Marketing Research Process

"Marketing research does not make decisions and it does not guarantee success". Marketing managers may seek advice from marketing research specialists, and indeed it is important that research reports should specify alternative courses of action and the probability of success, where possible, of these alternatives. However, it is marketing managers who make the final marketing decision and not the researcher

The purpose of the research

It is not at all unusual for marketing managers to neglect to tell the researcher the precise purpose of the research. They often do not appreciate the need to do so. Instead, they simply state what they think they need to know. This is not quite the same thing. To appreciate the difference consider the case of the marketing research agency which was contacted by the International Coffee Organization (ICO) and asked to carry out a survey of young people in the age group 15-24. They wanted information on the coffee drinking habits of these young people: how much coffee they drank, at what times of day, with meals or between meals, instant or ground coffee, which other beverages they preferred and so on. In response, the research organization developed a set of wide-ranging proposals which included taking a large random sample of young people.

In fact much of the information was interesting rather than important. Important information is that information which directly assists in making decisions and the ICO had not told the research company the purpose of the research. The initial reason for the study had been a suspicion, on the part of the ICO, that an increasing percentage of young people were consuming beverages other than coffee, particularly soft drinks, and simply never developed the coffee drinking habit. Had this been explained to the research company then it is likely that their proposals would have been radically different. To begin with, the sample would have been composed of 15-24 year old non-coffee drinkers rather than a random sample of all 15-24 year olds. Second, the focus would have been non-coffee drinking habits rather than coffee drinking habits.
Unless the purpose of the research is stated in unambiguous terms it is difficult for the marketing researcher to translate the decision-maker's problem into a research problem and study design.

Suppose that the marketing manager states that he needs to know the potential market for a new product his/her organisation has been developing. At first glance this might appear to meet all of the requirements of being clear, concise, attainable, measurable and quantifiable. In practice it would possibly meet only one of these criteria, i.e. it is concise!

Here is another case to be considered. A small engineering firm had purchased a prototype tree-lifter from a private research company. This machine was suitable for lifting semi-mature trees, complete with root-ball intact, and transplanting such trees in another location. It was thought to have potential in certain types of tree nurseries and plantations.

The problem with the objective is that the marketing manager needs to know the potential market for the new tree-lifter is that it is not attainable. One could find out how many tree-lifters were currently being sold but this is not the same as the objective set by the marketing manager. The market potential for any new brand is a function of at least 4 things, as shown in Figure 1.1.
Figure 1.1 The components of market potential

Step 1: Problem definition

The point has already been made that the decision-maker should clearly communicate the purpose of the research to the marketing researcher but it is often the case that the objectives are not fully explained to the individual carrying out the study. Decision-makers seldom work out their objectives fully or, if they have, they are not willing to fully disclose them. In theory, responsibility for ensuring that the research proceeds along clearly defined lines rests with the decision-maker. In many instances the researcher has to take the initiative.
In situations, in which the researcher senses that the decision-maker is either unwilling or unable to fully articulate the objectives then he/she will have to pursue an indirect line of questioning. One approach is to take the problem statement supplied by the decision-maker and to break this down into key components and/or terms and to explore these with the decision-maker. For example, the decision-maker could be asked what he has in mind when he uses the term market potential. This is a legitimate question since the researcher is charged with the responsibility to develop a research design which will provide the right kind of information. Another approach is to focus the discussions with the person commissioning the research on the decisions which would be made given alternative findings which the study might come up with. This process frequently proves of great value to the decision-maker in that it helps him think through the objectives and perhaps select the most important of the objectives.

Research forms a cycle. It starts with a problem and ends with a solution to the problem. The problem statement is therefore the axis which the whole research revolves around, beacause it explains in short the aim of the research.

1 WHAT IS A RESEARCH PROBLEM?
A research problem is the situation that causes the researcher to feel apprehensive, confused and ill at ease. It is the demarcation of a problem area within a certain context involving the WHO or WHAT, the WHERE, the WHEN and the WHY of the problem situation.

There are many problem situations that may give rise to reseach. Three sources usually contribute to problem identification. Own experience or the experience of others may be a source of problem supply. A second source could be scientific literature. You may read about certain findings and notice that a certain field was not covered. This could lead to a research problem. Theories could be a third source. Shortcomings in theories could be researched.
Research can thus be aimed at clarifying or substantiating an existing theory, at clarifying contradictory findings, at correcting a faulty methodology, at correcting the inadequate or unsuitable use of statistical techniques, at reconciling conflicting opinions, or at solving existing practical problems.

2 IDENTIFICATION OF THE PROBLEM
The prospective researcher should think on what caused the need to do the research (problem identification). The question that he/she should ask is: Are there questions about this problem to which answers have not been found up to the present?

Research originates from a need that arises. A clear distinction between the PROBLEM and the PURPOSE should be made. The problem is the aspect the researcher worries about, think about, wants to find a solution for. The purpose is to solve the problem, ie find answers to the question(s). If there is no clear problem formulation, the purpose and methods are meaningless.
Keep the following in mind:

• Outline the general context of the problem area.
• Highlight key theories, concepts and ideas current in this area.
• What appear to be some of the underlying assumptions of this area?
• Why are these issues identified important?
• What needs to be solved?
• Read round the area (subject) to get to know the background and to identify unanswered questions or controversies, and/or to identify the the most significant issues for further exploration.

The research problem should be stated in such a way that it would lead to analytical thinking on the part of the researcher with the aim of possible concluding solutions to the stated problem. Research problems can be stated in the form of either questions or statements.

• The research problem should always be formulated grammatically correct and as completely as possible. You should bear in mind the wording (expressions) you use. Avoid meaningless words. There should be no doubt in the mind of the reader what your intentions are.
• Demarcating the research field into manageable parts by dividing the main problem into subproblems is of the utmost importance.

3 STATEMENT OF THE PROBLEM
The statement of the problem involves the demarcation and formulation of the problem, ie the WHO/WHAT, WHERE, WHEN, WHY. It usually includes the statement of the hypothesis.
5 CHECKLIST FOR TESTING THE FEASIBILITY OF THE RESEARCH PROBLEM

Step.I: Problem Definition
the decision maker holds the initial responsibility of deciding that
there might be a need for the services of a researcher in addressing a recognized decision
problem or opportunity. Once brought into the situation, the researcher begins the problem
definition process by asking the decision maker to express his or her reasons for thinking
that there is a need to undertake research. Using this type of initial questioning procedure,
researchers can begin to develop insights as to what the decision maker believes to be the
problem. Having some basic idea of why research is needed focuses attention on the circumstances
surrounding the problem. The researcher can then present a line of questions
that can lead to establishing clarity between symptoms and actual causal factors. One
method that might be employed here is for researchers to familiarize the decision maker
with the iceberg principle

Iceberg principle

Principle that states that
only 10 % of most problems are visible to
decision makers, while the remaining 90 %

must be discovered through research.

