Chapter 6 – Product Strategy & New Product Development: Creating Offerings
- Explain how organizations manage offerings after being introduced to the marketplace.
- Explain how managing an offering may be different in international markets.
- Explain the product life cycle and the objectives and strategies for each stage
- Understand the product adoption curve.
Over 20,000 new offerings, including convenience foods, health and beauty aids, electronics, automobiles, pharmaceutical products, hotels, restaurants, and so on, enter the marketplace each year. Depending on the category, between 40% to 90% of them fail within their first year.
Once a product is created and introduced in the marketplace, the offering must be managed effectively for the customer to receive value from it. Only if this is done will the product’s producer achieve its profit objectives and be able to sustain the offering in the marketplace. The process involves making many complex decisions, especially if the product is being introduced in global markets. Before introducing products in global markets, an organization must evaluate and understand factors in the external environment, including laws and regulations, the economy and stage of economic development, the competitors and substitutes, cultural values, and market needs. Companies also need expertise to successfully launch products in foreign markets. Given many possible constraints in international markets, companies might initially introduce a product in limited areas abroad. Other organizations, such as Coca-Cola, decide to compete in markets worldwide (Interbrand, n.d.).
The product life cycle (PLC) includes the stages the product goes through after development, from introduction to the end of the product’s life. Just as children go through different phases in life (toddler, elementary school, adolescent, young adult, and so on), products and services also age and go through different stages. The PLC is a beneficial tool that helps marketers manage the stages of a product’s acceptance and success in the marketplace, beginning with the product’s introduction, its growth in market share, maturity, and possible decline in market share. Other tools such as the Boston Consulting Group matrix may also be used to manage and make decisions about what to do with products. For example, when a market is no longer growing but the product is doing well (cash cow in the BCG approach), the company may decide to use the money from the cash cow to invest in other products they have rather than continuing to invest in the product in a no-growth market.
The product life cycle can vary for different products and different product categories. Figure 6.8 “Life Cycle” illustrates an example of the product life cycle, showing how a product can move through four stages. However, not all products go through all stages and the length of a stage varies. For example, some products never experience market share growth and are withdrawn from the market.
Other products stay in one stage longer than others. For example, in 1992, PepsiCo introduced a product called Crystal Pepsi, which went from introduction to decline very rapidly. By contrast, Diet Coke entered the growth market soon after its introduction in the early 1980s and then entered (and remains in) the mature stage of the product life cycle. New computer products and software and video games often have limited life cycles, whereas product categories such as diamonds and durable goods (kitchen appliances) generally have longer life cycles. How a product is promoted, priced, distributed, or modified can also vary throughout its life cycle. Let’s now look at the various product life cycle stages and what characterizes each.
The Introduction Stage
The first stage in a product’s life cycle is the introduction stage. The introduction stage is the same as commercialization, or the last stage of the new product development process. Marketing costs are typically higher in this stage than in other stages. As an analogy, think about the amount of fuel a plane needs for takeoff relative to the amount it needs while in the air. Just as an airplane needs more fuel for takeoff, a new product or service needs more funds for introduction into the marketplace. Communication (promotion) is needed to generate awareness of the product and persuade consumers to try it, and placement alternatives and supply chains are needed to deliver the product to the customers. Profits are often low in the introductory stage due to the research and development costs and the marketing costs necessary to launch the product.
The length of the introductory stage varies for different products. An organization’s objectives during the introductory stage often involve educating potential customers about its value and benefits, creating awareness, and getting potential customers to try the product or service. Getting products and services, particularly multinational brands, accepted in foreign markets can take even longer. Consequently, companies introducing products and services abroad generally must have the financial resources to make a long-term (longer than one year) commitment to their success.
