A value based orientation to new product planning

JOURNAL OF CONSUMER MARKETING

A Value-based Orientation to New Product Planning

Tridib Mazumdar

New products are essential for corporate survival and long-term growth. However, a large proportion of new products introduced to the market fail to achieve desired results and eventually are withdrawn. Among the many factors identified as responsible for new product failure, one that is frequently cited in literature is the inability of launching firms to identify and adequately meet the needs of their target customers (Cooper and Kleinschmidt, 1987). Despite this recognition, the understanding of consumer-related issues in new product adoption process remains limited (Gatignon and Robertson, 1985). As a result, few consumer-oriented guidelines exist to assist new product managers when developing new products and formulating new product strategies.

The objective of this article is to offer a framework that will help managers to incorporate consumer viewpoints in new product planning activities. The framework is built on the concept of "perceived value", which is defined as the degree to which a potential adopter perceives that the benefits of a new product exceed the sacrifices associated with its adoption and consumption.

Journal of Consumer Marketing, Vol. 10 No. 1, 1993, pp. 28-41, © MCB University Press, 0736-3761

A key advantage of adopting a value orientation is that it takes into account both benefit and sacrifice components of a new product and therefore, it "conveys a more stable sense of worth..."(Rockefeller, 1986). The following examples will help to illustrate the notion of value: • Companies such as 3M, Dow

Chemicals, Maytag and Swissair routinely price their products above the competition and yet are able to maintain or expand market shares by more than compensating their customers with quality, reliability and service.

• After evaluating several models of receivers, Consumer Reports (March 1992, p. 170) picks Kenwood KR-V7030 with a quality rating of 89 (out of 100) and a price of $380 as the "best buy" over models (with quality rating/price) such as, Pioneer VSX-51 (91/$580), Kenwood KR-V8030 (89/$450), and Technics SA-GX505 (84/$375).

This research was partially funded by the School of Management, Syracuse University. The author wishes to thank Professor Patricia Meyers, S.P. Raj, Susan Thomas, and David Wilemon for their comments on earlier drafts of this article.

28

VOLUME 10 NUMBER 1 1993

As the preceding examples illustrate, and as preceding many industry leaders have noted, today's value-conscious customers are neither impressed by the "best" product nor are they persuaded by the "lowest" price alone. Instead, consumer purchase decisions are often guided by a careful assessment of what benefits they obtain in exchange for the costs they incur to acquire and consume the product. This realization has drawn the attention of designers, engineers and technicians to "value engineering" that focuses on offering need-satisfying attributes in a product at the minimum costs to the consumers.

This article is divided into two parts. The first describes how consumer perceptions of benefits and sacrifice are conceptually linked with their perception of new product value. This description helps to identify the factors which have direct or indirect influences on consumer perceptions of value. In the second part, a framework for analyzing consumers' perception of new product value is presented. The framework demonstrates how a new product manager can adopt different strategic orientations to maintain or improve consumer value perceptions for the new product. The article also provides a list of conditions under which each strategic orientation is suitable and suggests steps that a firm may take to move from one strategy type to another in response to changing conditions.

LINKING BENEFIT, SACRIFICE AND VALUE PERCEPTIONS In recent years, academicians (see for example, Monroe, 1990; Zeithaml, 1988) have proposed descriptive models to depict how consumer perceptions of benefits and sacrifice are related to perception of value. Figure 1 is an

adaptation of these models to suit a new product context. According to Figure 1, consumers assess the potential benefits of a new product as well as the sacrifices to be made in order to derive these benefits. New product benefits may include superior product quality, new features, convenience, or other functional, psychological, and social aspects of the new product that are considered desirable by potential adopters. Sacrifices, on the other hand, include the purchase price of a new product as well as other non-price costs. These costs include both monetary and non-monetary costs that potential adopters may incur to acquire, install, operate and consume the new product. Consumers weigh potential benefits against sacrifices, and this comparison results in perception of value. The higher the perceived value, the greater is consumer willingness to adopt a new product.

Evaluating a New Product: Relative to What? Consumers do not evaluate a new product in isolation; instead, the evaluations are made relative to a reference product. A reference product is the consumer's next best alternative to the new product (Monroe et al., 1987). It is important to note, however, that since consumers are not simply concerned with the hardware or physical aspects of the new product, reference products are not always physical products. They can be current practices or consumption behaviors that the new product is targeted to replace, complement, modify, or augment.

