4.1 Product and Service Decisions in:

Svend Hollensen, Marc Oliver Opresnik

Marketing, page 185 - 226

A Relationship Perspective

1. Edition 2010, ISBN print: 978-3-8006-3722-5, ISBN online: 978-3-8006-4870-2,

Bibliographic information
44. Marketing Mix in the MarketingPlanning Process Learning Objectives After studying the section about product and service decisions you should be able to do the following: define the term product and product levels• discuss the differences between services and goods• explain the different product differentiation strategies• explain the different product stretching strategies• After studying the section about pricing decisions you should be able to do the following: discuss the importance of pricing decisions to the individual firm• explain the major steps in pricing decisions• explain how the product life cycle can affect the price decision• understand the advantages with a differentiated price strategy across • segments After studying the section about distribution decisions you should be able to do the following: explain how distribution patterns affect the aspects of marketing• list the functions, advantages, and disadvantages of various kinds of • middle men explain the different stages in the design of channel structure• understand how distribution channels can be managed internationally• After studying the section about communication decisions you should be able to do the following: distinguish between theories of how advertising works• explain the steps in developing an international advertising campaign• describe the targets and objectives of public relations• discuss the objectives and methods of sponsorship• explain the reasons for the growth in product placement and its risk• Kapitel_4.indd 171 03.08.2010 13:01:28 Uhr 4. Marketing Mix in the Marketing Planning Process172 4.1 Product and Service Decisions To this point, we have discussed the analysis, which is essential in the framework of the development of detailed marketing programmes designed to meet corporate and strategic marketing objectives. In this and the following chapters, we will consider strategic decisions concerned with planning and implementing elements of the marketing mix; i.e. product, price, promotion and place decisions. In this chapter, we will start with the product element of the marketing mix. 4.1.1 Different Product Levels A Sony DVD player, a Ford Taurus, a coffee at Starbucks, and advice from a doctor – all are products. Essentially, a product can be defined as anything that can be offered to a customer for attention, acquisition, use, or consumption and that might satisfy a want or need. In creating an acceptable product offer for international markets, it is necessary to examine first what contributes to the ‘total’ product offer. In the product dimensions we include not just the core physical properties, but also additional elements such as packaging, branding and after-sales service that make up the total package for the purchaser. We can look at three levels of a product: 1. Core product benefits: Functional features, performance, perceived value, image and technology 2. Product attributes: Brand name, design, packaging, price, size, colour variants, country of origin 3. Support services: Delivery, installation, guarantees, after-sales service (repair and maintenance), spare part services Source: Adapted from Hollensen, 2003 Possibilities of standardizing elements of product Low High Support services Product attributes Core product benefits Delivery Installation Guarantees After-sales service ? repair ? maintenance Features Performance Perceived value Image Brand name Quality Packaging Design Staff behaviour Price Figure 4.1: The three levels of a product Kapitel_4.indd 172 03.08.2010 13:01:28 Uhr 4.1 Product and Service Decisions 173 In the product dimensions of Figure 4.1 we include not just the core physical properties, but also additional elements such as packaging, branding and after-sales service that make up the total package for the purchaser. We can also see from the figure that it is easier to standardize the core product benefits (functional features, performance, etc.) than it is to standardize the support services, which often have to be tailored to the business culture and sometimes to individual customers. Product differentiation seeks to increase the value of the product or service. As described in a previous chapter (see section 2.1.4), Levitt (1986) has suggested that products and ser vices can be seen on at least four main levels which we shall quickly summarize to add comprehensiveness in the framework of product policy. These levels are the core product, the expected product, the augmented product and the potential product. Figure 4.2 shows these levels. Differentiation is possible in all these respects. At the centre of the model is the core, or generic, product. This is the central product or service offered. The core benefit addresses the following question: What is the buyer really buying? When designing products, marketers must first define the core, problem-solving benefits or services that consumer want. Beyond the generic product, however, is what customers expect in addition, the expected product. When buying petrol, for example, customers expect the possibility of paying by credit card, the availability of screen wash facilities, and so on. Since most petrol forecourts meet these expectations they do not serve to differentiate one supplier from another. At the next level Levitt identifies the augmented product. This constitutes all the additional features and services that exceed customer expectations to convey added value and hence serve to differentiate the offer from that of competitors. Product planners must build an augmented product around the core benefit and expected product by offering additional customer services and benefits. The petrol station where one attendant Example 11: Ikea differentiates its offer advertising superior delivery services Example 12: By using colour and design, Swatch successfully augmented a basic product to create appeal for its market as exemplified in this “Missing the sea?” ad Kapitel_4.indd 173 03.08.2010 13:01:28 Uhr 4. Marketing Mix in the Marketing Planning Process174 fills the car with petrol while another cleans the windscreen, headlamps and mirrors, is going beyond what is expected. Over time, however, these means of distinguishing can become copied, routine, and ultimately merely part of what is expected. Finally, Levitt describes the potential product as all those further additional features and benefits that could be offered. At the petrol station these may include a free car wash with every fifth fill up. While the model shows the potential product bounded, in reality it is only bounded by the imagination and ingenuity of the supplier. In the past suppliers have concentrated on attempts to differentiate their offerings on the basis of the core and expected product that convergence is occurring at this level in many markets. As quality control, assurance and management methods become more widely understood and practiced, delivering a performing, reliable, durable, conforming offer (a ‘quality’ product in the classic sense of the word) will no longer be adequate. In the The core/basic offering (basic benefits) Additional benefits normally provided with the case offer (warranties, quality, service) The expected offer The augmented offer The potential offer Benefits not normally offered, e.g. credit facilities, branding delivery, etc. Additional benefits not currently offered, but that could be used to differentiate from competitors’ offerings Source: Adapted from Hollensen, 2006, modified Figure 4.2: Different product levels Kapitel_4.indd 174 03.08.2010 13:01:29 Uhr 4.1 Product and Service Decisions 175 future there will be greater emphasis on the augmented and potential product as ways of adding value, creating customer delight and hence creating competitive advantage. Differentiation of the core product or benefit offers a different way of satisfying the same basic want or need. It is typically created by a step change in technology, the application of innovation. For example, in the mobile telephone technology, SMS messages represent a ‘new’ way of communicating. 4.1.2 Product and Service Strategies The key decisions in the development and marketing of individual products and services include product attributes, branding, packaging, labelling and product support services. We shall examine those elements in more detail now. Product and Service Attributes Developing a product or service involves defining the benefits that it will offer. These benefits are delivered by product attributes such as quality, features, style and design: Product quality • is one of the marketer’s prime positioning tools. Quality has a direct impact on product or service performance and is therefore closely linked to consumer value and satisfaction. Product quality is the ability of a product to perform its functions; it includes the product’s durability, reliability, precision, ease of operation, and other valued attributes. Of key importance is customer perception of quality, which may not be the same as the manufacturer’s perception. Product quality has two dimensions – level and consistency. In developing a product, the planner must first choose a quality level that will support the product’s positioning in the target market. Companies hereby choose a quality level that matches target market needs and the quality levels of competing products. Beyond quality level, high quality can also imply high levels of quality consistency in delivering the targeted level of performance. All companies must strive for high levels of conformance quality (Kotler and Armstrong, 2009). Product features • are a competitive tool for differentiating the company’s products and services. A product service can be offered with varying features. The starting point is a simple product without any extras. The company can create higher-level models by adding more features. Being the first manufacturer to introduce a needed and valued new feature is one of the most effective ways to compete. In order to evaluate and decide which features to add, a company should periodically survey buyers who have used the product and ask some of the following questions: How do you like the product? Which specific features of the product do you like most? Which features could we add to improve the product? The company can then assess each feature’s value to customer versus its cost to the company. Features that customers value little in relation to costs should be dropped and those that consumers value highly in relation to costs should be added. Product style and design • also enable the creation of customer value add. Style simply describes the appearance of a product. An eye-catching style may create attention and produce pleasing aesthetics, but it does not necessarily make the product perform better. Unlike style, design goes to the very heart of a product as good design contributes to a product’s usefulness as well as to its looks. From a marketing perspective, prod- Kapitel_4.indd 175 03.08.2010 13:01:30 Uhr 4. Marketing Mix in the Marketing Planning Process176 uct designers should think less about product attributes and technical specifications and more about how customers will use and benefit from the product. Branding • is perhaps the most distinctive skill of professional marketers and a particularly effective way of differentiating at the tangible product level. A brand is a name, term, sign, symbol, or design, or a combination of these. Customers view a brand as an important part of a product, and branding can substantially add value to a product. Building and managing brands is eventually the marketer’s most important task. We will discuss branding strategy in more detail later in the chapter. Packaging• involves designing and producing the container or wrapper for a product. The package contains a product’s primary container (e.g. the tube holding Colgate toothpaste) and may also include a secondary package that is thrown away when the product is about to be used (e.g. the cardboard box containing the tube of Colgate). Finally, it can include a shipping package necessary to store, identify, and ship the product (e.g. a corrugated boy carrying six dozen tubes of Colgate). Labelling, printed information appearing on or with the package, is also part of packaging. Traditionally, the primary function of the package (see also chapter 2.1.4) was to contain and protect the product. In recent times, however, several factors have made packaging an important marketing tool. Increased competition implies that packages must now perform many sales tasks – from attracting attention, to describing the product, to marking the sale (Fitzgerald, 2003). Labelling• involves labels ranging from simple tags attached to products to complex graphics that are part of the package. The label identifies the product or brand, such as the name ‘Sunkist’ stamped on organs. The label might also describe several things about the product – who made it, where it was made, when it was made, its contents, how it is to be used, and how to use it safely. Finally, the label might promote the product through attractive graphics (Kotler and Armstrong, 2009). Product support services• are of key importance in the framework of product strategy development. A company’s offer usually includes some support services such as delivery, guarantees, hotline and after-sales service. Later in the chapter, we will discuss services as products in themselves. Product Line Decisions Beyond decisions about individual products and services, product strategy also calls for building a product line. A product line is a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges. For example, Nokia produces several lines of telecommunication products. The major product line decision involves product line length – the number of items in the product line. The line is too short if the manager can enlarge profits by adding items and the line is too long if the marketer can increase profits by dropping items. Product line length is influenced by company objectives and resources. For example, one goal might