Session 3: Modules 7-9 Lecture Notes

Module 7: Product Strategies

• Accounts for 9% weight on the assessment.
• Covers pages 43-46 in the course content and 221-261 in the external textbook.
• Complete module quizzes and unit tests with a score of 80% or higher.

Learning Objectives

• Describe the characteristics of a product.
• Describe the product life cycle and how product strategies change over time.
• Describe the role of new product development and the consumer product adoption process.

What is a Product?

• A product is what is offered to the consumer to satisfy a need or want.
• It is anything given up in exchange with the buyer.
• Can be a physical item, a service, or an event.

Three Levels of a Product:

• Essential Benefit: Why we need the product.

• Core Product: What makes up the benefits.

• Enhanced Product: Extras that come with the product.

• Example (Starbucks):

  • Essential Benefit: Quenches thirst, caffeine boost.
  • Core Product: Coffee, tea, frappuccinos.
  • Enhanced Product: Creamer, sugar, syrup, overall experience.

Product Classification

• Classified in four ways based on tangibility, durability, consumers, or businesses.
• Nature and use of the product are important because marketing strategies differ for consumers and businesses.

Tangibility

• How easy it is for the consumer to physically touch, examine, or see the product prior to purchase.
• Products can have a mix of tangibility (e.g., restaurant - food is tangible, service is intangible).

Durability

• Represents the length of the product's use.
• Durable products last a long time, while nondurable products don't.

Business to Consumer (B2C) Classifications:

Based on the buying habits that the consumer exhibits.

• Convenience Goods:
  • Grab-and-go items, low cost, regularly purchased.
• Shopping Goods:
  • Cost more, purchased less frequently, range in price.
• Specialty Products:
  • Once-in-a-lifetime purchases, customized, only available from the manufacturer, pricey.
• Unsougth Goods:
  • Products we don't know until we need them (e.g., disaster recovery, funeral services).

Business to Business (B2B) Classifications:

Based on whether they are used in the manufacturing process and cost.

• Materials:
  • Resources needed to produce the product (e.g., lumber, minerals, farm products).
• Parts:
  • Equipment either fully assembled or in smaller pieces used in the production process.
• MRO (Maintenance, Repair, and Operating Supplies):
  • Everyday items needed to keep a company running (e.g., janitorial supplies, safety equipment).
  • Low cost per unit, but total cost over a year can be high.
• Capital Goods:
  • Major purchases in support of a significant business function (e.g., building a new plant, installing a new IT network).
  • Require significant customization and are negotiated over months or years.

Product Differentiation

• How a company differentiates its products from competitors.

• Form: Size, shape, color, and other physical characteristics.

• Features: Product and performance attributes.

• Performance Quality: Building the product to performance expectations. Higher cost usually leads to higher expectations.

• Conformance Quality: Delivering on the promise of marketing communications.

• Durability: How long the product will last.

• Reliability: Percentage of time that the product will work without failure.

• Repairability: How easy it is to fix the product.

• Style: Look and feel of the product.

Additional Product Considerations

• Packaging: Designed to protect, communicate, and appeal to the target market.
  • Eye drops (safety seal to prevent tampering).
  • FDA requires processed food companies to provide detailed nutritional information.

Product Planning

• Helps a company organize individual products into lines.
• Companies balance the number of items in a product line.

Product Mix

• All the products offered by a company, regardless of product line.

Product Life Cycle

• Applies to an entire category of products, not an individual product.
• Four stages: introduction, growth, maturity, and decline.

Introduction Stage

• The product category becomes available to the consumer.
• Companies invest heavily in promotion to educate consumers.

Growth Stage

• Sales and profits increase dramatically.
• New competitors enter the market.

Maturity Stage

• Sales stabilize and can stay steady for a long time (decades).
• Companies try to make the product better and come up with new variations.

Decline Stage

• Sales and profits drop.
• A new better way to fulfill the need emerges.

New Product Development

• Can be done through acquisition or internal development.

Types of New Products

• New to the world:
  • So innovative that they create a fundamental change in the marketplace, known as disruptive innovation.
• Sustaining Innovations:
  • Newer, better, faster versions of existing products that target existing customers.
• Cost Reduction:
  • Introduces a value version of the product with less features, less quality, or altered service.
• New to the User:
  • The product has been around, but the user has not used it before.

Product Development Process - Three Major Phases:

Phase 1: Generating Product Ideas

• Ideas are generated either internally or externally.
• Go-to-market mistake: Company fails to stop a bad product idea.
• Stop-market mistake: A good idea is prematurely eliminated.
  • Example of Go-To-Market Mistake: Cheetos Lip Balm.

Phase 2: Product Definition and Testing

• The product idea is clearly defined and tested.
• Product definition objectives:
  • Define the product's value proposition.
  • Identify the target market.
  • Delineate the product's characteristics.
• Marketing strategy is prepared now, with tentative pricing, distribution, and marketing communication strategies.
• Business case analysis assesses the product's probability of success with focus on:
  • Total demand for the product over a specified period (5 years).
  • Cash flow statement specifying cash flow profitability and investment requirements.

