DEVELOPING NEW PRODUCTS

(Chapter 12)

Dr. Pieter Verhallen

 Topics Covered

1 Reasons firms create new products

2 Different groups of adopters articulated by diffusion of

innovation theory

3 Stages involved in developing a new product or service

4 Product life cycle

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 Innovation and Value

Why do firms create new products?

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Innovation and Value

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 Diffusion of Innovation

• The process of how innovation

spreads throughout a market over
time & across categories of adopters

• Pioneers, or breakthroughs,
establish completely new markets or
radically change competition &
consumer preferences

• Pioneers have the advantage of

being first movers

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Ksander
Diffusion of Innovation Curve

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 Identify the Adopter

The first year they were offered, John wanted a tablet

computer, but he did not know which one to choose.
Innovators
He waited until there were more choices, lower
prices, and improved quality. John is part of the
Blank diffusion of innovation group.
Late
Majority
Tiffany always asks Samantha about beauty supply
products. She considers her a well-informed friend
who always knows the latest trends. For Tiffany, Early
Samantha is a(n) Blank in the diffusion of Adopters
innovation curve.

Laggards
Denise and Janet attend a large university in North
Carolina. Denise asked for Janet’s e-mail address,
but Janet said she didn't have one. Janet would Early
probably be considered a(n) Blank in the Majority
diffusion of innovation process.
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 Using Diffusion of Innovation Theory

• Factors Affecting Product Diffusion

• Compatibility
• Observability
• Complexity & trialability
• Relative advantage

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Product Failures

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Product Failures

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 PROGRESS CHECK

1. What are the five groups on the diffusion of innovation curve?

2. What factors enhance the diffusion of a good or service?

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The Product Development Process

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The Product Development Process

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Sources of New Product Ideas

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Sources of New Product Ideas

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Sources of New Product Ideas: Internal R&D

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Sergey Nivens
 Sources of New Product Ideas: Internal R&D

• High product development costs

• Often the source of technological

products

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Sergey Nivens
Sources of New Product Ideas: R&D Consortia

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 Sources of New Product Ideas: R&D Consortia

• Firms join to form research consortia

• Lower costs & risks

• Benefits spread to all firms

• Example: pharmaceutical industry research

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Sources of New Product Ideas: Licensing

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 Sources of New Product Ideas: Licensing

• Firms purchase the rights to technology

or ideas from other research-intensive
firms

• University research centers often provide

such licenses

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Sources of New Product Ideas: Brainstorming

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 Sources of New Product Ideas: Brainstorming

• Groups work together to generate

ideas

• No idea is immediately accepted or

dismissed

• Members vote on best idea or

combination of ideas

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Sources of New Product Ideas: Outsourcing

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 Sources of New Product Ideas: Outsourcing

• Hiring an outside firm to help

generate ideas and develop new
products and services

• Design firms help clients generate

new product & service ideas in, e.g.,
health care, toys, computers

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Sources of New Product Ideas: Competitors’ Products

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Sources of New Product Ideas: Competitors’ Products

Reverse Engineering Copycat Products

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Sources of New Product Ideas: Customer Input

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 Sources of New Product Ideas: Customer Input

• Listening to the customer in both B2B

and B2C markets can lead to successful
idea generation

• Lead users
– Innovative product users who modify
existing products according to their
own specific needs

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 Sources of New Product Ideas: Concept Testing

• A concept is a brief written description of the

product

• Concept testing: when concept is presented to

buyers or users to obtain reactions

• Triggers the marketing research process

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Product Development Process

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Product Development Process: Development / Design

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Product Development Process: Development / Design

Prototype

Alpha testing

Beta testing

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Product Development Process: Market Testing

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Product Development Process: Market Testing

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Product Development Process: Product Launch

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 Product Development Process: Product Launch

• Requires high financial resources &

coordination of marketing mix

• Firm confirms target market(s), decides

how product will be positioned, finalizes
marketing mix variables, & determines
marketing budget

• Timing of launch may be critical

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Product Development Process: Evaluation of Results

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Product Development Process: Evaluation of Results

Satisfaction of technical requirements

Degree of customer acceptance

Satisfaction of firm's financial requirements

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 PROGRESS CHECK

1. What are the steps in the new product development

process?

2. Identify different sources of new product ideas.

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Product Life Cycle

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 Product Life Cycle

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 Product Life Cycle

Introduction Growth Maturity Decline

Sales Low Rising Peak Declining

Negative or Rapidly Peak to
Profits Declining
low rising declining
Early
Typical adopters &
Innovators Late majority Laggards
consumers early
majority
High number Low number
Competitors
Few but of of
(firms and One or few
increasing competitors competitors
products)
& products & products
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 Limitations of the PLC

Each product or service has its

own shape

Challenging to know precisely the

stage of the PLC

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 PROGRESS CHECK

1. What are the key marketing characteristics of products

or services at each stage of the product life cycle?

2. Why might placement decisions for products or services

into stages of the product life cycle become a self-
fulfilling prophecy?

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 PRICING
(Chapter 14)

Dr. Pieter Verhallen

 Topics Covered

1 Four pricing orientations

2 Relationship between price and quantity sold

3 Calculating a product’s break-even point

4 Types of price competitive levels

5 Everyday-low-pricing (EDLP) strategy vs. high/low strategy

6 Price skimming vs. market penetration pricing strategies

7 Pricing practices that are illegal or unethical

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The 5 Cs of Pricing

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The 5 Cs of Pricing

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 The 5 Cs of Pricing: Company Objectives

Company Objective Examples of Price Strategy Implications

Profit- Institute a companywide policy that all products must provide for at least an 18 percent
oriented profit margin to reach a particular profit goal for the firm.