be allowing for upselling. Thus BMW wants to move customers up from its 3-series models to 5- and 7-series models. Another objective might be to allow cross-selling: Hewlett-Packard sells printers as well as cartridges. Kapitel_4.indd 176 03.08.2010 13:01:30 Uhr 4.1 Product and Service Decisions 177 A firm can lengthen the product line in two ways: by line stretching or by line filling. Product line stretching occurs when a company lengthens its product line beyond its current range. The firm can stretch its line downward, upward, or both ways. Mercedes-Benz, for example, stretched its Mercedes line downward because of the following reasons: Facing a slow-growth luxury car market and attacks by Japanese automakers on its high-end positioning, it successfully introduced its Mercedes C- Class cars. Product line filling involves adding more items within the present range of the line. Reasons for this approach include reaching for extra profits, satisfying dealers, using excess capacity and being the leading full-line company. Sony, for example, filled its Walkman line by adding solar-powered and waterproof Walkmans, ultra light models for exercises, the CD Walkman, and the Memory Stick Walkman. Line filling is overdone if it results in cannibalization and customer confusion. Therefore, a company must ensure that new items are noticeable different from existing ones. (Kotler and Armstrong, 2009) Product Mix Decisions An organisation with several product lines has a product mix. A product mix (or product assortment) consist of all the product lines and items that a particular company markets. A company’s product mix has four important dimensions: width, length, depth, and consistency. Product mix width refers to the number of different product lines the company carries. For example, Procter & Gamble markets a wide product mix consisting of 250 brands organized into five major product lines: personal and beauty, house and home, health and wellness, baby and family, and pet nutrition and care products. Product mix length refers to the total number of items the firm carries within its product Example 13: Osram powerfully advertises its products to increase safety as a key customer benefit when marketing its nightbreaker bulbs Example 14: Print ad for the Nokia Nseries product line Kapitel_4.indd 177 03.08.2010 13:01:30 Uhr 4. Marketing Mix in the Marketing Planning Process178 lines. P&G carries many brands within each line. For example, its house and home lines includes seven laundry detergents, six hand soaps, five shampoos, and four dishwashing detergents (Kotler and Armstrong, 2009). Product line depth refers to the number of versions offered for each product in the line. P&G’s Crest toothpaste comes in 16 varieties. Finally, the consistency of the product mix refers to 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 insofar as they are consumer products that go through the same distribution channels. The lines are less consistent insofar as they perform different functions for customers. The hypothetical company in figure 4.3 manufactures and markets three product lines (= product width). Product depth refers to the number of product items in each line – 3, 4 and 2 respectively – with the average being 3. By looking at Figure 4.3 a strategic assessment of a company’s product offering can be made. For example, the product width could be extended by adding more product lines. The same could happen to the product depth. The depth of the product line depends upon the pattern of customer requirements, the product depth being offered by competitors, and company resources. These product mix dimensions provide the handles for defining the firm’s product strategy. The company can increase its business in four ways. It can add new product lines, widening its product mix. In this way, its new lines build on the organisation’s reputation in its other lines. The company can lengthen its existing product lines to become a more full-line company. Or it can add more versions of each product and thus deepen its product mix. Finally, the firm can pursue product line consistency – or less – depending on whether it wants to have strong reputation in a single field or in several fields (Kotler and Armstrong, 2009). Decisions about new products should reflect consistency with existing product lines in relation to earlier determined marketing objectives set for product provision in specified Product item 1a Product item 2a Product item 3a Product item 1b Product item 2b Product item 3b Product item 1c Product item 2c Product item 2d Product line 1 Product line 2 Product line 3 Product width Pr od uc t d ep th Source: Adapted from Hollensen, 2006, modified Figure 4.3: The product mix for a hypothetical company Kapitel_4.indd 178 03.08.2010 13:01:31 Uhr 4.1 Product and Service Decisions 179 markets. Hence, the addition to the width of the mix and the depth within each product line should be compatible with the planned long-term marketing strategy, based on a set of evaluation criteria so that the decisions taken are rational and not purely emotional or opportunistic. Product mix strategy involves the management of existing successful products, the elimination of obsolete or non-profit making ones and the development and introduction of new products. Each of these elements of product strategy and management is important to the achievement of company objectives (Hollensen, 2006). 4.1.3 Services Marketing Services have grown dramatically in recent years. According to Samiee (1999), 25 per cent of the global merchandise trade belongs to the service category. The value of global trade in services has been growing at double-digit rates and this trend is expected to continue. It is seen from the definition of a product that services often accompany products. Increasingly it is accepted that because buyers are concerned with benefits or satisfactions this is a combination of both tangible ‘products’, and intangible ‘services’ (Baker and Hart, 1999). Characteristics of Services Before considering possible service strategies, it is important to consider the special nature of service marketing. Services are characterized by the following features (Hollensen, 2006): Intangibility • means that services cannot be seen, tasted, felt, heard, or smelled before they are bought. For example, as services like air transportation or education cannot be touched or tested, the buyers or services cannot claim ownership or anything tangible in the conventional sense. Payment is for use or performance. Tangible elements of the service, such as food or drink on airlines, are used as part of the service in order to confirm the benefit provided and to enhance its perceived value. Against this background, a service marketing strategy consistently tries to ‘make the intangible tangible’ and send the right signals about the quality. This is called evidence management, in which the service organisation presents its customers with organized, honest evidence of its capabilities. Perishability • means that services cannot be stored for future usage – for example, unfilled airline seats are lost once the aircraft takes off. This characteristic causes considerable problems in planning and promotion in order to match supply and demand. To maintain service capacity constantly at levels necessary to satisfy peak demand will be very expensive. The marketer must therefore attempt to estimate demand levels in order optimise the use of capacity. Heterogeneity • implies that services are rarely the same because they involve interactions between people. Furthermore, there is high customer involvement in the production of services. This can cause problems of maintaining quality, particularly in international markets where there are quite different attitudes towards customer service. For example, within a given Marriott hotel, one registration-desk employee may be cheerful and highly efficient, whereas another standing just a few feet away may be unpleasant and slow. Even the quality of a single Marriott employee’s service varies according to his or her energy at the time of each customer encounter. Con- Kapitel_4.indd 179 03.08.2010 13:01:31 Uhr 4. Marketing Mix in the Marketing Planning Process180 sequently, the management of staff is of supreme importance in the framework of service marketing. Inseparability • means that services cannot be separated from their providers. The time of production is very close to or even simultaneous with the time of consumption. The service is provided at the point of sale. This means that economies of scale and experience curve benefits are difficult to achieve, and supplying the service to scattered markets can be expensive, particularly in the initial setting-up phase. If a service employee provides the service, then the employee is a part of the service. Because the customer is also present, provider-customer-interaction is a special feature of services marketing and both the provider and the customer affect the service outcome. Categories of Service All products, both goods and services, consist of a core element that is surrounded by an array of optional supplementary elements. If we look first at the core service products, we can assign them to one of three broad categories depending on their tangibility and the extent to which customers need to be physically present during service production. These categories are presented in Table 4.1 Determining the Service Quality Gap Quality is often considered to be one of the keys to success. The competitive advantage of the firm is said to depend on the quality, and value of its goods and services. Figure 4.4 illustrates how quality dimensions are connected to traditional marketing activities resulting in a perceived service quality. Premium total quality is obtained when the gap between the customer’s expected service quality and perceived service quality is zero or very small, meaning that perceived service quality meeting the customer’s expectations is the expected service quality. If expected service quality is much higher Categories of service Characteristics Examples Possibilities of worldwide standardization People processing Customers become a part of the production process. The service needs to maintain local geographic presence Education• Healthcare• Food service• Hotel service• No good possibilities because of high degree of customer involvement – very cultural sensitive Possession processing The object needs to be involved in the production process, but the owner of the object (the customer) does not. Involve tangible actions to physical objects to improve their value for the customers Car repair• Better possibilities Information based services Collecting, interpreting and transmitting data to create value to others. Minimal tangibility. Minimal customer involvement in the production process Banking• Internet • services Very good possibilities because of the virtual nature of these services Table 4.1: Categories of service Kapitel_4.indd 180 03.08.2010 13:01:31 Uhr 4.1 Product and Service Decisions 181 than the perceived service quality, the ‘gap’ will be large and the ‘total service quality’ will be low, even if the perceived service quality measured in an objective way is good. As shown in Figure 4.4 the customer’s ‘expected service quality’ and ‘perceived service quality’ is a function of several factors, most of them controllable by the company. The ‘expected service quality’ is highly influenced by the firm’s marketing tools and the combination of them. The image and word of mouth factors, as well as public relations, are only indirectly controlled by the firm. Also the needs of the customers and their past experience with the company may also have an impact on their expectations. On the other hand, what really counts is the quality as it is perceived by the customers (‘perceived service quality’). Basically, the ‘perceived service quality’ has two dimensions; a technical or outcome dimension, and a functional or process-related dimension. The hotel guest will be provided with a room and a bed to sleep in, the airline passenger will be transported from one place to another, and a company may get its goods transported from its warehouse to a consumer. These are examples of the ‘technical’ quality dimension. What the customers basically receive in their interaction with a company is clearly important to them and their quality perception. It is what the customer is left with, when the service production process and its buyer-seller interactions terminated. Sometimes this dimension can be measured quite objectively by customers because of its characteristic as a technical solution to a problem. However, as there are a number of exchanges between the service provider and the customer, including various series of moments of truth, the customer will also be influenced by the way in which the technical quality is transferred to him or her. This is called the ‘functional quality’ of the process. It is easy to see that the functional quality cannot be evaluated as neutrally as the technical dimension; it is frequently perceived very subjectively. The two quality dimensions, what and how, are not only valid for services. The technical solution for a customer provided by, for example, a machine – in the production function – is part of the overall technical quality perceived by this customer. But attempts to tailor this machine to the specific Source: Adapted from Hollensen, 2010, modified Market communication ß Advertising ß Sales promotion ß Direct marketing PR/image: ß Public relations ß Image Personal factors ß Personal wants and needs ß Past purchasing experience Technical quality What the customer receives Functional quality How and where the customer receives and perceives the service Expected service quality Perceived service quality Service quality gap Image Customer (before service delivery) Customer (after service delivery) ”Total service quality” when the ”service quality gap” is zero, the total service quality is high (expected service quality = perceived quality) Figure 4.4: Illustration of the total service ‘gap’ Kapitel_4.indd 181 03.08.2010 13:01:31 Uhr 4. Marketing Mix in the Marketing Planning Process182 demands of a customer is an additional value