By Nicholas Flores,2014-05-12 22:35
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Purpose and Perspective

    This chapter examines several ways to improve an organization’s product mix, including managing existing products through line extensions and product modifications. Next, we discuss how firms develop new products, from idea generation to commercialization. After development of new products, the process of product differentiation through quality, design, and support services is discussed. We discuss the goals and timing of product positioning and repositioning, as well as when a product should be deleted from the product mix. Then we examine the nature of services, focusing on the growing importance of service industries in our economy. We address the unique characteristics of servicesintangibility, inseparability of production and consumption, perishability, heterogeneity, client-based relationships, and customer contact. We next present issues associated with developing marketing mixes for services. Finally, we discuss the organizational alternatives in managing products, including the product manager, market manager, and venture team approaches.

Lecture Outline


    An organization can overcome weaknesses and gaps in its existing product mix through line extension or product modification.

    A. Line Extensions

    1. A line extension is the development of a product closely related to one or more products in the existing product line but designed specifically to meet somewhat different needs of customers.

    2. Line extensions are more common than new products because they are a less expensive, lower risk alternative for increasing sales.

    3. A line extension may focus on a different market segment or on increasing sales within the same market segment by more precisely satisfying the needs of people in that segment.

    B. Product Modifications

    1. Product modification means changing one or more character-istics of a firm’s

    product; it differs from a line extension in that the original product is removed from the line.

    2. Product modification is less risky than new-product development.

    3. Three conditions must exist for product modification to improve the firm’s product mix.

    a. The product must be modifiable.

    b. The customer must be able to perceive that a modification has been made. c. The modification should make the product more consistent with customers’


    4. There are three major ways to modify products.

    a. Quality Modifications

    1) Quality modifications are changes relating to a product’s dependability and durability, usually executed by altering the materials or the production process.

    2) Reducing quality may allow the firm to lower its price and direct the item at a different target market.

    3) Increasing quality may allow the firm to charge a higher price by creating customer loyalty and lowering customer sensitivity to price.

    4) Some companies have been able to both increase quality and reduce cost of a product.

b. Functional Modifications

    1) Functional modifications are changes that affect a product’s versatility, effectiveness, convenience, or safety; they usually require that the product be redesigned. 2) These modifications can make a product useful to more people and thus enlarge its market.

    3) These changes can place the product in a favorable competitive position by providing benefits that other brands do not offer and help the firm achieve a progressive image.

    c. Aesthetic Modifications

    1) Aesthetic modifications change the sensory appeal of a product by altering its taste, texture, sound, smell, or appearance.

    2) Aesthetics of a product can differentiate it from competing brands to gain market share.

    3) The major drawback in using aesthetic modifications is that their value is subjective.


    A. A firm develops new products as a means of enhancing its product mix and adding depth to a product line.

    1. Developing and introducing new products is frequently risky and expensive. 2. Failure to introduce new products is also risky.

    3. The term “new product” can have more than one meaning.

    a. A new product can be an innovative product that has never been sold by any organization.

    b. It can also be a product that a given firm has not marketed previously, although similar products may have been available from other companies.

    c. A product can be viewed as new when it is brought to one or more markets from another market.

    B. Before a product is introduced, it goes through the seven phases of the new-product development process; a product may be dropped at any stage of this process.

1. Idea Generation

    a. Idea generation, the first step in the development process, occurs when firms seek product ideas to achieve organizational objectives.

    b. Firms trying to maximize product mixes effectively usually develop systematic approaches to new-product development.

    c. New ideas may be generated internally or externally.

    2. Screening

    a. In phase two, screening, the most promising ideas are selected for further review.

    b. Ideas are analyzed to determine whether they match the organization’s objectives, resources, and abilities.

    c. The potential market, the needs and wants of buyers, possible environmental changes, and possible cannibalizations of current products are also analyzed and weighed. d. Using a checklist of new-product requirements to ensure a systematic approach, more ideas are rejected during screening than in any other stage.

    3. Concept Testing

    a. Stage three is concept testing, in which a sample of potential buyers is presented with a product idea to determine their attitudes and initial buying intentions regarding the product.

    b. A firm can test more than one concept for the same product before it invests considerable resources in research and development.

    c. The results of concept testing can be used to find out which aspects of the product are most important to potential customers.

    d. Concept tests include a brief written or oral description of the concept followed by a series of questions on the product’s advantages, disadvantages, and price.

