Setting Product Strategy

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Transcript of Setting Product Strategy

Page 1: Setting Product Strategy

SETTING PRODUCT STRATEGY

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AT THE HEART OF A GREAT BRAND IS PRODUCT. PRODUCT IS A KEY ELEMENT IN THE MARKET OFFERING

MARKET LEADERS GENERALLY OFFER PRODUCTS & SERVICES OF SUPERIOR QUALITY

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Marketing planning begins with…

FORMULATING AN OFFERING TO MEET TARGET CUSTOMER’S NEEDS OR WANTS. THE CUSTOMER WILL JUDGE THE OFFERING BY THREE BASIC ELEMENTS: PRODUCT FEATURES & QUALITY,

SERVICE MIX & QUALITY, & PRICE

Value-based priced

Attractiveness of the market

offering Product Services features mix & & quality quality

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Product strategy

1. Product characteristics & classification2. Product differentiation 3. Product & brand relationships4. Packaging, labeling, warrantees, &

guarantees

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1. Product characteristics & classification

Many people think that a product is a tangible offering, but a product can be more than that. A product is anything that can be offered to a market to satisfy a need or a want. Products that are marketed include physical goods, services, experiences, events, persons, places, properties, organizations, information, & ideas

A. Product levels: the customer value hierarchyB. Product classifications

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A. Product levels: the customer value hierarchy

5 product levels:1. Core benefit: service or benefit consumer is really buying2. Basic product: marketer turns core benefit into3. Expected product: a set of attributes & conditions buyers

normally expect when they purchase his product4. Augmented product: that exceeds customers expectations:

Differentiation arises on basis of product augmentation; it also leads to marketer looking at user’s total consumption system: the way the user performs the tasks of getting & using products & related services

Product augmentation:1. Each augmentation adds to costs2. Augmented benefit soon become expected benefits &

necessary points-of-parity 5. Potential product: encompasses all the possible augmentations

& transformations product or offering might undergo in the future: Here is where companies search for new ways to satisfy

customers & distinguish their offer

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B. Product classifications

Durability & tangibility

Consumer goods classification

Industrial goods classification

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Durability & tangibility Non-durable goods: tangible goods normally

consumed in one or a few uses, like beer & soap: Because these goods are consumed quickly & purchased

frequently, the appropriate strategy is to make them available in many locations, charge only small markup, & advertise heavily to induce trial & build preference

Durable goods: tangible goods that normaly survive many uses: refrigerators, machine tools, & clothing

Normally require more personal selling & service, command a higher margin, & require more seller guarantees

Services: intangible, inseparable, variable, & perishable products.

As a result, they normally require more quality control, supplier credibility, & adaptability; examples include haircuts, legal advice, & appliance repairs

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Consumer goods classification

Convenience goods: purchased frequently, immediately, & with a minimum of effort:

Convenience goods can be further divided: Staples are goods purchased on a regular basis: Maggii

sauces, Colgate toothpaste Impulse goods are purchased without any planning or

search effort: Candy, ice cream Emergency goods purchased when need is urgent:

umbrellas during rainstorm, car batteries when car breaks down due to battery failure

Shopping goods: in the process of selection & purchase, characteristically compares on such bases as suitability, quality, price, & style: furniture, clothing, used cars, major appliances

Shopping goods can be further divided: Homogenous shopping goods are similar in quality but

different enough in price to justify shopping comparisons Heterogeneous shopping goods differ in product features

& services that may be more important than price. Seller carries a wide assortment to satisfy individual tastes & must have well-trained salespeople to inform & advice customers

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Specialty goods: has unique characteristics or brand identification for which a sufficient number of buyers are willing to make special purchasing effort; cars, men’s suit. Mercedes is a specialty good because interested buyers will travel far to buy one

Do not involve making comparisons; buyers spend time only to reach dealers carrying the wanted products

Dealers do not need convenient locations, although they must let prospective buyers know the locations

Unsought goods: consumer does not know about or does not normally think of buying, like smoke detectors:

Require advertising & personal-selling effort

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Industrial goods classification

