Unit - I: Shaping the Market Offerings: Product Levels, Product Classifications,

Differentiation, Major product decisions; Product line and Product Mix, Packaging, Labeling,
Nature of Services, PLC – stages and strategies for different stages of PLC.; New product
development- planning and process; Failure of new products. Consumer adoption process &
Diffusion of Innovation. Pricing Decisions: Steps in Setting the Price, Adapting the Price.

Product – A product is anything that can be offered to a market to satisfy a want or need,
including physical goods, services, experiences, events, persons, places, properties,
organizations, information, and 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 customervalue hierarchy.
The fundamental level is the core benefit: the service or benefit the customer is really
buying. Marketers must see themselves as benefit providers.
At the second level, the marketer has to turn the core benefit into a basic product.
At the third level, the marketer prepares an expected product, a set of attributes and
conditions buyers normally expect when they purchase this product.
At the fourth level, the marketer prepares an augmented product that exceeds customer
expectations.
At the fifth level stands the potential product, which encompasses all the possible
augmentations 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 offering.

Product Classification
1 On the basis of durability / tangibility

a Nondurable goods are tangible goods normally consumed in one or a few uses. Because
these goods are 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.
b Durable goods are tangible goods that normally survive many uses: refrigerators and
clothing. Durable products normally require more personal selling and service, command a
higher margin, and require more seller guarantees.
c Services are intangible, inseparable, variable, and perishable products that normally require
more quality control, supplier credibility, and adaptability. Examples include haircuts, legal
advice, and appliance repairs.

2 On the basis of shopping habits

a Convenience goods - The consumer usually purchases convenience goods frequently,

immediately, and with minimal effort. Examples include soft drinks, soaps, and newspapers.
b Shopping goods - are those the consumer characteristically compares on such bases as
suitability, quality, price, and style. Examples include furniture, clothing, and major
appliances.
c Specialty goods - have unique characteristics or brand identification for which enough
buyers
are willing to make a special purchase effort. Examples include cars.
d Unsought goods - are those the consumer does not know about or normally thinks of
buying. Classic examples of known unsought goods are life insurance. Unsought goods
require advertising and personal-selling support.

Differentiation – To be branded the product must be differentiated. The different dimensions

for differentiation are
1 Form - Many products can be differentiated in form - the size, shape, or physical structure
of a product.
2 Features - Most products can be offered with varying features that supplement their 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.
3 Performance quality - Performance quality is the level at which the product’s primary
characteristics operate.
4 Conformance quality - Buyers expect a high conformance quality, the degree to which all
produced units are identical and meet promised specifications.
5 Durability - Durability, a measure of the product’s expected operating life under natural or
stressful conditions, is a valued attribute for vehicles, kitchen appliances, and other durable
goods.
6 Reliability - Reliability is a measure of the probability that a product will not malfunction
or fail within a specified time period.
7 Repairability - Repairability measures the ease of fixing a product when it malfunctions or
fails.
Style - Style describes the product’s look and feel to the buyer. It creates distinctiveness that
is hard to copy.
Product Mix - A product mix (also called product assortment) is the set of all products and
items that a particular seller offers for the sale.
Product Line – A group of products within a product mix that are closely related because
they perform a similar function, are marketed through same channels.
A company’s product mix has a certain width, length, depth, and consistency.
The width of a product mix refers to how many different product lines the company carries.
The length of a product mix refers to the total number of items in the mix. Also, the average
length of the line can be obtained by dividing the total length by the number of lines.
The depth of a product mix refers to how many variants are offered of each product in the
line.
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 – The product line analysis is done based on two factors.
1 Sales and profits - It is important to know the sales and profit of each item in the line to
determine which items to build, maintain, harvest, and divest.
2 Market Profile – It requires knowing how the line is positioned against competitors’ line
by drawing product map. Also, it reveals possible locations for new items.

Product-Line Decisions – Product line analysis provides information for two key decision
areas – product line length & product mix pricing.
Product-Line Length – It is influenced by the company objectives which can be
a to induce upselling
b to facilitate cross selling
c to protect against economic ups & downs.

A company strengthens its product line in two ways: by line stretching & line filling.
Line Stretching – occurs when a company lengthens its product line beyond its current
range. The company can stretch its line down-market, upmarket or both ways.
Down-market Stretch – When a company wants to introduce low-priced line due to strong
growth opportunities. A company faces a number of naming choices in deciding to move
down-market.
Upmarket Stretch – Company enters the high end of market for higher margins or to
position themselves as full line manufacturers.
Two-way stretch – Company serving middle market might decide to stretch their line in both
directions.

