Product Policies – What to Sell

The products a company sells determine its basic nature. As its organiz­ers visualize opportunities to make and/or market certain products, the company comes into existence. As it grows, management makes key deci­sions on products—whether to drop old ones, whether to add new ones, whether to expand the product line or add new lines—and on product design and product quality as well as on product-related matters such as guarantees and service.

1. Relation to Product Objectives

Product policies serve as guides for making product decisions. They derive from product objectives. If a product objective, for example, states that “this company desires to make and market products requiring only a minimum of service after their purchase by consumers,” then product policies spell out how this objective is to be attained. Or, if a product objective states that “this company desires to make and market only products superior to those of competitors in ways of great importance to users,” then product policies define the nature of superiority from the standpoint of product users. Often product policies take the form of a series of short definitions or of questions arranged as a checklist.

2. Product Line Policy

Policies on the width of a product line are classified as either short line or full line. The company following a short-line policy handles only part of a line, while the company with a full-line policy handles all or most of the items making up a line. For example, a manufacturer concentrating exclu­sively on a cornflakes has a short-line policy, whereas a company offering a complete, or almost complete, line of breakfast cereals has a full-line policy. Companies use short-line policies for some product groupings and full-line policies for others. Management decides for each product group­ing whether the basis of competition should be specialization (short line) or wide selection (full line).

The extent to which a short-line policy should be pursued is governed by the amount of risk that management is willing to assume—the narrower the line, the greater the risk. If a firm concentrates on a single product, the rewards can be great. Product specialization enables the manufacturing division to achieve low unit costs. In turn, this may make the company almost invulnerable to price competition, even though the product is of the highest quality. But the penalty for failure is also great. If the product is displaced by substitutes introduced by competitors, the company finds itself “locked out” of the market.

The extent to which a full-line policy should be followed is deter­mined by such factors as the number of items the sales force can sell effectively, the need for after-sale service, the desires of intermediaries and product users, the expenses of promotion, and the effect on produc­tion costs. The wider the product line, the more the risk is spread. Thus, in sharp contrast to the short-line policy, risk is diversified over many products. But, while there is less penalty attached to failure of any one item, there also is less reward for the success of any item.

Changes in product offerings. All items in a product line should be reappraised at regular intervals. Reappraisals serve two purposes: (1) to determine whether individual items are still in tune with mar­ket demand and (2) to identify those that should be dropped from, or added to, the line. Unless the product line is reappraised regularly, mar­ket demand may shift, and more alert competitors may capture larger market shares.

Regardless of which executive or group formulates product policies, sales executives should participate in product line appraisals. Compared with other executives, they have the most intimate contact with mar­kets. They should see that effective procedures are in place for receiving communications on product acceptance from the sales force, and should make this information available to those participating in product line reappraisals.

Reappraising the product line and line simplification. Each item in the line is compared with similar and competing items in other manufacturers’ lines. The focus is upon identifying strengths and weaknesses, especially as to which features of each item consumers consider desirable or undesirable. Special attention is paid to significant trends in usage: How much is used? What is it used for? When is it used? Where is it used? The answers also have supplemental benefits; they provide insights useful in constructing sales pre­sentations and in motivating the sales force and dealer organization.

The most critical factor in reappraising is profitability. Generally, an item in the line should not be retained unless it meets standards for profitability or shows promise of meeting them. Nevertheless, before an item is dropped because of inadequate profitability, other factors need to be considered. Will modifications in price policy or promotion cause the item to improve in profitability?

Even if the item would continue with a poor profit showing regardless of changes in price or promotion, do other factors indicate its retention? Some companies cater to customers and dealers who, logically or not, expect a full-line offering. If distribution is through exclusive agencies, for instance, dealers insist on a complete line. Repair and replacement parts are unprofitable for many manufacturers, but, because of needed service on major products, most manufacturers must retain them. Since markets are made up of segments with unique tastes and preferences, many com­panies find that some unprofitable products must be retained to help sell profitable products. This happens, for instance, when customers combine individual products into “product systems,” as in the case of sprayer fix­tures used with insecticides. Subject to exceptions such as these, unprofit­able products should be eliminated from the line.

Under certain conditions, it is appropriate to drop a profitable product. This should happen if the resources required for marketing it could be used to better advantage on behalf of a product with a brighter future or in which the company has a greater investment. An item should be dropped if it causes sales personnel to divert their efforts from more profitable items. Products with slow turnover rates should be discontinued if dealers place more emphasis on the better selling products in the line. Finally, any item not fitting logically into the line is a candidate for elimination.

Reappraising the product line and line diversification. Management makes reappraisals of the line relative to growth objectives. These objec­tives are restricted as an established product line approaches market saturation. They are restricted, too, when the industry is dying, or when competitors succeed in making permanent inroads in a company’s “natu­ral” market. If action is long delayed in these situations, the survival of the firm itself is at stake. Often the indicated action is to add new products or even entirely new product lines.

Some firms diversify to survive, but most diversify to expand sales or to reduce costs. For example, a decision to shorten marketing channels causes parallel consideration on widening the line. If sales personnel are to write orders large enough to justify the higher costs of direct selling, new products are required. On occasion, too, top management assigns the sales organization a substantially larger task than previously. When sales volume must be expanded greatly, one solution is to add new products. Sometimes, also, new products are added to stimulate the sales force or dealer organization. An addition to the line not only has news value, it may help salespeople to earn larger commissions and assist dealers in increas­ing sales and profits.

The sales department is the division that pushes hardest for line diversification. Its intimate contact with the market enables it to keep close watch on the market acceptance of new products of other manufacturers. With the objective of holding or improving market share, sales executives press for new products. Consequently, any shift in customers’ buying pat­terns may signal the need for line diversification.

