NEW PRODUCT DEVELOPMENT AND PRICE

PGBS0142

Dr. Victoria Hurth

• Marketing Co-ordinator 3M Commercial Graphics• Accenture Management Consultant

Retail Marketing: M&S, Sainsbury’s, Littlewoods, Imperial Cancer

• Masters of Environment and Development, South Africa

• PhD Exeter University – sustainable lifestyles of high- income households

• CAFOD sustainability co-ordinator volunteer SW

• Committee on British Standard in Sustainable Communities

• Fellow of LEAD (Leadership for Environment and Development)

• British Council Climate Advocate

Me:

SESSION OUTLINE

• New product development• Why it is important• The process involved

• Price• Identify the meaning of price• Examine the role of price within the marketing mix• To consider the link of price to profit• Explore the internal organisational forces that

influence pricing decisions• Understand the external factors that influence

pricing decisions

NEW PRODUCT DEVELOPMENT

BOSTON CONSULTING GROUP MATRIX

? STARS

• Build sales and market share• Invest to maintain position• Repel competitors

CASH COWS

• Hold sales and market share• Defend position• Use cash to support stars, selected ?’s and NPD

QUESTION MARKS

• Build selectively• Focus on defendable niche for dominance• Harvest / divest the rest

DOGS

• Harvest or• Divest or• Focus on defendable niche

Relative market share

Mark

et

gro

wth

rate

High

Hig

h

Low

Low

WHY IS NPD IMPORTANT?

• To keep product portfolios fresh, customers interested and sales growing

• To maintain competitive advantage

• To meet the customer’s needs

• To reflect an innovative organisation

HOW ‘NEW’ IS A NEW PRODUCT?

• New to the company, new to the market (c.10% of NPD)

• New to the company, significant innovation for the market

• New to the company, minor innovation for the market

•New to the company, no innovation for the market

ANSOFF MATRIX

Existing New

Existing

New

Products

Markets

MarketPenetration

ProductDevelopment

MarketDevelopment

Diversification

NPD PROCESS

1. IDEA GENERATION

• New-product development starts with idea generation, the systematic search for new product ideas.

• Sources of New ideas

• Internal Sources• Customers• Competitors• Distributors• Other Sources

http://www.youtube.com/watch?v=MKuwkTTPI5E

RESEARCH AND DEVELOPMENT

• Essential to be first or early to market with new products

• Significant and ongoing investment with funds

• UK R&D intensity (2004) was 2.3% compared with international average of 4.2%

WAYS OF ORGANISING R&D

• Outsourcing

• Collaboration

• In-house

2. IDEA SCREENING

• The purpose of this and the succeeding stages is to reduce the number of ideas. The purpose of screening is to spot good ideas and drop poor ones as soon as possible.

• Product development costs rise greatly in later stages.

• The company wants to go ahead only with the product ideas that will turn into profitable products.

3. CONCEPT TESTING

• Process of testing product concepts with a group of target customers

4. BUSINESS ANALYSIS

• Business analysis involves a review of the sales, costs and profit projections to find out whether they satisfy the company’s objectives. If they do, the product can move to the product-development stage.

5. PRODUCT DEVELOPMENT

• Here, R&D or engineering develops the product concept into a physical product. So far, the product has existed only as a word description, a drawing or perhaps a crude mock-up.

• The product-development step, however, now calls for a large jump in investment. It will show whether the product idea can be turned into a workable product.

6. TEST MARKETING

• If the product passes functional and consumer tests, the next step is test marketing.

• Test marketing is the stage at which the product and marketing program are introduced into more realistic market settings.

TEST MARKETING APPROACHES

• Simulated test markets– Companies can also test new products in a simulated

shopping environment. – The company or research firm shows a sample of

consumers the ads and promotions for a variety of products, including the new product being tested.

• Controlled test markets– Several research firms keep controlled panels of

stores that have agreed to carry new products often for a fee.

7. COMMERCIALISATION

• Introducing a new product into the market

• The company launching a new product must make four decisions:• When • Where • To whom • How

• Immediate national/intenational launch or rolling launch

8. MONITORING AND EVALUATION

• Due consideration at each stage? Right people? Time and resources? Analysis and decision-making?

• Comparing forecast performance with actual performance

NEW PRODUCT FAILURE

Outright failure & partial failure

• Insufficient differentiation (i.e. ‘me too’ product)

• Poor/inconsistent product quality

• No access to market

• Poor timing (launching too early or too late)

• Poor marketing

WHY NEW PRODUCTS FAIL

http://www.youtube.com/watch?v=S8tEuKA1kCM

http://www.youtube.com/watch?v=22gp69bNk

DASANI AND BOTTLED WATER

Please read the case study

1. What kind of new product was Dasani? In general, what are the advantages and disadvantages of this kind of new product? Why do you think Coca-Cola chose to go down this route?

2. At what stage in the new product development process did it all go wrong for Dasani? What could Coca-Cola have done to prevent this?

3. Was Coca-Cola right to withdraw Dasani from the UK market completely? Was Coca-Cola right to cancel the French & German launches?

