The Data Institute Acquisition Manual

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Volume 15

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ACQUISITION MANUAL for THE TARGET COMPANY

6
Corporate Development
7
Product Management
8
Overseas Development
9
Product Distribution & Service
10
Advertising + P.R.
16
New Technology Primers
17
Physical Process & Orders
18
Competition Analysis
19
Product Perceptions
20
Customer Perceptions
Financial
Industry
Markets
Products
Data Grids
World MDB
Research MDB
Product MDB
Corporate MDB
Reference MDB

Volume
15

 

New Product Development Blueprint

Uniqueness is the goal of all New Product development and this is particularly the case for the Company.

New Products represent the corner-stone of the long term growth and existence of the Company. This section scrutinizes all the aspects of new product screening and control.

In that the competitive position of the Company is under threat, it becomes increasingly necessary to accelerate new product introductions. The exploitation and market penetration of new products must be realistically evaluated if the Company are to form concrete plans.

Quantification of the levels of new product investment needed at the Company and the consequent financial results in balance sheet terms are shown.

Underlying industry comparisons are found to facilitate comparisons with the Company figures. Commercialization depends on the competitive situation and competitive new product development as the Company operates in a highly aggressive marketplace.

Essentially the entire survival of the Company depends on the generation of a successful flow of innovative new products. Failure on this account means failure for the Company.

  1. New Product Financial & Operational scenarios

  2. New Product Marketing

  3. Product Development

  4. New Product Criteria


 

1

New Product Financial Scenarios:

 

PRODUCT MARKETING FINANCIAL DATA

 

 

HISTORIC MARKETING DATA

Base Reference Country

HISTORIC MARKETING DATA

 

PRODUCT LAUNCH MARKETING COSTS

Target Company

Base Reference Country

PRODUCT LAUNCH MARKETING DATA

PRODUCT LAUNCH MARKETING DATA

 

PRODUCT LAUNCH MARKETING RATIOS

Target Company

Base Reference Country

PRODUCT LAUNCH MARKETING RATIOS

PRODUCT LAUNCH MARKETING RATIOS

 

 Financial Definitions


HISTORIC FINANCIAL INDUSTRY DATA

HISTORIC FINANCIAL INDUSTRY DATA

 Financial Definitions



PRODUCT MARKETING FINANCIAL SCENARIOS

PRODUCT MARKETING FINANCIAL BALANCE SHEET FORECASTS


The PRODUCT MARKETING FINANCIAL SCENARIOS BALANCE SHEET FORECASTS section gives a series of Forecasts for the Company and the industry using a number of assumptions relating to the marketing decisions available to the management of the Company.

The Balance sheet forecast given shows the effects of marketing changes or improvements which management is likely to recommend:

PRODUCT MARKETING FINANCIAL SCENARIOS

  • Base Forecast : Median Market Scenario

  • Marketing Expenditure

  • New Product Development

  • Market Segmentation

  • Distribution Channel Improvement

  • Price Cutting Effect

  • Price Increase Effect

  • Quality Improvement

  • Target Markets Development

  • Product Branding + Multi-branding Investment

  • New Product & New Technology Cost Scenarios

  • Product Quality Improvement

Managers in the Company will, in both the short-term and the long-term, have vital decisions to make regarding the marketing improvements, margins and profitability and these decisions will need to be evaluated in light of the customers, markets, competitors, products, industry and internal factors. The scenarios given isolate a number of the most important factors and provide balance sheet forecasts for each of the scenarios.

The data provides a short and medium term forecast covering the next 6 years for each of the Forecast Financial and Operational items. The Financial and Operational Data sections show each of the items listed below in terms of forecast data and covers a period of the next 6 years.

 

Financial Comparisons: Scenarios

 

Target Company

Base Reference Industry

 

MEDIAN  FORECAST : Financials

MEDIAN  FORECAST : Margins & Ratios

MEDIAN  FORECAST : Financials

MEDIAN  FORECAST : Margins & Ratios

 


THE TARGET COMPANY FORECASTS

MARKETING EXPENDITURE : Financials

MARKETING EXPENDITURE : Margins & Ratios

NEW PRODUCT DEVELOPMENT : Financials

NEW PRODUCT DEVELOPMENT : Margins & Ratios

MARKET SEGMENTATION : Financials

MARKET SEGMENTATION : Margins & Ratios

DISTRIBUTION CHANNEL IMPROVEMENT: Financials

DISTRIBUTION CHANNEL IMPROVEMENT: Margins & Ratios

SHORT-TERM PRICE CUTTING EFFECT : Financials

SHORT-TERM PRICE CUTTING EFFECT : Margins & Ratios

SHORT-TERM PRICE INCREASE EFFECT : Financials

SHORT-TERM PRICE INCREASE EFFECT : Margins & Ratios

QUALITY IMPROVEMENT: Financials

QUALITY IMPROVEMENT: Margins & Ratios

TARGET MARKETS DEVELOPMENT : Financials

TARGET MARKETS DEVELOPMENT : Margins & Ratios

PRODUCT BRANDING + MULTI-BRANDING Investment: Financials

PRODUCT BRANDING Investment: Margins & Ratios

NEW PRODUCT & NEW TECHNOLOGY COST Scenarios: Financials

NEW PRODUCT & NEW TECHNOLOGY COST: Margins & Ratios

PRODUCT QUALITY IMPROVEMENT: Financials

PRODUCT QUALITY IMPROVEMENT: Margins & Ratios


FORECAST FINANCIAL SCENARIOS

MARKETING EXPENDITURE : Financials

MARKETING EXPENDITURE : Margins & Ratios

NEW PRODUCT DEVELOPMENT : Financials

NEW PRODUCT DEVELOPMENT : Margins & Ratios

MARKET SEGMENTATION : Financials

MARKET SEGMENTATION : Margins & Ratios

DISTRIBUTION CHANNEL IMPROVEMENT: Financials

DISTRIBUTION CHANNEL IMPROVEMENT: Margins & Ratios

SHORT-TERM PRICE CUTTING EFFECT : Financials

SHORT-TERM PRICE CUTTING EFFECT : Margins & Ratios

SHORT-TERM PRICE INCREASE EFFECT : Financials

SHORT-TERM PRICE INCREASE EFFECT : Margins & Ratios

QUALITY IMPROVEMENT: Financials

QUALITY IMPROVEMENT: Margins & Ratios

TARGET MARKETS DEVELOPMENT : Financials

TARGET MARKETS DEVELOPMENT : Margins & Ratios

PRODUCT BRANDING + MULTI-BRANDING Investment: Financials

PRODUCT BRANDING Investment: Margins & Ratios

NEW PRODUCT & NEW TECHNOLOGY COST Scenarios: Financials

NEW PRODUCT & NEW TECHNOLOGY COST: Margins & Ratios

PRODUCT QUALITY IMPROVEMENT: Financials

PRODUCT QUALITY IMPROVEMENT: Margins & Ratios

 

 Financial Definitions

 


 

 

2

New Product Marketing Factors:

 

PRODUCT MARKETING FACTORS

 

CRITICAL FACTORS + PARAMETERS


It is important to establish the compatibility between the Company and the Product, Marketing, Supplier, Distribution/Customer Interface and Customer factors and parameters in each of the topics investigated in this report.

The Surveys of Suppliers, Distributors and End Users and various other sources have identified a number of critical or potentially critical factors and parameters for the Company. Most of these factors cannot be evaluated on a monetary scale and their measurements are not comparable, thus another mode of analysis and evaluation must be found.

In order to aggregate the separate factors into a single value or coherent series of values, which will indicate areas of concern or potential opportunity, one must convert them into a value scale. This can be done by assigning value points to each critical or potentially critical factor through a scale of judgments which are based on actual past experience of the product, the marketing and the customers concerned. The relative importance of each factor is indicated by the weights assigned. A factor's rating value is multiplied by its weight to yield its critical value.

Obviously such an analysis can assist companies in evaluating both areas which might produce problems for the marketing of the product and also areas of opportunity which may be exploited when marketing or distributing Products & Services in each of the countries concerned.

The techniques used here are very similar to those used in new product evaluation and screening, indeed subscribers to this report frequently use the weighting and conclusions found here when evaluating new products and markets. The main purpose of these analyses are of course to attempt to provide a rational and objective basis with which to compare and evaluate the factors and parameters critical to the provision of Products & Services in the countries covered.

The basis of the analysis is the use of value judgments to assign the rating value. This is done through a scale:-

AVERAGE VALUES EQUAL

HIGHLY

CRITICAL

CRITICAL

UNCERTAIN

NOT

CRITICAL

MINIMAL

80

40

20

10

5

[Readers wishing to apply this analysis to defined products and markets should amend both the Value scale and the Weight to suit the product. It should be remembered that once a company has decided upon a Value scale and a Weight scale this should be retained and not changed for other products. This is because it is important to be able to relate one product or market opportunity to another and thus scales must remain constant if a valid comparison is to be made. Subscribers wishing to undertake such analyses will find in the rear of this report a blank set of analysis forms which may be photocopied and used when evaluating current or new products or markets].


In addition to the scale of value judgments the results are applied to a standard weighting for each factor and parameter. These weights are based on past experience of the product and the marketing environment in relation to the individual factors and parameters analyzed.

The Value judgments are multiplied by the Weights to give the cell value, thus:-

   Value x Weight = Cell value

For example,

   80 x 1.1 = 88


The figures given in the tables below are individual "VALUE" and "WEIGHT" figures for the cell and are not the calculated "CELL VALUES". This calculation should be done by the reader.

The evaluation of any particular critical factor or parameter of corporate activity will allow readers to gain an insight into the problems and opportunities of the Company and the market.

 

 o

o

o

C

 o

 

E

 +

o

L

L

o

 o

 

o

V

o

A

o

L

o

U

o

E

o

 x

o

 o

o

o

o

RELATIVE IMPORTANCE TO SALES VOLUME MARKET SHARE & PROFITABILITY

 

 

CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

CRITICAL FACTORS

CRITICAL FACTORS

 

PRODUCT - CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

PRODUCT - CRITICAL FACTORS+ PARAMETERS

PRODUCT - CRITICAL FACTORS+ PARAMETERS

 

PRODUCT CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

PRODUCT - CRITICAL FACTOR+ PARAMETERS

PRODUCT - CRITICAL FACTOR+ PARAMETERS

 

TRADE CELL - CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

TRADE CELL - CRITICAL FACTOR+ PARAMETERS

TRADE CELL - CRITICAL FACTOR+ PARAMETERS

 

TRADE CELL CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

TRADE CELL - CRITICAL FACTOR + PARAMETERS

TRADE CELL - CRITICAL FACTOR + PARAMETERS

 

OPERATIONS - CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

OPERATIONS - CRITICAL FACTOR+ PARAMETERS

OPERATIONS - CRITICAL FACTOR+ PARAMETERS

 

OPERATIONS CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

OPERATIONS - CRITICAL FACTOR+ PARAMETERS

OPERATIONS - CRITICAL FACTOR+ PARAMETERS

 

COMPETITORS - CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

COMPETITORS - CRITICAL FACTOR+ PARAMETERS

COMPETITORS - CRITICAL FACTOR+ PARAMETERS

 

COMPETITOR CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

COMPETITORS - CRITICAL FACTOR+ PARAMETERS

COMPETITORS - CRITICAL FACTOR+ PARAMETERS

 

MAJOR CITY - CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

MAJOR CITY - CRITICAL FACTOR+ PARAMETERS

MAJOR CITY - CRITICAL FACTOR+ PARAMETERS

 

MAJOR CITY CRITICAL FACTORS + PARAMETERS

Target Company

Base Reference Country

MAJOR CITY - CRITICAL FACTOR+ PARAMETERS

MAJOR CITY - CRITICAL FACTOR+ PARAMETERS

 

 Critical Factors Definitions



MARKET & PRODUCT SEGMENTATION


It is suggested that the reader consider the following Product and Market Segmentations for the Company products and services. These segmentations will help the companies in the marketplace to increase the attractiveness of their Products & Services and thereby assist market penetration.

