BUAD 307 PRODUCT Lars Perner, Instructor 1 DEVELOPING AND MANAGING PRODUCTS Products and product lines Retailer and manufacturer perspectives The Product Life Cycle and Diffusion of Innovations Branding

BUAD 307 PRODUCT Lars Perner, Instructor 2 Learning Objective #1 The choices firms need to make on new product introductions PRODUCT DECISIONS TEST MARKETING COMPETITIVE RESPONSE IDEAS AND EVALUATIONS DIFFEREN- TIATION RISK CHOICES BRAND EXTENSIONS BRANDING DISTRIBUTION PRODUCT LINES IMAGE/ POSITIONING

BUAD 307 PRODUCT Lars Perner, Instructor 3 Learning Objective #2 Steering the product through the Product Life Cycle PRODUCT DIFFUSION AWARENESS -CATEGORY -BRAND IMAGE/ POSITIONING PRICE BRAND STRUCTURE SUBSTITUTESPARTNERSHIPS FEATURES COMPETITION DIFFEREN- TIATION

BUAD 307 PRODUCT Lars Perner, Instructor 4 Category Management Maximizing profits from assortments of products that are potential substitutes for each other— e.g., ◦ Cola drinks ◦ Laundry detergent In principle, substitutability is broad In practice, the focus is usually relatively narrow Manufacturer vs. retailer paid promotions ◦ Manufacturers pay for most coupons and some price promotions ◦ Retailers pay for double coupons ◦ Manufacturers’ discounts are usually tied to the promotional period and merchandise actually sold at the promotional price (verified by scanner data)

BUAD 307 PRODUCT Lars Perner, Instructor 5 The Product Life Cycle (PLC) Products will generally be invented and start with low use. With decreased costs and improved technology, more people tend to adopt. The product life cycle can reach: ◦ Plateau ◦ Decline ◦ Revitalization Peak (Maturity) Plateau Revitali- zation

BUAD 307 PRODUCT Lars Perner, Instructor 6 Some PLC Stage Examples Color TVs: Decline Black and white TVs: Decline HDTVs: Growth VCRs: Decline DVD players: Decline. Jeans: Maturity Fast food: Growth/maturity Traditional photography: Decline Digital photography: Growth/maturity Fax machines: Decline Travel agencies: Decline Cranberry juice: Revitalization

BUAD 307 PRODUCT Lars Perner, Instructor 7 The Product Life Cycle (PLC) involves ________ over time Demand for the product Awareness of the product Competition in supplying the product ◦ Price ◦ Features ◦ Differentiation Profitability Alternatives available to the product Investment opportunities (Boston Consulting Group model) Appropriate strategies

BUAD 307 PRODUCT Lars Perner, Instructor 8 Types of Innovations A continuum of “newness:” ◦ Continuous—same product, just small improvements over time—e.g., automobiles ◦ Dynamically continuous—product form changed, but function and usage are roughly similar—e.g., cell phones, HDTV, video streaming, Blu-ray ◦ Discontinuous—entirely new product; usage approach changes— e.g., fax, GPS The more “new” a product category is, the greater the need to educate the customer on benefits and basic idea of how the product works

BUAD 307 PRODUCT Lars Perner, Instructor 9 Some Diffusion Examples ATMs (*) ◦ Easy observability ◦ Significant relative advantage Credit cards (*) ◦ “Chicken-and-egg” problem ◦ “Jump-starting the cycle” Faded, torn jeans ◦ Fads ◦ Innovations do not have to be high tech Fax machines (*) ◦ Network economies Rap music ◦ Low barriers to entry ◦ Spread to a new consumer group Hybrid corn (*) ◦ Trialability ◦ Imitation *You should be able to discuss these case histories on the final

BUAD 307 PRODUCT Lars Perner, Instructor 10 Diffusion Themes Observability: Products that can be seen being used to others tend to spread faster “Chicken-and-egg” problem: A certain infrastructure is needed to make adoption attractive, but motivation to provide the infrastructure depends on market size—e.g., ◦ Coupons and clearinghouses ◦ Hydrogen/electric cars ◦ HDTV ◦ Entertainment media Trialability: People tend to prefer “trying out” a potentially costly innovation rather than having to commit before trial Network economies: Some innovations become more valuable when more others have that innovation—e.g., ◦ Text messaging ◦ ◦ Online personals sites ◦ Other online communities ◦ Auction sites

BUAD 307 PRODUCT Lars Perner, Instructor 11 Break-Even Sales Volume Points Two types of costs ◦ Fixed: Generally independent of quantity produced within a certain range (e.g., R&D, equipment needed, setup, overhead) ◦ Variable (marginal): Costs of making one additional unit (e.g., labor, materials) At what quantity sold will the firm break even—i.e., cover costs without making a profit?