Once the researcher understands the overall problem situation, he or she must work with
the decision maker to separate the root problems from the observable and measurable
symptoms that may have been initially perceived as being the decision problem. For example,
many times managers view declining sales or reduction in market share as problems.
After fully examining these issues, the researcher may see that they are the result of more
concise issues such as poor advertising execution, lack of sales force motivation, or even
poorly designed distribution networks. The challenge facing the researcher is one of clarifying
the real decision problem by separating out possible causes from symptoms. Is a
decline in sales truly the problem or merely a symptom of bad advertising practices, poor
retail choice, or ineffective sales management?
Once the decision problem at hand is understood and specific information requirements are
identified, the researcher must redefine the decision problem in more scientific terms.
A hypothesis is basically an unproven statement of a research question in a testable
format.
Step.II: Set research objectives
Definition of Research Objectives
Marketing Research Objectives: the specific bits of knowledge that need to be gathered to close the information gaps highlighted in the research problem.
Stated in action terms
Serve as a standard to evaluate the quality and value of the research
Objectives should be specific and unambiguous
Examples:
To measure the number of college freshmen at UAH
To assess viewer recall of our ad campaign
To describe the segments of the marketplace

Putting It All Together

Management Problem Expressed in Terms of Research Questions and Hypotheses
Situation: A small retail specialty store featuring men’s casual wear in Southern California was concerned
about its trends in low traffic and sales figures. Management was unclear about what the store’s retail
image was among consumers.
MANAGEMENT’S INITIAL DECISION PROBLEMS
Should any of my current store/product/service/operation strategies be evaluated and possibly modified
to increase growth in the store’s revenue and market share indicators? Do merchandise quality, prices, and
service quality have an impact on customer satisfaction, in-store traffic patterns, and store loyalty images?
REDEFINED AS RESEARCH QUESTIONS
What are the shopping habits and purchasing patterns among people who buy men’s casual wear? That is,
Where do these people normally shop for quality men’s casual wear?
When (how often) do they go shopping for quality men’s casual wear?
What types of casual wear items do they like to shop for (purchase)?
Whom do they normally purchase men’s casual wear for?
How much (on average) do they spend on men’s casual wear?
What store/operation features do people deem important in selecting a retail store in which to shop for
men’s casual wear?
How do known customers evaluate the store’s performance on given store/operation features compared to
selected direct competitors’ features?
REDEFINED AS RESEARCH HYPOTHESES
There is a positive relationship between quality of merchandise offered and store loyalty among customers.
Competitive prices have greater influence on generating in-store traffic patterns than do service quality features.
Unknowledgeable sales staff will negatively influence the satisfaction levels associated with customers’ instore
shopping experiences.
RESEARCH OBJECTIVES
To collect specific attitudinal and behavioral data for identifying consumers’ shopping behavior,
preferences, and purchasing habits toward men’s casual wear.
To collect specified store/product/service/operation performance data for identifying the retailer’s
strengths and weaknesses which could serve as indicators for evaluating current marketing and
operational strategies.
To collect attitudinal data for assessing the retailer’s current overall image and reputation as a retail men’s
casual wear specialty store.
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Management Problem
Placement office has noticed, while major companies make annual recruiting visits to campus for engineers, not many national or local companies are formally recruiting business majors through the placement office
Why? How do we address this?

Marketing Research Problems

Why are companies not taking advantage of the resources that the placement service offers? Are companies going around the service?
Are companies aware of the UAH placement service?
Are companies aware of the reputation of the UAH Business School?
What kind of things might generate more recruiting activity?
Marketing Research Objectives
To determine to what extent companies are aware of the UAH placement service
Determine whether companies, especially locals, are aware of the strong reputation of the UAH Business School
To determine whether a quarterly newsletter highlighting UAH business programs and students might generate more recruiting activity.

Another Example

Management Problem
What price should we charge for our new product?
Research Problem
What are our costs of production and marketing (COGS)?
What are our pricing objectives and position in the market?
What price does similar types of products sell for?
What is the perceived value of our product in the marketplace?
Are there any norms or conventional practices in the marketplace (e.g., customary prices, continual discounting)

Research Objectives

To assess the costs involved in producing and selling our product
To determine corporate objectives and their implications for pricing
To examine current prices for direct and indirect competition
To determine potential customer reaction to various prices and their perception of the benefits of owning the product

Exercise

For the following management problems, identify the underlying research problems and a couple of research objectives.

• “Should our retail chain offer online shopping?”
• “What advertising media should we use to reach our market?”
• “How do we get more people to attend our outdoor festival/event?”
• “Should we build a new warehouse to store our excess inventory?”
• How can we increase customer retention?”
• “Should the amount of in-store promotion for an existing product line be increased?”
• “Should the compensation package be changed to better motivate the sales force?”

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MARKETING RESEARCH MIX
The term Marketing research mix (or the "MR Mix") was created in 2004 and published in 2007 (Bradley - see references). It was designed as a framework to assist researchers to design or evaluate marketing research studies. The name was deliberately chosen to be similar to the Marketing Mix - it also has four Ps. Unlike the marketing mix these elements are sequential and they match the main phases that need to be followed. These four Ps are: Purpose; Population; Procedure and Publication.

The Financial Side of Product Management

Product managers need to establish a framework of financial plans,
budgets and controls related to their products, services, and customers to be able to make sound decisions. The starting point is a foundation of financial and managerial accounting to better understand the profit contribution of their offerings so that decisions on product rationalization,
pricing, and product-line management can be made. From a broader
financial perspective, product managers should understand key ratios and concepts drawn from an understanding of financial statements.

General Cost Classifications

In manufactured product environments, there are two major cost classifications, manufacturing and nonmanufacturing, each of which has sub classifications.

Manufacturing costs include all those related to the transformation of raw materials into final products, including direct materials, direct labor, and manufacturing overhead.

• Direct materials, such as wood in tables and steel in cars,
  become an integral part of the finished product and can
  be considered direct costs. Other materials, such as glue,
  may be more difficult to link to individual units of
  production and may be classified as indirect materials to
  be included in overhead.
• Direct labor includes the labor directly traceable to the
  creation of products. Research and development, support staff
  time, and other labor not directly related to manufacturing
  are included in indirect labor.
• Manufacturing overhead includes all costs of manufacturing,
  excluding the direct material and direct labor costs
  described above. Included in this category are items such
  as indirect material, indirect labor, heat, light, and depreciation.
  

Nonmanufacturing costs include the marketing, sales, administrative, and support costs unrelated to the production of products. These are typically included on the SG & A (selling, general, and administrative) expenses line of an income statement.

Historically, the nonmanufacturing costs have been less significant than the manufacturing costs for most products. However, the growth of services and the emergence of various technologies have reversed the relative weight of these costs in many companies.

• Marketing and selling costs include advertising, shipping,
  sales commission, and salaries.
• Administrative expenses include executive, organizational,
  and clerical salaries.

Both manufacturing and nonmanufacturing costs result from the
normal operation of a business. In addition, there may be other expenses, such as the purchase of an asset, that are charged to the income statement for the period, even though they are not operating expenses. These costs are presented in the simplified income statement on the next page. The cost of goods sold includes the direct material and labor as well as manufacturing overhead.

The data are frequently derived from standard costs and are a combination of fixed and variable expenses. (Standard costs are
predetermined cost amounts that represent what cost should be under the most efficient methods of operation; in other words, they are benchmarks for measuring performance.) Similarly, the overhead expenses (comprised of the nonmanufacturing or SG & A expenses) may be a combination of fixed and variable costs.
The income statement resulting from the above process of listing
costs provides a historical review of the results of operations. It does

not necessarily provide the information for planning and improving
the decision-making process of product management. To provide this type of information, it is necessary to distinguish between the variable and incremental costs associated with products to better understand their contributions to overhead and profit.

