products, services, and branding

BUAD 307—PRODUCTLars Perner, Instructor

BUAD 307 PRODUCT Lars Perner, Instructor 1

PRODUCTS, SERVICES, AND BRANDING

Products come in several forms. Consumer products can be categorized as convenience goods, for which consumers are willing to invest very limited shopping efforts. Thus, it is essential to have these products readily available and have the brand name well known. Shopping goods, in contrast, are goods in which the consumer is willing to invest a great deal of time and effort. For example, consumers will spend a great deal of time looking for a new car or a medical procedure. Specialty goods are those that are of interest only to a narrow segment of the population—e.g., drilling machines. Industrial goods can also be broken down into subgroups, depending on their uses. It should also be noted that, within the context of marketing decisions, the term product refers to more than tangible goods—a service can be a product, too.

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• The Product-Service Continuum

• Product Assortment

• Product lines

• The Product Life Cycle

• New product introductions

• Diffusion of innovation

• Branding

• International and cross-cultural product adaptations

PRODUCT

A number of issues come up in the area of product design, introduction, redesign, and branding.

For those wondering about the graphic here, the point is rather abstract: Two numbers multiplied together are known as a “product.”

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• Evaluate product assortment: Depth and breadth

• Identify tangible and intangible sources of offering value

• Identify issues and strategic options across the Product Life Cycle (PLC), including the diffusion of innovation and the degree of product category “newness”

• Evaluate a potential new product as an investment

• Identify and address chicken-and-egg issues in innovation and product introductions

• Evaluate and identify advantages and disadvantages of different brand structures and strategies

LEARNING OBJECTIVES

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TARGETINGSELECTING WHICH

SEGMENT(S) TOSERVE

POSITIONINGIMPLEMENTING

CHOSEN IMAGE ANDAPPEAL TO CHOSEN

SEGMENT

SEGMENTATIONIDENTIFYING

MEANINGFULLYDIFFERENT GROUPS

OF CUSTOMERS PROUDCT

DISTRIBUTION

PRICE

PROMOTION

As reminder, we are now building on the idea of positioning, using the marketing mix to implement our strategy to serve our chosen market segment or segments.

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Some Products That Are Surprisingly Difficult to Make

• French fries– Intense competition for taste– Consistency of taste despite changing harvests– Maximization of time until they have to be discarded if not sold– Theoretically: Balance taste with calories

• Razor blades– Must cut facial hair as tough as copper!– Shave should be close—preferably in one pass– Skin should be cut

• Nail polish– Should look “just put on”—shine– Should last as long as possible– Should dry quickly– Should avoid most dangerous chemicals (e.g., toluene)

• Candy bars– Should maintain consistency across a wide range of temperatures.

Some seemingly simply products and actually be very difficult to make to the standards demanded by consumers in today’s markets.

Normally, we do not think of French fries as a “high tech” product. In fact, In ‘n’ Out Burgers makes fries the old fashioned way, beating the other chains on taste. However, in restaurants where there is not the same willingness to start from scratch and wait for your order to be prepared, technological challenges become significant. The longer fries can be kept under a heat lamp without having to be discarded, the more efficiently the process can be run. Subject to this constraint, a great deal of science goes into optimizing the taste of the fries. Very large amounts of money goes into creating the optimal taste in a way that can be reliably done in different settings.

Razors seem like simple devices, and metallurgy has been done since the Middle Ages. However, Gillette still does extensive research and development. Each morning, number of men show up unshaven to try new innovations. Razors actually have do a very difficult task: To shave off something that, relative to its thickness, is as tough as copper while minimizing discomfort and injury done to the skin. The razor should also be as efficient as possible. Ideally, it should remove the hair with just a single pass over an area.

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Product Lines vs. Product Mix

• Product Line: A number of similar or related products—e.g.,

– BIC writing utensils

– Boeing Commercial Aircraft (aircraft and parts)

– Nike shoes; Nike clothing

• Product Mix: Assortment of different products offered

– E.g., “KFC—we do chicken right!” (Only one product line)

– Samsung: Computers, computer parts (e.g., RAM, SSDs), TVs, monitors, cell phones (numerous models for different markets), appliances

A firm’s product line or lines refers to the assortment of similar things that the firm holds. Brother, for example, has both a line of laser printers and one of typewriters. In contrast, the firm’s product mix describes the combination of different product lines that the firm holds. Boeing, for example, has both a commercial aircraft and a defense line of products that each take advantage of some of the same core competencies and technologies of the firm. Some firms have one very focused or narrow product line (e.g., KFC does only chicken right) while others maintain numerous lines that hopefully all have some common theme. This represents a wide product mix 3M, for example, makes a large assortment of goods that are thought to be related in the sense that they use the firm’s ability to bond surfaces together. Depth refers to the variety that is offered within each product line. Maybelline offers a great deal of depth in lipsticks with subtle differences in shades while Morton Salt offers few varieties of its product.



Brand vs. Firm Level Assortment

• A firm may spread both its product lines and product mix across different brands

– Different brand for each product (e.g., Procter & Gamble; Mars Candy)

– Different brands for different product lines (e.g., Microsoft Bing [search engine]; Sam’s Club)

– Different tier brands in same product category (e.g., Courtyard by Marriott, Lexus [owned by Toyota])

– Brands acquired by a firm over time and maintained (e.g., Toblerone is owned by Kraft)

– “Vestigial” brands (Rite Aid acquired Payless Drugs which had previously acquired Thrifty stores; the Thrifty brand name is still used on ice cream)

• Separately operated divisions using the same brand name (e.g., Virgin Group: Virgin Mobile, Virgin Hotels, Virgin Railways)

• Divisions sold off to a buyer who maintains the original brand name (e.g., Kit Kat brand name is owned by different firms in different parts of the World).