Sales- Set prices very low to generate new sales and take sales away from competitors, even if
oriented profits suffer.

Competitor-
To discourage more competitors from entering the market, set prices very low.
oriented

Customer- Target a market segment of consumers who highly value a particular product benefit and
oriented set prices relatively high (referred to as premium pricing).
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 Profit Orientation

Target
profit
pricing

Profit
Orientation

Target
Maximizing
return
Profits
pricing
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 Sales Orientation

• Focus on increasing sales

• More concerned with overall

market share

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 Competitor Orientation

Since Frontier and other airlines started

• Competitive parity: prices similar to offering low-cost, no-frills flights, other
airlines have had to work hard to keep
competitors increasing market share.

• Status quo pricing: only change prices

to meet competitors’ prices

• Value is not directly a part of this pricing

strategy

IM_photo 53
 Customer Orientation

Can you tell the difference between the

$17,500 and the $219 speakers?

• Pricing strategy based on how

the firm can add value to its
products and services

• Match prices to customer

expectations

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The 5 Cs of Pricing

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 The 5 Cs of Pricing: Customers

• How many units will a customer demand at different prices?

• Demand curves

• Knowing demand curve enables you to see relationship

between price & demand

• Based on assumption that everything else remains unchanged (i.e., no

increase in advertising expenditures)

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Demand Curve for Teeth-Whitening Kits

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Demand Curve for a Club Med Vacation

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Price Elasticity of Demand

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 Price Elasticity of Demand

• Elastic Price Elasticity of Demand =

(price sensitive)
% change in quantity demanded
• Inelastic % change in price
(price insensitive)

• Consumers are less sensitive to price

increases for necessities

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Marketing Analytics: Dynamic Pricing

Domenic Gareri 62
 Marketing Analytics: Dynamic Pricing

• Aka individual pricing

• Pricing based on current customer value; timing

Domenic Gareri 63
Factors Influencing Price Elasticity of Demand

Income
effect

Cross-price Substitution
elasticity effect

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 Income Effect

• Basic: consumers’ demand changes when

their income changes

– Income goes up, consumers often switch

to higher-priced alternatives, and/or
increase quantity purchased

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 Substitution Effect

• Consumers’ ability to substitute other products

for the focal brand

• Meet Ellie, a mom of three on a budget:

• Tide laundry detergent user
• At the store, she notices that Tide is more expensive
• Ellie decides to give another brand a try and save
money

Dmitri Maruta
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 Cross-Price Elasticity

• Percentage change in quantity of Product A

demanded compared with percentage change in
price in Product B

• Meet Kendra, a self-supporting college student:

• Buys a printer on sale for a great price
• Learns it requires ink cartridges that cost more than the printer

• Complementary products vs. substitute products

Dmitri Maruta 67
 PROGRESS CHECK

What is the difference between elastic demand and inelastic demand?

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The 5 Cs of Pricing

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The 5 Cs of Pricing: Costs

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Palto/Shutterstock
 The 5 Cs of Pricing: Costs

• Variable Costs
• Vary with production volume

• Fixed Costs
• Unaffected by production volume

• Total Cost
• Sum of variable and fixed costs

Palto 71
 Break-Even Analysis

Total variable costs = Variable cost per unit × Quantity

Total costs = Fixed costs + Total variable costs

Total revenue = Price × Quantity

Fixed Costs
Break-Even Point (units) =
Contribution per unit

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Break-Even Analysis

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 Markup & Target Return Pricing

• A firm might want to achieve a standard

percentage markup on the costs of the
product

• A target return price is then calculated based

on variable and fixed costs, expected sales,
and the target return markup

John Lund/Marc Romanelli 74

 PROGRESS CHECK

1. What is the difference between fixed costs and variable costs?

2. How does one calculate the break-even point in units?

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The 5 Cs of Pricing

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 The 5 Cs of Pricing: Competition
Four Levels of Competition: Can you match each photo to its respective type of competition?

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 PROGRESS CHECK

1. What are the four different types of competitive environments?

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The 5 Cs of Pricing

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The 5 Cs of Pricing: Channel Members

Pricing through the Channels

• Manufacturers, wholesalers,
and retailers can have
different perspectives on
pricing strategies

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Everyday Low Pricing (EDLP) vs. High/Low Pricing

Create value for consumers in different ways.

EDLP reduces consumers’ search costs.

High/low provides the thrill of the chase for the lowest price.

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Reference Prices

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 New Product Pricing Strategies

• Market Penetration Pricing

• The objective is to build sales, market Price skimming is often used for high-demand video
games like Far Cry 6, because fans will pay a higher
share, and profits quickly and deter price to be one of the first to own the newest version.

competition from entering the market

• Price Skimming
• It helps firms build market share for
their new products quickly, but
consumers must be price elastic for
this strategy to work

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 PROGRESS CHECK

1. Explain the difference between EDLP and high/low pricing

2. What pricing strategies should be considered when introducing

a new product?

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Legal Aspects & Ethics of Pricing

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 Deceptive or Illegal Price Advertising

• Deceptive reference prices

• Loss-leader pricing

• Bait and switch

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Predatory Pricing

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 Price Discrimination

• Is not always illegal

• Different rules in the B2B and

B2C markets

• Federal law does not apply to

sales to end consumers

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 Price Fixing

Horizontal price fixing

• Competing firms should refrain from discussing prices

or terms and conditions of sale with competitors

Vertical price fixing

• Manufacturers often encourage retailers to sell their

merchandise at a specific price, known as the
manufacturer’s suggested retail price (MSRP)
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