PRODUCT DEVELOPMENT

for inclusive financial services

March 2020
Bahir Dar
 PRODUCT DEVELOPMENT
for inclusive financial services
Goal
• To provide guidelines for a process of product
development that is:
• Systematic
• Client-focused
• Analysis-driven
• Results-oriented
 Objectives
– To describe the process of product
development
– To assess institutional capacity for
product development
– To apply various client-oriented
market research techniques
– To interpret research results to
design product prototypes •To launch new
– To cost and price products products that result
– To pilot test products in increased profits
and client
satisfaction
 Financial Product Characteristics
• Credit
– Term—frequency, length Collateral type
– Interest rate Collateral amount
– Interest-rate method Fees
– Loan amount
• Savings
– Fees
– Deposit Frequency
– Withdrawal frequency
– Minimum balances
• Insurance
– Fees
– Premiums
– Use
 Definitions: New Versus Refined Products

• NEW=a product new to the MFI that is marketing it

• Example: A housing loan or a contractual savings product
• REFINED=an improvement or addition to an existing
product
• Example: Changing interest rate or marketing strategies of an
existing product
• The end result is….
products appear in some degree new and desirable
to the consumer
Percentages of New and Refined Products
Is your product...
• a new-to-the-world product?
(10 percent of all new products introduced each year)
• a new product line?
(20 percent of all new products)
• an addition to existing product lines?
(26 percent of all new products)
• an improvement/revision of existing products?
(26 percent of all new products)
• a repositioned product?
(7 percent of all new products)
• a lower-cost product?
(11 percent of all new products)
 Questions

1. What are the basic steps for an organized process

of Product Development?
2. Why is it necessary to follow a systematic process
The Process of Product Development

Qualitative Qualitative
Research
Research Research:
Issue
Plan FGD/PRA
Understanding clients’ needs Concept
Development
Quantitative
Product Refine the
Research:
Ready for Concept into
Prototype
Pilot-test a Prototype
Testing
Refining/Testing the product prototype
Product Development Steps
Environmental and institutional analysis
Market research
Product concept/prototype design
Costing and pricing
Pilot testing
Rollout
 Why Follow A Process ?
• Investing small amounts up front can save
large amounts and/or generate larger
amounts of business in the future
• One step of the process leads to and informs
the next … and provides a disaster /reality
check
 Questions
• Are we ready for product development?
• What are the key elements/capacities/
resources necessary for product development
by an institution ?
• What do you need to start developing new
products ?
 Internal Preparations for Effective Product
Development
Successful Product Development Involves
• The team. Multidisciplinary skills and a product
champion.
• Buy-in. Support within the institution for the
process.
• Market segmentation. Definition of the
customer group to be targeted.
• Market research. Identification of unmet or
poorly met financial service needs and design
of the product prototype.
 Drafting Terms of Reference
• To be drafted by Product Champion and approved by
Managing Director/CEO
• Terms of Reference should contain:
– Background of the Relevant Project Objectives and
Activities
– Description of Required Services
– Duration and Timing
– Monitoring/Progress Control
– Definition of Expected Outputs/Results
– Budget
ACSI
 Real Examples of New/refined Products; The
case of ACSI
Targets Product Type Unique features
SLLC-linked Individual Small Holder New Product Collateral type
Loan farmers
Raey Savings Account Youth 12-29 New Product Higher interest rate
years old Special Marketing
means
(clubs/ambasaders/
Tirit Savings The public Refined product Rebranded & re-
engineered
Wheat Input Loan Wheat New Product Voucher based
producing (now replaced by
Small Holder voucher based Input
farmers loan)
Driving the Point Home—Fail If You Want
To
• Don’t bother to analyze the market
• Rush to the market with a defective
product
• Let wishful thinking drive development
projections
• Don’t bother with timing
• Just ignore the competition
• Spend millions for R&D but not one cent
on marketing
• Believe a small market is better than none
 Market Research
• Procedures and techniques:
– Involved in the design, data collection, analysis
and presentation of information
– Used by managers in making marketing decisions
• To respond to needs and opportunities by:
– Improving current marketing, promotion,
outreach, and delivery activities
– Refining existing products
– Developing new products
 Market Research Is Important
Cost to correct product error
1,000 Design
10,000 Design testing
100,000 Process planning
During

1,000,000 Test production

10,000,000 Final production

Each step is 10 times more costly than the previous!

