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New Product Development Chapter – 6
NEW PRODUCT DEVELOPMENT.
Once a company has Segmented market carefully. Chosen its target customer group. Identified their needs. Determined desired market positioning. Then, It is ready to develop / launch suitable new product. Marketing actively interacts with other departments (such as R & D) for product development. New product development due to: Need to maintain sales through replacement products. Need to build sales. Customer requirement for new products (which competitor may encash on if not attended to suitably). New product’s can be added through: Acquisition: • Company Acquisition. • Patent Acquisition. • License / Franchisee Acquisition. New Product Development: • In House. • Outsourced. New products categorized based on: Newness to Company. Newness to Market/Market place. New product could be: New-to-the-World Product: • New product that creates essentially new market. • Example: Sony walkman, Apple – i-pod. New Product Lines: • New product that allows a company to enter an established market for first time. • Example: HLL entering Toothpaste segment with Close-Up. Addition to Existing Product Lines: • New product that supplement a company’s established product lines (Pack sizes, Flavors). • Example: HLL adding Pepsodent to its toothpaste segment. Improvements/Revisions of Existing Product Lines: • New product gives increased performance/increased CDV & replaces existing products. • Example: Hero Honda, from Splendor to Splendor+. Repositioning:
Chapter - 6. New Product Development • Existing products targeted to new market/market segment. • Example: Bajaj Caliber – Caliber Chrome – Hoodibaba. Cost Reduction: • New product that provide similar performance at lower cost. • Example: Cadbury’s Five Star – from 5Rs pack to 2Rs pack by using flavors instead of pure cocoa.
Stages in New Product development Process: - To minimize risk of new product failure, new product development follows a structured process. - Stages in new product development are: Idea Generation. Idea Screening. Concept Development & Testing. Marketing Strategy Development. Business Analysis. Product Development. Market Testing. Commercialization. Idea Generation: - New product development process starts with search for ideas. - Sources of new product ideas could be Customers: • Market research could be done with recent customer/lead users (customer who make advance use of product & recognize improvement needs). • Market research determines product improvement required. R & D / Employees: • Employees could be encouraged to give new product ideas & rewarded suitably. Competition: • Through study/analysis of competitive products. Marketing Channel & Their Staff: • Dealers, distributors, employees of distributors & dealers. Senior/Top Management: • Product innovators could be senior management. Idea Generation Techniques: - Ideas may be generated using creative techniques such as Attribute Listing: • List out major attribute of a product. • Modify each attribute in search of an improved product. Forced Relationship: • Several objectives are considered in relations to one another to create a new product. • Example: Fax + Telephone + Table Display.
Chapter - 6. New Product Development Morphological Analysis: • Identify structural dimension of a problem & examine relationships among them. • Example: Moped: Motorised/Stronger/Cycle. • Hence, convenient/economical/effortless. Customer Need / Problem Identification: • Do market research on customer to determine their needs. • Wherever customer is dissatisfied, the reason for dissatisfaction could lead to a new product. • Example: Dettol used to burn, hence came Savlon. Brainstorming (Technique developed by Alex Osborn): • 6-10 people discuss a specific problem. • Asked to come up with ideas for some time. • Guidelines could be No criticism/evaluation of ideas. Free flow of thought is encouraged. Quantity is encouraged. Combining/better/improved ideas is encouraged. 75-80 new ideas are required for a company to develop a new product. HLL came with 84 new products. Ranbaxy came up with 46 new product in the last year. Idea Screening: - Ideas generated need to be screened for action. - To start with, ideas are sorted into Promising ideas. Marginal ideas. Rejects. - Promising ideas are evaluated by a committee. - Surviving promising ideas are screened through a process. While screening, company needs to avoid: Drop Error: • Company rejects a good idea. Go Error: • Company allows a poor idea to move into a product development and commercialization. Product failures are of three types: Absolute Product Failure: • Loses money, sales do not cover variable costs. Partial Product Failure: • Loses money, variable cost is covered. Relative Product Failure: • Makes profit that is less than company’s target rate of return. Objective of screening is to drop poor ideas at the earliest. Ideas are screened using product idea rating process. 3
