Productization: A Primer For Taking Ideas to Market I wrote this book originally for Pearson Publishing, but by the
time it was submitted they had bailed from publishing to the Dot.Com industry needs and closed the product line. The good news was they let me keep my advance, the better news was they returned the copyright to this book to me, the author. I wrote this book to a general vacuum in the industry of a short, easy to read book that can help you learn or refresh what you forgot. Ideas that are great are still marginal until they can be transformed into a utility of usage for mankind, and others…. Then ideas become great products. My goal is two-fold, help transform your perceptions about product development and commercialization of ideas to products. And help the work you do benefit both you and your associates. And by the way, how am I to benefit?
Can I trust you to appreciate this primer? Read it twice before you start to use it. It’s like lasagna; it gets better with age, as the information melds into your context of how you think. Then, if you like it, and know of others that might benefit, send them an electronic copy of this book. (I’ve added a glossary to the back which helps you talk the talk.) It’s all combined into one PDF file. At the same time you send your associate the book, send me $5, just a sawbuck. Preferably US currency, but I would be very pleased to get the equivalent from you in whatever country you might be living in. I am not selectively choosing the USA for distribution, just starting there. (My editor for the book is in UK, he’s getting a copy from me!) Mail the $5 to Rodrick Satre 530 Santa Fe Avenue, Richmond, CA 94801 United States of America. Either I will get better off or my postal person will. If you want to email me, use email@example.com If you have multiple associates, such as at Christmas or other events, send out 5 copies at $15 or 10 copies at $20 and send the cash to me. Same way, to my mailbox. Don’t send checks, if they bounce, it costs me more than the amount you sent. If you want to send a cashier’s check or money order, that’s fine. I’m only sending out a few copies to begin with. I hope my plan works, but this is an experiment in “distribution channels” that are based on the goodness of people. Yes if you wonder how it went, ask me! Oh by the way, I did write this book based on 30 years of business experience as well as my education. I have an MBA in International Business from JFK University, BS from Clarkson University. Written in Richmond, California, USA by Rodrick I. Satre copyright © 2002 updated 2008
Introduction I can’t tell anyone how to determine if the idea they have is a dynamo capable of generating wealth for them, the company they work for, investors, and the employees of the business. In fact, many times great ideas are squandered on those that turn them down, only to find new homes with others that find the magic key to unlocking the wealth in the idea, the product, the service. So this briefing is set with this caveat: Many books require no thought from those who read them, for a very simple reason; - they make no such demand upon those who wrote them. Those works, therefore, are the most valuable that set our thinking faculties in the fullest operation. ~ Colton I will attempt to provide the reader steps useful in taking a fine idea and developing a useful product from it. In this briefing I hope to help the reader in gaining an
appreciation for the many activities that form the world of Productization. My objective is to meld those many activities we perform in the business world into a ready and readable reference that the reader will use and apply in shaping the economic outlook of their business. There are multiple business paradigms that tie to this book, and management training programs and MBA programs are all highly recommended pursuits. I can readily think of just-in-time, guerrilla business tactics, and other well used tomes that the reader can pursue. Yet for the most part, those books begin at a somewhat advanced stage of the product life cycle. This briefing begins at the beginning and takes the reader on an exploration from the start of an idea that might be saleable to the culmination of the actions normally needed to generate profits back to the business. This is not all inclusive, and experience and thought are key components to a successful business venture. And luck. If I had a choice between being smart or lucky, I’d choose lucky. ~ Will Rogers But just maybe we can make luck occur by setting the stage where opportunity falls in our lap and success just seems to fall into place. This stage is like a fine play. The scenery and the music score mean almost as much as the acting and the dialog. The total performance requires a good script, proper lighting, a receptive audience, and the support of the environment (backdrops and props) and score (music and special effects) to come together for a successful play. And as in a theatrical production, many talents are called into action, and the audience has to be ready for the production in order for it to be a commercial success. If any or many of the contributing actions do not meet the standards of good quality, all suffer and the play will be closed after few performances. Businesses and products succeed or fail in a like manner. At the time this briefing was first considered, the world of high technology and the fast-paced growth of business starts in the information technology world had recently come crashing back to reality. Which is that many products were no more than a mere concept, and the money invested in these concepts was played fast and loose. Some ideas failed due to lack of sufficient funding, some due to lack of sufficient technical and management direction, and some due to the fact that the product envisioned met an audience that was not quite ready to embrace the product, run out and tell their efriends to buy the product, and generate the sales revenues that could surpass the investment costs. All of which defines a product’s success. Productization is a practice that looks at the holistic business and helps define the steps necessary to be successful. I talked the editor into expanding this subject to business as a whole. So, not only is the high technology business going to be a subject, but instead the scope is productization for a broadened program of commercialization of ideas into viable businesses . Both tangible and intangible products are covered. The key, “prime number” concept of the success is that productization is a skillful application of adding value to the
marketplace, and providing a choice to the customer that they want to make. This is called “opportunity cost.” It means that at each step of the way, the investment of time and money is balanced against the lost opportunities due to the fact that our time and money was already spent. For instance, today is bright and sunny, a warm gentle breeze is blowing, and I’m stuck in my library banging this out on my computer...... Perhaps I’ll come back to this later................. Oh, by the way, I want us to have a dialog. But I find that difficult outside of a lecture or presentation, both of which do not describe a way of learning that I enjoy. Instead, and again with the editor’s indulgence, the story line here, although far-fetched, could actually have happened, and as far as the case studies and referenced story lines; with some literary license they did and are continuing sagas. So the text is set in a parable style. However, terms that are the vernacular of the productization and related industries are italicized and can be found in a glossary. Also the chapter and page where they are first introduced are listed.
Good luck. ~the author
Chapter 1 What Is Productization? Why Does It Matter To Business? Mary first saw the older gentleman at a management conference she had attended a few months before. He was well dressed, had a regal air about him, but was neither dapper nor handsome. So she was puzzled by the attention that went his way whenever she saw him. It seemed as if small crowds would spy him, gather round and begin asking him questions. As he spoke in reply not only would the questioner would pay rapt attention, but so would all within earshot. She didn’t know his name, but understood from the talk at breaks the he was nicknamed “the productizer.” Whatever that meant. And now Mary was hailing a cab in some strange city, where she was on her way to a big trade show at which she was to show off one of her company’s new product. The new product was years ahead of its competition, in fact neither Mary nor anyone else at her company actually could name any single product that competed against it. Sure there were a few combinations of goods and services that when combined could do about the same thing, but this was the first that took all that and put it into one neat package. Her company figured it would sell itself. But Mary was worried. And it was raining. There was that older gentleman, and he had hailed a cab! On a whim, Mary ran up to him, introduced herself and asked if they had a mutual destination and, oh please, could she share the cab? This was Mary’s lucky day. As they rode to the trade show, Mary got to talking about her new product, described its features and asked the older gentleman what he thought. The “productizer” looked directly at her and asked: “has this product been through the productization process?” “Why no,” replied Mary. “At least I don’t think it has. In fact, I don’t know what productization is. Could you explain your question a little more thoroughly?” The old gentleman sighed. He reached into his pocket and gave her his card. “we’re almost there, why don’t you look me up tonight and we will discuss it over diner at the hotel, Dutch treat. About 7:00 suits me.” “Okay,” she replied and with that they had arrived and paid their fare and ran off in different directions to attend to the trade show. It turns out the Productizer was giving a seminar, but Mary couldn’t take a break from her booth, so she had to wait for that evening. During the day, quite a few business people came up to Mary’s booth, they politely asked questions about the new product, and then drifted away. No one really seemed that interested. This not only puzzled Mary, it got her worried. A big part of Mary’s compensation was based on how well this new product did in the marketplace. And her company, which had paid heavily to develop the product, was wanting the product
to make money quickly, as the board of directors was concerned with the costs rung up in its development. That evening, Mary got ready for meeting the older gentleman with a knot in her stomach and the ennui that comes with an unknowing fear. At dinner, Mary described the strange disinterest people had for her new product and asked the older gentleman to explain what he meant in the cab that morning. The productizer finished his roll and took a sip of the water and started to speak. “Productization is a method, a practice, and a process that should be used in the development of all new products. I travel the world giving seminars to business people just like you, Mary. And I normally charge a hefty fee for consulting to new clients. But this morning, after your candid presentation about your new product in the cab, I just had to give you an opportunity to learn more. However, I want you to promise to practice the productization method from here on out, or we can talk about other things during the rest of the meal.” A bit taken aback by such a bold request from a near stranger, Mary noticed that other diners in the room were attentively waiting and listening for her reply, and it seemed as if they were encouraging her commit to the request. Many of the diners she had seen at the trade show. How strange this day has been. “Why yes, of course,” she replied. Dabbing a bit of wine from the corner of his lips, the productizer began to describe Productization. “You see,” he said, “productization is a process that helps business people bring an idea to life. It’s not commercialization, it’s not product management, and it is not invention. While productization can contribute to these fields of practice, productization is applied sometimes even before invention, and long after commercialization.” Mary was more confused at that moment than she had been all day. And she wasn’t sure if her pledge to the older gentleman had been a good idea. “All right,” she said dazed and getting knotted up, “I’m more confused than this morning. You need to give me an example,” she demanded. Bemused, the productizer picked up the bottle of Pinot Greigo he had ordered with the meal, read the label and held it for her to observe. Mary noted that this wine came from a special area in California, it had been bottled several years before, and the label was remarkable and eye catching. “You see,” he said, “even this bottle of wine has been through the productization process.” Mary looked at him quizzically. “Let me explain,” he continued. “A few years ago, many of the wineries in California had invested in Chardonay grapes, and Chardonay wine had been selling very well. My client, the maker of this wine you’re holding, was concerned. The winery owner was troubled by all the money going into the Chardonay business, and wanted my opinion before they invested in it like their neighboring wineries. That’s when I introduced the winery to the productization process.” He paused, took a sip and started his meal.
“You see, Chardonay was getting more expensive to produce. The root stock was priced twice what it had been only a few years before, the crops were susceptible to seasonal weather fluctuations, and frankly, we both thought that the supply, once all the planted stock had reach maturity, would surpass the demand. I asked my client why he wanted to invest in Chardonay, and he could not give me any other reason than the fear of being left behind by his competitors. While that is a concern in any business, no single winery had market share that meant anything. Instead, microeconomic conditions were more in play with that business than the efforts of any one winery. Without market leadership, it was going to be hard to stand out from the rest. So no Chardonay wine maker would be able to dictate a market price without being close to the general market conditions. In such conditions, only the best managed wineries can hope to make a profit. And that includes getting the raw materials, tending the crop during the growing season, the selected time for harvesting, even the type of bottle used.” “So,” he continued, “I asked my client what he could do to stay in the wine making business without being another member of the ‘herd mentality.’ We started taking an assessment of the various grapes that grew well in his geographic area, and started to list features of each grape. This is called market definition by some, but I would prefer calling it cataloging the inputs.” With that, he quietly folded his napkin and called for the waiter. Mary was feeling better. She wasn’t sure if it was the wine, or the explanation she had just heard. It was starting to make sense. “Let me get this straight,” she said. “If I define the market, which in this case was the bottled wine market, and then I look at all the players in the market, I will have a better chance of making a profit?” The older gentleman scowled, “if it were as uncomplicated as that simplification, then all businesses would be successful. I guess I need to explain further. Defining the market means the size, the sensitivity to price, the alternatives of choice, and the inputs that further define the market. That’s why I would rather call it cataloging the inputs. Lets list them:” Cataloging the Inputs 1. market size 2. price elasticity 3. raw material costs 4. resource utilization (the use of the company’s and other services’ labor, management and capital equipment) 5. other resources (energy or consumable materials for example) 6. manufacturing costs 7. marketing and sales costs 8. warehousing 9. transportation and shipping 10. product differentiation 11. marketing and consumer demand
12. market position and pricing He pulled out a notebook and started writing down the twelve items. Mary was on the edge of her seat. The Pinot Gregio had helped, and this was interesting. The productizer handed her the list and stood up. “I’ve taken care of tonight’s dinner,” he said, “but you are buying me breakfast tomorrow. Right here at 7:30 sharp. And this list; by breakfast I want you to identify all the inputs that you can think of for each of the twelve headings. So you have a homework assignment, young lady.” And with a gleeful wink, he turned and walked out of the dining room. Mary looked up and saw several diners approaching her. “We want to help,” they said. So several of them gathered around a table in the lobby and began to list the inputs for cataloging. By 10:15 that night, they had amassed the following inputs: equipment) was further broken 1. market size included: down to: • domestic and international • business strengths wine sales, which further broke down to: • business weakness • varietal and specialty • corporate mission wines and • fixed costs champagnes • capital resources • blended wines and • marketing channels regional tastes • distribution • seasonal products, • opportunity cost such as champagne at 5. other resources (energy or other New Years costs) 2. price elasticity included: • utilities • demand trends relative to • water pricing • waste disposal • regionalized purchasing • capital habits and market volume • taxes • pricing points 6. manufacturing costs • step-wise pricing • labor benchmarks • fixed • wholesale volume • variable price breaks • maintenance and capital • segmented market investments pricing 3. raw material costs included: • jobbers • fertilizers • quality control • consumables • depreciation • variable costs • warehousing 4. resource utilization (the use of the • shipping company’s and other services’ 7. marketing and sales costs labor, management and capital • advertising • promotional expenses
• sales team • brokers and distributors • capital
8. warehousing • raw materials • finished goods • management, labor and maintenance • utilities • inventory taxes • shrinkage 9. transportation and shipping • fleet costs • demurrage • carriers • Less than truck load (LTL) • truck • rail • intermodal • bulk • packaging and labeling • insurance
• • • •
efficiency market share market segmentation competition
10. product differentiation • size and quantity • appearance • labeling • promotional • cross marketing 11. marketing and consumer demand • product definition • specialty • private branding • co-marketing • consumer definition • features marketing • advertising 12. market position and pricing • strategic allocation of market indicators • pricing floor • break even analysis
Mary thanked her new friends and gathered the lists they had made. She wondered how all this could be discussed in one breakfast. And she realized that her new product had been promoted without an analysis of many of the items on this list. That night she slept fitfully. In the morning, she was once again worried about all the activities she had to do as the product manager for her company’s new product. At breakfast, the older gentleman was kind and contemplative. After reviewing the list and jotting some notes in the margins, he took to drawing lines and circles around various items on the list. “Well Mary,” he said, “I think you have been busy! But are you sure that everything is on this list?” Before she could reply, he continued, “this list covers much of the inputs I wanted you to catalog. But what I really want is some organization of related tasks. The way you have them listed makes no sense. So I’ve reorganized them and regrouped them.” Mary was beside herself, wasn’t it originally his list? “Wait a minute,” she retorted, “if I’m buying you breakfast, at least you could take responsibility for the original organization of the list. It was you who gave it to me!” The productizer laughed, the first time she had heard a laugh from the fellow. “I do want to reorganize, but I want you to understand why we must. That was why I bungled the list last night, that and the Pinot Grigio. You see, the way the list flows now, there is little likelihood that the front work would be done before the final work. When you go through the productization process, it is best to systematically go through the early efforts before continuing. That way, should you determine that after all the product is not going to perform as you hoped and needed it to, at least you minimized your investment of time and money.” He shook his head and went on. “You see,” he continued, “too many times I’ve seen businesses go for broke trying to perfect a product that in hindsight did not deserve the attention it was getting. These businesses had too much invested to admit defeat. Sometimes, when they finally pulled the plug, the business and the professions of the people involved went flat-line. Its always best to take some time each day, week, month and year to reassess the progress and status of all products in the marketplace and in the pipeline. This practice helps a manager identify when situations need immediate attention. And, it forces the product manager to take notice and initiate a program to turnaround a bad situation.” The older gentleman continued, “Let’s list the main tasks and finish up our breakfast. I want you to come to my seminar today, we will be taking about your product as a case study. Now, don’t protest, if you are going to get my attention, the least you can do is allow me a real life situation to discuss in my program. Besides, you will get the benefit of many experienced people helping you on this. I find that such sounding boards are nearly as good as a board of directors.” “Anyhow, the list can be sorted to the following, sequential areas:
• definition of your business mission and product area(s) focus • a critical look at the resources your company has, and what else is needed • a product analysis which includes ⇒ definition of the client ⇒ determination of the defined client needs ⇒ ability to create client demand ⇒ alignment of the product features that help expand and firm the client demand ⇒ assessment of the early, mid, and long term expectations of market size and market share for this product • your route to this market i.e. marketing and product positioning • investment of company opportunity towards this product, including ⇒ your company’s long term plans to support this product, its evolution and changes.” “By the way, you’ll have some time to prepare for the myriad of questions the class will ask. I am going to talk about the Pinot Grigio productization first. And I’ll take that list you prepared, there are a few things I should have added to my list for that presentation. Thanks. Let’s catch a cab at 8:45?” Mary nodded yes, and he was off again. She wrote down the list of the organization she had just heard. Now she was mad that the marked up list she had given him was with the older gentleman, and she wasn’t certain how he had reorganized it. Well, she’d just have to take the above organization and assign numbers to that list and the one she and her mates had done last evening. [as an exercise, copy the list below and the 10:10pm list. Letter in capitals the breakfast list, and assign in numbers the cataloged inputs to the various headings done at breakfast. if there is repetition, decide if the repetition is worth considering under the competing headings, or should you limit this to only one heading?] Breakfast the prior evening 1. market size included: A. definition of your business’ mission • domestic and international and product area(s) focus wine sales, which further broke down to: • varietal and specialty B. a critical look at the resources your wines and champagnes company has, and what else is needed • blended wines and regional tastes • seasonal products, such C. a product analysis which includes as champagne at New Years 2. price elasticity included:
a) definition of the client
• demand trends relative to
• regionalized purchasing habits
b) determination of the defined client needs and market volume
• pricing points
• step-wise pricing benchmarks • wholesale volume price breaks • segmented market pricing 3. raw material costs included:
c) ability to create client demand
d) alignment of the product features that help expand and firm the client demand
e) assessment of the early, mid and long term expectations of market size and market share for this product
• fertilizers • consumables • variable costs
4. resource utilization (the use of the company’s and other services’ labor, management and capital equipment) was further broken down to:
f) your route to this market, i.e. marketing and product positioning
D. investment of company opportunity towards this product, including
opportunity cost 5. other resources (energy or other costs) E. your company’s long term plans to support this product, its evolution and changes.”
• • • • • • • • • • • • •
business strengths business weakness corporate mission fixed costs capital resources marketing channels distribution
utilities water waste disposal capital
taxes 6. manufacturing costs
• fixed • variable
• maintenance and capital
shipping 7. marketing and sales costs
• • • • • • • • • •
jobbers quality control depreciation warehousing
advertising promotional expenses sales team brokers and distributors
capital 8. warehousing
• raw materials • finished goods • management, labor and
• utilities • inventory taxes • shrinkage
9. transportation and shipping
• fleet costs • demurrage • carriers
• Less than truck load (LTL) • truck • rail • intermodal • bulk
• packaging and labeling • insurance
10. product differentiation
• size and quantity • appearance • labeling
• promotional • cross marketing
11. marketing and consumer demand
• product definition
• specialty • private branding • co-marketing
• consumer definition • features marketing • advertising
12. market position and pricing
• strategic allocation of market
• • • • • •
pricing floor break even analysis efficiency market share market segmentation competition
[you can see that many inputs would not need to be defined in the early stages of productization. However, before any product hits the market, all those input subjects will require a plan.]