4. Assess Coca-Cola’s decision to re-enter the UK market with Powerade Aqua+ rather than with a re-launch of Dasani?

5. What are the key lessons about new product development that any fmcg company could learn from this case?

Where should companies abstain from certain markets?http://www.youtube.com/watch?v=Se12y9hSOM0

PRICE

WHAT IS PRICE?

• The amount of money charged for a product or service

Or

• Any common currency of value to both buyer and seller

WHAT PRICE MEANS TO THE CUSTOMER

• Functional benefits – fulfil desired function

• Quality – expect price to reflect quality

• Operational – product’s ability to influence production process

• Financial – expected return on investment

• Personal – price measured against intangible measures of status, comfort, self-image

WHAT PRICE MEANS TO THE SELLER

• Only ‘P’ that directly generates income for the seller in the Marketing Mix

• Profit = Total revenue – Total cost

• Must think of price from the perspective of the customer

• Cost might be greater than the price

• Outweigh costs and benefits of high/low price

EXTERNAL INFLUENCES ON PRICING STRATEGY

Pricing decision

Demand & price

elasticity

Competitors

Channels of

distribution

Legal & regulatory

Customers &

consumers

EXTERNAL INFLUENCES ON PRICING STRATEGY

1. Customers and consumers

• Must take into account the feelings and sensitivities of the end buyer

• Different segments react differently

• Perception is important (e.g. better than competing products).

• Brand loyalty

2. Demand and price elasticity

• Demand must be estimated

• Changes in price will be reflected in nature and size of potential demand

• Demand curve (can be influenced by other factors such as changing consumer tastes/ needs)

EXTERNAL INFLUENCES ON PRICING STRATEGY

3. Channels of distribution

• Needs and expectations of the other members of the distribution chain

• These members will all have desired levels of profit margins

• All these costs add to the final costs and take the total nearer to the consumers’ upper limit

EXTERNAL INFLUENCES ON PRICING STRATEGY

4. Competitors

• The level and intensity of competition must be taken into account

• The influence of competition on price will depend upon the nature of the product and the number and size of competitors in the market

• Monopoly, oligopoly, monopolistic and perfect competition

EXTERNAL INFLUENCES ON PRICING STRATEGY

5. Legal & regulatory framework

• Pricing policies can be carefully scrutinised by the government to ensure that it is within public interest

• EU and national pricing regulations

EXTERNAL INFLUENCES ON PRICING STRATEGY

Pricing decisions

Organisational objectives

Costs

Marketing objectives

INTERNAL INFLUENCES ON PRICING STRATEGY

• 1. Organisational objectives – marketing plans and objectives, including price, must be set to satisfy customer needs as well as reflect aspirations of the organisation

• 2. Marketing objectives – close focus on specific target markets and position desired within them

• 3. Costs – the minimum a product can be sold for without making a loss. Requirements for surplus to fund investment etc.

INTERNAL INFLUENCES ON PRICING STRATEGY

Pricing objectives

Pricing policies & strategies

Setting the price

range

Pricing tactics &

adjustments

Demand assessmen

t

THE PROCESS OF PRICE SETTING

1. Pricing objectives

• Financial objectivesShort term and/or long term. E.g. day-to-day cash flow vs. reinvestment in future research

• Sales and marketing objectivesTarget market share, relative position within the market and target volume sales

THE PROCESS OF PRICE SETTING

2. Demand assessment

• Assess the likely levels of demand for a product at any given price

• Involves a great deal of managerial skill in defining and exploring various scenarios along with other elements of price setting

THE PROCESS OF PRICE SETTING

3. Pricing policies and strategies

New product pricing strategies

1.Price skimming – prices are set high to attract the least sensitive market segments

2.Penetration pricing – an attempt to gain as big a market share as possible in the shortest possible time

THE PROCESS OF PRICE SETTING

4. Setting the price range3 main pricing methods1. Cost-based2. Demand-based3. Competition-based

General principles of cost-volume-profit4. Fixed costs5. Variable costs6. Marginal costs7. Total cost

THE PROCESS OF PRICE SETTING

COST-BASED PRICING

• Mark-up Starts with price to supplier and then adds a % to reach retail price to the customer

• Cost-plus pricingAdds fixed % to production costs

• Experience curve pricingExperience and learning leading to efficiency and thereby cost savings

DEMAND-BASED PRICING

• Outward focus on customers and their responsiveness to different price levels

• Psychological pricing • Prestige pricing• Odd-even pricing• Bundle pricing

COMPETITION-BASED PRICING

• Structure of the marketThe number of competitors in the market

• Perceived value in the marketThe more differentiated the product is from competition, the more autonomy the company has in pricing it

5. Pricing tactics & adjustments

• Price structuresGuidelines to the sales reps to help in negotiating a final price

• Special adjustmentsCan be made either for short-term promotional purposes or as a regular deal to reward a trade customer

THE PROCESS OF PRICE SETTING

THINK ABOUT…

• The costs and pricing strategies at each stage of the PLC

• Examples for price skimming and price penetration situations

• The problems a multinational company would face in marketing to a less developed country