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Marketing Structure of Lecture 1. Importance of marketing to NPD 2. Strategic marketing frameworks 3. Marketing launch tools: 4Ps R&D Based Versus Marketing R&D Based Based Ideas Marketing Based 100% 10% 100% 100% 100% 100% 5% 22% 25% 31% 34% 69% 66% 61% Winners of the Industrial Research Award British innovators Weapons systems 90% 78% Materials 100% Computers, railway, housing 75% Instruments 34% Source: Utterbach NPD Process: Marketing Input Idea Business Conception Plan Fit with marketing/ corporate strategy Market research Design Market testing Manufacture Establish marketing mix Launch Implement marketing mix Approximate Costs of NPD: % Stage Opportunity Identification Design Testing Consumer Goods 2 2 3 28 16 Launch Total 100% = Industrial Chemicals $12.6m 13 79 57 100 100 $4.7m Marketing Mix: The 4 Ps Place Promotion The Marketing Mix Price Product Product Place • Definition • PLC • Physical products versus services The Promotion Marketing Mix Price Product Consistency in Marketing Mix Premium Product (e.g. Jermyn St shirt) Premium Price (+30% over average) Premium Place (narrow distribution) Premium Promotion (selective advertising) Importance of 4Ps by Industry – examples of promotions Consumer Goods Industrial Goods High Advertising Personal Selling Sales Promotion Sales Promotion Personal Selling Advertising PR PR Importance Low Push versus Pull Demand Push Strategy Manufacturer Demand Intermediary End User e.g Lever Brothers Demand Pull Strategy Manufacturer Demand Intermediary End User e.g. P & G Marketing’s Definition of the Product Any want - satisfying good or service that is considered together with its perceived tangible and intangible benefits Product from Customer’s Viewpoint A product is a “bundle of satisfactions or benefits” i.e. The nature of the product lies in the consumer’s perception of it This explains marketing’s obsession with the consumer Product versus Benefit Definitions: Examples Company Product-orientated definition Benefit-oriented definition Lancome We sell cosmetics We sell beauty Xerox We make photocopiers We improve office productivity Disney We make films and associated products We entertain you and provide escapism UCL-NPD We teach you a wide range of skills/frameworks We prepare you for the outside world SWOT Analysis SWOT Strengths Weaknesses Internal Opportunities Threats External BCG Growth Share Matrix Market Growth Rate High Star ? 10 % Dog Cash Cow Lo w 0% 0.1x Low 1x 10x High Relative Market Share Product Life Cycle Introductory Stage Growth Stage Maturity Stage Decline Stage Total Market Sales Time Characteristics of “Introduction” Phase of PLC 1. High product failure rate 2. Relatively little competition 3. Limited distribution 4. Frequent product modification 5. Losses associated with the product Characteristics of “Growth” Phase of PLC 1. More competitors 2. Less product distinctiveness 3. Profitable returns 4. Company or product acquisition by larger companies Characteristics of ‘Maturity’ Phase of NPD 1. Sales continue to increase but at reduced rate 2. Attempts are made to differentiate or re-differentiate the product 3. Product line may be widened 4. Prices fall as competitiveness increases 5. Profits fall due to “double whammy” of falling price and need to promote the product 6. Brand rationalisation becomes common among retailers/dealers 7. Marginal producers drop out of the industry Characteristics of “Decline” Phase of NPD 1. Falling sales for total industry 2. Price cutting may intensify 3. Many producers decide to abandon the market PLC example: audio cassette tapes 500 450 400 350 300 250 200 150 100 50 0 Years 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 units sold 1974 Units Sold (in millions) Cassettes Sold 1974 to 2004 Product Life Cycle Traditional With Variations Growth, Slump, Maturity Introduction Growth Maturity Sales Decline Cycle I Cycle II Cycle recycle Scalloped Fashion Time Fad Using the PLC Framework Pros Cons - Different stages of a product’s life call for explicitly different strategies - Time span of the curve varies enormously - The framework prepares management for changes of strategy. (A useful spur given much management inertia) - Rigid adherence to PLC means management can prematurely end the life of a product - The curve is not always a curve - variations exist Handle with Care! As with all frameworks , use as a guide, not a bible Strategic marketing -summary Strategic marketing is critical to NPD both prior to embarking on a new project and as an ongoing process, eg • SWOT analysis • BCG growth share matrix • Product life cycle (PS Some of these can be quite useful outside the NPD process too!) Service Products Definition “A service is an intangible product involving a deed, a performance, or an effort that cannot be physically possessed” Examples Education Health care R&D projects Insurance Transport Hairdressing Hotels Differences Between Physical Products and Services Difference Comment Intangibility Services generally have no “physical” element Inseparability Production and consumption occur simultaneously Variability High ‘human’ contact leads to different service levels Perishability Service products cannot be stored and ‘perish’ instantly No ownership Service is experienced –it can’t be sold on Implications for Marketing Service Products Characteristic Issue Intangibility Difficult for customers to compare services Marketing Implication ‘Tangibalise’ the product e.g. appearance of staff, promotional