Chapter Four

Product and Service Concept

4.1 Concept of new Product/service
New products are the lifeblood of an organization. Once a company has carefully segmented the market,
chosen its target market or customers, identified their needs and determined its market positioning, it is better
able to develop new products. Marketers play a key role in the new-product development process, by
identifying and evaluating new product idea and working with R&D and others in every stage of
development.

New product development shapes the company’s future. Improved or replacement products must be created
to maintain or build sizes. Customers want new products, and competitors will do their best to supply them.

New Product Defined

New product is a good, service, and idea that is perceived by some potential customers as a new.

Figure 4.1

By new products we mean original products, product improvement, product modifications, and new brands
that the firm develops through its own R&D departments.

Six categories of new products

Figure 4.2፡ Categories of New Products

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1. New –to-the world product-: is a new product that creates totally new market or new to the world or
products that are technological innovative that creates a completely new market that previously did not
exist.
2. New product line (new category entries) – this is new products that allow a company to enter an
established market for the first time. These products are new to the company, but as a category, the
product is not new to the consumer. E.g. The entry of Kodak into the battery market.
3. Line extension (additions to existing product lines) – is new products that supplements Company’s
established product lines. Line extension can be copies of existing product that contain unique features
of the original product do not have.
4. Product improvements (revision of existing product)-is a new products that provide improved
performance or greater perceived value or replace existing products or product improvements are
product entrancements that improve the product’s form or function.
5. Repositioned product (market extension) -is an existing products that are targeted to new markets or
market segments or original products positioned in new markets without any (with minimal) changes to
the product.
6. Lower priced product (Cost improvement or cost reduction)–this can be new products that provide
similar performance at lowest cost.
Rationale for New Product Development

Product innovation is essentially important for the following reasons:

1. Maximum use of resources

The fact that the supply of many of our natural resources are limited and irreplaceable points out clearly
the importance of careful new product development that requires efficient and effective use of available
resources
2. Product is a basic profit determinant
New products are essential of sustaining a firm’s expected rate of profit. As the product goes through
all four stages of its life cycle, the profit starts to decline in the late stages unit it become zero.
3. New products are essential for growth
New products are designed not only to maintain the existing profit but also to increase their profits and
have greater market share.

Figure 4.3 - Why New Products Fail

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4.2. Product development process
There are eight steps of new product development. These are:-

1. Idea generation,
2. Idea screening,
3. Concept development and testing
4. Marketing Strategy,
5. Business analysis,
6. Product development,
7. Test Marketing &
8. Commercialization
1. Idea Generation
New product development starts with idea generation - the systematic search for new product idea. A
company typically has to generate many ideas in order to fine a new good one.

Figure 4.3 Sources of new idea generation

Sources of new product ideas can be:

 Internal sources
 External Sources
Internal Sources
Using internal sources, the company can find new ideas through formal R&D. It can pick the brain of its
executives, scientists, engineers, manufacturing staff, and sales people.
External Sources
Good new product ideas also can come from watching and listening to customers. In this case the company
can analyze customer questions and complaints to find new products that better solve consumer problems.
In generally, external sources are: Customers, competitors, middlemen, private research organization and
trade associations.

2. Idea Screening
The purpose of idea generation is to create a large number of ideas. The purpose of the screening stage is to
reduce the number of ideas. Idea screening helps to distinguish good ideas and drop poor ones as soon as
possible. A company should motivate its employees through rewards to submit their new ideas.

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 Figure 4.4: Idea Screening

3. Concept development and Testing

Concept development

An attractive idea must be developed in to a product concept. It is important to distinguish between a

product idea, product concept and a product image. A product idea is an idea for a possible product that the
company can see itself offering to the market. A product concept is a detailed description of the idea
stated in the meaningful consumer terms.

Concept testing

Concept testing involves presenting the product concept to appropriate target consumers and getting their
reactions. The concept can be presented symbolically or physically. The more tested concepts look like the
final product or experience the more dependable concept testing. A product image is the way consumers
perceive an actual or potential product.

