Marketing Structure of Lecture 1 Importance of

Marketing

Structure of Lecture 1. Importance of marketing to NPD 2. Strategic marketing frameworks 3. Marketing launch tools: 4 Ps

R&D Based Versus Marketing R&D Based Ideas Marketing Based 100% 22% 100% 25% 100% 31% 34% 69% 66% 90% 78% Materials Computers, railway, housing 75% Instruments Winners of British the Industrial innovators Research Award 100% 5% 34% 61% Weapons systems 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 13 79 $12. 6 m 57 100 Total 100% = Industrial Chemicals 100 $4. 7 m

Marketing Mix: The 4 Ps Place Promotion The Marketing Mix Price Product

Product Place • Definition • PLC • Physical products Promotion versus services The 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 4 Ps by Industry – examples of promotions Consumer Goods Industrial Goods High Advertising Personal Selling 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 Low 0% 0. 1 x Low 1 x High Relative Market Share 10 x

Product Life Cycle

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

Product Life Cycle Traditional With Variations Growth, Slump, Maturity Introduction Growth Maturity Decline Sales Cycle II Cycle recycle Scalloped Time Fashion 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 Marketing Implication Intangibility Difficult for customers ‘Tangibalise’ the product e. g. to compare services 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 Gross margin 40 41 Sales and marketing 15 R&D 2 2 General & Admin 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 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 p 1 p 2 q 1 q 2 q 1 Q q 2 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% Preparation Promotion period 5% 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 p 342

Adopter Categorisation

Characteristics By Adopter Group Innovator Early adopter Willing to try new Characteristics ideas at some risk Ideas adopted early as sign to others Type of individual Technofreak(? ) Youngish 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 Description/ Rationale Relative advantage 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 • 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 Introduction Promotion 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