Pricing Strategies
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help.docxbe checked against norms for the product category to see whether the concept appears to be a winner,
a long shot, or a loser. One food manufacturer rejects any concept that draws a definitely-would-buy
score lower than 40 percent.
Conjoint Analysis Consumer preferences for alternative product concepts can be measured
with conjoint analysis, a method for deriving the utility values that consumers attach to varying
levels of a product’s attributes.85 Conjoint analysis has become one of the most popular conceptdevelopment
and testing tools. For example, Marriott used it to design its Courtyard hotel concept.86
With conjoint analysis, respondents see different hypothetical offers formed by combining varying
levels of the attributes and rank them. Management can then identify the most appealing offer and
its estimated market share and profit. In a classic illustration, academic research pioneers Green and
Wind used this approach in connection with developing a new spot-removing, carpet-cleaning agent
for home use.87 Suppose the new-product marketer is considering five design elements:
• Three package designs (A, B, C—see Figure 15.4)
• Three brand names (K2R, Glory, Bissell)
• Three prices ($1.19, $1.39, $1.59)
• A possible Good Housekeeping seal (yes, no)
• A possible money-back guarantee (yes, no)
Although the researcher can form 108 possible product concepts with these five elements (3 × 3 × 3 × 2 × 2), it
would be too much to ask consumers to rank them all from most to least preferred. A sample of, say, 18 contrasting
product concepts is feasible.
The marketer now uses a statistical program to derive the consumer’s utility functions for each of the five attributes
(see Figure 15.5). Utility ranges between zero and one; the higher the utility, the stronger the consumer’s
preference for that level of the attribute. Looking at packaging, package B is the most favored, followed by C and
then A (A has hardly any utility). The preferred names are Bissell, K2R, and Glory in that order. The consumer’s
utility varies inversely with price. A Good Housekeeping seal is preferred, but it does not add that much utility and
may not be worth the effort to obtain it. A money-back guarantee is strongly preferred.
The consumer’s most desired offer is package design B, brand name Bissell, priced at $1.19, with a Good
Housekeeping seal and a money-back guarantee. We can also determine the relative importance to this consumer
of each attribute—the difference between the highest and lowest utility level for that attribute. The greater the
PAGES 475-480
Business-Goods Market Testing Business goods can also benefit from market testing. Expensive
industrial goods and new technologies will normally undergo alpha and beta testing.100 During beta testing, the
company’s technical people observe how customers use the product, a practice that often exposes unanticipated
problems of safety and servicing and alerts the company to customer training and servicing requirements. The
company can also observe how much value the equipment adds to the customer’s operation, as a clue to subsequent
pricing.
Companies must interpret beta test results carefully because only a small number of test customers are used,
they are not randomly drawn, and tests are somewhat customized to each site. Another risk is that testers unimpressed
with the product may leak unfavorable reports about it. Square doesn’t employ beta testing—preferring to
test at its own internally controlled locations—because it feels it should never put out an unfinished product.101
At trade shows the company can observe how much interest buyers show in the new product, how they react to
various features and terms, and how many express purchase intentions or place orders. In distributor and dealer
display rooms, products may stand next to the manufacturer’s other products and possibly competitors’ products,
yielding preference and pricing information in the product’s normal selling atmosphere. However, customers who
come in might not represent the target market, or they might want to place early orders that cannot be filled.
Industrial manufacturers come close to using full test marketing when they give a limited supply of the product
to the sales force to sell in a limited number of areas that receive promotion support and printed catalog sheets.
Commercialization
Commercialization incurs the company’s highest costs to date.102 Too often companies are so focused on developing
a new product that they neglect to spend adequate time developing a winning marketing launch program.103
The firm will need to contract for manufacture, or it may build or rent a full-scale manufacturing facility. Most
new-product campaigns also require a sequenced mix of market communication tools to build awareness and
ultimately preference, choice, and loyalty.104
To introduce a major new consumer packaged good into the national market can cost $25 million to $100 million
in advertising, promotion, and other communications in the first year. For new food products, marketing
expenditures typically represent 57 percent of first-year sales.
