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Setting Product Strategy

LEARNING OBJECTIVES
After reading this chapter, students should:
Know what are the characteristics of products and how can they be classified
Know how companies can differentiate products
Know how a company can build and manage its product mix and product lines
Know how companies can combine products to create strong co-brands or ingredient brands
Know how companies can use packaging, labeling, warranties, and guarantees as marketing tools

DETAILED CHAPTER OUTLINE
At the heart of a great brand is a great product. Product is a key element in the market offering. Market leaders generally offer products and services of superior quality. Marketing planning begins with formulation an offering to meet target customers’ needs or wants. The customer will judge the offering by three basic elements: product features and quality, services mix and quality, and price.

PRODUCT CHARACTERISTICS AND CLASSIFICATIONS

A product is anything that can be offered to a market to satisfy a want or need.
A) Products that are marketed include:
1) Physical goods
2) Services
3) Experiences
4) Events
5) Persons
6) Places
7) Properties
8) Organizations
9) Information
10) Ideas

Product Levels: The Customer Value Hierarchy

In planning its market offering, the marketer needs to address five product levels. Each level adds more customer value, and the five constitute a customer value hierarchy.

A) The fundamental level is the core benefit: The service or benefit the customer is really buying. Marketers must see themselves as benefit providers.
B) At the second level, the marketer has to turn the core benefit into a basic product.
C) At the third level, the marketer prepares an expected product, a set of attributes and conditions buyers normally expect when they purchase this product.
D) At the fourth level, the marketer prepares an augmented product that exceeds customer expectations.
1) Differentiation arises on the basis of product augmentation. Product augmentation also leads the marketer to look at the total consumption system: the way the user performs the tasks of getting and using products and related services.
2) Some things should be noted about product-augmentation strategy:
a. First, each augmentation adds costs.
b. Second, augmented benefits soon become expected benefits and necessary points-of-parity.
c. Third, as companies raise the price of their augmented product, some competitors offer a “stripped-down” version at a much lower price.
E) At the fifth level stands the potential product that encompasses all the possible augmentations and transformations the product or offering might undergo in the future.
1) Here is where companies search for new ways to satisfy customers and distinguish its individual offer.
Product Classifications

Marketers have traditionally classified products on the basis of characteristics: durability, tangibility, and use. Each product type has an appropriate marketing-mix strategy.

Durability and Tangibility

Products can be classified into three groups, according to durability and tangibility:

A) Nondurable goods: tangible consumed in one or a few uses.
B) Durable goods: tangible that normally survives many uses. Durable goods require more personal selling and service, command a higher margin, and require more seller guarantees.
C) Services: intangible, inseparable, variable, and perishable products that require more quality control, supplier credibility, and adaptability.
Consumer-Goods Classification

The vast array of goods consumers buy can be classified on the basis of shopping habits.

A) Convenience goods are purchased frequently, immediately, and with a minimum of effort.
1) Staples
2) Impulse goods
3) Emergency goods
B) Shopping goods are goods that the consumer, in the process of selection and purchase, characteristically compares on such basis as suitability, quality, price, and style.
1) Homogeneous shopping goods are similar in quality but different enough on price to adjust shopping comparisons.
2) Heterogeneous shopping goods differ in product features and services that may be more important than price.
C) Specialty goods have unique characteristics or brand identification for which a sufficient number of buyers are willing to make a special purchasing effort.
D) Unsought goods are those that the consumer does not know about or does not normally think of buying. The classic examples of known but unsought goods are life insurance and cemetery plots.

Industrial-Goods Classification

An Industrial good can be classified in terms of how it enters the production process and its relative costliness. We can distinguish three groups of industrial goods: materials and parts, capital items, and suppliers and business services.

A) Materials and parts.
1) These are goods enter the manufacturer’s product completely. They fall into two major groups:
a. Raw materials include:
1. Farm products—commodity characteristics.
2. Natural products—are in limited supply.
b. Manufactured materials and parts fall into two categories:
1. Component materials.
2. Component parts.
B) Capital items are long-lasting goods that facilitate developing or managing the finished product. They include:
1) Installations.
2) Equipment.
C) Supplies and business services are short-term goods and services that facilitate developing or managing the finished product. Supplies are two kinds:
1) Maintenance and repair items (including business advisory services such as, legal, consulting, and advertising).
2) Operating supplies.

DIFFERENTIATION

To be branded, products must be differentiated. Physical products vary in potential for differentiation.