Classified in terms of how they enter the production process & their relative costliness into 3 groups of industrial goods:

1. Materials & parts2. Capital items3. Supplies & business services

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Materials & parts Materials & parts are goods that enter the

manufacturer’s product completely. They fall into 2 classes:

1. Raw materials: fall into 2 major groups: Farm products: supplied by many producers, who turn

them over to market intermediaries, who provide assembly, grading, storage, transportation, & selling services. Their perishable & seasonal nature leads to special

marketing practices. Their commodity character results in little advertising &

promotions, with some exceptions Natural products: limited in supply, usually have great

bulk & low unit value & must be moved from producer to user; fewer & larger producers often market them directly

industrial users long-term supply contracts are common; price &

delivery reliability are the major factors influencing the selection of supplier,

homogeneity of natural materials limiting the amount of demand creating activities

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2. Manufactured materials & parts: fall into 2 categories:

Component materials (iron, cement, wires): usually fabricated further – pig iron into steel, yarn woven into cloth. Standardized nature of component materials

usually means that price reliability are key purchase factors

Component parts (small motors, tyres, castings):enter the finished product with no further change in form, as when small motors are put into vacuum cleaners, tyres are put into automobiles. Most manufactured materials & parts are

sold directly to industrial users. Price & service are major marketing

considerations, & branding & advertising tend to be less important

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Capital items Long-lasting goods that facilitate development or

managing the finished product They include 2 groups:

1. Installation: consist of building & heavy equipment: Constitute major purchases, usually bought directly

from producer, with typical sale preceded by a long negotiation period

Producers sales force include technical personnel Producers have to be willing to design to specifications

& to supply post sale specifications Advertising much less important than personal selling

2. Equipment: comprises portable factory equipment & tools & office equipment; they don’t become part of finished product, shorter life than installations longer than operating supplies

Although some sell directly, normally routed through intermediaries, markets being geographically dispersed, buyers numerous, & orders small

Quality, feature, price, & service are major considerations

Sales force tend to be more important than advertising, although latter can be used effectively

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Supplies & business services

Short-term goods & services that facilitate developing or managing the finished product

Supplies are of 2 kinds, going under the name MRO goods:

1. Maintenance & repair items (paint, nail, brooms): usually supplied under contract by small parties or manufaturers of original equipment

2. Operating supplies (lubricants, coal, writing paper): equivalent of convenience goods, usually purchased with minimum effort on straight re-buy basis

Normally marketed thru’ intermediaries Price & service important considerations, standardisation

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2. Product differentiation

A. Product differentiationB. Design: the integrative forceC. Services differentiation

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A. Product differentiation Form: size, shape, or physical structure of a product. Features: a company can identify & select appropriate new

features by surveying recent buyers & then calculating customer value versus company cost for each potential feature

Co. should also know how many people want each feature, how lofg it would take to introduce each potential feature, whether competitors could copy it

Also think in terms of feature bundles or packages Auto companies often manufacture cars at several “trim

levels”: reduces inventory costs Each co. should decide whether to offer feature

customization at higher cost or a few standard packages at a lower cost

Performance quality: 4 levels- low, average, high or superior Performance quality is the level at which product’s

primary characteristics operate: cos Manufacturers must design aperformance level

appropriate to the target market & competitor’s performance levels

Co. should also manage performance quality over time; continuous improvement can produce high returns & market share

Lowering quality in an attempt to cut costs often has dire consequences. E.g. how Shiltz beer, no.2 beer in US in 1960s & 1970s lost out

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Conformance quality: degree to which all the units are identical & meet promised specifications – buyers expect this to be high; problem with low conformance is that it would disappoint some buyers

Durability: measure of product’s expected life under natural or stressful conditions, is a valued attribute for certain products; buyers will generally pay more for vehicles & kitchen appliances that have a reputation for being long lasting

Rule is subject to some qualifications: extra price should not be excessive; product should not be subject to rapid technological obsolescence, as with computers, video cameras

