Marketing Principles PDF

The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Products, Services, and Brands Building Customer Value What Is a Product? We define a product as anything that can be offered to a...

The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Products, Services, and Brands Building Customer Value What Is a Product? We define a product as anything that can be offered to a market for attention, acquisition, use, or consumption that might satisfy a want or need. Products include more than just tangible objects, such as cars, computers, or mobile phones. Broadly defined, products also include services, events, persons, places, organizations, and ideas, or a mixture of these. Throughout this text, we use the term product broadly to include any or all of these entities. Thus, an Apple iPhone, a Toyota Camry, and a Caffé Mocha at Starbucks are products. But so are a trip to Las Vegas, Schwab online investment services, your Facebook page, and advice from your family doctor. Because of their importance in the world economy, we give special attention to services. Services are a form of product that consists of activities, benefits, or satisfactions offered for sale that are essentially intangible and do not result in the ownership of anything. Examples include banking, hotel, airline travel, retail, wireless communication, and homerepair services. We will look at services more closely later in this chapter. Products, Services, and Experiences Products are a key element in the overall market offering. Marketing mix planning begins with building an offering that brings value to target customers. This offering becomes the basis on which the company builds profitable customer relationships. A company’s market offering often includes both tangible goods and services. At one extreme, the market offer may consist of a pure tangible good, such as soap, toothpaste, or salt; no services accompany the product. At the other extreme are pure services, for which the market offer consists primarily of a service. Examples include a doctor’s exam and financial services. Between these two extremes, however, many goods-and-services combinations are possible. Today, as products and services become more commoditized, many companies are moving to a new level in creating value for their customers. To differentiate their offers, beyond simply making products and delivering services, they are creating and managing customer experiences with their brands or companies. Experiences have always been an important part of marketing for some companies. Disney has long manufactured dreams and memories through its movies and theme parks—it wants theme park cast members to deliver a thousand “small wows” to every customer. And Nike has long declared, “It’s not so much the shoes but where they take you.” Today, however, all kinds of firms are recasting their traditional goods and services to create experiences. For example, Verizon’s newly redesigned Smart Stores don’t just sellphones. They create lifestyle experiences that encourage customers to visit more often, hang around, and experience the wonders of mobile technology. Levels of Product and Services Product planners need to think about products and services on three levels (see Figure 8.1). Each level adds more customer value. The most basic level is the core customer value, which addresses the question: What is the buyer really buying? When designing products, marketers must first define the core, problem-solving benefits or services that consumers seek. A woman buying lipstick buys more than lip color. Charles Revson of Revlon saw this early: “In the factory, we make cosmetics; in the store, we sell hope.” And people who buy an Apple iPad are buying much more than just a tablet computer. They are buying entertainment, self-expression, productivity, and connectivity with friends and family—a mobile and personal window to the world. At the second level, product planners must turn the core benefit into an actual product. They need to develop product and service features, a design, a quality level, a brand name, and packaging. For example, the iPad is an actual product. Its name, parts, styling, operating system, features, packaging, and other attributes have all been carefully combined to deliver the core customer value of staying connected. Finally, product planners must build an augmented product around the core benefit and actual product by offering additional consumer services and benefits. The iPad is more than just a digital device. It provides consumers with a complete connectivity solution. Thus, when consumers buy an iPad, Apple and its resellers also might give buyers a warranty on parts and workmanship, quick repair services when needed, and a Web site to use if they have problems or questions. Apple also provides access to a huge assortment of apps and accessories, along with an iCloud service that integrates buyers’ photos, music, documents, apps, calendars, contacts, and other content across all of their devices from any location. Consumers see products as complex bundles of benefits that satisfy their needs. When developing products, marketers first must identify the core customer value that consumers seek from the product. They must then design the actual product and find ways to augment it to create customer value and a full and satisfying brand experience. Product and Service Classifications Products and services fall into two broad classes based on the types of consumers who use them: consumer products and industrial products. Broadly defined, products also include other marketable entities such as experiences, organizations, persons, places, and ideas. Consumer Products The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Consumer products are products and services bought by final consumers for personal consumption. Marketers usually classify these products and services further based on how consumers go about buying them. Consumer products include convenience products, shopping products, specialty products, and unsought products. These products differ in the ways consumers buy them and, therefore, in how they are marketed (see Table 8.1). Convenience products are consumer products and services that customers usually buy frequently, immediately, and with minimal comparison and buying effort. Examples include laundry detergent, candy, magazines, and fast food. Convenience products are usually low priced, and marketers place them in many locations to make them readily available when customers need or want them. Shopping products are less frequently purchased consumer products and services that customers compare carefully on suitability, quality, price, and style. When buying shopping products and services, consumers spend much time and effort in gathering information and making comparisons. Examples include furniture, clothing, major appliances, and hotel services. Shopping product marketers usually distribute their products through fewer outlets but provide deeper sales support to help customers in their comparison efforts. Specialty products are consumer products and services with unique characteristics or brand identifications for which a significant group of buyers is willing to make a special purchase effort. Examples include specific brands of cars, high-priced photography equipment, designer clothes, gourmet foods, and the services of medical or legal specialists. A Lamborghini automobile, for example, is a specialty product because buyers are usually willing to travel great distances to buy one. Buyers normally do not compare specialty products. They invest only the time needed to reach dealers carrying the wanted products. Unsought products are consumer products that the consumer either does not know about or knows about but does not normally consider buying. Most major new innovations are unsought until the consumer becomes aware of them through advertising. Classic examples of known but unsought products and services are life insurance, preplanned funeral services, and blood donations to the Red Cross. By their very nature, unsought products require a lot of advertising, personal selling, and other marketing efforts. Industrial Products Industrial products are those products purchased for further processing or for use in conducting a business. Thus, the distinction between a consumer product and an industrial product is based on the purpose for which the product is purchased. If a consumer buys a lawn mower for use around home, the lawn mower is a consumer product. If the same consumer buys the same lawn mower for use in a landscaping business, the lawn mower is an industrial product. The three groups of industrial products and services are materials and parts, capital items, and supplies and services. Materials and parts include raw materials as well as manufactured materials and parts. Raw materials consist of farm products (wheat, cotton, livestock, fruits, vegetables) and natural products (fish, lumber, crude petroleum, iron ore). Manufactured materials and parts consist of component materials (iron, yarn, cement, wires) and component parts (small motors, tires, castings). Most manufactured materials and parts are sold directly to industrial users. Price and service are the major marketing factors; branding and advertising tend to be less important. Capital items are industrial products that aid in the buyer’s production or operations, including installations and accessory equipment. Installations consist of major purchases such as buildings (factories, offices) and fixed equipment (generators, drill presses, large computer systems, elevators). Accessory equipment includes portable factory equipment and tools (hand tools, lift trucks) and office equipment (computers, fax machines, desks). These types of equipment have shorter lives than do installations and simply aid in the production process. The final group of industrial products is supplies and services. Supplies include operating supplies (lubricants, coal, paper, pencils) and repair and maintenance items (paint, nails, brooms). Supplies are the convenience products of the industrial field because they are usually purchased with a minimum of effort or comparison. Business services include maintenance and repair services (window cleaning, computer repair) and business advisory services (legal, management consulting, advertising). Such services are usually supplied under contract. Organizations, Persons, Places, and Ideas In addition to tangible products and services, marketers have broadened the concept of a product to include other market offerings: organizations, persons, places, and ideas. Organizations often carry out activities to “sell” the organization itself. Organization marketing consists of activities undertaken to create, maintain, or change the attitudes and behavior of target consumers toward an organization. Both profit and not-for- profit organizations practice organization marketing. Business firms sponsor public relations or corporate image marketing campaigns to market themselves and polish their images. For example, Kaiser Permanente’s long-running “Thrive” campaign markets the health maintenance organization (HMO) not just as a health-care company, but as a total health advocate. Whereas “competitors [stand] for health care,” says the company, “Kaiser Permanente [stands] for health.” The awardwinning “Thrive” campaign promotes prevention and wellness through healthy lifestyles that will help Kaiser Permanente members and their families get healthy, stay healthy, and thrive. Some ads show people exercising or focus on healthy eating choices (“I scream, You scream. We all scream for green beans.”). Another ad shows a determined, trim, and fit young girl who declares, “I will not be part of Generation XXL.” Still other ads show how Kaiser Permanente accomplishes major health-care breakthroughs behind the scenes so that its members can thrive and enjoy the everyday moments of their lives to the fullest. People can also be thought of as products. Person marketing consists of activities undertaken to create, maintain, or