Concepts of Segmented Reporting Variable costs are those that vary in direct relation to the activity level.

If activity level doubles, variable costs double in total. This is true
because the cost per unit stays approximately constant over a relevant range of activity. Direct materials and direct labor are variable production costs, and sales commissions represent a variable sales expense.

In addition, there may be step-variable (similar to incremental or semi fixed ) costs. Setup time, seasonal labor, and similar activities related to the amount of business can be considered variable to that piece of business.

Fixed costs, on the other hand, do not change regardless of
changes in the level of activity. Since fixed costs remain constant in
total, the amount of cost per unit goes down as the number of units
increases. It is sometimes said that variable costs are the costs of doing business, whereas fixed costs are the costs of being in business.

Once costs have been separated into fixed and variable elements,
it is easier for product managers to determine the contribution of different products or customer segments. It is also easier for companies to evaluate the performance of several product managers. A comparison of a traditional income statement (using historical cost information) and a contribution income statement (separating fixed and variable costs) is shown in Figure 11.2.

Note that in Figure 11.2 the top line (sales revenue) and the bottom
line (net income) are the same using both approaches. However,
using the contribution margin approach it becomes clear that these
particular sales contribute $9,300 to fixed costs (prior to break-even) and profit (after break-even is achieved). (See Chapter 12 for a discussion of break-even analysis as it is applied to pricing decisions.) This concept of contribution reporting can be applied to business units, departments, product managers, product lines, customers, or similar units of analysis. When applied to these segments, direct costs and common costs must be understood.

Direct costs are those that can be identified directly with a particular
unit of analysis (i.e., product manager, product, customer, etc.) and that arise either because of the unit or because of the activity within it. Common costs are those that cannot be identified directly with any particular unit, but rather are identified in common with all units. The common costs (most likely fixed costs) cannot be allocated except through arbitrary means.

example, company revenues are $900,000, of which $500,000 come from Product Manager 1 and $400,000 come from Product Manager 2. They contribute $80,000 and $170,000, respectively, with $160,000 in overhead not allocated to either. The $400,000 revenue of Product Manager 2 comes from a standard model ($150,000) and a custom model ($250,000) contributing $70,000 and $140,000, respectively.

Product Manager 2 has $40,000 of fixed expenses not related
directly to either product. The custom product receives $180,000 from contractors and $70,000 from residential customers to generate its $250,000 in revenue. The segment contributions are shown without an arbitrary allocation of the $10,000 of fixed costs for the custom model which aren’t directly related to either customer group.

Cost Drivers

Before a product manager can price a product or evaluate a product
line, he or she must understand what the cost drivers are for the various products and customers. Some customers require additional expediting charges, others require special shipping and handling, while others expect free services. Each of these costs should be allocated to the particular product or customer to determine the true financial contribution.

Financial Statement Analysis

As suggested earlier, financial statements are historical documents indicating what happened during a particular period of time. This perspective helps a product manager judge past performance through the use of ratios. In addition, by comparing changes in the statements over time, it is possible to identify performance trends and use the information for subsequent decisions.

Investment Decisions

Directly or indirectly, product mangers may be involved in capital budgeting decisions in the preparation of investment proposals for new products, new markets, or new business ventures. The most common methods of evaluating different proposals are average rate of return, payback period, present value, and internal rate of return.
The average rate of return is the ratio of the average annual profits
to the investment in the project. Using this method, the product
manager prepares a forecast of the improvement in profit over a number of years from a given investment. The total profit is divided by the number of years to give an average annual profit, and this is then expressed either as a percentage of the original investment or as a percentage of the average investment per year. Assume the following stream of profits from, for example, a new product:

Year 1: $100,000
Year 2: $200,000
Year 3: $300,000 Average: $240,000
Year 4: $250,000
Year 5: $350,000
Total: $1,200,000

 

If the initial investment was $1 million, the average annual profit
would be the $240,000 as a percent of $1 million, or 24 percent. Alternatively, the $240,000 could be expressed as a percentage of the average investment for each of the five years. In either case, the rate would be compared to hurdles used by the company or to industry norms. The payback period is calculated by determining the length of time (number of years) it takes to recover an initial investment.

In the above example, the investment of $1 million is paid back during the fifth year. After four years, the cumulative profits are $850,000, with the remaining $150,000 being earned sometime during the final year. Here again, the payback as an absolute value is less important than looking at the relative values of different projects.

The present value (or net present value) refers to the value of future
cash inflows compared to the current outflow of the initial investment.

 

The internal rate of return is the interest rate that makes the present
value of all projected future cash flows equal to the initial outlay
for the investment. In other words, it is the rate that makes the net
present value (NPV) equal zero. The calculation is somewhat complex mathematically, and since it is a value that would be provided by your financial group, the definition should be sufficient for our purposes.

Launch

The next step of the new-product-development process, launch, results in the introduction of the product into the market. Decisions need to be made about timing (when to launch the product), geographic strategy, target market prospects, sales and customer service support, and final marketing strategy.

 

Timing can be a critical component of new-product success. If competitors might be (or are) entering the market, the product manager must decide whether to get there first, concurrently, or after the competition.

First entry usually provides an advantage, but if rushing results
in a flawed product, the result can be more damaging than good. Timing

an entry with competition can neutralize the competitor’s potential
first-mover advantage as well as possibly increase the potential market faster. Delaying an entry until after competition is in the market might make it possible to capitalize on competitive flaws as well as benefit from any competitive advertising that educates the market. Timing is also important if there are seasonal or cyclical aspects to a product, or if the introduction impacts the sales of existing products.

 

It is also necessary to make decisions on a geographic strategy. On
some occasions, a national launch is appropriate, but most new products start with a roll-out strategy. Prioritize the markets (e.g., regions, industries, or countries) and decide on an entry sequence.

For example, it might be desirable to first enter the most attractive markets in terms of size and dollar potential. Or it might be more desirable to enter markets where competition is weak, providing an ability to gain experience, exposure, and market position. In other situations, the selection of roll-out markets is based on different product applications, pipeline inventory in the markets, ability to gain distributor or retailer support, company reputation in the market, or a host of other factors.

 

Although the roll-out might appear similar to test marketing, it differs in a couple of important ways. First, in a test market the product manager targets regions that are representative of the final launch. This is not the case with a roll-out. The markets are selected based on their ability to provide an early cash flow or to gain commitment from an influential market needed for the continued roll-out. Second, the test market is a final test before the commercialization decision is made. The roll-out is the first step in commercialization after the decision is made.

As part of this geographic strategy, identify specific target market
prospects. This is particularly important in the business-to-business
market where clients/prospects can be listed by name. The more detail that can be provided here for the sales force, the greater the chances of encouraging them to sell the new product.

That leads right into sales support. Work closely with the sales force to provide them with information that will help them sell. Prepare “how to sell it” booklets that discuss customers (not target markets), applications (not features), and useful questions to ask on a sales call. Make sure that customer service stays in the loop with sufficient communication through internal newsletters, informal and formal meetings, and various announcements.

The last part is fine-tuning of the introductory marketing strategy.
This action plan details introductory pricing, base price, and option
pricing; press releases and product announcements; direct mail to select customers; shipping policies and procedures; channel and end-user communications; and training for the sales force and/or customers.

The sales training in particular should help salespeople sell the product rather than simply pitch the product.