Today, the same firm may own several different brands, and efforts may be made to clearly differentiate the different brands of the same company. Procter & Gamble owns a number of brands in the same product category. They own a number of laundry detergent brands, including Tide, Bold, and Gain in addition to a number of brands used in different regions of the world. Managers at these brands are expected to aggressively compete against each other. The historical philosophy held by P&G is that a weak product should not be allowed to “drag” the overall brand down. Thus, each separate brand has to make it on its own.

Sometimes, a brand may be involved in different product lines and, occasionally, some product lines may be sold off. The Virgin Group is best known for air travel, but they also own hotels and a number of other business units using its same. Occasionally, divisions—such as cellular phones—may be sold off but may still be allowed to keep the original Virgin brand name.

Different firms own the trademark on “Kit Kat” for candy bars in different parts of the world. This can cause problems in trying to maintain a consistent brand image.

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Mostly Tangible Product Mostly Service

_______________________________________________________________

Example Cement Microwave oven

Apple laptop Car tune-up Surgery

Tangible component

Content, bagging

Hardware Computer, accessories

Sparkplugs, other parts

Sutures, staples, antibiotic lotion, anesthetic

Service component

Retail availability, instructions

Instruction manual, warranty

Customer service, updates, warranty

Labor, warranty Diagnosis, planning, skilled procedures; administration of anesthesia

The Product-Service Continuum

Most of the value comes from the tangible product

Most of the value comes from the

service component

Most offerings have at least some element of both

a tangible and servicecomponent.

Some people insist on drawing a rigid distinction between tangible goods and services. In practice, this is not useful. Most products contain at least some element of both. It is more useful to examine where, on the continuum from a pure tangible good to a pure service a given offering lies. A computer, for example, is a tangible product, but it often comes with a warranty and software updates. Although surgery is primarily a service, it involves pain medication and sutures.

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NOTE: This Product-Service Continuum is NOT a question of whether the product can be used by the customer to perform a service (e.g., a washing machine can be used to wash clothes). What it identifies is the relative value of what is being provided by the seller: The tangible product component (e.g., the washing machine) and the service component (e.g., delivery and installation, instruction manual, phone and online support, warranty service).

It should be noted that the product-service continuum is understood in terms of what the customer receives. A washing machine is mostly a tangible good (although it may include a warranty and delivery). The fact that the customer might be able to use this to offer a service to others is not relevant here.

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• Products will generally be invented and start with low use.

• With decreased costs and improved technology, more people tend to adopt.

• With more consumer interest, competition increases, driving down prices and up quality, user friendliness, and features offered.

The “classic” curve—may

differ for specific

innovations

The Product Life Cycle (PLC)

Products often go through a life cycle. If a product is successful after its launch, it will generally reach greater acceptance over time, and sales volumes will go up. At some point, a saturation point may be reached where there is no further growth, and the product category may eventually be replaced, over time, by another a later innovation. For example, horse driven wagons were eventually replaced by automobiles and other vehicles.

A number of factors will change throughout the product life cycle.

The curve will look different for each product. Above is an example of a “classic” curve where a product goes through a number of different stages.

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• Certain major improvements within a product category are often seen as entirely “new” categories—e.g., black and white TV color TV HDTV

• The timing and shape of the Product Life Cycle (PLC) curve will differ depending on how general or specific evolutionary the level—TV as a whole may be in maturity, but color TV is in decline

Product Category and Era Specificity

Note that you can think of product categories either widely or narrowly. You can, for example, think of TV, which has evolved from black and white format to high definition, digital technology. Alternatively, you can think of black and white TV as a product category that was eventually supplanted by color TV, which, in turn, was supplanted by digital TV. Although the timings will be different, the general phenomenon will be similar.

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General product category

Evolutionary versions (note overlapping existence of some technologies)

Television Black & white TV; color TV; HDTV; Internet based portable device

Movie player devices

VHS, DVD, BluRay, Streaming

Phone Non-dialing, operator assisted only desktops; dial-able desktops; car phones (large); cell phones (big and clumsy); readily portable cell phones; smart phones; VOIP

General and Era Specific Category Examples

The bottom line here is that the design and function of products that serve a given purpose may change dramatically over time.

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• Typically:– Low awareness category awareness

– Limited competition—greater interest in category awareness

– No finalized standards/protocols (might be unable to get apps for a new cell phone OS)

– Fear that the technology maynot survive (may fade away or be replaced a different standard)

– Limited features

– Less reliable technology

– High prices

– Low unit sales

– Low or negative profits—limited sales and high expenses

Examples: Fuel cell battery technology (hydrogen converted to electricity for electric cars, allowing greater range than charged batteries); Internet of Things.

Introductory Stage

Initially, a product is introduced. At this stage, the product category is typically not well known and is usually expensive (e.g., as microwave ovens were in the late 1970s). In addition, products are often less reliable and clumsier than they are likely to be once production and design are improved, and features offered tend to be limited. Because the product is less well developed, it may also be more difficult to use. At this point, the interest is generally more in creating product category awareness than in brand awareness. Although prices tend to be high, expenses are also high and unit sales tend to be low, typically resulting in low profit levels (and often involve a negative cash flow as heavy investments in research, design, and production are needed.)

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• Typically:– Greater consumer awareness

– Higher sales volumes

– Better and more user friendly products

– Prices are lower, but not as low as they are likely to get (adjusted for inflation, at least)

– Although there are more competitors, market growth is large enough to carry the available supply.

– Greater interest in differentiation and brand awareness.

Steep slope of growth

Examples: Electric cars (battery powered); smart watches; consumer and business drones

Growth Stage

Eventually, however, many products reach a growth phase—sales increase dramatically. More firms enter with their models of the product. Because the market is growing so rapidly, the level of competitive intensity has usually not reached the highest intensity yet, but brand awareness and differentiation are becoming more important. Because of high sales volumes and moderate competition, profitability can be high at this stage. However, as markets become increasingly competitive, many are now pricing aggressively even at this stage.

