06. PRODUCT

A Product is anything that can be offered to a market to satisfy a want or need. Products that are marketed include physical goods, services, experiences, events, persons, places, properties, organizations, information and ideas. People satisfy their needs and wants with products. Product Levels In planning its market offering, the marketer needs to think through five levels of the product. Each level adds more customer value, and the five constitute a customer value hierarchy. The most fundamental level is the core benefit: the fundamental service or benefit that the customer is really buying. A hotel guest is buying ‘rest and sleep’. Marketers must see themselves as benefit providers. At the second level,

the marketer has to turn the core benefit into a basic product. Thus a hotel room includes a bed, bathroom, towels, dresser and closets. At the third level, the marketer prepares an expected product – a set of attributes and conditions buyers normally expect when they purchase this product. Hotel guests expect a clean bed, fresh towels, working lamps and a relatively degree of quiet. At the fourth level the marketer prepares an augmented product that exceeds customer expectations. A hotel can include a remote control colour television set, fresh flowers in the room, fine room service etc. Today’s

competition essentially takes place at the product augmentation level and then again today’s augmented

benefits soon become expected benefits. At the fifth level stands the potential product, which encompasses all the possible augmentations and transformations the product might undergo in the future. Here is where companies search for new ways to satisfy customers and distinguish their offer. All-suite hotels where the guest occupies a set of rooms represent an innovative transformation of the traditional hotel product. Successful companies add benefits to their offering to satisfy and delight their customers. Product Classifications Marketers have traditionally classified products on the basis of characteristics: durability, tangibility and use (consumer/industrial). Each product type has an appropriate marketing mix strategy.

Core Product

Basic Product

Expected Product

Augmented Product

Potential Product

Five Product Levels

On the basis of Durability and Tangibility PRODUCT

On the basis of Use

Non Durable Goods Durable Goods Services Industrial Products Consumer Products

Materials and Parts Raw Materials Manufactured Materials

Capital Items Installations Equipments

Supplies and business Services Operating Supplies Maintenance and Repair Items Maintenance and Repair Services Business Advisory Services

Convenience Goods Staple Goods

Impulse Goods Emergency Goods

Shopping Goods Homogeneous Shopping Goods Heterogeneous Shopping Goods

Specialty Goods

Unsought Goods

Product Classifications On the basis of Characteristics such as

Durability, Tangibility and Use

MB203 Marketing Management 06. Product Page - 2 - of 12 Products can be classified into two groups, according to use – industrial and consumer: Industrial products are products that are purchased to produce other products or facilitate the smooth running of an organisation. They are purchased to satisfy the organisation’s needs. Functional aspect of

the product is perceived to be more important when compared to the psychological rewards associated with it. Industrial products can be classified in terms of how they enter the production process and their costliness:

Materials and parts: Goods that are completely used up for the production of a manufacture’s product.

They include raw materials such as fruits, iron ore and manufactured materials such as concentrates, steel. Capital items: Long lasting goods that facilitate the developing or managing the finished product. They include installations such as factories, offices, generators and equipments such as hand tools, computers.

Supplies and business services: Short-lasting goods and services that facilitate the developing or managing the finished product. Supplies include operating supplies like lubricants, fuel, writing paper and maintenance and repair items such as nails, brooms. Services include maintenance and repair services like window cleaning, computer repair and business advisory services such as leagal, management consulting. Consumer products are products that are used by the consumer for personal, family or household use. Consumer products can be classified on the basis of shopping habits:

Convenience goods: Purchased frequently, immediately and with a minimum effort. Convenience goods can be further divided. Staple Goods – purchased on a regular basis, eg. Colgate toothpaste, Maggie Ketchup. Impulse Goods – purchased without any planning or search effort, eg. Chloromint, Magazines. Emergency Goods – purchased when a need is urgent, eg. K.C. Paul’s umbrella.

Shopping goods: Purchased after comparing on such bases as suitability, quality, price and style. Shopping goods can be further divided. Homogeneous shopping goods are similar in quality but different enough in price to justify shopping comparison, eg. home appliances like television sets. Heterogeneous shopping goods differ in product features and services that may be more important than price, eg. cameras. Specialty goods: Goods with unique characteristics or brand identification for which buyers are willing to make a special purchasing effort. eg. Bose stereo components, Mercedes car.

