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chapter

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Industry Profile

Introduction

Product Life Cycle Introduction Stage

Growth Stage

Maturity Stage

Decline Stage

Applying the Product Life Cycle Developing Strategies for the Product

Life Cycle

Ways to Extend the Product Life Cycle

Pros and Cons of the Product Life Cycle

Other Product Concepts Wheel of Retailing

Chapter Objectives

After studying this chapter, you should be able to:

1. Describe the four stages of the product life cycle and their

effects on marketing activities.

2. Analyze a product’s life cycle.

3. Explain marketing-related concepts, such as the wheel of

retailing and resource allocation models.

4. Use resource allocation models for menu engineering.

5. Identify the relationship between resource allocation models

and the product life cycle.

6. Outline the challenges unique to managing services as

opposed to products.

Managing Products and Services

Chapter Outline

(continues)

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EBSCO Publishing : eBook Academic Collection (EBSCOhost) - printed on 7/23/2018 3:17 AM via LOUISIANA STATE UNIV AT SHREVEPORT AN: 492766 ; Reid, Robert D., Bojanic, David C..; Hospitality Marketing Management Account: s3563253

Resource Allocation Models

Menu Sales Mix Analysis

Resource Allocation Models and the

Product Life Cycle

Managing in the Service Environment Conflicts between Operations and

Marketing

Managing Supply and Demand

Summary of Chapter Objectives

Key Terms and Concepts

Questions for Review and Discussion

Case Study: Starbucks Coffee

Chapter Outline (continued)

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industry profile 281 in d u stry p

ro file

Thomas Lee Hotel Manager Davidson Hotel Company • Houston, Texas

1. What are the major components or duties associated with your current position?

As Director of Food and Beverage, the major components associated with my

position consist of three major areas. Those areas are financial, guest satis-

faction, and employee satisfaction. In regards to the financial aspect of my

position, I create the operating budgets for all outlets of food and beverage

including banquets/catering, kitchen, restaurants, bars, room service, gift

shop, and minibar. It is my duty to ensure that we are properly abiding by

the guidelines of the budget on a daily basis and adjusting our expenses based

on revenue forecasts, which I also must create. In regards to guest satisfac-

tion, I am inevitably responsible for all service and product perceptions within

the hotel including restaurant and banquet staff service, catering sales man-

ager service, and of course the quality of the product that includes not only

food and beverage quality, but the quality and amenities of the facility as well.

In regards to employee satisfaction, I am responsible for keeping my employ-

ees motivated and productive by maintaining an equal and fair employment

environment for all employees of the hotel.

2. What are the components of your position that bring you the most satisfaction? What about your position causes you frustration?

The majority of people will tell you that there is no greater satisfaction in the

hospitality industry than when a guest compliments the service they received

while staying at your property, but I will tell you with over 15 years of hos-

pitality management experience, personally, there is no greater satisfaction

than watching your subordinates grow and develop through their careers. It

says a lot about a manager when they have former subordinates that get pro-

moted and retain successful careers in the industry. The greatest frustration

currently in my position is dealing with budgetary restraints. There are so

many improvements and upgrades that you want to make when you first walk

into a property, but then reality hits, and you realize that there are monetary

limitations that you must deal with.

3. What are the most challenging aspects that you face? I believe the most challenging aspect that I face currently and into the future

in the field of hospitality is the looming question of our economy. A recession

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282 chapter 8 managing products and services in

d u st

ry p

ro fi le

would inevitably hurt the hospitality and tourism industry in great lengths

because of the decrease in spending money per capita for both businesses in

general and people vacationing. It would end the era of the average general

manager, which our industry is overly abundant in currently, where in a tough

economy only the stronger general managers would survive. The strong gen-

eral managers would have to be not only well-versed in finding and keeping

business in a scarce market, but an expert on managing expenses as well.

4. What major trends do you see for your segment of the hospitality and tourism industry?

Once again, I believe the economy will play a great role for the industry. If

we go into a recession, everybody will be on pins and needles.

5. What role does marketing play within your company? Marketing plays a huge role within our company. The property that I am at

currently is a perfect example. The property is undergoing a $15 million ren-

ovation where the flag of the hotel is changing and the current clientele must

change and be upgraded where average rates must increase dramatically to

show return on investment. If a strong, well-planned marketing effort is not

in place, the $15 million would completely go to waste.

6. If you could offer one piece of advice to an individual preparing for a career in the hospitality and tourism industry, what would you suggest?

The one piece of advice that I would offer an individual preparing for a career

in the hospitality industry would be to learn all areas of the industry that you

are going into. This increases your individual stock as an employee because

you are well-versed in all aspects of the industry. By having the knowledge

of multiple departments, that individual can then make educated and better

informed decisions that will benefit the entire operation. For example, in a

hotel, try and learn all departments including front office, housekeeping,

sales/catering, food, and beverage.

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INTRODUCTION

Developing a sound marketing strategy is a cornerstone of successful mar-

keting. When a company is successful and its marketing programs are the

benchmarks among its competitors, it is often the result of a sound and well-

developed marketing strategy. This chapter examines the key aspects of

managing the product–service mix. The first area concerns the product

levels and their importance in differentiating the product. The second area

is the product life cycle. This advances the concept that all products and ser-

vices progress through a life cycle, much as people do. The concept of the

product life cycle is that different marketing strategies are best used at dif-

ferent stages in the life cycle. The third area involves the resource allocation

models used by firms to determine the most effective use of company

resources within their product portfolios. Most firms have a limited amount

of resources, and it is necessary to prioritize their expenditures based on

potential returns and company goals. Finally, this chapter examines the var-

ious issues surrounding managing services. The characteristics that differ-

entiate services from goods create different challenges for managers. It is

important to manage supply and demand in service industries because of

the inability to maintain inventories for intangible products. There are basi-

cally four product levels: the core product, the facilitating products, the sup-

porting products, and the augmented product. The core product is the basic

form of the product. In other words, it is the main benefit sought by cus-

tomers in an attempt to satisfy their needs as recognized by the gap between

the ideal state and actual state. For example, for a restaurant, the core prod-

uct is the food that will resolve the consumer’s state of hunger.

As one can see, there are many ways that this need can be satisfied. Similarly,

consumers in the lodging industry are looking for guest rooms with a shower.

Two of the other product levels can be referred to as peripheral services. The

peripheral services expand the core offering and can be used to obtain a com-

petitive advantage. The peripheral services must meet or exceed customer

expectations if customers are to be satisfied. The facilitating products are ser-

vices that enable the customer to consume the core product. They must be pres-

ent to make the product available where and when the customer wants it.

Hotels have front desks and reservations departments, and restaurants have

hosts or hostesses and waitstaff. Supporting products are additional goods and

services that can be bundled with the core service in an attempt to increase the

overall utility or value for consumers. Examples of supporting products within

the hotel industry include concierge service, multilingual staff, 24-hour room

service, and complimentary newspapers for business travelers.

introduction 283

Marketing strategy

Marketing strategy encompasses the overall plan for achieving marketing objectives.

Product levels

Three product levels exist: the core product, the facilitating products, and the supporting products.

Product life cycle

The product life cycle theory describes how a product progresses from its infancy as a new product in development, through a growth phase, to a maturity phase, and then, eventually into decline.

Resource allocation models

Model used by firms to determine the most effective use of company resources within their product portfolios.

Core product

The core product represents the basic form of the product. It is the main benefit sought by customers in an attempt to satisfy their needs as recognized by the gap between the ideal state and actual state (e.g., within a restaurant, the core service is the food that will resolve the consumer’s state of hunger).

