Marketing Concepts in Commercialization of High Technology

1
Marketing Concepts in Commercialization of High
Technology

• Session 6
• Marketing Mix Product Strategy Pricing Strategy

2
Agenda

• Review
• Lecture/Discuss PLC Introduction to Marketing
  Mix
• Lecture Product Strategy
• Lecture Diffusion Theory
• Exercise Designing Products to Accelerate
  Adoption
• Lecture Pricing Strategy Financial Concepts
• Exercise Calculating Break-Even Volume
• Lecture Setting a Price for a New Product
• Exercises Bobs Lawn Mowers
• Lecture Setting a Price, cont.

3
Review
? Kate Mackie, Ph.D. 2001, Center for Lifelong
Engineering Education, University of Texas at
Austin
4
Catching Up
5
The Marketing Plan
I. Executive Summary
II. Marketing Situation Analysis
III. Opportunity and Issue Analysis
IV. Objectives
V. Marketing Strategy
Segmentation, Targeting
Differentiation, Positioning
Product
Marketing Mix
Price
Promotion
Positive Word-of-Mouth
Place
VI. Action Programs
VII. Projected Profit-and-Loss
VIII. Controls
6
Product Life Cycle
Decline
Maturity
Growth
Introduction
Time
7
Product Life Cycle
Growth
Introduction
Product Development
Technology Development
Time
8
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9
General Marketing Objectives
Create product Maximize market share Maximize
profit Reduce expenditure awareness and
trial sustain growth as long while defending
share and milk the brand as possible.
Adapted from Kotler, Marketing Management, 9th
Edition, p. 363
10
Marketing Mix Strategies
Product Offer a basic product Offer product
extensions Diversify brands/models Phase out weak
items Price Try to use price/ Price to
penetrate Price to match or best Cut price
value Cost-plus frequent market competitors s
kimming vs. penetration Distribution Build
selective Build intensive Build more intensive Go
selective phase distribution distribution dis
tribution out unprofitable channels Advertising
Build product awareness Build awareness
and Build preference stress Reduce to level
needed among early adopters interest in the
mass brand differences and to retain
hard-core and dealers market and
benefits loyals Sales Promotion Use heavy sales
promotion Reduce to take Increase to
encourage Reduce to minimal to entice
trial advantage of heavy brand switching level
Adapted from Kotler, Marketing Management, 9th
Edition, p. 363
11
Marketing Mix Strategies
Product Offer a basic product Offer product
extensions Diversify brands/models Phase out weak
items Price Try to use price/ Price to
penetrate Price to match or best Cut price
value Cost-plus frequent market competitors s
kimming vs. penetration Distribution Build
selective Build intensive Build more intensive Go
selective phase distribution distribution dis
tribution out unprofitable channels Advertising
Build product awareness Build awareness
and Build preference stress Reduce to level
needed among early adopters interest in the
mass brand differences and to retain
hard-core and dealers market and
benefits loyals Sales Promotion Use heavy sales
promotion Reduce to take Increase to
encourage Reduce to minimal to entice
trial advantage of heavy brand switching level
Adapted from Kotler, Marketing Management, 9th
Edition, p. 363
12
Marketing Mix Strategies
Product Offer a basic product Offer product
extensions Diversify brands/models Phase out weak
items Price Try to use price/ Price to
penetrate Price to match or best Cut price
value Cost-plus frequent market competitors s
kimming vs. penetration Distribution Build
selective Build intensive Build more intensive Go
selective phase distribution distribution dis
tribution out unprofitable channels Advertising
Build product awareness Build awareness
and Build preference stress Reduce to level
needed among early adopters interest in the
mass brand differences and to retain
hard-core and dealers market and
benefits loyals Sales Promotion Use heavy sales
promotion Reduce to take Increase to
encourage Reduce to minimal to entice
trial advantage of heavy brand switching level
consumer demand
Adapted from Kotler, Marketing Management, 9th
Edition, p. 363
13
Marketing Mix Strategies
Product Offer a basic product Offer product
extensions Diversify brands/models Phase out weak
items Price Try to use price/ Price to
penetrate Price to match or best Cut price
value Cost-plus frequent market competitors s
kimming vs. penetration Distribution Build
selective Build intensive Build more intensive Go
selective phase distribution distribution dis
tribution out unprofitable channels Advertising
Build product awareness Build awareness
and Build preference stress Reduce to level
needed among early adopters interest in the
mass brand differences and to retain
hard-core and dealers market and
benefits loyals Sales Promotion Use heavy sales
promotion Reduce to take Increase to
encourage Reduce to minimal to entice
trial advantage of heavy brand switching level
consumer demand
Adapted from Kotler, Marketing Management, 9th
Edition, p. 363
14
Characteristics
Sales Low sales Rapidly rising Peak
sales Declining sales
sales Costs High cost per Average cost per Low
cost per Low cost per customer customer cus
tomer customer Profits Negative Rising
profits High profits Declining
profits Customers Innovators Early
adopters Middle majority Laggards Competitors F
ew Growing number Stable number Declining
beginning to decline number
General Marketing Objectives
Create product Maximize Maximize
profit Reduce expenditure awareness and
trial market share while defending share and
milk the brand
Strategies
Product Offer a basic product Offer product
extensions Diversify brands/models Phase out weak
items Price Try to use price/value Price to
penetrate Price to match or best Cut
price Cost-plus frequent market competitors
skimming vs. penetration Distribution Build
selective Build intensive Build more
intensive Go selective phase distribution dist
ribution distribution out unprofitable
channels Advertising Build product
awareness Build awareness and Build preference
stress Reduce to level needed among early
adopters interest in the mass brand differences
and to retain hard-core and dealers market and
benefits loyals Sales Promotion Use heavy
sales promotion Reduce to take Increase to
encourage Reduce to minimal to entice
trial advantage of heavy brand switching level
Adapted from Kotler, Marketing Management, 9th
Edition, p. 363
15
Session 6 Objectives

