BIS/221 Strategy and Positioning Analysis Part 1
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university_of_pheonix_text_book.docx
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Developing New Products and Services |
LEARNING OBJECTIVES
After reading this chapter you should be able to:
LO 10-1Recognize the various terms that pertain to products and services.
LO 10-2Identify the ways in which consumer and business products and services can be classified.
LO 10-3Explain the significance of “newness” in new products and services as it relates to the degree of consumer learning involved.
LO 10-4Describe the factors contributing to the success or failure of a new product or service.
LO 10-5Explain the purposes of each step of the new-product process.
APPLE: THE WORLD-CLASS NEW-PRODUCT MACHINE
The stage in front of an auditorium was empty except for a chair, a table, and a huge screen with a large white logo. Then, in walked a legend ready for his magic show in his black mock turtleneck, jeans, and gray New Balance sneakers.
Apple’s Innovation Machine
The legend, of course, was Steve Jobs (opposite page, at left), co-founder and former chairman of the board of Apple Inc., who died in October 2011. Advertising Age anointed Steve Jobs as Marketer of the Decade. Fortunerated Apple as the world’s most-admired company, while Bloomberg Businessweek has perennially identified Apple as the world’s most innovative company. The magic shows Jobs orchestrated over the years introduced many to Apple’s marketchanging innovations, such as the:
•Apple II—the first commercial personal computer (1977).
•Macintosh—the first personal computer (PC) with a mouse and a graphical user interface (1984).
•iPod—the first and most successful MP3 music player (2001).
•iPhone—the world’s best multitouch smartphone and media player with almost one million apps (2007).
•iPad (2010) and iPad mini (2012)—the thin tablet devices that allow users to read books, newspapers, magazines, and even textbooks!
•Mac Pro—the innovative black cylinder that will be the fastest desktop PC on the planet (2013)!
Steve Jobs’s innovations revolutionized six industries: personal computing, digitally animated movies (when he was CEO of Pixar), music, smartphones, tablet computing, and digital publishing.1 Jobs even designed and holds the patent on the staircase seen in major Apple retail stores. He said, “You want that stairway so people believe they’re in someplace magical.”2
When Steve Jobs named Tim Cook (opposite page, at right) to be Apple’s chief executive officer, his charge to Cook was simple: “Just do what’s right.” And under Cook, Apple has continued to deliver record sales and profits. However, as this chapter reveals, developing successful new products is difficult. Tim Cook’s challenge as the CEO of Apple will be to market new innovations to drive the company’s future growth.3
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QR 10-1
Apple iPad Ad
iCloud: Where the Digital Lifestyle Is Heading
Because many consumers now use multiple devices (smartphones like iPhone, PCs like iMac, and tablet devices like iPad), all of them need a way to share the music, photos, videos, files, and apps that reside on any one device. Enter iCloud (opposite page), “which will now be the center of your digital life,” as Steve Jobs explained in mid-2011. “iCloud stores all your content and wirelessly pushes any changes or purchases from one device automatically [up to the ‘cloud’ and then] down to all your other devices. Consumers won’t have to worry about syncing their devices any longer to transfer their data. With iCloud, it will just work!”4 Welcome to cloud computing, which involves moving the data and processing tasks normally hosted on your own device onto a remote data center server accessible via the Internet or Wi-Fi.5
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The life of an organization depends on how it conceives, produces, and markets new products (goods, services, and ideas), the topic of this chapter. Many examples involve small businesses facing the difficult task of launching a successful start-up. Chapter 11 discusses the process of managing existing products, services, and brands.
WHAT ARE PRODUCTS AND SERVICES?
The essence of marketing is in developing products and services to meet buyer needs. A product is a good, service, or idea consisting of a bundle of tangible and intangible attributes that satisfies consumers’ needs and is received in exchange for money or something else of value. Let’s clarify the meanings of goods, services, and ideas.
LO 10-1Recognize the various terms that pertain to products and services.
A Look at Goods, Services, and Ideas
A good has tangible attributes that a consumer’s five senses can perceive. For example, Apple’s iPad can be touched and its features can be seen and heard. A good also may have intangible attributes consisting of its delivery or warranties and embody more abstract concepts, such as becoming healthier or wealthier. Goods also can be divided into nondurable goods and durable goods. A nondurable good is an item consumed in one or a few uses, such as food products and fuel. A durable good is one that usually lasts over many uses, such as appliances, cars, and smartphones. This classification method also provides direction for marketing actions. For example, nondurable goods, such as Wrigley’s gum, rely heavily on consumer advertising. In contrast, costly durable goods, such as cars, generally emphasize personal selling.
Services are intangible activities or benefits that an organization provides to satisfy consumers’ needs in exchange for money or something else of value. Services have become a significant part of the U.S. economy, reaching almost 50 percent of its gross domestic product.6 Hence, a product may be the breakfast cereal you eat, whereas a service may be a tax return an accountant fills out for you.
Finally, in marketing, an idea is a thought that leads to a product or action, such as a concept for a new invention or getting people out to vote.
Throughout this book, product generally includes not only physical goods but services and ideas as well. When product is used in its narrower meaning of “goods,” it should be clear from the example or sentence.
Nondurable goods like chewing gum are easily consumed and rely on consumer advertising.
LO 10-2Identify the ways in which consumer and business products and services can be classified.
Classifying Products
Two broad categories of products widely used in marketing relate to the type of user. Consumer products are products purchased by the ultimate consumer, whereas business products (also called B2B products or industrial products) are products organizations buy that assist in providing other products for resale. Some products can be considered both consumer and business items. For example, an Apple iMac computer can be sold to consumers for personal use or to business firms for office use. Each classification results in different marketing actions. Viewed as a consumer product, the iMac would be sold through Apple’s retail stores or directly from its online store. As a business product, an Apple salesperson might contact a firm’s purchasing department directly and offer discounts for large volume purchases.
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FIGURE 10–1
How a consumer product is classified significantly affects which products consumers buy and the marketing strategies used.
Consumer Products The four types of consumer products shown in Figure 10–1 differ in terms of (1) the effort the consumer spends on the decision, (2) the attributes used in making the purchase decision, and (3) the frequency of purchase. Convenience products are items that the consumer purchases frequently, conveniently, and with a minimum of shopping effort. Shopping products are items for which the consumer compares several alternatives on criteria such as price, quality, or style. Specialty products are items that the consumer makes a special effort to search out and buy. Unsought products are items that the consumer does not know about or knows about but does not initially want.
Figure 10–1 shows how each type of consumer product stresses different marketing mix actions, degrees of brand loyalty, and shopping effort. But how a consumer product is classified depends on the individual. One woman may view a camera as a shopping product and visit several stores before deciding on a brand, whereas her friend may view a camera as a specialty product and make a special effort to buy only a Nikon.
Business Products A major characteristic of business products is that their sales are often the result of derived demand; that is, sales of business products frequently result (or are derived) from the sale of consumer products. For example, as consumer demand for Ford cars (a consumer product) increases, the company may increase its demand for paint spraying equipment (a business product).
Business products may be classified as components or support products. Components are items that become part of the final product. These include raw materials such as lumber, as well as assemblies such as a Ford car engine. Support products are items used to assist in producing other products and services. These include:
•Installations, such as buildings and fixed equipment.
•Accessory equipment, such as tools and office equipment.
•Supplies, such as stationery, paper clips, and brooms.
•Industrial services, such as maintenance, repair, and legal services.
Strategies to market business products reflect both the complexities of the product involved (paper clips versus private jets) and the buy-class situations discussed in Chapter 6.
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Classifying Services
Services can be classified according to whether they are delivered by (1) people or equipment, (2) business firms or nonprofit organizations, or (3) government agencies. These classifications are more thoroughly discussed in Chapter 12.
Product Classes, Forms, Items, Lines, and Mixes
Most organizations offer a range of products and services to consumers. Each set of offerings can be categorized according to the product class or industry to which they belong, like the iPad, which is classified as a tablet device. Products can exist in various product forms within a product class (see Chapters 2 and 11). A product item is a specific product that has a unique brand, size, or price. For example, Ultra Downy softener for clothes comes in different forms (liquid for the washer and sheets for the dryer) and load sizes (40, 60, etc.). Each of the different product items represents a separate stock keeping unit (SKU), which is a unique identification number that defines an item for ordering or inventory purposes.