Unsought goods: Goods that the consumer normally does not think of buying. eg. Smoke detectors. AGAIN, According to durability and tangibility, products can be classified as - Nondurable, Durable and Services: Nondurable goods: Tangible goods that are normally consumed in one or few uses – eg. cold drinks, and all FMCG (fast Moving Consumer Goods) like soaps, petrol etc. Since these goods are consumed quickly and purchased frequently, the appropriate strategy is to make them available in many locations, charge only a small mark up and advertise heavily to induce trial and build preference. Durable goods: Tangible goods that normally survive many uses – eg. refrigerators, heavy machines. Durable products normally require more personal selling and service, command higher margin and require more seller guarantees. Services: Intangible, inseparable, variable and perishable products – eg. haircuts, repairs. Services normally require more quality control, supplier credibility and adaptability. Examples Of Service Industries • Health Care– hospital, medical practice, dentistry, eye care • Professional Services– accounting, legal, architectural • Financial Services– banking, investment advising, insurance • Hospitality– restaurant, hotel/motel, bed & breakfast; ski resort, rafting • Travel– airline, travel agency, theme park • Others– hair styling, pest control, plumbing, counseling services, health club, interior design

MB203 Marketing Management 06. Product Page - 3 - of 12 Characteristics of Services

Services are different from goods because they have five distinct characteristics: Intangibility, Heterogeneity, Inseparability, Perishability, and Lack of Ownership.

Intangibility: Unlike Products, that can be seen, heard, touched, smelt and/or tasted, Services are to be experienced.

Quality of service is not always strictly measurable. Different people may have different expectations with regard the same service.

Heterogeneity: A machine can produce units identical in size, shape and quality. A human being cannot work uniformly

and consistently throughout the day. Since human beings offer a service, there is high probability that the same level of service is not delivered all the time. Further, the service offered by one employee of an organisation may vary from the service offered by another employee of the same organisation.

Inseparability: A service is consumed by the customer as soon as it is delivered to him. Production and consumption

occur simultaneously. Since the delivery and consumption of a service are inseparable, service providers and service receivers need to be in contact when the service is being rendered.

Perishability: Unlike products, services cannot be inventoried or stored for future consumption. The service provider

looses on revenue if his service capacity is not fully utilised. Lack of Ownership: Due to the intangible nature of services, service delivery, unlike product delivery, does not ensure

transfer of ownership. The challenge here is to make the customers believe that they are being offered a unique piece of service. Unlike a motor car or a vacuum cleaner, services once delivered cannot be returned or resold to a third party. They are enjoyed only once by the customer and once consumed cannot be meaningfully transferred to third parties. Extended Marketing Mix and Strategies for Services Marketing

In addition to the 4 elements of the Marketing Mix available to all marketers – Product, Price, Physical Distribution, and Promotion – Marketers of Services are equipped with 3 Additional P-s – Physical Evidence, Process, and People. The Extended Marketing Mix for Services Marketing consists of 7 P-s.

PRODUCT: Same standardised service – car service stations, couriers Customised service – doctors, consultants

The service offering needs to be looked at carefully to ensure it meets customer needs as closely as possible. The range of services offered may require extending/updating in response to new developments in the market.

PRICING: Fees: Doctors, Lawyers, Accountants Rent: House, Building, Home Appliances Admission Fee: Education, Recreation Parks, Resorts Premium: Insurance Policy Interests: Loans

The perishability nature of services makes pricing difficult since fluctuation in demand cannot be met through inventory. Hence, variation of price depending on time/season/consumption becomes the natural strategy. Price also represents other factors in addition to simply costs and is often used by prospective clients as a guide to quality. Therefore, pricing should be regarded as a strategic element of the overall marketing programme rather than a basic costing exercise.

