Chapter 8

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New Products and Innovation

Philosophies of Product Development

Top-down (or inside out) - Company creates new idea, develops it and doesn't bring in customer until later in the development process (favored by technical expertise companies, ie. technical, engineering, pharmaceutical, biomedical, financial services). Develop first, marketing/customer feedback is an after-thought when about to bring to market.

Bottom-up - Customers come up with ideas and company pursues them to bring it into development

Rarely just one of these, more likely a mixture of the two but it all depends on how much customer feedback received

Idea Creation and Market Potential

Internal - Boss, R&D, brainstorming, employees suggestions, feedback from front-lines, sales

External - customers (complaint, marketing research, blogs, focus groups, lead-users), business partners, competition, context (trends)

Once ideas have been generated begin to refine, by looking at target market, company brand and identity, customer segments, etc.

Product development process

Idea generation

Market Potential

Concept Testing

Design and Development

Beta Testing

Launch

Concept Testing and Design & Development

- Get customer feedback on concept. Use marketing research at this stage (focus groups, web surveys.) New product success is very often attributed to good marketing research.

- Conjoint procedure - does this product combination sound better (ie. going to the eye doctor and finding your prescription) shows what attributes matter more. Reveals what features customers are willing to trade off on because they are less important.

Choose most promising product and begin development. Usually only one product goes forward into development.

Beta Testing

- Try product out in the market on small scale before a more expensive full-scale commercial rollout.

Reveal more natural reaction of customers to product ad and price. Simulate real world setting to predict actual purchasing behavior when launched.

Area test markets - 40 -50 small metropolitan areas are seen as represnetative of the country as a whole, 2-3 areas are randomly sampled as test markets. Not used often due to expensiveness.

Electronic test markets - some households in sample of metro areas are designated to be tested and others are controls.

Simulated test markets - the most popular today - customer is recruited to go t a website, they are given a budget and the opportunity to buy the new product amonst competitors or elated products.

Launch

Forecasting - with customer data predict likely success of product. If not promising, the company can abort at this stage. If favorable, then move on to commercialize.

- Goal is estimate sales potential ($SP)

-Estimate Market potential - how many units might be sold

-Estimate purchase intention (PI)- how likely that target segment will buy (from customer research) research has suggested ratcheting the estimate downward by a factor of ¾.

- Price the company intends to charge (Pr)

$SP = MP × PI × Pr.

Timing - product development can be short or drag on, and time is money.

Product Life Cycle

1. Market introduction

- price low (penetration) or high (skimming to recoup development costs)

- spend high amounts on promotion and advertising

2. Market Growth

- sales accelerate and profits rise. strong awareness and maybe some buzz. good distribution channel coverage.

- maybe increase prices = higher margins and profits.

- competitors see the success and begin to enter the game.

3. Maturity

- continue advertising, may make a fuller product line to satisfy more segments. most competition which leads to higher marketing costs and lower prices, sales are stronger than ever but profits declined.

4. Decline

-sales and profit drop and new products replace older generation. Firm must decide what to do with old product

1. it may be divested - must sell off as early as possible

2. may be harvested - firm reduces supportive and marketing expenditures to extract more profits, milk the product while demand continues to drop

3. rejuvinate it and make it new and improved.

Diffusion of innovation

world of mouth or viral marketing helps activate the process of the diffusion

Normal curve of customer base

1. innovators, you know you're field and you can assess a product in it and tell people whether its good or not. first 3-5 percent who try it and are willing to take the risk.

2. Early adopters (10-15%) - big opinion leader because a bigger group.

3. Early majority(34%) more risk averse than first two, see they had a good experience with the new product and try it out.

4. late majority (34%) - more cautious, often older, more conservative, product must be proven

5. laggards or non-adopters (5-15%) - risk averse, skeptical of new products, typically lower in income.

Diffusion Model formula!

Strategic Thinking about Growth

- bring the product to new people or develop a new product for more segments.

- market penetration - hunker down and try to sell more - current markets and current products

product development - new products for current markets, keep current customers happy

Market development - current products and new markets. market segments are out there and we must target them. brand to meet new target, maybe expand channels or modify promotions.

Diversification - new products and new markets

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Product Life Cycle

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