Steps in Market Research
–Define research objectives
–Define research methods
–Review secondary data
–Prepare for primary data collection
–Collect primary data
–Analyze all data
–Report
 Select Techniques to be Used
 There are two basic techniques:
 A Discussion Guide-driven FGD
 Written discussion guide prepared in advance
 A PRA Method-driven FGD
 No discussion guides
 Discussion driven by the PRA tool (e.g. wealth
ranking, seasonality analysis etc.)
 These should be planned/implemented
together to allow triangulation of data
 Participatory Rapid Appraisal Toolkit
• Seasonality analyses
• Life-cycle profile
• Rankings
• Wealth ranking
• Cash mobility mapping
• Time series
• Financial services matrix
• Financial sector trend
analysis
 Institutional Considerations
• Operational methodology
• Information system
• Human resources
• Infrastructure
• Legal and regulatory
• Competition
Why Is Pricing Financial Services Different?

• Services are not heterogeneous

• Individual customer needs vary considerably
• Several services are bundled together
• Price information is overwhelming
• Many products involve future consumption –
making future values uncertain
• Some services involve a continuing
relationship between MFI and customer
 Pricing

Consider...
Costs
Consumers' sense of value
Competition
Profit
 Pricing Considerations
– The MFI
• The fixed and variable costs must be covered
• Risk needs to be priced
• Equity capital needs to be remunerated
• Retained profits must be generated for growth
 Pricing Bases
• Cost based – prices are based on the cost of
the product plus a margin.
• Competition/Market based – prices are based
on the prices charged by competitors
• Demand or Value-based – prices are based on
an assessment of the value of the product to
the customer
How To Perform Cost Based Pricing
• Cost based pricing is performed by adding a
margin on the basis of costs.
– For a new product this would have to be done on
the basis of an estimate from a similar product or
through a careful study of costs.
– For an existing product this is done through
Product Costing.
How to Perform Competition Based Pricing

• Competition based pricing is performed

through studying the prices charged by the
competition.
• It is the most common form of pricing, it is
simple to understand, but it is unlikely to
maximize returns.
• Why … because the price charged is not directly
related to the value your customers place on
the service…
How to Perform Demand/Value-Based Pricing

• Elicit customer definitions of value in own

words.
• Help participants express value by expressing
key benefits sought and the dimensions of
quality relevant to them.
• Reflect how your product reflects these benefits.
• Quantify monetary and non monetary values.
• Establish a price based on value.
 Combining the Three Approaches
• Combining the three approaches provides a three-
step process to pricing financial services:
– Step 1. Price to cover the full cost of delivering the
product/service
– Step 2. Compare this price with that of the competition
to see if it can be raised
– Step 3. Assess demand for your MFI’s USPs (8 Ps of
marketing!) and see if the price can be raised further.
• For steps 2 & 3 use Competition Analysis Matrix
and Market Research for position and relative
preference analysis
 Pilot Testing
Definition of Pilot Testing
• A pilot test is something that
measures the worth of a product in
such a way that the results of the test
guide management decision making
 When Should We Pilot Test?
• Most financial institutions have developed
financial services without pilot testing the
product. Sometimes experience is very
positive and at other times choosing not to
pilot has been very expensive.
 Ten Steps in Pilot Testing
1. Composing the pilot test team
2. Developing the testing protocol
3. Defining objectives
4. Preparing all systems
5. Modeling financial projections
6. Documenting product definitions and procedures
7. Training the relevant staff
8. Developing customer marketing materials
9. Commencing the pilot test
10. Evaluating the test
 Establishing the Testing Protocol
• Number of customers included
• Location of the test
• Duration of the test
• Reporting dates
• Data to be analyzed
• Boundaries that may cause
pausing or cancellation of the
test
 Product Policy in Brief: An Example
Product Policy
Product Brand Name Ra-ey (‰:Y) saving account
Opening Balance Birr 5
Minimum Balance Birr 5
Account Opening Requirements 2 photographs
“Kebele’’ or “school ID” Card
Deposit Policy Unlimited deposit frequency and amount for age cohorts (12-24)
Withdrawal Policy Unlimited withdrawal policy for youth clients with 12 and above years of age.
Process  Savings and withdrawals are made easy.
 Processes are designed to run on Banker’s Realm and are designed to
accommodate illiterate youth clients.
People Trained and friendly staff
Place  Micro-Bank branch offices, Branch offices, Piggy banks (mudday bank),
Door to door savings collection, In-school and out-of -school savings
centers (Kebele and School center)
Physical Evidence Standardized and high quality Savings passbook: Small size, Water proof,
Colourful with ACSI’s corporate colours
Promotion Use of parents (existing clients), community leader, schools, fliers, and word of
mouth, door to door, and media advertising
Establish school and kebele savings clubs/ambasaders and promote through them
 (Fliers, dramas, mini media, story telling, etc can be used here)
Promotion at sub branch and micro bank office level
(use of fliers, word of mouth, attractive service, financial education )
Positioning statement ACSI offers Ra-ey savings account to youth (12-24 years old), especially the low
income and the female youth to help them meet their financial needs.
Monitoring Pilot Performance
 Product Costing
Activity-Based Costing Steps
–Plan for the costing exercise
–Identify products for costing
– Ascertain core processes
–Designate specific activities for each core process
– Conduct staff time estimates for each activity
– Calculate costs per activity
–Assign cost drivers and determine unit activity costs
–Drive unit activity costs to products
 Allocation Based Costing
Income and expense statement Allocation bases Product costs
Loan product #1

