Product and Pricing Strategies
Developing ProductsOrganizations assess the current market for new product opportunities and, when potentially profitable, develop new product prototypes to test feasibility of production.
Learning ObjectivesOutline the steps involved in new product development, understanding the logic behind them
- Product development is the process of identifying consumer needs within a market and innovating towards developing a product to fulfill those needs.
- Internal and external factors impacting production and demand should all be considered during the product development period.
- The eight steps of Koen provide useful context on how organizations develop products. Market research, brainstorming, screening, prototyping, testing, process engineering, and distribution are all key phases in development.
- Another useful concept is the idea of a minimum viable product (MVP). Due to the cost of mass production and perfecting a product, MVP allows rapid prototyping and testing to ensure a demand exists.
- scale: To grow and expand rapidly.
- conceptualizing: To conceive an idea for something.
New Product OpportunitiesThe process of identifying consumer needs within a market, and innovating towards developing a product to fulfill those needs, is referred to as new product development. When developing new products, the most important thing to keep in mind is that the product itself must successfully fill an existing need in the market, transforming a market opportunity into a tangible and marketable product.
Cost, time of development, price points, ability to scale, distribution, legalities, and competition should all be considered during the product development period. Through assessing the opportunity, risks, costs and external environment, organizations can ensure they focus on developing and investing in the products with the highest potential.
How To Develop ProductsThere are a number of useful frameworks for product development and product design, each of which focus on a full process of identifying market needs, ideating upon solutions, conceptualizing these solutions, and ultimately prototyping the new product for testing. One of the more well-known approaches is called eight stages of Koen:
Eight Stages of Koen
- Idea generation – Using market research, SWOT assessments, industry trends, trade shows, and data gathering techniques, organizations identify the existing opportunities in the market. Ideas to fill these consumer needs are brainstormed. When brainstorming, any and all ideas are valid and should be considered thoroughly.
- Idea screening – Once all of the ideas are on the board, the screening process can begin. Screening revolves around identifying which products best align with the target market and the need being filled, along with the technical feasibility and potential profitability of producing it.
- Idea development and testing – In this phase, the organization focuses on identifying marketing and engineering needs for production. The idea, concept, and brand identity of the new product should be considered, and technical aspects such as patents, features, and cost saving should be considered. 3D printing is an excellent advantage for prototyping as well, and consumers can be invited to test 3D printed models of the product.
- Business analysis – At this point, estimated selling prices, volume and profitability should be projected, researched, and confirmed.
- Beta testing and market testing – After producing and testing the prototype, an organization can now package and send this to small focus groups, trade shows and user testing sessions. This initial run through will allow comments from real consumers and criticisms to be addressed before mass marketing.
- Technical implementation – Assuming the beta testing goes well, the technical aspects of larger scale manufacturing must be organized. This includes building in quality management, resource estimations, technical spec sheets, engineering planning, department scheduling, sourcing, logistics, and all the other various inputs specific products may need for production.
- Commercialization – The product is finally ready for commercialization. At this point, the organization can officially launch the product, advertise, fill distribution pipelines, and refine the process.
- New product pricing – Once the product has been on the shelves for a some time, sufficient data can be collected to identify the financial impacts of this new product. Differentiating between segments, price points, consumer groups, and competitive markets can yield useful strategic information for the firm.
Through executing these eight steps, organizations can effectively mitigate risk while capturing new and interesting opportunities in the external markets.
Minimum Viable ProductAnother useful concept to learn in regards to product development is referred to as the minimum viable product (MVP). A minimum viable product is the least investment of time and resources required to bring the product to market for testing. Often an MVP project will be developed rapidly and distributed in one or two locales, representative of the general market population. This mitigates risk and exposure while ensuring the organization can confirm the demand for a given product at a given price point.
Developing ServicesService products are offered by a wide variety of industries such as barbers, travel agencies, and consulting firms.
Learning ObjectivesExplain how services are a key aspect of the goods industry
- It is important to remember that all products - whether they are goods, services, blankets, diapers, or plate glass - possess peculiarities that require adjustments in the marketing effort.
- Behind every product is a series of supporting services, such as warranties and money-back guarantees.