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• Typically:– Greatly increased competition—lower prices,

more features, higher quality (capacity has reached its peak but the market is not growing much; any new capacity must take away market share from competitors)

– Both increased manufacturing and design in less developed countries

– Limited growth opportunities (in either domestic or world market) limited opportunities to reinvest profits in this category need to enter new product and/or country markets

– Significantly lower prices (relative to inflation)

– Sales may be mostly for replacements and new population

Very shallow growth slope (sometimes

entirely “flat”)

Examples: Microwave ovens; laser printers;

Maturity Stage

As more and more potential customers have bought the product, it will tend to reach a maturity stage where little growth will be seen. This can happen either as most consumers have now bought a durable product—e.g., a microwave oven, leaving (domestically, at least) mostly a replacement market where consumers buy new items to replace those worn out or to start new households. For non-durable goods, customers may continue to buy the product, but sales will have nearly peaked since the supply of new potential customers is limited, with existing customers not increasing their frequency of purchase. This means that it is difficult to reinvest profits in growth (i.e., in increasing manufacturing capacity) since any increased quantity produced will largely have to be sold at the expense of a competitor’s products. Thus, competition is likely to increase. This will often result both in decreased prices (at least when adjusted for inflation) and a race to offer more features and other benefits. Although costs of production may be at their lowest point (again, adjusted for inflation at this point), lower prices will tend to decrease profitability from its peak experienced at the growth stage.

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• Will usually eventually occur although the product category dominate last for a long time

• Typically:– The product category is increasingly

being replaced by other categories (which are often cheaper than the original category)

– Competition causes some—if not most—of the manufacturers to exit the market

– Product may be used as specialty product (e.g., typewriter to fill out “legacy” (old paper and carbon) forms

Examples: Cassette tape players; typewriters; brick-and-mortar travel agents; print newspapers

Decline Stage

Some products may also reach a decline stage, usually because the product category is being replaced by something better. For example, typewriters experienced declining sales as more consumers switched to computers or other word processing equipment. Many producers will be driven out of the business. Those who survive may focus on specialty markets (e.g., business users who need typewriters to fill out “legacy” carbon copy forms).

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• In a plateau, the product category is not being actively replaced by anything else, but growth ceases (or remains small) (e.g., fast food in U.S.)

• Under revitalization, a new use for the product emerges (or renewed interest develops) (e.g., cranberry juice; car cigarette lighters)

• Fad: Product spreads rapidly, but quickly loses appeal

Some Alternatives

In some cases, a product category may reach a plateau. Here, the product may not be replaced by another product—at least for quite some time—but it may reach a point where everyone who would like this product has one. Today, microwave ovens are relatively inexpensive. There may be some gourmet chefs who resist microwave ovens a matter of principle, most other households have them. However, at this point, the market will consist mostly of replacements and new households. Any growth will be very limited.

In some cases, a product category that has reached maturity or even decline may experience revitalization as a new use of, or other source of interest in, the product emerges. For example, consumption of cranberry juice increased dramatically once research showed that drinking this beverage could help combat urinary tract infections. Similarly, although an increasing number of car manufacturers had stopped including cigarette lighters in their cars as a standard feature (with a declining percentage of smokers in the population), these became more popular as technology that needed to be recharged (e.g., MP3 players and cell phones) took off.

Some innovations may become brief fads which end early as most people stop finding them useful.

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• Demand for the product

• Awareness of the product

• Competition in supplying the product

– Price

– Features

– Differentiation

• Profitability– Higher during growth

– Shrinking at maturity

– Possibly negative during decline—only some producers survive

• Alternatives available to the product—e.g., a DVD player competes with smart phones and other devices

• Investment opportunities: Should you reinvest in creating more capacity or focus on new products?

• Appropriate strategies

The Product Life Cycle (PLC) involves ________ over time

The product life cycle is tied to the phenomenon of diffusion of innovation. When a new product comes out, it is likely to first be adopted by consumers who are more innovative than others—they are willing to pay a premium price for the new product and take a risk on unproven technology. It is important to be on the good side of innovators since many other later adopters will tend to rely for advice on the innovators who are thought to be more knowledgeable about new products for advice.

The Product Life Cycle (PLC) impacts a number of strategic issues. As a market matures, firms will generally face more competition. Since the growth of the market is limited, they cannot grow much unless they do so by taking market share away from competitors. Therefore, firms will find it more difficult to reinvest profits in growth. There will generally be a strong downward pressure on prices. In addition, competition is likely to grow in terms or features and quality. The product category will also likely compete with an increasing number of other product categories to satisfy similar customer needs.

At later phases of the PLC, the firm may need to modify its market strategy. For example, facing a saturated market for baking soda in its traditional use, Arm & Hammer launched a major campaign to get consumers to use the product to deodorize refrigerators. Deodorizing powders to be used before vacuuming were also created.



Break-Even Sales Volume Points

• For a new product, how much do we have to sell at what price to avoid losing money?

• Two types of costs– Fixed: Generally independent of

quantity produced within a certain range (e.g., R&D, equipment needed, setup, overhead)

– Variable (marginal): Costs of making one additional unit (e.g., labor, materials)

Spreadsheet

In order to “break even”—that is, to at least not lose any money—on a new product introduction, a minimum of a certain quantity will need to be sold. If less than that quantity is sold, there will be a loss on the new product; if a larger quantity is sold, profits begin to accumulate. This break-even point is reached when

Total Revenue = Total Cost

It is assumed that all the product is sold at a constant price, meaning that the total revenue is equal to the price times the quantity sold.

Costs include both fixed costs (those that stay constant regardless of the quantity sold—e.g., costs of research and development) and variable costs incurred for each unit produced (e.g., labor and materials). Thus, we have that

Total Cost = Fixed Costs + Quantity * Variable Costs

The amount by which the selling price exceeds the cost of production is known as the “contribution by unit”—i.e., CPU= Price – Variable costs.