Since needs, preferences and applications vary across consumers (or customer segments), different customers may use different reference products to evaluate the same new product (Forbes

29


and Mehta, 1978). For example, potential adopters of a microcomputer, who are primarily interested in analyzing large volumes of data, may compare it with mainframe computers, mini-computers and workstations. Other adopters, interested in using a microcomputer for sales planning, management and operations, may use "laptop" computers with dial-up capability as a basis for comparison (Gosler, 1987). Moreover, consumers may use one reference product to evaluate one set of attributes of the new product but use a different reference product to evaluate other attributes. For example, when evaluating the benefits of a digital audio tape (DAT), consumers may use audio cassette tapes to compare the recording quality, but use compact discs as a reference product to evaluate the sound quality. As discussed later, using different reference products by different consumers can result in different perceptions of value for a new product.

Factors Affecting Benefit Perceptions Intrinsic product attributes. For potential adopters to perceive the benefits of adoption, a new product must offer certain additional need-satisfying properties relative to those offered by the reference product. These properties may include superior technology, quality, design or workmanship. New products may also offer savings or other economic benefits to consumers, including added features and increased convenience. Mere presence of desirable physical attributes in a new product does not, however, guarantee that consumers will perceive their benefits. Consumers' ability to perceive benefits depends on the degree to which the benefits are either observable or can be experienced via trial (i.e. without a decision to adopt) (Rogers, 1983).

The roles of observability and "trialability" in consumer evaluation of the benefits of a new product depend on whether the benefits of the product come primarily from its search, experience or credence attributes (Ford et al., 1988). Search attributes are those pieces of product information which consumers can evaluate via visual inspection of the product (e.g. size of a compact disc or portability of a Sony Walkman) or from external sources of product information (e.g. product test results or information labels). Experience attributes require actual consumption of the product (e.g. aftertaste of a new brand of beer; instant relief promised by a new drug). Finally, credence attributes can be evaluated either after a long period of usage of the product or when the product actually fails to perform (e.g. reliability of an automobile, performance of a mutual fund).

A new product may contain all three types of attributes in varying proportions.

30


For example, the smallness of compact discs is a search attribute, high sound quality an experience attribute, infinite recording life a credence attribute. When the new product benefits come primarily from its search attributes, it is critical that these attributes are clearly observable to consumers. For example, prospective buyers of portable computers must be able to acquire information concerning portability (e.g. size, weight, shape etc.) by visual inspection and/or through other external sources of product information (e.g. product brochures and advertisements). However, when the primary focus of a potential adopter is on experience attributes (e.g. "user-friendliness"), trial will best convey the new product benefits to consumers. Finally, when the emphasis is on credence attributes, or when neither observation nor trial opportunities exist, potential adopters rely on extrinsic cues to infer the relative benefits of the product (Zeithaml, 1988).

TRIAL WILL BEST CONVEY THE NEW PRODUCT BENEFITS

TO CONSUMERS

Extrinsic cues. Extrinsic cues are those pieces of information that are not physically related to the new product but are nonetheless used by consumers to assess future product performance. Reputation and innovativeness of launching firms, a product's country of origin, expert or reference group opinion, brand names, and product prices are some examples of extrinsic cues. Use of extrinsic cues has become popular, for example, in brand extension strategy where the strong name of the parent brand is used to convey the reputation

of quality of the extended brand (Aaker, 1990). Auto manufacturers routinely use the country of origin (e.g. German engineering, Japanese reliability) to emphasize superiority of the new models.

When do potential adopters use extrinsic cues rather than (or in addition to) the physical attributes to infer product benefits? The use of extrinsic cues to infer potential benefits or qualities of a new product are prevalent when:

(1) the potential benefits of a new product are not readily observable from the intrinsic attributes;

(2) the opportunity to use a product on a trial basis does not exist;

(3) potential adopters are interested in those dimensions of benefits of a new product (e.g. reliability, durability) that are not assessable via observation or trial (i.e. credence attributes);

(4) consumers lack the knowledge or technical expertise needed to understand and evaluate the potential benefits; and,

(5) the perceived risks of product failure, economic loss, and social rejection are high.