and therefore part of the overall functional quality and the customer experiences. The technical quality of a service process is normally a prerequisite for good quality. It has to be at an satisfactory level. The definition of an acceptable level depends of the firm’s strategy and the needs and expectations of the clients. However, once the outcome is good enough, this becomes transparent, and should not be used as a way of differentiating the product/service. The functional quality perception is also influenced by elements of the physical environment. The where aspect is considered to be part of the how dimension, which is consistent because the perception of the process clearly is dependent of the service process, for example, in a restaurant. Usually the service provider cannot hide behind brand names or distributors. In most cases the firm, its resources and is operating methods are visible to the customers. The firm’s corporate and/or local image is therefore of the utmost importance to most services. It can affect the perception of quality in various ways. If the provider has a favourable image in the minds of the customers, minor mistakes will probably be forgiven. However, if mistakes often occur, the image will be damaged. Against this background, it becomes evident, that the relationship approach to marketing is of key importance as each interaction between a customer and a representative of the brand, e.g. any service staff, is always a moment of truth, in which the whole value proposition of the company is at disposal because this is matched against how the customers perceive it. The important similarity between the value proposition of the company, which results in an aspired image of the brand on a ‘brand screen’, and the perception of the customer is visualized in Figure 4.5. The degree of congruence decides Figure 4.5: Moments of truth and the service ‘gap’ Kapitel_4.indd 182 03.08.2010 13:01:32 Uhr 4.1 Product and Service Decisions 183 about how the brand and ultimately the company are pictured in the minds of the customers which finally affect their buying behaviour. After-Sales Services (AS) Customer service provides one important means by which a company can tailor its offerings to the needs and wants of its customers. By offering premium service, a company assures consumers that its products and projects are reliable and of superior quality. Customer services offered after the sales transaction are of crucial importance in this respect. After-sales services (AS) can be defined as those activities in which a company engages after purchase of its product that minimize potential problems related to product use, and maximize the value of the consumption experience. Researchers have suggested that AS consists of a number of dimensions or elements. Here, AS is conceptualised as consisting of the following: the installation and start-up of the purchased product, the provision of spare parts for products, the provision of repair services, technical advice regarding the product, and the provision and support of warranties. AS adds to the product’s value and is often treated as an integral part of the product. Levitt (1983) suggests that because the provision of AS enhances product value in a manner similar to other intangible product components, these service elements should be regarded as part of the augmented product (Asugman et al., 1997). The potential financial importance of these services has been called to the attention of corporations. Herbig and Palumbo (1993) suggested that ‘profit margins for aftermarket services are typically about 15 % to 25 % before taxes, whereas those for products are only 7 % to 11 % … Often, up to 25 % to 40 % of corporate revenues and from 20 % to 50 % of corporate profits can be generated from the aftermarket service components of a business’ (Wilson, 1999). Customer Support in After-Sales Service Goffig and New (2001) suggest that there are seven key elements of customer support in B-t-B after-sales-service: Installation• . For many products, the first element of product support following the sale is installation. For complex products, or where safety issues are involved, personnel from the manufacturing organisation or their representatives usually perform this. User training• . The complexity of some types of equipment implies that manufacturers must provide good training for users. For example, the successful implementation of new manufacturing equipment often depends on extensive training. Many products include functions, which help users learn to use them more efficiently; these can range from simple Help functions, to full computer training packages. Documentation• . Most products require some form of documentation. Typical forms of documentation cover equipment operation, installation, maintenance and repair. Good documentation can reduce support costs (Miskie, 1989). Maintenance and repair• . Traditionally, this has always been an important element of customer support. Maintenance is necessary to clean refurbish or replace parts or equipment which otherwise would be liable to fail. If equipment fails, fast and efficient repair is essential in many markets because down-time costs are very high – often many times the price of spare parts or service. Manufacturers need to have Kapitel_4.indd 183 03.08.2010 13:01:32 Uhr 4. Marketing Mix in the Marketing Planning Process184 effective logistics for the management of customer support engineers and the movement of spares, the parts used in repairs. Online support• . Telephone advice on products is important in many industries. Product experts give online consulting to customers to help them use products more efficiently or, sometimes to trace the cause of faults. Warranty• . Manufacturers’ warranties reduce the financial risk of owning products. Over the working lifetime of a product, support costs can be high and so many manufacturers offer customer the possibility to purchase extended warranty. Upgrades• . Customers may be offered the opportunity to enhance the performance of existing products. For example, computer upgrades increase the working lifetimes of products. Over the years there has been a change in the relative importance of different elements of customer support. In the past, when many products had high failure rates, the most important aspect of support was quick and reliable repair. New technologies have now typically led to more reliable products. However, increased product complexity (which is often software-based) means that the importance of user training and online support has increased. ‘Full Service’ Contracts Based on Stremersch et al. (2001), ‘full service’ can be defined as ‘a comprehensive bundle of products and/or services, that fully satisfies the needs and wants of a customer related to a specific event or problem’. The concept of full service strategy is clearly related to the concepts of ‘bundling’ and ‘systems selling’. Bundling can be defined as ‘the offering of groups of products and/or services as a package’. Thus, the concept of full service is composed of two conceptually distinct dimensions, that is, (1) bundling strategy (a bundle of product and/or services), and (2) extension in customer need fulfilment (that fully satisfies the needs and wants of a customer related to a specific event or problem). These dimensions are confronted in the following way: Bundling strategy• : does the supplier company bundle its products and/or services? Within this dimension three positions are distinguished: pure components (unbundled offer, mixed bundling (components are available in a bundled as well as in an unbundled offer), and pure bundling (components are only available in a bundled offer). Extension in need fulfilment• : this dimension comprises the extent to which customer needs are satisfied by the supplier firm. Competitive offerings may compete with full-service suppliers by focusing on satisfying specific customer needs, either by means of bundled or unbundled offers. Alternatively, competitors may choose to satisfy multiple needs by offering different unbundled solutions. This approach may appeal to customers seeking high levels of flexibility in their purchasing behaviour. Therefore, it is clear that industrial customer firms will evaluate full-service offerings differently from mere product/service offerings. These differences are likely to related to both the purchasing criteria used as well as the purchasing process itself. The high de- Kapitel_4.indd 184 03.08.2010 13:01:32 Uhr 4.1 Product and Service Decisions 185 gree of comprehensiveness and potential implications for full-service contracts is likely to positively influence both the number of DMU (Decision Making Unit) members and the DMU’s heterogeneity. In the research of service maintenance contracts, Stremersch et al. (2001) found that maintenance companies (and OEMs) will have to broaden their marketing and sales approach in a horizontal as well as a vertical way. Higher management levels are involved in the buying process as well as other departments. Furthermore, other buying motives will come into play through the involvement of different people. Maintenance firms also will have to be prepared for the longer decision-making process and develop specific tools, for instance to calculate ‘total cost of ownership’, for specific phases throughout the extended buying process. 4.1.4 New Product Development (NPD) Given the rapid changes in customer tastes, technology and competition, companies must develop a steady stream of new products and services (question marks in the terminology of the BCG matrix). A company can create new products in two ways. One is through acquisition – by buying another company, a patent or a license to produce someone else’s product. The other is through new product development (NPD) in the company’s own research-and-development (R&D) department. The traditional new product development models involve the following stages in product development: idea generation, screening, concept development and testing, business analysis, product development and testing, test marketing, commercialization or launch (Baker and Hart, 1999). The Multiple Convergent Process Model Baker and Hart (1999) suggested the so-called ‘multiple convergent process’ model, which is conceptually derived from the idea of parallel processing. In the multiple convergent approach there are tasks that must be carried out in different internal departments (Research and Development, Marketing, Manufacturing) and in cooperation with external partners (suppliers and customers). The tasks have to be completed simultaneously and the results must converge at some juncture, which is likely to happen several times due to the iterations in the process. Consequently, there are multiple convergent points that link the activity-stage model to the decision-stage models. The extent of involvement of internal and external stakeholders will be determined by the firm’s specific needs in the product development process. One of the advantages of this model is that it recognizes the involvement of external partners in the product development process. There is growing interest in the need for supplier and customer participation in the NPD. From the customers the firm can benefit from new product ideas and product adaptations to specific customer needs. The supplier can contribute with supplier innovation and just-in-time. Product Platform/Modularity in New Product Development The modularity approach to product development is an important success factor in numerous markets. By sharing components and production processes across a product platform, companies can develop differentiated products efficiently, increase the flexi- Kapitel_4.indd 185 03.08.2010 13:01:32 Uhr 4. Marketing Mix in the Marketing Planning Process186 bility and responsiveness of their manufacturing processes, and take market share away from competitors that develop only one product at a time. The modularity approach is also a way to achieve successful mass customisation – the manufacture of products in high volumes that are tailored to meet the needs of individual customers. It allows highly differentiated products to be delivered to the market without consuming excessive resources. Product modularity consists of designing a platform that is a collection of assets that are shared by a set of products. These assets can be divided into four categories (Robertson, 1998): Components• – the part designs of a product, the fixtures and tools needed to make them, the circuit designs, and the programs burned into programmable chips or stored on disks. Processes• – the equipment used to make components or to assemble components into products and the design of the associated production process and supply chain. Knowledge• – design know-how, technology applications and limitations, production techniques, mathematical models, and testing methods. People and relationship• – teams, relationships among team members, relationships between the team and the larger organisation, and relationships with a network of suppliers. This general product platform should then be used for tailoring end products to the needs of different market segments or customers. The platform approach reduces the incremental cost of addressing the specific needs of a market segment or of an individual customer. (See also Figure 4.6 as an example of the modularity approach in new product development. For the sake of simplicity only the interaction between two product modules is illustrated). The firm’s advantages of using product modularity are: Reduction of development cost and time• : Parts and assembly processes developed for one end product can be used for other products. Reduction of variable costs• : When producing larger volumes of common components, companies achieve economies of scale. Cutting costs in materials management, logistics, distribution, inventory management, sales and service, and purchasing. Reduction of production investments:• Machinery, equipment, and tooling, and the engineering time needed to create them, can be shared across higher production volumes. Reduction of risks:• The lower investment required for each product developed from a platform results in decreased risk for each