    4. Business Analysis

    a. During stage four, business analysis, the product idea is evaluated to determine its potential contribution to the firm’s sales, costs, and profits.

    b. Marketers evaluate how well the product fits with the firm’s existing product mix, the strength of market demand for the product, the types of environmental and competitive changes to be expected, and how these changes might affect the product’s future sales, costs, and profits.

    c. For many product ideas, this analysis is challenging because forecasting accurately is difficult, especially for completely new products.

    5. Product Development

    a. In stage five, product development, the firm finds out if it is technically feasible to produce the product and if it can be produced at costs low enough to make the final price reasonable.

    1) The idea or concept is converted into a prototype, or working model, that should reveal the tangible and intangible attributes associated with the product in consumers’ minds.

    2) The functionality of the prototype must be tested, including performance, safety, and convenience.

    3) The specific level of product quality is determined based on what price the target market views as acceptable and on the quality level of the firm’s own and competing products.

    b. This phase can be lengthy and expensive; thus a relatively small number of product ideas are put into development.

    6. Test Marketing

    a. Stage six, test marketing, is the limited introduction of the product in geographic areas chosen to represent the intended market to gauge the extent to which potential customers will actually buy it.

    b. Test marketing is not an extension of the development stage, but a sample launching of the entire marketing mix.

c. Test marketing provides several important benefits.

    1) It minimizes the risk of product failure.

    2) It lets marketers expose a product in a natural marketing environment to obtain a measure of its sales performance.

    3) It allows marketers to identify any weaknesses in the product itself or in other aspects of the marketing mix.

    4) Marketers can experiment in different test areas with advertising, price, and packaging variations.

    d. Test marketing is also expensive and involves risks.

    1) Competitors may try to “jam” the testing program by increasing promotion of their own products.

    2) Competitors may copy the product in the testing stage and rush to introduce a similar product.

    e. Many companies use simulated test marketing to avoid these risks. f. Not all products that are test marketed are actually launched.

    7. Commercialization

    a. Stage seven, commercialization, is the phase of planning for full-scale manufacturing and marketing and preparing budgets.

    b. Marketing management analyzes the results of test marketing to find out what changes in the marketing mix are needed before the product is introduced. c. The organization refines plans for production, quality control, distribution, and promotion.

    d. Enormous amounts of money spent during this stage on marketing and manufacturing may not be recovered for several years.

    e. Products are usually launched through an introduction process called a “roll-

    out”—stages that start in a set of geographic areas and gradually expand into adjacent areas.

    1) Gradual introduction reduces the risk of introducing a new product and provides additional benefits.

    2) However, a gradual introduction allows competitors to monitor the product’s




    Product differentiation is the process of creating and designing products so that customers perceive them as different from competing products. The three physical aspects of product differentiation that companies must consider are product quality, product design and features, and product support services.

    A. Product Quality

    Product quality refers to the overall characteristics of a product that allow it to perform as expected in satisfying customer needs. Expectations and perceptions of quality vary by customer.

    1. Level of quality is the amount of quality possessed by a product. 2. Consistency of quality is the degree to which a product is the same level of quality over time. It can also be compared across competing products.

B. Product Design and Features

    1. Product design refers to how a product is conceived, planned, and produced; it involves the total sum of all the product’s physical characteristics.

    a. One component of design is styling, the physical appearance of a product. b. Most consumers seek out products that look good and function well. 2. Product features are specific design characteristics that allow a product to perform certain tasks. These can differentiate a firm’s products from those of its competitors.

    3. For a brand to have a sustainable competitive advantage, marketers must determine the product designs and features that customers desire.

    C. Product Support Services

    1. Customer services include any human or mechanical efforts or activities a company provides that add value to a product.

    2. Customer services can include delivery, installation, financing, customer training, warranties, repairs, and more.

    3. Providing good customer service may be the only way a firm can differentiate its products when all products in a market have essentially the same quality, design, and features.


    A. Product positioning refers to the decisions and activities intended to create and maintain a certain concept of a product in the customers’ minds.

    B. Marketers try to position a product so that it seems to possess the characteristics most desired by the target market.

    C. Product position is the result of customers’ perceptions of a product’s attributes relative to those of competing brands.

    1. Marketers sometimes analyze product positions by developing “perceptual maps,” as shown in Figure 11.3; these are created by questioning a sample of consumers about their perceptions of products, brands, and organizations with respect to two or more dimensions.