• Describe the innovation diffusion process, the
  characteristics of an innovation that affect its
  rate of adoption, and the characteristics of
  different types of adopters.
• Describe the relationships between product
  development and product platform development
• Understand the impact of the company,
  competition, and the customer on pricing
  strategies.
• Describe the financial concepts that affect
  pricing.
• Describe the steps and methods that can be used
  for setting the price of a new product or service.

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The Marketing Plan
I. Executive Summary
II. Marketing Situation Analysis
III. Opportunity and Issue Analysis
IV. Objectives
V. Marketing Strategy
Segmentation, Targeting
Differentiation, Positioning
Product
Marketing Mix
Price
Promotion
Positive Word-of-Mouth
Place
VI. Action Programs
VII. Projected Profit-and-Loss
VIII. Controls
17

• Attributes
• Quality
• Options
• Style
• Sizes
• Services
• Warranties
• Returns
• Brand name
• Packaging
• Product Lines/Product Mix

Product (Idea, Good, or Service)
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Basic, expected, and augmented product
Product Levels
Delivery and credit
Installation
packaging
core benefit
brand name
features
Core Benefit
quality
styling
Warranty
After- sale service
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Product Mix - Dell Small Business Division
Product Lines
Product Mix Width
Servers
Dimension
PowerEdge 1300
Precision 220
Inspiron 3800
OptiPlex
Precision 420
PowerEdge 2400
Inspiron 5000
Precision 620
PowerEdge 2450
Inspiron 7500
Product Line Length
PowerEdge 1300
Latitude CP
Latitude CS
PowerEdge 4400
Latitude LS
PowerEdge 6400
PowerEdge 6450
PowerEdge 8450
Partial
http//www.dell.com/us/en/dhs/default.htm
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Four-Level Structure of Product Strategy

• Platform Strategy Includes
• What platforms to develop?
• How to develop them
• When develop them

Vision
Primary Strategic Levels
Product Platforms
Product Lines
Individual Products
McGrath, 1995, Ch. 1
21
Product Family Planning
Entry premium product (features/cost)
Entry mid-range product (features/cost)
Entry low-end product (features/cost)
Segment A
Segment B
Segment C
Shared Product Platform Common Subsystems and
Interfaces
Meyer, 1997, p. 27
22
BREAK
23
Designing Products with Customers in Mind

• House of Quality
• Diffusion of Innovations

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Innovation Diffusion Process

• Process by which an idea spreads from its source
  of invention to its ultimate users or adopters.

