Marketing Strategy for New Market and Products
Marketing Strategy for New Markets
Marketing Strategies for New Market Entries
How New Is New?
A survey of the new product development practices found that the products introduced by those firms over a five year period were not all equally ‘new.’ The study identified six categories of new products based on their degree of newness as perceived by both the company and the target customers.
• New-to-the-world products – True innovations that are new to the firm and create an entirely new market (10 per cent).
• New product lines – A product category that is new for the company introducing it, but not new to customers in the target market because of the existence of one or more competitive brands (20 per cent).
• Additions to existing product lines – New items that supplement a firm’s established product line. These items may be moderately new to both the firm and the customers in its established product markets. They also may serve to expand the market segments appealed to by the line (26 per cent).
• Improvements in or revisions of existing products – Items providing improved performance or greater perceived value brought out to replace existing products. These items may present moderately new marketing and production challenges to the firm, but unless they represent a technologically new generation of products, customers are likely to perceive them as similar to the products they replace (26 per cent).
• Repositioning’s – Existing products that are targeted at new applications and new market segments (7 per cent).
• Cost reductions – Product modifications providing similar performance at lower cost (11 per cent).
A product’s degree of newness – to the company, its target customers, or both – helps determine the amount of complexity and uncertainty involved in the engineering, operations, and marketing tasks necessary to make it a successful new entry. It also contributes to the amount of risk inherent in those tasks.
Introducing a product that is new to both the firm and target customers requires the greatest expenditure of effort and resources. It also involves the greatest amount of uncertainty and risk of failure because of the lack of information and experience with the technology and the target customers.
Products new to target customers but not new to the firm (such as line extensions or modifications aimed at new customer segments or repositioning of existing products) are often not very innovative in design or operations, but they may present a great deal of marketing uncertainty. The marketing challenge here – as with new to the world products – is to build primary demand, making target customers aware of the product and convincing them to adopt it.
Objectives of New Product and Market Development
The primary objective of most new product and market development efforts is to secure future volume and profit growth. This objective has become even more crucial in recent years due to rapidly advancing technology and more intense global competition. A steady flow of new products and the development of new markets, including those in foreign countries, are essential for the continued growth of most firms.
Market Entry Strategies: Is It Better to Be a Pioneer or a Follower?
The important strategic question is whether it always makes sense to go first. Or do both pioneer and follower market entry strategies have some particular advantages under different conditions?
Conventional wisdom holds that although they take the greatest risks and probably experience more failures than their more conservative competitors, successful pioneers are handsomely rewarded. It is assumed competitive advantages inherent in being the first to enter a new product market can be sustained through the growth stage and into the maturity stage of the product life cycle, resulting in a strong share position and substantial returns.
· First choice of market segments and positions- The pioneer has the opportunity to develop a product offering with attributes most important to the largest segment of customers or to promote the importance of attributes that favor its brand. Thus, the pioneer’s brand can become the standard of reference customers use to evaluate other brands. This can make it more difficult for followers with me-too products to convince existing customers that their new brands are superior to the older and more familiar pioneer. If the pioneer has successfully tied its offering to the choice criteria of the largest group of customers, it also becomes more difficult for followers to differentiate their offerings in ways that are attractive to the mass-market segment. They may have to target a smaller peripheral segment or niche instead.
· The pioneer defines the rules of the game - The pioneer’s actions on such variables as product quality, price, distribution, warranties, post-sale service, and promotional appeals and budgets set standards that subsequent competitors must meet or beat. If the pioneer sets those standards high enough, it can raise the costs of entry and perhaps preempt some potential competitors.
· Distribution advantages- The pioneer has the most options in designing a distribution channel to bring the new product to market. Nevertheless, the pioneer still has the advantage of attaining more shelf facings at the outset of the growth stage. By quickly expanding its product line following an initial success, the pioneer can appropriate still more shelf space, thereby making the challenge faced by followers even more difficult.
· Economies of scale and experience- Being first means the pioneer can gain accumulated volume and experience and thereby lower per unit costs at a faster rate than followers. This advantage is particularly pronounced when the product is technically sophisticated and involves high development costs or when its life cycle is likely to be short with sales increasing rapidly during the introduction and early growth stages.
· High switching costs for early adopter- Customers who are early to adopt a pioneer’s new product may be reluctant to change suppliers when competitive products appear. This is particularly true for industrial goods where the costs of switching suppliers can be high.
