Marketing management Chapter 12 pdf

CHAPTER 12 SETTING PRODUCT STRATEGY At the heart of a great brand is a great product?. The customer will judge the offering by three basic ele-ments: product features and quality, serv

I N THIS CHAPTER, W E W I L L

ADDRESS THE F O L L O W I N G

QUESTIONS:

1 What are t h e characteristics of

products and how can they be

classified?

2 How can companies differentiate

products?

3 How can a company build and

manage its product mix and

product lines?

4 How can companies combine

products t o create strong

co-brands or ingredient co-brands?

5 How can companies use

packaging, labeling, warranties,

and guarantees as marketing

CHAPTER 12 SETTING PRODUCT

STRATEGY

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

erhaps no other high-end product combines the skilled

crafts-manship, market dominance, and longevity of Steinway pianos

One-hundred-fifty years o l d , t h e family-run company retains many

of the same manufacturing processes from its humble origins in New York

City Although mass-produced pianos take roughly 20 days to build,

build-ing a Steinway takes nine m o n t h s t o a year A Steinway piano requires

12,000 parts, most of them handcrafted, and relies on 120 technical patents

and innovations Despite the fact that it can produce only a few thousand

pianos a year and has only 2 percent of all keyboard unit sales in the United

States, Steinway commands 25 percent of the sales dollars and 35 percent

of the profits Not surprisingly, Steinway owns the market in concert halls

(where it has a market share over 95 percent) and with composers and

musicians.^

A Steinway concert grand: the great product at the

heart of a great brand

371

Marketing planning begins with formulating an offering t o meet target

cus-tomers' needs or wants The customer will judge the offering by three basic

ele-ments: product features and quality, services mix and quality, and price (see

Figure 12.1) In this chapter, we examine product; in Chapter 13, services; and

in Chapter 14, prices All three elements must be meshed into a competitively

attractive offering

Value-based prices • • •

• • • Product Characteristics and Classifications

| FIG. 12.1

Components of the Market Ottering

Many people think that a product is a tangible offering, but a product can be more than that

A product is anything that can be offered to a market to satisfy a want or need Products that are marketed include physical goods, services, experiences, events, persons, places, proper-ties, organizations, information, and ideas

Product Levels: T h e C u s t o m e r Value Hierarchy

In planning its market offering, the marketer needs to address five product levels (see Figure 12.2).2 Each level adds more customer value, and the five constitute a customer value hier-archy The fundamental level is the core benefit: the service or benefit the customer is really buying A hotel guest is buying "rest and sleep." The purchaser of a drill is buying "holes." Marketers must see themselves as benefit providers

At the second level, the marketer has to turn the core benefit into a basic product Thus a hotel room includes a bed, bathroom, towels, desk, dresser, and closet

At the third level, the marketer prepares an expected product, a set of attributes and ditions buyers normally expect when they purchase this product Hotel guests expect a clean bed, fresh towels, working lamps, and a relative degree of quiet Because most hotels can meet this minimum expectation, the traveler normally will settle for whichever hotel is most convenient or least expensive

con-At the fourth level, the marketer prepares an augmented product that exceeds customer expectations In developed countries, brand positioning and competition take place at this level In developing countries and emerging markets such as China and India, however, competition takes place mostly at the expected product level

Differentiation arises on the basis of product augmentation Product augmentation also leads the marketer to look at the user's total consumption system: the way the user performs the tasks of getting and using products and related services.3 As Levitt observed long ago:

F I G 1 2 2 |

Five Product Levels

SETTING PRODUCT STRATEGY CHAPTER 12

The new competition is not between what companies produce in their factories,

but between what they add to their factory output in the form of packaging,

ser-vices, advertising, customer advice, financing, delivery arrangements,

warehous-ing, and other things that people value.4

Some things should be noted about product-augmentation strategy First, each

augmen-tation adds cost Second, augmented benefits soon become expected benefits and necessary

points-of-parity Today's hotel guests expect cable or satellite television with a remote

con-trol and high-speed Internet access or two phone lines This means competitors will have to

search for still other features and benefits Third, as companies raise the price of their

aug-mented product, some competitors offer a "stripped-down" version at a much lower price

Thus, alongside the growth of fine hotels like Four Seasons and Ritz Carlton, we see the

emergence of lower-cost hotels and motels like Motel 6 and Comfort Inn, which cater to

clients who simply want the basic product

i - J A M E S T O W N C O N T A I N E R C O

What could be harder to differentiate than corrugated cardboard? Yet, Jamestown Container Company, the lead

supplier of corrugated products for companies such as 3M, has formed strategic partnerships with area

manu-facturers to provide every part of the shipping system It not only provides boxes, but also offers tape,

shrink-wrap, and everything else needed either to display or to ship a customer's final product "It's a combination for

survival," says the company's Chief Operating Officer "More customers want to call one place for everything We

n have to keep reinventing ourselves and form these kinds of relationships to remain competitive." 5

