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DEVELOPING NEW PRODUCTS AND SERVICES

A product - is a good, service or idea consisting of a bundle of tangible andintangible attributes that satisfies consumers and is received in exchange for money or some other unit of value.

Tangible - perceived by the sense of toughIntangible - not tangible

The life of a company often depends on how it conceives, produces andmarkets new products.

I Variations of Products

A Product varies in terms of whether it is a consumer or business good.

A. Product Line and Product Mix* A product Line is a group of products that are closely related

because they satisfy a class of needs, are used together, are sold toThe same customer group, are distributed through the same type of outlets, or fall within a given price range. A product Item - a specific product within the product line. A Stock Keeping Unit (SKU) is a unique identification number

That defines an item for ordering or inventory purposes. The product mix is the number of product lines offered by a

company.

B. Classifying Products

The government classifies products to collect information onindustrial activity. Companies classify products to develop similar marketing strategies for the wide range of products offered.

1. Type of user consists of two categories:a. Consumer goods are products purchased by the ultimateconsumer

b. Business goods (B2B goods) assist directly or indirectly in providing products for resale.

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Note: Some products can be considered both, an example: personal computer

2. Degree of Tangibility - three categoriesa. A nondurable good is consumed in one or a few uses. Is

usually inexpensive and purchased frequently. Consumer advertising and wide distribution in retail outlets is essential.

b. A durable good lasts over an extended number of usesCosts more and lasts longer than nondurable goods.

c. Services are defined as intangible activities or benefitsthat an organization provides to consumers in exchangefor money or something else of value.

The Uniqueness of Services - Four Is of services

Services are a significant component of the global economy andone of the most important components of the US economy, accounting for more than 40 percent of GDP.

1. Intangibilitya. Services are intangible, they cannot be held, touched, ore seen

before the purchase decision. b. Services are difficult for consumers to evaluate because they tend

to be performance rather than an object.2. Inconsistency

a. Developing, pricing, promoting, and delivering services ischallenging because the quality of a service is often inconsistent.

b. Because services depend on the people who provide them,their quality varies with each persons capabilities and day-to-day

job performance.3. Consumers cannot often distinguish the deliverer of the servicefrom the service itself.

4. Inventorya. Inventory problems exist with goods because many items are

perishable and there are costs associated with its handling. b. With services, inventory carrying costs are more subjective and arerelated to idle production capacity - the service provider is available

but there is no demand.c. The inventory cost of a service:

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* Is the cost of the person used to provide the service along withany needed equipment.

* Can be low or nonexistent because idle production capacity can be cut back through reducing hours or paying by commissions.

II CLASSIFYING GOODS AND SERVICES

A. Classifying Consumer GoodsThere are four types of consumer goods which differ in terms of (1) effortthe consumer spends on the decision (2) attributes used in purchase, (3)frequency of purchase.

Convenience goods - items consumer purchases frequently,conveniently, and with a minimum of shopping effort.

Shopping goods - items for which consumer compares severalalternatives on criteria, such as price, quality, or style

Specialty goods- items a consumer makes a special effort to searchout and buy

Unsought goods - items the consumer does not know about or knows about and does not initially want.

B. Classifying Business GoodsA major characteristic of business goods is that their sales are often theresult of derived demand , sales of industrial products frequently result or are derived from the sale of consumer goods

1. Production goods - items used in the manufacturing process thatBecome part of the final product, such as raw materials or Component parts.

2. Support goods - items used to assist in producing other goods andservices and include:

a. Installations - consists of buildings and fixed equipment purchased by industrial buyers through sales reps often via competitive bidding. b. Accessory Equipment - includes tools and office equipmentand is usually purchased in small-order sizes by buyers.

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c. Supplies - are similar to consumer convenience goods and are purchased with little effort using straight rebuy decisionsd. Industrial services - tangible activities to assist industrial

buyers, such as maintenance and repair services.

C. Classifying ServicesServices can also be classified in several different ways, according towhether (1) they are delivered by people or equipment, (2) they are profit or nonprofit, or (3) they are government sponsored.

1. Delivery by People or Equipmenta. Services include professional, skilled, and unskilled labor,

which are all provided by people to some extent.b. Equipment based services do not have inconsistency

concerns because people are not directly involved in providingthe service.

2. Profit or Nonprofit Organizationsa. Many organizations involved in services distinguishthemselves by their profit or nonprofit tax status.* Excesses in revenue over expenses are not taxed or distributed to shareholders.* Excess money goes back into the nonprofits treasury tocontinue the service.

b. The 1.1 million nonprofit organizations in the US now7 percent of GDP.

3. Government Sponsored or Not. Federal, state and localgovernments provide a broad range of services, although there is nodirect ownership and they are nonprofit organizations.

III NEW PRODUCTS AND WHY THEY SUCCEED OR FAIL

New products are the lifeblood of a company and keep it growing, but thefinancial risks are large.

A. What is a new product?The term new is difficult to define. The answer depends on perspective:

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New can refer to a product being functionally different thanexisting products

The Federal Trade Commission (FTC) advised that the term new be limited to use with a product only up to six months after it

enters regular distribution. A companys idea of a new product is simply anything differentfrom the previous one.