Chapter 2 Why To Productize? How To Productize? Mary didn’t go directly to her booth that day. Instead, she registered for the sessions the productizer was leading. There was one in the morning, the other from 2:00 top 5:00. She called her boss and told her that she would only be able to spend a few hours at the booth, but that the next day, she was sure what she was about to learn would make the next and last day very successful. At the booth, she put a stack of business cards and a note saying she was at the seminar on productization and hoped to catch up with anyone the next day. And she mentioned that she would be happy to describe just what her new product could do for meeting client’s needs. Mary joined the growing crowd at the seminar, took a seat near the front and grabbed a pen and paper and started to take notes. The productizer remarked about the dinner he had the night before, and encouraged the audience to sign up for the afternoon session which would discuss an application of productization to Mary’s product. He then began discussing the Pinot Grigio project. First, the client needed to determine its business mission and product area(s) focus As the wine maker was already growing grapes and producing fine wines, he was confused as to what was at issue. The productizer asked him if he had ever considered what was his product? ◊ Was it grapes? ◊ Was it wine? ◊ Or was it a bottle of wine that a consumer would enjoy? You see, each choice had different levels of financial and management commitment, each had unique talents needed to be successful, and a misstep at any choice would change the outcome and success. Each of the above bullets were subsets of his business. Each could be a separate business all to itself. The wine maker took stock of what this meant to him and his business: He liked to make wine, he had undeveloped acreage that he could plant in grapes, but his manufacturing capacity was limited, and funding for expansion might not be prudent early on. The productizer reminded the class that the underlying reason this client had called him was to make sense of investing in chardonnay grapes for chardonnay wine. The productizer held fast and made the wine maker look at the basic “prime numbers” of his business. As the class was spilt with understanding by some and a puzzled look by others, the productizer gave a definition for prime numbers. [all words that are first italicized are listed alphabetically in the glossary, this definition is also listed there, and here as part of the case text.]
“prime numbers” of a business are the building blocks of a business that can not be broken down into smaller identifiable units and still be unique to that business. For most businesses, the prime numbers equate to the various business departments of the organization. If any of these departments should be deleted, the business could not succeed in reaching the final outcomes it endeavored to take. However, and this is an important concept, prime numbers are activities and services or deliverables that can also be defined well enough to separate them from the business operation and secure their operation by some other means such as a (sub)contractor, a jobber, or a service provider. “So class,” he went on, “who can tell me some of his prime numbers?” In the end, he had a list similar to what he had given Mary at dinner:
Pinot Grigio Business Prime Numbers 1. labor 2. management 3. capital equipment 4. production (growing the grapes) 5. manufacturing: 6. making and 7. bottling the wine 8. marketing and sales 9. warehousing 10. transportation and shipping, and he added 11. accounting and finance (after all, the money has to come and go in any successful business)
Secondly A Business Needs To Take A Critical Look At The Resources It Has, And Determine What Else Is Needed For the case of the winery, it had the land, it did not have the labor force needed to expand the tending of the grapes nor the intense demand for labor at harvesting. Additionally, it was not nearly set up to prepare the grapes for the fermentation process, nor did it have the cellaring capacity if it was to add the Pinot Grigio to its stable of wines. This was when opportunity cost was used to assess what the short, mid and long term plans were to be. A winery as well as any other business could seek funding and acquire human resources and capital investment to undertake a new product line internally. But when one goes through the productization process, the unique steps for the prime numbers listed above are individually defined as they are associated with this product as well as they are with the other products now being sold, or planned for the future. So, in this case, the winery looked at each prime number on a strength or weakness basis. If it was a strength, then the winery would consider keeping that prime number activity in-house, if it was a weakness, then the winery would seriously consider looking outside the winery’s key business abilities and either contract, hire a jobber, or re-think the point in the product cycle where it would relinquish control of the product and sell. [think of it as vertical dis-integration] For now, suffice it to say that the client chose to plant the grapes. That had significant long term financial benefits, and the land was fallow and fertile. The tending to the crops was handled by their own staff with only a few additional employees. Harvest time was handled with contracted help and the crushing, stemming and fermenting went to a jobber that would return the wine in bulk for bottling at the winery. The winery could schedule the bottling and corking during non-peak production periods.
Warehousing would be contracted to current distributors with incentives to limit warehousing time. Next A Product Analysis Includes: 1. definition of the client a) This activity is not simple. The client is possibly any or all of the following: i) the end consumer, ii) the retailer, iii) the wholesaler and, iv) the distributor. 2. determination of the defined client needs a) Each client above has different needs and works under varying business decision criteria. b) The needs can cataloged into: i) use of the product and or by-products ii) handling iii) storing iv) marketing and financial needs [of the list i through iii above are best defined when the productization process modifies the subject with the predicator “ease of” and determines how that can be achieved] c) Establishing optimal means of meeting the needs of i through iv for each type of client, and defining how the product is handled by each client is required. For example: a distributor would better handle pallets or cases of wine where as an end consumer is more likely to buy and use wine by the bottle. If at all possible, consider the marketing units each would prefer to deal with and bundle the product in such a way so that unbundling allows for ease of handling by the next level of client. d) Should the wine maker determine that the wine was to be sold in bulk, then the end consumer for the wine maker is a bulk merchant or private label bottler. In that case, wine could be sold by the barrel or in even larger units. There are any number of reasons to sell a product in such an unfinished state. This briefing will only make mention of those reasons within the case studies herein. 3. ability to create client demand a) How many times have we all heard “if you build a better mouse trap, the world will beat a path to your door.”? That only holds true if there are a lot of mice. b) In other words, client demand is based on the client’s perception of a need, and your product being able to satisfy that need. i) But it is the ability to satisfy the need better than other products that would create a demand over and above competing products. ii) Yet again, sometimes products sell better in association with other products and services. For example, the Pinot Grigio sold to the
productizer in the hotel restaurant sold for a much higher value [cost] with the meal because the hotel meal complimented the sale and consumption of the wine. The ease of use, in that wine glasses were provided, the wine steward removed the cork and poured the wine, and the dirty glasses were handled by the hotel specialist in dishwashing meant that only the drinking and enjoyment of the wine was experienced by the end consumer. For that ease of use, the productizer paid a premium for the bottle of wine. iii) Another critical note: perception of a need is not always or already established at the time of product introduction. Many times, the need is shaped and defined by the product developer. In 1960, nobody considered or wanted a computer in their home. And the internet when it first was in use, was mainly a scientific endeavor, not a direct challenger to the postal service and the research library as well as other avenues of information and entertainment. alignment of the product features that help expand and firm the client demand a) In identifying client needs, the product can be refined to as closely match the client needs as practicable. Test marketing and consumer feed back can be used early on to adjust the features that make the product more desirable and correct the features that are perceived as negative. i) In improving/refining products, be certain to include a cost/benefit analysis to avoid placing demands on a product that would require pricing beyond the financial reach of the target client market. [See case study on “Scapula Exerciser” for an approach to the cost/benefit solution.] b) The productization of the product can also anticipate future awareness and benefits of a product that can be emphasized in order to add value and expansion of market size to the product. Many times this is done by offering variable sizes of the same product with convenient packaging to make the product portable. An example of a modest change is to have zip top removal for a canned product to ease its utility and ease of access. This friendly feature opens the market usefulness of the product which relates to more sales. And typically, the altered product can be sold for a higher margin due to the attractive feature which also differentiates it from competing products. Consumers/clients will value and pay more for features that directly benefit them. assessment of the early, mid, and long term expectations of market size and market share for this product a) Product demand can be fickle. Market size is controlled by the ability to distribute the product, market it so potential sales are exploited, and priced to encourage demand. Faddish products are not to be overlooked. In the 1980’s a small stone was packaged and advertised as a “pet rock” just in time for the Christmas gift giving holidays. While no feature was practical, the market demand was immediate and the product sales were
in the millions. This required an ability to supply at the time demand was at a peak, with an ability to reduce or stop production as the demand ebbed. Certainly, the productization of that “pet rock” was targeted to immediate sales only, no mid or long term expectations were defined, and as such, the methods used to market and distribute the product were tuned to short term business relations. b) Other products have the ability to grow in demand rapidly. When this might occur, the productization process must take careful review and assessment of the financial projections. If sales strip the ability to pay for the inputs to supply the product, cash flow problems can cause foundering of a business before the cycle balances out. For many businesses, early growth and development of the product can sap all the money out of a product. While in most business circles this is considered a normal feature of a “hot” product, it does not need to be so. Mechanisms and approaches will be covered in a future symposium,” said the productizer. c) “Long term expectations,” went on the productizer, “help define how the product pricing and strategy for bringing the product to market are played out. Should a business expect that a product has a long lifetime, then immediate profits can be less of an urgency in that as a business matures and grows, economies of scale, smarter methods and practices, and better buying power of raw materials can all contribute to a lowered delivered product cost. This long term strategy pushes the improvement of gross margin per unit sale into the future. If understood, and the product is the market leader, then there is an probable advantage the business has over later entering competing products.” The productizer looked up and directly at the audience. “Advantage is an opportunity, not a guarantee,” he bellowed. “Assessment of current, mid and long-term competition,” he went on, “are key to the strategy of how one is to build a business around a product. And even though a company might have numerous products, each product unto itself is a business. a) In the beginning of a product’s life, the current market conditions are studied for: i) Existing market demand and the products that are satisfying that demand. ii) Analysis of market share by the key competitors as well as identifying relative ranking if there are multiple competing products. iii) Assessment of production capacity and serviceability of product relative to demand. iv) Ease of entry and the cost of leaving the product business. v) Consumer awareness of this kind of product and of the market leader(s). b) Mid term competition is of great consequence.
The competition can very likely come from within or from business partners that introduce like or next generation products. ii) In fact, by mid life of a product, the business should have several lines that meet specific consumer needs that will overlap. While the unit sales and market share of the originating product decay, the product line is able to take advantage of the trade identity, common distribution and marketing channels, and an efficient corporate structure.” The productizer chuckled along with the audience with this last comment. “You know,” he went on, “efficient corporate structures can and do exist. Their efficiency is based on many things, but key amongst them are the ability to listen to the market, implement change rapidly but not foolishly, and demonstrate continuous product and process improvement.” iii) Business partners can become competitive if they have significant roles in either upstream or downstream business practices. Many times, the perception of sales growth is not met with actual performance. If business partners over invested in preparing for their participation in the product development and sales, they might have unused or under utilized capacity. In order to satisfy their own corporate directives, they sometimes look internally to maximize the capacity of their investment. This would mean that they might develop a directly competing product. Or they might find other business partners that would demand participation for goods and services in direct competition with the original product. Long term competition is usually due to a diluted market share and a gradual shift from the early, hot new product to a commodity status. i) At this point, the productization process has to access the value of maintaining the product. a) does it contribute more than its share of profitable cash flow? b) is competition mainly on price and is there little market appreciation for any other product features? c) can it reasonably compete without having to expend great amounts for advertising and discounting? d) is obsolescence a factor or is the product still a viable business? e) is the business’ infrastructure capable of continued performance at the levels of projected demand? (1) This last one is significant. Too many times, major overhauls and replacement projects are carried out just before management determines that the product’s commodity status does not enable enough profits to continue production and sale. (2) are the resources within a company better spent on maximizing the benefits of other products?
can divestment of the business make more cash flow in the foreseeable future with an alternative place to invest the money for long term strength than continuing the support of the product and not being able to invest in newer, more robust business ventures? “Your route to this market i.e. marketing and product positioning,” he went on, “have a determining factor in product pricing, brand and trade identity and market share.” a) Early on, if the product is part of the introduction of a good or service, the education of the consumer and even your own resources demands investment of management time and money. b) At this time, awareness of the product and the target market help in refining and defining the product and its key features and attributes. c) Your management must interpret the market’s needs, and identify the leading decision makers in the industry. Few end consumers are willing to try a new product before it has proven reliable and meeting the needs of the client. This frustration can lead to a stalemate in the introduction of a product. d) By positioning the product with like or complementary goods and services, the new product can be introduced with an already established good or service. e) Should you be introducing a product that competes in a well established market, then taking market share is more cut throat. “Investment of company opportunity towards this product, including your company’s long term plans to support this product, its evolution and changes.” Was the last heading before the noon break in the symposium. The productizer went on to list: a) “As in the analysis of the long term business issue, in the short term, a business needs to assess how much commitment of time, talent and money will be directed to introducing and supporting a new product. If the analysis of conditions was in error, the product could be overwhelmed with demand or there might not be any demand. b) During such times, the demands for commitment would require longer lead times before positive cash flow occurs. c) Other, possibly higher margin products can also be introduced at the same time, limiting the human resources available to commit to this product. d) As is human nature, talent would be most interested in committing to the highest profile product. Thus a lower level product might be abandoned or neglected prematurely. e) Products need champions. They are usually named “product manager.”
Mary took note of that last comment. Her title was product manager, but she had no way of knowing all the nuances required of her position until now. The productizer looked up at her and beckoned her to the front of the room. “Well, was it time well spent, Mary?” asked the productizer.
“Why I’m not sure I know more than I did before, but I am certainly concerned about all the decisions that go into the productization process.” Mary went on to list the key concepts she needed to stress in the productization:
Mary’s Productization List 1. The business needs to determine its business focus and capabilities to determine what it can reasonably do on its own, and where and when it should seek help from the outside. 2. The client is possibly a end consumer, retailer, a wholesaler or a distributor. 3. The product needs to be defined based on the target market/client 4. Each type of client has different needs and works under varying business decision criteria and priorities. 5. Understanding the type of client and aligning product features that best serve that client can expand and strengthen client demand. 6. Early, mid, and long term planning for market size and market share of a product require some forward thinking and analysis of the fit of the product to the corporate mission. 7. Pricing is determined based on the market and competition as well as the duration of the product life 8. Product management includes continuos improvement and assessment of cash flow projections and opportunity cost to the business.
The older gentleman smiled and told her, “Mary, I am very glad to have you as part of my audience. In this afternoon’s session, with your permission, I will explore your product and the first item of this list.” Mary agreed and they went off to lunch.
Chapter 3 Business Focus And Capabilities (step 1) After lunch, the productizer introduced Mary and her situation to the balance of the class. Mary was asked to get up and describe her product and what she has learned over the last few days: Mary began, “By chance I met the productizer only two days ago, although I had known of him for a number of years. I dearly needed some objective advice as I have been assigned to develop a product that my firm thought might be ready for the marketplace.” She went on, “I have a trade show booth here at this conference and for the life of me, I have not been able to tell passers -by just why we made this product, who our target market is and why this product is a good deal! So you can see that I need your help in defining this first from the standpoint of my business’ focus and capabilities.” “So, before I even get to the product itself, let me tell you about the firm. It was founded by principles that were early leaders in the development of XTML. Since most of you are from the high technology business, suffice it to say that XTML is the next generation of HTML. This language allows computers to talk to each other in a semi- to unstructured environment and query each other without the need for human interface. Essentially, the computers, once their objective is defined, can independently go out into the Web and seek out information, sort it and take action as is defined in the objective. “So this leading edge stuff seems great, but the founders didn’t see their old employer realizing this was a watershed event and had pretty much shelved it with no business plans for introducing it to the marketplace. In fact, the firm they left had no plans to use it with any of their existing products. So the founders bailed out, surrendered some of their stock options to pay for the rights to use and market the technical know how they developed and struck out on their own. “Surely you can appreciate this is a class of programmers and language experts that can find work anywhere in the IT world, and in fact, they initially sold time helping firms with tough IT problems. This wasn’t all that bad, and they developed a name and identity for being top notch at solving some very complicated IT problems and working out solutions to other’s software that kept crashing on their clients. Once they banked earnings enough to be able to breath a little, they started some marketing time with these same clients to introduce them to XTML.” At that moment, Mary was shocked at the number of hands that reached up. “Yes, you there, what is it?” she asked. The woman stood up and proclaimed, “how can they be marketing, when they have not defined the product, not determined its utility, and are just reaching out to their existing client base to see if the client wants to spend money without a clear concept of XTML’s value?” The woman went on, “that is not marketing, it is selling, and it is of the worst kind!”
If it had been Sunday, a big Amen would have been expelled from this crowd. As it was, Mary turned red and then composed herself. Before she spoke, she thought about what had been said by one, and agreed to by many in the audience. Yes, that was the issue! Mary’s firm was tops at solving IT problems, leading edge at developing code for the next level of computing power, and yet they were neophytes at defining what they should be doing to introduce XTML to the marketplace. No, worse than neophytes, in that they didn’t even have an inkling that there was work to be done. “You have a very good point,” said Mary as she sheepishly looked over at the productizer. “Thank you, Mary!” said the productizer as kindly as possible and taking the reins of the presentation. “You see folks, Mary’s firm knew its capabilities as leading edge programmers and ready to take on the world with this new XTML program or code or whatever it is. But the firm did not know what to do with its special capabilities in XTML to stand out from the rest of the high tech firms. Furthermore, the founders had never found the time to analyze what they could do with this understated and unrecognized product. “As is problematic with many high technology products, market leaders are the firms that are first to market an idea, and to establish a track record in the industry that attracts the interest of future clients and investors. So Mary’s firm was jumping in feet first trying to find clients and building an experience profile. But at the same time, XTML is not anything more than a language. A key task for Mary’s firm is to identify what they can do with this language that adds value to their clients’ business operations. In order to help Mary sort out the strengths and weaknesses of her firm let’s work out a +/- chart. We can use the “prime numbers” concept we did for the Pinot Grigio example yesterday:” “Prime Numbers” assessment of firm capabilities Prime number + - Comment labor + The technical talent is world renowned and hard working. The founders have demonstrated an ability to recruit additional talent at that time the business increases a demand for services. The direction of the firm is not well-versed in classic business structure. Top management, while technically proficient in this high technology field, are more likely to commit energies to technical problem solving for a client rather than establishing and nurturing a framework for operations of the business on a grander scale. This limits the firm’s ability to maintain a leadership role in bringing this technology to the marketplace. [The founders have not sought to augment internal talent with outside/recruited management resources]
In the classical sense, the technology rights to XTML source code and practice is the capital investment. This asset known as intellectual property is valued upon its replacement costs. This value is fleeting as other companies have some if not all of the same category of knowledge. Over a matter of years, the basic code will diminish in value and would need to be replaced in market application software. production ? ? This line is intentionally left blank in that the firm has not yet defined the product and level of service (tech support) assigned to the product. For a product like Mary’s, her firm needs to take an assessment of its production capacity and serviceability of product relative to demand. If follow-on technical support is expected, a ratio of after sales service to sales volume needs to be evaluated and plans to fund and provide tech support services needs to be factored into the business plan. manufacturing Once the product applications are determined, producing + tangible products such as guide books and electronic media is relegated to in-house production or outsourcing. marketing and sales - The firm has limited experience in new product productization in determining a target client, defining the needs and formulating products/services that will generate sales opportunities. warehousing - As the firm has mainly generated revenues by selling hours of top technical talent, a means of inventorying and tracking of goods is lacking. Additionally, the forward planning of human resource talent is lacking and histograms of professional services should be developed. transportation and + As for the most part, transportation and shipping of shipping tangible products will contribute little to the cost of sales, this firm can use reliable service vendors to support their needs without significant negative consequences. accounting - The firms current business practices are not aligned with the project new market entrance. Managing accounting of accounts payable, letters of credit, and accounts receivable will require new methods of cash flow tracking. Additionally, determination of a broader spectrum of employee pay, based on the cost for human resources of the future business, will need some management of market pricing. Otherwise, pay structures will fail to relate to external influences. finance - While the firm is now solvent, the current working cash flow business practice limits the firm’s ability to expand. Leveraging of assets and developing a relationship with a +
financial institution and possibly investors such as venture capital or the stock market will provide a working capital cushion to level out cycles of heavy fund demands and returning sales revenues. Early on, some sales will have extended payment structures or bad debt as some clients are likely to challenge the perceived value of the product. Expect initial days sales outstanding of over 150 days.