Line Filling - Adding more items within the present range to reach for incremental benefits,
trying to satisfy dealers who complain about missing items in the line & to keep out
competitors.
Line modernization, featuring & pruning
Modernization includes introducing more advanced versions of products to encourage
customer migration to higher valued items.
Featuring is selecting one or few items in the line to feature. eg. To feature a high - end item
to lend prestige to the product line.
Pruning is to review the line & prune the weak items through sales-cost analysis.

Product Mix pricing – Price setting logic must be modified when the product is the part of
the product mix. In this case the firm search for a set of prices that maximizes the profit on
total mix. There can be following situations involving product mix pricing.
a Product-Line pricing – In many lines of trades sellers use well-established price points for
the products in their line.
b Optional feature pricing – Many companies offer optional features and services along with
the product.
c Captive product pricing – Some products require the use of ancillary or captive products &
manufacturer can set higher mark ups for the captive products.
d Two-part pricing – Services often engage in two-part pricing, consisting of a fixed fee plus
a variable usage fee.
Packaging – All the activities of designing & producing the container for the product.

Factors behind growing importance of packaging:

1 Self-service - An increasing number of products are sold on a self-serve basis.
2 Consumer affluence - Rising affluence means consumers are willing to pay a little more for
the convenience, appearance, dependability, and prestige of better packages.
3 Company & brand image - Packages contribute to instant recognition of the company or
brand.

The objectives of packaging are as follows:

1 Identification of brand
2 Convey descriptive & persuasive information
3 Facilitate product transportation & protection
4 Assist at-home storage &
5 Aid product consumption.

Label is printed information, which is legally required, and it is in the form of text or
graphics that gives specific information about the product:
■ Date of manufacturing
■ Manufacturer’s name and address
■ Batch No. / Code No.
■ Expiry date
■ Pack size or quantity
■ Information on usage, application.
■ Contents or ingredients used.
■ Price or MRP (inclusive of taxes)
■ Statutory Warnings required for certain product categories.
 Services - Any activity, offered by one party to another, and essentially intangible, and
not resulting in ownership, is a service. For example, medical care, transportation, hotel
accommodation, consultancy, education etc. are all services.
Service - Goods Continuum - A Product is understood as an overall package of objects
or processes which provide some value to customers; whilst goods and services are
subcategories. There are four categories of offer:
● A pure tangible good e.g. salt, soap, pin, etc.
● A major tangible good with accompanying services
● A major service accompanied with minor good e.g. airlines, banking, etc.
● A pure service e.g. legal service, financial consultant, psychotherapy, etc.

Unique Characteristics of Services

● Intangibility – Unlike physical products, services cannot be seen, tasted, felt,
heard, or smelled before they are bought.
● Inseparability – Services are typically produced and consumed simultaneously. If
a person renders the service, then the provider is part of the service.
● Variability – Quality of service varies with people.
● Perishability – Services cannot be inventoried
Characteristics of Services Implications Marketing – related Tasks

Service products cannot be Customers may be turned Smooth demand through

inventoried away or have to wait promotions, dynamic
promotions & reservations

Intangible elements usually Harder to evaluate service & Make services tangible
dominate value creation distinguish it from through emphasis on physical
competitors clues

Customers may be involved in Customers interact with Develop user friendly facility
co-production provider’s facilities, which & train customers
may hurt productivity

People may be the part of Behavior of service personnel Recruit, train & reward
service experience shape customer satisfaction employees

Operational inputs & outputs Harder to maintain reliability Set quality standards, institute
tend to vary more widely good service recovery
procedures
Product Life Cycle
Each product has a life cycle & a typical product life cycle passes through the following four
stages.
1 Introduction – A period of slow sales growth as the product is introduced in the market.
Profits are non - existent because of the heavy expenses of the product introduction.
2 Growth – A period of rapid market acceptance & substantial profit improvement.
3 Maturity – A slowdown in sales growth because the product has achieved acceptance by
most potential buyers. Profits stabilize or decline because of increased competition.
4 Decline – Sales show a downward drift & profits erode.