To obtain the break-even quantity, we divide fixed costs by the contribution per unit—i.e.,

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Breakeven = Fixed Costs/Contribution per unit.

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-$20,000.00

-$10,000.00

$0.00

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

0 1000 2000 3000 4000 5000 6000

QUANTITY, REVENUE, COSTS, AND NET PROFIT

Total Revenue

Total Costs

Net Profit

TR = TC

PROFIT = 0

YOU WILL NOT BE ASKED TO DO ACTUAL

CALCULATIONS ON THE EXAM, BUT YOU SHOULD UNDERSTAND WHAT IS

INVOLVED IN BREAK-EVEN CALCULATIONS.

A spreadsheet available on the course web site demonstrates these relationships. We can calculate the break-even point directly and compare this with cost and revenue figures at various quantities. We can then graph these figures and note the point at which the total cost and total revenue curves intersect.

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Calculating Break-Even Quantities

Equation Example

CPU = P - VC CPU = $10 - $6 = $4

BEQ$12,000

= 3,000$4

TR = P * Q TR = $10 * 3,000 = $30,000

TC = FC = Q * VC TC = $12,000 + 3,000 * $6 = $30,000

PROFIT = TR - TC PROFIT = $30,000 - $30,000= $0

Abbreviations

TC Total cost Q Quantity

FC Fixed costs P Price

VC Variable costs CPU Contribution per unit

TR Total revenue BE Break-even quantity

As a check on our calculations, we notice that, in this example, the profit level is 0 at the break-even quantity of 3,000, the same volume that we calculated as a break-even point:

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Assumptions in Simple Break Even Analysis—Not Very Realistic

• No additional manufacturing capacity will be needed to make any of the quantities considered

• All customers pay the same price

• No discounting on future cash flow from made after the initial period

• No periodic fixed effects

• Marginal costs of resources remain constant– No quantity discounts

– No increase in costs due to limited market supply

Break-even analysis is a highly simplified method that makes a number of rather unreasonable assumptions—in particular that:

• No additional manufacturing capacity will be needed to make any of the quantities considered

• All customers pay the same price• No discounting on future cash flow from made after the initial period• No periodic fixed effects• Marginal costs of resources remain constant• No quantity discounts• No increase in costs due to limited market supply

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Alternative Approach: New Products an Investments

• Calculation of net present value (NPV)--discounted cash flows over time for– R&D expenses

– Setting up manufacturing capacity

– Period fixed expenses (e.g., cost of buildings and equipment depreciation)

– Total revenue

• Discount rate should reflect the risk associated with the specific product considered

• More complex models assign probabilities to various outcomes (e.g., competitor entry, reaching certain sales levels, changes in resource costs)

• This approach is covered in finance and managerial accounting coursesMain takeaways for exam:• There are certain fixed and start-up costs in introducing a product. If you do not sell a sufficient volume,

you will lose money.• Demand is uncertain; risk is involved. The greater the risk, the greater the expected return will be needed

to be to justify going ahead.• Expenditures and revenues occur at various times. Many expenses are incurred before the first revenues.• Money made in the future is worth less (“discounting”).

A more sophisticated approach involves treating a new product introduction as an investment. The details of this approach are beyond the scope of this course, but are covered in an introductory finance course. Some issues that are addressed in the investment approach are that:

• There are certain fixed and start-up costs in introducing a product. If you do not sell a sufficient volume, you will lose money.

• Demand is uncertain and there is risk is involved. The greater the risk, the greater the expected return will be needed to be to justify going ahead.

• Expenditures and revenues occur at various times. Many expenses are incurred before the first revenues.

• Money made in the future is worth less (“discounting”).

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• Firm adds value as intermediary between two parties—e.g.,

– Uber (riders and drivers)• Handles matching of riders with

nearby driver; collects money

– eBay (buyers and sellers)

– OpenMenu (diners and restaurants)

• Diners can check reservation availability for multiple restaurants in an area and make a reservation in the most preferred available one

Two-Sided (Multi-Sided) Platforms

Two-sided platforms involve services connect two parties without providing the direct service themselves. For example, Uber connects passengers looking for a ride with drivers offering these. Although Uber does some additional work—e.g., screening potential drivers and collecting credit card payments—Uber’s function is mostly as an intermediary that connects the two parties efficiently. Other examples of two-sided platforms include eBay (matching buyers and sellers), Airbnb, and OpenMenu—an online platform that allows diners to make reservations with a number of different restaurants depending on availability. Retailers—including online ones such as Amazon—which do a lot of the work of distribution are intermediaries that connect buyers and sellers, but they are not considered two-sided platforms since they do more substantive work (e.g., operating a retail store, keeping inventory, or shipping goods to customers.

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What Came First?

A potential “chicken-and-egg” problem may exist when it is necessary to have two conditions—each of which depends on the other—met before a product or exchange is possible. These problems come in a variety of forms:

• Investment in required infrastructure requires demand. (1) Consumers are reluctant to buy electric vehicles before charging stations are available at hotels and other parking facilities but (2) hotels and operators of parking facilities are unwilling to invest in putting in charging stations until enough consumers drive electric cars.

• Need for critical mass: Social media sites tend to require a certain “critical mass” before they can attract users. (1) You will not be particularly interested in joining a new social media site before your friends do, but (2) your friends will have limited interest in joining before you do. Similarly, (1) for a potential competitor to Netflix to attract customers, it must offer a strong recommendation database but (2) developing the recommendation database requires input from a large number of customers.

• Two parties must join, each of which requires the other to join first. A new online auction site will have difficulty attracting (1) potential buyers until sellers list their offerings, but (2) sellers will have limit interest in listing—especially if they have to pay—until there are sufficient numbers of potential buyers.

• A product needs third party accessories and/or support. If a new cell phone operating system (OS) is introduced to compete with the iPhone iOS, Android, or Windows, (1)

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customers will have limited interest in adopting until there is a sufficient number of apps available but (2) software developers will have limited interest in investing in creating apps for the OS until there are sufficient numbers of users to provide a profitable market.

