CHAPTER 6CHAPTER 6

New-Product New-Product Development Development andand Product Life-Cycle Product Life-Cycle

StrategiesStrategiesObjectiveObjective: finding and developing new products : finding and developing new products and managing them successfully over their life and managing them successfully over their life

cycle.cycle.

New-Product New-Product Development StrategyDevelopment Strategy

Because of the rapid changes in consumer Because of the rapid changes in consumer tastes, technology, and competition, tastes, technology, and competition, companies must develop new products companies must develop new products and services. A firm can obtain new and services. A firm can obtain new products in two ways; products in two ways;

acquisitionacquisition; buying a whole company, a ; buying a whole company, a patent, or a license.patent, or a license.

new-product developmentnew-product development; developing ; developing original products, product improvements, original products, product improvements, product modification, and new brandsproduct modification, and new brands

New-product New-product Development ProcessDevelopment Process

In order to find and develop successful products, In order to find and develop successful products, the marketers must go through the following the marketers must go through the following stages;stages;

idea generationidea generation idea screeningidea screening concept development and testingconcept development and testing marketing strategymarketing strategy business analysisbusiness analysis product developmentproduct development test marketingtest marketing commercializationcommercialization

Idea GenerationIdea Generation

New product development starts with idea New product development starts with idea generation - the systematic search for new-generation - the systematic search for new-product ideas. product ideas.

Major sources of new-product ideas include Major sources of new-product ideas include (1) internal sources - research & development (1) internal sources - research & development department, executives, salespeople; (2) department, executives, salespeople; (2) customers; (3) competitors; (4) distributors customers; (3) competitors; (4) distributors and suppliers; (5) others - trade magazines, and suppliers; (5) others - trade magazines, seminars, government agencies, new-product seminars, government agencies, new-product consultants, marketing research firms, consultants, marketing research firms, universities, inventorsuniversities, inventors..

Idea ScreeningIdea Screening

Idea screening reduces the number of Idea screening reduces the number of new ideas by screening new-product new ideas by screening new-product ideas in order to spot good ideas and ideas in order to spot good ideas and drop poor ones as soon as possible.drop poor ones as soon as possible.

In In idea screening, market size, idea screening, market size, product price, development time and product price, development time and costs, production costs, rate of return costs, production costs, rate of return and type of customers are put into and type of customers are put into consideration.consideration.

Concept Development Concept Development and Testingand Testing

An attractive idea must be developed An attractive idea must be developed into a product conceptinto a product concept. .

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

car for conscious people who look for basic car for conscious people who look for basic transportation, low fuel cost, and low transportation, low fuel cost, and low pollution. The marketer must test these pollution. The marketer must test these alternatives. alternatives.

Concept TestingConcept Testing; involves testing new-; involves testing new-product concepts with target consumers product concepts with target consumers before turning the new ideas into actual before turning the new ideas into actual new products. The concepts may be new products. The concepts may be presented to consumers symbolically or presented to consumers symbolically or physically. After being exposed to the physically. After being exposed to the concept, consumers may be asked to tell concept, consumers may be asked to tell their opinions. The answers will help the their opinions. The answers will help the company decide which concept has the company decide which concept has the strongest appeal.strongest appeal.

Marketing Strategy Marketing Strategy DevelopmentDevelopment

After all the concepts are tested, the company must After all the concepts are tested, the company must develop the initial develop the initial marketing strategymarketing strategy to introduce the to introduce the best concept to the market. best concept to the market.

At this stage, the marketing strategy consists of three At this stage, the marketing strategy consists of three parts; parts; the first part; describes the (1) target market, (2) the the first part; describes the (1) target market, (2) the

planned product positioning, and (3) the sales, market planned product positioning, and (3) the sales, market share and profit goals for the first year.share and profit goals for the first year.

the second part; outlines the product’s planned (1) the second part; outlines the product’s planned (1) price, (2) distribution, and (3) marketing budget for the price, (2) distribution, and (3) marketing budget for the first year.first year.

the third part; describes the planned long-run (1) sales, the third part; describes the planned long-run (1) sales, (2) profit goals, and (3) marketing mix strategy. (2) profit goals, and (3) marketing mix strategy.

