. cost or b. differentiation PRODUCT differentiation  SERVICE differentiation  INNOVATION (BLUE OCEAN STRATEGY) Core concept of this strategy are two basic principles: 1. Competitive advantage is believed to be the GOAL of any strategy 2. It is to be believed that a firm must define the TYPE of CA it seeks to attain and the scope within which it will be attained. From “all things to all people” (a below-average performance) to a focus on core competencies. Particular Segment only (Narrow Target) Focus Competitive Mechanism N Dr. Chen, The Trends of the Information Systems Technology TM -53

54 Business Strategies and its Competitive Advantage Innovation Alliance
Uniqueness Perceived by Customer Lower Cost Position Industrywide (Broad Target) Cost Leadership Differentiation Alliance Innovation Growth Competitive Scope Particular Segment only (Narrow Target) Three generic strategies Cost leadership differentiation (internal differentiation [e.g., stock option, bonus, salary increase] is good for building performance culture within the organization) From PRODUCT differentiation to SERVICE differentiation (BLUE OCEAN) Focus (focused strategy is to develop a new market niches for specialized products/services where a target area better than its competitors) means an appropriate position/market a. cost or b. differentiation PRODUCT differentiation  SERVICE differentiation  INNOVATION (BLUE OCEAN STRATEGY) Core concept of this strategy are two basic principles: 1. Competitive advantage is believed to be the GOAL of any strategy 2. It is to be believed that a firm must define the TYPE of CA it seeks to attain and the scope within which it will be attained. From “all things to all people” (a below-average performance) to a focus on core competencies. Cost Focus Differentiation Focus Knowledge-based economy Industrial economy Competitive Mechanism N Dr. Chen, The Trends of the Information Systems Technology TM -54

55 Dynamic Environment Strategies
Porter’s model is useful for diagnostics, or understanding how a business seeks to profit in its chosen marketplace, and for prescriptions, or building new opportunities for advantage Porter model was developed at a time where the rate of change in any given industry was relatively _____ and _________. (i.e., stable) Newer models were developed to take into account the increasing turbulence and velocity of the marketplace slow manageable


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