D One Seven for Learning Live Cohort - Session Three
Module 7: Product Strategies
What is a Product?
Formal definition: What we're offering to the consumer, satisfying a need or want.
Anything given up in exchange with the buyer.
Can be tangible (e.g., bag of M&Ms) or intangible (e.g., service, event like a concert).
Three Levels of a Product
Essential Benefit: Why we need the product, what we get out of it.
Core Product: The tangible aspects, the "what" of the product.
Enhanced Product: Extras we get with the product.
Starbucks example:
Essential Benefit: Quenches thirst, caffeine boost.
Core Product: Coffee, tea, frappuccinos.
Enhanced Product: Creamer, sugar, syrups, quality service.
Product Classification
Classified in four ways:
Tangibility: How easy to touch, examine, see before purchase.
Durability: Length of product's use.
Market (Consumers or Businesses): Who is using the product.
Products can have a mix of tangibility.
Restaurant: Food (tangible) and server (intangible).
Car: Physical good, warranty & service (intangible).
Consumer Goods (B2C)
Classification based on buying habits:
Convenience Goods: Grab-and-go, low cost, regular purchases.
Shopping Goods: More expensive, less frequent purchases (e.g., coffee makers, washing machines).
Specialty Products: Once-in-a-lifetime, customized, expensive (e.g., hand-carved carousel horses).
Unsought Goods: Products we don't know we need until we need them (e.g., disaster recovery, funeral services).
Business Goods (B2B)
Classified into three broad areas based on use in manufacturing process and cost:
Materials: Resources needed to produce our product (e.g., lumber, minerals, farm products).
Parts: Fully assembled or smaller pieces used in production (e.g., equipment).
MRO (Maintenance, Repair & Operating Supplies): Everyday items to keep the company running (e.g., janitorial supplies, office supplies).
Capital Goods: Major purchases for significant business functions (e.g., building a new plant, IT network).
Product Differentiation
How a company differentiates products from competitors, with eight different types of differentiation:
Form: Changes to size, shape, color.
Features: Product and performance attributes.
Performance Quality: Meeting performance expectations.
Conformance Quality: Delivering on marketing promises.
Durability: How long the product lasts.
Reliability: Percentage the product works without failure.
Repairability: Ease of fixing the product.
Style: Look and feel of the product.
Additional Product Considerations
Packaging: Protect, communicate, appeal to the target market.
Legal labeling requirements (e.g., FDA nutritional information).
Product Planning: Organize individual products into lines.
Product Mix: All products offered by a company (e.g., PepsiCo: Pepsi, Lay's, Tropicana, Quaker, Gatorade).
Product Life Cycle
Applies to an entire category of products, not individual products.
Four stages: introduction, growth, maturity, decline.
Introduction: Invest in promotion; educate people about what it is and why they should buy it.
Growth: Sales and profits increase, new competitors enter.
Maturity: Sales stabilize, companies try to improve the product; new variations of laundry detergent are constantly available; can last for decades (smartphones, laundry detergent).
Decline: Sales and profits drop, old school phones became obsolete.
New Product Development
Two basic ways:
Acquisition (e.g., Amazon acquiring Whole Foods).
Internal Development.
Types of New Products:
New to the World: Disruptive innovation (e.g., streaming video platforms disrupting video rental market).
Sustaining Innovations: Newer, better, faster versions of existing products (e.g., new cell phones).
Cost Reduction: Value version of the product with fewer features (eliminate or reduce features, use less expensive materials offer the product at a lower price point to the market).
New to the User: Product already exists, but new to the user (new owner).
Product Development Process
Three Major phases/stages
Product Ideas: Customers and distributors make good sources for new product ideas.
Go-to-market mistake: Failing to stop a bad product (e.g., Cheetos lip balm)
Stop-market mistake: Prematurely eliminating a good idea during screening.
Product Definition:
Define the products value proposition.
Identify target market and purchase frequency.
Delineate Products Characteristics.
Marketing Strategy: Helpful to product developers.
Business Case Analysis:
Evaluates product's probability for success.
Total demand for the product over a specified period (usually 5 years).
Cash flow statement specifying cash flow profitability and investment requirements.
Product Development: Concept to working product (the development team is looking for metrics such as sales price, revenue, profit margins, unit sales, cost to build)
Marketplace Testing: Testing in the marketplace using the product's market name
Phase three, which is the actual working product that meets customer needs, requires the development team to design and build a product the customer wants, while hitting goals and metrics such as: sales price, revenue, profit, margins, unit sales, and cost to build.
Marketing Plan Implementation: Define product objectives, value proposition, marketing tactics.
