In short…
- Focus on the Value of the Product, not cost
- Factors affecting value: Quality of Product, Support Services, and Perceived Features
- Segmentation, Differentiation, and Positioning: Different from a competitor, serve the market better than the competitor, better features
- Intangibles differentiate the product (75% while tangible is 25%)): Brand attachment, Customer engagement, supply chain, human capital who serve the customers, IP of the product.
- Value Migration →Initital phase: R&D, Design, Core Parts. Later Stage → Brand and Service, Customer Solutions
- Market development is also important: Initial phase is product development and the later stage is market development
- Defining the scope of the product (book on Kindle can also be read on mobile)
- Design thinking → starting from the customer, develop the market
- Management issues change with the product life cycle
Pricing Basics
Focus on value
Price elasticity of demand = %change in Quantity Demanded / % change in Price
PED = sale increase by 20% / price reduced by 10% = 2
Monopolies have PED as 1. PED > 1 → elastic, PED < 1 → inelastic (price doesn’t impact demand, e.g.: addictive substances)
In commodity markets (similar products), PED is highly elastic. Product differentiation disappears. Small change in price, leads to massive change in sales
If PED is 3, a 10% cut in price leads to a 30% increase in sales. If the margin is 20%, should we cut the price? The answer is NO because a 10% price reduction leads to a net margin of 10%, so to get the same profit margins as earlier, sales should increase by 100%
e.g.: SP→120, CP→100, Margin →20, Sale is 10 units. Revenue →1200. Profit → 200
New scenario after 10% price reduction:
SP→110, CP→100, Margin →10, Sale is 13 units. Revenue →1430. Profit → 130
In perfect markets, competition is so high that all firms break even. Not much profit.
Hence firms try to de-commoditize the market and focus on cash flow (not just revenue). Hence Segmentation is important.
Price Wars:
Pepsi and Coke have similar prices. But then they differentiate their marketing. Price wars lead to a reduction in profit.
Management literature is based on the Greco-Roman way of thinking. One has to lose for one to win. This is not always the best strategy.
Impact of premium pricing on products.
Generally, the net margin on products is 8.5%
If a firm can increase its pricing by 1%, its new margin would be 9.5%, almost 12% greater profit margins than its competitors.
Marketing Strategy and Product Development
Marketing strategy is dependent on segmentation and differentiation
Different from competitors: Pricing, product features, and competitive edge
e.g.: Push technology differentiated Blackberry from Nokia
Value creation needs channel partners (retailers for FMCG) and collaborators (software for hardware)
Different selling patterns for each product:
- Mobile – product reviews on YouTube
- Car – test drives
- FMCG – discounts and sampling
Where and how to compete, to be distinctly different, the value that the customers want, and how to extract that value from the market.
NarrowCasting: Instead of looking at a broad spectrum, focus on tactical issues, ground-level issues
Rule of three:
As the market expands, the market consolidates leaving 3-4 players in the market
Generalist: focus on volume and scale, push sales, full line of products (Toyota, Volkswagen, Samsung,)
Specialists: extract a much larger margin by focusing on niche markets, and lower volumes (Porche, iPhone)
Product Life Cycle:
Product development has to be a continuous process
The profit gap is the difference between product’s expected profit and the actual profit
Hence Ansoff’s Framework is used for product growth strategy:
Brand Equity: Penetration and Market Development
New Product Development Value: Product Development and Diversification
Customer Equity: Penetration and Product Development
Customer Acquisition Value: Market Development and Diversification
Aaker’s Vertical Integration is an addendum to Ansoff Matrix
Forward Integration → Apple has its own stores to compete with its own retailers, to generate more profit
Backward Integration → Amazon manufactures/sources the top-selling products on Amazon, to generate more profit
Product and Market Development Processes
Product Development Process – Engineering
Research, Design, Test the design, Manufacture, Market, and Evaluate the product
Design Thinking:
- Inspiration: Generation of Idea
- Empathy: Look at the idea from the lens of the customer, screening the idea
- Ideate: Ideate the concept
- Implementation: Implement the concept. MVP (Minimum Viable Product)
- Prototyping: Create a prototype. QFD (Quality Function Deployment)
Quality Function Deployment (QFD):
Customer needs to be met by both product engineering needs and customer perception needs
e.g.: Electric cars have no engine sound. So EV companies add sound modules to give the perception of the normal car to the consumers
Innovation Strategy across PLC
Product Development:
Idea and concept development
Product Development
Market Development:
Managing growth and value creation
Managing growth and risk
Business Sustainability and Value Extraction
Proof of Concept is when the idea survives the valley of death.
Managing Product/Technology Life Cycles
In a short life cycle environment, technology depreciates, hence there is a need for speed
Geoffrey Moore’s Framework for Consumer Segmentation Depending on Product Adoption
- Innovators: First one to test the new product
- Pragmatics: Verifies the product to the market
- Conservatives: After pragmatics, tests the verified product
- Skeptics: Don’t ever buy
While launching a product, prices and complementary products have to be considered before launching the product, then bringing the market and product together, and then maintaining the market
Searching costs → cost of switching to a new product
e.g.: In the USA digital payment adoption is slower due to credit card penetration. In India, there was no such searching cost for consumers from switching from credit cards to UPI
Technology Adoption Life Cycle
- Introduction: Attract customers. Focus on product design
- Growth: Shift from design to market development
- Maturity: Product differentiation and Branding lead to repurchases
- Decline: Switch the product strategy
Cost of Market Entry Delays
Importance of Timing
The second entrant to the market generally ends up with 60-70% of the market share compared to the first mover, since the first mover can get a quality share of mind of the customer.
The third entrant gets 60-70% of the second entrant.
e.g.: If the Total Addressable Market (market size) is 500 million,
market share of 1st three moves is 60% → 300 million
Now using the assumption of the cost of market entry delay:
x + 0.6x + (0.6*0.6)x = 300 million → x = 153 million
First Mover: x → 153 million
Second Entrant: 0.6x → 91 million
Third Entrant: (0.6*0.6)x → 55 million
For the second entrant, the cost of being late is (153-91) = 62 million
If the Contribution margin is 15/unit, then the second entrant is losing 15*62 million = 930 million/year
Cost of delay/day = 930 million/365 = 2.54 million per day
Managing Strategy Across the PLC
- Product Development
- Introduction: Push, Innovation, Top of mind awareness, Branding, Trial, Initial Purchase
- Growth: Push, Growth, Brand, CRM, Top of mind awareness
- Maturity: Pull, Operational Excellence, Services, and Solutions for customers, Retention, Availability, Brand Loyalty
- Decline: Exit/Rejuvenate
Brand Access: Consumers should be able to access the product in their market
Customer Value and Solutions
Role of Brand
Role of Complementary services
Role of Product Design relative to supply chain efficiency
Product Performance vs. Customer Service → This has to be managed
Product performance can be measured by Benchmarking against competitors
Ambidextrous Organizations focus on all: operational excellence, product differentiation, and customer centricity, brand centricity, managing the ecosystem (product and its complementary products/services)
Note: These are notes from the ISB Executive Education – Product Management program for my personal consumption.
In case you are looking for a Product Management course, I would highly recommend joining this cohort-based course.
PS: You can connect with me for review or referral discount (link for referral discount)
