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398 PART 5 | CRe ATing V Alue Luxury Products Design is often an important aspect of luxury products, though these products also face some unique issues. They are perhaps one of the purest examples of the role of branding because the brand and its image are often key competitive advantages that create enormous value and wealth. Marketers for luxury brands such as Prada, Gucci, Cartier, and Louis Vuitton manage lucrative franchises that have endured for decades in what some believe is now a $270 billion industry. 35 character Iz In G Luxur Y Brands Significantly higher priced than typical items in their categories, luxury brands for years were about social status and who a customer was—or perhaps wanted to be. Times have changed, and especially in the aftermath of a crippling recession, luxury for many has become more about style and substance, combining personal pleasure and self-expression. 36 A luxury shopper must feel he or she is getting something truly special. Thus the common denominators of luxury brands are quality and uniqueness. A winning formula for many is craftsmanship, heritage, authenticity, and history, often critical to justifying a sometimes extravagant price. Hermès, the French luxury leather-goods maker, sells its classic designs for hundreds or even thousands of dollars, “not because they are in fashion, ” as one writer put it, “but [because] they never go out of fashion. ”37 Here is how several luxury brands have become endur-ing market successes: Sub-Zero refrigerators. Sub-Zero sells refrigerators that range from $1,600 for small, under-counter models to $12,000 for a specialty Pro 48 with a stainless steel interior. The target is customers with high standards of performance and design who cherish their home and what they buy to furnish it. Sub-Zero extensively surveys this group as well as the kitchen designers, architects, and retailers who recommend and sell its products. 38 Patrón tequila. Cofounded by Paul Mitchell hair care founder John Paul De Joria, Patrón came about after a 1989 trip to a distillery in the small Mexican state of Jalisco. Named Patrón to convey “the boss, the cool guy, ” Source: ©David Pruter/Shutterstock With its unique product formulation and bottle, Patron pioneered the high end tequila market. the smooth agave tequila comes in an elegant hand-blown decanter and is sold in individually numbered bottles for $45 or more. Essentially creating the high-end tequila market, with more than $1. 1 billion in retail sales, Patrón has surpassed Jose Cuervo to become the world's largest tequila brand. 39 Montblanc luxury goods. The goal of Montblanc, whose products now range from pens to watches to leather goods and fragrances, is to be a strong luxury brand to as many classes of luxury customers as possible, while still retaining a prominent public image. The brand promise is that “the product you buy is of highest esteem, based on its timeliness, elegant design and the high quality, which is derived from the excellence of our craftsmen. ” The company branched out from its origins in writing instruments into categories such as leather goods and timepieces, where it could “rely on the trust of our customers, who believed in Montblanc as a brand that provides excellence in its core category writing instruments based on its philosophy of manufacturing competence, highest quality, sustainable value and creativity. ”40 Grow In G Luxur Y Brands The recent recession challenged many luxury brands as they tried to justify their value proposition and avoid discounting their products. 41 Those that had already successfully extended their brands vertically across a range of price points were usually the most immune to economic downturns. The Armani brand has extended from high-end Giorgio Armani and Giorgio Armani Privé to mid-range luxury with Emporio Armani to affordable luxury with Armani Jeans and Armani Exchange. Clear differentiation exists between these brands, minimizing the potential for consumer confusion and brand cannibalization. Each also lives up to the core promise of the parent brand, reducing chances of hurting the parent's image. Horizontal extensions into new categories can also be tricky for luxury brands. Even the most loyal consumer might question a $7,300 Ferragamo watch or an $85 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 399 bottle of Roberto Cavalli vodka. Jewelry maker Bulgari has moved into hotels, fragrances, chocolate, and skin care, prompting some branding experts to deem the brand overstretched. 42 In the past, iconic fashion designers Pierre Cardin and Halston licensed their names to so many ordinary products that the brands were badly tarnished. Ralph Lauren, however, has successfully marketed an aspirational luxury brand with wholesome all-American lifestyle imagery across a wide range of products. Besides clothing and fragrances, Lauren boutiques sell linens, candles, beds, couches, dishware, photo albums, and jewelry. Calvin Klein has adopted a similarly successful expansive strategy, though with different lifestyle imagery. Much of the growth in luxury brands in recent years has been geographical. China has overtaken the United States as the world's largest luxury market; it's forecast that one-third of all high-end goods will be sold there in the coming years. Although initially very “logo-driven” and interested in conspicuous brand signals, Chinese luxury consumers have also become more quality and design conscious, like luxury consumers in other parts of the world. 43 market In G Luxur Y Brands Luxury marketers have learned that luxury is not viewed the same way around the world. In post-communist Russia for a time, as in China, the bigger and gaudier the logo, the better. But in the end, luxury brand marketers have to remember they are often selling a dream, anchored in product quality, status, and prestige. Just like marketers in less expensive categories, those guiding the fortunes of luxury brands operate in a constantly evolving marketing environment. Globalization, new technologies, financial crises, shifting consumer cultures, and other forces require them to be skillful and adept at their brand stewardship to succeed. Table 13. 1 summarizes some key guidelines in marketing luxury brands. One trend for luxury brands is to wrap personal experiences around the products. Top-end fashion retailers are offering such experiences alongside their wares, expecting that customers who have visited a workshop or met the designer will feel closer to the brand. Gucci is inviting its biggest spenders to fashion shows, equestrian events, and the Cannes Film Festival. 44 Porsche Sport Driving Schools and Experience Centers in Germany, the United States, and other parts of the world allow Porsche drivers to “train their driving skills and enjoy the all-out pleasure of driving, on-road, off-road, or on snow and ice. ” The recently opened state-of-the-art facility in Southern California features 45-degree off-road inclines and a simulated ice hill. 45 table 13. 1 Guidelines for Marketing Luxury Brands 1. Maintaining a premium image for luxury brands is crucial; controlling that image is thus a priority. 2. Luxury branding typically includes the creation of many intangible brand associations and an aspirational image. 3. All aspects of the marketing program for luxury brands must be aligned to ensure high-quality products and services and pleasurable purchase and consumption experiences. 4. Besides brand names, other brand elements—logos, symbols, packaging, signage—can be important drivers of brand equity for luxury products. 5. Secondary associations from linked personalities, events, countries, and other entities can boost luxury-brand equity as well. 6. Luxury brands must carefully control distribution via a selective channel strategy. 7. Luxury brands must employ a premium pricing strategy, with strong quality cues and few discounts and markdowns. 8. Brand architecture for luxury brands must be managed carefully. 9. Competition for luxury brands must be defined broadly because it often comes from other categories. 10. Luxury brands must legally protect all trademarks and aggressively combat counterfeits. Source: Based on Kevin Lane Keller, “Managing the Growth Tradeoff: Challenges and Opportunities in Luxury Branding,” Journal of Brand Management 16 (March-May 2009), pp. 290-301. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
400 PART 5 | CRe ATing V Alue In an increasingly wired world, some luxury marketers have struggled to find the appropriate online selling and communication strategies for their brand. 46 Some fashion brands have begun to go beyond glossy magazine spreads to listening to and communicating with consumers through Facebook, Twitter, Foursquare, and other digital and social media channels. Coach and Tiffany are two luxury brands praised for their Web site and digital operations. E-commerce has also begun to take hold for some luxury brands. Sites such as Gilt Groupe and Ideel now offer new ways for fashion brands to move high-end goods. 47 Ultimately, luxury marketers are learning that, as for all marketers, success depends on getting the right balance of classic and contemporary imagery and continuity and change in marketing programs and activities. Environmental Issues Environmental issues are also playing an increasingly important role in product design and manufacturing. Many firms are considering ways to reduce the negative environmental consequences of conducting business, and some are changing the manufacture of their products or the ingredients that go into them. “Marketing Memo: A Sip or a Gulp: Environmental Concerns in the Water Industry” considers some of the environmental issues raised by the sale of bottled water. In a fascinating twist, Levi-Strauss found a highly creative way to address the problem of proliferating plastic bottles. 48 LEVi's Wast E<LEss If someone said your jeans were “made of garbage,” you might be insulted, but not if they were made by Levi-Strauss. Levi's new “Waste<Less” jeans and jackets carry a clothing tag that says exactly that—because they are! Twenty percent of the material in the denim comes from plastic bottles and black food trays re-cycled from municipal sites, including about eight 12-to 20-ounce bottles per pair. Much research and development went into creating the Waste<Less line, for which the plastic is cleaned, sorted, shredded into flakes, and made into a polyester fiber that's then blended with cotton. The resulting fabric looks and feels like traditional denim except for the color of the underside, which varies according to the hue of the plastic. The jeans retail for $69 to $128. Levi's is not a newcomer to the market for environmentally friendly products; sustainability is a company-wide priority. “Water<Less” jeans helped farmers grow cotton with less water, let Levi's manufacture with less water, and educated consumers about cleaning and disposing of the garments with less water. Both lines have made a tangible difference: The Water<Less line saved more than 360 mil-lion liters of water in its first full year, while the Waste<Less line recycled 3. 5 million bottles and trays in its first full year. Porsche has created driving tracks and schools so its owners can learn and experience more about their vehicles. Source: © Caro/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 401 Product and Brand Relationships Each product can be related to other products to ensure that a firm is offering and marketing the optimal set of products. The huge popularity of bottled water has been a boon to many companies, but at a high cost to the environment. One estimate put the amount of plastic used in disposable bottles at 2. 7 million tons a year, which requires about 47 million gallons of oil to manufacture. Unfortunately, fewer than 20 percent of these bottles are believed to be recycled in the United States. These high environmental costs have a number of implications for marketers. Colleges all over the country—from Western Washington University to Brown University, the University of Vermont, and the University of California at Berkeley—have banned the sale of plain bottled water, typically as part of a student-led movement toward greater sustainability on campus. The College of Saint Benedict in Minnesota equipped 31 fountains with an extra spigot to make them “hydration stations,” a practice adopted by many other schools that banned bottled water. Nor are schools alone. Many public institutions from zoos to national parks are similarly installing water filling stations and banning the sale of bottled water. As more consumers seek to reduce their personal environmental foot-print, sales of reusable water bottles have exploded. Sigg Switzerland sells cleverly designed lightweight aluminum water bottles for $25 to $30, choosing 100 new products from among 3,000 different designs each year. Features popular in other brands include caps with built-in micro-filtration systems. Glass bottles promote their environmental advantages over plastic and re-assure consumers who fear chemicals can leak into foods and beverages from plastic. They now account for an increasingly large percentage of water bottle sales. Glass is also being developed for greater safety if broken; for instance, PURE glass bottles uses clear protective Safe-Shell coating. Soft drink makers face similar pressures from environmentally aware con-sumers. Soda Stream sells equipment that allows people to carbonate and fla-vor plain tap water using reusable glass bottles. The company promotes three key benefits: Using tap water is cheaper, it can be slightly healthier, and there is no waste. Coca-Cola reports reclaiming more than one-third of its bottles and cans in North America, diverting 250 million pounds of waste from landfills each year. When Pepsi Co launched Eco-Fina packaging for its Aquafina water brand, which uses 50 percent less plastic, it estimated it would save more than 75 million pounds of plastic annually. Perhaps the most important lesson here is that environmental concerns matter to consumers, and they expect companies to make changes to address their concerns. Second, competition will emerge in all forms as companies try to find ways to better suit consumers' unmet needs, even for a sip of water. Sources: Caleb Melby, “Soda Stream's Moneymaking Battle Cry: Get Rid of Plastic Bottles,” Forbes, July 19, 2012; Stephanie Strom, “Wary of Plastic, and Waste, Some Consumers Turn to Glass,” New York Times, June 20, 2012; Kirsti Marohn, “Colleges Moving Away from Plastic Water Bottles," USA Today, September 15, 2011; Lindsay Armstrong, “The Best Reusable Water Bottles,” Huffington Post, May 25, 2011; Helen Coster, “The $25 Water Bottle,” Fortune, March 19, 2009; “Pepsi Co's Aquafina Launches the Eco-Fina Bottle, the Lightest Weight Bottle in the Market,” www. pepsico. com, March 25, 2009. A Sip or A Gulp: Environmental Concerns in the Water Industry marketing memo Emphasizing product design and variety, Swiss made Sigg has caught on as sales of reusable water bottles exploded. Source: SIGG Switzerland AG. Creators of “The Original Bottle” made in Switzerland. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
402 PART 5 | CRe ATing V Alue the Product h Ierarch Y The product hierarchy stretches from basic needs to particular items that satisfy those needs. We can identify six levels of the product hierarchy, using life insurance as an example: 1. Need family —The core need that underlies the existence of a product family. Example: security. 2. Product family —All the product classes that can satisfy a core need with reasonable effectiveness. Example: savings and income. 3. Product class —A group of products within the product family recognized as having a certain functional coherence, also known as a product category. Example: financial instruments. 4. Product line —A group of products within a product class that are closely related because they perform a similar function, are sold to the same customer groups, are marketed through the same outlets or channels, or fall within given price ranges. A product line may consist of different brands, a single family brand, or an individual brand that has been line extended. Example: life insurance. 5. Product type —A group of items within a product line that share one of several possible forms of the product. Example: term life insurance. 6. Item (also called stock-keeping unit or product variant )—A distinct unit within a brand or product line distinguishable by size, price, appearance, or some other attribute. Example: Prudential renewable term life insurance. Product s Ystems and m Ixes A product system is a group of diverse but related items that function in a compatible manner. 49 For example, the extensive i Pod product system includes headphones and headsets, cables and docks, armbands, cases, power and car accessories, and speakers. A product mix (also called a product assortment ) is the set of all products and items a particular seller offers for sale. A product mix consists of various product lines. NEC's (Japan) product mix consists of communication prod-ucts and computer products. Michelin has three product lines: tires, maps, and restaurant-rating services. At Northwestern University, separate academic deans oversee the schools of medicine, law, business, engineering, music, speech, journalism, and liberal arts, among others. A company's product mix has a certain width, length, depth, and consistency. These concepts are illustrated in Table 13. 2 for selected Procter & Gamble consumer products. The width of a product mix refers to how many different product lines the company carries. Table 13. 2 shows a product mix width of five lines. (In fact, P&G produces many additional lines. ) table 13. 2 Product Mix Width and Product Line Length for Procter & Gamble Products (including year of introduction) Product Mix Width Detergents Toothpaste Bar Soap Disposable Diapers Paper Products Ivory Snow (1930) Gleem (1952) Ivory (1879) Pampers (1961) Charmin (1928) Dreft (1933) Crest (1955) Camay (1926) Luvs (1976) Puffs (1960) Product Line Length Tide (1946) Zest (1952) Bounty (1965) Cheer (1950) Safeguard (1963) Dash (1954) Oil of Olay (1993) Bold (1965) Gain (1966) Era (1972) | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 403 The length of a product mix refers to the total number of items in the mix. In Table 13. 2, it is 20. We can also talk about the average length of a line. We obtain this by dividing the total length (here 20) by the number of lines (here 5), for an average product line length of 4. The depth of a product mix refers to how many variants are offered of each product in the line. If Tide came in two scents (Clean Breeze and Regular), two formulations (liquid and powder), and with two additives (with or without bleach), it would have a depth of eight because there are eight distinct variants. 50 We can calculate the average depth of P&G's product mix by averaging the number of variants within the brand groups. The consistency of the product mix describes how closely related the various product lines are in end use, production requirements, distribution channels, or some other way. P&G's product lines are consistent in that they are consumer goods that go through the same distribution channels. The lines are less consistent in the functions they perform for buyers. These four product mix dimensions permit the company to expand its business in four ways. It can add new product lines, thus widening its product mix. It can lengthen each product line. It can add more product variants to each product and deepen its product mix. Finally, a company can pursue more product line consistency. To make these product and brand decisions, marketers can conduct product line analysis. Product L Ine ana LYs Is In offering a product line, companies normally develop a basic platform and modules that can be added to meet different customer requirements and lower production costs. Car manufacturers build cars around a basic plat-form. Homebuilders show a model home to which buyers can add additional features. Product line managers need to know the sales and profits of each item in their line to determine which items to build, maintain, harvest, or divest. 51 They also need to understand each product line's market profile and image. 52 sales an D Profits Figure 13. 3 shows a sales and profit report for a five-item product line. The first item accounts for 50 percent of total sales and 30 percent of total profits. The first two items account for 80 percent of total sales and 60 percent of total profits. If these two items were suddenly hurt by a competitor, the line's sales and profitability could collapse. These items must be carefully monitored and protected. At the other end, the last item delivers only 5 percent of the product line's sales and profits. The product line manager may consider dropping this item unless it has strong growth potential. Every company's product portfolio contains products with different margins. Supermarkets make almost no margin on bread and milk, reasonable margins on canned and frozen foods, and better margins on flowers, ethnic food lines, and freshly baked goods. Companies should recognize that different items will allow for different mar-gins and respond differently to changes in level of advertising. 53 market Profile an D image The product line manager must review how the line is positioned against competitors' lines. Consider paper company X with a paperboard product line. 54 Two paperboard attributes are weight and finish quality. Paper is usually offered at standard levels of 90, 120, 150, and 180 weights. Finish quality is offered at low, medium, and high levels. Tide comes in many forms and varieties to suit different consumer needs. Source: Kris Tripplaar/Sipa USA/Newscom | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
404 PART 5 | CRe ATing V Alue The product map in Figure 13. 4 shows the location of the various product line items of company X and four competitors, A, B, C, and D. Competitor A sells two product items in the extra-high weight class ranging from medium to low finish quality. Competitor B sells four items that vary in weight and finish quality. Competitor C sells three items in which the greater the weight, the greater the finish quality. Competitor D sells three items, all lightweight but varying in finish quality. Company X offers three items that vary in weight and finish quality. The product map also shows which competitors' items are competing against company X's items. For example, company X's low-weight, medium-quality paper competes against competitor D's and B's papers, but its high-weight, medium-quality paper has no direct competitor. The map also reveals possible locations for new items. No manufacturer offers a high-weight, low-quality paper. If company X estimates a strong unmet demand and can produce this paper at low cost and price it accordingly, it could consider adding it to its line. Another benefit of product mapping is that it identifies market segments. Figure 13. 4 shows the types of paper, by weight and quality, preferred by the general printing industry, the point-of-purchase display industry, and the office supply industry. The map shows that company X is well positioned to serve the needs of the general printing industry but less effective in serving the other two markets. Product line analysis provides information for two key decision areas: product line length and product mix pricing. Product L Ine Len Gth Company objectives influence product line length. One objective is to create a product line to induce up-selling. Mercedes C-Class plays a critical function as an entry point to the brand. As one industry analyst notes: “The C-Class is critical for the luxury race because it creates the most amount of volume for Benz. It also opens the Benz brand to potential future buyers by catching them while they're young with the hopes that they upgrade as they get more affluent and older. ”55 A different objective is to create a product line that facilitates cross-selling: Hewlett-Packard sells printers as well as computers. Still another is to protect against economic ups and downs: Electrolux offers white goods such as refrigerators, dishwashers, and vacuum cleaners under different brand names in the discount, middle-market, and premium segments, in part as a hedge when the economy moves up or down. Companies seeking high market Product Item1050 40 30 20 10 2345Percentage Contribution to Sales and Profit Sales Profits| Fig. 13. 3 | Product-Item Contributions to a Product Line's Total Sales and Profits Paper Weight Low (90)High Medium Low Medium (120) High (150) Extra high (180)Finish Quality D CB BC D X A AD B XXB C Office supplies General printing Point-of-purchase displays| Fig. 13. 4 | Product Map for a Paper-Product Line Source: Benson P. Shapiro, Industrial Product Policy: Managing the Existing Product Line (Cambridge, MA: Marketing Science Institute Report No. 77-110). Copyright © 2003. Reprinted by permission of Marketing Science Institute and Benson P. Shapiro. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 405 share and market growth will generally carry longer product lines. Those emphasizing high profitability will carry shorter lines consisting of carefully chosen items. Product lines tend to lengthen over time. Excess manufacturing capacity puts pressure on the product line manager to develop new items. The sales force and distributors also lobby for a more complete product line to satisfy customers. But as items are added, costs rise for design and engineering, inventory carrying, manufacturing changeover, order processing, transportation, and new-item promotions. Eventually, top management may stop development because of insufficient funds or manufacturing capacity. A pattern of product line growth followed by massive pruning may repeat itself many times. Increasingly, consumers are growing weary of dense product lines, overextended brands, and feature-laden products (see “Marketing Insight: When Less Is More”). 56 A company lengthens its product line in two ways: line stretching and line filling. line stret Ching Every company's product line covers a certain part of the total possible range. For example, Mercedes automobiles are located in the upper price range of the automobile market. Line stretching occurs when a company lengthens its product line beyond its current range, whether down-market, up-market, or both ways. Down-Market Stretch A company positioned in the middle market may want to introduce a lower-priced line for any of three reasons: 1. The company may notice strong growth opportunities. Mass retailers such as Walmart, Target, and others attract a growing number of shoppers who want value-priced goods. 2. The company may wish to tie up lower-end competitors who might otherwise try to move up-market. If the company has been attacked by a low-end competitor, it often decides to counterattack by entering the low end of the market. 3. The company may find the middle market stagnating or declining. Marketers face a number of naming choices in deciding to move a brand down-market: 1. Use the parent brand name on all its offerings. Sony has used its name on products in a variety of price tiers. 2. Introduce lower-priced offerings using a sub-brand name, such as P&G's Charmin Basic and Bounty Basic. 3. Introduce the lower-priced offerings under a different name, such as the Gap's Old Navy brand. This strategy is expensive to implement and means brand equity will have to be built from scratch, but the equity of the par-ent brand name is protected. When Less Is More With thousands of new products introduced each year, consumers find it ever harder to navigate store aisles. One study found the average shopper spent 40 seconds or more in the supermarket soda aisle, com-pared with 25 seconds six or seven years ago. Although consumers may think greater product variety increases their likelihood of finding the right product for them, the reality is of-ten different. One study showed that although consumers expressed greater interest in shopping a larger assortment of 24 flavored jams than a smaller assortment of 6, they were 10 times more likely to actu-ally make a selection when given the smaller assortment. Presented with too many options, people “choose not to choose,” even if it may not be in their best interests. Similarly, if product quality in an assortment is high, consumers actually prefer fewer choices. Those with well-defined preferences may benefit from more-differentiated products that offer specific benefits, but others may experience frustration, confusion, and regret. Product proliferation has another downside. Constant product changes and introductions may nudge customers into reconsidering their choices and perhaps switching to a competitor's product. Some companies are getting the message. When Procter & Gamble went from 20 different kinds of Head & Shoulders to 15, sales for the brand increased by 10 percent. Smart marketers realize it's not just product lines making consumer heads spin—many products them-selves are too complicated. Technology marketers need to be especially sensitive to the problems of information overload. The launch of the HTC One smartphone succeeded in part because the company adopted a “less is more” approach instead of just adding features. Sources: John Davidson, “One Classic Example of When Less Is More,” Financial Review, April 9, 2013; Carolyn Cutrone, “Cutting Down on Choice Is the Best Way to Make Better Decisions,” Business Insider, January 10, 2013; Dimitri Kuksov and J. Miguel Villas-Boas, “When More Alternatives Lead to Less Choice,” Marketing Science, 29 (May/June 2010), pp. 507-24; Kristin Diehl and Cait Poynor, “Great Expectations?! Assortment Size, Expectations, and Satisfaction,” Journal of Marketing Research 46 (April 2009), pp. 312-22; Joseph P. Redden and Stephen J. Hoch, “The Presence of Variety Reduces Perceived Quantity,” Journal of Consumer Research 36 (October 2009), pp. 406-17; Alexander Chernev and Ryan Hamilton, “Assortment Size and Option Attractiveness in Consumer Choice Among Retailers,” Journal of Marketing Research 46 (June 2009), pp. 410-20; Richard A. Briesch, Pradeep K. Chintagunta, and Edward J. Fox, “How Does Assortment Affect Grocery Store Choice,” Journal of Marketing Research 46 (April 2009), pp. 176-89; Susan M. Broniarczyk, “Product Assortment,” Curt P. Haugtvedt, Paul M. Herr, and Frank R. Kardes, eds., Handbook of Consumer Psychology (New York: Taylor & Francis, 2008), pp. 755-79. marketing insight | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
406 PART 5 | CRe ATing V Alue Moving down-market carries risks. In one classic example, when Kodak introduced Kodak Funtime Film to counter lower-priced brands, it did not price it low enough to match competitors. It also found some of its regular customers buying Funtime, so it was cannibalizing its core brand. Kodak withdrew the product and may have also lost some of its quality image in the process. P&G also introduced Tide Basic in test markets—priced lower but also lacking some of the latest detergent technology of its famous parent brand—and decided against rolling it out. 57 On the other hand, Mercedes successfully introduced its C-Class cars at $30,000 without injuring its ability to sell other Mercedes cars for $100,000. John Deere introduced a lower-priced line of lawn tractors called Sabre from John Deere, while still selling its more expensive tractors under the John Deere name. In these cases, consumers may have been better able to compartmentalize the different offerings and understand the functional differences between them. 58 Up-Market Stretch Companies may wish to enter the high end of the market to achieve more growth, realize higher margins, or simply position themselves as full-line manufacturers. Many markets have spawned surprising upscale segments: Starbucks in coffee, Häagen-Dazs in ice cream, and Evian in bottled water. The leading Japanese auto companies each introduced a highly successful upscale automobile nameplate: Toyota's Lexus, Nissan's Infiniti, and Honda's Acura. They invented entirely new names because consumers might not have given the brand “permission” to stretch upward when those lines were first introduced. Other companies have included their own names in moving up-market. Gallo sells Gallo Family Vineyards (priced at $10 to $30 a bottle) with a hip, younger image to compete in the premium wine segment. General Electric introduced the GE Profile brand for its large-appliance offerings in the upscale market. Some brands have used modifiers to signal a quality improvement, such as Ultra Dry Pampers, Extra Strength Tylenol, and Power Pro Dustbuster Plus. Two-Way Stretch Companies serving the middle market might stretch their line in both directions. Robert Mondavi Winery, now owned by Constellation Brands, sells $35 bottles of wines as the first premium “New World” wine, but it also sells $125 bottles of Mondavi Reserve at high-end wineries, restaurants, and vineyards and through direct order, as well as $11 bottles of Woodbridge created during the grape oversupply of the mid-1990s. Purina Dog Food has stretched up and down to create a product line differentiated by benefits to dogs, breadth of varieties, ingredients, and price: Pro Plan ($38. 99/18 lb. bag)—helps dogs live long and healthy lives with high-quality ingredients (real meat, fish, and poultry) Purina ONE ($22. 99/16. 5 lb. bag)—meets dogs' changing and unique nutritional needs and provides super-premium nutrition for good health Purina Dog Chow ($12. 24/18. 5 lb. bag)—provides dogs with complete nutrition to build, replenish, and repair at each life stage Alpo by Purina ($8. 69/17. 6 lb. bag)—offers beef, liver, and cheese flavor combinations and three meaty varieties line filling A firm can also lengthen its product line by adding more items within the present range. Motives for line filling include reaching for incremental profits, satisfying dealers who complain about lost sales because of items missing from the line, utilizing excess capacity, trying to become the leading full-line company, and plugging holes to keep out competitors. Consider BMW. 59 BMW a G In four years, BMW has morphed from a one-brand, five-model carmaker into a powerhouse with three brands, 14 “Series,” and roughly 30 distinct models. Not only has the carmaker expanded its product range downward with MINI Coopers and its compact 1-series models, but it has also built it upward with Rolls-Royce and filled the gaps in between with its X1, X3, X5, and X6 sports activity vehicles, Z4 roadsters, and a 6-series coupe. The company has used line filling successfully to boost its appeal to the rich, the super-rich, and the hope-to-be-rich, all without departing from its pure premium positioning. BMW has also built a clear brand migration strategy within its product line. It would like to move customers up from a 1-series or 3-series vehicle to a 5-series and eventually even a 7-series. Line filling is overdone if it results in cannibalization and customer confusion. The company needs to differen-tiate each item in the consumer's mind with a just-noticeable difference. According to Weber's law, customers are | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 407 more attuned to relative than to absolute difference. 60 They will perceive the difference between boards 2 and 3 feet long and boards 20 and 30 feet long, but not between boards 29 and 30 feet long. The proposed item should also meet a market need and not be added simply to satisfy an internal need. The infamous Edsel automobile, on which Ford lost $350 million in the late 1950s, met Ford's internal positioning need for a car between its Ford and Lincoln lines, but not the market's needs. line mo Dernization, featuring, an D Pruning Product lines regularly need to be modernized. The question is whether to overhaul the line piecemeal or all at once. A piecemeal approach allows the company to see how customers and dealers take to the new style. It is also less draining on the company's cash flow, but it lets competitors see changes and start redesigning their own lines. In rapidly changing markets, modernization is continuous. Companies plan improvements to encourage customer migration to higher-value, higher-price items. Microprocessor companies such as Intel and AMD and software companies such as Microsoft and Oracle continually introduce more advanced versions of their products. Marketers want to time improvements so they do not appear too early (damaging sales of the current line) or too late (giving the competition time to establish a strong reputation). 61 The product line manager typically selects one or a few items in the line to feature. Best Buy will announce a special low-priced big-screen TV to attract customers. At other times, managers will feature a high-end item to lend prestige to the product line. Sometimes a company finds one end of its line selling well and the other end selling poorly. It may try to boost demand for slower sellers, especially if a factory is idled by lack of demand, but it could be counterargued that the firm should promote strong sellers rather than prop up weak ones. Nike's Air Force 1 basketball shoe, introduced in the 1980s, is a billion-dollar brand that is still a consumer and retailer favorite and a moneymaker for the company thanks to collectable styles and tight supplies. Since their introduction, the shoes have been designed or inspired by many celebrities and athletes. 62 Using sales and cost analysis, product line managers must periodically review the line for deadwood that depresses profits. 63 One study found that for a big Dutch retailer, a major assortment reduction led to a short-term drop in category sales, caused mainly by fewer category purchases by former buyers, but it also attracted new category buyers who partially offset the losses. 64 Multi-brand companies all over the world try to optimize their brand portfolios. This often means focusing on core brand growth and concentrating resources on the biggest and most established brands. Hasbro has designated a set of core toy brands to emphasize in its marketing, including GI Joe, Transformers, and My Little Pony. Procter & Gamble's “back to basics” strategy concentrated on brands with more than $1 billion in revenue, such as Tide, Crest, Pampers, and Pringles. Every product in a product line must play a role, as must any brand in the brand portfolio. 65 BMW has filled its product line to offer more vehicle choices to its customers. Source: © philipus/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
408 PART 5 | CRe ATing V Alue VOLks Wa GEn Volkswagen has four different core brands of particular importance in its European portfolio. Initially, Audi and Seat had a sporty image and VW and Skoda had a family-car image. Audi and VW were in a higher price-quality tier than Skoda and Seat, which had spartan interiors and utilitarian engine performance. To reduce costs, streamline part/systems designs, and eliminate redundancies, Volkswagen upgraded the Seat and Skoda brands, which captured market share with splashy interiors, a full array of safety systems, and reliable power trains. The danger, of course, is that by borrowing from its upper-echelon Audi and Volkswagen products, Volkswagen could dilute their cachet. Frugal European consumers may convince themselves that a Seat or Skoda is almost identical to its VW sister, at several thousand euros less. Product m Ix Pr Ic In G Marketers must modify their price-setting logic when the product is part of a product mix. In product mix pricing, the firm searches for a set of prices that maximizes profits on the total mix. The process is chal-lenging because the various products have demand and cost interrelationships and are subject to different degrees of competition. We can distinguish six situations calling for product-mix pricing: product line pricing, optional-feature pricing, captive-product pricing, two-part pricing, by-product pricing, and product-bundling pricing. Pro Du Ct line Pri Cing Companies normally develop product lines rather than single products, so they introduce price steps. A men's clothing store might carry men's suits at three price levels: $300, $600, and $900, which customers associate with low, average, and high quality. The seller's task is to establish perceived quality differences that justify the price differences. 66 o Ptional-feature Pri Cing Many companies offer optional products, features, and services with their main product. The 2013 Subaru Outback 2. 5i was available in five trim levels. Premium trim additional features included an eight-way power driver's seat, windshield wiper de-icer, leather-wrapped steering wheel, and 17-inch aluminum wheels; the more luxurious Limited trim added even more features, including perforated leather, dual-zone automatic climate control, heated front seats, heated side mirrors, and a Harman/Kardon audio system with satellite radio. 67 Pricing options is a sticky problem because companies must decide which to include in the standard price and which to offer separately. Many restaurants price their beverages high and their food low. The food revenue covers costs, and the beverages—especially liquor—produce the profit. This explains why servers often press hard to get customers to order drinks. Other restaurants price their liquor low and food high to draw in a drinking crowd. Ca Ptive-Pro Du Ct Pri Cing Some products require the use of ancillary or captive products. Manu-facturers of razors often price them low and set high markups on razor blades. Movie theaters and concert venues often make more from concessions and merchandise sales than from ticket receipts. 68 AT&T may give a cell phone for free if the person commits to buying two years of phone service. If the captive product is priced too high in the aftermarket, however, counterfeiting and substitutions can erode sales. Consumers now can buy cartridge refills for their printers from discount suppliers and save 20 percent to 30 percent off the manufacturer's price. Hewlett-Packard has attempted to strike the right balance in its printer pricing, though changes in the marketing environment are upending its well-honed profit machine. 69 HEWLE tt-Packard In 1996, Hewlett-Packard (HP) began drastically cutting prices on its printers, by as much as 60 percent in some cases. The company could afford to make these cuts because over the life of the prod-uct customers typically spend twice as much on replacement ink cartridges, toner, and specialty paper as on the printer, and inkjet supplies typically carry 45 percent to 60 percent profit margins. As the price dropped, printer sales rose, and so did aftermarket sales. Over the next decade, with a market share above 40 percent, the printer division was a highly profitable cash cow for the company. But with more consumers using tablets and smart phones and sharing images and information via cloud computing, HP's bigger challenge now is countering the continuing decline in sales of PCs. Lower PC sales have meant lower printer sales and a steady drop in profit margin and revenue in recent years. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 409 two-Part Pri Cing Service firms engage in two-part pricing, consisting of a fixed fee plus a variable usage fee. Cell phone users may have to pay a minimum monthly fee plus charges for calls that exceed their allotted minutes. Amusement parks charge an admission fee plus fees for rides over a certain minimum. The service firm faces a problem similar to captive-product pricing—namely, how much to charge for the basic service and how much for the variable usage. The fixed fee should be low enough to induce purchase; profit can then come from the usage fees. by-Pro Du Ct Pri Cing The production of certain goods—meats, petroleum products, and other chemicals—often yields by-products that should be priced on their value. Any income earned on the by-products will make it easier for the company to charge a lower price on its main product if competition forces it to do so. Formed in 1855, Australia's CSR was originally named Colonial Sugar Refinery and forged its early reputation as a sugar company. The company began to sell by-products of its sugar cane; waste sugar cane fiber was used to manufacture wallboard. Today, through product development and acquisition, the renamed CSR has become one of the top 10 companies in Australia selling building and construction materials. Pro Du Ct-bun Dling Pri Cing Sellers often bundle products and features. 70 Pure bundling occurs when a firm offers its products only as a bundle. Providers of aftermarket products for automobiles increasingly are bundling their offerings in customizable three-in-one and four-in-one programs, especially second-tier products such as tire-and-wheel protection and paintless dent repair. 71 A talent agency might insist that a “hot” actor can be signed to a film only if the film company also accepts other talent the agency represents such as directors or writers. This is a form of tied-in sales. In mixed bundling, the seller offers goods both individually and in bundles, normally charging less for the bundle than if the items were purchased separately. A theater will price a season subscription lower than the cost of buying all the performances separately. Customers may not have planned to buy all the components, so savings on the price bundle must be enough to induce them to buy it. 72 Some customers want less than the whole bundle in exchange for a lower price. 73 These customers ask the seller to “unbundle” or “rebundle” its offer. If a supplier saves $100 by not supplying unwanted delivery and reduces the customer's price by $80, it has kept the customer happy while increasing its profit by $20. “Marketing Memo: Product-Bundle Pricing Considerations” offers a few tips. co-Brand In G and In Gred Ient Brand In G Co-bran Ding Marketers often combine their products with products from other companies in various ways. In co-branding —also called dual branding or brand bundling—two or more well-known brands are combined into a joint product or marketed together in some fashion. HP prices its printers recognizing that its real profits comes from the supplies it sells customers afterwards. Source: Handout/MCT/Newscom | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