QR 10-2
Crapola Video
A product line is a group of product or service items that are closely related because they satisfy a class of needs, are used together, are sold to the same customer group, are distributed through the same outlets, or fall within a given price range. Nike’s product lines include shoes and clothing, whereas the Mayo Clinic’s service lines consist of inpatient hospital care and outpatient physician services. Each product line has its own marketing strategy.
The “Crapola Granola” product line started as an edgy party joke from Brian and Andrea Strom, owners of tiny Brainstorm Bakery. The dried CRanberries and APples granOLA—hence the “Crapola” name—also contains nuts and five organic grains sweetened with maple syrup and honey. Its package promises that Crapola “Makes Even Weird People Regular.”
What company cheerfully tells Its customers to “Have a crappy day”? Read the text to find out about this “tasty” offering!
Mentioned on TV by Jay Leno, Crapola is sold in retail outlets in the Midwest, California, and Oregon as well as online at www.crapola.us. The Stroms have a strategy of developing Crapola into a broader product line. Currently, they offer two other recipes: “Number Two” and “Red, White, and Blueberry.” These product line extensions enable both consumers and retailers to simplify their buying decisions. So if a family has a good experience with Crapola, it might buy another product in the line. With a more extensive product line, the Stroms may manage to obtain distribution and shelf space in supermarket chains, which strive to increase efficiencies by dealing with fewer suppliers.7
Many firms offer a product mix , which consists of all of the product lines offered by an organization. For example, Cray Inc. has a small product mix of three product lines (supercomputers, storage systems, and a “data appliance”) that are sold mostly to governments and large businesses. Procter & Gamble, however, has a large product mix that includes product lines such as beauty and grooming (Crest toothpaste and Gillette razors) and household care (Downy fabric softener, Tide detergent, and Pampers diapers).
learning review
10-1. What are the four main types of consumer products?
10-2. What is the difference between a product line and a product mix?
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Marketing Matters |
customer value |
Feature Bloat: Geek Squad to the Rescue!
Adding more features to a product to satisfy more consumers seems like a no-brainer strategy for success. Right?
Feature Bloat
In fact, most marketing research with potential buyers of a product shows that while they say they want more features, in actuality they are overwhelmed with the mind-boggling complexity—or “feature bloat”—of some new products.
Computers pose a special problem for home users because there’s no in-house technical assistance like that existing in large organizations. Ever call the manufacturer’s toll-free “help” line? One survey showed that 29 percent of the callers swore at the customer service representative and 21 percent just screamed.
Geek Squad to the Rescue
Computer feature bloat has given rise to what TV’s 60 Minutes says is “the multibillion-dollar service industry populated by the very people who used to be shunned in the high school cafeteria: Geeks like Robert Stephens!”
More than a decade ago he turned his geekiness into the Geek Squad—a group of technically savvy people who can fix almost any computer problem.
“The biggest complaint about tech support people is rude, egotistical behavior,” says Stephens. So he launched the Geek Squad to show some friendly humility by having team members work their wizardry while:
1.Showing genuine concern to customers.
2.Dressing in geeky white shirts, black clip-on ties, and white socks, a “uniform” borrowed from NASA engineers.
3.Driving to customer homes or offices in black-and-white VW “geekmobiles.”
Do customers appreciate the 20,000-person Geek Squad, now owned by Best Buy? Robert Stephens answers by explaining, “People will say, ‘They saved me … they saved my data.’” This includes countless college students working on their papers or theses with data lost somewhere in their computers—“data they promised themselves they’d back up next week.”
See the video case that concludes Chapter 3 for more on the Geek Squad.
NEW PRODUCTS AND WHY THEY SUCCEED OR FAIL
New products are the lifeblood of a company and keep it growing, but the financial risks can be large. Before discussing how new products reach the market, we’ll begin by looking at what a new product is.
LO 10-3Explain the significance of “newness” in new products and services as it relates to the degree of consumer learning involved.
What Is a New Product?
The term new is difficult to define. Is Sony’s PlayStation 4 new when there is already a PlayStation 3? Perhaps—because the PS4, Nintendo’s Wii U, and Microsoft’s new Xbox One will all position their consoles as entertainment “hubs” rather than just game consoles.8 What does new mean for new-product marketing? Newness from several points of view are discussed next.
Newness Compared with Existing Products If a product is functionally different from existing products, it can be defined as new. Sometimes this newness is revolutionary and creates a whole new industry, as in the case of the Apple II computer. At other times more features are added to an existing product to try to appeal to more customers. And as HDTVs, smartphones, and tablet devices become more sophisticated, consumers’ lives get far more complicated. This proliferation of extra features—sometimes called “feature bloat”—overwhelms many consumers. The Marketing Matters box describes how founder Robert Stephens launched his Geek Squad to address the rise of feature bloat.9
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FIGURE 10–2
The degree of “newness” in a new product affects the amount of learning effort consumers must exert to use the product and the resulting marketing strategy.
Newness from the Consumer’s Perspective A second way to define new products is in terms of their effects on consumption. This approach classifies new products according to the degree of learning required by the consumer, as shown in Figure 10–2.
With a continuous innovation, consumers don’t need to learn new behaviors. Toothpaste manufacturers can add new attributes or features like “whitens teeth” or “removes plaque” when they introduce a new or improved product, such as Colgate Total Advanced Gum Defense toothpaste. But the extra features in the new toothpaste do not require buyers to learn new tooth-brushing behaviors, so it is a continuous innovation. The benefit of this simple innovation is that effective marketing mainly depends on generating awareness, not re-educating customers.
With a dynamically continuous innovation, only minor changes in behavior are required. Heinz launched its EZ Squirt Ketchup in an array of unlikely hues—from green and orange to pink and teal—with kid-friendly squeeze bottles and nozzles.10 Encouraging kids to write their names on hot dogs or draw dinosaurs on burgers as they use this new product requires only minor behavioral changes. So the marketing strategy here is to educate prospective buyers on the product’s benefits, advantages, and proper use.
For how the kind of innovation present in this ketchup bottle affects its marketing strategy, see the text.
A discontinuous innovation involves making the consumer learn entirely new consumption patterns to use the product. Have you bought a wireless router for your computer? Congratulations if you installed it yourself! Recently, one-third of those bought at Best Buy were returned because they were too complicated to set up—the problem with a discontinuous innovation. So marketing efforts for discontinuous innovations usually involve not only gaining initial consumer awareness but also educating consumers on both the benefits and proper use of the innovative product, activities that can cost millions of dollars—and maybe require Geek Squad help.
Newness in Legal Terms The U.S. Federal Trade Commission (FTC) advises that the term new be limited to use with a product up to six months after it enters regular distribution. The difficulty with this suggestion is in the interpretation of the term regular distribution.
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Newness from the Organization’s Perspective Successful organizations view newness and innovation in their products at three levels. The lowest level, which usually involves the least risk, is a product line extension. This is an incremental improvement of an existing product line the company already sells. For example, Purina added its “new” line of Elegant Medleys, a “restaurant-inspired food for cats,” to its existing line of 50 varieties of its Fancy Feast gourmet cat food. This has the potential benefit of adding new customers but the twin dangers of increasing expenses and cannibalizing products in its existing line.
At the next level is (1) a significant jump in innovation or technology or (2) a brand extension involving putting an established brand name on a new product in an unfamiliar market. In the first case, the significant jump in technology might be when a manufacturer offers new smartphones or digital cameras.
The text describes the potential benefits and dangers of an incremental innovation such as Purina’s Elegant Medleys, its restaurant-inspired food for cats.
The second case—using an existing brand name to introduce a new product into an unfamiliar market—looks deceptively easy for companies with a powerful, national brand name. Colgate thought so. It puts its brand name on a line of frozen dinners called Colgate’s Kitchen Entrees. The product line died quickly. A marketing expert calls this “one of the most bizarre brand extensions ever,” observing that the Colgate brand name, which is strongly linked to toothpaste in people’s minds, does not exactly get their “taste buds tingling.” Cosmopolitan’s yogurt had the same problem. The magazine, which has 58 international editions, is distributed in more than 100 countries. Cosmopolitanhas the magazine business down pat. One thing Cosmo does not do best is brand and sell yogurt. Its Cosmopolitan Yogurt disappeared from retail shelves in 18 months.11
The third and highest level of innovation involves a radical invention, a truly revolutionary new product. Apple’s Apple II, the first commercially successful “personal computer,” and its iPad and iPod are examples of radical inventions. Effective new-product development in large firms exists at all three levels.