change attitudes or behavior toward particular people. People ranging from presidents, entertainers, and sports figures to professionals such as doctors, lawyers, and architects use person marketing to build their reputations. And businesses, charities, and other organizations use well-known personalities to help sell their products or causes. For example, P&G’s Cover Girl brand is represented by well-known celebrities such as Ellen DeGeneres, P!nk, and Sofia Vergara. The skillful use of marketing can The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. turn a person’s name into a powerhouse brand. For example, The Food Network’s celebrity chef Rachael Ray is a one-woman marketing phenomenon, with her own daytime talk show, cookware and cutlery brands, dog food brand (Nutrish), and even her own brand of EVOO (extra virgin olive oil, for those not familiar with Rayisms). Place marketing involves activities undertaken to create, maintain, or change attitude or behavior toward particular places. Cities, states, regions, and even entire nations compete to attract tourists, new residents, conventions, and company offices and factories. The New Orleans city Web site shouts “Go NOLA” and markets annual events such as Mardi Gras festivities and the New Orleans Jazz and Heritage Festival. Michigan invites visitors to experience Pure Michigan: unspoiled nature, lakes that feel like oceans, miles of cherry orchards, glorious sunsets, and nighttime skies scattered with stars. And Brand USA, a public– private marketing partnership created by a recent act of Congress, promotes the United States as a tourist destination to international travelers. Its mission is to “represent the true greatness of America—from sea to shining sea” through country- by-country ads and promotions and a DiscoverAmerica.com Web site that features destinations, U.S. travel information and tips, and travel planning tools. Ideas can also be marketed. In one sense, all marketing is the marketing of an idea, whether it is the general idea of brushing your teeth or the specific idea that Crest toothpastes create “healthy, beautiful smiles for life.” Here, however, we narrow our focus to the marketing of social ideas. This area has been called social marketing and consists of using traditional business marketing concepts and tools to create behaviors that will create individual and societal well-being. Social marketing programs cover a wide range of issues. The Ad Council of America (www.adcouncil.org), for example, has developed dozens of social advertising campaigns involving issues ranging from health care, education, and environmental sustainability to human rights and personal safety. But social marketing involves much more than just advertising. It involves a broad range of marketing strategies and marketing mix tools designed to bring about beneficial social change. Product and Service Decisions Marketers make product and service decisions at three levels: individual product decisions, product line decisions, and product mix decisions. We discuss each in turn. Individual Product and Service Decisions Figure 8.2 shows the important decisions in the development and marketing of individual products and services. We will focus on decisions about product attributes, branding, packaging, labeling, and product support services. Product and Service Attributes Developing a product or service involves defining the benefits that it will offer. These benefits are communicated and delivered by product attributes such as quality, features, and style and design. Product Quality. Product quality is one of the marketer’s major positioning tools. Quality affects product or service performance; thus, it is closely linked to customer value and satisfaction. In the narrowest sense, quality can be defined as “no defects.” But most marketers go beyond this narrow definition. Instead, they define quality in terms of creating customer value and satisfaction. The American Society for Quality defines quality as the characteristics of a product or service that bear on its ability to satisfy stated or implied customer needs. Similarly, Siemens defines quality this way: “Quality is when our customers come back and our products don’t.” Total quality management (TQM) is an approach in which all of the company’s people are involved in constantly improving the quality of products, services, and business processes. For most top companies, customer-driven quality has become a way of doing business. Today, companies are taking a return-on-quality approach, viewing quality as an investment and holding quality efforts accountable for bottom-line results. Product quality has two dimensions: level and consistency. In developing a product, the marketer must first choose a quality level that will support the product’s positioning. Here, product quality means performance quality—the product’s ability to perform its functions. Beyond quality level, high quality also can mean high levels of quality consistency. Here, product quality means conformance quality—freedom from defects and consistency in delivering a targeted level of performance. All companies should strive for high levels of conformance quality. In this sense, a Chevrolet can have just as much quality as a Rolls-Royce. Although a Chevy doesn’t perform at the same level as a Rolls- Royce, it can just as consistently deliver the quality that customers pay for and expect. Product Features. A product can be offered with varying features. A stripped-down model, one without any extras, is the starting point. The company can then create higher-level models by adding more features. Features are a competitive tool for differentiating the company’s product from competitors’ products. Being the first producer to introduce a valued new feature is one of the most effective ways to compete. How can a company identify new features and decide which ones to add to its product? It should periodically survey buyers who have used the product and ask these questions: How do you like the product? Which specific features of the product do you like most? Which features could we add to improve the product? The answers to these questions provide the company with a rich list of feature ideas. The company can then assess each feature’s value to customers versus its cost to the company. Features that customers value highly in relation to costs should be added. Product Style and Design. Another way to add customer value is through distinctive product style and design. Design is a larger concept than style. Style simply describes the appearance of a product. Styles can be eye catching or yawn producing. A sensational style may grab attention and produce pleasing aesthetics, but it does not necessarily make the product perform better. Unlike style, design is more than skin deep—it goes to the very heart of a product. Good design contributes to a product’s usefulness as well as to its looks. Good design doesn’t start with brainstorming new ideas and making prototypes. Design begins with observing customers, understanding their needs, and shaping their product-use experience. Product designers should think less about technical The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. product specifications and more about how customers will use and benefit from the product. For example, using smart design based on deep insights into consumer needs, Nest Labs created a home heating and cooling thermostat that’s not just pretty to look at but also packed with easy-to-access customer benefits. Branding Perhaps the most distinctive skill of professional marketers is their ability to build and manage brands. A brand is a name, term, sign, symbol, or design, or a combination of these, that identifies the maker or seller of a product or service. Consumers view a brand as an important part of a product, and branding can add value to a consumer’s purchase. Customers attach meanings to brands and develop brand relationships. As a result, brands have meaning well beyond a product’s physical attributes. Branding has become so strong that today hardly anything goes unbranded. Salt is packaged in branded containers, common nuts and bolts are packaged with a distributor’s label, and automobile parts—spark plugs, tires, filters—bear brand names that differ from those of the automakers. Even fruits, vegetables, dairy products, and poultry are branded—Cuties mandarin oranges, Dole Classic iceberg salads, Horizon Organic milk, Perdue chickens, and Eggland’s Best eggs. Branding helps buyers in many ways. Brand names help consumers identify products that might benefit them. Brands also say something about product quality and consistency—buyers who always buy the same brand know that they will get the same features, benefits, and quality each time they buy. Branding also gives the seller several advantages. The seller’s brand name and trademark provide legal protection for unique product features that otherwise might be copied by competitors. Branding helps the seller to segment markets. Finally, a brand name becomes the basis on which a whole story can be built about a product’s special qualities. For example, the Cuties brand of pint-sized mandarins sets itself apart from ordinary oranges by promising “Kids love Cuties because Cuties are made for kids.” They are a healthy snack that’s “perfect for little hands”: sweet, seedless, kid-sized, and easy to peel.9 Building and managing brands are perhaps the marketer’s most important tasks. We will discuss branding strategy in more detail later in the chapter. Packaging Packaging involves designing and producing the container or wrapper for a product. Traditionally, the primary function of the package was to hold and protect the product. In recent times, however, packaging has become an important marketing tool as well. Increased competition and clutter on retail store shelves means that packages must now perform many sales tasks— from attracting buyers, to communicating brand positioning, to closing the sale. Not every customer will see a brand’s advertising, social media pages, or other promotions. However, all consumers who buy and use a product will interact regularly with its packaging. Thus, the humble package represents prime marketing space. Companies are realizing the power of good packaging to create immediate consumer recognition of a brand. For example, an average supermarket stocks about 43,000 items; the average Walmart supercenter carries 142,000 items. The typical shopper makes three out of four purchase decisions in stores and passes by some 300 items per minute. In this highly competitive environment, the package may be the seller’s best and last chance to influence buyers. So the package itself has become an important promotional medium. Poorly designed packages can cause headaches for consumers and lost sales for the company. Think about all those hard-to- open packages, such as DVD cases sealed with impossibly sticky labels, packaging with finger-splitting wire twist-ties, or sealed plastic clamshell containers that cause “wrap rage” and send thousands of people to the hospital each year with lacerations and puncture wounds. Another packaging issue is overpackaging—as when a tiny USB flash drive in an oversized cardboard and plastic display package is delivered in a giant corrugated shipping carton. Overpackaging creates an incredible amount of waste, frustrating those who care about the environment. In recent years, product safety has also become a major packaging concern. We have all learned to deal with hard-to-open “childproof” packaging. Due to the rash of product tampering scares in the 1980s, most drug producers and food makers now put their products in tamper-resistant packages. In making packaging decisions, the company also must heed growing environmental concerns. Labeling Labels range from simple tags attached to products to complex graphics that are part of the packaging. They perform several functions. At the very least, the label identifies the product or brand, such as the name Sunkist stamped on oranges. The label might also describe several things