Rogers, 1962, 1983
25
Customer Adoption Process
Awareness
Aware, lack information
26
Types of Adopters
34 Early majority
34 Late majority
13.5
2.5 Innovators
16 Laggards
Early adopters
Time
27
Characteristics that Affect Rate of Adoption
Degree to which it

• Complexity (L) is difficult to
  understand/ use
• Divisibility (T) can be tried on a
  limited basis
• Relative Advantage (A) appears superior
• Compatibility (C) matches
  values/experiences of the
  target group
• Observability(0) its beneficial
  results are easily
• 
  observable/describable to
  others

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Rate of Adoption
L
T
A
C
O
I/G/S
Future
3M one-handed tape dispenser
Electric cars
Metric system in the U.S.
Scale -
- - Fast
Slow
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A Thought to Consider

• Marketing Plan Del. 3
• Product Strategy Section
• What elements might you design into the product
  that would encourage faster diffusion through
  your target market?

31
The Marketing Plan
I. Executive Summary
II. Marketing Situation Analysis
III. Opportunity and Issue Analysis
IV. Objectives
V. Marketing Strategy
Segmentation, Targeting
Differentiation, Positioning
Product
Marketing Mix
Price
Promotion
Positive Word-of-Mouth
Place
VI. Action Programs
VII. Projected Profit-and-Loss
VIII. Controls
32
Price

• List price
• Discounts
• Allowances
• Payment period
• Credit terms

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Why is Pricing Important?

• In a company with average economics,
• 1 increase in volume 3.3 increase in profit
• 1 increase in price 11.1 increase in profit
• Improvements in price typically have 3-4 times
  the effect on profit as proportionate increases
  in volume.

Based on average of 2,463 companies
Marn Rosiello, 1992
34
Handout Effect of Contribution Margin on
Breakeven Sales Changes
35
Pricing Strategy

• First/Central Strategy question
• Higher than the competition?
• Equal to the competition?
• Lower than the competition?
• Second
• Work out the details

36
Pros/Cons

• Higher than the competition
• Pros
• Cons
• Lower than the competition
• Pros
• Cons
• Equal to the competition
• Pros
• Cons

37
Clarification of Terms

• Cost what you/distributor/retailer paid for
  something
• Price what you/distributor/retailer sell
  something for

38
Pricing-Related Cost Concepts

• Margins
• Gross Margin
• Contribution Margin
• Net Profit Margin (Before Taxes)
• Costs
• Variable
• Fixed
• Contribution Analysis
• Break-Even Analysis
• Sensitivity Analysis

39
Marketing Plan Template p. 6
Pro Forma Income Statement
Contribution Analysis
40
Margins

• Gross Profit Margin
• Sales
• Less COGS
• Gross Margin

• Contribution Margin
• Sales
• Less Variable Costs
• Contribution

Gross Margin and Contribution Margin often
similar.
41
Margins

• Net Profit Margin
• Sales
• Less COGS
• Gross Margin
• Marketing/Selling Expenses (F.C. V.C.)
• G A Expenses (F.C.)
• Net Profit Margin

• Net Profit Margin
• Sales
• Less Variable Costs
• Contribution Margin
• Less Fixed Costs
• Net Profit Margin

42
Definitions

• Variable Cost
• Production/distribution costs required to place
  an additional unit of product in the hands of the
  customer.
• Vary in direct proportion to sales volume
• e.g., production materials, assembly work, sales
  commissions

43
Definitions

• Fixed Cost
• Production/distribution costs that stay the same
  regardless of changes in sales volume
• Costs are fixed
• e.g., RD, salaries, rent

44
Fixed or Variable Cost?

• Materials
• Physical plant
• Plant labor
• Supervisors in plant
• Equipment
• Marketing staff
• Accounting staff
• Finance staff

• Salesperson salary
• Salesperson commission
• Advertising
• Promotion
• Coupons
• Price cut