At the fifth level stands the potential product, which encompasses all the possible

aug-mentations and transformations the product or offering might undergo in the future Here is

where companies search for new ways to satisfy customers and distinguish their offer For

instance, in an era when customers are demanding ever-faster Internet and wireless

con-nections, Verizon is investing its capital in creating a raft of potential products:

r- V E R I Z O N

Rather than be seen as a follower in the highly competitive telecom industry, Verizon is pushing fast into totally

new territory For one thing, Verizon is rolling out fiber-optic connections to every home and business in its

29-state territory over the next 10 to 15 years This will allow the lightning-fast transmission of everything from

traditional phone service to HDTV The company is no less aggressive when it comes to wireless technology

Verizon has covered Manhattan with more than 1,000 Wi-Fi hot spots that lets any Verizon broadband subscriber

use a laptop to tap into the Net wirelessly when near a Verizon pay phone The company is also deploying 3G, a

third-generation wireless service that lets customers make super-speedy Net connections from their mobile

phones In short, the company is investing billions in services customers don't even know they want yet, but

a which—Verizon is betting—will set the standard for the entire industry 6

Also consider the customization platforms new e-commerce sites are offering, from

which companies can learn by seeing what different customers prefer Proctor & Gamble, for

example, has developed Reflect.com, which offers customized beauty products created

interactively on the Web site

Product Classifications

Marketers have traditionally classified products on the basis of characteristics: durability,

tangi-bility, and use (consumer or industrial) Each product type has an appropriate marketing-mix

strategy.7

DURABILITY AND TANGIBILITY Products can be classified into three groups, according to

durability and tangibility:

I Nondurable goods are tangible goods normally consumed in one or a few uses, like beer

and soap Because these goods are consumed quickly and purchased frequently, the

appropriate strategy is to make them available in many locations, charge only a small

markup, and advertise heavily to induce trial and build preference

2 Durable goods are tangible goods that normally survive many uses: refrigerators,

machine tools, and clothing Durable products normally require more personal selling and service, command a higher margin, and require more seller guarantees

3 Services are intangible, inseparable, variable, and perishable products As a result, they

normally require more quality control, supplier credibility, and adaptability Examples include haircuts, legal advice, and appliance repairs

CONSUMER-GOODS CLASSIFICATION The vast array of goods consumers buy can be classified on the basis of shopping habits We can distinguish among convenience, shop-ping, specialty, and unsought goods

The consumer usually purchases convenience goods frequently, immediately, and with a minimum of effort Examples include tobacco products, soaps, and newspapers

Convenience goods can be further divided Staples are goods consumers purchase on a

reg-ular basis A buyer might routinely purchase Heinz ketchup, Crest toothpaste, and Ritz

crackers Impulse goods are purchased without any planning or search effort Candy bars and magazines are impulse goods Emergency goods are purchased when a need is urgent—

umbrellas during a rainstorm, boots and shovels during the first winter snowstorm Manufacturers of impluse and emergency goods will place them in those outlets where con-sumers are likely to experience an urge or compelling need to make a purchase

Shopping goods are goods that the consumer, in the process of selection and purchase, characteristically compares on such bases as suitability, quality, price, and style Examples include furniture, clothing, used cars, and major appliances Shopping goods can be further

divided Homogeneous shopping goods are similar in quality but different enough in price to justify shopping comparisons Heterogeneous shopping goods differ in product features and

services that may be more important than price The seller of heterogeneous shopping goods carries a wide assortment to satisfy individual tastes and must have well-trained salespeople

to inform and advise customers

Specialty goods have unique characteristics or brand identification for which a sufficient number of buyers are willing to make a special purchasing effort Examples include cars, stereo components, photographic equipment, and men's suits A Mercedes is a specialty good because interested buyers will travel far to buy one Specialty goods do not involve making comparisons; buyers invest time only to reach dealers carrying the wanted products Dealers do not need convenient locations, although they must let prospective buyers know their locations

Unsought goods are those the consumer does not know about or does not normally think

of buying, like smoke detectors The classic examples of known but unsought goods are life insurance, cemetery plots, gravestones, and encyclopedias Unsought goods require adver-tising and personal-selling support