  1. MARKET SEGMENTATION THROUGH PRICING - LOWER PRICE: In countries where there is demand for a Products & Services at a price lower than the average retail price it may be possible for companies to offer Products & Services End Users a lower (or discount) priced product, probably under a separate brand name, in order to cover the market sector. The attractiveness of such segmentation would obviously depend on company marginal costs in relation to the probable marginal revenue which may be generated.

  2. MARKET SEGMENTATION THROUGH PRICING - HIGHER PRICE: In some countries a higher than average price may be associated with better delivery, services, et cetera, and it may be possible for companies to capitalize on this by offering Products & Services End Users higher priced products, probably under a separate brand name, in order to cover such market sectors. Obviously it is usually necessary to provide customers with some tangible benefit in return for a higher price. This benefit may be priority delivery and service, better back-up services, et cetera.

  3. PRODUCT SEGMENTATION THROUGH QUALITY - HIGHER QUALITY: Product segmentation through the provision of better quality products is common in most markets. The degree of quality segmentation and its acceptance depends on individual national markets, the prevailing circumstances within that market and the general situation in regard to Products & Services.

  4. PRODUCT SEGMENTATION THROUGH - LOWER QUALITY: Product segmentation through the downward variation of Products & Services quality is also possible. Certain markets and market sectors will be attracted to a down-market product if a reduced price is the benefit.

  5. MARKET SEGMENTATION THROUGH AVAILABILITY - GREATER AVAILABILITY: Often national markets or market sectors will be willing to pay a higher Products & Services End User price for greater availability. End users in certain markets (with a limited supplier base) will inevitably have difficulty in obtaining supplies and in these markets it will be possible for companies to offer greater availability of Products & Services and in return charge a price premium.

  6. MARKET SEGMENTATION THROUGH AVAILABILITY - REDUCED AVAILABILITY: Frequently national markets or market sectors will be attracted by discounted Products & Services End User price for reduced availability. Some buyers will be able to hold high stock and inventory levels and in these circumstances will be attracted to obtaining a price discount for reduced product availability through less frequent delivery and ordering.

  7. PRODUCT SEGMENTATION THROUGH PERFORMANCE VARIANCES: Specialist market sectors and end user application sectors will often have differing needs in terms of Products & Services performance and it will be possible for companies to exploit this and thereby segment the market. The need for Products & Services Performance segmentation of this sort will depend on the complexity of the national market in question, the broadness of the end user sectors and the variability of the applications in which Products & Services are being used. Better product performance will command a price premium and vice versa.

  8. PRODUCT SEGMENTATION THROUGH TECHNOLOGICAL + TECHNICAL FACTORS: Particular end user application sectors will have differing needs in terms of Products & Services technology and it will be possible for companies to exploit this and thereby segment the market. The need for Products & Services Technological and Technical segmentation of this sort will depend on the needs of the national market in question, the end user application sectors and the various national technical standards for Products & Services. Better product technology or technically superior products will command a price premium and vice versa.

  9. PRODUCT SEGMENTATION THROUGH WARRANTY VARIANCES: Many market sectors and end user application sectors will have differing needs in terms of Products & Services warranty and it will be possible for companies to use this to segment the market. The need for Products & Services warranty segmentation of this sort will depend on the circumstances of the national market in question, the warranty needs and expectations of the end user sectors and the sort of applications in which Products & Services are being used. Better product warranty, periods of warranty or warranty terms will command a price premium and vice versa.

  10. PRODUCT SEGMENTATION THROUGH SERVICE FACTOR VARIANCES: Certain market sectors and end user application sectors will have differing needs in terms of Products & Services (in terms of technical, advisory, after-sales and other related services) and it will be possible for companies to thereby segment the market. Service factor segmentation of this sort will depend on the perceptions of the national market in question, the service needs and expectations of the end user sectors and the sort of applications in which Products & Services are being used. Better services or terms of service will command a price premium and vice versa.

  11. PRODUCT SEGMENTATION THROUGH PRODUCT FRAGMENTATION: Specialist market sectors and end user application sectors will sometimes be attracted by the Fragmentation of Products & Services offered in terms of physical variations of the product, the provision of products which allow for the possibility of end users adding value or undertaking some of the production process and it may be possible for companies to thereby segment the market. Product Fragmentation of this sort will depend on the capabilities and capacities of the end users in question, the product needs and expectations of the end user sectors and the sort of applications in which Products & Services are being used.

  12. MARKET SEGMENTATION THROUGH CONVENIENCE FACTORS: Certain national markets or market sectors will be willing to pay a higher Products & Services End User price for the so called 'Convenience Factors'. End users in certain markets will inevitably find difficulty and inconvenience with Products & Services suppliers and supplies and in these markets it will be possible for companies to offer better convenience in terms of ordering procedures, order processing, credit period offered, delivery services and frequency, et cetera of Products & Services and in return charge a price premium.

  13. MARKET SEGMENTATION THROUGH DISTRIBUTION FACTORS: Sometimes geographically particular national markets or market sectors will be willing to pay a higher Products & Services End User price for better product distribution factors. End users in certain markets will inevitably have difficulty in Products & Services distribution factors and in these markets it will be possible for companies to offer better distribution (both geographic and in terms of distribution frequency, et cetera) of Products & Services and in return charge a price premium.

  14. MARKET SEGMENTATION THROUGH CUSTOMER FACTORS: Frequently certain national markets or market sectors will be willing to pay a higher Products & Services End User price for better or improved customer factors. End users in certain markets will be willing to pay for better customer servicing through the provision of up-market or otherwise unique customer services and thus it may be possible for companies to offer these customer services and in return charge a price premium.

  15. MARKET SEGMENTATION THROUGH PSYCHOGRAPHICS: Some national markets or market sectors will be effected and thereby segmented through certain Psychographic factors. End users in certain markets will have certain perceptions and attitudes unique to that market. For instance, an example of Psychographics is the phenomenon of product chauvinism whereby end users in certain national markets will usually give preference to products produced in their own country. This factor usually represents a problem, but can also be an area of potential opportunity for astute suppliers to exploit.

  16. MARKET SEGMENTATION THROUGH BRANDING: National markets or market sectors can be further segmented by the introduction of Products & Services branding in order to achieve pricing differentials or other tactical marketing objectives. Different end users will inevitably have differing perceptions, attitudes and needs and in these circumstances it will be possible for companies to offer Products & Services branding and thereby ensure a more effective market and product segmentation without unduly affecting existing Products & Services.

  17. MARKET SEGMENTATION THROUGH MULTI-BRANDING: Multi-branding is a vehicle whereby a supplier can introduce even more market segmentation and also increase or improve the distribution set-up through allowing the multiple branding of products. In certain markets this will be a very effective way to cater for a broad range of end users, market or application sectors.

  18. MARKET SEGMENTATION THROUGH MARKET STRETCHING: Market Stretching can often extend coverage to new markets or market sectors by the introduction of Products & Services changes in order to achieve product variations or differentials. Different end users will inevitably have differing perceptions, attitudes and needs and in these circumstances it will be possible for companies to offer Products & Services variations and thereby attract purchasers from new markets. This will not unduly affecting existing Products & Services.

 

PRODUCT + MARKET SEGMENTATION

Target Company

Base Reference Country

PRODUCT + MARKET SEGMENTATION

PRODUCT + MARKET SEGMENTATION

 

TRADE CELL - PRODUCT + MARKET SEGMENTATION

Target Company

Base Reference Country

TRADE CELL - PRODUCT + MARKET SEGMENTATION

TRADE CELL - PRODUCT + MARKET SEGMENTATION

 

OPERATIONS - PRODUCT + MARKET SEGMENTATION

Target Company

Base Reference Country

OPERATIONS - PRODUCT + MARKET SEGMENTATION

OPERATIONS - PRODUCT + MARKET SEGMENTATION

 

COMPETITOR - PRODUCT + MARKET SEGMENTATION

Target Company

Base Reference Country

COMPETITOR - PRODUCT + MARKET SEGMENTATION

COMPETITOR - PRODUCT + MARKET SEGMENTATION

 

MAJOR CITY - PRODUCT + MARKET SEGMENTATION

Target Company

Base Reference Country

MAJOR CITY - PRODUCT + MARKET SEGMENTATION

MAJOR CITY - PRODUCT + MARKET SEGMENTATION

 

 Segmentation Definitions



PRODUCT LAUNCH FACTORS


The data given below is based on actual research into the industry launches in the countries covered. Product launches include actual new products as well as product or technology innovations and product substitutions.


ADOPTION RATES:

Product Launch Adoption Rates were identified during the Surveys of End Users in the countries covered. Adoption rate is the term used to denote the likely level of End Users adoption of new products and services. Thus when interviewed a percentage of End Users stated that they were "likely" or "very likely" to purchase (i.e. adopt) new products if introduced to the market. This percentage forms the Adoption Rate.


CONVERSION RATIOS:

In addition to the Adoption Rates, it is also necessary to analyze the Conversion Ratio, i.e. the ratio at which potential new product adopters are converted into buyers.

Not all End Users who stated that they were likely to adopt new products will actually do so; thus this ratio is dependent on all the marketing factors e.g. the distribution channel, numbers of Distributors, sales promotion factors, et cetera, as isolated in the following pages on product launches. These ratios are based on past experience of product launches.

In conjunction with the Product Launch Adoption Rates one can use the Conversion Ratio to determine the actual level of likely Product Launch sales.

Thus the following calculation will provide the likely level of sales at Product Launch:-

 

 

 

 

(

 

AR

 

1

 

)

 

 

PLS

=

U x


x


 

 

 

 

10

 

CR

 

where,

 

PLS

=

Product Launch Sales

 

U

=

Total Universe

 

AR

=

Adoption Rate

 

CR

=

Conversion Ratio

THE RATIOS GIVEN ARE 1:X




SALES GROWTH:

It is possible to isolate likely sales growth data for Products & Services. The percentages given below are the likely average annual sales growth for Products & Services launches in the countries concerned. The data is based on current and forecasted economic conditions.

PRODUCT LAUNCH DATA:

In addition to the normal or usual industry costs, during the launch of a product greater costs are experienced. These costs are shown separately in the following tables.

It is possible to isolate these costs based on past experience of Products & Services launches.

 

PRODUCT LAUNCH FACTORS - PRODUCTS

Target Company

Base Reference Country

PRODUCT LAUNCH

PRODUCT LAUNCH

 

PRODUCT LAUNCH FACTORS - TRADE CELL

Target Company

Base Reference Country

PRODUCT LAUNCH FACTORS - TRADE CELL

PRODUCT LAUNCH FACTORS - TRADE CELL

 

PRODUCT LAUNCH FACTORS - OPERATIONS

Target Company

Base Reference Country

PRODUCT LAUNCH FACTORS - OPERATIONS

PRODUCT LAUNCH FACTORS - OPERATIONS

 

PRODUCT LAUNCH FACTORS - COMPETITOR

Target Company

Base Reference Country

PRODUCT LAUNCH FACTORS - COMPETITOR

PRODUCT LAUNCH FACTORS - COMPETITOR

 

PRODUCT LAUNCH FACTORS

Target Company

Base Reference Country

PRODUCT LAUNCH FACTORS

PRODUCT LAUNCH FACTORS

 

PRODUCT LAUNCH FACTORS - MAJOR CITY

Target Company

Base Reference Country

PRODUCT LAUNCH FACTORS - MAJOR CITY

PRODUCT LAUNCH FACTORS - MAJOR CITY

 

 Product Launch Definitions



MARKETING COSTS


This section covers Products & Services industry costs under the following component headings:-

  1. SALES & SELLING COSTS
    The table below gives the average sales and selling costs ( as a % of Turnover OR MSP) for Products & Services. These costs include sales personnel

  2. DISTRIBUTION COSTS
    The table below gives the average distribution costs ( as a % of Turnover or MSP ) for Products & Services. Distribution Costs also include PHYSICAL Handling, Processing and other related costs, but exclude order administration or accounts processing or handling costs.

