10 November 2019
In marketing theory, a "product" refers to the item a customer purchases.
In marketing language, the term "product" covers both tangible products (cars, soap powder, clothes, aircraft, nuts and bolts etc.) and intangible products such as services (car repairs, insurance, finance, legal services, travel etc.)
Products are often a bundle of both tangibles and intangibles because considerations such as customer service, delivery times, quality, and after sales service are weighed-up by the customer when considering a purchase. These added items cost a supplier money to produce and thus are part of the price structure.
Decisions are made by a firm to create a more competitive offering and this bundle forms the product concept. Equally, a valid decision may be made by a firm to not provide these items to provide a less expensive offering. These decisions are part of the determination of how the product is to be positioned and to which market segments it is designed to appeal.
A product strategy is those decisions made regarding the design and delivery of a product or service in order to enhance its competitive advantage while ensuring the economics of its production or service delivery enable it to be profitable for the firm delivering it.
Product strategy also refers to the planned future development or enhancement of the product to maintain or increase its competitive advantage, reduce its cost or improve its durability.
Physical (or tangible) products can be categorised in all sorts of ways. At the outset, we should cover the two main product groups...
Commodities are products that vary little in their attributes irrespective of who supplies them. Typical examples are raw materials (for example crude oil. iron ore, grains, bauxite, sands - the products of primary production) and common processed products such as steel, cement, bricks. While they may vary in their grade, when negotiating trade of these commodities the grade is taken into account. Essentially they are all the same.
Branded goods cover every other type of physical products that have considerable added value where the attributes vary so considerably comparing one to the other is more complex. Indeed, the product (the thing that people buy) consists of both its tangible form and the brand itself. Hence, a person looking at two identical T-Shirts, one high priced branded "Gucci" and the other an unknown brand at a very cheap price; many people would buy the Gucci. Further, even if you told them they were both made in the same factory and are identical, some people would still buy the Gucci T-Shirt. Brands have value.
Services cannot be held in the hand and looked at, buying them is the ultimate in trust. Hence, branding is very important.
Due to their intangibility, the product definition for services is dissected as...
- Brand: Brand is part of the product concept.
- People: People are involved in delivering services, hence a people strategy is an important component.
- Process: Defines a standardised specification for how the service will be delivered.
- Tangibles: Although services are intangible, there are some tangible aspects, for example, a guidebook describing the service, tickets, or booking office.
Product strategy as part of the marketing mix
Marketing theory holds that in order to gain a competitive advantage you have four levers that can be manipulated to gain competitive advantage (i.e. develop a superior offer to your competition)...
Assuming all other levers are equal, clearly, the customer will favor the superior value proposition.
The product strategy consists of decisions made by the firm to match the specification of the product to the needs of a customer segment.
However, the strategy needs to take into account the cost of manufacture (in the case of a tangible product) or the cost of service delivery, and simply aiming to produce the highest specification product (highest quality, best performing etc.) is too simplistic as this may price the product beyond the amount the customer is prepared to pay.
The product strategy, therefore, embraces the concept of a value proposition.
McDonald's for example doesn't aim to produce the best quality hamburger available instead it aims to produce an acceptable quality product however differentiated by aiming for high consistency and speed of delivery. The combination of these attributes is a deliberate strategy (their "product strategy") and achieves a value proposition that clearly appeals to a large number of people.
Key elements of a product strategy
This depends on how you view the Product Strategy. Two possible views are that the product strategy sits as a component of the marketing strategy alongside of Price, Place (Distribution), and Promotion as a key component of the 4P marketing mix.
The alternative view is that it is a strategy in its entirety and as such would more properly be called a marketing plan.
I point this out because when you Google “Product Strategy” you will get both versions. The Product Strategy as de facto marketing strategy will describe…
- Product Vision: describes the market landscape, who the customers are, what they need, and how you plan to deliver a unique offering.
- Product Goals: are quantifiable and define what you want to achieve in the next quarter, year, or 18 months.
- Product Initiatives: are the high-level efforts that will help you achieve your goals.
These look suspiciously like the high-level parts of a marketing strategy.
