Marketing

book.chapter.7.pdf

Home >Business & Finance homework help >Marketing homework help >Marketing

F I G U R E 7 . 1 Hewlett-Packard was founded in this California garage, which is now a national landmark.

Source: Wikimedia Commons.

C H A P T E R 7 Developing and Managing Offerings Having something that customers want to buy is important to any company. Most companies are started by

people who get an idea about how to make something better. Hewlett-Packard, for example, began in 1939 in a

garage (now a California Historic Landmark) when two young engineers, Bill Hewlett and Dave Packard, thought

they had a better idea for designing and making a precision audio oscillator, which is an electronic device that tests

sound. Their product was so much more precise than competitors’ products that it was manufactured and sold

around the world for over thirty years. In fact, it is probably one of the longest-selling electronic devices ever. It also

sold for just $54, whereas competing products sold for over $200. Hewlett-Packard, now more commonly known as

HP, has not been located in a little garage for many years. Yet the company’s ability to grow by successfully

designing and marketing new offerings continues.

Developing new offerings is a constant process in most companies. In some instances, a

company starts with a price and then develops products and services to fit that price. IKEA is an

example of a company that does this. IKEA looks at the various prices consumers are willing to

pay for home furnishings and then works backward to design products that match those prices

(using a demand backward pricing strategy is discussed in the pricing chapter). In other

situations, the goal is simply to develop a better product that adds value to existing products, and

the price comes later. Hewlett-Packard’s audio oscillator is an example of this type of product.

F I G U R E 7 . 2 To attract millennials, a number of companies that have traditionally specialized in hotels are now investing in a “new” product: upscale hostels that include amenities such as jacuzzis, rooftop terraces, and chic lounges, but skim on the rooms themselves.

Source: Thinkstock 95210913

Keep in mind that a “new” product need not be a never-before-seen innovation. It can also be a “new and

improved” product, such as a better laundry detergent or an addition to a product or service line, such as Marriott

adding the Courtyard by Marriott and the Fairfield Inn to its hotel lineup. Or, it can be a repositioned product or

company. The clothing retailer Timberland is an example. The company is trying to reinvigorate its sales by

adjusting its products and marketing to target more urban consumers rather than just hardcore outdoor

enthusiasts.

What is new for one company may not be new to another. For example, one hotel may already have budget

properties, but when a luxury hotel line adds a budget property, that property is considered a new offering for the

company.

1. THE NEW OFFERING DEVELOPMENT PROCESS

L E A R N I N G O B J E C T I V E S

1. Identify an effective process for creating offerings and bringing them to market. 2. Understand the relative importance of each step in the new offering development process and

the functions within each step. 3. Distinguish between the various forms of testing and analysis that take place before a new

offering is brought to the market.

Most new offerings go through similar stages in their development process. Although the size of a com- pany will affect how the different stages of their new product development process are conducted and whether products are test marketed before being introduced, the steps are generally the same. Figure 7.3 summarizes these steps.

140 PRINCIPLES OF MARKETING VERSION 3.0

lead users

Potential customers who are innovative and develop new applications or new products for their own use without the aid of a supplier.

F I G U R E 7 . 3 The New Offering Development Process

1.1 Idea Generation Product ideas can come from anywhere. Many companies, HP and Apple included, were launched in someone’s garage after the founders got an idea for a product and then tried to make and sell it. Apple’s Macintosh microcomputer was a low-cost knockoff of the Xerox Star, a software-equipped worksta- tion. Apple’s cofounder, Steve Jobs, saw the product demonstrated at a Xerox research center and Xer- ox was an early investor in Apple.[1]

Employees often come up with new product ideas, too. Motorola developed a prototype for a mo- bile phone that can be recharged by rubbing it on smooth surface. A Motorola engineer came up with the idea while rollerblading. He wondered if a small generator could be created to capture and store the energy generated by rollerblade wheels. This idea, in turn, led to the development of a small roller ball (like you would find on an old-style computer mouse) built into the mobile phone. To power up the phone, you just give it a roll.

Ideas can also come from your customers. In fact, in business-to-business (B2B) markets, custom- ers are probably the biggest source of new product ideas. Customers know what customers need and want, which provides organizations an indication of market needs. Customers who are good at gener- ating new product ideas or applications of products are called lead users. These people are often cour- ted by manufacturers for this purpose. Lead users exist in consumer markets, too. JCPenney, for ex- ample, utilizes a panel of women who help develop and improve the company’s Ambrielle line of lingerie products.

Customers are particularly important cocreators of offerings when they are consuming products with service components. For example, if you provide your hairdresser with feedback while your hair is being cut, your input will alter the final style you receive. Similarly, a businessperson who provides her

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 141

F I G U R E 7 . 4

Campbell’s creates many new products that are the result of working with their suppliers. Pace salsa is an example.

Source: Wikimedia Commons.

Crowdsourcing

The process of obtaining product ideas, funding, and other contributions online from large numbers of people rather than just one’s employees, customers, or suppliers.

Crowdfunding

The process of obtaining funding online for projects.

line extension

A new idea or offering that occurs when a company comes out with another model (related product or service) based on the same platform and brand as one of its other products.

certified public accountant (CPA) with information and feedback about her firm will help the CPA de- velop better financial and tax plans for her business.