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The augmented product is the core product and peripheral services that

combine to form the package of benefits offered by a product or service. In

addition, the augmented product includes how the service is delivered. In

other words, the augmented product encompasses everything surrounding the

service and its delivery, including intangible attributes such as accessibility

and atmosphere. For example, Las Vegas hotels and casinos have augmented

the core product to include extravagant design, in an attempt to attract visi-

tors and gain a competitive advantage over other hotels and casinos. The basic

hotel service is augmented with casinos, shows, high-quality restaurants, and

incredible atmospheres. Also, the hotels make themselves very accessible, with

good deals and special packages.

PRODUCT LIFE CYCLE

The product life cycle theory describes how a product progresses from its infancy

as a new product in development through a growth phase to a maturity phase

and then eventually into decline. Each stage of the product life cycle will be dis-

cussed in detail, followed by a discussion of the uses of the theory. Figure 8.1

illustrates the general shape of a typical product life cycle and its four stages.

284 chapter 8 managing products and services

Peripheral services

Additional goods and services that expand the core offering and can be used to obtain competitive advantage. Peripheral services consist of facilitating products and supporting products.

Facilitating products

Facilitating products are services that enable the customer to consume the core product. They must be present to make the product available where and when the customer wants it.

Supporting products

Supporting products are additional goods and services that can be bundled with the core service in an attempt to increase the overall utility or value for consumers (e.g., concierge service, multilingual staff, 24-hour room service, and complimentary newspapers for business travelers).

Augmented product

The augmented product is the core product and peripheral services that combine to form the package of benefits offered by a product or service. It encompasses everything surrounding the service and its delivery, including intangible attributes such as accessibility and atmosphere.

Supporting services such as a hotel gym are becoming increasingly important to guests. Courtesy of Wyndham Worldwide.

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Introduction Stage

The first stage of the product life cycle is called the introduction stage. At this

point, the product has been through the new product development process

presented in Chapter 7. It has survived analysis and testing, and it was deemed

worthy of market introduction. The product represents a new concept, so

there are no competitors offering the same product, and if the product is

unique, there aren’t even similar products in the market. Therefore, the goals

for the firm are to develop product awareness and stimulate trial and adop-

tion. To accomplish these goals, the firm must make a sizable investment even

though sales will initially be low, leading to negative profits. The investment

is in the form of capital expenditures on facilities and inventories, and a pro-

motional campaign to attract customers. However, even though the cost per

unit of manufacturing the product or providing the service is high, it is often

necessary to offer discounts and other promotions to induce potential cus-

tomers to try it. The pricing decision is usually based on the estimated costs

and demand for the product because there are no direct competitors. During

the introductory phase, customers tend to be innovators who are willing to

take risks to try new products and services. The distribution of the product

is selective in an attempt to build a customer base before adding new units or

distributors. Many of the large hotel and restaurant chains started with one

unit and eventually grew to become a large chain or franchise. For example,

Holiday Inn started with a single property in Memphis, Tennessee, in 1952,

and Wendy’s restaurant chain started with a single unit in Columbus, Ohio,

in 1969. Some hotels may start with a test-market property, but many recent

concepts were started with more than one property. For instance, Wyndham’s

Garden Hotels were opened with multiple units in an attempt to generate

more awareness and interest than could have been attained with a single prop-

erty. It is more common for restaurants to begin as single-unit operations and

add more units as they become successful and generate cash flow. This is due

to the fact that repeat business can be generated from the local market, whereas

hotels are dependent on a more transient market.

product life cycle 285

Sales and Profits ($)

SalesProfits

Time

DeclineMaturityGrowthIntroduction

figure 8.1 • The product life cycle.

Introduction stage

The first stage of the product life cycle is called the introduction stage. At this point, the product has been through the new product development process. It has survived analysis and testing, and it was deemed worthy of market introduction.

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Growth Stage

If the firm is able to accomplish its goals in the introductory stage and the

product builds an adequate customer base, the product will move into a

growth stage. The growth stage is evidenced by rapidly rising sales and prof-

its, and a decreasing cost per unit for providing the product or service. This

positive outlook attracts competitors who are willing to take the risk because

of customer acceptance and increasing profit margins. In this stage, the prof-

its being generated by the product allow the firm to consider product exten-

sions, new markets, and organizational expansion in the form of additional

properties or units. Minor changes may be made in the unit design and con-

cept, but normally the owners attempt to standardize the physical plant,

thereby reducing developmental costs. The owners’ rationalization is that if

the original unit is successful, additional units will also be successful. During

the growth stage, the organization typically expands its distribution by adding

new units. These units are often located in clusters within geographic regions.

It is during the growth stage that the second group of consumers, known

as early adopters, begins to enter the market as they obtain feedback from the

innovators. The increase in competitors during this stage and the need to build

market share put downward pressure on price. The use of the intensive dis-

tribution strategy helps the firm build its customer base and market share by

creating more awareness and interest in the product. The goal is that the firm

penetrates the market and develops loyal customers, while gradually reduc-

ing the amount of sales promotions and discounts. Instead, more emphasis

can be placed on other forms of promotion, such as personal selling and adver-

tising. The restaurant industry is a good example where new concepts enter

the market every year, and those that are successful become larger chains and

franchises. It is important to note that there is no standard length of time that

a product remains in the growth stage. Some products experience strong

growth over a short period of time, and then sales level off quickly, while oth-

ers maintain a lengthy period of growth.

Maturity Stage

If an organization is able to achieve the desired success in the growth stage,

it will eventually move to the maturity stage. At this point, the organization

has expanded as much as the market will allow, and volume, measured in

annual gross sales, will level off. Companies in this stage of the product life

cycle find that the market is often saturated and competition is increasing

from alternative options. Industry profits tend to peak near the end of the

286 chapter 8 managing products and services

Growth stage

The growth stage is evidenced by rapidly rising sales and profits and a decreasing cost per unit for providing the product or service.

Maturity stage

A stage within the product life cycle where the organization has expanded as much as the market will allow, and volume, measured in annual gross sales, will level off. Companies in this stage find that the market is often saturated and competition is increasing from alternative options.

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growth stage as the product moves into maturity. However, there are still

high profits due to the large volume and the beginning of a decline in the

number of competitors. In other words, the weaker competitors leave as the

market reaches equilibrium and stronger competitors are left to battle for

market share. A common strategy is for firms to standardize products and

remove some of the less-valued attributes. This streamlining will enable the

firm to take advantage of the economies of scale associated with higher vol-

ume, thereby widening the profit margin. For example, Delta Airlines intro-

duced box lunches that passengers received as they boarded the plane. A

couple of years later, the airline announced that it would no longer include

sandwiches in the box lunches, a move expected to save tens of millions of

dollars. Finally, the airline eliminated lunches and snacks entirely on most

of its flights.

There may also be changes in consumer preference as the consumer turns

toward newer and more innovative concepts. For example, some pizza restau-

rants like Bertucci’s Brick Oven Pizzeria and California Pizza Kitchen

emphasize the method of preparation as being unique in comparison to tra-

ditional pizza restaurants. The advertising and promotions during this stage

focus on differentiating the product, although it can be difficult because the

core products tend to be very similar. This product homogeneity increases the

consumer’s price sensitivity and firms are forced to price at the market. At

this point, the market may fragment into more segments with different needs

and price sensitivities. Most hotel chains offer more than one brand in an

attempt to attract consumers from various market segments. For example,

Holiday Inns have limited service hotels (i.e., Holiday Inn Express), full ser-

vice hotels (i.e., Holiday Inn), business hotels (i.e., Crowne Plaza), and luxury

hotels (i.e., InterContinental).

In this stage, the distribution of the product becomes even more inten-

sive to ensure consumer convenience and accessibility. This expansion can

be developed internally, or it can be the result of mergers and acquisitions.