The specific promotional strategies a company uses to launch a product vary depending on the type of product and the number of competitors it faces in the market. Firms that manufacture products such as cereals, snacks, toothpastes, soap, and shampoos often use mass marketing techniques such as television commercials and Internet campaigns and promotional programs such as coupons and sampling to reach consumers. To reach wholesalers and retailers such as Walmart, Target, and grocery stores, firms utilize personal selling. Many firms promote to customers, retailers, and wholesalers. Sometimes other, more targeted advertising strategies are employed, such as billboards and transit signs (signs on buses, taxis, subways, and so on). For more technical or expensive products such as computers or plasma televisions, many firms utilize professional selling, informational promotions, and in-store demonstrations so consumers can see how the products work.
During introduction, an organization must have enough distribution outlets (places where the product is sold or the service is available) to get the product or service to the customers. The product quantities must also be available to meet demand. Cooperation from a company’s supply chain members—its manufacturers, wholesalers, and so forth—helps ensure that supply meets demand and that value is added throughout the process.
When you were growing up, some of you may remember eating Rice Krispies Treats cereal, a very popular product. The product was so popular that Kellogg’s could not keep up with initial demand and placed ads to consumers apologizing for the problem. When demand is higher than supply, the door opens for competitors to enter the market, which is what happened when the microwave was introduced. Most people own a microwave, and prices have dropped significantly since Amana introduced the first microwave at a price of almost $500. As consumers in the United States initially saw and heard about the product, sales increased from forty thousand units to over a million units in only a few years. Sales in Japan increased even more rapidly due to a lower price. As a result of the high demand in both countries, many competitors entered the market and prices dropped (Microwave Oven, 2010).
Product pricing strategies in the introductory stage can vary depending on the type of product, competing products, the extra value the product provides consumers versus existing offerings, and the costs of developing and producing the product. Organizations want consumers to perceive that a new offering is better or more desirable than existing products. Two strategies that are widely used in the introductory stage are penetration pricing and skimming. A penetration pricing strategy involves using a low initial price to encourage many customers to try a product. The organization hopes to sell a high volume in order to generate substantial revenues. New varieties of cereals, fragrances of shampoo, scents of detergents, and snack foods are often introduced at low initial prices. Seldom does a company utilize a high price strategy with a product such as this. The low initial price of the product is often combined with advertising, coupons, samples, or other special incentives to increase awareness of the product and get consumers to try it.
A company uses a skimming pricing strategy, which involves setting a high initial price for a product, to more quickly recoup the investment related to its development and marketing. The skimming strategy attracts the top, or high end, of the market. Generally this market consists of customers who are not as price sensitive or who are early adopters of products. Firms that produce electronic products such as DVRs, plasma televisions, and digital cameras set their prices high in the introductory stage. However, the high price must be consistent with the nature of the product as well as the other marketing strategies being used to promote it. For example, engaging in more personal selling to customers, running ads targeting specific groups of customers, and placing the product in a limited number of distribution outlets are likely to be strategies firms use in conjunction with a skimming approach.
The Growth Stage
If a product is accepted by the marketplace, it enters the growth stage of the product life cycle. The growth stage is characterized by increasing sales, more competitors, and higher profits. Unfortunately for the firm, the growth stage attracts competitors who enter the market very quickly. For example, when Diet Coke experienced great success, Pepsi soon entered with Diet Pepsi. You’ll notice that both Coca-Cola and Pepsi have similar competitive offerings in the beverage industry, including their own brands of bottled water, juice, and sports drinks. As additional customers begin to buy the product, manufacturers must ensure that the product remains available to customers or run the risk of them buying competitors’ offerings. For example, the producers of video game systems such as Nintendo’s Wii could not keep up with consumer demand when the product was first launched. Consequently, some consumers purchased competing game systems such as Microsoft’s Xbox.
A company sometimes increases its promotional spending on a product during its growth stage. However, instead of encouraging consumers to try the product, the promotions often focus on the specific benefits the product offers and its value relative to competitive offerings. In other words, although the company must still inform and educate customers, it must counter the competition. Emphasizing the advantages of the product’s brand name can help a company maintain its sales in the face of competition. Although different organizations produce personal computers, a highly recognized brand such as Dell strengthens a firm’s advantage when competitors enter the market. New offerings that utilize the same successful brand name as a company’s already existing offerings, which is what Black & Decker does with some of its products, can give a company a competitive advantage. Companies typically begin to make a profit during the growth stage because more units are being sold and more revenue is generated.