  3. ADVERTISING COSTS
    The following table provides average ADVERTISING costs ( as a % of Turnover or MSP ) for Products & Services. Advertising Costs include all promotional expenditure, but excludes cost of sales personnel (i.e. retail, missionary or other sales personnel).

  4. AFTER-SALES COSTS
    The following table provides average AFTER-SALES costs ( as a % of Turnover or MSP ) for Products & Services. After-Sales Costs include all costs incurred after the point of sale (excluding credit and collection costs) which are not chargeable to, or recoupable from, the customer. These costs also include goodwill items such as after-sales visits to distributors or customers.

  5. WARRANTY COSTS
    The table covering average AFTER-SALES costs ( as a % of Turnover or MSP ) for Products & Services also covers WARRANTY COSTS. These costs include all costs incurred after the point of sale (excluding credit and collection costs) which are not chargeable to, or recoupable from, the customer. These costs also include goodwill items such as after-sales visits to distributors or customers.

    Warranty Costs are composed:-

1.

The ITEM COST, i.e. the actual costs of replacing the faulty or reject product

2.

The COST FACTOR, i.e. the administrative, handling, marketing and other costs involved in handling returns, rejects and warranties.

3.

The WARRANTY COST, i.e. the total cost of warranties. This is the figure given below.

4.

TOTAL AFTER-SALES COSTS

 

The following tables provides average marketing costs ( as a % of MSP ) for Products & Services.

 
NOTES: The costs isolated below represent the industry average and cover the costs of companies in the industry, as well as subsidiaries and other marketing companies or organizations in each of the countries concerned.

The figures given indicate an annual average by year on market and should not be confused with the product launch figures given. The definitions for these sets of figures are not directly comparable.

MSP: Denotes the Suppliers, Manufacturers or Producers Selling Price or, in the case of non-manufacturing sales and services, the overall turnover.

 

 

PRODUCT MARKETING FINANCIAL DATA

 

 

HISTORIC MARKETING DATA

Base Reference Country

HISTORIC MARKETING DATA

 

PRODUCT LAUNCH MARKETING COSTS

Target Company

Base Reference Country

PRODUCT LAUNCH MARKETING DATA

PRODUCT LAUNCH MARKETING DATA

 

PRODUCT LAUNCH MARKETING RATIOS

Target Company

Base Reference Country

PRODUCT LAUNCH MARKETING RATIOS

PRODUCT LAUNCH MARKETING RATIOS

 

 Financial Definitions


 

 

3

Product Development:

 

PRODUCT DEVELOPMENT

 

PRODUCT EVOLUTION


Every existing Company product and potential new product that is launched by the company is part of a product life cycle marked by a changing set of problems and opportunities. The sales evolution of the typical product follows an S-shaped curve made up of four stages. The introduction stage is marked by slow growth and minimal profits as the product is pushed into distribution.

The company has to decide during this stage between the four strategies of high-profile marketing, low-profile marketing, selective penetration and pre-emptive penetration. If successful, the product enters a growth stage marked by rapid sales growth and increasing profits. During this stage, the company attempts to improve the product, enter new market segments and distribution channels, and reduce its prices slightly. There follows a maturity stage in which sales growth slows down and profits stabilize. The company seeks innovative strategies to renew sales growth, including market, product, and marketing-mix modification. Finally, the product enters a stage of decline in which little can be done to halt the deterioration of sales and profits. The company's task during this period is to identify the truly declining products, develop for each one a strategy of continuation, concentration, or exploiting, and finally phase out the product in a way that minimizes the hardship to the company.

The Product Life Cycle concept is of varying usefulness in different types of management decision making. As a forecasting tool, it is of limited usefulness because sales histories exhibit various shapes in practice and the stages last for varying lengths of time. As a planning tool, the Product Life Cycle concept is quite useful in characterizing the main marketing features of each stage and indicating the major alternative marketing strategies available to the firm in each stage. As a control tool, the Product Life Cycle concept allows the company to roughly gauge how well a product is doing in relation to successful and comparable products that were launched in the past.

The product life cycle begins where the new-product development process leaves off. New products are launched in the hope that they will enjoy a long rich life of growing sales and profits. Some do, but along the way many more meet all kinds of problems that threaten to end the product's career prematurely. The various stages in a product's life cycle call for constant reprogramming of strategies and resources. In this part one can examine the concept of the product life cycle and consider appropriate strategies for the Company during the stages of introduction, growth, maturity and decline.

 

THE GOMPERTZ ANALYSIS

There are three stages of Products & Services Life Cycle, these are as follows:

1. The Introductory Stage:

This is when primary demand for the product just starts to grow and in the main the products and services are unknown to potential end users.

2. The Dynamic Phase:  

This is when demand is growing rapidly in real terms. The technological and competitive structure of the market and industry is changing rapidly.

3. The Maturity Stage:

This is when the majority of potential End Users are aware of the product. The technological and competitive structure of the market and industry is stable. Weaker suppliers begin to exit the market. The latter part of this stage will be marked with an actual decline of the market in real terms.


 

PRODUCT LIFE CYCLE


A product's sales position and profitability can be expected to change over time and the product life cycle is an attempt to recognize distinct stages in the sales history of the product. Corresponding to these stages are distinct opportunities and problems with respect to marketing strategy and profit potential. By identifying the stage that a product is in, or may be headed toward, better marketing plans can be formulated.

1. Stages in the product life cycle

Most discussions of Product Life Cycle portray the sales history of a typical product as following the form of an S-shaped sales curve. This curve is typically divided into four stages known as:

     a)  Introduction
     b)  Growth
     c)  Maturity
     d)  Decline


Introduction is a period of slow growth as the product is introduced in the market and the profit curve shows profits as almost nonexistent in this stage because of the heavy expenses of product introduction. Growth is a period of rapid market acceptance and substantial profit improvement. Maturity is a period of a slowdown in sales growth because the product has achieved acceptance by most of the potential buyers. Profits peak in this period and start to decline because of increased marketing outlays to sustain the product's position against competition. Finally, decline is the period when sales continue a strong downward drift and profits erode rapidly toward the zero point.

The designation of the points where these stages begin and end is somewhat arbitrary; being usually based on where the rate of sales growth, or decline, tend to become pronounced. One may propose a more operational measure based on a normal distribution of percentage changes real sales from year to year.

Not all products pass through the idealized S-shaped product life cycle as some products show a rapid growth from the very beginning, thus skipping the slow sales start implied by the introductory stage. Whilst other products, instead of going through a rapid-growth stage, go directly from introduction to maturity, and yet some products move from maturity to a second period of rapid growth. One study of the product life cycles of 754 high technology products found six different product life-cycle patterns.

On the other hand, other studies of various consumable products and commodities showed the Product Life Cycle concept to hold up well for many product categories. In planning to use this concept one must investigate the extent to which the Product Life Cycle concept holds up for products in the particular market and thus learn whether the idealized sequence of stages is typically follows the normal Product Life Cycle spanned an introductory period (where T = a period of time) of 1T, a growth stage of 6T, a maturity stage of 15T, and a decline stage that exceeded the sum of the previous three stages.

Before plotting a sales time series to assess its Product Life Cycle characteristics, the sales data should be adjusted or deflated for changes in such variables as buyer population size, prices, buyer revenues, and supply shortfalls. Early investigators often overlooked these adjustments, and this created Product Life Cycle pictures that were atypical or incorrect in their portrayal of the length of the various stages.


2. Product Life Cycles

The Product Life Cycle concept should be defined with respect to whether the product class (generic), a product form (type), or a brand (named). The Product Life Cycle concept has a different degree of applicability in these three cases. Product classes have the longest life histories, longer than particular product forms, and certainly longer than most brands. The sales of many product classes can be expected to continue in the mature stage for an indefinite period, since they are highly buyer population related. Product forms, on the other hand, probably exhibit the standard Product Life Cycle histories more faithfully than do product classes. Product forms seem to pass through a regular history of introduction, rapid growth, maturity, and decline. As for brands, an individual brand's sales history is likely to be more erratic than its production history because changing competitive strategies and tactics can produce substantial ups and downs in sales and market shares, even to the extent of causing a mature brand to suddenly enjoy another period of rapid growth.


3. Rationale for the product life cycle

The product life-cycle curve has been described without offering any underlying explanation in market terms and support for it lies in the theory of the diffusion and adoption of innovations. When a new product appears, it must overcome the resistance of existing purchasing patterns. Steps must be taken by the company to stimulate awareness, interest, trial, and purchase of the new product. This takes time, and in the introductory stage only a few persons (innovators) will buy it. If the product is satisfying, larger numbers of buyers (early adopters) are drawn in. The entry of competitors into the market speeds up the adoption process by increasing the market's awareness and by exerting a downward pressure on prices. More buyers come in (early majority) as the product is legitimated. Eventually the rate of growth decreases as the proportion of potential new buyers approaches zero. Sales become steady at the replacement purchase rate. Eventually they decline as new product classes, forms and brands appear and divert the interest of the buyers from the existing product. Thus the product life cycle is closely related to normal developments that can be expected in the diffusion and adoption of any new product.

The Product Life Cycle concept is useful mainly as a framework for developing effective marketing strategies in different stages of the product life cycle.


Target Company
Base Reference
AVERAGE PRODUCT-LINE STAGE IN LIFE CYCLE

Introductory

Growth

Maturity

Decline

Obsolescence

Performance Grid Definitions


 

PRODUCT INTRODUCTION


The introduction stage is marked by a slow growth in sales which may linger for many years before entering a stage of rapid growth. One can identify four causes for the slow growth of many products:

1)

Delays in the expansion of supply capacity

2)

Technical problems

3)

Delays in making the product available to customers, especially in obtaining adequate distribution

4)

Customer reluctance to change established behavior patterns


During this stage there are likely to be only a few firms selling the new product. They tend to put out limited versions of the product, since the market is not ready for product refinements. The firms direct their selling effort to those buyers who are the readiest to buy, usually higher-income groups. Prices tend to be on the high side because:

1)

Costs are high due to relatively low output rates

2)

Technological problems in supply may have not yet been fully mastered

3)

High margins are required to support the promotional expenditures which are integral to achieve growth.


The heavy promotional expenditures, which are often at their highest ratio to sales during this stage, occur not only because sales are small but more importantly because of the need for a high level of promotional effort to:

1)

Inform potential consumers of the new and unknown product

2)

Induce trial of the product

3)

Secure distribution in retail outlets




Marketing strategies in the introduction stage

In launching a new product, marketing management can set a high or a low level for each marketing variable such as price, promotion, distribution and product quality. Working only with price and promotion, several strategies are available to management:


i. A high-profile strategy

Consists of launching the new product with a high price and a high promotion level. The firm charges a high price in order to recover as much gross profit per unit as possible. At the same time, it spends a lot on promotion to convince the market of the product's merits even at the high-price level. The high promotion serves to accelerate the rate of market penetration.