Phase 3: Development

• The product must move from a concept to a working product.
• The development team must design and build a product customers want while hitting the company's success metrics.
• Products are often given code names to maintain security.
• Marketing strategy is created using the product's market name.
• Engineers work with package design professionals to ensure the product is protected and the packaging maximizes marketing communication opportunitie.

Phase 4: Launch

• Define the product's objectives (sales, target markets, success metrics).
• Specify the value proposition, plan marketing tactics, and implement the marketing plan.

Innovation Diffusion Process

• How long it takes the product to move from first purchase to last purchase.

• Individuals move through five stages before adopting the product.

  • Awareness: User knows of the product but has insufficient information.
  • Interest: User is looking for more information.
  • Evaluation: User is comparing the product with competitors.
  • Trial: The user purchases the product but is still deciding if the product is right for them. CRM provides an advantage.
  • Adoption: User has grown loyal to the product.

Product Adoption Groups:

Think about smartphones and where you fit into one of these product adoption groups.

• Innovators (2.5%): Product enthusiasts who enjoy being the first to try a new product. Prime candidates for beta testing.
• Early Adopters (13.5%): Opinion leaders who seek out new products consistent with their self-image. Not price sensitive, demand personalized service and product features.
• Early Majority (34%): Product watchers who want to be convinced of the product's claims and value proposition before making a commitment. Critical to long-term success.
• Late Majority (34%): Product followers who are price sensitive and risk-averse. Purchase older generation or discounted models.
• Laggards (16): Product avoiders that are resistant to change and will put off the purchase until there is absolutely no other option.

Module 8: Services

• Accounts for 8% weight on the assessment.
• Service and customer experience are the principal function in marketing.
• Over 80% of US jobs are service-based.

Learning Objectives

• Know the characteristics of service
• Know those service attributes
• The elements of the service profit chain
• Characteristics of service quality and how service quality is measured

Services vs. Goods: Services are different from goods in four distinct ways:

• Intangibility: Cannot be seen, heard, tasted, felt, or smelled.
• Inseparability: Produced and consumed at the same time. Cannot be separated from the provider or recipient. Think about when you go to the doctor. You cannot receive medical treatment without someone there to provide the treatment.
• Variability: Only as good as the service provider.
• Perishability: Cannot be stored for future use.

Service Profit Chain

• A tool used to see the connections between employees and the quality of service they deliver.
• Job design, employee recruitment, training, and rewards drive employee satisfaction.
• Satisfied employees lead to productive employees and strong employee retention.
• Internal marketing recognizes that employees are a customer group.
• Good employees provide high-value service through being customer-centric.
• Leads to higher customer satisfaction, loyalty, and profitability.
• The long-term goal is to turn loyal customers into brand advocates.

Evaluation Continuum

The things we see, experience, or trust..

• Search: Attributes that can be verified prior to use.
• Experience: Attributes that can be verified after use.
• Credence: Attributes that are difficult to evaluate after use, so trust comes into play.
  • Services are typically evaluated using experience and credence qualities, while tangible goods are often evaluated using search and experience qualities.

Service Attributes Examples

*For better understanding the differences*.

*   **Search Attributes:**
*   When you go to the grocery store, you can evaluate the produce through inspection before you buy it.
*   **Experience:**
*   I can evaluate the quality of my haircut by the skill of my stylist and the satisfaction with the final product.
*   **Credence:**
*   We can evaluate a visit to the doctor based on the doctor's degree and certifications.

How to Deliver Great Service

• Through exceeding expectations (customer delight).
• Delightful surprises, taking it up a notch, are things that the customer does not expect.

Tools to Assess Quality of Service

• Service Quality: How we measure performance versus expectations.
• Service Encounter: When the customer is interacting with the service provider.
• Moment of Truth: Face-to-face time between the customer and the service provider.

Gap Analysis

• A tool used to discover gaps between expectations and performance.

• Gap 1: We don't know what the customer actually wants.

  • Example: Domino's Pizza thinking people want pizza fast when they really want better-tasting pizza.

• Gap 2: We design service processes that do not meet the customer's needs.

  • Domino's Pizza thinks people want pizza fast, but don't develop a system for making, baking, and delivering a pizza in a short amount of time.

• Gap 3: We do not perform up to par, maybe due to poor training, poor execution, or poor management.

  • Maybe you place an online order at your favorite fast food restaurant. You get there, you go inside to pick up the order, but the order's not ready.

• Gap 4: We say one thing in our advertising and then do another.

  • Domino's promising curbside delivery within ninety seconds of arriving in their promotions, maybe when ordering via their app. So you do this.

• Gap 5: Customers think they should receive a certain level of service and perceive a different level of service actually provided.

