Chapter # 12

New product development

strategy
 New product development

Causes of New Product Failures

A high level executive push a favorable idea in spite
of negative market research findings;
Idea is good but market size is overestimated;
Product is not well design.
Product is incorrectly positioned.
Not advertised effectively or over-priced.
Product development cost is higher than expected
Product fails to gain sufficient distribution coverage.
Competitors fight back harder than expected.
 New product development
Several factors hinders new product
development:
Shortage of important idea in certain area.
Fragmented markets
Social and governmental constraints
Cost of development
Capital shortage
Faster required development time
To create successful
Shorter newcycle
product life products, the company must:
Understand it’s customers, markets and competitors
Develop products that deliver superior value to
customers.
 Y Lay
The new product development decision process e
future
plan
s
1. 2. 3. 4. 5. 6. 7. 8.
Idea Idea Concept Marketing Business Product Market Commer-
gene screening deve strategy analysis deve testing cialization
-ration -lopment Deve -lopment
and -lopment
Y Is the idea Y testing Y Y Y Y Y
e compatible e e e e Have we e e
s with s Can we s s developed s
s a
s
Is this company find a Can we Are
idea objective, good find a Will this technically Have product
worth strategies concept cost- product & product sales
consi and That effective, meet Commer sales meeting
dering? resources ? consumer affordable our -cially meeting sales
say they marketing profit sound expec expec
would strategy ? goal? product? -tation? -tation
try ?
No No
Y Would it
Should
e we send help to
No No No s the idea modify the
No No No back for product or
product marketing
development program

No No

Drop
 Step 1. Idea Generation
Idea generation is the systematic search for new
product ideas-the possible product the company might
offer to the market. Ideas can be obtained from –
customers
scientists
competitors
employees (sales representatives)
channel member
top executives
Other sources includes universities and
commercial laboratories, trade magazines, industrial
publications,seminars, gvt.agencies, advertising
agencies, marketing research firms etc.
 Step 2. Idea Screening

Process to spot good ideas and drop poor ones

as soon as possible.
Proposed ideas can be sorted into three groups -
 Promising ideas
 Marginal ideas
 Rejects

In screening idea, a company must avoid –

Drop error
Go error – can cause-
(a) An absolute product failure –
(b) A partial product failure
(c) A relative product failure
 Step 2. Idea Screening
Many companies have systems for rating screening ideas
which estimate:
 Market size
 Product price
 Development time & costs
 Manufacturing costs
 Rate of return

The idea is evaluated against a set of general criteria

 Does the product meet a need?
 Would it offer superior value?
 Can it be distinctively advertised?
 Does the company have the necessary know-how and capital
 Will the new product deliver the expected sales volume, sales
growth and profit?
 Step 2. Idea Screening
The surviving idea can be rated using a weight- index
method like –
Product success Relative Product Product
requirements weight score rating
(a) (b) (c= a*b)
Unique or superior product .40 .80 .32
High performance-to-cost ratio .30 .60 .18
High marketing dollar support .20 .70 .14
Lack of strong competition .10 .50 .05
Total 1.00 .69
Rating scale: .00-.30 poor, .31-.60 fair, .61-.80 good, Minimum acceptance rate : 61.
 Step 2. Idea Screening

Probability Probability
of of
Overall Probability commercia economic
profitability success
of = of technical
completion *
lization
given * given
success technical commercial
completion ization

= .50*.65*.74
= .24
 Step 3. Concept
Development & Testing

Concept Development – A detailed version of the

new product Ideas stated in meaningful consumer
terms.
Who will use this product ?
What primary benefit should the product provide?
 Step 3. Concept
Development & Testing
Concept Testing – involves presenting the product
concept to appropriate target customers and getting
their reaction.
The following factors can help to test a concept.
Communicability and believability
Need level
Gap level
Perceived value
Purchase intention
User targets, purchase occasions, purchasing
frequency
 Step 3. Concept
Development & Testing
Conjoint analysis: a method for deriving the utility
value that consumer attach to varying levels of a
product’s attributes.
Suppose, the product marketer is considering five
design elements:
Three package designs (A,B,C)
Three brand names (K2R,Glory,Bissell)
Three prices ($1.19, $1.39, $ 1.59)
A possible good housekeeping seal (yes, no)
A possible money back guarantee (yes, no)
 Step 3. Concept
Development & Testing
1 1 1