To raise funds, some inventors who don’t have the backing of a major corporation are relying on crowdfunding
and companies like Kickstarter.105 With crowdfunding, individuals or start-ups fund their projects by using social
media and other means to generate interest and contributions from the general public.
When (Timing) Suppose a company has almost completed the development work on its new product and
learns a competitor is nearing the end of its development work. The company faces three choices:
1. First entry—The first firm entering a market usually enjoys the “first mover advantages” of locking up key
distributors and customers and gaining leadership. But if rushed to market before it has been thoroughly
debugged,
the first entry can backfire.
2. Parallel entry—The firm might time its entry to coincide with the competitor’s entry. The market may pay
more attention when two companies are advertising the new product.106
3. Late entry—The firm might delay its launch until after the competitor has borne the cost of educating the
market, and its product may reveal flaws the late entrant can avoid. The late entrant can also learn the size of
the market.
If a new product replaces an older product, the company might delay until the old product’s stock has been
drawn down. If the product is seasonal, it might wait until the season arrives; often a product waits for a “killer
application”
to occur. Many companies are now encountering competitive “design-arounds”—rivals are making
their own versions just different enough to avoid patent infringement and royalties.107
Where (Geographic Strategy) Most companies will develop a planned market rollout over time.
In choosing rollout markets, the major criteria are market potential, the company’s local reputation, the cost of
filling the pipeline, the cost of communication media, the influence of the area on other areas, and competitive
penetration. Small companies select an attractive city and put on a blitz campaign, entering other cities one at a
time. Large companies introduce their product into a whole region and then move to the next. Companies with
national distribution networks, such as auto companies, launch new models nationally.
With the Internet connecting far-flung parts of the globe, competition is more likely to cross national borders.
Companies are increasingly rolling out new products simultaneously across the globe. However, masterminding a
global launch poses challenges, as Chapter 8 described, and a sequential rollout across countries may still be the
best option.108
To Whom (Target-Market Prospects) Within the rollout markets, the company must target
initial distribution and promotion to the best prospect groups. Ideally these should be early adopters, heavy users,
and opinion leaders it can reach at low cost. Few groups include all these, so the company should rate prospects
and target the best group. The aim is to generate strong sales as soon as possible to attract further prospects.
How (Introductory Market Strategy) Because new-product launches often take longer and
cost more than expected, many potentially successful offerings suffer from underfunding. It’s important to allocate
sufficient time and resources—yet not overspend—as the new product gains traction in the marketplace.109
To coordinate the many tasks in launching a new product, management can use network-planning techniques
such as critical path scheduling (CPS), which develops a master chart showing the simultaneous and sequential activities
that must take place. By estimating how much time each activity takes, planners estimate completion time for
the entire project. Any delay in any activity on the critical path—the shortest route to completion—will delay the project.
If the launch must be completed sooner, the planner searches for ways to reduce time along the critical path.110
The Consumer-Adoption Process
Adoption is an individual’s decision to become a regular user of a product and is followed by the consumerloyalty
process. New-product marketers typically aim at early adopters and use the theory of innovation diffusion
and consumer adoption to identify them.
Stages in the Adoption Process
An innovation is any good, service, or idea that someone perceives as new, no matter how long its history. Everett
Rogers defines the innovation diffusion process as “the spread of a new idea from its source of invention or
creation
to its ultimate users or adopters.”111 The consumer-adoption process is the mental steps through which
an individual passes from first hearing about an innovation to final adoption.112 They are:
1. Awareness—The consumer becomes aware of the innovation but lacks information about it.
2. Interest—The consumer is stimulated to seek information about the innovation.
3. Evaluation—The consumer considers whether to try the innovation.
4. Trial—The consumer tries the innovation to improve his or her estimate of its value.
5. Adoption—The consumer decides to make full and regular use of the innovation.
The new-product marketer should facilitate movement through these stages. A water filtration system manufacturer
might discover that many consumers are stuck in the interest stage; they do not buy because of their
uncertainty and the large investment cost.113 But these same consumers would be willing to use a water filtration
system at home on a trial basis for a small monthly fee. The manufacturer should consider offering a trial-use plan
with option to buy.
