Transcript CHAPTER 6

CHAPTER 6
New-Product Development and
Product Life-Cycle Strategies
Objective: finding and developing new products and managing
them successfully over their life cycle.
New-Product Development
Strategy
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Because of the rapid changes in consumer tastes,
technology, and competition, companies must develop
new products and services. A firm can obtain new
products in two ways;
acquisition; (1) buying a whole company, (2) a patent, or
(3) a license.
new-product development; (1) developing original products,
(2) product improvements, (3) product modification, or
(4) new brands.
New products
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Can be obtained via acquisition or development.
Suffer from high failure rates.
To create succesful new products, the company
must;
Undestand its customers, markets and competitiors
 Develop products that deliver superior value to
customers.
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Causes of new product failures
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Overestimation of market size
Product design problems
Product incorrectly positioned, priced or
advertised
Costs of product development
Competitive actions
New-product Development
Process
In order to find and develop successful products, the marketers
must go through the following stages;
Idea Generation
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New product development starts with idea generation the systematic search for new-product ideas.
Major sources of new-product ideas include (1) internal
sources - research & development department,
executives, salespeople; (2) customers; (3) competitors;
(4) distributors and suppliers; (5) others - trade
magazines, seminars, government agencies, newproduct consultants, marketing research firms,
universities, inventors.
Idea Screening
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Idea screening reduces the number of new ideas
by screening new-product ideas in order to
identify good ideas and drop poor ones as soon
as possible.
In idea screening, market size, product price,
development time and costs, production costs,
rate of return and type of customers are put into
consideration.
Concept Development and
Testing
An attractive idea must be developed into
alternative detailed product concepts.
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Concept Development; is a detailed version of the newproduct idea stated in meaningful consumer terms.
Several concepts can be developed for a product idea
e.g. the idea of developing an electric car may be
created in the following product concepts - (1) an
inexpensive family car; (2) a medium cost sporty car for
young people; (3) an inexpensive
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car for conscious people who look for basic
transportation, low fuel cost, and low pollution. The
marketer must test these alternatives.
Concept Testing; involves testing new-product
concepts with target consumers before turning the
new ideas into actual new products. The concepts
may be presented to consumers symbolically or
physically. After being exposed to the concept,
consumers may be asked to tell their opinions. The
answers will help the company decide which
concept has the strongest appeal.
Marketing Strategy Development
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After all the concepts are tested, the company must develop
the initial marketing strategy to introduce the best concept to
the market.
At this stage, the marketing strategy consists of three parts;
 Part one; describes the (1) target market, (2) the planned
product positioning, and (3) the sales, market share and
profit goals for the first year.
 Part two; outlines the product’s planned (1) price, (2)
distribution, and (3) marketing budget for the first year.
 Part three; describes the planned long-run (1) sales, (2)
profit goals, and (3) marketing mix strategy.
Business Analysis
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Once the product concept and the marketing
strategy is decided, the marketer should evaluate the
business attractiveness of the proposal.
Business analysis involves the projections for the sales
(by looking at the sales history of similar products
and getting the market opinion), costs (by looking at
the forecasted sales figures), and profit for the new
product to find out whether they satisfy the
company’s objectives. If they do, the product can
move to the product-development stage.
Product Development
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Here, the product concept is developed into a
physical product (prototype) to understand
whether the product idea can be turned into a
workable product.
Prototypes are tested under laboratory and field
conditions to make sure that the product
performs safely and effectively.
Test Marketing
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After the prototype is tested under the laboratory
and field conditions, the next stage is testing the
product under more realistic market settings.
Test marketing allows the company to test the
product and its marketing program (e.g. positioning
strategy, advertising, pricing, distribution, branding,
packaging, budget) before going into the full
introduction.
When introducing a new product requires a big
investment, or when management is not sure of the
product or marketing program, the companies do a
lot of test marketing.
Commercialization
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Commercialization is the introduction of a new
product into the market.
