Chapter 14
I. PRODUCT DEVELOPMENT AND THE TOTAL PRODUCT OFFER.
A. International competition today is strong.
1. To prevent losses, marketers must design and promote better products.
a. Products perceived to have VALUE are those offer good quality at a fair price.
b. When consumers calculate the value of a product, they look at the benefits and then subtract the cost to see if the benefits exceed the costs.
2. To satisfy consumers, marketers must listen and to adapt constantly to changing market demands.
3. This chapter explores two key parts of the marketing mix: PRODUCT and PRICE.
4. Customer wants and needs must be constantly monitored because these needs change over time.
5. The text gives numerous examples of new product development in the fast-food market, a particularly fast-changing market.
6. Product development is key in any business.
7. Marketers must create excitement and demand for their products.
B. DEVELOPING A TOTAL PRODUCT OFFER.
1. A TOTAL PRODUCTION OFFER consists of everything that consumers evaluate when deciding whether or not to buy something; also called the value package.
a. The basic product may be a physical good or service.
b. Tangible attributes are the product itself and the packaging.
c. Intangible attributes include image created by advertising, guarantee, and reputation of the producer.
d. Consumers evaluate the total product offer as a collection of impressions.
2. The value package as perceived by the consumer is much more than the product itself.
a. A high price may indicate exceptional quality.
b. A guarantee of satisfaction can increase the product’s value in the mind of consumers.
c. An organization can also use low price to create an attractive total product offer.
3. Different customers may want different total product offers, so marketers may develop a variety of offerings.
C. PRODUCT LINES AND THE PRODUCT MIX.
1. Companies usually sell several different, but complementary, products.
2. The PRODUCT LINE is a group of products that are physically similar or are intended for a similar market.
3. The PRODUCT MIX is the combination of product lines offered by a manufacturer.
4. SERVICE PROVIDERS also have product lines and product mixes.
II. PRODUCT DIFFERENTIATION.
A. PRODUCT DIFFERENTIATION is the creation of real or perceived product differences.
1. Actual product differences are sometimes quite small, so marketers must create a unique, attractive image.
2. Different products call for different marketing strategies.
3. Small businesses can often win market share with CREATIVE PRODUCT DIFFERENTIATION.
B. MARKETING DIFFERENT CLASSES OF CONSUMER GOODS AND SERVICES.
1. CONVENIENCE GOODS AND SERVICES are products that the consumer wants to purchase frequently and with a minimum of effort.
a. For these, location, brand awareness, and image are important for marketers.
b. Examples: candy, milk, snacks, gas, and banking.
c. Best marketing strategy: make them readily available and create the proper image.
2. SHOPPING GOODS AND SERVICES are those products that the consumer buys only after comparing value, quality, price, and style from a variety of sellers.
a. Shopping goods and services are sold largely through shopping centers where consumers can make comparisons.
b. Examples: clothes, shoes, appliances, and auto repair services.
c. Best marketing strategy: combinations of price, quality, and services.
3. SPECIALTY GOODS AND SERVICES are consumer products with unique characteristics and brand identity.
a. Because these products are perceived as having no reasonable substitute, the consumer puts forth a special effort to purchase them.
b. These products are often marketed through specialty magazines.
c. Examples: specialty foods marketed through gourmet magazines.
d. Best marketing strategy: advertising that reaches special market segments.
4. UNSOUGHT GOODS AND SERVICES are products that consumers are unaware of, haven’t necessarily thought of buying, or find that they need to solve an unexpected problem.
a. Examples: emergency car-towing services.
b. Unsought goods are best sold through personal selling.
5. The marketing task varies depending on the category of product.
6. The individual consumer determines whether or not a good or service falls into a particular class.
7. The convenience of Internet shopping puts pressure on retailers to offer outstanding service.
C. MARKETING INDUSTRIAL GOODS AND SERVICES.
1. INDUSTRIAL GOODS are products used in the production of other products (sometimes called business goods or B2B goods).
2. The buyer’s intended use of the product determines whether it is a consumer or an industrial product.
3. Industrial goods are more likely to be sold by salespeople or on the Internet.
4. Categories:
a. INSTALLATIONS consist of major capital equipment such as new factories and heavy equipment.
b. CAPITAL ITEMS are produces that last a long time and cost a lot of money.
c. ACCESSORY EQUIPMENT consists of capital items that are not quite as long lasting or expensive as installations, such as computers and photocopy machines.