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• For some innovations to work, two conditions must be met, but each requires the other to happen first

– E.g., drivers will be reluctant to buy electric cars before charging stations are available, but parking facility operators will not want to invest in putting these in until more people have electric cars

– E.g., Uber: must have drivers before riders will sign up, but will need riders before drivers can be recruited

• Most two-sided platforms face chicken-and egg problems, but not all innovations that have chicken-and-egg problems are two-sided platforms

– E.g., electric cars, cell phone systems (apps are needed before users will adopt the system),

Chicken-and-Egg Problems

Sometimes, concentrated interests may see an opportunity to invest in new technology that would become profitable. For example, when CD players were introduced, the record companies saw an opportunity to make large profits selling a new recording of what customers already owned on a new medium, so they readily cooperated in immediately making a great deal of content available on CD. The introduction of the DVD player also presented this type of opportunity. Similarly, when ATM machines were introduced, the banks realized that customers could be attracted shortly after the machines became available.

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Examples of “Chicken-and-Egg” Vulnerable Ventures

• Personals sites

• Auction sites

• Text messaging systems

• “Wiki” projects

• Crowdsourcing apps

• Carpool systems

• Electric cars

• Computer and cell phone operating systems

Listed above are some examples of where chicken-end-egg problems may come about.

Personals sites, social media platforms, and text messaging systems generally need a certain “critical mass” to attract and maintain participants. In the case of a social media platform, you are unlikely to join until your friends do and they, in turn, are likely to wait until you join.

Auction sites need both buyers and sellers. Sellers have limited incentive to post items for sale—especially if a listing fee is involved—until there is a sufficient mass of potential customers to buy. Buyers, on the other hand, are unlikely to visit the site until a sufficient number of sellers have something of interest to sell.

Electric cars require charging facilities. You may be able to charge at home and drive comfortably to and from work with a single charge. However, making a longer drive to stay overnight for a business trip could be more problematic. If the car has a range of 150 miles per charge, visiting a place 100 miles away requires a charge somewhere on the way. Here we have a Catch 22: Hotels would be quite willing to pay in charging systems in their parking garages if a sufficient number of guests have electric cars; however, many are reluctant to buy an electric car until such systems are available.

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To test the likelihood of a potential chicken-and-egg problem, you may think of these questions:

• Does the innovation or offering require a large number of others to be involved before it is useful for the first adopters? In the case of ATM machines, the answer was no since the system was useful as soon as the customer got his or her card. On the other hand, social networking sites are attractive only once friends or other interesting people have joined.

• Does the innovation or offering require investments by third parties that are unlikely to occur until a sufficient number of customers already own/use the innovation? For example, for customers to pay extra for a laptop offering a new and faster wi-fitechnology, there must be routers and wi-fi systems supporting this technology, but wi-fioperators may not be willing to invest in the required technology until sufficient numbers of people have computers and devices that can take advantage.

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• Subsidies—e.g., for electric cars, car makers and/or the government takes on a large portion of the cost of initial infrastructure

• Starting with a lesser innovation that can be used individually by one of the needed parties

– E.g., OpenMenu: First introduced as an internal reservation for restaurants to use; later on, users were invited to join Internet network for diners to make reservations (an easy step that many restaurants could take over a short period of time)

“Jump Starting” Innovations With Chicken-and-Egg Problems

It is sometimes possible to “jump start” an innovation facing a chicken-and-egg problem. For example, manufacturers of electric cars and/or the government can pay part of the cost for one hotel chain to install charging stations. Although there may not be a lot of guests arriving in electric cars immediately, the hotel chain gets “bragging rights” of being the first to offer this. It is now more attractive for consumers to buy electric cars, and as the number of owners increases, more and more facilities find it worthwhile to join in the offering of charging stations.

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Jump Starting Uber

• Uber must have drivers to attract riders, but recruiting drivers can be difficult if no riders have downloaded the app to hire them

• Uber was started in San Francisco– Through regulations promoted by cab firms and their drivers, the

supply of taxi cabs in SF has historically been kept artificially low finding an available taxi is especially difficult and can take a longtime. This increased motivation to download. This could help persuade drivers to sign up.

– SF is a heavy tourist destination. Once someone downloads the app for use there, he or she can use it elsewhere.

The fact that Uber was started in San Francisco likely contributed to the success of the system.

Historically, due to the influence of taxi operators and driver unions, there has been a significant under-supply of taxis in San Francisco. This has allowed taxis to go with little “down time” without passengers and has limited competition such that higher fares can be charged. With the difficulty of finding a conventional taxi, more people were motivated to download the app. Potential drivers, in turn, could see this potential and were willing to sign up earlier than they might have in other areas.

San Francisco is a major tourist destination. This means that once people have visited San Francisco and have the app installed on their phones, they now have once they come home to their own communities, reducing the obstacle to trying out Uber there and subsequently using it repeatedly.

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• Product or product line specific brands– Tide (one kind of detergent only)– Snickers (one candy bar only) – Subway (one type of restaurant

only)

• Broader brands with common “themes”– Samsung, Apple, Sony, Canon,

Virgin, Microsoft, Disney

• “Umbrella Brands” (vast assortment covered)– 3M

Continuumof brand breadth

Very specific brands—each product category by the same firm has its own brand name. (P&G even has

different brands of laundry detergent competing against each other).

Very broad brands—cover a number of different product categories. The rationale for using the brand across these product categories may or may

not be clear to the customer.

The brand covers different product categories, but these are usually

clearly related. E.g., Apple sells a number of electronic products—generally connected by use of

computing power or as accessories for these main products.

Brand Specificity

Narrow

Wide

Different firms have different policies on the branding on their products. On a continuum, different brands cover varying degrees of breadth:• Single product category brands. Some brands cover only a single product category.

