Part 4
PRODUCT AND PRICE
DECISIONS
Dr. Chen, Principle of Marketing
10: Product, Branding, and
Packing Concepts
11: Business Markets and Buying
Behavior
12: Developing and Managing
Prices
13: Marketing Channels and
Supply-Chain Management
14: Retailing, Direct Marketing,
and Wholesaling
Dr. Chen, Principle of Marketing
Chapter 11
Developing and Managing
Goods and Services
Professor Jason C. H. Chen, Ph.D.
School of Business Administration
Gonzaga University
Spokane, WA 99258
chen@jepson.gonzaga.edu
Dr. Chen, Principle of Marketing
Learning Objectives
 Understand how companies manage existing
products through line extensions and product
modifications
 Describe how businesses develop a product idea
into a commercial product
 Know the importance of product differentiation
and the elements that differentiate one product
from another
 Explain product positioning and repositioning
Dr. Chen, Principle of Marketing
4
Learning Objectives
 Understand how product deletion is used to
improve product mixes
 Understand the characteristics of services and
how these characteristics present challenges
when developing marketing mixes for service
products
 Be familiar with organizational structures used
for developing and managing products
Dr. Chen, Principle of Marketing
5
Managing Existing Products
 Organizations can benefit by capitalizing on
existing products
 Weaknesses and gaps can be identified by
assessing the composition of the current product
mix
 Analysis
can lead to improvement of the product
mix through:
extensions
Line __________
modifications
Product ____________
Dr. Chen, Principle of Marketing
6
Line Extensions
 A line extension is development of a product closely
related to existing products but designed specifically to
meet different customer needs.

risky and less costly
Less _____
_____ than introducing a new
product
 Line extensions may:


Focus on a different market segment
Increase sales within the same market segment
 Success of a line extension is enhanced when a:


image
Parent brand has a high-quality brand ______
Good fit between the line extension and its parent exists
Dr. Chen, Principle of Marketing
7
Product Modifications
 A product modification means changing one
or more characteristics of a product
 Differs
from a line extension because the original
drops from the product line
product ______
 Improves a firm’s product mix under certain
conditions
 Product
must be modifiable
 Customers must recognize the modification
 Modification should be consistent with customers’
desires
Dr. Chen, Principle of Marketing
8
Types of Product Modifications
Quality modifications
_________
• Changes relating to a product’s dependability and
durability (increase leg room in the seating area)
Functional modifications
___________
• Changes that affect a product’s versatility,
effectiveness, convenience, or safety (Bing search
from M/S to make searching more “social”.
Aesthetic modifications
• Changes the sensory appeal of a product (pros:
differentiation cons: ___________value;
subjective
product _____________;
eg., Louis Vuitton)
Dr. Chen, Principle of Marketing
9
Developing New Products
 Developing new products enhances product mix and adds depth to
a product line
 A new product can be:




An innovative product that has never been sold by any organization
A modified product that existed previously
A product a specific company has not marketed previously
Viewed as new when it is brought to one or more markets from
another market
 Introducing new products can be expensive and risky

New product failures often occur and can create major financial
problems for an organization
Failing to introduce new products is also risky
 However, _________