45
Exercise coming

• How many Gizmos would you need to sell to break
  even in the following scenario?
• Selling price/unit xxxx
• Variable costs/unit xxxx
• Fixed costs xxxx

46
Contribution Analysis

• Critical marketing concept
• Break-Even Analysis
• Sensitivity Analysis
• Cannibalization Assessment

Revenue (Sales) - Variable Costs
Contribution
Contribution Contribution Margin Revenue
Unit Selling Price - Unit Variable Costs
Unit Contribution
Unit Contribution Contribution Margin
Unit Selling Price
47
Definitions

• Unit contribution
• Price (revenue) less variable costs
• Funds available to the seller after subtracting
  variable costs
• Funds that can be used to contribute to fixed
  costs.
• Selling Price/widget 75
• Variable manufacturing cost/widget 25
• Shipping/widget 2
• Commissions to sales people/widget 4

48
Definitions

• Selling Price/widget 75
• Variable manufacturing cost/widget 25
• Shipping/widget 2
• Commissions to sales people/widget 4
• Total variable costs/widget 31
• Contribution/widget 44

Contribution Margin Contrib. Sales
44/75 59
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Definitions

• Contribution per widget 44
• Have 44 to contribute to covering fixed costs,
  e.g.,
• fixed manufacturing expenses
• overheads
• salaries
• fixed marketing costs for the product

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Break-Even

• Revenue sufficient to cover
• Variable costs
• Fixed costs
• No profits No losses

51
Breakeven Analysis
52
Break-Even Volume

• How many widgets do you have to sell to break
  even? That is, What must our unit sales volume
  be to break even?
• Total Fixed Costs/Unit Contribution
• Unit Contribution 44
• Fixed Costs 500,000/year
• 500,000/44 11,364 widgets
• Have to sell 11,364 widgets/year to break even

53
Exercise

• How many Gizmos would you need to sell to break
  even in the following scenario?
• Selling price/unit 10.00
• Variable costs/unit 7.50
• Fixed costs 9,000

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Contribution and Market Size

• Break-Even Point at 75 11, 363 widgets
• We know that the market size is 50,000 widgets.
• That would give us a market share of 22.7.
• Then ask Does that make sense given what we
  know about the market?

55
Break-Even and Profit Goals

• Can work a profit goal into the equation by
  adding the desired level of profit on to fixed
  costs.
• Unit Volume to achieve profit goal
• Fixed Costs Profit Goal
• Contribution per unit
• 500,000 100,000 13, 636 units
• 44

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Sensitivity Analysis

• Methodically examining the financial impact of
  several sets of assumptions.

57
Evaluating alternatives
A B C

Price/widget 75 150 90 Sales volume est.
11,500 6,500 10,000 Sales (000)
863 975
900 Variable Costs (000s) 357
202 310 Contribution (000s) 506
773 590 Fixed Costs (000s) 500
500 500 Net Profit Impact (000s) 6
273 90
Sensitivity analysis changing 1-2 assumptions
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BREAK
59
Six-Step Process for Setting Prices

• Select the pricing objective
• Determine customer demand
• Estimate costs
• Analyze competitors costs, prices, offers
• Select a pricing method
• Select final price

Kotler 9, Ch. 17
60
Overriding Goal

• Achieve a commanding position in the market
  segment(s) served.

Not to compete in every market segment the
product might conceivably fit
Davidow, p. 116
61
Select the Pricing Objective

• Maximize current profit
• Maximize market skimming
• Maximize sales growth (penetration)
• Product/quality leadership

62
Estimate Demand

• Analyze past prices, sales, other factors of
  similar products if available.
• Conduct price experiments
• Ask customers
• Review factors affecting price elasticity and
  sensitivity

63
Customers are less price sensitive if
Pricing Sensitivity Factors

• the product is highly innovative
• the product is more distinctive than competition
• there are few substitutes
• product is used in conjunction with assets
  previously bought
• product is assumed to have high quality

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3. Estimate Costs

• Variable Costs
• Fixed Costs
• Other Cost Concepts
• Target Costing
• Experience Curve

65
Target Costing

• Determine the price customers are willing to pay
  for the product/service.
• Determine what your costs would need to be to
  achieve that.
• Design the product/service to meet that cost
  target.