literature, etc Inseparability Both provider and client affect quality of relationship Selection and training of service provider’s personnel Variability Difficult to ensure consistent quality Implement strict quality control. Develop customer care programmes Perishability Periods of excess supply and demand Manage supply and demand explicitly (e.g. differential pricing, part time personnel) Price Place • Importance of Price • Influences on Price • Pricing Strategy The Promotion Marketing Mix Price Product Importance of price-theory S Price p D q Quantity Importance of Price-Practice “Which of the following would make you switch supermarket” (% of respondents) Lower price 75% Wider range 66% Closer to home Convenient hours Car parking 60% 45% 44% Source: Questions asked of AGB Superpanel Effect of 1% Rise on Price on Profits e.g. Consumer Goods Manufacturing Price rise of 1% Rise in operating profit Phenomenon known as operating leverage 10% Effect of 1% rise in price - e.g. consumer goods manufacturing Before After Revenue 100 101 Cost of goods sold 60 60 Gross margin 40 41 Sales and marketing 15 15 R&D 2 2 General & Admin 10 10 Depreciation 3 3 Operating Profit 10 11 1% rise 10% rise Inputs to Pricing Decisions • Demand • Costs • Other factors - company and marketing objectives - competition/ market structure - legal/ social constraints Demand Demand constrains the upper price limit (i.e. you cannot charge more than the customer will pay) Some people are more price sensitive than others Demand for some products is more price sensitive than for others If you can identify the people and charge them separately, you will increase revenue If you can identify price sensitive products and drop prices, you will increase revenue Conditions for Price Discrimination 1. The firm can control what is offered to a particular buyer 2. It can prevent the resale of the item by one buyer to another Industries with Price Discrimination Industry Example Theatres OAPs, students, etc charged less for same seats Food manufacturing Large retailers with huge volumes are given lower prices than small corner shops with low volume Airline transport Business and first class charged more than economy class Private dentistry Many dentists have no ‘schedule of prices’ and will charge patients what they think they can afford Price Sensitivity Price Elasticity measures Price Sensitivity e= percentage change in quantity demanded percentage change in price P P p1 p2 q1 q2 q1 Q q2 Inelastic demand Elastic demand e<1 e>1 Q Factors Affecting Price Sensitivity Customers are less price sensitive when: 1. The product is unique with few substitutes 2. Comparisons are difficult to make 3. The cost of the product is low relative to total expenditure 4. The product is perceived to be high value or prestigious 5. The product is required for assets previously bought Cost- based Pricing Price = Full cost of producing the item + x% profit margin Pros Cons 1. Simple method 1. Largely arbitrary method, depends how you allocate 2. Explicitly considers costs overhead therefore unlikely to result in loss 2. Prevents full usage of marketing tools as in short run 3. Fair and transparent pricing at less than full cost is feasible 3. Can lead to nonsensical vicious circle Vicious Circle of cost based pricing Full cost = Allocated fixed cost + variable cost - sales and marketing - raw materials - R&D - direct energy costs - general overhead - depreciation Demand Price Production Fixed cost per unit Range of Pricing Discretion Upper level determined by demand To increase pricing discretion the firm can: Price - increase perceived benefits (i.e. demand) - reduce costs Lower level determined by costs Other Factors Affecting Pricing Area Company and Marketing Objectives Examples - Overall goal (profit maximisation versus accessibility of service) - Target market (mass or niche) - Brand image (exclusive or commodity) - Rest of marketing mix (product, promotion, place) Competition/ Market Structure - No of firms (monopoly through to perfect competition) Legal/ Social - Government legislation (e.g. closely controlled pharmaceutical pricing) - Degree of differentiation (one-off product through to commodity) - Regulatory bodies (e.g. Oftel with RPI-7.5%) - Social/political pressure (e.g. for bell-weathers of the economy) Popular Pricing Strategies Strategy Description Skimming Start with a high price for early adopters, then reduce the price progressively (good for inelastic demand) Penetration Go for maximum market penetration by adopting a low price strategy to attract the largest number of new buyers early on Promotion Place • Types of Promotion • Effects • Promotion strategy The Promotion Marketing Mix Price Product Promotion (Marketing Communication)Types: Sales Promotion Direct Marketing Public Relations Salesforce Advertising Objectives of Promotions (Marketing Communications) To Customer To Trade Raise awareness Provide information Inform about new product Inform about promotions Correct misconceptions about product Present trade offers Increase frequency of use Present special offers Educate consumers in how to use Build image for brand/company Build customer loyalty Avoid stockpiling Educate the trade Build patronage Specific Objectives of Sales Promotions For Consumer For Trade Announce new product Encourage stocking Encourage product trial Increase inventory levels Stimulate greater use Encourage off-peak buying Encourage purchase of larger sizes Promote related products Attract non-users Encourage brand switching Offset