)A Marketers are always looking for new dimensions of differentiation.

Product Differentiation

A) Form: Many products can be differentiated in form—the size, shape, or physical structure of a product.
B) Features: Most products can be offered with varying features that supplement its basic function.
1) A company can identify and select appropriate features by surveying buyers and then calculating customer value versus company cost for each feature.
2) Each company must decide whether to offer feature customization at a higher cost or a few standard packages at a lower cost.
C) Customization: marketers can differentiate products by making them customized to an individual.
1) Mass customization is the ability of a company to meet each customer’s requirements.
D) Performance Quality: Most products are established at one of four performance levels: low, average, high, or superior.
1) Performance quality is the level at which the product’s primary characteristics operate.
2) The manufacturer must design a performance level appropriate to the target market and competitors’ performance levels.
3) A company must mange performance quality through time.
a. Quality is becoming an increasingly important parameter for differentiation as companies adopt a value model and provide higher quality for less money.
E) Conformance Quality: Buyers expect products to have a high conformance quality – the degree to which all the product units are identical and meet the promised specifications.
F) Durability: A measure of the product’s expected operating life under natural or stressful conditions
1) Durability is a valued attribute for certain products.
2) Buyers will generally pay more for products that have a reputation for being long lasting.
G) Reliability: Buyers normally will pay a premium for more reliable products. Reliability is a measure of the probability that a product will not malfunction or fail within a specified time period
H) Repairability: Is the measure of the ease of fixing a product.
I) Style: Describes the product’s look and feel to the buyer.
1) Style has the advantage of creating distinctiveness that is difficult to copy.
2) Strong style does not always mean high performance.
J) Design: The Integrative Force
1) As competition intensifies, design offers a potent way to differentiate and position a company’s products and services.
2) Design is the totality of features that affect how a product looks and functions in terms of customer requirements.
3) To the company, a well-designed product is one that is easy to manufacture and distribute.
4) To the customer, a well-designed product is one that is pleasant to look at and easy to open, install, use, repair, and dispose of.
Services Differentiation

When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and improving quality.

A) The main service differentiators are ordering ease, delivery, installation, customer training, customer consulting, and maintenance and repair.
B) Ordering Ease: Ordering ease refers to how easy it is for the customer to place an order with the company.
C) Delivery: refers to how well the product or service is brought to the customer.
D) Installation: Refers to the work done to make the product operational.
E) Customer Training: refers to the training the customer’s employees to use the vendor’s equipment properly and efficiently.
D) Customer consulting: refers to data, information systems, and advice services that the seller offers to the buyers.
E) Maintenance and Repair: Describes the service program for helping customers keep purchased products in good working order.
F) Returns: An unavoidable reality of doing business
1)Controllable returns
2) Uncontrollable returns

PRODUCT AND BRAND RELATIONSHIPS
Each product can be related to other products to ensure that a firm is offering and marketing the optimal set of products.

The Product Hierarchy

The product hierarchy stretches from basic needs to particular items that satisfy those needs. We can identify six levels of the product hierarchy.

A) Need family
B) Product family
C) Product class
D) Product line
E) Product type
F) Item, also called stockkeeping unit (SKU) or product variant

Product Systems and Mixes

A product system is a group of diverse but related items that function in a compatible manner.

A) A product mix (also called a product assortment) is a set of all products and items a particular seller offers for sale. A product mix consists of various product lines.
B) A company’s product mix has a certain width, length, depth, and consistency.
C) The width of a product mix refers to how many different product lines the company carries.
1) The length of a product mix refers to the total number of items in the mix.
a. We can also talk about the average length of a line. This is obtained by dividing the total length by the number of lines.
)D The depth of a product mix refers to how many variants are offered of each product in the line.
)E 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.
Product-Line Analysis

A) In offering a product line, companies normally develop a basic platform and modules that can be added to meet different customer requirements.
B) Product-line managers need to know the sales and profits of each item in their line in order to determine which items to build, maintain, harvest, or divest.

Sales and Profits

Every company’s product portfolio contains products with different margins.
A) A company can classify its products into four types that yield different gross margins, depending on sales volume and promotion.
1) Core products
2) Staples
3) Specialties
4) Convenience items

Market Profile

The product-line manager must review how the line is positioned against competitors’ lines.
A) The product map shows which competitors’ items are competing against company X’s items.
A) The map also reveals possible locations for new items.
B) Another benefit of product mapping is that it identifies market segments.
C) Product-line analysis provides information for two key decision areas—product-line length and product-mix pricing.