Suppliers provide another source of ideas for new products. A supplier might develop a new product or technology that can be used to make yet another product, and then go to the makers of those products and suggest new versions of them. For example, McClancy Seasoning Co. makes spices that restaurants and food processing companies use in their food products. McClancy’s research and development department works with companies such as Campbell’s to help them develop new and bet- ter offerings (for more information, visit http://www.mcclancy.com/research_and_development.asp).

Crowdsourcing is another way to come up with the product ideas. Crowdsourcing is the process of obtaining product ideas, funding, and other contributions online from large numbers of people rather than just one’s employees, customers, or suppliers. AppsCo is a crowdsourcing website where people can submit their ideas for Web and mobile apps. If their ideas are chosen for development, they get cash prizes. Realizing that it’s impossible for any organization to come up with all of the great ideas, General Electric now crowdsources ideas from entrepreneurs, innovators, and experts around the world to help it come up with new product ideas. Crowdfunding is the term used specifically for obtaining funding online for projects. Kickstarter and GoFundMe are examples of crowdfunding websites.

Of course, companies also watch their competitors to see what they’re doing. Some offerings are protected by patents or copyrights and can’t be legally duplicated. The software that runs Apple’s iPhone is an example. There are, however, different ways to achieve the same results as Apple has with its iPhone. Android mobile phones, which are manufactured by Motorola, LG, and other companies, have similar functions but use an operating system developed by Google. The same is true for Nokia’s phones, which use Microsoft’s Windows operating system.

Figure 7.5 shows some product ideas that came from each of the sources we have dis- cussed—employees, customers, suppliers, and competitors. Innovations like the iPod, which radically changed how the music industry operates, are rare. However, many new ideas (and consequently new products) aren’t actually new but rather are versions of products and services already available. A line extension occurs when a company comes out with another model (related product) based on the same platform and brand as one of its other products. For example, Apple’s addition of the Nano and the Shuffle to its iPod line were line extensions.

F I G U R E 7 . 5 New Offering Ideas

Keep in mind that idea generation is typically the least expensive step in the process of developing a new offering, whether you involve customers or not. As you move through the product development process, each step is usually more expensive than the last. Ideas for new products are relatively cheap and easy to generate; what is difficult and expensive is making them a reality.

142 PRINCIPLES OF MARKETING VERSION 3.0

http://www.mcclancy.com/research_and_development.asp

F I G U R E 7 . 6

Better idea screening might have helped Coca- Cola avoid the problems it encountered marketing its ill-fated “New Coke” formula.

Source: Wikimedia Commons.

Concept testing

Presenting an idea for an offering (including possible marketing communication ideas) to consumers for their reaction early in the offering development process.

focus groups

A group of potential buyers brought together to discuss a marketing research topic with one another.

depth interviews

An exploratory research technique of engaging in detailed, one-on-one, question-and-answer sessions with potential buyers.

1.2 Idea Screening Not all new product ideas are good ones. Famous product blunders include Ford Motor Company’s Edsel, Clear Pepsi, and Coca-Cola’s New Coke. Less famous is Dell’s cell phone for aging baby boomers. The phone’s large size, large buttons, and large screen screamed “I’m old and blind!” leading potential users to shun it in droves. Yes, even the big companies make mistakes.

The purpose of idea screening is to try to avoid mistakes early in the development process. The sooner bad ideas are discarded, the less the investment made and lost. In the idea screening stage, the company tries to evaluate the new offering by answering these questions:

< Does the proposed product add value for the customer? Does it satisfy a market need?

< Can the product be made within a stated time period to get it to market when needed?

< How many units of it will sell and at what price? < Can we manufacture and sell the product within budget and still make money? < Do we need to provide the customer with after-sales service? If so, do we have the

resources to do that? < Does the product fit our image and corporate strategy?

Some organizations conduct concept testing at this stage. Concept testing involves running the idea of the offering by potential consumers. The purpose is to get early consumer feedback before investing too much money in an offering that won’t work. Some of the methods used to test concepts include focus groups, in which groups of eight to twelve consumers gather and react to the concept, and depth interviews, in which individuals are presented with the concept and can react to it individually. (Both are discussed in more detail in Chapter 10.) These methods can be also used later dur- ing the offering development process to test ideas, or for other purposes. Focus groups conducted virtually on the Web and by phone actually helped to develop this textbook. Concepts may also be tested online by creating an image and having people represent- ative of the target market provide feedback. Whether using focus groups, depth inter- viewing, or online methods, concepts must be evaluated by people representative of the target market or the feedback is not relevant.

Because screening considers the feasibility of actually making and servicing an offering, price and cost are important components. If the company cannot sell the product in sufficient quantities to generate a profit, the idea must be scrapped. Under- standing the customer’s personal value equation is an important consideration, too. If the value consumers receive from the product is less than the price the company charges for it, they will not buy it. In other words, the offering must be financially feas- ible to justify investing in it.

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 143

F I G U R E 7 . 7

A good product doesn’t just look right. It also works right, which is the idea behind process feasibility.

Source: Wikimedia Commons.

