Product Design

STP

Segmentation

In a segmentation analysis, one determines who the potential customers are for a given product or service. Customers can be segmented along many different dimensions, so part of this analysis is deciding along which dimensions to segment the customer base.

Segmentation may seem counter productive if our goal is to sell to as many customers as possible. However, segmentation is important because in this way:

1. a product can do a great job at meeting the needs of one set of potential customers (which can in turn increase willingness to pay for the product)
2. the marketing strategy can be more efficient tailored to meet the needs of the customer

Populations can be segmented in the following ways:

1. Geographic (zip code, region)
2. Demographic (age, gender, income, education)
3. Psychographic (Personality, lifestyle, media habits)
4. Attitudinal (Benefit sought, brand loyalty)
5. Behavioral (usage occasion, usage rate)

Further, for a segmentation scheme to be successful, it must be

1. relevant
2. measurable
3. sizable
4. accessible
5. compatible with resources.

Targeting

In a targeting analysis, one determines which of the potential customer customer segments to pursue. This determination should include analysis of the size, rate of growth, and profitability of the market. One tool to determine which segment to target is to do a consumer lifetime value analysis. Another tool is the "chain rule", which allows one to calculate the size of a potential market.

Consumer Lifetime Value

With a few inputs, one can compute the consumer lifetime value of any given consumer. A number of inputs are needed to calculate a consumer lifetime value:

1. The probability that a consumer stops using a product from one year to the next (p)
2. The amount of money that a consumer spends every year on the product (contribution)
3. The amount of money that is costs to acquire a consumer (acquisition)
4. The weighted average cost of capital for the project (WACC)

Given this information is calculated as: Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle CLV = \frac{contribution}{WACC + p} - acquisition}

Positioning

In a positioning analysis, one determines what benefits the product or service will give to the potential customers that will be targeted. After completing the positioning analysis, a positioning statement should be created. This positioning statement should:

1. Identify the segment of the population that will be targeted.
2. Identify the point of difference and the key benefit of the product.
3. Identify the frame of reference of the product (i.e. how are the people who are switching to this product thinking about the product, and what product are they switching from).

Note that the positioning statement should only talk about the few key points of differentiation from the competition, rather than just listing every characteristic of the product.

There are a number of ways increase profit:

1. Increase primary demand
2. Manage brand switching
3. Increase purchases by current customers
4. Increase value to the customer
5. Decrease customer price sensitivity
6. Decrease fixed costs
7. Decrease variable cost

Marketing Mix

Price

The lowest that a firm is willing to charge for a product or service is the marginal cost of producing the product/service. The highest that a firm would be able to charge is the economic value of the good or service to the customer.

Economic Value to the Customer

A product's economic value to a new customer (EVC), is defined as:

EVC = The customer's lifecycle Cost
          -  The customer's startup cost
          -  The customer's post-purchase cost
          -  The new products incremental value

Where:

• Competitor's Life Cycle Cost - This is the total lifecycle cost of the competitor's product, including price, startup cost, post-purchase cost, less the competitor's incremental value.
• Customer's start up cost - This is the customer's immediate one time cost from switching from the competitor's product to this product.
• Customer's Post purchase cost - This is the customer's total cost of using and maintaining the firm's product till it is replaced.
• New Product incremental value - How much value does the new product offer over the competitor's product.

Price is also influenced by the 5 C's analysis

5 C's Price Analysis

1. Company. The lowest price that firm can set might be limited by the IRR required by the company stakeholders. Further, a company might not be able to price a product that has a price that is vastly different from the price of its other products to maintain consistency.
2. Competition. A company might be forced to charge lower prices if its competitors can afford to engage in a price war. Further, if competitors are market leaders, they will probably have the ability to set the price.
3. Collaborators. If collaborators push the firm's product, they might be able to sell it for a higher price. Further, if collaborators provide some help on the distribution side, then cost might be lower, and margins higher.
4. Customers. There are physiological factors that affect pricing decisions. For example, setting exact prices, such as $7.53, show that the firm has thought a lot about their prices. Further, a price will depend on how price sensitive a customer is. Price sensitivity depends on:
   1. How easy the product can be compared to other products
   2. The percentage of total cost the product is
   3. If the good is being subsidized by the government or an employer
   4. When there are quality differences between competing products that cannot be easily discerned

Promotion

In deciding how to structure one's marketing communication, one must consider:

1. Markets. This is the market that the firm should aim its communication to and should come from the firm's positioning statement.
2. Message content. One can make either rational appeals to the consumer base using testimonials, product demonstrations, or product comparisons. One can also make an emotional appeal using fear or humor. Again, the information delivered should derive from the positioning statement.
3. Mission. The purpose of promotion may be to change behavior, have the consumers take action, or to increase share of the market.
4. Message Design
5. Media Strategy. The will largely be determined by the preferences of the target market.
6. Money. For advertisements one can either use a percentage of sales, match competition, or try to set objects and spend to meet these objectives.
   1. In order to determine a Parfitt Collins analysis might be done where a break even market share is determined. Then, by using the awareness rate and the percentage of people who will become regular purchasers, and knowing the customer acquisition cost, we can determine the amount of money necessary to spend on advertising.
7. Measurement. The following terms are used when measuring marketing dollars spent:
   1. Reach is the percentage of population that has been exposed to a message
   2. Frequency is the number of times that the reached population has been exposed to an advertisement
   3. Gross Ratings Points (GRP) is defined as the the reach