Factors Influencing the Adoption Process
Marketers recognize the following characteristics of the adoption process: differences in individual readiness to
try new products, the effect of personal influence, differing rates of adoption, and differences in organizations’
readiness to try new products. Some researchers are focusing on use-diffusion processes as a complement to
adoption process models to see how consumers actually use new products.114
Readiness to Try New Products and Personal Influence Everett Rogers defines a
person’s level of innovativeness as “the degree to which an individual is relatively earlier in adopting new ideas
than the other members of his social system.” Some people are the first to adopt new clothing fashions or new
appliances; some doctors are the first to prescribe new medicines.115 See the adopter categories in Figure 15.7.
After a slow start, an increasing number of people adopt the innovation, the number reaches a peak, and then it
diminishes as fewer nonadopters remain.
The five adopter groups differ in their value orientations and their motives for adopting or resisting the new
product.116
• Innovators are technology enthusiasts; they are venturesome and enjoy tinkering with new products and
mastering
their intricacies. In return for low prices, they are happy to conduct alpha and beta testing and
report on early weaknesses.
• Early adopters are opinion leaders who carefully search for new technologies that might give them a dramatic
competitive advantage. They are less price sensitive and are willing to adopt the product if given personalized
solutions and good service support.
• Early majority are deliberate pragmatists who adopt the new technology when its benefits have been proven
and a lot of adoption has already taken place. They make up the mainstream market.
• Late majority are skeptical conservatives who are risk averse, technology shy, and price sensitive.
• Laggards are tradition-bound and resist the innovation until the status quo is no longer defensible.
Each group requires a different type of marketing if the firm wants to move its innovation through the full
product
life cycle. In addition to or instead of targeting opinions leaders, some experts advocate targeting revenue
leaders with a new product—those customers with higher customer lifetime-values—to accelerate the path to
profitability.117
Personal influence, the effect one person has on another’s attitude or purchase probability, has greater significance
in some situations and for some individuals than others, and it is more important in evaluation than in the
other stages. It has more power over late than early adopters and in risky situations.
Companies often target innovators and early adopters with product rollouts. When Nike entered the skateboarding
market, it recognized an anti-establishment, big-company bias from the target market that could present
a sizable challenge. To gain “street cred” with teen skaters, it sold exclusively to independent shops, advertised
nowhere but skate magazines, and gained sponsorships from admired pro riders by engaging them in product
design.118
Characteristics of the Innovation Some products catch on immediately (roller blades),
whereas others take a long time to gain acceptance (diesel engine autos). One new-product concept that quickly
took hold was StubHub online ticket reselling service.119
StubHub The cofounders of StubHub, Jeff Fluhr and Eric Barker, came up with the idea for their site when
they were Stanford MBA students. Realizing there were far too many unused tickets for sporting events, theater events,
and concerts, they decided to set up an “eBay for tickets” where sellers could set a price higher or lower than face value
depending on demand. StubHub would take a 10 percent cut from the buyer and a 15 percent cut from the seller on every
purchase. The service had to negotiate state laws restricting ticket reselling, but by 2006 it was making $100 million in
revenue, split between sports (75 percent), concerts (20 percent), and theater (5 percent) in a market estimated to be worth
$4 billion in the United States. StubHub was sold to eBay for $310 million in 2007. Original-ticket seller Ticketmaster and
its Live Nation parent have fought the company from the start, threatening legal action, introducing paperless tickets that
limit reselling, and launching the TicketExchange service to compete. StubHub has sets its sights on being more than a
ticket seller and becoming a multiplatform e-commerce site. A brand-building multimedia campaign launched in 2012 was
designed
to add emotional components to the company’s functional message, including the idea of tickets “growing on
trees.” With 40 percent of primary tickets going unsold, StubHub is also emphasizing helping consumers discover events
and attend more of them.
(DVRs) for home use, as exemplified by TiVo.120
1. Relative advantage—the degree to which the innovation appears superior to existing products. The greater the
perceived relative advantage of using a DVR, say, for easily recording favorite shows, pausing live TV, or skipping
commercials, the more quickly it was adopted.
2. Compatibility—the degree to which the innovation matches consumers’ values and experiences. DVRs are
highly compatible with the preferences of avid television watchers.
