MM Instructor Manual

CHAPTER 7 NEW PRODUCTS

KNOWLEDGE OBJECTIVES
1. Understand the Importance of New Products
2. Identify the Various Stages of the Product Development Process
3. Introduce the Concept of the Product Life Cycle
4. Explain Diffusion of Innovation and its Implications
5. Stress the Relationship between New Products and Marketing Strategy
6. Examine Trends in the Global Marketplace and their Potential Impact
7. Discuss the Impact of Word of Mouth Effects on New Products
CHAPTER OUTLINE

Why New Products are Important

New Product Development Process
Product Life Cycle
New Products and Strategy
Trends
Word-of-Mouth Effects
Summary
1. New Products and their Importance
Section relates to knowledge objective #1
There are many reasons why firms introduce new products: corporate pride, to demonstrate it is
innovative, a way to better satisfy existing customers, attract new customers, to fend off
competition. New products increase a companys long-term financial performance and the firms
value.
2. How New Products are Developed and Introduced
Section relates to knowledge objective #2
Corporate culture and industry both play a role in how new products are developed. Some firms
in pharmaceuticals and engineering among others take a top down approach to new products.
This style of new product development consists of three steps: idea generation, design and
development, and commercialization. Marketing typically is only involved in the
commercialization and launch phase. Top down approach is also referred to as the inside out
approach because the idea comes from within the firm and the feedback is received later in the
process from outside sources.

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Alternatively, a firm can take a more marketing oriented approach (also referred to as an outside
in, bottoms up, or co-creation). In this approach customer feedback is sought at most phases
of the new product development process. This approach can have many more steps than the top
down approach: idea generation, in-house winnowing and refinement, concept testing, repeated
in-house winnowing and refinement, product development, product testing, further refinement,
test marketing, and launch.
Figure 7.1 New Product Development (NPD) Process
This figure applies to knowledge objective #2
Figure shows the steps in both the top down and bottom up approaches. Customers and
marketing research are involved at the concept testing, product testing, and test marketing stages
and marketing management is involved throughout.
A. Idea Creation
Ideas can come about through a variety of methods. They can happen by accident, they
can be through observation of others, or through brainstorming. Ideas are subsequently
screened for their feasibility with respect to such things as: plausibility in construction,
compatibility with company goals, and likelihood of marketplace success.
Figure 7.2 New Product Development (NPD) Process
This figure applies to knowledge objective #2
Figure shows both internal and external sources for ideas. These include various employees,
customers, business partners, and competitors.
B. Concept Testing
Focus groups or Web surveys are often used to gain feedback about which ideas are most
promising. When employing either method, mock-ups, verbal descriptions, or
photographs can be used. A conjoint analysis can also be used in order to determine
which combination of attributes sound best. In some instances, further concept testing
may be required.
C. Product Testing
A test version of the product is made available for trial. Product should be used in a
setting as similar to actual usage situations. At the same time, marketing materials should
be developed including positioning information, advertising copy, pricing, and
distribution.
D. Test Marketing

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Test marketing attempts to simulate a real-world setting to enhance the chance that
customer response will be similar to actual purchasing behavior at launch. Area test
markets are small metropolitan areas that are reflective (demographics, socio-economic)
of the entire country. Products are launched in the area with full marketing support. The
test runs from 3 to 12 months and are expensive. Due to their cost, area test marketing is
not frequently used. Electronic test markets get around some of the issues associated
with area test markets so that differences between households can better be attributed to
advertising or product access. Simulated test markets use real products in either on offline or on-line setting with both product and competitive advertising included.
E. Forecasting
After test marketing, the customer data is used in an attempt to predict the likelihood of
the product being successful.
Figure 7.3 Forecasting
This figure applies to knowledge objective #2
Figure provides a formula for forecasting a new products potential. Formula is given as:
$SP = MP x PI x Pr where, $SP is Sales Potential (ceiling), MP is market potential, PI is an
estimate of purchase intention in the target segment, and Pr is price of the new product. The
figure $SP is not a sales estimate, but maximum on sales.
F. Timing
The time from genesis to launch is context dependent. Consumer product line extensions
may be rather quick, while the creation and launch of a blockbuster drug may take years
due to rigorous testing and FDA approval.
3. The Product Life Cycle (PLC)
Section relates to knowledge objective #3
The product life cycle illustrates the duration of the product being in the marketplace. Upon
market introduction, the product is supported by heavy marketing spending. It could be priced
either high or low depending upon the firms strategy. Distribution tends to be limited. The next
phase, market growth is reflected by accelerating sales and profits (at least at first). Customer
awareness increases, distribution coverage increases. At this stage, advertising is intended to
persuade customers of the brands superiority. Competition may also increase. The next stage is
market maturity. Advertising continues to try to persuade, but also remind. Product extensions
may occur in order to satisfy more segments. Due to competition, marketing expenditures have
increased, so while sales are strong, profits may be sagging. In addition, while the product is
mature, it is likely that the market has matured as well. It is possible due to market crowding,
that customers see little difference among the products in the market. Finally, there is market
decline. Sales and profits both decline. The firm must decide whether to divest, harvest or