Clearly these three items need to be addressed by a marketing strategy and their consideration will drive the product strategy. However, I prefer to think of the Product Strategy as a component of the Marketing Plan that deals specifically with product decision making…
- Positioning: Where the product fits in the competitive frame.
- Key product characteristics: Specification, Packaging (if relevant), and Brand graphics.
- Manufacturing strategy: Built in-house, outsourced, made for inventory or made-to-order.
- Quality: While one would expect quality will be maximised, a valid alternate strategy is not to aim to be the best in the market (because that increases cost) but position the product further down the quality scale.
- Product range and options: Many products are envisaged with a range in mind to meet different price points and to extend the investment in the original product development. Motor vehicles typically start with a base model at the lowest price point possible (which the dealer is encouraged never to sell) along with a range of standard option models (the GX, GXL and Deluxe concept). This is closely related to the price strategy. Options (or option packs) are also envisaged as part of the product strategy and quite often higher profit is built into the options. Hence why car dealerships employ specialist salespeople who work to sell the options.
- Service and support strategy: Many products require after sales support. Depending on the type of product this can be delegated to a dealer network, value added resellers, outsourced to a service organisation, or provided in-house – there are many options. However, it is an important part of the product strategy as it can greatly influence the customer’s decision to purchase. It also has cost considerations as who ever provides after sales support will need to be trained and supported.
There are a multitude of components to the product strategy made more complex by the fact that a product doesn’t end with the physical item but includes other activities and deliverables that support (or enable) the product.
In the Airline industry for example, while the primary product (a service product) is air travel, it is necessary to also provide booking, ticketing, check-in, baggage handling, business lounges, and other services. Together, these all combine to produce the total product concept that is perceived by the customer. A product strategy leaves none of these elements to chance and specifies all of them, including the decision (strategy) to strip them down to a bare minimum for a budget airline concept or to maximise them for a premium airline product concept.
These are strategic decisions.
Product strategy cannot be developed in isolation
Product strategy is very much linked to pricing strategy.
However, all 4 levers (product, price, distribution and promotion) are greatly intertwined.
For example, distribution (the strategy for making the product easily available to customers) adds cost to the end price. So, for example, the decision to appoint retail distributors must take into account that the retailer will need to add a margin to the product (anywhere from +30% to +100%) in order to serve their business needs. This adds to the final price paid by the end customer.
Similarly, the cost of promotion (advertising. paying salespeople etc.) also adds cost that must be recovered in the product price.
Product strategy and brand
The 4 P's marketing model (see what is marketing) defines 4 marketing levers that can be manipulated to create competitive advantage. Many people who get to know marketing conclude that there should be a fifth lever called "branding" (see what is branding?) and there is some sense to this.
However, each of the 4 levers (product, price, distribution, and promotion) can be infinitely divided creating new categories (driven by each new expert's view of marketing or the latest pet theory).
Positioning is also often put forward as the 5th P, however, positioning is again a product of all four marketing levers. The 4P's is therefore neither perfect nor complete but has stood the test of time.
Branding is integral to the product strategy but is supported by price, distribution, and promotion.
Product development is integral to product strategy and refers to both the development of completely new products and also improvements to existing products (applies equally to services).
Manufacturers understand that continuous improvement in manufacturing techniques, advancements in materials and the availability of new technologies enable competitors to develop new products and reduce the cost of manufacturer. Hence the need for product development.
A good example of product development is the automotive industry where a constant state of upgrading existing models and the development of new models takes place to remain competitive. On average the product development life cycle (for a new car model) takes between 3 to 5 years before the first new model rolls-off the production line. Car manufacturers have sophisticated processes (called programs) that guide the development of new models with suppliers (manufacturers of engines, wheels, transmissions, suspension components, windscreens, headlights, seats, dashboards etc.) all working in unison toward the development of the new model.
The primary source of information to guide product development comes from market research to determine consumer wants and needs, what competitors are doing, as well as new style trends.
Product strategy can also refer to product portfolios where automotive manufacturers (for example) seek to cater for the needs of a range of different consumer requirements, tastes, and budgets through designing different models (sedans, sports cars, SUVs, and utes for example) and variants (sedan vs station wagon for example). The matching of the product strategy to these various groups is achieved through market segmentation and psycho-graphic profiling.