Why Products and Services Succeed or Fail
We all know the giant product and service successes—such as Apple’s iPad, Google, and CNN. Yet the thousands of product failures every year that slide quietly into oblivion cost American businesses billions of dollars. Ideally, a new product or service needs a precise protocol , a statement that, before product development begins, identifies (1) a well-defined target market; (2) specific customers’ needs, wants, and preferences; and (3) what the product will be and do to satisfy consumers.
Research reveals how difficult it is to produce a single commercially successful new product, especially among consumer packaged goods (CPG) that appear on supermarket shelves one month and are gone forever a few months later. Most American families buy the same 150 items over and over again—making it difficult to gain buyers for new products. So less than 3 percent of new consumer packaged goods exceed first-year sales of $50 million—the benchmark of a successful CPG launch.12
A yogurt marketed by Cosmopolitan magazine? See the text for details.
To learn marketing lessons and convert potential failures to successes, we can analyze why new products fail and then study several failures in detail. As we go through the new-product process later in the chapter, we can identify ways such failures might have been avoided—admitting that hindsight is clearer than foresight.
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LO 10-4Describe the factors contributing to the success or failure of a new product or service.
Marketing Reasons for New-Product Failures Both marketing and nonmarketing factors contribute to new-product failures. Using the research results from several studies on new-product success and failure, we can identify critical marketing factors—which sometimes overlap—that often separate new-product winners and losers:13
1. Insignificant point of difference. Research shows that a distinctive point of difference is the single most important factor for a new product to defeat competing ones—having superior characteristics that deliver unique benefits to the user. In the mid-1990s, General Mills launched Fingos, a sweetened cereal flake about the size of a corn chip, with a $34 million promotional budget. Consumers were supposed to snack on them dry, but they didn’t.14The point of difference was not important enough to get consumers to stop eating competing snacks such as popcorn and potato chips.
New-product success or failure? Why might consumers choose not to buy sweetened corn flakes as a snack …
2. Incomplete market and product protocol before product development starts. Without this protocol, firms try to design a vague product for a phantom market. Developed by Kimberly-Clark, Avert Virucidal tissues contained vitamin C derivatives scientifically designed to kill cold and flu germs when users sneezed, coughed, or blew their noses into them. The product failed in test marketing. People didn’t believe the claims and were frightened by the “cidal” in the brand name, which they connected to words like suicidal. A big part of Avert’s failure was its lack of a product protocol that clearly defined how it would satisfy consumer wants and needs.15
3. Not satisfying customer needs on critical factors. Overlapping somewhat with point 1, this factor stresses that problems on one or two critical factors can kill the product, even though the general quality is high. For example, the Japanese, like the British, drive on the left side of the road. Until 1996, U.S. carmakers sent Japan few right-hand-drive cars—unlike German carmakers, which exported right-hand-drive models in several of their brands.
4. Bad timing. This results when a product is introduced too soon, too late, or when consumer tastes are shifting dramatically. Bad timing gives new-product managers nightmares. Microsoft, for example, introduced its Zune player a few years after Apple launched its iPod and other competitors offered their new MP3 players.
5. No economical access to buyers. Grocery products provide an example of this factor. Today’s mega-supermarkets carry more than 30,000 different SKUs. With about 40,000 new consumer packaged goods (food, beverage, health and beauty aids, household, and pet items) introduced annually in the United States, the cost to gain access to retailer shelf space is huge. Because shelf space is judged in terms of sales per square foot, Thirsty Dog! (a zesty beef-flavored, vitamin-enriched, mineral-loaded, lightly carbonated bottled water for your dog) must displace an existing product on the supermarket shelves, a difficult task with the high sales-per-square-foot demands of these stores. Thirsty Dog! and its companion product Thirsty Cat! failed to generate enough sales to meet these requirements.
… or a vitamin-enriched carbonated bottled water for their dog or cat …
6. Poor product quality. This factor often results when a product is not thoroughly tested. The costs to an organization for poor quality can be staggering and include the labor, materials, and other expenses to fix the problem—not to mention the lost sales, profits, and market share that usually result. In early 2007, with a $500 million promotional budget, Microsoft launched its Windows Vista to replace its successful predecessor Windows XP. But the Vista software had so many quality problems with compatibility and performance, even Microsoft’s most loyal users revolted. Today its problems would be highlighted even faster as Facebook and Twitter users post their complaints.16
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7. Poor execution of the marketing mix: brand name, package, price, promotion, distribution. Somewhere in the marketing mix there can be a showstopper that kills the product. Introduced by Gunderson & Rosario, Inc., Garlic Cake was supposed to be served as an hors d’oeuvre with sweet breads, spreads, and meats, but somehow the company forgot to tell this to potential consumers. Garlic Cake died because consumers were left to wonder just what a Garlic Cake is and when on earth a person would want to eat it.
… or a spray to get rid of scary creatures from a child’s bedroom? Answers appear in the text.
8. Too little market attractiveness. The ideal is a large target market with high growth and real buyer need. But often the target market is too small or competitive to warrant the huge expenses necessary to reach it. OUT! International’s Hey! There’s A Monster In My Room spray was designed to rid scary creatures from a kid’s bedroom and had a bubble-gum fragrance. While a creative and cute product, the brand name probably kept the kids awake at night more than their fear of the monsters because it implied the monster was still hiding in the bedroom. Also, was this a real market?
Simple marketing research should have revealed the problems in these new-product disasters. Developing successful new products may sometimes involve luck, but more often it involves having a product that really meets a need and has significant points of difference over competitive products.
Organizational Inertia in New-Product Failures Organizational problems and attitudes can also cause new-product disasters. Two key ones are:
•Encountering “groupthink” in task force and committee meetings. Someone in the new-product planning meeting knows or suspects the product concept is a dumb idea. But that person is afraid to speak up for fear of being cast as a “negative thinker,” “not a team player,” and then being ostracized from real participation in the group. Do you think someone on the Life Savers new-product team suspected a Life Savers soda wasn’t a good idea but was afraid to speak up?17 In the same way, a strong public commitment to a new product by its key advocate may make it difficult to kill the product even when new negative information comes to light.18
•Avoiding the “NIH problem.” A great idea is a great idea, regardless of its source. Yet in the bureaucracy that can occur in large organizations, ideas from outside often get rejected simply because they come from outside—what has been termed the “not-invented-here (NIH) problem.” NIH was never a problem for Steve Jobs. Part of his innovation genius was being open to ideas from everywhere. Jobs got the ideas for the mouse and the graphical user interface, which led to icons and pull-down menus for the Macintosh, from visits to the Xerox Corporation’s Palo Alto Research Center, known as Xerox PARC.19
Introduce a Life Savers soda? The text asks if “groupthink” played a part in this new-product decision.
These organizational problems can contribute to the eight marketing reasons for new-product failures described above.
How Marketing Dashboards Can Improve New-Product Performance
The Using Marketing Dashboards box on the next page shows how marketers measure actual market performance versus the goals set in new-product planning. It shows that you have set a goal of 10 percent annual growth for the new snack you developed. You have chosen a marketing metric of “annual % sales change” to measure the annual growth rate from 2012 to 2013 for each of the 50 states.
Your special concerns in the marketing dashboard are the states shown in red, where sales have actually declined. As shown in the box, having identified the northeastern United States as a problem region, you can now conduct in-depth marketing research to lead to corrective actions. For example, is the decline in sales in this region due to an external factor, such as consumer preference? Perhaps consumers in the northeastern United States prefer more regional snack tastes or think your snack is too sweet. Or perhaps the problem is due to your own internal marketing strategy, such as poor distribution, prices that are too high, or ineffective advertising.
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Using Marketing Dashboards |
Which States Are Underperforming?
In 2010, you started your own company to sell a nutritious, high-energy snack you developed. It is now January 2014. As a marketer, you ask yourself, “How well is my business growing?”