Reliability: probability that a product will not malfunction or fail within specified time period, consumers willing to pay a premium

Repairability: measure of ease of fixing when it malfunctions or fails. Ideal if users could users could fix themselves with little cost

Style: product’s look & feel to the buyer Style has the advantage of creating distinctiveness that is

difficult to copy On the negative side, does not always mean high performance

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B. Design: the integrative force

As competition intensifies, design offers a potent way to differentiate & position a company’s products & services: it is the totality of features that effect how a product looks & functions in terms of customer requirements

Design is particularly important in making & marketing retail services, apparel, packaged goods, & durable equipment- all these are design parameters, co. has to figure out how much to invest in form, feature development, durability, reliability, repairability, & style

To a co., a well designed product is easy to manufacture & distribute

To a customer, a well-designed product is pleasant to look at & easy to open, use repair, & dispose off

The argument for good design are particularly compelling for smaller consumer-product companies & star-ups that don’t have big budgets

Certain countries are winning on design: Italian design in apparel & furniture; Scandinavian design for functionality, aesthetics, & environmental consciousness

Cos. design department enjoys equal status with engineering & manufacturing

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C. Services differentiation

When physical product cannot easily be differentiated, the key to competitive success may lie in adding services & improving their quality.

The main differentiators are: Ordering ease Installation Customer training Maintenance & repair

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3. Product & brand relationships

The product hierarchy Product systems & mixes Product-line analysis Product-line length Product-mix pricing Co-branding & ingredient branding

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A. The product hierarchy

Stretches from basic needs to particular items that satisfy those needs (using life insurance)

Need family: core need that underlies the existence of a product family; e.g. security

Product family: all product classes that can satisfy the core need with reasonable effectiveness; e.g. savings & income

Product class: a group of products within the product family recognized as having a certain functional coherence, also known as product category; e.g. financial instruments

Product line: a group of products within a product class that are closely related because they perform a similar function, are sold to the same customer groups, are marketed through the same outlets or channels, or fall within price ranges

A product line may be composed of different brands or a single family brand or individual brand that has been line extended; e.g. life insurance

Product type: a group of items within a product line that share one of the several possible forms of the product; e.g. term life insurance

Item (a.k.a. SKU or product variant): a distinct unit within a brand or product line distinguishable by size, price, appearance, or some other attribute; e.g. Prudential renewable term life insurance

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B. Product systems & mixes

A product system is a group of diverse but related items that function in a compatible manner (camera, film, developer,..)

A product mix (a.k.a. product assortment) is a set of all products & items a particular seller offers for sale (items offered by Shoppers’ Stop)

A company’s product mix has certain: Width Depth consistency

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Table 1: Product-mix width & product-line length for P&G (including date of introduction)

Product-mix width

Detergents

Toothpaste

Bar soap Disposable diapers

Paper products

PRODUCT LINE LENGTH

Ivory snow(1930)Dreft (1933)Cheer (1950)Dash (1954)Bold (1965)Gain (1966)Era (1972)

Gleem (1952)Crest (1955)

Ivory (1879)Camay (1926)Zest (1952)Safeguard (1963)Oil of Olay (1993)

Pampers (1961)Lovs (1976)

Charmin (1928)Puffs (1960)Bounty (1965)

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Breadth of a product mix refers to how many different product lines the company carries (5 in P&G example)

Depth of a product mix refers to total number of items in the mix ( 20 in the P&G example). Can also consider average length of line (20/5=4)

Width of a product mix refers to how many variants are offered of each product in the line (e.g. Tide has a depth of 8 as it offers 8 distinct variants: 2 scents, 2 formulations, 2 additives)

Consistency of product mix refers to how closely related product lines are in end use, production requirements, distribution channels,.. P&G products are consistent in so far as they are consumer goods that go through the same distribution channels, less consistent in so far as they perform different functions for the buyer