- An industrial customer might be keenly interested in related services such as prompt delivery, reliable price quotations, credit, test facilities, demonstration capabilities, liberal return policies, engineering expertise, and so forth.
- credit: A privilege of delayed payment extended to a buyer or borrower on the seller's or lender's belief that what is given will be repaid.
Moreover, behind every product is a series of supporting services, such as warranties and money-back guarantees. In many instances, such services may be as important as the product itself. In fact, at times it is difficult to separate the associated services from the product features. Consequently, companies must constantly monitor the services offered by the company and its competitors. Based on the results of data-gathering devices such as customer surveys, consumer complaints, and suggestion boxes, the product manager can determine the types of services to offer, the form the service will take, and the price charged.
An industrial customer might be keenly interested in related services such as prompt delivery, reliable price quotations, credit, test facilities, demonstration capabilities, liberal return policies, engineering expertise, and so forth. Although there are a wide range of supportive services, the following are most prevalent:
- Credit and financing: With the increased acceptance of debt by the consumer, offering credit and/or financing has become an important part of the total product. For certain market segments and certain products, the availability of credit may make the difference between buying or not buying the product.
- Warranty: There are several types of durable products, retail stores, and even service products where warranties are expected. These warranties can provide a wide array of restitution, with a very limited warranty at one end of the continuum and extended warranties at the other.
- Money-back guarantees: The ultimate warranty is the money-back guarantee. To the customer, a money-back guarantee reduces risk almost totally. There are certain market segments (e.g., low risk takers) that perceive this service as very important. Obviously this service is effective only if the product is superior and the product will be returned by only a few people.
- Delivery, installation, and training: Firms that sell products that tend to be physically cumbersome or located far from the customer might consider delivery to be an integral part of the new product. Very few major appliance stores, lumber yards, or furniture stores could survive without provisions for this service. Similarly, there are products that are quite complicated and/or very technical, and whose average consumer could neither learn how to install or use it without assistance from the manufacturer. Both professional and home computer companies have been forced to provide such services.
Classifying Consumer ProductsConsumer products can be classified as convenience, shopping, or specialty goods.
Learning ObjectivesCategorize consumer product into three groups: convenience, shopping, specialty
- A convenience good is one that requires a minimum amount of effort on the part of the consumer.
- Goods that consumers want to be able to compare, such as automobiles, appliances, and homes,are categorized as shopping goods.
- Specialty goods are products so unique that consumers will go to any lengths to seek out and purchase them.
- wholesaler: a person or company that sells goods wholesale is a middleman that buys its merchandise from a third party supplier and resells the merchandise to retail businesses or the end consumer. A wholesaler normally does not sell to other wholesalers.
- reseller: a company or individual that purchases goods or services with the intention of reselling them rather than consuming or using them
Classifying Consumer ProductsA classification long used in marketing separates products targeted at consumers into three groups:
- And specialty
Convenience GoodsA convenience good is one that requires a minimum amount of effort on the part of the consumer. Extensive distribution is the primary marketing strategy. The product must be available in every conceivable outlet and must be easily accessible in these outlets. Vending machines typically dispense convenience goods, as do automatic teller machines. These products are usually of low unit value, they are highly standardized, and, frequently, they are nationally advertised. Yet, the key is to convince resellers (i.e., wholesalers and retailers) to carry the product. If the product is not available when, where, and in a form desirable by the consumer, the convenience product will fail. From the consumer's perspective, little time, planning, or effort go into buying convenience goods. Consequently, marketers must establish a high level of brand awareness and recognition. This is accomplished through extensive mass advertising; sales promotion devices, such as coupons and point-of-purchase displays; and effective packaging. The fact that many of our product purchases are often on impulse is evidence that these strategies work. Availability is also important. Consumers have come to expect a wide spectrum of products to be conveniently located at their local supermarkets, ranging from packaged goods used daily (e.g., bread and soft drinks) to products purchased rarely or in an emergency, such as snow shovels, carpet cleaners, and flowers.
