Marketing - Lesson 8

Developing New Market Offerings

A company can add new products through acquisition or development. The acquisition route can take three forms. The company can buy other companies, it can acquire patents from other companies, or it can buy a license or franchise from another company. The development route can take two forms. The company can develop new products in its own laboratories or it can contract with independent researchers or new product development firms to develop specific new products.

Booze, Allen and Hamilton has identified six categories of new products:

·         New-to-the-world products: New products that create an entirely new market.

·         New product lines: New products that allow a company to enter an established market for the first time.

·         Additions to existing product lines: New products that supplement a company’s established product lines (package sizes, flavors and so on)

·         Improvements and revisions of existing products: New products that provide improved performance or greater perceived value and replace existing products.

·         Repositioning: Existing products that are targeted to new markets or market segments.

·         Cost reductions: New products that provide similar performance at lower cost.

Why do new products fail?

·          A high-level executive pushes a favourite idea through in spite of negative market research findings

·         The idea is good, but the market size is overestimated

·          The product is not well designed

·          The product is incorrectly positioned in the market, not advertised effectively or overpriced

·         Development costs are higher than expected

·          Competitors fight back harder than expected

Several other factors that hinder new-product development:

·         Shortage of important ideas in certain areas

·          Fragmented products

·         Social and governmental constraints

·         Costliness of the development process

·         Capital Shortages

·          Faster required development time

·          Shorter product life-cycles

Factors for developing successful new products:

·         Unique, superior product

·         Well-defined product concept prior to development

·         Technological and marketing synergy

·         Quality of execution in all stages

·         Market attractiveness

“New product development is most effective when there is teamwork among R&D, engineering, manufacturing, purchasing, marketing and finance. The product idea must be researched from a marketing point of view and a specific cross-functional team must guide the project throughout its development”

ORGANIZING NEW PRODUCT DEVELOPMENT

Companies handle the organizational aspect of new-product development in several ways. The most common are:

Product Managers:

Many companies assign responsibility for new-product ideas to product managers. In practice, this system has several faults. Product managers are so busy managing existing lines that they give little thought to new products other than line extensions. They also lack specific skills and knowledge needed to develop and critique new products.

New-product managers:

 This position professionalizes the new-product function. However, like product managers, new-product managers tend to think in terms of modifications and line extensions limited to their product market.

New-product committees:

 Many companies have a high-level management committee charged with reviewing and approving proposals.

New-product departments:

Large companies often establish a department headed by a manager who has substantial authority and access to top management. The departments’ major responsibilities include generating and screening of new ideas, working with the R&D department, and carrying out field-testing and commercialization.

New-product venture teams:

A venture team is a group brought together from various operating departments and charged with developing a specific product or business. They are ‘intrapreneurs’ who are relieved of their other duties a given a budget, a time frame, and a ‘skunkworks’ setting. Skunkworks is informal places, sometimes garages, where intrapreneurial teams attempt to develop new products.

Managing the Development Process

Steps:

·         Idea Generation

·         Idea Screening

·         Concept Development and Testing

·         Marketing Strategy Development

·         Business Analysis

·         Product Development

·         Market Testing

·         Commercialization

Idea Generation

Customer needs and wants are the logical place to start the search for ideas. Companies can learn great deal by studying their lead users – those customers who take most advanced use of the company’s products and who recognize the need for improvements before other customers do

·         Ask employees new ways of improving production, products and services

·         Find good ideas by researching competitor’s products and services

·         Company sales representatives, intermediaries and top management are good sources for ideas

·         Even though ideas flow from various channels, the chances of them being noticed depend upon persons in the organization taking the role of product champion

Idea Screening

·         Idea to be submitted to idea manager and then to be reviewed by idea committee

·         Must avoid two types of errors:

o   Drop Error – Dismissal of an otherwise good idea

o   Go Error – Permitting a poor idea to move into Development and Commercialization

·         Three types of product failures:

o   Absolute Product Failure – Product loses money, sales do not cover variable costs

o   Partial Product Failure – Product loses money, sales cover variable costs and part of the fixed costs

o   Relative Product Failure – Product yields a profit that is less than the company’s target rate of return