Factors Affecting Perception of Sacrifice New product price. For a commercially marketed new product, purchase price is a major determinant of consumer perception of sacrifice. However, it is important to note that consumers do not evaluate the absolute magnitude of price in isolation. Rather, the new-product price is typically compared relative to the prices of reference products. The higher the price of the new product relative to that of the reference product, the greater

31


is the perception of sacrifice. Thus, consumers can be more resistant to paying for a new product that replaces what was previously free than when it replaces something they previously paid for, even when the incremental benefits of the new product fully justifies the price. For example, in introducing ATM facilities, banks which traditionally offered "free and unlimited" transactions face greater customer resistance to ATM charges than banks with a previous history of charging transaction fees, ceteris paribus.

D

CONSUMERS SOMETIMES USE THE EXPECTED FUTURE PRICE

AS A REFERENT □

Sometimes, instead of relying on current prices of reference products, consumers use the expected future price of a new product as a referent (Narasimhan, 1989). This practice occurs when consumers detect a trend in future prices. For example, based on prior experience, many consumers have come to expect that prices of consumer electronics products will decline after their introduction. As a result, consumers whose needs for this type of product are not immediate may judge the current price unfavorably and wait until the price declines.

Post-purchase monetary costs. Purchase price is not the only cost consumers incur to adopt a new product. Consumers often incur other monetary costs to acquire and consume the benefits of the new product (Forbes and Mehta, 1978). These include, for example, costs of delivery, installation, start-up, service and maintenance costs incurred by consumers over the life of the new product. Costs of

this nature are typically quite high for consumer durables and industrial equipments.

Cost of learning. Costs are also associated with learning how to use the new product to derive its full benefits. In organizational adoption literature, researchers have noted that organizations must plan and allocate considerable time and effort in order to fully implement an innovation. This is true for consumer adoption as well. The cost of learning is typically a function of the technical complexity associated with understanding and using the new product. Consumers often expect to encounter, and are able to cope with, some level of technical complexity when adopting a new product. However, when the perceived complexity exceeds a threshold, consumers need to allocate financial and/or non-financial resources to understand, operate, or otherwise derive all the benefits that the new products promise to offer. Likewise, incompatibility between the new product and current beliefs, values, and consumption norms, may demand substantial financial and non-financial sacrifices from potential adopters.

In recent years, industry experts have identified cost of learning as a major impediment to the depth of adoption, which is an indicator of the extent to which adopters are able to utilize the full benefits of a new product. To reduce this cost, companies such as Xerox routinely offer on-site training of personnel of adopting organizations through demonstrations and workshops. Welch Allyn, a manufacturer of high-technology medical testing equipments, has its technical reps spend considerable time with doctors and technicians to demonstrate the different applications of the equipments.

32


Cost of replacement. Apart from the costs of acquisition and consumption, there are also costs associated with giving up and disposal of the product or behavior currently in use. In financial terms, this cost is the difference between the amount consumers believe the "old" product is worth and its actual salvage value. Thus, consumers have a lower perception of sacrifice when there are opportunities for trade-ins, trade-ups and buy-back arrangements, for example. There are also such non-financial costs as the emotional and social costs consumers experience when giving up their old possessions for new ones.

Consumer Characteristics Although there are several characteristics of potential adopters that have been found to influence consumers' adoption decisions, this article focuses on only three factors that have direct effects on consumer perceptions of benefit and sacrifice. (Readers interested in other consumer characteristics may refer to Gatignon and Robertson, 1985.) These factors are: (1) product class knowledge, (2) attitude toward risk; and (3) relative concerns for low price

compared with high quality. First, since consumers who are knowledgeable about the product class require less effort to comprehend and evaluate the potential benefits of a new product, they are usually quicker to assess new product benefits, especially those involving high technology. Second, consumers with a favorable attitude toward risk (e.g. venturesome) place less emphasis on the possibility of new product failure and other sacrifices associated with the new product adoption

and are more influenced by the promised benefits of the product. Finally, consumers differ in their relative preference for low price versus high product quality. For a given level of benefits and cost, price-conscious consumers are likely to place a greater weight on the "low" price of a new product, whereas quality sensitive consumers place greater emphasis on the product superiority. In fact, quality-sensitive consumers may use high prices as an indicator for product quality.