III. PACKAGING CHANGES THE PRODUCT.
LEARNING GOAL 3
List and describe the six functions of packaging.
A. PACKAGING can be very important in customers’ evaluation of the value package.
1. It can change and improve its basic product (for example, the packaging of salt.)
2. Packaging can also help make a product more attractive to retailers (UPCs on packages help stores control inventory.)
3. Packaging changes the product by changing its visibility, usefulness, or attractiveness.
4. The radio frequency identifier chip is a new way to tracking products.
B. THE GROWING IMPORTANCE OF PACKAGING.
1. Today the package carries more of the promotional burden than in the past.
2. The Fair Packaging and Labeling Act requires that packages contain quantity and value comparison.
3. PACKAGING MUST DO THE FOLLOWING:
a. Protect the goods inside, stand up under handling and storage, be tamperproof, deter theft, and be easy to open.
b. Attract the buyer’s attention.
c. Describe the contents and give information about the contents.
d. Explain the benefits of the goods inside.
e. Provide information on warranties, warnings, and other consumer matters.
f. Give some indication of price, value, and uses.
4. Packaging of SERVICES has been getting more attention recently.
IV. BRANDING AND BRAND EQUITY.
A. A BRAND is a name, symbol, or design (or combination thereof) that identifies the goods or services of one seller or group of sellers and distinguishes them from the goods and services of competitors.
1. BRAND NAME is that part of the brand consisting of a word, letter, or group of words or letters comprising a name that differentiates a seller’s goods or services from those of competitors.
2. A TRADEMARK is a brand that has been given exclusive legal protection for both the brand name and the pictorial design.
3. Most people choose a brand name product over a nonbranded one, even when they say there’s no difference.
4. A brand name has benefits for both buyers and sellers.
B. BRAND CATEGORIES.
1. MANUFACTURERS’ BRAND NAMES are the brand names of manufacturers that distribute products nationally.
2. DEALER (PRIVATE-LABEL) BRANDS are products that do not carry the manufacturer’s name, but carry a distributor or retailer’s name instead.
3. Many manufacturers fear having their brand names become generic names.
a. A GENERIC NAME is the name for a product category.
b. Names such as nylon, escalator, kerosene, and zipper became so popular that they lost their brand status and became generic.
c. Companies today are protecting brand names such as Styrofoam and Rollerblade.
4. GENERIC GOODS are nonbranded products that usually sell at a sizable discount compared to national or private brands.
a. They have very basic packaging and are backed with little or no advertising.
b. Consumers today are buying more generic products because their quality has improved.
5. KNOCKOFF BRANDS are illegal copies of national brand name goods.
C. GENERATING BRAND EQUITY AND LOYALTY.
1. BRAND EQUITY is a combination of factors—such as awareness, loyalty, perceived quality, images, and other emotions—that people associate with a given brand name.
2. BRAND LOYALTY is the degree to which customers are satisfied, like the brand, and are committed to further purchases.
3. BRAND AWARENESS refers how quickly or easily a given brand name comes to mind when a product category is mentioned.
4. PERCEIVED QUALITY is an important part of brand equity.
a. A product that’s perceived as better quality can be priced accordingly.
b. Factors influencing the perception of quality include price, appearance, and reputation.
c. Consumers often develop BRAND PREFERENCE—they prefer one brand over another.
d. The product becomes a specialty good when customers reach the point of brand insistence.
5. Brand name manufacturers have to develop new products faster and promote their names better to hold off the challenge from competitors.
D. CREATING BRAND ASSOCIATIONS.
1. The name, symbol, and slogan a company uses can assist greatly in brand recognition for that company’s products.
2. BRAND ASSOCIATION is the linking of a brand to other favorable images.
3. The person responsible for building brands is a brand manager or product manager.
E. BRAND MANAGEMENT.
1. A BRAND MANAGER is a manager who has direct responsibility for one brand or one product line; called a product manager in some firms.
2. He or she is responsible for all the elements of the marketing mix.
3. Large consumer-product companies created the position of brand manager to have greater control over new-product development and product promotion.