·         Screening is done because product development costs rise substantially with each successive stage

·          Executive committee reviews each idea against a set of criteria:

o   Overall Probability of Success = (Prob. Of technical completion) X (Prob. Of commercialization given technical completion) X (Prob. Of economic success given commercialization)

Concept Development and Testing

·         Each concept represents a category concept that defines the product’s competition

·         Product concept has to be turned into a brand concept

·         Concept testing involves presenting the product concept to appropriate target consumers and getting their reactions

·         The more the tested concepts resemble the final product or experience, the more dependable concept testing is

·         Conjoint Analysis – a method for deriving the utility values that customers attach to varying levels of product’s attributes

Marketing Strategy Development

Once the testing is over, the next stage is development of a preliminary marketing strategy plan for the introduction of the new product. The plan consists of three parts.

First – describes the target market’s size, structure, and behaviour; the planned product positioning; and the sales, market share, and profit goals sought in the first few years.

Second – outlines the planned price, distribution strategy, and marketing budget for the first year.

Third – describes the long run sales and profit goals and marketing mix strategy over time.

Business Analysis

After the management develops the product concept and the marketing strategy, it can evaluate the proposal’s business attractiveness. Management needs to prepare sales, cost, and profit projections and to determine whether they satisfy company objectives. If they do the project concept can move to the product-development stage. As new information comes in the business analysis undergoes revision and expansion.

Estimating costs and profits

After sales forecast, the management estimates the expected costs and profits. Costs are estimated by the R&D, manufacturing, marketing and finance departments. The following type of sales, cost and profit projection is done

·         Sales revenue (estimated figure on the assumptions about market growth, company’s share and factory realized price)

·         Cost of goods sold (estimates)

·         Gross margins

·         Development cost (includes product development and market research cost)

·         Marketing costs (advertisement, sales force and administration)

·         Allocated costs (overheads)

·         Gross contribution

·         Supplementary contribution (Drag along income and cannibalized income)

·         Net contribution

·         Discounted contribution

·         Cumulative discounted cash flow

Other financial tools like Break even analysis and Risk analysis is also used for this purpose.

Managing the Development Process: Development to commercialization

Product Development

After the business test the concept moves on to R&D for development of physical product. This step involves huge costs. At this stage the company decides whether the idea can be translated in to a commercially feasible product. The job of translating the target customer requirements into a working prototype is helped by a set of methods known as quality function deployment (QFD). It involves listing of customer attributes (CAs), collected by market research, and turns them into engineering attributes (EAs). QFD improves communication between markets, engineers and the manufacturing people. The R&D first develops a prototype and ensures that it includes all that the customer wants. The R&D people not only design the product’s functional characteristics but also communicate its psychological aspects through physical cues. Marketers inform the R&D about the attributes customer seek and how consumers judge whether these attributes are present. Once the prototype is ready it undergoes rigorous functional and customer tests. Consumer preferences can be measured in several ways. Suppose there are three items A, B and C.

Rank holder method – The consumer is asked to rank the three items in order of preference. It is a simple method, but it doesn’t reveal the intensity to which the customer likes the product.

Paired comparison method – presenting pairs of items and asking them to select the preferred item form each pair. This method gives more accurate results as it is easier to select between two items.

Monadic-rating method – rating the liking of each product on a scale. This gives the individual’s preference order as well as the level of liking.

Market Testing

After management is satisfied with functional and psychological performance, the product is ready to be dressed up with a brand name and packaging, and put to a market test. The new product is introduced to an authentic setting to learn how large the market is and how consumers and dealers react to handling, using, and repurchasing the product.

Consumer-Goods Market Testing

In testing consumer goods the company seeks to estimate four variables:

·         Trial

·         First repeat

·         Adoption

·         Purchase frequency

Sales-Wave Research

In sales-wave research, consumers who initially try the product at no cost are reoffered the product, or a competitor’s product, at slightly reduced price. They might be reoffered the product five-six times, with the company noting how many customers selected that company’s product again and their reported level of satisfaction.