“So class,” went on the productizer, “what does the above table tell us about Mary’s firm? It tells us that they have talented human resources and a dynamite intellectual property rights. It also tells us that should they wish to go beyond the current revenue generating practice of selling time, they need to rethink the priorities of the business and restructure the organization. And in the fast paced world of high technology, the life cycle of hot product to dog is short. If Mary’s firm is to reap benefits from this intellectual property, it needs to take action now!” “As we have assessed the firm above, outside help or strategic hires are needed to strengthen management, marketing and sales, warehousing and shipping, accounting and finance. Outside help can be in the form of contracted services, partnerships and mergers. Strategic hires can come from executive resource consultants (head hunters), industry association referrals, and through indirect channels such as refereed executives from other partners, financial institutions and client recommendations. Alternatively, internal candidates that have strong background in what appears to be a weak area, but are working on other professional issues, can be reassigned to new responsibilities and the position they open up by the transfer can be filled with new talent.” The productizer stopped and surveyed the room. “Does anyone think Mary’s firm will be able to pull this off?” he queried, “you see,” he went on, “the current operation is geared towards making fast money, and is not investing in the actions necessary to succeed in defining and promoting the new product. A productization process for this XTML-derived product will require dedication of strategic management and technical talent resources. Those resources will not be able to be out with the existing clients as full-time consultants. So the cost for this talent will have to be borne by those others that are generating revenues now. As the firm is also at a loss of what and how to market this, then they must also come to the realization that this particular product line is in its infancy, and benefit awareness and client needs are not firmly established. In fact, pricing such a product is very hard to do. For this, and many more products, this needs to be evaluated by the added value means of pricing. Sometimes this can also be called opportunity cost.” “And,” he continued, “opportunity cost is also what Mary’s firm must consider as it pursues the productization of their new technology. Should the firm invest in
developing and promoting this business, then funds will be consumed, talent will direct its focus to the productization process of the new product, and other business opportunities are likely to be deferred or abandoned due to stretched human resources and finances.” “So, for business focus and capabilities, the firm must assess the strengths or weaknesses it has in each operational business category: 1. labor 2. management 3. capital equipment 4. production or raw materials sourcing 5. manufacturing: 6. intermediate goods and services 7. finished goods and services 8. marketing and sales 9. warehousing 10. transportation and shipping, 11. accounting, and 12. finance” “It must then determine how it is to augment the weak points in its own capabilities with new and/or expanded and stronger capabilities. This augmenting can be done with a growth of the firm itself, known as internal growth, or by teaming or partnering, known as external growth. “Internal growth will require not only the hiring of new talent, which is very time consuming, but also business practices will need to be developed so that the growth has structure and the new talent and the old talent learn to work together as a team. Additionally, as this new growth is dependent on the new revenues of the product in consideration, significant risk is taken to develop all the capabilities internally. Usually, business direction towards internal type growth is selected when the product in development has a potential, at least initially, of incremental or fractional expansion of the full firm’s business. In that case, the new product-related business activities relative to the full firm’s operations and revenue streams is a fraction of the firm’s total activities.” “External growth can limit the financial and human resource strain on a firm that occurs when it seeks to materially expand its business focus. This is frequently called leveraging your capabilities. However, the potential future profits are diluted as the external business partners, or jobbers, will require a return on their investment. Sales proceeds are distributed to the external resources based on some valued measure of service or by unit pricing. External growth can allow for timing a rapid deployment of special capabilities as close as possible to the earnings cycle of a new product. A special caution for external growth is advised,” warned the productizer. “The understanding of each firm must be clear, and the associated risks for the new venture
must be understood by both parties. Usually these understandings are put in writing and authored by corporate lawyers skilled in this area of practice.” By now, Mary was beside herself. “Sir, if I may ask, what should my firm do at this point? I mean, we definitely are far short of having in-house capabilities needed to proceed under our own steam. We have limited financial strength to undertake a grand internal expansion and surge in hiring, and yet we wouldn’t know where to begin in selecting external growth options.” The productizer smiled and said, “at this juncture, your firm needs to develop and define the product concept. I suggest your principals, and some external strategist consultant have a weekend or week-long retreat and think this through. Invite some of your closest existing business clients to the retreat for at least one or two days, preferably during the early sessions. Have them help your firm define what can be done in XTML that would benefit their business and that they would be willing to pay for.” “By the conclusion of the retreat your firm should have an action plan with a time line, assignments for each of the principals, and by inviting some of your clients along, a focus group assessment of the function of the new product and likely some interested and motivated customers. And since, as we discovered in measuring the capabilities of the firm that you need some critical help in complementing the talents your firm has, these same clients might be able to guide you in seeking either external resources or identifying candidates for internal growth!” The productizer took out his Daytimer® and looked up at Mary. “How about three weeks from today?” Mary returned to her booth for the final day of the trade show. Instead of discussing the unique attributes of the XTML language with the day’s booth visitors, she asked them questions about the IT part of the visitor’s business, and what level of staffing it took relative to the overall corporate manpower pool. And she began formulating an assessment of the added value an XTML-based product would be able to provide to the firms represented by those booth visitors. Later that day, as the show was winding down, the productizer dropped by. “You know,” he said, “I wasn’t kidding about my availability to help your firm. Have you given my offer any thought?” “As a matter of fact,” Mary replied, “I called my boss last night and we are both keenly interested in your advice. But won’t you be expensive?” “If you add up the pool of internal talent a week-long retreat will consume, and the cost of the facility, meals, entertainment as well as a value placed on the contribution by your visiting clients, my cost will be negligible. Besides,” countered the productizer, “if your team does not have experience in such exercises, then you might not have that much to show for the time spent away from your day-to-day, income generating work. I’ll offer to discount the value to half my normal rate with the other
half taken as an equity position in this product. That way, I will be earning something, and I will demonstrate a motivation towards your business’ success in this new venture!” Mary shook his hand, “Deal!”
Chapter 4 Developing And Defining The Product (part one) “Call him wise whose actions, words and steps are all a clear because to a clear why.” ~ Lavater Three weeks later, Mary, the four principals, the productizer and an administrative assistant were squirreled away at a retreat. The rules (in instructions provided with his consulting contract and laid out by the productizer) were that only family calls were allowed; after 6:00 p.m., and no business calls were allowed at all. If there were any questions related to the retreat’s mission, the administrative assistant alone was the only person allowed to call back to the main office. And only three calls per day were allowed. Prior to the retreat, each principal had selected an employee as a temporary replacement for themselves, and had carefully reviewed with the replacement what was expected of them during the week’s absence. Several had also lined up some trusted consultants to help out if there were some critical problem that might be beyond the abilities of the chosen replacement. The consultants were to be called if such an emergency arose, and not the principal. All of the clients were told of this important retreat, and this worked to pique an interest in the objective of the retreat. The principals offered to get back to each curious client and let them know what transpired within the month. Most of the principals even set up future lunch dates with their clients for just that purpose. Three clients were invited to the third and fourth day of the retreat, and all accepted. Once the morning greetings were completed, the productizer put forward a schedule for the next few days. A fun afternoon was scheduled with the attending clients on the fourth day, but overall, this group had a serious mission. The potential for a significant product that would rock the IT world was under consideration. How it was introduced, and how well it performed in a real application would either take the firm to triple digit growth or force them to remain as a high tech labor pool. The productizer had Mary distribute a confidentiality/non-compete agreement for to all attendees. “What we are doing here this week is for the firm and our combined mutual benefit,” she said apologetically.. “This confidentiality/non-compete agreement is to protect the firm’s commitments. It is only for three years, after which time, this business is either successful in this venture, or we have failed. As many of you remember, we left our former employer because it did not see the value in XTMLbased products and we wanted to see what we could do with it. I don’t want you to run from this employer, and as we are principals and top managers, I would not expect you to.” “You see, our legal counsel has advised that this agreement will act as an inducement to move quickly towards developing a great product at the firm. If anyone thought a
product could languish for a number of months and then steal away with the knowledge we developed this week, they might not be as inclined to pull out all stops in developing the product here. We must act quickly to get this product into the marketplace and establish a lead ahead of the competition. Yet, we all know that in three years’ time, a product defined this week will become yesterday’s news. So after three years, this non-compete agreement won’t be needed.” Mary finished and collected the signed agreements. No one had complained, and Mary’s explanation made sense. The productizer pitched in with, “remember, in three years, you will likely have launched at least the third version of the product we define this week. And, we will look back at version 1.0 and gasp at the simplicity it had.” The productizer looked over his glasses at the group with a scowl, “We should also strive to broaden the firm’s product line within three years. No firm should depend so heavily on only a few product offerings.” One of the principals, who had wanted to say something for some time blurted, “so why don’t we define ten or twenty new products this week? After all, don’t we need to start hundreds to have only one or two become successful?” He sat down with a smug look, pleased with his recent business journal readings. The productizer spoke softly and asked the group if he could triple or quadruple his fee? “Why not,” he asked, “if the firm has the resources to initiate 15 or 20 new products, then it has the resources to throw money around with abandon. You see,” he said, “those rule-of thumb guides are for firms that have hundreds of products all pulling in money at various levels of success. Once a business is at that size, your fifteen or twenty new product starts is realistic. For large companies, new product introductions can initiate with hundreds of ideas which winnow out to maybe four or five products going through the whole development cycle. You need to develop a product starting from an idea. And you need to expend the time and effort to truly reflect upon what that idea means. We will loose any sense of understanding of how to define and develop one product idea if we dilute our week looking at a multitude of products.” The group knew the productizer was pontificating then, and that he had some misgivings about the ability of the group being able to develop a product concept over the next three to five days. The fidgety principal asked, “sir, how are we to begin? I mean, we have hundreds of ideas among the five of us, our client guests might have even more. How can we sift through that number and figure out which idea or ideas we should develop?” The productizer smiled and replied. “We will need to determine a class of product, one that might have some variations as it could be tuned to specific needs of certain clients. But before that, we need to comprehend the class of business that this product might be serving and by which your firm will be defined. You see,” said the productizer,
“it’s not actually the product you are defining, or the means of putting it together. No, you are here to define the result.” “The result of what your product does for your client. And that result is due to the actual technology, the application of that technology to a client’s problem(s) and the resulting benefit of the mix of product and carry-through [service]. For your firm to be successful, the result must be significantly more beneficial to the client than the expense the client must assume to apply your product. This is called opportunity cost. And the value added your product provides to the client in solving a problem needs to be enough to sway your client towards paying your firm for the product. To achieve this, you must clearly understand the needs of you client. Sometimes you must help you client define its needs beyond its existing business needs paradigm.” “Let me give you and example,” he went on. “Quite a few years back a client of mine was seeking out a routine service for a large industrial facility that he managed. This service was to replace a wearable part of a major piece of equipment. Like brake pads in automobiles, the wearable part had a useful life, and at the end of that life, it had to be replaced, or like in the case of an automobile brake, the equipment would have total failure. Unlike brake pads and automobiles, this repair took weeks to complete, was labor intensive, and the industrial facility was worth hundreds of millions of dollars in capital investment. When the equipment was down, it was equivalent to an automobile being ‘in the shop’; it was not much use to the client’s business and production was at a standstill.” “Anyhow, in years past the standard practice was to replace the wearable part with some new part (product) that would last about a year, and then each year the old, worn-out part was removed, and a new repair part installed. But the client understood that a whole production system with hundreds of employees was dependent on that piece of equipment. When it was down for repairs and replacement, hundreds of idle employees were not of much good for the company. So, I asked my client what they wanted: was it to continue with the standard practice, or was a review of the practice and a results solution worth while? In other words, was its existing business needs paradigm in need of a major shift? And we worked together to establish what results would make this shift worth our while. In other words, my client needed to look at the opportunity cost of a new solution versus the standard practice.” “Now this became a whole shift in how my client’s business went about making decisions. In the end, every possible replacement part that would satisfy this repair need was evaluated, tested and considered. In the end, the part chosen cost, on a unit price basis, twice what the old standby part had cost. But the installation cost was the same, and the factory was able to run for almost twice as long as before. This result was not the key determining factor for making this decision. Do you know what that was?” Mary was once again beside herself, “I’ll bet it was the added value this solution had to the business! This extended time between repairs let the company keep running its
production facility and making product. That translated to increased production volume for more unit sales, and increased annual revenues all probably adding to better profits for the client’s business!? Besides, I know I hate it when my automobile is in the shop, I can’t go and make sales calls and my whole schedule is put in limbo.” “Mary is exactly on target,” replied the productizer. “In this case the incremental cost to change the means of solving the problem was greatly offset in the resulting benefits.” The result for this client was millions more in product and tens of millions more in sales. All achieved by my client seeking out a solution to a real problem, which was ‘how to keep the industrial facility operating?’ instead of a perceived problem of how to replace the worn out part for the least amount of money and time.” “This gets even better for the firm that did the work of the repairs,” he went on. “They used this insight and exploited the concept of selling a result of longer run time between repairs and asked other clients if this interested them. For those that did, and most did when the above experience was described to them, the repair firm had a steady customer. And as word spread, their business opportunities exploded. After a few years the repair firm had offices around the world, and payroll of over a million dollars a week. Not bad for a firm that in the years before this results solution might have seen revenues of only a few million per year. But what is most important to note is that the work was technically no more rigorous than replacing brake pads. The competition to this firm still sells the old standard practice of replacing brake pads with the lowest cost replacement product. This firm doesn’t even try to fight in the bottom-feeder business market. Why should they when the solutions result they offer has a different decision criteria for their clients?” The fidgety principal once again couldn’t contain himself, “what does an automobile brake repair have anything to do with our firm defining a new product using one of the most advanced programming languages in high technology? And our clients are in the information technology business, not some old rusty industrial facility. This doesn’t make sense at all and you’re wasting my time and our money!” The productizer glared at him, thought better of it and looked to Mary, whom seemed eager to pitch in with an answer. “Mary, care to answer that?” he asked. Mary stood and faced the group, she looked at each one and then calmly suggested, “the productizer’s example has transformed my approach to defining what a product is.” She went on with more energy, “I have finally figured out that we are not here to define a new bit of software, we are not here to develop the hottest IT product and turn the world of data communications upside down. No,........ we are here to determine how all of those activities can be intertwined into a result for our clients that turns their standard business practice paradigm in a different, better direction. And the results from that different direction need to have a positive impact to the business’ bottom line. Otherwise,” she said emphatically, “the opportunity cost to the client of even thinking about us helping them, and us selling a solution has no added value. We’ve got to define, this week, how we can be a firm that figures out how to provide a
product to our clients that significantly transfigures their standard business practice and adds value to that client’s bottom line.” The fidgety principal sheepishly apologized, “okay, so I was a bit agitated, but Mary here has set me straight. I now understand our product concept has to look beyond what it is from a simple features basis and we have to define how its use benefits our client with significant results. I guess that would mean that we need to determine what our product does for the client. And we will have to determine the opportunity cost decision the client will have to make to be willing to expend money and time for this purchase.” The productizer clapped his hands and said, “excellent, and I am glad you said money and time. Do you know why?” The principal replied, “because, when a new product is purchased, a customer has to figure out what to do with it, how to use it, the applications it has, and employees have to be oriented on using the product to the benefit of the firm. It’s not like we are defining an everyday product that is the same as what people have been using before. So we need to make sure the human resource time of our clients is used efficiently. I guess that would mean that our product must be user friendly and maybe as part of the introduction to the marketplace, we should consider having a high level of technical support and orientations. Now that I think of it, some of the major software firms have occasional regional training symposiums on how to take full advantage of the newest version of their product. And the seminars are usually free and last all day. I’ll bet they are using this method to help the client maximize the results available from their product. And that probably translates to a higher client satisfaction and improved market acceptance!” The whole group stared in wonder at the fidgety principal. While he had seemed contrary and argumentative, he had been processing the day’s information and had just uttered the most important thought of the whole day: A product is only fully useful to the consumer once the consumer understands how to use it and benefit from it. And sometimes, a bit of hand-holding such as in training seminars launched with the first wave of a new product introduction is the best means of insuring the added value of a product is realized at the most important place: in the consumer’s mind. The productizer clapped his hands and gave a hearty “bravo!” and told the group, “you have now defined the end point of the product; the utility of a product is maximized only when the consumer has grasped the process of how to use the product. This utility provides the added value of the product. It is, or at least should be, the motivation of why a consumer would go out and buy version 2.0 of a product when version 1.0 worked perfectly fine. Which is that the incremental utility of the new
product is so much improved beyond the old product (or process or service or combination of both) that the opportunity cost favors the purchase of the new version over do nothing or use the ‘time and money’ elsewhere. I suggest we break for dinner, and then think about what utility we want to discuss with the clients that are coming the day after tomorrow.” The group’s emotional high lasted right on past dinner, and everyone personally thanked the fidgety principal for his perspicacity. Dreams that night were all on the application of XTML in the process of adding value to a client’s business. part two The very next day the group was raring to go! “Today,” said the productizer, “we must define in our group just what features the XTML language has and what can be done in applying XTML that is either an improvement over current business practices or a complete and significant shift in the business needs paradigm. Now let me caution you that improvements are more easily assimilated into your clients’ business operations and culture. But, a significant business paradigm shift, while harder to define and requiring a greater assessment of opportunity cost by your client, can develop into a unique product that your firm will be able to sell and service ahead of the competition. By proper definition, the product development shall be coordinated to stay focused on the results we expect its use will provide to our client. Every feature of the product must relate back to the clients’ business needs purpose. And we will consider any complexing of the product, that goes beyond that scope of the intended result as a customizing option for future analysis. That is, if the feature does not have a clear and clean link to the intended result, and the result we are talking about is a significant shift in the business needs paradigm, we will table that feature. A tabled feature will be revisited at that future time when we are customizing product options for a client whom is already committed to the product.” “Let’s identify the special features that XTML provides and identify what benefits a potential client would realize as a result of using an XTML-based product. We can best do this by listing the feature, the benefit and the expected result in a table. Once this is done, we will progress into how the feature is instilled in the product and service we have to offer. Today, our mission is to list all of the features and benefits. Tomorrow, with our clients here and helping, we can sort out the important features and results with their input and sideline those features that are not necessary as a basic product and service. We can also force rank the features from the most important to the least important. That way, once we have established a time line for software development, we will have emphasized those critical, most important features in assignments to our development group. Those will be the key product attributes that contribute to the results our clients are looking for. Product Development Worksheet XTML-Based Software RAN FEATURES BENEFITS
K 2 Language is machine readable Information about a business can be read by computer (machine) Data can be converted simply Database can be generated during search Key attributes and related issues can be correlated
Software can convert HTML to XTML Conversion can be performed during search mode Database derived from software can be sorted
Business can expand its exposure i by identifying possible relations w business entities and determining p outbound communications Cost for inputting data avoided, su is reusable Special search fields can identify a qualifiers, and compile the informa
Query hierarchy can be defined
Level of detail can control information
Information derived can bridge fro search queries to gained knowledg identify future market trends quick information boundaries for analysi new product introductions Information storage capacity can b economically. Information pertine client’s business can be stored, and information can be discarded
The productizer, who had been silent during this exercise chuckled and said, “I can tell I am with a group of ‘IT tech-heads.’ What this table tells me is that information is a virtue to itself. But I will bet that the ultimate decision maker at your client’s business is not the head of the IT department. The ultimate decision maker needs to understand results that mean something to the owners of a firm. That is increased sales and profits. Along the way, increase in equity is also important, but ultimately, that has to lead to increased sales and profits.” “So let’s look at a table from a different perspective,” he went on. “Let’s look at those three issues and reorder the table accordingly:” Generic Product Definition Table for Product Development Business Needs (Results) Offered Product Benefit Offered Product Feature Increased Sales Product delivers expanded Product identifies new market market opportunities by identifying related business areas based on relational information of existing business to complimentary needs of prospective customers Increased Profits Product offered is efficient The machine information exchange can limit human in developing business resource needs and practices with limited demand for costly resource dependence and rapidly
Increased Business Equity
The product offered allows the firm to effectively expand its business thereby leveraging the ability to generate income and enabling the client to produce more revenues and profits with the resources in place. This is the equivalent to increasing the earnings per unit of investment and thereby, the value of each investment unit
determine probable opportunities for business as well as source outside inputs based on optimal value. The product can determine business trends by establishing queries that seek out information pertinent to the clients’ area of business. This can be used to identify new or emerging opportunities and determining the fit or modified fit of the client’s current product offering to fulfill those opportunities.
