CHAPTER 6

1. CHAPTER 6 New-Product Development andProduct Life-Cycle Strategies Objective: finding and developing new products and managing them successfully over their life cycle.

2. New-Product Development Strategy Because of the rapid changes in consumer tastes, technology, and competition, companies must develop new products and services. A firm can obtain new products in two ways; • acquisition; buying a whole company, a patent, or a license. • new-product development; developing original products, product improvements, product modification, and new brands

3. In order to find and develop successful products, the marketers must go through the following stages; idea generation idea screening concept development and testing marketing strategy business analysis product development test marketing commercialization New-product Development Process

4. Idea Generation • New product development starts with idea generation - the systematic search for new-product ideas. • Major sources of new-product ideas include (1) internal sources - research & development department, executives, salespeople; (2) customers; (3) competitors; (4) distributors and suppliers; (5) others - trade magazines, seminars, government agencies, new-product consultants, marketing research firms, universities, inventors.

5. Idea Screening • Idea screening reduces the number of new ideas by screening new-product ideas in order to spot good ideas and drop poor ones as soon as possible. • In idea screening, market size, product price, development time and costs, production costs, rate of return and type of customers are put into consideration.

6. Concept Development and Testing An attractive idea must be developed into a product concept. • Concept Development; is a detailed version of the new-product idea stated in meaningful consumer terms. Several concepts can be developed for a product idea e.g. the idea of developing an electric car may be created in the following product concepts - (1) an inexpensive family car; (2) a medium cost sporty car for young people; (3) an inexpensive

7. car for conscious people who look for basic transportation, low fuel cost, and low pollution. The marketer must test these alternatives. • Concept Testing; involves testing new-product concepts with target consumers before turning the new ideas into actual new products. The concepts may be presented to consumers symbolically or physically. After being exposed to the concept, consumers may be asked to tell their opinions. The answers will help the company decide which concept has the strongest appeal.

8. Marketing Strategy Development • After all the concepts are tested, the company must develop the initial marketing strategy to introduce the best concept to the market. • At this stage, the marketing strategy consists of three parts; • the first part; describes the (1) target market, (2) the planned product positioning, and (3) the sales, market share and profit goals for the first year. • the second part; outlines the product’s planned (1) price, (2) distribution, and (3) marketing budget for the first year. • the third part; describes the planned long-run (1) sales, (2) profit goals, and (3) marketing mix strategy.

9. Business Analysis • Once the product concept and the marketing strategy is decided, the marketer should evaluate the business attractiveness of the proposal. • Business analysis involves the projections for the sales (by looking at the sales history of similar products and getting the market opinion), costs (by looking at the forecasted sales figures), and profit for the new product to find out whether they satisfy the company’s objectives. If they do, the product can move to the product-development stage.

10. Product Development • Here, the product concept is developed into a physical product (prototype) to understand whether the product idea can be turned into a workable product. • Prototypes are tested under laboratory and field conditions to make sure that the product performs safely and effectively.

11. Test Marketing • After the prototype is tested under the laboratory and field conditions, the next stage is testing the product under more realistic market settings. • Test marketing allows the company to test the product and its marketing program (e.g. positioning strategy, advertising, pricing, distribution, branding, packaging, budget) before going into the full introduction. • When introducing a new product requires a big investment, or when management is not sure of the product or marketing program, the companies do a lot of test marketing.

12. Commercialization • Commercialization is the introduction of a new product into the market. • At this stage, the company may need to spend between $10 million and $100 million for advertising and sales promotion in the first year. • Here, the company should decide when and where the product will be introduced.

13. Product Life-Cycle Strategies • After launching a new product, management wants it to enjoy a long and happy life, although it does not expect the product to sell forever. • The product life cycle (PLC) is the course that a product’s sales and profits take over its lifetime. It has five stages; 1. Product development begins when the company develops a new-product idea. During product development, sales are zero and the company’s investment costs mount.

14. 2. Introduction is a period of slow sales growth as the product enters in the market. Profits are nonexistent in this stage because of the heavy expenses of product introduction. 3. Growth is a period of rapid market acceptance and increasing profits. 4. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Profits level off or decline because of increased marketing outlays to defend the product against competition. 5. Decline is the period when sales fall off and profits drop.