VALUE-BASED PLANNING Thus far, the article has examined how consumers evaluate the potential benefits and sacrifices associated with new product adoption. Utilizing the preceding analyses we now develop a framework to help the new product planning activities of managers by providing them with an explicit focus on consumer perception of value for the product.

A Framework for Value Analysis As defined earlier, perception of value can be expressed as:

Perceived value = Perceived benefits — Perceived sacrifices

The above expression has two implications for the value-based planning of new products. First, it suggests that a firm can enhance consumer perception of new product value either by increasing their perception of benefit or by reducing their perception of sacrifice. Second, various combinations of benefits and sacrifice levels can create the same level of value perception for a new product. These two premisses are utilized in Figure 2 which serves as a framework for analyzing consumer perception of value for a new product.

33


The horizontal and the vertical axes in Figure 2 represent consumer evaluations of new product sacrifice and benefit respectively. These are assessed relative to a reference product. The position of the reference product is located at the origin (point 0). It is assumed that the sacrifice associated with a new product adoption may be lower or higher than that associated with the reference product. However, the preceived benefit of the new product is never less than that of the product it aims to replace. That is, the new product is perceived to offer at least a minimal level of incremental benefit over the reference product.

The diagonal lines are perceived value lines (hereafter referred to as "value" lines), reflecting the difference between consumer perception of benefit and perception of sacrifice. All new products located on a given value lines are perceived by consumers as offering the

same level of value. However, consumer perception of value for a product increases as it moves from the bottom-right to the top-left. The dark value line (OA) represents a position where consumers' perception of relative benefits exactly matches their perception of relative sacrifice. Consumers are indifferent between a new product located on this line and the reference product as far as perceived value is concerned.

Evaluating Alternative Strategic Orientations To demonstrate how the framework in Figure 2 can be utilized to examine the feasibility of different new product strategies, it is divided into four cells. Since each cell represents a different combination of benefit (High-Low) and sacrifice (Higher-Lower) perceptions, the strategic focus of the cells are different. For example, products (e.g. NP1 and NP3) may be located on the same value line (i.e. offer customers the same level of value) but the products may have different strategic orientations. Also, two or more products (e.g. NP1 and NP2) may be perceived as offering identical sets of benefits, yet they may be located on different value lines because one of the products entails lower adoption costs than the other.

Strategic orientation of Cell 1. The strategic focus of new products located in this cell (e.g. NP1 in Figure 2) is to offer the potential adopters substantially greater benefits than the product or practice currently in use. However, the benefits come at a high price or non-price costs to customers. Gillette's recent introduction of the "Sensor" shaving system is a good example of this type of strategy. The objective of this strategy was to draw customers away from the disposable shaver segment by

34


emphasizing significantly superior quality, smoothness, closeness of shaving, and safety even though the product was priced many times higher than that of disposable shavers.

It is important to note that since adoption of a new product in Cell 1 entails a high level of monetary or nonmonetary sacrifice, the product's value is best communicated by emphasizing the potential benefits, rather than by trying to reduce consumers' perception of relative sacrifice. Thus, the success of this strategic orientation rests on strengthening the benefit-value link in Figure 1. Therefore, to pursue this strategy, the following conditions should be met:

• The intrinsic attributes of the new product are significantly superior to the reference product. Consumers are able to perceive this superiority either by observation including inspection of externally available product information or by trial.

• The firm is in a position to use extrinsic cues such as its reputation as an innovator, a strong brand name and favorable expert opinion to signal the new product's superiority. This condition is important when the benefits of the new product are difficult to perceive through observation or trial alone.

• Target customers: are knowledgeable about the product class; are interested in acquiring a superior product and are willing to pay a high price for it; and bear a favorable attitude toward risks.

Strategic orientation of Cell 2. The strategic orientation of this cell is to offer potential adopters signifcantly greater benefits than the product being replaced at a substantially lower cost. The main

objective is to penetrate or gain rapid market share in a highly competitive market by giving customers a new product (e.g. NP2) that promises extraordinary value. AT&T adopted this strategy when it introduced the Universal Card in an intensely competitive credit card market. With a promise of unparalleled service quality and reliability, backed by company reputation, and with no annual fee for the lifetime of the card holder, the AT&T Universal Card, winner of the prestigious Grand Edison Award in recognition of new product innovation, achieved 4.1 million accounts in just eight months after its launch.