Mary pointed out that the underlying feature of the second table were a variation of the previous days’ conclusion. ‘Time and Money.’ All agreed that any future product development and product definition would have to be translated to influence on the client’s time and money. The trick would be setting up the analysis so that these two features were derived, similar to the derivation of a mathematical formula. The productizer concluded the day’s discussion with a example of how time and money influenced a shift in the business practices of the farming community. “Quite a few years ago,” he began, “one of my clients had a weed killer that was very good at killing weeds, and practically everything else it touched. It had an additional feature that once it was exposed to the soil, it no longer acted as a weed killer, so that crops planted after its application were not affected by its prior use. The company that wanted to sell this found that it could be used as a harvest aid in that it would shrivel up the leaves, with only the produce left on the stalk. So seed based products, such as corn, beans, etc. would be able to be harvested faster as the harvest equipment would not be bogged down handling the leaves.” “But this would be complicated by the farmers desire to remove the dead leaves from the field and the residual toxicity of the herbicide on the leaves. Farmers had to be convinced to leave the dead plants on the ground.” “The following spring, when new crops were planted, the dead vegetation would be ground into the ground at the same time new seeds and fertilizer were applied. By leaving the dead plant material on the ground, the spring thaw would come faster due to the insulation the dead leaves and stalks provided, and moisture was better locked
into the soil as the standard business practice of turning over the soil by plowing exposed more soil to the drying sun, thus robbing the soil of needed moisture.” “The result of more time was due to the ability to extend the growing season by effecting an earlier planting time. The result of more money was due to the reduction of cumulative plowing requirements, saving in fuel and wear and tear on the farm equipment [including the harvest equipment.] While these benefits would make much sense to an outside observer, the farming community had a standard business practice of harvesting, tilling and removal of depleted crop waste. While this seemed to make sense, it was a significant business paradigm shift that required a reorientation of the client’s standard business paradigm. In other words, special seminars were required to help the target client understand the benefits and how to achieve them. The company introduced a name for the practice called “no till” and established a “no-till institute” with membership open to farmers and agricultural chemicals dealers and applicators. Annual regional meetings were held with case studies showing the positive results of this practice. For a number of years, the chemical company had a virtual lock on this business and sales were in the hundreds of millions per year. Later, other firms developed competing products. By continuing to support the efforts of the “no-till institute” the leading firms were able to expand the overall market size as new farmers around the world were introduced to this paradigm shift.” The fidgety, but perceptive principal observed, “Even a simple practice such as farming is subject to paradigm shifts. I guess we should look at the basic needs of our clients and ascertain how we can help them improve their business while at the same time they are utilizing our products and services to make the shift.” The productizer, who had begun to like this principal almost as much as he liked Mary, thanked him and said, “tomorrow, we will be defining just what the extent of our clients’ needs are relative to our product concept and the results we have defined today. This will help us determine the market opportunity such a product has, and special needs and cautions we must consider.”
Chapter 5 Researching the Market Opportunity
“An observant man, in all his intercourse with society and the world, carries a pencil constantly in his hand, and unperceived, marks on every person and thing the figure expressive of its value, and therefore instantly on meeting that person or thing again, knows what kind and degree of attention to give it. This is to make something of experience.” ~ John Foster Mary greeted the three clients and introduced them to the group. The three clients were an odd assortment. One was from banking, another was a component manufacturer for high tech equipment and the third represented a nationwide chain in the hospitality industry with aspirations of going global. All three industries had large and sometimes looming IT budgets. They were all hoping to hear how this new product was going to help them cut their IT budget. “We have spent the last two days sorting out what our product might be for addressing your firms’ needs,” said Mary. “Our group now has a better understanding of what should be evaluated and provided in a product and service. But we need to hear from you on the desire for such a product. But first, let me thank you from all of us for being willing to dedicate time with us and helping our business mature.” “First let me tell you,” she continued, “that we are analyzing an application of technology that can leap beyond an incremental improvement of a business practice. We believe that our product and service could, with the right client, and introduced the right way, promote a complete shift in how the client and ultimately a market uses the IT arm of its business.” The hospitality client jumped up and clamored, “this sounds scary! Our business is down now, competition is fierce, and a major shift in our industry would mean extraordinary costs in new IT equipment, training and ramp up time. Plus if we have to change the way we do business, don’t we have to think differently about our business too?” The two other clients rumbled along with her. Fortunately, Mary had a ready answer, so she kept her composure. “What an excellent and perceptive question, Susan. We have thought about this also and a great amount of time was spent trying to consider your perspective. That is one reason we invited you here. That and because we know your opinions will not be kept to yourself.” The group gave in to a chuckle and Mary continued, “IT so far has been a technology that gathers and sorts information. Sure it is sometimes used to solve complex or repetitive calculations, but for the most part it sucks up and stores much useless trivia which is never acted upon. The technology we are reviewing here over the next few days has
the ability to peer past the trivia and the piles of data and glean only the searchrelevant information from the web and itself.” “Tell us more,” pleaded Susan. “Well,” continued Mary, “right now, when your company is trying to make a decision for some action dealing with the business world outside the confines of your own, internal operational resources, what do you do? That is, how does your firm make decisions based on ‘environmental information’? And for that matter, how does your company determine future business offerings, determine where to sell services, where to invest in new hospitality facilities, even where to buy fresh towels?” “I see where you are going here Mary,” replied Susan. “Are you telling me that any decision my business makes that deals with outside information can be affected by your product? If that is the case, how does that change go forward to the bottom line?” “That question is precisely the question we have of you three,” Mary replied. “You see, we can appreciate and envision the outer boundaries of this technology. And, we can guess how those boundaries would fold into applications to your business worlds. But we don’t know if our outer boundaries are tuned in to your business’ safe zones and how much your business wants to put into the hands of new technology.” The productizer added, “The issue of market research is to determine the various levels a new product might enter into the business world. Taking a market by storm is great but possibly we could be offering a product that has too many bells and whistles and does too many special things that are not likely to be applied in practical business activities and will add to the cost of the product without adding to a perceived value. Furthermore, the more bells and whistles we add to the entry product, the longer the development time and greater the complexity. Plus, in the case of IT products, there is a demand for computing capacity and memory storage that does have limits. So, what we are attempting do achieve here is a dialog with the market so we offer a product that proves attractive and that you clients would be willing to purchase.” The high technology client, Jerry, offered, “we are talking about the Semantic Web1, aren’t we? I’ve wondered how that was going to be captured as a business tool. I thought it was going to be free!?” “The problem with free is that value and features take action,” replied Mary. “Our XML-based products will have the ability to narrow the information load and work faster in developing decisions. That program feature is not going to be found in a free product. Plus, for all the freeness of HTML and HTPP, haven’t we all noticed the number of professionals in this field that are making content that looks good, but can not allow or make an independent decision?”
Port, Otis (March 4, 2002) ‘The Next WEB’, Business Week, (ISSN 0007-7135), 96-102. 33
“So,” added the productizer, “once again we need to go back to the key question: what is the added value of this product that you, our client, would be willing to part money for? The features, which Mary is defending and promoting, are the means of delivering the product. And while features are important, the product needs to be defined. What I mean to say,” the productizer continued, “is that all too often, we become enamored with the features and loose sight of the product. SO, LET’S BE CLEAR,” he bellowed, and everyone jumped! “The market is a place where we provide a good or service, that is understood and valued by our customer/client. The good can be a service (intangible), or it can be a product (tangible), or it can be a combination of both. Markets, no matter what is being sold have: Elements of a Market i) size which can be further divided into, a) full “mass” market b) segmented market both of which can be divided into (1) industrial buyers or (2) individual consumers ii) a valuation of a unit of deliverable product, and iii) demand based on a) price b) competing products c) other alternatives
“Let’s start with the size of the market,” he went on. “Our clients will be able to tell you what each of their markets are as far as numbers and gross revenues. Can’t you?” Susan from the hospitality business sector noted that overall in the Americas the northern hemisphere had 40 major business entities and thousands of smaller chains or independents. In the southern hemisphere, Europe, Africa and Asia, there was a more concentrated, loose organization of chains and corporations that worked as if they were cohesive organizations. In each area, there were about 20 to 25 major entities. Beyond that, and in other regions of the world the business size was scattered and poorly organized. Mary was very impressed and asked, “how did you know so much of this detail?” Sue nonchalantly noted, “of course this is my professional field. As such, I am involved in professional and trade organizations and I also attend conferences. This kind of information is garnered by the organizations to which my firm belongs. We all pay annual fees, and sometimes for a bit more we can get various levels of details that come with hiring special studies from these organization researchers. You might ask why? It’s because we need to know what is going on with our industry. Such things as relative market share, the growth and the reduction of business travel, vacationers,
regional trends, etc. We also can read how well the industry is doing, information such as regional room rates, percentage of occupancy, average number of night stays. By keeping up on this, we can measure the performance of our chain to the competition as well as determining where the trends are. As a matter of fact,” Sue went on, “you can purchase studies from these organizations. Your cost would be much higher than my firm paid, but the insight would be well beyond what you could get from private research.” The two other clients agreed that they too were active in their professional organizations and kept up with the business trends by attending local and national meetings, reading the journals and special reports and over the years, had a good network of business associates that they talked to on events and trends. George, the banker, noted that the quarterly reports he gets are stored for several years and he notes and tracks the significant trends. So the information found in business studies, trade journals, and market research studies can all be used to establish an estimated size of a market. “Are you wondering why we want to know about the size?” Queried the productizer. “There are two reasons: 1.) You want to establish that there is enough market to make it worth your while to promote a product and 2.) If the market is too large on the whole, then you might best consider serving only a segment of the market, at least initially. After all, if you take on too large of a market in the beginning, your firm will likely fail to satisfy demand and this would open up a great opportunity for a competing product. Once the marketplace is aware of the product, known as a diffusion of information2 well placed products experience growth as increase in demand occurs. This wave of acknowledgment happens at varying speed. However, IT information can spread fast due to the communications capabilities of the typical IT professional.” “So, once the cat is out of the bag, if your product has answered a great need, you can have a hard time in limiting inquiries and requests for product. Other competing products can step in to attempt to satisfy that need with a substitute. This takes away a future sale, and if the substitute is of significantly poorer quality, it can spoil the generic value of your product on several fronts. But I am getting ahead of myself ,” said the productizer, apologetically. “We can take this up in a strategy session some time later.” “For now,” he went on, “let’s suffice it to note that: the goal of market size analysis is to capture the breadth and depth of the market size to determine potential sales opportunities and to identify strategic issues to help tailor market introductions.” “Now let’s take a look at the size of the market,” the productizer continued. “Each of your guests represents a specific market segment. They have all identified the relative
Mandell, Maurice I. & Rosenberg, Larry J., (1981) Marketing, Second Edition. Prentice-Hall, 210-211. 35
number of leading market participants and have given a general idea of the annual revenues for each market segment. Next we must ask the relative value of the current business’ cost for administration. And more specifically, the cost of the IT operations relative to percent revenues or lacking that, relative to total administrative costs. By doing this, we can calculate our way back to the full value of both the administrative and the IT part of the business expenses. Next we will have to identify what fraction of those costs are likely to be allocated to a product or service such as what you are offering. And finally, what might be a reasonable portion of that cost center that would be available to fund your product purchase.
ANNUAL REVENUES [100%]
(12%)IT EXPENSES (80%)IT-PAYROLL (12%)EQUIPMENT
(25%)SOFTWARE & RELATED SERVICES So in this example: 100%*25%*12%*8%*25% = 0.06% of revenues is for software and related services “Let’s presume that when all is said and done, that software and related services as part of IT expenses is equivalent to 0.06% of a business’ revenues. That means for every million in revenues of a firm, there is around 600 to spend on software and related services. Now notice that I have also drawn in an arrow from the IT-payroll to the software and related services. That can be, should the product deliver economies such that more can be done with less personnel, an allocation of labor savings could also be counted. For now, as the IT organization is going to contribute to a purchase decision, we will ignore that contribution.” “Why have we gone through this exercise? Because we can now identify the size of business that would be a qualified customer. Just as luxury items are not able to be sold to all of the public, firms with products targeted to commercial operations have to identify the reasonable market as those businesses that are sized to support a purchase decision for your product. So if your product is valued at 60,000 per target client the client with revenues of 60,000÷ 0.06%= 100,000,000 is the lower end of the client annual revenue stream that is likely to be considering your product. As a rule: MARKET QUALIFIER INVESTMENT VALUE ÷ PERCENT OF ALLOCATION FOR THIS INVESTMENT = QUALIFYING MINIMUM ANNUAL REVENUE “It helps to remember this because too often, market sizing looks at the whole industry without any thought to which prospective clients fail to qualify as candidates for buying your product or service. This also helps define the target market and establish the initial pricing for the product offered. Beware that if competing firms already offer comparable products, then the initial pricing most likely will have to fall in line with the expected price that customers are used to paying. If that is the case, the market qualifier is based on a lower expected price then the qualifying annual revenue amount
can be lowered. This of course,” went on the productizer, “is a practical application of the economics principle of price elasticity of demand.” George, being a conservative banker protested, “I’m at the end of my tether! Just how do you expect that any firm would be willing to pay 60,000 or more for a product? I have yet to understand the offer of this so-called product and I’ll tell you that these numbers are scaring me!” Mary, nervously asked George “what is the payroll cost per year at any of the bank’s branches? And if this software/service could reduce that by one or two payroll equivalents, then after the first year, the product has paid off in unrealized expenses. After two years of amortization, the operating costs for this IT enhancement have lowered the overall IT cost center expenses and savings are going to the bottom line. Plus this product will enable your procurement of products efficiently by identifying qualified, best price supplies on a world scale. It is the next effective evolution of MRP [material requirements planning]. Now how can your business ignore this?” George thought for a moment and replied, “well, the price you are offering if at 60,000 would be less than one full time equivalent. But wouldn’t you need a skilled person to work with this software, that I might have to pay at an even higher rate? Also, at some time, when my competitors are all using the same product, the benefits to my firm are reduced aren’t we likely to lose some of the savings due to competitive pressures driving our own revenues down?” “Only the more reason to introduce the savings earlier than the rest so that your savings can be realized over a longer period relative to the competition.” Mary went on, “you see, what always got me on market innovators was that they always seemed to be on the edge, taking risks in applying the new and the untried. Yet their performance and profits were always ahead of their industrial peers. Then I got to thinking that maybe, they were able to salt away savings from better economies earlier by applying the new technologies ahead of the competition. By the time the competition caught up to them, and were also applying the new technologies, they had already amortized the investment and were now working with an improved performance, even if competitive pressures cut into profit margins. So, you see, an innovative new product can be just as valuable to the industrial consumer as to the firm producing and selling the product or service. In effect, for commercial clients, any non-consumable purchase has to be considered by return on investment or ROI.” “So you can value your product by return on investment?” asked George. “That can be a convincing argument, but how can you confirm this?” “Well,” Mary replied, “we have to look at what the added value to you, our client is, and offer you a product that returns to your firm a savings or an improved market value that pays for itself in some period of time. Now I understand the a three year pay-out was good enough in the past. but that recently, we are looking at two years or less. What is your internal target for pay-out?”
Susan answered this quickly, “we have only so much to invest, and the demand for performance is so great that actually eight months to one year is the longest time frame we even consider. You see, the pace is so fast, and the time between a market innovator applying the product and realizing benefits from its use and the copy cats using something similar is getting so short, that longer time periods lose the advantage.” The productizer summed things up: “We know now that of the IT market, we have to limit the true marketplace to those businesses that have budgets in line with our projected pricing. We also understand that the market size would increase if we lower the price, but that would also reduce the sales and profits per unit of sale. We have determined that once we introduce a product to a market, either a selected segment of the market or the whole mass market area, we will only have a limited time to establish a market position before competition comes in with comparable products. If possible, copyright and patent protection can protect against exact copies. However, if we can not gear up to supply demand, there will be pressure by the marketplace to support competitors entering the marketplace with like products. We have also determined that quite possibly, limiting the initial market offering to a segment will work for some time, but due to the communicative nature of the IT world, diffusion of information about the product would likely be rapid. Finally we have just heard that a decision to purchase a product will be based on economic reasons not the least of them being a rapid pay-out of investment.” “Now we need to take a break and thank our clients for today’s advice with a good dinner.” The productizer concluded, “tomorrow we will define the value of the product and how we can tailor it to be most attractive to our clients.”