PLC – Introduction Stage

■ A new type of product or a modified product, which has few competitors enters the
market.
■ Initial costs are high, and profits are low, since sales are just building.
■ Target market mainly comprises the innovators.
■ Marketing objective – to increase consumer awareness & induce trials.
■ The product offered is the basic model.
■ Promotion is aimed at providing information and building awareness.
■ Distribution depends on the product category and target segment

PLC – Growth Stage

■ Sales start climbing up and profits start increasing
■ Consumer trials pick up and the product gains wider acceptance.
■ Early adopters and early majority are the major customer categories.
■ Marketing objective – to expand distribution and increase market shares.
■ The product mix is widened with extensions at this time to accommodate the growing
market.
■ Distribution becomes intensive.
■ Price becomes competitive and aims at penetrating the maximum market.
PLC – Maturity Stage
■ A product matures when it becomes a familiar offering.
■ The consumer base is large and has early majority as well as late majority categories.
■ Sales growth plateaus and profits begin to stabilize as a peak has been achieved.
■ Cost per customer is low.
■ Competition is high.
■ Marketing objective – to defend market shares and combat competition.
■ Product typically stresses brand differences and benefits. Product mix is further
expanded.
■ Promotion is competitive & reminder.
■ Price is competitive.

PLC – Decline Stage

■ Profits and product sales fall as technologically superior substitutes enter the market,
or the customers’ needs change.
■ Consumer base reduces and may include few laggards.
■ Competition reduces.
■ Marketing objectives – to cut marketing costs; revise brand; modify product mix;
reposition the brand; or terminate the brand.
■ Product mix is phased out or contracted or renewed.
■ Promotion is aimed at liquidating available stocks.
■ Distribution is selective and limited.
■ Prices are cut to liquidate stocks.
New product development- planning and process
The new product development process consists of the following stages.
1. Idea generation
2. Idea screening
3. Concept development and testing
4. Marketing strategy development
5. Business analysis
6. Product development
7. Market testing
8. Commercialization

Generating Ideas
The new-product development process starts with the search for ideas. New-product ideas
can come from interacting with various groups and from using creativity generating
techniques. Employees can be a source of ideas for improving production, products, and
services. Encouraged by the open innovation movement, many firms are increasingly going
outside the
company to tap external sources of new ideas, including customers, scientists, competitors,
employees, channel members, and top management.

Idea Screening
The purpose of screening is to drop poor ideas as early as possible. The rationale is that
product-development costs rise substantially with each successive development stage. The
executive committee reviews each idea against a set of criteria. Does the product meet a
need? Would it offer superior value? Can it be distinctively advertised? Does the company
have the necessary know-how and capital? Will the new product deliver the expected sales
volume, sales growth, and profit?

Concept Development and Testing

Concept development
A product idea can be turned into several concepts. The first question is: who will use this
product? Second, what primary benefit should this product provide? By answering these
questions, a company can form several concepts.
Concept Testing
Concept testing involves presenting the product concept to target consumers, and getting their
reactions. The concepts can be presented symbolically or physically. Visualization techniques
can help respondents match their mental state with what might occur when they are
evaluating or choosing the new product.

Marketing Strategy Development

Following a successful concept test, the new-product manager will develop a preliminary
strategy plan for introducing the new product into the market. The plan consists of three
parts. The first part describes the target market’s size, structure, and behavior; the planned
product positioning; and the sales, market share, and profit goals sought in the first few years.
The second part outlines the planned price, distribution strategy, and marketing budget for the
first year.
The third part of the marketing-strategy plan describes the long-run sales and profit goals,
and marketing-mix strategy over time.
Business Analysis
After management develops the product concept and marketing strategy, it can evaluate the
proposal’s business attractiveness. Management needs to prepare sales, cost, and profit
projections to determine whether they satisfy company objectives.

Product Development
The job of translating target customer requirements into a working prototype is helped by a
set of methods known as quality function deployment (QFD). The methodology takes the list
of desired customer attributes (CAs) generated by market research and turns them into a list
of engineering attributes (EAs) that the engineers can use.

Market Testing
After management is satisfied with functional and psychological performance, the product is
ready to be dressed up with a brand name and packaging and go into a market test.

Commercialization
Commercialization incurs the company’s highest costs to date. The firm will need to contract
for manufacture, or it may build or rent a full-scale manufacturing facility. Most new-product
campaigns also require a sequenced mix of market communication tools to build awareness,
preference, choice, and loyalty.

New-Product Failure
New products may fail for many reasons: ignoring or misinterpreting market research;
overestimating market size; high development costs; poor design; incorrect positioning,
ineffective advertising or wrong price; insufficient distribution support; and inadequate return
on investment or payback.
Consumer Adoption process & Diffusion of Innovation

Diffusion of innovation is the macro process by which the acceptance of an innovation (i.e.,
a new product, new service, new idea, or new practice) takes place among members of a
social system (or market segments), over time. This process includes four elements:
1. The Innovation: new product, model, or service.
2. The Channels of Communication: informal or formal, impersonal or personal.
3. The social system: a market segment.
4. Time.

In contrast, the innovation adoption process is a micro process that focuses on the stages
through which an individual consumer passes when deciding to accept or reject a new
product.