410 PART 5 | CRe ATing V Alue One form of co-branding is same-company co-branding, as when General Mills advertises Trix cereal and Y oplait yogurt. Another form is joint-venture co-branding, such as General Electric and Hitachi lightbulbs in Japan or the Citi Platinum Select AAdvantage Visa Signature credit card in which three different parties are involved. There is multiple-sponsor co-branding, such as Taligent, a one-time technological alliance of Apple, IBM, and Motorola. Finally, there is retail co-branding in which two retail establishments use the same location to optimize space and profits, such as jointly owned Pizza Hut, KFC, and Taco Bell restaurants. The main advantage of co-branding is that a product can be convincingly positioned by virtue of the multiple brands. Co-branding can generate greater sales from the existing market and open opportunities for new consum-ers and channels. It can also reduce the cost of product introduction because it combines two well-known images and speeds adoption. And co-branding may be a valuable means to learn about consumers and how other compa-nies approach them. Companies in the automotive industry have reaped all these benefits. The potential disadvantages of co-branding are the risks and lack of control in becoming aligned with another brand in consumers' minds. Consumer expectations of co-brands are likely to be high, so unsatisfactory performance could have negative repercussions for both brands. If the other brand enters a number of co-branding arrangements, overexposure may dilute the transfer of any association. It may also result in a lack of focus on exist-ing brands. Consumers may feel less sure of what they know about the brand. 74 For co-branding to succeed, the two brands must separately have brand equity—adequate brand awareness and a sufficiently positive brand image. The most important requirement is a logical fit between the two brands, to maximize the advantages of each while minimizing disadvantages. Consumers are more apt to perceive co-brands favorably if they are complementary and offer unique quality, rather than being overly similar and redundant. Managers must enter co-branding ventures carefully, looking for the right fit in values, capabilities, and goals and an appropriate balance of brand equity. There must be detailed plans to legalize contracts, make financial arrangements, and coordinate marketing programs. As one executive at Nabisco put it, “Giving away your brand is a lot like giving away your child—you want to make sure everything is perfect. ” Financial arrangements between brands vary; one common approach is for the brand more deeply invested in the production process to pay the other a licensing fee and royalty. As promotional activity increases on individual items in the bundle, buyers perceive less savings from the bundle and are less apt to pay for it. Research suggests the following guidelines for implementing a bundling strategy: Don't promote individual products in a package as frequently or for as little as the bundle. The bundle price should be much lower than the sum of individual products or the consumer will not perceive its attractiveness. If you still want to promote individual products, choose a single item in the mix. Another option is to alternate promotions to avoid running conflicting ones. If you offer large rebates on individual products, do so with discretion and make them the absolute exception. Otherwise, the consumer uses the price of individual products as an external reference for the bundle, which then loses value. Consider how experienced and knowledgeable your customer is. More knowledgeable customers may be less likely to need or want bundled offerings and prefer the freedom to choose components individually. Make sure the value of the bundle is easily understood. Bundles can streamline choices and make it easier for a consumer to appreciate different sets of benefits. Remember costs play a role. If marginal costs for the products are low—such as for proprietary software components that can be easily copied and distributed—a bundling strategy can be preferable to a pure component strategy where each component is purchased separately. Firms with single products that bundle their products together to compete against a multiproduct firm may not be successful if a price war ensues. Sources: Dina Gerdeman, “Product Bundling Is a Smart Strategy—But There's a Catch,” Forbes, January 18, 2013; Timothy P. Derdenger and Vineet Kumar, “The Dynamic Effects of Bundling as a Product Strategy,” Marketing Science 32 (November-December 2013), pp. 827-59; Aaron Brough and Alexander Chernev, “When Opposites Detract: Categorical Reasoning and Subtractive Valuations of Product Combinations” Journal of Consumer Research 39 (August 2012), pp. 399-414; Amiya Basu and Padmal Vitharana, “Impact of Customer Knowledge Heterogeneity on Bundling Strategy,” Marketing Science 28 (July-August 2009), pp. 792-801; Bikram Ghosh and Subramanian Balachnadar, “Competitive Bundling and Counterbundling with Generalist and Specialist Firms,” Management Science 53 (January 2007), pp. 159-68. Product-Bundle Pricing Considerations marketing memo | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 411 Brand alliances require a number of decisions. 75 What capabilities do you not have? What resource constraints do you face (people, time, money)? What are your growth goals or revenue needs? Ask whether the opportunity is a profitable business venture. How does it help maintain or strengthen brand equity? Is there any risk of diluting brand equity? Does the opportunity offer extrinsic advantages such as learning opportunities? ingre Dient bran Ding Ingredient branding is a special case of co-branding. 76 It creates brand equity for materials, components, or parts that are necessarily contained within other branded products. For host products whose brands are not that strong, ingredient brands can provide differentiation and important signals of quality. 77 Successful ingredient brands include Dolby noise reduction technology, GORE-TEX water-resistant fibers, and Scotchgard fabrics. Vibram is the world leader in high-performance rubber soles for outdoor, work, military, recreation, fashion, and orthopedic shoes. Look under your shoe and you may find Vibram soles—they are used by a wide range of footwear manufacturers, including The North Face, Saucony, Timberland, Lacoste, L. L. Bean, Wolverine, Rockport, Columbia, Nike, and Frye. 78 An interesting take on ingredient branding is self-branded ingredients that companies advertise and even trademark. 79 Westin Hotels advertises its own “Heavenly Bed”—a critically important ingredient to a guest's good night's sleep. The brand has been so successful that Westin now sells the bed, pillows, sheets, and blankets via an online catalog, along with other “Heavenly” gifts, bath products, and even pet items. The success of the bed has also created a halo for the Westin brand as a whole. Heavenly Bed enthusiasts are more likely to rate other aspects of their room or stay as more positive. 80 If it can be done well, using self-branded ingredients makes sense because firms have more control over them and can develop them to suit their purposes. Ingredient brands try to create enough awareness and preference for their product so consumers will not buy a host product that doesn't contain it. Du Pont has introduced a number of innovative products, such as Corian ® solid-surface material, for use in markets ranging from apparel to aerospace. Many of its products, such as Tyvek ® house wrap, Teflon ® non-stick coating, and Kevlar ® fiber, became household names as ingredient brands in consumer products manufactured by other companies. Since 2004, Du Pont has introduced more than 5,000 new products and received more than 2,400 new patents. 81 Many manufacturers make components or materials that enter final branded products but lose their individual identity. One of the few companies that avoided this fate is Intel. Intel's consumer-directed brand campaign convinced many personal computer buyers to buy only brands with “Intel Inside. ” As a result, major PC manufacturers—Dell, HP, Lenovo—typically purchase their chips from Intel at a premium price rather than buy equivalent chips from an unknown supplier. Westin has successfully built an ingredient brand around their “Heavenly Bed” innovation. Source: © David L. Moore-CA/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
412 PART 5 | CRe ATing V Alue What are the requirements for successful ingredient branding?82 1. Consumers must believe the ingredient matters to the performance and success of the end product. Ideally, this intrinsic value is easily seen or experienced. 2. Consumers must be convinced that not all ingredient brands are the same and that the ingredient is superior. 3. A distinctive symbol or logo must clearly signal that the host product contains the ingredient. Ideally, this symbol or logo functions like a “seal” and is simple and versatile, credibly communicating quality and confidence. 4. A coordinated “pull” and “push” program must help consumers understand the advantages of the branded ingredient. Channel members must offer full support such as consumer advertising and promotions and— sometimes in collaboration with manufacturers—retail merchandising and promotion programs. Packaging, Labeling, Warranties, and Guarantees Some product packages—such as the Coke bottle and Red Bull can—are world famous. Many marketers have called packaging a fifth P, along with price, product, place, and promotion. Most, however, treat packaging and labeling as an element of product strategy. Warranties and guarantees can also be an important part of the product strategy and often appear on the package. Packa GIn G Packaging includes all the activities of designing and producing the container for a product. Packages might have up to three layers. Cool Water by Davidoff For Men cologne comes in a bottle ( primary package ) inside a cardboard box ( secondary package ), shipped in a corrugated box ( shipping package ) containing six dozen bottles in cardboard boxes. Packaging is important because it is the buyer's first encounter with the product. A good package draws the consumer in and encourages product choice. In effect, it can act as a “five-second commercial” for the product. It also affects consumers' later product experiences when they open it and use what's inside. Some packages can even be attractively displayed at home. Distinctive packaging like that for Kiwi shoe polish, Altoids mints, and Absolut vodka is an important part of a brand's equity. Several factors contribute to the growing use of packaging as a marketing tool. Self-service. In an average supermarket, which may stock 15,000 items, the typical shopper passes some 300 products per minute. Given that 50 percent to 70 percent of all purchases are made in the store, the effective package must perform many sales tasks: attract attention, describe the product's features, create consumer confidence, and make a favorable overall impression. Consumer affluence. Rising affluence means consumers are willing to pay a little more for the convenience, appearance, dependability, and prestige of better packages. Company and brand image. Packages contribute to instant recognition of the company or brand. In the store, they can create a billboard effect, as Garnier Fructis does with its bright green packaging in the hair care aisle. Innovation opportunity. Unique or innovative packaging can bring big benefits to consumers and profits to producers. Companies are always looking for a way to make their products more convenient and easier to use—often charging a premium when they do so. The SC Johnson Smart Twist Cleaning System has a hand-held sprayer and carousel that rotates between concentrated versions of three different cleaning products; Kleenex hand towels use a dispenser that fits upside down in a bathroom towel rack; and Kiwi Express Shine shoe polish has a dispenser and applicator to shine shoes without the need to spread newspaper, wear a glove, or use a brush. 83 Formally, packaging must achieve a number of objectives: 1. Identify the brand. 2. Convey descriptive and persuasive information. 3. Facilitate product transportation and protection. 4. Assist at-home storage. 5. Aid product consumption. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 413 To achieve these objectives and satisfy consumers' desires, marketers must choose the functional and aesthetic components of packaging correctly. Functionally, structural design is crucial. The packaging elements must harmonize with each other and with pricing, advertising, and other parts of the marketing program. Aesthetic considerations relate to a package's size and shape, material, color, text, and graphics. Color is a particularly important aspect of packaging and carries different meanings in different cultures and market segments. As one expert says, “Color is all-pervasive. It is language-neutral, but loaded with meaning. It's completely overt, yet each person sees color through different eyes, both literally and figuratively. ”84 Color can define a brand, from Tiffany's blue box to Cadbury's purple wrapping and UPS's brown trucks. Orange, the telecom mobile operator, uses color as both its name and its look. Table 13. 3 summarizes the beliefs of some visual marketing experts about the role of color in Western culture. Tiffany's brand is defined in part by its iconic Tiffany Blue packaging. Source: © Simon Lord/Alamy table 13. 3 The Color Wheel of Branding and Packaging Red symbolizes excitement, energy, passion, courage, and being bold. Orange connotes friendliness and fun. It combines the energy of red and the warmth of yellow. Yellow, as the color of the sun, is equated with warmth, joy, and happiness. Green, as the color of nature, connotes health, growth, freshness, and renewal. Blue, as the color of the sky and sea, is associated with dependability, trust, competence, and integrity. Purple has symbolized nobility, wealth, and wisdom. It combines the stability of blue and the energy of red. Pink is considered to have soft, peaceful, comforting qualities. Brown, as the color of the earth, connotes honesty and dependability. Black is seen as classic, strong, and balanced. White connotes purity, innocence, and cleanliness. Sources: Elisabeth Sullivan, “Color Me Profitable,” Marketing New s, October 15, 2008, p. 8; “Color Meaning,” www. color-wheel-pro. com, accessed June 2, 2014; Melissa Stanger, “How Brands Use the Psychology of Color to Manipulate You,” Business Insider, December 29, 2012; The Logo Company, “Color Emotion Guide,” www. thelogocompany. net/blog/infographics/psychology-color-logo-design, January 13, 2013; Lauren Labrecque and George R. Milne, “Exciting Red and Competent Blue: the Importance of Color in Marketing,” Journal of Academy of Marketing Science 40 (September 2012), pp. 711-27. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
414 PART 5 | CRe ATing V Alue Packaging updates and redesigns can occur frequently to keep the brand contemporary, relevant, or practical. Although these changes can have immediate impact on sales, they also can have a downside, as Pepsi Co learned for its Tropicana brand. 85 tr OPicana Pepsi Co experienced great success with its Tropicana brand, acquired in 1998. Then in 2009, the company launched a redesigned package to “refresh and modernize” the brand. The goal was to create “emotional attachment by 'heroing' the juice and trumpeting the natural fruit goodness. ” Arnell Group led the extreme makeover, which led to an entirely new look, downplaying the brand name, highlighting the phrase “100 percent orange pure & natural,” and replacing the “straw in an orange” graphic on the front with a close-up of a glass of orange juice. Consumer response was swift and negative. The package was deemed “ugly” or “stupid,” and some even confused the product with a store brand. Sales dropped 20 percent. After only two months, Pepsi Co management announced it would revert to the old packaging. After the company designs its packaging, it must test it. Engineering tests ensure that the package stands up under normal conditions; visual tests, that the script is legible and the colors harmonious; dealer tests, that dealers find the packages attractive and easy to handle; and consumer tests, that buyers will respond favorably. Although developing effective packaging may require several months and several hundred thousand dollars, companies must consider growing environmental and safety concerns about excess and wasteful packaging. Fortunately, as discussed above, many firms have gone “green” and are finding creative new ways to package their wares. Dell introduced bamboo packaging as an alternative to corrugated cardboard, foam, molded paper pulp, and plastic and took other steps to reduce the overall volume of packaging used. 86 Developmental environmentally friendly packaging that also satisfies customers' needs can be challenging, as Frito-Lay found out. 87 sun c Hi Ps Frito-Lay's Sun Chips multigrain snacks, containing 30 percent less fat than potato chips, have succeeded as a healthier, “good for you” snack option. Part of the firm's effort to also support a “healthier planet” was to to run its factory in Modesto on solar power and unveil a novel 100 percent compostable bag made of plant-based materials. Much research went into the development of the bag, and it was launched with fanfare in 2010. Unfortunately, it included polymers that made it “kind of crispy and crunchy” at room temperature, and consumers began to complain about how noisy it was. One Air Force pilot said it was louder than the cockpit of his jet. To prove his point, he squeezed the new Sun Chips bag and recorded a 95-decibel level with a sound meter, considerably more than the 77-decibel level recorded when he squeezed a conventional Tostitos bag. When thousands of people chose to friend a Facebook page called “Sorry But I Can't Hear You Over This Sun Chips Bag”—and with sales sliding—Frito-Lay decided to drop the bag after an 18-month run. La Be LIn G The label can be a simple attached tag or an elaborately designed graphic that is part of the package. It might carry a great deal of information, or only the brand name. Even if the seller prefers a simple label, the law may require more. A label performs several functions. First, it identifies the product or brand—for instance, the name Sunkist stamped on oranges. It might also grade the product; canned peaches are grade-labeled A, B, and C. The label might describe the product: who made it, where and when, what it contains, how it is to be used, and how to use it safely. Finally, the label might promote the product through attractive graphics. Advanced technology allows 360-degree shrink-wrapped labels to surround containers with bright graphics and accommodate more product information, replacing glued-on paper labels. Labels eventually need freshening up. The label on Ivory soap has been redone at least 18 times since the 1890s, with gradual changes in the size and design of the letters. As Tropicana found out (see above), companies with labels that have become icons need to tread very carefully in order to preserve key branding elements when under-taking a redesign. A long history of legal concerns surrounds labels and packaging. In 1914, the Federal Trade Commission Act held that false, misleading, or deceptive labels or packages constitute unfair competition. The Fair Packaging and Labeling Act, passed by Congress in 1967, set mandatory labeling requirements, encouraged voluntary industry packaging standards, and allowed federal agencies to set packaging regulations in specific industries. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 415 The Food and Drug Administration (FDA) has required processed-food producers to include nutritional labeling that clearly states the amounts of protein, fat, carbohydrates, and calories contained in products, as well as vitamin and mineral content as a percentage of the recommended daily allowance. 88 The FDA has also taken action against potentially misleading uses of such descriptions as “light, ” “high fiber, ” and “low fat. ” Not all countries apply such strict definitions. In the United Kingdom, “light” and “lite” do not have an official meaning in law, though “low fat” does—the food product must be less than 3 percent fat to qualify. As a result, some foods branded “light” there have been found to contain up to seven times more fat than those described as “low fat. ”89 warrant Ies and Guarantees All sellers are legally responsible for fulfilling a buyer's normal or reasonable expectations. Warranties are formal statements of expected product performance by the manufacturer. Products under warranty can be returned to the manufacturer or designated repair center for repair, replacement, or refund. Whether expressed or implied, warranties are legally enforceable. Extended warranties and service contracts can be extremely lucrative for manufacturers and retailers. Analysts estimate that warranty sales have accounted for a large percentage of Best Buy's operating profits. 90 Despite evidence that extended warranties do not pay off for them, some consumers value the peace of mind. 91 These warranties still generate multibillion dollars in revenue for electronic goods in the United States, though the total has declined as consumers have become more comfortable seeking solutions to technical problems online or from friends. 92 Many sellers offer either general or specific guarantees. A company such as Procter & Gamble promises general or complete satisfaction without being more specific—“If you are not satisfied for any reason, return for replace-ment, exchange, or refund. ” A. T. Cross guarantees its Cross pens and pencils for life. The customer mails the pen to A. T. Cross (mailers are provided at stores), and the pen is repaired or replaced at no charge. Guarantees reduce the buyer's perceived risk. They suggest that the product is of high quality and the company and its service performance are dependable. They can be especially helpful when the company or product is not well known or when the product's quality is superior to that of competitors. Hyundai's and Kia's highly successful 10-year or 100,000-mile power train warranty programs were designed in part to assure potential buyers of the quality of the products and the companies' stability. equipment), and supplies and business services (operating supplies, maintenance and repair items, maintenance and repair services, and business advisory services). 4. Brands can be differentiated on the basis of product form, features, performance, conformance, durability, reliability, repairability, style, customization, and design, as well as such service dimensions as ordering ease, delivery, installation, customer training, customer con-sulting, and maintenance and repair. 5. Design is the totality of features that affect how a product looks, feels, and functions. A well-designed product offers functional and aesthetic benefits to consumers and can be an important source of differentiation. 6. Luxury brands command price premiums and often have a strong lifestyle component. They can require some special considerations in how they are sold. Summary 1. Product is the first and most important element of the marketing mix. Product strategy calls for making coordinated decisions on product mixes, product lines, brands, and packaging and labeling. 2. In planning its market offering, the marketer needs to think through the five levels of the product: the core benefit, the basic product, the expected product, the augmented product, and the potential product, which encompasses all the augmentations and transforma-tions the product might ultimately undergo. 3. Products can be nondurable goods, durable goods, or services. In the consumer-goods category are con-venience goods (staples, impulse goods, emergency goods), shopping goods (homogeneous and hetero-geneous), specialty goods, and unsought goods. The industrial-goods category has three subcategories: materials and parts (raw materials and manufactured materials and parts), capital items (installations and | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
416 PART 5 | CRe ATing V Alue 7. Products and their packaging must be designed to reduce adverse environmental impact as much as possible. 8. Most companies sell more than one product. A product mix can be classified according to width, length, depth, and consistency. These four dimensions are the tools for developing the company's marketing strategy and deciding which product lines to grow, maintain, harvest, and divest. To analyze a product line and decide how many resources to invest in it, product line managers need to look at sales and profits and market profile. 9. A company can change the product component of its marketing mix by lengthening its product via line stretching (down-market, up-market, or both) or line fill-ing, by modernizing its products, by featuring certain products, and by pruning its products to eliminate the least profitable. 10. Brands are often sold or marketed jointly with other brands. Ingredient brands and co-brands can add value, assuming they have equity and are perceived as fitting appropriately. 11. Physical products must be packaged and labeled. Well-designed packages can create convenience value for customers and promotional value for producers. Warranties and guarantees can offer further assurance to consumers. Applications Marketing Debate With Products, Is It Form or Function? The “form vs. function” debate applies in many arenas, including marketing. Some marketers believe product performance is the be-all and end-all. Other marketers maintain that the look, feel, and other design elements of products are what really make the difference. Take a position: Product performance is the key to brand success versus Product aesthetics are the key to brand success. Marketing Discussion: Product and Service Differentiation Consider the many means of differentiating products and services. Which ones have the most impact on your choices? Why? Can you think of certain brands that excel on a number of these means of differentiation? protected the skin so that it stayed white as snow—the ideal of female beauty in Europe at the beginning of the last century. By 1914, the company had already generated 42 percent of their sales outside of Germany and was doing business in 34 countries. Fourteen years after its market introduction, Nivea underwent what we would today call a relaunch. Before 1925, Nivea crème was sold in an off-white tin with the brand name written in green cursive lettering. With the re-launch, the package design was modernized. The dye of the tin was changed to blue, a color that is today Marketing Excellence >> Nivea In 1882, pharmacist Paul C. Beiersdorf established his company with a patent for medical plasters. Beiersdorf sold his company to Oscar Troplowitz in 1890. By 1911, Oscar Troplowitz had developed the world's first stable skin cream based on a water-in-oil emulsion. He named the product Nivea, derived from the Latin words nix, nivis, meaning “snow” or “of snow. ” With this brand name, the core benefit of Nivea was being highlighted: Nivea My Marketing Lab Go to mymktlab. com to complete the problems marked with this icon as well as for additional assisted-graded writing questions. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 417 lotion packages was reshaped. It is now tilted toward the user, and has a more inviting look and feel. Nivea for Men was renamed Nivea Men to strengthen the brand's position in the fast growing market for men's cosmetics. Also, the product line of Nivea was rearranged. Several products and categories, that were less successful and not enough in sync with the brand's slightly reshaped core values—trust, care, and closeness—were abandoned. All in all, the product port-folio was reduced by approximately 25 percent, especially in over-segmented categories like deodorants. Beauty was dropped as an additional core value of the brand that had been added in the 1990s. Consistently, makeup products were withdrawn from the product line. But the innovation process still continued. With In-Shower Body Moisturizer, Nivea introduced a highly innovative and suc-cessful product to be used on wet skin that is faster and more convenient to use than traditional body lotion. Today, Nivea is one of the strongest face care brands. Around 30 percent of all women around the world use Nivea products. The global brand awareness for Nivea is 93 percent. Nivea is the market leader in the skin care segment in 46 countries, and has repeatedly been voted the Most Trusted Skin Care Brand by consumers in 12 European countries. Questions 1. What were the key steps in maintaining Nivea's lead-ing position in the global facial care market? 2. Explain the connection between cultural norms and product choice. What is Nivea's strategy in respect-ing cultural diversity while pursuing a global brand strategy? 3. Discuss Nivea's future. What should Beiersdorf do next with its product line? Where is the future growth for the brand? Sources: Gregor Kessler, “Neue Rezeptur,” Capital, October 18, 2012; Michael Brandtner, “Innovation & Branding,” A3BOOM, September 25, 2014; Frauke Schobelt, “Weltweit neues Design: Beiersdorf adelt die Dose,” w&v, January 15, 2013; Beiersdorf, www. beiersdorf. com; Nivea, www. nivea. com. associated with the brand, and the typography was changed to a more modern font. Furthermore, the po-sitioning strategy was switched to keep up with the social changes of that time. Nivea now allowed its con-sumers to get a “healthy suntan” to reflect the changed ideals of beauty. After a difficult period during World War II, Beiersdorf started anew. In many countries, the Nivea trademarks were lost since they had been seized by the victorious nations. Soon after the war, Beiersdorf started buying back the trademarks. In 1963, it intro-duced innovative products like the world's first “liquid cream,” Nivea Milk. With Nivea Men After Shave Balsam, Beiersdorf introduced in 1980 the first aftershave prod-uct that soothed the skin. By the 1990s, Nivea was the world's leading skin care brand with a standardized global brand policy. It had expanded its product line into new areas, like makeup, men's facial crème, and deodorants. In only 10 years after standardizing its global brand policy, sales had quadrupled and Nivea became Beiersdorf's largest brand. But not all product line exten-sions were successful and several of the company's inter-national ventures were failures. The purchase of C-Bons in 2007, China's number two hair care brand, was a flop. Even in Western Europe, Nivea sales dropped for several years in a row. Nevertheless, Nivea continued its inter-national expansion strategy with a series of local product adaptations while the brand appearance was standard-ized. In Asian countries, for example, facial products sold much better since they contained ingredients promot-ing a fair complexion whereas in the Middle East local fragrances like musk were used. In 2011, Beiersdorf started to restructure Nivea's product portfolio and brand appearance. Above all, Nivea's current square logo was redesigned to resemble the classic Nivea logo. It now mirrors the famous tin packaging with a round blue logo with the brand name Nivea placed prominently in the middle. All Nivea products underwent these logo changes to reconnect the brand to its core product, Nivea crème. Tests showed that with the new logo Nivea's visibility at the points of purchase had improved. In addition, the package design of most Nivea products was changed. For example, the cap of all body | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
418 PART 5 | CRe ATing V Alue learned this market wanted more personalization, the company now builds the car “mono-spec” at the factory, with just one well-equipped trim level, letting customers choose from dozens of customization elements at dealer-ships. Toyota marketed the Scion at music events and has showrooms where “young people feel comfortable hanging out and not a place where they just go stare at a car,” said Scion Vice President Jim Letz. Another big reason behind Toyota's success is its mastery of lean manufacturing and continuous improve-ment. Its plants can make as many as eight models at the same time, bringing huge increases in productivity and market responsiveness. The company also relent-lessly innovates; a typical Toyota assembly line makes thousands of operational changes in a year. Employees see their purpose as threefold: making cars, making cars better, and teaching everyone how to make cars better. The company encourages problem solving, always look-ing to improve the process by which it improves all other processes. Toyota has integrated its assembly plants around the world into a single giant network that can custom-ize cars for local markets and shift production quickly to meet surges in demand from markets worldwide. The company is thus able to fill market niches inexpensively as they emerge, without building whole new assembly operations. “If there's a market or market segment where they aren't present, they go there,” said Tatsuo Yoshida, auto analyst at Deutsche Securities Ltd. Over the years, Toyota automobiles have consistently ranked high in quality and reliability. In 2009 and 2010, however, the company recalled more than 8 million cars for potential perceived problems ranging from sticking accelerator pedals to sudden acceleration to software glitches in the braking system. The Lexus, Prius, Camry, Corolla, and Tundra brands were all affected. Next, Toyota lost billions of dollars when an earthquake and tsunami in Japan destroyed the company's plants and parts suppliers in 2011. TMC President Akio Toyoda said, “We have faced many challenges since 2009, but have learned valuable lessons including the need for Toyota to maintain sustainable growth. ” Despite these challenges, Toyota recouped its losses. Its strong focus on hybrid vehicles has proved profitable and helped the company rebound. It sold its 4 millionth unit in 2012 and plans to continue to innovate hybrids, believing “there are many more gains we can achieve with hybrids. ” Today, Toyota offers a full line of cars for Marketing Excellence >> Toyota The world's largest automaker, Toyota has come a long way in its nearly 80-year history. The company launched its first passenger car, the Model AA, in 1936, copying the body design of Chrysler's landmark Airflow and the engine of a 1933 Chevrolet. Toyota then suf-fered several challenges, including a financial crisis in 1950. However, when consumers wanted smaller, more fuel-efficient automobiles during the 1973 oil cri-sis, the company responded. The Toyota Corona and Toyota Corolla offered basic features and acted as the company's new entry-level cars. Toyota also launched the Cressida, with the fuel efficiency consumers desired but space and amenities like air conditioning and AM-FM radio. During the 1980s and 1990s, Toyota gradually added more models ranging in price, size, and features. In 1982, the company introduced the Camry—a four-door, mid-sized car that offered more space than the Corona and became the best-selling passenger car in North America. The first of the company's popular SUVs, the 4Runner, appeared in 1984 looking and acting much like a pickup truck. It later morphed into more of a passenger vehicle and led the way for the Rav4, Highlander, and Land Cruiser. Toyota also introduced a full-sized pickup truck—today's Tundra—and several sporty and afford-able cars that targeted young adults. In 1989, it launched Lexus, its luxury division, promis-ing an unparalleled experience starting with white-glove treatment at the dealership. Toyota understood, however, that each country defines luxury differently. In the United States, it meant comfort, size, and dependability; in Europe, attention to detail and brand heritage. As a result, the company varied its advertising depending on the country and culture. In 1997, Toyota launched the Prius, the first mass-produced hybrid car, for $19,995—between the Corolla and the Camry. The company's keen focus on develop-ing a clean-energy car was brilliantly timed. Before the second-generation Prius hit showrooms in 2002, deal-ers had already received 10,000 orders. Over the next decade, Ford, Nissan, GM, and Honda followed the Prius with models of their own. Toyota also started creating vehicles for specific target groups, like the Scion for young adults. Having | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Se TTing P Rodu CT STRAT egy | chapter 13 419 2. Has Toyota done the right thing by manufacturing a car brand for everyone? Why or why not? Sources: Martin Zimmerman, “Toyota's First Quarter Global Sales Beat GM's Preliminary Numbers,” Los Angeles Times, April 24, 2007; Charles Fishman, “No Satisfaction at Toyota,” Fast Company, December 2006-January 2007, pp. 82-90; Stuart F. Brown, “Toyota's Global Body Shop,” Fortune, February 9, 2004, p. 120; James B. Treece, “Ford Down; Toyota Aims for No. 1,” Automotive News, February 2, 2004, p. 1; Brian Bemner and Chester Dawson, “Can Anything Stop Toyota?,” Business Week, November 17, 2003, pp. 114-22; Tomoko A. Hosaka, “Toyota Counts Rising Costs of Recall Woes,” Associated Press, March 16, 2010; “World Motor Vehicle Production by Manufacturer,” OICA, July 2009; Chris Isidore, “Toyota Recall Costs: $2 Billion,” http://money. cnn. com, February 4, 2010; Associated Press, “Toyota Sells Most Cars despite China Slump,” July 26, 2013; Trefis Team, “Japan Quake, Tsunami Take Heavy Toll On Toyota,” Forbes, April 8, 2011; Mike Ramsey, “Toyota Calls Hybrids 'Sturdy Bridge' to Automotive Future,” Wall Street Journal, September 30, 2013; Toyota Motor Corporation 2013 Annual Report; www. toyota. com. the global market, from family sedans and sport utility vehicles to trucks and minivans. In 2013, the company earned more than 22 trillion yen (or $217 billion) and sold 8. 87 million automobiles, edging past General Motors to become the world's largest carmaker. Questions 1. Toyota has built a huge manufacturing capac-ity that can produce millions of cars each year for a wide variety of consumers. Why was it able to become so much bigger than any other auto manufacturer? | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
420 My Marketing Lab™ Improve Y our Grade! Over 10 million students improved their results using the Pearson My Labs. Visit mymktlab. com for simulations, tutorials, and end-of-chapter problems. In This Chapter, We Will Address the Following Questions 1. How can services be defined and classified, and how do they differ from goods? (p. 421) 2. What are the new services realities? (p. 428) 3. How can companies achieve excellence in services marketing? (p. 432) 4. How can companies improve service quality? (p. 439) 5. How can goods marketers improve customer-support services? (p. 440)USAA's legendary quality of service and continual innovation has created strong customer loyalty. Source: © Blend Images/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
421 14 Designing and Managing Services The Nature of Services The Bureau of Labor Statistics reports that the service-producing sector will continue to be the dominant employment generator in the future economy, adding about 18 million jobs between 2010 and 2018, or about 88 percent of the expected increase in total employment. By 2020, the goods-producing sector is expected to account for 11. 9 percent of total jobs, down from 12. 4 percent in 2010 and 16. 8 percent in 2000. Manufacturing lost a staggering 5. 7 million jobs from 2000 through 2010. 3 These numbers and others have led to a growing interest in the unique opportunities of marketing services. 4 Serv Ice Indu Str Ie S Are ever Ywhere The government sector, with its courts, employment services, hospitals, loan agencies, military services, police and fire departments, postal service, regulatory agencies, and schools, is in the service business. The private nonprofit sector— museums, charities, churches, colleges, foundations, and hospitals—is in the service business. A good part of the business sector, with its airlines, banks, hotels, insurance companies, law firms, management consulting firms, medical practices, motion picture companies, plumbing repair companies, and real estate firms, is in the service business. Many workers in the manufacturing sector, such as computer operators, accountants, and legal staff, are really service providers. In fact, they make up a “service factory” providing services to the As companies find it harder to differentiate their physical products, they turn to service differentiation, whether that means on-time delivery, better and faster response to inquiries, or quicker resolution of complaints. Top service providers know these advantages well and also how to create memorable customer experiences. 1 One service business that understands how to better satisfy customers' needs is USAA. 2 USAA Insurance sells auto and other insurance products to current and former members of the military and their families. The company has increased its share of each customer's business by launching a consumer bank, issuing credit cards, opening a discount brokerage, and offering no-load mutual funds. Its legendary quality of service has led to the highest customer satisfac-tion in the industry. USAA subscribers will often relate how the company looks out for them, even counseling them not to take out more insurance than they need. With such levels of trust, the company enjoys high customer loyalty and significant cross-selling opportunities. It cross-trains its call center reps to answer investment queries as well as insurance-related calls, increasing productivity and reducing the need to transfer customers between agents. With servicemen and women needing remote access to financial products earlier and more often than civilians, USAA has become a technological leader in the financial services industry. It was the first bank to allow i Phone deposits for its military customers and to conduct face-to-face video chats with soldiers in the field. Whether a customer is using a tablet, smart phone, or computer or visiting one of its financial centers—located mostly near military bases—USAA is committed to providing exemplary service. Because it is critical to understand the special nature of services and what that means to marketers, in this chapter we systematically analyze services and how to market them most effectively. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
422 PART 5 | CRe ATing V Alue “goods factory. ” And those in the retail sector, such as cashiers, clerks, salespeople, and customer service represen-tatives, are also providing a service. A service is any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product. Increasingly, manufactur-ers, distributors, and retailers are providing value-added services, or simply excellent customer service, to differentiate themselves. Many pure service firms are now using the Internet to reach customers; some operate purely online. c Ate Gor Ie S of Serv Ice M Ix The service component can be a minor or a major part of the total offering. We distinguish five categories of offerings: 1. A pure tangible good such as soap, toothpaste, or salt with no accompanying services. 2. A tangible good with accompanying services, like a car, computer, or cell phone, with a warranty or special-ized customer service contract. Typically, the more technologically advanced the product, the greater the need for high-quality supporting services. 3. A hybrid offering, like a restaurant meal, of equal parts goods and services. People patronize restaurants for both the food and its preparation. 4. A major service with accompanying minor goods and services, like air travel with supporting goods such as snacks and drinks. This offering requires a capital-intensive good—an airplane—for its realization, but the primary item is a service. 5. A pure service, primarily an intangible service, such as babysitting, psychotherapy, or massage. Restaurants are good examples of hybrid offerings combining products and services. One of the more success-ful restaurant brands is Panera Bread. 5 Panera Bread Founded by Ron Shaich as a Boston bakery called the Cookie Jar in 1980, Panera Bread has emerged over time as a leader, with Chipotle, in the “fast casual” restaurant category. Panera combines the speed and convenience of fast food with the quality and menu variety of waiter-service dining. The chain targets “food people who understand and respond to food or those on the verge of that” by selling fresh “real” food at full prices customers are more than willing to pay. An unpretentious atmosphere—no table service, but no time limit—encourages customers to linger. The brand is seen as family-oriented but also sophisticated, offering fresh-baked artisan bread and a full menu of healthy, good-tasting sandwiches, salads, soups, and breakfast foods. Panera has innovated in a number of different ways, infusing a strong social conscience in much that it does. With the slogan “Live Consciously. Eat Deliciously,” CMO Michael Simon leads a number of social and community initiatives such as the Panera Bread Foundation, collabora-tions with Feeding America, and donations to local hunger relief agencies and charities. The company has opened five “pay-what-you-can” Panera Cares stores. In other marketing areas, it has boosted its digital spend and boasts a loyalty program with 14 million members, accounting for almost half its transactions. The range of service offerings makes it difficult to generalize without a few further distinctions. Services are equipment-based (automated car washes, vending machines) or people-based (window washing, accounting services). People-based services vary by whether unskilled, skilled, or professional workers provide them. Service companies can choose among different processes to deliver their service. Restaurants offer cafeteria-style, fast-food, buffet, and candlelight service formats. Some services need the client's presence. Brain surgery requires the client's presence; a car repair does not. If the client must be present, the service provider must be considerate of his or her needs. Thus beauty salon operators will invest in décor, play background music, and engage in light conversation with the client. Services may meet a personal need (personal services) or a business need (business services). Service providers typically develop different marketing programs for these markets. Service providers differ in their objectives (profit or nonprofit) and ownership (private or public). These two characteristics, when crossed, produce four quite different types of organizations. The marketing programs of a private investor hospital will differ from those of a private charity hospital or a Veterans Administration hospital. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 423 Customers typically cannot judge the technical quality of some services even after they have received them. Figure 14. 1 shows various products and services according to difficulty of evaluation. 6 At the left are goods high in search qualities —that is, characteristics the buyer can evaluate before purchase. In the middle are goods and services high in experience qualities —characteristics the buyer can evaluate after purchase. At the right are goods and services high in credence qualities —characteristics the buyer normally finds hard to evaluate even after consumption. 7 Because services are generally high in experience and credence qualities, there is more risk in their purchase, with several consequences. First, service consumers generally rely on word of mouth rather than advertising. Second, they rely heavily on price, provider, and physical cues to judge quality. Third, they are highly loyal to service providers who satisfy them. Fourth, because switching costs are high, consumer inertia can make it chal-lenging to entice business away from a competitor. Although customer loyalty can be strong with services, in today's modern communications environment, a ser-vice failure can be a PR nightmare and undermine that loyalty, as Carnival Cruises found. 8 A leader in the “fast casual” restaurant category, Panera Bread has also opened some “pay-what-you-can” Panera Cares stores. Source: © ZUMA Press, Inc. /Alamy Clothing Easy to Evaluate Most goods High in Search Qualities Difficult to Evaluate Jewelry Furniture Houses Automobiles Restaurant meals Vacation Haircuts Child care Television repair Legal services Root canal Auto repair Medical diagnosis High in Credence Qualities High in Experience Qualities Most services| Fig. 14. 1 | Continuum of Evaluation for Different Types of Products Source: Valarie A. Zeithaml, “How Consumer Evaluation Processes Differ between Goods and Services,” James H. Donnelly and William R. George, eds., Marketing of Services (Chicago: American Marketing Association, 1981). Reprinted with permission of the American Marketing Association. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