At this stage, the company may need to spend
between $10 million and $100 million for
advertising and sales promotion in the first year.
Here, the company should decide when and
where the product will be introduced.
Product Life-Cycle Strategies
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After launching a new product, management wants it to
enjoy a long and happy life, although it does not expect
the product to sell forever.
The product life cycle (PLC) is the course that a
product’s sales and profits take over its lifetime. It has
five stages;
1. Product development begins when the company develops a newproduct idea. During product development, sales are zero and
the company’s investment costs mount.
2. Introduction is a period of slow sales growth as the product
enters in the market. Profits are nonexistent in this stage
because of the heavy expenses of product introduction.
3. Growth is a period of rapid market acceptance and
increasing profits.
4. Maturity is a period of slowdown in sales growth because
the product has achieved acceptance by most potential
buyers. Profits level off or decline because of increased
marketing outlays to defend the product against
competition.
5. Decline is the period when sales fall off and profits drop.
Product Life-Cycle
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The PLC concept is used by the marketers to forecast
product performance or to develop marketing strategies.
But all products do not follow the PLC in the same way.
Some products are introduced and die quickly; others
stay in the maturity stage for a long time. Some enter the
decline stage and are then cycled back into the growth
stage through strong promotion or repositioning.
The major drawbacks of this cycle is that it is difficult
(1) to identify which stage of the PLC the product is in,
(2) to determine the factors that affect the product’s
movement through the stages, to forecast the (3) sales
level at each PLC stage, (4) the length of each stage, (5)
the shape of the PLC curve.
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The product life cycle concept can be applied to
a;
 Product class (soft drinks)
 Product form (diet colas)
 Brand (Pepsi)
Introduction Stage
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The introduction stage starts when the new product
is first launched.
Here, sales growth is slow, profits are negative or
low, because of low sales and high distribution and
promotion expenses.
Promotion spending is high to inform consumers of
the new product and get them to try it.
The company and its competitors produce the basic
versions of the product because the market is not
ready for the different versions of the product yet.
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The introduction stage strategies are;
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Rapid-skimming strategy (high price/high promotion);
here the company targets the “cream” of the buyers
(buyers with high income) so the price of the new
product or service is set high. When the company wants
to attract these people rapidly (quickly), it heavily
promotes the product.
Slow-skimming strategy (high price/low promotion);
the difference between slow- and rapid-skimming is in
the amount spent on promotion. Here less money is
spent on promotion.
Rapid-penetration (low price/high promotion); the
price level is the key difference between penetration and
skimming strategies. Whe the market is price sensitive,
penetration is a better strategy. In penetration, prices are
set low to capture as many buyers as possible. When
most of the potential buyers
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are unaware of the product, they use heavy promotion.
Here the risk is attracting heavy competition because a lot
of companies may like to copy.
Slow-penetration strategy (low price/low promotion);
here the new product or service is introduced at a low
price with a low level of promotion. Again, the potential
market is large and price sensitive but aware of the new
service or product that is why, the level of promotion is
low.
In summary;
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Marketing objective: Create product awareness and trial
Sales: Low sales
Costs: High cost per customer
Profits: Negative
Customers: Innovators
Competitors: Few
Strategies:
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Product: Offer a basic product
Price: Skimming or penetration
Place: Build selective distribution
Promotion: Build product awareness among early adopters and dealers
with advertising, use heavy sames promotion to entice trial
Growth Stage
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If the new product satisfies the market, it will enter a
growth stage, in which sales climb quickly.
Early adopters buy the product.
New competitors enter the market when they are
attracted by the opportunities for profit. They introduce
new product features so the market expands.
Sales increase, prices remain the same or fall slightly,
promotional spending stays the same or increase
slightly.
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Profits increase as promotion costs are spread over
a large volume (sales) and as unit production costs
fall.