Weaker competitors may be acquired by stronger—and often larger—

competitors who wish to gain access to new markets. Most of the products

in the United States are in the maturity stage, which can last indefinitely.

At this stage, the product adoption cycle has progressed to the point of

including the majority segment of consumers, leaving little room for growth

in the sales for the product category. As a result, individual brands can only

increase sales at the expense of their competitors, rather than rely on new

consumers in the market. The quick-service (i.e., fast-food) industry is noto-

rious for its fierce competition in advertising and pricing. For example, Sub-

way is being attacked by competitors such as Quiznos that refer to the brand

as “wrong way.”

product life cycle 287

Economies of scale

Cost efficiencies derived from operating at high volumes.

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Decline Stage

The last stage in the product life cycle is decline. During the decline stage,

industry sales and profits are dropping more rapidly, and the number of com-

petitors is reduced to those with very strong positions. The only new con-

sumers entering the market are the laggards, and prices are often cut even

further. Firms have progressed through the experience curve and the cost per

unit has been driven down with accumulated volume. At this point, firms

have phased out the weaker brands and focus more on the strong brands. The

product consists of the core product and only those peripheral services that

are of real value to the consumer. Distribution is selective as weaker outlets

are closed. Hospitality firms will sell or close their properties in markets that

aren’t performing well in an attempt to free up resources for the more suc-

cessful properties. For example, Planet Hollywood started its decline stage by

closing restaurants that were not profitable in an attempt to remain viable,

but the company eventually went bankrupt and decided to go out of business

completely.

The major objective during the decline stage is to reduce overall market-

ing expenditures and increase cash flow. This strategy is referred to as “milk-

ing the brand” because you are trying to get as much profit from it as possible.

The decrease in marketing expenditures comes in the form of reduced

customer service, reduced quality and variety, reduced distribution, and

reduced promotion and advertising. Firms are left with a group of loyal cus-

tomers that may or may not be large enough to continue with a profitable

operation. It is critical that firms are relatively certain about the product’s sta-

tus in the product life cycle because these actions may force the product into

decline prematurely. Many independent hospitality and tourism firms are

finding themselves in the decline stage as large chains and franchises take

advantage of their lower costs and engage in price wars that force the weaker

firms out of the market.

APPLYING THE PRODUCT LIFE CYCLE

McDonald’s serves as an excellent example of the way a corporation progresses

through the organizational life cycle. McDonald’s, under the direction of Ray

Kroc, began with a few units in the mid-1950s. The corporation quickly

achieved a sound financial base and rapidly moved into the growth stage of

the life cycle. New units were continually being constructed, and soon the

familiar red-and-white buildings with the golden arches could be found

288 chapter 8 managing products and services

Decline stage

During the decline stage, the last stage in the product life cycle, industry sales and profits decline more rapidly, and the number of competitors gets reduced to those with strong positions.

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throughout the country. However, an important decision was made as

McDonald’s was nearing the end of the maturity stage. The upper-level man-

agement felt that the red-and-white buildings with the golden arches had out-

lived their useful life and that a new image was needed.

With this in mind, the corporation began to rethink the design and décor

of both new units and the vast majority of existing units. They determined

that a more subdued appeal was needed to attract different target markets.

The term fast food was not used in any promotional or corporate literature.

Instead, emphasis was placed on the image of McDonald’s as a restaurant.

Instead of seeing its sales level off, McDonald’s was able to inject new life into

its concept and therefore continued to expand and increase the number of

units, total sales, and bottom-line profits. Later in McDonald’s history, when

sales growth had begun to slow, the corporation’s leaders launched a break-

fast program (McDonald’s had previously served meals only during lunch and

dinner). By serving breakfast, the company was able to increase sales without

adding new units or franchisees. After that, they added another feature that

is very common today—the drive-through window.

More recently, McDonald’s has developed units in nontraditional loca-

tions as a means of increasing sales. These new locations include gas stations

and convenience stores, as well as retail locations such as Wal-Mart. Another

way McDonald’s expanded its product life cycle was through entering inter-

national markets in an attempt to increase its growth potential. However, the

future is unsure for the fast-food giant. The beginning of the twenty-first cen-

tury marked the first time McDonald’s was forced to close some of its less

profitable units since the company was formed.

Developing Strategies for the Product Life Cycle

A number of strategies have been used for the various stages in the product

life cycle. To develop strategies, however, management must first analyze the

life cycle. This can be done in a seven-step process:

1. Compile historical data. It is imperative that hospitality firms compile his- torical sales data. Ideally, the data should be available for the entire his-

tory of the organization. The specific type of data needed include sales

volume (in units), prices, total sales revenue, costs, and profits.

2. Identify competitive trends. Recent activities of major competitors should be monitored closely to determine changes in market share and position,

as well as changes in quality of the product-service mix. Additionally, the

applying the product life cycle 289

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other elements of the marketing mix should be monitored for significant

changes.

3. Determine changes in product-service mix. The marketplace must be monitored to learn about new products and services that other hospital-

ity organizations are introducing and to anticipate the potential effects on

your operation.

4. Study the product life cycles of similar products. It is helpful to study the life cycle of similar products or services to determine whether a pattern

exists. Rarely is a product or service so new and unusual that it is not pos-

sible to compare it with a previous one.

5. Project sales. Based on the data collected, sales for a two- to three-year period should be projected. Applying computerized statistical techniques

may be particularly beneficial at this stage. Specialized software packages

are available that will allow a marketing manager to develop sophisticated

sales forecasts. However, for many business decisions, the statistical proce-

dures and techniques that are part of spreadsheet software, such as

Microsoft Excel, will suffice. The software will permit the development of

multiple scenarios or what-if scenarios by altering the levels of the decision

variables. In addition to projecting sales, management should examine key

financial ratios and other indicators of financial performance.

6. Locate the current position on the life cycle. Based on the historical data as well as the projections, it should now be possible to locate the product’s

position on the life cycle. This position is used to determine the most

appropriate baseline marketing strategies.

7. Develop strategies. Once the position is located on the product life cycle, strategy formulation begins. Table 8.1 illustrates the characteristics and

strategies that apply to different stages in the product life cycle. These

strategies should not be viewed as being absolutely firm, but they do rep-

resent the most widely accepted ideas in the marketing community.

Ways to Extend the Product Life Cycle

One of the marketing manager’s goals is to extend the product life cycle as

long as possible. By doing this, cash flow can be extended and greater long-

term profitability will result. There are several techniques that can be used to

accomplish this.

INCREASING SALES TO EXISTING CUSTOMERS. During the maturity stage of the product life cycle, the rate of sales growth begins to decrease and eventually

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applying the product life cycle 291

stage i stage ii stage iii stage iv

introduction growth maturity decline

characteristics

Sales Low Rapidly rising Peak Declining

Profits Negative Positive and High, starting Declining

increasing to decline

Cash flow Negligible Moderate High Low

Customers Innovators and Remaining early Remaining early Laggards

some early adopters and some majority and

adopters early majority late majority

Competitors Few increasing Many Declining in

in number number

and strength

strategies

Marketing Create trial Increase sales Increase profits Decrease market

objective and awareness. and maximize and maintain expenditures and

market share. market share. maximize short-

term profits.

Product Core product Minor product Add attributes Core product

with some changes and with positive and key

basic peripheral extensions. differentiation. attributes.

services.

Distribution Selective Becoming intensive Intensive Selective

Price Set initial price Price to penetrate Lower price to Reduce price to

based on costs market based on increase market maintain volume.

and estimated actual demand. share.

demand.