new product. Sharing components across products allows companies to stock fewer parts in their production and service parts inventories, which translates into better service levels and/or lower service costs. Major Stages in New Product Development To create successful new products, a company must understand its customers, markets, and other factors and stakeholder such as competitors and develop products that deliver superior value. It must carry out strong new-product planning and set up a systematic NPD process for finding and growing new products. Figure 4.7 shows the major steps in this process (Kotler and Armstrong, 2009). Kapitel_4.indd 186 03.08.2010 13:01:33 Uhr 4.1 Product and Service Decisions 187 Source: Adapted from Hollensen, 2003 End-product Usage of components in more modules leads to economies of scale and consequently to lower costs per unit Product platform:Components: Customized end-products: Components, processes, knowledge, people/teams VALUE ADDED Product platform Interaction between module 1 and 2: sharing components, production, processes, knowledge, and staff Adding different product features to the product platform leads to increasingly customised products for each segment Segment 1 End-product End-product End-product Segment 2 Segment 3 Segment 4 Product module 1 Product module 2 1 2 3 4 5 Figure 4.6 near here: Principle of using modularity in creating product platforms Source: Adapted from Kotler and Armstrong, 2009 Idea generation Idea screening Concept and development testing Marketing strategy Business analysis Product development Test marketing Commercialization Figure 4.7: Major stages in NPD Kapitel_4.indd 187 03.08.2010 13:01:33 Uhr 4. Marketing Mix in the Marketing Planning Process188 We shall describe the respective stages now: Idea generation • NPD starts with idea generation – the systematic search for new product ideas. In general, a company has to generate multiple ideas in order to find a few good ones. Major sources of new-product ideas include internal sources (e.g. staff, intrapreneurial programs, R&D) and external sources (e.g. customers, competitors, distributors, suppliers). Idea screening • While the purpose of idea generation is to create a large number of ideas the purpose of the succeeding stage is to reduce that number. Idea screening helps to spot good ideas and drop poor ones. As product development costs rise greatly in later stages, the company wants to go ahead only with the product ideas that will potentially turn into profitable products. Within the screening process questions such as the following should be asked: Is the product useful to consumers and society? Does the company have the people, skills, and resources to make the product succeed? Is the product easy to advertise and distribute? Concept development and testing • Any attractive idea must be developed into a product concept. A product concept is a detailed version of the idea stated in meaningful customer terms. Concept testing calls for testing new-product concepts with groups of target consumers. After being exposed to the concept, customers then may be asked to react to it by answering questions such as the following: Do understand the concept of the product e.g. a fuel-cell powered car? Do you believe the claims about the product? What improvements in the product’s features would you suggest? What would be a reasonable price for the product? Who would be involved in your decision to buy such a product? Marketing strategy development • This stage involves designing an initial marketing strategy for introducing the product. The marketing strategy statement consists of three parts: The first part describes the target market; the planned product positioning; and the sales, market share, and profit objectives for the first few years. The second part outlines the product’s planned price, distribution, and budget for the first year. The last part of the marketing strategy statement describes the long-run sales, profit goals, and marketing mix strategy. Business analysis • Business analysis involves a review of sales, costs, and profit projections for a new product to find out whether they satisfy the organisation’s objectives. In case they do, the product can move to the product development stage. Product development • In this stage, R&D or engineering develops the product concept into a physical product. This goes along with a large increase in investment. The product development step will show whether the product idea can be turned into a usable product. R&D strives to design a prototype that will satisfy and excite customers. A new product must have the required functional features and also convey the aspired psychological characteristics. Test marketing • Test marketing is the stage at which the product and marketing program are introduced into more realistic market settings. Test marketing gives the marketer experi- Kapitel_4.indd 188 03.08.2010 13:01:34 Uhr 4.1 Product and Service Decisions 189 ence with marketing the product before going to the large investment of full introduction. It lets the company test the product and its entire marketing strategy. Commercialization • Test marketing provides management with the information needed to make the final decision about whether to launch the new product. If the company goes ahead with commercialization – introducing the new product into the market – it will face high costs. The company launching a new product must decide on issues such as introduction timing and where to launch the new product. An effective commercialization strategy relies upon marketing management making plain choices regarding the target market, and the development of a marketing strategy that provides a differential advantage. A useful starting point for choosing a target market is an understanding of the diffusion of innovation process which explains how a new product spreads throughout a market over time (Rogers, 2003). Figure 4.8 shows the diffusion of innovation curve which categorizes people or organisations according to how soon they are willing to adopt the innovation. The graph shows that those actors (innovators and early adopters) who are willing to purchase the new product soon after launch are likely to from a minor part of the total number of actors who will eventually be willing to buy it. As the new product is accepted and approved by these customers, and the decision to purchase it becomes less risky, the customers that make up the bulk of the market, comprising the early and late majority, begin to try the product themselves. Finally, after the product has gained full acceptance, a group describes as the laggards adopt the new product. These diffusion of innovation categories play a crucial role in the choice or target market. The key is to understand the characteristics of the innovator and early adopter categories and specifically target them at launch. In addition, these classes can provide an important basis for segmenting the market for an innovative product. For example, Samsung Electronics directs much of its marketing efforts towards the innovator/early adopter segments by targeting the ‘high-life seekers’ consumers who adopt technology early and are prepared to pay a premium price for it (Pesola, 2005). Source: Adapted from Jobber, 2010 34% 34% 16%13.5%2.5% Innovators Early adopters Early majority Late majority Laggards Pe rc en ta ge a do pt in g Time Figure 4.8: The diffusion of innovation process Kapitel_4.indd 189 03.08.2010 13:01:34 Uhr 4. Marketing Mix in the Marketing Planning Process190 Creating and Nurturing an Innovative Culture The precondition and foundation for successful NPD is the creation and nurturing of a corporate culture that promotes and rewards innovation. Figure 4.9 shows key elements that may foster an innovation culture. We shall discuss some of those in more detail now (Jobber, 2010). People in all sorts of organisation thoroughly observe those actions that are likely to lead to success or punishment. A definite way to eradicate any innovative spirit is to punish those people who are prepared to create and champion new product ideas through to communication when things go wrong, and to reward those employees who are content to manage the status quo. Research suggests that those firms that have supportive attitudes to reward risk, and a tolerant attitude towards failure, are more inclined to innovate successfully (Shrivastava and Souder, 1987; Pfeiffer, 2010). The problem, however, is that still many organisations reward employees solely on performance in terms of operational excellence. As innovations are per se antithetical to the status quo this approach can be significantly damaging in terms of maintaining and fostering an innovative spirit. An innovation culture must also be nurtured by senior management visibly supporting NPD in general. Source: Adapted from Jobber, 2010, modified Reward success greatly Clear messages about the significance of innovation Back words with resources Resist automatic nay-saying Tolerate failure Be approachable 20% time: give time off to people working on pet projects Symbolic management and leading by example Innovation culture Figure 4.9: Creating and nurturing an innovation culture Example 15: BP advertises its focus on innovation and product development Kapitel_4.indd 190 03.08.2010 13:01:34 Uhr 4.1 Product and Service Decisions 191 Beside sending clear messages about the role and importance of NPD, senior management is called to reinforce their words by allowing time off from usual duties to people, who wish to develop their own ideas, make available funds and resources for projects, and make themselves approachable when decisions need to be taken at the top level. Google, for example, supports NPD by allowing employees 20 per cent of their work time to spend on individual projects. Gmail and Google News are two products that have resulted. Finally, management at all levels should resist the temptation of automatic ‘nay-saying’. Whenever a new idea is suggested the tendency of others is to think of the negatives. This will ultimately ‘kill’ the idea and in the end any potential innovative spirit in the company. Instead, the proposer should be encouraged to take the idea further, to research and develop it. Creative leadership is required to release passions, imaginations and energy needed for innovation. Such leadership encourages staff to reject and question the status quo and operate in a productive ‘discomfort zone’, has a clear vision of the future, provides effort for exploration, and shows in its actions how to tolerate uncertainty (Francis, 2000). 4.1.5 The Product Life Cycle The concept of the product life cycle (PLC) provides useful inputs into making product decisions and formulating product strategies. The product life cycle visualizes the course of a product’s sales and profits over its lifetime. It involves four distinct stages: introduction, growth, maturity and decline (see Figure 4.10). Each stage is identified by its sales performance and characterized by different level of profitability, various degrees of competition and distinctive marketing programmes. Sales and profits Time Maturity Decline Sales Profits Introduction Growth Figure 4.10: The product life cycle Kapitel_4.indd 191 03.08.2010 13:01:36 Uhr 4. Marketing Mix in the Marketing Planning Process192 We shall now look at the four stages of the product life cycle in more detail: Introduction • is a period of slow sales as the product is introduced in the market. Profits are nonexistent in this stage because of the large expenses of product introduction. Growth • is a period of rapid market acceptance and increasing profits. Profits may begin to decline towards the latter stage of growth as new rivals enter the market, attracted by fast sales growth and high profit potential. The end of this stage is often associated with competitive shakeout, whereby weaker suppliers terminate production. Maturity • is a period of slowdown in sales growth because the product has achieved acceptance by most potential buyers. Saturation occurs, hastening competitive shakeout. The remaining companies are engaged in a fierce battle for market share by employing product improvements, advertising and sales promotional offers, and price cutting; the result is strain on profit margins. The need for successful brand building is increasingly recognized as brand leaders are in the strongest position to resist the pressure on profit margins (Doyle, 1989). Decline • is the period when sales and profits fall as new technology or changes in consumer tastes work to reduce demand for the products and services. Suppliers may decide to end production completely or reduce product depth. Advertising may be used to defend against rivals and prevent the sales from falling further. Levels of Product Life Cycle The PLC concept can be examined at various levels, from the life cycle of a whole industry or product form (the technological life cycle or TLC – see Figure 4.11) to the life cycle of a single model of a specific product (Popper and Buskirk, 1992). It is probably most constructive to reflect in terms of the life cycle of a product form such as photocopiers or video cassette recorders. Life cycles for product forms include definable groups of direct and close competitors and a core technology. These characteristics make life cycles for product forms easier to spot and analyze, and would seem to have more stable and Source: Adapted from Hollensen, 2003 Time 1980 1998 2010 S al es TLC of Betamax PLC of single VHS model from Philips TLC of VHS TLC of digital VCR system ? ? Figure 4.11: Comparisons of TLC for different VCR systems and PLC of a single VCR model Kapitel_4.indd 192 03.08.2010 13:01:36 Uhr 4.1 Product and Service Decisions 193 general implications. The battle between different technologies in the childhood of video-recorders is shown in Figure 4.11. It is a well-known fact that the ‘winner’ of this battle was the JVC-initiated VHS-system. Another example of a TLCshift happened when the compact disc (CD) format was introduced as a result of a joint development between Philips and Sony. A key factor success of the CD format displacing the old LP record format was the ownership by Sony of CBS in the USA, and