The sales training that is part of the product launch should educate
and motivate the salespeople to sell your product. In other words, why should the salespeople believe the product will perform as claimed?

What motivation is there for them to sell it? For an existing product,
the best proof is past sales success. For new products, a bit more persuasion is necessary. Results from test marketing or beta testing, statements from sales managers or other salespeople indicating their success in a roll-out region, sales that you (as product manager) have personally made, or trade shows and lead generation programs in place can convince salespeople that the product is worth their time and effort to pursue. In addition, financial and nonfinancial motivators should be considered. Higher commissions, better bonuses, and desirable contests can work under the right circumstances.

Nonfinancial motivators could include customer input suggesting that less sales effort is necessary to be successful, the ability to sell the product along with another product with a minimal increase in selling time, or unquestionable proof of competitive superiority.
A portion of the training might also include a motivational explanation of the need for and use of market intelligence by product managers, and how providing this information can help the salespeople. A standard intelligence report form can be built into a call report, designed into the menu system on a computer, or included as part of the expense form. Because this information typically comes into sales management or sales administration, a process would need to be established to send a copy of relevant product-related data to the appropriate product manager.

• The type of information useful for submission might include the following:
  • New-product announcements by competitors
  • Effective and ineffective approaches to selling a product
  • Changes in competitive strategies
  • Unusual product applications by customers, especially if
  they indicate a trend
  • Perspectives on market trends that might affect company
  strategy
  

 

Project Evaluation

After (or during) the launch stage, some type of project appraisal should be completed. The main objectives of this stage are to improve future product development efforts and to move the product from a new product status to being an ongoing product requiring long-term maintenance.

There may also be a need on occasion to relaunch a product
that is not meeting expectations. The relaunch should be considered as early as possible, and hopefully will have been uncovered by the early indicators as discussed in the prelaunch section of this chapter. If the product is still an acceptable product, changes to the marketing strategy may need to be made to make it a success.

Prelaunch

The prelaunch is the period prior to commercialization when the product manager verifies that all preparations have been made for the actual product introduction. During this stage, the product manager must identify all stakeholders and determine their information requirements.

Customer service needs to be prepared to handle inquiries and fulfill
orders. Technical support personnel may require specialized training.

The distribution channel may require advance warning of any unique
requirements of the product or service.

Also at this time, there may be a need to consider a market test or
a simulated market test to determine whether the strategy (not just the product) is ready for introduction. Various use tests already should have determined the viability of the product, but the tests might not have addressed the best way to go to market.

Test marketing helps assess whether the right price is being charged, whether the appropriate message is being communicated through advertising, and whether the proper distribution strategy is being employed. Of course, test marketing is expensive in terms of both money and time. Therefore, it should be undertaken only when the risk of not doing it is great.

 

For a typical test market, the product manager selects a geographic
area that is as representative of the product’s target market as possible and markets the product on a limited basis in that region. The key decisions to be made include how many test markets, which ones, and how long the tests should run. Most companies select two or three test markets that provide good representation of their target customers.

Good representation refers to assuring that critical demographic variables are dispersed in the target area in about the same proportion as exists in the total market area. The length of the test market will vary depending on the type of product. Some will require six to nine months, and others will need two years. The factor to consider is the length of the buying cycle, with the test market being at least as long as two buying cycles.5

Based on this information, a launch plan can be developed. The
launch documentation should contain three specific components: (1) a milestone activities chart, (2) the marketing strategy to support the
launch, and (3) an early indicator chart. (See Figure 10.7.) All of these guide the launch and early commercialization.

The milestone activities chart lists the desired dates of completion for significant activities such as purchasing equipment for the launch, finalizing package design, obtaining legal clearance, subcontracting specialized labor, and preparing the owner’s manual. Each of these may require several steps and may vary in importance depending on the project. Their potential impact on product success must be considered in assessing priority.

For example, electronic or high-tech consumer products require
clarity in technical documentation to be successful. Customers are increasingly seeking simplicity in a complicated world. However, as a recent Business Week article stated, “Plain English is a language
unknown in most of the manuals that are supposed to help us use electronic products.”6 The format of the milestone activities chart can vary from a simple list of activities and dates to more formal project schedule and control techniques like Gantt and PERT charts. (Refer to operations management or project management books for more details.)

The marketing strategy component of the launch materials details
the tactical components of the launch. Branding, packaging, pricing,
advertising, and all aspects of marketing are studied. As with the
annual product plan, the new-product marketing plan should start with an objective such as “Convert 25 percent of current customers to the product upgrade and obtain trial by an additional 25 percent.” The marketing tactics would then be put into place to accomplish this objective. A sample outline for this new-product marketing strategy is shown as Figure 10.8. Some companies include all or most of the listed components; others will need to be more selective.

Figure 10.8 The Supporting New-Product Marketing Plan

Line extensions might require only an abbreviated outline, whereas breakthrough products will need extensive marketing strategy plans.
As mentioned earlier in the chapter, a decision will need to be made
whether to price a product high initially to recover the development
costs or to price it low to gain market share faster.

Now you have more information than was available early in the process and you are able to fine-tune the pricing.

A number of factors affect this decision:

• First, how likely is it that competitors will enter the market soon? The ability of competitors to enter the market will be based on the investment required to enter, the ease of entering, and their own strategies. The faster that competition is likely to enter, the more appropriate a penetration (low) price strategy.
• Second, is there a large enough segment of customers willing to pay a high price for the product initially? Third, is the company, product, or service positioned appropriately for the
  price strategy being considered?
• Finally, what are the payback period, “hurdle rates,” and return required by the company?

The final component of the launch documentation (after completing the milestone activities chart and the various event calendars and schedules from the marketing plan) is a calendar of early indicators of potential launch success. Early indicators refer to outcomes, such as the number of inquiries, that can help predict or provide early indicators of the level of launch success.

For example, history might indicate that thirty inquiries typically convert to one sale. In that case, tracking the number of inquiries could provide an early indicator of future sales. Other early indicators might include the number of sales calls made on the new product, the percentage of distributors willing to carry it, the awareness level of the market, the number of facings retailers give to the product, and so on.

After identifying the early indicators, the next step is to set time-based (e.g., weekly, monthly) goals to achieve for each. The early indicator chart, then, lists the outcomes expected by the end of designated time periods (e.g., each month), enabling the product manager to compare actual against expected performance without waiting for final sales data.

 

With launch documentation prepared, the product is ready to move
to the launch phase. It’s worth noting that sales training may sometimes be required during the prelaunch phase (perhaps six to nine months prior to the official launch). The information on sales training is presented in the next section covering the launch stage.

Porter’s 5 forces

Five Forces model of Michael Porter is a tool used for evaluating company's competitive position. Michael Porter provided a framework that models an industry and therefore implicitly also businesses as being influenced by Major Five Forces.

What is good about Porter's Five Forces model?

Porter has the ability to represent complex concepts in relatively easily accessible formats. His book about the Five Forces model is written in a very easy and understandable language. Even though his model is backed up by some complex model, the model itself is simple and easily comprehensible at all levels.

Porter's Five Forces model provides suggested points under each main heading, by which you can develop a broad and sophisticated analysis of competitive position. This can be then used when Evaluating different target segments or creating strategy, plans, or making investment decisions about your business or organization.

What is the basic idea behind Porter's Five Forces model?