Chapter - 6. New Product Development
Product Idea Rating Process: - New product ideas are described in details. - Details include: Product idea. Who is target market? Who is/are competition? Estimate of: • Market size. • Product price. • Development time/cost. • Manufacturing cost. • Rate of returns. - Ideas are evaluated against a set of criteria - Base criteria could be: Does product meet a need? Would it offer superior CDV / Price performance? Can it be distinctly positioned / advertised/ Fit with company’s objective / strategies & resources seen o Company objective / strategies fitment include: Profit objective. Sales objective. Sales growth objectives. Customer goodwill objectives. o Fit with company resources include: Does company have required capital or can it acquire it? Does company have / acquire required production/marketing know how? Does company have / acquire required distribution ability? If answer to any question is Nominal Office, then the idea is rejected. Surviving ideas are rated using weighted index method. Weighted Index method tries to quantify the success probability of an idea. Example : Dove Soap Relative Weight 0.40 0.30 0.2 0.1 Product /Idea Score 0.6 0.5 0.7 0.8 Rating 0.24 0.15 0.14 0.08 Ratings Overall 0.00 – 0.30 = Poor. 0.31 – 0.60 = Fair. 0.61 – 0.80 = Good. 0.81 + = Excellent. Minimum acceptable score = 0.61
Requirements for product success. Unique/Superior Product High Performance High marketing support Lack of strong competition
Chapter - 6. New Product Development 1.0 0.61 Only those product ideas with a score of 0.61+ are taken ahead to the next stage.
Development & Testing: - Attractive ideas should be refined into list able product concepts. Product Ideas: • Possible product that company may offer to the market. Product Concept: • Elaborated version of the idea expressed in meaningful consumer terms. Product Image: • Picture that consumer acquire of an actual/potential product. Concept Development: - A product idea is converted into concepts. Example: Product Idea (Food Processing Company). Desires to produce a powder which is nutritious & tasty. - To convert to concept answer following questions: Who will use this product? • Children / Young working Professionals / Elderly. What primary benefit should product provide? • Taste / Nutrition / Refreshment / Energy. When will consumers consume product? • Breakfast / Snacks / Dinner. Based on answers, concepts could be: C1 : Instant breakfast for working professionals who want quick/convenient/nutritious breakfast. C2 : Tasty snack for children. C3 : Lunch/dinner item for elderly customer staying on their own. Each concept represent a category concept, i.e., each concept positions the idea within a category. Category defines the products competition. Example: • Competition for C1: Paranthas/ Idlis/ Toast/ Cornflakes. • Competition for C2: Maggi noodles/ Grilled Sandwiches/ Indian Snacks/ Burgers/ Potato Chips. • Competition C3: Normal food items/ Dial up food Next task is to determine where each category would stand in relation to its concept. For this, we can use: Product Positioning Map. = Idlis. Price = Paranthas. = Cornflakes. = Space for C1. 5 Speed
Chapter - 6. New Product Development
Brand Positioning Map. = Brand A. = Brand B. = Space for New Product
Price . Nutrition/Calories
There may be 2-3 ideas resulting in 6-7 concepts.
Concept Testing: - Involves testing product concepts with appropriate customer group to obtain customer reaction. - Concepts presented in verbal / visual / form (Computer visualization may be used). - Dimensions of concept tested out includes: o Communicability / Believability: Are the benefits clear / believable? o Need Level: Do you see a product filling a need? To what extent? o Gap Level: Do other products currently meet this need and satisfy you? o Perceived Value: Is the price reasonable with respect to the value? o Purchase Intention (Juster Scale): Minimum 30% - 40% top box score. Would you buy the product? o User Targets/Purchase Occasion/Purchase Frequency: Who would / when / how / often use this product? Consumer preferences for alternative product concepts tested out through Conjoint Analysis.