V. THE NEW PRODUCT DEVELOPMENT PROCESS
A. Changes that a new product will fail are high, as high as 86%.
1. Not delivering what is promised is a leading cause of new-product failure.
2. Other reasons for failure include poor positioning, not enough differences from competitors, and poor packaging.
B. THE NEW-PRODUCT DEVELOPMENT PROCESS:
1. IDEA GENERATION, based on consumer wants and needs.
2. PRODUCT SCREENING.
3. PRODUCT ANALYSIS.
4. DEVELOPMENT, including building prototypes.
5. TESTING.
6. COMMERCIALIZATION (bringing the product to market).
C. GENERATING NEW-PRODUCT IDEAS.
1. The number one source of ideas for industrial products has been employees.
2. Firms should also listen to their suppliers for new product ideas.
D. PRODUCT SCREENING
1. PRODUCT SCREENING is a process designed to reduce the number of new-product ideas being worked on at any one time.
2. Criteria needed for screening include fit with present products, profit potential, marketability, and personnel requirements.
E. PRODUCT ANALYSIS is done after screening.
1. PRODUCT ANALYSIS is making cost estimates and sales forecasts to get a feeling for profitability of new-product ideas.
2. Products that don’t meet the established criteria are withdrawn from further consideration.
F. PRODUCT DEVELOPMENT AND TESTING.
1. A PRODUCT IDEA can be developed into many different PRODUCT CONCEPTS, or alternative product offerings based on the same product idea.
2. The firm may develop a prototype.
3. CONCEPT TESTING involves taking a product idea to consumers to test their reactions.
G. COMMERCIALIZATION.
1. The text uses the example of the long struggle for the inventor of zippers to gain consumer acceptance of the product.
2. The marketing effort must include commercialization.
3. COMMERCIALIZATION is promoting the product to distributors and retailers to get wide distribution and developing strong advertising and sales campaigns to generate and maintain interest in the product among distributors and consumers.
4. Today new products are getting more rapid exposure to global markets through promotion on the Internet.
H. THE INTERNATIONAL CHALLENGE.
1. The secret to international success is to BRING OUT HIGH-QUALITY NEW PRODUCTS and bring them out quickly.
2. Other countries, particularly Japan, are known for their rapid development processes.
3. To stay competitive in world markets, U.S. businesses must develop a NEW-PRODUCT DEVELOPMENT PROCESS.
a. This requires continuous, incremental improvements in function, cost, and quality.
b. Cost-sensitive design and new process technologies are also crucial.
4. Successful new-product development is an INTERACTIVE PROCESS between customers and marketers.
5. The focus shifts from INTERNAL product development processes to EXTERNAL customer responsiveness.
6. Their responsiveness is especially important in the global market.
VI. THE PRODUCT LIFE CYCLE.
A. The PRODUCT LIFE CYCLE is a theoretical model of what happens to sales and profits for a product class over time.
1. Products go though four stages: introduction, growth, maturity, and decline.
2. Not all products follow the life cycle, and some brands may act differently.
3. Knowing what stage in the cycle a product is in helps marketing managers to decide when strategic changes are needed.
B. EXAMPLE OF THE PRODUCT LIFE CYCLE—The text uses the example of the product life cycle for instant coffee.
C. THE IMPORTANCE OF THE PRODUCT LIFE CYCLE.
1. Different stages in the product life cycle call for different strategies.
2. Each stage calls for multiple marketing mix changes.
3. Example: Every few years Arm and Hammer baking soda promotes new uses for the product to boost sales.
VII. COMPETITIVE PRICING.
A. PRICE is a critical ingredient in consumer evaluations of the product and a difficult one for marketers to control.
B. PRICING OBJECTIVES.
1. When setting a pricing strategy, the firm may have several objectives in mind.
2. A firm must formulate price objectives clearly before developing an overall pricing objective.
3. Popular PRICING STRATEGIES include:
a. Achieving a target return on investment or profit: Most first seek to maximize profit.
b. Building traffic: Low prices on certain products can bring customers into your store.
c. Achieving greater market share: Price can be used to capture and hold market share.
d. Creating an image: A high price may present an image of status.
e. Furthering social objectives: A product may be priced low so more people can afford to buy it.