Companies can lose market share with failure to innovate and keep
up with competitive products
Dr. Chen, Principle of Marketing
10
Figure 11.1 - Phases
of New-Product
Development
New-product
development process
is a seven-phase
process for introducing
products
A product can be
viewed as new when it
is brought to one or
more markets from
another market (e.g.,
Daimler brought its
Smart Car to US had
been out in Europe for
years)
Dr. Chen, Principle of Marketing
Idea generation
Idea generation
Screening
Screening
testing
ConceptConcept
testing
Business
analysis
Business
analysis
development
ProductProduct
development
Test marketing
Test making
Commercialization
Commercialization
11
1. Idea Generation
 Ideas can come from several sources
Internal
•
•
•
•
•
Marketing managers
Researchers
Sales personnel
Engineers
Other organizational
personnel
External
•
•
•
•
Customers
Competitors
Advertising agencies
Management
consultants
• Research
organizations
3M post-it Notes came from an employee – a church choir
member, he used slips of paper to mark songs in his hymnal.
Dr. Chen, Principle of Marketing
12
2. Screening
 Screening means selecting ideas with greatest
potential for further review
 Ideas
are analyzed to determine whether they match
the organization’s objectives and resources
 Keeping the product idea in focus and on track by
understanding consumer needs and wants is the key
to success
 A checklist is often used encouraging evaluators to
be systematic
 Most new products are rejected during this phase
Dr. Chen, Principle of Marketing
13
3. Concept Testing
 Concept testing is presenting potential buyers
with a product idea
 To
determine their attitudes and initial buying
intentions regarding the product
 Low-cost procedure
 The result of concept testing can help marketers
understand which attributes and benefits are
most important to potential customers
Dr. Chen, Principle of Marketing
14
4. Business Analysis
 Business analysis involves evaluating a product idea
to determine its potential contribution to the firm’s
sales, costs, and profits
 Marketers ask a series of questions


Results supply the specifics needed to estimate potential
sales, costs and profits
Analysis based on estimates (for return on investment)
Breakeven analysis
 ___________
Payback analysis
For example, when HP launched its TouchPad tablet computer,
the business analysis did not signal to the company that the
competitive environment and profit margins would cause the firm
to withdraw this product shortly after its launch.
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15
5. Product Development
 Product development is determining if
producing a product is technically feasible and
cost effective
prototype
 Idea is converted into a test _________
 Overall
functioning of the prototype is tested
 Determining the quality to be built into the
product
 This phase is lengthy and expensive so a small
number of product ideas are put into
development
Dr. Chen, Principle of Marketing
16
6. Test Marketing
 Test marketing is a limited introduction of a product in
geographic areas chosen to represent the intended
market

Aims to determine the extent to which potential customers
will buy the product
 Exposes a product in a natural marketing environment
to measure its sales performance

Measures the extent of brand awareness
_________
 Risks

interfere
Expensive and Competitors may try to ________
Clearly, not all products that are test-marketed are launched. At times,
problems discovered during test marketing cannot be resolved.
Dr. Chen, Principle of Marketing
17
7. Commercialization
 Plans for full-scale manufacturing and
marketing are refined and settled, and budgets
are prepared
 Marketers analyze results of test marketing
 Necessary
changes to the marketing mix are made
 Decisions on warranties, repairs and replacement
parts are made
 Rollout - Product is introduced in stages
 Starting
in one geographic area and gradually
expanding into adjacent areas
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18
Stages of Commercialization
Introduction in test cities
Market coverage of the states
where the test cities are located
Marketing efforts be extended
into adjacent states
Remaining states be covered in
stage
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19
Figure 11.2 - Stages of Expansion into a National
Market During Commercialization
Dr. Chen, Principle of Marketing
20
PRODCUT DIFFERENTIATION
THROUGH QUALITY, DESIGN,
AND SUPPORT SERVICES
Dr. Chen, Principle of Marketing
21
Product Differentiation
 Product differentiation is a process of creating
and designing products that are perceived as
different from other products
 Three aspects to be considered when creating
and offering products for sale
 Product
quality
 Product design and features
 Product support services
Dr. Chen, Principle of Marketing
22
Product Quality
 Quality refers to the overall characteristics of a product
that allow it to perform as expected in satisfying
customer needs
 Concept of quality varies between consumer and
business markets
 Dimensions of quality
Level of quality: Amount of quality a product
 _______
possesses (customer satisfaction was ranked)
Consistency of quality: Degree to which a product
 ___________
has the same level of quality over time (FedEx
delivers more than 99 percent of overnight packages on
time)
Dr. Chen, Principle of Marketing
23
Product Design and Features
Product design
• How a product is conceived, planned and produced.
• Good design (more than just appearance) is one of the
best competitive advantages any brand can possess.
• Styling: Physical appearance of a product
Product features
• Specific design characteristics that allows a product to
perform certain tasks
• By adding or subtracting features, a company can
differentiate its products from their competitors.
sustainable competitive advantage, marketers
For a brand to have a __________
must determine the product designs and features that customers desire.
Dr. Chen, Principle of Marketing
24
Product Support Services
 Customer services: Human or mechanical efforts or
activities a company provides