Shopping GoodsIn contrast, consumers want to be able to compare products categorized as shopping goods. Automobiles, appliances, furniture, and homes are in this group. Shoppers are willing to go to some lengths to compare values, and, therefore, these goods need not be distributed so widely. Although many shopping goods are nationally advertised, often, it is the ability of the retailer to differentiate itself that creates the sale. The differentiation could be equated with a strong brand name, such as Sears Roebuck, effective merchandising, aggressive personal selling, or the availability of credit. Discounting, or promotional price -cutting, is a characteristic of many shopping goods because of retailers' desire to provide attractive shopping values. In the end, product turn over is slower, and retailers have a great deal of their capital tied-up in inventory. This, combined with the necessity to price discount and provide exceptional service, means that retailers expect strong support from manufacturers with shopping goods.
Specialty GoodsSpecialty goods represent the third product classification. From the consumer's perspective, these products are so unique that they will go to any lengths to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods. Although these products may be custom-made (e.g., a hairpiece) or one-of-a-kind (e.g., a statue), it is also possible that the marketer has been very successful in differentiating the product in the mind of the consumer. Crisco shortening, for instance, may be a unique product in the mind of a consumer, and the consumer would pay any price for it. Such a consumer would not accept a substitute and would be willing to go to another store or put off their pie baking until the product arrives. Another example might be the strong attachment some people feel toward a particular hair stylist or barber. A person may wait a long time for that individual and might even move with that person to another hair salon. It is generally desirable for a marketer to lift the product from the shopping to the specialty class. With the exception of price cutting, the entire range of marketing activities are required to accomplish this goal.
Classifying Business ProductsBusiness products are goods or services that are sold to other businesses rather than to end-consumers.
Learning ObjectivesExplain the different marketing strategies of various types of indistrial goods
- Forests, mines, and quarries provide extractiveproducts to producers.
- Manufactured products are those that have undergone some processing. Semi-manufactured goods are raw materials that have received some processing but require more before they are useful to the purchaser.
- Parts are manufactured items that are ready to be incorporated into other products.
- Process machinery (sometimes called installations) refers to major pieces of equipment used in the manufacture of other goods.
- Equipment is made up of portable factory equipment (e.g., fork lift trucks, fire extinguishers) and office equipment (e.g., computers, copier machines).
- Supplies and service do not enter the finished product at all, but are nevertheless consumed in conjunction with making the product.
- process: A series of events to produce a result, especially as contrasted to product.
- lathe: A machine tool used to shape a piece of material, or workpiece, by rotating the workpiece against a cutting tool.
Forests, mines, and quarries provide extractive products to producers. Although there are some farm products that are ready for consumption when they leave the farm, most farm and other extractive products require some processing before purchase by the consumer. A useful way to divide extractive products is into farm products and natural products, since they are marketed in slightly different ways.
Manufactured products are those that have undergone some processing. The demands for manufactured industrial goods are usually derived from the demands for ultimate consumer goods. There are a number of specific types of manufactured industrial goods.
Semi-manufactured goods are raw materials that have received some processing but require more before they are useful to the purchaser. Lumber and crude oil are examples of these types of products. Since these products tend to be standardized, there is a strong emphasis on price and vendor reliability.
Parts are manufactured items that are ready to be incorporated into other products. For instance, the motors that go into lawn mowers and steering wheels on new cars are carefully assembled when they arrive at the manufacturing plant. Since products such as these are usually ordered well in advance and in large quantities, price and service are the two most important marketing considerations.
Process machinery (sometimes called installations) refers to major pieces of equipment used in the manufacture of other goods. This category would include the physical plant of a manufacturer (boilers, lathes, blast furnaces, elevators, and conveyor systems). The marketing process would incorporate the efforts of a professional sales force, supported by engineers and technicians, and a tremendous amount of personalized service.
Equipment is made up of portable factory equipment (e.g., fork lift trucks, fire extinguishers) and office equipment (e.g., computers, copier machines). Although these products do not contribute directly to the physical product, they do aid in the production process. These products may be sold directly from the manufacturer to the user, or a middleman can be used in geographically dispersed markets. The marketing strategy employs a wide range of activities, including product quality and features, price, service, vendor deals, and promotion.