Promotion Create trial Build awareness Use to Reduce expendi-

and awareness and interest and differentiate tures and

through sales reduce sales among major focus on loyal

promotions. promotions. competitors. customers.

table 8.1 • Characteristics and Strategies for Stages of the Product Life Cycle.

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levels off because most of the potential users of the product have either been con-

verted or left the market. Under normal circumstances, it becomes very difficult

and expensive to identify potential new customers and convert them into buy-

ers. One way to increase sales and market share under these circumstances is to

sell more to existing customers. There are basically two alternatives: encourage

the customers to purchase more on each occasion, or encourage the customers to

purchase more frequently. In order to get a consumer to purchase more, some

hotels periodically offer one “free” night if the consumer purchases two or three

nights. Similarly, restaurants train waiters to “upsell” customers by suggesting

items like more expensive entrees, appetizers, wine, and dessert.

Another common method of increasing sales to existing customers is the

use of product bundling. Internet travel agents (e.g., Expedia.com and Trav-

elocity) form relationships with hotels, airlines, rental car companies, and

tourist attractions to offer vacation packages. This is also being done on air-

line Web sites, and Disney bundles its offerings in an attempt to increase con-

sumer spending. Travelers enjoy the convenience of one-stop shopping and

the lure of a price incentive for purchasing the bundle rather than each com-

ponent separately. Disney has expanded beyond the product-service offerings

of theme parks and hotels to include a line of cruise ships. This affords an

opportunity to sell travel packages that include several days at the theme parks

while staying in a Disney hotel, followed by a cruise on one of its Disney cruise

ships. Finally, hospitality and tourism firms get customers to purchase more

frequently with loyalty programs that reward heavy users with free products

and services in exchange for points.

INCREASING THE NUMBER OF USERS. Another strategy used to extend the product life cycle is to seek new users of the product. The goal is to increase

the size of the overall market by identifying those who have not previously

purchased the products or services. Several quick-service restaurant chains

have used this strategy very successfully. As the number of primary locations

for new stores decreased, these chains have sought additional locations where

they might attract new customers, such as kiosk locations within stores, shop-

ping malls, and gas stations along the highways. By expanding the definition

of suitable location, they have been able to increase the number of purchasers,

increase sales, and extend the product life cycle. Another example of this strat-

egy is when hotels sell memberships to local residents for their pools and fit-

ness centers in order to increase revenue by increasing the customer base.

FINDING NEW USES. Within the realm of product marketing, one of the ways product life cycles can be extended is to find new uses for products. For

example, aspirin is used to prevent heart attacks in addition to its use for

headaches, and baking soda is used to deodorize refrigerators in addition to

292 chapter 8 managing products and services

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its use in baking. In some cases, new uses for products are discovered and

marketed by the firm. However, in other instances, they are the result of

market feedback.

For example, many restaurants realize that it is relatively easy to run a

catering operation out of the same facility that is used to serve regular cus-

tomers. The catering operation uses the same equipment and adds little to the

fixed costs of operating the restaurant, but it brings in additional revenue that

can enhance the firm’s overall financial condition. Interestingly, a lot of restau-

rants didn’t explore this avenue until they received repeated inquiries regard-

ing catering services.

Pros and Cons of the Product Life Cycle

As with most concepts or theories, the product life cycle has its supporters and

its opponents. There has been a good deal of debate over the applicability and

usefulness of the concept in the real world. The following discussion presents

the pros and cons.

PROS. Supporters argue that firms that apply the concept correctly are able to identify the stage in which the organization or an individual product finds

itself and then use this knowledge to formulate better marketing plans. Once

a product’s position in the product life cycle is determined, firms are able to

consider the characteristics associated with the respective stage and use the

aforementioned strategies. This would lead to the correct mix of products and

services to improve the performance of the entire organization and allow the

firm to analyze trends in the product-service mix, as well as the impact that

this mix will have on short- and long-term financial performance. In addi-

tion, proponents argue that this will encourage firms to be more proactive in

recognizing changes in the environment and taking advantage of opportuni-

ties. It will also help them recognize potential threats and implement strate-

gies to avoid or minimize any negative impacts. Many products that are currently

in the maturity stage of the product life cycle have been there for some time

and have managed to stay profitable through product changes and extensions.

Successful marketing managers have learned the art of extending the prod-

uct life cycle by adapting to changes in the market and implementing timely

growth strategies.

CONS. The opponents of the product life cycle concept state their case with equal vigor. They contend that few products or services actually conform to

the shape of the curve illustrated in Figure 8.1. Rather, the curve may rise

and fall in any number of patterns, each unique to the product or service

applying the product life cycle 293

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itself. If managers believe that a product follows the normal life cycle curve,

the product’s demise may become a self-fulfilling prophecy. As industry sales

begin to decline, a firm may decide to reduce distribution and marketing

expenditures in conformance with the recommendations for decline stage

strategy. This may lead to the premature decline of the product with sub-

stantial consequences.

Opponents of the concept also claim that it is often difficult to determine

the exact stage in which a product lies. There are clearly no indicators to mark

the transition from one stage to another. It is possible that changes in indus-

try sales or firm sales could be the result of temporary conditions, and it may

be possible to rejuvenate the product and extend the product life cycle. A prod-

uct could remain in the maturity stage indefinitely if management is able to

continually reinvent it. The product life cycle is more of a descriptive tool than

a prescriptive tool. It cannot be used to forecast changes, because of the vari-

ous shapes and time frames associated with different products and industries.

Finally, opponents of the product life cycle concept indicate that some mar-

keting managers place too much faith in it. These individuals focus too much

attention on the product life cycle and forget about all the other environmental

factors that can influence the success of a product or service. This marketing

myopia or narrow-mindedness can cause firms to miss opportunities and not

take risks that could be advantageous in the long run. Finally, the product

life cycle can put too much emphasis on the development of new products to

the detriment of existing products. Managers are painfully aware that as prod-

ucts reach decline, they will be responsible for finding ways to replace the lost

revenues.

Whether you agree or disagree with the use of the product life cycle, it is

important to view it solely as a tool. Complete reliance on the product life

cycle as the basis for marketing management decisions would be unwise.

Equally unwise would be to totally ignore the sales trends that are the foun-

dation of the product life cycle. The product life cycle is best characterized as

a valuable tool for a marketing manager to use in analyzing past market behav-

iors and future marketing strategies.

OTHER PRODUCT CONCEPTS

This section presents two other concepts that should be discussed to provide a

thorough understanding of product management. These concepts are all inter-

related in that they are based on the management of the marketing mix and the

positioning of products in the marketplace. Firms change their product-service

294 chapter 8 managing products and services

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mixes over time to reflect changes in consumers’ tastes and lifestyles. The two

concepts in this section address the question of resource allocation as it relates

to the firm’s image and its mix of products and services.

Wheel of Retailing

The wheel of retailing is a concept that was originally used to describe the

evolution of department stores and other retail outlets. However, it can be

applied very easily to the hospitality and tourism industry. It is founded on

the notion that there is some type of impetus for retail firms that enter the

low end of the market with basic products and low prices to gravitate toward

the high end of the market (see Figure 8.2). This is accomplished by adding

value through new features and amenities and raising prices. Firms also look

to move to locations with more traffic and higher rents or real estate values.

Eventually, this continual upward movement of firms and their products pro-

vides an opportunity for new competitors to enter the market at the lower

end of the market. This repositioning can backfire and cause a firm to lose

sales and market share.

