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.
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.
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.
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
- 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.
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.
- Case Study for Concept Development & Testing
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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:
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.
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!
Source:
Principles of Marketing – Kotler & Armstrong.
The Product Manager's Handbook.