These 4 product mix dimensions permit the company to expand its business in 4 ways:1. Can add new product lines, widening product mix2. Lengthen each product line, 3. Add more product variants to each product & deepen

its product mix4. Pursue more product-line consistency

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C. Product-line analysis Sales & profits: every company’s product portfolio contains

products with different margins

A company can classify its products into 4 types that yield different gross margins, depending on sales volume & promotion. To illustrate with P.C.s:

Core product: basic computers that produce high sales volume & are heavily promoted but with low margins because they are viewed as undifferentiated commodities

Staples: items with lower sales volume & no promotion, such as faster CPUs or bigger memories; these yield somewhat higher margin

Specialties: items with lower sales volume but which might be highly promoted, such as digital movie making equipment

Convenience items: peripheral items that sell in high volume but receive less promotion, such as computer monitors, printers, upscale video or sound cards

Main point is that companies should recognize that these items differ in their potential for being priced higher or advertised more as ways to increase their sales , margins, or both

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Market profile: the product-line manager must know how the line is positioned against competitor’s lines Product-line analysis provides information

for two key decision areas: Product–line length Product-mix pricing

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D. Product-line length

Company objectives influence product-line length.

One objective is to create a product line to induce up-selling

Product lines tend to lengthen over time A company lengthens its product line in two

ways:1. Line stretching2. Line filling

Line modernization, features, & pruning: a continuous process to cope with changing product-markets

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1. Line stretching Down-market stretch: a company positioned in the middle may

want to introduce a lower-priced line for any of 3 reasons:1. May notice strong growth opportunities as mass market

retailers attract growing number of shoppers who want value-priced good

2. Wish to tie up lower-end competitors who might otherwise try to move up-market (low-end competitor if moving up often counterattacked by entering low-end market)

3. May find middle market stagnating or declining Moving down-market carries risks

Up-market stretch: companies may wish to enter the high end of the market for more growth, higher margins, or simply to position themselves as full-line manufacturers:

Many markets have spawned surprising upscale segments: Starbucks in coffee, Haagen-Dazs in ice cream; Japanese auto makers introduced upscale automobile: Toyota’s Lexus, Honda’s Acura. They invented entirely new names rather than using or including their own names

Other companies have included their own name in moving up-market: Extra Strength Tylenol

Two-way stretch: companies serving the middle market might decide to stretch their line in both directions

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2. Line filling

A product line can be lengthened by adding more products within the present range

Several motives for line filling: Reaching for incremental profits Trying to satisfy dealers who complain about loss

sales, because of missing items Trying to utilize excess capacity Trying to be leading full-line company Trying to plug holes to keep competitors out

Line filling is overdone if it results in self-cannibalization & customer confusion Each item should possess just-noticeable difference

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E. Product-mix pricing

Price-setting logic must be modified when the product is part of the product mix: here firm searches for a set of prices that maximizes profits on the total mix.

Pricing is difficult because the various products have demand & cost interrelationships & are subject to different degrees of competition

Can distinguish 6 situations involving product-mix pricing:1. Product-line pricing: companies normally develop product

lines rather than single products & introduce price steps; often with well established price points for products

2. Optional feature pricing: optional products, features, & services offered with main product, e.g. auto mobiles

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3. Captive-product pricing: manufacturers of razors, cameras often price them low & set high markups for razor blades, & film

There is danger of pricing the captive product too high in the aftermarket, can lead to piroting

4. Two-part pricing: fixed fee plus variable usage fee, e.g. telephone users. Fixed fee should be low enough to induce purchase of the service, profit can be made on the usage fees

5. By-product pricing; if by-products have value to a customer group, they should be priced on their value; it allows competitive leverage for the main product

6. Product-bundling pricing: pure bundling occurs when a firm only offers its products as a bundle

In mixed bundling seller offers goods both iboth individually & in bundles. Seller normally charges less for the bundle than if the items were purchased separately

3 suggested guidelins for correctly implementing bundling strategy:

1. Don’t promote individual products in a package as frequently & cheaply as a bundle; bundle price should be much lower than the sum of the individual products, otherwise consumer will not perceive its attractiveness

2. Limit promotions to a single item in the mix if still want to promote individual products; alternatively promote products one after another, not simultaneously, to avoid conflicting promotions