Adds value to a product
Differentiates a company’s products from competitors’
Profoundly affects customer satisfaction
 Consumers infer a higher level of quality from the
availability of add-on services
 Examples include:
Delivery/Installation
Financing
Customer training
Warranties/Guarantees
Repairs
Layaway plans
Convenient hours
Adequate parking
Toll-free numbers
Websites
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25
PRODUCT POSITIONING AND
REPOSITIONING
Dr. Chen, Principle of Marketing
26
Product Positioning
 Product positioning refers to the decisions and
activities intended to create and maintain a
certain concept of the firm’s product in
customers’ minds
Product is positioned so that it appears to have the
characteristics that the target market most desires
 Perceptual maps (Fig. 11.3) are created by questioning
a sample of consumers about their perceptions of
products, brands and organizations with respect to two
or more dimensions

For example, how customers perceive selected pain relievers
in regard to price and type of pain for which the products are
used) .
Dr. Chen, Principle of Marketing
27
Figure 11.3 - Hypothetical Perceptual Map of Pain Relievers
Dr. Chen, Principle of Marketing
28
Bases for Positioning
Head-to-head
• Product’s performance characteristics are equal to those of competitive
brands and if the product is priced lower (PepsiCo vs. Coca-Cola); or
even the price is higher (Samsung vs. Apple)
Avoid competition
• Brand has unique characteristics that are important to some buyers
(Volvo positioned itself for its safety)
• Product’s performance characteristics do not differ significantly from
those of competing brands.
Specifically based
• Product attributes and features (iPhone’s attributes such as its unique
shape, easy-to-use touchscreen and its access to iTunes)
Other bases
• Price
• Quality level
• Benefits
Dr. Chen, Principle of Marketing
29
Repositioning
 Evaluating the positions of existing products


Brand’s market share and profitability may be strengthened
2013 Ford Fusion was repositioned as a sporty-looking,
sporty-handling, mid-sized care with gas savings.
 Repositioning can be accomplished by:



Physically changing the product, price, or distribution
Changing product image through promotional efforts
Aiming at a different target market.
When introducing a new product into a product line, one or more
existing brands may have to be repositioned to minimize
cannibalization of established brands and thus ensure a favorable
reposition for the new brand.
Dr. Chen, Principle of Marketing
30
Product Deletion
 Product deletion means eliminating a product from the
product mix



Systematic review allows an organization to improve a product or
delete a product
Declining products reduce profitability and drain resources
A dying product may lose favor with customers and negative
feelings may transfer to a company’s other products
 Three ways of product deletion


Phase
_______-out:
Allows a product to decline without a change in
marketing strategy
Run
_____-out:
Exploits any strengths left in the product
 It is commonly taken for technologically obsolete products such as
older models of computer and CD players.
 Often, the price is reduced to get a sales spurt.