by Philips of Polygram in Europe, two of the biggest music software companies in the world. This contributed to the new CD format establishing itself as the industry standard. However, there were also a number of barriers to the adoption of the new format. The potential users had already invested in LP record collections and the prices of discs and players were relatively high at the beginning of the TLC. Limitations of the Product Life Cycle The PLC emphasizes the need to review marketing objectives and strategies as products pass through various stages. It is supportive to think of marketing decisions during the lifetime of a product, but managers need to be aware of the limitations of the PLC so they are not misled by its prescriptions (Jobber, 2010): Misleading strategy prescriptions • The PLC is a dependent variable that is determined by the marketing mix; it is not an independent variable to which firms should adapt their marketing programmes (Dhalla and Yuspeh, 1976). If a product’s sale is declining, management should not conclude that the brand is in the decline stage. If management withdraws marketing resources from the brand, it will create a self-fulfilling prophecy and the brand’s sales will continue to decline. Instead, management might increase marketing support in order to create a recycle. This could be realized by use of one or more of the following measures: product improvements (e.g. new product packaging), reposition perception of the product, reach new users of the product (via new distribution outlets), promote more frequent use of the product (fulfilling same need), and promote new uses of the product (fulfilling new needs). Fads • Not all products follow the classic PLC curve. Fads are fashions that are adopted very quickly by the public, peak early and decline very fast. It is difficult to predict whether something will be only a fad, or how long it will last. The amount of massmedia attention together with other factors will influence the fad’s duration. Example 16: Product life cycle: Some products die quickly; others stay in the mature stage for a long time. For more than 100 years, Perrier is one of the leading mineral water brands Kapitel_4.indd 193 03.08.2010 13:01:36 Uhr 4. Marketing Mix in the Marketing Planning Process194 Unpredictability • The duration of the PLC stages is unpredictable. Critics charge that markets can seldom tell what stage the product is in. A product may appear to be mature when actually it has only reached a temporary plateau prior to another upsurge. 4.1.6 New Products for the International Market Customer needs are the starting point for product development, whether for domestic or global markets. In addition to customer needs, conditions of use and ability to buy the product form a framework for decisions on new product development for the international market. Developing New Products/Cutting the Time to Market As a consequence of increasing international competition, speed is becoming a key success factor for an increasing number of companies that manufacture technologically sophisticated products. This swiftness of change in the environment is accelerating, leading to greater complexity and added ‘turbulence’, or discontinuity. Technological developments are combining to shorten product life cycles and speed up commercialisation times. The increasing turbulence in the market makes it particularly difficult to predict. As a result planning horizons have been shortened. Where long-range plans in relatively predictable markets could span 10-15 years, very few companies today are able to plan beyond the next few years in any but the most general terms. In parallel to shorter PLCs, the product development times for new products are being greatly reduced. This applies not only to technical products in the field of office communication equipment, but also to cars and consumer electronics. In some cases there have been reductions in development times of more than half. Similarly, the time for marketing/selling, and hence also for R&D cost to pay off, has gone down from about four years to only two years and less for a number of products like printers and computers during a period of ten years (Töpfer, 1995). For all types of technological products it holds true that the manufactured product must be as good as required by the customer (i.e. good as necessary), but not as good as technically feasible. Too frequently, technological products are over-optimized and therefore too expensive from the customer’s point of view. Traditionally, Japanese and European suppliers to the car industry have had different approaches to the product development process. Normally the Japanese have been able to develop a product in a shorter time using the newest technology. The reason for the better time competition of the Japanese manufacturers is the intensive use of the following measures: Early integration of customers and suppliers• Multiskilled project teams• Interlinking of R & D, production and marketing activities• Total quality management• Parallel planning of new products and the required production facilities (simulta-• neous engineering) High degree of outsourcing (reduction of internal manufacturing content)• Kapitel_4.indd 194 03.08.2010 13:01:37 Uhr 4.1 Product and Service Decisions 195 Today product quality is not enough to reach and to satisfy the customer. Quality of design and appearance play an increasingly important role. A highly qualified product support and customer service is also required. Degrees of Product Newness A new product can have several degrees of newness. A product may be an entirely new invention (new to the world) or it may be a slight modification of an existing product (cost reductions). In fact, the following broad categories exist (Booz, Allan and Hamilton, 1982): Product replacements • account for about 45 per cent of all new product launches, and include revisions and improvements to existing products (e.g. Sony PlayStation 3 replacing PlayStation 2), repositioning (existing products such as Coca-Cola being targeted at new market segments) and cost reductions (existing products being reformulated or redesigned to cost less to produce). Additions to existing lines • account for roughly 25 per cent of new product launches and take the form of new products that add to a firm’s existing product lines thus producing greater product depth. For example, Virgin Soft Drink’s energy is an addition to its established line of Cola-brands. New product lines • total around 20 per cent of new product launches, and represent a move into a new market for the company. They provide an opportunity for the company to enter an established market for the first time. For example, Microsoft was able to enter the games consol market, when it launched the X-box, ready to compete head-on with Sony and Nintendo. New-to-the-world products • total roughly 10 per cent of new product launches, and create entirely new markets. Those new products are inventions that usually contain a significant development in technology such as a new discovery or manipulation of existing technology in an exceptionally different way leading to revolutionary new products such as the Sony Discman. Other examples include Polaroid Instamatic camera and 3M’s Post-it. Product Cannibalisation Introducing new brands that negatively impact the sales of existing products has often been regarded as an erroneous product strategy. It is important, however, that managers realize that pro-active cannibalisation may be a sound strategy under certain conditions (Cravens et al., 2001). This strategy assures a continuing flow of new products, and recognized that products need to be replaced as they move through their life cycles. Managers of innovative firms often resist the instinct to preserve the value of part investments in products. Instead, these companies pursue a continuing strategy of investing in new products that will cannibalise existing products (Chandy and Tellis, 1998). Successful cannibalisation strategies are more likely to occur in companies with the following conditions: Effective market sensing capabilities have been developed, enabling the firms to form • accurate visions about their markets and how they are most likely to change. Some internal competition across business units is prevalent. Innovation is encour-• aged, and managers must compete for resources. Executives in these organisations accept cannibalisation threats, but by encouraging competition across business units, Kapitel_4.indd 195 03.08.2010 13:01:37 Uhr 4. Marketing Mix in the Marketing Planning Process196 they focus their attention on the most promising product concepts. Top management must coordinate these processes towards optimal performance for the product portfolio. New product champions are able to influence corporate decisions. For example, the • CEO may play a central leadership role in new product development. Fine examples of successful pro-active cannibalisation are the following (Gravens et al., 2000): Gilette• , the global market leader in razors introduced the Gillette sensor razor in 1989 with the objective of countering the sales growth of disposable razors. However, management knew the mature Atra Plus brand would also lose sales to Sensor. Sensor was a huge success, providing Gillette with impressive sales and profit growth. In 1998 Gillette introduced yet another new razor, MACH3. It was positioned as a significant improvement in shaving technology with development costs of over $750 million and market entry costs of $300 million in the first year of introduction. Management knew that while the MACH3 was priced above the SensorExcell, it was likely to cannibalise the existing brand’s sales. The German automobile group, • Volkswagen (VW), now holds more than 18 per cent of the European market six points clear of its nearest rival, Fiat. This gain has been achieved by VW’s ‘multibrand’ strategy. The VW group includes automobiles from the VW brand portfolio, but also the Audi, Seat and Skoda operations. There are several platforms across the group and shared R&D. The brands compete directly with each other in several automobile segments across Europe, but have different strengths in different national markets. Although cannibalising the VW brand’s sales, the result has been overall market leadership. 4.1.7 Branding Strategy Branding is the process by which companies distinguish their product offerings from the competition. By developing a distinctive name, packaging and design, a brand is produced. However, a brand name is more than a label employed to differentiate among the manufacturers of a product. It is a complex symbol that represents a variety of ideas and attributes. It tells the consumer numerous things by the body of associations it has built up and acquired as a public object over a period of time. The net result is the public image, the character or personality that may be more important for the customers. Es- Example 17: To attract attention, advertisers can use novelty and contrast, eye-catching pictures and headlines, as in this Volkswagen advertisement Kapitel_4.indd 196 03.08.2010 13:01:37 Uhr 4.1 Product and Service Decisions 197 sentially, a brand is a collection of perceptions in the eyes of the consumer influenced by values, communication, the marketing mix, and behaviour of staff (see Figure 4.12). The concept of the brand represents an acceptance of the fact that all purchasing decisions for both products and services involve a combination of rational and emotional criteria. The rational criteria are the physical components or factual elements of the product or service in question. The emotional criteria are the sum of the impressions, ideas, opinions and random associations that the potential purchaser has stored in their mind about the product or service. Rational and emotional elements combine to form a brand image. The word ‘brand’ is used to represent everything that people know about, think about or feel about anything. There are a number of implications of this definition (Hollensen, 2003). Successful brand management necessitates the company innovating to stay abreast of constantly changing market conditions, ideally anticipating evolving tastes, and telling their brand stories to each new generation of consumers. The notion of storytelling is of key importance. Well-managed brands are continually telling stories about themselves, and updating these stories to take account of underlying change in society, though their core values usually remain constant. Astute management of brands Behaviour of staff Products and Services Communication Values Principles CI Marketing Figure 4.12: The creation of a brand in the customer‘s mind Example 18: The most powerful brands go beyond attribute or benefit positioning. They engage customers on a deeper level, touching universal emotions as Unilever’s Lion awardwinning ‘Campaign for real beauty’ for its ‘Dove’ brand illustrates Kapitel_4.indd 197 03.08.2010 13:01:37 Uhr 4. Marketing Mix in the Marketing Planning Process198 also involves decisions about the service element that supports a brand and the extent to which a brand should embrace some higher order universal value. Nike is one of the most quoted examples of this phenomenon. This hugely successful worldwide brand rarely talks about the product itself but about core values such as achievement, competitiveness and winning. Nike stories are parables, a tried and trusted technique for communication desired messages. John Scully, the former chief executive of Apple, is another proponent of this approach. He is on record as saying that he doesn’t want Apple advertising to mention anything to do with megabytes, memory or any other technical terms that could be employed to create a superior brand store for Apple computers (Fanning, 1999). Scully believes that Apple at its core is ‘that we believe that people with passion can change the world for the better’. Branding is about storytelling and communicating values and benefits. Charles Revson of Revlon stated early: ‘In the factory, we make cosmetics; in the store we sell hope.’ Why Strong Brands are Important Strong brands are important to both companies and customers. Firms benefit because powerful brands add value to companies, positively affect consumer perceptions, act as a barrier to competition, improve profits and provide a base for brand extension. Customers gain because strong brands act as a form of quality certification and create trust (Jobber, 2010). We shall look at each of these factors in turn: Company value • The financial value of companies can be greatly enhanced by the possession of strong brands. For example, Nestlé paid GBP 2,5 billion for Rowntree, a UK confectionary manufacturer, a sum that was six times its balance sheet value. More recently, Procter & Gamble paid GBP 31 billion for Gillette. Coca-Cola attributes only 7 per cent of its value to its plants and machinery – its real value lies in its brands (Simms, 2001). Figure 4.13 lists the top global brands in terms of brand value. Consumer perceptions and preferences • Strong brands can have significant positive effects on consumer perceptions and preferences. A famous example from the soft drinks market describes evidence, which shows how strong brands can influence perception and preference: Two matched samples of customers were asked to taste Diet coke, the market leader, and Diet Pepsi. The first group tasted the drinks ‘blind’ (i.e. the brand identities were concealed) and were asked to state a preference. The procedure was then repeated for the second group, except that the test was ‘open’ (i.e. the brand identities were shown). The results are presented below: Blind (%) Open (%) Prefer Diet Pepsi 51 23 Prefer Diet Coke 44 65 Equal/cannot say 5 12 The test clearly shows the power of strong brand names in influencing perceptions and preferences towards Diet Coke. Advances in neuroscience go some way to explain the results (Valentine, 2009). Another example is Skoda Cars (the Czech car manufacturer which once had the status now enjoyed by BMW) displaying a ‘negative brand equity’. In Britain, Skoda Kapitel_4.indd 198 03.08.2010 13:01:37 Uhr 4.1 Product and Service Decisions 199 cars have been best known as the butt of bad jokes, reflecting a widespread belief that the cars are of very low quality. In 1995, Skoda was preparing to launch a new model in the UK, and did ‘blind and seen’ tests of the consumers’ judgement of the vehicle. The vehicle was rated as better designed and worth more by those who did not know the brand. With the Skoda name revealed, perceptions of the design were less favourable and estimated value was substantially lower. The consumer perception of the value of Skoda cars and the likelihood of purchase was higher in some overseas markets when the Skoda badges and branding were removed from the vehicles. The company has succeeded in turning the brand around and it now scores well in Europe (Hooley et al., 1998). Barrier to competition • The impact of strong, positive perceptions held by consumers about powerful brands implies that it is difficult for innovative brands to compete. Even 68,73 60,21 56,65 47,78 34,86 32,28 31,98 31,33 30,64 28,45 0 10 20 30 40 50 60 70 80 Bn. USD Source: Based on interbrand research,, accessed 12th February 2010 Figure 4.13: Top 10 brand values 2009 Example 19: Skoda has successfully turned its brand around in Europe Kapitel_4.indd 199 03.08.2010 13:01:37 Uhr 4. Marketing Mix in the Marketing Planning Process200 if the new product performs well on blind testing, as described above, this may be insufficient to beat the market leader. This is actually one of the key reasons Virgin Coke failed to eradicate Coca-Cola’s domination of the cola market. High profits • Market leading brands are rarely cheap. Brands such as Mercedes-Benz, Nokia and Microsoft are all associated with premium prices. This is because their superior brand equity (for a more detailed analysis of this term see the following sections) means that customers receive added value over their less powerful competitors. Powerful brands also achieve distribution more readily, economies of scale, and are in a stronger position to resist retailer demands for price discounts. The PIMS study (Profit Impact of Market Strategy) shows that return on investment is related to a brand’s share of the market: larger brands yield higher returns than smaller brands (Buzzell and Gale, 1987). Base for brand extensions • A strong brand provides the basis for leveraging positive perceptions from the core brand to brand extensions. Examples include Diet Coke, Coke Zero, Smirnoff Ice and Lego Bionicle. The new brand benefits from the value add that the brand equity of the core brand bestows on the extension. Quality certification • Powerful brands also bene fit customers in that they provide quality certification, which can substantially support decision-making. Trust • Consumers tend to trust powerful brands and turn to those brands to manage choice. The brand name and its perceptual associations are key drivers. Brand Equity As stated above, brands represent customer’s perceptions about a product and its performance. Finally, brands exist in the minds of consumers. Therefore, the real value of a strong brand is its power to capture consumer preference and loyalty. Determining the value of a brand is believed to be important to companies for a number of reasons. Brands highly valued by customers produce competitive advantage in as much as brand equity comes about due to customers having greater confidence in the brand compared to competitors’ brands (Lassar et al., 1995). Brand equity may play a role in consumers’ decisions to purchase certain brands over others (Swait et al., 1993), and understanding brand equity can help develop marketing strategies (Keller, 1993). Fur- Example 20: The strong Lego brand has provided a sound basis for its Bionicle products Kapitel_4.indd 200 03.08.2010 13:01:38 Uhr 4.1 Product and Service Decisions 201 thermore, brand equity may play an important role in cobranding. In certain co-branding situations, a well-known brand name is paired with another brand name (either well known in its own right or less well known) in order to enhance the lesser-known composite product. Co-branding is believed to limit the risk of entering into a new product category in which consumers may question the firm’s expertise (Aaker, 1996). A powerful brand has high brand equity. Although the definition of brand equity is often debated, the term deals with the brand value, beyond the physical assets associated with its manufacture. Brand equity has been measured in a number of ways: equalization price (Swait et al., 1993)• brand attributes (Lassar et al., 1995)• price premiums (Aaker, 1991)• stock price analysis (Simon and Sullivan, 1990)• replacement cost (Aaker, 1991)• brand loyalty analysis (Feldwick, 1996)• Aaker, one of the leading authorities on brand equity, has defined the term as a set of brand assets and liabilities linked to the brand, its name and symbol that add to or subtract from the value provided by a product or service to a firm or to the firm’s customers (Aaker, 1991). Aaker has clustered those assets and liabilities into five categories: 1. Brand loyalty. Encourages customers to buy a particular brand time after time and remain insensitive to competitors’ offerings. 2. Brand awareness. Brand names attract attention and convey images of familiarity. May be translated to: how a big percentage of the customers know the brand name. 3. Perceived quality. ‘Perceived’ means that the customers decide upon the level of quality, not the company. 4. Brand associations. The values and the personality linked to the brand. 5. Other proprietary brand assets. Include trademarks, patents, and marketing channel relationships. Brand equity can be thought of as the additional cash flow achieved by associating a brand with the underlying values of the product or service. In this connection it is practical to think of a brand’s equity as the premium a customer/consumer would pay for the branded product or service compared to an identical unbranded version of the same product/service. One study found that 72 per cent of customers would pay a 20 per cent premium for their brand of choice relative to the closest competing brand (Davis, 2000). Example 21: Persil is a brand with a heritage of more than 100 years creating trust and loyalty Kapitel_4.indd 201 03.08.2010 13:01:38 Uhr 4. Marketing Mix in the Marketing Planning Process202 Above all, brand equity refers to the strength, depth, and character of the consumerbrand relationship. A strong equity implies a positive force that keeps the consumer and the brand together, in the face of resistance and tension. The strength, depth, and character of the customer-brand relationship is referred to as the brand relationship quality (BRQ) (Marketing Science Institute, 1995). Consequently, the fundamental asset underlying brand equity is customer equity – the value of the customer relationships that the brand creates. Obviously, a powerful brand is important, but what is really represents is a profitable set of loyal customers and one proper focus of marketing should be building customer equity, with brand management as a major marketing tool (Rust et al., 2004). Brand Positioning Marketing managers must position their brands in the minds of the target customer. In general they can position brands at any of the following three levels (Kotler and Keller, 2006): Product attributes • At the lowest level, marketers can position the brand on product attributes. For example, marketers of Crest toothpaste talk about the product’s innovative ingredients and excellent taste. However, as competitors can easily copy attributes, this is the least sustainable level of brand positioning. In addition, customers are not interested in the attributes as such but in what they will do for them. Product benefits • A brand can better be positioned by associating its name with a benefit desired by the customers. Thus, Crest product managers do talk about the resulting cavity prevention of teeth whitening benefits. Other examples include Volvo (safety), Harley-Davidson (adventure), and Lexus (luxury). Beliefs and values • The strongest and most powerful brands are positioned on beliefs and values. Therefore, Crest marketers do not just talk about ingredients and cavity-prevention benefits, but about how these give customers ‘healthy, beautiful smiles for life.’ Successful brands have to ensure they engage customers on a deeper level, touching a universal emotion (Gobe, 2001). In this context, successful brands do not rely so much on tangible attributes but more on creating surprise, passion, and excitement surrounding the brand. Example 22: Volvo promotes safety as the overriding benefit of its products Kapitel_4.indd 202 03.08.2010 13:01:39 Uhr 4.1 Product and Service Decisions 203 Brand Sponsorship The basic purposes of branding are the same everywhere in the world. In general, the functions of branding are as follows: To distinguish a company’s offering and differentiate one particular product from its • competitors. To create identification and brand awareness.• To guarantee a certain level of quality and satisfaction.• To help with promotion of the product.• All these purposes have the same ultimate goals: to create new sales (market shares taken from competitors) or induce repeat sales (keep customers loyal). Basically, a manufacturer has four brand sponsorship options (Kotler and Armstrong, 2009): The product may be launched as a manufacturer’s brand (or national brand), as when IBM sells their output under their own brand names. Or the manufacturer may sell to resellers who give it a private brand (also called store brand or distributor brand). Another option is to market licensed brands. Finally, two companies can join forces and pursue a co-branding strategy. We shall discuss each of the options in more detail now: Private label versus co-branding versus manufacturer’s own brand • The question of consumers having brand loyalty or shop loyalty is a central one. The competitive struggle between the manufacturer and the retailer actualised the need for a better understanding of shopping behaviour. Both actors need to be aware of determinants of shop choice, shopping frequency and in-store behaviour. Where manufacturers pay little attention to the shopping behaviour of their consumers, this information helps to anticipate the increasing power of certain retail chains. Private brands or store brands are most developed in the USA and the UK, where Marks & Spencer, for instance, only sell own-label products. At Sainsbury own labels account for 60 per cent of the sales. Contrary to the high share of private labelling in North Europe, the share in South Europe (e.g. Spain and Portugal) is not higher than 10 per cent. For the retailer there are two main advantages connected with own-label business: First of all, own labels provide better profit margins. The cost of goods typically makes up 70-85 per cent of a retailer’s total cost (The Economist, 4 March 1995, p. 10). So if the retailer can buy a quality product from the manufacturer at a lower price, this will provide a better profit margin for the retailer. In fact, private labels have helped UK food retailers to achieve profit margins averaging 8 per cent of sales, which is high by international standards. The typical figure in France and the USA is 1-2 per cent. Next, own labels strengthen the retailer’s image with its customers. Many retail chains try to establish loyalty to their particular chain of shops by offering their own quality products. In fact, premium private-label products (e.g. Marks & Spencer’s St. Michael) that compete in quality with manufacturers’ top brands have seen a growth in market share, whereas the share of cheap generics is tiny and declining (Hollensen, 2003). On the other hand there are a number of reasons why private branding is not appropriate for the manufacturer: Initially, by not having its own identity, the manufacturer must compete mainly on price, because the retail chain can always switch supplier. In addition, the manufacturer loses control over how its products should be promoted. This may become critical if the retailer does not do a good job in pushing the product to the consumer. Finally, if the manufacturer is producing both its own brands and Kapitel_4.indd 203 03.08.2010 13:01:39 Uhr 4. Marketing Mix in