Porter's Five Forces model is made up by identification of 5 fundamental competitive forces:

· Barriers to entry

· Threat of substitutes

· Bargaining power of buyers

· Bargaining power of suppliers

· Rivalry among the existing players

 

Sometimes we need to consider different factors under each title then When putting all these points together we get Porter's Five Forces model which looks like this:

Force 1: Barriers to entry

Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example:

· Cost advantages (economies of scale, economies of scope)

· Access to production inputs and financing,

· Government policies and taxation

· Production cycle and learning curve

· Capital requirements

· Access to distribution channels

Patents, branding, and image also fall into this category.

Force 2: Threat of substitutes

Every top decision makes has to ask: How easy can our product or service be substituted? The following needs to be analyzed:

· How much does it cost the customer to switch to competing products or services?

· How likely are customers to switch?

· What is the price-performance trade-off of substitutes?

If a product can be easily substituted, then it is a threat to the company because it can compete with price only.

Force 3: Bargaining power of buyers

Now the question is how strong the position of buyers is. For example, can your customers work together to order large volumes to squeeze your profit margins? The following is a list of other examples:

· Buyer volume and concentration

· What information buyers have

· Can buyers corner you in negotiations about price

· How loyal are customers to your brand

· Price sensitivity

· Threat of backward integration

· How well differentiated your product is

· Availability of substitutes

Having a customer that has the leverage to dictate your prices is not a good position.

Force 4: Bargaining power of suppliers

This relates to what your suppliers can do in relationship with you.

· How strong is the position of sellers?

· Are there many or only few potential suppliers?

· Is there a monopoly?

· Do you take inputs from a single supplier or from a group? (concentration)

· How much do you take from each of your suppliers?

· Can you easily switch from one supplier to another one? (switching costs)

· If you switch to another supplier, will it affect the cost and differentiation of your product?

· Are there other suppliers with the same inputs available? (substitute inputs)

The threat of forward integration is also an important factor here.

Force 5: Rivalry among the existing players

Finally, we have to analyze the level of competition between existing players in the industry.

· Is one player very dominant or all equal in strength/size?

· Are there exit barriers?

· How fast does the industry grow?

· Does the industry operate at surplus or shortage?

· How is the industry concentrated?

· How do customers identify themselves with your brand?

· Is the product differentiated?

· How well are rivals diversified?

Rivalry is the fifth factor in the Five Forces model but probably the one with the most attention.

Conclusion:

After Segmentation we must start to evaluate each segment in order to know will it be profitable if targeted or not.

Thus, to evaluate the different segments, we need to apply Porter’s five forces on each segment in addition to the following factors in order to decide which segment to target:

• Company objectives and resources
• Segment size and growth
• Indicator for profitability
• Large size segment with high growth rate is not suitable for small companies
• Sales estimate
• Cost estimate

Who is Michael Porter?

Michael Porter is a professor at Harvard Business School and is a leading authority on competitive strategy and international competitiveness. Michael Porter was born in Ann Arbor, Michigan.

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Source:

1) Maxi Pedia

2) Competitive Strategy: Techniques for Analyzing Industries and Competitors

New Product Development (NPD)

Due to the rapid changes in consumer tastes, technology, and competition, companies must develop a steady stream of new products and services.
A firm can obtain new products in two ways:

• acquisition—by buying a whole company, a patent, or a license to produce someone else's product.


• new-product development in the company's own research and development department.

By new products we mean original products, product improvements, product modifications, and new brands that the firm develops through its own research and development efforts.

Innovation can be very risky. Ford lost $350 million on its Edsel automobile; RCA lost $580 million on its SelectaVision videodisc player; and Texas Instruments lost a staggering $660 million before withdrawing from the home computer business. Other costly product failures from sophisticated companies include New Coke (Coca-Cola Company), Eagle Snacks (Anheuser-Busch), Zap Mail electronic mail (Federal Express), Polarvision instant movies (Polaroid), Premier "smokeless" cigarettes (R.J. Reynolds), Clorox detergent (Clorox Company), and Arch Deluxe sandwiches (McDonald's)

Why do so many new products fail? …

There are several reasons, like:

• the market size may have been overestimated.
• the actual product was not designed as well as it should have been.
• the products are incorrectly positioned in the market
• the products may be priced too high, or advertised poorly.

Because so many new products fail, companies are anxious to learn how to improve their odds of new-product success. One way is to identify successful new products and find out what they have in common. Another is to study new-product failures to see what lessons can be learned. In all, to create successful new products, a company must understand its consumers, markets, and competitors and develop products that deliver superior value to customers.

New Product Development process...

Throughout the previous 8 steps all new products or improved existing products will be created.

Step.I: Idea Generation

New-product development starts with idea generation—the systematic search for new-product ideas. A company typically has to generate many ideas in order to find a few good ones. At Gillette, of every 45 carefully developed new-product ideas, 3 make it into the development stage and only 1 eventually reaches the marketplace. DuPont has found that it can take as many as 3,000 raw ideas to produce just 2 winning commercial products, and pharmaceutical companies may require 6,000 to 8,000 starting ideas for every successful commercial new product.

Major sources of new-product ideas include:

• Internal sources, the company can find new ideas through formal research and development. It can pick the brains of its executives, scientists, engineers, manufacturing, and salespeople. Some companies have developed successful "intrapreneurial" programs that encourage employees to think up and develop new-product ideas. For example, 3M's well-known "15 percent rule" allows employees to spend 15 percent of their time "bootlegging"—working on projects of personal interest whether or not those projects directly benefit the company. The spectacularly successful Post-it notes evolved out of this program. Similarly, Texas Instruments's IDEA program provides funds for employees who pursue their own ideas. Among the successful new products to come out of the IDEA program was TI's Speak 'n' Spell, the first children's toy to contain a microchip. Many other speaking toys followed, ultimately generating several hundred million dollars for TI.


• External sources, since new-product ideas also come from watching and listening to customers. The company can analyze customer questions and complaints to find new products that better solve consumer problems. The company can conduct surveys or focus groups to learn about consumer needs and wants. Or company engineers or salespeople can meet with and work alongside customers to get suggestions and ideas.

For example, United States Surgical Corporation (USSC) has developed most of its surgical instruments byworking closely with surgeons. The company was quick to pick up on early experiments in laparoscopy—surgery performed by inserting a tiny TV camera into the body along with slim, long-handled instruments. USSC now captures about 58 percent of the single-use laparoscopy market.

Finally, consumers often create new products and uses on their own, and companies can benefit by finding these products and putting them on the market. Customers can also be a good source of ideas for new product uses that can expand the market for and extend the life of current products.


Competitors are another good source of new-product ideas. Companies watch competitors' ads and other communications to get clues about their new products. They buy competing new products, take them apart to see how they work, analyze their sales, and decide whether they should bring out a new product of their own.


Distributors and suppliers contribute many good new-product ideas. Resellers are close to the market and can pass along information about consumer problems and new-product possibilities. Suppliers can tell the company about new concepts, techniques, and materials that can be used to develop new products. Other idea sources include trade magazines, shows, and seminars; government agencies; new-product consultants; advertising agencies; marketing research firms; university and commercial laboratories; and inventors.