Your Challenge The snack is sold in all 50 states. Your goal is 10 percent annual growth. To begin 2014, you want to quickly solve any sales problems that occurred during 2013. You know that states whose sales are stagnant or in decline are offset by those with greater than 10 percent growth.
Studying a table of the sales and percent change versus a year ago in each of the 50 states would work but be very timeconsuming. A good graphic is better. You choose the following marketing metric, where “sales” are measured in units:
You want to act quickly to improve sales. In your map, growth that is greater than 10 percent is green, 0 to 10 percent growth is orange, and decline is red. Notice that you (1) picked a metric and (2) made your own rules that green is good, orange is bad, and red is very bad.
Your Findings You see that sales growth in the northeastern states is weaker than the 10 percent target, and sales are actually declining in many of the states.
Your Action Marketing is often about grappling with sales shortfalls. You’ll need to start by trying to identify and correct the problems in the largest volume states that are underperforming—in this case in the northeastern United States.
You’ll want to do marketing research to see if the problem starts with (1) an external factor involving consumer tastes or (2) an internal factor such as a breakdown in your distribution system.
learning review
10-3. What kind of innovation would an improved electric toothbrush be?
10-4. Why can an “insignificant point of difference” lead to new-product failure?
10-5. What marketing metric might you use in a marketing dashboard to discover which states have weak sales?
THE NEW-PRODUCT PROCESS
To develop new products efficiently, companies such as General Electric and 3M use a specific sequence of steps to make their products ready for market. Figure 10–3 shows the new-product process , the seven stages an organization goes through to identify opportunities and convert them into salable products or services. Today many firms use a formal Stage-Gate® process to evaluate whether the results at each stage of the new-product development process are successful enough to warrant proceeding to the next stage. If problems in a stage can’t be corrected, the project doesn’t proceed to the next stage and product development is killed.20
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FIGURE 10–3
Carefully using the seven stages in the new-product process increases the chances of new-product success.
LO 10-5Explain the purposes of each step of the new-product process.
Stage 1: New-Product Strategy Development
For companies, new-product strategy development is the stage of the new-product process that defines the role for a new product in terms of the firm’s overall objectives. During this stage, the firm uses both a SWOT analysis (Chapter 2) and environmental scanning (Chapter 3) to assess its strengths and weaknesses relative to the trends it identifies as opportunities or threats. The outcome not only defines the vital “protocol” for each new-product idea but also identifies the strategic role it might serve in the firm’s business portfolio.
Occasionally a firm’s Stage 1 activities can be blindsided by a revolutionary new product or technology that completely disrupts its business, sometimes called a “disruptive innovation.” For example:
•Wikipedia. This free and community-edited online encyclopedia caused Encyclopedia Britannica to cease print production after 244 years.
•Digital photography. Even though they were invented by Kodak, digital cameras made film and film cameras obsolete by the mid-2000s and drove Kodak into bankruptcy in 2012. Kodak did not actively market its digital cameras because it wanted to protect its film business, the firm’s cash cow.
•Personal computers. Xerox’s PARC never actively marketed personal computers (whose key components were actually invented at its Palo Alto Research Center) because top management didn’t envision business opportunities beyond the photocopying business; this left the market open for Steve Jobs.21
After inventing the digital camera in the mid-1970s, Kodak chose not to market it for fear of killing off its “cash cow” film business. Sadly, this led to a disastrous result, as the text describes.
Clearly, a firm’s new-product strategy development must be on the lookout for innovative products or technology that might disrupt its plans.
New-product development for services, such as buying a stock or airline ticket or watching a National Football League game, is often difficult. Why? Because services are intangible and performance-oriented. Nevertheless, service innovations can have a huge impact on our lives. For example, the online brokerage firm E*TRADE has revolutionized the financial services industry through its online investment trading.
Stage 2: Idea Generation
Idea generation , the second stage of the new-product process, involves developing a pool of concepts to serve as candidates for new products, building upon the previous stage’s results. Many forward-looking organizations have discovered that they are not generating enough useful new-product ideas. One internal approach for getting ideas within the firm is to train employees in the art and science of asking specific, probing questions. The goal in generating new-product ideas and strategies is to move from “what is” questions that describe the present situation to “what if” questions that focus on solutions and marketing actions.22
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Many firms obtain ideas externally using open innovation, in which they find and execute creative new-product ideas by developing strategic relationships with outside individuals and organizations. Open innovation helps organizations overcome the not-invented-here (NIH) barriers discussed earlier. The following discussion suggests methods of generating new-product ideas both internally and externally, the latter often using open innovation relationships.23
What method of idea generation did Ford use to create the new Ford Fusion? Read the text to find out.
Employee and Co-Worker Suggestions Employees should be encouraged to suggest new-product ideas through suggestion boxes. The idea for Nature Valley granola bars from General Mills came when one of its marketing managers observed co-workers bringing granola to work in plastic bags.
An important part of Ford’s current turnaround has been chief executive officer Alan Mulally’s encouraging managers and employees to speak up and volunteer ideas to improve its technology and line of new cars—an openness lacking in U.S. auto companies in the past.24 Further, Mulally has made clear that managers and employees in different departments aren’t rivals. Instead of the not-invented-here (NIH) thinking of past years, Mulally has encouraged managers and employees to see themselves as part of the “One Ford” team and share information and help one another. This emphasis on improved employee communications has helped Ford launch new models, like its Fusion, add new technologies and redesign its supply chain.25
QR 10-3
P&G’s Tide Pods Ad
Customer and Supplier Suggestions Firms ask their salespeople to talk to customers and ask their purchasing personnel to talk to suppliers to discover new-product ideas.26 Whirlpool gets ideas from customers on ways to standardize components so that it can cut the number of different product platforms to reduce costs.27 Business researchers tell firms to actively involve customers and suppliers in the new-product development process. This means the focus should be on what the new product will actually do for them rather than simply what they want.28
A. G. Lafley, CEO of Procter & Gamble (P&G), gave his executives a revolutionary thought: “Look outside the company for solutions to problems rather than insisting P&G knows best.” When he ran P&G’s laundry detergent business, he had to redesign the laundry boxes so they were easier to open. Why? While consumers said P&G’s laundry boxes were “easy to open,” cameras they agreed to have installed in their laundry rooms showed they opened the boxes with screwdrivers!29
With a $150 million marketing budget, in 2012 P&G launched Tide Pods, a revolutionary three-chamber liquid dose that cleans, fights stains, and brightens. P&G describes Tide Pods as “its biggest laundry innovation in more than a quarter century.” P&G says Tide Pods has produced the highest consumer-satisfaction scores the company has ever seen for a new laundry product. Following its successful new-product launch, however, P&G redesigned its packaging after discovering that some children thought the pods were candy and tried to eat them. How successful has Tide Pods been for P&G? After its first year, the product garnered a 73 percent share of the “unit dose” segment of the detergent market on estimated sales of $500 million—making it one of the most successful product launches of 2012!30
Procter & Gamble’s new Tide Pods launch shows how it has improved both planning and implementation by involving consumers earlier in its innovation activities.
“Crowdsourcing” is another creative idea-generation method if an R&D-marketing team wants ideas from 10,000 or 20,000 customers or suppliers. Crowdsourcing involves generating insights leading to actions based on ideas from massive numbers of people. It requires a precise question to focus the idea-generation process. Dell used crowdsourcing to develop an online site to generate 13,464 ideas for new products as well as website and marketing improvements, of which 402 were implemented.31
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Research and Development Laboratories Another source of new products is a firm’s own research and development laboratories. Apple’s sleek, cutting-edge designs for the iPad, iPhone, and iMac came out of its Apple Industrial Design Group, whose culture was established by the late Steve Jobs and is now guided by Senior Vice President of Design Jonathan Ive. What is the secret to Apple’s world-class ability to convert vague concepts into tangible products? An action-item list from every meeting that focuses on who does what by when!32
Professional R&D and innovation laboratories that are outside the walls of large corporations are also sources of open innovation and can provide new-product ideas.33 IDEO is a world-class new-product development firm that uses “design thinking,” which involves incorporating human behavior as well as building upon the ideas of others in the innovation-design process. As the most prolific and influential design firm in the world, IDEO has created thousands of new products for its clients. Brainstorming sessions conducted at IDEO can generate 100 new ideas in an hour!