Process feasibility

The degree to which the manufacturing of a product or the delivery of a service can be done within the proper quality specifications on a repeatable basis; the degree to which an organization can actually make and service an offering.

financial feasibility

A new offering’s ability to make money.

investment risk

The potential of losing one’s money and time should a new offering fail.

opportunity risk

The potential loss of revenue a company risks when it chooses an alternative course of action such as launching a different offering.

quality function deployment (QFD)

A specific process for designing new offerings that begins by specifying a customer’s requirements and then designing a product to meet those needs.

alpha testing

The testing of a product in a laboratory setting.

The offering must also have process feasibility. Process feasibility is the degree to which the company can actually make and service the product. Process feasibility affects financial feasibility. If the product’s costs cannot be controlled when it’s being made or serviced, the firm’s financial goals won’t be met. Process feasibility also affects customer satisfaction. For example, many manufacturers make great-looking faucets, yet one of your authors had to have the “guts” of one faucet replaced three times before it would work, only to find two other friends had the same experience with the same mod- el. A product with a great-looking design is really only great if it works right.

The question of strategic fit is a difficult one. The history of business is rife with examples of com- panies failing to develop winning new products only to see their competitors do so. For example, when the inventor Chester Carlson approached IBM executives with the idea of photocopying, the techno- logy platform that later became the heart of Xerox, the executives turned Carlson down. They did not see the product fitting in with IBM’s strategy and didn’t fully consider the moneymaking potential of the product.

Risks are also assessed at this point in the new-product development process. There are two types of risks firms face. The first is investment risk, which is the possibility that the company will fail to earn the appropriate return on the money and effort (the investment) it puts into the new product. The second is opportunity risk, or the risk that there is a better idea that gets ignored because the firm has invested in the idea at hand.

When a company is assessing fit, it is assessing its opportunity risk. When it is assessing feasibility (both financial and process), it is assessing its investment risk. Other risk-related questions include whether or not the offering can be developed on time and within budget. Assessing a product’s feasibil- ity continues throughout the entire new product development process.

1.3 Feature Specification The next step involves narrowing down the product’s features. Again, price enters the picture as the company considers which features are important to consumers at different price points. A premium (high-priced) offering is likely to be loaded with extra features. By contrast, a low-priced offering is likely to be a “bare-bones” product with few features.

Quality function deployment (QFD) is a process whereby a company begins with the custom- er’s desired benefits and then designs an offering that delivers those benefits. The benefits are linked to certain characteristics of the offering, which are then broken down into component-part characterist- ics. From this list of component parts, the product is designed. Thus, the feature specifications process begins with a strong understanding of what consumers want and need.

HP has developed a number of computer printers using the QFD process. The QFD process has been particularly helpful when it comes to bundling the right features within the HP’s printer line be- cause each printer model can be targeted to specific customer needs. Customers can then purchase the model that best suits their needs and doesn’t have a bunch of features that don’t add value for them.

1.4 Development In the development stage, the actual offering is designed, specifications for it are written, and proto- types of it are developed. It is also during this stage that the firm considers the product’s manufacturing process. For example, when a restaurant is developing a new dish, it must not only taste good, but be a dish that can be made in a reasonable amount of time once it’s ordered and prepared at a cost that earns the restaurant a profit. In terms of a manufacturer’s offerings, using the same technology plat- form as another product (like Microsoft has done with Windows phones) can be very effective and cheaper. Using the same platform also generally makes it easier for a company to train its technicians to service a new product.

1.5 Testing During the testing stage, the offering is tested, first in the lab and then with real customers. Lab testing is also called alpha testing. Alpha testing ensures that the offering works like it’s supposed to in a vari- ety of different environments—that it meets its specifications, that is. For example, Kraft might launch a new food product that has to work in hot climates, cold climates, high humidity, dry climates, and high altitudes—all conditions that can change how well the product works.

144 PRINCIPLES OF MARKETING VERSION 3.0

beta testing

The testing of a product by real customer in the customer’s location.

rolling launch

Introducing a new offering across markets one by one in order to work out any challenges or problems related to marketing and supporting the offering.

market test

The test launch of a product’s complete marketing plan to ensure that it reaches buyers, gets positive reactions, and generates sales of the product.

The next step is beta testing. During beta testing, actual customers make sure the offering works under real-world conditions. Beta testing not only tests whether the offering works as advertised but also tests the offering’s delivery mechanisms, service processes, and other aspects of marketing the product. This step can be an expensive. Depending on the product, some companies might find it bet- ter to simply launch the product and let the market respond to, or test, it once it is available for purchase.

In B2B settings, beta tests are usually conducted with lead users and preferred customers. The de- veloper of the product needs a strong relationship with these customers because the product might still have bugs that need to be ironed out. If the relationship between the parties is “iffy,” and the product or service needs a significant amount of changes, beta testing could damage the relationship between the two parties and hurt the developer of the product’s sales.

Simultaneous to testing the offering’s ability to meet its specs, the company is also developing and testing the marketing communication plan that will be used to launch the product. Many companies involve consumer panels or user communities, both for testing the offering and the communication plan. As we mentioned, JCPenney solicits the advice of a user community for its Ambrielle line of lingerie. The company frequently runs concepts by the group as well as sends actual prototypes to users to try on and report back to the company. Similarly, the data warehousing company Teradata has a “partners” organization that consists of a community of users who participate in the firm’s product design and testing.