The search for new-product ideas should be systematic rather than haphazard. Otherwise, few new ideas will surface and many good ideas will sputter in and die. Top management can avoid these problems by installing an idea management system that directs the flow of new ideas to a central point where they can be collected, reviewed, and evaluated. In setting up such a system, the company can do any or all of the following:

• Appoint a respected senior person to be the company's idea manager.
• Create a multidisciplinary idea management committee consisting of people from R&D, engineering, purchasing, operations, finance, and sales and marketing to meet regularly and evaluate proposed new-product and service ideas.


• Set up a toll-free number for anyone who wants to send a new idea to the idea manager.


• Encourage all company stakeholders—employees, suppliers, distributors, dealers— to send their ideas to the idea manager.


• Set up formal recognition programs to reward those who contribute the best new ideas.

The idea manager approach yields two favorable outcomes. First, it helps create an innovation-oriented company culture. It shows that top management supports, encourages, and rewards innovation. Second, it will yield a larger number of ideas among which will be found some especially good ones.

Step.II: Idea Screening

The purpose of idea generation is to create a large number of ideas while The purpose of screening stage is to reduce that number.





Many companies require their executives to write up new-product ideas on a standard form that can be reviewed by a new-product committee. The committee then evaluates the idea against a set of general criteria as follows:
• Fit within existing product mix
• Patentability
• Risk of competitive entry
• Ability to sell through existing distribution
• Compatibility with strategic plan
• Acceptable payback period
• Growth potential
• Cost of tooling and machinery
• Compatibility with core technologies

For example, at Kao Company, the large Japanese consumer-products company, the committee asks questions such as these: Is the product truly useful to consumers and society? Is it good for our particular company? Does it mesh well with the company's objectives and strategies? Do we have the people, skills, and resources to make it succeed? Does it deliver more value to customers than do competing products? Is it easy to advertise and distribute?

Another way of screening is to use “Product- Screening Checklist” as follows:






The most important screening criterion was “compatibility with strategic plan” as designed by the weight of 0.20. The committee rated this particular idea 0.7 for “compatibility with strategic plan,” yielding a rating of 0.20 × 0.70 = 0.01 (rounded from 0.014). Each row is calculated this way, then added together to arrive at the weighted rating. Note that the product idea being evaluated obtained a weighted score of 0.44. If several other ideas being evaluated
simultaneously obtained scores of 0.56, 0.62, and 0.70, the relative priorities would become clear. The real value of these priorities is the ability to decide how to best allocate developmental resources

Step.III: Concept Development &Testing

An attractive idea must be developed into a product concept. It is important to distinguish between a product idea, a product concept, and a product image.

• A product idea is an idea for a possible product that the company can see itself offering to the market.
• A product concept is a detailed version of the idea stated in meaningful consumer terms.

• A product image is the way consumers perceive an actual or potential product.

May be after developing the product concept, the input from key customers who are knowledgeable and cooperative is needed to suggest improvements and modifications to the initial concept.
This will be done by Probing for specific modifications that could affect the sales potential of the product. What if certain features were enlarged? Minimized? What if the product was harder? Softer? What if the dimensions were more standardized? More customized? Is color important? How about location? Get as much input from these key informants as possible.

In some cases, this type of qualitative research with a small sample
is sufficient to develop the concept. In other cases, a larger sample
is required to fully understand needs. When the Oldsmobile Aurora
was being developed, the project team used focus groups extensively
even before the first designs were drawn.

Once the concept is more fully developed, it is important to test it among a large group of customers. This group will be more representative of the target market. The concepts may be presented to consumers symbolically or physically.
For some concept tests, a word or picture description might be sufficient. However, a more concrete and physical presentation of the concept will increase the reliability of the concept test.

Today, some marketers are finding innovative ways to make product concepts more real to consumer subjects. For example, some are using virtual reality to test product concepts. Virtual reality programs use computers to simulate reality.

For example, a designer of kitchen cabinets can use a virtual reality program to help a customer "see" how her kitchen would look and work if remodeled with the company's products. Although virtual reality is still in its infancy, its applications are increasing daily.

There is no one best approach to concept testing, but most are variations of qualitative research and focus-group discussions. Generally, several versions of a concept (possibly including competitors or placebo concepts) or several different product concepts that address the same need (i.e., substitutes) are explored in one concept test. This is because people usually provide better information when comparing alternatives, and the resulting information is more reliable than absolute evaluation.

Some of the questions to be addressed during the concept test include the following: Does the proposed concept make sense to the customers? Is it preferred over what is currently available? How much value do the improvements have over existing alternatives available to the customer? Is the product consistent with the way customers currently perform the function, or will it require a change in mind-set? Would they be willing to pay more? What are the flaws? Are there changes that would make the product viable (or more viable)? What is the basic need that this product would satisfy? Has the brand name or trademark been included in the concept test? The concept tests usually include some indication of intent to buy at some specified price. “Intent to buy” refers to the respondents’ indication of the probability they would buy the product if it existed, usually expressed along a scale (e.g., 1 = “definitely would not buy” to 5 = “definitely would buy”).

This is an important component of the concept test but should not be projected literally as the actual sales potential. Customers will almost always overestimate their willingness to buy in an artificial setting such as a focus group. Obtaining pricing information is difficult at best. However, determining a target price is critical for establishing a target cost for the product-development process. Although no research method is infallible, there are a few techniques that are worth trying.


• One approach is to ask customers to supply a price range: What is
  the highest price you’d pay, above which you’d feel you were being
  gouged? What is the lowest price you’d pay, below which you’d question the quality of the product?



• Another approach is to split the concept test groups into experimental and control groups. Give each group a different price for the same described concept and determine whether there are differences in the willingness to buy at the stated prices.



• A third strategy is to ask customers what value (in monetary terms) the new product would have over what they are currently using. A final approach is to ask customers what they would be willing to pay for the product and what features they would be willing to give up to attain that price. In each case, an intent-to-buy question should be included.
  
  At this point, the product team should attempt to establish a target
  price. The target price is necessary to estimate target costs for the
  developmental process. “Design by price” is an approach used by several companies in industries with rapidly changing technologies, short life cycles, and pressure on pricing.
  
  
  The target price depends on the value perceived by the market.
  Determining value will be different for low-unit-value, frequently purchased items (e.g., consumer packaged goods) than for high-priced, infrequently purchased goods (e.g., capital equipment). The purchase of consumer packaged goods has an element of habit and inertia in the decision process. Higher-priced products may have groups or committees involved in the process. The differences in decision making, as well as the different decision makers, need to be included in the analysis.
  
Case Study for Concept Development & Testing

DaimlerChrysler is getting ready to commercialize its experimental fuel-cell-powered electric car. This car's low-polluting fuel-cell system runs directly off liquid hydrogen. It is highly fuel efficient (75 percent more efficient than gasoline engines) and gives the new car an environmental advantage over standard internal combustion engine cars. DaimlerChrysler is currently road testing its NECAR 4 (New Electric Car) subcompact prototype and plans to deliver the first fuel-cell cars to customers in 2004. Based on the tiny Mercedes A-Class, the car accelerates quickly, reaches speeds of 90 miles per hour, and has a 280-mile driving range, giving it a huge edge over battery-powered electric cars that travel only about 80 miles before needing 3 to 12 hours of recharging.
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DaimlerChrysler's task is to develop its fuel-cell powered electric car into alternative product concepts, find out how attractive each is to customers, and choose the best one.