This strategy makes sense under the following assumptions:

1)

A large part of the potential market is not aware of the product

2)

Those who become aware of the product are eager to have it and pay the asking price

3)

The firm faces potential competition and wants to build up brand preference.


  
ii. A selective penetration strategy

Consists of launching the new product with a high price and low promotion. The purpose of the high price is to recover as much gross profit per unit as possible; and the purpose of the low promotion of profit from the market.

This strategy makes sense under the following assumptions:

1)

The market is relatively limited in size

2)

Most of the market is aware of the product

3)

Those who want the product are prepared to pay a high price

4)

There is little threat of potential competition.



iii. A pre-emptive penetration strategy

Consists of launching the product with a low price and heavy promotion. The low price will encourage the market's rapid acceptance of the product; at the same time, the company keeps its promotion costs down in order to realize more net profit. The company firmly believes that market demand is highly price-elastic but minimally promotion-elastic.

This strategy makes sense if:

1)

The market is large

2)

The market is highly aware of the product

3)

The market is price-sensitive

4)

There is some potential competition.


 

PRODUCT GROWTH STAGES


If the new product satisfies the market, sales will start climbing substantially. Previous purchasers will continue their purchasing, and new buyers will enter in large numbers. The product attains sales momentum through favorable word of mouth as well as distinctive steps taken by the firm.

In this stage, new competitors enter the market attracted by the promise of a large market with opportunities for large-scale production and profit. The firm begins to add new product features and refinements to move into new parts of the market. The increase in the number of competitors leads to a scramble for available distribution outlets, hopefully on an exclusive basis. More often than not, however, distribution channels tend to adopt a multi-brand policy.

Prices tend to remain where they are or fall only slightly during this period, insofar as demand is managing to increase quite rapidly. Companies maintain their promotion expenditures at the same or at a slightly raised level to meet competition and continue educating the market. Sales rise much faster, causing a decline in the promotion-sales ratio. The falling ratio of promotional expenditures to sales is one of the important contributions to the high profits during the stage.


Marketing strategies in the growth stage

During this stage, the firm tries to sustain rapid market growth as long as possible.

This is accomplished through such actions as:

1)

The firm undertakes to improve product quality and add new-product features and models.

2)

It vigorously searches out new market segments to enter.

3)

It keeps its eyes open to new distribution channels to gain additional product exposure.

4)

It shifts some advertising from building product awareness to trying to bring about product conviction and purchase.

5)

It decides when the time is right to lower prices to attract the next layer of price-sensitive buyers into the market.


The firm that aggressively pursues any or all of these market-expanding activities will increase its competitive position; but this comes at additional cost. The firm in the growth stage thus faces a trade-off between high market share and high current profit. By spending a lot of money on product improvement, promotion, and distribution, it can capture a dominant position; but it forgoes maximum current profit in the hope, presumably, of making up for this in the next stage.


Target Company
Base Reference
STRATEGY FOR PRODUCT INTRODUCTIONS

High Profile: Product Based

High Profile: Market Based

Selective: Product Based

Selective: Market Based

Preemptive

Performance Grid Definitions


Target Company
Base Reference
PRODUCT GROWTH STAGE STRATEGIES

Product Quality Improvements

New Market Segmentation

New Distribution

Improved Marketing

Price Adjustments

Performance Grid Definitions


 

PRODUCT MATURITY


At some point in the history of every product, its rate of sales growth will slow down and the product will enter a stage of relative maturity. This stage normally lasts much longer than the previous stages, and it poses some of the most formidable challenges to marketing management. Most products are in the maturity stage of the life cycle, and therefore most of marketing management deals with the mature product.

The maturity stage can be divided into three phases:

a)

The first phase is called growth maturity. Here, total sales continue to grow slowly because of some laggard buyers entering the market, although most of the demand comes from present customers.

b)

The second phase is stable maturity (also called saturation). Sales now maintain a constant level, consisting almost entirely of replacement demand.

c)

The third phase is decaying maturity. The absolute level of sales now starts to decline as some customers move toward other products and substitutes.


The beginning of a slowdown in the rate of sales growth has the effect of producing some over-capacity in the industry and this leads to intensified competition. Competitors engage more frequently in markdowns and off-list pricing. There is a strong increase in promotional budgets, in the form of trade and customer deals. Firms may increase their R & D budgets to find better versions of the product. All of these steps, to the extent that they do not stimulate adequate sales increases, mean some profit erosion. Some of the weaker competitors start dropping out and the industry eventually consists of a set of well-entrenched competitors whose basic orientation is toward gaining competitive advantage.


1 Marketing strategies in the mature stage

The product manager whose product has settled into a stage of sales maturity is not content to simply defend its current position. One recognizes that a good offensive will provide the best defence of the product. Three basic strategies are available in this stage: market modification, product modification, and marketing-mix modification.
 

i.

Market modification

The product manager first looks for opportunities to find new buyers for the product. There are several possibilities:

a)

First, one looks for new markets and market segments that have not yet tried the product.

b)

Second, one looks at ways to stimulate increased usage among present customers.

c)

Third, one may want to consider repositioning the brand to achieve larger brand sales, although this will not affect total industry sales.

ii.

Product modification

Managers try to break out of a stagnant sales picture by initiating conscious changes in the product's features that will attract new users and / or more usage from current users. The trade term for this is re-launch, and it can take several forms:
 

a.

A strategy of quality improvement:

Aims at increasing the functional performance of the product by such traits as its durability, reliability, performance and taste. A firm may make a real gain on competition by launching the "new and improved" product.

This strategy is effective to the extent that:

1)

the product is capable of quality improvement

2)

buyers are highly responsive to improved quality.

b.

A strategy of feature improvement:

Aims at adding new features that expand the product's versatility, safety, or convenience. All of these feature improvements are quite distinguishable from quality increment on the one hand and styling revival on the other.

One can outline five advantages flowing from a strategy of feature improvement:

1)

The development of new functional features is one of the most effective means of building an image of progressiveness and leadership.

2)

Functional features are an extremely flexible competitive tool because they can be adapted quickly, and often can be made optional at very little expense.

3)

Functional features allow the company to gain the intense preference of pre-selected market segments.

4)

Functional features often bring the innovating company free publicity.

5)

Functional features generate a great amount of sales-force and distributors' enthusiasm.

The chief disadvantage is that feature improvements are highly imitable; unless there is a permanent gain from being first, the feature investment in innovation may not be justified.

c.

A strategy of style improvement:

Aims at increasing the aesthetic appeal of the product in contrast to its functional appeal. The great advantage of a style strategy is that each firm may achieve a unique market identity and secure some durable share of the market on the basis of that identification. Yet styling competition also brings a number of problems. First, it is difficult to predict whether people - and which people - will like a new style. Second, style changes usually mean discontinuing the old style, and the company risks losing some of the customers who liked the old style.

iii.

Marketing-mix modification

As a final source of mature product strategy, one considers the possibility of stimulating sales through altering one or more elements of the marketing mix. One strong possibility is to cut prices as a way of drawing new segments into the market as well as attracting other brand users. Another is to search for a new and brilliant advertising appeal that wins the consumers' attention and favor. A more direct way to attract other brand users is through aggressive and attractive promotions - deals, discounts, gifts and contests. The company can also consider moving into higher-volume market channels, particularly discount channels, if it is in a growth stage. The company can also offer more services to the buyer as a patronage building step.

The main problem with relying exclusively on marketing-mix modification is that these steps are highly imitable by competition, especially price reductions, additional services and mass-distribution penetration. This means that the firm may not gain as much as expected and, in, all firms may pay a price in the form of profit erosion.



2. The dominant versus the trailing firm

All of the preceding strategies are available to both dominant and smaller firms in an industry, but their situations are different enough to warrant further discussion. In the mature stage there is often one dominant firm that is the conceded leader and enjoys the largest market share. There are also trailing firms in second and third place. Finally, there are other firms that account for still smaller market shares and tend to be located in special parts of the market. A property of the mature stage is that these firms are relatively locked into their present level and it is tricky to alter their relative market rank very much. As soon as one firm starts gaining on another, the latter adopts a series of sharp counter-measures that tend to restore it to its former market position.

Yet one may ask, What are the strategic options available to the trailing firms and the dominant firm, respectively? The trailing firms live in the constant hope of capturing the first-place position in an market. If the trailing firm is not as large as the dominant firm, it will want to avoid a frontal attack through price cutting or increased promotional spend and the firm must search for an area in which it can gain a differential edge over its dominant competition.
 

 

The first and most important area to consider is the product. Is there an opportunity to improve upon the product of the dominant competitor? Several second-place firms attained substantial success because they found a better product.

 

Secondly, the firm should next consider whether there are some profitable segments of the market that the larger firm is failing to cover. In many cases the large firm gives its attention to the mass market or the large customers and neglects various fringe markets.

 

A third competitive strategy for the trailing firm is to find a new way to distribute its goods that offers substantial economies or covers special parts of the market more efficiently.

 

Another recourse is to try to develop a superior advertising campaign. However, too many trailing firms assume erroneously that advertising will be the key to their success, when they should be spending their time searching for real product or distribution advantages backed by good advertising.

 

Finally, the smaller firm may sometimes try to overtake the larger firm through legal tactics.


The quality of life for the dominant firm is not all that easy or straightforward, as its very success and bigness make it extremely vulnerable.

What can the large firms do to discipline or discourage an upstart firm? The relevant concepts, are "brinkmanship", "massive retaliation" (or threat of), "limited warfare", "graduated response", "diplomacy of violence", "threat systems", and so on.

But for the purposes of this discussion it is important to define specific types of action:

 

i.

A strategy of innovation is the most effective

It means that the dominant firm refuses to be content with the way things are, that it wants to continue to outperform itself and the industry by being the source of new-product ideas, customer services, means of distribution and cost-cutting. It is applying the "principle of the offensive": the company must exercise initiative, set the pace, and exploit weaknesses.

ii.

A strategy of segmentation and fortification to maintaining leadership.

Here the company does its best to fortify and extend itself to additional segments. One variant is the multi-brand strategy, where the company introduces a number of brands competing with each other, the effect being to lock out some of the competition; another variant is the brand extension strategy, where the company introduces additional items under its current brand names.

iii.

A confrontation strategy will be the principal defence of non-innovative firms.

The dominant firm can initiate a promotional war, engaging in massive promotional expenditures that the smaller firm cannot possibly match. Or it might resort to price war. A major company makes it clear that it will meet all competitive price cuts, thus discouraging any potential benefits to the would-be cutter. It wants to convince competitors that they have more to gain through following than through attack.

iv.

The dominant firm sometimes pursues a persecution strategy.

Attempting to wield its power with suppliers, channels, and others to restrict the growth of the upstart firm; the persecution strategy is apt to be used by the dominant that has grown sluggish, inefficient, or overly content. Having lost the spirit of innovation, it attempts to protect its position through deterrent measures, including direct or implied threats, harassment and brinkmanship to would-be competitors.


Target Company
Base Reference
PRODUCT MATURITY STAGE STRATEGIES

Product Modifications: Quality

Product Modifications: Features

Market Segmentation

Marketing-Mix Modifications

Market Extension

Performance Grid Definitions


Target Company
Base Reference
COMPETITIVE STRATEGIES

Product Innovation

Market Segmentation & Fortification

Confrontation

Domination

Competitive niche position

Performance Grid Definitions


 

PRODUCT DECLINE


Most product forms and brands eventually enter a stage of sustained sales decline. Sales may plunge to zero and the product may be withdrawn from the market, or they may petrify at a low level and continue for many years at that level. As sales of the product decline, a number of firms withdraw from the market in order to invest their resources in more profitable areas. Those remaining in the industry tend to reduce the number of product offering. They withdraw from selling in the smaller market segments and more marginal trade channels; their promotion budget is reduced and the price may also be reduced to keep demand from falling further.