For example observe the following situation to understand concept development. A large food processing
company gets the idea of producing a powder to add to milk to increase its nutritional value and taste. This
is the product idea, consumers do not buy product idea; they buy product concepts. A product idea can be
turned into several concepts. E.g who will use this product? (Infants, adults, young people etc), when will
people consume this product? (Breakfast, lunch, evening etc)

4. Marketing Strategy

Following a successful concept test the new product manager develops a preliminary marketing strategy
plan for introducing the new product into the market.

The plan consists of three parts. The first part describes the target market’s size, structure, and behavior;
the planned product positioning; and the sales, market share, and profit goals sought in the first few years.
The Second part outlines the planned price, distribution strategy, and market budget for the first year. The
third part of the marketing strategy plan describes the long-run sales and profit goals and marketing mix
strategy over time.

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5. Business Analysis

After management develops the product concept and marketing strategy, it can evaluate the proposal’s
business attractiveness. Management needs to prepare sales; cost and profit projections to determine
whether they satisfy company objectives.

The simplest way to analyze business is break even analysis in which management estimates how many
units of the product the company would have to sell to break even with the given price and cost structure.

6. Product Development

Up to now, the product has existed only as a word description, a drawing, or a prototype (trial product). At
this stage the company determines whether the product idea can be translated into a technically and
commercially feasible product.

7. Test marketing
After management is satisfied with functional and psychological performance, the product is ready to be
dressed up with a brand name and packaging and put into a market taste. The new product is introduced
into a real setting to learn how large the market is and how consumers and dealers react to handling, using
and repurchasing the product.
Pros are:
o Can reduce the risk of product failure.
o Reduces the risk of loss of credibility or undercutting a profitable product.
o Can determine the weaknesses in the marketing management and make adjustments.
Cons are:
o Test market is expensive.
o Firm's competitors may interfere.
o Competitors may copy the product and rush it out.
8. Commercialization
Commercialization is introducing a new product into the market. Here, firms fully promote, distribute, and
sell their new products. Thus, it is a passage of presenting to consumers tangibly with high financial
company expenditure cost and trying to reach at breakeven point

The Concept of Product Life Cycle

Product life cycle is the path of a product’s sales & profit take over its lifetime. Company’s positioning and
differentiation strategy must change as the product, market, and competitors change over time.

The Life Cycle Concept provides a useful framework for looking at the development of either products or
services and a small business. A product or service has a life cycle of four stages.

Stage 1- Introduction
This is the stage where the product or service is introduced & encounters a certain amount of consumer
ignorance and resistance. Sales are low and growing slowly and profits are low or negative because of the

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heavy expenses of product introduction. Promotional expenditures are also highest ratio to sales because of
the need to inform potential customers.
Stage 2- Growth
This is a period of rapid market acceptance and substantial profit improvement. New competitors enter,
attracted by the opportunities. Small firms maintain their promotional expenditures at the same or slightly
increased level to meet competition and to continue to educate the market.

Stage 3 – Maturity
At some point, the rate of sales growth will slow, and the product will enter a stage of relative maturity. In
this stage; the market becomes saturated and slowdown in sales growth. Profits stabilize or decline because
of increased competition. Product sales may simply be for replacement and customers begin switching to
other products.
Stage 4 – Decline
After sometimes, sales will star to decline as substitute, improved products or services become more
attractive and the old product becomes obsolete. Sales decline for a number of reasons, including
technological advances, shifts in consumer tastes, and increased domestic and foreign competition. Some
firms withdraw from the market.

Figure 4.8 Product life cycle stage

The life-cycle concept helps small firms to interpret product and market dynamics. It can be used for
planning and control, although it is useful as a forecasting tool. It can also be a competitive device, in the
sense that it allows the firm to compare its sales performance to the industry as a whole. For some products
or services the life-cycle can be counted in days. For others, it can span a number of years. It is usually
possible to extend the life of a product or service by developing it in some way or expending the market
into which it is sold.