· Possibility of positive network effects- The value of some kinds of goods and services to an individual customer increases as greater numbers of other people adopt the product and the network of users grows larger. Economists say that such products exhibit network externalities or positive network effects. Information and communications technologies, such as wireless phones, fax machines, computer software, email, and many Internet sites, are particularly likely to benefit from network effects.
· Possibility of preempting scarce resources and suppliers -The pioneer may be able to negotiate favorable deals with suppliers who are eager for new business or who do not appreciate the size of the opportunity for their raw materials or component parts. If later entrants subsequently find those materials and components in short supply, they may be constrained from expanding as fast as they might like or be forced to pay premium prices.
Not All Pioneers Capitalize on Their Potential Advantages
There is some evidence to suggest that the above advantages can help pioneers gain and maintain a competitive edge in new markets. For instance, some research has found that surviving pioneers hold a significantly larger average market share when their industries reach maturity than firms that were either fast followers or late entrants in the product category.
On the other hand, some pioneers fail. They either abandon the product category, go out of business, or get acquired before their industry matures.
One study, which took these failed pioneers into account and averaged, their performance together with that of the more successful survivors, found that pioneers overall did not perform as well over the long haul as followers.
In many cases a firm becomes a follower by default. It is simply beaten to a new product market by a quicker competitor. But even when a company has the capability of being the first mover, the above observations suggest there may be some advantages to letting other firms go first into a product market. Let the pioneer shoulder the initial risks while the followers observe their shortcomings and mistakes.
· Ability to take advantage of the pioneer’s positioning mistakes- If the pioneer misjudges the preferences and purchase criteria of the mass market segment or attempts to satisfy two or more segments at once, it is vulnerable to the introduction of more precisely positioned products by a follower. By tailoring its offerings to each distinct segment, the follower(s) can successfully encircle the pioneer.
· Ability to take advantage of the pioneer’s product mistakes- If the pioneer’s initial product has technical limitations or design flaws, the follower can benefit by overcoming these weaknesses. Even when the pioneering product is technically satisfactory, a follower may gain an advantage through product enhancements.
· Ability to take advantage of the pioneer’s marketing mistakes- If the pioneer makes any marketing mistakes in introducing a new entry, it opens opportunities for later entrants. This observation is closely related to the first two points, yet goes beyond product positioning and design to the actual execution of the pioneer’s marketing programme.
· Ability to take advantage of the latest technology- In industries characterized by rapid technological advances, followers can possibly introduce products based on a superior, second-generation technology and thereby gain an advantage over the pioneer. And the pioneer may have difficulty reacting quickly to such advances if it is heavily committed to an earlier technology.
· Ability to take advantage of pioneer’s limited resource - If the pioneer has limited resources for production facilities or marketing programmes, or fails to commit sufficient resources to its new entry, followers willing and able to outspend the pioneer experience few enduring constraints.
Determinants of Success for Pioneers and Followers
A pioneering firm stands the best chance for long-term success in market share leadership and profitability when (1) the new product market is insulated from the entry of competitors, at least for a while, by strong patent protection, proprietary technology (such as a unique production process), substantial investment requirements, or positive network effects, or (2) the firm has sufficient size, resources, and competencies to take full advantage of its pioneering position and preserve it in the face of later competitive entries. Evidence suggests that organizational competencies, such as R&D and marketing skills, not only affect a firm’s success as a pioneer, but also may influence the company’s decision about whether or not to be a pioneer in the first place.
A follower will most likely succeed when there are few legal, technological, or financial barriers to inhibit entry and when it has sufficient resources or competencies to overwhelm the pioneer’s early advantage.
A study conducted across a broad range of industries in the PIMS database supports these observations.
• Large entry scale – Successful pioneers had sufficient capacity, or could expand quickly enough, to pursue a mass market targeting strategy, usually on a national rather than a local or regional basis.
• Broad product line – Successful pioneers also quickly add line extensions or modifications to their initial product to tailor their offerings to specific market segments. This helps reduce their vulnerability to later entrants who might differentiate themselves by targeting one or more peripheral markets.
• High product quality – Successful pioneers also offer a high quality, well-designed product from the beginning, thus removing one potential differential advantage for later followers.