about the product—who made it, where it was made, when it was made, its contents, how it is to be used, and how to use it safely. Finally, the label might help to promote the brand, support its positioning, and connect with customers. For many companies, labels have become an important element in broader marketing campaigns. Labels and brand logos can support the brand’s positioning and add personality to the brand. In fact, brand labels and logos can become a crucial element in the brand–customer connection. Customers often become strongly attached to logos as symbols of the brands they represent. However, companies must take care when changing such important brand symbols. Along with the positives, there has been a long history of legal concerns about packaging and labels. The Federal Trade Commission Act of 1914 held that false, misleading, or deceptive labels or packages constitute unfair competition. Labels can mislead customers, fail to describe important ingredients, or fail to include needed safety warnings. As a result, several federal and state laws regulate labeling. The most prominent is the Fair Packaging and Labeling Act of 1966, which set mandatory labeling requirements, encouraged voluntary industry packaging standards, and allowed federal agencies to set packaging regulations in specific industries. Labeling has been affected in recent times by unit pricing (stating the price per unit of a standard measure), open dating (stating the expected shelf life of the product), and nutritional labeling (stating the nutritional values in the product). The Nutritional Labeling and Educational Act of 1990 requires sellers to provide detailed nutritional information on food products, and recent sweeping actions by the Food and Drug Administration (FDA) regulate the use of health-related terms such as low fat, light, and high fiber. Sellers must ensure that their labels contain all the required information. Product Support Services The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Customer service is another element of product strategy. A company’s offer usually includes some support services, which can be a minor part or a major part of the total offering. Later in this chapter, we will discuss services as products in themselves. Here, we discuss services that augment actual products. Support services are an important part of the customer’s overall brand experience. Keeping customers happy after the sale is the key to building lasting relationships. The first step in designing support services is to survey customers periodically to assess the value of current services and obtain ideas for new ones. Once the company has assessed the quality of various support services to customers, it can take steps to fix problems and add new services that will both delight customers and yield profits to the company. Many companies now use a sophisticated mix of phone, e-mail, online, social media, mobile, and interactive voice and data technologies to provide support services that were not possible before. For example, home improvement store Lowe’s offers a vigorous dose of customer service at both its store and online locations that makes shopping easier, answers customer questions, and handles problems. Product Line Decisions Beyond decisions about individual products and services, product strategy also calls for building a product line. A product line is a group of products that are closely related because they function in a similar manner, are sold to the same customer groups, are marketed through the same types of outlets, or fall within given price ranges. The major product line decision involves product line length—the number of items in the product line. The line is too short if the manager can increase profits by adding items; the line is too long if the manager can increase profits by dropping items. Managers need to analyze their product lines periodically to assess each item’s sales and profits and understand how each item contributes to the line’s overall performance. A company can expand its product line in two ways: by line filling or line stretching. Product line filling involves adding more items within the present range of the line. There are several reasons for product line filling: reaching for extra profits, satisfying dealers, using excess capacity, being the leading full-line company, and plugging holes to keep out competitors. However, line filling is overdone if it results in cannibalization and customer confusion. The company should ensure that new items are noticeably different from existing ones. Product line stretching occurs when a company lengthens its product line beyond its current range. The company can stretch its line downward, upward, or both ways. Companies located at the upper end of the market can stretch their lines downward. A company may stretch downward to plug a market hole that otherwise would attract a new competitor or to respond to a competitor’s attack on the upper end. Or it may add low-end products because it finds faster growth taking place in the low- end segments. Companies can also stretch their product lines upward. Sometimes, companies stretch upward to add prestige to their current products. Or they may be attracted by a faster growth rate or higher margins at the higher end. Product Mix Decisions An organization with several product lines has a product mix. A product mix (or product portfolio) consists of all the product lines and items that a particular seller offers for sale. Each product line consists of many brands and items. A company’s product mix has four important dimensions: width, length, depth, and consistency. Product mix width refers to the number of different product lines the company carries. Product mix length refers to the total number of items a company carries within its product lines. Clorox carries several brands within each line. For example, its cleaning line includes CLOROX, FORMULA 409, LIQUID PLUMBER, SOS, PINE-SOL, TILEX, HANDI-WIPES, and others. The lifestyle line contains the KC MASTERPIECE, BRITA, HIDDEN VALLEY, and BURT’S BEES brands, among others. Product mix depth refers to the number of versions offered for each product in the line. The Clorox brand contains a deep assortment of items and varieties, including disinfecting wipes, floor cleaners, stain removers, and bleach products. Each variety comes in a number of product forms, formulations, scents, and sizes. For example, you can buy CLOROX Regular Bleach, CLOROX Scented Bleach, CLOROX Bleach Foamer, CLOROX High Efficiency Bleach, CLOROX UltimateCare Bleach (gentle for delicate fabrics), or any of a dozen other varieties. Finally, 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 aspect. The Clorox Company’s product lines are consistent insofar as they are primarily consumer products and go through the same distribution channels. The lines are less consistent insofar as they perform different functions for buyers. These product mix dimensions provide the handles for defining the company’s product strategy. A company can increase its business in four ways. It can add new product lines, widening its product mix. In this way, its new lines build on the company’s reputation in its other lines. A company can lengthen its existing product lines to become a more full-line company. It can add more versions of each product and thus deepen its product mix. Finally, a company can pursue more product line consistency— or less—depending on whether it wants to have a strong reputation in a single field or in several fields. From time to time, a company may also have to streamline its product mix to pare out marginally performing lines and to regain its focus. For example, as discussed in the previous chapter, P&G pursues a megabrand strategy built around 25 billion-dollar brands in the household care and beauty and grooming categories. During the past decade, the consumer products giant has sold off dozens of major brands that no longer fit either its evolving focus or the billion-dollar threshold, ranging from Jif peanut butter, Crisco shortening, Folgers coffee, Pringles snack chips, and Sunny Delight drinks to Noxema skin care products, Right Guard deodorant, and Aleve pain reliever. Such pruning is essential for maintaining a focused, healthy product mix. Services Marketing Services have grown dramatically in recent years. Services now account for 80 percent of the U.S. gross domestic product (GDP). Services are growing even faster in the world economy, making up almost 64 percent of the gross world product. 17 The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Service industries vary greatly. Governments offer services through courts, employment services, hospitals, military services, police and fire departments, the postal service, and schools. Private not-for-profit organizations offer services through museums, charities, churches, colleges, foundations, and hospitals. In addition, a large number of business organizations offer services—airlines, banks, hotels, insurance companies, consulting firms, medical and legal practices, entertainment and telecommunications companies, real estate firms, retailers, and others. The Nature and Characteristics of a Service A company must consider four special service characteristics when designing marketing programs: intangibility, inseparability, variability, and perishability (see Figure 8.3). Service intangibility means that services cannot be seen, tasted, felt, heard, or smelled before they are bought. For example, people undergoing cosmetic surgery cannot see the result before the purchase. Airline passengers have nothing but a ticket and a promise that they and their luggage will arrive safely at the intended destination, hopefully at the same time. To reduce uncertainty, buyers look for signals of service quality. They draw conclusions about quality from the place, people, price, equipment, and communications that they can see. Therefore, the service provider’s task is to make the service tangible in one or more ways and send the right signals about quality. The Mayo Clinic does this well. Physical goods are produced, then stored, then later sold, and then still later consumed. In contrast, services are first sold and then produced and consumed at the same time. Service inseparability means that services cannot be separated from their providers, whether the providers are people or machines. If a service employee provides the service, then the employee becomes a part of the service. And customers don’t just buy and use a service, they play an active role in its delivery. Customer coproduction makes provider–customer interaction a special feature of services marketing. Both the provider and the customer affect the service outcome. Service variability means that the quality of services depends on who provides them as well as when, where, and how they are provided. For example, some hotels—say, Marriott—have reputations for providing better service than others. Still, within a given Marriott hotel, one registration-counter employee may be cheerful and efficient, whereas another standing just a few feet away may be grumpy and slow. Even the quality of a single Marriott employee’s service varies according to his or her energy and frame of mind at the time of each customer encounter. Service perishability means that services cannot be stored for later sale or use. Some doctors charge patients for missed appointments because the service value existed only at that point and disappeared when the patient did not show up. The perishability of services is not a problem when demand is steady. However, when demand fluctuates, service firms often have difficult problems. For example, because of rush-hour demand, public transportation companies have to own much more equipment than they would if demand were even throughout the day. Thus, service firms often design strategies for producing a better match between demand and supply. Hotels and resorts charge lower prices in the off-season to attract more guests. And restaurants hire part-time employees to serve during peak periods. Marketing Strategies