424 PART 5 | CRe ATing V Alue Carni Va L The Carnival Triumph was on the third day of a four-day cruise from Galveston, Texas, to Mexico when an engine room fire set the boat adrift and disabled, leaving 3,100 passengers with little access to food, water, and toilets. Waste spilled into the hallways, and decks below became insufferably hot. When the boat returned to shore after a long five days, the CEO greeted passengers as they disembarked, given them each $500, a free flight home, a refund for the trip, and credit for another cruise. Nevertheless, given the publicity surrounding what the media called the “poop cruise,” the damage had been done. Public opinion of cruises as a whole dropped. Carnival found its bookings declining by a hefty 20 percent, forcing the company to pass along steep discounts to fill boats. To avoid future problems, the cruise line invested $600 million to upgrade its fleet and hired a new VP of Technical Operations to oversee its safety initiatives. d ISt Inct Ive ch Ar Acter ISt Ic S of Serv Ice S Four distinctive service characteristics greatly affect the design of marketing programs: intangibility, inseparabil-ity, variability, and perishability. 9 Intang Ib Il Ity Unlike physical products, services cannot be seen, tasted, felt, heard, or smelled before they are bought. A person getting cosmetic surgery cannot see the results before the purchase, and the patient in the psychiatrist's office cannot know the exact outcome of treatment. To reduce uncertainty, buyers will look for evidence of quality by drawing inferences from the place, people, equipment, communication material, symbols, and price. Therefore, the service provider's task is to “manage the evidence, ” to “tangibilize the intangible. ”10 Service companies can try to demonstrate their service quality through physical evidence and presentation. 11 Suppose a supermarket wants to position itself as the “fast” supermarket. It could make this positioning strategy tangible through any number of marketing tools: 1. Place —The layout of the checkout area and the traffic flow should be planned carefully. Waiting lines should not get overly long. 2. People —Checkout staff should be busy, but there should be a sufficient number to manage the workload. 3. Equipment —UPC scanners, credit card readers, and electronic registers should all be state of the art. 4. Communication material —signage and brochures—text and photos—should suggest efficiency and speed. 5. Symbols —The supermarket's name and symbol could suggest fast service, for instance, “Speedy Shop. ” 6. Price —The supermarket could advertise a $10 rebate if customers have to wait in line more than five minutes. Disney is a master at “tangibilizing the intangible” and creating magical fantasies in its theme parks; so are retailers such as Toys “R” Us and Bass Pro Shops. 12 Table 14. 1 measures brand experiences along sensory, affective, behavioral, and intellectual dimensions. Applications to services are clear. An on-board disaster on one of Carnival's cruise ships created longer-term problems for the company. Source: © Greg Balfour Evans/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 425 Because there is no physical product, the service provider's facilities—its primary and secondary signage, environmental design and reception area, employee apparel, collateral material, and so on—are especially important. All aspects of the service delivery process can be branded, which is why Allied Van Lines is con-cerned about the appearance of its drivers and laborers, why UPS has developed such strong equity with its brown trucks, and why Doubletree by Hilton hotels offers fresh-baked chocolate chip cookies to symbolize care and friendliness. Service providers often choose brand elements—logos, symbols, characters, and slogans—to make the service and its key benefits more tangible—for example, the “friendly skies” of United, the “good hands” of Allstate, and the “bullish” nature of Merrill Lynch. Inseparab Il Ity Whereas physical goods are manufactured, then inventoried, then distributed, and later consumed, services are typically produced and consumed simultaneously. 13 A haircut can't be stored— or produced without the barber. The provider is part of the service. Because the client is also often present, provider-client interaction is a special feature of services marketing. Buyers of entertainment and professional services are very interested in the specific provider. It's not the same concert if Taylor Swift is indisposed and replaced by Beyoncé or if a corporate legal defense is supplied by an intern because antitrust expert David Boies is unavailable. When clients have strong provider preferences, the provider can raise its price to ration its limited time. Several strategies exist for getting around the limitations of inseparability. The service provider can work with larger groups. Some psychotherapists have moved from one-on-one therapy to small-group therapy to groups of more than 300 people in a large hotel ballroom. The service provider can work faster—the psychotherapist can spend 30 more efficient minutes with each patient instead of 50 less-structured minutes and thus see more patients. The service organization can train more service providers and build up client confidence, as H&R Block has done with its national network of trained tax consultants. Var Iab Il Ity Because the quality of services depends on who provides them, when and where, and to whom, services are highly variable. Some doctors have an excellent bedside manner; others are less empathetic. Service firms know that variability in their performance puts them at risk. Hilton initiated a major program to create more uniformity in guest experiences. 14table 14. 1 Dimensions of Brand Experience Sensory This brand makes a strong impression on my visual sense or other senses. I find this brand interesting in a sensory way. This brand does not appeal to my senses. Affective This brand induces feelings and sentiments. I do not have strong emotions for this brand. This brand is an emotional brand. Behavioral I engage in physical actions and behaviors when I use this brand. This brand results in bodily experiences. This brand is not action-oriented. Intellectual I engage in a lot of thinking when I encounter this brand. This brand does not make me think. This brand stimulates my curiosity and problem solving. Source: Joško Brakus, Bernd H. Schmitt, and Lia Zarantonello, “Brand Experience: What Is It? How Is It Measured? Does It Affect Loyalty?,” Journal of Marketing 73 (May 2009), pp. 52-68. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
426 PART 5 | CRe ATing V Alue Hi Lt On HOte Ls Between 1964 when Hilton Hotels sold its foreign licensee Hilton International Co. and 2006 when it bought it back, the two companies operated largely independently, and as a result, the Hilton brand was no longer providing customers with a uniform high-quality experience. Nomura research analyst Harry Curtis said, “The brand standards in Europe were always very different from those in the U. S. I think they were, quite frankly, a bit slacker in Europe. ” Chris Nassetta, appointed CEO in 2008, initiated H360, a project to review everything from breakfast fare to bath amenities, the décor of lobbies, Wi-Fi service, hotel architecture, and handling of customer complaints at all the company's hotels. Nassetta said, “There was a huge amount of inconsistency in the granular standards that travelers care about. ” As a result of H360, independent owners of Hilton-branded hotels in the United States and abroad have been forced to upgrade to Hilton standards where necessary or be dropped from the Hilton system. Protecting the brand seems to have served the company well—by 2010, the company had the highest brand equity of nearly 40 hotel chains. Service buyers are aware of potential variability and often talk to others or go online to collect information before selecting a specific service provider. To reassure customers, some firms offer service guar-antees that may reduce consumer perceptions of risk. 15 Here are three steps service firms can take to increase quality control. 1. Invest in good hiring and training procedures. Recruiting the right employees and giving them excellent training are crucial, whether they are highly skilled professionals or low-skilled work-ers. Better-trained people exhibit six characteristics that improve service quality: competence, courtesy, credibility, reliability, re-sponsiveness, and communication skill. 2. Standardize the service-performance process throughout the organization. A service blueprint can map out the service process, the points of customer contact, and the evidence of service from the customer's point of view. 16 Figure 14. 2 shows a service blueprint for an overnight guest at a hotel. 17 Behind the scenes, the hotel must skillfully help the guest move from one step to the next. Service blueprints can be helpful in identifying potential “pain points” for custom-ers, developing new services, supporting a zero-defects culture, and devising service recovery strategies. 3. Monitor customer satisfaction. Employ suggestion and complaint systems, customer surveys, and third-party comparison shopping. Customer needs may vary in different areas, allowing firms to develop region-specific customer satisfaction programs. 18 Firms can also develop customer information databases and systems for more personalized service, especially online. 19 Service firms can also design marketing communication and information programs so consumers learn more about the brand than what their subjective experience alone tells them. per Ishab Il Ity Services cannot be stored, so their perishability can be a problem when demand fluctuates. To accommodate rush-hour demand, public transportation companies must own more equipment than if demand was even throughout the day. Some doctors charge patients for missed appointments because the service value (the doctor's availability) exists only at the time of the appointment. Demand or yield management is critical—the right services must be available to the right customers at the right places at the right times and right prices to maximize profitability. Several strategies can produce a better match between service demand and supply. 20 On the demand (customer) side: Differential pricing will shift some demand from peak to off-peak periods. Examples include low matinee movie prices and weekend discounts for car rentals. 21 Nonpeak demand can be cultivated. Mc Donald's pushes breakfast service, and hotels promote minivacation weekends. Hilton's H360 program created higher and more uniform service standards for its properties all over the world. Source: © Stock Images/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 427 Complementary services can provide alternatives to waiting customers, such as cocktail lounges in restaurants and automated teller machines in banks. Reservation systems are a way to manage the demand level. Airlines, hotels, and physicians employ them extensively. On the supply side: Part-time employees can serve peak demand. Colleges add part-time teachers when enrollment goes up; stores hire extra clerks during holiday periods. Peak-time efficiency routines can allow employees to perform only essential tasks during peak periods. Paramedics assist physicians during busy periods. Increased consumer participation frees service providers' time. Consumers fill out their own medical records or bag their own groceries. Shared services can improve offerings. Several hospitals can share medical-equipment purchases. Facilities for future expansion can be a good investment. An amusement park might buy surrounding land for later development. For fast-food chains, drive-through windows are a way to expand selling opportunities beyond sit-down meals. An impressive 70 percent of revenue for the fast-food industry comes via drive-through windows. According to QSR magazine, Taco Bell operates some of the fastest and most accurate drive-through windows. The company aims for 3 minutes and 30 seconds per order and is constantly looking at ways to shave seconds and cut costs. 22 Arrive at Hotel Give Bags to Bellperson Check In Greet and Take Bags Process Registration Go to Room Sleep Shower Deliver Bags Call Room Service Receive Food Take Bags to Room Take Food Order Registration System Prepare Food Registration System Eat Check Out and Leave Deliver Food Process Check Out Hotel Exterior Parking Cart for Bags Desk Registration Papers Lobby Key Elevators Hallways Room Care for Bags Room Amenities Bath Menu Delive ry Tray Food Appearance Food Bill Desk Lobby Hotel Exterior Parking Receive Bags Line of Interaction Line of Visibility Line of Internal Interaction | Fig. 14. 2 | Blueprint for Overnight Hotel Stay Source: Valarie Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating Customer Focus across the Firm, 4th ed. (New York: Mc Graw-Hill, 2006). | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
428 PART 5 | CRe ATing V Alue The New Services Realities Service firms once lagged behind manufacturers in their understanding and use of marketing because they were small or they faced large demand or little competition. This has certainly changed. Some of the most skilled mar-keters now are service firms. One that wins consistent praise for its brand-building success is Singapore Airlines. 23 singa POre air Lines Singapore Airlines (SIA) has been consistently recognized as the world's “best” airline, in large part due to its stellar marketing. The carrier wins so many awards, it has to update its Web site monthly to keep up to date. Famous for pampering passengers, it continually strives to create a “wow effect” and surpass customers' expectations. SIA was the first to launch on-demand entertainment systems in all classes, Dolby sound systems, and a book-the-cook service that allows business-and first-class passengers to order meals before boarding. Thanks to a first-of-its-kind $1 million simulator the airline built to mimic the air pressure and humidity inside a plane, it found that taste buds change in the air and that, among other things, it needed to cut back on spices in its food. New SIA recruits receive four months of training, twice the industry average, and existing staff get nearly three weeks of refresher training a year (costing $70 million). With its stellar reputation, the carrier attracts some of the best local graduates and staffs each flight with more attendants and other cabin crew members than other airlines. SIA applies a 40-30-30 rule: 40 percent of resources go to training and motivating staff, 30 percent to reviewing process and procedures, and 30 percent to creating new product and service ideas. A Sh Ift In G cu Sto Mer rel At Ion Sh Ip Because U. S. consumers generally have high expectations about service delivery, they often feel their needs are not being adequately met. A 2013 Forrester study asked consumers to rate 154 companies on how well they met their needs and how easy and enjoyable they were to do business with. Almost two-thirds of the companies were rated only “OK, ” “poor, ” or “very poor. ” Retail and hotel companies were rated the highest on average, and Internet, health service, and television service providers were rated the worst. The highest-ranking companies were Marshalls, USAA (bank), Amazon. com, Kohl's, Target, Courtyard by Marriott, Sam's Club, Rite Aid, Costco, Lowe's, TJ Maxx, JCPenney, and Marriott Hotels & Resorts. 24 Service providers receive low marks for many reasons. Customers complain about inaccurate information; unresponsive, rude, or poorly trained workers; and long waits. Even worse, many find their complaints never reach A huge source of revenue for fast food chains, Taco Bell has excelled in its drive-through speed and accuracy. Source: Taco Bell Corp. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 429 a human ear because of slow or faulty phone or online reporting systems. They say companies mishandle online complaints by responding selectively or inconsistently (or not at all) and by “cutting and running, ” appearing insin-cere, or attempting to just “bribe” the consumer. 25 It doesn't have to be that way. Fifty-five operators on Butterball Turkey's 800 number handle 100,000 calls a year about how to prepare, cook, and serve turkeys; 12,000 people call on Thanksgiving Day alone. Trained at Butterball University, the operators have all cooked turkeys dozens of different ways and can handle any queries that come their way, including why you shouldn't stash turkeys in snow banks and how to tell when the turkey is done. 26 Savvy services marketers are recognizing the new services realities, such as the importance of the newly em-powered customer, customer coproduction, and the need to engage employees as well as customers. Customer empowerment The digital era has clearly altered customer relationships. Customers are becoming more sophisticated about buying product-support services and are pressing for “unbundled services” and the right to select the elements they want. They increasingly dislike having to deal with a multitude of service providers handling different types of products or equipment. With that in mind, some third-party service organizations now service a greater range of equipment. A plumbing business may also service air conditioners, furnaces, and other components of a household infrastructure. Most importantly, the Internet has empowered customers by letting them send their comments around the world with a mouse click. A person who has a good customer experience is more likely to talk about it, but some-one who has a bad experience will talk to more people. 27 Ninety percent of angry customers reported sharing their story with a friend; now, they can share it with strangers too. At Planet Feedback. com shoppers can send a com-plaint, compliment, suggestion, or question directly to a company, with the option to post comments publicly on the site as well. Online sites such as Angie's List, Y elp, Google Places, and Urbanspoon are other popular means to spread the word on customer service adventures. Even more challenging for firms, unhappy customers may choose to download a damaging video to share their customer service miseries with others. “Marketing Memo: Lights! Camera! Customer Service Disasters!” describes some notable customer service disasters brought to light with online videos. When a customer complains, most companies now respond quickly. Comcast allows contact 24/7 by phone and e-chat but also reaches out to customers and monitors blogs, Web sites, and social media. If employees see a customer report a problem on a blog, they get in touch and offer help. Clear, helpful e-mail replies to customers' que-ries can be effective too. 28 Delta Airlines introduced Delta Assist to monitor customer Twitter tweets and Facebook posts around the clock with a 10-person team and to provide real-time replies to any queries or problems. 29 More important than simply responding to a disgruntled customer, however, is preventing dissatisfaction from occurring in the future. That may mean simply taking the time to nurture customer relationships with attention from a real person. Solving a customer's problem quickly and easily goes a long way toward winning long-term loyal customers. 30 Customer Coprodu Ct Ion The reality is that customers do not merely purchase and use a service; they play an active role in its delivery. Their words and actions affect the quality of their service experiences and those of others as well as the productivity of frontline employees. 31 Singapore's exemplary service quality starts with its famed flight attendants. Source: AFP/Getty Images | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
430 PART 5 | CRe ATing V Alue Customers often feel they derive more value, and feel a stronger connection to the service provider, if they are actively engaged in the service process. This coproduction can put stress on employees, however, and reduce their satisfaction, especially if they differ from customers culturally or in other ways. 32 Moreover, one study estimated that one-third of all service problems are caused by the customer. 33 The growing shift to self-service technologies will likely increase this percentage. Preventing service failures is crucial because recovery is always challenging. One of the biggest problems is attribution—customers often feel the firm is at fault or, even if not, that it is still responsible for righting any wrongs. Unfortunately, although many firms have well-designed and executed procedures to deal with their own failures, they find managing customer failures—when a service problem arises from a customer's mistake or lack of understanding—much more difficult. Solutions come in all forms, as these examples show:34 1. Redesign processes and redefine customer roles to simplify service encounters. Staples transformed its business with its “Easy” program to take the hassle out of ordering office supplies. 2. Incorporate the right technology to aid employees and customers. Comcast, the largest U. S. cable operator, introduced software to identify network glitches before they affected service and to better inform call-center operators about customer problems. Repeat service calls dropped 30 percent as a result. 3. Create high-performance customers by enhancing their role clarity, motivation, and ability. USAA reminds enlisted policyholders to suspend their car insurance when they are stationed overseas. 4. Encourage “customer citizenship” so customers help each other. At golf courses, players can not only follow the rules by playing and behaving appropriately, they can encourage others to do so. sat Isfy Ing employees as well as Customers Excellent service companies know that positive employee attitudes will strengthen customer loyalty. 35 Instilling a strong customer orientation in employees can also increase their job satisfaction and commitment, especially if they have high customer contact. Employees thrive in customer-contact positions when they have an internal drive to (1) pamper customers, (2) accurately read their needs, (3) develop a personal relationship with them, and (4) deliver high-quality service to solve customers' problems. 36The explosion of videos online has posed many challenges to firms. Not only customers but also employees can damage the firm's reputation, and the Internet greatly magnifies the impact. Many fast-food chains have had to deal with unflattering or inappropriate behavior their employees capture on video as a prank. Online clips have shown a Wendy's worker with his mouth wide open under a Frosty machine, a Domino's employee putting cheese up his nose and mucus on food meant for delivery, and a Taco Bell employee licking a stack of empty taco shells. Any service organization may pay the price for a service breakdown. When Canadian singer Dave Carroll faced $1,200 in damages to his $3,000 Gibson guitar after a United flight, he put his creative energy to good use and launched a humorous You Tube video, United Breaks Guitars, with this catchy refrain: “United, you broke my Taylor guitar. United, some big help you are. You broke it, you should fix it. You're liable, just admit it. I should have flown with someone else or gone by car 'cuz United breaks guitars. ” Carroll's follow-up video about his frustrating efforts to get United to pay for the damage was viewed more than 5 million times. The airline got the mes-sage and donated a check for $1,200 to a charity Carroll designated. It now uses the incident to train baggage handlers and customer-service representatives. After a security camera caught a Fed Ex driver delivering a computer monitor by throwing it over a six-foot fence instead of ringing the doorbell, the 21-second You Tube video placed by the irate customer received millions of views and heaps of negative publicity. Fed Ex cut a You Tube apology of its own, titled “Absolutely, Positively Unacceptable”—a play on its old advertising slogan, though with only a fraction of the views. Fed Ex not only replaced the cus-tomer's computer monitor free of charge, it also has shared the video internally with employees. Critics credit the companies for attempting to deal with their problems quickly and forcefully, while often faulting them too for their hiring and training practices and for not creating a stronger, brand-supportive climate with employees. Sources: “Bruce Horovitz, “Wendy's Is Latest to See Gross Photo Go Viral,” USA Today, June 13, 2013; Bruce Horovitz, “Photo of Taco Bell Worker Licking Shells Sends Shudders,” USA Today, June 3, 2013; Chad Brooks, “Caught on Video: Employees Behaving Badly,” Business News, March 28, 2012; Chunka Mui, “The 5 Most Brand-Damaging Viral Videos of 2011,” Forbes, December 28, 2011; Laurent Belsie, “Fed Ex Delivery Video: Package Thrown. Fed Ex Apologizes on You Tube,” Christian Science Monitor, December 23, 2011; Dan Reed, “United Makeover Aims to Refresh and Renew,” USA Today, September 17, 2009, pp. 1B-2B; Elisabeth Sullivan, “Happy Endings Lead to Happy Returns,” Marketing News, October 30, 2009, p. 20. Lights! Cameras! Customer Service Disasters! marketing memo | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 431 Consistent with this reasoning, Sears found a high correlation be-tween customer satisfaction, employee satisfaction, and store profitability. The downside of not treating employees right is significant. A survey of 10,000 employees from the largest 1,000 companies found that 40 percent of workers cited “lack of recognition” as a key reason for leaving a job. 37 Given the importance of positive employee attitudes to customer satisfaction, service companies must attract the best employees they can find. They need to market a career rather than just a job. They must design a sound training program and provide support and rewards for good performance. They can use an intranet, internal newsletters, daily reminders, and employee roundtables to reinforce customer-centered attitudes. Finally, they must audit employee job satisfaction regularly. The Panda Express restaurant chain has management turnover that's half the industry average, due in part to a combination of ample bonuses and health benefits with a strong emphasis on worker self-improvement through meditation, education, and hobbies. Special wellness seminars and get-to-know-you events outside work help create a caring, nurtur-ing atmosphere. 38 Zappos has built a customer-focused organization admired by many. 39 Za PPO s Online retailer Zappos was cofounded by Tony Hsieh in 1999 with superior customer service at the core of its culture. With free shipping and returns, 24/7 customer service, and fast turnaround on the numerous products offered on the site from thousands of brands, the company works hard to create repeat customers. Unlike many other companies, it has not outsourced its Zappos. com call centers, and half the interview process is devoted to finding out whether job candidates are sufficiently outgoing, open-minded, and creative to be a good cultural fit. Zappos empowers its customer service reps to solve problems. When a customer called to complain that a pair of boots was leaking after a year of use, the rep sent a new pair even though the company's policy is that only unworn shoes are returnable. Every employee has a chance each year to contribute to the company's Culture Book, about life at Zappos and how each department implements superior customer service from selling to warehousing, delivery, pricing, and billing. Bought by Amazon. com in 2009 for a reported $850 million but still run separately, the company now also sells clothing, handbags, and accessories. Thanks to its success, it even offers two-day seminars to business executives eager to learn the secrets behind Zappos's unique corporate culture and approach to customer service. Achieving Excellence In Services Marketing The increased importance of the service industry has sharpened the focus on what it takes to excel in the market-ing of services. 40 Here are some guidelines. MArket In G excellence Marketing excellence in services requires excellence in three broad areas: external, internal, and interactive marketing (see Figure 14. 3). 41 External marketing describes the normal work of preparing, pricing, distributing, and promoting the service to customers. Founder Tony Hsieh's customer service practices at online retailer Zappos are widely-admired and studied. Source: Zappos. com Inc. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
432 PART 5 | CRe ATing V Alue Internal marketing describes training and motivating employees to serve customers well. Arguably the most important contribution the marketing department can make is to be “exceptionally clever in getting everyone else in the organization to practice marketing. ”42 Interactive marketing describes the employees' skill in serving the client. Clients judge service not only by its technical quality (Was the surgery successful?), but also by its functional quality (Did the surgeon show concern and inspire confidence?). 43 In interactive marketing, teamwork is often key. Delegating authority to frontline employees can allow for greater service flexibility and adaptability because it promotes better problem solving, closer employee cooperation, and more efficient knowledge transfer. 44 A good example of a service company achieving marketing excellence is Charles Schwab. 45 CHar Les s CH wa B Charles Schwab, one of the nation's largest discount brokerage houses, uses the telephone, Internet, and wireless devices to create an innovative combination of high-tech and high-touch services. One of the first major brokerage houses to provide online trading, the company today serves more than 8 million indi-vidual and institutional accounts. It offers account information and proprietary research from retail brokers, real-time quotes, an after-hours trading program, the Schwab learning center, live events, online chats with customer service rep-resentatives, a global investing service, and market updates delivered by e-mail. It has also been adding a slew of mobile capabilities to satisfy its customer on the go. Schwab grew during the financial crisis by offering new products for sophis-ticated investors, such as managed portfolio ETFs and fixed income funds. Besides the discount brokerage, the firm offers mutual funds, annuities, bond trading, and now mortgages through its Charles Schwab Bank. Its success has been driven by its efforts to lead in three areas: superior service (online, via phone, and in local branch offices), innovative products, and low prices. Its long-running “Talk to Chuck” marketing campaign reinforces how the firm is always there to help its customers. technolo GY And Serv Ice del Iver Y Technology is changing the rules of the game for services in a very fundamental way. Banking, for instance, is being transformed by the ability to bank online and via mobile apps—some customers rarely see a bank lobby or interact with an employee anymore. 46 Technology also has great power to make service workers more productive. When USAirways deployed handheld scanners to better track baggage, mishandled baggage decreased almost 50 percent. The new technology paid for itself in the first year and helped contribute to a 35 percent drop in complaints. 47 Company External Marketing Internal Marketing Customers Employees Interactive Marketing Cleaning/ maintenance services Restaurant industry Financial/ banking services$| Fig. 14. 3 | Three Types of Marketing in Service Industries | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 433 Sometimes new technology has unanticipated benefits. When BMW introduced Wi-Fi to its dealerships to help customers pass the time more productively while their cars were being serviced, more chose to wait rather than use loaner cars, an expensive item for dealers to maintain. 48 Companies must avoid pushing technological efficiency so hard, however, that they reduce perceived quality. 49 Some methods lead to too much standardization, but service providers must deliver “high touch” as well as “high tech. ”50 Amazon has some of the most innovative technology in online retailing, but it also keeps customers extremely satisfied when a problem arises even if they don't actually talk to an Amazon employee. 51 More companies are introducing “live chat” features to blend technology with a human voice. 52 As Chapter 5 reviewed, the Internet lets firms improve their service offerings and strengthen their relationships with customers by allowing for true interactivity, customer-specific and situational personalization, and real-time adjustments of the firm's offerings. But as companies collect, store, and use more information about customers, they have also raised concerns about security and privacy. Companies must incorporate the proper safeguards and reassure customers about their efforts. Be St pr Act Ice S of top Serv Ice co Mp An Ie S Well-managed service companies that achieve marketing excellence have in common a strategic concept, a his-tory of top-management commitment to quality, high standards, profit tiers, and systems for monitoring service performance and customer complaints. strateg IC Con Cept Top service companies are “customer obsessed. ” They have a clear sense of their target customers and their needs and have developed a distinctive strategy for satisfying them. At the Four Seasons luxury hotel chain, employees must pass four interviews before being hired. Each hotel also employs a “guest historian” to track guest preferences. With more than 10,000 branches in the United States, more than any other brokerage firm, Edward Jones stays close to customers by assigning a single financial advisor and one administrator to each office. Although costly, maintaining such small teams fosters personal relationships. 53 top-management Comm Itment Companies such as Marriott, Disney, and Ace Hardware have a thorough commitment to service quality. Their managers look monthly not only at financial performance, but also at service performance. Ray Kroc of Mc Donald's insisted on continually measuring each Mc Donald's outlet on its conformance to QSCV: quality, service, cleanliness, and value. Some companies insert a reminder along with employees' paychecks: “Brought to you by the customer. ” Sam Walton of Walmart required the following employee pledge: “I solemnly swear and declare that every customer that comes within 10 feet of me, I will smile, look them in the eye, and greet them, so help me Sam. ” Allstate, Dunkin' Brands, Oracle, and USAA have high-level senior executives with titles such as Chief Customer Officer, Chief Client Officer, or Chief Experience Officer who have the power and authority to improve customer service across every customer interaction. 54 Edward Jones has invested in an extensive branch network to foster closer customer relationships. Source: © ZUMA Press, Inc. /Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
434 PART 5 | CRe ATing V Alue h Igh standards The best service providers set high quality standards. In the highly regulated banking industry, Citibank still aims to answer customer phone calls within 10 seconds and letters within two days; it has been an industry leader in using social media for customer service. 55 The standards must be set appropriately high. A 98 percent accuracy standard may sound good, but it would result in 64,000 lost Fed Ex packages a day; six misspelled words on each page of a book; 400,000 incorrectly filled prescriptions daily; 3 million lost piece of USPS mail each day; no phone, Internet, or electricity for eight days per year or 29 minutes per day; 1,000 mislabeled or (mispriced) products at a supermarket; and 6 million people unaccounted for in a U. S. census. prof It t Iers Firms have decided to coddle big spenders to retain their patronage as long as possible. Customers in high-profit tiers get special discounts, promotional offers, and lots of special service; those in lower-profit tiers who barely pay their way may get more fees, stripped-down service, and voice messages to process their inquiries. When the recent recession hit, Zappos decided to stop offering complimentary overnight shipping to first-time buyers and offer it to repeat buyers only. The money saved was invested in a new VIP service for the com-pany's most loyal customers. 56 Companies that provide differentiated levels of service must be careful about claiming superior service, however—customers who receive lesser treatment will bad-mouth the company and injure its reputation. Delivering services that maximize both customer satisfaction and company profitability can be challenging. mon Itor Ing systems Top firms audit service performance, both their own and competitors', on a regular basis. They collect voice of the customer (VOC) measurements to probe customer satisfiers and dissatisfiers and use comparison shopping, mystery or ghost shopping, customer surveys, suggestion and complaint forms, service-audit teams, and customers' letters. We can judge services on customer importance and company performance. Importance-performance analysis rates the various elements of the service bundle and identifies required actions. Table 14. 2 shows how customers rated 14 service elements or attributes of an automobile dealer's service department on importance and perfor-mance. For example, “Job done right the first time” (attribute 1) received a mean importance rating of 3. 83 and a table 14. 2 Customer Importance and Performance Ratings for an Auto Dealership Number Attribute Attribute Description Mean Importance Ratinga Mean Performance Ratingb 1 Job done right the first time 3. 83 2. 63 2 Fast action on complaints 3. 63 2. 73 3 Prompt warranty work 3. 60 3. 15 4 Able to do any job needed 3. 56 3. 00 5 Service available when needed 3. 41 3. 05 6 Courteous and friendly service 3. 41 3. 29 7 Car ready when promised 3. 38 3. 03 8 Perform only necessary work 3. 37 3. 11 9 Low prices on service 3. 29 2. 00 10 Clean up after service work 3. 27 3. 02 11 Convenient to home 2. 52 2. 25 12 Convenient to work 2. 43 2. 49 13 Courtesy buses and cars 2. 37 2. 35 14 Send out maintenance notices 2. 05 3. 33 a Ratings obtained from a four-point scale of “extremely important” (4), “important” (3), “slightly important” (2), and “not important” (1). b Ratings obtained from a four-point scale of “excellent” (4), “good” (3), “fair” (2), and “poor” (1). A “no basis for judgment” category was also provided. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 435 mean performance rating of 2. 63, indicating that customers felt it was highly important but not performed well. The ratings of the 14 elements are divided into four sections in Figure 14. 4. Quadrant A in the figure shows important service elements that are not being performed at the desired lev-els; they include elements 1, 2, and 9. The dealer should concentrate on improving the service department's performance on these elements. Quadrant B shows important service elements that are being performed well; the company needs to maintain this high performance. Quadrant C shows minor service elements that are being delivered in a mediocre way but do not need any attention. Quadrant D shows that a minor service element, “Send out maintenance notices,” is being performed in an excellent manner. Perhaps the company should spend less on sending out maintenance notices and use the savings to improve performance on important elements. Management can enhance its analysis by checking on competitors' perfor-mance levels on each element. 57 sat Isfy Ing Customer Compla Ints On average, 40 percent of customers who suffer through a bad service experience stop doing business with the company. 58 But if those customers are willing to complain first, they actually offer the company a gift if the complaint is handled well. Companies that encourage disappointed customers to complain—and also empower employees to remedy the situation on the spot—have been shown to achieve higher revenues and greater profits than companies without a systematic approach for addressing service failures. 59 Frontline employees who adopt extra-role behaviors and who advocate the interests and image of the firm to consumers, as well as taking initiative and engaging in consci-entious behavior in dealing with customers, can be a critical asset in handling complaints. 60 Customers evaluate complaint incidents in terms of the outcomes they receive, the procedures used to arrive at those outcomes, and the nature of interpersonal treatment during the process. 61 Companies also are increasing the quality of their call centers and their customer service representatives (CSRs). “Marketing Insight: Improving Company Call Centers” illustrates what top companies are doing. d Ifferent IAt In G Serv Ice S Finally, customers who view a service as fairly homogeneous care less about the provider than about the price. Marketing excellence requires service marketers to continually differentiate their brands so they are not seen as a commodity. Consider how Jet Blue and Southwest Airlines have succeeded through differentiation. 62 1 23 4 5 7 86 9 10 11 12 13 14 D. Possible overkill Slightly Important Extremely Important Fair Performance Excellent Performance C. Low priority B. Keep up the good work A. Concentrate here| Fig. 14. 4 | Importance-Performance Analysis | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