Unfortunately, most companies have not developed a well thought out policy for handling their aging products. Management's attention is riveted on its new products and mature products. Yesteryear's products are a source of embarrassment. There is a reluctance to take up the axe and there is a hope that they will fade away without any action on the part of management.

Companies show an aversion to product abandonment decisions for a number of reasons.

Sentiment plays a role, but Logic also plays a role. Sometimes it is expected, or hoped, that product sales will pick up when economic or market factors become more propitious. Sometimes the fault is thought to lie in the marketing programme, which the company plans to revitalize. Management may feel that the solution lies in product modification. When none of these explanations work, a weak product may be retained because of its alleged contribution to the sales of the company's other products. The ultimate argument may be that its sales volume at least covers "out-of-pocket" costs, and the company may temporarily have no better way of keeping its fixed resources employed.

Unless strong retention reasons exist, carrying a weak product is very costly to the firm. The cost of sustaining a weak product is not just the amount of uncovered overhead and profit.

No financial accounting can adequately convey all the hidden costs:

a)

The weak product tends to consume a disproportionate amount of management's time.

b)

It often requires frequent price and inventory adjustments.

c)

It generally involves short production runs in spite of expensive setup times.

d)

It requires both advertising and sales-force attention that might better be diverted to making the "healthy" products more profitable.

e)

Its very unfitness can cause customer misgivings and cast a shadow on the company's image.


 The biggest cost imposed by carrying weak products may well lie in the future. By not being eliminated at the proper time, these products delay the aggressive search for replacement products; they create a lopsided product mix, long on "yesterday's breadwinners" and short on "tomorrow's breadwinners"; they depress present profitability and weaken the company's foothold on the future.



Marketing strategies in the decline stage

A company faces a number of tasks and decisions to ensure the effective handling of its aging products.

 

i.

Identifying the weak products

The first task is to set up an information system that will spot those products in the line that are truly in a declining stage.

An overall view of such a system is:

1)

A product review committee is appointed with the responsibility for developing a system for periodically reviewing weak products in the company's mix. This committee includes representatives from marketing, process and the finance departments.

2)

This committee meets and develops a set of objectives and procedures for reviewing weak products.

3)

The financial controller fills out data for each product showing industry sales, company sales, unit costs, prices and other information over the last several years.

4)

This information is run against a computer programme that identifies the most dubious products. The criteria include the number of years of sales decline, market-share trends, gross profit margin and return on investment.

5)

Products put on the dubious list are then reported to those managers responsible for them. Each manager fills out a diagnostic and prognostic rating form showing where he thinks sales and profits on dubious products will go with no change in the current programme.

6)

The product review committee examines the product rating form for each dubious product and makes a recommendation

(a) to leave it alone,

(b) to modify its marketing.

ii.

Determining marketing strategies

In the face of declining sales, some firms will abandon the market earlier than others. The firms that remain enjoy a temporary increase in sales as they pick up the customers of the withdrawing firms. Thus any particular firm faces the issue of whether it should be the one to stay in the market until the end.

If it decides to stay in the market, the firm faces further strategic choices. The firm could adopt a continuation strategy, in which case it continues its past marketing strategy: same market segments, channels, pricing, promotion, and so on. The product simply continues to decline until at last it is dropped from the line. Or the firm could follow a concentration strategy, in which case it concentrates its resources only in the strongest markets and channels while phasing out its efforts elsewhere. Finally, it could follow a milking strategy, in which case it sharply reduces its marketing expenses to increase its current profits, knowing this will accelerate the rate of sales decline and ultimate demise of the product. In some situations the hard-core loyalty may remain strong enough to allow marketing the product at a greatly reduced level of promotion, and at the old or even a higher price, both of which mean good profits.

iii.

The drop decision

When a product has been singled out for elimination, the firm faces some further decisions. First, it has the option of selling or transferring the product to someone else or dropping it completely. It will usually prefer the former because this will bring in some cash and will minimize the hardship to customers and employees. Second, the organization has to decide decisively so there would be no chance for resistance to build up and reverse the decision. Or it could be discontinued gradually with timetable to allow resources to transfer out in an orderly way and to allow customers to make other arrangements. Management will also want to provide a stock of product and service to stretch over the expected life of the most recently demand.


Target Company
Base Reference
PRODUCT DECLINE STRATEGIES

Elimination of Products

Harvesting of Products

Product Reformulation

Market Repositioning

Customer Base Change

Performance Grid Definitions


 

 

4

New Product Criteria:

 

NEW PRODUCT CRITERIA


The industry is increasingly recognizing that the key to their survival and growth lies in the continuous development of new and improved products. Gone is the confidence that established products will maintain strong market positions indefinitely. There are too many competitors with fast moving new product development projects, sophisticated marketing strategies and large budgets standing ready to capture customers.

New products for the purposes of this manual will mean products new to the industry. This definition embraces original products, major modifications of existing products, duplications of competitors' products and product line acquisitions, all of which involve assimilation of something new into the product mix. Newness can also be defined from the viewpoint of the customer, and embraces all that the customer perceives, rightly or wrongly, as a new offering.

Companies are recognizing the advantages, indeed the necessity, of developing new products and services. If anything, their current offerings are facing shortening life spans and must be replaced by newer products.

New Product development, however, does not mean assured success. The risks of innovation are as great as the rewards. A large percentage of new products fail in the marketplace, and a still larger number have to be dropped before commercialization. The secret of successful innovation lies in developing sound research and decision procedure.

One can view the new product development process as consisting of seven stages: idea generation, screening, concept development and testing, business analysis, product development, test marketing, and commercialization. The purpose of each successive stage is to decide whether the idea should be further developed or dropped. The company seeks decision criteria for each stage that minimizes the chances of poor ideas moving forward and good ideas being rejected. The last stage, commercialization, involves the introduction of the products that have passed the previous tests; it is benefited by marketing planning and strategy based on an understanding of the consumer adoption process.


 

NEW PRODUCT PERCEPTIONS


In the present economic climate and given increasingly aggressive conditions of competition, it is becoming increasingly risky for the industry not to innovate. Customers want and expect a stream of new and improved products and if the company fails then the competition will certainly do its best to meet these desires. Continuous innovation seems to be the only way to avert obsolescence of the company's product line.

At the same time, successful new-product development is becoming increasingly hard to achieve. There are several reasons for this.

 

1.

SHORTAGE OF IMPORTANT NEW-PRODUCT IDEAS

Some technologists think there is a shortage of fundamentally new technologies - on the order of the automobile, television, computers, xerography and wonder drugs. Although there are many minor new products emerging, the industrial nations need major innovations to avoid economic stagnation.

2.

FRAGMENTED MARKETS

Keen competition is leading to increasingly fragmented markets. A new product is aimed at capturing a large share of a small market segment rather than the mass market. This means smaller sales and profits, although the company may maintain its position longer.

3.

GROWING SOCIAL AND GOVERNMENTAL CONSTRAINTS

New products have to increasingly satisfy public criteria in addition to promising reasonable profits. They must be designed with consideration given to consumer safety and ecological compatibility. Government requirements have considerably complicated product design and advertising decisions in many markets.

4.

COSTLINESS OF NEW-PRODUCT DEVELOPMENT PROCESS

A company typically has to develop a great number of new-product ideas in order to finish with a few good ones. One study showed that of its findings in the form of a decay curve of new-product ideas, of every sixty-odd ideas, about 12 pass the initial screening test, which shows them to be compatible with companies objectives and resources. Of these, some seven remain after a thorough evaluation of their profit potential. About three survive the product development stage, two survive the test-marketing stage, and only one is commercially successful. Thus, about fifty-eight new ideas must be generated to find one good one. This one successful idea must be priced at a profitable enough level to cover all the money lost by the company in researching fifty-seven other ideas that failed.

5.

HIGH RATE OF PRODUCT FAILURE

A recent survey of 150 companies indicated that the median percentage of major new products and services whose performance fell short of expectations was slightly more than 20 percent: the breakdown was 20 percent for industrial product manufacturers, around 18 percent for service industries, and approximately 40 percent for consumer manufacturers. The last rate is particularly discouraging and very costly to the consumer product manufacturers who miss the mark.

6.

SHORTER LIFE SPANS OF SUCCESSFUL PRODUCTS

Even when a new product turns out to be a commercial success, rivals are so quick to follow suit that the new product is typically fated for only a short happy life. The honeymoon cycle of a new product is becoming shorter and many more suppliers are preparing to quickly and effectively enter the marketplace.



The race to be first on the market sometimes assumes grotesque proportions and companies are so eager to beat a competitor's new product to the market that they develop a name and produce advertising before they have even developed their own product.

Being first on the market does not guarantee good profits as marketing costs tend to be highest for the first product and rapid entry by more established competitors will tend to exclude smaller companies from the market.

Thus the industry management finds itself in a dilemma: they must develop new products, yet the odds weigh heavily against their success. The answer still must lie in new product development, but conducted in a way that reduces the risk of failure.

Two needs stand out:

1.

The need for effective organizational arrangements

2.

The need for improved techniques at each stage of the new product development process.


Target Company
Base Reference
NEW PRODUCT RATING

Market Fragmentation

New Product Stagnation

New Product Life Cycle Limits

New Product Failures

New Product Costs

Performance Grid Definitions


 

NEW PRODUCT ORGANIZATION


The industry may use five different organizational arrangements for handling the development of new products:

 

1.

Product managers

Many firms leave this new product development up to their product managers. In practice, this system has several faults. The product managers are usually too busy managing their product lines to give much thought to new products other than brand modification or extension; they also lack the specific skills and knowledge needed to actively develop new products.

2.

New Product managers

Some companies have established new positions of new product managers (also called product planners) who report to group product managers. This position adds professionalism to the new product function; on the other hand, new product managers tend to think in terms of product modifications and line extensions limited to their product market. The position often does not have sufficient authority or top level support.

3.

New Product committees

Most firms have a high level management committee charged with reviewing new product proposals. Consisting of proxies from marketing, process, finance, technical, accounting and other functional areas, its function is not actual development work or coordination of development work so much as the reviewing and approving of new product plans. These committees tend to be conservative; their members are very busy and too far removed from the actual details of the new product areas. They are not a total solution to the new product development problem.

4.

New Product departments

Large firms often establish a new product department headed by an officer who is given substantial authority and access to top management. He normally reports to the chief executive, or marketing director, or research and development director. The department's major responsibilities include generating and screening new ideas, directing and coordinating research and development work, and carrying out field testing and pre-commercialization work.

5.

New Product venture teams

Often firms entrust new product development to venture teams. A venture team is a group specifically brought together from various operating departments and charged with the obligation of bringing a specific product to market or a specific new business into being. One sees them as a regeneration of the entrepreneurial spirit in that they are a small business-minded group of zealous men around a common objective. Venture teaming reproduces in spirit and substance what is largely a more modern version of the corner shop or lone inventor. Venture teams bring together a good mix of expertise and enthusiasm. The members of the venture team changes as the venture passes through the different stages of development. When the new product has been well established, it may be taken over by the usual marketing organization and the venture team passes out of existence.

The fact that highly formal arrangements for new product development still allow a high rate of new product failure means that certain critical organizational factors operate and must be understood. Most new product ideas do not get anywhere in an firm without a product champion, a self-appointed person who tries to convince others in the firm that the idea is great. In his enthusiasm for the idea, he is sometimes blind to its weakness; thus, he accepts the support of others even if it means compromising the idea somewhat. The market research department presses for a certain new research method that it is interested in; the pack-aging department presses for a POS concept that reflects its own interests; the buying department argues that a cheaper ingredient should be used. When the product finally emerges, it is a sad version of the original because every group turned the project to its own ends as a condition for support. This has been called the problem of coalition formation.