Staff costs

Staff time sheet

Loan product #1

Staff time sheet

Non staff costs
Savings product #1
 Product viability Analysis
Savings Product Name SAMPLE SAVINGS PRODUCT
Average portfolio balance 10,000,000
Reserve rate 5% Regulated by the Central Bank
% Amount
Transfer rate 18.0 1,800,000 Funding alternative :rate charged if you
were to borrow the fund
Annual
MINUSaccount interest rate 4.0 400,000 Annual interest rate clients will earn on
their savings
Reserve cost 0.21 21,053 (Annual interest rate/(1 − reserve rate))
MINUS −Annual interest rate
Annual fees charged to 1.0 100,000 Example: Annual interest rate = 4%
clients
Plus
= Net yield 14.8 1,478,947 Reserve rate = 5%
Reserve cost = (4% / (1 − 5%)) − 4% =
0.21%
Total Annual Activity Costs 10.0 1,000,000
= Bottom
Minusline 4.8 478,947 If bottom line is positive, product is viable
 Product viability Analysis:
Credit Product Name SAMPLE CREDIT PRODUCT
Average portfolio balance 6,000,000
% Amount
Interest & fees from loans 36.0 2,160,000 Annual interest and fees from clients

MINUSfunds
Interest on borrowed 18.0 1,080,000 Annual interest on funds borrowed

= Gross Margin 18.0 1,080,000 (Annual interest rate/(1 − reserve rate))

−Annual interest rate
Loan Loss Provision
MINUS 1.0 60,000 Example:
Annual interest rate = 4%
= NET MARGIN 17.0 1,020,000 Reserve rate = 5%
Reserve cost = (4% / (1 − 5%)) − 4% =
0.21%
Minus costs
Total annual activity 15.0 900,000
= Bottom line 2.0 120,000 If bottom line is positive, product is viable
 Rollout
The Roll-out Protocol
• As you did in the pilot testing phase, there
should be a Rollout protocol that addresses:
– When each step will occur
– How often tracking meetings should be held
– What should be monitored and when
– What results might cause the rollout to be halted
– How the roll-out will proceed
 New Product Rollout
is so Much More than Just the Launch
 What is Rollout?
Roll-out is a process that includes:
– Transfer to permanent department
– Preparation of:
• Site
• Staff
• Systems
• Marketing
– Launch
– Assessment
• Roll-out is NOT just the launch (launch is only a small part)
• Starts with recommendation letter approval
• “Ends” after roll out to all target locations, but analysis continues
• Actually the roll-out process simply opens into the regular
continuous and periodic product monitoring processes)
 What is Needed Before Rollout?
• Approved “Recommendation Letter”
• Capacity re-assessment to identify institutional needs
given the lessons learned from the pilot test (institutional
strategy, financial viability, organizational culture, HR, delivery networks, and systems - a grid
with questions is provided to assist with this)

• Other requirements:
– Management commitment
– Project Management skills
– Flexibility
– Infrastructure (includes marketing capacity)
– Compliance with regulatory matters
 The Recommendation Letter
What it is -
1. Summary recommendation to senior management
or board (done at end of pilot test)
1. Used by management or the board to make the go/no-
go decision about the product
2. Hand over document with all relevant materials
1. Detailed operational and financial results of the pilot
test
2. Plans for rollout
3. Financial information from actual purchases
4. Documentation (Training materials, procedures)
 The Recommendation Letter
How it helps the Rollout –
• Procedures manuals are already available
• Tested training curriculum is available to train staff
• Financial projections are already structured (likely to require
modification once the final roll-out process is agreed)
• Draft plan for roll-out is available
• Offers explicit management (and board) buy-in based
on approval of the recommendation
• Much of what needs to be done for roll-out has already
been done for the “letter”. Now management simply
reviews and adjusts rather than developing
 Some Important Issues in Conclusion

• Roll-out is so much more than just the launch

• The incentive structures within the roll-out
branches are critical to roll-out success
– Management must create incentives to build branch teams
– More often than not these are non-financial incentives
• If you have a good “Recommendation Letter” prior to
roll-out the process should be much smoother
 Discussion
What are the results of
1. Successful Rollout
2. Rushed Rollout=
 Product Development Success Factors
• Unique, superior product
• Customer-focused, market-driven
• Homework
• Sharp, clear, early product definition
• Quality of execution
• Correct organizational structure and climate
• Focused project selection decisions
• Planning and resourcing the launch
• Role of top management
• Speed—but not at the expense of quality
-END-