Business AnalysisBusiness Analysis

Once the product concept and the marketOnce the product concept and the marketing ing strategy is decided, the marketer should strategy is decided, the marketer should evaluate the business attractiveness of the evaluate the business attractiveness of the proposal.proposal.

Business analysisBusiness analysis involves the projections for involves the projections for the sales (by looking at the sales history of the sales (by looking at the sales history of similar products and getting the market similar products and getting the market opinion), costs (by looking at the opinion), costs (by looking at the forecastedforecasted sales figures), and profit for the new product to sales figures), and profit for the new product to find out whether they satisfy the company’s find out whether they satisfy the company’s objectives. If they do, the product can move to objectives. If they do, the product can move to the product-development stage. the product-development stage.

Product DevelopmentProduct Development

Here, the product concept is Here, the product concept is developed into a physical product developed into a physical product (prototype) to understand whether (prototype) to understand whether the product idea can be turned into the product idea can be turned into a workable product. a workable product.

Prototypes are tested under Prototypes are tested under laboratory and field conditions to laboratory and field conditions to make sure that the product performs make sure that the product performs safely and effectively.safely and effectively.

Test MarketingTest Marketing After the prototype is tested under the laboratory After the prototype is tested under the laboratory

and field conditions, the next stage is testing the and field conditions, the next stage is testing the product under more realistic market settings. product under more realistic market settings.

Test marketing allows the company to test the Test marketing allows the company to test the product and its marketing program (e.g. product and its marketing program (e.g. positioning strategy, advertising, pricing, positioning strategy, advertising, pricing, distribution, branding, packaging, budget) before distribution, branding, packaging, budget) before going into the full introduction.going into the full introduction.

When introducing a new product requires a big When introducing a new product requires a big investment, or when management is not sure of investment, or when management is not sure of the product or marketing program, the the product or marketing program, the companies do a lot of test marketing.companies do a lot of test marketing.

CommercializationCommercialization

Commercialization is the introduction Commercialization is the introduction of a new product into the market. of a new product into the market.

At this stage, the company may need At this stage, the company may need to spend between $10 million and to spend between $10 million and $100 million for advertising and sales $100 million for advertising and sales promotion in the first year.promotion in the first year.

Here, the company should decide Here, the company should decide when and where the product will be when and where the product will be introduced.introduced.

After launching a new product, After launching a new product, management wants it to enjoy a long and management wants it to enjoy a long and happy life, although it does not expect the happy life, although it does not expect the product to sell forever.product to sell forever.

The product life cycle (PLC) is the course The product life cycle (PLC) is the course that a product’s sales and profits take that a product’s sales and profits take over its lifetime. It has five stages;over its lifetime. It has five stages;1. 1. Product developmentProduct development begins when the begins when the

company develops a new-product idea. During company develops a new-product idea. During product development, sales are zero and the product development, sales are zero and the company’s investment costs mount.company’s investment costs mount.

Product Life-Cycle Product Life-Cycle StrategiesStrategies

2. 2. IntroductionIntroduction is a period of slow sales is a period of slow sales growth as the product enters in the market. growth as the product enters in the market. Profits are nonexistent in this stage Profits are nonexistent in this stage because of the heavy expenses of product because of the heavy expenses of product introduction.introduction.

3. 3. GrowthGrowth is a period of rapid market is a period of rapid market acceptance and increasing profits.acceptance and increasing profits.

4. 4. MaturityMaturity is a period of slowdown in sales is a period of slowdown in sales growth because the product has achieved growth because the product has achieved acceptance by most potential buyers. acceptance by most potential buyers. Profits level off or decline because of Profits level off or decline because of increased marketing outlays to defend the increased marketing outlays to defend the product against competition.product against competition.

5. 5. DeclineDecline is the period when sales fall off is the period when sales fall off and profits drop.and profits drop.

Product Life-CycleProduct Life-CycleSales and Sales and profits ($)profits ($)

SalesSales

ProfitsProfits

TimeTime

Product Product Introduction Growth Maturity DeclineIntroduction Growth Maturity Decline

Losses/Losses/ develop-develop-invest-invest- mentmentmentment stagestage

The PLC concept is used by the marketers to The PLC concept is used by the marketers to forecast product performance or to develop forecast product performance or to develop marketing strategies.marketing strategies.