Supplies and service do not enter the finished product at all, but are nevertheless consumed in conjunction with making the product. Supplies would include paper, pencils, brooms, soap, etc. These products are normally purchased as convenience products with a minimum of effort and evaluation. Business services include maintenance (e,g., office cleaning), repairs (e.g., plumbing), and advisory (e.g., legal). Because the need for services tends to be unpredictable, they are often contracted for a relatively long period of time.
Marketing Classes of ProductsProducts can be classified based on consumer versus industrial goods and goods versus services.
Learning ObjectivesCategorize products into consumer goods, industrial goods, goods, services
- When we purchase products for our own consumption with no intention of selling these products to others, we are referring to consumer goods.
- Industrial goods are purchased by an individual or organization in order to modify them or simply distribute them to the ultimate consumer in order to make a profit or meet some other objective.
- Consumer goods can be classified as convenience, shopping, or specialty goods.
- Service products are characterized as being intangible, produced and consumed simultaneously, lacking standardization, and having high buyer involvement.
- All intermediaries that buy finished or semi-finished products and resell them for profit are part of the reseller market. This market includes approximately 383,000 wholesalers and 1,300,000 retailers that operate in the United States, with the exception of products obtained directly from the producer, all products are sold through resellers. Since resellers operate under unique business characteristics, they must be approached carefully. Producers are always cognizant of the fact that successful marketing to resellers is just as important as successful marketing to consumers.
- marketing: The promotion, distribution and selling of a product or service; includes market research and advertising.
- Consumer: Someone who acquires goods or services for direct use or ownership rather than for resale or use in production and manufacturing.
- intangible: incapable of being perceived by the senses; incorporeal
Consumer Goods and Industrial GoodsThe traditional classification of products is to dichotomize all products as being either consumer goods or industrial goods. When we purchase products for our own consumption with no intention of selling these products to others, we are referring to consumer goods. Conversely, industrial goods are purchased by an individual or an organization in order to modify them or simply distribute them to the ultimate consumer in order to make a profit or meet some other objective.
Classification of Consumer GoodsA classification long used in marketing separates products targeted at consumers into three groups: (1) Convenience goods, (2) shopping goods and (3) specialty goods.
A convenience good is one that requires a minimum amount of effort on the part of the consumer. Extensive distribution is the primary marketing strategy. The product must be available in every conceivable outlet and must be easily accessible in these outlets. These products are usually of low unit value, they are highly standardized, and frequently they are nationally advertised.
Consumers desire to compare products categorized as shopping goods. Automobiles, appliances, furniture, and homes are in this group. Shoppers are willing to go to some lengths to compare values; therefore, these goods need not be distributed so widely. Although many shopping goods are nationally advertised, often it is the ability of the retailer to differentiate itself that creates the sale. Discounting, or promotional price -cutting, is a characteristic of many shopping goods because of retailers' desire to provide attractive shopping values.
Specialty goods represent the third product classification. From the consumer's perspective, these products are so unique that they will go to any lengths to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods.
Classification of Industrial GoodsAlthough consumer products are more familiar to most readers, industrial goods represent a very important product category. For some manufacturers, industrial goods are the only product sold. The methods of industrial marketing are somewhat more specialized. Industrial products can either be categorized from the perspective of the producer and how they shop for the product, or the perspective of the manufacturer and how they are produced and how much they cost. The latter criteria offers a more insightful classification for industrial products.
Forests, mines, and quarries provide extractive products to producers. Most extractive products require some processing before purchase by the consumer. Manufactured products are those that have undergone some processing. The demand for manufactured industrial goods are usually derived from the demand for ultimate consumer goods.
Goods Versus ServicesService products are reflected by a wide variety of industries—utilities, barbers, travel agencies, health spas, consulting firms, medical facilities and banks are but a few. They account for nearly 50 percent of the average consumer's total expenditures and 70 percent of jobs. Like goods products, service products are quite heterogeneous. Nevertheless, there are several characteristics that are generalized to service products.
Intangible: With the purchase of a good, one has something that can be seen, touched, tasted, worn or displayed. This is not true with a service. Although one pays money and consumes the service, there is nothing tangible to show for it.
