Chapter 5 Developing New Market Offerings

Once a company has carefully segmented the market, chosen its target customers, identified their needs, and determined its market positioning, it is better able to develop new products. Marketers play a key role in the new-product process, by identifying and evaluating new-product ideas and working with R&D and others in every stage of development. Every company must develop new products. New-product development shapes the companys future. Replacement products must be created to maintain or build sales. Customers want new products, and competitors will do their best to supply them. Each year over 16,000 new products (including line extensions and new brands) are introduced into groceries and drugstores. A company can add new products through acquisition or development. The acquisition route can take three forms. The company can buy other companies, it can acquire patents from other companies, or it can buy a license or franchise from another company. The development route can take two forms. The company can develop new products in its own laboratories. Or it can contract with independent researchers or new-product-development firms to develop specific new products. Six Categories of a New Product: 1. New-to-the-world products: New products that create an entirely new market. 2. New product lines: New products that allow a company to enter an established market for the first time. 3. Additions to existing product lines: New products that supplement a companys established product lines (package sizes, flavors, and so on). 4. Improvements and revisions of existing products: New products that provide improved performance or greater perceived value and replace existing products. 5. Repositionings: Existing products that are targeted to new markets or market segments. 6. Cost reductions: New products that provide similar performance at lower cost. Challenges in New-Product Development Companies that fail to develop new products are putting themselves at great risk. Their existing products are vulnerable to changing customer needs and tastes, new technologies, shortened product life cycles, and increased domestic and foreign competition. At the same time, new-product development is risky. Texas Instruments lost $660 million before withdrawing from the home computer business, RCA lost $500 million on its videodisc players, Federal Express lost $340 million on its Zap mail, Ford lost $250 million on its Edsel, DuPont lost an estimated $100 million on a synthetic leather called Corfam, and the British French Concorde aircraft will never recover its investment. Why do new products fail? A high-level executive pushes a favorite idea through in spite of negative market research findings. The idea is good, but the market size is overestimated. The product is not well designed. The product is incorrectly positioned in the market, not advertised effectively, or overpriced. Development costs are higher than expected. Competitors fight back harder than expected. Several other factors hinder new-product development: Shortage of important ideas in certain areas: There may be few ways left to improve some basic products (such as steel, detergents). Fragmented markets: Keen competition is leading to market fragmentation. Companies have to aim their new products at smaller market segments, and this can mean lower sales and profits for each product. Social and governmental constraints: New products have to satisfy consumer safety and environmental concerns. Government requirements slow down innovation in drugs, toys, and some other industries. Costliness of the development process: A company typically has to generate many ideas to find just one worthy of development. Furthermore, the company often faces high R&D, manufacturing, and marketing costs. Capital shortages: Some companies with good ideas cannot raise the funds needed to research and launch them. Shorter product life cycles: When a new product is successful, rivals are quick to copy it. Sony used to enjoy a three-year lead on its new products. Now Matsushita will copy the product within six months, leaving hardly enough time for Sony to recoup its investment.

What can a company do to develop successful new products? Cooper and Kleinschmidt found that the number-one success factor is a unique, superior product. Products with a high product advantage succeed 98 percent of the time, compared to products with a moderate advantage (58 percent success) or minimal advantage (18 percent success). Another key success factor is a well-defined product concept prior to development. The company carefully defines and assesses the target market, product requirements, and benefits before proceeding. Other success factors are technological and marketing synergy, quality of execution in all stages, and market attractiveness Madique and Zirger, in a study of successful product launches in the electronics industry, found eight factors accounting for new-product success. New-product success is greater the deeper the companys understanding of customer needs, the higher the performance-to-cost ratio, the earlier the product is introduced ahead of competition, the greater the expected contribution margin, the more spent on announcing and launching the product, the greater the top management support, and the greater the cross-functional teamwork New-product development is most effective when there is teamwork among R&D, engineering, manufacturing, purchasing, marketing, and finance. The product idea must be researched from a marketing point of view, and a specific cross-functional team must guide the project throughout its development. Studies of Japanese companies show that their new-product successes are due in large part to cross-functional teamwork.