The retailing world and the hospitality industry are filled with examples

of how the wheel of retailing works. Sears was the original low-end depart-

ment store serving rural areas throughout the United States. Over time, Sears

increased its inventories of popular brand names and moved to shopping malls

and strip malls on major roads. As the prices at Sears continued to increase,

Kmart decided to start a new low-end operation. Sears lost a good deal of

market share and even attempted to roll back prices to return to its original

position, but it was too late. Surprisingly, Kmart followed in Sears’s footsteps

and added brand names and moved to more expensive locations. This opened

the door for Wal-Mart to occupy the low-end position, and the firm has

attained the highest market share in the industry, leaving both Sears and

other product concepts 295

Wheel of retailing

The evolution of an organization from a low-end provider to a high-end provider.

High end

Low end

figure 8.2 • The wheel of retailing.

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Kmart to question their strategies. In fact, Sears and Kmart eventually merged

in an attempt to remain competitive. Wal-Mart has not made the mistake of

moving up the wheel of retailing toward the high end and away from its

strengths. The hotel industry has demonstrated a similar pattern. Holiday Inn

and Howard Johnson’s were the original economy hotel chains. However,

both of these chains attempted to become more like the Marriott International

and Sheraton chains, which occupied positions in the middle to upper end of

the market with more amenities and higher prices. This vacated the low-end

position, which was eventually filled by other firms such as Red Roof Inn and

Days Inn. The economy segment has become one of the fastest-growing seg-

ments, attracting more and more competitors. Unfortunately, very few firms

are successful at recapturing a market once they abandon it.

One might wonder what compels companies to leave their comfortable

positions for the risk of new markets. One of the reasons for this phenome-

non is the allure of high prices and high profit margins. In the hotel indus-

try, the daily cost of servicing a room between guests ranges from around $15

to $50. At the same time, the average daily rate (ADR) paid for most hotel

rooms ranges from around $40 to $300. The additional amenities offered at

higher-priced properties do not substantially increase the variable costs of pro-

viding the service. This potential for increasing the profit margin is difficult

to ignore. However, hotel chains may underestimate the investment necessary

to obtain the expensive real estate and add restaurants and indoor pools. Also,

once a brand is identified in the minds of consumers, it is almost impossible

to change their perceptions.

The other reason that has been used to explain this phenomenon is the

prestige, or lack thereof, associated with a less expensive or limited service

hotel chain. Most managers and college graduates want to work for presti-

gious hotels such as the Four Seasons or the Ritz-Carlton rather than the econ-

omy or limited-service chains like Motel 6 or Econo Lodge. Managers either

consciously or subconsciously adapt the hotel to be more like the chains that

they aspire to, rather than exercise sound marketing strategies and planning.

There is a similar pattern in the foodservice industry, with companies like

Friendly’s trying to move up the chain to be more of a casual dining restau-

rant than a quick-service restaurant.

Resource Allocation Models

It is important for firms to view themselves as a portfolio of products that both

provide funds and need funds. Within the portfolio, some brands or items are

in industries or categories that show strong potential for future growth, whereas

296 chapter 8 managing products and services

Average daily rate (ADR)

Average rate paid for occupied hotel rooms on a daily basis.

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others don’t show the same potential. In addition, some of the brands or items

have strong positions in their industries or categories while others do not. These

brands or items can be referred to as strategic business units (SBUs) because

each is viewed as a separate entity with its own set of market conditions and

competitors. All of a firm’s SBUs will affect a firm’s cash flow by providing a

source of funds through revenues and using funds in the form of expenses to

produce the product and compete in the marketplace.

other product concepts 297

Howard Johnson hotels have expanded beyond the economy hotel line into the middle market for full-service hotels. Courtesy of Wyndham Worldwide.

Strategic business units (SBUs)

Brands or units that have their own sets of market conditions and competitors.

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A few variations of resource allocation models are similar in their matrix

approaches. The cells within the matrix are classified using the SBU’s ability

to act as a source of funds (e.g., relative market share or competitive position)

and its need for funds based on future growth potential (e.g., market growth

rate or industry attractiveness). This process of plotting SBUs and determin-

ing the best sources and uses for funds will aid an organization in allocating

its finite resources. The resource allocation process will be explained using the

Boston Consulting Group (BCG) matrix because it is the most common,

straightforward resource allocation model in marketing.

The BCG matrix is illustrated in Figure 8.3 with four cells based on two

axes. The horizontal axis is labeled relative market share and can be viewed as a

proxy for competitive position. Relative market share refers to a firm’s market

share relative to its largest competitor. The vertical axis is labeled market growth

rate and can be viewed as a proxy for industry attractiveness or future growth

potential. The market growth rate is usually based on average annual growth

rate over the last few years, depending on the age of the industry or category.

There are two levels, high and low, for each axis, resulting in four cells.

Two other factors are important in evaluating SBUs: the size of the circle

and the placement within the cell. The size of the circle representing each

SBU gives an indication as to the actual size of the unit measured in sales or

volume. This is important because some SBUs may generate a good deal of

revenue based on sheer volume but not look as attractive in terms of relative

market share and market growth rate. The SBU’s placement within the cell

is also important because the axes represent a continuous scale even though

298 chapter 8 managing products and services

Boston Consulting Group (BCG) matrix

Most common, straightforward resource allocation model used in marketing. The matrix contains four cells based on two axes. The horizontal axis is labeled relative market share and the vertical axis is labeled market growth rate. Each axis has two levels, high and low, resulting in four cells.

Relative market share

Relative market share refers to a firm’s market share relative to its largest competitor.

Market growth rate

The market growth rate is usually based on average annual growth rate over the last few years, depending on the age of the industry, or category, and can be viewed as a proxy for industry attractiveness, or future growth potential.

Star Question mark

Cash cow

High

Low

Dog

High

Relative Market Share

Market Growth

Rate

Low

figure 8.3 • The Boston Consulting Group Matrix. Reprinted from Long Range Planning, B. Hedley, “Strategy and the Business Portfolio,” p. 12, February 1977, with permission from Elsevier Science.

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there are only two labels. Two SBUs could be on opposite sides of the same

cell and should be viewed differently. The ensuing discussion will explain the

characteristics and marketing objectives associated with each of the four cells.

QUESTION MARKS. The SBUs in the question mark category contain prod- ucts and services that have low relative market shares in industries or cate-

gories with high market growth rates. This is a critical category for man-

agers because either question marks can improve their market share or the

growth rate in the industry could decline. At this point, these SBUs require

a good deal of cash to increase sales and build market share. However, with

limited available resources, not all question marks can be completely funded,

and choices have to be made. If a question mark does not receive adequate

funding, it is almost certain that its business position will not improve. Most

question marks provide little or no positive cash flow and must be supported

for growth or eliminated from the portfolio. SBUs in this category are often

represented with relatively new products in new markets, creating a risky

environment. For example, Darden Restaurants recently opened a new con-

cept called Seasons 52 in 2003. The new concept is positioned to serve people

who are health-conscious, a segment with good growth potential. However,

the concept has just started to penetrate the market and has relatively low

sales volume with only seven restaurants.

STARS. SBUs that are considered stars contain products with high relative market shares in industries or categories with high market growth rates. This

is the second best category for producing positive cash flows, and the objec-

tive is to build these products. The SBUs’ strong business positions and high

market shares provide good returns and become strong sources of funds for

the firm. However, they are in industries or categories that are experiencing

high market growth rates. This will attract many competitors and require a

high level of marketing expenditures in order for an SBU to compete and

maintain its business position. Therefore, these SBUs are normally self-sus-

taining in that they don’t require funds from other sources, but they aren’t

able to supply much in the way of excess funds for other SBUs. Olive Gar-

den is a Darden Restaurants concept that has enjoyed strong growth and good

market share over the past decade. The chain doubled sales from its incep-

tion in 1982 to 1994. It is the largest casual, full-service Italian restaurant in

the United States and same restaurant sales have increased for 50 consecutive

quarters. The increase in same store sales in 2006 was 6 percent with sales per

restaurant of $4.6 million (all figures and dates were obtained from Darden

Restaurants, Inc.’s Web site, http://www.darden.com/).