    2. Using a perceptual map, marketers can compare how consumers perceive their brands compared to ideal points representing customer desires.

    D. Positioning can be designed to compete head to head or to avoid it. 1. Head-to-head positioning may be appropriate if the product’s performance characteristics are at least equal to those of competitive brands, if the product is priced lower, or even when the price is higher if the product’s performance characteristics are


    2. Positioning to avoid competition may be best when the product’s performance characteristics do not differ significantly from competing brands, when the brand has unique characteristics, or when marketers want to keep a new brand from cannibalizing sales of their existing brands.

    E. Positioning is used for both existing and new products.

    1. Evaluating the positions of existing products is important because a brand’s market share and profitability may be strengthened by product repositioning. 2. Repositioning can be accomplished by physically changing the product, its price, its distribution, or its promotion.


    Product deletion is the process of eliminating a product from the product mix when it no longer satisfies a sufficient number of customers.

    A. A weak product is a drain on potential profitability and the marketer’s time and resources.

    B. It is often difficult to drop a product over the protests of management, salespeople, and loyal customers.

    C. Instead of letting a weak product become a financial burden, a firm should periodically and systematically review and analyze its contribution to the firm’s sales for a given time frame.

    D. There are three ways to delete products.

    1. A phase-out lets the product decline without changing the marketing strategy. 2. A run-out calls for increased marketing efforts in core markets, deletion of some marketing expenditures, or price reductions to exploit any strengths left in the product. 3. An immediate drop is the best strategy when losses are too great to prolong its life.


    A. A service is an intangible product involving a deed, a performance, or an effort that cannot be physically possessed.

    B. Services as products should not be confused with customer service, which involves any service activity that adds value to the product.

    C. Service industries account for over half of the U.S. gross domestic product (GNP) and about 80 percent of U.S. nonfarm jobs.


    There are six distinguishing characteristics of services that differentiate them from goods. A. Intangibility

    Intangibility means a service is unperceivable by the senses.

    1. A service cannot be seen, touched, tasted, or smelled.

    2. A service cannot be physically possessed by a consumer.

    B. Inseparability of Production and Consumption

    Inseparability of production and consumption means that a service is produced and consumed at the same time.

    C. Perishability

    Perishability means that storing unused service capacity for future use is impossible. 1. Goods marketers can handle supply-demand problems through production scheduling and inventory techniques; service providers cannot.

    2. Service providers can plan for demand that fluctuates according to day of the week, time of day, or season.

    D. Heterogeneity

    Heterogeneity is variation in quality.

    1. Quality of manufactured goods is easier to control with standardized procedures. 2. Variations can occur with services provided by different organizations, the same organization, different people, or the same person and are therefore very difficult to control.

    3. Heterogeneity usually increases as the degree of labor-intensiveness increases. 4. Services that are people-based are susceptible to fluctuations in quality. E. Client-Based Relationships

    Client-based relationships result in satisfied customers who use a service repeatedly over time.

    1. The success of many services depends on creating and main-taining interactions with customers that result in client-based relationships.

    2. A concentrated effort to provide quality services builds a relationship in which customers become very loyal and are unlikely to switch to a competitor. F. Customer Contact

    Customer contact comprises the necessary interaction between the provider and the customer needed to deliver the service.

    1. Customer contact varies depending on the service.

    2. Satisfied employees lead to satisfied customers.

    3. Service organizations must train employees to perform customer-oriented behavior and reward them for success.


    The characteristics of services require that marketers consider additional issues when it comes to the four major marketing mix variablesproduct, price, distribution, and


    A. Development of Services

    1. A service offered by an organization is generally a package, or bundle, of services consisting of a core service and one or more supplementary services. a. A core service is the basic service experience or commodity that a customer expects to receive.

    b. A supplementary service is a supportive one related to the core service and used to differentiate the service bundle from that of competitors.

    2. Heterogeneity results in variability in service quality and makes it difficult to standardize service delivery.

    3. The heterogeneity advantage to marketers is that it allows them to customize their services to match the specific needs of individual customers.

    4. The expense of some customized services leaves marketers with a dilemma: how to provide service at an acceptable level of quality in an efficient and economic manner and still satisfy individual customer needs.

    a. Some marketers provide standardized packages to cope with the problem. b. This leads to highly specified actions and activities the service provider provides. 5. Intangibility makes it difficult for customers to evaluate a service prior to purchase.

    a. Intangibility requires service marketers to market promises to customers. b. Customers are forced to place some degree of trust in the service provider to perform the service in a manner that meets or exceeds those promises. c. Marketers also employ tangible cues to help assure customers about the quality of the service, such as well-groomed, professional-appearing contact personnel, and clean, attractive physical facilities.