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revamp the product. The product life cycle is not without criticism. Critics note that product life
spans can vary greatly. Movies may last a week or two at the box office, Ivory soap has been
around for over 100 years.
Figure 7.4 Product Life Cycle (PLC)
This figure applies to knowledge objective #3
Figure provides a graphical representation of the PLC. With $ on the vertical and time on the
horizontal, the product passes through the four stages: introduction, growth, maturity, and
decline. Sales are depicted as a slightly elongated S function. With profits being a similar,
though smaller S function. Figure provides some general information for the goals, product,
price and promotion at each stage.
Diffusion of Innovation is the term used by marketers to explain the process by which a the
adoption of a new product spreads throughout the marketplace.
Figure 7.5 Diffusion of Innovation
This figure applies to knowledge objectives #4 & #5
Figure depicts the diffusion process as a normal curve and partitions the customer base into 5
groups. Number of adopters in a given period is on the vertical axis and time on the horizontal
axis. The first group to adopt are the innovators and represent 3 to 5% of all adopters. The
next group are early adopters and represent 10 to 15% of all adopters and are the most
influential group. The early majority represents approximately 34% of all adopters and the final
group are considered laggards or nonadopters and represent the remaining 5 to 15%.
Figure 7.6 Cumulative Diffusion
This figure applies to knowledge objectives #4 & #5
Figure shows diffusion as a cumulative distribution function (S-curve). Cumulative sales are on
the vertical axis and time (year) on the horizontal. The inflection point of the curve represents
where sales begin to take off and is often referred to in business as the tipping point or where
the product becomes mainstream.
Figure 7.7 Model of Diffusion
This figure applies to knowledge objectives #4 & #5
Figure provides an equation (Bass model) for determining the number of people adopting at any
given time. Equation is given as: nt = [ p + q (Nt 1 / M)] (M Nt 1) where, is nt the number of
people adopting at any given time, p is a coefficient of innovation, q is a coefficient of imitation,
Nt 1 is the number of people have already adopted, and M is the total number of customers in the

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given market (segment) all of whom will ultimately adopt. Key to the model are the terms p and
q. p represents the people that will adopt based upon marketer information. q represents the
people that adopt due to word of mouth effects (WOM). This model of diffusion has been used
in two ways, the first manner in which it has been used is by using existing sales data for the
product to predict future sales. The second has been to use data for similar products to predict
sales of a product prior to launch. Lastly, imitation effect is usually about ten times larger than
the innovation effect which explains the same of the curve in figure 7.5.
4. How New Products fit in Marketing Strategy
Section relates to knowledge objective #5
Marketers need to consider how each new product fits into the marketing and company portfolio.
Paths to growth can be through either remaining with the current product mix and targeting new
segments, or by creating totally new products.
Figure 7.8 Growth Strategies
This figure applies to knowledge objectives #4 & #5
Figure provides a 2 x 2 classification scheme for growth strategies. A growth strategy can either
involve new products, or existing products, new markets or current markets. A current market,
current product growth strategy is referred to as a penetration strategy. A current market, new
product growth strategy is a product development strategy. A new market, existing product
growth strategy is referred to as a market development strategy and a new market, new product
growth strategy is a diversification strategy.
In a market penetration growth strategy, firms often suggest new ways to use the product. Firms
may also use a new media and/or promotional campaign, implement price changes, or increase
availability.
TEACHING NOTE: Arm & Hammer made by Dwight and Church is the frequently cited
example of a firm using a market penetration strategy by finding and communicating new uses
for an existing product. Baking soda is rising agent used in baking. It also has deodorizing
properties and the firm suggested to the market that its Arm & Hammer baking soda could be
used to combat a variety of odors in freezers, refrigerators, sink drains, and carpets among
others. Most people were already buying the product, but now some bought two units one for
baking and one for the refrigerator or freezer, or both. Some people may have not bought the
product previously as a baking product, but once informed, bought the product as a deodorizer.
So in this instance it is more of a market development growth strategy.
5. Trends and Their Impact
Section relates to knowledge objective #6