Although the strategy of offering extraordinary value to consumers virtually guarantees success of a new product, it comes at a cost for the launching firm. By offering a superior product at a low cost to consumers, the firm foregoes an opportunity for increasing its profitability by charging a higher price for the product. However, the loss of this short-term profit may be more than compensated for by long-term growth in market share, consumer franchise, and pre-emption of competition by market leadership. Overall, the strategic orientation of Cell 2 is suitable under the following conditions:

• A "close follower" may introduce a new product offering comparable or better value to the customers. The strategy of providing super-normal value to consumers may pre-empt such competitive moves.

• Firms intend to achieve a rapid initial adoption or expand market share with introductory offers such as "low" price, free installation, free on-site demonstration and training, or other forms of inducements that lower adopters' perceptions of sacrifice.

35


• The purchase price or other post-purchase costs for adoption of the new product is either controlled or subsidized by government or other agencies so as to accelerate adoption of the new product.

It is important to note, however, that in the long run, a firm may determine that it cannot pursue this strategy at the cost of the firm's profits and revenues and decide to shift its strategic orientation to that of Cell 1 or Cell 3. Shifting the strategic orientation to that of Cell 3 involves, for example, withdrawing certain value-added services (e.g. free installation, on-site training, or maintenance contract) or eliminating certain benefit-generating features, hitherto offered to customers to induce switching to the new product. Whereas, shifting the strategic focus to that of Cell 1 involves increasing the price of the product or charging for (or raising) post-purchase costs such as service and maintenance. For example, after achieving its initial market share target, AT&T has now decided to withdraw the "no annual fee for lifetime" feature of its Universal card.

□ SHIFTING STRATEGIC ORIENTATION

MAY INVOLVE FIRMS WITHDRAWING CERTAIN VALUE-ADDED SERVICES

□ Strategic orientation of Cell 3. The strategic objective of this cell is to offer potential adopters a new product (e.g. NP3) that provides only marginally greater benefits than the product it aims to replace but the price and/or other costs of adoption of the new product are significantly lower. This type of strategic orientation is suitable when the new product is a "me too", minor line extension or a clone of a major brand.

In entering the personal computer market, Packard Bell followed this strategy. They did not claim technical superiority over computer giants like IBM and Apple; instead they offered inexpensive PCs with preloaded popular softwares and sold them through mass merchandisers such as department stores, warehouse clubs and consumer electronics stores. Hewlett-Packard traditionally follows the Cell 1 strategic orientation of charging premium prices for its high quality PCs and printers. However, HP has decided to enter the workstation market, not with a break-through innovation but with a significantly lower price than the market leader Sun Microsystems.

As these examples illustrate, the strategic focus of Cell 3 is not on product superiority but in reduction of perceived sacrifice. Since the aim is to weaken the sacrifice-value link (see Figure 1), this strategic orientation is best suited when: • The intrinsic attributes of new

products are not significantly superior to the reference products.

• Launching firms are unable to back their new product with extrinsic cues such as a strong brand name or firm reputation.

• The cost structure of new products are such that they can be offered to customers at prices lower than that of reference products.

• Post-purchase costs, such as costs of installation and maintenance as well as the costs of switching from and disposing of existing products are low. Also, the product is neither complex nor incompatible with current consumption pattern, thus keeping the cost of learning low.

• Target customers are highly price-sensitive (rather than quality-conscious) and have a low propensity to accept risk.

36


Strategic orientation of Cell 4. A firm should take all steps to avoid developing and launching a new product (e.g. NP4) that is perceived as only marginally superior to an existing product but requires high sacrifice for its adoption. In fact, the products located below the value line OA offer negative value, implying that consumers are better off with the current product. For example, less environmentally sensitive consumers may perceive the sacrifices associated with buying electric cars (e.g. a hefty price tag of about $18,000 for a compact sedan, the inconvenience of recharging during long-distance travels, and the limited horsepower) to far exceed the product's benefits. While forced adoption techniques, such as the Clean Air Act, may still make it feasible to launch the product, at least in certain parts of the USA (e.g. California), long-term success of the product will depend on consumers' conviction that the benefits exceed the sacrifices.