MANAGING THE DEVELOPMENT PROCESS: IDEAS Idea Generation The new-product development process starts with the search for ideas. Top managers should define the product and market scope and the new products objectives. They should state how much effort should be devoted to developing breakthrough products, modifying existing products, and copying competitors products. New-product ideas can come from many sources: customers, scientists, competitors, employees, channel members, and top management. The marketing concept holds that customer needs and wants are the logical place to start the search for ideas. Hippel has shown that the highest percentage of ideas for new industrial products originate with customers.11 Technical companies can learn a great deal by studying their lead users, those customers who make the most advanced use of the companys products and who recognize the need for improvements before other customers do. Many of the best ideas come from asking customers to describe their problems with current products Successful companies have established a company culture that encourages every employee to seek new ways of improving production, products, and services. Toyota claims its employees submit 2 million ideas annually (about 35 suggestions per employee),

over 85 percent of which are implemented. Kodak and other firms give monetary, holiday, or recognition awards to employees who submit the best ideas Companies can also find good ideas by researching their competitors products and services. They can learn from distributors, suppliers, and sales representatives. They can find out what customers like and dislike in their competitors products. They can buy their competitors products, take them apart, and build better ones. Company sales representatives and intermediaries are a particularly good source of ideas. These groups have firsthand exposure to customers and are often the first to learn about competitive developments. Idea Screening In screening ideas, the company must avoid two types of errors. A DROP-error occurs when the company dismisses an otherwise good idea. It is extremely easy to find fault with other peoples ideas. Some companies shudder when they look back at ideas they dismissed: Marshall Field understood the unique market-development possibilities of installment buying; Endicott Johnson did not. Sears dismissed the importance of discounting; Wal-Mart and Kmart did not.13 If a company makes too many DROP-errors, its standards are too conservative. A GO-error occurs when the company permits a poor idea to move into development and commercialization. We can distinguish three types of product failures. An absolute product failure loses money; its sales do not cover variable costs. A partial product failure loses money, but its sales cover all its variable costs and some of its fixed costs. A relative product failure yields a profit that is less than the companys target rate of return. The purpose of screening is to drop poor ideas as early as possible. The rationale is that product-development costs rise substantially with each successive development stage. MANAGING THE DEVELOPMENT PROCESS: CONCEPTS TO STRATEGY: A product idea is a possible product the company might offer to the market. A product concept is an elaborated version of the idea expressed in meaningful consumer terms Concept Development Concept development can be illustrated with the following situation: A large food processing company gets the idea of producing a powder to add to milk to increase its nutritional value and taste. This is a product idea. But consumers do not buy product ideas; they buy product concepts. A product idea can be turned into several concepts. The first question is: Who will use this product? The powder can be aimed at infants, children, teenagers, young or middle-aged adults, or older adults. Second, what primary benefit should this product provide? Taste, nutrition, refreshment, energy? Third, when will people consume this drink? Breakfast, midmorning, lunch, midafternoon, dinner, late evening? By answering these questions, a company can form several concepts: Concept 1: An instant breakfast drink for adults who want a quick nutritious breakfast without preparing a breakfast. Concept 2: A tasty snack drink for children to drink as a midday refreshment. Concept 3: A health supplement for older adults to drink in the late evening before they go to bed. Marketing Strategy Development After testing, the new-product manager must develop a preliminary marketing-strategy plan for introducing the new product into the market. The plan consists of three parts. The first part describes the target markets size, structure, and behavior; the planned product positioning; and the sales, market share, and profit goals sought in the first few years: The target market for the instant breakfast drink is families with children who are receptive to a new, convenient, nutritious, and inexpensive form of breakfast. The companys brand will be positioned at the higher -price, higher-quality end of the instant-breakfastdrink category. The company will aim initially to sell 500,000 cases or 10 percent of the market, with a loss in the first year not exceeding $1.3 million. The second year will aim for 700,000 cases or 14 percent of the market, with a planned profit of $2.2 million. The second part outlines the planned price, distribution strategy, and marketing budget for the first year: The product will be offered in chocolate, vanilla, and strawberry in individual packets of six to a box at a retail price of $2.49 a box. There will be 48 boxes per case, and the case price to distributors will be $24. For the first two months, dealers will be offered one case free for every four cases bought, plus cooperative-advertising allowances. Free samples will be distributed door to door. Coupons for 20 off will appear in newspapers. The total sales-promotional budget will be $2.9 million. An advertising budget of $6 million will be split 50:50 between national and local. Two-thirds will go into television and one-third into newspapers. Advertising copy will emphasize the benefit concepts of nutrition and convenience. The advertising-execution concept will revolve around a small boy who drinks instant breakfast and grows strong. During the first year, $100,000 will be spent on marketing research to buy store audits and consumer-panel information to monitor market reaction and buying rates. The third part of the marketing-strategy plan describes the long-run sales and profit goals and marketing-mix strategy over time:

The company intends to win a 25 percent market share and realize an after- tax return on investment of 12 percent. To achieve this return, product quality will start high and be improved over time through technical research. Price will initially be set at a high level and lowered gradually to expand the market and meet competition. The total promotion budget will be boosted each year about 20 percent, with the initial advertisingsales promotion split of 65:35 evolving eventually to 50:50. Marketing research will be reduced to $60,000 per year after the first year. Business Analysis After management develops the product concept and marketing strategy, it can evaluate the proposals business attractiveness. Management needs to prepare sales, cost, and profit projections to determine whether they satisfy company objectives. If they do, the product concept can move to the product-development stage. As new information comes in, the business analysis will undergo revision and expansion. Estimating Total Sales Management needs to estimate whether sales will be high enough to yield a satisfactory profit. Total estimated sales are the sum of estimated first-time sales, replacement sales, and repeat sales. Sales-estimation methods depend on whether the product is a one-time purchase (such as an engagement ring or retirement home), an infrequently purchased product, or a frequently purchased product. For one-time purchased products, sales rise at the beginning, peak, and later approach zero as the number of potentialbuyers is exhausted. Estimating Costs and Profits After preparing the sales forecast, management should estimate expected costs and profits. Costs are estimated by the R&D, manufacturing, marketing, and finance departments. MANAGING THE DEVELOPMENT PROCESS: DEVELOPMENT TO COMMERCIALIZATION Product Development If the product concept passes the business test, it moves to R&D or engineering to be developed into a physical product. Up to now it has existed only as a word description, a drawing, or a prototype. This step involves a large jump in investment that dwarfs the costs incurred in the earlier stages. At this stage the company will determine whether the product idea can be translated into a technically and commercially feasible product. If it cannot, the accumulated project cost will be lost except for any useful information gained in the process. The job of translating target customer requirements into a working prototype is helped by a set of methods known as quality function deployment (QFD). The methodology takes the list of desired customer attributes (CAs) generated by market research and turns them into a list of engineering attributes (EAs) that the engineers can use. The R&D department will develop one or more physical versions of the product concept. Its goal is to find a prototype that consumers see as embodying the key attributes described in the product-concept statement, that performs safely under normal use and conditions, and that can be produced within the budgeted manufacturing costs. Developing and manufacturing a successful prototype can take days, weeks, months, or even years. When the prototypes are ready, they must be put through rigorous functional tests and customer tests. Alpha testing is the name given to testing the product within the firm to see how it performs in different applications. After refining the prototype further, the company moves to beta testing. It enlists a set of customers to use the prototype and give feedback on their experiences. Beta testing is most useful when the potential customers are heterogeneous, the potential applications are not fully known, several decision makers are involved in purchasing the product, and opinion leadership from early adopters is sought. Consumer testing can take a variety of forms, from bringing consumers into a laboratory to giving them samples to use in their homes. In-home placement tests are common with products ranging from ice cream flavors to new appliances. When DuPont developed its new synthetic carpeting, it installed free carpeting in several homes in exchange for the homeowners willingness to report their likes and dislikes about the carpeting. Consumer preferences can be measured in several ways. Suppose a consumer is shown three items A, B, and C, such as three cameras, three insurance plans, or three advertisements. The rank-order method asks the consumer to rank the three items in order of preference. The consumer might respond with A _ B _ C. Although this method has the advantage of simplicity, it does not reveal how intensely the consumer feels about each item nor whether the consumer likes any item very much. It is also difficult to use this method when there are many objects to be ranked. The paired-comparison method calls for presenting pairs of items and asking the consumer which one is preferred in each pair. Thus the consumer could be presented with the pairs AB, AC, and BC and say that she prefers A to B, A to C, and B to C. Then

we could conclude that A _ B _ C. People find it easy to state their preference between two items, and this method allows the consumer to focus on the two items, noting their differences and similarities. The monadic-rating method asks the consumer to rate liking of each product on a scale. Suppose a seven-point scale is used, where 1 signifies intense dislike, 4 indifference, and 7 intense like. Suppose the consumer returns the following ratings: A _ 6, B _ 5, C _ 3. We can derive the individuals preference order (i.e. A _ B _ C) and even know the qualitative levels of the persons preference for each and the rough distance between preferences.