    6. The fact that customers take part in the production of a service means that other customers can affect the outcome of a service.

    B. Pricing of Services

    1. Prices of services can be established on several different bases. a. The performance of specific tasks

    b. Hourly, daily, or some other amount of time rates

    c. Demand-based pricing, so that when demand for the service is high, the price is high.

    1) The perishability of services means that when demand is low, the unused capacity cannot be stored and is lost forever.

    2) Some services are very time-sensitive in that a significant number of customers desire the service at a particular time. This is the peak demand.

    3) Providers of time-sensitive services often use demand-based pricing to manage the problem of balancing supply and demand, charging top prices during peak demand.

    d. Services offered to customers in bundles leave marketers to decide whether to offer the services at one price, separately priced, or to use a combination of the methods. 2. Because of the intangibility of services, customers rely heavily at times on price as an indicator of quality.

    a. If customers perceive the services in a category as being similar in quality, and if the quality of the services is difficult to judge even after purchase, customers may seek the lowest-priced provider.

    b. If quality varies, customers may rely on the price-quality association. C. Distribution of Services

    Marketers deliver services in a variety of ways.

    1. In some instances, customers go to a service provider’s facility.

    2. Some services are provided at the customer’s home or business.

    3. Some services are delivered primarily at “arm’s length,” without face-to-face


    4. Marketing channels for services are usually short and direct, meaning that the producer delivers the service directly to the end user, but some services use intermediaries.

    5. Inventory management is very important to service providers, especially balancing supply and demand.

    a. Inseparability and level of customer contact contribute to the challenges of demand management.

    b. In some instances, appointments and reservations are used to schedule service delivery.

    c. To increase the supply of a service, marketers use multiple service sites and increase the number of contact service providers at each site.

    d. To make delivery more accessible to customers and to increase the supply of a service as well as to reduce labor costs, some service providers have decreased the use of contact personnel and replaced them with equipment. This can create a lack of personalization.

    D. Promotion of Services

    1. The intangibility of services results in several promotion-related challenges to service marketers.

    a. It may not be possible to depict the performance of a service in an advertisement.

    b. It may not be possible to depict the performance of a service in a store display. 2. Promotion of services typically includes tangible cues that symbolize the service.

    3. While these symbols have nothing to do with the actual service, they make it much easier for customers to understand the intangible attributes associated with the service.

    4. To add tangibility, ads for services often show pictures of facilities, equipment, and service personnel.

    5. Service providers are more likely to promote price, guarantees, performance documentation, availability, and training and certification of contact personnel than goods marketers.

    6. Use of concrete, specific language makes the services more tangible in the minds of customers.

    7. Promoters are also careful not to promise too much, because customers’ expectations may be raised to unattainable levels.

    8. Contact personnel, through their actions, can be directly or indirectly involved in the personal selling of a service.

    9. Since many services cannot be experienced beforehand, or before an extended period of time, offering some services such as insurance on a trial basis cannot be done. 10. Because of the heterogeneity and intangibility of services, word-of-mouth communication is important in service promotion.


    There are several alternatives to the traditional functional form of business organization. A. The Product Manager Approach

    1. A product manager is the person within an organization responsible for a product, product line, or several distinct products that make up a group.

    2. A brand manager is responsible for a single brand.

    3. Product or brand managers operate cross-functionally to coordinate the activities, information, and strategies involved in marketing an assigned product. 4. This approach is used by many large, multiple-product companies in the consumer packaged-goods business.

B. The Market Manager Approach

    1. A market manager is responsible for managing the marketing activities that serve a particular group of customers.

    2. This approach is effective when a firm uses different types of activities to market products to diverse customer groups.

    C. The Venture Team Approach

    1. The venture team is a cross-functional team that creates entirely new products that may be aimed at new markets.

    2. Venture teams, unlike product managers or market managers, are responsible for all aspects of a product’s development.

    3. Venture teams work outside established organizational divisions and have greater flexibility to apply innovative approaches to new products and markets, which lets the company take advantage of opportunities in highly segmented markets.

    4. Companies are increasingly using such cross-functional teams for product development to boost product quality.

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