1.6 Launch or Commercialization Once an offering has been designed and tested, it is made available to customers. Sometimes a com- pany launches the offering to all of its markets at once. Other companies may use a rolling launch in which the offering is made available to certain markets first and then other markets later. A rolling launch might make sense if the company’s service technicians need training. The company makes the offering available to one market after the first batch of its employees are prepared to service the product; then as new batches of employees are prepared to service the product, the company enters more markets. See the following video clip for an example of a new product launch.

Some companies test the complete launch of a product’s marketing plan to ensure that it reaches buyers, gets positive feedback, and generates sales of the product or service. This is called a market test. Companies may conduct market tests in limited markets or nationwide. For example, when one beverage maker tested the marketing plan for a new wine cooler, the firm first launched the product on the east coast, where the beverage was promoted as a “Polynesian” drink; on the west coast, the bever- age was promoted as an “Australian” drink. The Polynesian version proved more popular, so in other new markets, that’s how the beverage was advertised and packaged.

1.7 Evaluation Once an offering is launched, a firm’s executives carefully monitor its progress. You have probably heard about the “box office” sales for new movies the first weekend following their release. The first weekend is a good predictor of how much money a movie will make overall. If the ticket sales for it are high during the first weekend, a studio’s executives might decide to beef up the promotions for it. If the ticket sales for the movie are low, the studio might stop screening the movie in theaters altogether and instead release it on DVD or via a streaming service such as Netflix or Hulu.

For other types of offerings, important milestones might be the first ninety days after the product is launched, followed by a second period of ninety days, and so forth. However, be aware that firms are constantly in the process of evaluating their offerings and modifying them by either adding or subtract- ing the features and services associated with them, changing their prices, or how they are marketed. The length of time for milestones used to evaluate products may vary depending on the organization and other products or services being developed.

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 145

K E Y T A K E A W A Y S

Most companies put new offering ideas through a seven-step process, beginning with the idea generation stage. Ideas for new offerings can come from anywhere including one’s customers, employees, suppliers, large numbers of people on the Internet, and one’s competitors. The next step in the process is the idea screening stage, followed by the feature specifications, development, testing, and launching stages. After an offering is launched, it is evaluated. A company must balance an offering’s investment risk (the risk associated with losing the time and money put into developing the offering) against the offering’s opportunity risk (the risk associ- ated with missing the opportunity to market the product and profit from it).

R E V I E W Q U E S T I O N S

1. What are the seven steps in the offering development process? What are the key activities in each step?

2. Who are lead users?

3. How should a company evaluate new ideas? What are the criteria?

4. How does quality function deployment work?

2. MANAGING PRODUCTS OVER THE COURSE OF THE PRODUCT LIFE CYCLE

L E A R N I N G O B J E C T I V E S

1. Explain how organizations manage offerings after being introduced to the marketplace. 2. Explain how managing an offering may be different in international markets. 3. Explain the product life cycle and the objectives and strategies for each stage.

Thousands of new offerings, including convenience foods, health and beauty aids, electronics, automo- biles, pharmaceutical products, hotels, restaurants, and so on, enter the marketplace each year. But what happens to them after they get there? Do they thrive, just survive, or fail? Once a product is cre- ated and introduced in the marketplace, the offering must be managed effectively. Only if this is done will the product’s producer achieve its profit objectives and be able to sustain the offering in the marketplace.

The process of managing a product involves making many complex decisions, especially if the product is being introduced in global markets, for example. Before introducing products in global mar- kets, an organization must evaluate and understand factors in the external environment, including laws and regulations, the economy and stage of economic development, the competitors and substitutes, cultural values, and market needs. Companies also need expertise to successfully launch products in foreign markets.

Given many possible constraints in international markets, companies might initially introduce a product in limited areas abroad. Other organizations, such as Coca-Cola, decide to compete in markets worldwide. When the US market became saturated, McDonald’s began opening restaurants in foreign markets. Burger King and many other companies have done the same thing.[2]

146 PRINCIPLES OF MARKETING VERSION 3.0

product life cycle (PLC)

The stages (introduction, growth, maturity, decline) that a product may go through over time.

F I G U R E 7 . 8 McDonald’s in China

Source: Wikimedia Commons.

The product life cycle (PLC) includes the stages a product goes through after development, from its introduction to the end of the product. Just as children go through different phases in life (toddler, ele- mentary school, adolescent, young adult, and so on), products and services also age and go through different stages. The PLC is a beneficial tool that helps marketers manage the stages of a product’s ac- ceptance and success in the marketplace, beginning with the product’s introduction, its growth in mar- ket share, maturity, and possible decline in market share.

Other tools such as the Boston Consulting Group matrix and the General Electric approach (see Chapter 2 for discussion) may also be used to manage and make decisions about what to do with products. For example, when a market is no longer growing but the product is doing well (cash cow in the BCG approach), the company may decide to use the money from the cash cow to invest in other products they have rather than continuing to invest in the product in a no-growth market.

The product life cycle can vary for different products and different product categories. Figure 7.9 illustrates an example of the product life cycle, showing how a product can move through four stages. New computer products, mobile phones, and video games often have limited life cycles, whereas product categories such as diamonds and durable goods (kitchen appliances, for example) generally have longer life cycles.

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 147

F I G U R E 7 . 1 0

The sales of Diet Coke were steady for decades, but now they are declining.

Source: Wikimedia Commons.

introduction stage

The first stage of the product life cycle after a product is launched.