PROMOTION: Ambience;Employees (Personal Selling); Awards and Certificates displayed; Publicity

Promotional objectives need to be clearly defined before a strategic promotional program can be designed. Service providers may have more than one promotional objective and will use a variety of messages and media to communicate with target audiences. Advertising can increase awareness. Newsletters or house magazines can be a useful tool for communicating with existing customer and other publics. Sponsorship, PR and publicity can be used to attract attention and inform target audiences. A higher profile and enhanced corporate identity will make the organisation more attractive to customers.

Bases of Pricing Demand, Season, Time of year/day, Age

of Consumer, Ability to pay

MB203 Marketing Management 06. Product Page - 4 - of 12

PHYSICAL DISTRIBUTION: No Intermediaries Required: Legal or Medical consultation Intermediaries Required: Public Utilities – Electricity, Gas, Ration, Mass Transport etc.; Travel and

Entertainment; Financial Services

Location decisions are important in professional services marketing as many clients use convenience as a key factor in provider selection. Location may be less important for highly complex or specialist services. Some services, such as building surveying or accounting audits, have to be carried out at the clients’

premises. PHYSICAL EVIDENCE: The Remote Encounter- ATM transactions, e-ticketing etc.

The Indirect Personal Encounter- Helplines of banks & credit card companies

The Direct Personal Encounter- Direct face-to-face encounter with customers

Customers will base their judgement on the physical evidence available to them. Appearance and

cleanliness of hospitals influence a customer perception of the service. PROCESS: Standardisation of Processes The arrangements through which the customer actually receives delivery of the service constitute the

process. In a hospital, the service comprises of getting an appointment at the reception, consulting the doctor etc. Administration quality, customer care, appointment systems, methods of communication, office opening hours and operating efficiency in terms of delegation or team working, are all examples of aspects of the service delivery process which may be improved or revised.

PEOPLE: Competitive advantage through service personnel Behavioural Training Since most services are provided by people and service delivery quality depends on the person delivering

the service, hence the selection, training and motivation of employees can make huge difference in customer satisfaction. Ideally, employees should exhibit competence, a caring attitude, responsiveness, initiative, problem solving ability and goodwill. Product Mix A product mix (also called product assortment) is the set of all product lines and all items that a particular seller offers for sale. A company’s product mix has a certain width, length, depth &

consistency. These concepts are illustrated in the tables for selected HUL and ITC products. Width: Total number of product lines a company carries. Our example shows HUL’s and ITC’s product

mix width as 7. They have 7 product lines (Lines of Business). Length: Total number of items in the mix. In our example, it is 21. The average length of a line is obtained by dividing the total length by the number of lines. Here, it is 21/7 = 3. Depth: How many variants are offered of each product in the lines. It is the assortment of sizes, colors and variations offered for each product. (Lifebuoy Active Red comes in 3 sizes: 125gm, 100gm & 60gm cakes) Consistency: Refers to the closeness exhibited by the product lines with respect to end use, production requirements, distribution channels etc. (HUL product lines are consistent as they are consumer goods distributed by the same channels but ITC product lines are inconsistent as they are widely varied in nature.)

Product Mix of HUL (Illustrative Only) Colour

Cosmetics Hair Care Skin Care Oral Care Deodorants Soaps and Detergents Toilet Soaps

Lakme Sunsilk Fair & Lovely Pepsodent Axe Surf Liril Clinic Ponds Close-up Denim Rin Lifebuoy Rexona Wheel Lux Sunlight Pears Vim Hamam Savlon

Product Lines of ITC (Illustrative Only)

Cigarettes Garments Edible Oil Exports (Sea Food)

Financial Services Hotels Sports Gear

MB203 Marketing Management 06. Product Page - 5 - of 12 Product Life Cycle The product life cycle is an important concept in marketing. It describes the stages a product goes through from when it was first thought of until it finally is removed from the market. Not all products reach this final stage. Some continue to grow and others rise and fall. Just as businesses go through stages, so do products and services. The product or service life cycle is determined by how long it is marketable. The life cycle of the TV cathode ray tube (CRT) is coming to an end as more and more flat screens are being purchased. The life cycle of voice-over IP telephone service is entering its growth phase as more and more people try it out. A branded good can enjoy continuous growth, such as Microsoft, because the product is being constantly improved and advertised, and maintains a strong brand loyalty. Knowing where your products or services are in their life cycle will help you determine refinements or adjustments you may need to make to align them with the vision and strategy you have already developed. To say a product has a life cycle is to assert four things: 1. Products have a limited life. 2. Product Sales pass through distinct stages, each posing different challenges & opportunities to the seller. 3. Profits rise and fall at different stages of the product life cycle. 4. Products require different strategies in each stage of their life cycle. The PLC concept can be used to analyse product category, product form, a product or a brand:

Product categories have the longest life cycles. Many product categories stay in the mature stage indefinitely. Typewriters seem to have entered the decline stage of the PLC whereas mobile phones, fax machines, bottled drinking water are clearly in the growth stage. Product forms follow the standard PLC more faithfully. Manual typewriters passed through the 4 stages; their successors – electric typewriters and electronic typewriters – passed through these same stages. Products follow either the standard PLC or one of several variant shapes. Brands can have a short or long PLC. Although many new brands die an early death, some brand names – like Cadbury’s, Colgate, Surf – have a very long PLC and are sometimes used to launch new products. Most product life cycle curves are portrayed as bell shaped. This curve is typically divided into four stages: introduction, growth, maturity and decline.

Introduction – researching, developing and then launching the product Growth – when sales are increasing at their fastest rate Maturity – sales are near their highest, but the rate of growth is slowing down, e.g. new

competitors in market or saturation Decline – final stage of the cycle, when sales begin to fall

SalesProfit

Introduction: A period of slow sales growth as the product is introduced in the market. Profits are low or non existent in this stage because of the heavy expenses incurred in set-up cost and advertising. Research and development, production, and marketing costs are high. Prices are set high on the product or service to recoup some of the development and introduction costs. For example microwave ovens that can now be purchased for Rs.7,000/- were priced between Rs.12,000 andRs.15,000 when they were first introduced. In this stage, you’ll want to keep a close watch on the market’s reaction to your products and

services and be ready to make changes. It sometimes helps to experiment with several different product and service configurations to see what works in these early stages.

Intro duction Growth Maturity Decline

Sales & Profits

Time

MB203 Marketing Management 06. Product Page - 6 - of 12 Growth: A period of rapid market acceptance and substantial profit improvement. Sales generally increase with the demand for the product. Cash flow improves and profits are at their peak. When real estate is being developed, there is an increased demand for construction and the products and services that support the development. Continue to make refinements to stay ahead of the competition. Build product & service development capabilities with the cash received from increasing sales. Maturity: A period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits stabilise or decline because of increased competition. Sales may continue to increase or level off. Profits decrease since prices are continually lowered to compete. Still, a great amount of cash flow is generated through sales. Conduct market research to determine trends. Invest in research and development. Adapt your product or service to meet the coming trends. If you don’t look for

new opportunities in new markets and new products, the coming decline stage will leave you with products and services that no longer sell. Decline: The period when sales show a downward drift and profits erode. Sales drop rapidly even though prices continue to fall. Profits are extremely low at this stage, but the product or service has generated sufficient cash flow during its life. When a product or service hits this stage many entrepreneurs reintroduce it with a new feature or create a new benefit. Simply increasing the size of a candy bar by 33 percent can start its life cycle over again. Consider making changes to your product or service or the way you market it. You may decide to discontinue your product or service before losses eat into the cash flow generated by sales. Marketing Strategies at different stages of PLC Some key features of each stage in the product life cycle along with their relevant strategies can be summarised as follows:

Introduction Stage •New product launched on the market •Low level of sales •Low capacity utilisation •High unit costs - teething problems occur •Usually negative cash flow •Distributors may be reluctant to take an unproven product •Heavy promotion to make consumers aware of the product

Relevant strategies at the introduction stage might include: Aim – to encourage customer adoption High promotional spending to create awareness and inform people Either skimming or penetration pricing Limited, focused distribution Demand initially from “early adopters”

Growth Stage •Expanding market but arrival of competitors •Fast growing sales •Rise in capacity utilisation •Product gains market acceptance •Cash flow may become positive •Unit costs fall with economies of scale •The market grows, profits rise but attracts the entry of new competitors

Relevant strategies at the growth stage might include: Improve the product - new features, improved styling, more options Improve Product Quality,

Add New Product Features, Improve Styling. Add New Models and Flanker Products. Enter New Market Segments. Increase Distribution Coverage, Enter New Distribution Channels. Shift from Product Awareness-Advertising to Product-Preference Advertising Lower Prices to attract the next layer of Price-Sensitive Buyers.

