Products

What this topic is all about

• The nature and importance of product in the marketing mix

• Product differentiation• Product life cycle• Managing a portfolio of

products

What is a Product?

A product is anything that is capable of

satisfying customer needs

The Importance of Product

Products are at the heart of marketingThe product needs to exist for the other elements

of the mix to happen

Parts of a Product

• Specifications and materials• Design or styling• Functions and benefits• Packaging• Range (options & accessories)

Product Range

• Product range – a collection of similar products offered by the same business

• Helps spread risk – a decline in one product may be offset by sales of other products

• A range can be sold to different segments of market e.g. family & activity holidays

• Selling a single product may not generate enough returns for business (e.g. market segment may be too small to earn a living)

Product Differentiation

• Products that are the same – tend to get the same price

• Challenges for a business– To make products different from competitors– Ensure that customers recognise that product is

different!

• Ways of differentiating a product– Distinctive design– e.g. Dyson; Apple iPod– Branding - e.g. Nike, Reebok– Performance - e.g. Mercedes, BMW

Marketing Services

• Services are mainly marketed through product differentiation

• Similar products are adjusted to target audience

• Businesses then use heavy promotion to highlight these differences.

• Differs from goods marketing, because goods have greater opportunity to use packaging and physical product design

Brands

Brands

• A product with a unique character for instance in design or image

• It is consistent and well-recognised.• Benefits

– Inspires customer loyalty leading to repeat sales– Can charge higher prices, especially if brand is market

leader– Retailers or service sellers want to stock brands

• Own label brands– A retailer which uses their own name on product rather

than manufacturer’s– Examples: Tesco tea or Sainsbury Cola

Brand Extension

• Brand extension– When a business uses a brand

name on a new product that has some of brand’s characteristics

– Examples include:• Dove soap and Dove shampoo

(both contain moisturiser)• Mars Bar and Mars Ice Cream• Lucozade & Lucozade Sport

Brand Stretching

• Where brand is used for a diverse range of products, not necessarily connected.

• Virgin is perhaps the best example of how far a brand can be stretched into distinct markets

Role of Packaging

• Packaging has several functions:– Protection of contents– Distribution – getting product from manufacturer to customer– Selling – design and labelling provides information and also

conveys a certain image– Customer convenience – e.g. multi-pack

• Packaging plays important role in “selling”– If a product cannot be differentiated by its features or designs,

then packaging becomes really important– Help to advertise and promote brand image– Help maintain quality standards (important)– Designed to encourage impulse buying (e.g. crisps, snacks)– Packaging also needs to appeal to distributors (e.g. shops)

Product Life Cycle

Product life cycle

A theoretical model which describes the

stages a product goes through

Stages in the Product Life Cycle

• Research & product development

• Introduction• Growth• Maturity• Decline• Rejuvenation or

termination

Theory can be applied to a:

Product categoryStyleBrand or model

Implications of each stage

• Net cash flow• Profit• Marketing strategy

Product life cycle and cash flow

Sales

CashFlow

Research & product development phase

• Often complex• Absorbs significant

resources• May not be successful• May involves a long

lead time before sales are achieved

Product development

• Often takes years but CAD is reducing product development times

• Evaluate at each stage and ,if necessary, abort the product idea

• The cost of development rises as it approaches launch

• Market research including a test launch often done to reduce the risk of product failure

• Most product ideas do not reach the launch phase

Causes of elimination before launch

• Inadequate demand• Action of competitors• Change in the external environment• Production problem• High costs• Does not fit in the firm’s product range• Life cycle expected to be too short

Introduction stage

• New product launched on the market• Low level of sales• Low capacity utilisation• High unit costs - teething problems occur• Usually negative cash flow• Distributors may be reluctant to take an

unproven product• Heavy promotion to make consumers aware

of the product

Strategies at the introduction phase

• This stage makes special demands on the marketing function

• Aim – to encourage customer adoption• High promotional spending to create

awareness and inform people• Either skimming or penetration pricing• Limited, focused distribution• Demand initially from “early adopters”