But all products do not follow the PLC in the But all products do not follow the PLC in the same way. Some products are introduced and die same way. Some products are introduced and die quickly; others stay in the maturity stage for a quickly; others stay in the maturity stage for a long time. Some enter the decline stage and are long time. Some enter the decline stage and are then cycled back into the growth stage through then cycled back into the growth stage through strong promotion or repositioning.strong promotion or repositioning.

The major drawbacks of this cycle is that it is The major drawbacks of this cycle is that it is difficult (1) to identify which stage of the PLC the difficult (1) to identify which stage of the PLC the product is in, (2) to determine the factors that product is in, (2) to determine the factors that affect the product’s movement through the affect the product’s movement through the stages, to forecast the (3) sales level at each PLC stages, to forecast the (3) sales level at each PLC stage, (4) the length of each stage, (5) the shape stage, (4) the length of each stage, (5) the shape of the PLC curve.of the PLC curve.

Introduction StageIntroduction Stage

The The introduction introduction stage starts when the new stage starts when the new product is first launched. product is first launched.

Here, sales growth is slow, profits are Here, sales growth is slow, profits are negative or low, because of low sales and high negative or low, because of low sales and high distribution and promotion expenses. distribution and promotion expenses.

Promotion spending is high to inform Promotion spending is high to inform consumers of the new product and get them to consumers of the new product and get them to try it.try it.

The company and its competitors produce the The company and its competitors produce the basic versions of the product because the basic versions of the product because the market is not ready for the different versions market is not ready for the different versions of the product yet.of the product yet.

The introduction stage strategies are;The introduction stage strategies are; Rapid-skimming strategyRapid-skimming strategy (high price/high (high price/high

promotion);promotion); here here the company targets the “cream” the company targets the “cream” of the buyers (buyers with high income) so the of the buyers (buyers with high income) so the price of the new product or service is set high. price of the new product or service is set high. When the company wants to attract these people When the company wants to attract these people rapidly (quickly), it heavily promotes the product.rapidly (quickly), it heavily promotes the product.

Slow-skimming strategySlow-skimming strategy (high price/low (high price/low promotion); the difference between slow- and promotion); the difference between slow- and rapid-skimming is in the amount spent on rapid-skimming is in the amount spent on promotion. Here less money is spent on promotion. Here less money is spent on promotion. promotion.

Rapid-penetrationRapid-penetration (low price/high promotion); (low price/high promotion); the price level is the key difference between the price level is the key difference between penetration and skimming strategies. Whe the penetration and skimming strategies. Whe the market is price sensitive, penetration is a better market is price sensitive, penetration is a better strategy. In penetration, prices are set low to strategy. In penetration, prices are set low to capture as many buyers as possible. When most capture as many buyers as possible. When most of the potential buyersof the potential buyers

are unaware of theare unaware of the product, they use heavy product, they use heavy promotion. Here the risk is attracting promotion. Here the risk is attracting heavy competition because a lot of heavy competition because a lot of companies may like to copy. companies may like to copy.

Slow-penetration strategySlow-penetration strategy (low price/low (low price/low promotion); here the new product or promotion); here the new product or service is introduced at a low price with a service is introduced at a low price with a low level of promotion. Again, the potential low level of promotion. Again, the potential market is large and price sensitive but market is large and price sensitive but aware of the new service or product that is aware of the new service or product that is why, the level of promotion is low.why, the level of promotion is low.

Growth StageGrowth Stage

If the new product satisfies the market, it will If the new product satisfies the market, it will enter a growth stage, in which sales climb enter a growth stage, in which sales climb quickly.quickly.

Early adopters buy the product.Early adopters buy the product. New competitors enter the market when they New competitors enter the market when they

are attracted by the opportunities for profit. are attracted by the opportunities for profit. They introduce new product features so the They introduce new product features so the market expands.market expands.

Sales increase, prices remain the same or fall Sales increase, prices remain the same or fall slightly, promotional spending stays the same slightly, promotional spending stays the same or increase slightly.or increase slightly.