MB203 Marketing Management 06. Product Page - 7 - of 12 Maturity Stage •Slower sales growth as rivals enter the market = intense competition + fight for market share •High level of capacity utilisation •High profits for those with high market share •Cash flow should be strongly positive •Weaker competitors start to leave the market •Prices and profits fall There is a wide variety of possible options for a product that has reached the maturity stage:

Market Modification Product Modification Marketing Mix Modification. Rationalisation of capacity Competitor based pricing Promotion focuses on differentiation Persuasive advertising Intensive distribution Enter new segments Attract new users Repositioning Develop new uses Product differentiation & product improvements

Extension Strategies

These extend the life of the product before it goes into decline. Again businesses use marketing techniques to improve sales. Examples of the techniques are:

Advertising – try to gain a new audience or remind the current audience Price reduction – more attractive to customers Adding value – add new features to the current product, e.g. video messaging on mobile phones Explore new markets – try selling abroad New packaging – brightening up old packaging, or subtle changes such as putting crisps in foil

packets or Seventies music compilations.

Decline Stage •Falling sales •Market saturation and/or competition •Decline in profits & weaker cash flows •More competitors leave the market •Decline in capacity utilisation –switch capacity to alternative products Potential strategies are:

Harvest by spending little on marketing the product Rationalise by weeding out product variations Price cutting to maintain competitiveness Promotion to retain loyal customers Distribution narrowed Decrease the Firm’s Investment Divesting the Business quickly by disposing off its assets advantageously.

MB203 Marketing Management 06. Product Page - 8 - of 12 Different Products – Different Product Life Cycle Stages Not all products follow all five stages of the product life cycle. While some products are introduced and die quickly afterwards, others stay in the mature stage for a very long time. Some are cycled back into the growth stage after reaching the decline stage through strong promotion or repositioning. In fact, a well-managed brand could live forever if wise strategies are applied. Examples include Coca-Cola, Gillette, American Express, which still live on after more than 100 years. Special Product Life Cycle Forms

We can also apply the Product Life Cycle stages to styles, fashion and fads. Their product life cycles are somewhat special.

A style is a basic and distinctive mode of expression. For instance, styles appear in homes (e.g. country cottage, functional art deco), clothing (e.g. formal and casual) and art (e.g. realist, surrealist and abstract). A style may last for generations, but usually passes in and out of vogue. Therefore, a style’s product life

cycle stages show several periods of renewed interest.

A fashion is a currently popular or accepted style in a certain field. For instance, the more formal ‘business attire’ look in the 1980’s gave way to the ‘business casual’ look of the 2000’s. Fashions tend to

grow slowly and remain popular for a while, before declining slowly.

Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate product or brand popularity. A fad may be part of an otherwise normal product life cycle, passing through the product life cycle stages. But at a certain point, sales raise unexpectedly, but drop afterwards equally quickly. The best example is the Rubik’s Cube.

The product life cycle stages can be used for describing how products and markets work. When used carefully, the PLC concept can be a great help in developing goods marketing strategies for the different product life cycle stages. However, using the PLC concept for forecasting product performance or developing marketing strategies brings some practical problems. For instance, it is difficult to forecast the sales level at each of the product life cycle stages, as well as the length of each stage and the overall shape of the PLC curve. Also, the marketing strategy is both the cause and the result of the product life cycle. The best option is to use a product’s current position in the product life cycle in order to develop

marketing strategies. The resulting strategies will then affect the product’s performance in later product

life cycle stages.

The idea behind the PLC concept is that companies must continually innovate. Regardless of the success of a company’s current product line-up, it must skilfully manage the product life cycles of existing products for future success. In order to grow, it must develop a steady stream of new products that offer new value to customers.

MB203 Marketing Management 06. Product Page - 9 - of 12 NEW PRODUCT DEVELOPMENT Every product goes through a life cycle and eventually dies as new products come along that serve customers better.

