Week 5 - Prof: Hamed Mehrabi PDF

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Prof: Hamed Mehrabi ...

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Week 5: - What is a new product?  Radically new (e.g. the 1st telephone, TV, dishwasher)  Incremental (e.g. continuously updating car models) - New products result from: The process of innovation - Newness is subjective:  How marketers position it  How the market perceives it - Why create new products:  New products add value to the firm  Satisfy the changing needs of consumers  Diversify firm’s risk - Diffusion of Innovation:  Innovators (2.5%): who want to be 1st to have the new product  Early adopters (13.5%): generally don’t like to take as much risk as innovators  Early majority (34%): tend to wait until bugs are worked out  Late majority (34%): the last group of buyers to enter a new product market  Laggards (16%): who like to avoid change and rely on traditional products until they are no longer available. - Product Life cycle:  Introduction: innovators start buying the products  Growth: the product gains acceptance, demand and sale increase, and competitors emerge in the product category  Maturing: industry sales reach their peak, so firms try to rejuvenate their products by adding new features or repositioning them  Decline: sales decline and the product eventually exit the market - Strategies for extending the PLC:  Develop new uses - Modify product  Increase frequency of use - Increase # users  Find new users - Reposition product  Change mkt strategy - Product Lines vs Brand Portfolios: - Brand extension: taking the brand into a previously unrelated territory or market - Line Extension: adding variation to an existing product  E.g. adding more scent for shampoo: shampoo cucumber, etc - Brand Portfolios: developing a brand portfolio strategy  Pros:  Ability to adjust mkt mix to reflect the consumer’s perceptive  Can be used to defend against competitive pressure  Cons:  Potential confusion of brand meanings  Brand proliferation – increased costs with inventory, logistics, etc.  Potential to dilute mkt efforts, limiting the growth of the key brand.

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Cannibalization:  A reduction of sales from one product due to the introduction of another  Can be a new product or a new channel outlet  E.g. Starbucks currently has a location in the base of TRSM. If they opened a location across the street in the Atrium, some of the current customers would choose to go that location, reducing the sales of TRSM location. Sales Lost

Cannibalization Rate%=

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¿ Existing Products(¿ , $)

¿ Sales of New Product ( ¿ , $ )

E.g1. In TRSM: sell 4,000 coffees per day If open new one in Atrium: Atrium: will sell 3,000 coffees per day. TRSM: sell 2,500 per day. 4,000−2,500 Cannibalization Rate = = 50% 3,000 E.g 2: sells 10K units P = $2,000 C= $1,000 In new quarter, product improved: Sells 6K units Cannibalization rate = 60% P= $2,500 C= $1,200 Total contribution margin of new quarter =? Sales Lost 0.60 = ¿ Existing product ¿ 6,000 Sales Lost = 3,600 Sales of Existing Product in New Quarter = 10,000 – 3,600 = 6,400 Total Contribution margin = 6,400 (1,000) + 6,000(1,200) = $13,600,000 Break-Even Cannibalization Rate (BECR) tells us the maximum sustainable cannibalization rate. New product unit contribution BECR = Old product unit contribution If BECR > Cannibalization rate => total contribution margin increases $ 1,200 E.g. BECR = = 120 % > 60% => TCM increase $ 1,000 Product Line Analysis: used to determine if you should launch a new product in the marketplace  Step 1: Estimate impact on total sales in the market and cannibalization of existing products  Step 2: Estimate Price and Costs to find Contribution  Step 3: Calculate ROI for scenarios  Step 4: Make decision Customer Retention: of the people who try out brand, how many will continue to purchase our brand. Repeat Volume = [Trial Population x Repeat Rate] x Volume of Purchased x Frequency of Purchase Sales Projections:

 Penetration: how many customers we are retaining + new customers Penetration (t)= [Penetration (t-1) x Repeat Rate (t) + 1st time try triers (t) 1st time triers (t) = Total Population x Trial Rate %  Average Frequency of Purchase: how often people buy our particular product  Average Volume of Purchase: when they buy, how much they buy Sales Projections (t) = Penetration (t) x Frequency of Purchase x Volume of Purchase

Midterm: - Content/ Theory questions  Service mkt  Porter’s 5 forces model  Red vs Blue ocean strategy - Metrics questions  Margin and Mark-up  ROIC  Break-even point  Brand Z value  Compound Annual growth rate (CAGR)...