Market Testing After management is satisfied with functional and psychological performance, the product is ready to be dressed up with a brand name and packaging, and put to a market test. The new product is introduced into an authentic setting to learn how large the market is and how consumers and dealers react to handling, using, and repurchasing the product. Procter & Gamble spent two years market testing its new no-calorie fat substitute, Olestra. While the Food and Drug Administration approved the new product in 1996, a very small percentage (estimated at 2 percent) of consumers experienced stomach problems and the indelicately named side effect, anal leakage. The company made a slight change in the formula, but even after test marketing has proved that this side effect does not occur, the FDA requires that every package containing food made with Olestra bear a label that reads: This product contains Olestra. Olestra may cause abdominal cramping and loose stools. Olestra inhibits the absorption of some vitamins and other nutrients. Consumer-Goods Market Testing In testing consumer products, the company seeks to estimate four variables: trial, first repeat, adoption, and purchase frequency. The company hopes to find all these variables at high levels. In some cases, it will find many consumers trying the product but few rebuying it. Or it might find high permanent adoption but low purchase frequency (as with gourmet frozen foods). Major methods of consumer-goods market testing: Sales-Wave Research. In sales-wave research, consumers who initially try the product at no cost are reoffered the product, or a competitors product, at slightly reduced prices. They might be reoffered the product as many as three to five times (sales w aves), with the company noting how many customers selected that companys product again an d their reported level of satisfaction. Saleswave research can also include exposing consumers to one or more advertising concepts to see the impact of that advertising on repeat purchase. Simulated Test Marketing. Simulated test marketing calls for finding 30 to 40 qualified shoppers and questioning them about brand familiarity and preferences in a specific product category. These people are then invited to a brief screening of both well-known and new commercials or print ads. One ad advertises the new product, but it is not singled out for attention. Consumers receive a small amount of money and are invited into a store where they may buy any items. The company notes how many consumers buy the new brand and competing brands. This provides a measure of the ads relative effectiveness against competing ads in stimulating trial. Consumers are asked the reasons for their purchases or nonpurchases. Those who did not buy the new brand are given a free sample. Some weeks later, they are reinterviewed by phone to determine product attitudes, usage, satisfaction, and repurchase intention and are offered an opportunity to repurchase any products. Controlled Test Marketing. In this method, a research firm manages a panel of stores that will carry new products for a fee. The company with the new product specifies the number of stores and geographic locations it wants to test. The research firm delivers the product to the participating stores and controls shelf position; number of facings, displays, and point-of-purchase promotions; and pricing. Sales results can be measured through electronic scanners at the checkout. The company can also evaluate the impact of local advertising and promotions during the test. Test Markets. The ultimate way to test a new consumer product is to put it into full-blown test markets. The company chooses a few representative cities, and the sales force tries to sell the trade on carrying the product and giving it good shelf exposure. The company puts on a full advertising and promotion campaign in these markets similar to the one that it would use in national marketing. A fullscale test can cost over $1 million, depending on the number of test cities, the test duration, and the amount of data the company wants to collect. Business-Goods Market Testing Business goods can also benefit from market testing. Expensive industrial goods and new technologies will normally undergo alpha testing (within the company) and beta testing (with outside customers). During beta testing, the vendors technical people observe how test customers use the product, a practice that often exposes unanticipated problems of safety and servicing and alerts the vendor to customer training and servicing requirements. The vendor can also observe how much value the equip ment adds to the customers operation as a clue to subsequent pricing. The vendor will ask the test customers to express their purchase intention and other reactions after the test.

