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New-Product Development and Life-Cycle Strategies Chapter 9 Learning Goals 1. Learn how companies find and develop new-product ideas 2. Understand the steps in the newproduct development process 3. Know the stages of the product life cycle 4. Realize how marketing strategies change during the product’s life cycle 9-1 Definition • New Product Development Development of original products, product improvements, product modifications, and new brands through the firm’s own R & D efforts. 9-2 Goal 1: Learn how companies find & develop new-product ideas New Product Development Strategy • New products can be obtained via acquisition or development. • New products suffer from high failure rates. • Several reasons account for failure. 9-3 Goal 1: Learn how companies find & develop new-product ideas Causes of New Product Failures • Overestimation of Market Size • Product Design Problems • Product Incorrectly Positioned, Priced or Advertised • Costs of Product Development • Competitive Actions • To create successful new products, the company must: understand it’s customers, markets and competitors develop products that deliver superior value to customers. 9-4 Stages of the New Product Development Process • Stage 1: Idea Generation Internal idea sources: •R&D External idea sources: • Customers, competitors, distributors, suppliers 9-5 Goal 2: Understand steps in the new-product development process Stages of the New Product Development Process • Stage 2: Idea Screening Product development costs increase substantially in later stages so poor ideas must be dropped Ideas are evaluated against criteria; most are eliminated 9-6 Goal 2: Understand steps in the new-product development process New Product Development Process Step 2. Idea Screening • Process to spot good ideas and drop poor ones as soon as possible. • Many companies have systems for rating and screening ideas which estimate: Market Size Product Price Development Time & Costs Manufacturing Costs Rate of Return • Then, the idea is evaluated against a set of general company criteria. 9-7 Stages of the New Product Development Process • Stage 3: Concept Development and Testing Concept development creates a detailed version of the idea stated in meaningful consumer terms. Concept testing asks target consumers to evaluate product concepts. 9-8 Goal 2: Understand steps in the new-product development process Stages of the New Product Development Process • Stage 4: Marketing Strategy Development • The target market, product positioning, and sales, share, and profit goals for the first few years. • Product price, distribution, and marketing budget for the first year. • Long-run sales and profit goals and the marketing mix strategy. 9-9 Goal 2: Understand steps in the new-product development process Stages of the New Product Development Process • Stage 5: Business Analysis Sales, cost, and profit projections • Stage 6: Product Development Prototype development and testing 9 - 10 Goal 2: Understand steps in the new-product development process Stages of the New Product Development Process • Stage 7: Test Marketing Standard test markets Controlled test markets Simulated test markets • Stage 8: Commercialization 9 - 11 Goal 2: Understand steps in the new-product development process New Product Development Process Step 7. Test Marketing Standard Test Market Controlled Test Market Full marketing campaign in a small number of representative cities. A few stores that have agreed to carry new products for a fee. Simulated Test Market Test in a simulated shopping environment to a sample of consumers. 9 - 12 Product Life-Cycle Strategies • The Product Life Cycle (PLC) has Five Stages Product Development, Introduction, Growth, Maturity, Decline Not all products follow this cycle: • Fads • Styles • Fashions 9 - 13 Goal 3: Know the stages of the product life cycle process Product Life Cycle Sales and Profits Over the Product’s Life From Introduction to Decline Sales and Profits ($) Sales Profits Time Product Development Introduction Growth Maturity Decline Losses/ Investments ($) 9 - 14 Product Life-Cycle Strategies • The product life cycle concept can be applied to a: Product class (soft drinks) Product form (diet colas) Brand (Diet Dr. Pepper) • Using the PLC to forecast brand performance or to develop marketing strategies is problematic 9 - 15 Goal 3: Know the stages of the product life cycle process Product Life-Cycle Strategies PLC Stages • Product development • Begins when the company develops a new-product idea • Introduction • Sales are zero • Growth • Maturity • Decline • Investment costs are high • Profits are negative 9 - 16 Goal 4: Realize how marketing strategies change during the product life cycle Product Life-Cycle Strategies PLC Stages • Low sales • Product development • High cost per customer acquired • Introduction • Negative profits • Growth • Innovators are targeted • Maturity • Decline • Little competition 9 - 17 Goal 4: Realize how marketing strategies change during the product life cycle Marketing Strategies: Introduction Stage • Product – Offer a basic product • Price – Use cost-plus basis to set • Distribution – Build selective distribution • Advertising – Build awareness among early adopters and dealers/resellers • Sales Promotion – Heavy expenditures to create trial 9 - 18 Goal 4: Realize how marketing strategies change during the product life cycle Product Life-Cycle Strategies PLC Stages • Rapidly rising sales • Product development • Average cost per customer • Introduction • Rising profits • Growth • Early adopters are targeted • Maturity • Decline • Growing competition 9 - 19 Goal 4: Realize how marketing strategies change during the product life cycle Marketing Strategies: Growth Stage • Product – Offer product extensions, service, warranty • Price – Penetration pricing • Distribution – Build intensive distribution • Advertising – Build awareness and interest in the mass market • Sales Promotion – Reduce expenditures to take advantage of consumer demand 9 - 20 Goal 4: Realize how marketing strategies change during the product life cycle Product Life-Cycle Strategies PLC Stages • Sales peak • Product development • Low cost per customer • Introduction • High profits • Growth • Middle majority are targeted • Maturity • Decline • Competition begins to decline 9 - 21 Goal 4: Realize how marketing strategies change during the product life cycle Marketing Strategies: Maturity Stage • Product – Diversify brand and models • Price – Set to match or beat competition • Distribution – Build more intensive distribution • Advertising – Stress brand differences and benefits • Sales Promotion – Increase to encourage brand switching 9 - 22 Goal 4: Realize how marketing strategies change during the product life cycle Product Life-Cycle Strategies PLC Stages • Declining sales • Product development • Low cost per customer • Introduction • Declining profits • Growth • Laggards are targeted • Maturity • Declining competition • Decline 9 - 23 Goal 4: Realize how marketing strategies change during the product life cycle Marketing Strategies: Decline Stage • Product – Phase out weak items • Price – Cut price • Distribution – Use selective distribution: phase out unprofitable outlets • Advertising – Reduce to level needed to retain hard-core loyalists • Sales Promotion – Reduce to minimal level 9 - 24 Goal 4: Realize how marketing strategies change during the product life cycle roduction Stage of the PLC Summary of Characteristics, Objectives, & Strategies Sales Low sales Costs High cost per customer Profits Negative Create product awareness and trial Marketing Objectives Product Offer a basic product Price Use cost-plus Distribution Advertising Build selective distribution Build product awareness among early adopters and dealers 9 - 25 Growth Stage of the PLC Summary of Characteristics, Objectives, & Strategies Sales Rapidly rising sales Costs Average cost per customer Profits Rising profits Marketing Objectives Price Maximize market share Offer product extensions, service, warranty Price to penetrate market Distribution Build intensive distribution Product Advertising Build awareness and interest in the mass market 9 - 26 Maturity Stage of the PLC Summary of Characteristics, Objectives, & Strategies Sales Peak sales Costs Low cost per customer Profits High profits Marketing Objectives Product Price Distribution Advertising Maximize profit while defending market share Diversify brand and models Price to match or best competitors Build more intensive distribution Stress brand differences and benefits 9 - 27 Decline Stage of the PLC Summary of Characteristics, Objectives, & Strategies Sales Declining sales Costs Low cost per customer Profits Declining profits Marketing Objectives Product Price Distribution Advertising Reduce expenditure and milk the brand Phase out weak items Cut price Go selective: phase out unprofitable outlets Reduce to level needed to retain hard-core loyal customers 9 - 28