The strategic objective of Cell 4, therefore, should be to move a new product to a higher value line. Firms can do this in two ways. First, the perception of product benefits can be improved via functional redesign or by incorporating improved technology and utilization of extrinsic cues such as strong brand names, firm reputation, favorable expert opinion, etc. Alternatively, firms may attempt to lower consumer perception of sacrifice by lowering price or offering other incentives. For example, during the introductory phase of facsimile technology, some organizational buyers did not perceive the benefits of adopting the technology until their main communicating partners also adopted the same. To overcome this problem, fax machine suppliers sometimes offered incentives such as reduced group rates

to enhance the perceived benefits of adoption as well as to reduce the perceived sacrifice.

Use Multiple Reference Products for Value Analysis During the entire discussion so far, it was assumed that the value analysis is carried out relative to one reference product (0). However, as noted before, different consumers or consumer segments may use different reference products to evaluate a new product. Depending on the reference product chosen, consumer perceptions of new product value can vary widely. As depicted in Figure 3(a), consumers who use reference product A may perceive high value for the new product NP but customers who use B as a referent, perceive little or no value for the same product. For example, workstations are usually perceived as an attractive alternative to users of mainframe computers because of the added flexibility, convenience, and lower price of workstations. However, for users of microcomputer interested primarily in word processing and spreadsheets, workstations may be perceived as too expensive for the purpose.

37


As shown in Figure 3(b), it is also possible that when a new product (NP) is compared with different reference products (e.g. C and D), the comparisons result in the same levels of value perceptions. However, the positions of the new product on the value line, and therefore the strategic orientations, may be different. Consider this example. Teenage users of roller skates and skateboards may perceive value in Rollerblades™ because of its superior quality, safety features, and greater sporting value even though Rollerblades are significantly more expensive. On the other hand, customers who are interested in Rollerblades as a replacement for health and fitness club memberships, may perceive value in a Rollerblade because of the low cost. Thus, a company can pursue a Cell 1 strategy for one customer segment and a Cell 3 strategy for another. Given these implications, it is important that new product managers carry out value analyses based on multiple reference products. The following checklist can serve as a useful guide for this purpose. • What is the intended application of

the new product? A new product may have different applications to different consumer segments, which may result in consumers using different reference products to evaluate new product benefits and costs. For example, microcomputers may have a variety of applications such as, word processing, executing sales order, and large statistical data analysis (Gosler, 1987). Depending on the desired application, microcomputer adopters may compare it with electric typewriter, minicomputer, or even large mainframe computers.

• What products are being replaced? New product adoptions can result in the replacement of more than one

existing product. For example, a new software may replace not only the immediately preceding version but also older versions of the software that may be currently in use. For some potential adopters, the new software may entail substantial costs and benefits, while for others the difference is only marginal. Thus, new product managers should consider segmenting a market according to the products which consumers currently use and carrying out separate value analyses for each group.

• Are consumers forward-looking? In many technology-intensive industries, new models are introduced in rapid succession, usually making the earlier models obsolete. In such industries, consumers exhibit a forward-looking behavior and evaluate new products relative to future models or versions (Levinthal and Purohit, 1989). In these instances, firms wishing to perform value analyses should consider not only the products being replaced but also products that are expected to enter the market within a short period of time.

MANAGERIAL IMPLICATIONS AND RECOMMENDATIONS In recent years, many companies have found that providing consumers value for their money is a viable strategy to gain and sustain competitive advantage. To quote a team of industry experts:

Customers are used to buying on price, which is visible and measurable. Manufacturers are used to competing on the same basis, for the same reason. But a strategic advantage based on total value delivered to the customer is far less duplicated by competitors (Forbes and Mehta, 1978).

The wisdom of this quote stems from the realization that consumers consider not only what they will have to "give up" to

38

VOLUME 10 NUMBER I 1993

acquire a product but also what they will "get" in exchange. The "get" component includes the physical attributes or the core product as well as value-added service, warranty, brand name, and company reputation. Focusing on the concept of "value" permits a firm to analyze how consumers make the tradeoff between the potential benefits and sacrifices of a new product. A value orientation also helps to explain why some firms are able to flourish, despite charging premium prices for their new products, while others face stiff consumer resistance despite charging the lowest prices or claiming technical superiority of their products. It is clear that unless consumers perceive what they will "get" from a new product is more than what they will have to "give up", neither a technically superior product nor the lowest price alone is going to have an effect on consumer adoption decisions.