Immediate drop: Used when losses are too great
Dr. Chen, Principle of Marketing
31
Product Deletion Process
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Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
12-32
MANAGINING SERVICES
Dr. Chen, Principle of Marketing
33
Dr. Chen, Principle of Marketing
34
Service
 An intangible product that involves a deed,
a performance, or an effort that cannot be
physically possessed
 A service is not the same as customer
service
Homesourcing
 A practice whereby customer contact jobs
are outsourced into workers’ homes
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Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
13-35
Services as Products
 Services are of increasing importance to U.S.
economy
 Represent 70% of U.S. GDP
 Long-term economic growth and lifestyle
changes have encouraged service sector
expansion
 Business services have grown as the business
environment becomes more complex
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
13-36
Characteristics of Services
Intangibility
_____________
• Service is not physical and cannot be touched
Inseparability of production and
consumption
• Shared responsibility between the customer and service
provider in giving and receiving the service
Perishability
____________
• Unused service capacity of one time period cannot be
stored for future use (important topic for Revenue
Management)
Dr. Chen, Principle of Marketing
37
Characteristics of Services
Heterogeneity
• Variation in quality
Client-based relationships
• Interactions that result in satisfied customers who
use a service repeatedly over time
Customer contact
• Level of interaction between provider and customer
needed to deliver the service
Dr. Chen, Principle of Marketing
38
Customer Contact
 The level of interaction between provider and
customer needed to deliver the service
 The look of facilities plays an important role in
high-contact industries
 Well-trained, satisfied employees are essential
High
Health Care
Real Estate
Spa Services
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
Low
Level of
Contact
Tax Filing
Auto Repair
Dry Cleaning
13-39
Development of Services
 The characteristics of services create marketing
challenges and opportunities
 Services generally come in a bundle:
Core Service – The basic service experience a
 _____
customer expects to receive (tutoring)
 ______________
Supplementary Services – One or more
supportive services used to differentiate the
service bundle from competitors’ (outlines,
handouts and online practice questions)
 Heterogeneity allows for customization, which
creates a competitive advantage
Dr. Chen, Principle of Marketing
40
Pricing of Services
 Pricing should consider consumer price
sensitivity, nature of the transaction, and costs
 Prices can be based on performance of specific
tasks, time, and level of demand
 Services
can be offered at one price, separately, or a
combination of the two
 How about perishable products/services:
 Customers rely on price as an indicator of quality
 Marketers must decide whether to bundle options
and how to price bundles
Dr. Chen, Principle of Marketing
41
Distribution of Services
 Marketers deliver services in a variety of ways



At the service provider’s facility (health-care)
At customer’s home or business (carpet cleaning)
With no face-to-face contact (at “arm’s length”)
Electric, Internet, Cable TV, Phone services
They can be costly but essential in keeping customers
satisfied and maintaining market share)
 Marketing channels for services are usually short and
direct

Some services use intermediaries (travel and insurance
agents)
 Inventory management is a serious concern for services
Dr. Chen, Principle of Marketing
42
Promotion of Services
 Tangible cues are a typical way to promote
services
 Intangibility
results in promotion-related challenges
 Advertisements for services show pictures of
facilities, equipment, and service personnel
 Personal selling can help customers visualize
the service experience
 Word-of-mouth communication is important
Dr. Chen, Principle of Marketing
43
Organizing to Develop and Manage Products
Product manager
• Responsible for a product, a product line, or several distinct
products that make up an interrelated group within a
multiproduct organization.
Brand manager
• Responsible for a single brand
Venture team
• Responsible for all aspects of developing a product
• Research and development
• Production and engineering
• Finance and accounting
• Marketing
Both product and brand managers operate cross-functionally to coordinate the
activities, information, and strategies involved in marketing an assigned product.
44
Dr. Chen, Principle of Marketing
Video Case 11.1
 DO AXE PRODUCTS MAKE MEN
MORE DESIRABLE?
Dr. Chen, Principle of Marketing
45
Discussion Point




Do AXE Products Make Men More Desirable?
To effectively manage the brand, Unilever has
regularly developed new products
AXE’s product features are both tangible and
psychological
Love them or hate them, AXE commercials
leave an indelible impression
Take a look at the website
Dr. ©
Chen,
of Marketing
Copyright
2014Principle
South-Western,
Cengage Learning. ALL RIGHTS RESERVED.
12-46
 SUMMARY

 AXE is the number one male grooming brand in both the
United States and Canada. The company’s advertisements
feature women who are very attracted to men who wear
AXE body spray. AXE believes the provocative ads are
important because they get the attention of men 18-24 years
old, the company’s target demographic. AXE has extended
their product line to include other grooming products such
as shower gel to continue to meet the needs of young men.
However, the ads and the products also appeal to pre-teens
who want to feel more confident, which could damage
AXE’s “sexy” perception.
Dr. Chen, Principle of Marketing
47
 1. How has AXE managed its product mix?