BUAD 307 PRODUCT Lars Perner, Instructor 13 Break-Even Quantities

BUAD 307 PRODUCT Lars Perner, Instructor 14 QuantityTotal RevenueTotal CostsNet Profit 1$15.00$100, $99, $1,500.00$100, $99, $7,500.00$104, $96, $15,000.00$108, $93, $30,000.00$116, $86, $45,000.00$124, $79, $60,000.00$132, $72, $75,000.00$140, $65, $90,000.00$148, $58, $105,000.00$156, $51, $120,000.00$164, $44, $135,000.00$172, $37, $150,000.00$180, $30, $165,000.00$188, $23, $180,000.00$196, $16, $195,000.00$204, $9, $210,000.00$212, $2, $225,000.00$220,000.00$5, $240,000.00$228,000.00$12, $255,000.00$236,000.00$19, $270,000.00$244,000.00$26, $285,000.00$252,000.00$33, $300,000.00$260,000.00$40, $315,000.00$268,000.00$47, $330,000.00$276,000.00$54,000.00

BUAD 307 PRODUCT Lars Perner, Instructor 15 Assumptions in Simple Break Even Analysis No additional manufacturing capacity will be needed to make any of the quantities considered All customers pay the same price No interest on sales made after the initial period No periodic fixed effects Marginal costs of resources remain constant ◦ No quantity discounts ◦ No increase in costs due to limited market supply

BUAD 307 PRODUCT Lars Perner, Instructor 16 Alternative Approach: New Products an Investments Calculation of net present value (NPV)--discounted cash flows over time for ◦ R&D expenses ◦ Setting up manufacturing capacity ◦ Period fixed expenses (e.g., cost of buildings and equipment depreciation) ◦ Total revenue Discount rate should reflect the risk associated with the specific product considered More complex models assign probabilities to various outcomes (e.g., competitor entry, reaching certain sales levels, changes in resource costs) This approach is covered in finance and managerial accounting course s

BUAD 307 PRODUCT Lars Perner, Instructor 17 Branding Brands ◦ Product or product line specific brands  E.g., Tide, DeWalt, Hayes modem  International issues ◦ “Umbrella Brands”  3M ◦ National vs. regional ◦ National vs. international ◦ Store brands Trade marks and “genericide” Branding has been traced to whiskey casks that were identified for quality.

BUAD 307 PRODUCT Lars Perner, Instructor 18 Brand Value and Image Brand equity: Value added to product based on brand name ◦ Choice likelihood ◦ Ability to charge higher price ◦ Use of product as loss leader  Benefit in market share, temporary revenue (Coca Cola)  Possible damage to long term brand image (Louis Vuitton suitcases in Japan) Brand “personality:” Associations with product

BUAD 307 PRODUCT Lars Perner, Instructor 19 Co-branding To take advantage of assets of both firms Types ◦ Distributional  Egalitarian: Carl’s Jr. and Green Taco  Hierarchical: Visa as official credit card of the Olympics ◦ Line filling—e.g., airline code sharing ◦ Ingredients  Cooperative: Dryers’ ice cream with Mars M&Ms  Independent: Local computer maker advertises Maxtor hard drive components ◦ Intrusive: “Intel Inside” ◦ Partial: McD’s serves Coca Cola ◦ Sponsorship: Good Housekeeping seal of approval

BUAD 307 PRODUCT Lars Perner, Instructor 20 Brand Extensions Use of an existing brand name to a new-to-the-brand product category May lower cost of launching new product line and increase speed of market penetration, but… Considerations ◦ Congruence: Are products consistent in image to be represented by the same brand name?  Coke and Diet Coke  Miller vs. Miller Light Beer ◦ Perception of ability to make product well ◦ Extension should not be exploitative— making a “trivial” product by high image brand (e.g., Heineken Popcorn) ◦ Order of entry: First manufacturer of new to market product should not extend an existing brand—this causes confusion