for Service Firms Just like manufacturing businesses, good service firms use marketing to position themselves strongly in chosen target markets. FedEx promises to take your packages “faster, farther”; Angie’s List offers “Reviews you can trust.” At Hampton, “We love having you here.” And St. Jude Children’s Hospital is “Finding cures. Saving children.” These and other service firms establish their positions through traditional marketing mix activities. However, because services differ from tangible products, they often require additional marketing approaches. The Service Profit Chain In a service business, the customer and the front-line service employee interact to co-create the service. Effective interaction, in turn, depends on the skills of front-line service employees and on the support processes backing these employees. Thus, successful service companies focus their attention on both their customers and their employees. They understand the service profit chain, which links service firm profits with employee and customer satisfaction. This chain consists of five links: Internal service quality. Superior employee selection and training, a quality work environment, and strong support for those dealing with customers, which results in... Satisfied and productive service employees. More satisfied, loyal, and hardworking employees, which results in... Greater service value. More effective and efficient customer value creation, engagement, and service delivery, which results in... Satisfied and loyal customers. Satisfied customers who remain loyal, make repeat purchases, and refer other customers, which results in... Healthy service profits and growth. Superior service firm performance. For example, supermarket chain Wegmans—a perennial customer service champion—has developed a cult-like customer following by putting its employees first. Wegmans believes that happy, superbly trained employees create a superior customer experience. The resulting happy customers are tremendously loyal, give the firm more business, and convince other customers to do the same. That, in turn, results in happy investors. “Our employees are our number one asset, period,” says a Wegmans executive. “The first question [we] ask is ‘Is this the best thing for employees?’”20 Similarly, HSBC, a major multinational bank with a reputation for outstanding customer service, is also legendary for its motivated and satisfied employees. Service marketing requires more than just traditional external marketing using the four Ps. Figure 8.4 shows that service marketing also requires internal marketing and interactive marketing. Internal marketing means that the service firm must orient and motivate its customer-contact employees and supporting service people to work as a team to provide customer satisfaction. Marketers must get everyone in the organization to be customer centered. In fact, internal marketing must precede external marketing. For example, Four Seasons Hotels and Resorts starts by hiring the right people and carefully orienting and The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. inspiring them to give unparalleled customer service. The idea is to make certain that employees themselves believe in the brand so that they can authentically deliver the brand’s promise to customers. Interactive marketing means that service quality depends heavily on the quality of the buyer–seller interaction during the service encounter. In product marketing, product quality often depends little on how the product is obtained. But in services marketing, service quality depends on both the service deliverer and the quality of delivery. Service marketers, therefore, have to master interactive marketing skills. Thus, Four Seasons selects only people with an innate “passion to serve” and instructs them carefully in the fine art of interacting with customers to satisfy their every need. All new hires complete three months of training to help them improve their customer-interaction skills. Today, as competition and costs increase, and as productivity and quality decrease, more service marketing sophistication is needed. Service companies face three major marketing tasks: They want to increase their service differentiation, service quality, and service productivity. Managing Service Differentiation In these days of intense price competition, service marketers often complain about the difficulty of differentiating their services from those of competitors. To the extent that customers view the services of different providers as similar, they care less about the provider than the price. The solution to price competition is to develop a differentiated offer, delivery, and image. The offer can include innovative features that set one company’s offer apart from competitors’ offers. Customers can sample shoes on Dick’s indoor footwear track, test golf clubs with an on-site golf swing analyzer and putting green, shoot bows in its archery range, and receive personalized fitness product guidance from an in-store team of fitness trainers. Such differentiated services help make Dick’s “the ultimate sporting goods destination store for core athletes and outdoor enthusiasts.” Service companies can differentiate their service delivery by having more able and reliable customer-contact people, developing a superior physical environment in which the service product is delivered, or designing a superior delivery process. For example, many grocery chains now offer online shopping and home delivery as a better way to shop than having to drive, park, wait in line, and tote groceries home. And most banks offer mobile phone apps that allow you to more easily transfer money and check account balances. Many even allow mobile check deposits. “Sign, snap a photo, and submit a check from anywhere,” says one Citibank ad. “It’s easier than running to the bank.” Finally, service companies also can work on differentiating their images through symbols and branding. Aflac adopted the duck as its advertising symbol. Today, the duck is immortalized through stuffed animals, golf club covers, and free ringtones and screensavers. The well-known Aflac duck helped make the big but previously unknown insurance company memorable and approachable. Other well-known service characters and symbols include the GEICO gecko, Progressive Insurance’s Flo, McDonald’s golden arches, Allstate’s “good hands,” the Twitter bird, and Wendy’s freckled, red-haired, pigtailed spokesperson. Managing Service Quality A service firm can differentiate itself by delivering consistently higher quality than its competitors provide. Like manufacturers before them, most service industries have now joined the customer-driven quality movement. And like product marketers, service providers need to identify what target customers expect in regard to service quality. Unfortunately, service quality is harder to define and judge than product quality. For instance, it is harder to agree on the quality of a haircut than on the quality of a hair dryer. Customer retention is perhaps the best measure of quality; a service firm’s ability to hang onto its customers depends on how consistently it delivers value to them. Top service companies set high service-quality standards. They watch service performance closely, both their own and that of competitors. They do not settle for merely good service—they strive for 100 percent defect-free service. A 98 percent performance standard may sound good, but using this standard, the U.S. Postal Service would lose or misdirect 440,000 pieces of mail each hour, and U.S. pharmacies would misfill more than 75.3 million prescriptions each week. Unlike product manufacturers who can adjust their machinery and inputs until everything is perfect, service quality will always vary, depending on the interactions between employees and customers. As hard as they may try, even the best companies will have an occasional late delivery, burned steak, or grumpy employee. However, good service recovery can turn angry customers into loyal ones. In fact, good recovery can win more customer purchasing and loyalty than if things had gone well in the first place. For example, Southwest Airlines has a proactive customer communications team whose job is to find the situations in which something went wrong—a mechanical delay, bad weather, a medical emergency, or a berserk passenger—then remedy the bad experience quickly, within 24 hours, if possible.23 The team’s communications to passengers, usually e-mails these days, have three basic components: a sincere apology, a brief explanation of what happened, and a gift to make it up, usually a voucher in dollars that can be used on their next Southwest flight. Surveys show that when Southwest handles a delay situation well, customers score it 14 to 16 points higher than on regular on-time flights. These days, social media such as Facebook and Twitter can help companies root out and remedy customer dissatisfaction with service. Consider Marriott International. Managing Service Productivity With their costs rising rapidly, service firms are under great pressure to increase service productivity. They can do so in several ways. They can train current employees better or hire new ones who will work harder or more skillfully. Or they can increase the quantity of their service by giving up some quality. Finally, a service provider can harness the power of technology. Although we often think of technology’s power to save time and costs in manufacturing companies, it also has great— and often untapped— potential to make service workers more productive. However, companies must avoid pushing productivity so hard that doing so reduces quality. Attempts to streamline a service or cut costs can make a service company more efficient in the short run. But that can also reduce its longer-run ability to innovate, maintain service quality, or respond The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. to consumer needs and desires. For example, some airlines have learned this lesson the hard way as they attempt to economize in the face of rising costs. Passengers on most airlines now encounter “time-saving” check-in kiosks rather than personal counter service. And most airlines have stopped offering even the little things for free—such as in-flight snacks—and now charge extra for everything from checked luggage to aisle seats. The result is a plane full of disgruntled customers. In their attempts to improve productivity, many airlines have mangled customer service. Thus, in attempting to improve service productivity, companies must be mindful of how they create and deliver customer value. They should be careful not to take service out of the service. In fact, a company may purposely lower service productivity in order to improve service quality, in turn allowing it to maintain higher prices and profit margins. Branding Strategy: Building Strong Brands Some analysts see brands as the major enduring asset of a company, outlasting the company’s specific products and facilities. John Stewart, former CEO of Quaker Oats, once said, “If this business were split up, I would give you the land and bricks and mortar, and I would keep the brands and trademarks, and I would fare better than you.” A former CEO of McDonald’s declared, “If every asset we own, every building, and every piece of equipment were destroyed in a terrible natural disaster, we would be able to borrow all the money to replace it very quickly because of the value of our brand.... The brand is more valuable than the totality of all these assets.” Thus, brands are powerful assets that must be carefully developed and managed. In this section, we examine the key strategies for building and managing product and service brands. Brand Equity and Brand Value Brands are more than just names and symbols. They are a key element in the company’s relationships with consumers. Brands represent consumers’ perceptions and feelings about a product and its performance—everything that the product or the service means to consumers. In the final analysis, brands exist in the heads of consumers. As one