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Marketers continually watch the environment to detect trends that could impact future business
activity. Such trends typically fall into the categories of demographic, lifestyle, and cultural
trends. These trends can impact the fortunes of existing products and services as well as any new
product launch. General noteworthy trends include: the continued aging of America and Western
Europe, the continued increasing multiculturalism in the United States and the increasing
purchasing power of minorities in the U.S. Other trends include the continued globalization of
the worlds economies and the increased wealth among many of the worlds emerging economies,
increased concern over environmental issues and depletion of the worlds natural resources. All
of these issues can impact marketing such as the drive to use more recycled and/or
renewable/sustainable materials.
TEACHING NOTE: Bamboo flooring represents one product that is growing in acceptance
among home owners and contractors. Bamboo flooring products have been engineered to mimic
the appearance of natural tongue and groove hardwood floors and can be more dent and scratch
resistant than many hardwoods, such as oak. The advantage of bamboo is that it is less costly
and bamboo plants re-grow after the bamboo shoots have been harvested. Bamboo also grows at
a much faster rate than hardwood trees, so they are considered a sustainable product. It should
be noted that cork flooring is considered sustainable and environmentally friendly as well and
has been re-engineered to better match consumer preferences.
6. Word of Mouth (WOM) Effects
Section relates to knowledge objective #7
Word of mouth effects can have a tremendous impact on the rate of diffusion of new products.
Due to information technology, especially in the form of blogs and online social networks,
marketing communications is becoming less a one-way (firm to customer) form of
communication and more interactive, and even more beyond the control of the firm. However,
increasingly firms are trying to at least start or create WOM on their own. The advantage of
WOM is that it seems more authentic and credible because the comments and opinions are
expressed by users rather than the company. Two manners in which companies attempt to create
WOM are 1) providing free products to brand agents and 2) offering incentives to users for
referrals.
Figure 7.9 Diffusion and Word-of-Mouth Networks
This figure applies to knowledge objective #7
Figure provides a network diagram of links and nodes for an individual and their social
connections as well as their friends social connections. Each person is a node and the
relationship is a line or link. One note of interest, is that the figure doe not show reciprocal
relationships which could be interpreted to mean that you might be friends with someone, but
they may not be friends with you, or a person might consider you a friend, but you may not
consider them a friend.

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TEACHING NOTE: A good instructional device to demonstrate the power of word of mouth
and its relation to diffusion effects and the parameters of p (innovation) and imitation (q) in the
model of diffusion is provided in the following simple example. Ask students to start with them
self and suppose that they talk to 3 friends on Monday about a new product. If each person who
is informed about the tells 3 people the next day, at the end of 11 days how many people will
have heard about the product. Provide a line graph to illustrate the effect.
Day 1 - Monday = 3 , Tuesday = 9, Wednesday = 27, Thursday = 81, Friday = 243, Saturday =
729, Sunday = 2187, Monday = 6561, Tuesday = 19683, Day 10 -Wednesday = 59049.
A simply line graph:

The graph assumes that there is only one form of information, each person tells exactly 3 people
all in a single day, and no person included in the graph had previously heard about the product.
Graph illustrates the beginning of the S-curve in Figure 7.6, or the first portion of the curve in
Figure 7.5. As people become aware, the curve will begin to tail or reach its saturation point.
Also, note that this is NOT a cumulative distribution function, it represents only those that hear
on any given day, NOT the total have heard to date!
7. Summary
New products are developed through a process. The process may be long or short and have few
steps or several. New products are critical for continued firm growth and success. Products
seem to have an evolution, much like a life cycle: introduction, growth, maturity, and decline.
The duration of a products life can be impacted by the marketers ability to reinvigorate and
reformulate. Diffusion models can be used to forecast sales and product success can depend on
word-of-mouth.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
For the questions that follow, consider these noteworthy lifestyle trends:
1. Demographics
a. U.S. baby boomers are beginning to retire and experience health problems.

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b. The world is smaller and feels more diverse than ever.

2. Psychological
a. People care about the environment, hence more green marketing and more
organic products.
b. Everyone wants to feel special, so indulgence, hedonic, and luxury or faux luxury
sales are on the rise.
c. Everyone wants purchases that are good value (good quality at good prices).
d. There is a somewhat greater tolerance of a variety of lifestyle choices.
e. People are wearing more casual clothing, even at work.
f. Adults and families are experiencing less leisure time.
g. People are spending less time reading newspapers.
h. There are concerns for health and nutrition (e.g., less smoking).
3. Technological
a. IT helps the marketer (e.g., CRM) and customer (e.g., decision making).
b. There are more forms of media, and customers are taking control, in time- and
place-shifting (e.g., when to watch what is on TV).
c. e-things:
i. More shopping is done from home rather than at stores and malls.
ii. Its accessible and acceptable to buy almost anything online.
iii. More time is spent online, doing anything
Using the previous trend observations, answer the following questions:
1. Choose one fact that seems most relevant to your business and forecast (conceptually)
how that trend will affect your marketplace, company direction, competitive offerings,
etc.
U.S. baby boomers are beginning to retire and experience health problems.
As was noted in the text, as people age, these individuals, and their loved ones will need
financial planning, health care and medicine, assisted living facilities, and activities and
pursuits (travel) directed towards them. Such items might include such things as exercise
facilities that cater to an older crowd think of it as the mature equivalent of curves.
This would also require physical trainers that specialize in the mature exercise participant
and the special needs they may have such as nutrition, joint pain, decreased flexibility,
strength and endurance.
The world is smaller and feels more diverse than ever.
People need to be made to feel special, yet connected at the same time. This could mean
more individual tailored marketing appeals, both in the form of products and
communications. It would require increased ability on the part of marketers to recognize this
diversity and understand what it means. Marketer sponsored events and networks would
help with this issue.
People care about the environment, hence more green marketing and more organic
products.