Chapter 6 Value The Market Opportunity
I have never yet been able to perceive how any thing can be known for truth by consecutive reasoning - and yet it must be. ~ John Keats
The fourth morning was stormy and the winds were blowing from the north. Mary woke with a start as the thunder rumbled through her windows and shook the bed. Today was unsettling for her also because she still didn’t know what her product could actually do for the clients, at least not with any certainty. She still believed that it was a good concept, and the talent that put it together was the best in the business. Yet, she could not get any of them to come to grips with how a client would look at this. The principals’ perspective was always on the “leading edge of technology” as if that was enough for anyone to go out and spend funds without another thought. Yesterday, she found out that for industrial clients, the pay out had to be in less then a year! And that all purchase decisions were based on perceived value as related to other goods and services all vying for the same chunk of a business budget. What was most troubling her was that the invited clients might be disturbed by the naiveté of the business principals. At least, when Mary was working in consumer products, she had found that buyers were more influenced by trends or fads and less likely to make decisions by equations and pay outs. But she remembered the fickleness of that market was what caused her to shift to industrial product management. The other difference she noted was that in consumer products sales, there was little need to follow up on a sale with client services and continued dialog. On the other hand, it seemed that for this product at least, the sale was really a partnership with the client and there would be no separation of the firm from the client once the deal had been made. She looked forward to that part of the day, and the clients had been very helpful in sorting out most of the issues yesterday. Still the manufacturer of high tech components was remarkably quiet yesterday. She would just have to see what the morning brought. A solid clap of thunder yanked her out of her musings and she headed off to the meeting room. The productizer was already gathering the participants in a circle and looked up as Mary entered the room. “I hope you slept well, in spite of the storm last night, Mary,” he said. “As we were to have a golf outing break this afternoon, I had planned on a hard morning of work. Instead, due to the weather we will head off to a gallery exhibit mid afternoon. This will give us some more time today to consider how we can value a product and generate client interest. I have asked Jerry here to help us start off on this discussion as being a manufacturer of products, he is most in tune with our need to understand a product related to a tangible as both banking and hospitality business are most about service, and to some extent valuation of what they offer is based on
comparable product price structures and competition, not on a purely contribution basis.” “That’s right,” Jerry added. “Yesterday I was pretty quiet as I was more of an audience than a speaker. You see, each product we develop, just like your firm’s, is based on an idea and a perception that someone out there wants such a product and is willing to buy it from us. We are all constrained from doing too much of a market survey, as that type of activity can tip our hand to the competition. And frankly, until yesterday, I had never even thought that there might be some clients that would be in our perceived market except they had budget constraints that kept them out. It reminds me of the early days of heavy computing where only a few organizations could afford the big computers and the rest of us ‘bought time’ on them.” Mary made a mental note to herself: ‘This concept of bought time could be a useful idea. Maybe her firm’s product could be sold to smaller firms if there was a means for those firms to combine budgets and all share the use of the product; some form of collective or cooperative or timeshare or something.’ Jerry waited for Mary to get back to the group. “Anyhow,” he went on, “last night after dinner and pleasant conversation I started to think about how we determine a purchase of a product. Basically we look at a product in one of three boxes:
1. The product will be used as a contributing part of what is manufactured and therefore it must add to the value of the final product. This is a raw material. 2. The product will be consumed in day to day business, and while it affects the final product, it is not considered a raw material but rather a consumable. and finally, 3. The product is neither a raw material or a consumable, and it exists independently of the size of the business as a fixed cost asset. This is an investment added to buyer’s operations and as such, it is valued by how it helps buyer’s business. buyer’s categorization of product
“Now for my business, I can see this as both a fixed cost asset and possibly a raw material. You see,” Jerry went on, “many times in the high tech business we license other technologies and bundle products together. If this software could combine with one of our products to make for a more attractive final product, we would think of ways this could be used to enhance our product. Sometimes, we seek exclusive licensing, or specialized programming to differentiate our product from others, we would want to add the software to our product as an added value enhancement.”
“But that is not the issue here. Instead, I have to consider what this product does as an investment; how it can modify or shift the way my firm does business and evaluate how my business will change as a direct or indirect result of this purchase and any follow-on service. Now if a product is uniquely different from any other product, and it has not been used at a business like mine, it will be very hard to determine its full impact on my business. In fact, there is a very good likelihood that over the first one or two years of its commercial life, the product will be under appreciated and undervalued. Only after the results of its use have proven out, over a period of time will its effect be understood.” “Yet, that doesn’t help the question of today. It only helps in that such a product will have some staying power in the marketplace, and likely an ability to keep its pricing stable if not increasing once demand outstrips any balance with supply. So we have to dig deep into how this product can affect my business, as well as the businesses of Susan and George and determine what impact this does. And by the way, I don’t have a clue as to where to start!” concluded Jerry. Mary figured right then an there, that Jerry had been saving himself for this speech and she was grateful. She was also grateful for having attended the productizer’s seminar the month prior as she did have a clue! “I think I have a way,” suggested Mary. “First we have to look at our businesses as various tasks that are unique to themselves, and which without them, our well run organizations would start to crumble and fall apart. We can call them the business prime numbers.” The productizer was beaming but the rest of them were puzzled. “You see, “ she continued, “business operations consist of various tasks, some carried out in tandem, others done sequentially and still others that work to control the effect of others are done independently of the others. They are sometimes called ‘business prime numbers’ in that as in mathematics, they are the simplest unit of operations that can not be further broken down without loosing their identity and function.” “I brought a slide of the typical prime numbers, which are usually called functional areas of a business:”
Business Prime Numbers (or Functional Areas of a Business) 1. Labor 2. management 3. capital equipment 4. production (growing the grapes) getting the raw materials and intermediate products gathered 5. manufacturing: 6. making and 7. bottling the wine this could be packaging and casing 8. marketing and sales 9. warehousing 10. transportation and shipping, and he added 11. accounting and finance (after all, the money has to come and go in any successful business)
Mary took out a marking pen and wrote over the list. “The list I made was from a case study example of a winery and I forgot it was case specific,” she chuckled. “The wine was good too. Anyhow, the eleven areas on this list can help us determine a pro forma value of the benefits of the product by estimating the effect it has on each of the eleven prime numbers. We can start with identifying the fixed and variable costs for each unit. Next we can determine the impact a product has on either the fixed cost or the variable cost or a combination of both. This can be shown as follows:” Yfunctional unit cost = Cost for a Functional Unit = Xfixed cost + Qvolume*Zvariable cost per unit ΣY1 + Y2 + Y3 +...+Y11 = Revenues - Profits “So it stands to reason,” she went on, “that if you can start to reduce the Y’s, with Revenues unchanged, your profits will increase. If our product has this consequence on one or more of the Y’s, and we can define those outcomes, then we can predict how our product can improve profits. And that, my friends, is the means to the justification of why our product adds value to the clients business.” Now George was getting irritated. “Don’t think a few numbers on the screen and some mathematics is going to convince us, nor any other possible customer. No, we need to work out the why with the how. Up until now I thought your arm waving was going to help you fly. But we really need to show the how, just one example would help, on just how this product will be reducing a fixed or a variable expense.” Jerry added, “and it isn’t just the banking industry, manufacturing, and I am sure, service industries want clear routes to how savings are achieved. This is not just adding value, it is a definition of the practice on how the value is added, with a specific method that is thought out for each client. And, by the way, why aren’t we looking at how we can get an increase in Q meaning more unit sales. If you product is so good, won’t it help us sell more of our product? And if it can how do we do that?”
and of course
Susan observed, “I couldn’t help but notice but in the last few moments we have said “how?” seven times. Have we emphasized this enough? All too often, we are sold a product and left to our own devices as to how to use it, what are typical applications, and what are options that can be adopted, including using a product with other products to enhance its features and benefit the client even more. The firms that are successful will be the ones that work with the client, understand fundamentally how the product could be placed into our business practices, and suggest, with our participation, how we can use the product to our advantage.” “How" to Place a Product into a Client’s Business - Successfully • Work with the client, • Understand fundamentals of client’s business • Determine how to place product into business practices, and • Suggest how to can use the product to advantage. The productizer stood up, faced the group and began. “Thank you, Mary. We have all seen that a classic application of this practice can be found with many software products. Not only do they come with extensive tutorials built into the software, but there are reader interest cards to fill out that automatically qualify the consumer periodical subscriptions. The periodicals’ subject is focused on the enhanced use of the software with examples of real life projects carried out by lay people just like us. Both the tutorial and the magazine articles provide a how. And then, if you are registered, you will be notified if enhancements that could benefit your business activities become available.” George pitched in, “in the banking business, we have trade associations and regional conferences where many of the firms we do business with provide free training seminars and contribute to our professional journals. And it seems as if every other month I an answering a directed survey, the results of which get posted in our trade publications and sometimes, more depth is available for a fee. I can see now that the information is not just of itself, but a program to understand our business as well as help us understand our business.” Jerry looked a bit sheepish and confirmed, “actually, George is on target, sometimes we develop products that our clients haven’t asked for, but that we know they would ask for, if we only educated them on what is missing from the work tools now in the system. So we play the “what if?” games and come up with application ideas that we turn into a case study and present it to a broader base of potential clients. Now that I think of it in this light, we are providing the how as a why. That is, our mock case studies show a method of application that generates the results we can achieve with our product. The results then are profiled to demonstrate why a prospective client should run out and purchase our product.” “I’m conflicted,” confessed Jerry. “In hindsight, it seems as if our business is generating demand based on our ability to conspire to show benefits of a product
unimaginable to the prospective buyer. If this is the case, are we adding value to our business clients or are we just selling the hype?” The productizer shook his head. “As we all go about our day to day actions of doing the work laid out in front of us, few of us have time to sit back and think of “a better way.” Besides, the economies of scale for a single person’s quest for a “better way” would work against us. On the other hand, when a firm takes it upon themselves to develop the “better way” for our benefit, and in return they expect to receive compensation for their efforts, we can continue taking care of the work laid out in front of us yet at the same time take advantage of the incremental and more monumental changes the marketplace introduces to us annually.” The productizer gave that impish smile he sometimes had. “You do know that our clients here this week are being exposed to a product that they actually did not request, have no idea of how to use it to their advantage, and at the same time are bombarded with hundreds of offers to take their hard-earned money with no guarantee of a value added return. While we have explored how to place a value of the product based on the how it is applied and the why’s of its affect on a business’ operations, we have not discussed how to bring this to the “masses” which we will do after our break.”
Chapter 7 How to Go to Market? When seeking kindling, look in the forest, not in the field ~ Iverson
When everyone returned from the break, they were excitedly ready to discuss how to take the new product to market. The focus clients each had a comfortable understanding about the way they did business now and were comfortable with that old way. But each knew that the old tried and true marketing methods were diminishing in value. What they saw happening for each of them was the shift in business practices due to the technological wave of information channels that had matured (relatively) over the past ten years. And based on what they had heard, this product they had been hearing about such products could eclipse the “information highway” with a veritable sea of information and knowledge that all could use. Still, most products had to be transported, warehoused, and on a shelf for some one to pick off and give to an end customer. And the wave of just in time and kaban fully understood in the 1980’s and well implemented in the 1990’s had tilted the time span between supply and demand such that a hiccup in either one would have a nearly immediate affect on the other. To a person, each was uncertain and uneasy with what decision to make in brining a product to market. So the looked to the productizer with pleading eyes and hoped he would have a ready answer. “Let’s ignore our subject product,” started the productizer, “and if you will, we will look at a bag of popcorn. And let’s assume that we buy that bag of popcorn at a movie theater to enjoy with a feature film we have gone to see. This relatively simple and not very expensive product has to navigate a very torturous path to get into our mouths. And, like a drop of dew migrating to the ocean, there are any number of twists and turns in the market channel that it could take.” “So somewhere, a farmer plants a field, tills the weeds, harvests the corn, removes the husk and has an ear of corn ready for market. It is very unlikely that he will have any knowledge of where that ear of corn goes after it makes its way to the silo and the grain storage business. As far the farmer is concerned, his getting to market is done. But wait, the corn has only begun its journey. After it has landed in the silo, it gets sold to another middleman that finds a buyer for the corn and ships it via a transporter to its next market stop. That buyer separates the corn from the cob, and sells both. If it goes to the popcorn manufacturer, it will be graded and sorted and the kernels that pass inspection will go into a container for sale to bulk popcorn buyers such as movie theaters. After it is popped and maybe buttered and salted, it will then to go into your bag.”
“From a sale of $2.10 a bushel to a sale of $3.50 for a bag of about 3 ounces of popcorn at the theater we have just defined a particular marketing channel. That is, how did a product move from production to final sale and consumption?” asked the productizer. “It can be shown even with a simple product like popcorn, that marketing and distribution channels have a tremendous role in moving a product for its originating point to its place of final consumption. And these channels are formed over time, with an understanding and acknowledgment between the channel partners as to what is the role and responsibility for each. And of course the relationships are strongest at the point of transfer when the product or product rights move ahead. I mention this,” he went on, “because your channel can contribute to your business venture either positively or negatively. You must have an understanding of what actions your channel needs to take to help move your product into you client’s hands.” “Channels have an ability to open doors for products and can become a marketing arm of the business in that the channel is looked to by the “downstream” businesses as a source for products in a certain category of goods and services. In fact,” the productizer went on, “for the most part, a direct sale of a product from the producer to the end consumer is an anomaly. This is due to the fact that a distribution network and the cost of selling is typically uneconomical. By using middlemen, the producer can find an efficient route from the production to the end consumer. Of course, there are always exceptions such as Dell® computer that does high volumes if direct sales. We must remember that companies such as Dell® are able to do this because the product line is varied enough to attract a large enough market demand to justify the set up of direct sales. And if we look carefully enough we will note that the shipper for is actually a third party, which is to be considered in the market channel mix.” Mary thought it would be good to interject, “now let’s sort this out. The market channel includes all the activities and paths to take the product to the end customer. How can a firm determine which method is best for the firm? What choices doe we have and what are the differences. I mean, what you have said is all well and good, but I am getting more confused by the minute!” The rest of the study group nodded in agreement. George suggested they have a matrix to help them out. After some participation by all, and based on each participant’s experience the following matrix was fleshed out:
Market Channel Matrix
Producer Channel → Activity ↓ yes Make Product yes/no Inventory yes Distribute yes/no Set Pricing yes Negotiate Price yes Advertising yes Marketing yes Sales yes Title yes Financial Flow
Wholesaler Jobber no yes/no yes yes/no yes yes/no yes/no yes yes/no yes no yes/no yes yes/no yes yes/no yes/no yes yes/no yes
Retailer no yes yes yes/no yes yes/no yes/no yes yes/no yes
Consumer no no no no yes no no no yes yes
As the group discovered, the matrix was very helpful in demonstrating that the channel was very complicated with divergent directions at almost every possible step. But this is very true of the marketplace, and even the presence of some of the channels between the producer and the consumer are optional as was evident in the Dell Computer example. Furthermore, to avoid any particular complications, the Financial Flow excluded mentioning banks which are typically used between each transfer of title and the intermediary of each step in the movement of goods and services. However, even banks can be bypassed in those cases where the financial management of goods and services is vertically integrated. Examples of such are General Motors Financial and General Electric Capital. In both cases, the cost of funding and credit is absorbed within the overall corporate structure. “The reason for so many choices, and divergent paths is due to the factors of economy of scale, efficiency and projected life of a business product or product mix. This is true of tangible and intangible products. For the most part,” the productizer continued, “the decision path is an economic one. And the decision is made by each participant in the marketing channel. If carried out with finesse, the decision is based on a break even analysis, and return on investment or ROI.” The productizer stared our at the sea of puzzled faces. “What I mean by that is if one of the channel sectors considers how much input it has on the handling, pricing, selling and distribution of a product, it considers it based on the expected effort it must make to effect each activity, and the expected fees it can realistically recover for its value added efforts. There is an added consideration in that each time some other business takes control of a product, the outcome is subject to the whims of that business also. Thus maintaining product pricing stability, quality of handling, distribution and sales are all issues that each channel must consider. Frequently, those issues are so important that agreements are made between channels to protect the interests of both parties. Additionally, distribution channels might be segregated regionally or even on
a world scale. One only needs to look at the crystalline carbon industry♣ for an extreme example of control of the marketing channels in order to maintain quality and pricing for optimal ROI.” “So there are occasions, typically where control of the product and pricing is not driven to an efficient market, where control of the business is maintained in either a sole business or a closely controlled market channel called a vertical marketing system. In those, the activities are either all under the control of one business entity or a combination of business entities with well orchestrated efforts and agreements that cause the channels to work for a common interest and like minded efforts as a team. The opposite of the vertical marketing system is a flat marketing system wherein the control of each activity is limited to the two parties involved in that activity. That means that the producer and the wholesaler have an agreement, but that agreement does not have any direct implications on the agreement between the wholesaler and the next step of either the jobber or the retailer.” “The vertical marketing system is typically found in specialty, unique and subjectively priced products wherein price support is in need of control and the differentiation of the end consumer product is subject to a high level of control to maximize the outcome. This can be found in fine automobiles, art, jewelry, and professional services.” “The flat marketing system is typically found in lower cost, more ubiquitous products such as commodity crops and non-durable products. In these cases, efficient manufacturing and distribution activities are paramount to profitable operations.” The productizer determined that the group was not to be satisfied with a simple matrix and suggested that each channel and each activity be further defined. As a group, they determined that the explanations below would be the minimal amount of information and that an example case study would be beneficial.
Producer: The business that produces a tangible good or service that has a price value and a commercial use in the marketplace. A producer will typically utilize goods and services from others and combine them in certain ways such that the product is derived from the parts but is value added so that the utility of the end product is remarkably different than any of the raw materials used in the production of the product. For example, a book is the end product of a combination of paper, ink, artwork, and the efforts of the author and publisher. The inputs include the intangible efforts of the author and editor, the tangible products include the ink, the paper, the binding glue etc. Sold separately, the combined maximum revenues would not likely match the revenue
The Gem Quality Diamond Industry is considered nearly a monoploy with a significant holding of all production capacity by a single business. This monopoly maintains a premium pricing structure and in return, contributes greatly to the advertising and product promotion in order to protect its pricing structure and control access to the product. 49
of the end product. That is because the consumer typically places higher value on a good book over paper. On the other hand, the saying “it’s not worth the paper it’s printed on” shows that value added is subject to the consumers evaluation of the usefulness of a product. Wholesaler: The wholesaler takes all or a large volume of the producer’s product and resells it in smaller lots to either jobbers or retailers. The wholesaler will typically handle transactions in a specific geographic region where it has a market presence and ability to place the product into the hands of the next market channel due to its business practices, product lines and business capabilities. For this activity, the wholesaler will add a price to the cost it pays for the product and will usually negotiate a volume related discount such that increasing movement of a product can translate to better margins between its purchase and sales price. Jobber: A jobber is not always present in the marketing channel. The jobber has a functional role similar to the wholesaler except that it is a middleman between the wholesaler and a retailer. Jobbers are usually in marketing channels to place products into retailers that do not directly negotiate with the wholesaler. This can be due to the small size of the retailer, or a limited access to the retailer. As the wholesaler is driven by market efficiencies, these limited access retailers require more interaction per unit sale than the wholesaler is willing to commit. Typically the jobber has a direct link to a market segment or regional area with efficient practices that make it an attractive ROI for the wholesaler. The transaction value per unit of sale between the wholesaler and the jobber relative to the wholesaler and the retailer is volume based. That is that a retailer might not pay any more for a unit product than the jobber, and even sometimes less if the retailer is a large buyer relative to the jobber. However, the jobber has an ability to place a product into niche markets that are overlooked by the wholesaler. Retailer: A retailer is the last place in the market channel before a product is acquired by the end consumer. Retailers do not necessarily have storefronts and both catalog sales and web based sales sites are considered retailers. In addition, retailers can have any combination of the above. When they participate in multiple paths to segregated end consumers, this method of retail sales is called multi-channel marketing. If we look at the example of book sales, many retailers have both brick and mortar as well as clicks and mortar sales, and currently, sales are made with electronic transfer of product and zero mortar. In the later case, this retail is made with direct agreements with the producer so that price maintenance is in agreement of all parties and ROI is protected. The flip side of this is the evaluation of web based distribution of music and videos as well as proprietary software. Copyright laws and protection of intellectual property is an evolving subject and too complex to give it more than a mere mention. Consumer: The consumer is the last step in the market channel where the product is used and is not distributed to any downstream user in the same form and volume. The consumer takes beneficial title to the product and uses the product in whatever manner
the consumer wishes. The product can be held, as in a durable good such as a chair or consumed as in a produce-based product such as an apple or a non-durable good such as soap. The key to being identified as a consumer is that the product is either held for an indeterminate period of time or it is consumed and its nature transformed before it re-enters the marketplace as a new product. For example, a consumer might buy sugar, but then mix it with other ingredients, and produce a pastry for sale which is then entering the market as a new product. Thus consumers can also be producers, just not of the same exact product.