CASH COWS. The SBUs in the category of cash cows contain products with high relative market shares in industries or categories with low market growth

other product concepts 299

Question mark

Question marks represent a specific business unit in the Boston Consulting Group Matrix. This category contains products and services that have low relative market shares in industries with high market growth rates. This is a critical category for managers because question marks can either improve their market share or the growth rate in the industry could decline.

Stars

Stars represent a specific business unit in the Boston Consulting Group Matrix. This category contains products with high relative market shares in industries with high market growth rates.

Cash cows

Cash cows represent a specific business unit in the Boston Consulting Group Matrix. This category contains products with high relative market shares in industries with low market growth rates. Products or divisions that are cash cows are the best source for positive cash flows because they have strong sales in established markets.

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rates. Products or divisions that are cash cows are the best source for positive

cash flows because they have strong sales in established markets. There is not

much growth potential, and the risk of new competitors is low. Cash cows

are used as sources of funds for the SBUs in the other categories, especially

question marks. However, it is important that as much of the cash flow as

necessary to maintain or hold the market shares for cash cows is kept within

the division or SBU. They are the foundation of the firm’s portfolio, making

it possible to develop new products and take chances with other existing prod-

ucts. Red Lobster is in a saturated market with low growth potential, how-

ever, this Darden Restaurants concept still provides good cash flow. The chain

was started in 1968 and a 3 percent increase in same restaurant sales in 2006,

with an average $2.5 million in sales per restaurant.

DOGS. SBUs that are considered dogs contain products with low relative market shares in industries or categories with low market growth rates. Dogs

are the least attractive category in the matrix. They generate low or negative

cash flows because of their poor business positions and the low rate of growth

in their markets. These SBUs are drains on the firm’s resources and should

be phased out or divested. Marketing expenditures should be decreased unless

there is some potential for repositioning the product. Most firms will try to

sell these divisions and products to companies that are better equipped to mar-

ket them while they are still viable. Darden Restaurants has two concepts that

aren’t meeting their performance expectations. The restaurant company is

working on repositioning the Smokey Bones concept that had a decrease in

same store sales for the first half of 2007. Bahama Breeze showed a slight

increase in same store sales for the first half of 2007, but there are only 23

restaurants in the chain and current financial performance is an issue.

Menu Sales Mix Analysis

Numerous methods can be used to evaluate menu effectiveness. The selection

of one method over another is usually a function of time and money. The sim-

plest method used to evaluate menu effectiveness is to count the number of

times that each item is sold. This method is commonly referred to as menu

sales mix analysis. In most food service operations today, this information is

readily available from the detailed tape printout and spreadsheet files pro-

duced by point-of-sale (POS) systems. Based on this information, manage-

ment can add or delete menu items or change the merchandising focus of the

menu. Another common approach is a comparison with menu census data.

Menu census data allow management to compare sales figures and sales trends

with regional and national data.

300 chapter 8 managing products and services

Dogs

Dogs represent a specific business unit in the Boston Consulting Group Matrix. This category contains products with low relative market shares in industries with low market growth rates. Dogs are the least attractive category in the matrix.

Menu sales mix analysis

The simplest method used to evaluate menu effectiveness is to count the number of times that each item is sold.

Point-of-sale systems

A computerized system for recording sales and transactions.

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A more sophisticated approach, referred to as menu engineering, would

be to perform an in-depth analysis of the menu items, including their sales

and costs. In the case of a menu, each item is treated as its own strategic busi-

ness unit. The two axes are item contribution margin in dollars and the num-

ber sold of each item. Items with larger contribution margins would be con-

sidered good growth prospects that warrant more marketing effort and

resources. Items with larger sales figures would be considered high-share

items and a good source of revenue. The axes would be divided to form four

quadrants using the average contribution margin and the average number

sold (see Figure 8.4).

Each menu item would be plotted on the matrix based on its contribution

margin and the number sold during the time period in question. Based on

these two criteria, menu items are classified as dogs, question marks, stars, or

cash cows. Each quadrant has some baseline strategies that can be used for

the menu items that are positioned in it. Once again, this is similar to the

Boston Consulting Group’s growth-share matrix. There are other variations

of this methodology, but this one was chosen because it is consistent with the

approach used in product management. The important thing to remember is

that any approach should take into account food costs, food prices, and sales

volume. In this case, the contribution margin is the difference between menu

price and food cost.

The menu items classified as dogs have low sales volumes and low contri-

bution margins. They don’t warrant much attention and should be placed in

less desirable locations on the menu. In an attempt to increase the contribution

margin, management can consider raising the prices on these items and/or low-

ering the food costs of preparing the items. In the long run, management should

other product concepts 301

Menu engineering

Analysis of menu items based on cost, volume, and profitability.

Stars Question marks

Average number sold

Average contribution margin

Cash cows

High

Low

Dogs

High

Item Contribution

Margin ($)

Number Sold

Low

figure 8.4 • Sales mix analysis matrix.

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consider finding a substitute for this item. The substitute could be an item that

is already on the menu that can be promoted, or a new item that can be added

to the menu to take its place. If the contribution margin cannot be improved,

then the item may need to be removed from the menu.

The menu items classified as question marks have low sales volumes and

high contribution margins. They have the potential for growth and should

receive management’s attention. Given the high contribution margin, an

increase in sales volume would greatly benefit the restaurant. These items

should be placed in prime locations on the menu and be strongly promoted.

For example, waiters could be instructed to focus on them in their suggestive

selling, and the items could be highlighted on table tents and other in-store

promotions. Other strategies that could be employed include making one a

signature item, or offering special deals to create awareness and trial.

The menu items classified as stars have high sales volumes and high con-

tribution margins. They should occupy prime locations on the menu and be

a major focus of promotional efforts. These menu items should be promoted

through in-store displays and suggestive-selling efforts. It is important to

maintain current levels of quality and price. Any significant changes could

hurt the sales of these items, which would impact greatly on the profitability

of the restaurant. These menu items are often signature items for restaurants

and should be carefully managed until newer items (i.e., question marks) can

be phased in.

The menu items classified as cash cows have high sales volumes and low

contribution margins. They tend to be menu items that have been around for

a while, and in many cases, they are used as loss leaders because they attract

customers and are often signature items (e.g., Burger King’s Whopper).

Management should experiment with price increases or ways to decrease food

costs. However, if customers are sensitive to changes in price, it is advisable

to focus more on costs. For example, management could decide to substitute

less expensive ingredients or serve smaller portions, thereby increasing the

contribution margin. In the long run, it is possible to find different items that

are similar and offer larger contribution margins. Over time, these menu items

can be moved to less prominent locations on the menu.

Resource Allocation Models and the Product Life Cycle

There is a relationship between resource allocation models such as the BCG

matrix and the product life cycle. The two dimensions in the product life

cycle are time and annual sales. The stages are based on the rate of sales

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growth over time. The two dimensions in resource allocation models are

competitive position or market share and industry attractiveness or market

growth rate. The underlying premise of the resource allocation models is that

products evolve from question marks into stars and then into cash cows.

When the market stops growing and/or the product loses market share, it

will move into the dog category, where it is eventually divested. This is sim-

ilar to a product’s movement from introduction (question mark) through a

growth stage (star) to maturity (cash cow) and eventually into decline (dog).