Simulated Test Marketing

Simulated test-marketing calls for finding 30 to 40 qualified shoppers and questioning them about brand familiarity and preferences in a specific product category. These people are then invited to a brief screening of both well-known and new commercials or print ads. This method has several advantages like

·         Gives fairly accurate results

·         Shorter time span

·         Very low cost

Controlled Test Marketing

In this method, a research firm manages a panel of stores that will carry new products for a fee. The company with the new product specifies the number of stores and geographic locations it wants to test. It allows the company to test the impact of in-store factors and limited advertising on buying behaviour. This technique also exposes the product and its features to competitor’s scrutiny.

Test Markets

The ultimate way to test a new consumer product is to put it into full-blown test markets. The company chooses a few representative cities, and the sale force tries to sell the trade on carrying the product and giving it good shelf exposure. Here the management faces several questions like:

·         How many test cities?

·         Which cities?

·         Length of test?

·         What Information?

·         What action to take?

Business-Goods Market Testing

Business goods can also benefit from market testing. Expensive industrial goods and new technologies will normally undergo alpha testing and beta testing. During beta testing vendor’s technical people observer how test customers use the product, a practice that often exposes unanticipated problems of safety and servicing and alerts the vendor to customer training and servicing requirements. Benefits of test customers are as follows:

·         Can influence product design

·         Gain experience with new product ahead of competitors

·         Can receive the price break in return for cooperation

·         Enhance their reputation as technological pioneers

Commercialization

When (Timing)

In commercializing a new product, market entry timing is critical. The company faces three choices:

·         First Entry- The first entering the market usually enjoys the ‘first mover advantage’ of locking up key distributors and customers and gaining reputational leadership.

·         Parallel Entry- The firm might time its entry to coincide with competitor’s entry. The market may pay more attention when two companies are advertising the new product.

·         Late Entry- The firm might delay its launch until after the competitor has entered. The competitor will have borne the cost of educating the market.

Where (Geographic Strategy)

The company must decide whether to launch the new product in a single locality, a region, several regions, the national market, or the international market. Most will develop a planned market roll out over the time. Company size is an important factor here. Large companies will introduce their product into a whole region and then move out to the next region. Most companies design their product for the domestic market. If the product does well, the company considers exporting to other countries.

To Whom (Target Market Prospects)

A company must target its initial distribution and promotion to the best of prospect groups. Should have already profiled the prime prospects with the following characteristics.

·         early adopters

·         heavy users

·         opinion leaders

·         reachable at a low cost

How (Introductory Market Strategy)

Action plan to for launching a new product is a must. Coordination of activities involved for launch, network planning techniques can be used such as Critical path scheduling. Develop master chart, showing sequence of simultaneous activities, etc.

The consumer Adoption Process

How do potential customers learn about new products, try them and adopt or reject them?

·         Adoption: individual decision to become a regular user of a product

·         Consumer adoption process

·         Consumer loyalty process

Technique – mass market approach: distribute product everywhere and advertise to everyone on an assumption that everyone is a potential buyer.

Drawback: 1) heavy marketing expenditure required and 2) involved wasteful expenditure towards people who may not be potential customers.

New approach to marketing: heavy user target marketing: - product is initially aimed at heavy users, if such can be identified and are heavy adopters.

The early adopter theory states that

·         Persons within a target market differ in the amount of elapsed time between their exposure to a new product and their trying it.

·         Early adopters share some traits that differentiate them from late adopters

·         Efficient media exist for reaching early adopters

·         Early adopters tend to be opinion leaders and helpful in advertising the new products to other potential buyers

The theory of diffusion and consumer adoption helps marketers identify early adopters.

Stages in the adoption process

·         Awareness: consumer becomes aware of innovation – no information

·         Interest: Stimulated to seek information about innovation

·         Evaluation: Consumer considers whether he/she should try the new innovation

·         Trial: Consumer tires innovation to improve his/her estimate of value

·         Adoption: Decides to make full and regular use of the innovation

Factors influencing the adoption process

Following are the characteristics of the adoption process:

·         differences in individual readiness to try new products

·         effect of personal influence

·         differing rates of adoption

·         Differences in organizations’ readiness to try new products.

People differ in readiness to try new products