Stage.I : Concept Development

DaimlerChrysler's task is to develop this new product into alternative product concepts, find out how attractive each concept is to customers, and choose the best one. It might create the following product concepts for the fuel-cell electric car:
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Concept 1	A moderately priced subcompact designed as a second family car to be used around town. The car is ideal for running errands and visiting friends.
Concept 2	A medium-cost sporty compact appealing to young people.
Concept 3	An inexpensive subcompact "green" car appealing to environmentally conscious people who want practical transportation and low pollution.

Stage.II: Concept Testing

Here, in words, is concept 3 which will be tested with the target segment:


An efficient, fun-to-drive, fuel-cell-powered electric subcompact car that seats four. This high-tech wonder runs on liquid hydrogen, providing practical and reliable transportation with almost no pollution. It goes up to 90 miles per hour and, unlike battery-powered electric cars, it never needs recharging… so what do you think about this car?…


After being exposed to the concept, consumers then may be asked to react to it by answering questions such as those in the following Table. The answers will help the company decide which concept has the strongest appeal. For example, the last question asks about the consumer's intention to buy. Suppose 10 percent of the consumers said they "definitely" would buy and another 5 percent said "probably." The company could project these figures to the full population in this target group to estimate sales volume. Even then, the estimate is uncertain because people do not always carry out their stated intentions.
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1. Do you understand the concept of a fuel-cell-powered electric car?

2. Do you believe the claims about the car's performance?

3. What are the major benefits of the fuel-cell-powered electric car compared with a conventional car?

4. What are its advantages compared with a batter-powered electric car?

5. What improvements in the car's features would you suggest?

6. For what uses would you prefer a fuel-cell-powered electric car to a conventional car?

7. What would be a reasonable price to charge for the car?

8. Who would be involved in your decision to buy such a car? Who would drive it?

9. Would you buy such a car? (Definitely, probably, probably not, definitely not)

Step.IV: Marketing Strategy Development

Suppose DaimlerChrysler finds that concept 3 for the fuel-cell-powered electric car tests best. The next step is marketing strategy development, designing an initial marketing strategy for introducing this car to the market.


The marketing strategy statement consists of three parts:

• the target market, the product Differentiation & positioning, the sales, market share, and profit goals for the first few years.


• the product's planned price, distribution, and marketing budget for the first year.


• the planned long-run sales, profit goals, and marketing mix strategy.

Thus for Daimler Chrysler :



The 1st Part:

The target market is younger, well-educated, moderate-to-high-income individuals, couples, or small families seeking practical, environmentally responsible transportation. The car will be positioned as more economical to operate, more fun to drive, and less polluting than today's internal combustion engine cars, and as less restricting than battery-powered electric cars, which must be recharged regularly. The company will aim to sell 100,000 cars in the first year, at a loss of not more than $15 million. In the second year, the company will aim for sales of 120,000 cars and a profit of $25 million.

The 2nd part:

The fuel-cell-powered electric car will be offered in three colors—red, white, and blue—and will have optional air-conditioning and power-drive features. It will sell at a retail price of $20,000—with 15 percent off the list price to dealers. Dealers who sell more than 10 cars per month will get an additional discount of 5 percent on each car sold that month. An advertising budget of $20 million will be split 50–50 between national and local advertising. Advertising will emphasize the car's fun and low emissions. During the first year, $100,000 will be spent on marketing research to find out who is buying the car and their satisfaction levels.

The 3rd part:

DaimlerChrysler intends to capture a 3 percent long-run share of the total auto market and realize an after-tax return on investment of 15 percent. To achieve this, product quality will start high and be improved over time. Price will be raised in the second and third years if competition permits. The total advertising budget will be raised each year by about 10 percent.Marketing research will be reduced to $60,000 per year after the first year.

Stage.V: Business Analysis

Once management has decided on its product concept and marketing strategy, it can evaluate the business attractiveness of the proposal. Business analysis involves a review of the sales, costs, and profit projections for a new product to find out whether they satisfy the company's objectives. If they do, the product can move to the product development stage.


To estimate sales, the company might look at the sales history of similar products and conduct surveys of market opinion. It can then estimate minimum and maximum sales to assess the range of risk. After preparing the sales forecast, management can estimate the expected costs and profits for the product, including marketing, R&D, operations, accounting, and finance costs. The company then uses the sales and costs figures to analyze the new product's financial attractiveness.

Stage.VI: Product Development

So far, for many new-product concepts, the product may have existed only as a word description or a drawing. If the product concept passes the business test, it moves into product development. Here, R&D or engineering develops the product concept into a physical product. The product development step, however, now calls for a large jump in investment. It will show whether the product idea can be turned into a workable product.


The R&D department will develop and test one or more physical versions of the product concept. R&D hopes to design a prototype that will satisfy and excite consumers and that can be produced quickly and at budgeted costs. Developing a successful prototype can take days, weeks, months, or even years. Often, products undergo rigorous functional tests to make sure that they perform safely and effectively. Here are some examples of such functional tests:

• A scuba-diving Barbie doll must swim and kick for 15 straight hours to satisfy Mattel that she will last at least one year. But because Barbie may find her feet in small owners' mouths rather than in the bathtub, Mattel has devised another, more torturous test: Barbie's feet are clamped by two steel jaws to make sure that her skin doesn't crack—and choke—potential owners.

The prototype must have the required functional features and also convey the intended psychological characteristics. The electric car, for example, should strike consumers as being well built, comfortable, and safe. Management must learn what makes consumers decide that a car is well built. To some consumers, this means that the car has "solid-sounding" doors. To others, it means that the car is able to withstand heavy impact in crash tests. Consumer tests are conducted in which consumers test-drive the car and rate its attributes.

Stage.VII: Test Marketing

If the product passes functional and consumer tests, the next step is test marketing, the stage at which the product and marketing program are introduced into more realistic market settings. Test marketing gives the marketer experience with marketing the product before going to the great expense of full introduction. It lets the company test the product and its entire marketing program—positioning strategy, advertising, distribution, pricing, branding and packaging, and budget levels.



The amount of test marketing needed varies with each new product. Test marketing costs can be enormous, and it takes time that may allow competitors to gain advantages. When the costs of developing and introducing the product are low, or when management is already confident about the new product, the company may do little or no test marketing. Companies often do not test-market simple line extensions or copies of successful competitor products.

For example, Procter & Gamble introduced its Folger's decaffeinated coffee crystals without test marketing, and Pillsbury rolled out Chewy granola bars and chocolate-covered Granola Dipps with no standard test market. However, when introducing a new product requires a big investment, or when management is not sure of the product or marketing program, a company may do a lot of test marketing. For instance, Lever USA spent two years testing its highly successful Lever 2000 bar soap in Atlanta before introducing it internationally. Frito-Lay did eighteen months of testing in three markets on at least five formulations before introducing its Baked Lays line of low-fat snacks.

The costs of test marketing can be high, but they are often small when compared with the costs of making a major mistake. For example, Nabisco's launch of one new product without testing had disastrous—and soggy—results:

Nabisco hit a marketing home run with its Teddy Grahams, teddy-bear-shaped graham crackers in several different flavors. So, the company decided to extend Teddy Grahams into a new area. In 1989, it introduced chocolate, cinnamon, and honey versions of Breakfast Bears Graham Cereal. When the product came out, however, consumers didn't like the taste enough, so the product developers went back to the kitchen and modified the formula. But they didn't test it. The result was a disaster. Although the cereal may have tasted better, it no longer stayed crunchy in milk, as the advertising on the box promised. Instead, it left a gooey mess of graham mush on the bottom of cereal bowls. Supermarket managers soon refused to restock the cereal, and Nabisco executives decided it was too late to reformulate the product again. So a promising new product was killed through haste to get it to market.