The number of distribution outlets (stores and dealers) utilized to sell the product can also increase during the growth stage as a company tries to reach as much of the marketplace as possible. Expanding a product’s distribution and increasing its production to ensure its availability at different outlets usually results in a product’s costs remaining high during the growth stage. The price of the product itself typically remains at about the same level during the growth stage, although some companies reduce their prices slightly to attract additional buyers and meet the competitors’ prices. Companies hope by increasing their sales, they also improve their profits.
The Maturity Stage
After many competitors enter the market and the number of potential new customers declines, the sales of a product typically begin to level off. This indicates that a product has entered the maturity stage of its life cycle. Most consumer products are in the mature stage of their life cycle; their buyers are repeat purchasers versus new customers. Intense competition causes profits to fall until only the strongest players remain. The maturity stage lasts longer than other stages. Quaker Oats and Ivory Soap are products in the maturity stage—they have been on the market for over one hundred years.
Given the competitive environment in the maturity stage, many products are promoted heavily to consumers by stronger competitors. The strategies used to promote the products often focus on value and benefits that give the offering a competitive advantage. The promotions aimed at a company’s distributors may also increase during the mature stage. Companies may decrease the price of mature products to counter the competition. However, they must be careful not to get into “price wars” with their competitors and destroy all the profit potential of their markets, threatening a firm’s survival.
Companies are challenged to develop strategies to extend the maturity stage of their products so they remain competitive. Many firms do so by modifying their target markets, their offerings, or their marketing strategies. Next, we look at each of these strategies.
Modifying the target market helps a company attract different customers by seeking new users, going after different market segments, or finding new uses for a product in order to attract additional customers. With the growth in the number of online shoppers, more organizations sell their products and services through the Internet. Entering new markets provides companies an opportunity to extend the product life cycles of their different offerings.
Many companies enter different geographic markets or international markets as a strategy to get new users. A product that might be in the mature stage in one country might be in the introductory stage in another market. For example, when the U.S. market became saturated, McDonald’s began opening restaurants in foreign markets.
Modifying the product, such as changing its packaging, size, flavors, colors, or quality can also extend the product’s maturity stage. The 100 Calorie Packs created by Nabisco provide an example of how a company changed the packaging and size to provide convenience and one-hundred-calorie portions for consumers. While the sales of many packaged foods fell, the sales of the 100 Calorie Packs increased to over $200 million, prompting Nabisco to repackage more products (Hunter, 2008). Kraft Foods extended the mature stage of different crackers such as Wheat Thins and Triscuits by creating different flavors. Although not popular with consumers, many companies downsize (or decrease) the package sizes of their products or the amount of the product in the packages to save money and keep prices from rising too much.
Car manufacturers modify their vehicles slightly each year to offer new styles and new safety features. Every three to five years, automobile manufacturers do more extensive modifications. Changing the package or adding variations or features are common ways to extend the mature stage of the life cycle.
When introducing products to international markets, firms must decide if the product can be standardized (kept the same) or how much, if any, adaptation, or changing, of the product to meet the needs of the local culture is necessary. Although it is much less expensive to standardize products and promotional strategies, cultural and environmental differences usually require some adaptation. Product colors and packages as well as product names must often be changed because of cultural and legal differences. For example, in many Asian and European countries, Coca-Cola’s diet drinks are called “light,” not diet, due to legal restrictions on how the word diet can be used. GE makes smaller appliances such as washers and dryers for the Japanese market because houses tend to be smaller and don’t have the room for larger models. Hyundai Motor Company had to improve the quality of its automobiles in order to compete in the U.S. market. Companies must also examine the external environment in foreign markets since the regulations, competition, and economic conditions vary as well as the cultures.