Focusing on consumer perception of value, this article offers a framework that can assist firms in carrying out new product planning and development activities. The first part described how consumer perceptions of benefits and sacrifice are conceptually related to value perceptions. Based on the conceptual linkages, we then developed a framework that permits a firm to examine alternative strategic orientations.

Which Strategic Orientation Should I Take? Although a set of conditions for success has been presented for each strategic orientation (specifically, Cell 1, Cell 2 and Cell 3), the decision to adopt a particular orientation must be made in a broader context. First, firms should adopt a strategic orientation for the new product that is consistent with the overall corporate strategy. Companies such as

Dow Chemicals, 3M and Merck view their new product strategy as an integral part of the overriding corporate objectives of being innovative with high quality products and skimming the market with high prices until the competition enters. Second, the strategic orientations identified here should dictate not only the launch and post-launch activities, but the R&D and new product development activities as well. For example, a firm which decides to take a Cell 1 orientation should typically allocate greater resources on R&D and NPD activities for breakthrough innovations than a firm which chooses to adopt a Cell 3 orientation. Finally, a firm need not take the same strategic orientation for all of its new products. Instead, it may adopt different orientations for different new products in its portfolio.

At a more tactical level, the choice of a particular orientation needs careful consideration of several marketing as well as consumer-related variables. The roles of each of these factors and some implications are summarized below:

• The product. The intrinsic need-satisfying attributes of the product are key determinants of the firm's strategy. The new product may fall anywhere in the continuum of a "me too" to a line extension to a radical innovation. Breakthrough new products offering significantly greater benefits than the existing product are prime candidates for Cell 1 or Cell 2 strategies. Whereas, new products that are incremental innovations are suitable for Cell 3 strategy.

• Extrinsic cues. In the event consumers cannot assess the superiority of a new product via observation or trial, extrinsic cues can play an important role in signalling product benefits.

39


Extrinsic cues such as a strong brand name, corporate reputation, country of origin, etc., are often prerequisites for Cell 1 and Cell 2 strategic orientations.

• Price. The traditional dichotomy of skimming versus penetration pricing strategy takes attention away from consumer perception of value. Note that when price is the only component of sacrifice, both Cell 1 and Cell 4 would fall under the category of a skimming strategy. However, as explained before, Cell 1 strategy offers value to customers whereas Cell 4 does not. In general, setting a "low" price enhances consumer perception of value but it also comes at the cost of reduced profits for the firm.

• Non-price costs. When non-price costs are high, a firm can ensure value either by low purchase price or with a high level of benefits. Offering a product at a low purchase price but higher post-purchase costs may appeal to consumers with immediate resource constraints.

• Customer characteristics. The characteristics of target customers are also important in deciding which strategic orientation a firm should adopt. High benefit-high sacrifice (i.e. Cell 1) strategy is appropriate when target customers are knowledgeable about the product class, quality conscious, and have a high propensity to accept risks. Conversely, the strategic orientation of Cell 3 is suitable when target customers have opposite characteristics.

While the framework proposed and the guidelines listed above are aimed at helping managers in new product planning activities, it is important to note that the usefulness of the framework depends on the firm's ability to compile valid and reliable information needed for value analysis. The task of identifying and quantifying the potential benefits and

sacrifices of a new product may pose unique methodological and measurement challenges for practicing managers. Tangible benefits and sacrifices are somewhat easy to identify and quantify. However, when the benefits or sacrifice components are not readily assessable, the value analysis relies on the managers' ability to assess consumer perceptions of these components accurately. Perceptual data can be collected during usage tests, pre-test markets, or even from a panel in the actual test market. For example, consumers or a panel of experts may be asked to list all potential new product benefits and sacrifices. Consumers can then evaluate each of these components relative to certain reference products on appropriate rating scales (see Monroe, 1990 for an overview of these research approaches). Nevertheless, certain elements of benefit and sacrifice must be left for qualitative assessments.