Circumstances elsewhere in the company can result in new products. The production department initiates the search for new products if there are unused plant facilities or if seasonal sales fluctuations cause manufac­turing irregularities. The treasurer advocates diversification if idle funds cause financial criticism or if there is an opportunity for profitable acquisi­tion of a firm with related products. The purchasing department suggests new products, particularly when difficulty is experienced in procuring materials for the fabrication of existing products. Pressure for line diversi­fication originates in the scientific research division, when it discovers or perfects a new product, and in the marketing research department, when it uncovers natural additions as the result of other studies. Occasionally, too, either through research or by chance, uses for industrial waste materials result in additions to the line.

Ideas for new products. Companies tap both internal and external sources of new-product ideas. Product ideas coming from within the com­pany generally are related to regular operations. The sales department identifies unsatisfied needs in its day-to-day contacts with customers and prospects. The production department develops improvements in existing products. The research and development department turns up ideas for new products as a routine part of its activities.

Appraisal of proposed new products. What criteria should be used for appraising candidates for addition? As in the reappraisal of established offerings, the key question is: Will this item (line) add to profitability? Other factors include the nature and size of likely markets, competition, price policy, sales programs, selling resources, and legal implications.

The marketing and production characteristics of a proposed product should be compared with those of the existing line. Ideally, an addition should be in alignment on both the marketing and production sides.

These natural additions round out the line and make marketing and production efforts more efficient and more profitable. The same sales force can sell the product and reap the benefits of goodwill built up for other items in the line; the new product’s seasonal sales dovetail with present sales patterns; and the product broadens the market base (diversifies the company’s business by adding new classes of customers).

3. Product Design Policy

The two main policy decisions on product design are (1) the frequency of design change and (2) the extent to which designs should be protected from copying.

Frequent introduction and promotion of design changes and improve­ments is an important marketing factor in many industries, as in clothing, automobiles, home appliances, and office machines. Through design changes that make the product more attractive, users are persuaded to replace old models, which in many instances are still usable, with new models. In addi­tion to weakening buyers’ sales resistance, changes in design reduce the emphasis on price, assist in the stimulation of salespeople and dealers, and provide new inspiration for the advertising department. However, a policy of changing designs frequently is not appropriate for all companies or for all types of products, since the successful promotion of a design change (especially if it is only in the product’s external appearance) requires excep­tional skill in the planning and execution of promotional programs.

Policy on design protection is related to policy on frequency of design change. In certain industries, such as in women’s apparel, it is impractical to protect a new design. The rapid rate of fashion change makes legal protection impractical. Success in high-fashion fields depends upon the extent to which designs are adopted by competing firms so that the style becomes fashionable. Where design changes occur less frequently, design protection is practical and desirable, as in the case of home appliance, fur­niture, and jewelry industries. Legal protection is effected through design patents granted by the United States Patent Office for terms of up to four­teen years. While they are in force, these patents protect a company against use of the design by others.

4. Product Quality and Service Policy

For consumer durables, and most industrial goods, product quality and ser­vice are related. High-quality products require less service and low-quality products, more service. Buyers expect product performance to vary with the quality, so manufacturers with high-quality products have liberal ser­vice policies. Often product quality is a matter of characteristics built into a product that the buyer is unable to judge until after the purchase. Technical features are apt to be deeply hidden, and a liberal service policy helps to reduce the customers’ reluctance to buy. The maintenance and improve­ment of product quality are important matters for the sales department—if quality deteriorates, for example, the sales department bears the brunt of customer and dissatisfaction of the intermediary.

Manufacturers’ service policies take different forms. The simplest merely provides for education of the buyer in the use and care of the product. Other service policies—particularly for industrial products and such consumer lines as air-conditioning and heating equipment—provide for product instal­lation, inspection, and repair.

When a company adopts a formal service policy, sales management should make it part of the promotional program. An appropriate service policy facilitates the making of initial sales and helps in keeping products sold, stimulating repeat sales, and building customer goodwill. There is no legitimate place for a service policy that fails to accomplish these aims.

Many manufacturers, at least for a specified period after sale of the product, do not charge for service. “Free” service may be provided either under the terms of a written guarantee of as a matter of policy. When the buyer requests service a considerable time after the purchase, most manufacturers charge for it. Firms with centralized service facilities, or operating their own service stations, generally make the charge nominal. A nominal charge pays part of the costs and eliminates many unreasonable demands.

Companies that depend upon dealers or distributors to provide ser­vice have less control over the charge. It may be nominal, with the manu­facturer absorbing part and the user the remainder, or it may be larger, and borne entirely by the user. Unless the manufacturer pays some of the cost, intermediaries hesitate to assume responsibility for service.

Guarantee policy. Guarantees, or warranties as they are sometimes called, serve as sales promotional devices and as guards against abuses of the service policy. If the product does not perform as represented, the guarantor may promise to replace it, to refund the purchase price or a multiple of that price, to furnish the purchaser with a competitive product at no expense, or to remedy defects free of charge or for a small fee. When a guarantee is used for promotional purposes, its terms are liberal. When used for protection, its terms are hedged with conditions and restrictions.

It is unusual for a guarantee to serve both promotional and protec­tive purposes well. It is weakened as a tool for sales promotion because it includes clauses to protect the manufacturer, and the absence of such clauses makes it less effective as a protective device. This does not mean that a promotional guarantee should lack protective provisions, or that a protective guarantee should be useless for promotional purposes. But the guarantee must emphasize one purpose, not both.

Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.