4. A company’s SHORT-TERM PRICING OBJECTIVES may differ from its LONG-TERM OBJECTIVES.
5. Pricing objectives are influenced by OTHER MARKETING DECISIONS regarding product design, packaging, branding, distribution, and promotion.
6. Price and cost to produce aren’t always related.
C. COST-BASED PRICING.
1. Producers often use COST as a primary basis for setting price.
2. In the long run, THE MARKET—not the producer—DETERMINES WHAT THE PRICE WILL BE.
D. DEMAND-BASED PRICING.
1. TARGET COSTING is designing a product so that it satisfies customers and meets the profit margins desired by the firm.
2. Target costing makes cost an input to the development process, not an outcome of it.
E. COMPETITION-BASED PRICING.
1. COMPETITION-BASED PRICING is a pricing strategy based on what all the other competitors are doing; the price can be set at, above, or below competitor’s prices.
2. PRICE LEADERSHIP is the procedure by which one or more dominant firms set the pricing practices that all competitors in an industry follow.
F. PRICING IN THE SERVICE SECTOR.
1. Service industries are adopting many of the same pricing tactics as goods-producing firms.
a. Service firms begin by cutting costs as much as possible.
b. Those services that aren’t important to customers are cut.
2. Example: Luxury hotels cut prices after the September 11, 2001 terrorist attacks because business demand fell.
3. With both goods and services, the idea is to give the consumer value.
G. BREAK-EVEN ANALYSIS.
1. BREAK-EVEN ANALYSIS is the process used to determine profitability at various levels of sales.
2. The BREAK-EVEN POINT (BEP) is the point where revenues from sales equal all costs.
3. BEP is calculated:
total
fixed cost (FC)
price of one unit (P) minus variable cost (VC) of one unit
4. TOTAL FIXED COSTS are all the expenses that remain the same no matter how many products are sold.
5. VARIABLE COSTS are costs that change according to the level of production.
H. OTHER PRICING STRATEGIES.
1. A SKIMMING PRICE STRATEGY is a strategy in which a new product is priced high to make optimum profit while there is little competition; however, it invites competitors.
2. A PENETRATION STRATEGY is one in which a product is priced low to attract more customers and discourage competitors; it allows a company to capture market share quickly.
3. Pricing strategies used by retailers.
a. EVERYDAY LOW PRICING (EDLP) is setting prices lower than competitors and then not having any special sales. Example: Wal-Mart.
b. The HIGH-LOW PRICING STRATEGY is setting prices that are higher than EDLP stores, but have many special sales where the prices are lower than competitors. Example: department stores.
c. These price strategies are less effective because consumers are able to use the Internet to find better prices.
d. Some retailers use price as a major determinant of the goods they carry. Example: Stores that sell only products priced at $1.
e. Retailers also use BUNDLING, grouping two or more products together and pricing them as a unit.
f. PSYCHOLOGICAL PRICING is pricing goods and services at price points that make the product appear less expensive than it is. (Example: gasoline priced at $1.)
H. HOW MARKET FORCES AFFECT PRICING.
1. Ultimately, price is determined by supply and demand in the marketplace.
2. The price that results from the interaction of buyers and sellers in the marketplace is called the MARKET PRICE.
3. Different consumers may be willing to pay different prices.
4. Marketers sometimes set price on the basis of consumer demand, called DEMAND-ORIENTED PRICING, rather than cost or other calculations.
5. Marketers now face a new pricing problem: customers can compare prices of many goods and services on the Internet.
6. Price competition is going to heat up as consumers have more access to price information from all around the world.
VIII. NONPRICE COMPETITION.
A. Marketers often compete on product attributes other than price.
1. Because price differences are small in products such as candy bars and gas, marketers stress image and benefits.
2. Many smaller organizations promote the services that accompany basic products rather than price in order to compete with bigger firms.
B. NONPRICE STRATEGIES:
1. Marketers emphasize nonprice differences because prices are so easy to match.
2. Other STRATEGIES FOR AVOIDING PRICE WARS include:
a. Add value, such as home delivery.
b. Educate consumers; teach customers about the product and its benefits.
c. Establish relationships with customers.