INDUSTRIAL-GOODS CLASSIFICATION Industrial goods can be classified in terms of how they enter the production process and their relative costliness We can distinguish three groups of industrial goods: materials and parts, capital items, and supplies and business ser-vices Materials and parts are goods that enter the manufacturer's product completely They

fall into two classes: raw materials and manufactured materials and parts Raw materials fall into two major groups: farm products (e.g., wheat, cotton, livestock, fruits, and vegetables) and natural products (e.g., fish, lumber, crude petroleum, iron ore) Farm products are sup-

plied by many producers, who turn them over to marketing intermediaries, who provide assembly, grading, storage, transportation, and selling services Their perishable and sea-sonal nature gives rise to special marketing practices Their commodity character results in relatively little advertising and promotional activity, with some exceptions At times, com-modity groups will launch campaigns to promote their product—potatoes, cheese, and beef Some producers brand their products—Dole salads, Mott's apples, and Chiquita bananas Natural products are limited in supply They usually have great bulk and low unit value and must be moved from producer to user Fewer and larger producers often market them directly to industrial users Because the users depend on these materials, long-term supply contracts are common The homogeneity of natural materials limits the amount of demand-creation activity Price and delivery reliability are the major factors influencing the selection

of suppliers

Manufactured materials and parts fall into two categories: component materials (iron, yarn, cement, wires) and component parts (small motors, tires, castings) Component mate- rials are usually fabricated further—pig iron is made into steel, and yarn is woven into cloth

SETTING PRODUCT STRATEGY CHAPTER 12 375

A Beef Council ad, part of the "Beef, It's What's for Dinner" campaign of TV and print ads designed to promote beef as a good food

The standardized nature of component materials usually means that price and supplier

reli-ability are key purchase factors Component parts enter the finished product with no further

change in form, as when small motors are put into vacuum cleaners, and tires are put on

automobiles Most manufactured materials and parts are sold directly to industrial users

Price and service are major marketing considerations, and branding and advertising tend to

be less important

Capital items are long-lasting goods that facilitate developing or managing the finished

product They include two groups: installations and equipment Installations consist of

buildings (factories, offices) and heavy equipment (generators, drill presses, mainframe

computers, elevators) Installations are major purchases They are usually bought directly

from the producer, with the typical sale preceded by a long negotiation period The

pro-ducer's sales force includes technical personnel Producers have to be willing to design to

specification and to supply postsale services Advertising is much less important than

per-sonal selling

Equipment comprises portable factory equipment and tools (hand tools, lift trucks) and

office equipment (personal computers, desks) These types of equipment do not become

part of a finished product They have a shorter life than installations but a longer life than

operating supplies Although some equipment manufacturers sell direct, more often they

use intermediaries, because the market is geographically dispersed, the buyers are

numer-ous, and the orders are small Quality, features, price, and service are major considerations

The sales force tends to be more important than advertising, although the latter can be used

effectively

Supplies and business services are short-term goods and services that facilitate

develop-ing or managdevelop-ing the finished product Supplies are of two kinds: maintenance and repair

items (paint, nails, brooms), and operating supplies (lubricants, coal, writing paper, pencils)

Together, they go under the name of MRO goods Supplies are the equivalent of convenience

goods; they are usually purchased with minimum effort on a straight rebuy basis They are normally marketed through intermediaries because of their low unit value and the great number and geographic dispersion of customers Price and service are important consider-ations, because suppliers are standardized and brand preference is not high

Business services include maintenance and repair services (window cleaning, copier repair) and business advisory services (legal, management consulting, advertising)

Maintenance and repair services are usually supplied under contract by small producers or are available from the manufacturers of the original equipment Business advisory services are usually purchased on the basis of the supplier's reputation and staff

Ill Differentiation

To be branded, products must be differentiated Physical products vary in their potential for differentiation At one extreme, we find products that allow little variation: chicken, aspirin, and steel Yet even here, some differentiation is possible: Perdue chickens, Bayer aspirin, and India's Tata Steel have carved out distinct identities in their categories Procter & Gamble makes Tide, Cheer, and Gain laundry detergents, each with a separate brand identity At the other extreme are products capable of high differentiation, such as automobiles, commer-cial buildings, and furniture Here the seller faces an abundance of design parameters, including form, features, performance quality, conformance quality, durability, reliability, repairability, and style.8

Marketers are always looking for new dimensions of differentiation Otis Elevator Company has upped the ante in its category by making its elevators smarter:

O T I S E L E V A T O R C O M P A N Y

At a typical bank of elevators in an office building lobby, you press the "up" button and take the first elevator that comes, with no idea how many stops there will be until you get to your floor Now Otis has developed a "smart" elevator You key in your floor on a centralized panel The panel tells you which elevator is going to take you to your floor Your elevator takes you right to your floor and races back to the lobby With this simple change, Otis has managed to turn every elevator into an express This remarkable differentiator means a speedier ride and less groaning and sighing by riders, but it also has big benefits for builders Buildings need fewer elevators for

a given density of people, so builders can use the extra space for people rather than people conveyers 9

Product Differentiation

FORM Many products can be differentiated in form—the size, shape, or physical structure

of a product Consider the many possible forms taken by products such as aspirin Although aspirin is essentially a commodity, it can be differentiated by dosage size, shape, color, coat-ing, or action time