436 PART 5 | CRe ATing V Alue Jet B Lue and s Out Hwest air Lines In an industry often characterized by bank-ruptcies and unhappy customers, two exceptions are Jet Blue and Southwest Airlines. The companies have followed very different paths on their way to financial and marketplace success. Southwest, the older of the two, developed an unusual business model for an airline: short hauls only, no travel agents, no meals, no gates at major airports, and no fees. Although the carrier has changed some of those practices, it remains determined to avoid the bag, ticket change, and other fees adopted by competing airlines, believing it would lose $1 billion in revenue from lost bookings otherwise. A true discount airline, Southwest has been able to offer low fares by virtue of a disciplined cost structure that keeps planes in the air and seats filled, all with an informal, friendly style. The company hires employees with outgoing personalities who like to work with people and empowers them to do so. Jet Blue also started with a very different business model, primarily targeting leisure travelers at its JFK hub in New York City. Another discount carrier with a low-cost structure, the company had the advantage of offering comfy seats, live TV, and choice of snacks. It is building a $25 million lodge at Jet Blue University in Orlando to foster culture and camaraderie among employees and exploring options for business travelers, including fancier, more expensive seating on its transcontinental routes. pr Imary and se Condary ser VICe opt Ions Marketers can differentiate their service offerings in many ways, through people and processes that add value. What the customer expects is called the primary Improving Company Call Centers Many firms have learned the hard way that empowered customers will not put up with poor service. After Sprint and Nextel merged, they set out to run their call centers as cost centers, rather than a means to enhance customer loyalty. Employee rewards were based on keeping customer calls short, and when management started to monitor even bathroom trips, morale sank. With customer churn spinning out of control, Sprint Nextel adopted a plan to emphasize service over effi-ciency. The company appointed its first chief service officer and started rewarding operators for solving problems on a customer's first call rather than for keeping their calls short. After a year, the average cus-tomer was contacting customer service only four times instead of eight. Some firms, such as AT&T, JPMorgan Chase, and Expedia, have established call centers in the Philippines rather than India because Filipinos speak lightly accented English and are more steeped in U. S. cul-ture than Indians, who speak British-style English and may use unfamiliar idioms. Others are getting smarter about the type of calls they send to off-shore call centers, homeshoring by directing more complex calls to highly trained domestic customer service reps. These work-at-home reps often provide higher-quality service at less cost with lower turnover. Firms have to decide how many customer service reps they need. One study showed that cutting just four reps at a call center of three dozen sent the number of customers put on hold for four minutes or more from zero to eighty. Firms can also try to reasonably get more from each rep. Marriott and other firms such as Key Bank and Ace Hardware have consolidated call center operations into fewer locations, allowing them to maintain their number of reps in the process. Hiring and training are influential too. An extensive study by Xerox demonstrated that a good call-center worker with a high probability to stay the six months necessary to recoup the company's $5,000 invest-ment was likely to have a creative rather than an inquisitive personal-ity. Rather than emphasizing prior experience in hiring for its roughly 50,000 call-center jobs, Xerox now factors in answers to questions like “I ask more questions than most people do” and “People tend to trust what I say. ” Some firms are taking advantage of Big Data capabilities to match individual customers with the call center agent best suited to meet their needs. Using something like the methods of online dating sites, advanced analytics technology mines transaction and demographic information about customers (products or services they've purchased, contract terms and expiration date, record of complaints or average call wait time) and call center agents (average call handling time and sales efficiency) to identify optimal matches in real time. Finally, keeping call center reps happy and motivated is obvi-ously a key to boosting their ability to offer excellent customer service. American Express lets call center reps choose their own hours and swap shifts without a supervisor's approval. Sources: Claudia Jasmand, Vera Blazevic, and Ko de Ruyter, “Generating Sales while Providing Service: A Study of Customer Service Representatives' Ambidextrous Behavior,” Journal of Marketing 76 (January 2012), pp. 20-37; Kimmy Wa Chan and Echo Wen Wan, “How Can Stressed Employees Deliver Better Customer Service? The Underlying Self-Regulation Depletion Mechanism,” Journal of Marketing 76 (January 2012), pp. 119-37; Joseph Walker, “Meet the New Boss: Big Data,” Wall Street Journal, September 20, 2012; Vikas Bajaj, “A New Capital of Call Centers,” New York Times, November 25, 2011; Michael Shroeck, “Why the Customer Call Center Isn't Dead,” Forbes, March 15, 2011; Michael Sanserino and Cari Tuna, “Companies Strive Harder to Please Customers,” Wall Street Journal, July 27, 2009, p. B4; Spencer E. Ante, “Sprint's Wake-Up Call,” Business Week, March 3, 2008, pp. 54-57; Jena Mc Gregor, “Customer Service Champs,” Business Week, March 5, 2007. marketing insight | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 437 service package. Vanguard, one of the world's largest no-load mutual fund company, has a unique client ownership structure that lowers costs and permits better fund returns. Strongly differentiated from many competitors, the brand grew through word of mouth, PR, and viral marketing. 63 The provider can also add secondary service features to the package. In the hotel industry, various chains have introduced such secondary service features as merchandise for sale, free breakfast buffets, and loyalty programs. Seaside Luxe has transformed sleepy gift shops into profitable revenue generators for various resorts by making them a more engaging shopping experience that reflects their particular customers and locale. 64 Many companies are using the Internet to offer primary or secondary service features that were never possible before. Salesforce. com uses cloud computing—centralized computing services delivered over the Internet—to run customer-management databases for companies. Häagen-Dazs estimated it would have had to spend $65,000 for a custom-designed database to stay in contact with its retail franchises across the country. Instead, the company spent only $20,000 to set up an account with Salesforce. com and pays $125 per month for 20 users to remotely monitor franchises via the Internet. 65 The service company that regularly introduces innovations can intrigue customers and stay a step ahead of any competitors. 66 Sometimes it can even reinvent a service category, as Cirque du Soleil did. 67 Cirque du s OLei L In its more than 25-year history, Cirque du Soleil (French for “circus of the sun”) has repeatedly broken loose from circus convention. The company takes traditional ingredients such as trapeze artists, clowns, muscle men, and contortionists and places them in a nontraditional setting with lavish costumes, new age music, and spectacular stage designs. And it eliminates other common circus elements—there are no animals. Each production is loosely tied together with a theme such as “a tribute to the nomadic soul” (Varekai) or “a phantasmagoria of urban life” (Saltimbanco). The group has grown from its Quebec street-performance roots to become a half-billion-dollar global enterprise, with 3,000 employees on four continents entertaining audiences of millions annually. Part of its success comes from a company culture that encourages artistic creativity and innova-tion and carefully safeguards the brand. One new production is created each year—always in-house—and is unique: There are no duplicate touring companies. In addition to Cirque's mix of media and local promotion, an extensive interactive e-mail program to its million-plus-member Cirque Club creates an online community of fans—20 percent to 30 percent of all ticket sales come from club members. Generating $800 million in revenue annually, the Cirque du Soleil brand has expanded to encompass a record label, a retail operation, and resident productions in Las Vegas (five in all), Orlando, Tokyo, and other cities. Inno Vat Ion w Ith ser VICes Innovation is as vital in services as in any industry. 68 After years of losing customers to its Hilton and Marriott hotel competitors, Starwood decided to invest $1. 7 billion in its Sheraton chain of 400 properties worldwide to give them fresher décor and brighter colors, as well as more enticing lobbies, restaurants, and cafés. In explaining the need for the makeover, one hospitality industry expert noted, “There was a time when Sheraton was one of the leading brands. But it lagged in introducing new design and service concepts and developed a level of inconsistency. ”69 Source: Photo courtesy of Stephen Tornblom/Jet Blue Although they have very different business models, discount airlines Jet Blue and Southwest Airlines have both experienced great marketplace success. Source: © Jim West/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
438 PART 5 | CRe ATing V Alue On the other hand, consider how these relatively new service categories emerged and how, in some cases, orga-nizations found creative solutions in existing categories. Online travel. Online travel agents such as Expedia and Travelocity offer customers the opportunity to conveniently book travel at discount prices. However, they make money only when visitors go to their Web sites and book travel. Kayak successfully entered the category later by applying the Google business model of collecting money on a per-click basis. Kayak's marketing emphasis is on building a better search engine by offering more alternatives, flexibility, and airlines. Hipmunk is a newer online travel agency that tries to make things even simpler for the savvy traveler by fitting all search results on one easy-to-navigate page—with fewer ads—ranking flights on an “agony algorithm” that factors in price, duration, and number of stops and offering information about and discounts on nearby hotels. 70 Retail health clinics. One of the hardest areas in which to innovate is health care. But whereas the current health care system is designed to treat a small number of complex cases, retail health clinics address a large number of simple cases. Retail health clinics such as Quick Care, Redi Clinic, and Minute Clinic are often found in drugstores and other retail chain stores such as Target and Walmart. They typically use nurse prac-titioners to handle minor illnesses and injuries such as colds, flu, and ear infections; offer various health and wellness services such as physicals and exams for high school sports; and administer vaccinations. They seek to offer convenient, predictable service and transparent pricing, without an appointment, seven days (and evenings) a week. Most visits take no more than 15 minutes, and costs vary from $25 to $100. 71 Private aviation. Initially, private aviation was restricted to those who could own or charter a private plane. Fractional ownership, pioneered by Net Jets, allowed customers to pay a percentage of the cost of a private plane plus maintenance and a direct hourly cost, making it more affordable for a broader customer base. Marquis Jets came up with the simple idea of prepaid time on the world's largest, best-maintained fleet, offer-ing the consistency and benefits of fractional ownership without the long-term commitment. The two compa-nies merged in 2010. Along with competitor Flight Options, private aviation firms are capitalizing on business executives' increasing dissatisfaction with commercial airline service and need for efficient travel options. 72 New service categories are constantly being introduced to satisfy unmet needs and wants: Examples include drybar, the new “blow-dry bar” salon concept created around the simple promise “No Cuts. No Color. Just Blowouts for Only $40”; Reddit, a giant online digital bulletin board with tens of thousands of active forums where registered users can post content or links; and online start-up Carelinx, which functions as a matchmaking site for families with at-home elderly and nonmedical caregivers who can provide home care. 73 Innovation in existing services can also have big payoffs. When Ticketmaster introduced interactive seat maps that allowed customers to pick their own seats instead of being given one by a “best seat available” function, the conversion rate from potential to actual buyers increased by 25 percent to 30 percent. Persuading a ticket buyer to add an “I'm going ... ” message to Facebook adds an extra $5 in ticket sales on average; adding reviews of a show on the site doubles the conversion rate. 74 Cirque du Soleil defied conventions to create a totally unique and non-traditional circus experience. Source: © Nathan King/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 439 Managing Service Quality The service quality of a firm is tested at each service encounter. If employees are bored, cannot answer simple questions, or are visiting each other while customers are waiting, customers will think twice about doing busi-ness there again. Wells Fargo has succeeded in the banking industry by focusing on its customers and delivering superior service. 75 we LLs Farg O Through acquisitions and steady growth, Wells Fargo has become the largest U. S. bank. Marketing has also played a key role. The company's stagecoach symbol reinforces heritage and experience, but it's the way Wells Fargo operates that ensures continued success, beginning with a customer-focused corporate culture that aims to “treat the customer right. ” The bank also sees a financial benefit to its customer focus. As its values handbook notes: The core of our vision and our strategy is “cross-selling. ” ... The more we give our customers what they need, the more we know about them. The more we know about their other financial needs, the easier it is for them to bring us more of their business. The more business they do with us, the better value they receive, the more loyal they are. Given the diverse nature of its customer base in California, Wells Fargo actively seeks and trains a diverse workforce. The average customer uses 5. 2 different bank products, roughly twice the industry average, thanks in part to the teamwork of the company's highly motivated staff. Wells Fargo's market share declined from 2003 to 2006, but because it also avoided issuing risky mortgages, its stock has delivered a 25 percent return over the past 10 years, comparable to Goldman Sachs and better than many other large banks. Service outcome and customer loyalty are influenced by a host of variables. One study identified more than 800 critical behaviors that cause customers to switch services; see the eight categories of those behaviors in Table 14. 3. 76 A more recent study honed in on the service dimensions customers would most like companies to measure. Knowledgeable frontline workers and the ability to achieve one-call-and-done rose to the top. 77 Flawless service delivery is the ideal output for any service organization. “Marketing Memo: Recommendations for Improving Service Quality” offers a comprehensive set of guidelines to which top service marketing organizations can adhere. Two top activities are managing customer expectations and incorporating self-service technologies. New service categories are always being created as with drybar, a blow-dry only chain of salons founded by Alli Webb. Source: Getty/The Washington Post | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
440 PART 5 | CRe ATing V Alue table 14. 3 Factors Leading to Customer Switching Behavior Pricing Response to Service Failure High price Negative response Price increases No response Unfair pricing Reluctant response Deceptive pricing Competition Inconvenience Found better service Location/hours Ethical Problems Wait for appointment Cheat Wait for service Hard sell Core Service Failure Unsafe Service mistakes Conflict of interest Billing errors Involuntary Switching Service catastrophe Customer moved Service Encounter Failures Provider closed Uncaring Impolite Unresponsive Unknowledgeable Source: Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing (April 1995), pp. 71-82. Reprinted with permission from Journal of Marketing, published by the American Marketing Association. MAn AGIn G cu Sto Mer expect At Ion S Customers form service expectations from many sources, such as past experiences, word of mouth, and advertis-ing. In general, they compare perceived and expected service. If the perceived service falls below the expected service, customers are disappointed. Successful companies add benefits to their offering that not only satisfy customers but surprise and delight them by exceeding expectations. 78 One company that has built its business around exceeding customer expectations is American Express. 79 a Meri Can ex Press Under the direction of Executive VP Jim Bush, American Express has em-braced a relationship-building approach in which customer service reps are judged in part on whether customers say they would recommend the brand to friends or family (NPS or Net Promoter Score ; see Chapter 5). Reps—called customer care professionals—can see all kinds of relevant data on their screen when a customer calls, including name, age, ad-dress, and buying and payment habits. Whether a cardmember loses a wallet or purse while traveling or needs assistance finding a missing child in a foreign country, American Express has empowered its customer care professionals to do what-ever it takes to help. This exemplary customer service brings financial benefits too. Cardmembers designated promoters on the basis of NPS score increase their Am Ex card spending 10 percent to 15 percent and are four to five times more likely to remain customers, increasing shareholder value. Not least, because of its strong service culture and support, American Express boasts some of the highest employee retention rates in the industry. The service-quality model in Figure 14. 5 highlights the main requirements for delivering high service quality. 80 It identifies five gaps that prevent successful delivery: 1. Gap between consumer expectation and management perception —Management does not always correctly perceive what customers want. Hospital administrators may think patients want better food, but patients may be more concerned with nurse responsiveness. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
441GAP 5 GAP 3 GAP 1GAP 4 GAP 2CONSUMER MARKETERWord-of-mouth communications Past experience Personal needs Expected service Perceived service Service delivery (including pre-and post-contacts)External communications to consumers Translation of perceptions into service-quality specifications Management perceptions of consumer expectations| Fig. 14. 5 | Service-Quality Model Sources: A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry, “A Conceptual Model of Service Quality and Its Implications for Future Research,” Journal of Marketing (Fall 1985), p. 44. The model is more fully discussed or elaborated in Valarie Zeithaml, Mary Jo Bitner, and Dwayne D. Gremler, Services Marketing: Integrating Customer Focus across the Firm, 6th ed. (New York: Mc Graw-Hill/Irwin, 2013). Sources: Leonard L. Berry, A. Parasuraman, and Valarie A. Zeithaml, “Ten Lessons for Improving Service Quality,” MSI Reports Working Paper Series, No. 03-001 (Cambridge, MA: Marketing Science Institute, 2003), pp. 61-82. See also Leonard L. Berry, Venkatesh Shankar, Janet Parish, Susan Cadwallader, and Thomas Dotzel, “Creating New Markets through Service Innovation,” Sloan Management Review (Winter 2006), pp. 56-63; and Leonard L. Berry, Kathleen Seiders, and Dhruv Grewal, “Understanding Service Convenience,” Journal of Marketing (July 2002), pp. 1-17. Pioneers in conducting academic service research, Berry, Parasuraman, and Zeithaml offer 10 lessons they maintain are essential for improving service quality across service industries. 1. Listening —Service providers should understand what customers really want through continuous learning about the expectations and perceptions of customers and noncustomers (for instance, by means of a service-quality information system). 2. Reliability —Reliability is the single most important dimension of service quality and must be a service priority. 3. Basic service —Service companies must deliver the basics and do what they are supposed to do—keep promises, use common sense, listen to customers, keep customers informed, and be determined to deliver value to customers. 4. Service design —Service providers should take a holistic view of the service while managing its many details. 5. Recovery —To satisfy customers who encounter a service problem, service companies should encourage customers to complain (and make it easy for them to do so), respond quickly and personally, and develop a problem-resolution system. 6. Surprising customers —Although reliability is the most important dimension in meeting customers' service expectations, process dimensions such as assurance, responsiveness, and empathy are most important in exceeding customer expectations, for example, by surprising them with uncommon swift-ness, grace, courtesy, competence, commitment, and understanding. 7. Fair play —Service companies must make special efforts to be fair, and to demonstrate fairness, to customers and employees. 8. Teamwork —Teamwork is what enables large organizations to deliver service with care and attentiveness by improving employee motivation and capabilities. 9. Employee research —Marketers should conduct research with employees to reveal why service problems occur and what companies must do to solve problems. 10. Servant leadership —Quality service comes from inspired leadership throughout the organization; from excellent service-system design; from the effec-tive use of information and technology; and from a slow-to-change, invisible, all-powerful, internal force called corporate culture. Recommendations for Improving Service Quality marketing memo | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
442 PART 5 | CRe ATing V Alue 2. Gap between management perception and service-quality specification —Management might correctly perceive customers' wants but not set a performance standard. Hospital administrators may tell the nurses to give “fast” service without specifying speed in minutes. 3. Gap between service-quality specifications and service delivery —Employees might be poorly trained or incapable of or unwilling to meet the standard; they may be held to conflicting standards, such as taking time to listen to customers and serving them fast. 4. Gap between service delivery and external communications —Consumer expectations are affected by statements made by company representatives and ads. If a hospital brochure shows a beautiful room but the patient finds it cheap and tacky-looking, external communications have distorted the customer's expectations. 5. Gap between perceived and expected service —The consumer may misperceive the service quality. The physi-cian may keep visiting the patient to show care, but the patient may interpret this as an indication that some-thing is really wrong. Based on this service-quality model, researchers identified five determinants of service quality, in descending order of importance:81 1. Reliability —The ability to perform the promised service dependably and accurately. 2. Responsiveness —The willingness to help customers and provide prompt service. 3. Assurance —The knowledge and courtesy of employees and their ability to convey trust and confidence. 4. Empathy —The provision of caring, individualized attention to customers. 5. Tangibles —The appearance of physical facilities, equipment, staff, and communication materials. Based on these five factors, the researchers developed the 21-item SERVQUAL scale (see Table 14. 4). 82 They also note there is a zone of tolerance, or a range in which a service dimension would be deemed satisfactory, anchored by the minimum level consumers are willing to accept and the level they believe can and should be delivered. table 14. 4 SERVQUAL Attributes Reliability Empathy Providing service as promised Giving customers individual attention Dependability in handling customers' service problems Employees who deal with customers in a caring fashion Performing services right the first time Having the customer's best interests at heart Providing services at the promised time Employees who understand the needs of their customers Maintaining error-free records Convenient business hours Employees who have the knowledge to answer customer questions Responsiveness Tangibles Keeping customer informed as to when services will be performed Modern equipment Prompt service to customers Visually appealing facilities Willingness to help customers Employees who have a neat, professional appearance Readiness to respond to customers' requests Visually appealing materials associated with the service Assurance Employees who instill confidence in customers Making customers feel safe in their transactions Employees who are consistently courteous Source: A. Parasuraman, Valarie A. Zeithaml, and Leonard L. Berry, “A Conceptual Model of Service Quality and Its Implications for Future Research,” Journal of Marketing (Fall 1985), pp. 41-50. Reprinted by permission of the American Marketing Association. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 443 Subsequent research has extended the service-quality model. One dynamic process model of service quality was based on the premise that customer perceptions and expectations of service quality change over time, but at any one point they are a function of prior expectations about what will and what should happen during the service encounter, as well as the actual service delivered during the last contact. 83 Tests of the dynamic process model reveal that the two different types of expectations have opposite effects on perceptions of service quality. 1. Increasing customer expectations of what the firm will deliver can lead to improved perceptions of overall service quality. 2. Decreasing customer expectations of what the firm should deliver can also lead to improved perceptions of overall service quality. Much work has validated the role of expectations in consumers' interpretations and evaluations of the service encounter and in the relationship they adopt with a firm over time. 84 Consumers are often forward-looking with re-spect to their decision to keep or drop a service relationship in terms of their likely behavior and interactions with a firm. Any marketing activity that affects current or expected future usage can help to solidify a service relationship. With continuously provided services, such as public utilities, health care, financial and computing services, insurance, and other professional, membership, or subscription services, customers have been observed to mentally calculate their payment equity —the perceived economic benefits in relationship to the economic costs. In other words, customers ask themselves, “ Am I using this service enough, given what I pay for it?” A negative response will lead to change in behavior and possible termination of an account. Long-term service relationships can have a dark side. An ad agency client may feel that over time the agency is losing objectivity, becoming stale in its thinking, or beginning to take advantage of the relationship. 85 Incorpor At In G Self-Serv Ice technolo GIe S (SSt S) Consumers value convenience in services,86 and many person-to-person service inter-actions are being replaced by self-service technologies (SSTs) intended to provide that convenience. To traditional vending machines we can add automated teller machines (ATMs), self-pumping at gas stations, self-checkout at hotels, and a variety of activities on the Internet, such as ticket purchasing, investment trading, and customization of products. Chili's is installing tabletop computer screens in its restaurants so customers can order directly and pay by credit card. The restaurant found users of the service spend more per check, in part because they buy more desserts and coffee when the screen is present. 87 You can add an app like Wait Away to your cell phone and be contacted by text message when your table is ready at a restaurant—and monitor the length of the line in the process. 88 Open Table lets you easily book the reservation ahead of time. 89 OPenta BLe Open Table has become the world's largest online reservation system, letting users book a reservation on its Web site or with its smart-phone app at thousands of restaurants around the world. A new deal with Facebook allows users to book on a restaurant's Facebook page. For a fairly modest setup charge and monthly fee—$249 a month for software to manage bookings plus $1 for every diner seated through the Web site—a restaurant can tap into Open Table's vast customer base. With half of all restaurants in North America signed up and more than 15 million people seated monthly via the Web site, the service has been adding func-tionality. For instance, the acquisition of Foodspotting for $10 million allows users to search menu images by dish. Now more than 40 percent of its reservations are booked via phone or tablet, Open Table is beefing up its mobile strategy and adding payment services with a new app. Its new priority is to take the massive amounts of data it has collected on users' dining preferences to offer customized dining recommendations. Open Table, the market leader in online restaurant reservations, is investing heavily in its mobile offerings. Source: Open Table | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
444 PART 5 | CRe ATing V Alue Not all SSTs improve service quality, but they can make service transactions more accurate, convenient, and faster. Obviously, they can also reduce costs. One technology firm, Comverse, estimates the cost to answer a query through a call center at $7, but online at only 10 cents. One of Comverse's clients was able to direct 200,000 calls a week through online self-service support, saving $52 million a year. 90 Every company needs to think about improving its service using SSTs. Comcast can offer less customer service because 40 percent of its installations are done by the customer and 31 percent of customers now manage their accounts completely online. 91 Successfully integrating technology into the workforce thus requires a comprehensive reengineering of the front office to identify what people do best, what machines do best, and how to deploy them separately and together. 92 Some companies have found the biggest obstacle is not the technology itself, but convincing customers to use it, especially for the first time. Customers must have a clear sense of their roles in the SST process, must see a clear benefit, and must feel they can actually use it. 93 SST is not for everyone. Although some automated voices are actually popular with customers—the unfailingly polite and chipper voice of Amtrak's “Julie” has been generally well-received by callers—many can incite frustration and even rage. 94 Managing Product-Support Services No less important than service industries are product-based industries that must provide a service bundle. 95 Manufacturers of equipment—small appliances, office machines, tractors, mainframes, airplanes—all must provide product-support services, now a battleground for competitive advantage. Many product companies also have a stronger online presence than before and must ensure they offer adequate—if not superior—service online as well. Chapter 13 described how products could be augmented with key service differentiators—ordering ease, deliv-ery, installation, customer training, customer consulting, maintenance, and repair. Some equipment companies, such as Caterpillar Tractor and John Deere, make a significant percentage of their profits from these services. 96 In the global marketplace, companies that make a good product but provide poor local service support are seriously disadvantaged. Ident If YIn G And S At ISf YIn G cu Sto Mer need S Traditionally, customers have had three specific worries about product service:97 They worry about reliability and failure frequency. A farmer may tolerate a combine that will break down once a year, but not one that goes down two or three times a year. They worry about downtime. The longer the downtime, the higher the cost. The customer counts on the seller's service dependability —the ability to fix the machine quickly or at least provide a loaner. They worry about out-of-pocket costs. How much does the customer have to spend on regular maintenance and repair costs? A buyer takes all these factors into consideration and tries to estimate the life-cycle cost, which is the prod-uct's purchase cost plus the discounted cost of maintenance and repair less the discounted salvage value. A one-computer office will need higher product reliability and faster repair service than an office where other computers are available if one breaks down. An airline needs 100 percent reliability in the air. Where reliability is important, manufacturers or service providers can offer guarantees to promote sales. To provide the best support, a manufacturer must identify the services customers value most and their relative importance. For expensive equipment, manufacturers offer facilitating services such as installation, staff training, maintenance and repair services, and financing. They may also add value-augmenting services that extend beyond the functioning and performance of the product itself. Johnson Controls reached beyond its climate control equip-ment and components business to manage integrated facilities, offering products and services that optimize energy use and improve comfort and security. A manufacturer can offer, and charge for, product-support services in different ways. One specialty organic-chemical company provides a standard offering plus a basic level of services. If the customer wants additional services, it can pay extra or increase its annual purchases to a higher level. Many companies offer service contracts | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 445 (also called extended warranties ), in which sellers agree to provide maintenance and repair services for a specified period of time at a specified contract price. Product companies must understand their strategic intent and competitive advantage in developing ser-vices. Are service units supposed to support and protect existing product businesses or grow as an independent platform? Are the sources of competitive advantage based on economies of scale (size) or economies of skill (smarts)?98 po St SAle Serv Ice Str Ate GY The quality of customer service departments varies greatly. At one extreme are those that simply transfer cus-tomer calls to the appropriate person for action with little follow-up. At the other extreme are departments eager to receive customer requests, suggestions, and even complaints and handle them expeditiously. Some firms even proactively contact customers to provide service after the sale is complete. 99 Customer-ser VICe e Volut Ion Manufacturers usually start by running their own parts-and-service departments. They want to stay close to the equipment and know its problems. They also find it expensive and time consuming to train others and discover they can make good money from parts and service if they are the only supplier and can charge a premium price. In fact, many equipment manufacturers price their equipment low and compensate by charging high prices for parts and service. Over time, manufacturers switch more maintenance and repair service to authorized distributors and dealers. These intermediaries are closer to customers, operate in more locations, and can offer quicker service. Still later, independent service firms emerge and offer a lower price or faster service. A significant percentage of auto-service work is now done outside franchised automobile dealerships by independent garages and chains such as Midas Muffler and Sears. Independent service organizations handle mainframes, telecommunications equipment, and a variety of other equipment lines. the Customer-ser VICe Imperat IVe Customer-service choices are increasing rapidly, however, and equipment manufacturers increasingly must figure out how to make money on their equipment, independent of service contracts. Some new-car warranties now cover 100,000 miles before customers have to pay for servicing. The increase in disposable or never-fail equipment makes customers less inclined to pay 2 percent to 10 percent of the purchase price every year for service. A company with several hundred laptops, printers, and related equipment might find it cheaper to have its own service people on-site. coproduction, and the need to satisfy employees as well as customers. 4. Achieving excellence in service marketing calls not only for external marketing but also for internal marketing to motivate employees, as well as interactive marketing to emphasize the importance of both “high tech” and “high touch. ” 5. Top service companies adopt a strategic concept, have a history of top-management commitment to quality, commit to high standards, establish profit tiers, and pay attention to their systems for moni-toring service performance and customer com-plaints. They also differentiate their brands through Summary 1. A service is any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything. It may or may not be tied to a physical product. 2. Services are intangible, inseparable, variable, and per-ishable. Each characteristic poses challenges and requires certain strategies. Marketers must find ways to give tangibility to intangibles, to increase the productiv-ity of service providers, to increase and standardize the quality of the service provided, and to match the supply of services with market demand. 3. Marketing of services faces new realities in the 21st century due to customer empowerment, customer | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
446 PART 5 | CRe ATing V Alue Applications Marketing Debate Is Service Marketing Different from Product Marketing? Some service marketers maintain that service marketing is fundamentally different from product marketing and relies on different skills. Some traditional product marketers disagree, saying “good marketing is good marketing. ” Take a position: Product and service marketing are fundamentally different versus Product and service marketing are highly related. Marketing Discussion Educational Institutions Colleges, universities, and other educational institutions can be classified as service organizations. How can you apply the marketing principles developed in this chapter to your school? Do you have any advice for how it could become a better service marketer? and sports that allowed them to be happy and one with the others. Club Med proposed a new social link that was more festive and less binding on the client. It wanted to reconcile individual liberty and social life. At that time, in the holiday villages, customers could do what they wanted without the concept of money being present. Upon arrival, customers were provided with necklaces made out of beads that allowed customers to pay for their drinks (which would later be patented). Big tables allowed customers to share their meals and get acquainted with each other. The notions of freedom and equality were and still remain fundamental to the culture of Club Med. Since its creation, Club Med has never ceased to innovate. New and unknown destinations were added to the portfolio— Tahiti in 1955 and Leysin in Switzerland in 1956. In 1967, Club Med created the first mini clubs for children. Marketing Excellence >> Club Med Club Méditerranée or Club Med is a French company founded in 1950 by Gérard Blitz and Gilbert Trigano with the objective of offering holidays to customers with an innovative “all-inclusive” formula. The idea of happi-ness was at the heart of the concept. Today, Club Med has 72 resorts in more than 30 countries, including the Mediterranean, the tropics, and even the snow-covered Alps. In 2013, more than 1. 5 million customers chose Club Med for their holidays. Club Med has revolutionized holidays with its all-inclusive formula. At the time of its creation, the company aimed to give people a sense of freedom through nature primary and secondary service features and continual innovation. 6. Superior service delivery requires managing customer expectations and incorporating self-service technolo-gies. Customers' expectations play a critical role in their service experiences and evaluations. Companies must manage service quality by understanding the effects of each service encounter. 7. Even product-based companies must provide post-purchase service. To offer the best support, a manu-facturer must identify the services customers value most and their relative importance. The service mix includes both presale services (facilitating and value-augmenting services) and postsale services (cus-tomer service departments, repair and maintenance services). My Marketing Lab go to mymktlab. com to complete the problems marked with this icon as well as for additional assisted-graded writing questions. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 447 The organization's customer relationship has also evolved through the development of customer rela-tionship management tools for a finer segmentation of customers. In some agencies, a concept of sale side-by-side has been developed to allow clients to customize their holiday packages along with the sellers. Club Med's communication campaign “and what's your idea of happiness?” highlights this upmarket strategy. This campaign has been deployed in 47 countries and in 22 languages. The positioning of Club Med's resorts, from 3 trident to 5 trident, allows for a broader coverage of the competi-tion field—from standardization, and luxury services to all-inclusive offers. No other company offers this. Club Med's 4 trident resorts are in competition with the Swiss Mövenpick (69 hotels in 23 countries) and the Jamaican Sandals (12 resorts in Jamaica and the Bahamas). Club Med's 5 trident resorts compete with the Singaporean Banyan Tree (30 hotels and 60 spas all over the world). Finally, the Club Med luxury villas are in competition with the villas of the Mauritius company Beachcomber that works on the philosophy “dream is a serious thing” (9 hotels, resorts, and luxury villas), Aman Resorts (25 hotels in 15 countries), and the Ritz-Carlton (80 hotels in 27 countries). With the range and quality of its service, Club Med turns holidays into a one-of-a-kind experience. The fo-cus on a globalized customer strategy helped Club Med grow and ensured its unique positioning in the market. As of January 2015, the proposed takeover of Club Med by the Chinese investor Fosun will help accelerate the internationalization of the brand and its development in Asia. Questions 1. How did Club Med reach an upscale positioning and achieve excellence in the quality of service? 2. Was Club Med's upmarket positioning the only one viable strategy? 3. Do you think that Club Med takes a risk by not in spe-cializing in a particular range level, such as 4 trident or 5 trident? Sources: Marcel Michelson, “The Battle For Tourism Firm Club Med, Sharks Or Saviors?” Forbes, August 2, 2014; Julia Pimsleur, “Reinventing a 50-Year-Old Brand: Lessons From Le Club Med,” Forbes, January 15, 2013; David Jolly, “Chinese Investors Raise Their Bid for Club Med,” The New York Times, December 19, 2014; “La transformation du Club Med en une marque mondiale de tourisme haut de gamme,” Le Hub, October 14, 2011; “Le haut-de-gamme, la stratégie payante du Club Med face à la concurrence,” Paris Tribune, July 25, 2014; Martin Soma, “Club Med, Leader des vacances tout compris, l'empire du soleil levant change d'orbite,” Management Magazine, Novembre 2014, pp. 30-34; Club Med, www. clubmed. com. In the years 1980-1990, decline of the attractiveness of the concept of holiday homes and the sharp rise of competition at lower prices weakened Club Med's posi-tion. The company's strategy at that point was unclear—it was neither a volume nor a value strategy. In addition, the economic crisis of 1993, a result of the Gulf war, and the events of September 2001 severely affected Club Med in the same way it affected all kinds of tourism. In 2004, Club Med decided to redirect to a value strategy in order to target an international clientele that wanted comfort, elegance, service, and customization. The holiday package offer was therefore repositioned with the closure of entry-level vacation villages (classified 2 trident), renovation of other villages in 4 trident to 5 tri-dent, and the creation of a new range of luxury 5 trident (villages, villas, and chalets). Club Med now offers an all-inclusive premium with a high range of services and an extension of the à la carte services that come with gourmet food and high-quality drinks. Starting at 4 trident, all clubs offer a spa in partnership with a famous brand. The shows in the resorts are all designed by specialized companies. Clubs for children have dedicated spaces with an emphasis on nature and local culture. The sports schools offer up to 10 different disciplines with qualified coaches and quality equipment. For its 5 trident resorts, Club Med chooses sites of exception in the most beautiful destinations of the world, such as Cancun in Mexico, Punta Cana in the Dominican Republic, and Kani in the Maldives. The development of these resorts is entrusted to renowned architects and designers. The services developed are high-end with all-day room service, a concierge service, and champagne offered after 6 p. m. Private villas come with a butler. In the 5 trident resorts in the Maldives, the villas are placed on stilts; clients have private access to the sea, and can observe marine life through a transparent floor in the room. This repositioning to the high-end has also neces-sitated a change in the relationship between custom-ers, called Gentle Members, and staff, called Gentle Organizers. Club Med has 15,000 Gentle Organizers of 100 different nationalities to meet the requirements of its international clientele. They are qualified in various fields and specialize in cooking, sport, amusement, and client-servicing. Trainings to inculcate precision and a sense of premium service have been developed. A resort school has even been created in Vittel, France; it welcomes 10,000 trainees every year. Club Med is always looking to recruit real talent and unique personalities. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
448 PART 5 | CRe ATing V Alue patients. Coverage begins from the moment initial surgery is completed and ends 24 hours after a patient has been discharged. Parkway's Pantai Hospital in Penang, Malaysia, caters to patients at all socioeconomic levels. At the low-est price range, beds in the open ward, painted a cool lavender, begin at $40. However, a Deluxe Room costing $110 per night has the feel of a luxury chalet. It is fully air-conditioned and features a lounge area with a dining table and private bathroom. A refrigerator is provided as well: patients in Pantai Penang's Deluxe suites are meant to feel as much at home as possible. Gleneagles Singapore has a novel way of attract-ing new patients. The hospital invites specialists to purchase or rent rooms on its premises. Then, because of proximity, these doctors tend to admit their patients to Gleneagles, the admissions desk operates around the clock to accommodate every patient that walks in through the door. A patient is allowed to proceed to the admissions desk at any time of day, without the need for a referral, and be guaranteed a bed. Gleneagles has 700 doctors and, across the whole of Singapore, the group has around 4228 doctors. Parkway understands that patients have the right to be treated with dignity, respect, and be kept fully ap-prised of the progress of their treatment, via a translator if needed. A patient in a Parkway hospital is also always entitled to request a second opinion from an accredited doctor; the company believes every patient must be al-lowed to participate in, and understand, their own health care needs. Parkway Patient Assistance (PPA), one of the Gleneagles Singapore's initiatives, provides a one-stop service for international patients looking for specialist expertise, personalized care, and cutting-edge technol-ogy. PPA staff also provides advice on estimated costs of treatments and procedures. The CEO of Parkway Holdings, Dr. Tan See Leng, has noted that Asia is becoming a hub for patient treat-ment. He believes that the next 1-2 years will see great benefits for Asian health care providers, as long as high-quality service is provided. Parkway Group's biggest strength lies in its ability to capture the market for medical tourists in the Asian region, expected to be worth at least $10 billion by 2015. Low-cost, high-quality health care in Asia is estimated to attract over 10 million tourists a Marketing Excellence >> Parkway Group Hotels Parkway Group Healthcare, headquartered in Singapore, was founded by Dr. Lim Cheok Peng and others in 1987 and has grown internationally by an-nexing other hospitals. For example, Parkway's joint venture with Apollo Hospitals in India has facilitated its expansion into that market. Parkway's hospitals provide exceptional patient care and offer specialty clinics in areas, including oncology, neurology, optom-etry, and fertility. Its radiology department serves hos-pitals regionally, its laboratories serve inpatients and outpatients in Singapore, and it runs a physical reha-bilitation service. In 2013, the Medical Travel and Health Tourism Quality Alliance (MTQVA) ranked Singapore's Gleneagles Hospital, Parkway's flagship facility, as ninth highest on its list for medical tourism in 2013. According to the MTQVA, Gleneagles provides top-quality medical services in a top-quality location. This high acclaim is testament to Parkway Group's primary mission, which is to make a difference in people's lives through a high level of patient care. Parkway's focus on providing excellent service starts with its pre-admission procedure and continues through post-surgical care. To take patients' needs fully into account, the company applies a different set of service standards in different hospitals. In all its hospitals, how-ever, patients can just approach the reception counter and ask for assistance instead of making appointments beforehand. Doctors on duty make the preliminary recom-mendations, then hospital administrators bring in appro-priate specialists to provide the necessary care. Parkway operates 18 hospitals with over 3,500 beds in Singapore, Malaysia, Brunei, India, China, and the United Arab Emirates. Patients are treated like five-star hotel guests. At Danat Al Emarat Women & Children's Hospital in Abu Dhabi, patient rooms are fully equipped with high-speed Internet, video-on-demand, and video games for children. The Royal Suites at Danat Al Emarat have dedicated medi-cal staff exclusive to each suite. But Parkway attends to more than just a patient's comforts. At Singapore's flagship Gleneagles Hospital, post-surgical care insurance provides coverage for treatment of postsurgical complications for all | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