Characteristics Introduction Stage Growth Stage Maturity Stage Decline Stage

Sales low sales rapidly rising sales high sales and starts Declining sales
to decline

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 Costs high cost per average cost per low cost per low cost per-customer
customer customer customers

Profit Negative increasing profits high profits declining profits

Customers Innovators early adopters middle majority Laggards

Competitors few competitors growing competitors stable number declining in number

beginning to decline

Objective create product maximize market maximize profit Reduce expenditure and
awareness share milk the product

Product Offer basic product Offer product Diversity brands and Phase out weak
extensions, service, item models (remove)
and warranty

Price Charge cost -plus Price to penetrate Price to match Cut-price (reduce)
market competitors’

Distribution Selective Intensive distribution More intensive Go selective or phase

distribution distribution out unprofitable outlets

Advertising Build product Build awareness and Stress brand Reduce advertising cost
awareness interest in the mass differences and to retain hard-core loyal
market benefits

Sales Use heavy sales Reduce to take Increase to Reduce to minimal

promotion promotion s advantage of heavy encourage brand level
consumer demand switching

4.3 Product protection

Most entrepreneurs will not be inventors, but all of them are concerned with protecting their idea. When
those ideas relate to new products, unusual processes, unique designs, or biological innovations such as
new plants, understanding patent law becomes paramount. When entrepreneurs want to protect unusual
brand names or establish ownership of intellectual property, then understanding trademarks and copyrights
is vital. Entrepreneurship has several dimensions and an entrepreneur is expected to know them thoroughly.
One such dimension is a legal dimension. Thus conforming to legal requirements will be the first thing to
start an enterprise. Any enterprise (i.e., sole proprietorship, partnership or Joint Stock Company) has to be
run within the legal framework doing business according to commercial law, labour law, etc. of the
country. Therefore, an entrepreneur should be aware of such governmental legislation. Moreover, it is
important if entrepreneurs have well fledged information about the characteristics, advantages and
disadvantages of the different types of business organization.

4.3.1. Patent

Patents are exclusive property rights that can be sold, transferred, willed, licensed, or used as collateral;
much like other valuable assets. A utility patent is granted for new products, processes, machines, methods,

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of manufacturing, and compositions of matter. This category excludes most botanical creations related to
plant and agricultural use. The utility patent is the most common patent sought by inventors.

What can be patented?

 Process: - New method of manufacturing or new technological procedures that can be validated as
unique.
 Machine: - Products, instruments, machines and other physical objects that have proved useful and
unique.
 Manufacturers: - Refers to physical items that have been fabricated through new combinations of
materials or technical applications.
 Composition of Matter: - relates to chemical compounds, medicines... that do not exist in nature in an
uncultivated state.
4.3.2. Registered design
Registered design- is granted for any new or original decorative design for an article of manufacture. A
design patent protects the appearance of the article, not the article itself. An inventor could easily register
both a utility patent and a design patent, but the design patent has a limited life. Entrepreneurs can select
the period of time for protection in order to commercialize designs and to realize the benefits of their
ingenuity. The benefit of a design patent is that the ornamental nature of the patent may be a distinguishing
feature that allows an individual to have exclusive use of visual imagery, thus enhancing sales or creating
brand identification. When registered, this allows the shape, design, or decorative features of a commercial
product to be protected from copying.
4.3.3. Copyright
A copyright is that the intellectual property is protected for the life of the originator plus 50 years. This
protection affords an extraordinary property right and a substantial estate. A copyright extends protection to
authors, composers, and artists, and it relates to a form of expression rather than the subject matter.
4.3.4. Trademarks
A trade mark includes any word name, symbol, or distinguishing device, or any combinations thereof
adopted and used by a manufacturer or merchant to identify their goods and distinguish them from those
manufactured or sold by others. A trade mark is granted thought the U.S patent and trade mark office for a
period of 20 years. Examples: coke (name) for coca-cola corporation, (Symbol) apple with a bite in his side
– apple Computer Corporation, Wild mustang horse-ford automobile.
Implications for Entrepreneurs:
There are several excellent reasons why hopeful entrepreneurs should be well informed on patents,
trademarks, and copyrights. Aside from the obvious need to protect one's ideas, the entrepreneurs must be
careful not to violate on others. Being familiar with regulations is also important for designing packaging,
writing advertisement and distributing materials. But perhaps most important, obtaining property rights
(patents, trademarks, or copyrights) create valuable assets. Patents can be sold, licensed assigned, or
leveraged as assets of new enterprise.