An IDEO innovation: A five-section, single-serve package for salads. Visit IDEO’s website (www.ideo.com) to view its recent innovations.
IDEO designs include developing the standing Crest Neat Squeeze toothpaste dispenser and improving the original Apple mouse. Recently, Fresh Express asked IDEO to design an innovative single-serve package for salads. IDEO’s solution: A five-section package—one large section for the salad greens and four smaller ones for proteins, dressings, and so on—with each section sealed in plastic (see the photo).34
Competitive Products Analyzing the competition can lead to new-product ideas. For six months, the Marriott Corporation sent a six-person intelligence team to travel and stay at economy hotels around the country. The team assessed the competition’s strengths and weaknesses on everything from the soundproof qualities of the rooms to the softness of the towels. Marriott then budgeted $500 million for a new economy hotel chain—Fairfield Inns.
Smaller Firms, Universities, and Inventors Many firms look for outside visionaries that have inventions or innovative ideas that can become products. Some sources of this open innovation strategy include:
•Smaller, nontraditional firms. Small technology firms and even small, nontraditional firms in adjacent industries provide creative advances. General Mills partnered with Weight Watchers to develop Progresso Light soups, the first consumer packaged product in any grocery category to carry the Weight Watchers endorsement with a 0 points value per serving.35
•Universities. Many universities have technology transfer centers that often partner with business firms to commercialize faculty inventions. The first-of-its-kind carbonated yogurt Go-Gurt Fizzix was launched in late 2007 as a result of General Mills partnering with Brigham Young University to license the university’s patent to put the “fizz” into the yogurt.36
•Inventors. Many lone inventors and entrepreneurs develop brilliant new-product ideas—like Gary Schwartzberg’s tube-shaped bagel filled with cream cheese. A portable breakfast for the on-the-go person, the innovative bagel couldn’t get widespread distribution. So Schwartzberg sold his idea to Kraft Foods, Inc., which now markets its Bagel-fuls filled with Kraft’s best-selling Philadelphia cream cheese in supermarkets across the United States.37
Gary Schwartzberg partnered with Kraft Foods to get his cream cheese-filled bagels in stores across the United States.
Early-stage financing is almost always a problem for inventors and those starting a new business. Crowdfunding is a way to gather an online community of supporters to financially rally around a specific project that is unlikely to get resources from traditional sources such as banks or venture capital firms. For example, Kickstarter.com raised $1.2 million for start-up SmartThings to introduce a product that allows users to monitor their homes by remote control. But its biggest crowdfunding project was for the Pebble digital smartwatch with iPhone and Android smartphone integration: Almost 70,000 backers contributed over $10 million to develop this amazing product, which initially sold for $150! If your idea needs financing, here are five other crowdfunding sources and what they support:
•Crowdrise. Charitable causes.
•Crowdtilt. Anything.
•Fundable. Early-stage financing for start-up businesses.
•Rally. Nonprofits, artists, musicians, entrepreneurs.
•GiveForward. Medical causes.
If you want to donate to crowdfunding projects, that’s fine, too: The average Kick-starter donor gives $25.38
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Crowdfunder Kickstarter.com enabled Pebble to market its customizable watch that runs a variety of apps.
Great ideas can come from almost anywhere—the challenge is recognizing and implementing them.
Stage 3: Screening and Evaluation
Screening and evaluation is the stage of the new-product process that internally and externally evaluates new-product ideas to eliminate those that warrant no further effort.
Internal Approach In this approach to screening and evaluation, a firm’s employees evaluate the technical feasibility of a proposed new-product idea to determine whether it meets the objectives defined in the new-product strategy development stage. For example, 3M scientists develop many world-class innovations in the company’s labs. A recent innovation was its microreplication technology—one that has 3,000 tiny gripping “fingers” per square inch. An internal assessment showed 3M that this technology could be used to improve the gripping of both batting and work gloves.
Organizations that develop service-dominated offerings need to ensure that employees have the commitment and skills to meet customer expectations and sustain customer loyalty—an important criterion in screening a new-service idea. This is the essence of customer experience management (CEM) , which is the process of managing the entire customer experience within the company. Marketers must consider employees’ interactions with customers so that the new services are consistently delivered and experienced, clearly differentiated from other service offerings, and relevant and valuable to the target market.
External Approach Firms that take an external approach to screening and evaluation use concept tests, external evaluations with consumers that consist of preliminary testing of a new-product idea rather than an actual product. Generally, these tests are more useful with minor modifications of existing products than with new, innovative products with which consumers are not familiar.39 Concept tests rely on written descriptions of the product but may be augmented with sketches, mockups, or promotional literature. Key questions for concept testing include: How does the customer perceive the product? Who would use it? and How would it be used?
learning review
10-6. What is the new-product strategy development stage in the new-product process?
10-7. What are the main sources of new-product ideas?
10-8. How do internal and external screening and evaluation approaches differ?
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Stage 4: Business Analysis
Business analysis specifies the features of the product and the marketing strategy needed to bring it to market and make financial projections. This is the last checkpoint before significant resources are invested to create a prototype—a full-scale operating model of the product. The business analysis stage assesses the total “business fit” of the proposed new product with the company’s mission and objectives—from whether the product can be economically developed and manufactured to the marketing strategy needed to have it succeed in the marketplace.
This process requires not only detailed financial projections but also assessments of the marketing and product synergies related to the company’s existing operations. Will the new product require a lot of new machinery to produce it or can it be produced using the unused capacity of existing machines? Will the new product cannibalize sales of existing products or will it increase revenues by reaching new market segments? Can the new product be protected with a patent or copyright? Financial projections of expected profits require estimates of expected prices per unit and units sold, as well as detailed estimates of the costs of R&D, production, and marketing.
Is this what you’ll be “driving” in 2020? Google’s driverless cars have logged 300,000 miles without an accident!
For services, business analysis involves using capacity management (discussed in Chapter 12) to find ways to match the availability of the service offering to when it is needed. For example, airlines and mobile phone service providers use off-peak pricing to charge different prices during different times of the day or during different days of the week to help match the supply and demand for their services.40
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Google Car Video
Stage 5: Development
Development is the stage of the new-product process that turns the idea on paper into a prototype. This results in a demonstrable, producible product that involves not only manufacturing the product efficiently but also performing laboratory and consumer tests to ensure the product meets the standards established for it in the protocol.
Google’s driverless car is an extreme example of the complexity of the Stage 5 development process for a durable consumer good. The Google team consists of 15 engineers and has a fleet of 10 vehicles as the test models, among them the Toyota Prius and the Lexus RX 450h. In August 2012, the Google team announced its cars had completed over 300,000 miles of accident-free, “autonomous driving.” These miles were “driven” by a driver with an unblemished driving record behind the wheel and a Google engineer in the passenger seat. A spinning, roof-mounted laser range finder and sophisticated software negotiated the steep hairpin turns in San Francisco and trips both across the Golden Gate Bridge and along the curvy Pacific Coast Highway.
Where is Google’s driverless car headed? Google has no plans to commercialize the vehicle itself but wants to market the technology to auto manufacturers. But it is clear Google will need to invest tens of millions of dollars into additional development and testing (see Stage 6 below) before anyone can buy a driverless car—typical of high-technology devices. Right now, only Nevada, California, and Florida have laws allowing driverless cars.
Netflix is confronting changing markets, technologies, and competition. See the text and Marketing Matters box on the next page for a discussion of these changes at Netflix.
The good news for Google: safety. If its driverless car is perfected and allowed on U.S. highways, the 34,000 highway deaths and 240,000 hospitalizations caused by car accidents annually should fall.41 This will surely be part of Google’s marketing campaign!
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Marketing Matters |
technology |
Netflix’s Wild Roller-Coaster Ride
If in 1997, a customer had been charged a late fee of $40 for a VHS tape of Apollo 13, what might she or he have done? Maybe just grumble and pay it? Not Reed Hastings. Although he paid the $40 late fee, Hastings, unlike other disgruntled video store patrons, began “to investigate the idea of how to create a movie-rental business by mail.”
