Part 4: How Goods & Services Can Be Used To Improve Sales Revenues
In the previous report of this series, we discussed the theory behind distribution as well as the implications for managers. In this report (Part four of six), we continue looking at the Ansoff Matrix albeit from a different angle. Having discussed distribution, we now look to the product (goods & services).
The firm’s product is arguably the most essential part of its business. It must make several decisions including product performance level, reliability, serviceability, etc… which will have a bearing on the utility of the product. At the most basic level, if the good or service is unable to meet the needs or wants of the market, the business is fundamentally broken and no amount of marketing effectiveness can fix that.
Ensuring that all products are optimised on product features is outside the scope of today’s report. That would include the optimal use of distinctive brand assets. However, another, very important, dimension of a firm’s product strategy is its range (product mix). Here we’re primarily concerned with the width and depth of the range.
On this topic, Steenkamp, Kushwaha, and Rajavi's [i] research (which we’ve been referencing throughout these reports), also investigated the effectiveness of increasing line length. They found that this can attract new customers to the brand and help the brand occupy more of the market’s “mental space” (share of mind), on top of improving brand perceptions indirectly. They found that these large effects remain constant regardless of economic conditions, product involvement or brand expensiveness.
Should managers then make their product lines as long as possible? I think not. Managers should pay special attention to the overall product strategy of the firm. If the firm does follow the generalist approach, expanding line length might be effective assuming that the products are effective and there is existing market demand to tap into. If the firm is choosing to serve a very small group of segments with specialist products, line-length expansion will also have to fit into the firm’s positioning.
While product innovation is an area full of potential growth, we return to the Ansoff matrix to dive a bit deeper. In the Ansoff matrix, a firm's growth is split into 4 possible pathways relating to its products, and the market. The options are for the firm to either offer new products to new markets (diversification), offer new products to current markets (Product Development), offer current products to new markets (Market Development), or offer current products to current markets (Market Penetration).
Optimising the firm’s existing product mix would involve a close look at the sales volume of different products, along with their respective margins. If a firm could theoretically sell more of the high-margin products, it could see a small lift in profit. The same applies to revenue contribution. In the FMCG category, retailers often provide valuable direction to manufacturers. They simply won’t stock items that don’t sell. In other categories, these decisions might become more challenging, but no less important. After all, there is no sense in wasting resources creating and selling products that don’t sell.
Product development and diversification strategies are mainly concerned with major product innovations. However, it is also possible to get some lift in sales from minor product improvements although that would also require some form of promotional support.
As those familiar with the Ansoff matrix will tell you, the options presented carry different levels of risk. Producing a completely new product for a completely new market will probably be the riskiest. Therefore it may be worth examining the risk associated with different marketing tactics. Eg. a minor product innovation initiative may be cheap but carries a lot more risk of failure. Overall, product innovation can work as a means of increasing sales revenue although that is dependent on distribution, production, and most of all the cost of R&D.
Based on the literature and research, there are several major implications:
When considering the introduction of new products, although line length can be very beneficial, careful attention needs to be paid to overall product strategy and brand positioning.
Additionally, to ensure the success of product innovation, managers need to ensure that the product itself:
At times, it might not be necessary to develop a completely new product. In this case, firms could also consider acquiring the licence, patent or even manufacturer of the product.
Because of the high risk involved in product innovation, managers need to thoroughly screen ideas. Here are a couple of considerations:
Any product innovation or a modification could require promotional support and have implications for distribution and operations. These extra variables need to be accounted for especially considering that we’re trying to increase sales revenue without significantly increasing marketing expenditure.
In the next report, we’ll be looking at how firms might be able to better utilise the advertising budget they already have.
i. The Effect of Marketing Mix Instruments on Brand Equity in Good versus Bad Times; K. Rajavi, T. Kushwaha, J.B. Steenkamp
This report was a collaborative effort and without the aid of our colleagues, it might've looked very different. The following individuals have made significant contributions to this series of reports: J.Moolman, I.Barnard, S.Brealey, and E.Gentle. We thank you all for being so generous with your time.