3. Complexity—the degree to which the innovation is difficult to understand or use. DVRs are somewhat complex
and therefore took a slightly longer time to penetrate into home use.
4. Divisibility—the degree to which the innovation can be tried on a limited basis. This provided a sizable challenge
for DVRs—sampling could occur only in a retail store or perhaps a friend’s house.
5. Communicability—the degree to which the benefits of use are observable or describable to others. The fact
that DVRs have some clear advantages helped create interest and curiosity.
Other characteristics that influence the rate of adoption are cost, risk and uncertainty, scientific credibility, and
social approval. The new-product marketer must research all these factors and give the key ones maximum attention
in designing the product and its marketing program.
Organizations’ Readiness to Adopt Innovations The creator of a new teaching
method would want to identify innovative schools. The producer of a new piece of medical equipment would
want to identify innovative hospitals. Adoption is associated with variables in the organization’s environment
(community progressiveness, community income), the organization itself (size, profits, pressure to change), and
the administrators (education level, age, sophistication). Other forces come into play in trying to get a product
adopted into organizations that receive the bulk of their funding from the government, such as public schools.
A controversial or innovative product can be squelched by negative public opinion.
analysis, product development, market testing, and
commercialization. At each stage, the company must
decide whether to drop the idea or move to the next
stage.
4. The consumer-adoption process is the process by which
customers learn about new products, try them, and
adopt or reject them. Today many marketers are targeting
heavy users and early adopters of new products because
both groups can be reached by specific media and tend
to be opinion leaders. The consumer-adoption process is
influenced by many factors beyond the marketer’s control,
including consumers’ and organizations’ willingness
to try new products, personal influences, and the characteristics
of the new product or innovation.
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Marketing Debate
Whom Should You Target with New
Products?
Some new-product experts maintain that getting close to
customers through intensive research is the only way to
develop
successful new products. Other experts disagree
and say customers can’t possibly provide useful feedback
on what they don’t know and can’t provide insights that will
lead to breakthrough products.
Take a position: Consumer research is critical to newproduct
development versus Consumer research may
not be all that helpful in new-product development.
Marketing Discussion
Product Innovativeness
Think about the last new product you bought. How do
you think its success will be affected by the five characteristics
of an innovation: relative advantage, compatibility,
complexity, divisibility, and communicability?
Apple has transformed the way people listen to music,
play video games, talk on the phone, and even read
books. The company’s revolutionary product innovations
include the iPod, the iMac, the iPhone, and
the iPad. They are the reason the company topped
Fortune’s Most Admired Companies list every year from
2008 to 2014.
The iPod introduced many consumers to Apple and
initiated a series of monumental product innovations. It
exemplified Apple’s innovative design skills and looked,
felt, and operated like no other device. To the delight
of Apple (and the chagrin of competitor Sony), the
revolutionary MP3 player became “the Walkman of the
21st century,” and the launch of the iTunes online music
store helped drive iPod sales through the roof.
The iPod was also central in changing the way people
listened to and used music. According to musician
John Mayer, people felt like they were “walking through
musicology” when they used their iPods, leading them
to listen to more music and with more passion. The iPod
has gone through a series of re-generations, adding
features like photo, video, and radio capabilities along
the way.
Apple reached its impressive market domination
through a combination of shrewd product innovation
and clever marketing. The marketing effort appealed
to both Apple fans and people new to the brand. To
reach such a broad base, the company had to shift its
channel strategies. It added “mass electronic” retailers
such as Best Buy and Circuit City (now defunct) to
its existing channels, which quadrupled its number of
outlets.
Besides this enhanced “push” effort, Apple also
developed memorable, creative “pull” advertising that
helped drive the popularity of the iPod. The Silhouettes
campaign featured silhouettes of people listening to and
dancing with their iPods and appeared all over the world.
This simple message worked across cultures, portraying
the iPod as cool but not beyond the reach of anyone who
enjoyed music.
As the iPod’s popularity grew, a halo effect helped
increase Apple’s share in its other markets. In fact, in
2007 the company officially changed its name from Apple
Computer Inc. to Apple Inc. to help communicate its
focus
on non-computer products.
Apple’s next-largest product launch after the iPod
was the iPhone, its 2007 entry to the cell phone industry.