Product-Line Length

A) Company objectives influence product-line length.
B) One objective is to create a product line to induce upselling.
C) A different objective is to create a product line that facilitates cross selling.
D) Still another objective is to create a product line that protects against economic ups and downs.
E) Product lines tend to lengthen over time.
F) A company lengthens its product line in two ways: by line stretching and line filling.
Line Stretching

A) Line stretching occurs when a company lengthens its product line beyond its current range.
Down-market stretch
Is when a company positioned in the middle market may want to introduce a lower-priced line for any of three reasons:
)A Shoppers want value-priced goods
)B Wish to tie up lower-end competitors
)C Find that the middle market is stagnating or declining
A company faces a number of choices in deciding to move a brand down-market:
)A Use the parent name on all offerings.
)B Use a sub-brand name
)C Introduce lower-price goods under a different brand name.
)D Moving down-market carries risk.
Up-Market stretch: Companies may wish to enter the high end of the market for:
1) More growth
2) Higher margins
3) Simply to position themselves as a full-line manufacturer
Two-way stretch
A) Is where companies serving the middle market might decide to stretch the line in both directions.
B) Research has shown that a high-end model of a low-end brand is favored over a low-end model of a high-end brand.
Line Filling

A) A product line can also be lengthened by adding more items within the present range. There are several motives for line filling:
1) Reaching for incremental profits.
2) Trying to satisfy dealers who complain about lost sales because of missing items in the line.
3) Trying to utilize excess capacity.
4) Trying to be the leading full-line company.
5) Trying to plug holes to keep out competitors.
B) Line filling is overdone if it results in self-cannibalization and customer confusion.
C) The company needs to differentiate each item in the consumer’s mind.
D) Each item should possess a just-noticeable difference.
E) The company should also check that the proposed item meets a market need and is not being added simply to satisfy an internal need.
Line Modernization, Featuring, and Pruning

Product lines need to be modernized. In rapidly changing product markets, modernization
is continuous.

A) Companies plan improvement to encourage customer migration to higher-valued, higher-priced items.
B) The product-line manager typically select one or a few items in the line to feature.
C) Product-line managers must periodically review the line for deadwood that is depressing profits.
Product-Mix Pricing

A) Price-setting logic must be modified when the product is part of a product mix.
B) Product-mix pricing is when the firm searches for a set of prices that mazimizes profits on the total mix.
C) Pricing is difficult because the various products have demand, cost interrelationships, and are subject to different degrees of competition.
Six situations involving product-mix pricing:
A) Product-line pricing.
1) Companies normally develop product lines rather than single products and introduce price steps.
2) In many lines of trade, sellers use well-established price points for the products in its personal line.
3) The seller’s task is to establish perceived-quality differences that justify the price differences.
B) Optional-feature pricing.
1) Many companies offer optional products, features, and services along with their main product.
2) Pricing is a sticky problem, because companies must decide which items to include in the standard price and which to offer as options.
C) Captive-product pricing.
1) Some products require the use of ancillary or captive products.
2) There is a danger in pricing the captive product too high in the aftermarket.
D) Two-part pricing.
1) Service firms often engage in two-part pricing, consisting of a fixed fee plus a variable usage fee.
E) By-product pricing.
1) The production of certain goods often results in by-products. If the by-products have value to a customer group, they should be priced on their value.
F) Product-bundling pricing.
1) Sellers often bundle product and features.
2) Pure bundling occurs when a firm only offers its products as a bundle (tied-in sales).
3) In mixed-bundling, the seller offers goods both individually and in bundles.
4) When offering a mixed bundle, the seller normally charges less for the bundle than if the items were purchased separately.
5) Some customers will want less than the whole bundle.
6) Studies have shown that as promotional activity increases on individual items in the bundle, buyers perceive less savings on the bundle and are less apt to pay for the bundle.
7) This research has offered the following three suggested guidelines for correctly implementing a bundling strategy:
a. Don’t promote individual products in a package as frequently and cheaply as the bundle. The bundle price should be much lower than the sum of individual products or the consumer will not perceive its attractiveness.
(i) Limit promotions to a single item in the mix if you still want to promote individual products. Another option: alternate promotions, one after another, in order to avoid conflicting promotions.
(ii) If you decide to offer large rebates on individual products, it must be the absolute exception and done with discretion. Otherwise, the consumer uses the price of individual products as an external reference for the bundle that then loses value.
Co-Branding and Ingredient Branding

Products are often combined with products from other companies in various ways.