Procter & Gamble (P&G) even goes as far as maintaining different brands of laundry detergent which actively compete against each other (e.g., Tide, Ariel, Bold, Era). The philosophy here typically is that one less well regarded product should not drag the whole brand own with it.

• Brands covering a broader scope. Disney uses its brands for amusement parks, movies, TV programming, and a cruise line. Although the brands cover a broader scope, there is usually a clear reason why the different products belong under the same brand name. In the Disney case, for example, the different offerings each make use of the Disney image and borrow characters other creations across the offerings.

• “Umbrella” brands. Some brands cover a very vast scope. Although there may be good reasons why the respective offerings are presented under a common brand, these may not be readily evident to customers. 3M, for example, focuses on different types of products that involve bonding materials to surfaces in some way—thus, we have glue, tape, and recordable DVDs (where a metal disk is coated with iron oxide).

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International Brands

• Some brands gain part of the mystique and value from being ubiquitous across the world—e.g.,

– Coca Cola

– Apple

– Disney

– Louis Vuitton

– Nike

• Although adaptations may be made across countries, these are often deemphasized.

Some brands derive a great deal of their value, prestige, and mystique from their global status. It is often necessary to make modest adaptations to the products across countries. For example, the artificial sweeteners permitted will often vary across countries. Sizing may also be made to conform with local standards. For example, in the U.S., a can of soda is usually twelve ounces; in Europe, a size of 250 milliliters is more common. These adaptations, however, are not advertised.

Note that some of the classic advertising of Coca Cola has emphasized the international reach of this product. For example, the ad series “I’d Like to Buy the World a Coke” featured people of many different ethnicities and nationalities.

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National vs. Regional Brands

• National brands– Generally available across the U.S.

– Usually have a longer history

– Have usually been built with extensive advertising

– Often described as “major” brands

– Typically more expensive than regional brands

• Regional brands– Usually brands that have started in and are available only in some region

– Regional entry may have occurred because the manufacturer did not have the investment capital to start a national one

– Typically do not have a long history of elaborate advertising

– May be adapted for regional tastes

– Typically sell for lower prices than national brands

– May eventually go national with sufficient success and resources

In many markets, brands of different strength compete against each other. At the top level are national or international brands. A large investment has usually been put into extensive brand building—including advertising, distribution and, if needed, infrastructure support. Although some national brands are better regarded than others—e.g., Dell has a better reputation than e-Machines—the national brands usually sell at higher prices than to regional and store brands

Regional brands, as the name suggests, are typically sold only in one area. In some cases, regional distribution is all that firms can initially accomplish with the investment capital and other resources that they have. This means that advertising is usually done at the regional level. This limits the advertising opportunities and thus the effect of advertising. In some cases, regional brands may eventually grow into national ones. For example, Snapple® was a regional beverage. While a regional beverage, itbecame so successful that it was able to attract investments to allow a national launch. In a similar manner, some brands often start in a narrow niche—either nationally or regionally—and may eventually work their way up to a more inclusive national brand. For example, Mars was originally a small brand that focused on liquor filled chocolate candy. Eventually, the firm was able to expand.

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Store (Private Label) Brands

• Brands owned by a retail chain, a collection of chains, or a consortium

– E.g., Sam’s Choice (Walmart), Kirkland (Costco), Kroger (owner of regional chains such as Ralph’s)

• Usually sell for lower prices than national brands

• More profitable—event though prices are lower, there are fewer brand building costs

• May be manufactured by the same firms that make the major brands, but with different brand name attached

• Retailers can put these next to national brands to emphasize savings

• More common in Europe, where there are more national grocery retail chains

Store, or private label brands are, as the name suggests, brands that are owned by retail store chains or consortia thereof. (For example, Vons and Safeway have the same corporate parent and both carry the “Select” brand). Typically, store brands sell at lower prices than do national brands. However, because the chains do not have the external brand building costs, the margins on the store brands are often higher. Retailers have a great deal of power because they control the placement of products within the store. Many place the store brand right next to the national brand and place a sign highlighting the cost savings on the store brand.

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Lower Tier Brands

• Brands that are usually national in scope, but are less regarded and have been developed less than the major ones

• E.g., Shasta (soda)

• Quality tends to vary

• May emphasize specific tastes or needs

A number of “lower tier” products exist across various categories. Although these are often sold nationally, less has been spent on building these brands. The owners of some of these brands may also have access to less research and development funds, so the products may be—but are not always—of lower quality.

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Generics

• No brand name products

• Typically lowest price

• Quality tends to vary

Generics are products where no brand name is readily visible. These often sell for the very lowest prices. Sometimes, these are actually made by the same firms that make major brands, but the quality tends to vary considerably.

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Trademarks and “Genericide”

• To retain trade marks, owners must “vigorously protect” them

• In theory, trademark protection can be lost of if the brand same comes to be used as synonymous with the product category—uncommon in practice

• Some examples of brand names that are often used to refer to the product category rather than the specific brand

– Kleenex

– Xerox

– “FedEx” (verb)—to send overnight

Genericide refers to a situation where a brand name, in the informal day-to-day speech of consumers, comes to be synonymous with the product category. Many people, for example, refer to a “Xerox” without meaning to specify that the copier would necessarily be made manufactured by Xerox. It is common to refer to a “Kleenex” even though one would be just as happy with a “facial” tissue made by another manufacturer. People have even gone so far as to turn some brand names into verbs. People may, for example, promise to “Fed Ex” something to someone who needs the delivery the next day without meaning to promise that this exact shipper will be used. Because Google has an overwhelming market share today, someone who refers go “Googling” someone or something probably intends to use the search engine implied, but other search engines were to gain significant market share in the future, it is not clear that the recently invented verb would exclusive to the search engine from which it is named.