With its touch-screen pad, virtual keyboard, and Internet
and e-mail capabilities, the iPhone launched to huge
consumer excitement; people lined up for hours to be
among the first to buy one. Investment analysts initially
feared that Apple’s two-year contract with AT&T and
the iPhone’s high price would hinder its success. But
74 days after the product’s debut, 1 million units had
been sold. It had taken the iPod two years to reach the
cumulative sales ($1.1 million) the iPhone had reached
after just its first quarter. In fact, half the iPhones’ buyers
switched to AT&T, incurring fees to break their contracts
with other carriers, just to have a chance to own an
iPhone.
Over the next few years, Apple dropped the price of
the iPhone significantly and added impressive picture and
video capabilities, video game features, a faster processor,
and access to millions of additional applications. The
iPhone had become yet another game-changing technological
invention. When the iPhone 4 launched in 2010,
showcasing FaceTime video calling, Steve Jobs declared
it “the most successful product launch in Apple’s history.”
Jobs died in 2011 and didn’t get to witness the success
of the iPhone 5 launch in 2012. Apple received more
than 2 million preorders of the iPhone 5 within the first
24 hours, far exceeding sales of any preceding iPhone
launch. When the phone officially hit the shelves on
September 21, 2012, the company couldn’t keep up with
the initial demand.
The launch of the iPad also created media frenzy in
2013. The multitouch device combined the look and feel
of the iPhone with the power of a MacBook and gave
consumers access to music, books, movies, pictures,
video games, documents, and hundreds of thousands
of applications at the touch of a finger without mouse or
keyboard. Apple followed up with the launch of the iPad
mini, a smaller version of the original, and the iPad Air,
accompanied by a powerful marketing campaign that
inspired consumers to do anything with their iPad, including
creating movies, building wind turbines, studying coral
reefs, and making mountain climbing safer.
In recent years, Apple has faced more serious competition
for its smart phones, tablets, and other handheld
devices, especially from Samsung and HTC. Investment
in research and development is just one way the company
remains a leader in this cutthroat industry. It spent
$2.4 billion in R&D in 2011, $3.4 billion in 2012, and $4.5
billion in 2013. Creating, producing, and launching new
products is a top priority for Apple. With creative marketing
support behind them, these products are the reason
consumers and analysts stay on their toes awaiting
Apple’s latest product news.
Questions
1. Apple’s product launches over the past decade have
been monumental. What makes the company so
good at innovation? Is anyone comparable to Apple
in this respect?
2. How important was the iPod to Apple’s current success?
Discuss the significance of the iPhone and
iPad launches to Apple’s new-product development
strategy.
3. It has been a few years since Apple’s last epic innovation.
What’s next for Apple?
Sources: Matt Vella, “Apples’ Latest Ad Is Probably Going to Give You the Chills,” Time, January 13,
2014; www.apple.com; 2013 Apple Annual Report; “iPhone4: The ‘Most Successful Product Launch’
in Apple’s History,” Independent, June 28, 2010; Joseph De Avila, “Why Some Apple Fans Won’t
Buy the iPhone,” Wall Street Journal, September 12, 2007, p. D3; Nick Wingfield, “Apple Businesses
Fuel Each Other; Net Jumps as Mac Sales Top PC-Industry Growth Rate; iPhones, iPods Also Thrive,”
Wall Street Journal, October 23, 2007; Terril Yue Jones, “How Long Can the iPod Stay on Top?,” Los
Angeles Times, March 5, 2006; Beth Snyder Bulik, “Grab an Apple and a Bag of Chips,” Advertising
Age, May 23, 2005; Jay Parsons, “A Is for Apple on iPod,” Dallas Morning News, October 6, 2005;
Peter Burrows, “Rock On, iPod,” BusinessWeek, June 7, 2004, pp. 130–31; Jay Lyman, “Mini iPod
Moving Quickly, Apple Says,” TechNewsWorld, February 26, 2004; Steven Levy, “iPod Nation,”
Newsweek, July 25, 2004; “Apple Computer: iPod Silhouettes,” New York Marketing Association;
Steven Levy, “iPod Nation,” Newsweek, July 25, 2004; Effie Worldwide, www.effie.org.