In Venture Team organizations, a different problem arises. At some point the venture team must surrender control of the project to the new product department for final market research and testing; later control is passed to line managers for a national roll-out. This transfer of controls of the product from its originators to developers to managers may be fatal because each group adds new ideas to satisfy its own goals. The product emerges with little affinity to its original concept. This has been called the problem of discontinuous jumps.


A company has to seek organizational arrangements that do not lead to fatal compromising and diffusion of responsibility with various departments meeting their own needs rather than the new product's needs.


 

IDEAS GENERATION


We are now ready to look at the successive stages of the new product development process with an eye toward examining the techniques that would improve the chances of developing good products and eliminating poor product ideas as early as possible. Seven stages are involved:

   a) idea generation
   b) screening
   c) concept development and testing
   d) business analysis
   e) product development
   f) test marketing
   g) commercialization


Idea generation calls for procedures that will help the organization develop a large and interesting pool of possible product ideas. A large number of ideas must be generated to find a few good ones; and the greater the number of ideas generated, the better the best ones are likely to be.

Many companies do nothing formally about generating product ideas. They rely on the spontaneous emergence of ideas from various sources inside and outside of the company. But an increasing number of companies are turning to more systematic idea search procedures. A management team in one company, for example, went on a weekend retreat and returned with sixty exciting ideas for new products or product modifications.

 

1. SOURCES OF NEW PRODUCT IDEAS

The major sources of new product ideas are customers, scientists, competitors, company salesmen and dealers, and top management.
 

i.

Customers

The marketing concept would suggest that customers' needs and wants should be the starting point in the search for new product ideas.

Companies can identify the customers' needs and wants in several ways:

1)

direct customer surveys

2)

projective tests

3)

focus group discussions

4)

suggestion systems & contacts from customers

5)

perceptual and preference mapping of the current product space to discern new opportunities.

ii.

Technocrats & Specialists

Many companies search for product ideas in research facilities. Basis research has yielded substantial new product opportunities. Highly successful companies are particularly noted for basic research, whereas most other companies are content to exploit the basic technologies and to search for minor modifications of existing products.

iii.

Competitors

Companies must watch the new products being developed by their competitors. Marketing intelligence can come from distributors, suppliers and salesmen. The sales performance of these new products can be audited through research services.

iv.

Company salesmen and distributors

Company salesmen and distributors are a particularly good source of product ideas. They have first hand experience of customers' unsatisfied needs and complaints. They are often the first to learn of competitive developments. An increasing number of companies are developing more systematic procedures to tap the ideas of salesmen and dealers.

v.

Top Management

Top management can help by defining those product market areas of greatest interest in which new product ideas should be sought. They may be areas that tap company strengths or would help overcome company weaknesses.


Target Company
Base Reference
NEW PRODUCT ORGANIZATION

Board Responsibility

Senior Management Responsibility

Middle Management Responsibility

Junior Management Responsibility

Ad Hoc Responsibility

Performance Grid Definitions


Target Company
Base Reference
NEW PRODUCT GENERATION

Executive Responsibility

Senior Management Responsibility

Middle Management Responsibility

Junior Management Responsibility

Ad Hoc Responsibility

Performance Grid Definitions




2. IDEAS DEVICES

Really good ideas come out of a combination of inspiration, perspiration and method. Several scientific techniques have been developed over the years to help individuals and groups generate better ideas.
 

i.

Attribute listing

This technique involves listing the attributes of an object and then modifying different attributes in the search for a new combination that will improve the object.

The following helpful list of questions is suggested to stimulate ideas for changing attributes:

Put to other uses?

New ways to use as is? Other uses if modified?

Adapt?

What else is like this? What other idea does this suggest? Does past offer parallel? What could one copy? Whom could one emulate?

Modify?

New twist? Changing meaning, color, motion, sound, odor, form, shape? Other changes?

Magnify?

What to add? More time? Greater frequency? Stronger? Higher? Longer? Thicker? Extra value? Plus ingredient? Duplicate? Multiply? Exaggerate?

Minimize?

What to subtract? Smaller? Condensed? Miniature? Lower? Shorter? Lighter? Omit? Streamline? Split up? Understate?

Substitute?

Who else instead? What else instead? Other ingredient? Other material? Other process? Other power? Other place? Other approach? Other tone of voice?

Rearrange?

Interchange components? Other pattern? Other layout? Other sequence? Transpose cause and effect? Change pace? Change schedule?

Reverse?

Transpose positive and negative? How about opposites? Turn it backward? Turn it upside down? reverse roles? Change shoes? Turn tables? Turn the other cheek?

Combine?

How about a blend, an alloy, an assortment, an ensemble? Combine units? Combine purposes? Combine appeals? Combine ideas?

 

ii.

Forced relationships

This technique relies upon listing a lot of ideas and then considering each one in relation to every other one as a means of sparking new ideas. A supplier might list separate items they supply and this may lead them to visualize designing a new product incorporating two existing products. They go systematically through the list heeding all the combinations.

iii.

Morphological analysis

This method consists of singling out the most important decisions of a problem and the examining all the relationships between them. Suppose the problem is described as that of getting something from one place to another via a vehicle. The important dimensions are the type of vehicle to use; the medium in which the vehicle operates; and the power source. The next step is to let the imagination loose on every mixture. The hope is that some other combinations will turn out to be quite novel and appealing.

iv.

Brainstorming

Persons can also be stimulated to greater creativity through certain forms of organized group exercise. One well known technique is brainstorming, whereby a session is held for the sole purpose of producing a lot of ideas. Generally the group is limited to between six and ten. It is not a good idea to include too many experts in the group, as they tend to have a stereotyped way of looking at a problem. The problem should be made as specific as possible, and there should be no more than one problem.

As the system works in some companies, almost every office contains one or more brainstorming groups. When a responsible manager brings in a problem, the group chairman notifies the members of the brainstorming group of the problem, in brief and specific terms, and schedules a meeting to take place in the next day or two. The purpose of outlining the problem before the meeting is to stimulate some preparation and idea incubation. When the meeting takes place, the chairman starts with 'Remember now, we want as many ideas as possible - the wilder the better, and remember, no evaluation'. The ideas start to flow, one idea sparks off another, and within the hour over a hundred or more new ideas may find their way into the tape recorder. For the conference to be maximally effective the following four rules must be observed:

a)

Criticism is ruled out. Adverse judgment of ideas must be withheld until later.

b)

Free wheeling is welcomed. The wilder the idea, the better, it is easier to tame down than to think up.

c)

Quantity is wanted. The greater the number of ideas, the more the likelihood of useful ideas.

d)

Combination and improvement are sought. In addition to contributing ideas of their own, participants should suggest how ideas of others can be joined into still another idea.

Free wheeling brainstorming sessions are highly productive of new product ideas.

v.

Operational creativity

An alternative technique is called synergic. Developed in response to the perceived main weakness of the brainstorming session, being that it produced solutions too quickly before a sufficient number of perspectives had been developed. Thus instead of defining the problem specifically, one could define it so broadly that the group would have no inkling of the specific problem.

The technique involves keeping the specific problem a secret and sparking a discussion of the general notion of 'a question'. This leads to images of different ideas. As the group exhausts the initial perspectives, one gradually interjects facts that further defined the problem. Only when the group leader senses that the group is close to a good solution that he would describe the exact nature of the problem. Then the group starts to refine the solution. These sessions last a minimum of three hours, and often longer, for it is believed that fatigue plays an important role in unlocking ideas.

Five themes that guided these idea conception conferences are described:

a)

Deferment. Look first for viewpoints rather than solutions.

b)

Autonomy of object. Let the problem take on a life of its own.

c)

Use of the commonplace. Take advantage of the familiar as a springboard to the strange.

d)

Involvement / detachment. Alternate between entering into the particulars of the problem and standing back from them, in order to see them as instances of a universal.

e)

Use of metaphor. Let apparently irrelevant, accidental things suggest analogies which are sources of new viewpoints.


 

PRODUCT SCREENING


The main purpose of the first stage in the new product development process is to increase the number of good ideas. The main purpose of all the succeeding stages is to reduce the number of ideas. The industry is not likely to have the resources or the inclination to develop all of the new product ideas, even if they were all good. And they will not all be equally good. Evaluation and decision now enter the picture. The first idea pruning stage is screened.

In the screening stage, the company must seek to avoid two types of errors. A DROP error occurs when the company dismisses an otherwise good idea because of a lack of vision of its potentialities.

Some companies still shudder when they think of some of the ideas they have dismissed:
Xerox saw the novel promise of the photocopying machine; IBM and Eastman Kodak did not see it at all. RCA was able to envision the innovative opportunity of radio; the Victor Talking Machine Company could not. Henry Ford recognized the promise of the automobile; yet only General Motors realized the need to segment the automobile market into price and performance categories, with a model for every classification, if the promise was to be fully achieved. Marshal Field understood the unique market development possibilities of installment buying; Endicott Johnson did not, calling it 'the vilest system yet devised to create trouble'. And so it has gone.

If a company makes too many DROP errors, its standards are obviously too conservative.

A GO error occurs when the company lets a poor idea proceed to development and commercialization. We can distinguish at least three types of product failures that ensue. An absolute product failure loses money and its sales do not cover variable costs; a partial product failure loses money but its sales cover all the variable costs and some of the fixed costs; and a relative product failure yields a profit less than the company's normal rate of return. Poor screening cannot be held responsible for all product failures; many subsequent factors often cause a bad performance in spite of an essentially good idea. Financial loss is not always the result of not a poor idea but of poor execution. Nevertheless, overtly lax screening procedures could let too many poor ideas go through, causing GO errors.



Product idea rating devices

An increasing number of companies are using some sort of formal device for rating and screening product ideas. Checklists are a favorite method. An example of such a checklist is shown below.

The first column lists factors required for successful launching of the product in the marketplace.

In the next column, management allocates weights to these factors according to their importance. Thus, management believes marketing competence will be very important (.20) and purchasing and supplies competence will be of minor importance (.05). The next task is to rate the company's degree of competence in each factor on a scale from .0 to 1.0. Here management feels that its marketing competence is very high (.9) and its location and facilities competence is low (.3). The final step is to multiply the relative importance of the success requirements by the corresponding levels of company competence to obtain a single overall rating of the company's fitness to carry this product successfully into the market. Thus, if marketing is an important success requirement, and this company is very good at marketing, this will increase the overall rating of the product idea.

This basic rating device is capable of additional refinements, whether it is advisable to introduce them is largely a matter of how much more would be gained. The purpose of the product screening stage might be missed if the devices became too elaborate. It costs a company money and valuable executive time to review product proposals. Since over half of the proposals are likely to be eliminated at this stage, the company has an interest in rapidly screening out ideas that do not have prima facie appeal. The checklist serves as a means of promoting systematic evaluation and discussion of the product idea among management - it is not designed to make the decision for them.

 

PRODUCT SCREENING CHECKLIST

PRODUCT SCREENING CHECKLIST

Company Competence Level {B}


Product
Success
Requirements

Relative
Weight {A}

.0

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

Rating
{A x B}

Company
Image

.20


Marketing

.20


Development

.20


Personnel

.15


Finance

.10


Process

.05

Location &
Facilities

.05


Purchasing

.05


TOTAL

1.00

The Relative Weight should total 1.00

Rating Scale:
.00 - .50 = Unacceptable
.51 - .80 = Possibility
.81 - 1.00 = Probable acceptance



 

CONCEPT DECISIONS


Those ideas that survive screening must undergo further development into fully mature product concepts. It is important to distinguish between a product idea, a product concept and a product image. A product idea is a possible product, described in objective functional terms, that the company can see itself offering to the market. A product concept is a particular subjective consumer meaning that the company tries to build into the product idea. A product image is the particular subjective picture consumers actually acquire of the product.

