spend $20 million to $50 million to develop and advertise one new product—it is a wonder that companies continue to innovate at all. Yet product failures can serve one useful purpose: Inventors, entrepreneurs, and new-product team leaders can learn valuable lessons about what notto do.
Some of the reasons for new-product failure are: (1) a high-level executive pushes a favorite idea through in spite of negative market research findings; (2) the idea is good, but the market size is overestimated; (3) the product is not well designed;
(4) the product is incorrectly positioned, ineffectively advertised, or overpriced;
(5) development costs are higher than expected; or (6) competitors fight back harder than expected.
What can a company do to develop successful new products? Cooper and Kleinschmidt found that new products with a high product advantage succeed 98 per- cent of the time, compared to products with a moderate advantage (58 percent suc- cess) or minimal advantage (18 percent success).4Madique and Zirger studied suc- cessful product launches in the electronics industry and found greater new-product success when the firm: has a better understanding of customer needs; a higher performance-to-cost ratio; a head-start in introducing the product before competitors;
a higher expected contribution margin; a higher budget for promoting and launching the product; more use of cross-functional teamwork; and stronger top-management support.5
MANAGING NEW PRODUCTS: IDEAS TO STRATEGY
The process of developing new products spans eight stages, each with a particular set of marketing challenges and questions to answer (see Figure 3-8). If the company can- not answer “yes” to the key question at each of the first six stages, the new product will be dropped; in the final two stages, the company has the option of further develop- ment or modification rather than immediately dropping the new product. This sec- tion covers the stages from idea to strategy and analysis; the following section covers the stages from product development through market testing and commercialization.
Idea Generation
The marketing concept holds that customer needs and wantsare the logical place to start the search for new product ideas. Hippel has shown that the highest percentage of ideas for new industrial products originates with customers.6Many of the best ideas come from asking customers to describe their problems with current products. For instance, in an attempt to grab a foothold in steel wool soap pads, 3M organized con- sumer focus groups and asked about problems with these products. The most frequent complaint was that the pads scratched expensive cookware. This finding produced the idea for the highly successful Scotch-Brite Never Scratch soap pad.7In addition to cus- tomers, new-product ideas can come from many sources: scientists, competitors, employees, channel members, sales reps, top management, inventors, patent attor- neys, university and commercial laboratories, industrial consultants, advertising agen- cies, marketing research firms, and industry publications.
Idea Screening
Once the firm has collected a number of new product ideas, the next step is to screen out the weaker ideas, because product-development costs rise substantially with each successive development stage. Most companies require new-product ideas to be described on a standard form that can be reviewed by a new-product committee. The
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description states the product idea, the target market, and the competition, along with a rough estimate of the market size, product price, development time and costs, man- ufacturing costs, and rate of return. The new-product committee then reviews each idea against criteria such as: Does the product meet a need? Would it offer superior value? Will the new product deliver the expected sales volume, sales growth, and profit? The ideas that survive this screening move on to the concept development stage.
Concept Development
Aproduct ideais a possible product the company might offer to the market. In con- trast, a product conceptis an elaborated version of the idea expressed in meaningful consumer terms. A product idea can be turned into several concepts by asking: Who will use this product? What primary benefit should this product provide? When will people consume or use this product? By answering such questions, a company can often form several product concepts, select the single most promising concept, and create a product-positioning mapfor it. Figure 3-9 shows the positioning of a product concept, a low-cost instant breakfast drink, compared to other breakfast foods already on the market.
Next, the product concept has to be turned into a brand concept.To transform the concept of a low-cost instant breakfast drink into a brand concept, the company must decide how much to charge and how calorific to make its drink. Figure 3-9 shows a brand-positioning mapthat reflects the positions of three instant breakfast drink brands.
The gaps on this map indicate that the new brand concept would have to be distinctive in the medium-price, medium-calorie market or the high-price, high-calorie market.
Figure 3-8 The New-Product-Development Decision Process
Managing New Products: Ideas to Strategy 165
Concept Testing
Concept testing involves presenting the product concept to appropriate target con- sumers and getting their reactions. The concepts can be presented symbolically or physically. However, the more the tested concepts resemble the final product or expe- rience, the more dependable concept testing is. In the past, creating physical proto- types was costly and time-consuming, but computer-aided design and manufacturing programs have changed that. Today firms can design a number of prototypes via com- puter and then create plastic models to obtain feedback from potential consumers.8 Companies are also using virtual reality to test product concepts.
Many companies today use customer-driven engineeringto design new products.
Customer-driven engineering attaches high importance to incorporating customer preferences in the final design. National Semiconductor uses the Internet to enhance its customer-driven engineering by tracking what customers search for on its Web site.
Sometimes, says the company’s Web services manager, it is more important to know when a customer did not find a product than when he did. That helps National Semiconductor shrink the time needed to identify market niches and create new products.9
Marketing Strategy Development
After testing and selecting a product concept for development, the new-product man- ager must draft a three-part preliminary marketing-strategy plan for introducing the new product into the market. The first part will describe the target market’s size, struc- ture, and behavior; the planned product positioning; and the sales, market share, and profit goals sought in the first few years. The second part will outline the planned price, distribution strategy, and marketing budget for the first year. The third part will describe the long-run sales and profit goals and marketing-mix strategy over time. This plan forms the basis for the business analysis that is conducted before management makes a final decision on the new product.
Business Analysis
In this stage, the company evaluates the proposed new product’s business attractiveness by preparing sales, cost, and profit projections to determine whether these satisfy com-
Figure 3-9 Product and Brand Positioning
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pany objectives. If they do, the product concept can move to the product-development stage. Note that this cannot be a static process: As new information emerges, the busi- ness analysis must be revised and expanded accordingly.
Estimating Total Sales
First, management needs to estimate whether sales will be high enough to yield a sat- isfactory profit. Total estimated sales are the sum of estimated first-time sales, replace- ment sales, and repeat sales. For one-time purchased products, such as a retirement home, sales rise at the beginning, then peak, and later approach zero as the number of potential buyers is exhausted; if new buyers keep entering the market, the curve will not drop to zero. Infrequently purchased products—such as automobiles and indus- trial equipment—exhibit replacement cycles that are dictated by physical wearing out or by obsolescence due to changing styles, features, and performance; sales forecast- ing calls for estimating first-time sales and replacement sales separately.
For frequently purchased products, such as consumer and industrial non- durables like soap, the number of first-time buyers initially increases and then decreases as fewer buyers are left (assuming a fixed population). Repeat purchases occur soon, providing that the product satisfies some buyers. The sales curve eventu- ally falls to a plateau representing a level of steady repeat-purchase volume; by this time, the product is no longer a new product.
Estimating Costs and Profits
After preparing the sales forecast, management should analyze expected costs and profits based on estimates prepared by the R&D, manufacturing, marketing, and finance departments. Companies can also use other financial measures to evaluate new-product proposals. The simplest is break-even analysis,in which management esti- mates how many units of the product the company will have to sell to break even with the given price and cost structure.
The most complex method of estimating profit is risk analysis.Here, three esti- mates (optimistic, pessimistic, and most likely) are obtained for each uncertain vari- able affecting profitability under an assumed marketing environment and marketing strategy for the planning period. The computer simulates possible outcomes and com- putes a rate-of-return probability distribution showing the range of possible rates of returns and their probabilities.10