Make Product: As discussed above, making a product means that goods and services are combined in such a way that the value of the original inputs is transformed to a new product that has unique attributes not found in any of the consumed input products. In making a product, producers do consume other products, known as raw materials, and frequently other goods and services such as energy, water, and labor. Inventory: Inventory is used to retain control of a product such that sale of the product is not directly related to the production of the product. The contrary to this is the Kaban or “just-in-time” method of production sequenced to immediate demand and sale. Durable and non-perishable goods, or goods that can be protected from losing market value if inventoried are typically inventoried. The rational behind inventorying is to separate the manufacturing step from the distribution and sale step in the market channel. If demand is cyclical and the production is continuous, then inventory is used to anticipate the future demand and production pass-through capacity can be reduced for economic lot size of production. Inventory is also used to fill market channels with product so that production can be disconnected from the retail sale of a product. This allows for efficiency in distribution and transport of goods and services. Distribute: Distribute means to take control of a good or service from one or more producers and redirect the good or service to a greater number of market channels downstream of the distributor. Distribution is typically carried out at each step of the market channel. Set Pricing: Pricing is set not only by the producer, but by each step of the marketing channel. Direct control is usually held by those channels that take title to the good or service. Indirect control is limited to those channels that do not take title, but add a charge to the product based on the activity they perform. An example of indirect control is a auto dealership where the dealer actually does not own title to the vehicle, but instead sells a vehicle at a “suggested retail” price. This price can be negotiated to somewhere between the “actual invoice” price the dealer owes the market channel immediately before it and the dealer mark-up and preparation fees that it incurs. In setting price, the full market channel is surveyed for an assessment of what the end consumer is willing to pay, and the basis of cost for each step in the market channel is factored into the pricing strategy.
Negotiate Price: Negotiate price is typically limited to the actions between market channels where title transfers. Each such channel has an independent knowledge, and sometimes proprietary understanding of the market drivers for each step in the marketing channel. Price negotiations in a flat market system are subject to the objectives of each market channel as an independent business. In a vertical market system, pricing is more closely controlled as each step is managed by either the leading channel or the producer of the originating producer. In the case of a large retailer, it can seek products at an offer price it requires and fulfill its demand through competitive sourcing of products. Thus price establishments are not necessarily made by the producer. This is most likely the case for commodity products that are not significantly differentiated from one producer to another. Advertising: Advertising is the activity of increasing the awareness of the product or an input to the product effected by any or all of the market channels that have some level of title of the product. Advertising can also be made by the raw material producers to encourage the purchase of a product containing their raw materials. Advertising can be directed at various levels of distribution, from the commercial buyer to the end, household consumer. The function of advertising is to make the purchaser aware of a product, encourage the purchase of the product and reinforce the buyer’s decision in making the purchase, as in an after market influence. This last reason is useful in creating brand and product loyalty which can lead to repeat sales with less risk of competing purchasing decisions swaying a buyer to select a different product in a succeeding purchase activity. Marketing: Marketing is the activity of determining the needs and demands of the market and defining a product or product mix that satisfies that demand. This includes the activities of price determination, analysis of price/demand elasticity, marketing channel decisions, product attributes, advertising, sales and market differentiation. Like advertising above, marketing is typically performed in some manner by all channels that hold title to a good or service. Frequently, the marketing effort is coordinated and joint responsibility is carried over two or more discrete market channel steps. Ideal outcomes are best reached by these joint efforts.♦ Additionally, as previously discussed, part of marketing is customer support and as noted, customer training seminars and other outreach efforts can improve the utility of a product and increase its market value and encourage growth in sales. Sales: Sales is the act of negotiating a price for a good or service and exchanging it for money or some other asset of value. At the conclusion of a sale, the title to the good or service has transferred to the buyer and the seller has received some instrument of value in exchange. Sales includes bartering or counter-trade.
The author has observed negative consequences when advertising campaigns at the retail level were not coordinated with the producer nor the distributor leading to an immediate sales demand stripping available supply and causing a loss of future sales as consumers shifted to other sources of product.
Title: Title means that clear ownership of the good or service is held by the possessor and control of the use of the product is determined by the owner of title. Some products are limited to the use of the product itself, and the intellectual rights are maintained by the original producer. These rights are protected by patents, trade laws, copyrights and intellectual confidentiality agreements or exclusions. Such title is typically limited to the single use of the product in possession. This subject is complex and discussion is limited here to the above comment. Financial Flow: Is the exchange of currency for a good or service. Typically a bank is the agent between each marketing channel step with exchange of funds consummated upon a pre-negotiated action. In larger marketing steps, financial activities can include financial instruments such as letters of credit where the upstream marketing channel is protected from losses by bank guarantees that funds are set aside to pay for goods or services. A Case Study: An inventor has determined that the health and exercise industry has not yet satisfied all muscle groups and a product that exercised the back, rhomboids and deltoids would be useful for the general public and especially for those suffering from back pain or simply wishing to improve their posture. The inventor is seeking patent protection and is considering the productization of this product. The initial market sector would be channeled through the physical therapist industry as these individuals would be well qualified to explain the benefits of such a product and they provide a direct link they have to that section of the public which is already seeking solutions to physical discomfort. The pricing for such a product is in negotiations with this market channel and as title would transfer upon delivery to the physical therapists, a joint marketing program is called for. Limited funding for advertising and product awareness is initially directed to introducing the product in professional trade shows and no other advertising is budgeted. The inventor does anticipate some level of user reviews and will encourage publication of medical studies evaluating the effectiveness of the product. Such studies and publications will be able to be quoted in future marketing and advertising programs. However, the market size and expansion of the market if limited to this retail niche, would be hampered from reaching the maximum level of sales. For that reason, the inventor has considered several levels of product attributes [good, better, best] with the physical therapist-offered product expected to be a premium, higher-cost product. Future lines of similar functionality could be directed to the home and commercial gymnasium retail market as well as catalog, shopping network, and web based sales. For each stepwise level of quality, the product will have variations in the materials and manufactured cost so that product lines are in accordance with this good, better, best product differentiation. Likewise, as the business gains experience, it will strive to make continued improvements as well as gaining efficiency in the fabrication of the
product as well as coordination of the marketing channels. This strategy is directed to a continual improvement of profit margins, even though the later product introductions will sell at a lower unit price. In productizing this idea, what are the key issues? How should the inventor introduce his product(s) to the marketplace? Should he seek an independent manufacture and sale of his product, or license his idea to an existing gym equipment & supply manufacturer? How would you set a market price and consider price elasticity to demand for each level of product quality? How would title transfer at the point of sale, would consignment be more attractive to get inventory into the business, or would transfer of title encourage the physical therapists to sell the product more aggressively?
[This case study is presented to help the reader process the various concepts already presented. The answers to the questions are a group effort and are posted on www.dolberg_enterprises.biz the password is “posture.” As this business progresses, the results and actions will be posted to the web site, and future editions of this executive briefing will update the business model and include reader’s contributions as appropriate.]
Chapter 8 Determine Pricing Options
The group concluded that one key issue in determining the marketing channel mix was that each step of the way required an exchange of goods, services, or currency. The emphasis was on currency and the decision point on whether or not to proceed internally or externally was a combination of avoided external costs versus extra internal costs and skills. This all boiled down to one thing: money! And the only way that money was going to come into the firms was through the sales of this product or some other product. As the firm was certain it did not want to underwrite the sale of this product with the consulting revenue it made, the key was to establish a pricing that was certain to earn money for the firm, allow for the other marketing channels to earn money for their services, and still have a product that was attractive to the end purchaser. The productizer reminded the group of the analysis of a bag of popcorn and its price of about $1.00 per ounce versus the original bushel of corn selling for $2.00. Mary suggested they consider how to set pricing, and determine what channels would be required to handle their product or if they would license the product to others or even seriously consider a web-based sale only. “Firstly,” started the productizer, “we will have to realize that bringing a product into the marketplace will require several steps with each step adding a cost to the final price. And some of the channels require as mark-up a percentage of pass through cost no matter what, others require a ratio of margin per unit handled and others will consider varying the fees charged based on how fast turnover of title occurs. In other words, pricing can be based on several different models. And in the end, pricing has to contribute at minimum some form of contribution to a firm or it will bankrupt itself.” “Now in the case of the XTML product line, as your previous primary business was consulting in the IT world, you can very easily consider pricing as a loss leader in order to introduce your firm’s consulting services to a broadening market. The problem with this approach is that other firms, offering similar consulting services would not be burdened by the same weight of giving away product for a loss. This would place them in a better position in a business downturn, and allow them more sensitivity in pricing other services as independent products,” cautioned the productizer. “Pricing is based on several objectives all of which compete with each other. By that I mean that the highest volume of sales might be due to having an extremely low price, that counters with having the highest profit margin or quite possibly the appeal of a high quality, high-priced product. What truly goes into the decision of pricing is unique to each business, and an analysis of the product mix, the way it reflects on the firm and the product lines, and the desire to maintain a product line for some extended period of time. Yet again,” cautioned the productizer, “the business environment surrounding the product under pricing consideration will have a significant impact on optimizing the price.”
“By business environment, the consideration is based on competition, either by direct competing products or by some alternative mix of product or practices that can effectively meet the needs of the end consumer in much the same way as the product under pricing review. In other words, all competition affects the pricing decisions of the firm. Another threat to pricing can be the condition of the economy and specifically, the economic factors surrounding the business area served by the product. For example, in a downturn of airline travel, a firm offering a new jumbo jet will not have the same opportunity for upper end pricing as during a booming travel period. And in fact, introducing a product at a greatly reduced cost during an economic downturn is counterproductive to being able to raise prices in the future.” “A well managed firm,” noted the productizer will have thought through what a product will cost to bring to the market and what is the likely selling price and volume of sales. As for many products, the cost to bring a product to market is steep, and it is best to recognize this cost and the risk of productization of a less than worthy product should be balanced against the reward of a successful product generating large sums of positive cash flow. But who could imagine selling a plastic bottle of drinking water for over $1.00 while a gallon of gasoline sells for $1.45 and everyone complains!” The group chuckled at the preposterous observation. “You see, first the market conditioned the consumer to purchase soft drinks, and juices, etc. made with water. And gradually, after we were conditioned to pay higher prices for these products, they introduced drinking water in a portable container. And some have more faith in a clear bottle than what comes from the tap. So, you can start to see how product pricing can vary with attributes.” “Basically the goals of price setting are to achieve one or more objectives. They are, 1.) market leadership otherwise known as market share, 2.) product or brand leadership otherwise known as quality bench marking, 3.)maximizing profits usually identified in some form of ROI, and finally 4.)maintaining just enough revenues to “keep the lights on.” The later is a situation that comes when a firm has not diversified and is caught with a product that has become obsolete relative to other products competing for the same consumer’s currency. Sometimes this obsolescence is due to the maturation of the business and technology. Again, forward thinking would cause a firm to realize that certain products will have a sunset, and plan accordingly. However, if keeping the lights on allows other products to develop and grow while the older waning product ekes out its final revenues, then it is cash-cowing a stream of revenue and doing its part to support a firm.” [This will be discussed more thoroughly in the chapter on product management.] “A key consideration of pricing is the price-demand elasticity. Sometimes we think of the reverse of this known as scarcity which almost always means that the price will rise exorbitantly and the “profit takers” will experience great margins. I remember a story told me by an old European woman that had Russian royalty in her family line and after the revolution, her ancestors took into town a cart full of expensive jewelry
and silverware and servers, etc. For that they were able to exchange it for a loaf of bread.” “With the consideration of price demand elasticity, consider the fine silver servers offered to a starving populace with scarcity of food products, the expression “you couldn’t give it away” comes to mind. These points are raised” noted the productizer, “to help us appreciate that even a zero-priced product will have a maximum level of demand that does not reach a tangent with infinity.” Jerry, the manager at the high tech company, asked, “so how can you establish a price for a product if it is unique? Many of our customers sell products that are nearly one of a kind and they are always wracking their brains on what would be the optimal price.” “That is not a question with an easy answer,” replied the productizer. “However, you can establish price points based on other products in the same market. That is if the quality and complexity compare favorably to one of the more expensive product offerings, you charge at costs comparable to those products. If, your product is not that complicated and the functions it performs can be considered of similar complexity and benefit as a lower priced product, then you would set your price points at that level. Effectively, the perception of the value and the market pricing of like products helps establish the range, relative to value of product that you would price your product. The high end of that range would be your top of the line product and the bottom end of the range would be the stripped down product.” “For example, some software has a “professional level” for the price point at the high end and the “home office level” for the low end. Sometimes the difference might be that attributes and flexibility found in the higher end product are stripped out of the lower end product. The base product is comparable, and compatibility of use is usually fine. But this offers additional sales to the lower end user, and a significant cost reduction to encourage sales to a market segment that is sensitive to price. This market segmentation encourages the seller to offer premium products at a higher cost (and profit margin) yet allows the same product class to reach the lower end demand thus bracketing the price points about the upper and lower end market segments.” “You will note,” cautioned the productizer, “that there are always some products that sell at costs much lower than the top of the line products. The lower costs do make these products available to a price sensitive marketplace. But due to the much lower selling value, the utility of those products can be overlooked as there is no profit margin available for significant advertising and market awareness, no chance to fund regional training symposiums or the like, and little likelihood that some earnings would be available to reinvest in competitive upgrades over the typical life of a software offering. Growth in use of such products can happen, but as most members of the marketing channel place some of their fees based on unit value, those channels will not realize as much income on the lower end product lines as the upper end. So as a result, they are very much less likely to promote the “loss leader” product over the
premium, higher-valued and more profitable product. Ultimately, when a firm is selling a product with these characteristics, it will quickly find a new champion to rally behind and market, leaving this low cost product to falter and go away. And if there were plans to have this product successful, there will be few employees that will want to hand their hat on this type of product. A self fulfilling prophesy will occur.” Jerry, looked in disbelief at the productizer. “I have one or two of those products, they are fine products, but we don’t do any marketing as they just barely sell for more than unit cost. And you know, I have a hard time getting our marketing people to promote those products. Yet I have a boss that says that the product is so good that it sells itself. I’ve noticed that it never comes up as subject of discussion of the sales call reports. The product continues to make money, but like I said, just enough to cover costs. And our marketing people tell us that if we raise the price, we won’t sell as much as the competition’s product will look more attractive. What do we do?” The productizer thought for a moment and then looked out the window. “Does anyone in this group know what “unit cost” actually means?” He asked. The Banker, George volunteered that, “unit cost is the actual input of all expenses that are used to make, warehouse, manage, advertise, sell and ship a product divided by the number of units actually sold. That is that : Unit Cost = (Cost of Manufacture + Cost of Warehousing & Shipping + Cost of Advertising + Cost of Sales ) ÷ Number of units sold Total “But that is not all, is it George?” asked the productizer. “We have to note that: (Cost of Manufacture + Cost of Warehousing & Shipping + Cost of Advertising + Cost of Sales ) Σ( CostsFixed + Costs Variable) And that: 1. CostsFixed = all costs that are based on activities not directly related to the production volume of the product in question. i.e. costs such as depreciation, administration etc. 2. CostsVariable = all costs that are directly related to the product production. These would include raw materials, power costs used in the production, packaging and shipping costs, warehousing and inventory carrying costs directly linked to the actual product sold. “If we look at these two equations, we can note that unit cost can change inversely with varying volume of products manufactured and sold. That is,” George went on, “the more units sold the more the fixed cost is spread out over more and more product. At some volume point, the net unit cost will be economical and at the right price can generate a profit with additional sales.”
“This my friends,” added the productizer, “is how a business can determine the break even price for a product. If a business can carefully measure all the expenses of its business, and allocate them to the fixed and variable cost categories for all their products, then the business can determine the price at which the volume in consideration would equal to the costs for the same volume. Likewise, the business would understand that effectively, any additional product sold would only incur additional expenses from the direct, Variable Costs as all Fixed Costs were (technically) absorbed by the volume of product sold up to the break even point of volume/price relationship. Graphically it looks like this:”
cummulative revenue & cumulative costs Break Even Point Total Sales Revenue Profit Variable Costs
Loss cummulative sales & production volume
Break Even Analysis
Break Even Analysis is used to determine the relationship that price has with volume of sales. The figure above represents an anlaysis of a set price per unit with known fixed costs- the red hrizontal line, combined with the variable costs- the blue sloped line that begins at the fixed cost intersect of the Y-axis and angles upwards. As sales increase the cumulative value will reach the combined value of the unit cost at the point X units sold. The red shaded section to the left of that intersect is loss to the company and the black shaded section to the right is the profit to the firm.
“So you see,” went on the productizer, “we can always determine what our bottom line number might be, based on the forecast of sales volume. Of course this can get to be a gamble on a new product. With no history of sales, forecasts from our market research will have to make a judgment of how many units we will be able to sell at a given price. And as we can see, if our sales volume is left of our Break Even Analysis point, we will be loosing money.”
With this comment the productizer saw the worry on everyone’s face and concluded it was time for a mid-day break. “Let’s all go for a walk, the fresh air and the sunshine will do us all good. And don’t be so gloomy. The businesses that should be gloomy are the ones that have never ever considered the break point analysis and we can go over ways to set pricing so that we limit our risk.” with that he led the group out to a breezy walk.