In addition to the similarities in evolution or movement through the matrix,

the two concepts share similar characteristics and strategies. Question marks

are often new products, like those found in the introduction stage having

negative cash flows but good growth potential. Stars experience rapid growth

and start to realize positive cash flows, like products in the growth stage.

Cash cows have large sales volumes and market shares, resulting in large

cash flows, like the products that survive the maturity stage. Finally, dogs

have low market shares and decreasing cash flows, just like products in the

decline stage.

Marketing strategies are also similar. Marketing expenditures are great-

est for question marks and stars, like products in the introduction and growth

stages. Money is spent selectively to hold market share during the maturity

phase and for cash cows, whereas marketing expenditures are very low for

dogs and products in decline. Finally, both concepts can overemphasize the

importance of new product development to the detriment of existing prod-

ucts. Many companies have survived with cash cows and products in the matu-

rity stage over a long period of time. Many local or regional food chains, airlines,

and large hotel chains such as Sheraton and Holiday Inn have survived with

minor product extensions over their respective life cycles.

MANAGING IN THE SERVICE ENVIRONMENT

As discussed in Chapter 2, certain characteristics are associated with services

that distinguish them from tangible products. Most of these characteristics stem

from the fact that services are intangible. In other words, services cannot be

held, inspected before purchase, or inventoried. As a result, the consumer is

actually part of the production process, making it difficult to maintain the

consistency and efficiency that a firm can experience in the manufacture of tan-

gible products.

managing in the service environment 303

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Conflicts between Operations and Marketing

Within any service-based organization there are bound to be conflicts between

those responsible for sales and marketing and those with operational respon-

sibilities. In virtually every hotel, those working in operating departments

could share stories of how sales and marketing personnel have made promises

to clients that were impossible to fulfill to the satisfaction of the client. For

example, hotel salespeople will sometimes price meals for a banquet below

the benchmark set by the catering department in order to book a group into

the hotel. Similarly, sales and marketing personnel could share stories of how

the operating personnel were inflexible and cost them business. One of the

best ways to keep the conflicts to a minimum is to try to look at things from

the other person’s perspective.

Sales and marketing personnel tend to view the world from a revenue

perspective. That is, everything that they attempt to do is targeted toward

increasing revenue. Every new group that is booked into the hotel is seen

as additional revenue. If a promotion is developed to increase the number

of covers served in the dining room, the goal is to increase revenue. From

this perspective, it is best to have many options and flexibility in providing

a service.

Operations personnel, on the other hand, tend to view the world from a

cost containment perspective. All efforts are focused on increasing efficiency

and reducing costs to the lowest level that will keep the operation running

smoothly. The main objective of production and operations is to standardize

as much as possible and lower the cost per unit of providing a service. Both

sales and marketing and operations want to increase profits, but they focus

on different components of the profit equation.

When it comes to offering expanded products and services as a means of

gaining a competitive advantage, the sales and marketing staff will be eager

to offer many alternatives. However, they may not stop to think how the new

products and services will integrate with those that already exist. Operations

personnel will tend to take a very conservative point of view, trying to keep

the operation as simple and straightforward as possible. Some of the conflict

between the two functions stems from the way each is evaluated. A salesper-

son’s performance is based on generating revenue and meeting quotas,

whereas people in operations are rewarded for lowering costs and maintain-

ing quality control. There isn’t much incentive for the two departments to

work together, even though a joint effort would benefit the company as a

whole.

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Christopher Lovelock recommends five ways that managers can be per-

suaded to build bridges between the functional areas:2

1. Transfer managers across functional areas. In other words, have them work in different departments so that they gain an understanding of the

nuances of each area.

2. Create cross-functional teams. Top management’s goal should be to build on the energy of managers who have been working in different depart-

ments instead of letting their energies evolve into internal disputes.

3. Cross-train associates to perform a broader variety of tasks. Moving hourly associates across departmental lines can serve to break down barriers and

build relationships that can help the departments work together more

effectively.

4. Delegate authority to individual units. Historically, operational managers in the hospitality industry have focused on cost containment. By transform-

ing cost centers into profit centers and empowering managers and associates

to take greater responsibility for both revenue generation and spending deci-

sions, managers and associates focus more on the big picture.

5. Institute gain-sharing programs. Allowing managers and associates to share in the results from improved profits provides an incentive to con-

tinue to seek better ways to operate the business.

Managing Supply and Demand

Managing supply and demand in a service organization such as a hotel or

restaurant is very difficult. Demand for services comes in waves and often is

not as consistent as one would like. The demand may be seasonal, as with a

resort hotel, or it may fluctuate by time of day, as with restaurants. It might

also fluctuate by day of the week, as is the case with business-oriented hotels

that are busy Monday through Thursday but quite slow on Friday through

Sunday. Managing the fluctuations in demand and the corresponding supply

is perhaps one of management’s greatest challenges.

Two calculations can be used to evaluate the extent to which the supply

and demand is being successfully managed: asset revenue generating efficiency

(ARGE) and revenue per available room (REVPAR). ARGE evaluates the

relationship between actual revenue and maximum potential revenue. For

example, within a hotel operation, ARGE takes into account the occupancy

managing in the service environment 305

Asset revenue generating efficiency (ARGE)

ARGE evaluates the relationship between actual revenue and maximum potential revenue. For example, within a hotel operation, the ARGE will examine the occupancy percentage and the average daily rate to determine the extent to which the revenue potential is being realized.

Revenue per available room (REVPAR)

REVPAR is calculated by multiplying the average daily rate by the occupancy percentage.

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percentage and the average daily rate to determine the extent to which the

revenue potential is being realized. Suppose that a hotel has 400 available

rooms each day with a rack rate of $100. If all of the rooms were sold each

day at this maximum rate, the maximum daily revenue would be $40,000.

However, it is rare that a hotel would be able to do this consistently. Assume

that over a period of time, say, a month, the hotel achieved a 68 percent occu-

pancy rate and had an average daily rate of $75. This means that on average,

272 rooms were sold each day at an average daily room rate of $75, resulting

in total revenue of $20,400. Next, the total daily revenue is divided by the

maximum potential daily revenue of $40,000, resulting in an ARGE of 51 per-

cent [(20,400/40,000) � 100]. The ARGE is useful as an evaluation tool for

sales and marketing personnel because it measures performance against poten-

tial revenue at full capacity.

REVPAR, or revenue per available room, is calculated by multiplying the

average daily rate by the occupancy percentage. For example, if a hotel has an

average daily rate of $85 and is running an occupancy percentage of 75 percent,

then the REVPAR would be $85 � 0.75 � $63.75. This figure, like ARGE,

accounts for the amount of unused capacity. An alternative calculation would

be to multiply the average daily rate by the number of occupied rooms to get

the total room revenue, and then divide total room revenue by the total num-

ber of rooms in the hotel to get the REVPAR. The main difference between

ARGE and REVPAR is that REVPAR does not compare actual revenue to

maximum potential revenue. However, REVPAR does give a measure that

can be tracked over time to assess the hotel’s performance. Higher values of

REVPAR would denote more effective use of available resources. One of the

major issues facing service industries such as hospitality and tourism is the

inability to inventory the product. Unused capacity is lost forever when there

are empty hotel rooms, tables in restaurants, or seats on airplanes. The fol-

lowing strategies can be used to manage supply and demand.

MODIFY PRICE. Prices can be used to transfer demand from peak periods to nonpeak periods. Many restaurants in tourist areas use “early bird” prices to

encourage price-sensitive consumers, such as families and senior citizens, to

eat earlier. Restaurants are able to offer a limited selection of meals at lower

prices, enabling them to purchase and prepare in larger, more efficient vol-

umes. This shifts the demand to a period when there are empty tables and

the customers can be easily accommodated. This results in less waiting and

fewer people turned away during the peak period between 7 P.M. and 10 P.M.

