EP103x New Product Development

Professor Ganesh N Prabhu

We will now look at business models for new products. What is a business model? Essentially
a business model tells a good story about: Who are the customers? What do they value? And
how does the company make money? How do we deliver the value at a reasonable cost? A
good business model required articulation of how you will make the product or service, how
you will deliver the product or service and innovation can focus on either or both these areas.
New resources may, of course, be required on both these areas.

New products typically require new business models. It may not be essential, but it is worth
reflecting whether the new product that you are about to launch requires a new business
model or not. New products can actually fail due to failed business models or inappropriate
businessmodels.

So what is a good business model and why does a new or proposed business model fail when
it is inappropriate. So a new business model may fail when it cannot pass any of these two
tests. The first is the narrative test. The story about who are the customers, what they value
and why they will buy your product does not make sense. The second is the numbers test.
The projected profits do not add up to make money. We are unable to deliver value to
customers at a reasonable cost. If either one of these tests fail business model will not be
suitable for the product.

When do existing Business models fail? Even an existing business model may fail because the
assumptions under which the business model was built may no longer hold. So business
models are built on very specific assumptions about customer behavior if these assumptions
become faulty then the projected returns may not materialize. Business models may have
very specific limits for example willingness to pay within which they work. If these limits get
stretched too far then the projected returns may not materialize. If the business model is very
robust to the variations in customer behavior and the limits can be stretched to some extent
then the business may survive with corrective action. However, if the business model is very
sensitive to variations in customer behavior or the limits cannot be stretched then even
prompt corrective action may not save the business.

So how do you assess the business model required for a new product? We ask basically two
sets of questions, the first is what is known as a customer set of questions. So it starts with
who are the customers and who are not your customers? What do these customers value in
your business? What specifically will you offer to your customers? What will you not offer
even if asked for? Both are important questions what you will offer and what you will not
offer. How much will your customers pay? How much will your customers be willing to pay?
Both are again important questions. What they are currently paying may be less than what
they are willing to pay? Finally, how will your customers behave in terms of opting out or
dropping out of the product or service? The second set of questions is what are known as cost
questions? What will you offer? What activities will you perform will drive the cost of that
offer and the activities? Is there any high upfront investment required for this business. If so,
then you are taking a risk because you have to make that investment up front before
launching the business or is there a float in this business? Do you get an advance from
© All Rights Reserved. This document has been authored by Professor Ganesh N Prabhu and is permitted for use only within the course "New
Product Development" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations,
pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
 EP103x New Product Development
Professor Ganesh N Prabhu

customers to run the business or do you need high working capital? So this will determine the
profitability of that business. How much will it cost to deliver the value promised? Does the
cost depend on scale? Sometimes it is believed that if the scale goes up the cost will come
down it is not necessary that when the scale goes up the cost actually comes down. Finally,
will the cost to deliver the value vary for different types of customers and will it grow over
time, again an important question because when you add new types of customers you might
face additional cost which are not part of your initial pricing for that new product.

© All Rights Reserved. This document has been authored by Professor Ganesh N Prabhu and is permitted for use only within the course "New
Product Development" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data, illustrations,
pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.