Place

Direct versus Indirect

The first choice that must be made in deciding a distribution strategy is to determine whether to directly market and sell the product to end users, or to sell to distributors who would then directly sell to consumers. One of the major advantages of selling to distributors is that there are fewer transactions needed on the part of firm.

However, there may be reasons that one may choose a to directly sell to customers. Reasons might include:

1. There might be valuable intellectual property that one would like to keep from distributors
2. The product might not lend itself to having a loyal consumer base and the customers might switch suppliers when the distributor switches to a different product.
3. It might be beneficial for the firm to have direct access to customers so it can get feedback on the product and marketing tactics.
4. If the firm sells many products, it might be able to bundle products if it distributes the products itself.

Distribution includes many factors such as:

1. Generating awareness
2. Giving consumer advice
3. Taking product orders
4. Taking bulk from manufacturers and breaking it down
5. Keeping goods fresh
6. Delivering goods to the end users
7. Receiving payment
8. Recycling goods

Advantageous of using intermediary:

1. Intermediary is more efficient
2. Reach customers company could not
3. Reach new customers
4. Company has no distribution infrastructure
5. Don't have funds or scale to go it alone
6. Eventually partner can help distribute other products

These tasks can be either classified as logistical services or demand for information. If we assume that third parties are better at providing logistics and the manufacturer is the best at proving information about its products, we land at the following matrix:

		Demand for Logistic Services
		Low	High
Demand for Information	High	Direct Channel (Information and Logistics are Direct)	Bifurcated Channel [Pull] (Information is given directly but logistics are done indirectly)
	Low	Brokered Channel (Information is delivered indirectly but logistics are done directly)	Indirect Channel [Push] (Information and logistics are done indirectly)

One must keep in mind, however, that each channel has a margin and if certain aspects of distribution are given to third parties, these parties must be compensated for.

Channel Coordination

Manufacturers and distributors have very different incentives. Manufacturers, for example, want distributors to carry their entire line of products, want to have an active role in selling new products, want consumer information, want distributors to spend more on promotion.

On the other hand, distributors would like to only select the successful products from the manufacturer. Further, the do not want to share customer information as this is a threat to their livelihood. Finally, distributors want manufacturers to spend more on discounts and coupons.

To manage the conflict in a channel, a manufacturer can give special incentives to distributors and/or monitor the interaction between the customer and the distributor. In designing the channel, the manufacturer can make sure that the channel is structured in a way as to minimize the conflict. The conflict in a channel is determined by

1. the length of the channel (conflict increases as the length of the channel increases)
2. the autonomy of the members in the channel and (conflict increases as the autonomy of the members of the channel increase) XXX
3. the density of the channel (conflict levels are low for low and high amounts of density; conflict levels are high for a medium amount of conflict)

Brand

Purpose of a Brand

Brands are used to signal quality to the consumer. They can be used to differentiate one set of goods and services from their competition. Because brands can be used to signal quality, they decrease the consumer's risk of buying a product that is lower quality than they expected. Since brands can decrease this consumer risk, consumers are willing to pay a premium for brand name products.

A brand serves 5 purposes:

1. A brand can identify a product
2. A brand can signal unobserved quality
3. A brand can serve as a credible commitment to trustworthiness
4. A brand can serve as a node in an associative network
5. A brand can serve as a symbol of values and identity

Valuing a Brand

Interbrand Valuation Method

Interbrand uses the following formula to value brands:

BE = Present Value ([Operating Earnings - Tangible Capital x Weighted Average Cost of Capita ] x [Role of Branding Index])

This way of valuing a brand is limited for companies that do not have many tangible assets on their books.

Bottom Up Brand Valuation Method

This method of valuing brand uses a conjoint analysis. To determine brand equity, compare two products that ...

Cases

Unilever

• When repositioning a product, think about cannibalization
• Sell what the targeted client group wants

Biopure

• Frame of reference is essential in determining how to price/launch your product. You have to know what your customers are comparing your product to.

Rohm and Haas

• Competitive parity price - how much could you charge to be as effective as the competition dollar for dollar.
• Distributor indifference price - If a more effective product is created, how much more would have to be charged so that the distributor is indifferent between selling the more efficient versus the less efficient product.
• Distributors have to be given the proper incentives to push products and in order for a product to succeed all collaborators need to be taken care of.
• Pricing strategy should consider the EVC
• Competition can be good (competitors help create primary demand for the product and help set a reference point for the price)