  • In the fast food restaurant example I just gave you, you felt that after waiting so long, you should have received either a refund on your order or something free, especially when you get back to the car to realize you got the wrong order.

How to Measure Service Quality - The ServQual Instrument

• A survey with scaled responses to a number of questions related to five dimensions of service quality.

Dimensions of Service Quality:

• Tangibles: Physical observable elements (e.g., cleanliness of bathrooms, employee uniforms, tables).
• Reliability: How well the company delivers the service correctly and consistently.
• Responsiveness: How quickly we respond to customer requests (e.g., how quickly we respond to emails).
• Assurance: The knowledge and courtesy of employees, which builds customer confidence.
• Empathy: How caring the service provider is and whether they can see things from the customer's point of view.

Service Blueprints

• Marketers use service blueprints to visualize the customer experience and relationships among all service components, both those that are visible to the customer and those that are not.
• Marketers can identify potential bottlenecks in the delivery process and help maximize team performance because the relationships among departments are displayed.

Module 9: Pricing

• Accounts for 9% weight on the assessment.
• Price and value are connected; what we pay impacts whether we see the value in the product.

Learning Objectives

• Describe the role of pricing objectives and strategies in capturing value, pricing tactics, and approaches to setting a price.
• Describe discount, allowance, and price change strategies.
• Know the legal considerations in pricing

Pricing Decisions

• Understand what we hope to accomplish with our pricing (objective).
• Establish pricing strategies and tactics to help achieve that goal.
• Set the exact price for the product.
• Determine what types of discounts or allowances we might offer our channel partners.
• Implement those price changes.
• Consider laws that impact pricing decisions.

Pricing Strategies

• Penetration Pricing: Enter the market with a lower price to capture market share.
• Skimming Strategy: Enter the market with a higher price to maximize profitability.
• Target ROI: Focused on how to price the product to secure a certain level of profit. (Price Elasticity of Demand)
• Competitor-Based Pricing: Pricing products in line with competitors.
• Stability Pricing: Setting a neutral price point to avoid a price war but not damage the value proposition.
• Value Pricing: Based on the consumer's perceived value of the product or service.

Pricing Tactics

• Product Line Pricing: Releasing multiple versions of the same product or service at different price points.
• Captive Pricing/Complementary Pricing: Gaining commitment for a basic product that requires continual purchase of additional items (e.g., razors with changeable blades).
• Price Bundling: Offering multiple products together at a slightly lower price.
• Reference Pricing: The price customers believe or expect an item should cost.
• Prestige Pricing: Pricing the product high due to the quality of the product and the status of owning it. (Louis Vuitton, Rolex etc).
• Odd-Even Pricing: Odd pricing is not expressed in whole dollars, while even pricing is a whole dollar amount (9.99 vs. 10).
• One-Price Strategy: The seller offers the same price to every customer.
• Variable Pricing: Customers are encouraged to haggle over the price.
• Everyday Low Price: Reduce investment in promotion and transfer part of the savings to lower the price. (Walmart)
• High-Low Pricing: Introduce products at a higher price and then gradually discount the price as demand decreases. (Macy’s or Nordstrom’s).
• Auction Pricing: The highest bidder wins and pays exactly what they bid.

Setting the Price

• Cost-Plus Pricing: Adding a standardized markup on top of costs for an offering.

Cost + (Markup \% \times Cost) = Sale Price

• Markup on Sales Price: Uses the sales price as a basis for calculating the market percentage.

Market\% = \frac{Sales Price - Cost}{Cost}

• Target Return Pricing: How much the company wants to make from the sale of the product Includes fixed costs, which are incurred over time, and variable costs, which fluctuate with volume.

Discounts and Allowances

Discounts - Immediate reductions in price. Allowances - Monies given to purchases after the fact.

• Cash Discounts: Encourage distributors to pay faster.
  • Example: 2%, over 10 net 40 (2% discount if paid within 10 days, full amount due in 40 days).
• Trade: Discount in exchange for the buyer performing some function (e.g., assembly in-store).
• Seasonal Discounts: Applied when a company buys a product and doesn't take possession until later (e.g., Home Depot buying lawn mowers in December but receiving them in March).
• Promotional Allowances: Price reduction granted by a manufacturer to a channel partner in return for special promotion of a product.
• Geographically Driven Prices: Adjust the sale price according to location:
  • Zone pricing: Pricing by zones.
  • Uniform delivered pricing: Same delivery fee regardless of location.

Legal Considerations in Pricing

• Price Fixing: Companies collude to set prices at a mutually beneficial high level. Sherman Act forbids horizontal price fixing.
• Price Discrimination: A seller offers different prices to different customers without a substantial basis. Regulated by The Robinson Patman Act.
• Deceptive Pricing: Pricing goods or services in such a way that the customer is misled.
• Predatory Pricing: A company intentionally sells below cost to push a competitor out of the market, then raises the prices to new highs.