5 Most products can be offered with varying features that supplement its basic function A company can identify and select appropriate new features by surveying recent

buyers and then calculating customer value versus company cost for each potential feature

The company should also consider how many people want each feature, how long it would take to introduce each feature, and whether competitors could easily copy the feature Companies must also think in terms of feature bundles or packages Auto companies often manufacture cars at several "trim levels." This lowers manufacturing and inventory costs Each company must decide whether to offer feature customization at a higher cost or a few standard packages at a lower cost

PERFORMANCE QUALITY Most products are established at one of four performance els: low, average, high, or superior Performance quality is the level at which the product's primary characteristics operate Firms should not necessarily design the highest perfor-mance level possible The manufacturer must design a performance level appropriate to the target market and competitors' performance levels A company must also manage perfor-mance quality through time Continuously improving the product can produce the high returns and market share Lowering quality in an attempt to cut costs often has dire conse-quences Schlitz, the number-two beer brand in the United States in the 1960s and 1970s,

lev-SETTING PRODUCT STRATEGY CHAPTER 12 377

was driven into the dust because management adopted a financially motivated strategy to

increase its short-term profits and curry favor with shareholders In fact, quality is becoming

an increasingly important parameter for differentiation as companies adopt a value model

and provide higher quality for less money Cataloger J Crew is raising the prices of its

mer-chandise as it raises the quality bar higher:

J C R E W

J Crew is returning to a tradition of preppy quality goods It is adding pleats to the backs of its shirts and

hav-ing them made in Italy instead of China Its shoes are also behav-ing made in Italy, and the company is tailorhav-ing

trousers to fit better The cover of the Fall 2003 catalog reflected the company's emphasis on quality by crisply

portraying each color-dyed stitch, the weave of the wool, and each tiny pearl collar button 10

ONFORMANCI QUALITY Buyers expect products to have a high conformance quality,

which is the degree to which all the produced units are identical and meet the promised

specifications Suppose a Porsche 944 is designed to accelerate to 60 miles per hour within

10 seconds If every Porsche 944 coming off the assembly line does this, the model is said to

have high conformance quality The problem with low conformance quality is that the

prod-uct will disappoint some buyers

DURABILITY Durability, a measure of the product's expected operating life under natural

or stressful conditions, is a valued attribute for certain products Buyers will generally pay

more for vehicles and kitchen appliances that have a reputation for being long lasting

However, this rule is subject to some qualifications The extra price must not be excessive

Furthermore, the product must not be subject to rapid technological obsolescence, as is the

case with personal computers and video cameras

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 Maytag, which manufactures major home appliances, has an outstanding

rep-utation for creating reliable appliances

REPAIRABILITY Repairability is a measure of the ease of fixing a product when it

malfunc-tions or fails Ideal repairability would exist if users could fix the product themselves with

lit-tle cost in money or time Some products include a diagnostic feature that allows service

people to correct a problem over the telephone or advise the user how to correct it Many

computer hardware and software companies offer technical support over the phone, or by

fax or e-mail Cisco put together a Knowledge Base of Frequently Asked Questions (FAQs) on

its Web site which it estimates handles about 80 percent of the roughly 4 million monthly

requests for information, and saves the company $250 million annually Each new call and

solution goes to a tech writer who adds the solution to the FAQs, thus reducing the number

of future phone calls.11

STYLE Style describes the product's look and feel to the buyer Car buyers pay a premium

for Jaguars because of their extraordinary look Aesthetics play a key role in such brands as

Absolut vodka, Apple computers, Montblanc pens, Godiva chocolate, and Harley-Davidson

motorcycles.12 Style has the advantage of creating distinctiveness that is difficult to copy On

the negative side, strong style does not always mean high performance A car may look

sen-sational but spend a lot of time in the repair shop

Design: The I n t e g r a t i v e Force

As competition intensifies, design offers a potent way to differentiate and position a

com-pany's products and services.13 In increasingly fast-paced markets, price, and technology are

not enough Design is the factor that will often give a company its competitive edge Design

is the totality of features that affect how a product looks and functions in terms of customer

requirements

Design is particularly important in making and marketing retail services, apparel, packaged

goods, and durable equipment All the qualities we have discussed are design parameters The

designer has to figure out how much to invest in form, feature development, performance, conformance, durability, reliability, repairability, and style To the company, a well-designed product is one that is easy to manufacture and distribute 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 The designer has to take all these factors into account

The arguments for good design are particularly compelling for smaller consumer-products companies and start-ups that don't have big advertising dollars That's how one small brewery got noticed

F L Y I N G F I S H B R E W I N G C O

Before he started his company, founder Gene Muller sent Pentagram Design Company a case of beer bottles with blank labels and a note that said, "This space available for good design." He told Pentagram partner Michael Beirut that he wanted something a breed apart from the usual mountain-range motif themes that every- one else seemed to be doing The Pentagram design Muller liked most and picked for his start-up was a fish- bone propeller plane Flying Fish Brewing Company was born Not only has the eye-catching image helped sell

the beer, but the company's merchandise sales (T-shirts, hats, and pint glasses) have been surprisingly strong, especially at music festivals 14