Growth stage

• Expanding market but arrival of competitors

• Fast growing sales• Rise in capacity utilisation• Product gains market acceptance• Cash flow may become positive • Unit costs fall with economies of scale• The market grows, profits rise but attracts

the entry of new competitors

Strategies in the growth stage

• Advertising to promote brand awareness• Increase in distribution outlets - intensive

distribution• Go for market penetration and (if possible)

price leadership• Target the early majority of potential buyers• Continuing high promotional spending• Improve the product - new features,

improved styling, more options

Maturity

• Slower sales growth as rivals enter the market = intense competition + fight for market share

• High level of capacity utilisation• High profits for those with high market share• Cash flow should be strongly positive• Weaker competitors start to leave the market • Prices and profits fall

Strategies for mature products

• Need to defend position• Product differentiation & product improvements• Rationalisation of capacity• Competitor based pricing• Promotion focuses on differentiation• Persuasive advertising• Intensive distribution • Enter new segments• Attract new users• Repositioning• Develop new uses

Decline stage

• Falling sales• Market saturation and/or competition• Decline in profits & weaker cash flows• More competitors leave the market• Decline in capacity utilisation –switch

capacity to alternative products

Reasons for decline

• Technological advance• Changes in taste and behaviour• Increased competition• Economic circumstances• Damaging publicity• Product side effects

Strategies for the decline phase

• Maintain market share• Harvest by spending little on marketing

the product• Rationalise by weeding out product

variations• Price cutting to maintain competitiveness• Promotion to retain loyal customers• Distribution narrowed

Strategies to reduce the rate of decline

• Increase in promotion• Focus on profitable segments• Reduce prices • Change distribution channels• Product improvement• Reposition the product

Extending the product life cycle

• Change price• Change promotion (e.g new promotional

message)• Change product - re-styling and product

improvement • Change more efficient distribution• Develop new market segment• Find new uses for the product• Reposition the product

Product life cycle with an extension

Sales(£)

Time

Product rationalisation

• Elimination of the product – either a natural death or termination (brand culling)

• Unless the product is profitable or has growth potential or is seen as necessary to maintain sales of another product the organisation should seriously consider eliminating the product

• Weak products take a disproportionate amount of the firm’s financial resources and can harm the firms image

The life cycle is short if….

• The rate of technological change is rapid• There is a high degree of innovation in

the market• Customers’ tastes are changing rapidly• The product is a fashion item • The product is badly marketed

Short product life cycle of a fashion (or fad) item

Sales(£)

Time

Is decline inevitable?

• The assumption is that products go through the cycle and inevitably reach the decline phase

• But some classic products have a long life cycle and no apparent sign of decline

• These are exceptions to the rule although the life cycle can be extended

• Examples: Corn Flakes, Coca Cola

No apparent decline

Sales(£)

Time

Uses of the product life cycle concept

• To forecast future behaviour of sales• To be a tool of analysis to assist in the

formulation of marketing strategies• As a manipulative device to indicate when

short-term measures might be used to distort the life cycle to the firms advantage

• To identify deviations from the norm• To aid the analysis of the firm’s product

portfolio

A balanced portfolio

• Product portfolio refers to the mix of products produced by a single firm

• Undesirable to have too many products at one stage

• New products involve heavy investment and mature products might only have a short life left to them

• A balanced portfolio is one in which the firm has a variety of products at different stages in the life cycle

Criticisms of the PLC concept

• The shape and duration of the cycle varies• Strategic decisions can change the life cycle• It is difficult to recognise exactly where a

product is in its life cycle• Length cannot be reliably predicted• Decline is not inevitable?• Assumes no reversion to earlier consumer

preferences • It can become a self fulfilling prophecy

Product life cycle of the VHS video

1976 Competing video systems launched: VHS (JVC and Victor) and Betamax (Sony)

1980s VHS-Betamax war. VHS’s longer playing time and more liberal licensing system gave it the edge