• Heavy promotional expenditures – Successful pioneers had marketing programmes characterized by relatively high advertising and promotional expenditures as a percentage of sales. Initially the promotion helps to stimulate awareness and primary demand for the new product category, build volume, and reduce unit costs
• Focus on peripheral target markets or niches - The same study found that the most successful fast followers had the resources to enter the new market on a larger scale than the pioneer. Consequently, they could quickly reduce their unit costs, offer lower prices than incumbent competitors, and enjoy any positive network effects. Some fast followers achieved success, however, by leapfrogging earlier entrants. These followers won customers away from the pioneer by offering a product with more sophisticated technology, better quality, or superior service.
Strategic Marketing Programs for Pioneers
Strategic Marketing Plan depends on how the pioneer defines success – in other words, the objectives it seeks to achieve. Thus, a pioneer might choose from one of three different types of marketing strategies: mass market penetration, niche penetration, or skimming and early withdrawal.
The ultimate objective of a mass market penetration strategy is to capture and maintain a commanding share of the total market for the new product. Thus, the critical marketing task is to convince as many potential customers as possible to adopt the pioneer’s product quickly to drive down unit costs and build a large contingent of loyal customers before competitors enter the market.
Mass-market penetration tends to be most successful when entry barriers inhibit or delay the appearance of competitors, thus allowing the pioneer more time to build volume, lower costs, and create loyal customers, or when the pioneer has competencies or resources that most potential competitors cannot match.
Even when a new product market expands quickly, however, it still may be possible for a small firm with limited resources to be a successful pioneer. In such cases, though, the firm must define success in a more limited way. Instead of pursuing the objective of capturing and sustaining a leading share of the entire market, it may make more sense for such firms to focus their efforts on a single market segment. This kind of niche penetration strategy can help the smaller pioneer gain the biggest bang for its limited bucks and avoid direct confrontations with bigger competitors.
A niche penetration strategy is most appropriate when the new market is expected to grow quickly and there are a number of different benefit or applications segments to appeal to. It is particularly attractive when there are few barriers to the entry of major competitors and when the pioneer has only limited resources and competencies to defend any advantage it gains through early entry.
Skimming and Early Withdrawal
Even when a firm has the resources to sustain a leading position in a new product market, it may choose not to. Competition is usually inevitable, and prices and margins tend to drop dramatically after followers enter the market.
Therefore, some pioneers opt to pursue a skimming strategy while planning an early withdrawal from the market. This involves setting a high price and engaging in only limited advertising and promotion to maximize per unit profits and recover the product’s development costs as quickly as possible. At the same time, the firm may work to develop new applications for its technology or the next generation of more advanced technology. Then when competitors enter the market and margins fall, the firm is ready to cannibalize its own product with one based on new technology or to move into new segments of the market.
Marketing Programme Components for a Mass-Market Penetration Strategy
As mentioned, the crucial marketing task in a mass market penetration strategy is to maximize the number of customers adopting the firm’s new product as quickly as possible. This requires a marketing programme focused on (1) aggressively building product awareness and motivation to buy among a broad cross-section of potential customers and (2) making it as easy as possible for those customers to try the new product, on the assumption that they will try it, like it, develop loyalty, and make repeat purchases.
Increasing Customers’ Awareness and Willingness to Buy
Obviously, heavy expenditures on advertising, introductory promotions such as sampling and couponing, and personal selling efforts all can increase awareness of a new product or service among potential customers. This is the critical first step in the adoption process for a new entry. The relative importance of these promotional tools varies, however, depending on the nature of the product and the number of potential customers.
Increasing Customers’ Ability to Buy
For customers to adopt a new product and develop loyalty toward it, they must be aware of the item and be motivated to buy. But they also must have the wherewithal to purchase it. Thus, to capture as many customers in as short a time as possible, it usually makes sense for a firm pursuing mass market penetration to keep prices low (penetration pricing) and perhaps offer liberal financing arrangements or easy credit terms during the introductory period.
Additional Considerations When Pioneering Global Markets
Whether the product market a pioneer is trying to penetrate is domestic or foreign, many of the marketing tasks appropriate for increasing potential customers’ awareness, willingness, and ability to buy the new product or service are largely the same. Of course, some of the tactical aspects of the pioneer’s strategic marketing programme – such as specific product features, promotional appeals, or distribution channels – may have to be adjusted to fit different cultural, legal, or economic circumstances across national borders.
Marketing Programme Components for a Niche Penetration Strategy
Because the objectives of a niche penetration strategy are similar to but more narrowly focused than those of a mass market strategy, the marketing programme elements are also likely to be similar under the two strategies. Obviously, however, the niche penetrator should keep its marketing efforts clearly focused on the target segment to gain as much impact as possible from its limited resources.
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