MMBA 6530 Week 5, Lecture 1 - 1
SLIDE 1
We're going to be continuing on, to understand marketing
strategy. Over the last couple of weeks we talked about the
heart of marketing strategy. We talked about segmentation and
targeting, and we talked bout differentiation and positioning.
As we move forward over the next few weeks we're going to be
talking about the individual elements of the marketing mix.
We're going to be talking about product strategy, pricing
strategy, place and distribution strategy, and promotion and
communications strategy.
To introduce these individual marketing mix concepts, I'm
going to use the product life cycle. This is another concept
you may find helpful as you move ahead with managing your
businesses in the simulation. At the same time, it will give
you a chance to see how these individual marketing mix
elements are used at different stages in the life cycle.
SLIDE 2
Our objective is for you to be able to describe how the
product life cycle concept can assist in the development of
the marketing mix.
SLIDE 3
This is a picture of what is commonly called the product life
cycle. Basically it assumes that when a product is in the
market it goes through four basic stages.
There is a period of introduction, where sales increase very
slowly over time.
Then it goes through a period of growth where sales pick up
and start growing very quickly.
Then it starts into a maturity phase; there's early, middle
and late maturity, where the rate of growth slows until the
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MMBA 6530 Week 5, Lecture 1 - 2
product sales just flatten out over time.
And then, the theory says that products will go into a period
of decline and sales will start to taper off over time.
This can be a very helpful concept in order to understand how
the products evolve over time. At the same time, it can be a
little misleading, because I'm sure you’ve heard of the
concept of the self-fulfilling prophecy. If for example you
have a slow month in sales, you might make the assumption that
you're in decline and pull all support for the product. And
that would kill the product.
So the product life cycle is a great help in understanding how
certain things happen at different times. But you have to be
a little cautious sometimes in how you use it.
SLIDE 4
Starting out understanding the cycle, one of the very first
things you need to understand is that that particular shape of
the cycle is very rarely seen. Instead there are other,
similar shapes.
This first one, for example, is the life cycle of a mature
market with a long life cycle. For example, you might see
automobiles here, or you might see, within the food industry,
some brands that have been going on for many years. Think for
example of Cheerios, the cereal, or think of Ivory soap. Some
products are in maturity and have been there for a very long
time, and will continue to be there for a long time.
Now, what happens is that as these products, if they start to
decline a little bit, the companies that have those brands
will increase the support just a little in order to them back
(to) top-of-mind with their consumers. But these are the
products that go on forever in maturity, provided they get a
little bit of periodic support.
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MMBA 6530 Week 5, Lecture 1 - 3
SLIDE 5
This next shape of the life cycle is called a scalloped life
cycle. It basically means that sales pass through a
succession of life cycles, based on the discovery of new uses
for the product. For example think about nylon. In World War
II era, that was used primarily for nylon stockings, and it
has evolved into use in parachutes; and so many clothes that
we all wear today are made of nylon.
Another great example of a
soda. This was originally
I’m sure that you've heard
baking soda that are being
scalloped life cycle is baking
developed to use in baking, and now
of at least 10 or 15 other uses for
actually advertised by the company.
SLIDE 6
This next one is called the cycle-recycle, and it's a very,
very common form of the life cycle. Basically it means that
when the sales start to decline the company pumps some support
back into the product to give it a little bit more life before
it starts to die off. You see this fairly frequently with
pharmaceuticals. When their patents are about to expire
they'll pump them back up a little bit again for a while, and
then slowly they will start to decline.
SLIDE 7
This one is called the growth-slump maturity cycle, and you've
seen this one. This one is when there is a product that meets
a real market need, but it's a durable: it's something that
someone buys for their house, and then keeps in their house.
So think for example of a food processor, or an electric
carving knife. When it's first introduced, lots of people buy
them, and they get one in each household. Then once there's
one in each household sales basically taper off. Then you
only see sales come back in as people replace them or as new
households are formed.
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SLIDE 8
And this last form is called the fad. It makes sense, right?
It goes up, it comes down immediately. Think about the pet
rock, or Cabbage Patch dolls. These products are fads. They
come and they go quickly, normally because they really don't
fill a need in the market, other than the need for novelty.
People need that novelty, but it doesn't last for very long.
After all, it's not a novelty after just a little bit of time.
SLIDE 9
When you think about using the product life cycle as a tool in
helping to understand how to develop marketing strategy, the
first thing to understand is what's going on at each one of
these stages of the cycle.
Let's talk first about the introduction stage. Sales at the
introductory stage are very low. That makes sense. You're
just introducing the product into the market and there aren't
very many people buying it. So your costs as a result are
very high on a customer by customer basis. Your profits are
negative. The types of customers who are buying your product
are innovators: they're people who are trying something new
because they really enjoy doing that. And typically there
aren't very many competitors, especially if this is a new
category.