Although having a brand name used to describe the product category might seem like a blessing at first, the catch is that a trademark may be lost if the general population begins to use the term indiscriminately to refer to the product category regardless of the actual brand. U.S. trademark law requires registrants of trademarks to “vigorously defend” these trademarks. Therefore, for example, Coca Cola® may send representatives to warn restaurants that serve Pepsi® that they will be sued if a customer who asks for “Coke®” is served Pepsi® without being told that the drink actually available is Pepsi®. So long as brands

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actively protect their trademarks, loss of trademark protection is, in practice, quite rare.

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Main and Subbrands

• Some brand names may consist of a main brand and a subbrand:– Apple iPhone

– Toyota Prius

• These brands may be referred to by the combination or by the subbrand

• Even when the main brand is not mentioned, it is usually understood and adds value

Brands may consist of both a main brand (e.g., Apple) and a subbrand (iPhone). In the beginning, the main brand often adds considerable value. In practice, the product may be referred to simply by its subbrand. In some cases, the subbrand may become deemphasized. For example, today many people refer simply to Apple computers rather than Apple Macintosh.

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Corporate (Owner) vs. Product Brands

• Conglomerates may hold numerous brands

• The brand owner may or may not want to emphasize corporate brand

– Procter & Gamble does not want to risk damage to the main brand by unsuccessful brands

– Brand owners may not feel that their corporate identity adds value to brands that have been built over decades

Some corporations do not find value in associating their corporate brands with more specific brands. In some cases, these companies own an assortment of brands that may have been built by a variety of other firms and are then acquired. Promoting the corporate name and its products to investors may be important, but the original brands tend to convey more value to consumers.

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• Brand equity: Value added to product based on brand name– Choice likelihood

– Ability to charge higher price

– Use of product as loss leader• Benefit in market share, temporary revenue

(Coca Cola)

• Possible damage to long term brand image (Louis Vuitton suitcases in Japan)

• Brand “personality:” Human associations with product

Brand Value and Image

An essential issue in product management is branding. Brand equity refers to the effective value of a brand. This value—often resulting from a history of advertising and a reputation for quality that a manufacturer has established among consumers over time—results from the increased profits that can be made by selling products and/or services under the brand name over and above what could be obtained by selling a generic, un-branded product. In practice, increased profits might result from both a higher price that can be charged and the greater volume that can be sold with the brand name. In some countries, accountings standards allow firms to maintain brand equity on their balance sheets as an asset. In the United States, generally accepted accounting principles generally provide that advertising expenses must be “expensed” in the period in which they are made. However, if one firm acquires another and/or buys a brand from another firm, the “good will” component of the purchase price can be depreciated over time.


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• Using two or more brands as a way of offering customers greater value

• Types

– Distributional• Egalitarian: Carl’s Jr. and

Green Taco

• Hierarchical: Visa as official credit card of the Olympics

– Line filling—e.g., airline code sharing

– Ingredients• Cooperative: Dryers’ ice cream

with Mars M&Ms

• Independent: Local computer maker advertises Maxtor hard drive components

– Intrusive: “Intel Inside”

– Partial: McD’s serves Coca Cola

– Sponsorship: Good Housekeeping seal of approval

Co-branding

Details on specific types of co-branding are not needed for the exam!

The main take-away hire is that by involving two or more brands, greater value can be

created for customers.

Co-branding involves firms using two or more brands together to maximize appeal to consumers. Some ice cream makers, for example, use their own brand name in addition to naming the brands of ingredients contained. Sometimes, this strategy may help one brand at the expense of the other. It is widely believed, for example, that the “Intel inside” messages, which Intel paid computer makers to put on their products and packaging, reduced the value of the computer makers’ brand names because the emphasis was now put on the Intel component.


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• Use of an existing brand name to a new-to-the-brand product category

• May lower cost of launching new product line and increase speed of market penetration, but…

• Considerations

– Perception of ability to make product well

– Extension should not be exploitative—making a “trivial” product by high image brand (e.g., Heineken Popcorn)

– Congruence: Are products seen by customers as “sensible” creations by the same brand?

• Apple iPod made sense as a “mini computer” with hard drive based music files; iPhone made sense as an extension of the iPod

• Would apple “stylish” Apple furniture make sense?

Brand Extensions

In some cases, brand extensions may allow a firm to use an existing brand for a product category that is new to the firm. For example, although Apple had originally focused on computers, its brand name was also used when MP3 players, smart phones, and tablet computers were offered. Using an existing brand name can save a great deal of money on brand building, and also allows the firm to “hit the ground running” by using an existing, strong brand name that would otherwise take time to develop regardless of the resources available.

There may be concerns about the propriety of a particular brand extension. A poorly received product from the firm could damage a strong brand name extended, and a new offering from a brand that customers would not find suitable as the maker of a product would tend to be less successful. Coca Cola for many years resisted putting its coveted brand name on a diet soft drink. In the old days, available sweeteners such as saccharin added an undesirable aftertaste, implying a clear sacrifice in taste for the reduction in calories. Thus, to avoid damaging the brand name Coca Cola, Coke instead named its diet cola Tab. Only after NutraSweet was introduced was the brand extension allowed. Research shows that consumers are more receptive to brand extensions when (1) the company appears to have the expertise to make the product [McDonald’s was not thought as credible as a photo-finishing service], (2) the products are congruent (compatible), and (3) the brand extension is not seen as being exploitative of a high quality brand name [e.g., one should not use a


premium brand name like Heineken to make a trivially easy product like popcorn].

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Types of Innovations

• A continuum of “newness:”– Continuous—same product, just small improvements over

time—e.g., automobiles

– Dynamically continuous—product form changed, but function and usage are roughly similar—e.g., cell phones, HDTV, video streaming, Blu-ray

– Discontinuous—entirely new product; usage approach changes— e.g., fax, GPS

• The more “new” a product category is, the greater the need to educate the customer on benefits and basic idea of how the product works

Innovations can be classified into several different types, although lines may somewhat be a bit blurred.