Newness from the consumers point of view may be classifiedaccording to the degree of learning required by the consumer inorder to use the product properly.

a. Continuous Innovation* Prospective buyers dont have to learn new behaviors* Effective marketing depends on generating awareness and

having strong distribution, not reeducating users.

b. Dynamically continuous innovation* Only minor changes in behavior are required* The marketing strategy is to educate prospective buyers on

their benefits, advantages and proper use.

c. Discontinuous innovation* Consumers must learn entirely new consumption patterns

* Marketing efforts 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 costmillions of dollars.

B. Why products Succeed or Fail.While there are many huge product successes, there are thousands of failureseach year. Research indicates that it takes about 3,000 ideas to produce asingle commercially successful new product.

1. Marketing Reasons for New Product FailuresBoth marketing and nonmarketing factors contribute to new product successof failures.

a. Insignificant point of difference* Must have superior characteristics that deliver unique benefits to

The user.

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Must be important enough for consumers to switch from aCompeting product.

b. Incomplete market and product definition before product

development starts. New products need a specific protocol, a statement that beforeProduct development begins, identifies: (1) a well defined targetMarket; (2) specific customers needs, wants, and preferences; and(3) what it will be and do.

* Without this precision, money disappears as R&D tries to design aVague product for a phantom market.

c. Too small a market attractiveness.* New product managers look for large and growing markets with real

Buyer needs.*When looking for market niches, the target market may be too small

And competitive to warrant the R&D, product, and marketingExpenses necessary to reach it.

d. Poor execution of the marketing mix. Name and package (product)price, promotion, and distribution (place) can cause products to failif any element isnt executed properly.

e. Poor product quality or insensitivity to consumer needs on criticalfactors. Even if general quality is high, a problem with a critical factor can

Kill a product. Sometimes large markets can be served by taking features out of a

Product to make it simpler to use.

f. Bad timing. Occurs when the product is introduced too soon, toolate, or when consumer tastes are shifting dramatically.

g. No economic access to buyers. Over 33,000 new consumer packaged goods products (food, beverage, household, etc) wereintroduced in the last few years. As a result the fight for exposure

is tremendous in terms of costs for advertising, distribution and shelf space.

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IV NEW PRODUCT PROCESSThe New-product process consists of seven stages a firm goes through toIdentify business opportunities and convert them to a salable good or service

1. New product strategy development

2. Idea Generation3. Research and Development Breakthroughs4. Screening and Evaluation5. Business Analysis6. Development7 Market Testing

Stage 1. New Product strategy developmentFirms use the environmental scanning process to identify trends that poseeither an opportunity or threat. The outcome of the new product strategydevelopment is not only new product ideas but also identifying markets for which new products will be developed.

Stage 2. Idea generation - is the stage of the new product process that involves developing a pool of concepts ascandidates for new products that must build on the previousstages results.

New product ideas are generated by customers, suppliers,Employees, basic R&D, and competitors.

1. Customer and Supplier Suggestionsa. Firms must involve customers and suppliers in the product

development process. Focus on what the new product willactually do for them.

2. Employee and Co-Worker Suggestions

a. Employees may be encouraged to suggest new-product ideasthrough suggestion boxes or contests

Stage 3 Research and Development Breakthroughsa. Another source of new products is a firms basic research, but

the costs can be huge. Professional R&D labs also providenew product ideas.

4. Competitive Productsa. New product ideas are found by purchasing competitors

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products or using their services to assess their strengthsand weaknesses relative to the firms offerings.

Stage 4. Screening and EvaluationScreening and evaluation is the stage of new product process that involvesinternal and external evaluations of the new product ideas that warrant nofurther effort.

1. Internal approach. Internally a firm evaluates the technicalDifficulty of the proposal.

2. External approach.* Concept tests are external evaluations that consist of testing the

New product idea rather than the actual product. These tests areMore useful with minor modifications of existing products thanWith really new innovative products.

Stage 5 Business AnalysisBusiness Analysis is the stage of the new product process that involvesspecifying the product features and marketing strategy and making necessaryfinancial projections needed to commercialize a product. This is the lastcheckpoint before capital is invested in creating a prototype, a full-scaleoperating model of the product under development.

a. Is the new product consistent with the companys mission andobjectives?

b. Can the product be developed and manufactured economically?c. New machinery vs existing capacity?d. Cannibalization of existing products vs new revenues from new

markets?e. Can the new product be protected with a patent or copyright so that

it cannot easily be copied.f. Do our detailed financial analysis and projections which include

estimates of units sold,prices per unit the costs of R&D, production andmarketing still give us a go ahead or green light?

Stage 6. Product DevelopmentProduct ideas that survive the business analysis proceed to actualdevelopment - the stage that turns the idea into a prototype.

Stage 7 Market Testing

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Market testing is the stage the new product process that exposes actual products to prospective consumers under realistic purchase conditions to seeif they will buy.

1. Test Marketing - offering a product for sale on a limited basis in aDefined area to determine whether consumers will actually buy theProduct and to try to different ways of marketing it.

Only about a third of the products test marketing go on to the Next phase.

Market tests are usually conducted in cities that are representativeof average us consumers

Gives the company an indication of potential sales volume andmarket share in the test area.

Are time consuming and expensive due to production andmarketing costs

Reveal plans to competitors, enabling them to get a product in National distribution first.

Because of this some firms skip market tests

When test markets dont work 1. Testing a service beyond the concept level is very difficult.Testing expensive consumer products is impractical.