The Decline Stage
When sales decrease and continue to drop to lower levels, the product has entered the decline stage of the product life cycle. In the decline stage, changes in consumer preferences, technological advances, and alternatives that satisfy the same need, in a better way, can lead to a decrease in demand for a product. How many of your fellow students do you think have used a typewriter, adding machine, or slide rule? Computers replaced the typewriter and calculators replaced adding machines and the slide rule. Ask your parents about cassette tapes, which were popular before CDs, which were popular before itunes and music streaming services. Some products decline slowly. Others go through a rapid level of decline. Many fads and fashions for young people tend to have very short life cycles and go “out of style” very quickly. (If you ever ask to see your parents’ clothes from the 1990s, you may be amused at how much the styles have changed.) Similarly, many students don’t have landline phones or televisions and cannot believe that people still use these devices. Some devices, such as payphones (phones available on the street and which you paid to use per call), have almost completely disappeared with the advent of cell and smart phones.
Products that rely on the technology of the day, such as smartphones and video games that appeal to young people often have limited life cycles. Companies must decide what strategies to take when the product had entered the decline stage. To save money, some companies try to reduce their promotional expenditures on these products and the number of distribution outlets in which they are sold. They might implement price cuts to get customers to buy the product. Harvesting the product entails gradually reducing all costs spent on it, including investments made in the product and marketing costs. By reducing these costs, the company hopes that the profits from the product will increase until their inventory runs out. Another option for the company is divesting (dropping or deleting) the product from its offerings. The company might choose to sell the brand to another firm or simply reduce the price drastically in order to get rid of all remaining inventory. If a company decides to keep the product, it may lose money or make money if competitors drop out. Many companies decide the best strategy is to modify the product in the maturity stage to avoid entering the decline stage.
The Product Adoption Curve
In addition to understanding the lifecycle of products, it is also important to understand the different types of consumers and how they adopt new products as they are introduced to the marketplace. This is called the product adoption curve or the diffusion of innovation theory. Figure 6.9 “Diffusion of Innovation”, illustrates the type of customers who adopt the new product over time. It is the process by which a product or service is adopted by consumers as it spreads throughout the market. Note that some people will never adopt. They are called non-adopters and are not shown on this adoption curve. Over time, various types of adopters will buy the new product. It helps marketers understand the rate at which consumers are likely to adopt new products or services. You will notice that the adoption curve generally follows a bell-shaped curve. Let’s look at the characteristics of each group and how they may influence later adopters (Rogers, 2003). ‡
Innovators are typically the first to buy new products when they hit the market. They are characterized as risk takers because they are willing to buy when the products first come to market, even though there may be some bugs in the new product. Innovators are regarded as highly knowledgeable and are typically not price-sensitive when it comes to new products. These types of adopters tend to keep themselves well informed about the product category by subscribing to trade and or specialty publications, talking to other experts, searching the internet, and attending product-related forums and special events. While they may not represent a sizeable part of the overall market, innovators are crucial to the success of a new product because they tend to influence the next group of adopters with their review of the product. A good example of an innovator might be someone who purchased the first iPhone when it was launched back in 2007. You may not remember, but when the iPhone first launched, it was the first touch-based smartphone to hit the market. ‡
Early adopters generally take fewer risks and therefore tend to wait for favourable feedback from innovators before they purchase. Early adopters are often regarded as opinion leaders and tend to influence the next group of adopters. This group of adopters tends to represent a greater amount of the overall market, however, still pales in comparison to the next two adopter groups. It is this group which makes or breaks the success of a new product as their adoption and influence leads the next two groups to adopt. ‡
Early Majority Adopters
Early majority adopters tend to avoid most risks. They like to wait for the problems in the new product (identified by the previous groups) to be worked out before they purchase. It is at this point were new competitors tend to peak and the greatest number of price and quality choices also peak. A new product needs to reach this stage of adoption in order to become profitable. ‡
Late Majority Adopters
Late majority adopters are even more risk averse than the previous adopter groups. They tend to be very cautious and skeptical. It is usually when this group adopts that the market for the new product reaches its full potential. It is also true that once the group begins to adopt, sales begin to level off. ‡
Laggard adopters like to avoid change all together and rely on previous technologies often until they are no longer available before they begin to adopt. A good example of a laggard are those who are still using non-smartphone devices. ‡