Marketing Strategy Development: - After concept testing, for concepts that qualify a preliminary marketing strategy is created to introduce new product into market. 6
Chapter - 6. New Product Development Marketing strategy may be refined in later stages. Marketing strategy plan made up of: o Part ‘A’: Target market size/structure/behaviour. Planned product positioning. Sales/Market share/Profit objective in 2/3 years.
o Part ‘B’: Product’s price planned. Product form/shape/size of packs. Distribution strategy. Marketing budget for first year. o Part ‘C’: Long term sales/profit goals. Marketing mix strategy over time. Business Analysis: - After product concept/marketing strategy is developed, company can evaluate proposal’s business attractiveness. - For this, Sales. Cost. Profits. • Are projected for 5 years period. - These are matched with company’s objectives. If there is a match, the new product concept moves to product development stage. Estimating Total Sales: - Total sales is made up of: First time sales. Replacement sales. Repeat sales. - Sales estimation process varies with product type. - If product is: o One Time Purchasing Product: First time sale is adequate. Example: House, Honeymoon o Infrequently Purchasing Product: First time sales + Replacement sales need to be calculated. Example: Automobiles, Toaster. o Frequently Purchasing Product: First time sales + Repeat sales needs to be estimated. Example: Soap, Toothpaste.
Chapter - 6. New Product Development Each sales category is estimated using market research techniques with demand forecasting methods.
Estimating Costs & Profits: - Costs estimated for 5 year period jointly by Research & Development. Manufacturing. Marketing. Finance. - Costs element includes Cost of goods sold. Development costs. Marketing costs. Allocated overhead. Supplementary contribution. - Supplementary contribution is made up of: o Drag Along Income: Additional income on own company products due to new product. Example: Maruti launching Maruti finance, which resulted in increase in sales of M800. o Cannibalized Income: Reduction in income on own company products due to new product. Example: HLL(Soaps) Before Dove After Dove Sales went up by 15 units due to introduction of new product(Dove). Dove(N.P.) 30 But due to this, sales of existing Lux 100 90 product came down by 15 units. Lifebuoy 200 200 This is cannibalized income. Liril 50 50 Pears 60 55 410 425 Costs calculated using concepts of discounted cash flow (DCF) / Net Present Value of Money. Based on above following data is analysed. o Maximum Investment Exposure: Highest loss that a project can create. o Pay Back Period: Time taken by company to uncover all investment in new product. o Break Even Point: Number of units that a company have to sell of a new product to break even. Give price (cost structure). o Risk Analysis: Uncertainties in projection analysis. To come up with 3 estimates. • Optimistic. • Pessimistic. • Realistic (Most Likely). 8
Chapter - 6. New Product Development Based on above, profit/profitability determined/projected for next 5 years.
Product Development: - If a product concept passes the business analysis test, it is taken forward to the product development stage. - So far, the concept exists on paper. - In product development, concept is provided in detail to R & D to make physical product. - Stages in product development could be: o Prototype development. o Prototype Lab Testing. Test for Functionality. Test for Psychological aspects such as color. Test for Looks/Styles. Test for Price Fitment. o Functional Testing. Test for Safety/Effectiveness. o Consumer Testing. Test samples with consumers in lab. Once management is satisfied with new product, functional/psychological performance, product is ready for market.
Market Testing: - At this stage, new product is ready for: Brand Name. Packaging. Preliminary Marketing Program. - Objective of market testing could be: Test product in actual market setting. Learn about actual market size. Learn about how consumers/dealers handle, use, repurchase new product. Extent of market testing depends on: o Investment Cost & Risk: Higher investment cost/risk needs, market testing more thoroughly. o Time Pressure: May reduce testing time. o Newness of Product: More newness of product leads to more testing. For consumer goods, market testing helps to estimate: Trial. First Repeat. Adoption. Purchasing Frequency of consumers. Methods for market testing. 9
Chapter - 6. New Product Development Sales wave research. Simulated test marketing. Controlled testing marketing. Test markets.
Sales Wave Research: (Procedure) - Consumers offered free samples. - Same consumers are then offered product at prices slightly lower than actual prices. - This is repeated with product at small discounts 3-5 times. - Number of consumers buying again is noted & their satisfaction level studied through market research. Example: Amul milk : It gave free samples of milk at first and then at discounted price for a week.