F I G U R E 7 . 9 The Product Life Cycle

However, not all products go through all stages and the length of a stage varies. Some products never experience market share growth and are withdrawn from the market. Other products stay in one stage longer than others. For example, in 1992, PepsiCo introduced a product called Clear Pepsi, which went from introduction to decline very rapidly. By contrast, in the early 1980s, Diet Coke entered the growth stage soon after its introduction followed by the maturity stage, which lasted for decades, and remained there for many years until recently. Now Diet Coke is in the decline stage because consumers are buy- ing fewer carbonated and artificially-flavored drinks. The sales of chewing gum are also in decline. (Do you know anyone who chews gum?)

How a product is promoted, priced, distributed, or modified can also vary throughout its life cycle. Let’s now look at the various product life cycle stages and what characterizes each.

2.1 The Introduction Stage The first stage in a product’s life cycle is the introduction stage. The introduction stage is the same as commercialization, or the last stage of the new product development process. Marketing costs are typ- ically higher in this stage than in other stages. As an analogy, think about the amount of fuel a plane needs for takeoff relative to the amount it needs while in the air. Just as an airplane needs more fuel for takeoff, a new product or service needs more funds for introduction into the marketplace. Communic- ation (promotion) is needed to generate awareness of the product and persuade consumers to try it, and placement alternatives and supply chains are needed to deliver the product to the customers. Profits are often low in the introductory stage due to the research and development costs and the mar- keting costs necessary to launch the product.

The length of the introductory stage varies for different products. However, by law in the United States, a company is only allowed to use the label “new” on a product’s package for six months. An or- ganization’s objectives during the introductory stage often involve educating potential customers about its value and benefits, creating awareness, and getting potential customers to try the product or service. Getting products and services, particularly multinational brands, accepted in foreign markets can take even longer. Consequently, companies introducing products and services abroad generally must have the financial resources to make a long-term (longer than one year) commitment to their success.

The specific promotional strategies a company uses to launch a product vary depending on the type of product and the number of competitors it faces in the market. Firms that manufacture products such as cereals, snacks, toothpastes, soap, and shampoos often use mass marketing techniques such as television commercials and Internet campaigns and promotional programs such as coupons and sampling to reach consumers. For more technical or expensive products, such as investment and insur- ance products and home-security systems, companies often utilize professional selling, informational promotions, and in-store demonstrations so consumers can see how the products work. To sell to ma- jor wholesalers and retailers such as Walmart, Target, and grocery stores, manufacturers utilize person- al selling. Many manufacturers use a combination of techniques to sell to all three groups: customers, retailers, and wholesalers.

During the introduction stage, an organization must have enough distribution outlets (places where the product is sold or the service is available) to get the product or service to the customers. Sufficient product quantities must also be available to meet demand. When you were growing up, you may remember eating Rice Krispies Treats, a very popular product. The product was so popular that Kellogg’s could not keep up with its initial demand and ran ads apologizing to consumers for the prob- lem. Cooperation from a company’s supply chain members—its retailers, wholesalers, logistical

148 PRINCIPLES OF MARKETING VERSION 3.0

penetration pricing strategy

A strategy in which an organization offers a low initial price on a product so that it captures as much market share as possible.

F I G U R E 7 . 1 1

Fitbit Inc. used a price-skimming strategy when it introduced its fitness trackers in the marketplace. The price of the trackers were high relative to similar products, and remained high.

Source: Thinkstock 533536853.

skimming pricing strategy

A high initial price that companies set when introducing new products in order to get back money invested.

growth stage

The stage of the life cycle in which sales increase and more competitors enter the market.

F I G U R E 7 . 1 2

The first microwave on the market cost $500. Now you can buy one for as little as $50.

Source: Thinkstock177123015.

partners, and so forth—can help ensure that supply meets demand and that value is added throughout the process.

Product pricing strategies in the introductory stage can vary depending on the type of product, competing products, the extra value the product provides consumers versus existing offerings, and the costs of developing and producing the product. Organizations want consumers to perceive that a new offering is better or more desirable than existing products. Two strategies that are widely used in the in- troductory stage are penetration pricing and skimming.

A penetration pricing strategy involves using a low initial price to encourage many customers to try a product. The organization hopes to sell a high volume in order to generate substantial reven- ues. New varieties of cereals, fragrances of shampoo, scents of detergents, and snack foods are often in- troduced at low initial prices. Seldom does a company utilize a high price strategy with a product such as this. The low initial price of the product is often combined with advertising, coupons, samples, or other special incentives to increase awareness of the product and get consumers to try it.

A company uses a skimming pricing strategy, which involves setting a high ini- tial price for a product, to more quickly recoup the investment related to its develop- ment and marketing. The skimming strategy attracts the top, or high end, of the mar- ket. Generally this market consists of customers who are not as price sensitive or who are early adopters of products. Firms that produce expensive electronic products such as the Apple Watch and ultra-high definition TVs charge high prices in the introduct- ory stage. In conjunction with a skimming approach, the sellers of products such as these are also more likely to engage personal selling, running ads aimed at high-income customers, and placing the product in a limited number of distribution outlets.