3. If deciding to give rebates on individual products, it must be absolute exception done with discretion, otherwise danger of bundle losing value

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F. Co-branding & ingredient branding

Co-branding Ingredient branding

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Co-branding Two or more well known existing-brands are combined into a

joint product and/or marketed together in some fashion: Same-company co-branding Joint venture co-branding Multi-sponsor co-branding Retail co-branding

Main advantage of co-branding is that product may be convincingly positioned by virtue of multiple brands involved:

Can generate greater sales from existing target markets as well as open additional opportunities with new consumers & channels

Can reduce cost of product introduction – 2 well known images – accelerating potential adoption

Valuable means to, learn about consumers & how other companies approach them

Potential disadvantages of co-branding are the risks & lack of control from becoming aligned with another brand in the minds of consumers:

Consumer expectations about level of involvement & commitment with co-brands likely to be high, so unsatisfactory performance could have negative repercussions for brands involved

If other brand has entered into a number of co-branding arrangements, there may be a risk that overexposure will dilute the transfer of any association; may also result in lack of focus on existing brands

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A necessary condition for co-branding success is that the two brands separately have brand equity – adequate brand awareness & brand image:

Most important requirement logical fit between two brands such that combined brand or marketing activity maximizes advantages of the individual brands while minimizing disadvantages

Research studies show consumers more apt to perceive brands favourably if two brands are complementary rather than similar

Besides these strategic considerations, co-branding ventures must be entered into & executed carefully:

There must be right kind if values capabilities & goals, in addition to an appropriate balance of brand equity

Must be detailed plans to legalize contracts, make financial arrangements, & coordinate marketing programmes

Brand alliances require a number of decisions: What capabilities you do not have? What resource constraints are

you faced with? What growth goals or revenue needs do you have? In assessing qa joint branding opportunity, a number of questions

need to be asked : Is it a profitable business venture? How does it help to maintain or

strengthen brand equity? Is there any possible risk of dilution of brand equity? Does it offer any intrinsic advantages?

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Ingredient branding

Involves creating brand equity for materials, components, or parts that are necessarily contained within other branded products

Interesting type of branding is “self branding” in which companies advertise & even trademark their own brand ingredients

Ingredient brands attempt to create awareness & preference for their product such that consumers will not buy a “host” product that does not contain the ingredient brands

Many manufacturers make components or materials that enter into final products, but whose individual identity generally gets lost:

Intel has succeeded in building a separate identity As a result , major PC manufacturers - IBM, Dell, Compaq –

purchase at a premium price

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4. Packaging, labeling, warrantees, & guarantees

A. PackagingB. LabelingC. Warrantees & guarantees

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A. Packaging

Includes all the activities of designing & producing the container for a product. Package might include up to 3 levels of material: primary package, secondary package & shipping packageVarious factors contributing to the growing use of packaging as a marketing tool: Self-service: an increasing number of products are sold on a self-service basis,:

Given that 53% of all purchases made on impulse, effective package must perform many of the sales tasks: attract attention, describe the products features, create consumer confidence, & make favourable overall impression

Consumer affluence: consumers are willing to pay a little more for convenience, appearance, dependability, & prestige of better packages

Company brand image; contribute to instant recognition of company or brand Innovation opportunity: can bring large benefits to consumers & profits to

producersDeveloping an effective package requires a number of decisions. From the

perspectiveof both the firm & consumers, packaging must achieve a number of objectives:1. Identify the brand2. Convey descriptive & persuasive information3. Facilitate product transportation & protection4. Assist at-home storage, &5. Aid product consumption

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B. Labeling

1. Identifies product or brand2. Might describe the product3. Might promote the product through

attractive graphics

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C. Warrantees & guarantees

All sellers are legally responsible for fulfilling a buyer’s normal or reasonable expectations:

Many sellers offer either general ghuarantee or specific guarantee

Guarantee’s reduce buyers perceived risk Guarantees are most effective in two

situations:1. When company or product is not well known2. When product’s quality is superior top competitors