Profits increase as promotion costs are Profits increase as promotion costs are spread over a large volume (sales) and spread over a large volume (sales) and as unit production costs fall.as unit production costs fall.

The growth stage strategies are;The growth stage strategies are; improving product quality and adding new improving product quality and adding new

product features and modelsproduct features and models entering into the new market segmentsentering into the new market segments entering into the new distribution channelsentering into the new distribution channels shifting some advertising from building shifting some advertising from building

product awareness to building product product awareness to building product conviction and purchaseconviction and purchase

lowering prices at the right time to attract lowering prices at the right time to attract more buyersmore buyers

in order to sustain its rapid growth and in order to sustain its rapid growth and meet competition.meet competition.

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

Maturity StageMaturity Stage

At some point, a product’s sales growth will At some point, a product’s sales growth will slow down, and the product will enter a slow down, and the product will enter a maturity stage which lasts longer than the maturity stage which lasts longer than the previous stages.previous stages.

Here, competition is greater because of the Here, competition is greater because of the overcapacity. They drop their prices, increase overcapacity. They drop their prices, increase advertising and sales promotions, and advertising and sales promotions, and increase their R&D budgets to find better increase their R&D budgets to find better products. As a result, profits decrease, products. As a result, profits decrease, weaker competitors leave the market and weaker competitors leave the market and only the well-established competitors remain.only the well-established competitors remain.

The product managers should consider The product managers should consider modifying their market, product and modifying their market, product and marketing mix rather than defending their marketing mix rather than defending their product. The maturity stage strategies are;product. The maturity stage strategies are; In In modifying the marketmodifying the market, the company looks for , the company looks for

new users and market segments e.g. Johnson & new users and market segments e.g. Johnson & Johnson Baby Shampoo is marketed to adults + Johnson Baby Shampoo is marketed to adults + looks for ways to increase usage among present looks for ways to increase usage among present customers e.g. “Sut icin Sut icirin” campaign of Mis customers e.g. “Sut icin Sut icirin” campaign of Mis Sut. Or the company may want to reposition the Sut. Or the company may want to reposition the brand to appeal to a larger or faster-growing brand to appeal to a larger or faster-growing segment.segment.

Or the company may try Or the company may try modifying the productmodifying the product by changing its product’s features, quality or style by changing its product’s features, quality or style to attract new users e.g. Sony adds new styles and to attract new users e.g. Sony adds new styles and features to its Walkman and Discman lines, Algida features to its Walkman and Discman lines, Algida adds new flavors and ingredients to its current adds new flavors and ingredients to its current products, Burger King introduces its new Fish products, Burger King introduces its new Fish Burgers or carBurgers or car

manufacturers restyle their cars to attract manufacturers restyle their cars to attract buyers who want a new look.buyers who want a new look.

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

Decline StageDecline Stage

Most product forms and brands’ sales decline. Most product forms and brands’ sales decline. Here, the sales may become zero suddenly or Here, the sales may become zero suddenly or

may drop to a low level where they continue may drop to a low level where they continue for may years.for may years.

As sales and profits decline, firms withdraw As sales and profits decline, firms withdraw from the market.from the market.

The remaining companies prune their product The remaining companies prune their product offerings, drop smaller segments or channels, offerings, drop smaller segments or channels, cut the promotion budget or reduce their cut the promotion budget or reduce their prices further.prices further.

Here, the company should decide whether Here, the company should decide whether to maintain, harvest, or drop its product in to maintain, harvest, or drop its product in the decline stage.the decline stage. Management may decide to Management may decide to maintainmaintain its brand its brand

without changing it in the hope that the without changing it in the hope that the competitors would leave the market. Or competitors would leave the market. Or management may decide to reposition the management may decide to reposition the brand in the hope of moving it back into the brand in the hope of moving it back into the growth stage of the product life cycle.growth stage of the product life cycle.

Management may decide to Management may decide to harvestharvest the the product by reducing costs (equipment, product by reducing costs (equipment, advertising, sales force) hoping that sales will advertising, sales force) hoping that sales will remain.remain.

Or the management may decide to Or the management may decide to dropdrop the the product from the line by selling it to another product from the line by selling it to another firm or simply liquidate it at salvage value.firm or simply liquidate it at salvage value.