2.2 The Growth Stage If a product is accepted by the marketplace, it enters the growth stage of the product life cycle. The growth stage is characterized by increasing sales and profits. Companies typically begin to make a profit during the growth stage because more units are being sold and more revenue is generated. However, the high sales and profits attract compet- itors who enter the market very quickly. For example, when Diet Coke experienced great success, Pepsi soon entered with Diet Pepsi. You’ll notice that both Coca-Cola and Pepsi have similar competitive offerings in the beverage industry, including their own brands of bottled water, juice, and sports drinks.

As additional customers begin to buy the product, manufacturers must ensure that the product remains available to customers or run the risk of them eventually buying competitors’ offerings. When demand is higher than supply, the door opens for competitors to enter the market. This is typical in growth stage. Consider what happened when Amana introduced the first microwave, which originally cost $500. As consumers in the United States and elsewhere saw and heard about the product, sales increased from forty thousand units to over a million units in only a few years. As a res- ult of the high demand, many competitors entered the market, prices dropped, and microwaves entered the maturity stage.[3]

A company sometimes increases its promotional spending on a product a little later on during its growth stage. Instead of encouraging consumers to try the product later on, which they may have already done, the promotions often focus on the specific benefits the product offers and its value relat- ive to competitive offerings. In other words, although the company must still inform and educate cus- tomers about the product, it must counter the competition. Emphasizing the advantages of the product’s brand name can help a company maintain its sales in the face of competition. Although different organizations produce appliances and electronics, having a highly recognized brand name such as Apple or Samsung strengthens a firm’s advantage when competitors enter the market.

The number of distribution outlets (stores and dealers) utilized to sell the product can also in- crease during the growth stage as a company tries to reach as much of the marketplace as possible. Ex- panding a product’s distribution and increasing its production to ensure its availability at different out- lets usually results in a product’s costs remaining high during the growth stage. The price of the product itself typically remains at about the same level during the growth stage, although some com- panies reduce their prices slightly to attract additional buyers and meet the competitors’ prices. Com- panies hope that by increasing their sales, they also improve their profits.

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 149

maturity stage

The stage of the product life cycle at which sales begin to level off and competitors have saturated the market.

F I G U R E 7 . 1 3

To expand its declining target market (middle- aged men), Harley-Davidson is now courting women as well as minorities and millennials.

Source: Thinkstock 507860035.

2.3 The Maturity Stage After competitors enter the market and the number of potential new customers declines, the sales of a product typically begin to level off. This indicates that a product has entered the maturity stage of its life cycle. Intense competition causes profits to fall until only the strongest players remain.

Most consumer products are in the maturity stage of their life cycles; their buyers are repeat pur- chasers versus new customers. The maturity stage usually lasts longer than other stages. The sports drinks Gatorade and Powerade are in the maturity stage. They have been around for a number of years and the sales of them are steady.

Given the competitive environment in the maturity stage, many products are promoted heavily to consumers. The strategies used to promote the products often focus on the value and benefits that give the offering a competitive advantage. The promotions aimed at a company’s distributors may also in- crease during the mature stage.

Companies are also more likely decrease the price of mature products to counter the competition. The problem with lowering prices is that it can result in “price wars” between companies and decrease all of their profits. To counter mobile-phone pricing apps that allow shoppers to find identical products cheaper online and buy them, brick-and-mortar retailers like Target, Macy’s, and others are signing agreements with top designers to make products no other company (online or otherwise) has.

Clearly companies are challenged to develop strategies to extend the maturity stage of their products so they remain competitive—and so are the marketing personnel who work for them. Usually these people’s compensation levels are based on the sales of the products they manage, so they want to not just sustain them but growth them. How do they accomplish this? Many firms do so by modifying their target markets, offerings, or marketing strategies. Next, we look at each of these strategies.

Modifying the target market helps a company attract different customers by seek- ing new users and going after different market segments. Financial institutions and automobile dealers realized that women have increased buying power and now market to them.

Finding new uses for a product in order to attract additional customers is another strategy. The maker of Pedialyte, a product that replaces nutrients and electrolytes when infants are ill, has found a new use for its product: curing hangovers. People dis- covered the product worked well for this purpose and began talking about it on social media. Abbott Laboratories, the maker of the product, subsequently launched a social media campaign aimed at adult users, and the sales of Pedialyte jumped dramatically upward.[4]

As we have indicated, many companies enter different geographic markets or in- ternational markets as a strategy to get new users. A product that might be in the ma- ture stage in one country might be in the introductory stage in another market. Mobile phones were very popular in Asia before they were introduced in the United States. The sales of minivans are flat in the United States but are increasing in China. Consequently, automobile manufacturers are expanding the number of minivans and the variety of them they offer in China.

Modifying the product, such as changing its packaging, size, flavors, colors, or quality, can also extend the product’s maturity stage. Car manufacturers modify their vehicles slightly each year to offer new styles and new safety features and make more extensive modifications to them every three-to-five years. Kraft Foods extended the mature stage of different crackers such as Wheat Thins and Triscuits by creating different flavors.

The 100 Calorie Packs created by Nabisco provide an example of how a company changed the packaging and size to provide convenience and boost sales. While the sales of many packaged foods were falling, the sales of the 100 Calorie Packs increased to over $200 million, prompting Nabisco to re- package more products.[5] Similarly, Gucci, Prada, and other makers of designer handbags are finding that they have hit a wall in terms of the prices they charge for the bags and the number of them they can sell. So, they are beginning to offer smaller bags for lower prices.