Certain countries are winning on design: Italian design in apparel and furniture; Scandinavian design for functionality, aesthetics, and environmental consciousness Braun, a German division of Gillette, has elevated design to a high art in its electric shavers, coffeemak- ers, hair dryers, and food processors The company's design department enjoys equal status with engineering and manufacturing The Danish firm Bang & Olufsen has received many kudos for the design of its stereos, TV equipment, and telephones "Marketing Insight: Design

as a Powerful Marketing Tool" describes some successes and failures in design

Services D i f f e r e n t i a t i o n

When the physical product cannot easily be differentiated, the key to competitive success may lie in adding valued services and improving their quality The main service differentia- tors are: ordering ease, delivery, installation, customer training, customer consulting, and maintenance and repair

ORDERING EASE Ordering ease refers to how easy it is for the customer to place an order with the company Baxter Healthcare has eased the ordering process by supplying hospitals

with computer terminals through which they send orders directly to Baxter Many banks now provide h o m e banking software to help customers get information and do transac- tions more efficiently Consumers are now able

to order and receive groceries without going to the supermarket

DELIVERY Delivery refers to how well the

p r o d u c t or service is delivered to the tomer It includes speed, accuracy, and care

a t t e n d i n g the delivery process Today's tomers have grown to expect delivery speed: pizza delivered in one-half hour, film devel-

cus-o p e d in cus-one hcus-our, eyeglasses m a d e in cus-one hour, cars lubricated in 15 m i n u t e s Levi Strauss, Benetton, a n d The Limited have

a d o p t e d c o m p u t e r i z e d quick response tems (QRS) that link the information systems

sys-of their suppliers, manufacturing plants, tribution centers, a n d retailing outlets Cemex, a giant c e m e n t c o m p a n y based in Mexico, has transformed the c e m e n t busi-

dis-A group of franchisees learning the business at McDonald's Hamburger U in Oak Brook, Illinois

SETTING PRODUCT STRATEGY CHAPTER 12 3 7 9

Manufacturers, service providers, and retailers seek new designs to

create differentiation and establish a more complete connection with

consumers Holistic marketers recognize the emotional power of

design and the importance to consumers of how things look and feel

Design is now more fully integrated into the marketing management

process For example:

• After seeing some of their brands lose share to competitors with

stronger designs and aesthetics, Procter & Gamble appointed a

Chief Design Officer in 2001 and now hands out an A G Lafley

Design award each Fall Lafley, P&G's CEO, is credited with

push-ing for more products to involve design at the front end—not as

an afterthought These products, such as Crest Whitestrips, Olay

Daily Facials, and the whole line of Swifter Quick Clean products,

have generated more trials, more repurchases, and more sales

• Sweden's IKEA has become one of the top furniture retailers in the

world in part through its ability to design and manufacture

inex-pensive furniture that doesn't seem cheap Another Scandinavian

company, Finland's Nokia, is credited with taking a little black blob

with tiny buttons and turning it into an object of desire Nokia was

the first to introduce user-changeable covers for cellphones, the

first to have elliptical-shaped, soft, and friendly forms, and the first

with big screens In the early 1990s, Nokia controlled only 12

per-cent of the global market for cell phones Today, it is the world

leader in handsets, with 38 percent of the market

With an increasingly visually oriented culture, translating brand

meaning and positioning through design is critical "In a crowded

marketplace," writes Virginia Postrel in The Substance of Style,

"aes-thetics is often the only way to make a product stand out." Design can shift consumer perceptions to make brand experiences more rewarding Consider the lengths Boeing went to to make its 777 air- plane seem roomier and more comfortable Raised center bins, side luggage bins, divider panels, gently arched ceilings, and raised seats make the aircraft interior seem bigger As one design engineer noted,

"If we do our jobs, people don't realize what we have done They just say they feel more comfortable."

Designers sometimes put a human face — literally—on their products The Porsche Boxster's bulges and curves can be seen as suggestive of muscle; the Apple iMac was thought by one designer to

be "a head stuck to a body via a long skinny arm"; and Microsoft's optical mouse can be seen as an outstretched hand When Frog Design set out to make a Disney cordless phone for kids, it wanted the design to live up to the famed Disney imagery After exhaustive

study, Frog defined the composite elements of a Disney character

and applied it to the phone The eyes were interpreted in terms of the LCD screen and were made as big as possible; the torso was inter- preted in terms of the housing of the phone and was S-shaped, with

a roundness in the top front and bottom back; and the feet were

interpreted in terms of the base and charger stand, which used

built-up plastic to emulate a sock pushed up around an ankle

A bad design can also ruin a product's prospects Sony's e-Villa Internet appliance was intended to allow consumers to have Internet access from their kitchens But at nearly 32 pounds and 16 inches, the mammoth product was so awkward and heavy that the owner's manual recommended customers bend their legs, not their back, to pick it up The product was eventually withdrawn after three months