competitive marketing Open up new outlets Build retailer loyalty Effect of Sales Promotion on Brand Share 10% 7% 6% 5% Preparation Promotion period period Immediate postpromotion Long-term postpromotion Direct Marketing Targeting customer directly without an intermediary Examples of Methods Phone Internet Letters Catalogues Direct response radio Direct response TV Loyalty cards Trends in Direct Marketing Increasingly focused on target group - specific lists - technology advances Used frequently with multiple approaches Changing to long-term “relationship marketing” rather than one-off mail-shots Direct Marketing: Pros and Cons Pros Cons - Measurable response - Can alienate potential customers - Relatively cheap - Communicate directly with customer (67% customers go elsewhere next time as no one keeps in touch) - Low hit rate if unfocused Public Relations Definition by IPR: “the deliberate, planned and sustained effort to establish and maintain mutual understanding between an organisation and its public” Whom to influence Community Employees Government The City Distributors Consumers Opinion leaders How Interviews Articles Exhibitions Launches Sponsorships Publications Videos Training Factory visits Press releases Community projects Advertising Objectives Increases sales and profits through: - Building awareness - Building comprehension - Reminding - Generating leads - Legitimising - Reassuring Stages in the Adoption Process Adoption Trial Evaluation Interest Awareness Source: K p342 Adopter Categorisation Characteristics By Adopter Group Group Innovator Willing to try new Characteristics ideas at some risk Type of individual Technofreak(?) Youngish Early adopter Ideas adopted early as sign to others Opinion leaders in community Early majority Deliberate steady adoption of new ideas Late majority Laggard Sceptical: wait to see what world thinks before trying Tradition bound: suspicious of change Most of Population Older, Conservative Innovation adoption - examples • INNOVATOR Blu-ray • EARLY ADOPTER Mobile TV, (Sky service to deliver broadcasts to mobile phones), video i-pod • EARLY MAJORITY HDTV, Skype, Podcasting; Sky + / PVRs • LATE MAJORITY i-Pod; Broadband • LAGGARDS DVD players, internet shopping, online banking VHS; mobile phones Influence of Product Characteristic on Adoption Rate Product Characteristic Relative advantage Description/ Rationale The degree to which it outperforms existing products Compatibility How it matches experiences & values of the target market Complexity How difficult or simple it is to use Divisibility Extent to which it can be tried on a limited basis Communicability How easy it is to describe or communicate the product attributes Advertising Characteristics Types - Public presentation - Subliminal - Pervasive - Subtle - Amplified - Direct - Impersonal - “Knocking copy” Advertising Management Set objective Decide budget Choose message - Communication - Affordable objectives approach - Message generation - Sales objectives - % sales - Message evaluation - competitive parity - Message execution Choose media - Type - Impact - Frequency - Reach - Timing Evaluate effectiveness - Communication impact - Sales impact Place Place • Types of channel • Value of channel • Choice of channel The Promotion Marketing Mix Price Product Place Channels Coverage Location Inventory Transport What do Distribution Channels Do? - Provide information - Promote - Negotiable - Take orders - Hold inventory - Take risk - Assume title - Distribute to final customer Considerations in Choice of Channel Consideration Example/ Comment Company objectives Maximisation of market share suggests widespread distribution Target customer - numbers High numbers require mass market channels - geographical dispersion Wide dispersion may suggest need for mail order - customer needs Specialist channels if complex needs Product Direct selling if high value complex product Competition How do competitors distribute and do consumers like it? Control How much control is relinquished by choosing a specific channel Intermediaries: Pros and Cons Pros Cons - Allows manufacturers to “stick to the knitting” - Company loses some control - Replaces inefficiency of multiple deliveries - Company loses touch with end user - Enables consumers to minimise efforts - Can add to costs PLC Strategies Promotion Introduction Growth Create product awareness - advertising - personal selling Promote the brand (rather than product awareness) Price Skimming or penetration Place Distribution according to pricing strategy Key focus on distribution to establish foothold prior to ‘maturity’ Profits Losses as advertising can exceed revenues Product becomes profitable Continue existing strategy Maturity Decline Reinforce the ‘message’ to: - encourage regular repurchase - build loyalty Price reductions frequent though not necessarily advisable Build the foothold by moving some promotional activity to the channel Possibly withdraw promotions or target specific niches Profits peak and start to decline Firm emphasis on cost control to prevent huge fall in profits Lower price prevents excessive erosion of demand Resign yourself to narrow distribution strategy Reasons to Understand Marketing 1. Ultimately your research/ new product is to benefit the customer/public (widely defined). Why else are you doing it? 2. Allows you to understand who the customer is and what elements of the product/ research they value 3. If other areas within the organisation can think like marketing (and vice versa) it reduces cultural conflict