150 PRINCIPLES OF MARKETING VERSION 3.0

Video Clip

Packaging candy (like Oreo Candy Bites) in 100-calorie snack packs aimed at adults has helped Nabisco extend the lives of its products.

But sometimes changing a product’s packaging can backfire. A few years ago, PepsiCo changed the design and packaging of its Tropicana juice products, but consumers didn’t like it. They thought the new package looked like a less expensive brand, which made the quality of the product seem poorer. As a result, Pepsi resumed the use of the original Tropicana carton. At about the same time, PepsiCo also redesigned the Pepsi can, but consumers had mixed feelings about it, as well.

Video Clip

This video promoting Pepsi-Cola’s new design was well done, but it didn’t convince consumers to buy more of the product.

View the video online at: http://www.youtube.com/embed/ZNfqKHSkL7o?rel=0

View the video online at: http://www.youtube.com/embed/tZJRJy0UK4g?rel=0

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 151

standardized

Keeping a product or service the same in all markets.

adaptation

The changes that an organization must make for a product or service to fit the local culture.

F I G U R E 7 . 1 4

In Europe, diet drinks are called “light,” not diet. This Coca-Cola product is available in Germany.

Source: Wikimedia Commons.

Video Clip

Tropicana’s new (and now abandoned) packaging didn’t compare well with the “orange and the straw,” but is still used on the packages of lower-calorie Tropicana products.

When introducing products to international markets, firms must decide if the product can be standardized (kept the same) or how much, if any, adaptation, or changing, of the product to meet the needs of the local culture is necessary. Although it is much less expensive to standardize products and promotional strategies, cultural and environmental differences usually require some adaptation. In Asia, Burger King sells a squid burger. Because people of the Hindu faith in India don’t eat beef, McDonald’s sells Chicken Maharaja Macs instead of Big Macs there.

Product colors and packages as well as product names must often be changed be- cause of cultural and legal differences. For example, in many Asian and European countries, Coca-Cola’s diet drinks are called “light,” not diet, due to legal restrictions on how the word diet can be used. GE makes smaller appliances such as washers and dryers for the Japanese market because houses tend to be smaller and don’t have the room for larger models. Companies must also examine the external environment in foreign markets since the regulations, competition, and economic conditions vary as well as the cultures.

Some companies modify the marketing strategy for one or more marketing vari- ables of their products. For example, many coffee shops and fast-food restaurants such as McDonald’s offer specialty coffee that competes with Starbucks. As a result, Star- bucks’ managers decided it was time to change the company’s strategy. Over the years, Starbucks added lunch offerings at some of its stores, and a night menu with beer, wine, and small plates of food.

As for McDonald’s, in addition to adding coffee bars, a number of stores have been remodeled to feature flat-screen televisions, recessed lighting, and more modern decor. Other McDonald’s restaurants kept their original design, which customers still like.

View the video online at: http://www.youtube.com/embed/_GzVpG3jfR4?rel=0

152 PRINCIPLES OF MARKETING VERSION 3.0

decline stage

The stage of the life cycle at which sales drop and companies must decide whether to keep, modify, or drop a product.

F I G U R E 7 . 1 6

Your parents or grandparents might still use a videocassette recorder (VCR) like this.

F I G U R E 7 . 1 5

The oldest operating McDonald’s is this store in Downey, California. The store hasn’t been remodeled since it opened in 1953.

Source: Wikimedia Commons.

2.4 The Decline Stage When sales decrease and continue to drop to lower levels, the product has entered the decline stage of the product life cycle. In the decline stage, changes in consumer preferences, technological advances, and alternatives that satisfy the same need can lead to a decrease in demand for a product. How many of your fellow students do you think have used a typewriter, adding machine, or played an eight-track tape?

Some products decline slowly. Others go through a rapid level of decline. Many fads and fashions for young people tend to have very short life cycles and go “out of style” very quickly. (If you’ve ever asked your parents to borrow clothes from the 1990s, you may be amused at how much the styles have changed.) Similarly, many students don’t have landline phones or VCR players and cannot believe that people still use the “outdated” devices. Some outdated devices, like payphones, disappear almost com- pletely as they become obsolete.

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 153

Harvesting

Companies reduce investment in a product, service, or business.

divesting

Companies get rid of a product, service, or business.

Companies must decide what strategies to take when their products enter the decline stage. To save money, some companies try to reduce their promotional expenditures on these products and the number of distribution outlets in which they are sold. They might implement price cuts to get custom- ers to buy the product. Harvesting the product entails gradually reducing all costs spent on it, includ- ing investments made in the product and marketing costs. By reducing these costs, the company hopes that the profits from the product will increase until their inventory runs out. Another option for the company is divesting (dropping or deleting) the product from its offerings. The company might choose to sell the brand to another firm or simply reduce the price drastically in order to get rid of all remaining inventory. If a company decides to keep the product, it may make money if competing products drop out of the marketplace. Many companies decide the best strategy is to modify the product in the maturity stage to avoid having it enter the decline stage.