66
Cost Per Unit as a Functionof Accumulated
Production
T78
Fig 17.06
10 8 6 4 2
Current price
- - - - -
Experience curve
- - - -
Cost per unit
100,000
800,000
400,000
200,000
Accumulated production
67

• Analyze Competitors Costs, Prices, Offers
  

68
Select a Pricing Method

• Mark-up Pricing - Cost Plus

69
Mark-Up or Cost-Plus Pricing

• Mark-up profit based on cost
• Selling Price - Cost
• Cost
• To set price based on a desired mark-up
• (also called Cost-Plus . . . Cost some )
• Cost 25 Desired mark-up 20
• 25 x 1.20 30.00

70
Stop and Do the Bobs Lawn Mowing Pricing
Exercise Now
71
Fixed Costs 500 - lawnmower Variable
Costs 5 - per lawnDesired Profit
(Mark-up on cost) 20Time Frame
5 months (4wks/mo.)
Demand Price/lawn

• 1) 10 lawns, weekly (200 lawns)
• 2) 10 lawns, every 2 wks (100 lawns)
• 3) 5 lawns, every 2 wks ( 50 lawns)
• 4) 10 lawns, 2 times/wk (400 lawns)
• 5) 20 lawns, 2 times/wk (800 lawns)

• 9.00
• 12.00
• 18.00
• 7.50
• 6.75

Weak Markets?
Strong Markets?
72
Demand Price/lawn

• 1) 10 lawns, weekly (200 lawns)
• 2) 10 lawns, every 2 wks (100 lawns)
• 3) 5 lawns, every 2 wks ( 50 lawns)
• 4) 10 lawns, 2 times/wk (400 lawns)
• 5) 20 lawns, 2 times/wk (800 lawns)

• 9.00
• 12.00
• 18.00
• 7.50
• 6.75

Example of The Cost-Plus Delusion

• Over priced in weak markets
• Under priced in strong markets

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Select a Pricing Method

• Mark-up Pricing - Cost Plus
• Target Return Pricing

74
Target Return Pricing Gizmo mfg. invested 1MM
wants 20 ROI Fixed cost 300,000 variable
cost 10/unit Estimate 50,000 unit sales
(therefore, fixed cost/unit 6). What is the
price?
Target-return price unit cost desired return
X invested capital
unit sales
Target-return price 16 200,000 20
50,000
75
Select a Pricing Method

• Mark-up Pricing - Cost Plus
• Target Return Pricing
• Perceived Value Pricing

76
Exercise coming

• Think about your projects and one market
  segment.
• What are some specific ways that you could
  determine how much your product is worth to that
  market segment?

77
Device Pricing vs. Whole Product Pricing

• Value of any product to its market is strongly
  influenced by prices of competitive products.
• Competitive devices are analyzed, but
  products are priced.
• Product features have different values
• Customer service
• Warranties
• Distribution channels (e.g., convenience)
• The sum of the features makes up the product

Moore, p. 110 Davidow, p. 106
78
Perceived Value Pricing in Chemicals
79
Perceived Value Pricing in Chemicals
Note The Device is the chemicals. The
Product includes the device plus. . . .
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Determining Perceived Value

• What value is placed on the end result?
• The cost of alternative solutions to the
  customer.
• A function of
• Prices of comparable (though not identical)
  products
• The value (/-) of the products differences
  vs. the competitive offering
• The value of the Whole Product

81
Economic Value Analysis

• Identify the cost of the competitive product or
  process (i.e., the reference value)
• Identify all the factors that differentiate the
  product.
• Determine the value to the customer of these
  differentiating factors (i.e., the
  differentiation value)
• Sum the reference value and the differentiation
  value to determine the total economic value.