Utility
Utility
Utility

0 0 0
A B C K2R Glory Bissell $1.19 $1.39 $1.59

1 1
Utility

Utility

0 0
No Yes No Yes
 Step 4. Marketing
Strategy Development
Designing an initial marketing strategy for introducing
the new product into the market.
Part one describes:
Target market size, planned product positioning & the
sales, market share & profit goals for the first few
years.
Part two describes:
Short term product’s planned price, distribution
strategy, marketing budget for the first year.
Part Three Describes:
Long-term sales, profit goals & marketing mix strategy
 Step 5. Business Analysis
Business Analysis - Review of product sales, costs,
and profits projections to see if they meet company
objectives.
• Estimating total sales: the sum of estimated first
time sales, replacement sale, and repeat sales.
Replacement Repeat purchase
sales sales

Sales
Sales
Sales

Time Time Time

(a) One-time (b) Infrequent (C) Frequently
purchased product purchased product purchased product
 Step 5. Business Analysis
Estimating cost and profit
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Sales revenue $ 00 $11,889 $15,381 $19,654 $ 28,253 $ 32,491
Cost of goods sold 00 3,981 5,150 6,581 9,461 10,880
Gross margin 00 7,908 10,231 13,073 18,792 21,611
Development cost - 3,500 00 00 00 00 00
Marketing costs 00 8,000 6,460 8,255 11,866 13,646
Allocated overhead 00 1,189 1,538 1,965 2,825 3,249

Gross contribution -3,500 -1,281 2,233 2,853 4,101 4,716

Supplementary 00 00 00 00 00 00
contribution
Net contribution -3,500 -1,281 2,233 2,853 4,101 4,716
Discounted -3,500 -1,113 1,691 1,877 2,343 2,346
contribution @15%
Cumulative -3500 -4,613 -2,922 -1,045 1,298 3,644
discounted cash flow
Projected five years cash-flow statement (in thousand dollars)
 Step 6. Product development

Product development – developing the concept into

a technically and commercially feasible product –
helped by a set of methods known as quality function
deployed (QFD).
• The methodology takes a list of desired customer
attributes (CAs) into a list of engineering attributes
(EAs) that a engineer can use.
• QFD – improves communication between marketers,
engineers and the manufacturing people.
 Step 6. Product development

The working prototypes must be put through

functional tests and customer tests.
Alpha testing
Beta testing
Customer preferences can be measured in several
ways:
The rank -order method – Intensity & many objects
The paired -comparison method -
The monadic- rating method
 Step 7. Market testing

Consumer- goods marketing testing:company hopes

to find the four variables at high level: trial, first repeat,
adaptation and purchase frequency.

Four major methods of consumer market goods testing:

• Sales wave research
• Simulated test marketing
• Controlled test marketing
• Tests markets
 Step 7. Market testing
• Sales wave research
- Product might be offered as many as three to five
times (sales waves)
- Noting how many customer selected the product
and their reported level of satisfaction.
- Including exposing advertising to see it’s impact on
repeat purchase.
• Simulated test marketing –
- Finding 30 to 40 qualified shoppers & questioning
them about brand familiarity and preference.
- These people are then invited to a brief screening
of both well known and new product ads.
- Consumer receive a small amount of money and
are invited into a store to purchase any item.
 Step 7. Market testing

• Simulated test marketing –

- The company notes how many consumer purchase
new brands and competing brands
- Then consumer are asked the reason of their
purchase & not purchase.
- The company provide free sample for those who
do not buy the new brand.
- they are re-interviewed some week later by phone
to determine product attitude, usages, satisfaction
and repurchase intention.
- this method gives fairly accurate result on
advertising effectiveness and trial rates.
 Step 7. Market testing

• Controlled test marketing –

- A research firm manages a panel of stores
selected by company with it geographic location that
carry new product for a fee
- Research firm control shelf position, display , point
of purchase & pricing
- Sales result can be measured through electronic
scanner at the checkout
- Company also evaluate the impact of local
advertisement and promotion during the test.
 Step 7. Market testing

• Tests markets- management faces several decision

• How many test cities? (2 to 6)
• Which cities? - good media coverage, average
competitive activity.
• Length of test? – 9 to12 month - depending on the
average purchase period.
• What information? – about consumer attitude,
usage and satisfaction
• What action to take?-
 Step 7. Market testing

• What action to take?- if shows high trial and

repurchase rate, product launched nationally,
if shows a high trial but low repurchase rate,
product should be redesign or dropped,
if shows a low trial and a high repurchase rate,
product launched nationally – increase advertise
and sales promotion
if shows a low trial and a low repurchase rate,the
product should be abandoned.
 Step 8. Commercialization

Commercialization - the Introduction of the new product

into the marketplace.
When (timing)
First entry
Parallel entry
Late entry
Where (geographic strategy)
To whom (target market prospect)
How (introductory market strategy)