Why are new products needed Existing products will eventually die, so new products must be developed to maintain or increase

sales. Customers want new products Competitors will try their best to supply new products The future of the company will depend on new products

What is a new product

Products those are new to the world. Less than 10% of all new products are new to the world. New product lines - products that are new to the company but not new to the market. Helps the

company to enter established markets. Additions to existing product lines - line extension e.g. New packs, flavours, etc. Improvements/modifications of existing products. Repositioning: Existing products targeted to new market segments.

To the Market New Existing New Existing New Steps of New Product Development Process

Idea Generation

Idea Screening

Concept Development & Testing

Marketing Strategy Development

Business Analysis

Product Development

Market Testing

Commercialization

New to the world Improvement/ Modification/

New Product Lines

Repositioning Line Extensions

To

the

Com

pany

MB203 Marketing Management 06. Product Page - 10 - of 12 Idea Generation

Interacting with others: Customers, scientists, competitors, employees, channel members, consultants, top management, engineering, patent attorneys, universities, commercial laboratories

Marketing Research can throw light on new product possibilities New product ideas in industrial product area are often suggested by customers who make the

most advanced use of existing products Competitors’ products can be researched to find new product ideas Company’s salespeople & channel members can be tapped for new product ideas Often companies encourage all employees to officially submit suggestions that could lead to

new ideas Creativity Labs: Several techniques are used to stimulate creative thinking in individuals and

in groups The company should appoint a senior and respected idea manager to institutionalize New

Product Development Some companies appoint a cross-functional team to act as an Idea Management Committee. It

consists of people from R&D, engg, purchasing, product, finance, marketing. It meets on a regular basis to evaluate new product ideas

Some companies reward & recognize contributors of the best new idea

Idea Screening:

If the purpose of the idea generation stage is to generate as many new ideas as possible, the purpose of all subsequent stages is to reduce the number of ideas

Each new idea is evaluated against a set of criteria. The ones that receive low ratings are dropped. The ones that survive move on to the next stage

In evaluating new ideas, the criteria could be as follows: (i) Will the new idea be truly useful to consumers and to the society? (ii) Is it a good idea for our Company? (iii) Does it gel with the company’s objectives? (iv) Do we have the right people, skills and other resources? (v) Will it deliver more value to consumers than existing products? (vi) Can it be easily marketed?

In screening ideas, the Company needs to avoid 2 types of errors - the Go error & the Drop error

A Drop error occurs when the company drops an otherwise good idea due to lack of imagination, vision & foresight

(i) The idea of copying documents was seen by Xerox but IBM & Eastman Kodak failed to see it.

(ii) The idea of a home PC was overlooked by IBM but Compaq saw it. A Go-error occurs when the Company allows a poor idea to move into

development & commercialization. Product development costs rise substantially through the successive stages.

Concept Development

An attractive idea has to be developed into a product concept. A product idea is more generic, a product concept is more specific. It is a possible version of an actual product stated in meaningful consumer terms.

(1) Yoghurt with exotic flavours - if projected as a nutritional dessert, it will have to compete with curd, custard etc. If projected as a casual fun–filled snack, it will have to compete with ice–cream, scoops, even non-alcoholic beverages

(2) Milk Shake: a breakfast drink, casual drink, bedtime drink, health drink

A product idea can give rise to alternative product concepts The product concept will then have to be turned into a brand concept by

choosing a positioning based mainly on functional terms

MB203 Marketing Management 06. Product Page - 11 - of 12 Concept Testing It involves presenting alternative product concepts to target consumers for their reactions symbolically or physically

The more the concepts being tested resemble the final product, the more reliable concept testing is

At the least, concept testing involves presenting target consumers with a detailed written description of the physical product - its nature, its benefits, its features, its packaging, its shape and its price

For some products a written or a pictorial description may be good enough. Some companies develop physical prototypes by using CAD/CAM

Some companies even use virtual reality for concept testing Having exposed target consumers to the product concept, they are asked to react

to them by answering questions like (a) Do you understand the concept? (b) Do you believe in its advantages?