Then as the product starts to take off, obviously sales start
to rise pretty rapidly. The costs per customer start to come
down, and you start to actually see some profits come in. In
terms of customers you start to see another group of customers
start to adopt the product. You've read about these in
Geoffrey Moore's book, Crossing the Chasm, where this next
group of people are the early adopters. They're the people
who will try a new product as long as they know for sure that
it's going to do something for them. And of course once a
product is in growth stage, competitors start to see that
there's a possibility for some business there, and so they
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MMBA 6530 Week 5, Lecture 1 - 5
will launch products into the market to compete with you.
As you move into the maturity stage, sales start to slow in
terms of their growth rate, and then they start to peak and
level off. So your costs at this stage have come down much
further on a cost per customer basis. This is where you're
seeing the most profitability. And the customers tend to be
that middle majority group that you read about in Crossing the
Chasm. In terms of competitors, well, think back to Porter's
five forces, and what’s happening in an industry when you
start to get lots of competitors. Remember that profit levels
start to come down just a little bit, because there's more and
more competition; they're starting to slug it out and your
margins are starting to come down. So what happens here, at
this stage in maturity, is that you start to see the number of
competitors start to level off and maybe even start to drop
out.
And then finally in the declining stage, obviously sales are
starting to decline. The cost per customer is still pretty
low. Profits, though, are starting to come down, and the
people who are buying your product for the first time tend to
be those laggards. They're the ones who were really not very
interested in the first place. That's actually one of the
signs that your product might be in decline. If you do some
consumer research on those folks and find out who it is that's
buying that product and what their attitudes are towards these
categories of products, you'll start to discover that these
are probably the laggards. And of course, as the market gets
smaller, there's really not much there in the way of sales any
more. The market becomes less attractive for competitors.
So this particular cycle can really help you in terms of
thinking about how you would want to manage your marketing
strategies over that term.
SLIDE 10
Remember that we've also talked about objectives.
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We talked
MMBA 6530 Week 5, Lecture 1 - 6
about the
marketing
marketing
marketing
cycle.
difference between financial objectives and
objectives. We're going to be talking purely about
objectives here, and what are the objectives from a
standpoint at each one of these stages in the life
During the introductory stage, you need to create awareness
and trial. That makes total sense. Nobody's going to buy
your product until they're aware that it exists. And then
nobody's going to buy it on a regular basis until they've
tried it. So your marketing strategies, your marketing mix
strategies as you'll see in a few minutes, are going to be
focused on getting awareness and getting trial.
As you move into the next stage, growth, your objective is to
maximize your market share. Remember that as your sales are
going up you also have competitors coming in, and so your
sales are going up together. So you want to sustain the
growth as long as possible but you also want to keep gaining
market share to stay ahead of your competition.
As sales start to level off in the maturity section, you need
to think about maximizing your profit while at the same time
defending share. Remember, in maturity, you have all these
competitors who are starting to slug it out for this business.
So you have to defend your business while at the same time
making sure that you're making enough money, if only to fund
this business – and also to fund new businesses that you have
coming down the road.
And then as you move into the decline stage, you reduce
expenditures and you milk the brand. Remember what I said a
few minutes ago? One of the real difficulties with the
product life cycle is that -- if you mis-estimate where you
are in the cycle, and you come to the conclusion that you're
in decline when in reality you're just having a bad quarter,
and you use this general marketing objective of reducing
expenditure and milking the brand -- the sales are going to
decline automatically once you reduce expenditures and milk
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MMBA 6530 Week 5, Lecture 1 - 7
the brand.
So while the product life cycle is a very helpful tool, you
have to be very careful not to take it all on face value.
SLIDE 11
The next question then is, we know what your objectives are at
the various stages, so what are the marketing mix strategies
that you would use? One of the key things that you're going
to get coming out of this is that your strategies are actually
going to shift as you move from one stage to the next.
When you're first introducing a new product into the market,
you need to offer a basic product. There are no frills to add
confusion. For example, remember the Newton? The Newton was
one of the very first personal digital assistants. It was a
fabulous product, but at the same time it confused people; it
did so many things.
When the Palm Pilot came out, the president of the company for
the Palm Pilot insisted that this be a very, very simple tool,
and that it carry only a few things. It was an address book,
a to-do list, a calendar and a memo pad. And those were
really the only four things it would do. There are stories
about the design of the Palm Pilot, that the fabulous
engineers they had in the company continually wanted to add
new features to it, but at that particular point in time the
president of the company was saying hold those features off
for later. We want to introduce a very simple product at this
point, to introduce them to this new concept, this new product
category, of a personal digital assistant.
So a basic product is something that's very simple for people
to understand and they can get started with it.
From a pricing standpoint, it's very important to try to think
in terms of what your product offers the customer in terms of
value. What kind of money can they save by using your product
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MMBA 6530 Week 5, Lecture 1 - 8
compared to somebody else’s? And try to think about how to
put a price on that product that really connects to the value
that people get from it. That's difficult to do and we'll
spend a fair amount of time talking about that next week.