Riding High
“Early on, the first concept we launched was rental by mail, but it wasn’t subscription based so it worked more like Blockbuster,” says Hastings, the founder and CEO of Netflix. It wasn’t very popular. So in 1999, he relaunched his idea as a DVD-by-mail subscription service that delivered movies to customers for a fixed monthly fee. The business took off!
A Bump in the Road
But the Netflix business changed again in 2008 when advances in technology allowed subscribers to receive thousands of movies and TV shows “streamed” over the Internet via a television, set-top box, or video game console or wirelessly to a smartphone or tablet device.
This method caused a problem for Netflix because the firm is both a customer of and a competitor to broadcast and TV cable networks as well as movie studios—which can earn much more with their pay-per-view alternatives than with Netflix’s streaming of its content. The result: higher licensing fees and reduced choices for Netflix, not to mention the copycat services from Apple (Apple TV/iTunes), Amazon (Instant Video), a new Verizon-Redbox venture, and others that add even more competition.
Where to Now? Up? Or Down?
As of mid-2013, Netflix’s over 30 million U.S. subscribers love that they can view TV shows and movies for about $8 a month—far cheaper than pay-TV options. But to continue growing, Netflix believes that it must reinvent itself—again! Its solution? Offer original programming, starting with a political thriller called House of Cards—and deliver all 13 episodes at once rather than one per week. In 2013, this made-for-Netflix TV drama received nine Emmy nominations, the first time an online-only show has been in the running for TV’s top award.
For services, improving the delivery of customer service is critical. This involves analyzing the entire sequence of steps or “service encounters” to improve the interactions between consumers and the service provider. High-contact services such as hotels, car rental agencies, and web providers use this approach to serve customers better.
The Marketing Matters box describes how Netflix founder and chief executive officer Reed Hastings got the idea for his start-up and how his business model has changed to reflect the way Internet breakthroughs are able to stream movies more conveniently to a consumer’s TV set, game console, or iPad. Learning from its success with its House of Cards drama, Netflix signed an agreement in mid-2013 with Dream-Works Animation for over 300 hours of TV programming. But new competitors to Netflix are all around—including Amazon, a new Verizon-Redbox venture, and cable TV networks. What is Netflix’s future? Stay tuned.42
Stage 6: Market Testing
Market testing is a stage of the new-product process that involves exposing actual products to prospective consumers under realistic purchase conditions to see if they will buy. If the budget permits, consumer packaged goods firms do this by test marketing, which involves offering a product for sale on a limited basis in a defined area for a specific time period. The three main kinds of test markets are (1) standard, (2) controlled, and (3) simulated.43 Because standard test markets are so time-consuming and expensive and can alert competitors to a firm’s plans, some firms skip test markets entirely or use controlled or simulated test markets.
Standard Test Markets In a standard test market, a company develops a product and then attempts to sell it through normal distribution channels in a number of test-market cities. Test-market cities must be demographically representative of markets targeted for the new product, have cable TV systems that can deliver different ads to different homes, and have retailers with checkout counter scanners to measure sales. A distinguishing feature of a standard test market is that the producer sells the product to distributors, wholesalers, and retailers, just as it would do for other products.
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Controlled Test Markets A controlled test market involves contracting the entire test program to an outside service. The service pays retailers for shelf space and can therefore guarantee a specified percentage of the test product’s potential distribution volume. IRI is a leader in supplying controlled test markets to consumer packaged good firms like General Mills. Its BehaviorScan service uses five demographically representative cities to track sales made to a panel of households. In some cases the effectiveness of different TV commercials and other direct-to-consumer promotions can be measured.
Consumer products, such as those from General Mills, often use controlled test markets to assess the likely success of new-product, promotional, or pricing strategies.
Simulated Test Markets To save time and money, companies often turn to simulated (or laboratory) test markets (STM), a technique that somewhat replicates a full-scale test market. STMs are often run in shopping malls, to find consumers who use the product class being tested. Next, qualified participants are shown the product or the product concept and are asked about usage, reasons for purchase, and important product attributes. They then see the company’s and competitors’ ads for the test product. Finally, participants are given money and allowed to choose between buying the firm’s product or the products of competitors from a real or simulated store environment.
When Test Markets Don’t Work Not all products can use test markets. Test marketing a service is very difficult because consumers can’t see what they are buying. For example, how do you test market a new building for an art museum? Similarly, test markets for expensive consumer products, such as cars or costly industrial products such as jet engines, are impractical. For these products, reactions of potential buyers to mockups or one-of-a-kind prototypes are all that is feasible.
Stage 7: Commercialization
Finally, the product is brought to the point of commercialization —the stage of the new-product process that positions and launches a new product in full-scale production and sales. This is the most expensive stage for most new products. If competitors introduce a product that leapfrogs the firm’s own new product or if cannibalization of its own existing products appears significant, the firm may halt the new-product launch. Companies can face disasters at the commercialization stage, regardless of whether they are selling business products or consumer products. Examples are Boeing’s 787 Dreamliner and Burger King’s french fries, which are discussed next.
Takeaway new-product lesson from the Boeing 787 Dreamliner: “Innovation … doesn’t come easy.” See the text for details.
The Boeing 787 Dreamliner Experience In 2004, Boeing announced the design for its Boeing 787 Dreamliner commercial airplane. Its technical advances would mean the plane would burn 20 percent less fuel and cost 30 percent less to maintain than present airliners. Boeing invested billions of dollars in the 787’s development, and airlines had placed orders for almost 930 Dreamliners by mid-2013.
As the Dreamliner entered its commercialization stage, airlines around the world began taking deliveries. But with all the new technology in the Dreamliner, the new airplane was plagued by technical nightmares—even after extensive testing. Its wings, made with plastic-reinforced carbon fiber instead of aluminum, proved difficult to produce and attach to the fuselage. And with this new “high-tech skin,” lightning doesn’t dissipate like it did with the old aluminum skin. But an even more serious problem arose in early 2013: Lithium-ion batteries, which provide electrical power, caught fire on two Dreamliner aircraft, prompting regulators to ground all 50 Dreamliners in service around the world. Perhaps The Wall Street Journal gave the best new-product lesson from the Boeing 787 Dreamliner example: “Innovation—for all its value—doesn’t come as easily as a catchphrase. It can get messy.”44
To discover the downs and ups of commercializing a new product, see the text discussion of Burger King’s 15-year search for a french fry recipe that can compete with McDonald’s.
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Burger King’s French Fries: The Complexities of Commercialization Burger King’s “improved french fries” are an example of what can go wrong with a consumer product at the commercialization stage. McDonald’s french fries are the gold standard against which all other fries in the fast-food industry are measured. In 1997, Burger King decided to take on McDonald’s fries and spent millions of R&D dollars developing a whey/starch-coated fry designed to retain heat longer and add crispiness. The launch, backed with a $70 million marketing campaign, turned into a disaster. The reason: Except under ideal conditions, the new fry proved too complicated to get right day after day in Burger King restaurants, and changes had to be made to get the “production” process correct to ensure consistent results.
Fast-forward to today. Over the past couple of years, Wendy’s has introduced new fries in the fast-food war. Launched in late 2010, Wendy’s Natural-Cut Fries with Sea Salt have become a huge hit.
Burger King, now the number three fast-food marketer after McDonalds and Wendy’s, responded with its new thick-cut fries in late 2011. In development and testing for over two years, the new fries are “fluffier” on the inside for a more “potatoey” taste, have less sodium, and have a new “coating” on the outside. This was done to create a “crispy, golden-brown deliciousness” while retaining the heat longer—for at least 10 minutes because 75 percent of customers eat their fries “on the go” in their cars, offices, or homes.
A taste test conducted by an independent market research firm stated that the new Burger King fries were preferred over McDonald’s fries by a 57 to 35 percent margin. Burger King also launched the largest TV advertising campaign in its history—featuring “spokespud” Mr. Potato Head—to promote the new fries.45
The Special Risks in Commercializing Grocery Products New grocery products pose special commercialization problems. Because shelf space is so limited, many supermarkets require a slotting fee for new products, a payment a manufacturer makes to place a new item on a retailer’s shelf. This can run to several million dollars for a single product. But there’s even another potential expense. If a new grocery product does not achieve a predetermined sales target, some retailers require a failure fee, a penalty payment a manufacturer makes to compensate a retailer for devoting valuable shelf space to a product that failed to sell.