The continuous innovation implies the inclusion of some new technology or ideas without any fundamental way in the way the product, idea, or service, is used. For example, although there are great technological differences between the electric typewriter, with its many moving parts, and the electronic typewriter based more on circuits, the two products may work very similarly. Whether a car has a carburetor or fuel injection, again, may not constitute a highly visible difference for the consumer, with established methods of operation left unchanged.

Dynamically continuous innovations involve some degree of change for the consumer, although such changes do not completely change existing ways of product usage. For example, digital watches, although different from electronic ones, basically serve the same purpose. The ball point pen, although somewhat more convenient, did not change the fundamental way people wrote.

A discontinuous innovation, on the other hand, fundamentally changes the way things are done. For example, many consumers had difficulty understanding the concept of a microwave oven when this device first came out.


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Some Diffusion Examples

• Ride sharing (Uber, Lyft) (*)– Chicken and egg problem– Observability– Imitation

• Paleo diet– Word-of-mouth and social currency

• MP3 players (*)– iPod users became “walking advertisements”

• GPS systems (*)– Initially expensive– Trial through rental cars

• Faded, torn jeans– Fads– Innovations do not have to be high tech

(*) You should be familiar with these for the exam.

The use of ride-share services became increasingly popular as smart phones became more widespread. Uber and Lyft logos on cars have increased awareness. The social proof of the sheer number of people using these services has caused more people to try.

Although only some food is consumed in public, word has spread extensively on diet innovations such as the Paleo diet. Many of its adherents are glad to talk, with great conviction, about is principles. Such a diet is readily trialable. You can stop any time.

Although the Apple iPod today has been largely supplanted by smart phones that now integrate this function, MP3 players started to spread rapidly with the advent of the Apple iPod. Although MP3 players had been available before, these were usually quite big and bulky. The iPhone, in contrast, was much handier. The iPod featured white earbuds, in contrast to most other audio devices which, at the time, mostly came in black. Thus, even if the user kept the iPad in a pocket, the earbuds alone turned the user into a walking advertisement.

In the early days, GPS systems were expensive. However, users could try these out when renting cars, and thus the risk was greatly reduced.

Not all innovations involve high technology. Fashions are often quite arbitrary, and


sometimes cyclical. At various times, faded and torn jeans have come into fashion. It is actually not easy to artificially wear out jeans, so used ones have often been resold.

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Diffusion Themes, Part I

• Observability: Products that can be seen being used advantageously by others tend to spread faster

• Imitation: Later adopters follow the lead of earlier adopters whose adoption has been shown to be successful

• “Chicken-and-egg” problem: A certain infrastructure is needed to make adoption attractive, but motivation to provide the infrastructure depends on market size—e.g.,

– Coupons and clearinghouses – Hydrogen/electric cars– HDTV– Social networks

A number of factors affect the likelihood that an innovation will spread successfully.

Observability involves the extent to which an innovation can be readily observed in public. iPhones were readily observable as were Uber and Lyft cars and riders. In contrast, nutritional supplements are often consumed in private and are thus not as visible. To the extent that new fashions can be seen readily on Instagram and other social media, they may catch the attention of more and more people.

Imitation refers to the extent to which people who see other people using an innovation will eventually follow. Given the cost involved, many people might have hesitated to “take the plunge” to get a smart phone. However, as people notice more and more others using these phones, they become increasingly well assured that these devices are useful and manageable.

We have previously discussed chicken-and-egg problems. Some innovations require two things to happen, each of which in turn requires the other, to take off. For example, for electric cars to be widely adopted, charging stations need to be conveniently available. However, hotel and parking facility operators may be unwilling to invest in these until a sufficient number of potential customers have these. In such cases, it may be necessary to “jump start” the innovation. For example, car makers might subsidize the cost for one hotel

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chain to put these in so that it will now be possible to recharge at most destinations.

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Diffusion Themes, Part II

• Trialability: People tend to prefer “trying out” a potentially costly innovation on a smaller scale rather than having to commit before trial

– In contrast, solar panels are not readily triable

• Network economies (the inverse of the chicken-and-egg problem): Some innovations become more valuable when more others have that innovation—e.g.,

– Peer-to-peer payment systems (Venmo)– E-mail– Online personals sites– Other online communities

Trialability refers to the extent to which a consumer can try out a new innovation with committing to a large expenditure or extensive efforts to learn to use the innovation. Although automobile GPS systems were quite expensive when they were first introduced, those renting cars often got a chance to try out the device and realize its usefulness. One can easily try new foods and beverages and discontinue these if they are not satisfactory. However, a solar panel for one’s home cannot be readily tried.

Network economies involve essentially the inverse of the chicken-and-egg problem: Some innovations will be more valuable to a potential adopter the more others have adopted the innovation. This is particularly the case for innovations that involve communication, distribution, or certain other types of contact. Contrary to what one might have expected, there was no real chicken-and-egg problem with the fax machine. Large businesses immediately found it useful to have at least one fax machine in each building, thus allowing these organizations to fax each other. This, in turn, made it attractive for major suppliers and customers to acquire their own fax machines, a cycle that then continued to the next “generation” of firms:

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Technology Driven Consumer Innovation

• Widespread smartphone diffusion has led to– More people adopting digital photography (developed countries)

• Some never photographed before

• Some did not want or remember to carry a standalone digital camera

– Electronic payment systems

• Currency shortage in India made e-payments attractive

• Local street vendors in China started to accept mobile payments

• Online banking in rural African towns not served by brick-and-mortar banks

• Increased Internet bandwidth– Movie streaming became feasible and was easier than renting movies

In some cases, new product categories or practices diffuse as innovation make these cost effective.

For example, many more people today take photographs than was the case in the old days when film based cameras were used. There is no real cost in taking a photo and there is no need to go through the hassle of having it developed. The fact that smart phones today allow users to take high quality pictures also means that there is no need to carry a separate camera.

With the spread of smart phones, e-payments have become more common across the world. China, in fact, runs ahead of the U.S. in this regard as an increasing number of street merchants now accept electronic payments.

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