New Product Development

Risky Business

95% of new businesses fail in the first 5 years

Failure rates for new consumer packaged goods:

1961 45.6%1971 53.4%1981 64.5%1991 80.0%

Why Introduce New Products?Large Firms

• If you do not attack your own brands someone else will (Barco)

• Approximately 30% of corporate profits come from new products (5 years old or less)

• Innovation by large firms tends to be more incremental despite:– additional resources – greater risk of cannibalization– lower risk aversion

Why Introduce New Products?Start-Ups

Not aware of the risks

• Never hear about the failures

• Over-estimate own abilities

Positive expected return despite the risks

• Large upside

• Can manage downside (jumping into a cold pool)

Test Before You Leap

Success Cost / TotalStage Ideas Ratio Idea Cost

Idea Screening 64 1:4 $1,000 $64,000Concept Test 16 1:2 $20,000 $320,000Product Development 8 1:2 $200,000 $1,600,000Test Marketing 4 1:2 $500,000 $2,000,000National Launch 2 1:2 $5,000,000 $10,000,000

Stages in the Process

1. Idea generation

2. Screening

3. Concept testing

4. Product development

5. Market testing

6. Launch

Business plan

Idea Generation: Examples

Channel suggestions: aspirin prevents heart attacks

Foreign markets : Muesli breakfast cereal

Consumers: Lite beer

Basic research: nylon

Competitors: diet colas

Employees: baking soda is a deodorizer

Existing products: personal computers

Idea ScreeningConservatively screen impractical, infeasible or unmarketable ideas

Set Criteria: product can be introduced within 5 yearsmarket potential of at least $50 millionmarket has at least a 15% growth rateproduct will yield at least 30% return on salesproduct will yield at least 40% return on investmentproduct will achieve technical or market leadership

Allow trade-offs between criteria

Separate tasks of sponsoring and evaluating the idea:start ups need a mentorbanks are not a good screen (SBA distortion)

Concept Testing

Product Concept:• target market • needs

Powder to add to milk to increase its nutritional value and taste

• An instant breakfast drink for adults who want a quick nutritious breakfast with little preparation

• A tasty snack drink for children as a midday refreshment

• A health supplement for older adults to drink before retiring

Concept Testing

A powdered product that is added to milk to make an instant breakfast providing all of the required nutrition in a convenient, tasty drink. The product would be offered in chocolate, vanilla and strawberry flavors and would be packaged individually and sold in packs of 6 for 79 cents.

1. Does this product satisfy a need for you?2. Do other products currently satisfy this need?3. Is the price reasonable in relation to value?4. Would you purchase this product?5. How frequently would you use this product?

Concept Testing

Begin informally (CD exchange service)

If advertising is important, advertise before the product is available

Do not ignore the results: “just using the wrong copy”

Business Plan

1. Strategic plan2. Tactics3. Financial predictions4. Timetable5. Hurdles

Business Plan: Financial Predictions

Estimate costs: additive

Estimate demand: multiplicativedo sensitivity analysis

Estimating demand is even harder when:– customers have multiple needs – customers’ needs vary (segments)– needs are measured on non-monetary scales– the product is very new/different– the benefits are hard to evaluate (need to predict credibility)

Product Development

Extensive topic of ongoing research

Examples:1. Involve suppliers:

– increase surplus (coordination)– share surplus (horizontal competition)

2. Resolve language problems:– House of Quality

Market Testing

Generally optimistic because attention is focussed

Consumer Products:– Simulated Test– Controlled Test– Test Market

Industrial products– Alpha Test– Beta Test– Test Market

Under-test: perceived risk of competitive entry

Launch

Few firms use a national or global launch

Phased roll-out is an extension of market testing

Which markets?

Example

Large industrial equipment manufacturer: EngTech

Idea Generation: Bain & Co. Idea Screening: Phase 1 research

Concept Testing: Phase 2 research Product Development: go/no go

Phase 1 Research

Screen out training services that customers do not need

Process: telephone interviews with 20 customers– do you need?– what do you currently do?– how much do you spend?– is EngTech appropriate?

Willingness to Pay

NEEDSegment

1Segment

2Segment

3Segment

4Segment

5

Operator Training

Technician Training

Engineer Training

Management Training

Number of Customers

PROFIT POTENTIAL Segment1

Segment2

Segment3

Segment4

Segment5

Operator Training

Technician Training

Engineer Training

Management Training

Factors: Willingness to PayNumber of CustomersCost of Delivery

Overall Attractiveness of Training Options

Operator Training

Technician Training

Engineer Training

Management Training

Phase 2 Research

Objectives: – identify whether to proceed with Product Development– identify customer response to different product features

Process:– e-mail interview with 20 customers– asked to choose between different product alternatives– varied delivery format, price and length of consulting services– focussed on concepts that survived the Phase 1 research

Phase 2 Results

• Many prefer these alternatives over their current solution.

• Strongly prefer on-site over interactive

• Price insensitive

• More depth is preferable to less depth

• Wide variance in number of operators from each plant who would be sent for training.