1984 Toshiba formulates plan for Digital Versatile Disc

1987 Betamax concedes defeat

1996 First film released on DVD

2003 US DVD rentals surpass VHS

2004 Hollywood studios stop releasing films on VHS

Product Portfolios

Boston Matrix

• The Boston Consulting Group developed this as a tool of portfolio analysis

• It can be applied to the portfolio of products produced by a firm or the portfolio of businesses owned by a firm

• Portfolio is the collection of businesses or products that make up a business

Essence of the Boston Matrix

• Firms should analyse the portfolio or collection of products

• Products are categorised as:– Question marks (also known as problem children)– Stars– Cash cows – Dogs

• The ideal is a balanced portfolio with some products in each category

Drawing the Matrix

Comparison with the Product Life Cycle

• The product life cycle– Is concerned with individual products– Is concerned with sales over time

• The Boston Matrix – Is concerned with the firm’s portfolio of products– Focuses on cash flow from products

The axes of the matrix

• Relative market share– This is expressed not as a % but

share in relation to other firms in the market

– A measure of the firm’s/product’s strength in the market

• Market growth– % rate of growth of sales in the

market– Measure of market attractiveness– From this we derive four cells as a

means of analysing products

“Question mark” product

• Low share of a rapidly growing market• Cash flow is negative• Have potential but the future is uncertain• Could become either a star or a dog

Strategy for “question marks”

• Invest to increase market share• Substantial investment to achieve growth

at the expense of powerful competitors• Invest in promotion and other aspects of

marketing• Build selectively

Stars

• High share of a rapidly growing market• Position of leadership in a high growth

market• The product/business is relatively strong

and the market is growing• Require high marketing spending• Net cash inflow is neutral or at best

modestly positive

Strategy for stars

• Investment to sustain growth• Build sales and/or market share• Spend to keep competitors at bay• Invest to maintain or increase leadership

position• Repel challenges from competitors

Cash cows

• High share of a slowly growing market• Mature stage in the product life cycle• Mature, successful product• Dominant share• Little potential for growth• Large positive cash inflow

Strategy for cash cows

• Harvest • Defend market share• Aim for short term profits• Little need for investment• Little potential for further growth• Reduce investment in order to maximise

short term cash flow and profits• Use profits from cash cows to invest in new

products

Dogs

• Here dog means unattractive• Low share of a slowly growth market• Not going anywhere• No real potential• Dogs are either

– Products that have failed or – Products that are in the decline phase of their life

cycle

Strategy for dogs

• Phase out or sell off (divest) • Not worth investing in• Any profit made has to be re-invested just

to maintain market share• Uses up more management time and

resources than can be justified• Divest or, at most, focus on a defendable

niche

Strategic decisions that flow from the Boston Matrix

• Cash from cash cows should be used to support stars

• Inadequate funding of stars will lead to a fall in market share and eventually becoming a problem child

• As markets mature stars will become cash cows and eventually problem children

• Problem children should be funded to become stars-if not they should be dropped

• Dogs can be milked for cash but are probably bettered dropped

Value of the Boston Matrix

• A useful tool for analysing product portfolio decisions

• But it is only a snapshot of the current position

• Has little or no predictive value• Does not take account of environmental

factors• There are flaws which flow from the

assumptions on which the matrix is based

Assumptions underlying the Boston Matrix

• Market share can be gained by investment in marketing

• Market share gains will always generate cash surpluses

• Cash surpluses will be generated when the product is in the maturity stage of the life cycle

• The best opportunity to build a dominant market position is during the growth phase

Criticisms of the Boston Matrix

• Market growth is an inadequate measure of a market’s attractiveness

• Market share is an adequate measure of a products ability to generate cash

• The focus on market share and market growth ignores issues such as developing a sustainable competitive advantages

• The product life cycle varies

Boston Matrix: summary

StarHigh market growthHigh market shareCash neutral Hold

Problem childHigh market growthLow market shareCash absorbingBuild

Cash cowLow market growthHigh market shareCash generating Harvest or milk

DogLow market growthLow market shareCash neutralDivest

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Products