These costly slotting fees and failure fees are further examples of why large grocery product manufacturers use regional rollouts. Companies selling consumer products using regional rollouts introduce a product sequentially into geographical areas of the United States to allow production levels and marketing activities to build up gradually, to minimize the risk of new-product failure. Grocery product manufacturers and telephone service providers use this strategy.
Speed as a Factor in New-Product Success Companies have discovered that speed or time to market (TtM) is often vital in introducing a new product. Recent studies have shown that high-tech products coming to market on time are far more profitable than those arriving late. So companies like Sony, BMW, 3M, and Hewlett-Packard often overlap the sequence of stages described in this chapter.
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With this approach, termed parallel development, cross-functional team members who conduct the simultaneous development of both the product and the production process stay with the product from conception to production. This approach enabled Hewlett-Packard to reduce the development time for notebook computers from 12 to 7 months. In software development, fast prototyping uses a “do it, try it, fix it” approach—encouraging continuing improvement even after the initial design. To speed up time to market, many firms insulate their new-product teams from routine administrative tasks to keep them from bogging down in red tape.46
learning review
10-9. How does the development stage of the new-product process involve testing the product inside and outside the firm?
10-10. What is a test market?
10-11. What is the commercialization of a new product?
LEARNING OBJECTIVES REVIEW
LO 10-1 Recognize the various terms that pertain to products and services.
A product is a good, service, or idea consisting of a bundle of tangible and intangible attributes that satisfies consumers and is received in exchange for money or something else of value.
A good has tangible attributes that a consumer’s five senses can perceive and intangible ones such as warranties; a laptop computer is an example. Goods also can be divided into nondurable goods, which are consumed in one or a few uses, and durable goods, which usually last over many uses.
Services are intangible activities or benefits that an organization provides to satisfy consumer needs in exchange for money or something else of value, such as an airline trip. An idea is a thought that leads to a product or action, such as eating healthier foods.
LO 10-2 Identify the ways in which consumer and business products and services can be classified.
By type of user, the major distinctions are consumer products, which are products purchased by the ultimate consumer, and business products, which are products that assist an organization in providing other products for resale.
Consumer products can be broken down based on the effort involved in the purchase decision process, marketing mix attributes used in the purchase, and the frequency of purchase: (a) convenience products are items that consumers purchase frequently and with a minimum of shopping effort; (b) shopping products are items for which consumers compare several alternatives on selected criteria; (c) specialty products are items that consumers make special efforts to seek out and buy; and (d) unsought products are items that consumers either do not know about or do not initially want.
Business products can be broken down into (a) components, which are items that become part of the final product, such as raw materials or parts, and (b) support products, which are items used to assist in producing other goods and services and include installations, accessory equipment, supplies, and industrial services.
Services can be classified in terms of whether they are delivered by (a) people or equipment, (b) business firms or nonprofit organizations, or (c) government agencies.
Firms can offer a range of products, which involve decisions regarding the product item, product line, and product mix.
LO 10-3 Explain the significance of “newness” in new products and services as it relates to the degree of consumer learning involved.
From the important perspective of the consumer, “newness” is often seen as the degree of learning that a consumer must engage in to use the product. With a continuous innovation, no new behaviors must be learned. With a dynamically continuous innovation, only minor behavioral changes are needed. With a discontinuous innovation, consumers must learn entirely new consumption patterns.
LO 10-4 Describe the factors contributing to the success or failure of a new product or service.
A new product or service often fails for these marketing reasons: (a) insignificant points of difference, (b) incomplete market and product protocol before product development starts, (c) a failure to satisfy customer needs on critical factors, (d) bad timing, (e) no economical access to buyers, (f) poor product quality, (g) poor execution of the marketing mix, and (h) too little market attractiveness.
LO 10-5 Explain the purposes of each step of the new-product process.
The new-product process consists of seven stages a firm uses to develop salable products or services: (1) New-product strategy development involves defining the role for the new product within the firm’s overall objectives. (2) Idea generation involves developing a pool of concepts from consumers, employees, basic R&D, and competitors to serve as candidates for new products. (3) Screening and evaluation involves evaluating new-product ideas to eliminate those that are not feasible from a technical or consumer perspective. (4) Business analysis involves defining the features of the new product, developing the marketing strategy and marketing program to introduce it, and making a financial forecast. (5) Development involves not only producing a prototype product but also testing it in the lab and with consumers to see that it meets the standards set for it. (6) Market testing involves exposing actual products to prospective consumers under realistic purchasing conditions to see if they will buy the product. (7) Commercialization involves positioning and launching a product in full-scale production and sales with a specific marketing program.
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FOCUSING ON KEY TERMS
customer experience management (CEM)
new-product strategy development
APPLYING MARKETING KNOWLEDGE
1Products can be classified as either consumer or business products. How would you classify the following products? (a) Johnson’s baby shampoo, (b) a Black & Decker two-speed drill, and (c) an arc welder.
2Are Nature Valley granola bars and Eddie Bauer hiking boots convenience, shopping, specialty, or unsought products?
3Based on your answer to question 2, how would the marketing actions differ for each product and the classification to which you assigned it?
4In terms of the behavioral effect on consumers, how would a computer, such as an Apple iMac, be classified? In light of this classification, what actions would you suggest to the manufacturers of these products to increase their sales in the market?
5What methods would you suggest to assess the potential commercial success for the following new products? (a) a new, improved ketchup; (b) a three-dimensional television system that took the company 10 years to develop; and (c) a new children’s toy on which the company holds a patent.
6Concept testing is an important step in the new-product process. Outline the concept tests for (a) an electrically powered car and (b) a new loan payment system for automobiles that is based on a variable interest rate. What are the differences in developing concept tests for products as opposed to services?
BUILDING YOUR MARKETING PLAN
In fine-tuning the product strategy for your marketing plan, do these two things:
1Develop a simple three-column table in which (a) market segments of potential customers are in the first column and (b) the one or two key points of difference of the product to satisfy the segment’s needs are in the second column.
2In the third column of your table, write ideas for specific new products for your business in each of the rows in your table.
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VIDEO CASE 10
X-1: Breaking the Barriers of Sound with New-Product Development
QR 10-5
X-1 Video Case
X-1 started as a simple idea for a business school project and has quickly grown to become the foremost leader in waterproof, sweatproof, and weatherproof audio equipment for athletes. Many factors contribute to the success of X-1, “but new product development is the engine that drives it all,” explains CEO Carl Thomas.
If you are a swimmer, runner, snowboarder, surfer, triathlete, climber, bicyclist, or any kind of sports enthusiast who enjoys music while you exercise, chances are you’ve seen X-1’s products. The first product, a waterproof case for iPods, served as the starting point for a new-product development process that has added headphones, earbuds, cases, armbands, and accessories—an entire product line of audio solutions—to the company’s offerings.
The commitment to new products has been so successful that the company now holds eight patents on its technology and was recognized by Inc. magazine as one of the top 500 fastest-growing companies in the United States. It is not surprising, then, to hear Thomas explain that marketing and new-product development “is a very key function for any company, but it’s especially important for us.”
THE COMPANY
X-1 has a fascinating history. Its founders were scuba divers who wanted to listen to music while they were diving, so they investigated how to use electronic devices and speakers underwater. The waterproof case they developed functioned to depths of 300 feet and led to a U.S. patent for a “waterproof enclosure for an audio device.” At the same time, they were enrolled in a business school course that required the development of a business plan. They wrote the plan for their new technology, called their company Diver Entertainment, and began shipping products to other scuba divers.
It soon became obvious that the concept of waterproof audio equipment would appeal to many applications other than scuba diving. The company began developing waterproof headphones, changed its name to H2O Audio, and adopted the advertising tagline “Your Sport, Your Music.” Swimmers, surfers, and triathletes were obvious potential customers, so Olympic swimmers Natalie Coughlin and Michael Phelps, professional surfer Laird Hamilton, and triathletes Greg and Laura Bennett were signed as official H2O Audio Ambassadors. The popularity of the brand grew rapidly as athletes in each of the sports learned about and tried the new products.