A very common pricing strategy that you see during the
introductory stages is cost plus. This is especially common
in business-to-business and in engineering firms. It means
that you take whatever your costs were and you add a certain
profit margin on top of it. That's actually not the optimum
strategy and we'll talk more about that next time. But it's a
frequent strategy that's used.
And finally, two very frequent introductory strategies are
either skimming on one hand, or penetration on the other.
With a skimming strategy, you have a product that, when people
see it, they want badly. It's a product where you're pricing
it as high as you can in those early days for that first
target segment, the ones who are the innovators and who want
it very badly. You price it very, very high so that you can
start to recover some of those R&D costs that you put into it.
This works really well if you don't have a lot of competition
coming behind you and if it's the kind of product where, the
minute customers see it, the minute your target sees it, they
want it and they're willing to pay whatever the cost is,
whatever the price is.
Penetration strategies on the other hand are another way of
starting off. A penetration strategy means you price very,
very low because you want to penetrate that market and get as
many people buying that product as you can in the short term.
You would want to do that if you see competition coming,
breathing down your neck very quickly, and you want to get
into the market as far as you can and get as much market share
as you can, as quickly as you can, in order to hold off the
competition.
So that's pricing strategy, and you can do a couple of things
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MMBA 6530 Week 5, Lecture 1 - 9
during the introductory stage. We'll talk more about these in
detail in the individual sections.
In terms of place and distribution strategy, this seems kind
of intuitive. When you start out with introducing the product
you start with selective distribution. You only distribute it
a few places: only a few places where your target prefers to
shop. Remember you're starting out with a fairly narrow
initial target. Remember the invasion of Normandy, in
Crossing the Chasm? You're starting out with a fairly small
segment, so you only build distribution into that small
segment. You don't want to build more distribution than you
can handle. You wouldn’t want to build lots of distribution
and then not have the capacity to fulfill all those channels.
You start it with a very small, selective distribution.
In terms of promotion, you have both advertising and you have
sales promotion. A quick rule of thumb to remember about
advertising and sales promotion is that advertising gives
people a reason to buy, and sales promotion gives people an
incentive to buy. So advertising is something that builds
over the long term. It's building an attitude. Remember how
we measured attitudes and purchase intent during the Fishbein
analysis? So advertising helps to build attitude in people,
and sales promotion gives them an incentive to buy something
right now. So it might be a price cut, it might be a coupon,
it might be a discount, it might be an offer to buy one get
one free. But it's an incentive to act right now.
So what you're doing with advertising in the introductory
stage is building awareness. You're trying to get the word
out, especially to the early adopters, the innovators, and the
dealers. Then in terms of sales promotion, remember that the
second big objective during introduction is trial. Awareness
and trial. So heavy sales promotion, which gives people an
incentive to buy right now, will get them to try the product.
So that's how you use the marketing mix during the
introductory stage.
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SLIDE 12
When you move into the growth stage, then you start adding
some additional extensions. You can add more features to the
product because this makes it attractive to a broader group of
people. You’re moving from one target perhaps into another.
You price to penetrate the market, so at this point you start
to bring the price down, because remember you're starting to
see some competition here. In terms of distribution, you
start moving out to more distribution channels. You build
awareness and interest in the mass market, the bigger market.
And at this point you actually start reducing your sales
promotion because the advertising and the distribution and the
price are helping to get you to take off. You have some
momentum going, so we don't need to spend money on promotion
right now: save it for something else.
SLIDE 13
As you move into the mature stage, then you have to start
diversifying in terms of more brands and more models. At this
point your pricing is going to have to match or better your
competitors.
In terms of distribution you're looking for even more
intensive distribution. Perhaps you go into foreign markets.
As you continue into maturity remember that you have
competitors there, and so you have to figure out a way to
build preference among those target customers, and stress the
differences between your brand and competitors' brands, and
what the benefits are that your product offers compared to
competitors.
And then of course we're back to sales promotion again.
You’re trying to get people to switch from other brands, from
competitors' brands to yours, so here you need incentives. So
we're back to using sales promotion again.
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SLIDE 14
Then as you move into decline, assuming you really are in the
decline stage, the first thing you have to do is start phasing
out weak items. This is really hard to do because every
product has a champion. Within the organization lots of
people don’t want to kill products - they really like that
product. So as a result lots of companies have tens of
thousands of stock keeping units that are taking up shelf
space in their warehouses. But it's really important here to
bite the bullet and when you have a weak item you need to let
it go.
Prices start coming down.
In terms of distribution, instead of being broad as you were,
now distribution starts to narrow back, to phasing out
unprofitable channels and zeroing in on the ones that your
loyal customers are using.
In terms of advertising, you start to reduce this and only
enough to hang on to and kind of reward your most loyal
customers. And sales promotions pretty much get reduced to a
minimal level at this point.
So those are the strategies over the course of the life cycle.
SLIDE 15
That acts as a good introduction for you to what are the
elements of the marketing mix, and how the product life cycle
can be used to help guide which strategies of the mix
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