Reference Product Selection and Targeting As noted earlier, since different consumers or consumer segments may use different reference products for assessing the value of a new product, firms should also use multiple reference products for value analysis. The checklist provided in the previous section can serve as an initial guide for managers to identify a set of products or practices which may potentially be used by the consumers as referents. However, the list is by no means exhaustive. Firms should consider using such research techniques as customer surveys, focus group discussions, or controlled laboratory experiments to identify close substitutes or referents of the new product. Techniques such as perceptual mapping or multidimensional scaling may also assist managers in assessing the proximities of these substitutes to the new product and identifying dimensions on which these similarities are judged.

40

VOLUME 10 NUMBER I 1993

Since the use of different reference products by different consumer segments leads to different value perceptions, the firm has to decide which consumer segment is optimal to target. In general, a new product should be initially targeted to a segment that has the greatest perception of value (Forbes and Mehta, 1978). For example, as illustrated in Figure 3a, the new product (e.g. workstations) has a greater probability of adoption if it is initially targeted to the heavy mainframe users than to users of PCs for word processing and spreadsheets. Obviously, the ultimate targeting decision will depend on whether this segment is accessible and large enough to be profitable.

Also, as illustrated in the Rollerblade example (also see Figure 3b), two or more customer segments may perceive the same level of value for a new product but the product may be at different locations on the same value line. Under this condition, the firm should carefully examine the characteristics and size of each consumer segment before deciding which segment is appropriate to target. If both segments are profitable, the firm may decide to target both segments simultaneously. Finally, in instances where potential adopters have little or no basis for comparing the new product, firms should consider providing them with a credible reference point not only to assist their evaluation process but also to maximize perceived value for the new product.

□

References Aaker, D. (1990), "Brand Extension: The Good,

the Bad, and the Ugly", Sloan Management Review, Summer, pp. 47-56.

Consumer Reports, March 1992, p. 170. Cooper, R. and Kleinschmidt, E.J. (1987),

"New Products: What Separates Winners from Losers?", Journal of Product Innovation Management, Vol. 4, pp. 169-84.

Forbes, J.L. and Mehta, NT. (1978), "Value-based Strategies for Industrial Products", Business Horizons, October, pp. 25-31.

Ford, G.T., Smith, D.B. and Swassy, J.L. (1988), "An Empirical Test of the Search, Experience, and Credence Attributes Framework", in Houston, M.J. (Ed.), Advances in Consumer Research, Vol. 15, Association for Consumer Research, Provo, UT, pp. 239-43.

Gatignon, H. and Robertson, T.S. (1985), "A Propositional Inventory for New Diffusion Research", Journal of Consumer Research, Vol. 11, March, pp. 849-67.

Gosler, M.D. (1987), "Marketing and The Adoption of Microcomputers: An Application of Diffusion Theory", Journal of Academy of Marketing Science, Vol. 15 No. 2, pp. 42-8.

Levinthal, D.A. and Purohit, D. (1989), "Durable Goods and Product Obsolescence", Marketing Science, Vol. 8 No. 1, pp. 35-56.

Monroe, K.B. (1990), Pricing: Making Profitable Decisions, 2nd ed., McGraw-Hill Book Company, New York, NY.

Monroe, K.B., Rao, A.R. and Chapman, J.D. (1987), "Toward a Theory of New Product Pricing", in Frazier, G. (Ed.), Contemporary Views on Marketing Practice, Lexington Books, Lexington, MA, pp. 201-13.

Narasimhan, C. (1989), "Incorporating Consumer Price Expectation in Diffusion Models", Marketing Science, Vol. 8 No. 4, pp. 343-57.

Rockefeller, D. (1986), "Value Versus Price", Bell Atlantic Quarterly, Vol. 3, Spring, p. 43.

Rogers, E.M. (1983), Diffusion of Innovations, The Free Press, New York, NY.

Zeithaml, V.A. (1988), "Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence", Journal of Marketing, Vol. 52, July, pp. 2-22.

Tridib Mazumdar is Assistant Professor of Marketing and Innovation Management, Crouse-Hinds School of Management, Syracuse University, New York, USA. He is currently a Visiting Assistant Professor of Marketing at the J.L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois.

41

Documents

A value based orientation to new product planning