The success of H2O Audio products with aquatic athletes led the company to look for the next opportunity for growth. The obvious step was to expand to other sports and to attract athletes such as runners, kayakers, snowboarders, climbers, and weightlifters. In fact, H2O Audio soon came to realize that its market could be all athletes regardless of their sport.
The new strategy ran into an unexpected problem, however. While the H20 brand name was intuitive and descriptive and contributed to the initial success of the products, it also limited the perception of the products’ uses to water sports. Applications to sports where the athletes were not actually underwater were not immediately obvious to retail store managers. Bicycle retailers and shoe stores, for example, would often decline to carry the products saying, “You’re just a swim company,” explains Thomas. As a result, H2O Audio undertook a six-month review of its brand.
The review process included interviews with athletes, retailers, manufacturers, and current customers. A branding agency was hired to help assess the information and to identify possible changes in the products and brand. It asked, “What characteristics are important to enable all athletes to train and perform at their peak with music?” The answer was to expand the original “waterproof” product concept to “waterproof, weatherproof, and sweat-proof technology that is durable and comfortable.”
According to Thomas, “We learned that every single one of the athletes out there needed the headphone to be not only durable and stable in whatever environment they were in, but they wanted it to be comfortable, they wanted it to fit, and they wanted it to not fall out.” The process also identified a new brand name, X-1, which was inspired by the first aircraft to break the sound barrier—the Bell X-1. The new name led to a new advertising tag line—“Breaking the Barriers of Sound”—and immediately changed the perception of the products.
The X-1 product line was expanded to reflect the new, broader appeal to all athletes. The line included:
•Momentum. An in-ear ultralight headphone that is rinsable, weatherproof, and sweatproof.
•Surge. An in-ear headphone that is waterproof, weatherproof, and sweatproof and has bass amplified sound and sportwrap options.
•Women’s Momentum and Surge. Headphones that are designed for petite ears.
•Amphibx. Armbands and cases that hold most audio devices including iPod Shuffle, iPod Touch, iPod Classic, and iPhone.
•Interval. A solution designed specifically for swimmers to attach to goggle straps.
All of the headphones are customizable with 3 to 5 different sizes of ear tips, and the cases all allow full function of touchscreens and buttons. The entire product line is the result of and reflects the importance of the product development process.
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THE PRODUCT DEVELOPMENT PROCESS AT X-1
“Here at X-1, new-product development is essential. We are constantly monitoring and speaking with our retail buyers to make sure that we have the best product mix for the marketplace,” explains Peter Dirksing, director of product development at X-1. Generally, the company follows a rigorous sequence of steps or stages.
The first stage, new-product strategy development, reflects X-1’s environmental scanning efforts. They observed that while the audio industry was mature, the advent of personal or mobile audio, created by products such as the Walkman, the Discman, the iPod, and now smartphones, represents an opportunity for new products.
The second stage is idea generation. X-1 uses many sources to help generate new ideas. Employees and coworkers, for example, can make suggestions at a “blue sky” meeting where, according to Dirksing, “No idea is a bad idea.” The company also uses open innovation to generate new ideas by engaging retail buyers and soliciting ideas from a group of volunteer athletes called Team X-1.
The next stage, screening and evaluation, involves an evaluation of each idea to determine if it warrants further effort. X-1 assesses the feasibility of new technical requirements, synergy with existing technology, and the magnitude of resource requirements. All the factors “mix together to determine what is the greatest priority,” explains Dirksing.
The fourth step, business analysis, involves creating a “business case” for the idea. The X-1 product development team works closely with sales and marketing to create a 12-month forecast that accounts for possible cannibalization of existing products and also estimates how long the product will be on the market before it reaches the break-even point.
In the development stage of the process, X-1 actually turns the idea into a prototype. The firm uses a 3D printer to check the aesthetics and the dimensions and to see how the product will actually fit on a person. Once the dimensions are determined, a functional prototype is needed. Dirksing explains, “After we’ve checked the outside dimensions on a 3D printed prototype, we’ll actually send the final 3D drawings to a factory and get a functional prototype made.”
The initial prototypes are used to conduct safety tests and the first functionality tests. “Part of my job is also making sure that the product functions as it’s intended. So one of the really cool aspects of my job is that I’m taking prototypes out and hopping in the pool in the morning before work or getting in the water on my board and catching a wave or two before I get into the office just to make sure that these products we’re developing are actually functioning in a real world environment,” explains Dirksing.
Once production-quality prototypes are available, X-1 begins stage six, market testing. “We have a team of a few hundred amateur athletes that will get out and test the product and provide feedback,” says Dirksing. X-1 also uses its website to connect with a cross-section of consumers and to get feedback as quickly as possible. Changes from this process lead to the final stage of the new-product development process, commercialization. X-1 develops a go-to-market plan, alerts the salesforce and retail buyers of the availability of new products, and begins production. Because X-1 is an international brand, this stage also includes developing the advertising and packaging for its customers in Europe, Asia, Australia, and around the world.
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The new-product development process is an ongoing activity at X-1. At any given time the company may have 10 to 15 new-product ideas at various stages of the process. X-1’s use of new technologies, such as 3D printers, as well as its fast-prototyping orientation has reduced product development time to about 12 months from start to commercialization. Once the new products are ready for consumers, the marketing department adds its expertise to ensure the success of the products.
MARKETING ADVANCED AUDIO SOLUTIONS
The marketing activities at X-1 are very comprehensive. “We do everything from print advertising, digital advertising, events, trade shows, social media, pretty much anything you can think of,” says Dana Swanson, X-1 director of marketing. The many activities contribute to several different objectives, including changing the name of the company, rebranding the products, introducing new products, and communicating with different segments of consumers.
Changing the name from H2O Audio to X-1, for example, required marketing that helped get the product into people’s hands so they could understand the value of the product. Swanson explains, “Something that is just going to splash our logo everywhere, like sponsoring a big race or an event, isn’t as important to us as something like going to an event and having a booth where we can actually interact with people, talk about our product, and get our product into people’s hands.” This is also one of the reasons X-1 has product ambassadors. First, X-1 has contracts with selected professional and Olympic athletes who use X-1 products. Second, X-1 created a team of amateur athletes who receive product samples to use during amateur sporting events. In both cases, the ambassadors give X-1 products exposure to the marketplace and help demonstrate how they work.
X-1 also relies on social media, particularly to develop and introduce new products. “If it’s out there, we’ve got a page, from Facebook to Twitter to Instagram,” explains Swanson. “It’s really all about just being where your people are and being there for them, interacting, talking, and answering questions,” she goes on. Social media also allow X-1 to ask occasional questions about satisfaction with the products, color preferences, and even how the products are being used. Many of today’s customers “love being involved,” and their engagement is particularly helpful when X-1 introduces new products.
Communicating with different segments is also an important marketing objective. Currently, the three primary segments are:
•Endurance Segment. Includes athletes participating in all demanding athletic activities (e.g., marathons, triathalons, etc.) and training.
•Outdoors Segment. Includes all participants in activities that take place outside (e.g., hiking).
•Club Segment. Includes everyone who goes to a health club, fitness studio, or gymnasium.
One way X-1 ensures that it reaches these segments is through its sales channels. By offering its products through sporting goods stores (such as REI, Sports Chalet, and Eastern Mountain Sports), specialty retail stores, e-tailers (such as Amazon.com), and online through its own website, X-1 can reach the many potential consumers in each of the segments.
Public relations also helps provide a lot of exposure. X-1 is fortunate that it has many unique attributes such as reflective cables, customizable ear fit, ambient noise allowance, and special sizes for women to attract media interest. For example, Fitness magazine, Women’s Running magazine, MSN News, Fox News, The Wall Street Journal, and Travel Weekly have all recently carried stories about X-1 products.
The combination of a great initial idea, a rigorous product development process, and excellent marketing actions all contribute to X-1’s success. “I think X-1 products are successful because we actually are a solutions company,” says Swanson, “We try to find a way that really works for athletes to bring their music with them while they’re doing any activity.”
Questions
1What are the points of difference, or unique attributes, for X-1 products?
2What are X-1’s primary target markets?
3Describe the new-product development process used at X-1. What are the similarities and differences to the process described in Figure 10–3?
4Which of the eight reasons for new-product failure did X-1 avoid to ensure the success of X-1’s products?
5Identify one new-product idea you would suggest that X-1 evaluate.