 

1.

Concept development

A product idea is the Supplier's perception of a new product; alas customers do not buy product ideas - they buy product concepts.

A product idea can be turned into a large number of alternative product concepts.

    First, the question, Who is to use the product?
    Second, What primary benefit should be built into this product?
    Third, What is the primary usage of the product?

By asking these and similar questions, many alternative product concepts can be formed.

The company must narrow down the choice to one of these concepts.

Here it introduces criteria that it wants to achieve with this new product:

       a) good rate of return
       b) high sales volume
       c) rounding out of product line
       d) utilization of idle capacity
       e) competitive response

The criteria could be listed as rows of a matrix, and the alternative product concepts as columns. In each cell a number between -5 and +5 can be placed to indicate how high that product concept stands on that criterion. Certain concepts will profile badly on the set of criteria: the market is too small, the concept is too new, and so forth. More data is then collected on the residual concepts until one is finally chosen as the core product concept.

 

2.

Product and brand positioning

Once the core product is chosen, it defines the character of the product space in which the new product has to be positioned in terms of competitive and parallel products, usage and customer perceptions. The product concept, and not the product idea, defines the product's competition and this should be kept in mind and utilized in communicating the concept to the market.

If the firm is entering a market that has already been formed, then it also has to develop a brand positioning map which indicates the firm's new product in relation to that of competitors in terms of price -v- performance. The new firm must decide on how much to price and how the product will perform (assuming these are salient attributes used by buyers). One prospect is to position the new brand in the medium price, medium performance part of the market; another is in the low price, low performance end of the market. Both would give the new brand distinctiveness, as opposed to positioning the brand right next to another brand and clash intensely for market share. This decision needs researching the size of alternative preference segments of the market.

3.

Concept testing

Through these steps, the firm will arrive at some viable product or brand concepts. Concept testing calls for showing these ideas to a group of target buyers and getting their reactions. The concepts may be shown symbolically or physically.

The consumers may be offered a word description which explicitly explains and describes the product to be offered.

The consumers will be asked to react to the total concept of several of its specific attributes.

The concept test should include the following questions:

a)

Is the concept clear and easy to understand? Often the concept test reveals that people are not really grasping the concept.

b)

Do you see some distinct benefits of this product over competing offerings? The respondents must recognize distinct benefits of this product over its near substitutes.

c)

Do you like this product better than that of its major competitors? The respondents report whether they really prefer this product.

d)

Would you buy this product? The company must find out if there is a sufficient percentage of respondents with an actual intention to buy this product.

e)

Would this product meet a real need of yours? If consumers do not feel a real need for the product, they may buy it only once for curiosity; this will not make it a successful product.

f)

What improvements can you suggest in various attributes of the product? This enables the company to bring about further improvements in form, features, pricing, quality, and so on.


The contributions of the concept testing will be to help the firm enrich the concepts and choose the best among them.


Too many companies think their job is done when they get a product idea. They do not mature it into a full concept and subject it to adequate concept testing. Later the product encounters all kinds of problems in the marketplace which would have been avoided if the firm had done a good job of concept development and testing.


 

BUSINESS ANALYSIS


The purpose of this stage is to project the future sales, profits and rate of return for the proposed new product, and to determine whether these meet the company's objectives. If they do, the company will develop the new product. Business analysis occurs not only at this stage but throughout the development process as new information is accumulated about the product and market.

Companies resort to a variety of methods for carrying out the business analysis, such as break-even analysis, earnings flow discounting, Bayesian decision theory and risk analysis.


1. Estimating future sales

The key to whether a product should be developed is whether it will find early and sufficient market acceptance to return a satisfactory profit to the firm. There is no way to estimate future sales with certainty, although one can obtain some helpful benchmarks by carefully examining the history of previous (analogous) products and surveying market opinion. At the very least, management finds it helpful to have estimates of minimum and maximum sales to provide some indication of the risk involved. Unfortunately, the range is sometimes so broad that there is a lot of room for manipulating the figures to draw the desired conclusion. All too often company managers complain that if the salespeople wanted a new product added to the line, they would create a market potential estimate that would justify it.

Nevertheless, most managers seek a reliable model for sales estimation. Models differ depending upon whether they are designed to estimate the sales of a one-time purchased product, an infrequently purchased product, or a frequently purchased product.

The life cycle sales that can be expected for one-time purchased products show that they rise at the beginning and later fall towards zero, stopping when no buyers are left. If new buyers keep entering the market, the curve will not go down quite to zero.

Products that are purchased infrequently are exemplified by many durable goods, such as automobiles, toasters and industrial equipment. These goods exhibit replacement cycles, dictated either by their physical wearing out or their obsolescence associated with changing styles, features and tastes. Most sales forecasting for this category of products consists of separately estimating new sales to first time buyers and expected replacement sales.

New products that are repurchased frequently, such as consumer and industrial non-durables, have a sales life cycle which indicates that the number of persons buying the product for the first time increases and then decreases as there are fewer left (assuming a fixed population). Repeat purchase sales occur soon, providing that the product satisfies some fraction of people who become steady customers. The sales curve eventually falls to a plateau level representing a level of steady repeat purchase volume; by this time the product is no longer in the class of new products.

 

i.

ESTIMATING FIRST TIME SALES

The first task, regardless of the type of product, is to estimate first time purchases of the new product in each period. There are different ways to do this.

Some examples of reaching estimates are given below:-

a)

To estimate market potential, the company first must define the various market segments and for each segment, a one further defines the minimum the characteristics of a potential customer for the new product. Then one turns to data indicating the number of such sales units in each segment. One then reduces the number by the estimated purchase probability, which varied from segment to segment. Thereby one cumulates the number of remaining potential customers over the segments and calls this the market potential.

The rate of market penetration is then estimated. The company seeing this as depending on the amount of advertised and personal selling effort per period, the rate of favorable word of mouth, the product price set, and the activity of competitors. This leads to an estimate of how much penetration of the remaining market potential could be expected in each period, and this is easily translated into company sales.

b)

A number of investigators have proposed that models of epidemics (sometimes called contagion models) provide a useful analogy to the new product diffusion process. They argue that the passage of a message, an idea, or a product from a knower (company or adopter) to a non-knower (potential adopter) is like passage of a germ from an infective to a susceptible. Admittedly, catching a contagious disease lacks the human elements of cognition and volition, which figure prominently in the adoption process. On the other hand, these human mechanisms may not be so important in the case of some new product introductions; furthermore, modifications of the model may be possible to take these higher-order processes into account.

Some have used an equation based on an epidemic model to forecast future sales of new products. In each case he used sales data for only the first few years of product introduction to estimate sales for the subsequent years, until replacement demand became a big factor. For example, for one of the new products the sales projection fit the pattern of actual sales with a coefficient of determination,  R2=.92. The predicted time of peak was 8.6 years as against an actual time peak of 7.0 years, and the predicted magnitude of peak was 1.9 million sales units as against an actual peak of 1.8 million sales units. This prediction is close, and even the basic model gives reasonable good fits to several of the other innovations studied.

c)

A useful first time sales model that has been tested against several new nondurable products indicates that the observation of new product market penetration rates:

1) showed that cumulative sales approached a limiting penetration level of less than 100 percent of all households, frequently far less, and

2) the successive increments of gain declined.

 

The equation used is: Qt  =  rq (1 - r) t-1

where,

Qt = % of total buyers expected to try product in period t

r = rate of penetration of untapped potential

q = % of total buyers expected to eventually try the new product

t = time period


Assume that a new product is about to be introduced where it is estimated that 40 percent of all buyers will eventually try the new product (q = .4). Furthermore it is believed that in each period 30 percent of the remaining new buyer potential is penetrated (r = .3). Therefore the percentage of buyers trying the product in each of the first four periods will be:

           Q1  =  rq(1-r) 1-1  =  (.3)(.4)(.70) = .120

           Q2  =  rq(1-r) 2-1  =  (.3)(.4)(.71) = .084

           Q3  =  rq(1-r) 3-1  =  (.3)(.4)(.72) = .059

           Q4  =  rq(1-r) 4-1  =  (.3)(.4)(.73) = .041

As time goes to infinity, the incremental trial percentage goes to zero. To estimate sales value from new triers in any period, the estimated trial rate for the period given by equation is multiplied by the total number of total buyers times the expected first purchase expenditures per buyer on the product.

Those wishing to use the equation, first estimates q using market surveys. One then estimates r on the basis of how fast potential buyers are likely to learn about the product and seek to purchase it. Once the product has been introduced, and two periods have passed, the analyst can update his estimate of r by observing what occurs.

Target Company
Base Reference
NEW PRODUCT PROFITABILITY

High Immediate Profit

Sustained Profits

Average Long-Term Profits

Marginal Profitability

High Risk Profit Scenario

Performance Grid Definitions


ii.

ESTIMATING REPLACEMENT OR REPEAT SALES

If the product is expected to have replacement sales, they are estimated and added to the estimate of first time sales. The company has to guess at the survival-age distribution of the product it has designed. The lower end of the age distribution will indicate when the first replacement sales will take place. The actual dates of replacement will also be influenced by how much discretion the buyers have with respect to replacing the product, new product alternatives, the state of the economy, and other factors. Needless to say, replacement sales are difficult to estimate before the product is in actual use, and some suppliers prefer to rest the case for the new product solely on the basis of first time sales.

As for frequently purchased products, the seller has to estimate repeat as well as first time sales. This is because the unit value of frequently purchased products is low, and repeat purchases take place soon after the introduction. A high rate of repeat purchasing means buyer satisfaction with the product; sales are likely to remain high even after all first time purchases take place. The seller should note the percentage of repeat purchases that take place in each repeat purchase class: those who buy once, twice, three times and so on. Some products and brands are bought a few times and then dropped. It is important to estimate whether the repeat purchase ratio is likely to rise or fall, and at what rate, with deeper repeat purchase classes.



2. Estimating future costs and profits

Most companies treat costs as something to consider after the sales have been estimated. This is because many costs, particularly labor and raw material, vary with the level of output. Marketing costs are also often treated in the same way because of a budgeting approach to setting them. However, this treatment of marketing costs is illogical, because it is in the nature of promotional expenditures to influence both sales and costs simultaneously. The dual role of marketing effort as both a cost and a sales stimulant must be simultaneously considered in the analysis.

The ideal way to plan marketing costs is to seek an expression that relates sales and profits to alternative marketing programmes and costs.

The profit equation:

          
Zt  =  (Pt - ct)Qt - Ft - Mt

where,

Zt   =

profits in year t

Pt   =

average price in year t

ct   =

variable cost per unit in year t

Q=

number of units demanded in year t

 Ft   =

fixed cost of process and selling in year t

Mt   =

marketing costs in year t

 

Next, one estimates the total demand forecasting equation:

Poep

MteM

Yt eY

Qt  =  

Qo(1+g)t




Pt

Mo(1+g)t

Yo

where,

Q   =

total market demand

g   =

annual growth rate of demand

P   =

average market price (each brand's price weighted by its market share)

M   =

total marketing expenditure for industry

Y   =

average revenue of buyers

e   =

elasticity parameter

t   =

time subscript for year

O   =

time subscript for year O


According to this equation, total market demand is expected to be responsive to both environmental and marketing factors. Starting with a specific demand level in the base year. Qo, demand grows through time at the constant annual rate g. A separate environmental influence on demand is wielded by the current level of buyer income in relation to the base level of buyer income, its magnitude of response being given by eY, the income elasticity. Demand is also influenced by two marketing variables, price and marketing expenditure. As current price rises above the base price, demand is depressed to an extent governed by the price elasticity of demand. As current marketing expenditures rise above the base level modified by normal growth, demand is stimulated to an extent governed by the promotional elasticity of demand.