 AXE’s product mix must satisfy its target market—
men between the ages of 18 and 24.
 When they first entered the American market, the
company needed to get young men to purchase
body spray. Once AXE body spray was successful,
the company engaged in line extensions and
product modifications in order to keep existing
customers and attract new ones. AXE’s products
help young men develop an “AXE Lifestyle.”
Dr. Chen, Principle of Marketing
48
 2. How has AXE used line extensions to increase
its reach among consumers?

 AXE uses line extensions in several ways. It release
new scents every year, and it has introduced
hairstyling, aftershave, skin care, and shower gel
products.
 AXE has also developed products for women that
compliment its men’s products.
Dr. Chen, Principle of Marketing
49
 3. Why are younger generations attracted to AXE
products?

 During preadolescence many young men become
more conscientious of their appearance and how
attractive they are to the opposite sex.
 AXE provides a way for them to feel more
confident about their body image.
Dr. Chen, Principle of Marketing
50
PORTER’S FIVE COMPETITIVE
FORCES MODEL
NEW
MARKET
ENTRANTS
•Switching cost
•Access to
distribution channels
•Economies of scale
THE FIRM
INDUSTRY
COMPETITORS
•Cost-effectiveness
•Market access
•Differentiation of
product or service
•Selection of suppler
•Threat of backward
integration
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
Bargaining power
Dr. Chen, Principle
of The
Marketing
Dr. Chen,
Trends of the Information Systems Technology
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
CUSTOMERS
51
TM -51
N
Generic Strategies Framework
 Michael Porter describes how businesses can build a
sustainable competitive advantage
 “fundamental basis of above-average performance in
the long run is sustainable competitive advantage.”
 He identified three primary strategies for achieving
competitive advantage:
______
Cost leadership - lowest-cost producer
Differentiation- product/service is with unique feature
_____________
Focus - limited scope; occupy narrow market niche
_______
where the products/services can stand out by virtue of
their cost leadership or differentiation.
52
Dr. Chen, Principle of Marketing
Figure 1.2: Porter’s Generic Strategy Framework –
3 Strategies for achieving Competitive Advantage
Competitive Advantage
Lower Cost
Position
Industrywide
(Broad
Target)
Particular
Segment only
(Narrow
Target)
Overall Cost
Leadership
Uniqueness
Perceived by
Customer
Differentiation
Focus
N
Competitive Mechanism
Dr. Chen,
Dr. Chen,
The Trends
Principle
of the
of Marketing
Information Systems Technology
TM -53
53
Business Strategies
and its Competitive Advantage
Lower Cost
Position
Industry
wide
(Broad
Target)
Particular
Segment
only
(Narrow
Target)
Uniqueness
Perceived by
Customer
Cost
Leadership
Differentiation
Cost Focus
Differentiation
Focus
Industrial economy
Knowledge-based
economy
Competitive Mechanism
Dr. Chen,
Dr. Chen,
The Trends
Principle
of the
of Marketing
Information Systems Technology
N
TM -54
54
Dynamic Environment Strategies
 Porter’s model is useful for diagnostics, or
understanding how a business seeks to profit in
its chosen marketplace, and for prescriptions, or
building new opportunities for advantage
 Porter model was developed at a time where the
rate of change in any given industry was
slow and _________.
manageable (i.e., stable)
relatively _____
 Newer models were developed to take into
account the increasing turbulence and velocity
of the marketplace
Dr. Chen, Principle of Marketing
55