The growth stage strategies are;
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improving product quality and adding new product
features and models
entering into the new market segments
entering into the new distribution channels
shifting some advertising from building product
awareness to building product conviction and purchase
lowering prices at the right time to attract more buyers
in order to sustain its rapid growth and meet
competition.
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By spending a lot of money on product
improvement, promotion, and distribution, the
company can gain a dominant position in the market
but, as a result of this, it gives up maximum current
profit and hopes to make it in the next stage.
In summary;
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Marketing objective: Maximize market share
Sales: Rapidly raising sales
Profits: Rising profits
Customers: Early adopters
Competitors: Growing number
Strategies:
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Product: Offer product extentions, service and warranty
Price: Depends on the strategy chosen at the intorduction stage
Place: Build intensive distribution
Promotion: Build awareness and interest in the mass market with
advertisements, Reduce sales promotions to take advantage of ehavy
customer demand
Maturity Stage
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At some point, a product’s sales growth will slow down,
and the product will enter a maturity stage which lasts
longer than the previous stages.
Here, competition is greater because of the
overcapacity. They drop their prices, increase
advertising and sales promotions, and increase their
R&D budgets to find better products. As a result,
profits decrease, weaker competitors leave the market
and only the well-established competitors remain.
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The product managers should consider modifying
their market, product and marketing mix rather than
defending their product. The maturity stage
strategies are;
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In modifying the market, the company looks for new
users and market segments e.g. Johnson & Johnson Baby
Shampoo is marketed to adults + looks for ways to
increase usage among present customers e.g. “Sut icin Sut
icirin” campaign of Mis Sut. Or the company may want
to reposition the brand to appeal to a larger or fastergrowing segment.
Or the company may try modifying the product by
changing its product’s features, quality or style to attract
new users e.g. Sony adds new styles and features to its
Walkman and Discman lines, Algida adds new flavors and
ingredients to its current products, Burger King
introduces its new Fish Burgers or car
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manufacturers restyle their cars to attract buyers who
want a new look.
Or the company can try modifying the marketing mix
by changing one or more marketing mix elements to
improve sales. They can cut prices to attract new users
and competitors’ customers. They can launch a better
advertising campaign or use heavy sales promotions. The
company can also move into larger market channels mass merchandisers. Or the company can offer new or
improved services to buyers.
In summary;
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Marketing objective: Maximize profit while defending market share
Sales: Peak sales
Costs: Low cost per customer
Profits: High profits
Customers: Middle majority
Competitors: Stable number begining to decline
Strategies:
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Product: Diversify brand and models
Price: Price to match or beat competitors
Place: Build more intensive distribution
Promotion: Stress brand differences and benefits with advertising. Sales
promotions are increased to encourage brand switching.
Decline Stage
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Most product forms and brands’ sales decline.
Here, the sales may become zero suddenly or may drop
to a low level where they continue for may years.
As sales and profits decline, firms withdraw from the
market.
The remaining companies prune their product
offerings, drop smaller segments or channels, cut the
promotion budget or reduce their prices further.
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Here, the company should decide whether to
maintain, harvest, or drop its product in the decline
stage.
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Management may decide to maintain its brand without
changing it in the hope that the competitors would leave
the market. Or management may decide to reposition the
brand in the hope of moving it back into the growth stage
of the product life cycle.
Management may decide to harvest the product by
reducing costs (equipment, advertising, sales force)
hoping that sales will remain.
Or the management may decide to drop the product
from the line by selling it to another firm or simply
liquidate it at salvage value.
In summary;
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Marketing objective: Reduce expenditure and milk the brand
Sales: Declining sales
Costs: Low cost per customer
Profits: Declining profits
Customers: Laggards
Competitors: Declining number
Strategies:
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Product: Phase out weak items
Price: Cut price
Place: Go selective; phase out unprofitable outlets
Promotion: Reduce advertisements to level needed to retain hard-core loyals.
Reduce sales promotions to minimal level.