well-respected marketer once said, “Products are created in the factory, but brands are created in the mind.” A powerful brand has high brand equity. Brand equity is the differential effect that knowing the brand name has on customer response to the product and its marketing. It’s a measure of the brand’s ability to capture consumer preference and loyalty. A brand has positive brand equity when consumers react more favorably to it than to a generic or unbranded version of the same product. It has negative brand equity if consumers react less favorably than to an unbranded version. Brands vary in the amount of power and value they hold in the marketplace. These brands win in the marketplace not simply because they deliver unique benefits or reliable service. Rather, they succeed because they forge deep connections with customers. People really do have relationships with brands. For example, to devoted Vespa fans around the world, the brand stands for much more than just a scooter. It stands for “La Vespa Vida,” a carefree, stylish lifestyle. Colorful, cute, sleek, nimble, efficient—the Vespa brand represents the freedom to roam wherever you wish and “live life with passion.” Ad agency Young & Rubicam’s BrandAsset Valuator measures brand strength along four consumer perception dimensions: differentiation (what makes the brand stand out), relevance (how consumers feel it meets their needs), knowledge (how much consumers know about the brand), and esteem (how highly consumers regard and respect the brand). Brands with strong brand equity rate high on all four dimensions. The brand must be distinct, or consumers will have no reason to choose it over other brands. However, the fact that a brand is highly differentiated doesn’t necessarily mean that consumers will buy it. The brand must stand out in ways that are relevant to consumers’ needs. Even a differentiated, relevant brand is far from a shoe-in. Before consumers will respond to the brand, they must first know about and understand it. And that familiarity must lead to a strong, positive consumer–brand connection. Thus, positive brand equity derives from consumer feelings about and connections with a brand. Consumers sometimes bond very closely with specific brands. As perhaps the ultimate expression of brand devotion, a surprising number of people—and not just Harley-Davidson fans—have their favorite brand tattooed on their bodies. Whether it’s contemporary new brands such as Facebook or Amazon or old classics like Harley or Converse, strong brands are built around an ideal of engaging consumers in some relevant way. A brand with high brand equity is a very valuable asset. Brand value is the total financial value of a brand. Measuring such value is difficult. However, according to one estimate, the brand value of Apple is a whopping $185 billion, with Google at $113.6 billion, IBM at $112.5 billion, McDonald’s at $90 billion, Coca-Cola at $78.4 billion, and Microsoft at Consumers’ relationship with brands: To devoted Vespa fans around the world, the brand stands for much more than just a scooter. It stands for “La Vespa Vita”—living life with passion $70 billion. Other brands rating among the world’s most valuable include AT&T, China Mobile, GE, Walmart, and Amazon.com. High brand equity provides a company with many competitive advantages. A powerful brand enjoys a high level of consumer brand awareness and loyalty. Because consumers expect stores to carry the particular brand, the company has more leverage in bargaining with resellers. Because a brand name carries high credibility, the company can more easily launch line and brand extensions. A powerful brand also offers the company some defense against fierce price competition. Above all, however, a powerful brand forms the basis for building strong and profitable customer relationships. The fundamental asset underlying brand equity is customer equity—the value of customer relationships that the brand creates. A powerful brand is important, but what it really represents is a profitable set of loyal customers. The proper focus of marketing is building customer equity, with brand management serving as a major marketing tool. Companies need to think of themselves not as portfolios of brands but as portfolios of customers. Building Strong Brands Branding poses challenging decisions to the marketer. Figure 8.5 shows that the major brand strategy decisions involve brand positioning, brand name selection, brand sponsorship, and brand development. The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Brand Positioning Marketers need to position their brands clearly in target customers’ minds. They can position brands at any of three levels.31 At the lowest level, they can position the brand on product attributes. For example, P&G invented the disposable diaper category with its Pampers brand. Early Pampers marketing focused on attributes such as fluid absorption, fit, and disposability. In general, however, attributes are the least desirable level for brand positioning. Competitors can easily copy attributes. More important, customers are not interested in attributes as such—they are interested in what the attributes will do for them. A brand can be better positioned by associating its name with a desirable benefit. Thus, Pampers can go beyond technical product attributes and talk about the resulting containment and skin-health benefits from dryness. Some successful brands positioned on benefits are FedEx (guaranteed on-time delivery), Nike (performance), Walmart (save money), and Facebook (connections and sharing). The strongest brands go beyond attribute or benefit positioning. They are positioned on strong beliefs and values, engaging customers on a deep, emotional level. For example, to parents, Pampers mean much more than just containment and dryness. The Pampers Web site (www.pampers.com) positions Pampers as a “love, sleep, and play” brand that’s concerned about happy babies, parent–child relationships, and total baby care. Says a former P&G executive, “Our baby care business didn’t start growing aggressively until we changed Pampers from being about dryness to helping mom with her baby’s development.” Successful brands engage customers on a deep, emotional level. Advertising agency Saatchi & Saatchi suggests that brands should strive to become lovemarks, products or services that “inspire loyalty beyond reason.” Brands ranging from Apple, Disney, Nike, and Coca-Cola to Google and Pinterest have achieved this status with many of their customers. Lovemark brands pack an emotional wallop. Customers don’t just like these brands, they have strong emotional connections with them and love them unconditionally.33 Brands don’t have to be big or legendary to be classified as lovemarks. Consider Shake Shack, which began 10 years ago as a lowly hot dog cart in Manhattan and grew into a small burger chain with a big, almost cult-like following. The occasionally epic lines at local Shake Shacks testify to its status as a lovemark brand. When positioning a brand, the marketer should establish a mission for the brand and a vision of what the brand must be and do. A brand is the company’s promise to deliver a specific set of features, benefits, services, and experiences consistently to buyers. The brand promise must be clear, simple, and honest. Motel 6, for example, offers clean rooms, low prices, and good service but does not promise expensive furnishings or large bathrooms. In contrast, The Ritz-Carlton offers luxurious rooms and a truly memorable experience but does not promise low prices. Brand Name Selection A good name can add greatly to a product’s success. However, finding the best brand name is a difficult task. It begins with a careful review of the product and its benefits, the target market, and proposed marketing strategies. After that, naming a brand becomes part science, part art, and a measure of instinct. Desirable qualities for a brand name include the following: (1) It should suggest something about the product’s benefits and qualities: Beautyrest, Lean Cuisine, Snapchat, Pinterest. (2) It should be easy to pronounce, recognize, and remember: iPad, Tide, Jelly Belly, Twitter, JetBlue. (3) The brand name should be distinctive: Panera, Swiffer, Zappos, Nest. (4) It should be extendable—Amazon.com began as an online bookseller but chose a name that would allow expansion into other categories. (5) The name should translate easily into foreign languages. Before changing its name to Exxon, Standard Oil of New Jersey rejected the name Enco, which it learned meant a stalled engine when pronounced in Japanese. (6) It should be capable of registration and legal protection. A brand name cannot be registered if it infringes on existing brand names. Choosing a new brand name is hard work. After a decade of choosing quirky names (Yahoo!, Google) or trademark- proof made-up names (Novartis, Aventis, Accenture), today’s style is to build brands around names that have real meaning. For example, names like Silk (soy milk), Method (home products), Smartwater (beverages), and Blackboard (school software) are simple and make intuitive sense. But with trademark applications soaring, available new names can be hard to find. Try it yourself. Pick a product and see if you can come up with a better name for it. How about Moonshot? Tickle? Vanilla? Treehugger? Simplicity? Google them and you’ll find that they are already taken. Once chosen, the brand name must be protected. Many firms try to build a brand name that will eventually become identified with the product category. Brand names such as Kleenex, JELL-O, BAND-AID, Scotch Tape, Velcro, Formica, Magic Marker, Post-it notes, and Ziploc have succeeded in this way. However, their very success may threaten the company’s rights to the name. Many originally protected brand names—such as cellophane, aspirin, nylon, kerosene, linoleum, yo-yo, trampoline, escalator, thermos, and shredded wheat—are now generic names that any seller can use. To protect their brands, marketers present them carefully using the word brand and the registered trademark symbol, as in “BAND-AID® Brand Adhesive Bandages.” Even the long-standing “I am stuck on BAND-AID ‘cause BAND-AID’s stuck on me” jingle has now become “I am stuck on BAND-AID brand ‘cause BAND-AID’s stuck on me.” Similarly, a recent Xerox advertisement notes that a brand name can be lost if people misuse it. The ad asks people to use the Xerox name only as an adjective to identify its products and services (such as “Xerox copiers”), not as a verb (“to Xerox” something) or a noun (“I’ll make a Xerox”). Brand Sponsorship A manufacturer has four sponsorship options. The product may be launched as a national brand (or manufacturer’s brand), as when Samsung and Kellogg sell their output under their own brand names (the Samsung Galaxy tablet or Kellogg’s Frosted Flakes). Or the manufacturer may sell to resellers who give the product a private brand (also called a store brand or distributor brand). Although most manufacturers create their own brand names, others market licensed brands. Finally, two companies can join forces and co-brand a product. We discuss each of these options in turn. The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. National Brands versus Store Brands. National brands (or manufacturers’ brands) have long dominated the retail scene. In recent times, however, increasing numbers of retailers and wholesalers have created their own store brands (or private brands). Store brands have been gaining strength for more than two decades, but recent tighter economic times have created a store-brand boom. Studies show that consumers are now buying even more private brands, which on average yield a 30 percent savings.34 More frugal times give store brands a boost as consumers become more price-conscious and less brand- conscious. In fact, store brands have grown much faster than national brands in recent years. Over the past three years, annual sales of private-brand grocery goods have grown at twice the rate of national brands. Private labels now account for more than 18 percent of supermarket