Nagle Holden (2002)
82
A Value-based Approach Example of Alathon 25
Dupont
(Example from Nagle and Holden The Strategy and
Tactics of Pricing, pp. 107-113)
83
A Value-based Approach Example of Alathon 25
from a farmers viewpoint
Per 100 feet
Crop savings 0.40
Labor savings 3.00
Differentiation Value
Replacement savings 0.31
(Example from Nagle and Holden The Strategy and
Tactics of Pricing, pp. 107-113)
84
Example of Alathon 25 continued from the
extruders viewpoint...
Per pound
Added Value to extruders product 0.228
Positive Differentiation Value
(Example from Nagle and Holden The Strategy and
Tactics of Pricing)
85
Toxic Industrial Chemicals
64.1
Nontoxic Industrial Wastes
58.3
Indoor Plumbing Do-It-Yourself
Economic Value per Pound ()
Sewage
In-Ground Irrigation
44.5
39.8
Indoor Plumbing New Construction Market
Above-Ground Irrigation
- Commodity Value
28.0
Millions of Pounds of Market Potential
0
86
Economic Value vs. Perceived Value
Product Performance
A key task of marketing is to translate the
economic value into high customer perceived
value.
Cumberland TN, p. 10
87
Research Approaches for Value Assessment
Handout
88
Exercise

• Think about your projects and one market
  segment.
• What are some specific ways that you could
  determine how much your product is worth to that
  market segment?

89
Select a Pricing Method

• Mark-up Pricing - Cost Plus
• Target Return Pricing
• Perceived Value Pricing
• Value Pricing
• Going Rate Pricing (market price)
• Reference Pricing (comparison w/substitutes)

90
Select a Pricing Method

• Mark-up Pricing - Cost Plus
• Target Return Pricing
• Perceived Value Pricing
• Value Pricing
• Going Rate Pricing (market price)
• Reference Pricing (comparison w/substitutes)
• Sealed-Bid Pricing

91
Sealed Bid Pricing
Company Company Probability
Expected Bid Profit of Award
Profit 9,500 100 .81
81 10,000 600 .36
216 10,500 1,100
.09 99
11,000 1,600 .01
16
92
Select the Final Price

• Desired/Required Distributor Margins
• Psychological pricing
• Influence of other marketing mix elements
• Company pricing policies
• Impact of price on others

10,000
375.00
2,000,000
93
Review/Wrap-Up

• Marketing Mix Product Life Cycle
• Product Strategy
• Platform Strategy
• Diffusion of Innovations
• Pricing
• Cost Plus Delusion
• Economic Value
• Perceived Value
• Determining Worth

Remember to complete evaluations
94
Next Time

• Topics
• Reading
• Prepare/discuss study questions in Discussion
  Board Session 7
• Marketing Plan Del. 2 due on 08/18

95
Marketing Plan Del. 2
Read the Instructions!

• Situation Analysis supplement and polish
• Market Potential supplement and polish
• O/I Analysis
• Strategy Recommendation Target Segment
• Presentation Guidelines
• 15 pages max., excluding exhibits
• Double-spaced 1 margins 12 pt. Font document
  sources

96
References

• Davidow, W.H. (1986). Marketing High Technology,
  New York The Free Press
• Dwyer, F.R. Tanner, J.F., Jr. (1999). Business
  Marketing, New York Irwin McGraw-Hill
• Marn, M.V. Rosiello, R.L. (1992). Managing
  Price, Gaining Profit. Harvard Business Review,
  Sept-Oct. pp. 82-93.
• McGrath, M.E. (1995). Product Strategy for
  High-Technology Companies, New York McGraw
  Hill.
• Moore, G. (1999). Crossing the Chasm. New York
  HarperBusiness.
• Nagle, T.T. and R.K. Holden. 1994. Ch. 1 -
  Strategic Pricing - The Harvest of Your Profit
  Potential. The Strategy and Tactics of Pricing
  A Guide to Profitable Decision Making. Second
  Edition. Upper Saddle River Prentice Hall
  Business Publishing.
• Nimer, Daniel A. July 1986. Theres More to
  Pricing Than Meets the Eye. Journal of
  Information and Image Management, pp.30-34.
• Rogers, E.M. (1962). Diffusion of Innovations,
  New York Free Press. (See also, 3rd Edition,
  1983).