The test customers benefit in several ways: They can influence product design, gain experience with the new product ahead of competitors, receive a price break in return for cooperation, and enhance their reputation as technological pioneers. Vendors must carefully interpret the beta test results because only a small number of test customers are used, they are not randomly drawn, and the tests are somewhat customized to each site. Another risk is that test customers who are unimpressed with the product may leak unfavorable reports about it. A second common test method for business goods is to introduce the new product at trade shows. Trade shows draw a large number of buyers, who view many new products in a few concentrated days. The vendor can observe how much interest buyers show in the new product, how they react to various features and terms, and how many express purchase intentions or place orders. Book publishers, for instance, regularly launch their fall titles at the American Booksellers Association convention each spring. There they display page proofs wrapped in dummy book covers. If a large bookstore chain objects to a cover design or title of a promising new book, the publisher will consider changing the cover or title. The disadvantage of trade shows is that they reveal the product to competitors; therefore, the vendor should be ready to launch the product soon after the trade show. New industrial products can be tested in distributor and dealer display rooms, where they may stand next to the manufacturer s other products and possibly competitors products. This method yields preference and pricing information in the products normal selling atmosphere. The disadvantages are that the customers might want to place early orders that cannot be filled, and those customers who come in might not represent the target market. Industrial manufacturers come close to using full test marketing when they give a limited supply of the product to the sales force to sell in a limited number of areas that receive promotion support and printed catalog sheets. In this way, management can make a more informed decision about commercializing the product. Commercialization If the company goes ahead with commercialization, it will face its largest costs to date. The company will have to contract for manufacture or build or rent a full-scale manufacturing facility. Plant size will be a critical decision. The company can build a smaller plant than called for by the sales forecast, to be on the safe side. That is what Quaker Oats did when it launched its 100 Percent Natural breakfast cereal. The demand so exceeded the companys sales forecast that for about a year it could not supply enough product to the stores. Although Quaker Oats was gratified with the response, the low forecast cost it a considerable amount of profit. Another major cost is marketing. To introduce a major new consumer packaged good into the national market, the company may have to spend between $20 million and $80 million in advertising and promotion in the first year. In the introduction of new food products, marketing expenditures typically represent 57 percent of sales during the first year. When (Timing) In commercializing a new product, market-entry timing is critical. Suppose a company has almost completed the development work on its new product and learns that a competitor is nearing the end of its development work. The company faces three choices: 1. First entry: The first firm entering a market usually enjoys the first mover advantages of locking up key distributors and customers and gaining reputational leadership. But, if the product is rushed to market before it is thoroughly debugged, the product can acquire a flawed image. 2. Parallel entry: The firm might time its entry to coincide with the competitors entry. The market may pay more attention when two companies are advertising the new product. 3. Late entry: The firm might delay its launch until after the competitor has entered. The competitor will have borne the cost of educating the market. The competitors product may reveal faults the late entrant can avoid. The com pany can also learn the size of the market. The timing decision involves additional considerations. If a new product replaces an older product, the company might delay the introduction until the old products stock is drawn down. If the product is highly seasonal, it might be delayed until the right season arrives Where (Geographic Strategy) The company must decide whether to launch the new product in a single locality, a region, several regions, the national market, or the international market. Most will develop a planned market rollout over time. Most companies design new products to sell primarily in the domestic market. If the product does well, the company considers exporting to neighboring countries or the world market, redesigning if necessary To Whom (Target-Market Prospects) Within the rollout markets, the company must target its initial distribution and promotion to the best prospect groups. Presumably, the company has already profiled the prime prospects, who would ideally have the following characteristics: They would be early adopters, heavy users, and opinion leaders, and they could be reached at a low cost. Few groups have all these characteristics.

How (Introductory Market Strategy) The company must develop an action plan for introducing the new product into the rollout markets. With its debut in 1998, the competitively priced iMac represented Apple Computers reentry into the computer PC business after a hiatus of 14 years. The company staged a massive marketing blitz to launch the new machine CONSUMER ADOPTION PROCESS How do potential customers learn about new products, try them, and adopt or reject them? ( Adoption is an individuals decision to become a regular user of a product.) The consumer-adoption process is later followed by the consumer-loyalty process, which is the concern of the established producer. Years ago, new-product marketers used a mass-market approach in launching products. They would distribute a product everywhere and advertise it to everyone on the assumption that most people are potential buyers. This approach had two main drawbacks: It called for heavy marketing expenditures, and it involved many wasted exposures to people who are not potential consumers. These drawbacks led to a second approach, heavy-user target marketing, where the product is initially aimed at heavy users. This approach makes sense, provided that heavy users are identifiable and are early adopters. But even within the heavy-user group, consumers differ in interest in new products and brands; many heavy users are loyal to existing brands. Many new-product marketers now aim at consumers who are early adopters Stages in the Adoption Process An innovation refers to any good, service, or idea that is perceived by someone as new. The idea may have a long history, but it is an innovation to the person who sees it as new. Innovations take time to spread through the social system. Rogers defines the innovation diffusion process as the spread of a new idea from its source of invention or creation to its ultimate users or adopters.43 The consumer-adoption process focuses on the mental process through which an individual passes from first hearing about an innovation to final adoption. Adopters of new products have been observed to move through five stages: 1. Awareness: The consumer becomes aware of the innovation but lacks information about it. 2. Interest: The consumer is stimulated to seek information about the innovation. 3. Evaluation: The consumer considers whether to try the innovation. 4. Trial: The consumer tries the innovation to improve his or her estimate of its value. 5. Adoption: The consumer decides to make full and regular use of the innovation.