When using test marketing, consumer products companies usually choose one of three approaches—standard test markets, controlled test markets, or simulated test markets.

Standard Test Markets

Using standard test markets, the company finds a small number of representative test cities, conducts a full marketing campaign in these cities, and uses store audits, consumer and distributor surveys, and other measures to gauge product performance.


The results are used to forecast national sales and profits, discover potential product problems, and fine-tune the marketing program.


Standard test markets have some drawbacks:

• They can be very costly and they may take a long time—some last as long as three years.


• Competitors can monitor test market results or even interfere with them by cutting their prices in test cities, increasing their promotion, or even buying up the product being tested.


• Competitors may have time to develop defensive strategies, and may even beat the company's product to the market.

For example, while Clorox was still test marketing its new detergent with bleach in selected markets, P&G launched Tide with Bleach nationally. Tide with Bleach quickly became the segment leader; Clorox later withdrew its detergent.

Despite these disadvantages, standard test markets are still the most widely used approach for major market testing. However, many companies today are shifting toward quicker and cheaper controlled and simulated test marketing methods.

Controlled Test Markets

Several research firms keep controlled panels of stores that have agreed to carry new products for a fee.


Controlled test marketing systems like Nielsen's Scantrack and Information Resources, Inc.'s (IRI) BehaviorScan track individual behavior from the television set to the checkout counter. IRI keeps panels of 2,000 to 3,000 shoppers in 6 carefully selected markets.

It measures TV viewing in each panel household and can send special commercials to panel member television sets. Panel consumers buy from cooperating stores and show identification cards when making purchases.


Within test stores, IRI controls such factors as shelf placement, price, and in-store promotions. Detailed electronic scanner information on each consumer's purchases is fed into a central computer, where it is combined with the consumer's demographic and TV viewing information and reported daily. Thus, BehaviorScan can provide store-by-store, week-by-week reports on the sales of new products being tested. Because the scanners record the specific purchases of individual consumers, the system also can provide information on repeat purchases and the ways that different types of consumers are reacting to the new product, its advertising, and various other elements of the marketing program.



Controlled test markets usually cost less than standard test markets and take less time (6 months to a year). A typical BehaviorScan test takes 16 to 24 months to complete. However, some companies are concerned that the limited number of small cities and panel consumers used by the research services may not be representative of their products' markets or target consumers. As in standard test markets, controlled test markets allow competitors to get a look at the company's new product.

Simulated Test Markets

Companies can also test new products in a simulated shopping environment. The company or research firm shows ads and promotions for a variety of products, including the new product being tested, to a sample of consumers. It gives consumers a small amount of money and invites them to a real or laboratory store where they may keep the money or use it to buy items.


The researchers note how many consumers buy the new product and competing brands. This simulation provides a measure of trial and the commercial's effectiveness against competing commercials.

The researchers then ask consumers the reasons for their purchase or nonpurchase. Some weeks later, they interview the consumers by phone to determine product attitudes, usage, satisfaction, and repurchase intentions. Using sophisticated computer models, the researchers then project national sales from results of the simulated test market. Recently, some marketers have begun to use interesting new high-tech approaches to simulated test market research, such as virtual reality and the Internet.


Simulated test markets overcome some of the disadvantages of standard and controlled test markets. They usually cost much less, can be run in eight weeks, and keep the new product out of competitors' view. Yet, because of their small samples and simulated shopping environments, many marketers do not think that simulated test markets are as accurate or reliable as larger, real-world tests. Still, simulated test markets are used widely, often as "pretest" markets. Because they are fast and inexpensive, they can be run to quickly assess a new product or its marketing program. If the pretest results are strongly positive, the product might be introduced without further testing. If the results are very poor, the product might be dropped or substantially redesigned and retested. If the results are promising but indefinite, the product and marketing program can be tested further in controlled or standard test markets.

Stage.VIII: Commercialization

Test marketing gives management the information needed to make a final decision about whether to launch the new product. If the company goes ahead with commercialization—introducing the new product into the market—it will face high costs. The company will have to build or rent a manufacturing facility. It may have to spend, in the case of a new consumer packaged good, between $10 million and $200 million for advertising, sales promotion, and other marketing efforts in the first year.

• The company launching a new product must first decide on introduction timing (When?).

If DaimlerChrysler's new fuel-cell electric car will eat into the sales of the company's other cars, its introduction may be delayed. If the car can be improved further, or if the economy is down, the company may wait until the following year to launch it.

• Next, the company must decide (where?) to launch the new product—in a single location, a region, the national market, or the international market.

Few companies have the confidence, capital, and capacity to launch new products into full national or international distribution. They will develop a planned market rollout over time.


In particular, small companies may enter attractive cities or regions one at a time. Larger companies, however, may quickly introduce new models into several regions or into the full national market.


Companies with international distribution systems may introduce new products through global rollouts.

Colgate-Palmolive uses a "lead-country" strategy. For example, it launched its Palmolive Optims shampoo and conditioner first in Australia, the Philippines, Hong Kong, and Mexico, then rapidly rolled it out into Europe, Asia, Latin America, and Africa. However, international companies are increasingly introducing their new products in swift global assaults. Procter & Gamble did this with its Pampers Phases line of disposable diapers, which it had on the shelf in 90 countries within just 12 months of introduction. Such rapid worldwide expansion solidified the brand's market position before foreign competitors could react. P&G has since mounted worldwide introductions of several other new products.

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Colgate-Palmolive introduces its new products internationally using a "lead country" strategy, launching the product first in a few important regions, followed by a swift global rollout.

• Then, the company must decided the target customer (To Whom?) Within the roll-out markets, the company must target its distribution and promotion to customer groups who represent the best prospects. These prime prospects should have been profiled by the firm in earlier research and test marketing.

For instance, When The European newspaper launched a multimedia version of the paper, it was initially targeted at professionals, who were sent an electronic version of the paper via telephone to personal computers at work.

Generally, firms must fine-tune their targeting efforts, starting with the innovators, then looking especially for early adopters, heavy users and opinion leaders. Opinion leaders are particularly important as their endorsement of the new product has a powerful impact upon adoption by other buyers in the marketplace.

• The company also must develop an action plan for introducing the new product into the selected markets (How?). It must spend the marketing budget on the marketing mix and various other activities.

For example, in August 1995, Microsoft introduced its Windows 95 operating system for personal computers in a fanfare of publicity. Observers estimated that the company spent some §1 billion, one of the biggest ever blitzes in advertising. The company paid up to $600,000 to fund 1.5 million copies of the software for The Times newspaper in London on the day of the product's launch. The soundtrack to the campaign was the Rolling Stones song, 'Start me up', for which the company had to pay $8 million. The first European markets to get Windows 95 were Benelux, France, Ireland and the United Kingdom, followed immediately by Denmark, Finland, Germany, Norway, Portugal, Spain and Sweden, and then Greece. Distributors the world over wanted to be the first to sell a copy of the software. Thousands queued late at night
outside stores for the first copies. The world's first buyer was a business student in New Zealand, 12 hours ahead of the European launch!

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Source:

Principles of Marketing – Kotler & Armstrong.
The Product Manager's Handbook.