dollar sales and almost 17 percent of drugstore dollar sales. Similarly, for apparel sales, private-label brands—such as Hollister, The Limited, Arizona Jean Company (JCPenney), and Xhilaration (Target)—now capture a 50 percent share of all U.S. apparel sales, up from 25 percent a decade ago. Many large retailers skillfully market a deep assortment of store-brand merchandise. Once known as “generic” or “no-name” brands, today’s store brands are shedding their image as cheap knockoffs of national brands. Store brands now offer much greater selection, and they are rapidly achieving name-brand quality. In fact, retailers such as Target and Trader Joe’s are out- innovating many of their national-brand competitors. As a result, consumers are becoming loyal to store brands for reasons besides price. Recent research showed that 80 percent of all shoppers believe store brand quality is equal to or better than that of national brands. “Sometimes I think they don’t actually know what is a store brand,” says one retail analyst. In some cases, consumers are even willing to pay more for store brands that have been positioned as gourmet or premium items. In the so-called battle of the brands between national and private brands, retailers have many advantages. They control what products they stock, where they go on the shelf, what prices they charge, and which ones they will feature in local promotions. Retailers often price their store brands lower than comparable national brands and feature the price differences in side-by-side comparisons on store shelves. Although store brands can be hard to establish and costly to stock and promote, they also yield higher profit margins for the reseller. And they give resellers exclusive products that cannot be bought from competitors, resulting in greater store traffic and loyalty. Fast-growing retailer Trader Joe’s, which carries 85 percent store brands, largely controls its own brand destiny, rather than relying on producers to make and manage the brands it needs to serve its customers best. To compete with store brands, national brands must sharpen their value propositions, especially when appealing to today’s more frugal consumers. Many national brands are fighting back by rolling out more discounts and coupons to defend their market share. In the long run, however, leading brand marketers must compete by investing in new brands, new features, and quality improvements that set them apart. They must design strong advertising programs to maintain high awareness and preference. And they must find ways to partner with major distributors to find distribution economies and improve joint performance. Licensing. Most manufacturers take years and spend millions to create their own brand names. However, some companies license names or symbols previously created by other manufacturers, names of well-known celebrities, or characters from popular movies and books. For a fee, any of these can provide an instant and proven brand name. Apparel and accessories sellers pay large royalties to adorn their products—from blouses to ties and linens to luggage—with the names or initials of well-known fashion innovators such as Calvin Klein, Tommy Hilfiger, Gucci, or Armani. Sellers of children’s products attach an almost endless list of character names to clothing, toys, school supplies, linens, dolls, lunch boxes, cereals, and other items. Licensed character names range from classics such as Sesame Street, Disney, Barbie, Star Wars, Scooby Doo, Hello Kitty, and Dr. Seuss characters to the more recent Doc McStuffins, Monster High, Angry Birds, and Ben 10. And currently, numerous top-selling retail toys are products based on television shows and movies. Name and character licensing has grown rapidly in recent years. Annual retail sales of licensed products worldwide have grown from only $4 billion in 1977 to $55 billion in 1987 and more than $230 billion today. Licensing can be a highly profitable business for many companies. Co-branding. Co-branding occurs when two established brand names of different companies are used on the same product. Cobranding offers many advantages. Because each brand operates in a different category, the combined brands create broader consumer appeal and greater brand equity. Google has traditionally named versions of its Android operating system after sweet treats (because Android devices “make our lives so sweet”), with names such as Cupcake, Honeycomb, and Jelly Bean. This time, it named the new version “ after one of our favorite chocolate treats, KitKat.” In turn, KitKat launched specially branded KitKat candy bars featuring the Android robot. The co-branding effort added a touch or fun, familiarity, and exposure to both brands. Co-branding can take advantage of the complementary strengths of two brands. It also allows a company to expand its existing brand into a category it might otherwise have difficulty entering alone. For example, Nike and Apple co-branded the Nike+iPod Sport Kit, which lets runners link their Nike shoes with their iPods to track and enhance running performance in real time. “Your iPod Nano [or iPod Touch] becomes your coach. Your personal trainer. Your favorite workout companion.” The Nike+iPod arrangement gives Apple a presence in the sports and fitness market. At the same time, it helps Nike bring new value to its customers. Co- branding can also have limitations. Such relationships usually involve complex legal contracts and licenses. Co-branding partners must carefully coordinate their advertising, sales promotion, and other marketing efforts. Finally, when co-branding, each partner must trust that the other will take good care of its brand. If something damages the reputation of one brand, it can tarnish the co-brand as well. Brand Development A company has four choices when it comes to developing brands (see Figure 8.6). It can introduce line extensions, brand extensions, multibrands, or new brands. Line Extensions. Line extensions occur when a company extends existing brand names to new forms, colors, sizes, ingredients, or flavors of an existing product category. For example, over the years, KFC has extended its “finger lickin’ good” The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. chicken lineup well beyond original recipe, bone-in Kentucky fried chicken. It now offers grilled chicken, boneless fried chicken, chicken tenders, hot wings, chicken bites, and, most recently, KFC Go Cups—chicken and potato wedges in a handy car-cup holder that lets customers snack on the go. A company might introduce line extensions as a low-cost, low-risk way to introduce new products. Or it might want to meet consumer desires for variety, use excess capacity, or simply command more shelf space from resellers. However, line extensions involve some risks. An overextended brand name might cause consumer confusion or lose some of its specific meaning. For example, in its efforts to offer something for everyone—from basic burger buffs to practical parents to health-minded fast- food seekers—McDonald’s has created a menu bulging with options. Some customers find the crowded menu a bit overwhelming, and offering so many choices has complicated the chain’s food assembly process and slowed service at counters and drive-throughs. The extended menu may also be confusing the chain’s positioning. According to one analyst, McDonald’s “doesn’t have a clear marketing message right now.” At some point, additional extensions might add little value to a line. A line extension works best when it takes sales away from competing brands, not when it “cannibalizes” the company’s other items. Brand Extensions. A brand extension extends a current brand name to new or modified products in a new category. For example, Starbucks has extended its retail coffee shops by adding packaged supermarket coffees, a chain of teahouses (Teavana Fine Teas + Tea Bar), and even a single-serve home coffee, espresso, and latte machine—the Verismo. And P&G has leveraged the strength of its Mr. Clean household cleaner brand to launch several new lines: cleaning pads (Magic Eraser), bathroom cleaning tools (Magic Reach), and home auto cleaning kits (Mr. Clean AutoDry). It even launched Mr. Clean-branded car washes. A brand extension gives a new product instant recognition and faster acceptance. It also saves the high advertising costs usually required to build a new brand name. At the same time, a brand extension strategy involves some risk. The extension may confuse the image of the main brand—for example, how about Zippo perfume or Dr. Pepper marinades? Brand extensions such as Cheetos lip balm, Heinz pet food, and Life Savers gum met early deaths.45 And if a brand extension fails, it may harm consumer attitudes toward other products carrying the same brand name. Furthermore, a brand name may not be appropriate to a particular new product, even if it is well made and satisfying—would you consider flying on Hooters Air or wearing an Evian water-filled padded bra (both failed)? Thus, before transferring a brand name to a new product, marketers must research how well the extension fits the parent brand’s associations, as well as how much the parent brand will boost the extension’s market success. Multibrands. Companies often market many different brands in a given product category. For example, in the United States, PepsiCo markets at least eight brands of soft drinks (Pepsi, Sierra Mist, Mountain Dew, Manzanita Sol, Mirinda, IZZE, Tropicana Twister, and Mug root beer), three brands of sports and energy drinks (Gatorade, AMP Energy, Starbucks Refreshers), four brands of bottled teas and coffees (Lipton, SoBe, Starbucks, and Tazo), three brands of bottled waters (Aquafina, H2OH!, and SoBe), and nine brands of fruit drinks (Tropicana, Dole, IZZE, Lipton, Looza, Ocean Spray, and others). Each brand includes a long list of sub-brands. For instance, SoBe consists of SoBe Teas & Elixers, SoBe Lifewater, SoBe Lean, and SoBe Lifewater with Coconut Water. Aquafina includes regular Aquafina, Aquafina Flavorsplash, and Aquafina Sparkling. Multibranding offers a way to establish different features that appeal to different customer segments, lock up more reseller shelf space, and capture a larger market share. For example, although PepsiCo’s many brands of beverages compete with one another on supermarket shelves, the combined brands reap a much greater overall market share than any single brand ever could. Similarly, by positioning multiple brands in multiple segments, Pepsi’s eight soft drink brands combine to capture much more market share than any single brand could capture by itself. A major drawback of multibranding is that each brand might obtain only a small market share, and none may be very profitable. The company may end up spreading its resources over many brands instead of building a few brands to a highly profitable level. These companies should reduce the number of brands they sell in a given category and set up tighter screening procedures for new brands. This happened to GM, which in recent years has cut numerous brands from its portfolio, including Saturn, Oldsmobile, Pontiac, Hummer, and Saab. Similarly, as part of its recent turnaround, Ford dropped its Mercury line, sold off Volvo, and pruned the number of Ford nameplates from 97 to fewer than 20. Says Ford CEO Alan Mulally, “I mean, we had 97 [models, for goodness] sake! How you gonna make ‘em all cool? You gonna come in at 8 a.m. and say ‘from 8 until noon I’m gonna make No. 64 cool? And then I’ll make No. 17 cool after lunch?’ It was ridiculous.” New Brands. A company might believe that the power of its existing brand name is waning, so a new brand name is needed. Or it may create a new brand name when it enters a new product category for which none of its current brand names are appropriate. For example, Toyota created the separate Lexus brand aimed at luxury car consumers and the Scion brand, targeted toward Millennial consumers. As with multibranding, offering too many new brands can result in a company spreading its resources too thin. And in some industries, such as consumer packaged goods, consumers and retailers have become concerned that there are already too many brands, with too few differences between them. Thus, P&G, PepsiCo, Kraft, and other large marketers of consumer products are now pursuing megabrand strategies—weeding out weaker or slower-growing brands and focusing their marketing dollars on brands that can achieve the number-one or number-two market share positions with good growth prospects in their categories. Managing Brands Companies must manage their brands carefully. First, the brand’s positioning must be continuously communicated to consumers. Major brand marketers often spend huge amounts on advertising to create brand awareness and build preference and loyalty. For example, worldwide, Coca-Cola spends almost $3 billion annually to advertise its many brands, GM spends $3.2 billion, Unilever spends $7.4 billion, and P&G spends an astounding $10.6 billion. Such advertising campaigns can help create name recognition, brand knowledge, and perhaps even some brand preference. However, the fact is that brands are not maintained by advertising but by customers’ engagement with brands and customers’ brand experiences. Today, customers come to know a brand through a wide range of contacts and touch points. These include advertising but also personal experience The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. with the brand, word of mouth and social media, company Web pages and mobile apps, and many others. The company must put as much care into managing these touch points as it does into producing its ads. As one former Disney top executive put it: “A brand is a living entity, and it is enriched or undermined cumulatively over time, the product of a thousand small gestures.” The brand’s positioning will not take hold fully unless everyone in the company lives the brand. Therefore, the company needs to train its people to be customer centered. Even better, the company should carry on internal brand building to help employees understand and be enthusiastic about the brand promise. Many companies go even further by training and encouraging their distributors and dealers to serve their customers well. Finally, companies need to periodically audit their brands’ strengths and weaknesses. They should ask: Does our brand excel at delivering benefits that consumers truly value? Is the brand properly positioned? Do all of our consumer touch points support the brand’s positioning? Do the brand’s managers understand what the brand means to consumers? Does the brand receive proper, sustained support? The brand audit may turn up brands that need more support, brands that need to be dropped, or brands that must be rebranded or repositioned because of changing customer preferences or new competitors. The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. New Product Development and Product Life-Cycle Strategies As the Google story suggests, companies that excel at developing and managing new products reap big rewards. Every product seems to go through a life cycle: It is born, goes through several phases, and eventually dies as newer products come along that create new or greater value for customers. This product life cycle presents two major challenges: First, because all products eventually decline, a firm must be good at developing new products to replace aging ones (the challenge of new product development). Second, a firm must be good at adapting its marketing strategies in the face of changing tastes, technologies, and competition as products pass through stages (the challenge of product life-cycle strategies). We first look at the problem of finding and developing new products and then at the problem of managing them successfully over their life cycles. New Product Development Strategy A firm can obtain new products in two ways. One is through acquisition—by buying a whole company, a patent, or a license to produce someone else’s product. The other is through the firm’s own new product development efforts. By new products we mean original products, product improvements, product modifications, and new brands that the firm develops through its own research and development (R&D) efforts. In this chapter, we concentrate on new product development. New products are important to both customers and the marketers who serve them: They bring new solutions and variety to customers’ lives, and they are a key source of growth for companies. In today’s fast- changing environment, many companies rely on new products for the majority of their growth. For example, new products have almost completely transformed Apple in recent years. The iPhone and iPad—neither of which was available just eight years ago—are now the company’s two biggest-selling products, with the iPhone bringing in more than half of Apple’s total revenues. Yet innovation can be very expensive and very risky. New products face tough odds. By one estimate, 66 percent of all new products introduced by established companies fail within two years. By another, 96 percent of all innovations fail to return their development costs. Why do so many new products fail? There are several reasons. Although an idea may be good, the company may overestimate market size. The actual product may be poorly designed. Or it might be incorrectly positioned, launched at the wrong time, priced too high, or poorly advertised. A high-level executive might push a favorite idea despite poor marketing research findings. Sometimes the costs of product development are higher than expected, and sometimes competitors fight back harder than expected. So, companies face a problem: They must develop new products, but the odds weigh heavily against success. To create successful new products, a company must understand its consumers, markets, and competitors and develop products that deliver superior value to customers. The New Product Development Process Rather than leaving new products to chance, a company must carry out strong new product planning and set up a systematic, customer-driven new product development process for finding and growing new products. Figure 9.1 shows the eight major steps in this process. Idea Generation New product development starts with idea generation—the systematic search for new product ideas. A company typically generates hundreds—even thousands—of ideas to find a few good ones. Major sources of new product ideas include internal sources and external sources such as customers, competitors, distributors and suppliers, and others. Internal Idea Sources Using internal sources, the company can find new ideas through formal R&D. However, according to one study, only 33 percent of companies surveyed rated traditional R&D as a leading source of innovation ideas. In contrast, 41 percent of companies identified customers as a key source, followed by heads of company business units (35 percent), employees (33 percent), and the sales force (17 percent). Thus, beyond its internal R&D process, a company can pick the brains of its own people—from executives to salespeople to scientists, engineers, and manufacturing staff. Many companies have developed successful internal social networks and intrapreneurial programs that encourage employees to develop new product ideas. For example, Google’s Innovation Time- Off program has resulted in blockbuster product ideas ranging from Gmail and Ad Sense to Google News. A similar program at 3M, called Dream Days, has long encouraged employees to spend 15 percent of their working time on their own projects, resulting in Post-it Notes and many other successful products. Tech companies such as Facebook and Twitter sponsor periodic “hackathons,” in which employees take a day or a week away from their day-to-day work to develop new ideas. LinkedIn, the 250-million-member professional social media network, holds “hackdays,” a Friday each month when it encourages employees to work on whatever they want that will benefit the company. LinkedIn takes the process a step further with its InCubator program, under which employees can form teams each quarter that The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. pitch innovative new ideas to LinkedIn executives. If approved, the team gets up to 90 days away from its regular work to develop the idea into reality. So far, the program has produced proposals for new products and business lines, internal tools, and human resources programs developed by employees from all over the company. External Idea Sources Companies can also obtain good new product ideas from any of a number of external sources. For example, distributors and suppliers can contribute ideas. Distributors are close to the market and can pass along information about consumer problems and new product possibilities. Suppliers can tell the company about new concepts, techniques, and materials that can be used to develop new products. Walmart invites its thousands of would-be suppliers to submit product ideas and supporting videos through its “Get on the Shelf” program. The retailer then invites its millions of customers nationwide to vote online for the products they’d most like to see on its shelves. Recent winners include an Elvis Pressley Home Bedding Collection and SKRIBS Customizable Wristbands. Competitors are another important source. Companies watch competitors’ ads to get clues about their new products. They buy competing new products, take them apart to see how they work, analyze their sales, and decide whether they should bring out a new product of their own. Other idea sources include trade magazines, shows, Web sites, and seminars; government agencies; advertising agencies; marketing research firms; university and commercial laboratories; and inventors. Perhaps the most important sources of new product ideas are customers themselves. The company can analyze customer questions and complaints to find new products that better solve consumer problems. Or it can invite customers to share suggestions and ideas. For example, the Danish-based LEGO Group, maker of the classic LEGO plastic bricks that have been fixtures in homes around the world for more than 60 years, systematically taps users for new product ideas and input. Crowdsourcing More broadly, many companies are now developing crowdsourcing or open-innovation new product idea programs. Through crowdsourcing, a company invites broad communities of people—customers, employees, independent scientists and researchers, and even the public at large—into the innovation process. Tapping into a breadth of sources—both inside and outside the company—can produce unexpected and powerful new ideas. Companies large and small, across all industries, are using crowdsourcing rather than relying only on their own R&D labs to produce all of the needed new product innovations. Rather than creating and managing their own crowdsourcing platforms, companies can use third-party crowdsourcing networks, such as InnoCentive, TopCoder, CloudSpokes, and jovoto. For example, organizations ranging from Audi, Microsoft, and Nestlé to Swiss Army Knife maker Victorinox have tapped into jovoto’s network of 50,000 creative professionals for ideas and solutions, offering prizes of $100 to $100,000. For the past three years, Victorinox has used jovoto to capture new designs for a limited fashion edition of its Swiss Army Knife. The aim of fashion designs is to attract younger buyers to the venerable old product. The first year, more than 1,000 artists submitted designs via jovoto. The limited edition, consisting of 10 designs selected after review by jovoto community members and voting on Facebook by Victorinox brand fans, had 20 percent better sales success than any previous internally created limited edition models. Crowdsourcing can produce a flood of innovative ideas. In fact, opening the floodgates to anyone and everyone can overwhelm the company with ideas—some good and some bad. For example, when Cisco Systems sponsored an open-innovation effort called I-Prize, soliciting ideas from external sources, it received more than 820 distinct ideas from more than 2,900 innovators from 156 countries. “The evaluation process was far more