Types of Innovations
The definition of what is a “new product” varies among product developers and marketing
strategists. Many marketers maintain that new products should be classified into three
categories reflecting the extent to which they require consumers to change existing
consumption behaviour or buying patterns.
1. A continuous innovation has the least disruptive influence on established behaviour. It
involves the introduction of a modified product rather than a totally new product. Examples
include the latest version of Microsoft Office.
2. A dynamically continuous innovation is somewhat more disruptive than a continuous
innovation but still does not alter established behaviour. It may involve the creation of a new
product or the modification of an existing product. Examples include MP3 players and USB
flash drives.
3. A discontinuous innovation requires consumers to adopt new behaviour. Examples
include TVs, fax machines, PCs and the Internet.

Product characteristics that influence diffusion

1 Relative advantage – the degree to which potential consumers perceive a new product as
superior to existing substitutes.
2 Compatibility – The degree to which potential consumers feel a new product is consistent
with their present needs, values and practices is a measure of its compatibility.
3 Complexity – the degree to which a new product is difficult to understand or use. The
complexity of the product may act as a barrier to diffusion.
4 Trialability – it refers to the degree to which a new product is capable of being tried on a
limited basis.
5 Observability – is the ease with which a product’s benefits can be observed, imagined or
described to potential consumers.
The Adoption Process
The innovation adoption process consists of five stages through which potential consumers
pass in attempting to arrive at a decision to try or not to try a new product. The five stages
are:
1. Awareness: The consumer becomes aware that an innovation exists.
2. Interest: The consumer becomes interested in the innovative product or service.
3. Evaluation: The consumer undertakes a “mental trial” of the innovation.
4. Trial: The consumer tries the innovation.
5. Adoption: If satisfied, the consumer decides to use the innovation repeatedly.
Pricing - Price is the monetary value set to acquire a product and its accompanying services.
Price determines the company’s market share and profitability. The only element in the
marketing mix that can be changed faster than other elements, in response to changes in the
environment.
Procedure for setting pricing policy

1 Selecting the pricing objective – The company first decides where it wants to position its
offering.
a Survival – if the company is plagued with intense competition or changing consumer
wants.
b Maximum current profit – The company estimates the demand & costs associated with
alternate prices & chooses the price that produces maximum current profit.
c Maximum market share – The company sets the price to penetrate the market.
d Maximum market skimming – The company starts with high prices which are slowly
lowered over time.
e Product – quality leadership – The company strives to provide affordable luxuries.

2 Determining demand – Each price will lead to a different level of demand and therefore,
have a different impact on a company’s marketing objectives.

3 Estimating Costs – Demands set a ceiling on the price & costs set the floor.

4 Analyzing competitors’ costs, prices & offers – Within the range of possible prices
determined by market demand & company costs, the firm must take competitor’s costs,
prices & possible price reactions into account.

5 Selecting a pricing method

a Markup pricing – to add a standard markup to the product’s cost.
b Target return pricing – The firm determines the price that would yield its target rate of
return on investment.
c Perceived value pricing – The price is based on the customer’s perceived value. They use
the other marketing mix elements, such as advertising & sales force, to communicate &
enhance perceived value in buyer’s mind.
d Value pricing – The company charges a low price for a high-quality offering.
e Going rate pricing – The firm bases its price largely on the competitor’s price and may
charge the same, more or less than the major competitors.
f Auction type pricing – It is becoming more popular with the growth of the internet.

6 Selecting the final price – Pricing methods narrow the range & in selecting the final price
the company must consider the following additional factors.
a Impact of other marketing activities
b Company pricing policies
c Impact of price on other parties
Price-adaptation strategies
1 Geographical pricing – In geographical pricing the company decides how to price its
products for different customers in different locations and countries.
2 Price discounts & allowances – These can be given as cash discount, quantity discount,
functional discount, seasonal discount & allowance.
3 Promotional pricing – Companies can use several pricing techniques to stimulate early
purchase:
a Loss-leader pricing b Special event pricing
c Cash rebates d Low interest financing
e Longer payment terms f Warranties & service contracts
4 Differentiated pricing – Price discrimination occurs when a company sells a product or
service at two or more prices that do not reflect proportional difference in costs.
a Customer segment pricing b Product form pricing
c Channel pricing d Location pricing
e Time pricing f Image pricing

Initiating price changes - A company initiate price cut due to

1 excess plant capacity
2 drive to dominate the market through lower costs.
A company may initiate price increases due to
1 cost inflation
2 over demand
Responding to competitors’ price changes
1 Maintain price
2 Maintain price & add value
3 Reduce price
4 Increase price and improve quality
5 Launch a low-price fighter line