Innovative Diffusion: how long it takes the product to move, from first purchase to last purchase
Innovation Diffusion Process
How long it takes for a product to move from first purchase to last purchase.
Five stages:
Awareness: User knows of the product (insufficient information).
Interest: User looks for more information.
Evaluation: User compares product with competitors.
Trial: User purchases to test if it's right for them.
Adoption: User becomes loyal to the product.
Product Adoption Groups
Innovators (2.5%): Product enthusiasts, beta testers (prime candidates for beta testing and representing a really good source of feedback late in the product development process or early in the product launch phase).
Early Adopters (13.5%): Opinion leaders, seek new products, not price sensitive, demand high service and product features
Early Majority (34%): Product watchers, want to be convinced of value, critical to long-term success, take the product into the mainstream.
Late Majority (34%): Product followers, price-sensitive, risk-averse, purchase older/discounted models.
Laggards (16%): Product avoiders, resistant to change, delay purchase until no other option.
Module 8: Services
Accounts for 8% weight on the assessment.
Learning Objectives:
Know the characteristics of service.
Service attributes.
Elements of the service profit chain.
Characteristics of service quality, how it is measured.
Service and customer experience are principal functions in today's global economies.
Over 80% of US jobs are service-based.
Differences between Services and Goods
Intangibility: Cannot be seen, heard, tasted, felt, or smelled.
Inseparability: Produced and consumed simultaneously; cannot separate service from provider/recipient.
Variability: Quality depends on the service provider (good vs. bad doctors).
Perishability: Cannot be stored for future use (e.g., unsold hotel rooms = loss of opportunity). Cancellation policies address this.
Service Profit Chain
Connects employee satisfaction with service quality.
Happy employees lead to productive employees and strong employee retention.
Internal marketing recognizes employees as customers and aims to meet their needs.
Good employees provide customer-centric, high-value service.
Goal: Turn loyal customers into brand advocates.
Evaluation Continuum
How we evaluate a service
Search: Verified before use, (grocery store produce available to see and feel).
Experience: Verified after use, quality of haircut.
Credence: Difficult to evaluate even after use; based on trust, healthcare examples.
Service Attributes Examples
To help you better understand the difference between service attributes:
Search Attributes: Evaluate produce through inspection before purchase.
Experience Attributes: Evaluate haircut by skill of stylist and final product.
Credence Attributes: Evaluate doctor based on degree and certifications.
Delivering Great Service
Exceed expectations (customer delight).
Delightful surprises (exceeding expectations) through going above and beyond what is expected for customers, by means of a generous action.
Assessing Service Quality
Service Quality: Measure performance versus expectations.
Service Encounter: Interaction between customer and service provider
Moment of Truth: Face-to-face time between customer and service provider; customer judgment is formed.
Gap Analysis
Tool to discover gaps between expectations and performance.
Gap 1: We don't know what the customer wants (e.g., Domino's Pizza thinking people want pizza fast, not better tasting pizza).
Gap 2: Design processes don't meet customer needs (Domino's doesn't develop a fast system).
Gap 3: Poor performance due to training, execution, management (e.g., online order not ready).
Gap 4: Say one thing, do another (Domino's promising curbside delivery in 90 seconds, only to have customer wait).
Gap 5: Customers perceive a different level of service than provided (customer felt they should receive a refund, but instead received the wrong order).
Measuring Service Quality
SERVQUAL instrument: Survey with scaled responses related to five dimensions:
Tangibles: observable elements; how clean are the bathrooms and tables?
Reliability: Delivering service correctly and consistently.
Responsiveness: Quickly responding to customer requests.
Assurance: Knowledge and courtesy of employees, builds confidence.
Empathy: Caring and seeing things from the customer's point of view.
Service Blueprints
Visualize customer experience and relationships among service components.
Identify potential bottlenecks and maximize team performance.
Module 9: Pricing
Accounts for 9% weight on the assessment.
Learning Objectives:
Describe the role of pricing objectives and strategies in capturing value.
Pricing tactics and approaches.
Describe discount, allowance, and price change strategies.
Legal considerations in pricing.
Price and value are connected.
Pricing Decisions
1. Establish pricing objectives
2. Establish pricing strategies and tactics.
3. Set exact price
4. Determine discounts/allowances for channel partners.
5. Implement price changes.
6. Consider laws impacting pricing.
Specific Pricing Strategies
Specific pricing strategies to consider; Penetration; Skimming; Target ROI; Competitor Based, Value:
Penetration Pricing: Lower price than competitors to capture market share.