labor-intensive than we’d anticipated,” says Cisco’s chief technology officer. It required “significant investments of time, energy, patience, and imagination. to discern the gems hidden within rough stones.” In the end, a team of six Cisco people worked full-time for three months to carve out 32 semifinalist ideas, as well as nine teams representing 14 countries in six continents for the final phase of the competition. Truly innovative companies don’t rely only on one source or another for new product ideas. Instead, they develop extensive innovation networks that capture ideas and inspiration from every possible source, from employees and customers to outside innovators and multiple points beyond. Idea Screening The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding stages is to reduce that number. The first idea-reducing stage is idea screening, which helps spot good ideas and drop poor ones as soon as possible. Product development costs rise greatly in later stages, so the company wants to go ahead only with those product ideas that will turn into profitable products. Many companies require their executives to write up new product ideas in a standard format that can be reviewed by a new product committee. The write-up describes the product or the service, the proposed customer value proposition, the target market, and the competition. It makes some rough estimates of market size, product price, development time and costs, manufacturing costs, and rate of return. The committee then evaluates the idea against a set of general criteria. One marketing expert describes an R-W-W (“real, win, worth doing”) new product screening framework that asks three questions. First, Is it real? Is there a real need and desire for the product and will customers buy it? Is there a clear product concept and will such a product satisfy the market? Second, Can we win? Does the product offer a sustainable competitive advantage? Does the company have the resources to make such a product a success? Finally, Is it worth doing? Does the product fit the company’s overall growth strategy? Does it offer sufficient profit potential? The company should be able to answer yes to all three R-W-W questions before developing the new product idea further. Concept Development and Testing An attractive idea must then be developed into a product concept. It is important to distinguish between a product idea, a product concept, and a product image. A product idea is an idea for a possible product that the company can see itself offering The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. to the market. A product concept is a detailed version of the idea stated in meaningful consumer terms. A product image is the way consumers perceive an actual or potential product. Concept Development Suppose a car manufacturer has developed a practical battery-powered, all-electric car. Its initial prototype is a sleek, sporty roadster convertible that sells for more than $100,000. Looking ahead, the marketer’s task is to develop this new product into alternative product concepts, find out how attractive each concept is to customers, and choose the best one. It might create the following product concepts for this electric car: Concept 1. An affordably priced midsize car designed as a second family car to be used around town for running errands and visiting friends. Concept 2. A mid-priced sporty compact appealing to young singles and couples. Concept 3. A “green” car appealing to environmentally conscious people who want practical, no-polluting transportation. Concept 4. A high-end midsize utility vehicle appealing to those who love the space SUVs provide but lament the poor gas mileage. Concept Testing Concept testing calls for testing new product concepts with groups of target consumers. The concepts may be presented to consumers symbolically or physically. Many firms routinely test new product concepts with consumers before attempting to turn them into actual new products. For some concept tests, a word or picture description might be sufficient. However, a more concrete and physical presentation of the concept will increase the reliability of the concept test. After being exposed to the concept, consumers then may be asked to react to it by answering questions similar to those in Table 9.1. The answers to such questions will help the company decide which concept has the strongest appeal. For example, the last question asks about the consumer’s intention to buy. Suppose 2 percent of consumers say they “definitely” would buy, and another 5 percent say “probably.” The company could project these figures to the full population in this target group to estimate sales volume. Even then, however, the estimate is uncertain because people do not always carry out their stated intentions. Marketing Strategy Development Suppose the carmaker finds that concept 3 for the electric car tests best. The next step is marketing strategy development, designing an initial marketing strategy for introducing this car to the market. The marketing strategy statement consists of three parts. The first part describes the target market; the planned value proposition; and the sales, market-share, and profit goals for the first few years. The second part of the marketing strategy statement outlines the product’s planned price, distribution, and marketing budget for the first year. The third part of the marketing strategy statement describes the planned long-run sales, profit goals, and marketing mix strategy. Business Analysis Once management has decided on its product concept and marketing strategy, it can evaluate the business attractiveness of the proposal. Business analysis involves a review of the sales, costs, and profit projections for a new product to find out whether they satisfy the company’s objectives. If they do, the product can move to the product development stage. To estimate sales, the company might look at the sales history of similar products and conduct market surveys. It can then estimate minimum and maximum sales to assess the range of risk. After preparing the sales forecast, management can estimate the expected costs and profits for the product, including marketing, R&D, operations, accounting, and finance costs. The company then uses the sales and costs figures to analyze the new product’s financial attractiveness. Product Development For many new product concepts, a product may exist only as a word description, a drawing, or perhaps a crude mock-up. If the product concept passes the business test, it moves into product development. Here, R&D or engineering develops the product concept into a physical product. The product development step, however, now calls for a huge jump in investment. It will show whether the product idea can be turned into a workable product. The R&D department will develop and test one or more physical versions of the product concept. R&D hopes to design a prototype that will satisfy and excite consumers and that can be produced quickly and at budgeted costs. Developing a successful prototype can take days, weeks, months, or even years depending on the product and prototype methods. Often, products undergo rigorous tests to make sure that they perform safely and effectively, or that consumers will find value in them. Companies can do their own product testing or outsource testing to other firms that specialize in testing. Marketers often involve actual customers in product development and testing. For example, Patagonia selects triedand-true customers—called Patagonia Ambassadors—to work closely with its design department to field test and refine its products under harsh conditions. Similarly, Carhartt, maker of durable workwear and outerwear, has enlisted an army of Groundbreakers, “hard working men and women to help us create our next generation of products.” These volunteers take part in live chats with Carhartt designers, review new product concepts, and field test products that they helped to create. A new product must have the required functional features and also convey the intended psychological characteristics. The all- electric car, for example, should strike consumers as being well built, comfortable, and safe. Management must learn what makes consumers decide that a car is well built. To some consumers, this means that the car has “solid-sounding” doors. To others, it means that the car is able to withstand a heavy impact in crash tests. Consumer tests are conducted in which consumers test-drive the car and rate its attributes. The information in the lessons based on Kotler P.: Principles of Marketing. The content can be used for educational purposes only and cannot be made publicly available. Test Marketing If the product passes both the concept test and the product test, the next step is test marketing, the stage at which the product and its proposed marketing program are introduced into realistic market settings. Test marketing gives the marketer experience with marketing a product before going to the great expense of full introduction. It lets the company test the product and its entire marketing program—targeting and positioning strategy, advertising, distribution, pricing, branding and packaging, and budget levels. The amount of test marketing needed varies with each new product. When introducing a new product requires a big investment, when the risks are high, or when management is not sure of the product or its marketing program, a company may do a lot of test marketing. For instance, Taco Bell took three years and 45 prototypes before introducing Doritos Locos Tacos, now the most successful product launch in the company’s history. And Starbucks spent 20 years developing Starbucks VIA instant coffee—one of its most risky product rollouts ever—and several months testing the product in Starbucks shops in Chicago and Seattle before releasing it nationally. The testing paid off. The Starbucks VIA line now accounts for more than $300 million in sales annually. However, test marketing costs can be high, and testing takes time that may allow market opportunities to slip by or competitors to gain advantages. A company may do little or no test marketing when the costs of developing and introducing a new product are low, or when management is already confident about the new product. For example, companies often do not test market simple line extensions or copies of competitors’ successful products. Companies may also shorten or skip testing to take advantage of fast-changing market developments. That’s what Post Foods did when it launched Honey Bunches of Oats Greek Honey Crunch cereal: As an alternative to extensive and costly standard test markets, companies can use controlled test markets or simulated test markets. In controlled test markets, such as SymphonyIRI’s BehaviorScan, new products and tactics are tested among controlled panels of shoppers and stores.17 By combining information on each test consumer’s purchases with consumer demographic and TV viewing information, BehaviorScan can provide store-by-store, week-by-week reports on the sales of tested products and the impact of in-store and in-home marketing efforts. Using simulated test markets, researchers measure consumer responses to new products and marketing tactics in laboratory stores or simulated online shopping environments. Both controlled test markets and simulated test markets reduce the costs of test marketing and speed up the process. Commercialization Test marketing gives management the information needed to make a final decision about whether to launch the new product. If the company goes ahead with commercialization—introducing the new product into the market—it will face high costs. For example, the company may need to build or rent a manufacturing facility. And, in the case of a major new consumer product, it may spend hundreds of millions of dollars for advertising, sales promotion, and other marketing efforts in the first year. For instance, to introduce the Surface tablet, Microsoft spent close to $400 million on an advertising blitz that spanned TV, print, radio, outdoor, the Internet, events,