Sources: A G Lafley, "Delivering Delight," Fast Company, June 2004, p 51; Frank Nuovo, "A Call for Fashion," Fast Company, June 2004, p 52; Bobbie

Gossage, "Strategies: Designing Success," Inc Magazine, May 2004, pp 27-29; Jim Hopkins, "When the Devil Is in the Design," USA Today, December

31, 2001, p 3B; J Lynn Lunsford and Daniel Michaels, "Masters of Illusion," Wall Street Journal, November 25, 2002, pp B1, B5; Jerome Kathman,

"Building Leadership Brands by Design," Brandweek, December 1, 2003, p 20; Bob Parks, "Deconstructing Cute," Business 2.0, December

2002/January 2003, pp 47-50; Lisa Margonelli, "How Ikea Designs Its Sexy Price Tags," Business 2.0, October 2002, pp 106-112

ness by promising to deliver concrete faster than pizza Cemex equips every truck with a

global positioning system (GPS) so that its real-time location is known and full

informa-tion is available to drivers and dispatchers Cemex is able to promise that if your load is

more than 10 minutes late, you get a 20 percent discount.15

INSTALLATION Installation refers to the work done to make a product operational in its

planned location Buyers of heavy equipment expect good installation service

Differentiating at this point in the consumption chain is particularly important for

compa-nies with complex products Ease of installation becomes a true selling point, especially

when the target market is technology novices For customers wishing to connect to the

Internet using a high-speed digital subscriber line (DSL), Pacific Bell developed installation

kits that included an interactive software setup program so customers could complete their

DSL setup in less than an hour.16

CUSTOMER TRAINING Customer training refers to training the customer's employees to

use the vendor's equipment properly and efficiently General Electric not only sells and

installs expensive X-ray equipment in hospitals; it also gives extensive training to users of

this equipment McDonald's requires its new franchisees to attend Hamburger University in

Oak Brook, Illinois, for two weeks, to learn how to manage the franchise properly

CUSTOMER CONSULTING Customer consulting refers to data, information systems, and advice services that the seller offers to buyers

- H E R M A N M I L L E R I N C

Herman Miller, a large office furniture company, has partnered with a California firm to show corporate clients how to get the full benefits out of its furnishings The firm, Future Industrial Technologies, specializes in work- place ergonomics training Working through Herman Miller's dealership network, customers can arrange two- hour training sessions for small groups of employees The sessions are run by some of the 1,200 physical ther- apists, occupational therapists, registered nurses, and chiropractors who work under contract to Future Industrial Technologies While customer ergonomics training results in only modest revenue gains for Herman Miller, the company feels that teaching healthy work habits creates higher levels of satisfaction for customers and sets Herman Miller products apart 17

MAINTENANCE AND REPAIR Maintenance and repair describes the service program for helping customers keep purchased products in good working order Hewlett-Packard offers online technical support, or "e-support," for its customers In the event of a service problem, customers can use various online tools to find a solution Those aware of the specific prob-lem can search an online database for fixes; those unaware can use diagnostic software that finds the problem and searches the online database for an automatic fix Customers can also seek online help from a technician.18

- B E S T B U Y

As consolidation and competitive pricing among electronics retailers continues, companies are increasingly looking for new ways to stand out in the crowd That's why Best Buy contracted with the Geek Squad, a small residential computer services company in its home market of Minnesota's twin cities, to revamp the chain's in-store computer repair services Previously, PCs were sent to regional repair facilities, a process that was time-consuming and ultimately contributed to a high degree of consumer dissatisfaction Now about half of all repairs are made in Best Buy stores But the real differentiator is the Geek Squad's ability

to make house calls (at a higher fee) Geek Squad house calls are called a "Beetle Roll" because of the squad's signature fleet of hip VW Beetles Geek Squad employees even dress differently for house calls— they wear a distinctive "geek" look as opposed to the traditional Best Buy blue they wear at the in-store ser- vice centers 19

Ill Product a n d Brand Relationships

Each product can be related to other 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 (using life insurance as an example):

1 Need family -The core need that underlies the existence of a product family Example:

security

2 Product family - All the product classes that can satisfy a core need with reasonable

effectiveness Example: savings and income

3 Product class -A group of products within the product family recognized as having a

certain functional coherence Also known as product category Example: financial instruments