Firms can also raise prices during peak demand periods in an effort to shift

demand to nonpeak periods. Hotels and fine-dining restaurants use this prac-

tice to maximize the potential revenue from limited capacity.

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DEVELOP PROGRAMS TO BOOST NONPEAK DEMAND PERIODS. When the fast-food companies first began operation, they were open only for lunch

and dinner. They did not offer breakfast. After many years of operation, most

began to develop breakfast programs that resulted in a very significant increase

in total revenue. This represents an example of how fast-food restaurants stim-

ulated demand during a nonpeak period. In the case of fast-food companies

that did not have any type of breakfast menu, they were stimulating business

during a zero-volume period. Business-oriented hotels adopt the same sort of

strategy when they offer special weekend rates and packages to boost occu-

pancy during low-demand weekends.

SHIFT DEMAND THROUGH RESERVATIONS. All of the major hotel chains maintain toll-free telephone reservation services. If demand for a particu-

lar location exceeds capacity, rather than losing the business they will

simply offer to make a reservation at a hotel that is close to the desired

location. If a hotel company operates multiple brands and the hotel at which

the guest is seeking a reservation is full, the reservations agent will offer

to make a reservation at a nearby hotel that is owned, franchised, or oper-

ated by the same company. For example, if a customer wants to make a

reservation at a Quality Inn and all of the rooms are reserved, the reser-

vations agent would try to make a reservation at a nearby Comfort Inn or

a Sleep Inn because they are part of the same organization. In this way, the

company still realizes the revenue, while providing a valuable service to

the guest.

INCREASE PERSONNEL EFFICIENCY. By using part-time employees and cross-training employees to perform two or more jobs, management can

improve employee productivity. Restaurants can decrease the time required

to take orders and prepare meals, enabling them to serve more customers in

the same time period.

INCREASE CONSUMER INVOLVEMENT IN SELF-SERVICE ASPECTS OF THE SERVICE DELIVERY SYSTEM. Service firms are able to decrease labor costs and increase supply by having consumers become more involved in the

service delivery process. A common trend in restaurants is to offer buffet-

style service. In fact, this is one of the methods used by many of the food

service operations at Epcot Center in Disney World to increase capacity,

revenues, and profits. The airline industry has also tried to reduce costs by

allowing customers to make their own reservations and seating assignments

via the Internet. In some cases, customers are actually given bonus miles for

their frequent flyer accounts when they use the airline’s Web site to make

reservations.

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Summary of Chapter Objectives

The product–service mix is an important component of a firm’s marketing

program. The other strategies (price, promotion, and distribution) are used to

provide further assistance in positioning the brand in conjunction with the

product–service mix. All of the strategies are based on the customers’ wants

and needs and the trade-offs that are necessary to offer a competitive prod-

uct. When managing a product or service, it is necessary to consider all of the

product levels: the core product, the facilitating products, the supporting prod-

ucts, and the augmented product.

The product life cycle can be used to develop marketing strategies that

are appropriate for the product or service throughout its useful life. Products

evolve from introduction through growth into maturity and eventually

decline. History shows us that certain marketing strategies or actions are more

appropriate in certain stages in the life cycle. The pros and cons of the prod-

uct life cycle were presented, as well as ways to extend the product life cycle

and the use of the life cycle concept for tourist areas. The wheel-of-retailing

concept was introduced to explain why firms change their product–service

mixes over time and make room for new competitors at the low end.

Resource allocation models were introduced, and the Boston Consulting

Group (BCG) matrix was presented in some detail. These types of models are

useful to firms in establishing marketing budgets and developing marketing

strategies in an attempt to achieve the firms’ overall goals. Each strategic busi-

ness unit has a unique set of conditions and competitors that must be moni-

tored so that the firm can analyze cash flow. Resource allocation models can

be used by restaurants in menu sales mix analysis and menu engineering.

Finally, some issues unique to the managing of services were discussed in

this chapter. Most of the problems stem from the fact that services are intan-

gible and cannot be inventoried. Therefore, it is crucial that firms concentrate

on managing supply and demand so they can maximize potential revenue.

Customers are an integral part of the service delivery process and should be

included in the product–service mix strategy.

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w Key Terms and Concepts

Asset revenue generating efficiency (ARGE)

Augmented product

Average daily rate (ADR)

Boston Consulting Group (BCG) matrix

Cash cows

Core product

Decline stage

Dogs

Economies of scale

Facilitating products

Growth stage

Introduction stage

Market growth rate

Marketing strategy

Maturity stage

Menu engineering

Menu sales mix analysis

Peripheral services

Point-of-sales systems

Product levels

Product life cycle

Question marks

Relative market share

Resource allocation models

Revenue per available room (REVPAR)

Stars

Strategic business units (SBUs)

Supporting products

Wheel of retailing

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Questions for Review and Discussion

1. What are the four levels of a product? How can peripheral services be used to gain a competitive advantage?

2. What are the stages of the product life cycle? What are the characteristics of each stage?

3. What do you see as the advantages and disadvantages of using the product life cycle as a marketing tool?

4. How should a business go about developing a strategy for various stages in the product life cycle? What techniques are most appropriate for the

various stages?

5. What are some of the ways to extend the product life cycle? Of these techniques, which one do you think is most useful? Why?

6. What is the wheel of retailing? Does it apply to the hospitality industry?

7. What is menu sales mix analysis?

8. What are Lovelock’s recommendations for reducing the conflicts between sales and operations?

9. What are the methods for managing supply and demand? Which methods are capable of increasing capacity for hospitality firms?

10. What are resource allocation models? How are they related to the product life cycle?

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w Notes 1 Jeff Higley, “The Name Game,” Hotel & Motel Management (February 1, 1999), p. 36.

2 Christopher H. Lovelock, Product Plus: How Product � Service � Competitive Advantage (New York:

McGraw-Hill, 1994), pp. 351–352.

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Case Study Starbucks Coffee

T he following quote is from the Starbucks Coffee Web site (www.

Starbucks.com) and it describes its current business. The information

regarding the number of units in operation over Starbucks Coffee’s

life cycle was taken from the “Timeline” provided on the Web site.

“Starbucks purchases and roasts high-quality whole bean coffees and sells

them along with fresh, rich-brewed, Italian style espresso beverages, a variety

of pastries and confections, and coffee-related accessories and equipment—

primarily through its company-operated retail stores. In addition to sales

through our company-operated retail stores, Starbucks sells whole bean cof-

fees through a specialty sales group and supermarkets. Additionally, Starbucks

produces and sells bottled Frappuccino® coffee drink and a line of premium

ice creams through its joint venture partnerships and offers a line of innova-

tive premium teas produced by its wholly owned subsidiary, Tazo Tea Com-

pany. The Company’s objective is to establish Starbucks as the most recog-

nized and respected brand in the world. The following table contains the

year-end number of units in the Starbucks chain since 1987.

Year Units

1987 17

1988 33

1989 55

1990 84

1991 116

1992 165

1993 272

1994 425

1995 677

1996 1015

1997 1412

1998 1886

1999 2498

2000 3501

2001 4709

2002 5886

2003 7225

2004 8569

2005 10241

2006 12440

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Case Study Questions and Issues

1. In what stage of the product life cycle was Starbucks brand as of 2006? Explain your answer.

2. What product category would describe the Starbucks brand? What other companies would you consider direct and indirect competitors for

Starbucks, and why?

3. In 2008, Starbucks announced plans to close over 600 of its stores, most of which were opened in 2006. What led to this decision?

4. What future strategies would you suggest for the Starbucks brand?

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Courtesy of Mobile Bay CVB.

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