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Continued and increased demand for locally grown products. Forces mainstream grocers to
search for quality local sources with sufficient supply to meet demand at competitive prices.
Also will present an opportunity for creative chefs and restaurants to provide seasonal menu
variation as a way to promote locally grown and distinguish themselves from restaurants
with static (set/fixed) menus. Also presents a challenge as in how to get people to eat root
vegetables that they typically dont eat (turnips, rutabagas, etc).
2. Have a friend choose any two of the trends randomly, and imagine creating a new
product to address that combined new need.
Eco-friendly roof design and installation service. With a greater number of people
desiring to live an eco-friendly lifestyle, Eat-Off-Your-Roof is a company that designs
roofs that consist of low water-needs vegetation that can be consumed by humans. This
allows families to live an eco-friendly life and to be more self-sufficient. So, the two
trends are: eco-friendly life and eat locally grown products.
3. Surf to (a) find three more new trends and (b) identify the (likely) top-10 trends (its
okay to include the trends listed earlier) for the next 10 years (and reasons why you
believe theyll be the most important).
There are a near infinite number of trends to watch in any number of categories that
could affect marketing behavior. Any of the above trends is likely to have a counter-trend
as well (with few exceptions). Such trends: with respect to on-line behavior there could
be a backlash to technology with some people rejecting being electronically connected
(no cell phones, cable, internet, web-based social networks, there will continue to be
those individuals that reject the notion of consumerist culture. One potential trend will be
growth in micro-trends these are small trends adopted by a relatively few number of
people, that may also exist for a relatively short period of time. But the shear number of
categories make trends difficult to evaluate: technology, political, economic, consumer,
technology, medical.
SUGGESTED ANSWERS TO MARKETING PLAN QUESTIONS
Take the new products perspective of this chapter and build on the answers you compiled in
Chapters 5 and 6.
Product:
fill in descriptions here:
Choose high-end quality or basic-quality level:
Product1
This example has elected to pursue a high-end quality energy drink. This is due to the
reasoning that the target group (women) would be more accepting of a quality product rather
than a lesser quality-lower priced product. This may in part be due to potential resentment of
having a low-quality product made for directly to them. Complete Energy (Total Energy was
rejected due to potential conflict with the cereal brand Total) is an energy drink for todays
active woman. In todays frenetic, multi-tasking world, women need an energy supplement
formulated especially for them. Complete energy is that drink. The description would continue
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to detail: taste, number of calories and carbohydrates, nutrients, and caffeine level. It gives
you the kick, without the crash.
Use conjoint on target segments to determine primary attributes/features:

Product2

Primary attributes could be: flavor, serving size (8, 12, 16 or some other size), amount of
caffeine, nutritional supplements, type of sweetener (sugar, substitute), caloric level, package
type, and price.
What are our brand associations, and what do want to trade in/out:

Product3

It would appear that possible brand associations the product marketers would want would
include: strength vs. femininity (which do NOT have to be mutually exclusive), active vs.
passive, endurance vs. quickness among others. The product wants to distinguish itself from the
more masculine products on the market, yet should appeal to strong, independent, successful
women. Another key trade-off is between the speed at which the energy boost will kick in
versus the duration of the effect. For other product categories, students need to think in terms
of competitive advantage: is the product cheaper, better, or different. How do those strategies
translate in to brand meaning and associations among customers. Again, encourage students
to ask others what they think. A simple and effective procedure is to create a semantic
differential and have students ask others what words they think most relate to the product or
product category. Alternatively, a simple word association test may also be beneficial.
Where are we in the product life cycle; is it time to jumpstart:

Product4

Depending on approach either a) new product concept (yet to be tested and launched) or if
existing most likely in the late growth stage as the energy drink market still has double digit
annual growth. For other product categories, have students conduct secondary research to
determine if they can find such things are number of years on the market, annual sales volume
(both unit and dollar) for the past several years. These could be provide rough approximations
of where the product is in the product lifecycle.

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