SETTING PRODUCT STRATEGY CHAPTER 12 381

4 Product line -A group of products within a product class that are closely related because

they perform a similar function, are sold to the same customer groups, are marketed

through the same outlets or channels, or fall within given price ranges A product line

may be composed of different brands or a single family brand or individual brand that

has been line extended Example: life insurance

5 Product type - A group of items within a product line that share one of several possible

forms of the product Example: term life insurance

6 Item (also called stockkeeping unit or product variant) - A distinct unit within a brand

or product line distinguishable by size, price, appearance, or some other attribute

Example: Prudential renewable term life insurance

Product Systems and M i x e s

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

manner For example, PalmOne handheld and smartphone product lines come with

attachable products including headsets, cameras, keyboards, presentation projectors,

e-books, MP3 players, and voice recorders A product mix (also called a product

assort-ment) is the set of all products and items a particular seller offers for sale A product mix

consists of various product lines In General Electric's Consumer Appliance Division,

there are product-line managers for refrigerators, stoves, and washing machines NEC's

(Japan) product mix consists of communication products and computer products

Michelin has three product lines: tires, maps, and restaurant-rating services At

Northwestern University, there are separate academic deans for the medical school, law

school, business school, engineering school, music school,

speech school, journalism school, and liberal arts school

A company's product mix has a certain width, length, depth, and

consistency These concepts are illustrated in Table 12.1 for selected

Procter & Gamble consumer products

• The width of a product mix refers to how many different product

lines the company carries Table 12.1 shows a product-mix width of

five lines (In fact, P&G produces many additional lines.)

a The depth of a product mix refers to the total number of items in

the mix In Table 12.1, it is 20 We can also talk about the average

length of a line This is obtained by dividing the total length (here

20) by the number of lines (here 5), or an average product length

of 4

offered of each product in the line If Tide comes in two scents

(Mountain Spring and Regular), two formulations (liquid and

pow-der), and two additives (with or without bleach), Tide has a depth of

eight as there are eight distinct variants The average depth of P&G's

product mix can be calculated by averaging the number of variants

within the brand groups

v 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 goods that go through the

same distribution channels The lines are less consistent insofar as

they perform different functions for the buyers

These four product-mix dimensions permit the company to

expand its business in four ways It can add new product lines, thus

widening its product mix It can lengthen each product line It can

add more product variants to each product and deepen its product

mix Finally, a company can pursue more product-line consistency

To make these product and brand decisions, it is useful to conduct

product-line analysis

The PalmOne Zire 31 handheld Owners can select from more than 20,000 available applications and use the expansion slot to add more memory, applications, or MP3 tunes

T A B L E 1 2 1 Product-Mix Width and Product-Line Length for Procter & Gamble Products (including Dates of Introduction)

Detergents Toothpaste

Product-Mix Width Bar Soap

Disposable Diapers Paper Products

Ivory Snow (1930) Gleem (1952) Ivory (1879) Pampers (1961) Charmin (1928)

Product-Line Analysis

In offering a product line, companies normally develop a basic platform and modules that can be added to meet different customer requirements Car manufacturers build their cars around a basic platform Homebuilders show a model home to which additional features can be added This modular approach enables the company to offer variety while lowering production costs

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.20 They also need to understand each product line's market profile

SALES AND PROFITS Figure 12.3 shows a sales and profit report for a five-item product line The first item accounts for 50 percent of total sales and 30 percent of total profits The first two items account for 80 percent of total sales and 60 percent of total profits If these two items were suddenly hurt by a competitor, the line's sales and profitability could col-lapse These items must be carefully monitored and protected At the other end, the last item delivers only 5 percent of the product line's sales and profits The product-line manager may consider dropping this item unless it has strong growth potential

Every company's product portfolio contains products with different margins Supermarkets make almost no margin on bread and milk; reasonable margins on canned and frozen foods; and even better margins on flowers, ethnic food lines, and freshly baked goods A local telephone company makes different margins on its core telephone service, call waiting, caller ID, and voice mail

A company can classify its products into four types that yield different gross margins, depending on sales volume and promotion To illustrate with personal computers:

• Core product Basic computers that produce high sales volume and are heavily promoted

but with low margins because they are viewed as undifferentiated commodities

• Staples Items with lower sales volume and no promotion, such as faster CPUs or bigger

memories These yield a somewhat higher margin

m Specialties Items with lower sales volume but which might be highly promoted, such as

digital moviemaking equipment; or might generate income for services, such as personal delivery, installation, or on-site training

& Convenience items Peripheral items that sell in high volume but receive less promotion,

such as computer monitors, printers, upscale video or sound cards, and software Consumers tend to buy them where they buy the original equipment because it is more con-venient than making further shopping trips These items can carry higher margins

The main point is that companies should recognize that these items differ in their

poten-tial for being priced higher or advertised more as ways to increase their sales, margins,

or both.21

MARKET PROFILE The product-line manager must review how the line is positioned

against competitors' lines Consider paper company X with a paperboard product line.22