Skimming Strategy: Higher price due to technically advanced product, maximize profitability, Apple is great at using a skimming strategy, but eventually having to provide discounts
Target ROI: Price product to secure a certain level of profit, consider price elasticity of demand (how sensitive the customer is to price changes).
Price elasticity of demand is an important factor when considering how consumer behavior changes with price, for example, will you continue purchasing eggs if the price goes up 10% , 25%, or 50%?
Competitor Based Pricing: Price products in line with competitors.
With Undercutting, there is risk of a Price War, where you need to consider how much your company can endure before considering something such as undercutting.
Stability Pricing: Setting a neutral price point, not too low to encourage a price war, not too high to damage your value proposition.
Value Pricing: Based on the consumer's perceived value of the product or service value based pricing is very customer focused.
There is risks to this, such as Price is harder to set and is certainly not an exact science, or that perceived value is not always stable. Designer apparel companies actually use value based pricing.
Pricing Tactics
Product Line Pricing: Releasing multiple versions of the same product at different price points (e.g., smart thermostats).
Captive Pricing (Complementary Pricing): Commitment for a basic product that requires continual purchases to operate (e.g., razors with changeable blades, printers with ink refills).
Price Bundling: Multiple products together at a lower price than if buying individually (e.g., value meals).
Reference Pricing: Price customers believe an item should cost based on experience.
Prestige Pricing: Products priced high due to the quality and the status that accompanies owning the product. Luxury Brands often fall into this category, such as Louis Vuitton or Rolex.
Odd/Even Pricing: Prices end in odd numbers (e.g., 1.99 vs. 2.00), the psychological factor is that, customers naturally think the product is cheaper when they see 9.99 versus 10 when we're really just talking about a $0.01 difference.
One-Price Strategy: Seller offers the same price to every customer and cannot negotiate the price.
Variable Pricing: Where customers encouraged to haggle over the price and negotiate a lower price.
Everyday Low Price: Simplifies decision-making, minimizes marketing costs, and helps with forecasting (Walmart is built on everyday low pricing).
High-Low Pricing: Retailers introduce products at a higher price point and gradually discount or mark down as demand decreases. Major retailers like Macy's do this.
Auction Pricing: Highest bidder wins and pays what they bid.
Setting the Price
Cost-Plus Pricing: Standardized markup on top of costs (estimate costs, add markup, arrive at sales price).
Markup on Sales Price: Uses the sales price as a basis for calculating the market percentage Market \% = (item : price - cost) \div cost .
Market \% = (sales :price - item :price ) / cost
For example, if an item is priced at 12 dollars, but cost the company 8 dollars to make, the market percentage is 50 \%, which is calculated as 12 - 8 / 8.
Target Return Pricing: How much the company wants to make from the sale of the product involves fixed costs, which are incurred over time regardless of volume, and variable costs, which fluctuate with volume.
Total costs are the sum of fixed and variable costs.
Calculating this requires predicting how much of the offering will be demanded by clients.
Discounts and Allowances for Channel Partners
Discounts: Immediate reductions in price.
Cash Discounts: Encourage faster payments (e.g., 2% discount if paid within 10 days, net 40).
Trade Discounts: Discount for performing a function (e.g., assembly in store, trading concert tickets for airtime).
Seasonal Discounts: Buy product but don't take possession until later.
Allowances: Monies given to purchasers after the fact.
Promotional Allowances: Price reduction for special promotion of a product.
**Geographically Driven Prices ** adjust the sales price of a product, according to the location of the buyer.
Zone Pricing: Pricing by zones.
Uniform Delivered Pricing: Same delivery fee regardless of location.
Legal Considerations in Pricing
You will want to know the difference between these different Legal Considerations
Price Fixing: Colluding to set prices at a mutually beneficial level (horizontal price fixing is illegal per the Sherman Act).
Price Discrimination: Offering different prices to different customers without a substantial basis (Robinson-Patman Act prevents discrimination with retailers).
Movie theatres are okay, because some price discrimination is unethical, but not necessarily illegal.
Deceptive Pricing: Misleading customers (e.g., bait and switch - advertising a specific car model at a certain price, but the dealer says it's unavailable; disclaimer is the way they advertise the ad).
Deceptive pricing practices are monitored and enforced by the FTC.
Predatory Pricing: Selling below cost to push a competitor out of the market, then raising prices (intent must be proved). For example, Walmart wanting to undercut Target and starting offering drug prices well below the price floor. Luckily, the state of Minnesota put and end to the price wars.
Drastic price reductions include inventory overstock, which makes it hard to prove predatory pricing.