15. Product Life-Cycle Sales and profits ($) Sales Profits Time Product Introduction Growth Maturity Decline Losses/develop- invest-ment mentstage

16. The PLC concept is used by the marketers to forecast product performance or to develop marketing strategies. • But all products do not follow the PLC in the same way. Some products are introduced and die quickly; others stay in the maturity stage for a long time. Some enter the decline stage and are then cycled back into the growth stage through strong promotion or repositioning. • The major drawbacks of this cycle is that it is difficult (1) to identify which stage of the PLC the product is in, (2) to determine the factors that affect the product’s movement through the stages, to forecast the (3) sales level at each PLC stage, (4) the length of each stage, (5) the shape of the PLC curve.

17. Introduction Stage • The introduction stage starts when the new product is first launched. • Here, sales growth is slow, profits are negative or low, because of low sales and high distribution and promotion expenses. • Promotion spending is high to inform consumers of the new product and get them to try it. • The company and its competitors produce the basic versions of the product because the market is not ready for the different versions of the product yet.

18. The introduction stage strategies are; • Rapid-skimming strategy (high price/high promotion); here the company targets the “cream” of the buyers (buyers with high income) so the price of the new product or service is set high. When the company wants to attract these people rapidly (quickly), it heavily promotes the product. • Slow-skimming strategy (high price/low promotion); the difference between slow- and rapid-skimming is in the amount spent on promotion. Here less money is spent on promotion. • Rapid-penetration (low price/high promotion); the price level is the key difference between penetration and skimming strategies. Whe the market is price sensitive, penetration is a better strategy. In penetration, prices are set low to capture as many buyers as possible. When most of the potential buyers

19. are unaware of theproduct, they use heavy promotion. Here the risk is attracting heavy competition because a lot of companies may like to copy. • Slow-penetration strategy (low price/low promotion); here the new product or service is introduced at a low price with a low level of promotion. Again, the potential market is large and price sensitive but aware of the new service or product that is why, the level of promotion is low.

20. Growth Stage • If the new product satisfies the market, it will enter a growth stage, in which sales climb quickly. • Early adopters buy the product. • New competitors enter the market when they are attracted by the opportunities for profit. They introduce new product features so the market expands. • Sales increase, prices remain the same or fall slightly, promotional spending stays the same or increase slightly.

21. Profits increase as promotion costs are spread over a large volume (sales) and as unit production costs fall. • The growth stage strategies are; • improving product quality and adding new product features and models • entering into the new market segments • entering into the new distribution channels • shifting some advertising from building product awareness to building product conviction and purchase • lowering prices at the right time to attract more buyers in order to sustain its rapid growth and meet competition.

22. By spending a lot of money on product improvement, promotion, and distribution, the company can gain a dominant position in the market but, as a result of this, it gives up maximum current profit and hopes to make it in the next stage.

23. Maturity Stage • At some point, a product’s sales growth will slow down, and the product will enter a maturity stage which lasts longer than the previous stages. • Here, competition is greater because of the overcapacity. They drop their prices, increase advertising and sales promotions, and increase their R&D budgets to find better products. As a result, profits decrease, weaker competitors leave the market and only the well-established competitors remain.

24. The product managers should consider modifying their market, product and marketing mix rather than defending their product. The maturity stage strategies are; • In modifying the market, the company looks for new users and market segments e.g. Johnson & Johnson Baby Shampoo is marketed to adults + looks for ways to increase usage among present customers e.g. “Sut icin Sut icirin” campaign of Mis Sut. Or the company may want to reposition the brand to appeal to a larger or faster-growing segment. • Or the company may try modifying the product by changing its product’s features, quality or style to attract new users e.g. Sony adds new styles and features to its Walkman and Discman lines, Algida adds new flavors and ingredients to its current products, Burger King introduces its new Fish Burgers or car

25. manufacturers restyle their cars to attract buyers who want a new look. • Or the company can try modifying the marketing mix by changing one or more marketing mix elements to improve sales. They can cut prices to attract new users and competitors’ customers. They can launch a better advertising campaign or use heavy sales promotions. The company can also move into larger market channels - mass merchandisers. Or the company can offer new or improved services to buyers.

26. Decline Stage • Most product forms and brands’ sales decline. • Here, the sales may become zero suddenly or may drop to a low level where they continue for may years. • As sales and profits decline, firms withdraw from the market. • The remaining companies prune their product offerings, drop smaller segments or channels, cut the promotion budget or reduce their prices further.

27. Here, the company should decide whether to maintain, harvest, or drop its product in the decline stage. • Management may decide to maintain its brand without changing it in the hope that the competitors would leave the market. Or management may decide to reposition the brand in the hope of moving it back into the growth stage of the product life cycle. • Management may decide to harvest the product by reducing costs (equipment, advertising, sales force) hoping that sales will remain. • Or the management may decide to drop the product from the line by selling it to another firm or simply liquidate it at salvage value.