Two paperboard attributes are weight and finish quality Paper weight is usually offered at

standard levels of 90, 120, 150, and 180 weight Finish quality is offered at low, medium,

and high levels Figure 12.4 shows the location of the various product-line items of

com-pany X and four competitors, A, B, C, and D Competitor A sells two product items in the

extra-high weight class ranging from medium to low finish quality Competitor B sells four

items that vary in weight and finish quality Competitor C sells three items in which the

greater the weight, the greater the finish quality Competitor D sells three items, all

light-weight but varying in finish quality Company X offers three items that vary in light-weight and

finish quality

The product map shows which competitors' items are competing against company

X's items For example, company X's low-weight, medium-quality paper competes

against competitor D's and B's papers, but its high-weight, medium-quality paper has no

direct competitor The map also reveals possible locations for new items No

manufac-turer offers a high-weight, low-quality paper If company X estimates a strong unmet

demand and can produce and price this paper at low cost, it could consider adding this

item to its line

Another benefit of product mapping is that it identifies market segments Figure 12.4

shows the types of paper, by weight and quality, preferred by the general printing industry,

the point-of-purchase display industry, and the office supply industry The map shows that

FIG 12.3 I Product-item Contributions to a Product

Line's Total Sales and Profits

Medium

Low (90) Medium (120) High (150) Extra high (11

Paperweight

FIG 12.4 I Product Map for a Paper-Product Line

Source: Benson P Shapiro, Industrial Product Policy: Managing the Existing Product Line

(Cambridge, MA: Marketing Science Institute Report No 77-110)

company X is well positioned to serve the needs of the general printing industry but is less effective in serving the other two industries

Product-line analysis provides information for two key decision areas—product-line length and product-mix pricing

Product-Line Length

Company objectives influence product-line length One objective is to create a product line

to induce upselling: Thus General Motors would like to move customers up from the Chevrolet to the Buick to the Cadillac A different objective is to create a product line that facilitates cross-selling: Hewlett-Packard sells printers as well as computers Still another objective is to create a product line that protects against economic ups and downs; Electrolux offers white goods such as refrigerators, dishwashers, and vacuum cleaners under different brand names in the discount, middle-market, and premium segments, in part in case the economy moves up or down.23 Companies seeking high market share and market growth will generally carry longer product lines Companies that emphasize high profitabil-ity will carry shorter lines consisting of carefully chosen items

Product lines tend to lengthen over time Excess manufacturing capacity puts pressure on the product-line manager to develop new items The sales force and distributors also pressure the company for a more complete product line to satisfy customers But as items are added, costs rise: design and engineering costs, inventory-carrying costs, manufacturing-changeover costs, order-processing costs, transportation costs, and new-item promotional costs Eventually, some-one calls a halt: Top management may stop development because of insufficient funds or man-ufacturing capacity The controller may call for a study of money-losing items A pattern of prod-uct-line growth followed by massive pruning may repeat itself many times

A company lengthens its product line in two ways: by line stretching and line filling

LINE STRETCHING Every company's product line covers a certain part of the total possible range For example, BMW automobiles are located in the upper price range of the automo-

bile market Line stretching occurs when a company lengthens its product line beyond its

current range The company can stretch its line down-market, up-market, or both ways

D o w n - M a r k e t S t r e t c h A company positioned in the middle market may want

to introduce a lower-priced line for any of three reasons:

1 The company may notice strong growth opportunities as mass retailers such as Wal-Mart, Best Buy, and others attract a growing number of shoppers who want value-priced goods

2 The company may wish to tie up lower-end competitors who might otherwise try to move up-market If the company has been attacked by a low-end competitor, it often decides to counterattack by entering the low end of the market

3 The company may find that the middle market is stagnating or declining

A company faces a number of naming choices in deciding to move down-market Sony, for example, faced three choices:

1 Use the name Sony on all of its offerings (Sony did this.)

2 Introduce lower-priced offerings using a sub-brand name, such as Sony Value Line Other companies have done this, such as Gillette with Gillette Good News and Ramada Limited The risks are that the Sony name loses some of its quality image and that some Sony buyers might switch to the lower-priced offerings

3 Introduce the lower-priced offerings under a different name, without mentioning Sony; but Sony would have to spend a lot of money to build up the new brand name, and the mass merchants may not even accept a brand that lacks the Sony name

Moving down-market carries risks Kodak introduced Kodak Funtime film to counter lower-priced brands, but it did not price Kodak Funtime low enough to match the lower-priced film It also found some of its regular customers buying Funtime, so it was cannibal-izing its core brand It withdrew the product On the other hand, Mercedes successfully introduced its C-Class cars at $30,000 without injuring its ability to sell other Mercedes cars for $100,000 and up John Deere introduced a lower-priced line of lawn tractors called Sabre from John Deere while still selling its more expensive tractors under the John Deere name