Designing An D MAn Aging se RVi Ces | chapter 14 449 2. Parkway hospitals do not employ many doctors but depend on the use of the hospital services by private specialists. What are the risks in this approach? Sources: “Moving Up the Value Chain,” Business Times, November 10, 2009; “Patient Guide,” Parkway Health, www. parkwayhealth. com; “Overview,” Pantai Holdings Berhad, www. pantai. com; “Sustainable Design,” Danat Al Emarat Women & Children's Hospital, www. danatalemarat. ae; “Gleneagles Hospital,” Parkway Health, www. parkwayhealth. com. year. If Parkway Group continues to expand its reach and maintain the world-class quality of its medical establish-ments, then the sky is the limit for what it can achieve. Questions 1. With many hospitals in Asia competing in the medical tourism market, how can Parkway position itself in order to attract more patients? | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
450 My Marketing Lab™ Improve Y our Grade! Over 10 million students improved their results using the Pearson My Labs. Visit mymktlab. com for simulations, tutorials, and end-of-chapter problems. In This Chapter, We Will Address the Following Questions 1. How can new products be categorized? (p. 451) 2. What challenges does a company face in developing new products and services? (p. 453) 3. What organizational structures and processes do managers use to oversee new-product development? (p. 456) 4. What are the main stages in developing new products and services? (p. 458) 5. What is the best way to manage the generation of new ideas? (p. 460) 6. What is the best way to manage concept and strategy development? (p. 467) 7. What is the best way to manage the commercialization of new products? (p. 472) 8. What factors affect the rate of diffusion and consumer adoption of newly launched products and services? (p. 476)The unique features of General Motors' innovative On Star in-car communication system are highly valued by GM's customers. Source: General Motors, LLC 2011 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
451 15Introducing New Market Offerings New-Product Options There are a variety of types of new products and ways to create them. 2 Make or Bu Y A company can add new products through acquisition or development. When acquiring, the company can buy other companies, buy patents from other companies, or buy a license or franchise from another company. Swiss food giant Nestlé has increased its presence in North America by acquiring a variety of different brands such as Carnation, Stouffer's, Ralston Purina, Dreyer's Ice Cream, Jenny Craig, Gerber, Poland Springs, and Power Bar. 3 But firms can successfully make only so many acquisitions. At some point, they need organic growth— the development of new products from within. Praxair, worldwide provider of industrial gases, achieved an ambi-tious goal of $200 million per year of double-digit new annual sales growth only through a healthy dose of organic growth and a large number of smaller but significant $5 million projects. 4 For product development, the company can create new products in its own laboratories, or it can contract with independent researchers or new-product development firms to develop specific new products or new tech-nology. 5 Firms such as Samsung, GE, Diageo, Hershey, and USB have engaged new-product consulting boutiques to provide fresh insights and points of view. New-product development shapes the company's future. Improved or replacement products and services can maintain or build sales; new-to-the-world products and services can transform industries and companies and change lives. Companies that challenge industry norms and apply imaginative solutions will delight and engage consumers, as General Motors has done with On Star. 1 Technology has always played an important role in the automobile industry, and breakthrough innova-tions can have enormous payoffs. General Motors has found a real winner in its On Star technology, a creative blend of cellular technology, Bluetooth, GPS, speakers, and, most importantly, human operators. The in-car communication system provides both safety and convenience benefits, includ-ing hands-free calling, turn-by-turn navigation, stolen vehicle location assistance, and an Automatic Crash Response System that contacts the driver immediately if airbags have been activated and sends emergency medical assistance if needed. Two thousand advisers staff the call center 24 hours a day and can help drivers if they have a flat tire, run out of gas, need to find the nearest bank or pizza parlor, or just want the weather report or a phone number. An On Star adviser can even unlock a car via satellite. More than 4. 5 million GM owners were so satisfied with the service, which is backed by a strong ad campaign, that they signed up to pay for it after their six-month free trial expired. On Star FMV (“for my vehicle”) expands many of these benefits to non-GM cars for a sign-up fee and monthly charge by replacing the existing rear view mirror with a special On Star mirror. Marketers play a key role in new-product develop-ment by identifying and evaluating ideas and working with R&D and other areas in every stage of development. This chapter provides a detailed analysis of the new-product development process. Much of the discussion is equally relevant to new products, services, or business models. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
452 PART 5 | CRe ATing V Alue TYpes of New produc Ts New products range from new-to-the-world items that create an entirely new market to minor improvements or revisions of existing products. Most new-product activity is devoted to improving existing products. Some recent product launches in the supermarket were brand extensions, such as Tide To Go Stain Eraser, Gillette Fusion Pro Glide Styler, Dawn Power Clean, Crest 3D White Glamorous White Toothpaste, and Coconut Delight Oreo Fudge Cremes. 6 At Sony, modifications of established products accounted for more than 80 percent of new-product activity. It is increasingly difficult to identify blockbuster products that will transform a market, but continuous innovation can broaden the brand meaning and also force competitors to play catch-up. 7 Armstrong World Industries moved from selling floor coverings to selling ceilings to decorating all interior surfaces. Once a running-shoe manufacturer, Nike now competes with makers of all types of athletic shoes, clothing, and equip-ment. Its innovative Fuel Band measures a person's energy output during the day and allows it to be shared with others online; its sock-like Flyknit Racer shoes are environmentally friendly and create a wholly different running experience. 8 Fewer than 10 percent of all new products are truly innovative and new to the world. 9 These products incur the greatest cost and risk. And while radical innovations can hurt the company's bottom line in the short run, if they succeed they can improve the corporate image, create a greater sustainable competitive advantage than ordinary products, and produce significant financial rewards. 10 Keurig pioneered the one-cup-at-a-time pod-style brewing system that has swept homes and offices alike. For the speed, convenience, and variety offered, users are willing to pay 10 times the cost of a traditionally brewed cup of coffee, helping Keurig sales approach $4 billion and its sales based revenue market share exceed 40 percent. 11 Another innovative new product that commands a premium is Beats by Dr. Dre headphones. 12 Beats By Dre Born Andrew Young and a founding member of N. W. A and famed rap producer, Dr. Dre had made an indel-ible mark on the music scene before becoming an entrepreneur. His Beats by Dre headphones, launched in 2006 with music mogul Jimmy Iovine, have become a must for many music lovers despite costing $300, nearly 10 times what ordinary ear buds sell for. Their appeal is in the thumping bass-heavy sound and sleek look, even if the reviews among audiophiles are somewhat mixed. With strong adoption among celebrity musicians and athletes—the headphones were seen every-where at the 2012 Summer Olympic Games in London—Beats became as fashionable as they were practical and an essential modern lifestyle item. Beats by Dre has partnered with firms like Chrysler, HP, and HTC to build its sound technology in their cars, computers, and smart phones and has also introduced its own version of ear buds and other products. The company was acquired by Apple for $3 billion in August 2014. Companies typically must create a strong R&D and marketing partnership to pull off a radical innovation. 13 The right corporate culture is another crucial determinant; the firm must prepare to cannibalize existing products, tolerate risk, and maintain a future market orientation. 14 A keen understanding of customers is also paramount. 15 Few reliable techniques exist for estimating demand for radi-cal innovations. 16 Focus groups can provide perspective on customer interest and need, but marketers may need a probe-and-learn approach based on observation and feedback of early users' experiences and other means such as online chats or product-focused blogs. High-tech firms in telecommunications, computers, consumer elec-tronics, biotech, and software in particular seek radical innovation. 17 They face a number of product-launch challenges: high technological Beats by Dre's innovative features and design permits the brand to command a premium price in the marketplace. Source: © epa european pressphoto agency b. v. /Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 453 uncertainty, high market uncertainty, fierce competition, high investment costs, short product life cycles, and scarce funding sources for risky projects. 18 Successes abound, however. Goggle has launched a number of path-breaking products and is looking for more. 19 GOOGL e Since its beginnings as the quintessential search engine, Google has launched a wide variety of products that earned its reputation as one of the most innovative companies and amassed a market cap exceeding $300 billion. The company has introduced a series of related online products—notably gmail e-mail, Google+ social networking, and the Google Chrome enhanced browser. It has made a strong entry in the mobile market with its Andrioid operating sys-tem and its acquisition of Motorola Mobility for $12. 5 billion. But not all new products are hits; some that seemed to miss their mark were Google Answers, Dodgeball, and Lively. Perhaps one of Google's most ambitious new products is Google Glass, a computer worn like eyewear with an optical display that allows the user to answer calls, record video, and take photos with voice activation, connect to a smart phone, post to social media, and perform Google searches, among other things. The company has been beta-testing the product with thousands of Glass Explorers, who are paying $1,500 each for the opportunity to be an early adopter and pass along feedback. Google X, the internal group that developed Google Glass, is looking into other “out of this world” products, like self-driving cars and balloons that can transmit broadband Internet to remote regions from 12 miles in the air. Challenges in New-Product Development In retailing, consumer goods, electronics, autos, and other industries, the time to bring a product to market has been cut in half. 20 For instance, luxury leather-goods maker Louis Vuitton has implemented a new factory format dubbed Pégase so it could ship fresh collections to its boutiques every six weeks—more than twice as frequently as in the past—giving customers more new looks to choose from. 21 Google co-founder Sergey Brin is a strong supporter of innovative new products such as Google Glass. Source: © epa european pressphoto agency b. v. /Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
454 PART 5 | CRe ATing V Alue The I NNova TIo N IMpera TIve In an economy of rapid change, continuous innovation is a necessity. Companies that fail to develop new prod-ucts leave themselves vulnerable to changing customer needs and tastes, shortened product life cycles, increased domestic and foreign competition, and especially new technologies. Google, Dropbox, and Box update their software daily. 22 Highly innovative firms are able to repeatedly identify and quickly seize new market opportunities. They create a positive attitude toward innovation and risk taking, routinize the innovation process, practice teamwork, and allow their people to experiment and even fail. One such firm is W. L. Gore. 23 W. L. G Ore Best known for its GORE-TEX high-performance fabrics, W. L. Gore has introduced breakthrough versions of guitar strings, dental floss, medical devices, and fuel cells—while constantly reinventing the uses of the polymer polytetrafluoroeth-ylene (PTFE). Several principles guide the company's new-product development. First, it works with potential customers. Its thoracic graft, designed to combat heart disease, was developed in close collaboration with physicians. Second, Gore has a distinctly egalitarian culture; it lets employees choose projects and appoints few product leaders and teams. The company likes to nurture “passionate champions” who convince oth-ers a project is worth their time and commitment, and leaders have positions of authority because they have followers. The development of the fuel cell rallied more than 100 of Gore's 9,000 research associates. Third, all research associates spend 10 percent of their work hours on “dabble time,” developing their own ideas. Promising ideas are judged according to a “Real, Win, Worth” exercise: Is the opportunity real? Can we win? Can we make money? Fourth, Gore knows when to let go, though dead ends in one area can spark innovation in another: Elixir acoustic guitar strings were the result of a failed venture into bike cables. Even successful ventures may need to move on. Glide shred-resistant dental floss was sold to Procter & Gamble because Gore knew retailers want to deal with a company selling a family of health care products. The 10,000-person private company now has operations in dozens of countries around the globe and revenue of more than $3 billion. Innovation is about “creating new choices” the competition doesn't have access to, says IDEO's CEO Tim Brown. It isn't about brilliant people spontaneously generating new ideas, he argues, but about finding hidden assumptions and ignored processes that can change the way a company does business. 24 New-produc T success Most established companies focus on incremental innovation, entering new markets by tweaking products for new customers, using variations on a core product to stay one step ahead of the market, and creating interim solutions for industry-wide problems. With the widespread adoption of smart phones, mobile apps are becoming a lucrative busi-ness, as the creators of Angry Birds video game have found, securing their leadership with continual innovation. 25 YOU STAY DRY, PROTECTED AN D FOCUS ED OUTSIDE gore-tex. com Experience mo re WITH GORE-TEX® PRO SHELL INSIDE. The question isn't if you' re going to climb in unpr edictable weathe r, it's how. Whether enduring gusty winds, r ain, sleet or snow, GORE-TEX products impr ove perf ormance by providing dur ably waterpr oof, windp roof and breathable pr otection and comf ort—guar anteed. That's why the best outdoor br ands choose GORE-TEX product technology. The North Face Point Fi ve Jacket Source: W. L. Gore & Associates Through different policies and processes, W. L. Gore has created an innovative culture that has produced numerous new product successes. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 455 an Gry Bir Ds A spectacular success, Angry Birds has transcended its origins as a mobile app to become a cultural phenomenon and entrenched brand franchise. Created in Finland by Niklas Hed and commercialized by Rovio Entertainment, the video game uses a slingshot to hurl brightly colored birds at green pigs trying to take shelter. It scored 50 million downloads in its first year while becoming the top seller at the Apple App Store, spawning a series of sequels, RIO Seasons and Space, and two subsequent releases tied to Star Wars. Rovio has kept users interested in existing titles by continually adding new levels to the games—Angry Birds had 63 levels when it began, which grew to more than 360. Taking a page from Disney, the brand has been successfully extended within and outside entertainment, with toys, games, backpacks, fruit snacks, underwear, and more that have reached $650 million in sales. Rovio— Finnish for “bonfire”—is worth an estimated $9 billion. There is an Angry Birds television show, comic book series, and planned 3-D movie; its You Tube site has had more than 1 billion views. The brand has more than 400 partners, from Coca-Cola to Intel to Kraft. Rovio has also opened up retail stores in China and themed activity parks in Finland, China, and the United Kingdom. Newer companies create disruptive technologies that are cheaper and more likely to alter the competitive space. Established companies can be slow to react or invest in these disruptive technologies because they threaten their investment. Then they suddenly find themselves facing formidable new competitors, and many fail. 26 To avoid this trap, incumbent firms must carefully monitor the preferences of both customers and noncustomers and uncover evolving, difficult-to-articulate customer needs. 27 What else can a company do? In a classic study of industrial products, new-product specialists Cooper and Kleinschmidt found that the number-one success factor is a unique, superior product. Such products succeed 98 percent of the time, compared with products with a moderate advantage (58 percent success) or minimal advantage (18 percent success). Another key factor is a well-defined product concept. The com-pany carefully defines and assesses the target market, product requirements, and benefits before proceeding. Other success factors are technological and marketing synergy, quality of execution in all stages, and mar-ket attractiveness. Products designed with other countries and a global perspective in mind also tended to fare better. 28 New-produc T fa Ilure New products continue to fail at rates estimated as high as 50 percent or even 95 percent in the United States and 90 percent in Europe. 29 The reasons are many: ignored or misinterpreted market research; overestimates of mar-ket size; high development costs; poor design or ineffectual performance; incorrect positioning, advertising, or Mobile app Angry Birds is so popular that there are even themed activity parks in some different countries. Source: Sarkanniemi Adventure Park | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
456 PART 5 | CRe ATing V Alue price; insufficient distribution support; competitors who fight back hard; and inadequate ROI or payback. Some additional drawbacks new-product launches face are: Fragmented markets. Companies must aim their new products at smaller market segments than before, which can mean lower sales and profits for each product. Social, economic, and governmental constraints. New products must satisfy consumer safety and environ-mental concerns and stringent production constraints. Cost of development. A company typically must generate many ideas to find just one worthy of development and thus often faces high R&D, manufacturing, and marketing costs. Capital shortages. Some companies with good ideas cannot raise the funds to research and launch them. Shorter required development time. Companies must learn to compress development time with new tech-niques, strategic partners, early concept tests, and advanced marketing planning. Poor launch timing. New products are sometimes launched too late, after the category has already taken off, or too early for sufficient interest to have gathered. Shorter product life cycles. Rivals are quick to copy success. At one time, Sony enjoyed a three-year lead on its new products, but Matsushita and others learned to copy them within six months, leaving Sony with barely time to recoup its investment. Lack of organizational support. The new product may not mesh with the corporate culture or receive the financial or other support it needs. But failure comes with the territory, and truly innovative firms accept it as part of what's necessary to be suc-cessful. Silicon Valley marketing expert Seth Godin maintains, “It is not just OK to fail; it's imperative to fail. ”30 Many Internet companies are the result of failed earlier ventures and experience numerous setbacks as their ser-vices evolve. Dogster. com, a social network site for dog lovers, emerged after the spectacular demise of Pets. com. 31 Failure is not always the end of an idea. Recognizing that 90 percent of experimental drugs are unsuccessful, Eli Lilly looks at failure as an inevitable part of discovery and encourages its scientists to find new uses for compounds that fail at any stage in a human clinical trial. Evista, a failed contraceptive, became a $1 billion-a-year drug for osteoporosis. Strattera was unsuccessful as an antidepressant but became a top seller for attention deficit/hyperactivity disorder. 32 Organizational Arrangements Many companies use customer-driven engineering to develop new products, incorporating customer preferences in the final design. Some, such as SAP, have relied on organizational changes to help develop more successful new products. 33 sa P After a series of high-profile acquisitions of firms such as Success Factors, Sybase, and Ariba, business software leader SAP set out to create internal start-ups to pursue new business ideas in adjacent markets or just in markets where large companies typically did not operate. Hiring entrepreneurs from inside and outside its ranks, the company treated every project much like a typical start-up, making funding decisions like an investor at each stage of the new-product development process. In formulating their business ideas, the start-ups had to be cognizant of SAP's global footprint and the need to satisfy regulatory requirements around the world, but they could also tap into its strong relationships with clients. One success was the development of HANA, the company's real-time database analysis technology. HANA was designed to be a powerful com-puting platform, so SAP also enlisted the developer community to discover applications that could be part of that platform. New-product development requires senior management to define business domains, product categories, and specific criteria. One company established the following acceptance criteria: The product can be introduced within five years. The product has a market potential of at least $50 million and a 15 percent growth rate. The product can provide at least 30 percent return on sales and 40 percent on investment. The product can achieve technical or market leadership. Bud Ge TING for New-produc T develop Me NT R&D outcomes are so uncertain that it is difficult to use normal investment criteria when budgeting for new-product development. Some companies simply finance as many projects as possible, hoping to achieve a few winners. Others apply a conventional percentage-of-sales figure or spend what the competition spends. Still oth-ers decide how many successful new products they need and work backward to estimate the required investment. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 457 Table 15. 1 shows how a company might calculate the cost of new-product development. The new-products manager at a large consumer packaged-goods company reviewed 64 ideas. Sixteen passed the screening stage and cost $1,000 each to review at this point. Half, or eight, survived the concept-testing stage, at a cost of $20,000 each. Four survived the product-development stage, at a cost of $200,000 each. Two did well in the test market, costing $500,000 each. When they were launched, at a cost of $5 million each, one was highly successful. Thus, this one successful idea cost the company $5,721,000 to develop, while 63 others fell by the wayside for a total development cost of $13,984,000. Unless the company can improve its pass ratios and reduce costs at each stage, it will need to budget nearly $14 million for each successful new idea it hopes to find. Hit rates vary. Inventor Sir James Dyson claims he made 5,127 prototypes of his bagless, transparent vacuum cleaner over a 14-year period before getting it right, resulting in the best-selling vacuum cleaner by revenue in the United States with more than 20 million sold and annual revenue of more than $1. 5 billion. He doesn't lament his failures, though: “If you want to discover something that other people haven't, you need to do things the wrong way... watching why that fails can take you on a completely different path. ” His latest successes: the Airblade, an energy-efficient hand drier for public restrooms, and the Air Multiplier, a bladeless table fan. 34 or Ga NIz ING New-produc T develop Me NT Companies handle the organizational aspect of new-product development in several ways. Many assign respon-sibility to product managers. But product managers are often busy managing existing lines and may lack the skills and knowledge to develop and critique new products. Table 15. 1 Cost of Finding One Successful New Product (Starting with 64 New Ideas) Stage Number of Ideas Pass Ratio Cost per Product Idea Total Cost 1. Idea screening 64 1:4 $ 1,000 $ 64,000 2. Concept testing 16 1:2 20,000 320,000 3. Product development 8 1:2 200,000 1,600,000 4. Test marketing 4 1:2 500,000 2,000,000 5. National launch 2 1:2 5,000,000 10,000,000 $5,721,000 $13,984,000 Inventor Sir James Dyson acknowledges that he has endured many unsuccessful new product ideas on his way to finding a few successful ones. Source: © Adrian Sherratt/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
458 PART 5 | CRe ATing V Alue Kraft and Johnson & Johnson have employed new-product managers who report to category managers. Westinghouse has used growth leaders —a full-time job for its most creative and successful managers. 35 Intuit uses a team of innovation catalysts —design-thinking coaches—to help mangers work on initiatives throughout the organi-zation. 36 Some companies have a high-level management committee charged with reviewing and approving proposals. Large companies often establish a new-product department headed by a manager with substantial authority, access to top management, and responsibility for generating and screening new ideas, working with the R&D department, and carrying out field testing and commercialization. Eli Lilly put every department engaged in the process of turning molecules into medicine—from R&D staff to the team who seek FDA approval—under one roof to improve efficiency and cut development time. 37 Some firms open innovation centers in new geographical locations to better design new products for those regions. Diageo, purveyor of premium spirits, beers, and wine, opened such a center in Singapore to support the company's Asian growth initiatives. 38 Cross-Fun CTional Teams 3M, Dow, and General Mills have assigned new-product development to venture teams, cross-functional groups charged with developing a specific product or business. These “intrapreneurs” are relieved of other duties and given a budget, time frame, and “skunkworks” setting. Skunkworks are informal workplaces, sometimes garages, where intrapreneurial teams work to develop new products. As it transforms itself from a PC company to a solutions company in the cyber-security and data cen-ter design and management business, Dell has established separate headquarters for its new units with marching orders to think entrepreneurially. 39 Communities of practice are often housed on internal Web sites where employees from different departments are encouraged to share knowledge and skills with others. 40 Japanese pharmaceutical maker Esai Co. has formed more than 400 innovation communities. One helped develop a jelly-like medication for Alzheimer's patients that is easy to swallow. Of the 29 innovation community projects commissioned by grocery retailer Supervalu, 22 were implemented over a 10-year period. 41 Cross-functional teams can collaborate and use concurrent new-product development to push new products to mar-ket. 42 Concurrent product development resembles a rugby match, with team members passing the new product back and forth as they head toward the goal. Using this system, Allen-Bradley Corporation (a maker of industrial controls) was able to develop a new device in just two years, down from six under its old system. Cross-functional teams help ensure that engineers are not driven to create a “better mousetrap” when potential customers don't need or want one. Crowdsour Cing The Internet lets companies engage external participants in the new-product development process in rich and meaningful ways. Through crowdsourcing, these paid or unpaid outsiders can offer needed expertise or a different perspective on a task or project that might otherwise be overlooked. Companies such as Edison Nation and the Big Idea Group have sprung up to tap into crowdsourcing's possibilities. 43 Quirky combines its own design, branding, engineering, and sales teams with 864,000 online partici-pants, forming a community for devising new products. The company sifts through thousands of submissions weekly to identify eight to ten ideas that merit greater scrutiny. For the chosen ideas, it will design, manufacture, and sell the product. Inventors and any members of the community who contribute to the design and branding get a cut. 44 As another example, P&G wanted to create a dishwashing detergent “smart enough” to reveal when the right amount of soap has been added to a sink full of dirty plates. With its formidable in-house research and develop-ment team stumped, the company went to Inno Centive, a spin-off of Eli Lilly, which handed the problem over to its global network of volunteer tinkerers—professionals, retired scientists, students, and others. As it happened, an Italian chemist working from her home laboratory had pioneered a new kind of dye that turns dishwater blue when a certain amount of soap is added. For $30,000 in prize money, P&G had a solution. 45 s Tage-ga Te sys Tems Many top companies use the stage-gate system to divide the innovation process into stages, with a gate or checkpoint at the end of each. 46 The project leader, working with a cross-functional team, must bring a set of known deliverables to each gate before the project can pass to the next stage. To move from the business plan stage into product development requires a convincing market research study of consumer needs and interest, a competitive analysis, and a technical appraisal. Senior managers review the criteria at each gate to make one of four decisions: go, kill, hold, or recycle. For example, at Tata Steel, initial ideas generated by “trend scouting” become future pipeline developments and then, in turn, priority product and process developments and finally product and process implementations. About 50 to 100 ideas are generated for every one that makes it to implementation, and at any point in time, 50 to 70 pri-ority product or process development projects are in the pipeline before the final-phase gate. 47 The stages in the new-product development process are shown in Figure 15. 1. Many firms have parallel sets of projects working through the process, each at a different stage. 48 Think of the process as a funnel: A large number | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 459 of initial new-product ideas and concepts are winnowed down to a few high-potential products that are ultimately launched. But the process is not always linear. Many firms use a spiral development process that recognizes the value of returning to an earlier stage to make improvements before moving forward. 49 Stage-gate systems make the innovation process visible to all and clarify the project leader's and team's responsibilities at each stage. 50 The gates or controls should not be so rigid, however, that they inhibit learning and the development of novel products. 51 These systems have evolved over the years as users have made them more flexible, adaptive, and scalable; built in better governance; integrated portfolio management; incorporated accountability and continuous improvement; and adapted the process to include open innovation and input from sources outside the company at different stages. 52 Quirky uses crowdsourcing with a large online consumer panel and its own experts to help develop new products. Source: Quirky No No No No No No No No No Yes Y es Yes Y es Yes Y es Yes Yes Yes Yes No Yes Yes Ye Ye Ye Yes Yes Y Send the idea back for product development?7. Market testing6. Product development Have we got a technically and commercially sound product?5. Business analysis Will this product meet our profit goal?4. Marketing strateg y development 1. Idea generation Is the idea worth considering? Modify the product or marketing program?2. Idea screening Is the product idea compatible with company objectives, strategies, and resources?Make future plans Drop8. Commercialization Are product sales meeting expectations?3. Concept development and testing Can we find a good concept consumers say they would tr y?Can we find a cost-effective, affordable marketing strategy?Have product sales met expectations? | Fig. 15. 1 | The New-Product Development Decision Process | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
460 PART 5 | CRe ATing V Alue Managing the Development Process: Ideas Ge Nera TING Ideas The new-product development process starts with the search for ideas. Some marketing experts believe we find the greatest opportunities and highest leverage for new products by uncovering the best possible set of unmet customer needs or technological innovation. 53 New-product ideas can in fact come from interacting with various groups and using creativity-generating techniques. 54 (See “Marketing Memo: Ten Ways to Find Great New-Product Ideas. ”) in Tera CTing wi Th employees Employees can be a source of ideas for improving production, products, and services. 55 Consider what these three firms have done: Toyota reports its employees submit 2 million ideas annually (about 35 suggestions per employee), more than 85 percent of which are implemented. 56 Linked In launched an in-house incubator that allows any employee to organize a team and pitch a project to a group of executives. The company has also created “hackdays”—one Friday a month when employees work on creative projects. 57 Pricewaterhouse Coopers set up an American Idol-style innovation competition dubbed “Power Pitch, ” in which the winning team received $100,000 and the opportunity to implement their proposal for a new line of business that could eventually be worth $100 million in revenue. Live chats and an online platform for discussion and vot-ing led up to a five-team finale televised internally from the company's New Y ork City headquarters. 58 Top management can be another major source of ideas. Some company leaders, such as former CEO Andy Grove of Intel, take personal responsibility for technological innovation in the firm. New-product ideas can come from a variety of outside sources, as discussed below, however, their chances of receiving serious attention often depend on having an employee in the organization take the role of product champion. in Tera CTing wi Th ou Tsiders Encouraged by the open innovation movement, many firms are going outside their bounds to tap external sources of new ideas, including customers, scientists, engineers, patent attorneys, university and commercial laboratories, industrial consultants and publications, channel members, marketing and advertising agencies, and even competitors. 59 “Marketing Insight: P&G's Connect + Develop Approach to Innovation” describes how P&G has made new-product development more externally focused. 1. Run informal sessions where groups of customers meet with company engineers and designers to discuss problems and needs and brainstorm potential solutions. 2. Allow time off—scouting time—for technical people to putter on their own pet projects. Google has allowed 20 percent time off; 3M 15 percent; and Rohm & Haas 10 percent. 3. Make a customer brainstorming session a standard feature of plant tours. 4. Survey your customers: Find out what they like and dislike in your and competitors' products. 5. Undertake “fly-on-the-wall” or “camping out” research with customers, as do Fluke and Hewlett-Packard. 6. Use iterative rounds: a group of customers in one room, focusing on identifying problems, and a group of your technical people in the next room, listening and brainstorming solutions. Immediately test proposed solutions with the group of customers. 7. Set up a keyword search that routinely scans trade publications in multiple countries for new-product announcements. 8. Treat trade shows as intelligence missions, where you view all that is new in your industry under one roof. 9. Have your technical and marketing people visit your suppliers' labs and spend time with their technical people—find out what's new. 10. Set up an idea vault, and make it open and easily accessed. Allow employees to review the ideas and add constructively to them. Source: Adapted from Robert G. Cooper, Product Leadership: Creating and Launching Superior New Products (New York: Perseus Books, 1998). Adapted with permission from the author. See also Robert G. Cooper and Scott J. Edgett, “Ideation for Product Innovation: What are the Best Methods?,” PDMA Visions, March 2008, pp. 12-17. Ten Ways to Find Great New-Product Ideas marketing memo | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
461 Pricewaterhouse Coopers has run an American Idol style innovation competition. Source: © Mark Peterson 2011 P&G'S Connect + Develop Approach to Innovation In the first decade of the 21st century, one of the corporations with the fastest-growing revenue and profit was Procter & Gamble. Fueling its growth were successful new products such as Olay Regenerist, Swiffer, Mr. Clean Magic Eraser, Pulsonic toothbrushes, and Actonel, prescribed for osteoporosis. Many of these reflected innovation in what then-CEO A. G. Lafley called “the core”—core markets, categories, brands, tech-nologies, and capabilities. To more effectively develop its core, P&G has adopted a “Connect + Develop” model that emphasizes the pursuit of outside innovation. The firm collaborates with organizations and individuals around the world, searching for proven technologies, packages, and products it can improve, scale up, and market on its own or in partnership with other companies. It has strong relationships with external designers, distributing product development around the world to increase what it calls “con-sumer sensing. ” P&G identifies the top 10 customer needs, closely related products that could leverage or benefit from existing brand equity, and “game boards” that map the adoption of technology across different product categories. It may consult government and private labs as well as aca-demic and other research institutions, venture capital firms, individual entrepreneurs, and suppliers, retailers, competitors, and development and trade partners, using online networks to reach thousands of experts worldwide. P&G's three core requirements for a successful Connect + Develop strategy are: 1. Never assume that “ready to go” ideas found outside are truly ready to go. There will always be development work to do, includ-ing risky scale-up. 2. Don't underestimate the internal resources required. A full-time, senior executive will need to run any connect-and-develop initiative. 3. Never launch without a mandate from the CEO. Connect-and-develop cannot succeed if it's cordoned off in R&D. It must be a top-down, company-wide strategy. P&G vets 4,000 submissions annually and actively solicits innova-tion ideas from a larger network of individuals and businesses with a past history of working with the company. Through Connect + Develop—and improvements in product cost, design, and marketing—P&G increased R&D productivity nearly 60 percent during the decade. The innovation success rate has more than doubled, and costs have fallen. Sources: www. pgconnectdevelop. com; Lydia Dishman, “How Outsiders Get Their Products to the Innovation Big League at Proctor & Gamble,” Fast Company, July 13, 2012; Bruce Brown and Scott D. Anthony, “How P&G Tripled Its Innovation Success Rate,” Harvard Business Review, June 2011, pp. 64-72; A. G. Lafley and Ram Charan, The Game Changer: How You Can Drive Revenue and Profit Growth Through Innovation (New York: Crown Business, 2009); Larry Huston and Nabil Sakkab, “Connect and Develop: Inside Procter & Gamble's New Model for Innovation,” Harvard Business Review, March 2006, pp. 58-66. marketing insight Customer needs and wants are the logical place to start the search. 60 Griffin and Hauser suggest that conduct-ing 10 to 20 in-depth experiential interviews per market segment often uncovers the vast majority of customer needs. 61 But other approaches can be profitable (see “Marketing Memo: Seven Ways to Draw New Ideas from Y our Customers”). One marketer-sponsored café in Tokyo tests products of all kinds with affluent, influential young Japanese women. 62 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