Limiting Your Risk:
When they returned from the walk, re-energized and ready for more the productizer started right in, “there are two types of products. There are brand new products that have no comparison and there are products that are similar to other products or offer features like other products. In the first case, you have a definite problem in establishing a good price to offer your product. In the second case, you had better understood the market, the reason why your product should be chosen over the competing product(s) and an ability to compete on all fronts in the competitive marketing game. We will discuss competing against like products on a pricing standpoint later. But let’s look at a brand new product. How many here have heard “there’s nothing new under the sun?” asked the productizer. “Well, for the most part that is true. When the Betamax® came out, it offered a compact system that would store audio/visual information and was meant for the sale and rental of home movies. But if we look closely, we would remember that very rich people already had theaters in their homes and would show films with projectors. What the Betamax® did was realize this posibility for more people, and helped the movie industry consider that they could market movies to the public with pre-recorded versions for home showing.” Mary jumped up and asked, “is this a drastic example of price elasticity?” The group laughed but they understood her point. “Exactly,” replied the productizer. “The very rich could hire a projectionist, and handle the reel movie format. The Betamax® just put the information on electronic media and thus was able to convert it to a signal that our televisions could translate to a show on our televisions. And larger versions of the cassett type film were already in use in the broadcast world before. Sony was able to realize that at the right price, the general public would be willing to plunk down their money to have the privilge of seeing movies on there own televisions.” “But, the Betamax® didn’t last long,” stammered Mary. “Oh, now I understand, Sony set a price that was attractive enough to influence some of the public to buy its product. But the offer price was so high that competing products, recognizing that even more of the public would buy such a product at a lower price introduced the VCR type of product at a substantially lower cost. And even though many buyers considered it a lesser product, the buying public did not consider the inferiority to be
substantially deterimental to the choice. In short time, the Betamax® product was withdrawn form the market and the VCR reigned for many years.” “Exactly!” replied the productizer. “This example shows that price is established to do two things: 1.) make a profit and 2.)match the market expectations. In the case of Sony’s Betamax®, the “make a profit” mentality was used to recover costs of the early development and production expenses. There was a failure to anticipate the degree of demand by the full marketplace for the VHS competing product offered at a substantially lower price. This lower price pulled in so much business and revenue that any market leadership initially owned by the Betamax® was lost and never recovered. Should they have considered the potential volume of the marketplace at the lower cost, the unit cost assessment for the Betamax® could have been calculated over a much larger sales volume and thus the fixed cost could have been lower per unit sale. This would have had the ability to influence the initital offering price and suggested sales price as well as allowed for more if not all of the market share for this type of product.” “So,” added George, “by aiming for a higher selling price, Sony was expecting either a lower volume of unit sales and priced for a recovery of investment expense and unit price inputs based on that lower expected volume, and was not in tune with the degree of price demand elasticity. This opened the door for competing products that might not have had as good a performance quality but certainly were able to pull in enough sales to be profitable for the competition. And as a killing blow to Sony’s Betamax® product, the aftermarket support, of products to be used with this time of recording and feature film, easily shifted loyalty to the larger consumer group, the VHS owners. This negatively influenced any further sales of the product and sealed the Betamax® fate.” “So,” asked the Productizer, “what could have been done for Sony to protect its market introduction and maintain the early edge it had with the market? Frankly, the product management of that introduction was left holding the bag. Why don’t we get into this question after we have had a breather on this.”
Chapter 9 Managing the Product
“Let’s start off with a question for the group,” began the Productizer. “The question is:
what is product management?
Let’s take a roll call listing from each of you,” he demanded. The list prepared identified some of the activities and atributes of “product managment:” 1. 2. 3. 4. 5. 6. 7. 8. 9. gathering and interpreting market intelligence projecting sales demand establishing pricing policy and pricing points coordinating internal and external supply and sales channels managing co-marketing product relations supervising cost of product(s) managing marketing and public relations scheduling of marketing events fighting fires!
The Productizer surveyed the list, thought for a moment and made an observation. “The ninth item on the list was not placed there on a whim, but it was put in last place for a reason. While putting out fires is a good practice, if it becomes the primary activity of a product management team, then not much quality time will be expended. While the product management team (team) acts and looks busy, it has let events overcome the mission. I am actually disappointed that we did not include: 1-a.) defining product and business mission and goals and managing to the mission and goals. Otherwise, how are we benchmarking the performance of the product and the product team? Additionally, to some degree, the team establishes the personna of the product or possible product line. That is: a) b) c) d) e) f) how well does the product anticipate and meet the market’s needs? how do the atributes of the product measure up to the norm? how dependable is the product? what is the maturity expectation of the product? what degree of promotion is provided? what flexibility of pricing is determined?
By reviewing the six questions above, the early product life cycle can be proposed. I am saying ‘proposed,’” noted the Productizer, “because as a product matures from idea to market introduction, information not previously considered, quite possibly unknown, can have remarkable effects on the actual product management program.” Mary pitched in, “I think I would appreciate a step by step process for product management. It seems like some of this is a rehash of the early part of the week, and other information is new or at least, when it comes to my experience. After all, I thought putting out fires was my primary responsibility.” The group chuckled at that admission, but clamored for details in earnest. The Productizer figured this was the capstone of the week, and as it was drawing to a close, this would be the last time he would be able have the attention of the group and leave with them some key actions they could use in their respective professions. “Okay,” he started, “let’s take the last few hours together to collect some information to take back with you. A caution, to pay close attention to; making a plan and carrying out a plan is only as good as the adjustments made to the plan to compensate for actual conditions. The product managment team, and the product manager must always measure the results that action achieve and be cautious as to the true causitive effect for the results. Over time, adjustments to product management activities (cause) and the results from those activities will be understood. But always look at the information from many sides, as holistically, events are caused in response to the environment. And the environment defines what happens to a product’s performance.” George piped in, “is that another way of saying - ‘a rising tide lifts all boats?’” “Exactly!” replied the Productizer. “Boom times and bust times have different primary motivators for the markeplace. And the degree of activity is greatly influenced during the extreemes of the marketplace and the economy in general. Also, the stability of the local and macro political climate can also influence both the demand as well as the possibility of uses for products. It is the responsibility of the product manager to have a crystal ball, sort out the short and long term environmental issues and determine optimal activities to maximize meeting the mission of the product line.” “But isn’t the mission always to make the best possible profit?” asked Mary. “That depends on your reference of time,” the Productizer replied. “You see, early on you might want the mission of a product to be establishing market share, or define a new market from a previously unrecognized need. And based on the degree of product protection, through strategic capabilities, know how or patent protection, you might consider pricing to be secondary to establishing a critical market size, or educating a marketplace to a completely new product. Sometimes, a business will wait a number of years until a product awareness in the marketplace gradually matures and makes profits due to economies of scale due to the demand growth and/or based on expansion of the product line to higher profit niche markets. By a careful waiting
until the identity of the product is intricately linked to a particular business’ product line, with little earlly profits, the risk of other competitors entering the market with like products is lowered as the anticipation of profits, the primary motivator to enter a marketplace would be elusive unless the competitor has a strategic edge. While this sounds like a great plan to corner a marketplace, being a loss leader does not attract much investment interest nor can you attract top talent to run a money losing or break even business.” “Of course,” he went on, with a twinkle in his eye, “there have been many businesses over time that would have loved to break even.”
Benchmarking the Product
a.) how well does the product anticipate and meet the market’s needs? i.) Is the market studied both before and during the product introduction? ii.) Are surveys of consumer feedback a periodic activity? iii.) Is there an active consumer response network that directs all information to the product manager? iv.) Is there a program for upgrades and /or customization for the product? v.) Does the product manager support a “users group” with periodic product information and case studies? vi.) Is market share rising?
b.) how do the atributes of the product measure up to the norm? i.) Is market share rising? 1.) Are unit sales as good or better than competing products? 2.) Are niche markets served as well as those served by competing products? ii.) Are there key features that the product has that exceed the value of the competing products? If not, is this a planned market stance or is the competition offering more than the product? iii.) Are product attributes fairly compensated or does the cost for the “bells and whistles” get absorbed in profit margin? iv.) Is the product considered a market leader or a follower? v.) What do the results from comparison performance tests say about the competition? Do these results provide information suitable for strengthening or weakening the marketing effort?
c.) how dependable is the product? i.) Does the product’s “mean time between failures” meet expectation, exceed expectation, or fail to hold up? Has this been evaluated? ii.) Does statistical process control indicate that the deviation from target ideal product quality is within one standard deviation? Is this measured and managed? iii.) If the product requires working with other products is it compatible with all the likely combinations of complementary products? iv.) If there are some incompatiblities, are there after market fixes, and if possible are they provided free or at cost? v.) Are the tangible attributes of the product of sound material and workmanship? Is the product suited for its intended use? vi.) Is the product capable of keeping up with obsolesence? Will upgrades and fixes be offered to registere owners? vii.) If reasonable, are spare parts available for reparing of originat equipment. How are they procured? Is there some easy method of getting product repaired should it be required? vii.) Is there a help desk, a web site, a useful owner’s manual with clear instructions in the appropriate languages? 64
d.) what is the maturity expectation of the product? i.) Will the opportunity cost of the product ( for both buyer and seller) be recovered prior to the need to replace the product due to obsolescence? ii.) Are sales levels to a sufficient net revenue to maintain product support and product improvement activities? iii.) Is the product likely to have a long run of steady sales level with little competition and good cash flow generation? Or is it likely to have significant competitive pressure and reduced sales income due to price competition? iv.) Is the product line expected to wrap around the general market area with other products to round out the offered products, and maintain a market leadership position?
e.) what degree of promotion is provided? i.) Are there user gorups and is the product featured at trade shows with technical courses? ii.) Are seasonal market cycles understood and is advertising coordinatied with sales promotions and production schedules? iii.) Are sales demands outstripping production capacity? Or is production capacity exceeding sales forecast. iv.) Is the product linked, pre-market with complementary or co-products. v.) Is the product cross-licensed with other businesses for sales in markets otherwise not served by the product developer/proprietary owner? vi.) Is the media used in promoting the use of the product and after market confirmation of benefits? vii.) Is the relationship of promotion undetstood so that increased advertizing has certain, verified results? viii.) If the answer to vii above is no, has the promotion method changed or is it expected to change? ix.) Do your employees use the product, and promote it, even if not in the sales department?
f.) what flexibility of pricing is determined? i.) Is market segmentaion used to maximize the potential of descrete markets? ii.) Is each market understood so that pricing expectations for each market are monitored and met. iii.) Is the owner willing to increase price in the face of competing products dropping prices? iv.) Is the pricing and market demand tuned to optimized production size and warhousing projections? v.) Is market leadership paid for with lower than necessary pricing? Is product promotion not used in conjunction with pricing? Mary looked bewildered at the last sentence of f.)v.) the Productizer looked at her and asked what was meant by product promotion in conjunction with pricing. “Well I acutally am confused,” she confessed. “What does promotion have to do with pricing that it is worthy of mention?” Bob pitched in, “many times we want to add new customers, so we do a big marketing blitz, with more radio time and possibly some direct mail connection. But to grab attention, we offer some special deal to the new prospects. That is effectively a pricing issue. You see, in the banking industry, we can’t lower our prices for services or offer interest rates that don’t follow certain rules. Instead we might offer discounts such as free checking with minimum deposits, or waive ATM fees for the first five withdrawals in a month. The promotion gets the attention, but the hook that pulls in new customers is the free stuff or special deals.” “You do have to worry though,” he cautioned. “Many times, we have found ourselves giving special rewards to our longer term, loyal customers. We’ve found that holding onto a long term customer is very valuable as compared to bringing in new clients. So we have looked for ways that don’t cost so much but pay back in loyalty. Such things as the Thanksgiving Turkey Giveaway is an example.” “That’s right!” encouraged the Productizer. “If your product is worth promoting, then the current clients already using it are just as worthy of protection and special dispensation. I think Mary has seen the connection!”
And with that, the Productizer took off for his next project. He turned for a moment, and noted, “by the way, when do you end the life of a product? When the cash flow is not worth the effort to maintain the product line, and you have better things to do with your resources. Remember, opportunity cost know no boundaries.”
accounting and finance - a service group that measures the financial units of a business and determines the best practices to manage cash flows, debt and investment practice added value - the act of improving a product so that after the improvement the product has more worth than it previously had. This worth can be based on better utility of the improved product, or an enhancement that makes the product have worth more intrinsically. advertising advertising advertising advertising - this was listed 4 times in the text, and left here for emphasis and definition of what advertising is: bringing product awareness to the marketplace appearance - the look of a product, which can include not only the form, feel, color and texture of the product but also the package and labeling of the product. assessment - a comparative measure of something such as a product and analysis of the product against other competing products. This could include tallying up the pluses and minuses of the broad review of the product. See- benchmarking bartering - exchange of good or services for other goods or services without the normal “financial instruments” such as legal tender or other conventional means of transferring wealth. benchmarking - includes setting a basis for the performance of the product and also can be defined as establishing a product type base for various attributes. Typically a product is said to be benchmarking when it establishes the quality that is to be met or beaten if competing products are to have any chance of being accepted into the marketplace. bottling the wine - wine is typically produced in large casks, barrels or tanks, bottling means to take some of the bulk produced wine and place it in a smaller bottle that is easily transported, finally being sold and consumed by individual customers the “added value” is a reasonable size of product as well as significantly improved portability of the product.
bottom-feeder - business entities that emphasize and focus their business pursuits on the acquisition of low valued goods and services and take little note of quality differences. Bottom-feeders find uses and markets for products that the average buyer would not purchase. Acquisitions are typically for much less than cost of goods. bought time - purchase of product utility on a shared basis, where ownership is for only the period of time needed. It reminds me of the early days of heavy computing where only a few organizations could afford the big computers and the rest of us ‘bought time’ on them. break even analysis - consideration of when “costs going in” are evenly matched to the revenues from the sale of the product. This can establish the price of a product, based on all considerations including volume of product sales, where there is neither loss nor any profit. This is below what many call the bottom line value. brokers and distributors - brokers sell large volumes of products in smaller volumes and units. Distributors do the same but they are likely to actually handle the product and possibly inventory the product whereas brokers quite likely never see the actual product. bulk - product in volumes too large for any one user, unless that user also produces other products in bulk. Bulk can be used either for large volumes of finished good or for raw materials that will be consumed in the production of other products. bulk merchant - one that sells only to large volume, commercial/industrial customers bundle - add things to the final the product in such a way so that more than one unique product is definable within the final product and the bundle has better utility that the items sold separately. For example: printers with cables have more utility and ease of use than printer and cable sold separately. business strengths - those attributes of a business that promote the success of a business and are measurably better that those of competing businesses business weakness - those attributes of a business that promote the failure or poor performance of a business and are measurably worse that those of competing businesses buying power - the ability to purchase services or materials in such volume that the purchaser can contribute to a lowered delivered product cost and thus negotiate a better purchase price than smaller volume buyers capital capital capital
capital - Again listed 4 times in the text. You can’t have too much capital, or the basic measuring stick of success - money or some other form of wealth. capital equipment - what is also called hard goods or durable goods, equipment that lasts for a number of years and is not considered disposable. On that basis, management wishes to utilize the capital goods as efficiently as possible. capital resources - These are durable, fixed equipment, machinery or other property that is needed to produce the product. Failing to own these resources would require that the needed equipment and fabrication space would have to be rented or leased or some other business would be involved in applying its resources in the manufacture of a product. Those firms with capital resources have already spent the money, or committed to some form of debt to acquire the resources. Many times this is what the income from stock sales are used for. While capital resources are usually identified as already spent, they are charged back on a tax basis as depreciation. The cost should also be recognized in the allocation of fixed costs to the manufactured cost of the product. carriers - These service businesses work to transport product from one location to another and include the transaction of sales with delivered goods. The modes of transport are any combination of truck, ship, rail, or air cargo. cash flow - problems can cause foundering of a business before the cycle balances out. For many businesses, early growth and development of the product can sap all the money out of a product. While in most business circles this is considered a normal feature of a growth spurt in the product “raising star” the forecast and management of cash flow; balancing money coming in against money going out is tantamount to success. Once real cash flow is determined to be flowing out faster than it is coming in, the product manager is required to correct the issue. In fact, by then it might be too late. One way to manage this is to gather a cash reserve in the beginning anticipating that there will be a delay in cash flowing in until the product is established. This is also one use of stock funds. In the early stages of the DOT.COMs in the 1990’s and into 2000’s, many firms over estimated the possible cash flow coming in and underestimated the cash flow going out. Once their realization of a negative spiral came to the forefront, multiple businesses filed for bankruptcy and closed down. cataloging the inputs - in the production of any good or service, many efforts and materials are brought into the mix. A careful cataloging g of the inputs is required to fully recognize what is required to produce a product or service. in the end, all products totaled up will have used all inputs and allocating between products is the best way to identify those products that contribute to a business’ success and those that undermine the profitability of the business. Special caution is offered to not cut products too quickly before complementing results are fully understood. channels - common distribution and marketing, and an efficient corporate structure are identified as channels. Consider them as pathways to produce and deliver product to
the end consumer. Each pathway, as it is refined over time wears a stable, solid path of practice for “that’s the way we do it,” or “we’ve always gone to XYZ for that service,” to “we always buy from ACME.” co-marketing co-marketing - Many products sell through the efforts of more than one unique business. By working together, each benefits in the sale of their individual product bundled with some other firm’s product. This includes both tangible and intangible goods and services. commodity - status indicates that the product is so ubiquitous and little differentiation is made that the only feature of variation is price. The consumer is confident that all product attributes are so similar that each source of product is exchangeable with competing products. Milk and eggs are examples. competition - When more than one company makes a product or offers a service, the other company is known as the competition and its like product is called a competing product. complementary - goods positioning the product with like goods or/and services, the new product can be introduced with an already established good or service or comarketed. Complimentary goods are not necessarily from multiple firms. They are, however, discrete products that combined have an added value and promote the consumption of both products. Engine oil is typically sold at gasoline filling stations, even though each is a separate purchase. consumables - These products are depleted in use and have no residual end product identity. In making charcoal, the energy used to making the charcoal is consumed, and although part of the process of making the product is consumed in the manufacture and is not recoverable and a defined product. consumer definition - A key demand on the product manager is to define and understand the consumer or the different type of consumer. Following that definition, the product manager can tailor a product to fulfill the requests of that consumer. Also, dialog with a consumer will help in the direction of enhancement of the product over time and the introduction of additional products that both complement the original and expand the market services. corporate mission - This is the defining of what a business is trying to achieve and helps both the business and its customers establish what is expected of the business. Missions should be clear enough to establish an identity, but flexible enough to allow a company to adapt to growth and evolution of the business. cost of leaving - When a business leaves a product production and sales, the cost of leaving includes what happens to the capital resources, excess raw material and
finished goods inventory, selling of land and buildings, and termination of human resources. There is also a cost of impact on other products such that ongoing expenses that would have been distributed over a broader product line now must be carried by few products and thus cause a higher fixed cost portion. Non-recurring expenses related to the cost of leaving are allowed to be reported as one time expenses and are usually reported as below the line costs in financial reporting. CostsFixed - all costs that are based on activities not directly related to the production volume of the product in question. i.e. costs such as depreciation, administration etc. CostsVariable - all costs that are directly related to the product production. These would include raw materials, power costs used in the production, packaging and shipping costs, warehousing and inventory carrying costs directly linked to the actual product sold. counter-trade - also known as bartering, the exchange is not quid pro quo but instead third party products are traded so that the end product of the consuming firm is not what is sold to the provider of the good or service to that consuming firm. Instead, the end product is sold in the country of origin and goods purchased in that form of money are exchanged for a third product that has value in the counter-trading country of origin of the original supply to the consuming firm. This is used in economies with weak financial methods and avoids the exchange of inflated local currency. cross marketing - This entails the marketing of products that are in demand due to the popularity and demand of some other product. Thus if off road vehicles start to be a large market section, the tilt level gauges could find a cross market to those owners that go off-road. The key to success in cross market is to identify products and needs that initially have not been embraced by the consuming public and establishing a demand ahead of the competition requires a marketing of the concept to the buyer. customizing - providing a feature or multiple features that does not have a clear and clean link to the intended utility of a product for the mass consumer, yet would result in a significant shift in the business satisfaction for a subset of the marketplace. Customized products are frequently directed to one or few more customers. For that reason, long term agreements and capture of the extra product development costs are used to recognize a business relationship much closer than an ordinary buyer-seller relationship. day’s sales outstanding - . The total number of days from when a good or service is delivered to a client to when payments are received for that good or service. Typical terms are 20% down and net 30 days from invoice. Some organizations measure the days sales outstanding based on when a product was available for sale up to the date the cash flow came in to pay for that product. This is also sometimes called cost of inventory.