the Marketing Planning Process204 private brands, there is a danger that the private brands will cannibalise the manufacturer’s brand name products. Quelch and Harding (1996) argue that many manufacturers have over-reacted to the threat of private brands. Increasing numbers of manufacturers are beginning to make private-label products to take up excess production capacity. The authors state that more than 50 per cent of US manufacturers of branded consumer packaged goods already make private-label goods as well. Managers typically examine private-label production opportunities on an incremental marginal cost basis. The fixed overhead costs associated with the excess capacity used to make the private-label products would be incurred anyway. But if privatelabel manufacturing were evaluated on a full-cost basis rather than on an incremental basis, it would, in many cases, appear much less profitable. The more private-label production grows as a percentage of total production, the more an analysis based on full costs becomes relevant (Quelch and Harding, 1996). Although private brands are normally regarded as threats for manufacturers, there may be situations where private branding is a preferable option: Since there are no promotional expenses associated with private branding for the producer, the strategy is especially suitable for SMEs with limited financial resources and limited competences in the downstream functions. Another factor which has to be taken into evaluation is that the private brand manufacturer gains access to the shelves of the retail chains. With increasing internationalisation of the big retail chains, this may also result in export business for the SME, which has never been in international markets. From the Second World War until the 1960s the brand manufacturers managed to build a bridge over the heads of the retailers to the consumers. They created consumer loyalty for their manufacturer’s brand by using sophisticated advertising (culminating in TV advertising) and other promotional techniques. Since the 1960s various sociological changes have encouraged the rise of large efficient retailers. Nowadays the distribution system is being turned upside down. The traditional supply chain, powered by manufacturer ‘push’, is becoming a demand chain, driven by consumer ‘pull’. Retailers have won control over distribution not just because they decide the price at which goods are sold but also because individual shops and retail companies have become much bigger and more efficient. They are able to buy in bulk and to reap economies of scale, mainly due to advances in transport, and more recently, in information technology. Most retail chains have not only set up computer links between each store and the distribution warehouses, they are also hooked up with the computers of the firm’s main suppliers, through an EDI (Electronic Data Interchange) system. After some decades of absence, private labels reappeared in the 1970s as generic products pioneered by Carrefour in France but were soon adopted by UK and American retailers. Ten years ago, there was a distinct gap in the level of quality between private-label and brand name products. Today the gap has narrowed: private-label quality levels are much higher than ever before, and they are more consistent, especially in categories historically characterized by little product innovation. Licensing • Most manufacturers take years and spend large investments to create their own brands. However, some firms license names or symbols previously created by other manufacturers, names of celebrities, or characters from popular movies and books. For a fee, any of these can provide and instant brand name with already high brand Kapitel_4.indd 204 03.08.2010 13:01:39 Uhr 4.1 Product and Service Decisions 205 awareness. Sellers of children’s products, for example, attach an almost endless list of character names to clothing, toys, school supplies, lunch boxes, and other items. Licensed character names range from Disney, Peanuts and Winnie the Pooh to Pokemon and Harry Potter characters. One of the fastest growing categories is corporate brand licensing which enables companies to generate additional revenues and brand recognition. Coca-Cola, for example, has roughly 320 licenses in 57 countries producing more than 10.000 products, ranging from baby clothes and boxer shorts to earrings and even a Barbie doll. Each year, licensees sold more than $ 1 billion worth of licensed Coca-Cola products (Vavra, 2001). Co-branding • Co-branding (brand alliances )occurs when two or more existing brands are combined into a joint product or marketed together through the same distribution channel. Cobranding has been around for years; for example, Betty Crocker paired with Sunkist Growers in 1961 to successfully market a lemon chiffon cake mix. Co-branding can generate greater sales from the existing market as well as additional opportunities with new consumers and channels. Co-branding can also reduce the cost of product innovation because two well-known images are combined, accelerating potential adoption. The potential disadvantages of co-branding are the risks and lack of control that arise from becoming aligned with another brand in the minds of consumers. In addition, co-branding implies more complexity as partners must carefully coordinate their advertising, sales promotion, and other marketing efforts. A special case of cobranding is ingredient branding, which involves creating brand equity for components, or parts that are necessarily contained within another branded products. Some successful ingredient brands include Dolby noise reduction, Gore-tex water-resistant fibers and Teflon non-stick coatings. From a consumer behaviour perspective, branded ingredients are often seen a sign of quality. Brand Development Basically, a company has four options when it comes to developing brands (see Figure 4.14). In the framework of brand development, an organisation can introduce line extensions, brand extensions, multibrands, or new brands (Kotler and Armstrong, 2009): Line extensions • Line extensions occur when a company introduces additional items in a given product category under the same brand name, such as new forms, sizes and flavours. A Example 23: Bang & Olufsen and Samsung as an example of co-branding Kapitel_4.indd 205 03.08.2010 13:01:39 Uhr 4. Marketing Mix in the Marketing Planning Process206 company might introduce line extensions as a low-cost, reduced-risk way to introduce ‘new’ products. Or it might want to meet customer desire for variety, to use excess capacity, or to claim more shelf space from resellers. However, an overextended brand name might potentially lose its specific meaning, or strongly extended brands can cause customer confusion. Another risk which has to be taken into account is that sales of an extension may come at the expense of other items in the line and increase cannibalisation (see respective section above) . Brand extensions • A brand extension strategy involves the use of a successful brand name to launch new or modified products in a new category. For example, Mattel has extended its enduring Barbie Doll brand into new categories ranging from Barbie home furnishings, Barbie cosmetics, and Barbie electronics to Barbie books and Barbie sporting goods. A brand extension is also referred to as brand stretching and can give a new product immediate recognition and quicker acceptance. It may also save the high advertising costs usually required to build a new brand name. On the other hand, brand extensions may confuse the image of the main brand as line extensions. And if brand extension fails, it may harm customer attitudes toward the other products carrying the same brand name. The Virgin brand name, for example, was in danger of being tarnished at one time due to poor punctuality of its trains under the Virgin Trains brand. Finally, a brand name may not be suitable for a particular new product (Swaminathan et al., 2001). A major test of any brand extension opportunity is to ask if the new brand concept is compatible with the values inher ent in the core brand to ensure a ‘fluent fit’ between them. An example is the failure to extend the Levi’s brand name to suits in the USA partly as a result of customers refusing to accept the casual, denim image of Levi’s as being suitable for smart, exclusive clothing. Consequently, brand extensions are not viable when a new brand is being developed for a target group that holds different values and aspirations from those in the original market segment. When this occurs, the Product category Existing New Brand name Existing Line extension Brand extension New Multibrands New brands Source: Adapted from Kotler and Armstrong, 2009 Figure 4.14: Brand development strategies Example 24: Following a line extension approach Guinness launched Guinness draught beer in a can and Guinness Extra Gold Kapitel_4.indd 206 03.08.2010 13:01:39 Uhr 4.1 Product and Service Decisions 207 use of the brand extension strategy would detract from the new brand. The answer is to develop a separate brand name, as did Toyota with the Lexus, and Seiko with its Pulsar brand name developed for the lower-priced mass market for watches. Finally, management needs to guard against the loss of credibility if a brand name is extended too far, which can be called brand overstretching. The use of the Pierre Cardin name for such diverse products as clothing, toiletries and cosmetics has tarnished the brand name’s credibility (Aaker, 1990). Multibrands • In the case of multibrands, new brand names are introduced in the same product category. A single brand or family brand (for a number of products) may be helpful in convincing consumers that each product is of the same quality or meets certain standards. In other words, when a single brand on a single market is marketed by the manufacturer, the brand is assured of receiving full attention for maximum impact. Conversely, the company may also choose to market several brands on a single market (multibrands). This is based on the assumption that the market is heterogeneous and consists of several segments. For example, Procter & Gamble markets many different brands in each of its product categories. Multibranding offers a way to establish different features and appeal to different buying motives and may allow a company to successfully claim more reseller shelf space. A major drawback is that each brand might obtain only a small market share, and none may be very profitable. The company may end up spreading its resources or – too – many brands instead of focusing on a few brands and building them to a highly profitable level. New brands • Within the framework of this brand development strategy a company might believe that the power of its existing brand name is waning and a new brand name is required. Alternatively, a company may create a new brand name when it enters a new product category for which none of the company’s current brand names is appropriate. For example, Japan’s Matsushita uses separate brand names for its different families of products: Technics, Panasonic National, and Quasar. As with multibranding, offering too many new brands can result in a company spreading its resources too thin. And in some industries, such as consumer packaged goods, customers and retailers have become concerned that there are already too many brands, with too few differences. Against this background, Procter & Gamble, Unilever, and other large consumer-product marketers are pursuing megabrand strategies – weeding out weaker brands and focusing their marketing spending primarily on brands that can achieve the number one or two market share positions in their categories. Global Branding A company has the option of using the same brand in most or all of its foreign markets, or using individual, local brands. A single, global brand is also known as an interna- Example 25: Hugo Boss applies a brand extensions approach launching Hugo fragrances Kapitel_4.indd 207 03.08.2010 13:01:39 Uhr 4. Marketing Mix in the Marketing Planning Process208 tional brand or universal brand. A Eurobrand is a slight modification of this approach, as it is a single product for a single market of twelve or more European countries, with an emphasis on the search for inter-market similarities rather than differences. A global brand is an appropriate approach when a product has a good reputation or is known for quality. In such a case, a company would be wise to extend the brand name to other products in the product line. The advocates of global branding argue that intensified competition and technological development will force companies to operate globally; ignoring superficial national differences (Levitt, 1983). A ‘global village’ is emerging, where consumers seek reliable, quality products at a reasonable price and the marketing task is to offer the same products and services the a consistent way, thereby achieving global economies of scale. The engine behind this trend is the twin forces of customer convergence of tastes and needs, and the prospect of global efficiencies in production, procurement, marketing, and research and development. Furthermore, the creation of global brands speeds up a brand’s time to market by reducing time-consuming local modifications. Examples of global brands include Shell and the Visa credit card. The counter-argument to global branding is that it is the exception rather than the rule. Although some global successes, such as BMW, Gucci and McDonald’s can be noted, national varieties in taste and consumption patterns will ensure that such achievements in the future will be limited. For example, the fact that the French eat four times more yoghurt than the British reflects the kind of national differences that will affect the marketing strategies for manufacturers. In fact, many so-called global brands are not standardised, claim the ‘local marketing advocates’. For example, Coca-Cola in Scandinavia tastes different from that in Greece (Barwise and Robertson, 1992). One of the most essential questions when considering global branding is not whether brands can be built on a global scale but which parts of the brand (e.g. formulation, design, name, packaging, delivery, service) can be standardised