Simultaneous Production and Consumption: Service products are characterized as those that are being consumed at the same time they are being produced. In contrast, goods products are produced, stored, and then consumed. A result of this characteristic is that the provider of the service is often present when consumption takes place.
Little Standardization: Because service products are so closely related to the people providing the service, ensuring the same level of satisfaction from time to time is quite difficult.
High Buyer Involvement: With many service products, the purchaser may provide a great deal of input into the final form of the product. For example, in the case of a cruise, a good travel agent would provide a large selection of brochures and pamphlets describing the various cruise locations, options provided in terms of cabin location and size, islands visited, food, entertainment, prices, and whether there are facilities for children.
It should be noted that these four characteristics associated with service products vary in intensity from product to product. In fact, service products are best viewed as being on a continuum in respect to these four characteristics.
Using a Product Life Cycle FrameworkEvidence suggests that every product goes through a lifecycle with different phases of sales and profits.
Learning ObjectivesExplain the five stages of the product life cycle
- A company has to be good at both developing new products and managing them in the face of changing tastes, technologies, and competition.
- It should be noted that the predictive capabilities of the product lifecycle are dependent upon several factors, both controllable and uncontrollable, and that no two companies may follow the same exact pattern or produce the same results.
- Some argue that the competitive situation is the single most important factor influencing the duration of height of a product lifecycle curve.
- Almost all new products can expect fewer than 5, 10, or 15 years of market protection.
- Usually the improvements brought about by non-product tactics are relatively short-lived, and basic alterations to product offerings provide longer benefits.
- obsolete: no longer in use; gone into disuse; disused or neglected (often by preference for something newer, which replaces the subject).
- distinctiveness: Something which distinguishes something from anything else
- patent: A declaration issued by a government agency declaring someone the inventor of a new invention and having the privilege of stopping others from making, using or selling the claimed invention; a letter patent.
The Product LifecycleA company has to be good at both developing new products and managing them in the face of changing tastes, technologies, and competition. Evidence suggests that every product goes through a lifecycle with different phases of sales and profits. As such, the manager must find new products to replace those that are in the declining stage of the product lifecycle and learn how to manage products optimally as they move from one stage to the next. The five stages of the product life cycle and their components can be defined as follows:
- Product development: the period during which new product ideas are generated, operationalized, and tested prior to commercialization.
- Introduction: the period during which a new product is introduced. Initial distribution is obtained and promotion is obtained.
- Growth: the period during which the product is accepted by consumers and the trade. Initial distribution is expanded, promotion is increased, repeat orders from initial buyers are obtained, and word-of-mouth advertising leads to more and more new users.
- Maturity: the period during which competition becomes serious. Towards the end of this period, competitors' products cut deeply into the company's market position.
- Decline: the product becomes obsolete and its competitive disadvantage result in decline in sales and, eventually, deletion.
It should be noted that the predictive capabilities of the product lifecycle are dependent upon several factors, both controllable and uncontrollable, and that no two companies may follow the same exact pattern or produce the same results. For example, differences in the competitive situation during each of these stages may dictate different marketing approaches. Some argue that the competitive situation is the single most important factor influencing the duration of height of a product lifecycle curve. A useful way of looking at this phenomenon is in terms of competitive distinctiveness.
Often, new products may, upon introduction, realistically expect a long period of lasting distinctiveness or market protection—through such factors as secrecy, patent protection, and the time and cash required to develop competitive products. However, almost all new products can expect fewer than 5, 10, or 15 years of market protection.
Of course, changes in other elements of the marketing mix may also affect the performance of the product during its lifecycle. For example, a vigorous promotional program or a dramatic lowering of price may improve the sales picture in the decline period, at least temporarily. The black-and-white TV market illustrated this point. Usually the improvements brought about by non-product tactics are relatively short-lived, and basic alterations to product offerings provide longer benefits. Whether one accepts the S-shaped curve as a valid product-sales pattern or as a pattern that holds only for some products (but not for others), the product lifecycle concept can still be very useful. It offers a framework for dealing systematically with product management issues and activities. Thus, the marketer must be cognizant of the generalizations that apply to a given product as it moves through the various stages. This process begins with product development and ends with the deletion (discontinuation) of the product.