(c) What are the major benefits seen in it? (d) What are its advantages over….? (e) Who will decide to buy it? (f) How will you use it? (g) Who will use it? (h) What improvements will you suggest? (i) Would you buy it?

(j) What should be a reasonable price for a product like this? The answers will help the company to decide which concept has the strongest appeal

However, the most customer-appealing concept may not be the most profitable concept for the company because of cost considerations

Marketing Strategy Development The marketing strategy statement has 3 parts: Part – 1: Describes the target market, the planned product positioning, the sales, market share & profit

goals for the first few years Part – 2: Outlines the product’s planned price, distribution, ad and sales promotion budget, MR budget

for the first year Part – 3: Describes planned long–run sales, profit goals & marketing mix strategy Business Analysis

At this stage, the company projects sales, costs and profits to see if company goals are met. If they do, the concept is taken up for development

Management will now have to forecast sales for, say, the next 5 years Costs are estimated by R&D, Production, Marketing, Finance depts.

Sales, Cost & Profit Projections

Year 0 Year 1 Year 2 Year 3

Sales Revenue COGS Gross Margin Development Cost Marketing Costs Allocated O/H Net Margin Discounted cash inflow Cum. disc. cash inflow

From this projection, the max. investment risk (the most negative cumulative discounted cash inflow) is ascertained. This is an indication of the max. loss that the company can incur from this product . The other thing is the payback period, i.e. when does the cum.discounted cash

inflow turns positive from negative. Other simple yardsticks like the BEP is estimated given the price & cost structures.

MB203 Marketing Management 06. Product Page - 12 - of 12 Product Development

Up to now, the product has existed only as a description on a drawing or as a prototype This step sees a large jump in investment The R&D dept now develops one or more physical versions of the product concept. The prototype is tested within the firm to check if it performs under different adverse conditions

(Alpha testing) The prototype may be modified subject to alpha testing and then moved to customers for beta

testing Customer testing can take several forms. They can be brought to the lab or they may be given samples to use at home. In-home and in-store tests are also quite common

Customer attitudes and purchase intentions are measured using MR techniques like Ranking, Paired Comparisons, Semantic Differential Scales, etc.

Market Testing From alpha & beta testing, if the company is satisfied that the prototype has delivered functional

and perceived benefits, then it is developed into a full–scale product with a packaging and a brand name and is put in a real life market setting to learn about its potential and how consumers and the trade react to it.

In market testing of consumer goods, firms are interested to find out trial, 1st repeat purchase, adoption & purchase frequency

Some of the commonly used methods of market testing are -

i. Sales Wave Research Some chosen potential customers are offered the product free. They are

expected to report their experience after use.

ii. Simulated Test Marketing 30-40 target customers are shown ads for the new product ads of competitive brands They are then given a small amount of money and invited to a store where they can buy

any product The company notes how many people buy the new brand

iii. Controlled Test Marketing A panel of stores is selected to carry the new brand for a fee for certain duration. The

shelf–positions, no. of facings, POP displays, etc. are controlled. iv. Full–Scale Test Marketing

The company chooses one or a few representative markets where the brand is launched with full advt. and sales support

Commercialization This step involves the largest cost The firm has to set up manufacturing facilities or contract manufacturing. If a plant has to be set

up, its location and capacity are crucial issues to be decided. Plant size and capacity will depend upon both short and long–run demand forecasts.

Marketing is another major cost. e.g. in introducing a new food product, expenditure typically represents 55–60% of sales during the first year

The Co will spend heavily on MR in the first year to buy retail audit reports. “Timing” the launch is an important decision which also depends on competitors’ moves. The

timing may be tuned to take advantage of ‘seasons’. The “where” question is also important. Most companies develop a phased roll–out over time.

The new product may be launched in a city or a state or a region or nationally Company size plays a role in this. Small companies roll out new products in a small market and

move to adjoining markets. Big companies with strong distribution network launches in a region or in a few states.

The question of “to whom” needs to be addressed. The company should aim promotion and to attract the early adopters, opinion leaders and the heavy users in its target group

“How”? To co-ordinate the various activities involved in launching a new product, the company can use network–planning techniques such as PERT or CPM.