demand trends - the measurement of “price elasticity” measures how many units are sold relative to pricing at different offered prices. Thus a trend of number of buyers compared to the offer price of a product can define a demand trend. demurrage - if transportation equipment is used to store product instead of just loading it at point “A” and unloading it at point “B,” then the shipper can no earn money hiring out its transportation system to others. To discourage this and to realize income from lost availability of its transportation asset, most shippers charge a demurrage fee based on extra time beyond the reasonable expected time period for unloading a product. depreciation - this is an accounting method of charging business operations an allocated cost for the purchase and often the installation of fixed capital equipment or other durable capital resources that are not allowed to be charged at full cost in the period of acquisition. This allows for spreading the cost of long term investments over an extended period and recognizing the application of capital resources in the production of goods and services. Depreciation is also applied to reducing tax liability in many countries. differentiators - those attributes of a product or service that are remarkably different than that of competing product offerings. diffusion of information - well placed products, i.e. products that are a hit as well as targets that met some consumer need generate“word of mouth” market knowledge. This diffusion of information is a phenomenon that allows for the marketplace to help promote products that meet otherwise previously unsatisfied needs. diluted market share - is that point in time that other competing firms offer competitive products and thus there are more offered products than the original demand would demand. This forces each firm to scramble for its fraction of the product sales and a gradual shift from the early, lead position to one that does not have the percent of full market shares and or a reduced volume of sales units. This is usually indicative of lower priced product offerings and less profit per unit of sale. discounting - many products have a “list” price which is discounted to various buyers based on some relationship or incentive program. This activity is legal under some circumstances such as group buying relationships or volume discounts. Discounting regulations should be understood prior to implementation to adhere to local, national and international laws and protocols. distribution - this is the act of taking a product and providing it to consumers beyond the manufacturer’s facility. Thus the distribution offers products to a wide range and possibly greater geographical marketplace than what the manufacturing activity works with. Distribution employs considerations for sizes of shipments, external warehousing needs, and pricing to the various channels the product flows through.
domestic and international - local, within one country (domestic) as opposed to; multicountry (international.) downstream - business practices of companies following the gathering of natural resources or other raw material production that can be sold as a product itself. Term typically used in the energy, oil and gas business. Ease of entry - a judgment of how much knowledge, worker skills, and capital resources are required to enter into a business. A low ease of entry business is subject to multiple competitors that can ramp up production and sales early and recover the business development costs quickly. A business with a high entry cost, such as a pharmaceuticals manufacture and sales, requires many years and some technical know-how that is not easily found. economies of scale - many products are less expensive to manufacture with larger volumes of production because the fixed costs can be spread over a larger production count. Thus products with high percentage of total product cost in fixed costs (CostsFixed) can experience lower fixed costs per unit as product volume grows. efficiency - a measure of how little waste is produced both in human labor and consumption of materials and energy in the carrying out of business activities. This applies in both goods and service businesses. expected price - is the price that customers are used to paying. external growth - many times, to gain an entry into a business, firms will purchase some or all of another business that already has an established capability to satisfy that desired growth objective. This purchase can be in same business areas or in a diversification of business areas. Many times there are governmental oversight issues that need to be satisfied for external growth to be legally allowed. features marketing - marketing of the differentiators in a product and not necessarily the product itself. features - those definable attributes of a product that can be measured or observed such that they add to the expectation of quality and utility of a product. fertilizers - a product used to improve the plant growth in agriculture. The product increases some or all of size, speed of growth, size of foliage or flowers. final work - the last steps in a product development and marketing program where multiple other activities had to be carried out in order to come to this step of the product development. When you go through the productization process, it is best to systematically go through the early efforts (front work) before continuing on to the last steps (final work.)
financial projections - an assessment of the positive and negative cash flow streams over a period of some extended time. This time period is typically one year with relative certainty and 5 to 10 years on a speculative basis. These projections are used to establish budgets and identify when cash flows might require some constraints or infusion of funds. finished goods - product that some consumer will buy and use for their benefit. finished goods and services both tangible and intangible products that are ready for use by a consumer. fixed and variable costs - see CostsFixed - all costs that are based on activities not directly related to the production volume of the product in question. i.e. costs such as depreciation, administration etc. & CostsVariable - all costs that are directly related to the product production. These would include raw materials, power costs used in the production, packaging and shipping costs, warehousing and inventory carrying costs directly linked to the actual product sold. fixed cost asset - this is an investment added to buyer’s operations and as such, it is valued by how it helps buyer’s business produce its product(s). By being a fixed cost, it will contribute to the production of multiple years and the investment cost is allocated over the time of its productive contribution rather than a one time expense. fixed costs - see fixed and variable costs above. flat-line- when a business has no life left in it, as compared to an electrocardiogram. Its always best to take some time each day, week, month and year to reassess the progress and energy of a product and determine whether or not the product is health and vibrant or the opposite, approaching a flat-line. fleet costs - this is the cost for the shipping vehicles, both allocated depreciation costs as well as the variable costs of maintenance and fuel, plus driver expenses. force rank - to measure and determine a ranking of features from the most important to the least important. for example; once a firm has established a time line for software development, we will have emphasized those critical, most important features in assignments to development groups as the most critical efforts to solve. . front work - the earliest steps in product development, such as determining size of market, price ideas, competing product offerings. This technique is very often done in a market driven business that seeks to develop products that anticipate market needs. A manufacturing driven business, on the other hand, will have already made a product or by-product [one that is also made in the course of manufacturing the target product] and instead of doing front work will try to determine a market for a product after the fact. This very often results in selling a product for little or no profit as the manufacturing has no way to deal with it otherwise. Profitable end uses and analysis
of commercial value are very often ignored, thereby resulting in lost income streams due to the lack of “front work.” go for broke - trying to perfect a product that in many ways can consume all financial and physical resources. Otherwise known as gambling. This is found mostly in entrepreneurial firms and not in established publicly held firms. gross margin per unit sale - is identifying the difference in cost per unit sale from the sales price per unit. growth - the increase of a business in unit sales and capacity achieved by either teaming or partnering with other firms, acquisition of other firms (external growth) or by expanding the business from within, known as internal growth. herd mentality -following the common practice and taking actions as other do, with possibly no insight as to how or why business changes are initiated. hindsight - the understanding one gains after the consequences of actions or inactions are already in place. Frequently called experience. hot - a product, that is so popular that diffusion of information promotes the product faster than production can provide it. ‘“Mechanisms and approaches will be covered in a future symposium,” said the productizer.’ The development and marketing of hot products is a special effort requiring streamlined development and fast, proprietary action and introduction into the marketplace. Frequently, competition enters so quickly that profits have to be made on the overall development costs in a short time period. Many hot products have short life spans and although profitable, early entry of competing products or better, second generation products dilute the market share and cause the overall profitability of the product to wane. in the pipeline - is a term for products in development and nearly ready for introduction to the marketplace. incremental or fractional - expansion of the full firm’s business is the growth of parts of a business to add a bit more product capacity or like products without having to expend much in the way of capital resources or technology development. Incremental and fractional growth depends on an established business and offers a business the opportunity to add to sales and profits with little or no additional fixed costs. This is an enviable activity as profits relative to unit costs are good for the new products and the fixed costs for the existing products are reduced due to the larger number of overall unit sales. [This should be cautioned in that many very profitable businesses get caught up in incremental or fractional growth and loose their way when the overall business line approaches obsolescence as fresh new ideas and brand new product development strategy is a lost art for the firm.]
insurance - a means of providing for loss by buying a recovery of lost funds and efforts through the purchase of insurance policies that will pay funds to the lossee. Insurance firms make profit by understanding the risk of loss and distributing the risk over many businesses and activities, thus providing a profit margin to their operations from the cash in versus the payouts out. intermediate - goods and services are those that have only a narrow utility in the marketplace but are necessary to some other producer of goods and services to produce their product. Thus it is an intermediate step of a longer process of providing a finished good or service. intermodal - a means of transporting products with differing types of transportation vehicles such as ship and rail and train via “piggy-back” trailers. internal - growth of the firm itself is achieved by adding both technical and capital resources that otherwise do not exist and expanding the ability of the firm without having to acquire other firms. Frequently internal growth is achieved by hiring competing technical and management talent from others and giving them the ability to steer the business in expanding markets. This is sometimes called “raiding” and although it is called internal growth, the overall marketplace is at zero gain in capabilities as some other firm(s) then suffers from lesser capabilities. inventory taxes - in many areas throughout the world, property, even that for sale, is itemized and taxed on the potential of future sales value. This can discourage hoarding and encourages the sale goods in the near time frame to the manufacture of the goods. investment of - all actions require a commitment to some degree of time and money. As such, if either is in limited supply, the optimal use of that resource should be considered and investment and decisions made on the basis of optimization of the resource’s payout. jobbers - these are firms that do work for others and do not necessarily seek an end consumer for their product but instead fulfill some form of production service to other firms that take responsibility of introducing and marketing products. Also called contract ___. just in time - is the providing of goods and services at the time of demand and no sooner. This streamlines the day’s sales outstanding as investments are made at the time of need and no sooner. This requires a good communication program so that all channels are in synchronization. kaban - the Japanese term for just in time. See: http://web.mit.edu/manufsys/www/amb.summary.html
key product attributes - are those that contribute to the results our clients are looking for. labeling - on products is the means of both informing the consumer of the contents of a package as well as a means of distinguishing a product or product class with style, color, size of text and other features. Campbell’s Soup® recently revised the label for its soups by redrawing its model children to leaner forms thereby removing the stigma of more rotund children which are now considered less healthy. labor - human resources applied in the production of goods and services. Labor is many times considered a direct cost for those individuals that work in the actual production of a good or service and indirect cost for all other human resource endeavors. Less than truck load (LTL) - is a form of shipping where the material shipped does not demand a full truck capacity and thus the shipping firm will make several stops to fill up the truck with the LTL products prior to traveling to the destination(s). FedEx and UPS services are extreme examples of LTL. leveraging - means using other, outside resources in both capital as well as technical and manufacturing labor to expand your capabilities. However, the potential future profits are diluted as the external business partners, or jobbers, will require a return on their investment. loss leader - sometimes a product introduction will be coupled with a loss leader in order to introduce your firm’s product to a broadening market. By “giving away” a product for a loss, the firm hopes to gain additional business based on the actual product it is trying to promote and grow. maintenance and capital investments - maintenance is the day to day, ongoing activity of keeping equipment operational. Maintenance is expensed on an annual basis. Capital investments are those expenditures of new equipment and installation that will contribute to productive uses over many years and are expensed via depreciation. making - the practice of producing something. management - the leading and administration of a business. management, labor and maintenance - the three types of human resource demand inputs to a labor cost. manufacturing costs - the cost of producing a product up to the point of placing a finished good upon the manufacturing factory floor. manufacturing- producing a product.
market definition - a description of a market which develops an understanding of all the relevant issues. market innovators - those firms that do not have a herd mentality and instead help determine how and why a market works and introduce new ideas and products before the competition does or even understands what the heck is going on. market leadership- what happens to market innovators that are able to provide early products with good quality. market position and pricing - a leader can command a higher product price based on reputation and diffusion of information. Competing firms must find ways to differentiate and this is typically done with some form of lowered cost, even if artificial. market segmentation - the practice of redefining a product to meet subset market sectors with unique products that can allow for an adjusted price per market sector. market share - the part of or percentage of a total like product demand that is controlled by a sole business or business sector. market size - the total number of units or equivalent currency value of a market demanded by the market on an annual basis. This can be domestic, international or global. market - a set of consumers/customers that seek to acquire a product or service. marketing and consumer demand - product definition into categories such as specialty, mass marketing and private branding. Analysis of co-marketing opportunities. Developing consumer definition and determining features marketing and advertising approaches. marketing and sales - the former is the establishment of tools to understand and manage the dynamics of market forces and the later is the actual exchange of goods and services for some form of wealth such as currency. marketing and sales costs - unfortunately are linked together in many businesses even though they are discrete activities. This is the expense of carrying out either the marketing function or the sales function. marketing channels - these are the methods and approaches of providing the information about a product to the target consumer in overview they are channels as was described previously, see channels. marketing units - this is a part of a business that specializes in marketing activities.
micro-economic - conditions are economic units on a more local level and more directly impacting a particular product. MRP [material requirements planning] - a method of monitoring production inputs and determining when and how much replacement materials are needed to keep a working inventory of raw materials and other consumable inputs. opportunity cost opportunity cost opportunity cost opportunity cost. opportunity cost - can’t stress this on enough! The cost of spending limited resources for one activity relative to the ability to pursue other activities with the same, limited resources. orientations - high level of technical support used to train consumers in the functional use of the product or service delivered. other resources (energy or consumable materials for example) - anything that has to be purchased and is not uniquely defined in the end product is an other resource. packaging and labeling - see labeling. price elasticity and price elasticity of demand - is the measure of demand relative to pricing levels. Highly elastic means that sales are very much a function of price whereas the opposite, inelastic means that the demand is stable over large price fluctuations. price points - are the expected prices set for certain activity level in market demand. pricing floor - the minimal value of sale price before the seller walks away from a sale. pricing stability - this is when enough buyers and sellers participate that a truce in price and competition leads to stability. prime numbers - of a business are the building blocks of a business that can not be broken down into smaller identifiable units and still be unique to that business. For most businesses, the prime numbers equate to the various business departments of the organization. If any of these departments should be deleted, the business could not succeed in reaching the final outcomes it endeavored to take. However, and this is an important concept, prime numbers are activities and services or deliverables that can also be defined well enough to separate them from the business operation and secure their operation by some other means such as a (sub)contractor, a jobber, or a service provider.
private branding - the practice of associating a product with other complementing products all under a common brand name. private label - the affixing of a private label to an otherwise common good or service. product definition - the established features of a product that describe the attributes of a product. product differentiation - see differentiation. product lines - multiple products that meet specific consumer needs that overlap in application and usefulness. While the unit sales and market share of the originating product might decay, the product line is able to take advantage of the trade identity. production - the act of manufacturing a product or developing a natural resource. productization process - the holistic approach to determining ways to introduce ideas into the marketplace. profit - the residual money left over after all costs for doing business are subtracted from sales revenue. Note: there is a before and after taxes level of profit. promotional - actions undertaken to increase the consumer awareness of a product. promotional expenses - the cost of promoting. providing a choice - offering a differentiated product to the customer that they may make a selection. In some economies, only one product is offered per product type. quality control - the application of measuring product attributes and removing those products that do not meet certain expectations for performance or other quality. Many times the quality control is applied early in the process to remove conditions leading to poor quality products. quality of handling - distribution and sales are all issues for which each channel must consider attributes of certain expectations. Frequently, those issues are so important that agreements worded to maintain levels of performance. rail - another name for train-based transport of goods. raw material costs - the costs of products that are used in the manufacture of a final product and are in some manner, part of the makeup of the product. raw materials - products that are used in the manufacture of a final product and are in some manner, part of the makeup of the product.
reasonable market - as those businesses that are sized to support a purchase decision for your product in balance with all other factors and demands on its resources. regionalized purchasing habits and market volume - by region are due to the unique driving forces in each business region having a different influence on buying habits. resource utilization - the use of the company’s and other services’ labor, management and capital equipment. return on investment or “ROI” - the pace at which savings or increased earnings pays out an investment cost. sales team - those persons exchanging product for money or other method of transfer of assets. seasonal products - products that only sell or sell at expanded levels during certain times of the year, such as champagne at New Years. segmented market pricing - established subset markets that are sold products at different prices based on some differentiation of product attributes or volumes. shipping - moving goods from one point to another. shrinkage - loss of finished goods or raw materials due to theft of products. situations - critical business periods that needs immediate attention. And, it forces the product manager to take notice and initiate a program to fix things. size and quantity - differentiators. sold time - the selling of excess capacity of a capital resource. specialty - unique, small niche scale service or product line. standard practice - a set of methods that can contribute to stable operations. status - conditions of a situation. step-wise pricing benchmarks - as economies of scale intercede with production, overall price for product(s) can recede or if the opposite is more likely, the benchmarks might increase. strategic allocation of market indicators - some indicators are more important than others.
taxes - if you make money, the government wants some of it. They run the public side of society by taxing the rest of business. training symposiums - see orientation. transportation and shipping - a business sector that can be a prime number or service. truck - a method of shipping with the ability to travel on paved roads easily. turnaround - the act of fixing a bad situation, typically where control of the product and pricing is not driven to an efficient market. un-bundling - the act of breaking larger volumes of products into smaller volumes which allows for ease of handling by the next level of client. unfinished state - a product that is not useful to other firms. Unit Cost = unit price basis = the cost of one sales unit. unit pricing - see unit pricing above. upstream - those business practices to get raw materials typically from nature. user friendly - easy to use and maybe as part of the introduction to the marketplace, we should consider having a high level of technical support to ease the transition to new products. utilities - oil, gas, steam, water, electricity. value added - your product provides to the client in solving a problem needs to be enough to sway your client towards paying your firm for the product. To achieve this, you must clearly understand the needs of you client. variable - something that on a composite whole increases or decreases in final costs based on volume of product. variable costs - are costs that are common to each unit of sales and typically are steady over multiple sales volumes. vertical marketing system - in those, the activities are either all under the control of one business entity or a combination of business entities with well orchestrated efforts and agreements that cause the channels to work for a common interest and like minded efforts as a team. The opposite of the vertical marketing system is a flat marketing system wherein the control of each activity is limited to the two parties involved in that activity. That means that the producer and the wholesaler have an agreement, but that agreement does not have any direct implications on the agreement between the wholesaler and the next step of either the jobber or the retailer.”
warehousing - storing of finished or intermediate products. waste disposal - the cost of removing any unwanted materials. water - a utility and /or a raw material watershed - is an event that contributes great understanding to a business practice. wholesale volume price breaks - see discounting.