K E Y T A K E A W A Y S

The product life cycle helps a company understand the stages (introduction, growth, maturity, and decline) a product or service may go through once it is launched in the marketplace. The number and length of stages can vary. When a product is launched or commercialized, it enters the introduction stage. Companies must try to generate awareness of the product and encourage consumers to try it. During the growth stage, compan- ies must demonstrate the product’s benefits and value to persuade customers to buy it versus competing products. Some products never experience growth. Most products are in the mature stage. In the maturity stage, sales level off and the market typically has many competitors. Companies modify the target market, the offering, or the marketing mix in order to extend the maturity stage and keep a product from going into the decline stage. If a product goes into decline, a company must decide whether to keep the product, harvest and reduce the spending on it until all the inventory is sold, or divest the product.

R E V I E W Q U E S T I O N S

1. Explain what a firm that sells a product with a limited life cycle (such as software) should do in each stage so there is not a lot of inventory left over when a newer version is introduced?

2. Explain why the marketing costs related to a product are typically higher during the introduction stage and why companies must generate awareness of the new product or service and encourage consumers to try it.

3. Explain why and when penetration and skimming pricing are used in the introduction stage.

4. What stage of the life cycle is a product in when the company cannot meet the demand for it and competitors begin to enter the market?

5. What different strategies do firms use to extend the life cycles of their products throughout the maturity stage?

6. How did Kraft extend the mature stage of the product life cycle of Wheat Thins crackers?

7. Explain the difference between harvesting and a divesting when a firm enters the decline stage.

154 PRINCIPLES OF MARKETING VERSION 3.0

3. DISCUSSION QUESTIONS AND ACTIVITIES

D I S C U S S I O N Q U E S T I O N S

1. Who owns an idea? If a customer comes up with an innovation involving your product, and your company thinks that innovation can be commercialized, who owns the new product?

2. Assume you come up with an idea for a new electronic product you think your fellow students would really like. How would you go through the product development process? How would you accomplish each step within that process?

3. Select a product you are familiar with and explain the stages of the product’s life cycle and different ways in which a company can extend its mature stage.

4. Why, given the availability of good research practices, do so many new products fail?

5. What has been Apple’s pricing strategy throughout their products’ life cycles? If you made an Apple Watch copycat product, what would your price have to be in order to compete successfully?

6. What are the risks associated with beta testing? What criteria would you use to select customers when needing a beta test?

7. This textbook is an open-source text, meaning your professor can modify its contents. Further, it has multiple delivery mode. You can view it online, buy a black and white, or color copy. What type of screening process do you think was used in developing this concept? How would that screening process differ from the screening process used to assess this specific book’s potential? Describe what you think those two processes would look like. If you don’t think the screening process would differ, why?

8. You’ve got a really great idea for a new online business. But you need capital to get the business going and when you ask investors for money, they want to know if you’ve done a market test and what the results were. Why are they asking for market test results? What are the risks associated with a market test? Are there other ways you can answer their real concerns without doing a market test?

9. What characteristics of a product would make it a good candidate for a phased launch? What would make the product a good candidate for a worldwide launch?

10. The product life cycle, the BCG matrix, and the GE matrix have all been criticized for leading to early harvesting of older products and overinvesting in new products. Why did that happen when these tools were applied?

A C T I V I T I E S

1. Take two existing offerings and combine them to create a new one. What type of offering is it? To whom would you sell it? What new benefits does the product offer, and how would you communicate them to potential buyers? What evidence could you generate to predict the likelihood of the new offering being successful?

2. Identify two new consumer products sold in a grocery store or by a mass merchandiser such as Walmart. Explain the strategies used to introduce each of the products and which strategy you feel will be most successful.

3. Identify three products that are sold in international markets and explain any differences in how the products have been changed to meet the needs of consumers in the international markets.

We want to hear your feedback

At Flat World Knowledge, we always want to improve our books. Have a comment or suggestion? Send it along! http://bit.ly/wUJmef

CHAPTER 7 DEVELOPING AND MANAGING OFFERINGS 155

http://bit.ly/wUJmef

ENDNOTES

Lawrence M. Fisher, “Xerox Sues Apple Computer Over Macintosh Copyright,” New York Times, December 15, 1989, http://www.nytimes.com/1989/12/15/business/ company-news-xerox-sues-apple-computer-over-macintosh-copyright.html? pagewanted=1.

“Best Global Brands,” Interbrand, 2009, http://www.interbrand.com/ best_global_brands.aspx?langid=1000.

“Microwave Oven,” Wikipedia, Accessed January 20, 2010, http://en.wikipedia.org/ wiki/Microwave_oven.

Andria Cheng, “Pedialyte Sales Grow into an Adult Market,” Wall Street Journal, May 15, 2015, http://wsj.com.

Molly Hunter, “The True Cost of the 100-Calorie Snack Pack,” ABC News, July 15, 2008; http://abcnewsgo.com.

156 PRINCIPLES OF MARKETING VERSION 3.0

http://www.nytimes.com/1989/12/15/business/company-news-xerox-sues-apple-computer-over-macintosh-copyright.html?pagewanted=1

http://www.interbrand.com/best_global_brands.aspx?langid=1000

Chapter 7: Developing and Managing Offerings

The New Offering Development Process

Idea Generation
Idea Screening
Feature Specification
Development
Testing
Launch or Commercialization
Evaluation

Managing Products over the Course of the Product Life Cycle

The Introduction Stage
The Growth Stage
The Maturity Stage
The Decline Stage

Discussion Questions and Activities
Endnotes