462 PART 5 | CRe ATing V Alue 1. Observe how customers are using your product. Medtronic, a medical device company, has salespeople and market researchers regularly observe spine surgeons who use their products and competitive products to learn how theirs can be improved. After living with lower-middle-class families in Mexico City, Procter & Gamble researchers devised Downy Single Rinse, a fabric softener that removed an arduous step from the partly manual laundry process there. 2. Ask customers about their problems with your products. Komatsu Heavy Equipment sent a group of engineers and designers to the United States for six months to ride with equipment drivers and learn how to make products better. Procter & Gamble, recognizing consumers were frustrated that potato chips break and are difficult to save after opening the bag, designed Pringles to be uniform in size and encased in a protective tennis-ball-type can. 3. Ask customers about their dream products. Ask your customers what they want your product to do, even if the ideal sounds impossible. One 70-year-old camera user told Minolta he would like the camera to make his subjects look better and not show their wrinkles and aging. In response, Minolta produced a camera with two lenses, one for rendering softer images of the subjects. 4. Use a customer advisory board to comment on your company's ideas. Levi Strauss uses youth panels to discuss lifestyles, habits, values, and brand engage-ments; Cisco runs Customer Forums to improve its offerings; and Harley-Davidson solicits product ideas from its one million H. O. G. (Harley Owners Group) members. 5. Use Web sites for new ideas. Companies can use specialized search engines such as Technorati to find blogs and postings relevant to their businesses. P&G's corporate global Web site has a Share Your Thoughts section to gain advice and feedback from customers. 6. Form a brand community of enthusiasts who discuss your product. Harley-Davidson and Apple have strong brand enthusiasts and advocates; Sony engaged in collaborative dialogues with consumers to codevelop its Play Station products. LEGO draws on kids and influential adult enthusiasts for feedback on new-product concepts in early stages of development. 7. Encourage or challenge your customers to change or improve your product. Salesforce. com wants its users to develop and share new software applications using simple programming tools; International Flavors & Fragrances gives a toolkit to its customers to modify specific flavors, which IFF then manufactures; LSI Logic Corporation also provides customers with do-it-yourself toolkits so customers can design their own specialized chips; and BMW posted a toolkit on its Web site to let customers develop ideas using telematics and in-car online services. Source: From an unpublished paper, Philip Kotler, “Drawing New Ideas from Your Customers,” 2013. Seven Ways to Draw New Ideas from Your Customers marketing memo The traditional company-centric approach to product innovation is giving way to a world in which companies cocreate products with consumers. At Blank Label. com, you can design your own unique shirt by specifying the cut, size, collar, buttons, cuffs, and pockets you want. 63 As noted above, companies are also increasingly turning to crowdsourcing to generate new ideas. One form of crowdsourcing invites the online community to help create content or software, often with prize money or a mo-ment of glory as an incentive. 64 When Baskin-Robbins ran an online contest to pick its next flavor, 40,000 consum-ers entered. The winning entry—from a 62-year-old grandmother of four—combined chocolate, nuts, and caramel and was launched as Toffee Pecan Crunch. 65 One recent convert to crowdsourcing is Cisco. 66 Cis CO The Cisco Internet of Things (Io T) Grand Challenge (formerly the Cisco I-Prize) is a worldwide initiative, aiming to bring the industry together and accelerate the adoption of breakthrough technologies and products that will contribute to the growth and evolution of the Internet of Things. Awards of U. S. $250,000 in cash prizes are to be shared among three winners, and can be used to jump-start ventures. Cisco also provides winners with mentoring, training, and access to business expertise from Cisco and other supporting organizations. From the inception of I-Prize, Cisco's ratio-nale for these challenges—which drew 2,500 entrepreneurs from 104 countries in its first iteration—was simple: “In many parts of the world, you have incredibly smart people with incredibly great ideas who have absolutely no access to capital to take a great idea and turn it into a business. ” In the first year, high-potential technology start-ups aimed to meet five main criteria with their submissions: (1) Does it address a real pain point? (2) Will it appeal to a big enough market? (3) Is the timing right? (4) If we pursue the idea, will we be good at it? and (5) Can we exploit the opportunity for the long term? The public judged the entries online, where Cisco found the detailed comments even more useful than the actual votes. The winning entry in the first competition was a plan for a sensor-enabled smart-electricity grid. The second competition drew 3,000 participants from more than 156 countries. The winning entry was from a team of five university students from Mexico and based on the idea of a “Life Account” that gathered information about users through connected devices in the physical world and online data from the | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 463 Cisco's I-Prize innovation competition, now called Io T, draws entries from around the world, like this winning team from Russia, and has generated numerous new product ideas. Source: Cisco I-Prize (now referred to Io T Challenge) Moscow Teamvirtual world. The next two Io T Grand Challenges targeted Russia where Cisco has massive investment plans. One of the winning Russian Io T Grand Challenge teams developed a system that uses a mobile phone as a mediator for transmitting data from sensors to healthcare systems and is compatible with all major mobile phone platforms, as well as more than 40 medical devices. As the Cisco I-Prize has evolved into the form of the Cisco Io T Grand Challenge, submissions are now entered into one of six categories: Applications and Application Enablement, Analytics, Management, Networking, Security or Things. Each submis-sion must map to one of a variety of industries Education, Energy, Healthcare, Manufacturing, Oil and Gas, Retail, Smart Cities, Sports and Entertainment or Transportation. Besides producing new and better ideas, cocreation can help customers feel closer to the company and create favorable word of mouth. 67 Getting the right customers engaged in the right way, however, is critical. 68 Lead users can be a good source of input, even when they innovate products without the consent or knowledge of the companies that produce them. Mountain bikes developed as a result of youngsters taking their bikes to the top of a mountain and riding down. When the bikes broke, the youngsters began building more durable bikes and adding motorcycle brakes, improved suspension, and accessories. They, not bike companies, developed these innovations. Some companies, particularly those that want to appeal to younger, leading-edge consumers, bring their lead users into their product-design process. Technical companies can learn a great deal by studying customers who make the most advanced use of the company's products and who recognize the need for improvements before other customers do. 69 In a business-to-business market, collecting information from distributors and retailers who are not usually in close contact can provide more diverse insights and information. 70 Not everyone believes a customer focus helps create better new products. 71 As Henry Ford famously said, “If I' d asked people what they wanted, they would have said a faster horse. ” Some still caution that being overly focused on consumers who may not really know what they want, or what could be possible, can result in shortsighted product development and miss real potential breakthroughs. 72 Apple and IKEA have reputations for incorporating user input with some caution, and others believe focusing on lead users leads to incremental and not breakthrough innovation. 73 s Tudying Compe Ti Tors Companies can find good ideas by researching the products and services of competitors and other companies. They can find out what customers like and dislike about competitors' products. They can buy their competitors' products, take them apart, and build better ones. They can ask their own sales representatives and intermediaries for ideas. These groups have firsthand exposure to customers and are often the first to learn about competitive developments. Electronic retailer Best Buy even checks with venture capitalists to find out what start-ups are working on. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
464 PART 5 | CRe ATing V Alue To establish the optimal brand positioning for the new product and the right points-of-parity and points-of-differences, marketers need a thorough understanding of the competition. Consider how the fierce video game console battle among Microsoft, Sony, and Nintendo has spurred innovation as each firm attempts to break loose from the pack. 74 Vi De O Ga Me COns OLes Makers of video game consoles fight tooth-and-nail for the minds and hearts of the 1 billion gamers worldwide, 220 million of whom live in the United States. For the 2013 holiday season, Microsoft's new Xbox One went head to head with Sony's new PS4. Although the two game consoles both added many new features—from motion-detection cameras to allow gamers to play using gestures to technology linking the gaming console to a smart phone or tablet—the Xbox One was priced $100 higher than the PS4's $399 list price. Microsoft also lost the early PR battle when it announced policies that angered customers, such as restrictions on the process of gaming and shar-ing games. And the company had a tough act to follow. Its earlier model, the Xbox 360, brought significant power and online functionality to gamers, introducing Achievements and the gamer score to facilitate competition. With sales of more than 75 million units, Xbox 360 also drew more than 40 million users into Microsoft's Xbox Live connected gaming service. The third major player, Nintendo, found great success in 2006 with its Wii gaming system. Bucking industry trends, it chose a cheaper, lower-power chip with fewer graphics capabilities, creating a totally different style of play based on physical gestures. A sleek white design and motion-sensitive wireless controller also made Wii much more engaging and interactive, and Nintendo's decision to embrace outside software developers meant new titles quickly became available. Its collaborative nature made Wii a hit with non-gamers drawn by its capabilities and with hard-core players seeking to master its many intriguing games. The 2012 follow-up, the Wii U, did not attract the same interest, putting Nintendo in a tough spot against its two chief competitors. adop Ting Crea Tivi Ty Te Chniques Internal brainstorming sessions also can be quite effective—if conducted correctly. “Marketing Memo: How to Run a Successful Brainstorming Session” provides some guidelines. If done correctly, group brainstorming sessions can create insights, ideas, and solutions that would have been impossible without everyone's participation. If done incorrectly, they are a painful waste of time that can frustrate and antagonize participants. To ensure success, experts recommend the following: 1. A trained facilitator should guide the session, and the right physical environment must be used. 2. The right participants must be chosen. Sometimes it is useful to have a real mixture with many different points of view. 3. Participants must see themselves as collaborators working toward a common goal. 4. Rules need to be set up and followed so conversations don't get off track. Some structure is needed, though flexibility is desired too. 5. Participants must be given proper background preparation and materials so they can get into the task quickly. 6. Individual sessions before and after the brainstorming can be useful for thinking and learning about the topic ahead of time and for reflecting afterward on what happened. 7. During the session, each participant must be encouraged to participate and think freely and constructively. It may be useful to give participants time to think and gather their thoughts based on what they have heard. 8. To help stimulate thinking, participants may be told to identify and challenge existing assumptions, role-play some aspect of the situation they are analyzing, or consider borrowing ideas from other firms, even outside the industry. 9. Brainstorming sessions must lead to a clear plan of action and implementation so the ideas that materialize can provide tangible value. 10. Brainstorming can do more than just generate ideas—it should help build teams and leave participants better informed and energized. Sources: Anne Fisher, “Why Most Brainstorming Sessions Fail,” Fortune, August 23, 2013; “7 Ways to Enliven Your Next Brainstorming Session,” Forbes, March 18, 2013; Natalie Peace, “Why Most Brainstorming Sessions Are Useless,” Forbes, April 9, 2012; Linda Tischler, “Be Creative: You Have 30 Seconds,” Fast Company, May 2007, pp. 47-50; Michael Myser, “When Brainstorming Goes Bad,” Business 2. 0, October 2006, p. 76; Robert I. Sutton, “Eight Rules to Brilliant Brainstorming,” Business Week IN Inside Innovation, September 2006, pp. 17-21. How to Run a Successful Brainstorming Session marketing memo | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 465 Creativity is mostly about making connections in ways that are not obvious. Here is a sampling of techniques for stimulating creativity in individuals and groups. 75 Attribute listing. List the attributes of an object, such as a screwdriver. Then modify each attribute, such as replacing the wooden handle with plastic, providing torque power, adding different screw heads, and so on. Forced relationships. List several ideas and consider each in relationship to each of the others. In designing new office furniture, for example, consider a desk, bookcase, and filing cabinet as separate ideas. Then imagine a desk with a built-in bookcase or a desk with built-in files or a bookcase with built-in files. Morphological analysis. Start with a problem, such as “getting something from one place to another via a powered vehicle. ” Now think of dimensions, such as the type of platform (cart, chair, sling, bed), the medium (air, water, oil, rails), and the power source (compressed air, electric motor, magnetic fields). By listing every possible combination, you can generate many new solutions. Reverse-assumption analysis. List all the normal assumptions about an entity and then reverse them. Instead of assuming that a restaurant has menus, charges for food, and serves food, reverse each assumption. The new restaurant may decide to serve only what the chef bought that morning, provide some food but charge for the time the person sits at the table, or design an exotic atmosphere and rent the space to people who bring their own food and beverages. New contexts. Take familiar processes, such as people-helping services, and put them into a new con-text. Imagine helping dogs and cats with day care service, stress reduction, psychotherapy, funerals, and so on. Instead of sending hotel guests to the front desk to check in, greet them at curbside and use a wireless device to register them. Mind mapping. Start with an idea, such as a car, then think of the next idea that comes up (say Mercedes) and link it to car, then think of the next association (Germany), and do this with all associa-tions that come up with each new word. Perhaps a whole new idea will materialize. New-product ideas can arise from lateral marketing that combines two product concepts or ideas to create a new offering. 76 Cereal bars are a successful combination of cereal and snacking. Kinder Surprise combined candy with a toy. us ING Idea scree NING In screening ideas, the company must avoid two types of errors. A DROP-error occurs when the company dis-misses a good idea. It is extremely easy to find fault with other people's ideas (Figure 15. 2). Some companies shudder when they look back at ideas they dismissed or breathe sighs of relief when they realize how close they came to dropping what eventually became a huge success. Consider the hit television show Friends. 77 Frien Ds The NBC situation comedy Friends enjoyed a 10-year run from 1994 to 2004 as a perennial ratings powerhouse. But the show almost didn't see the light of the day. According to an internal NBC research report, the pilot episode was described as “not very entertaining, clever, or original” and was given a failing grade, scoring 41 of a possible 100. Ironically, the pilot for an earlier hit sitcom, Seinfeld, was also rated “weak,” though the pilot for the medical drama ER scored a healthy 91. Courteney Cox's Monica was the Friends character who scored best with test audiences, while characters portrayed by Lisa Kudrow and Matthew Perry were deemed to have marginal appeal, and the Rachel, Ross, and Joey characters scored even lower. Adults 35 and older in the sample found the characters as a whole “smug, superficial, and self-absorbed. ” The purpose of screening is to drop poor ideas as early as possible. The rationale is that product-development costs rise substantially at each successive development stage. Most companies require new-product ideas to be described on a standard form for a committee's review. The description states the product idea, the target market, and the competition and roughly estimates market size, product price, development time and costs, manufacturing costs, and rate of return. The executive committee then reviews each idea against a set of criteria. Does the product meet a need? Would it offer superior value? Can it be distinctively advertised or promoted? Does the company have the necessary know-how and capital? Will the new product deliver the expected sales volume, sales growth, and profit? Consumer input may be necessary too. 78"Let's discuss it at our next meeting. ""It will cost too much. ""We've done all right without it. ""It won't work here. " "We've tried it before. " "It can't be done. " "It's not the wa y we do things. ""This isn't the right time. ""I've got a great idea!" | Fig. 15. 2 | Forces Fighting New Ideas Source: With permission of Jerold Panas, Young & Partners Inc. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
466 PART 5 | CRe ATing V Alue Management can rate the surviving ideas using a weighted-index method like that in Table 15. 2. The first column lists factors required for successful product launches, and the second column assigns importance weights. The third column scores the product idea on a scale from 0 to 1. 0, with 1. 0 the highest score. The final step multiplies each factor's importance by the product score to obtain an overall rating. In this example, the product idea scores 0. 69, which places it in the “good idea” level. The purpose of this basic rating device is to promote systematic evaluation and discussion, not to make the decision for management. As the idea moves through development, the company will need to constantly revise its estimate of the product's overall probability of success, using the following formula: A research study almost killed one of the all-time successful TV sitcoms, Friends, reinforcing the fact that research must be interpreted and used carefully. Source: © Pictorial Press Ltd/Alamy Table 15. 2 Product-Idea Rating Device Product Success Requirements Relative Weight (a) Product Score (b)Product Rating (c = a : b) Unique or superior product . 40. 8. 32 High performance-to-cost ratio . 30. 6. 18 High marketing dollar support . 20. 7. 14 Lack of strong competition . 10. 5. 05 Total 1. 00. 69 a Rating scale:. 00-. 30 poor;. 31-. 60 fair;. 61-. 80 good. Minimum acceptance rate:. 61Overall probability of success=Probability of technical completion*Probability of commercialization given technical completion*Probability of economic success given commercialization | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 467 For example, if the three probabilities are estimated at 0. 50, 0. 65, and 0. 74, respectively, the overall probability of success is 0. 24. The company then must judge whether this probability is high enough to warrant continued development. Managing the Development Process: Concept to Strategy Attractive ideas must be refined into testable product concepts. A product idea is a possible product the company might offer to the market. A product concept is an elaborated version of the idea expressed in consumer terms. co Ncep T develop Me NT a Nd Tes TING Concept development is a necessary but not sufficient step for new-product success. Marketers must also distin-guish winning concepts from losers by testing. Con Cep T developmen T Imagine a large food-processing company gets the idea of producing a powder to add to milk to increase its nutritional value and taste. This is a product idea, but consumers don't buy product ideas; they buy product concepts. A product idea can be turned into several concepts. The first question is: Who will use this product? It can be aimed at infants, children, teenagers, young or middle-aged adults, or older adults. Second, what primary benefit should this product provide—taste, nutrition, refreshment, or energy? Third, when will people consume this drink—at breakfast, midmorning, for lunch, midafternoon, with dinner, late evening? By answering these questions, a company can form several concepts: Concept 1. An instant drink for adults who want a quick nutritious breakfast without preparation. Concept 2. A tasty snack for children to drink as a midday refreshment. Concept 3. A health supplement for older adults to drink in the late evening before bed. Each concept represents a category concept that defines the product's competition. An instant breakfast drink would compete against bacon and eggs, breakfast cereals, coffee and pastry, and other breakfast alternatives. A snack drink would compete against soft drinks, fruit juices, sports drinks, and other thirst quenchers. Suppose the instant-breakfast-drink concept looks best. The next task is to show where this pow-dered product would stand in relationship to other breakfast products via perceptual mapping. Figure 15. 3(a) uses the two dimensions of cost and preparation time to create a product-positioning map for the breakfast drink, which offers low cost and quick preparation. Its nearest competitors are cold cereal and breakfast bars; its most distant is bacon and eggs. These contrasts can help communicate and promote the concept to the market. Next, the product concept becomes a brand concept. Figure 15. 3(b) is a brand-positioning map, a per-ceptual map showing the current positions of three existing brands of instant breakfast drinks (A-C) as seen by consumers. As Chapter 10 described, it can also be useful to overlay current or desired consumer preferences on to the map. Figure 15. 3(b) also shows four segments of consumers (1-4) whose prefer-ences are clustered around the points on the map. The brand-positioning map helps the company decide how much to charge and how calorific to make its drink. Three segments (1-3) are well served by existing brands (A-C). The company would not want to position itself next to one of those existing brands, unless that brand is weak or inferior or market demand was high enough to be shared. As it turns out, the new brand would be distinctive in the medium-price, medium-calorie market or in the high-price, high-calorie market. There is also a seg-ment of consumers (4) clustered fairly near the medium-price, medium-calorie market, suggesting this may offer the greatest opportunity. Con Cep T Tes Ting Concept testing means presenting the product concept to target consumers, physically or symbolically, and getting their reactions. The more the tested concepts resemble the final product or experience, the more dependable concept testing is. Concept testing of prototypes can help avoid costly mistakes, but it may be especially challenging with radically different, new-to-the-world products. 79 Visualization techniques can help respondents match their mental state with what might occur when they are actually evaluating or choosing the new product. 80 Slow Pancakes Quick Expensive Inexpensive Bacon and eggs Cold cereal Hot cereal Instant breakfast Low in calories High in calories High price per ounce Low price per ounce Brand C Brand ABrand B(a) Product-positioning Ma p (Breakf ast Market) (b) Brand-positioning Ma p (Instant Breakf ast Market) Segment 3 Segment 4 Segment 2 Segment 1 | Fig. 15. 3 | Product and Brand Positioning | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
468 PART 5 | CRe ATing V Alue In the past, creating physical prototypes was costly and time consuming, but today firms can use rapid prototyp-ing to design products on a computer and then produce rough models to show potential consumers for their reac-tions. Firms developing big-ticket items such as orthopedic devices for knee replacements or electric cars use rapid prototyping in new-product development to save time and money. 81 In response to a short-term oversupply of wine in the marketplace, the makers of Kendall-Jackson developed two new brands by using rapid prototyping to quickly bring their ideas to life, selling 100,000 cases of each brand, 10 times more than expected, in the process. 82 Companies are also using virtual reality to test product concepts. Virtual reality programs use computers and sensory devices (such as gloves or goggles) to simulate reality. Lockheed Martin uses virtual reality to develop its GPS satellites for the U. S. Air Force. 83 Supercomputers allow for elaborate product testing to assess changes in per-formance and supplement consumer input. Kenworth used to test new truck designs with clay models and wind tunnels. Using supercomputer analysis, it can now make more accurate estimates of how much drag and fuel use it can eliminate with new trimmed and tapered mud flaps (answer: $400 of a typical truck's annual gas bill). 84 Concept testing presents consumers with an elaborated version of the concept. Here is the elaboration of con-cept 1 in our milk example: Our product is a powdered mixture added to milk to make an instant breakfast that gives all the day's needed nutrition along with good taste and high convenience. The product comes in three flavors (choc-olate, vanilla, and strawberry) and individual packets, six to a box, at $2. 49 a box. After receiving this information, researchers measure product dimensions by having consumers respond to questions like these: 1. Communicability and believability —“ Are the benefits clear to you and believable?” If the scores are low, the concept must be refined or revised. 2. Need level —“Do you see this product solving a problem or filling a need for you?” The stronger the need, the higher the expected consumer interest. 3. Gap level —“Do other products currently meet this need and satisfy you?” The greater the gap, the higher the expected consumer interest. Marketers can multiply the need level by the gap level to produce a need-gap score. A high score means the consumer sees the product as filling a strong need not satisfied by available alternatives. 4. Perceived value —“Is the price reasonable in relationship to value?” The higher the perceived value, the higher is expected consumer interest. 5. Purchase intention —“Would you (definitely, probably, probably not, definitely not) buy the product?” Consumers who answered the first three questions positively should answer “Definitely” here. 6. User targets, purchase occasions, purchasing frequency —“Who would use this product, when, and how often?” Respondents' answers indicate whether the concept has a broad and strong consumer appeal, what products it competes against, and which consumers are the best targets. The need-gap levels and purchase-intention levels can A in-depth conjoint analysis helped to design the Courtyard by Marriott hotel chain. Source: © Jeff Greenberg “0 people images”/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 469 be checked against norms for the product category to see whether the concept appears to be a winner, a long shot, or a loser. One food manufacturer rejects any concept that draws a definitely-would-buy score lower than 40 percent. Conjoin T analysis Consumer preferences for alternative product concepts can be measured with conjoint analysis, a method for deriving the utility values that consumers attach to varying levels of a product's attributes. 85 Conjoint analysis has become one of the most popular concept-development and testing tools. For example, Marriott used it to design its Courtyard hotel concept. 86 With conjoint analysis, respondents see different hypothetical offers formed by combining varying levels of the attributes and rank them. Management can then identify the most appealing offer and its estimated market share and profit. In a classic illustration, academic research pioneers Green and Wind used this approach in connection with developing a new spot-removing, carpet-cleaning agent for home use. 87 Suppose the new-product marketer is considering five design elements: Three package designs (A, B, C—see Figure 15. 4) Three brand names (K2R, Glory, Bissell) Three prices ($1. 19, $1. 39, $1. 59) A possible Good Housekeeping seal (yes, no) A possible money-back guarantee (yes, no) Although the researcher can form 108 possible product concepts with these five elements (3 × 3 × 3 × 2 × 2), it would be too much to ask consumers to rank them all from most to least preferred. A sample of, say, 18 contrasting product concepts is feasible. The marketer now uses a statistical program to derive the consumer's utility functions for each of the five at-tributes (see Figure 15. 5). Utility ranges between zero and one; the higher the utility, the stronger the consumer's preference for that level of the attribute. Looking at packaging, package B is the most favored, followed by C and then A (A has hardly any utility). The preferred names are Bissell, K2R, and Glory in that order. The consumer's utility varies inversely with price. A Good Housekeeping seal is preferred, but it does not add that much utility and may not be worth the effort to obtain it. A money-back guarantee is strongly preferred. The consumer's most desired offer is package design B, brand name Bissell, priced at $1. 19, with a Good Housekeeping seal and a money-back guarantee. We can also determine the relative importance to this consumer of each attribute—the difference between the highest and lowest utility level for that attribute. The greater the C A B | Fig. 15. 4 | Samples for Conjoint Analysis No01. 0 Yes Utility Money-Back Guarantee?A01. 0 BCUtility Package Design K2R01. 0 Glory Bissell Utility Brand Name $1. 1901. 0 $1. 39 $1. 59Utility Retail Price No01. 0 Yes Utility Good Housekeeping Seal?| Fig. 15. 5 | Utility Functions Based on Conjoint Analysis | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
470 PART 5 | CRe ATing V Alue difference, the more important the attribute. Clearly, this consumer sees price and package design as the most important attributes, followed by money-back guarantee, brand name, and a Good Housekeeping seal. Preference data from a sufficient sample of target consumers help to estimate the market share any specific offer is likely to achieve, given any assumptions about competitive response. Still, the company may not launch the market offer that promises to gain the greatest market share because of cost considerations. The most customer-appealing offer is not always the most profitable offer to make. Under some conditions, researchers will collect the data by presenting not a full-profile description of each offer, but two factors at a time. For example, respondents may see a table with three price levels and three pack-age types and indicate which of the nine combinations they would like best, second-best, and so on. Another table consists of trade-offs between two other variables. This trade-off approach may be easier to use when there are many variables and possible offers. However, it is less realistic in that respondents are focusing on only two variables at a time. Adaptive conjoint analysis (ACA) is a “hybrid” data collection technique that combines self-stated or explicated importance ratings of attributes with pair-wise trade-off tasks comparing two options. 88 Marke TING s Tra Te GY develop Me NT Following a successful concept test, the new-product manager will develop a preliminary three-part strategy plan for introducing the new product into the market. The first part describes the target market's size, struc-ture, and behavior; the planned brand positioning; and the sales, market share, and profit goals sought in the first few years: The target market for the instant breakfast drink is families with children who are receptive to a new, convenient, nutritious, and inexpensive form of breakfast. The company's brand will be positioned at the higher-price, higher-quality end of the instant-breakfast-drink category. The company will aim initially to sell 500,000 cases or 10 percent of the market, with a loss in the first year not exceeding $1. 3 million. The second year it will aim for 700,000 cases or 14 percent of the market, with a planned profit of $2. 2 million. The second part outlines the planned price, distribution strategy, and marketing budget for the first year: The product will be offered in chocolate, vanilla, and strawberry, in individual packets of six to a box, at a retail price of $2. 49 a box. There will be 48 boxes per case, and the case price to distributors will be $24. For the first two months, dealers will be offered one case free for every four cases bought, plus cooperative-advertising allowances. Free samples will be distributed in stores. Coupons for 50 cents off will appear in newspapers and online. The total sales promotional budget will be $2. 9 million. An advertising budget of $6 million will be split 50:50 between national and local. Two-thirds will go into television and one-third into online. Advertising copy will emphasize the benefit concepts of nutrition and convenience. The advertising-execution concept will revolve around a small boy who drinks instant breakfast and grows strong. During the first year, $100,000 will be spent on marketing research to buy store audits and consumer-panel information to monitor market reaction and buying rates. The third part of the marketing strategy plan describes the long-run sales and profit goals and marketing-mix strategy over time: The company intends to win a 25 percent market share and realize an after-tax return on investment of 12 percent. To achieve this return, product quality will start high and be improved over time through technical research. Price will initially be set at a high level and gradually drop to expand the market and meet competition. The total promotion budget will be boosted about 20 percent each year, with the ini-tial advertising-sales promotion split of 65:35 eventually evolving to 50:50. Marketing research will be reduced to $60,000 per year after the first year. Bus INess a Nal Ys Is After management develops the product concept and marketing strategy, it can evaluate the proposal's business attractiveness. Management needs to prepare sales, cost, and profit projections to determine whether they satisfy company objectives. If they do, the concept can move to the development stage. As new information comes in, the business analysis will undergo revision and expansion. es Tima Ting To Tal sales Total estimated sales are the sum of estimated first-time sales, replacement sales, and repeat sales. Sales-estimation methods depend on whether the product is purchased once (such | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 471 as an engagement ring or retirement home), infrequently, or often. For one-time products, sales rise at the beginning, peak, and approach zero as the number of potential buyers becomes exhausted [see Figure 15. 6(a)]. If new buyers keep entering the market, the curve will not go to zero. Infrequently purchased products—such as automobiles, microwaves, and industrial equipment— exhibit replacement cycles dictated by physical wear or obsolescence associated with changing styles, features, and performance. Sales forecasting for this product category calls for estimating first-time sales and replacement sales separately [see Figure 15. 6(b)]. Frequently purchased products, such as consumer and industrial nondurables, have product life-cycle sales resembling Figure 15. 6(c). The number of first-time buyers initially increases and then decreases as fewer buyers are left (assuming a fixed population). Repeat purchases occur soon, providing the product satisfies some buyers. The sales curve eventually falls to a plateau representing a level of steady repeat-purchase volume; by this time, the product is no longer a new product. In estimating sales, the manager's first task is to estimate first-time purchases of the new product in each period. To estimate replacement sales, management researches the product's survival-age distribution —that is, the number of units that fail in year one, two, three, and so on. The low end of the distribution indicates when the first replacement sales will take place. Because replacement sales are difficult to estimate before the product is in use, some manufacturers base the decision to launch a new product on their estimate of first-time sales alone. For a frequently purchased new product, the seller estimates repeat sales as well as first-time sales. A high rate of repeat purchasing means customers are satisfied; sales are likely to stay high even after all first-time purchases take place. Some products and brands are bought a few times and dropped. Colgate's Wisp disposable toothbrush received much trial, but repeat sales slowed consid-erably after that. 89 es Tima Ting Cos Ts and pro Fi Ts Costs are estimated by the R&D, manufacturing, marketing, and finance departments. Table 15. 3 illustrates a five-year projection of sales, costs, and profits for the instant breakfast drink. Row 1 shows projected sales revenue over the five-year period. The company expects to sell $11,889,000 (approximately 500,000 cases at $24 per case) in the first year. Behind this projec-tion is a set of assumptions about the rate of market growth, the company's market share, and the factory-realized price. Row 2 shows the cost of goods sold, which hovers around 33 percent of sales revenue. We find this cost by estimating the average cost of labor, ingredients, and packaging per case. Row 3 shows the expected gross margin, the difference between sales revenue and cost of goods sold. Row 4 shows anticipated development costs of $3. 5 million, including product-development cost, marketing research costs, and manufacturing development costs. Row 5 shows the estimated mar-keting costs over the five-year period to cover advertising, sales promotion, and marketing research and an amount allocated for sales force coverage and marketing administration. Row 6 shows the allocated overhead to this new product to cover its share of the cost of executive salaries, heat, light, and so on. Row 7, the gross contribution, is gross margin minus the preceding three costs. Row 8, supplementary contribution, lists any change in income to other company products caused by the new-product introduc-tion. Dragalong income is additional income to them, and cannibalized income is reduced income. 90 Table 15. 3 assumes no supplementary contributions. Row 9 shows net contribution, which in this case is the same as gross contribution. Row 10 shows discounted contribution—that is, the present value of each future contribution discounted at 15 percent per annum. For example, the company will not receive $4,716,000 until the fifth year. This amount is worth only $2,346,000 today if the company can earn 15 percent on its money through other investments. 91 Finally, row 11 shows the cumulative discounted cash flow, the accumulation of the annual contributions in row 10. Two points are of central interest. First is the maximum investment exposure, the highest loss the project can create. The company will be in a maximum loss position of $4,613,000 in year 1. The second is the payback period, the time when the company recovers all its investment, including the built-in return of 15 percent. The payback period here is about three and a half years. Management must decide whether to risk a maximum investment loss of $4. 6 million and a possible payback period of three and a half years. As part of their financial analysis, firms may conduct a breakeven or risk analysis. Sales Time(a) One-time Purchased Product Time Sales(b) Infrequently Purchased Product Replacement sales Sales Time(c) Frequently Purchased Product Repeat purchase sales | Fig. 15. 6 | Product Life-Cycle Sales for Three Types of Products | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
472 PART 5 | CRe ATing V Alue Managing the Development Process: Development to Commercialization Up to now, the product has existed only as a word description, a drawing, or a prototype. The next step represents a jump in investment that dwarfs the costs incurred so far. The company will determine whether the product idea can translate into a technically and commercially feasible product. If not, the accumulated project cost will be lost, except for any useful information gained in the process. produc T develop Me NT The job of translating target customer requirements into a working prototype is helped by a set of methods known as quality function deployment (QFD). The methodology takes the list of desired customer attributes (CAs) generated by market research and turns them into a list of engineering attributes (EAs) that engineers can use. For example, customers of a proposed truck may want a certain acceleration rate (CA). Engineers can turn this into the required horsepower and other engineering equivalents (EAs). A major contribution of QFD is improved communication between marketers, engineers, and manufacturing people. 92 physi Cal pro To Types The goal of the R&D department is to find a prototype that embodies the key attributes in the product-concept statement, performs safely under normal use and conditions, and can be produced within budgeted manufacturing costs. Sophisticated virtual reality technology and the Internet now permit rapid prototyping and flexible development processes. R&D must also decide how consumers will react to different colors, sizes, and weights. Historically, a yellow mouthwash supported an “antiseptic” claim (Listerine), red a “refreshing” claim (Lavoris), and green or blue a “cool” claim (Scope). Marketers need to supply R&D with information about what attributes consumers seek and how they judge whether these are present. Firms rigorously test product prototypes internally. Vibram, which makes its own Five Fingers line as well as soles for all types of shoes—such as for skateboarding, cycling, rock climbing, and fly fishing—employs a team of product testers. The company puts its products into the most extreme conditions by executing tests directly in the field and employing a series of procedures:93 If our chemist creates a new compound targeted towards road running applications, first we perform a bat-tery of lab tests to understand the compound's physical properties. Next, we bring natural environments and surfaces into the laboratory and calculate information. Then lastly shoes are distributed to our tester team who will document things like weather/temp, distance, location, and running surfaces, etc. They'll comment on the differences in the grip of the soles. We then compile the results and make a decision on validation. Table 15. 3 Projected Five-Year Cash Flow Statement (in thousands of dollars) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 1. Sales revenue $ 0 $11,889 $15,381 $19,654 $28,253 $32,491 2. Cost of goods sold 0 3,981 5,150 6,581 9,461 10,880 3. Gross margin 0 7,908 10,231 13,073 18,792 21,611 4. Development costs-3,500 0 0 0 0 0 5. Marketing costs 0 8,000 6,460 8,255 11,866 13,646 6. Allocated overhead 0 1,189 1,538 1,965 2,825 3,249 7. Gross contribution-3,500-1,281 2,233 2,853 4,101 4,716 8. Supplementary contribution 0 0 0 0 0 0 9. Net contribution-3,500-1,281 2,233 2,853 4,101 4,716 10. Discounted contribution (15%)-3,500-1,113 1,691 1,877 2,343 2,346 11. Cumulative discounted cash flow-3,500-4,613-2,922-1,045 1,298 3,644 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 473 Cus Tomer Tes Ts When the prototypes are ready, they must be put through rigorous functional and customer tests before they enter the marketplace. Alpha testing tests the product within the firm to see how it performs in different applications. After refining the prototype further, the company moves to beta testing with customers. Consumer testing can bring consumers into a laboratory or give them samples to use at home. Procter & Gamble has on-site labs such as a diaper-testing center where dozens of mothers bring their babies to be studied. To develop its Cover Girl Outlast all-day lip color, P&G invited 500 women to come to its labs each morning to apply the lipstick, record their activities, and return eight hours later so it could measure remaining lip color, resulting in a product that came with a tube of glossy moisturizer that women could apply on top of their color without looking at a mirror. In-home placement tests are common for products from ice cream flavors to new appliances. Marke T Tes TING After management is satisfied with functional and psychological perfor-mance, the product is ready to be branded with a name, logo, and packag-ing and go into a market test, if desired. Not all companies undertake market testing. A company officer at Revlon stated: “In our field—primarily higher-priced cosmetics not geared for mass distribution—it would be unnecessary for us to market test. When we develop a new product, say an improved liquid makeup, we know it's going to sell because we're familiar with the field. And we've got 1,500 dem-onstrators in department stores to promote it. ” One problem is that many managers find it difficult to kill a project that attracted much effort and attention, even if they should do so based on market testing. The result is an unfortunate (and typically unsuccessful) escalation of commitment. 94 Many companies, however, believe market testing, if done correctly, can yield valuable information about buyers, dealers, marketing program ef-fectiveness, and market potential. The main issues are: How much market testing should be done, and what kind(s)? The amount of testing is influenced by the investment cost and risk on the one hand and time pressure and research cost on the other. High-investment-high-risk products, whose chance of failure is high, must be market tested; the cost will be an insignificant percentage of total project cost. High-risk products that create new-product categories (the first instant-breakfast drink) or have novel features (the first gum-strengthening toothpaste) war-rant more market testing than modified products (another toothpaste brand). Consumer-goods marke T Tes Ting Consumer-products tests seek to estimate four variables: trial, first repeat, adoption, and purchase frequency. Many consumers may try the product but not rebuy it, or it might achieve high permanent adoption but low purchase frequency (like gourmet frozen foods). Here are four major methods of consumer-goods market testing, from least to most costly. Sales-Wave Research Consumers who initially try the product at no cost are reoffered it, or a competitor's product, at slightly reduced prices. The offer may be made as many as five times (sales waves), while the company notes how many customers select it again and their reported level of satisfaction. Sales-wave research can be implemented quickly, conducted with a fair amount of security, and carried out without final packaging and advertising. However, because customers are preselected, it does not indicate trial rates the product would achieve with different sales incentives, nor does it indicate the brand's power to gain distri-bution and favorable shelf position. Simulated Test Marketing Thirty to 40 qualified shoppers are asked about brand familiarity and preferences in a specific product category and attend a brief screening of both well-known and new TV or print ads. One ad advertises the new product but is not singled out for attention. Consumers receive a small amount of money and are invited into a store where they may buy any items. The company notes how many consumers buy the new brand and competing brands. This provides a measure of the ad's relative effectiveness against competing ads in stimulating trial. Consumers are asked the reasons for their purchases or nonpurchases. Those who did not buy Vibram has professional product testers who put the soles it makes for shoes through extreme conditions to see how they hold up. Source: © ZUMA Press, Inc. /Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