A) Co-branding—is also called dual branding or brand bundling.
1) Is in which two or more well known existing brands are combined into a joint product and/or marketed together in some fashion.
B) One form of co-branding is same-company co-branding.
C) Still another form is joint-venture co-branding.
D) Another form of co-branding is called multi-sponsor co-branding.
E) Finally there is retail co-branding where two retail establishments use the same location to maximize sales.
F) The main advantage to co-branding is that a product may be convincingly positioned by virtue of the multiple brands involved.
G) Co-branding can generate greater sales from the existing target market as well as open additional opportunities with new consumers and channels.
1) Co-branding can also reduce the cost of product introduction because two well-known images are combined, accelerating potential adoption.
2) The potential disadvantages of co-branding are:
H) The risks and lack of control from becoming aligned with another brand in the minds of consumers.
I) Consumer expectations about the level of involvement and commitment with co-brands are likely to be high, so unsatisfactory performance could have negative repercussions for the brands involved.
J) Risk of overexposure if the other brand has entered into a number of co-branding arrangements.
K) It may also result in a lack of focus on existing brands.
1) A necessary condition for co-branding success is that the two brands separately have brand equity—adequate brand awareness and a sufficiently positive brand image.
2) The most important requirement is that there is a logical fit between the two brands such that the combined brand or marketing activity maximizes the advantages of the individual brands while minimizing the disadvantage.
3) Research studies show that consumers are more apt to perceive co-brands favorable if the two brands are complementary rather than similar.
4) Co-branding ventures must be entered into and executed carefully.
5) There must be the right kind of fit in value, capabilities, and goals, in addition to an appropriate balance of brand equity.
Ingredient Branding

Ingredient branding is a special case of co-branding that involves creating brand equity for materials, components, or parts that are necessarily contained within other branded products.

A) An interesting take on ingredient branding is “self-branding” in which companies advertise and even trademark their own branded ingredients.
B) Ingredient brands attempt to create sufficient awareness and preference for their product such that consumers will not buy a “host” product that does not contain the ingredient.

PACKAGING, LABELING, WARRANTIES, AND GUARANTEES

Most physical products have to be packaged and labeled. Many marketers have called packaging a fifth P. Most marketers, however, treat packaging and labeling as an element of product strategy.

Packaging

We define packaging as all the activities of designing and producing the container for a
product.

A) Various factors have contributed to the growing use of packaging as a marketing tool:
1) Self-service
2) Consumer affluence
3) Company and brand image
4) Innovation opportunity
B) From the perspective of both the firm and consumers, packaging must achieve a number of objectives:
1) Identify the brand
2) Convey descriptive and persuasive information
3) Facilitate product transportation and protection
4) Assist at-home storage
5) Aid product consumption
C) After packaging is designed, it must be tested
1) Engineering tests are conducted to ensure that the package stands up under normal conditions.
2) Visual tests are used to ensure that the script is legible and the colors harmonious.
3) Dealer tests are performed to ensure that dealers find the packages attractive and easy to handle.
4) Consumer tests ensure favorable consumer response.
Labeling

A) Sellers must label products
B) Labels perform several functions
1) The label identifies the product or brand
2) The label might also grade the product
3) The label might describe the product
4) Finally, the label might promote the product through attractive graphics
C) Labels eventually become outmoded and need freshening up
D) Companies with labels that have become icons need to tread very carefully when initiating a redesign.
E) The Fair Packaging and Labeling Act of 1967, set mandatory labeling requirements, and allows federal agencies to set packaging regulations in specific industries.
F) The Food and Drug Administration (FDA) sets other labeling requirements.
G) Consumerists have lobbied for additional labeling laws to require:
1) Open dating
2) Unit pricing
3) Grade labeling
4) Percentage labeling

Warranties and Guarantees

Warranties are formal statements of expected product performance by the manufacturer. Warranties, whether expressed or implied are legally enforceable.

A) Many sellers offer either general guarantees or specific guarantees.
B) Guarantees reduce the buyer’s perceived risk.
C) Guarantees are most effective in two situations:
1) Where the company or the product is not well-known.
2) Where the product’s quality is superior to the competition.

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