Simulated Test Marketing: (Procedure) - Certain numbers of qualified shoppers are researched on familiarity/preference in specific product category. - Consumers invited to see advertisements. These advertisements are for mixed products. - Consumers rewarded for their time with shopping coupons/money for shopping & invited to a store where they can buy anything. - Consumers who buy new product or competitor product is noted. This helps to understand trial rates. - Consumers who don’t but new product are given free samples. - After suitable time, consumers researched for satisfaction levels/ repurchase intent. Example: ITC (Kitchens of India): Launched ready meals for working young professionals in mind. They invited them for a seminar and then presented them with a free sample. Then they followed them and asked for their review. Controlled Test Marketing: (Procedure) - Panel of stores identified who would carry new product far a fee (normally done by market research) - At the store, Shelf Facing. Display. Point of Purchase promotions are used. - May include local advertising. - Retail sales monitored over specific period of time. Test Markets: (Best way to test product) (Procedure) Normally all automobile companies do this. - Few cities identified to sell product. - All marketing mix elements are as per normal marketing program.
Chapter - 6. New Product Development Typically, 3-9 cities selected All- India. Cities represent A/B/C category cities. Duration of test should permit product repurchase if applicable. Test information monitored through: Stock off take from ware house/godowns. Retail stores audit. Consumers panel surveys. Buyer research. Effectiveness of all marketing mix elements tested out. If results are negative, new product may need to be redesigned / dropped. Example: Indica to Indica V2.
Commercialisation: - After successful market testing, new product moves to commercialisation stage. - During this stage, production of new product on a commercial basis is rapidly built up. - New product is formally launched. For this, decision to be taken could be: o When to Launch: First entry for first mover advantage. • Example: Nokia, Intel. Parallel entry to coincide with competitor. • Example: NIIT and APTECH (GNIIT and ESSACP). Late entry to learn from competitor experience (Used apple approach). • Example: Used only by market leaders. • Colgate waited for Meswak to sell its product in market. After seeing the response, colgate came up with Colgate Herbal. o Where to Launch: All India. Regional roll out. State by state. Urban/Rural (city categorization). o To Whom: Distributors/ Promotion needs to be aimed at: • Early adopters. • Heavy users. • Opinion leaders. • Reachable at low costs. o How to Launch: Decisions encapsulated initial marketing strategy. Introductory offers may be involved. 11
Chapter - 6. New Product Development
Consumer Adoption Process: Q: How do potential customers learn about new product & try them/adopt them/reject them? A: For early market penetration of new product, marketers need to understand the customer adaptation process. Adoption: - Individual’s decision to become a regular user of a product. - Adoption when sustained leads to loyalty. - New product marketers aim at those customers who are early adopters. - According to early adopters concept: Persons within a target market/segment differ in the time elapsed exposure to new product and trying it. Early adopters are similar to each other and different from late adopters. Efficient media exist to reach out to early adopters. Early adopters tend to be opinion leaders & help in advertising product to other product customers. Stages in Adoption Process: - Adopters of new product typically go through the four stages: o Awareness: Consumer becomes aware, but lacks information. o Interest: Customer stimulated to seek information about new product. o Evaluation: Customer considers whether to try new product. o Trial: Customers tries product to improve estimate of its value to himself/herself. o Adoption: Customer decides to make full/regular use of new product. New product marketers should aim to facilitate consumer movement through these stages.
Factors Influencing Adoption Process: - Adoption process varies fro customer to customer. - Factors Influencing Adoption Process are: o Customers readiness to try new product: For each new product, some customer try out new product early while some others try out late. Based on the relative time taken for new product adoption, customer/adopters categorized as: • Innovators. • Early Adopters. • Early Majority.
Chapter - 6. New Product Development • Late Majority. • Laggards. Personal influence of others/peer groups • More active in evaluation stage of the adoption process.
Number Of Adopters
I = Willing to try new product. EA = Opinion Leaders. EM = Deliberate/ Adopts before average person. LM = Skeptical/ Try out late. L = Tradition Bound / Suspicious of Change.
Characteristics of New Products: - Some new product catch on immediately, others may take some time. - This depends on new product characteristic, such as: Relative Advantage of New Product. • Dove. Compatibility of New Product to Individual Values & Experience. • Livon. Complexity of New Product Use. • Sony Handy cam. Divisibility of New Product. • Chick in rural market sold on basis of sachet. Communicability of Benefits of New Product: • If benefits are visible & communicable, they are easier to adopt. • Fair & Lovely.
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