474 PART 5 | CRe ATing V Alue the new brand are given a free sample. Some weeks later, they are contacted to ascertain product attitudes, usage, satisfaction, and repurchase intention and are offered an opportunity to repurchase any products. This method can give some surprisingly accurate results about advertising effectiveness and trial rates (and repeat rates if extended) in a much shorter time and at a fraction of the cost of using real test markets, making it especially appealing to marketers of fast-moving consumer goods. 95 As media and channels have grown more fragmented, however, it has become harder to truly simulate market conditions with only traditional approaches. Controlled Test Marketing The company with the new product specifies the number of stores and geographic locations it wants to test. A research firm delivers the product to a panel of participating stores and controls shelf position, pricing, and number of facings, displays, and point-of-purchase promotions. Electronic scanners measure sales at checkout. The company can also evaluate the impact of local advertising and promotions and interview a sample of customers later to get their impressions of the product. It does not have to use its own sales force, give trade allowances, or “buy” distribution. However, controlled test marketing provides no information about how to sell the trade on carrying the new product. It also exposes the product and its features to competitors' scrutiny. Test Markets The ultimate way to test a new consumer product is to put it into full-blown test markets. The company chooses a few representative cities and puts on a full marketing communications campaign, and the sales force tries to sell the trade on carrying the product and giving it good shelf exposure. Test marketing also measures the impact of alternative marketing plans by implementing them in different cities. A full-scale test can cost more than $1 million, depending on the number of test cities, the test duration, and the amount of data the company wants to collect. In designing a test market, management faces several decisions: (1) How many test cities? (2) Which test cities? (3) Length of the test? (4) Which information to collect? and (5) What action to take? A number of considerations come into play for each decision. Columbus, Ohio, is a popular location for testing new fast-food products: The city is reasonably representative demographically of the rest of the nation, with a healthy dose of college-aged students, and is a contained media market with reasonable ad rates. 96 Many major global consumer goods makers such as L 'Oréal, Philips, and Nikon like to test in South Korea be-cause its demanding but fair consumers and well-developed marketing infrastructure help ensure that products are in good enough shape to enter other global markets. 97 Gucci likes to test its luxury products in China because it feels consumers there indicate where the luxury market is heading. 98 Many companies today skip test marketing despite its benefits and rely on faster and more economical testing methods. Starbucks regularly launches products before they have been deemed “perfect, ” based on this philosophy espoused by chief digital officer, Adam Brotman: “We don't think it is okay if things aren't perfect, but we're willing to innovate and have speed to market trump a 100% guarantee that it's be perfect. ” The company's mobile payments app had a number of flaws and corrections in its first six months after launch, but it now generates 3 million mobile transactions a week. 99 General Mills prefers to launch new products in 25 percent of the country, an area too large for rivals to disrupt. Managers review retail scanner data, which tells them within days how the product is doing and what corrective fine-tuning to do. Some companies like to test their new products in South Korea because of the open-minded attitude of consumers who live there and the marketing infrastructure that exists. Source: © JTB MEDIA CREATION, Inc. /Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 475 business-goods marke T Tes Ting Business goods can also benefit from market testing. Expensive industrial goods and new technologies will normally undergo alpha and beta testing. 100 During beta testing, the company's technical people observe how customers use the product, a practice that often exposes unanticipated problems of safety and servicing and alerts the company to customer training and servicing requirements. The company can also observe how much value the equipment adds to the customer's operation, as a clue to subsequent pricing. Companies must interpret beta test results carefully because only a small number of test customers are used, they are not randomly drawn, and tests are somewhat customized to each site. Another risk is that testers unim-pressed with the product may leak unfavorable reports about it. Square doesn't employ beta testing—preferring to test at its own internally controlled locations—because it feels it should never put out an unfinished product. 101 At trade shows the company can observe how much interest buyers show in the new product, how they react to various features and terms, and how many express purchase intentions or place orders. In distributor and dealer display rooms, products may stand next to the manufacturer's other products and possibly competitors' products, yielding preference and pricing information in the product's normal selling atmosphere. However, customers who come in might not represent the target market, or they might want to place early orders that cannot be filled. Industrial manufacturers come close to using full test marketing when they give a limited supply of the product to the sales force to sell in a limited number of areas that receive promotion support and printed catalog sheets. co MMerc Ial Iza TIo N Commercialization incurs the company's highest costs to date. 102 Too often companies are so focused on develop-ing a new product that they neglect to spend adequate time developing a winning marketing launch program. 103 The firm will need to contract for manufacture, or it may build or rent a full-scale manufacturing facility. Most new-product campaigns also require a sequenced mix of market communication tools to build awareness and ultimately preference, choice, and loyalty. 104 To introduce a major new consumer packaged good into the national market can cost $25 million to $100 mil-lion in advertising, promotion, and other communications in the first year. For new food products, marketing expenditures typically represent 57 percent of first-year sales. To raise funds, some inventors who don't have the backing of a major corporation are relying on crowdfunding and companies like Kickstarter. 105 With crowdfunding, individuals or start-ups fund their projects by using social media and other means to generate interest and contributions from the general public. when (Timing) Suppose a company has almost completed the development work on its new product and learns a competitor is nearing the end of its development work. The company faces three choices: 1. First entry —The first firm entering a market usually enjoys the “first mover advantages” of locking up key distributors and customers and gaining leadership. But if rushed to market before it has been thoroughly debugged, the first entry can backfire. 2. Parallel entry —The firm might time its entry to coincide with the competitor's entry. The market may pay more attention when two companies are advertising the new product. 106 3. Late entry —The firm might delay its launch until after the competitor has borne the cost of educating the market, and its product may reveal flaws the late entrant can avoid. The late entrant can also learn the size of the market. If a new product replaces an older product, the company might delay until the old product's stock has been drawn down. If the product is seasonal, it might wait until the season arrives; often a product waits for a “killer application” to occur. Many companies are now encountering competitive “design-arounds”—rivals are making their own versions just different enough to avoid patent infringement and royalties. 107 where ( geographi C s Tra Tegy) Most companies will develop a planned market rollout over time. In choosing rollout markets, the major criteria are market potential, the company's local reputation, the cost of filling the pipeline, the cost of communication media, the influence of the area on other areas, and competitive penetration. Small companies select an attractive city and put on a blitz campaign, entering other cities one at a time. Large companies introduce their product into a whole region and then move to the next. Companies with national distribution networks, such as auto companies, launch new models nationally. With the Internet connecting far-flung parts of the globe, competition is more likely to cross national borders. Companies are increasingly rolling out new products simultaneously across the globe. However, masterminding a global launch poses challenges, as Chapter 8 described, and a sequential rollout across countries may still be the best option. 108 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
476 PART 5 | CRe ATing V Alue To whom (Targe T-marke T prospe CTs) Within the rollout markets, the company must target initial distribution and promotion to the best prospect groups. Ideally these should be early adopters, heavy users, and opinion leaders it can reach at low cost. Few groups include all these, so the company should rate prospects and target the best group. The aim is to generate strong sales as soon as possible to attract further prospects. how ( in Trodu CTory marke T s Tra Tegy) Because new-product launches often take longer and cost more than expected, many potentially successful offerings suffer from underfunding. It's important to allocate sufficient time and resources—yet not overspend—as the new product gains traction in the marketplace. 109 To coordinate the many tasks in launching a new product, management can use network-planning techniques such as critical path scheduling (CPS), which develops a master chart showing the simultaneous and sequential ac-tivities that must take place. By estimating how much time each activity takes, planners estimate completion time for the entire project. Any delay in any activity on the critical path—the shortest route to completion—will delay the proj-ect. If the launch must be completed sooner, the planner searches for ways to reduce time along the critical path. 110 The Consumer-Adoption Process Adoption is an individual's decision to become a regular user of a product and is followed by the consumer-loyalty process. New-product marketers typically aim at early adopters and use the theory of innovation diffusion and consumer adoption to identify them. s Ta Ges IN The adop TIo N process An innovation is any good, service, or idea that someone perceives as new, no matter how long its history. Everett Rogers defines the innovation diffusion process as “the spread of a new idea from its source of invention or creation to its ultimate users or adopters. ”111 The consumer-adoption process is the mental steps through which an individual passes from first hearing about an innovation to final adoption. 112 They are: 1. Awareness —The consumer becomes aware of the innovation but lacks information about it. 2. Interest —The consumer is stimulated to seek information about the innovation. 3. Evaluation —The consumer considers whether to try the innovation. 4. Trial —The consumer tries the innovation to improve his or her estimate of its value. 5. Adoption —The consumer decides to make full and regular use of the innovation. The new-product marketer should facilitate movement through these stages. A water filtration system manu-facturer might discover that many consumers are stuck in the interest stage; they do not buy because of their uncertainty and the large investment cost. 113 But these same consumers would be willing to use a water filtration system at home on a trial basis for a small monthly fee. The manufacturer should consider offering a trial-use plan with option to buy. fac Tors I Nflue Nc ING The adop TIo N process Marketers recognize the following characteristics of the adoption process: differences in individual readiness to try new products, the effect of personal influence, differing rates of adoption, and differences in organizations' readiness to try new products. Some researchers are focusing on use-diffusion processes as a complement to adoption process models to see how consumers actually use new products. 114 readiness To Try new produ CTs and personal in Fluen Ce Everett Rogers defines a person's level of innovativeness as “the degree to which an individual is relatively earlier in adopting new ideas than the other members of his social system. ” Some people are the first to adopt new clothing fashions or new appliances; some doctors are the first to prescribe new medicines. 115 See the adopter categories in Figure 15. 7. After a slow start, an increasing number of people adopt the innovation, the number reaches a peak, and then it diminishes as fewer nonadopters remain. The five adopter groups differ in their value orientations and their motives for adopting or resisting the new product. 116 Innovators are technology enthusiasts; they are venturesome and enjoy tinkering with new products and mastering their intricacies. In return for low prices, they are happy to conduct alpha and beta testing and report on early weaknesses. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 477 Early adopters are opinion leaders who carefully search for new technologies that might give them a dramatic competitive advantage. They are less price sensitive and are willing to adopt the product if given personalized solutions and good service support. Early majority are deliberate pragmatists who adopt the new technology when its benefits have been proven and a lot of adoption has already taken place. They make up the mainstream market. Late majority are skeptical conservatives who are risk averse, technology shy, and price sensitive. Laggards are tradition-bound and resist the innovation until the status quo is no longer defensible. Each group requires a different type of marketing if the firm wants to move its innovation through the full product life cycle. In addition to or instead of targeting opinions leaders, some experts advocate targeting revenue leaders with a new product—those customers with higher customer lifetime-values—to accelerate the path to profitability. 117 Personal influence, the effect one person has on another's attitude or purchase probability, has greater signifi-cance in some situations and for some individuals than others, and it is more important in evaluation than in the other stages. It has more power over late than early adopters and in risky situations. Companies often target innovators and early adopters with product rollouts. When Nike entered the skate-boarding market, it recognized an anti-establishment, big-company bias from the target market that could present a sizable challenge. To gain “street cred” with teen skaters, it sold exclusively to independent shops, advertised nowhere but skate magazines, and gained sponsorships from admired pro riders by engaging them in product design. 118 Chara CTeris Ti Cs o F The innova Tion Some products catch on immediately (roller blades), whereas others take a long time to gain acceptance (diesel engine autos). One new-product concept that quickly took hold was Stub Hub online ticket reselling service. 119 stu BHu B The cofounders of Stub Hub, Jeff Fluhr and Eric Barker, came up with the idea for their site when they were Stanford MBA students. Realizing there were far too many unused tickets for sporting events, theater events, and concerts, they decided to set up an “e Bay for tickets” where sellers could set a price higher or lower than face value depending on demand. Stub Hub would take a 10 percent cut from the buyer and a 15 percent cut from the seller on every purchase. The service had to negotiate state laws restricting ticket reselling, but by 2006 it was making $100 million in revenue, split between sports (75 percent), concerts (20 percent), and theater (5 percent) in a market estimated to be worth $4 billion in the United States. Stub Hub was sold to e Bay for $310 million in 2007. Original-ticket seller Ticketmaster and its Live Nation parent have fought the company from the start, threatening legal action, introducing paperless tickets that limit reselling, and launching the Ticket Exchange service to compete. Stub Hub has sets its sights on being more than a ticket seller and becoming a multiplatform e-commerce site. A brand-building multimedia campaign launched in 2012 was designed to add emotional components to the company's functional message, including the idea of tickets “growing on trees. ” With 40 percent of primary tickets going unsold, Stub Hub is also emphasizing helping consumers discover events and attend more of them. 16% Laggards34% Late majority34% Early majority13 % Early adopters2 % Innovators Time of Adoption of Innovations| Fig. 15. 7 | Adopter Categorization on the Basis of Relative Time of Adoption of Innovations Source: Tungsten, http://en. wikipedia. org/ wiki/Everett_Rogers. Based on E. Rogers, Diffusion of Innovations (London: Free Press, 1962). | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
478 PART 5 | CRe ATing V Alue Five characteristics influence an innovation's rate of adoption. We consider them for digital video recorders (DVRs) for home use, as exemplified by Ti Vo. 120 1. Relative advantage —the degree to which the innovation appears superior to existing products. The greater the perceived relative advantage of using a DVR, say, for easily recording favorite shows, pausing live TV, or skip-ping commercials, the more quickly it was adopted. 2. Compatibility —the degree to which the innovation matches consumers' values and experiences. DVRs are highly compatible with the preferences of avid television watchers. 3. Complexity —the degree to which the innovation is difficult to understand or use. DVRs are somewhat com-plex and therefore took a slightly longer time to penetrate into home use. 4. Divisibility —the degree to which the innovation can be tried on a limited basis. This provided a sizable chal-lenge for DVRs—sampling could occur only in a retail store or perhaps a friend's house. 5. Communicability —the degree to which the benefits of use are observable or describable to others. The fact that DVRs have some clear advantages helped create interest and curiosity. Other characteristics that influence the rate of adoption are cost, risk and uncertainty, scientific credibility, and social approval. The new-product marketer must research all these factors and give the key ones maximum atten-tion in designing the product and its marketing program. organiza Tions' readiness To adop T innova Tions The creator of a new teaching method would want to identify innovative schools. The producer of a new piece of medical equipment would want to identify innovative hospitals. Adoption is associated with variables in the organization's environment (community progressiveness, community income), the organization itself (size, profits, pressure to change), and the administrators (education level, age, sophistication). Other forces come into play in trying to get a product adopted into organizations that receive the bulk of their funding from the government, such as public schools. A controversial or innovative product can be squelched by negative public opinion. Stub Hub, a leader in online ticket reselling, is considering other e-commerce options while adding a more emotional component to its core business. choose product managers or new-product managers, committees, departments, or venture teams. Increas-ingly, they are adopting cross-functional teams, con-necting to individuals and organizations outside the company through crowd-sourcing and other means, and developing multiple product concepts. 3. Eight stages define the new-product development pro-cess: idea generation, screening, concept development and testing, marketing strategy development, business Summary 1. Once a company has segmented the market, chosen its target customer groups and identified their needs, and selected its desired market positioning, it is ready to develop and launch appropriate new products and ser-vices. Marketing should participate with other depart-ments in every stage of new-product development. 2. Successful new-product development requires the company to establish an effective organization for managing the development process. Companies can Source: These materials have been reproduced with the permission of Stub Hub, Inc. © 2014 STUBHUB, INC. ALL RIGHTS RESERVED. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 479 analysis, product development, market testing, and commercialization. At each stage, the company must decide whether to drop the idea or move to the next stage. 4. The consumer-adoption process is the process by which customers learn about new products, try them, and adopt or reject them. Today many marketers are targeting heavy users and early adopters of new products because both groups can be reached by specific media and tend to be opinion leaders. The consumer-adoption process is influenced by many factors beyond the marketer's con-trol, including consumers' and organizations' willingness to try new products, personal influences, and the charac-teristics of the new product or innovation. My Marketing Lab Go to mymktlab. com to complete the problems marked with this icon as well as for additional assisted-graded writing questions. Applications Marketing Debate Whom Should You Target with New Products? Some new-product experts maintain that getting close to customers through intensive research is the only way to develop successful new products. Other experts disagree and say customers can't possibly provide useful feedback on what they don't know and can't provide insights that will lead to breakthrough products. Take a position: Consumer research is critical to new-product development versus Consumer research may not be all that helpful in new-product development. Marketing Discussion Product Innovativeness Think about the last new product you bought. How do you think its success will be affected by the five charac-teristics of an innovation: relative advantage, compatibility, complexity, divisibility, and communicability? revolutionary MP3 player became “the Walkman of the 21st century,” and the launch of the i Tunes online music store helped drive i Pod sales through the roof. The i Pod was also central in changing the way peo-ple listened to and used music. According to musician John Mayer, people felt like they were “walking through musicology” when they used their i Pods, leading them to listen to more music and with more passion. The i Pod has gone through a series of re-generations, adding features like photo, video, and radio capabilities along the way. Apple reached its impressive market domination through a combination of shrewd product innovation and clever marketing. The marketing effort appealed to both Apple fans and people new to the brand. To reach such a broad base, the company had to shift its Marketing Excellence >> Apple Apple has transformed the way people listen to music, play video games, talk on the phone, and even read books. The company's revolutionary product innova-tions include the i Pod, the i Mac, the i Phone, and the i Pad. They are the reason the company topped Fortune 's Most Admired Companies list every year from 2008 to 2014. The i Pod introduced many consumers to Apple and initiated a series of monumental product innovations. It exemplified Apple's innovative design skills and looked, felt, and operated like no other device. To the delight of Apple (and the chagrin of competitor Sony), the | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
480 PART 5 | CRe ATing V Alue The launch of the i Pad also created media frenzy in 2013. The multitouch device combined the look and feel of the i Phone with the power of a Mac Book and gave consumers access to music, books, movies, pictures, video games, documents, and hundreds of thousands of applications at the touch of a finger without mouse or keyboard. Apple followed up with the launch of the i Pad mini, a smaller version of the original, and the i Pad Air, accompanied by a powerful marketing campaign that inspired consumers to do anything with their i Pad, includ-ing creating movies, building wind turbines, studying coral reefs, and making mountain climbing safer. In recent years, Apple has faced more serious com-petition for its smart phones, tablets, and other handheld devices, especially from Samsung and HTC. Investment in research and development is just one way the com-pany remains a leader in this cutthroat industry. It spent $2. 4 billion in R&D in 2011, $3. 4 billion in 2012, and $4. 5 billion in 2013. Creating, producing, and launching new products is a top priority for Apple. With creative market-ing support behind them, these products are the reason consumers and analysts stay on their toes awaiting Apple's latest product news. Questions 1. Apple's product launches over the past decade have been monumental. What makes the company so good at innovation? Is anyone comparable to Apple in this respect? 2. How important was the i Pod to Apple's current suc-cess? Discuss the significance of the i Phone and i Pad launches to Apple's new-product development strategy. 3. It has been a few years since Apple's last epic inno-vation. What's next for Apple? Sources: Matt Vella, “Apples' Latest Ad Is Probably Going to Give You the Chills,” Time, January 13, 2014; www. apple. com; 2013 Apple Annual Report; “i Phone4: The 'Most Successful Product Launch' in Apple's History,” Independent, June 28, 2010; Joseph De Avila, “Why Some Apple Fans Won't Buy the i Phone,” Wall Street Journal, September 12, 2007, p. D3; Nick Wingfield, “Apple Businesses Fuel Each Other; Net Jumps as Mac Sales Top PC-Industry Growth Rate; i Phones, i Pods Also Thrive,” Wall Street Journal, October 23, 2007; Terril Yue Jones, “How Long Can the i Pod Stay on Top?,” Los Angeles Times, March 5, 2006; Beth Snyder Bulik, “Grab an Apple and a Bag of Chips,” Advertising Age, May 23, 2005; Jay Parsons, “A Is for Apple on i Pod,” Dallas Morning News, October 6, 2005; Peter Burrows, “Rock On, i Pod,” Business Week, June 7, 2004, pp. 130-31; Jay Lyman, “Mini i Pod Moving Quickly, Apple Says,” Tech News World, February 26, 2004; Steven Levy, “i Pod Nation,” Newsweek, July 25, 2004; “Apple Computer: i Pod Silhouettes,” New York Marketing Association; Steven Levy, “i Pod Nation,” Newsweek, July 25, 2004; Effie Worldwide, www. effie. org. channel strategies. It added “mass electronic” retail-ers such as Best Buy and Circuit City (now defunct) to its existing channels, which quadrupled its number of outlets. Besides this enhanced “push” effort, Apple also developed memorable, creative “pull” advertising that helped drive the popularity of the i Pod. The Silhouettes campaign featured silhouettes of people listening to and dancing with their i Pods and appeared all over the world. This simple message worked across cultures, portraying the i Pod as cool but not beyond the reach of anyone who enjoyed music. As the i Pod's popularity grew, a halo effect helped increase Apple's share in its other markets. In fact, in 2007 the company officially changed its name from Apple Computer Inc. to Apple Inc. to help communicate its focus on non-computer products. Apple's next-largest product launch after the i Pod was the i Phone, its 2007 entry to the cell phone industry. With its touch-screen pad, virtual keyboard, and Internet and e-mail capabilities, the i Phone launched to huge consumer excitement; people lined up for hours to be among the first to buy one. Investment analysts initially feared that Apple's two-year contract with AT&T and the i Phone's high price would hinder its success. But 74 days after the product's debut, 1 million units had been sold. It had taken the i Pod two years to reach the cumulative sales ($1. 1 million) the i Phone had reached after just its first quarter. In fact, half the i Phones' buyers switched to AT&T, incurring fees to break their contracts with other carriers, just to have a chance to own an i Phone. Over the next few years, Apple dropped the price of the i Phone significantly and added impressive picture and video capabilities, video game features, a faster proces-sor, and access to millions of additional applications. The i Phone had become yet another game-changing techno-logical invention. When the i Phone 4 launched in 2010, showcasing Face Time video calling, Steve Jobs declared it “the most successful product launch in Apple's history. ” Jobs died in 2011 and didn't get to witness the success of the i Phone 5 launch in 2012. Apple received more than 2 million preorders of the i Phone 5 within the first 24 hours, far exceeding sales of any preceding i Phone launch. When the phone officially hit the shelves on September 21, 2012, the company couldn't keep up with the initial demand. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
in TRodu Cing new M ARke T offe Rings | chapter 15 481 social media sites like Twitter and Facebook. In addition, The Marketing Cloud enables companies to monitor their brand and products across the Internet and analyze their sales leads. Salesforce. com transitioned into the platform-as-a-service or Paa S category with the launch of Force. com. Paa S provides customers with tools to build their own applications rather than supplying the application already built. For example, a university might develop an appli-cation for its student body that includes campus maps, bus routes, and school events, while a clothing store can customize sale discounts and product offerings for each customer based on previous purchase patterns. By 2014, more than 4 million customers had created their own applications using the Force. com platform. A first mover, Salesforce. com is also the market leader with 14 percent market share. The company spends 7 percent of revenues on research and develop-ment and an astonishing 53 percent on marketing to help generate leads and new customers. Cloud computing has become a competitive, rapidly evolving industry, inhabited by big players like Oracle, IBM, and Workday as well as niche companies that focus on specific industries such as health care and hospitality. Over the years, Salesforce. com has won numerous awards for its products and services. Forbes ranked it the most innovative company in the world from 2011 to 2014. With $3 billion in sales, it has expanded into 16 dif-ferent languages and has more than 100,000 customers and more than 2. 1 million subscribers. Questions 1. Why has Salesforce. com been so successful? What did the company do well when it created and expanded its product offerings? 2. What are some of the challenges Salesforce. com faces in the near future? 3. What other products and services might Salesforce. com offer next? Why? Sources : Spencer E. Ante, “New Cloud-Software Firms Take Off,” Wall Street Journal, March 5, 2014, p. B5; Salesforce. com; 2013 Salesforce. com Annual Report; David Trainer, “Salesforce. com Has Insider Selling, Valuation in the Clouds,” Forbes, December 16, 2013; blogs. salesforce. com/company/2013/03/how-to-turn-a-simple-idea-into-a-high-growth-company, accessed June 2, 2014; Vauhini Vara, “Business Technology: An Early Adopter's New Idea; Salesforce. com Sees Future Built on 'Platforms,'” Wall Street Journal, January 22, 2008, p. B3; Floyd Norris, “First Insiders Sold Their Shares Privately, then Salesforce. com Filed to Go Public,” New York Times, May 14, 2004, p. C1. Marketing Excellence >> Salesforce. com Salesforce. com was founded by former Oracle executive Marc Benioff in 1999. Benioff believed software should be free of troublesome installations, maintenance issues, and continuous upgrades. His vision was “to make soft-ware easier to purchase, simpler to use, and more demo-cratic. ” With that in mind, Benioff led a start-up company called Salesforce. com that offered software-as-a-service (Saa S), or cloud computing. Saa S differs from old-school software technology because companies pay for the product per use each month, much like a utility bill. Salesforce. com uses the Internet or “cloud” to host its customer relationship man-agement (CRM) applications and to deliver them directly to customers, who can access the software from any device just by logging on to a Web site. They don't have to invest in servers or software licensing, install the soft-ware, or store the data themselves. With this innovative concept, Salesforce. com turned the software industry upside down and created an entirely new multibillion-dollar industry. From the start, Salesforce. com wanted its products to be everything traditional software wasn't. Its first prod-uct had an extremely user-friendly sales interface that organized contacts, accounts, and opportunities. The company welcomed customer feedback, and as a result it could develop new features to fit users' needs. Today, The Sales Cloud is Salesforce. com's key product. It lets companies track leads, change forecasts, collaborate with colleagues, and access real-time customer informa-tion, improving productivity and closing more sales. Salesforce. com next launched The Service Cloud, a CRM solution that changed the way companies connect with their customers. This product provides companies with a call-center view of each customer and the abil-ity to track each case on an individual basis. Users can communicate with customers through every media chan-nel, escalate complaints, and plug into conversations on social networking sites, ultimately resulting in better over-all customer service. From 2010 to 2012, Salesforce. com acquired 19 companies in order to expand its product offerings. In 2011, it purchased Radian6, which allowed it to launch The Marketing Cloud, with which customers can listen to and engage in conversations taking place on public | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
482 My Marketing Lab™ Improve Y our Grade! Over 10 million students improved their results using the Pearson My Labs. Visit mymktlab. com for simulations, tutorials, and end-of-chapter problems. In This Chapter, We Will Address the Following Questions 1. How do consumers process and evaluate prices? (p. 483) 2. How should a company set prices initially for products or services? (p. 489) 3. How should a company adapt prices to meet varying circumstances and opportunities? (p. 504) 4. When and how should a company initiate a price change? (p. 507) 5. How should a company respond to a competitor's price change? (p. 509)Ryanair's revolutionary pricing strategy charges a nominal airfare—or even nothing—for the seat, but also charges a fee for almost everything else involved in the flight. Source: © Alex Segre/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
483 16 Developing Pricing Strategies and Programs Price is the one element of the marketing mix that produces revenue; the other elements produce costs. Price also communicates the company's intended value positioning of its product or brand. A well-designed and marketed product can still command a price premium and reap big profits. But new economic realities have caused many consumers to reevaluate what they are willing to pay for products and services, and companies have had to carefully review their pricing strategies as a result. One that has caught the attention of consumers and businesses is Ryanair, with an unusual pricing strategy. 1 Profits for discount European air carrier Ryanair have been sky-high thanks to its revolutionary busi-ness model. The secret? Founder Michael O'Leary thinks like a retailer, charging passengers for almost everything—except their seat. A quarter of Ryanair's seats are free, and O'Leary wants to double that within five years, with the ultimate goal of making all seats free. Passengers currently pay only taxes and fees of about $10 to $24, with an average one-way fare of roughly $52. Every-thing else is extra: checked luggage ($9. 50 per bag), snacks ($5. 50 for a hot dog, $4. 50 for chicken soup, $3. 50 for water), and bus or train transportation into town from the far-flung airports Ryanair uses ($24). Flight attendants sell a variety of merchandise, including digital cameras ($137. 50) and i Pocket MP3 players ($165). Onboard gambling and cell phone service are projected new revenue sources. Other strategies cut costs or generate outside revenue. Seats don't recline, window shades and seat-back pockets have been removed, and there is no entertainment. Seat-back trays carry ads, and the exteriors of the planes are giant revenue-producing billboards for Vodafone Group, Jaguar, Hertz, and others. More than 99 percent of tickets are sold online. The Web site also offers travel insurance, hotels, ski packages, and car rentals. Only Boeing 737-800 jets are flown to reduce maintenance costs, and flight crews buy their own uniforms. O'Leary has even discussed the possibility of pay toilets and 10 rows of standing room with handrails like a New York City subway car (to squeeze 30 more passengers aboard), though both sug-gestions drew much public concern and skepticism. Although his ideas may seem unconventional, the formula works for Ryanair's customers; the airline flies 58 million people to more than 150 airports each year. All the extras add up to 20 percent of revenue. Ryanair enjoys net margins of 25 percent, more than three times Southwest's 7 percent. Some industry pundits even refer to Ryanair as “Walmart with wings”!Pricing decisions are complex and must take into account many factors—the company, the customers, the com-petition, and the marketing environment. Holistic marketers know their pricing decisions must also be consistent with the firm's marketing strategy and its target markets and brand positions. In this chapter, we provide concepts and tools to facilitate the setting of initial prices and adjusting prices over time and markets. Understanding Pricing Price is not just a number on a tag. It comes in many forms and performs many functions. Rent, tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price you pay for some good or service. Price also has many components. If you buy a new car, the sticker price may be adjusted by rebates and dealer incentives. Some firms allow customers to pay through multiple forms, such as $150 plus 25,000 frequent flier miles for a flight. 2 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
484 PART 5 | CRe ATing V Alue Throughout most of history, prices were set by negotiation between buyers and sellers. Bargaining is still a sport in some areas. Setting one price for all buyers is a relatively modern idea that arose with the development of large-scale retailing at the end of the nineteenth century. F. W. Woolworth, Tiffany & Co., John Wanamaker, and others advertised a “strictly one-price policy, ” efficient because they carried so many items and supervised so many employees. Pr Ic In G In a D IGItal Worl D Traditionally, price has operated as a major determinant of buyer choice. Consumers and purchasing agents who have access to price information and price discounters put pressure on retailers to lower their prices. Retailers in turn put pressure on manufacturers to lower their prices. The result can be a marketplace characterized by heavy discounting and sales promotion. Downward price pressure from a changing economic environment coincided with some longer-term trends in the technological environment. For some years now, the Internet has been changing the way buyers and sellers interact. Here is a short list of how the Internet allows sellers to discriminate between buyers and buyers to discriminate between sellers. Buyers can: Get instant price comparisons from thousands of vendors. Customers can compare the prices offered by multiple retailers by clicking my Simon. com. Intelligent shopping agents (“bots”) take price comparison a step further and seek out products, prices, and reviews from hundreds if not thousands of merchants. Check prices at the point of purchase. Customers can use smart phones to make price comparisons in stores before deciding whether to purchase, pressure the retailer to match or better the price, or buy elsewhere. Name their price and have it met. On Priceline. com, customers state the price they want to pay for an airline ticket, hotel, or rental car, and the site looks for any seller willing to meet that price. 3 Volume-aggregating sites combine the orders of many customers and press the supplier for a deeper discount. Get products free. Open source, the free software movement that started with Linux, will erode margins for just about any company creating software. The biggest challenge confronting Microsoft, Oracle, IBM, and virtually every other major software producer is: How do you compete with programs that can be had for free? “Marketing Insight: Giving It All Away” describes how firms have been successful with essentially free offerings. Sellers can: Monitor customer behavior and tailor offers to individuals. GE Lighting, which gets 55,000 pricing requests a year from its B-to-B customers, has Web programs that evaluate 300 factors going into a pricing quote, such as past sales data and discounts, so it can reduce processing time from up to 30 days to six hours. Give certain customers access to special prices. Ruelala is a members-only Web site that sells upscale women's fashion, accessories, and footwear through limited-time sales, usually two-day events. Other business market-ers are already using extranets to get a precise handle on inventory, costs, and demand at any given moment in order to adjust prices instantly. Both buyers and sellers can: Negotiate prices in online auctions and exchanges or even in person. Want to sell hundreds of excess and slightly worn widgets? Post a sale on e Bay. Want to purchase vintage baseball cards at a bargain price? Go to www. baseball-cards. com. According to Consumer Reports, more than half of U. S. adults reported bargain-ing for a better deal on everyday goods and services in the past three years; almost 90 percent were success-ful at least once. Some successful tactics included: told salesperson I' d check competitor's prices (57 percent of respondents); looked for lower prices at a walk-in store (57 percent); chatted with salesperson to make a personal connection (46 percent); used other store circulars or coupons as leverage (44 percent); and checked user reviews to see what others paid (39 percent). 4 a chan GIn G Pr Ic In G Env Ironm Ent Pricing practices have changed significantly, thanks in part to a severe recession in 2008-2009, a slow recovery, and rapid technological advances. But the new millennial generation also brings new attitudes and values to con-sumption. Often burdened by student loans and other financial demands, members of this group (born between about 1977 and 1994) are reconsidering just what they really need to own. Renting, borrowing, and sharing are valid options to many. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 485 Giving It All Away Giving away products for free via sampling has been a successful mar-keting tactic for years. Estée Lauder gave free samples of cosmetics to celebrities, and organizers at awards shows lavish winners with plenti-ful free items or gifts known as “swag. ” Other manufacturers, such as Gillette and HP, built their business model around selling the host product essentially at cost and making money on the sale of necessary supplies, such as razor blades and printer ink. Software companies adopted similar practices. Adobe gave away its Adobe Reader for free in 1994, as did Macromedia with its Shockwave player in 1995. Their software became the industry stan-dard, but the firms really made their money selling their authoring software. More recently, start-ups such as Blogger Weblog and Skype have succeeded with a “freemium” strategy—free online services with a premium component. Chris Anderson, former editor-in-chief of Wired, believes that in a digital marketplace companies can make money with free products. As evidence, he offers revenue models relying on cross-subsidies (giving away a DVR to sell cable service) and freemiums (offering the Flickr online photo management and sharing application for free to everyone while selling the superior Flickr Pro to more committed users). Some online firms have successfully moved “from free to fee” and begun charging for services. Under a new participative-pricing mecha-nism that lets consumers decide on the price they feel is warranted, buyers often choose to pay more than zero, and even enough for sell-ers' revenues to increase over what a fixed price would have yielded. Red Hat successfully applied a “freemium” model. A pioneer with open source Linux software, the company offers its business custom-ers stability and dependability. Every few years it freezes a version of the constantly evolving software and sells a long-term support edition with customized applications, backdated updates from later versions of Linux, and customer support, all for a subscription fee. Red Hat also works with developers and programmers for its free version of Linux via its Fedora program. Thanks to these moves, Red Hat is now a billion-dollar company serving 80 percent of the Fortune 500 companies. Sources: Ashlee Vance, “Red Hat Sees Lots of Green,” Bloomberg Businessweek, March 29, 2012; Jon Brodkin, “How Red Hat Killed Its Core Product—and Became a Billion-Dollar Business,” www. arstechnica. com, February 28, 2012; Chris Anderson, Free: The Future of a Radical Price (New York: Hyperion, 2009); Ju-Young Kim, Martin Natter, and Martin Spann, “Pay What You Want: A New Participative Pricing Mechanism,” Journal of Marketing 73 (January 2009), pp. 44-58; Koen Pauwels and Allen Weiss, “Moving from Free to Fee: How Online Firms Market to Change Their Business Model Successfully,” Journal of Marketing 72 (May 2008), pp. 14-31. marketing insight Champion of open source Linux software, Red Hat complements its free offerings with valuable fee-based services. Source: ASSOCIATED PRESS | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
