Principles of Marketing Chapter 8: Developing New Products And Managing The Product Life-Cycle

1. Principles of MarketingChapter 8:Developing New ProductsAnd ManagingThe Product Life-Cycle

2. New Product Development • Pertains to: • Not only the development of original products, • But also improvements, modifications, and new brands • Involves great amounts of: (all data reported below pertain to the CPG market & sourced from the American Association of Advertising Agencies’ “Research Matters” report on June 6, 2007) • Risk • Only 10% new in ‘04 had sales of $20 million in ’05 • Over 80% of new fail due to lack of differentiation • As of ‘07, 49% of line extensions, and 74% of more innovative NPD resulted in failure • And expense • Total average marketing cost (only) for a major product launch as of ’05 was $68.3 million (includes adv.; slotting fees; in-market testing; etc.) • Advertising spending alone in 2007 was over $500 million for Vista and $50 million for Cadbury Schweppes’ Accelerade sports drink Dr. James Carver – Auburn University

3. NPD’s Most Common Outcome:Failure • Food Industry: • Average $20-$30 billion lost annually • Reasons for: • Overestimation of market size. • Product design problems. • Incorrectly positioned, priced, or advertised. • Pushed by high level executives despite poor marketing research findings. • Excessive development costs. • Competitive reaction. Dr. James Carver – Auburn University

4. NPD Process • Steps involved: • Idea screening • Concept development and testing • Marketing strategy development • Business analysis • Product development • Test marketing • Commercialization Dr. James Carver – Auburn University

5. Idea Generation • Ideas can come from: • Internal sources: • Company employees at all levels. • External sources: • Customers • Competitors • Distributors • Suppliers • Outsourcing (design firms, product consultancies, online collaborative communities) Dr. James Carver – Auburn University

6. Idea Screening • Idea screening: • Process used to spot good ideas and drop poor ones. • Executives provide a description of the product along with estimates of market size, product price, development time and costs, manufacturing costs, and rate of return. • Evaluated against a set of company criteria for new products. Dr. James Carver – Auburn University

7. Concept Development & Testing • Concept development and testing: • Product idea: • Idea for a possible product that the company can see itself offering to the market. • Product concept: • Detailed version of the new-product idea stated in meaningful consumer terms. • Concept testing: • Testing new-product concepts with groups of target consumers to find out if the concepts have strong consumer appeal. Dr. James Carver – Auburn University

8. Marketing Strategy Development • Marketing strategy development: • Part One: • Describes the target market, planned value proposition, sales, market share, and profit goals. • Part Two: • Outlines the product’s planned price, distribution, and marketing budget. • Part Three: • Describes the planned long-run sales and profit goals, marketing mix strategy. Dr. James Carver – Auburn University

9. Business Analysis • Involves a review of the sales, costs, and profit projections to assess fit with company objectives. • If results are positive, project moves to the product development phase. Dr. James Carver – Auburn University

10. Product Development • Product development: • Where a concept transforms into a physical good • Requires a large jump in investment. • Prototypes are made. • Must have correct physical features and convey psychological characteristics. • Prototypes are then subjected to physical tests. Dr. James Carver – Auburn University

11. Test Marketing • Involves: • The product and marketing program being introduced in a more realistic market setting. • Not necessary for all products, but can decrease risk • “If it plays in Peoria…” • An old marketing adage about test marketing • But no longer the “top dog” • Top 5 cities: (Acxiom(R) Corporation’s “Mirror on America” study) • Albany, NY • Rochester, NY • Greensboro, NC • Birmingham, AL • Syracuse, NY Dr. James Carver – Auburn University

12. Commercialization • Is a function: • Timing • When to introduce the product • Where (to introduce) • A single location, state, region, nationally, internationally • Etc. • Everything builds into a market rollout plan Dr. James Carver – Auburn University

13. The Product Life Cycle (PLC)* Sales ($) Sales Profits Time Introduction Growth Maturity Decline Dr. James Carver – Auburn University

14. Problems with the PLC • When used carefully, the PLC may help develop good marketing strategies. • However, in practice, it is difficult to: • Forecast sales level, length of each stage, and shape of PLC. • Develop marketing strategy because strategy is both a cause and result of the PLC. • As a result, the PLC is more of a descriptive tool for general strategy and life of a product, but not a predictive (i.e., theoretical) tool Dr. James Carver – Auburn University

15. General Characteristics and Strategies GivenStage • Intro: • Characteristics: • Sales are low; profits are generally negative till end; customers tend to be innovators; and competition is low • Strategic Problem Faced: • Get out of “Intro” as fast as you can, so • Create product awareness and trial Dr. James Carver – Auburn University

16. General Characteristics and Strategies Given Stage • Growth: • Characteristics: • Fastest rise in sales and profits; profits peak here; customers tend to be early adopters; and competition is growing because of success • Strategic Problem Faced: • Maximize one’s market share and monitor the entry and effects of competitors, while simultaneously ensuring product availability to hold stage as long as possible. Dr. James Carver – Auburn University

17. General Characteristics and Strategies Given Stage • Maturity: • Characteristics: • Sales peak here; profit growth is now in decline (but still positive); customers tend to be the middle majority; and competition is stable and beginning to decline • Strategic Problem Faced: • Maintain market share and maximize profits available as they’re shrinking; look to begin a new PLC* • As one cannot return to earlier stages* Dr. James Carver – Auburn University

18. General Characteristics and Strategies Given Stage • Decline: • Characteristics: • Sales are declining; profits are still declining; customers tend to be laggards; and competition is declining still • Strategic Problem Faced: • Reduce expenditures and milk the brand • Consider dropping underperforming models or entirely • Dropping will affect resellers and customers • May be needed by resellers to “complete” image or “drive” traffic Dr. James Carver – Auburn University