and which must be varied across countries (Kotler and Armstrong, 2009). There are three major ways to achieve global brand positions (Barwise and Robertson, 1992): Geographic extension• : taking present brands into the geographic markets Brand acquisition• : purchasing brands Brand alliance• : joint venture or partnership to market brands in national or crossnational markets Managers need to evaluate the strength and weaknesses of each option, and Figure 4.15 summarizes these using as criteria speed of market penetration, control of operations and the level of investment required. Brand acquisition gives the fastest method of developing brands. For example, Unilever’s acquisition of Fabergé, Elizabeth Arden and Calvin Klein immediately made it a major player in fragrances, cosmetics and skincare. Brand alliance typically gives moderate speed and geographic extension is likely to be the slowest unless the company is already a major player with in-depth resources. However, geographic extension provides a high degree of control since companies can choose which brands to globalize, and plan their global extensions. Brand acquisition gives a rather moderate degree of control and brand alliance fosters the lowest degree of control, as strategy and resource allocation will need to be negotiated constantly with the partner. Kapitel_4.indd 208 03.08.2010 13:01:40 Uhr 4.1 Product and Service Decisions 209 Finally, brand acquisitions are likely to incur the highest level of investment. Geographic extension is likely to be more expensive than brand alliance since, in the latter case, costs are shared, and one partner may profit from the experience and distribution capabilities of the other. Summary The first level of product decisions concerns individual products or services that a firm manufactures and market. A product item is then by definition a separate product entity, identified by a certain design quality, features, packaging and branding. Individual product items that are closely related in some way to another are classed as product lines (product width). The product mix constitutes the sum of individual product items and product lines. The product width could e extended by adding more product lines. The same could happen to the product depth. All products, both goods and services, consist of a core element that is surrounded by a variety of optional supplementary elements. If we look first at the core service products, we can assign them to one of three broad categories depending on their tangibility and the extent to which customers need to be physically present during service production. Basically, the ‘perceived’ service quality has two dimensions: a technical or outcome dimension and a functional or process-related dimension. The technical quality of a service process is normally a prerequisite for good quality. It has to be at an acceptable level. After sales service adds to the product’s value and is often treated as an integral part of the product. The traditional New Product Development models involve the following stages in product development: Idea generation, screening, concept development and testing, business analysis, product development and testing, test marketing, commercialisation or launch. Products, like individuals, pass through a series of stages. Each stage is identified by its sales performance and characterized by different levels of profitability, various degrees of competition and distinctive marketing programmes. The four stages of the product life cycle are introduction, growth, maturity and decline. A new product can have several degrees of newness. A product may be an entirely new invention (new to the world) or it may be a slight modification of an existing product. Criteria for evaluation Speed Control Investment Strategy Geopgraphic expansion Slow High Medium Brand acquisition Fast Medium High Brand alliance Moderate Low Low Source: Adapted from Barwise and Robertson, 1992 Figure 4.15: Brand development strategies Kapitel_4.indd 209 03.08.2010 13:01:40 Uhr 4. Marketing Mix in the Marketing Planning Process210 Brand equity can be defined as a set of brand assets and liabilities linked to the brand, its name and symbol, that add to or subtract from the value provided by a product or service to a firm or to the firm’s customers. A very important issue is the question of branding. Different branding alternatives have been discusses. For example, because large (often transnational) retail chains have won control over distribution, they try to develop their own labels. For the retailer, private labels provide better profit margins and strengthen the retailer’s image with its customers. Because of the power shift to retailers, the percentage of retail grocery sales derived from private brands has increased in recent years. The basic purposes of branding are the same everywhere in the world. In general, the functions of branding are as follows: To distinguish a company’s offering and differentiate one particular product from its – competitors. To create identification and brand awareness. – To guarantee a certain level of quality and satisfaction. – To help with promotion of the product. – Decisions about new products should reflect consistency with existing product lines in relation to previously determined marketing objectives set for product provision in specified markets. Hence, the addition to the width of the mix and the depth within each product line should be compatible with the planned long-term marketing strategy. Product mix strategy involves the management of existing successful products, the elimination of obsolete or non-profit making ones and the development and introduction of new products. Each of these elements of product strategy and management is important to the achievement of company objectives. The core product is the basic element of the firm’s offer to its customers. It has to be right in order for customers to consider the other elements. To create value, we can improve our performance and provide superior service. This increases what the customer gets because he or she can rely on the company to deliver on time and produce exactly what was promised. Thus, value is added through the addition of controls and systems to ensure that service is completed as and when we said it would be. We do whatever it takes to get it right. Same companies are now so confident of their ability to deliver for their customers that that are offering service guarantees. In addition, we can reduce the psychological cost to customers by making it easier for them to obtain information and advice. Product differentiation seeks to increase the value of the product or service on offer to the customer. Products and services can be seen on at least four main levels. These are the core product, the expected product, the augmented product and the potential product. Differentiation is possible in all these respects. A prime factor in differentiating the product or service from that of competitors is quality. Quality concerns the fitness for purpose of a product or service. For manufactured products that can include the durability, appearance or grade of the product while in services it often comes down to the tangible elements of the service, the reliability and responsiveness of the service provider, the assurance provided of the value of the service and the empathy, or caring attention, received. Of central importance is consumer perception of quality, which may not be the same as the manufacturer’s perception. Closely related to perceptions of quality are perceptions of style, particularly for products with a high emotional appeal. A particularly effective way of differentiating at the tangible product level is to create a unique brand with a favourable image and reputation. Brand and company reputation can be powerful marketing assets for a company. Kapitel_4.indd 210 03.08.2010 13:01:40 Uhr 4.1 Product and Service Decisions 211 An attempt to define the relationship between customers and brands produced the term ‘brand equity’ in the marketing literature. Basically, brand equity refers to the value of a company’s brand names. A brand that has high awareness, perceives quality and brand loyalty among customers has high brand equity. A brand with strong brand equity is a valuable asset. Product development is the heart of the global marketing process. New products should be developed, or old ones modified, in order to fit to new or changing customer needs on a global or regional basis. With competition increasingly able to react quickly to new product introductions, a firm that adopts a worldwide approach is better able to develop products quickly with basic specifications compatible on a worldwide scale. But worldwide products should be adaptable in order to adjust features to unique market requirements whenever technically feasible. Some firms design their products to meet major market needs and then they make adjustments for smaller markets on a country-by-country basis. Brand stretching – the use of an existing brand name for a new product in a different product class – has been used extensively by many consumer goods organisations. The use of existing brand names to access new markets is based on the premise that established brands have high name recognition and significant consumer loyalty, at least parts of which will gel transferred to the new product. Brand stretching, on the other hand, involve the use of an existing brand name for introducing new products in the same product category. Questions for discussion 1. Suggest ways in which a computer manufacturer could add to his product offering to provide a more acceptable ‘total product’ 2. From the firm’s perspective, what are the advantages and disadvantages of line and brand extensions? 3. What types of products might reach maturity more quickly than other products? What are the implications for marketing planning? 4. How can you use research to support decisions about building brand equity? 5. For what kinds of products do you expect customers need to be worldwide? Why? 6. In what ways does the products packaging need changing when the product is being marketed in another country? 7. What factors decide whether a similar product can be marketed in different international markets and whether modifications are necessary? Kapitel_4.indd 211 03.08.2010 13:01:40 Uhr 4. Marketing Mix in the Marketing Planning Process212 4.2 Pricing Decisions Pricing is one of the most important marketing mix decisions, price being the only marketing mix variable that generates revenues. Pricing is not a single concept, but a multidimensional one with different meanings and implications for the manufacturer, the middleman and the end-customer. Pricing strategy is of great importance because it affects both revenue and buyer behaviour. The whole pricing environment is therefore considered, first from the point of view of the company and its strategies and then from the aspect of the consumer. However, it must not be forgotten that there are other, external influences on pricing – not just a firm’s competitors but also from government and legislation. Once these factors have been taken into account, various pricing strategies are reviewed and some attention is given to how best to implement those strategies; how pricing levels can be adjusted and how such tactics do affect buyer behaviour and company revenue. The multidimensional character of price should be taken into account for the pricing of products and services. Generally speaking, price is the amount of money charged for a product or service, or the sum of all the values that customers exchange for the benefits of having or using the product or service. Price is the only element of the marketing mix that produces revenue; all other elements represent costs. Additionally, price is also one of the most flexible elements of the marketing mix. Unlike product features and channel strategies, price can be changed quickly. Pricing involves the determination (and adjustment) of a price structure and price levels, as well as decisions on short-term price changes. Price should not be set in isolation; it should be blended with product, promotion and place to form a coherent mix that provides superior customer value. Furthermore, an effective goal-oriented approach to pricing is needed that explicitly takes into account the role of price as a marketing mix instrument and as a profit generator. This provides a framework for effective, goal-oriented pricing, and to highlight the major aspects and factors of the pricing decision. 4.2.1 A Pricing Framework A company’s pricing decisions are affected by both internal company factors and external environmental factors. It is important that firms recognize that the cost structures of product are very significant, but they should not be regarded as sole determinants when setting prices. Pricing policy is an important strategic and tactical competitive weapon that, in contrast to the other elements of the global marketing mix, is highly controllable and inexpensive to change and implement. Therefore, pricing strategies and actions should be integrated with the other elements of the global marketing mix as stated above. Figure 4.16 presents a general framework for pricing decisions. According to this model, factors affecting pricing can be broken down into two main groups (internal and external factors) which consist of various factors. We shall now consider the most important elements in more detail (Nagle and Holden, 2001). Kapitel_4.indd 212 03.08.2010 13:01:40 Uhr

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Marketing – A Relationship Perspective

Moderne Grundlange zum Marketing

Das Lehrbuch behandelt eines der wichtigsten und aktuellsten Themenfelder des modernen Marketings. Der Ansatz verbindet dabei den klassischen Ansatz der strategischen Marketingplanung und seiner Instrumente mit dem neuen Ansatz des Relationship Marketing. Der ganzheitliche Ansatz des Buches umfasst dabei die aktuellen Marketing-Grundlagen, Praxisbeispiele sowie anwendungsorientierte Fallstudien und eignet sich somit ideal sowohl für Manager und Entscheidungsträger im Marketing-Bereich, Studenten in Bachelor- und Materstudiengängen sowie Dozenten und Trainer.