486 PART 5 | CRe ATing V Alue Some say these new behaviors are creating a sharing economy in which consumers share bikes, cars, clothes, couches, apartments, tools, and skills and extracting more value from what they already own. As one sharing- related entrepreneur noted, “We're moving from a world where we're organized around ownership to one organized around access to assets. ” In a sharing economy, someone can be both a consumer and a producer, reaping the benefits of both roles. 5 Trust and a good reputation are crucial in any exchange, but imperative in a sharing economy. Most platforms that are part of a sharing-related business have some form of self-policing mechanism such as public profiles and community rating systems, sometimes linked with Facebook. Let's look at bartering and renting, two pillars of a sharing economy. Bartering Bartering, one of the oldest ways of acquiring goods, is making a comeback through transactions estimated to total $12 billion annually in the United States. Trade exchange companies like Florida Barter and Web sites like www. swap. com connect people and businesses seeking win-win solutions. One financial analyst has traded financial plans to clients in return for a tutorial in butter churning and trapeze and fire-breathing lessons. Thred UP allows parents to swap kids' outgrown and unused clothing and toys with other parents in similar situations all over the United States. Zimride is a ride-sharing social network for college campuses. 6 Experts advise using barter only for goods and services that someone would be willing to pay for anyway. The founders of a Web site for swapping sporting goods and outdoor gear drew up these criteria for sharable objects: cost more than $100 but less than $500, easily transportable, and infrequently used. 7 renting The sector of the new sharing economy that is really exploding is rentals. Rent The Runway offers affordable rentals of designer dresses. Customers are sent two different sizes of the dress they choose—to ensure better fit—at a cost of $50 to $300, or about 10 percent of retail value. The site is adding 100,000 customers a month, typically 15 to 35 years old. 8 One of the pioneers in the rental economy is Airbnb. 9 AIRBNB Rhode Island School of Design graduates Brian Chesky and Joe Gebbia came upon the idea of making a little extra money by launching www. airbedandbreakfast. com and renting out air mattresses to attendees at an industrial design conference in San Francisco. Emboldened by their success at attracting three very different guests for a week, the two shortened the name of their venture to Airbnb, hired a tech expert, and set out to extend their “couch-surfing” business by adding features such as escrow payments and professional photography so the potential rental properties looked their best. Around-the-clock customer service for guests and a $1 million insurance policy for hosts provided each party with valuable peace of mind. All kinds of spaces were included—not just rooms, apartments, and houses but also driveways, treehouses, igloos, and even castles. Airbnb applied a broker's model to generate revenues: 3 percent from the host and 6 percent to 12 percent from the guest, depending on the property price. Although it now operates in 190 countries and 28,000 cities, books millions of spaces annually, and has seen its valuation approach $10 billion, it faces several significant challenges, including government intervention in the form of taxes, disputes over illegal subletting, and the imposition of safety and other hospitality-related regulation. Even big companies are getting in on the act. German car maker Daimler introduced its Car2Go service for customers who want to rent a car for a short period of time—even at the spur of the moment. In about half its stores, Home Depot has a unit that rents out all kinds of products such as drills and saws that it also sells. 10 ho W com Pan IEs Pr Ic E In small companies, the boss often sets prices. In large companies, division and product line managers do. Even here, top management sets general pricing objectives and policies and often approves lower management's proposals. Where pricing is a key competitive factor (aerospace, railroads, oil companies), companies often establish a pricing department to set or assist others in setting appropriate prices. This department reports to the market-ing department, finance department, or top management. Others who influence pricing include sales managers, production managers, finance managers, and accountants. In B-to-B settings, research suggests that pricing perfor-mance improves when pricing authority is spread horizontally across the sales, marketing, and finance units and when there is a balance in centralizing and delegating that authority between individual salespeople and teams and central management. 11 Many companies do not handle pricing well and fall back on “strategies” such as: “We calculate our costs and add our industry's traditional margins. ” Other common mistakes are not revising price often enough to capitalize | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 487 on market changes; setting price independently of the rest of the marketing program rather than as an intrinsic ele-ment of market-positioning strategy; and not varying price enough for different product items, market segments, distribution channels, and purchase occasions. For any organization, effectively designing and implementing pricing strategies requires a thorough under-standing of consumer pricing psychology and a systematic approach to setting, adapting, and changing prices. consum Er Ps Ycholo GY an D Pr Ic In G Many economists traditionally assumed that consumers were “price takers” who accepted prices at face value or as a given. Marketers, however, recognize that consumers often actively process price information, interpret-ing it from the context of prior purchasing experience, formal communications (advertising, sales calls, and brochures), informal communications (friends, colleagues, or family members), point-of-purchase or online resources, and other factors. 12 Purchase decisions are based on how consumers perceive prices and what they consider the current actual price to be— not on the marketer's stated price. Customers may have a lower price threshold, below which prices signal inferior or unacceptable quality, and an upper price threshold, above which prices are prohibitive and the product appears not worth the money. Different people interpret prices in different ways. Consider the consumer psychol-ogy involved in buying a simple pair of jeans and a T-shirt. 13 Je ANs ANd A t-sh IRt Why does a black T-shirt for women that looks pretty ordinary cost $275 from Armani but only $14. 90 from the Gap and $7. 90 from Swedish discount clothing chain H&M? Customers who pur-chase the Armani T-shirt are paying for a more stylishly cut T-shirt made of 70 percent nylon, 25 percent polyester, and 5 percent elastane with a “Made in Italy” label from a luxury brand known for suits, handbags, and evening gowns that sell for thousands of dollars. The Gap and H&M shirts are made mainly of cotton. For pants to go with that T-shirt, choices abound. Gap sells its “Original Khakis” for $44. 50, though Abercrombie & Fitch's classic button-fly chinos cost $70. But that's a comparative bargain compared to Michael Bastian's plain khakis for $480 or Giorgio Armani's for $595. High-priced designer jeans may use expensive fabrics such as cotton gabardine and require hours of me-ticulous hand-stitching to create a distinctive design, but equally important are an image and a sense of exclusivity. Understanding how consumers arrive at their perceptions of prices is an important marketing priority. Here we consider three key topics—reference prices, price-quality inferences, and price endings. reference Prices Although consumers may have fairly good knowledge of price ranges, surprisingly few can accurately recall specific prices. 14 When examining products, however, they often employ reference prices, comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price. ”15 All types of reference prices are possible (see Table 16. 1), and sellers often attempt to manipulate them. For example, a seller can situate its product among expensive competitors to imply that it belongs in the same class. Department stores will display women's apparel in separate departments differentiated by price; dresses in the more expensive department are assumed to be of better quality. 16 Marketers also encourage reference-price thinking by stating a high manu-facturer's suggested price, indicating that the price was much higher originally, or by pointing to a competitor's high price. 17 When consumers evoke one or more of these frames of reference, their perceived price can vary from the stated price. 18 Research has found that unpleasant surprises—when perceived price is lower than the stated price—can have a greater impact on purchase likelihood than pleasant surprises. 19 Consumer expectations can also play a For even something as simple as a black t-shirt and a pair of jeans or pants, consumers may choose to pay as little as $50 or hundreds of dollars instead. Source: ©Peshkov Daniil/Shutterstock | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
488 PART 5 | CRe ATing V Alue key role in price response. On Internet auction sites such as e Bay, when consumers know similar goods will be available in future auctions, they will bid less in the current auction. 20 Clever marketers try to frame the price to signal the best value possible. For example, a relatively expensive item can look less expensive if the price is broken into smaller units, such as a $500 annual membership for “under $50 a month, ” even if the totals are the same. 21 Price-Quality inferences Many consumers use price as an indicator of quality. Image pricing is especially effective with ego-sensitive products such as perfumes, expensive cars, and designer clothing. A $100 bottle of perfume might contain $10 worth of scent, but gift givers pay $100 to communicate their high regard for the receiver. Price and quality perceptions of cars interact. Higher-priced cars are perceived to possess high quality. Higher-quality cars are likewise perceived to be higher priced than they actually are. When information about true quality is available, price becomes a less significant indicator of quality. When this information is not available, price acts as a signal of quality. Some brands adopt exclusivity and scarcity to signify uniqueness and justify premium pricing. Luxury-goods makers of watches, jewelry, perfume, and other products often emphasize exclusivity in their communication mes-sages and channel strategies. For luxury-goods customers who desire uniqueness, demand may actually increase price because they then believe fewer other customers can afford the product. 22 To maintain its air of exclusivity, Ferrari deliberately curtailed sales of its iconic, $200,000-or-more Italian sports car to below 7,000 despite growing demand in China, the Middle East, and the United States. But even ex-clusivity and status can vary by customer. Brahma beer is a no-frills light brew in its home market of Brazil but has thrived in Europe, where it is seen as “Brazil in a bottle. ” Pabst Blue Ribbon is a retro favorite among U. S. college students, but its sales have exploded in China where an upgraded bottle and claims of being “matured in a precious wooden cask like a Scotch whiskey” allow it to command a $44 price tag. 23 Price endings Many sellers believe prices should end in an odd number. Customers perceive an item priced at $299 to be in the $200 rather than the $300 range; they tend to process prices “left to right” rather than by rounding. 24 Price encoding in this fashion is important if there is a mental price break at the higher, rounded price. Another explanation for the popularity of “9” endings is that they suggest a discount or bargain, so if a company wants a high-price image, it should probably avoid the odd-ending tactic. 25 One study showed that demand actu-ally increased one-third when the price of a dress rose from $34 to $39 but was unchanged when it rose from $34 to $44. 26 Prices that end with 0 and 5 are also popular and are thought to be easier for consumers to process and retrieve from memory. “Sale” signs next to prices spur demand, but only if not overused: Total category sales are highest when some, but not all, items in a category have sale signs; past a certain point, sale signs may cause total category sales to fall. 27 Pricing cues such as sale signs and prices that end in 9 are more influential when consumers' price knowl-edge is poor, when they purchase the item infrequently or are new to the category, and when product designs vary over time, prices vary seasonally, or quality or sizes vary across stores. 28 They are less effective the more they are used. Limited availability (for example, “three days only”) also can spur sales among consumers actively shopping for a product. 29ta Ble 16. 1 Possible Consumer Reference Prices “Fair Price” (what consumers feel the product should cost) Typical Price Last Price Paid Upper-Bound Price (reservation price or the maximum most consumers would pay) Lower-Bound Price (lower threshold price or the minimum most consumers would pay) Historical Competitor Prices Expected Future Price Usual Discounted Price Source: Adapted from Russell S. Winer, Pricing, MSI Relevant Knowledge Series (Cambridge, MA: Marketing Science Institute, 2006). | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 489 Setting the Price A firm must set a price for the first time when it develops a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. Most markets have three to five price points or tiers. Marriott Hotels is good at developing different brands or variations of brands for different price points: Marriott Vacation Club—Vacation Villas (highest price), Marriott Marquis (high price), Marriott (high-medium price), Renaissance (medium-high price), Courtyard (medium price), Towne Place Suites (medium-low price), and Fairfield Inn (low price). Firms devise their branding strategies to help convey the price-quality tiers of their products or services to consumers. 30 Having a range of price points allows a firm to cover more of the market and to give any one consumer more choices. “Marketing Insight: Trading Up, Down, and Over” describes how consumers have been shifting their spending in recent years. The firm must consider many factors in setting its pricing policy. 31 Table 16. 2 summarizes the six steps in the process. st EP 1: s El Ect In G th E Pr Ic In G obj Ect Iv E The company first decides where it wants to position its market offering. The clearer a firm's objectives, the easier it is to set price. Five major objectives are: survival, maximum current profit, maximum market share, maximum market skimming, and product-quality leadership. Despite booming demand, Ferrari limits production and the number of sports cars that it sells to maintain the brand's exclusivity. Source: © Ian Shaw/Alamy ta Ble 16. 2 Steps in Setting a Pricing Policy 1. Selecting the Pricing Objective 2. Determining Demand 3. Estimating Costs 4. Analyzing Competitors' Costs, Prices, and Offers 5. Selecting a Pricing Method 6. Selecting the Final Price | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
490 PART 5 | CRe ATing V Alue Trading Up, Down, And Over Michael Silverstein and Neil Fiske, the authors of Trading Up, have observed a number of middle-market consumers periodically “trading up” to what they call “New Luxury” products and services “that possess higher levels of quality, taste, and aspiration than other goods in the category but are not so expensive as to be out of reach. ” The authors identify three main types of New Luxury products: Accessible super-premium products, such as Victoria's Secret underwear and Kettle gourmet potato chips, carry a significant premium over middle-market brands, yet consumers can readily trade up to them because they are relatively low-ticket items in affordable categories. Old Luxury brand extensions extend historically high-priced brands down-market while retaining their cachet, such as the Mercedes-Benz C-class and the American Express Blue card. Masstige goods, such as Kiehl's skin care and Kendall-Jackson wines, are priced between average middle-market brands and super-premium Old Luxury brands. They are “always based on emotions, and consumers have a much stronger emotional engagement with them than with other goods. ” To trade up to brands that offer these emotional benefits, consumers often “trade down” by shopping at discounters such as Walmart and Costco for staple items or goods that confer no emotional benefit but still deliver quality and functionality. As one con-sumer explained in rationalizing why her kitchen boasted a Sub-Zero refrigerator, a state-of-the-art Fisher & Paykel dishwasher, and a $900 warming drawer but a giant 12-pack of Bounty paper towels from a warehouse discounter: “When it comes to this house, I didn't give in on anything. But when it comes to food shopping or cleaning products, if it's not on sale, I won't buy it. ” The recent economic downturn increased the prevalence of trad-ing down, as many found themselves unable to sustain their lifestyles. Consumers began to buy more from need than desire and to trade down more frequently in price. They shunned conspicuous consump-tion, and sales of some luxury goods suffered. Even purchases that had never been challenged before were scrutinized. Almost 1 million U. S. patients became “medical tourists” in 2010 and traveled overseas for medical procedures at lower costs, sometimes at the urging of U. S. health insurance companies. As the economy improved and consumers tired of putting off dis-cretionary purchases, retail sales picked up, benefiting luxury products in the process. Trading up and down has persisted, however, along with “trading over” or switching spending from one category to another, buying a new home theater system, say, instead of a new car. Often this meant setting priorities and making a decision not to buy in some categories in order to buy in others. Sources: Cotten Timberlake, “U. S. 2 Percenters Trade Down with Post-Recession Angst,” www. bloomberg. com, May 15, 2013; Anna-Louise Jackson and Anthony Feld, “Frugality Fatigue Spurs Americans to Trade Up,” www. bloomberg. com, April 13, 2012; Walker Smith, “Consumer Behavior: From Trading Up to Trading Off,” Branding Strategy Insider, January 26, 2012; Sbriya Rice, “'I Can't Afford Surgery in the U. S.,' Says Bargain Shopper,” www. cnn. com, April 26, 2010; Bruce Horovitz, “Sale, Sale, Sale: Today Everyone Wants a Deal,” USA Today, April 21, 2010, pp. 1A-2A; Michael J. Silverstein, Treasure Hunt: Inside the Mind of the New Consumer (New York: Portfolio, 2006); Michael J. Silverstein and Neil Fiske, Trading Up: The New American Luxury (New York: Portfolio, 2003). marketing insight Some consumers are trading up to buy expensive luxury products like Sub-Zero refrigerators, but also trading down to buy basic staples and more functional products. Source: Digital Vision/Getty Images | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 491 survival Companies pursue survival as their major objective if they are plagued with overcapacity, intense competition, or changing consumer wants. As long as prices cover variable costs and some fixed costs, the company stays in business. Survival is a short-run objective; in the long run, the firm must learn how to add value or face extinction. Maxi Mu M current Profit Many companies try to set a price that will maximize current profits. They estimate the demand and costs associated with alternative prices and choose the price that produces maximum current profit, cash flow, or rate of return on investment. This strategy assumes the firm knows its demand and cost functions; in reality, these are difficult to estimate. In emphasizing current performance, the company may sacrifice long-run performance by ignoring the effects of other marketing variables, competitors' reactions, and legal restraints on price. Maxi Mu M Market share Some companies want to maximize their market share. They believe a higher sales volume will lead to lower unit costs and higher long-run profit, so they set the lowest price, assuming the market is price sensitive. Texas Instruments famously practiced this market-penetration pricing for years. The company would build a large plant, set its price as low as possible, win a large market share, experience falling costs, and cut its price further as costs fell. The following conditions favor adopting a market-penetration pricing strategy: (1) The market is highly price sensitive and a low price stimulates market growth; (2) production and distribution costs fall with accumulated production experience; and (3) a low price discourages actual and potential competition. Maxi Mu M Market ski MMing Companies unveiling a new technology favor setting high prices to maximize market skimming. Sony has been a frequent practitioner of market-skimming pricing, in which prices start high and slowly drop over time. When Sony introduced the world's first high-definition television (HDTV) to the Japanese market in 1990, it was priced at $43,000. So that Sony could “skim” the maximum amount of revenue from the various segments of the market, the price dropped steadily through the years—a 28-inch Sony HDTV cost just over $6,000 in 1993, but a 42-inch Sony LED HDTV cost only $579 20 years later in 2013. This strategy can be fatal, however, if a worthy competitor decides to price low. When Philips, the Dutch electronics manufacturer, priced its videodisc players to make a profit on each, Japanese competitors priced low and rapidly built their market share, which in turn pushed down their costs substantially. Moreover, consumers who buy early at the highest prices may be dissatisfied if they compare themselves with those who buy later at a lower price. When Apple dropped the early i Phone's price from $600 to $400 only two months after its introduction, public outcry caused the firm to give initial buyers a $100 credit toward future Apple purchases. 32 Market skimming makes sense under the following conditions: (1) A sufficient number of buyers have a high current demand; (2) the unit costs of producing a small volume are high enough to cancel the advantage of charg-ing what the traffic will bear; (3) the high initial price does not attract more competitors to the market; and (4) the high price communicates the image of a superior product. Product-Quality leadershi P A company might aim to be the product-quality leader in the market. 33 Many brands strive to be “affordable luxuries”—products or services characterized by high levels of perceived quality, taste, and status with a price just high enough not to be out of consumers' reach. Brands such as Starbucks, Aveda, Victoria's Secret, BMW, and Viking have positioned themselves as quality leaders in their categories, combining quality, luxury, and premium prices with an intensely loyal customer base. Grey Goose and Absolut carved out a superpremium niche in the essentially odorless, colorless, and tasteless vodka category through clever on-premise and off-premise marketing that made the brands seem hip and exclusive. other o Bjectives Nonprofit and public organizations may have other pricing objectives. A university aims for partial cost recovery, knowing that it must rely on private gifts and public grants to cover its remaining costs. A nonprofit hospital may aim for full cost recovery in its pricing. A nonprofit theater company may price its productions to fill the maximum number of seats. A social service agency may set a service price geared to client income. Whatever the specific objective, businesses that use price as a strategic tool will profit more than those that simply let costs or the market determine their pricing. For art museums, which earn an average of only 5 percent of their revenues from admission charges, pricing can send a message that affects their public image and the amount of donations and sponsorships they receive. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
492 PART 5 | CRe ATing V Alue st EP 2: DEt Erm In In G DEman D Each price will lead to a different level of demand and have a different impact on a company's market-ing objectives. The normally inverse relationship between price and demand is captured in a demand curve (see Figure 16. 1): The higher the price, the lower the demand. For prestige goods, the demand curve sometimes slopes upward. Some consumers take the higher price to signify a better product. However, if the price is too high, demand may fall. Price sensitivity The demand curve shows the market's probable purchase quantity at alternative prices, summing the reactions of many individuals with different price sensitivities. The first step in estimating demand is to understand what affects price sensitivity. Generally speaking, customers are less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher price; (3) they are slow to change their buying habits; (4) they think the higher prices are justified; and (5) price is only a small part of the total cost of obtaining, operating, and servicing the product over its lifetime. A seller can successfully charge a higher price than competitors if it can convince customers that it offers the lowest total cost of ownership (TCO). Marketers often treat the service elements in a product offering as sales incentives rather than as value-enhancing augmentations for which they can charge. In fact, pricing expert Tom Nagle believes the most common mistake manufacturers have made in recent years is to offer all sorts of services to differentiate their products without charging for them. 34 Of course, companies prefer customers who are less price-sensitive. Table 16. 3 lists some characteristics associ-ated with decreased price sensitivity. On the other hand, the Internet has the potential to increase price sensitivity. In some established, fairly big-ticket categories, such as auto retailing and term insurance, consumers pay lower prices as a result of the Internet. Car buyers use the Internet to gather information and borrow the negotiating 150 50 Quantity Demanded per Period105$15 $10Price 100 Quantity Demanded per Period(b) Elastic Demand (a) Inelastic Demand $15 $10| Fig. 16. 1 | Inelastic and Elastic Demand ta Ble 16. 3 Factors That Reduce Price Sensitivity The product is more distinctive. Buyers are less aware of substitutes. Buyers cannot easily compare the quality of substitutes. The expenditure is a smaller part of the buyer's total income. The expenditure is small compared to the total cost of the end product. Part of the cost is borne by another party. The product is used in conjunction with assets previously bought. The product is assumed to have more quality, prestige, or exclusiveness. Buyers cannot store the product. Source: Based on information from Thomas T. Nagle, John E. Hogan, and Joseph Zale, The Strategy and Tactics of Pricing, 5th ed. (Upper Saddle River, NJ: Pearson, 2011). Printed and electronically reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 493 clout of an online buying service. 35 But customers may have to visit multiple sites to realize possible savings, and they don't always do so. Targeting only price-sensitive consumers may in fact be “leaving money on the table. ” esti Mating de Mand curves Most companies attempt to measure their demand curves using several different methods. Surveys can explore how many units consumers would buy at different proposed prices. Although consumers might understate their purchase intentions at higher prices to discourage the company from pricing high, they also tend to actually exaggerate their willingness to pay for new products or services. 36 Price experiments can vary the prices of different products in a store or of the same product in similar territo-ries to see how the change affects sales. Online, an e-commerce site could test the impact of a 5 percent price increase by quoting a higher price to every 40th visitor to compare the purchase response. However, it must do this carefully and not alienate customers or be seen as reducing competition in any way (thus violating the Sherman Antitrust Act). 37 Statistical analysis of past prices, quantities sold, and other factors can reveal their relationships. The data can be longitudinal (over time) or cross-sectional (from different locations at the same time). Building the appropriate model and fitting the data with the proper statistical techniques call for considerable skill, but sophisticated price optimization software and advances in database management have improved marketers' abilities to optimize pricing. One large retail chain was selling a line of “good-better-best” power drills at $90, $120, and $130, respectively. Sales of the least and most expensive drills were fine, but sales of the midpriced drill lagged. Based on a price optimization analysis, the retailer dropped the price of the midpriced drill to $110. Sales of the low-priced drill dropped 4 percent because it seemed less of a bargain, but sales of the midpriced drill increased 11 percent. Profits rose as a result. 38 In measuring the price-demand relationship, the market researcher must control for various factors that will influence demand. 39 The competitor's response will make a difference. Also, if the company changes other aspects of the marketing program besides price, the effect of the price change itself will be hard to isolate. Price elasticity of de Mand Marketers need to know how responsive, or elastic, demand is to a change in price. Consider the two demand curves in Figure 16. 1. In demand curve (a), a price increase from $10 to $15 leads to a relatively small decline in demand from 105 to 100. In demand curve (b), the same price increase leads to a substantial drop in demand from 150 to 50. If demand hardly changes with a small change in price, we say it is inelastic. If demand changes considerably, it is elastic. The higher the elasticity, the greater the volume growth resulting from a 1 percent price reduction. If demand is elastic, sellers will consider lowering the price to produce more total revenue. This makes sense as long as the costs of producing and selling more units do not increase disproportionately. Price elasticity depends on the magnitude and direction of the contemplated price change. It may be negligible with a small price change and substantial with a large price change. It may differ for a price cut than for a price increase, and there may be a price indifference band within which price changes have little or no effect. Finally, long-run price elasticity may differ from short-run elasticity. Buyers may continue to buy from a cur-rent supplier after a price increase but eventually switch suppliers. Here demand is more elastic in the long run than in the short run, or the reverse may happen: Buyers may drop a supplier after a price increase but return later. The distinction between short-run and long-run elasticity means that sellers will not know the total effect of a price change until time passes. Research has shown that consumers tend to be more sensitive to prices during tough economic times, but that is not true across all categories. 40 One comprehensive review of a 40-year period of academic research on price elasticity yielded interesting findings:41 The average price elasticity across all products, markets, and time periods studied was -2. 62. In other words, a 1 percent decrease in prices led to a 2. 62 percent increase in sales. Price elasticity magnitudes were higher for durable goods than for other goods and higher for products in the introduction/growth stages of the product life cycle than in the mature/decline stages. Inflation led to substantially higher price elasticities, especially in the short run. Promotional price elasticities were higher than actual price elasticities in the short run (though the reverse was true in the long run). Price elasticities were higher at the individual item or SKU level than at the overall brand level. | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
494 PART 5 | CRe ATing V Alue st EP 3: Est Imat In G costs Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The company wants to charge a price that covers its cost of producing, distributing, and selling the product, including a fair return for its effort and risk. Y et when companies price products to cover their full costs, profitability isn't always the net result. ty Pes of costs and levels of Production A company's costs take two forms, fixed and variable. Fixed costs, also known as overhead, are costs that do not vary with production level or sales revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on, regardless of output. Variable costs vary directly with the level of production. For example, each tablet computer pro-duced by Samsung incurs the cost of plastic and glass, microprocessor chips and other electronics, and packaging. These costs tend to be constant per unit produced, but they're called variable because their total varies with the number of units produced. Total costs consist of the sum of the fixed and variable costs for any given level of production. Average cost is the cost per unit at that level of production; it equals total costs divided by produc-tion. Management wants to charge a price that will at least cover the total production costs at a given level of production. To price intelligently, management needs to know how its costs vary with different levels of pro-duction. Take the case in which a company such as Samsung has built a fixed-size plant to produce 1,000 tablet computers a day. The cost per unit is high if few units are produced per day. As produc-tion approaches 1,000 units per day, the average cost falls because the fixed costs are spread over more units. Short-run average cost increases after 1,000 units, however, because the plant becomes inefficient: Workers must line up for machines, getting in each other's way, and machines break down more often [see Figure 16. 2(a)]. If Samsung believes it can sell 2,000 units per day, it should consider building a larger plant. The plant will use more efficient machinery and work arrangements, and the unit cost of producing 2,000 tablets per day will be lower than the unit cost of producing 1,000 per day. This is shown in the long-run average cost curve (LRAC) in Figure 16. 2(b). In fact, a 3,000-capacity plant would be even more efficient according to Figure 16. 2(b), but a 4,000-daily production plant would be less so because of increasing diseconomies of scale: There are too many work-ers to manage, and paperwork slows things down. Figure 16. 2(b) indicates that a 3,000-daily production plant is the optimal size if demand is strong enough to support this level of production. There are more costs than those associated with manufacturing. To estimate the real profitability of selling to different types of retailers or customers, the manufacturer needs to use activity-based cost (ABC) accounting instead of standard cost accounting, as described in Chapter 5. accu Mulated Production Suppose Samsung runs a plant that produces 3,000 tablet computers per day. As the company gains experience producing tablets, its methods improve. Workers learn shortcuts, materials flow more smoothly, and procurement costs fall. The result, as Figure 16. 3 shows, is that average cost 4,000 1,0001 2,000 3,000 Quantity Produced per Day Cost per Unit Cost per Unit1,000SRAC SRAC LRACQuantity Produced per Day (b) Cost Behavior over Different-Size Plants(a) Cost Behavior in a Fixed-Size Plant 234 | Fig. 16. 2 | Cost per Unit at Different Levels of Production per Period 200,000 400,000 800,000$80 $60 $40 $20$100Cost per Unit 100,000 Accumulated Production Current price Experience curve B A Samsung| Fig. 16. 3 | Cost per Unit as a Function of Accumulated Production: The Experience Curve | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 495 falls with accumulated production experience. Thus the average cost of producing the first 100,000 tablets is $100 per tablet. When the company has produced the first 200,000 tablets, the average cost has fallen to $90. After its accumulated production experience doubles again to 400,000, the average cost is $80. This decline in the average cost with accumulated production experience is called the experience curve or learning curve. Now suppose three firms compete in this particular tablet market, Samsung, A, and B. Samsung is the lowest-cost producer at $80, having produced 400,000 units in the past. If all three firms sell the tablet for $100, Samsung makes $20 profit per unit, A makes $10 per unit, and B breaks even. The smart move for Samsung would be to lower its price to $90. This will drive B out of the market, and even A may consider leaving. Samsung will pick up the business that would have gone to B (and possibly A). Furthermore, price-sensitive customers will enter the market at the lower price. As production increases beyond 400,000 units, Samsung's costs will drop still further and faster, more than restoring its profits, even at a price of $90. Experience-curve pricing nevertheless carries major risks. Aggressive pricing might give the product a cheap image. It also assumes competitors are weak followers. The strategy leads the company to build more plants to meet demand, but a competitor may choose to innovate with a lower-cost technology. The market leader is now stuck with the old technology. Most experience-curve pricing has focused on manufacturing costs, but all costs can be improved on, including marketing costs. If three firms are each investing a large sum of money in marketing, the firm that has used it lon-gest might achieve the lowest costs. This firm can charge a little less for its product and still earn the same return, all other costs being equal. 42 target costing Costs change with production scale and experience. They can also change as a result of a concentrated effort by designers, engineers, and purchasing agents to reduce them through target costing. Market research establishes a new product's desired functions and the price at which it will sell, given its appeal and competitors' prices. This price less desired profit margin leaves the target cost the marketer must achieve. The firm must examine each cost element—design, engineering, manufacturing, sales—and bring down costs so the final cost projections are in the target range. When Con Agra Foods decided to increase the list prices of its Banquet frozen dinners to cover higher commodity costs, the average retail price of the meals increased from $1 to $1. 25. When sales dropped significantly, management vowed to return to a $1 price, which necessitated cutting $250 million in other costs through a variety of methods, such as centralizing purchasing and shipping, using less expensive ingredients, and designing smaller portions. 43 Cost cutting cannot go so deep as to compromise the brand promise and value delivered. Despite the early suc-cess of the PT Cruiser, Chrysler chose to squeeze out more profit by avoiding certain redesigns and cutting costs with cheaper radios and inferior materials. Once a best-selling car, the PT Cruiser was eventually discontinued. 44 Apparel makers tweak clothing designs to cut costs but are careful to avoid overly shallow pants pockets, waist-bands that can roll over, and buttons that crack. 45 “Marketing Memo: How to Cut Costs” describes how firms are successfully cutting costs to improve profitability. Overly aggressive cost-cutting actions resulted in declines in perceived quality for the PT Cruiser, helping to contribute to the brand's demise. Source: © Tom Hanslien Photography/Alamy | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
496 PART 5 | CRe ATing V Alue Prices inevitably have to reflect the cost structure of the products and services. Rising commodity costs and a highly competitive post-recession environment have put pressure on many firms to manage their costs carefully and decide what cost increases, if any, to pass along to consumers in the form of higher prices. When calf-skin prices surged due to a shortage, pressure was placed on those luxury goods makers that need fine leather. Similarly, when steel and other input prices soared by as much as 20 percent, Whirlpool and Electrolux raised their own prices 8 percent to 10 percent. Companies can cut costs in many ways. For General Mills, it was as simple as reducing the number of varieties of Hamburger Helper from 75 to 45 and the number of pasta shapes from 30 to 10. Dropping multicolored Yoplait lids saved $2 million a year. Other firms are attempting to shrink their products and packages while holding price and hoping consumers don't notice or care. Canned vegetables dropped to 13 or 14 ounces from 16, boxes of baby wipes hold 72 instead of 80, and sugar is sold in 4-pound instead of 5-pound bags. The cost savings from minor shrinkage can be significant. When the size of a Scott 1000 toilet paper sheet dropped from 4. 5 by 3. 7 inches to 4. 1 by 3. 7 inches, the height of a four-pack package decreased from 9. 2 to 8 inches, resulting in a 12 percent to 17 percent increase in the amount of product Scott can fit in a truck and a drop of 345,000 gallons in the gasoline needed for shipping because of the resulting fewer trucks on the road. Some marketers attempt to justify packaging changes on environmental grounds (smaller packages are “greener”) or to address health concerns (smaller packages have “fewer calories”), though consumers may not be duped. Others add other benefits in the process (“even stronger” or “new look”). Some com-panies are applying what they learned from making affordable products with scarce resources in developing countries such as India to the task of cutting costs in developed markets. Cisco blends teams of U. S. software engineers with Indian supervisors. Supermarket giant Aldi takes advantage of its global scope. It stocks only about 1,000 of the most popular everyday grocery and household items, com-pared with more than 20,000 at a traditional grocer such as Royal Ahold's Albert Heijn. Almost all the products carry Aldi's own exclusive label. Because it sells so few items, Aldi can exert strong control over quality and price and simplify shipping and handling, leading to high margins. With more than 8,200 stores worldwide currently, Aldi brings in almost $60 billion in annual sales. Sources: Richard Alleyne, “Household Brands Slash Size of Goods in 'Hidden Price Hikes,'” The Telegraph, March 21, 2013; Andrew Roberts, “Getting a Handle on the Steep Price of Leather,” Bloomberg Businessweek, September 19, 2011; Stephanie Clifford and Catherine Rampell, “Inflation Looms, but Is Stealthily Disguised in Packaging,” New York Times, March 28, 2011; “Everyday Higher Prices,” The Economist, February 26, 2011; Beth Kowitt, “When Less Is ... Less,” Fortune, November 15, 2010, p. 21; Reena Jane, “From India, the Latest Management Fad,” Bloomberg Business Week, December 14, 2009, p. 57; “German Discounter Aldi Aims to Profit from Belt-Tightening in US,” www. dw-world. de, January 15, 2009; Mina Kimes, “Cereal Cost Cutters,” Fortune, November 10, 2008, p. 24. How to Cut Costs marketing memo st EP 4: anal Yz In G com PEt Itors' costs, Pr Ic Es, an D off Ers Within the range of possible prices identified by market demand and company costs, the firm must take com-petitors' costs, prices, and possible reactions into account. If the firm's offer contains features not offered by the nearest competitor, it should evaluate their worth to the customer and add that value to the competitor's price. If the competitor's offer contains some features not offered by the firm, the firm should subtract their value from its own price. Now the firm can decide whether it can charge more, the same, or less than the competitor. 46 value-Priced co MPetitors Companies offering the powerful combination of low price and high quality are capturing the hearts and wallets of consumers all over the world. 47 Value players, such as Aldi, E*TRADE Financial, Jet Blue Airways, Southwest Airlines, Target, and Walmart, are transforming the way consumers of nearly every age and income level purchase groceries, apparel, airline tickets, financial services, and other goods and services. Traditional players are right to feel threatened. Upstart firms often rely on serving one or a few consumer segments, providing better delivery or just one additional benefit, and matching low prices with highly efficient operations to keep costs down. They have changed consumer expectations about the trade-off between quality and price. One school of thought is that companies should set up their own low-cost operations to compete with value-priced competitors only if: (1) their existing businesses will become more competitive as a result and (2) the new business will derive some advantages it would not have gained if independent. 48 | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
De Velo Ping P Ri Cing S TRAT egie S An D PRog RAm S | chapter 16 497 Low-cost operations set up by HSBC, ING, Merrill Lynch, and Royal Bank of Scotland—First Direct, ING Direct, ML Direct, and Direct Line Insurance, respectively—succeed in part thanks to synergies between the old and new lines of business. Major airlines have also introduced their own low-cost carriers. But Continental's Lite, KLM's Buzz, SAS's Snowflake, and United's Shuttle have all been unsuccessful, due in part to a lack of syn-ergies. The low-cost operation must be designed and launched as a moneymaker in its own right, not just as a defensive play. st EP 5: s El Ect In G a Pr Ic In G m Etho D Given the customers' demand schedule, the cost function, and competitors' prices, the company is now ready to select a price. Figure 16. 4 summarizes the three major considerations in price setting: Costs set a floor to the price. Competitors' prices and the price of substitutes provide an orienting point. Customers' assessment of unique features establishes the price ceiling. Companies select a pricing method that includes one or more of these three considerations. We will examine seven price-setting methods: markup pricing, target-return pricing, perceived-value pricing, value pricing, EDLP, going-rate pricing, and auction-type pricing. Marku P Pricing The most elementary pricing method is to add a standard markup to the product's cost. Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants typically price by adding a standard markup on their time and costs. Variable cost per unit $10 Fixed costs $300,000 Expected unit sales 50,000 Suppose a toaster manufacturer has the following costs and sales expectations: The manufacturer's unit cost is given by: Unit cost=variable cost+fixed cost unit sales =$10+$300,00 50,000 =$16 Now assume the manufacturer wants to earn a 20 percent markup on sales. The manufacturer's markup price is given by: Markup price= unit cost (1-desired return on sales) = $16 1-0. 2 =$20 The manufacturer will charge dealers $20 per toaster and make a profit of $4 per unit. If deal-ers want to earn 50 percent on their selling price, they will mark up the toaster 100 percent to $40. Markups are generally higher on seasonal items (to cover the risk of not selling), specialty items, slower-moving items, items with high storage and handling costs, and demand-inelastic items, such as prescription drugs. Creating a successful low cost marketing entry is not easy—United is one of many airlines who failed to do so. Source: Konstantin von Wedelstaedt Low Price (No possible profit at this price)Customers' assessment of unique product features Ceiling price Orienting point Competitors' prices and prices of substitutes Costs Floor price High Price (No possible demand at this price) | Fig. 16. 4 | The Three Cs Model for Price Setting | Keller Kevin Lane_ Kotler Philip - Marketing management-Pearson Education 2016 1.pdf |
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