Finally, assume that the company's market share will be determined by its marketing effort relative to competitors, as given by a market share equation. This market share equation predicts that the company's market share will be related to the settings of its marketing instruments relative to the average settings of competition. The marketing expenditure items are adjusted for their effectiveness indices, as well as their elasticities.

Given the profit equation, total demand equation and market share equation, management has a framework for studying the profit impact of different possible marketing programmes. In principle, the last two equations can be substituted into the profit equation, and calculus can be used to find the profit maximizing marketing programme. If the equation is too intractable to be solved for an optimum, then simulation methodology can be used.


 

PRODUCT DEVELOPMENT FACTORS


Product ideas appearing attractive and sound, from a business point of view, can now be turned over to the research and development department. This is an important step in at least three ways. It marks the first attempt to develop the product in a concrete form. Up to now, it has existed only as an idea, or perhaps as a drawing, or a very crude mock-up. Second, it represents a very large investment, which is likely to dwarf the idea evaluation costs incurred in the earlier stages. Much time and money go into trying to develop a technically feasible product. And finally, it provides an answer as to whether the product idea can be translated into a technically and commercially feasible product. If not, the company's investment up to now is lost except for any by-product information gained in the process. Three steps are involved in the product development and consumer testing, branding and packaging:


1. Prototype development and consumer testing

The first task is for the R & D department to build a physical prototype that realizes the attributes specified in the product concept and is trouble free and economical to produce. For example, one might discover, through consumer research, a strong preference for a product that would be perceived by the buyer as having particular features. The firm might spend many months working with various product formulations to attempt to satisfy the buyers' desires. Even then it might turn out to be very expensive to produce the desired product, and then one may take steps to 'cost reduce' the formulation. All too often the firm produce a prototype that compromises the original product concept, and this contributes to subsequent product failure.

Consumer testing goes hand in hand with prototype development. Various methods have been proposed for the testing of consumer preferences among a set of prototype alternatives, such as paired comparisons, multiple choices and ranking procedures. Consumers are normally asked to sample the alternative products in a laboratory or other setting, and the testing organization exercises the normal controls to avoid biased results. The company examines the results and decides on the prototype model that seems most promising on the overall criteria.


2. Brand Naming

The brand name should not be a casual afterthought but an integral part or reinforcement of the product concept.

Among the desirable qualities for a brand name are:

a)

It should suggest something about the product's benefits.

b)

It should suggest product qualities such as action, color or whatever.

c)

It should be easy to pronounce, recognize and remember. Short names help.

d)

It should be distinctive.

Some marketing research firms have developed elaborate name research procedures including association tests (what images come to mind), learning tests (how easily is the name pronounced), memory tests (how well is the name remembered) and preference tests (which names are preferred).

The goal of many firms is to build a unique brand name that will eventually become identified with the generic product. However in the long term, their very success has threatened some of the companies with the loss of exclusive rights to the name.



3. Packaging

Until recently, packaging has been considered a minor element in the marketing mix for a product. The two traditional packaging concerns of suppliers are a product protection and economy. A third packaging objective, which comes closer to considering the customer, is convenience. This means such things as size options and packages that are easy to open. Over the years a fourth packaging objective has received increasing recognition from suppliers, particularly those in the consumers' goods field. This is the promotional function. Various factors account for the growing recognition of packaging as an independent and potential selling tool:
 

i.

Performance

Product packaging should primarily be designed to perform its task of protection and handling characteristics. The package must also now perform many of the sales tasks. It must attract attention, describe the product's features, give the customer confidence and make a favorable overall impression.

ii.

Consumer affluence

The steady rise in disposable and discretionary expenditure has caused customers to attach increasing importance to non-price features. They are willing to pay a little more for convenience, appearance, dependability and prestige. Packaging is an important vehicle for projecting these qualities.

iii.

Integrated marketing concept

Companies are increasingly trying to endow their brands with distinctive personalities. These personalities are conveyed through the general company image, through advertising messages and media, through the choice of brand name and through packaging.

iv.

Innovational opportunity

Packaging is an area where innovation per se can bring large sales gains.


Developing the packaging for a new product requires a large number of decisions. The first task is to establish the packaging concept. The packaging concept is a definition of what the package should basically be or do for the particular product. Should the main function(s) of the package be to offer superior product protection, introduce a novel dispensing method, suggest certain qualities about the product or the company, or something else?

A host of further decisions must be made on the component elements of the package design - size, shape, materials, color, text and brand mark. Decisions must be made between much text or little text, between cellophane and other transparent films, a plastic or a laminate tray and so on. Each packaging element must be harmonized with the other packaging elements; size suggests certain things about materials, materials suggest certain things about colors and so forth. The packaging elements also must be guided by decisions on pricing, advertising and other marketing elements.

After the package is designed, companies put it through a number of tests before it is finalized. Engineering tests are conducted to ensure that the packaging stands up under normal conditions; visual test, to ensure that the script is legible and the colors harmonious; dealer tests, to ensure that dealers find the packages attractive and easy to handle; and consumer tests, to ensure favorable consumer reaction.

By now it becomes clear why developing a packaging for a new product may cost a great deal of money and take from six months to a year to finalize. According to a traditional view of the functions of packaging, it may seem an excessive amount. But to those who recognize the promotional potency of packaging, it is a very small investment.


Target Company
Base Reference
PRODUCT DEVELOPMENT RATING

Prototype Efficiency

Process Development

Packaging & Distribution

Marketing-Mix

Customer Service

Performance Grid Definitions


 

NEW PRODUCT TESTING


New Product Test marketing is the stage where the entire product and marketing programme is tried out for the first time in a small number of well chosen and authentic sales environments.

The decision to test market is related to the degree of confidence the supplier has in the new product. It is a matter of comparing the expected value of immediate action and the expected value of first sampling and then acting. Suppose, in a particular case, it is estimated that test marketing would cost $100,000. Suppose the company has estimated that it may lose at most $2 million if the product fails. If management felt the odds of this product's failing were one in 100, then its expected loss for going national would only be $20,000 (2,000,000 x 1/100). Thus the expected loss from immediately going national is only one-fifth of the sure loss of $100,000 if the company pays for a market test.

If management thought the product had only an even chance of succeeding - and only 50 percent of new products are clear successes - then paying $100,000 for a market test makes good sense. The company is paying a small sum of money to protect its interest in a much larger sum.

Test marketing is more frequently used by consumer companies than industrial companies. Industrial companies get their new product feedback in more formal ways. When an industrial concern develops a new product, its sales representatives usually take it around to a sample of prospective buyers to learn their reactions. Often they pick up ideas and suggestions that lead the company to rework the product. When the company is finally satisfied that a sufficient number of prospective customers like the product in its latest form, the company adds the product to its catalogue and prepares to sell it nationally. Thus test marketing in industrial situations amounts in reality to a market probe.

The test marketing of new consumer products is a much more organized and grandiose proposition. The normal test costs more than $100,000, mostly in fees for marketing research and advertising. Typically these figures do not include production and physical distribution expenses since they are expected to be covered by test sales. The test may involve three to six different cities and run from six weeks to as much as two years, depending on how long it takes to establish the repurchase rate.


1. Reasons for test marketing

Test marketing is expected to yield several benefits. The primary motive for testing is to improve knowledge of potential product sales. If product sales fall below break-even expectations in the test markets, then for a relatively small amount of money, the company has averted the expense and embarrassment of a national product fiasco.

A second motive for test marketing is to pre-test alternative marketing plans. A different marketing appeal in each of, say, four cities to test market a new product.

The four approaches might be:

a)

An average amount of advertising coupled with a reduced price.

b)

Heavy advertising.

c)

An average amount of advertising linked with an incentive offer.

d)

An average amount of advertising with no special introductory offer.

One might find that a particular approach generated the best sales, which subject to certain qualifications, provided some evidence on the relative merits of different marketing mixes.

Some other benefits may also be derived from test marketing. The company may discover a product fault that escaped its attention in the product development stage. The company may pick up valuable clues to distribution level problems and may gain a richer understanding of the various segments making up the market.


2. Procedures for test marketing

Test marketing is rapidly approaching the state of a science, or at least a highly developed art. Large companies have accumulated considerable experience, and they generally develop their test plans internally. Companies with less experience generally rely on advertising agencies, specialized consultants, or large marketing service firms. The major decisions in test marketing concern the number of test cities to use, the selection of cities, the length of the test run, the type of information to collect, and the action to take on the basis of test results.

 

i.

HOW MANY TEST CITIES?

Great variation is found in the number of cities used in market tests; most companies used fewer than four cities. Results can be expected to be more representative as the sample size is increased. Additional cities allow the company to set up better experimental controls, test more alternative mixes and probe more carefully for regional differences. But set-up and auditing fees increase with the number of cities. The benefits of including an additional city must exceed the cost of including it.

In general, a larger number of cities should be used:

a)

The greater the maximum possible loss and/or the probability of loss from going national

b)

The greater the number of alternative marketing plans and the more the uncertainty surrounding which is best

c)

The greater the number of regional differences

d)

The greater the chance of calculated test market interference by competitors.

ii.

WHICH CITIES?

No single city is a perfect replication in miniature of the nation as a whole. Some cities, however, typify aggregate national or regional characteristics better than others and have become popular for test marketing purposes.

Each firm develops its own test city selection criteria. One firm restricts its choice of test cities to those with several industries, good media coverage, cooperative distribution, average competitive activity, and no evidence of being over-tested. Additional test city selection criteria may be introduced because of the special characteristics of the product.

iii.

HOW LONG SHOULD THE TEST RUN?

Market tests have lasted anywhere from a few months to several years. The test duration is decided in each case by the individual circumstances.

The first factor is the product's average repurchase period, that is, the length of time that normally elapses before the purchaser restocks the product. The new product may have reached the consumer as a sample, or on a special deal, or as an impulse purchase. Asking for his opinion after he uses it is not an adequate substitute for observing his next purchase. It is highly desirable to observe a few repurchase periods.

The second factor is the competitive situation. A company wants the market test to last long enough to get useful information but not so long that competitors are given a chance to catch up.

The third factor is cost. The total costs of test marketing vary directly with the test's duration. The expenses of auditing the sales results and supervising the test continue through the test period. The company also bears the opportunity costs of not introducing the product earlier.

iv.

WHAT INFORMATION SHOULD BE COLLECTED DURING THE TEST?

The planner must decide what sales and other information is required to evaluate the new product's strengths and weaknesses. One must then make arrangements with the company's marketing research department and outside commercial services to gather this information.

a.

Product shipments data
The most readily available data are product shipments to test markets. Product shipments are made in response to distributors' orders for new stock. Yet because of reporting lags and supply level changes, weekly changes in shipment figures do not usefully reflect weekly changes in the rate of sales.

b.

Store audits
To keep abreast of the actual movement of sales, it is necessary to arrange for periodic audits. The firm has the option of buying periodic reports from a regular commercial service or arranging for special auditing. One limitation is that sales information gained though audits, is that it does not really say anything about the characteristics of the buyers, such as the proportion of new buyers to repeat buyers.

c.

Consumer panels
Information on buyer characteristics can be obtained from consumer panels. If the company has introduced a new brand, it can purchase information on the product purchase sequences of the sample of buyers in the test area. From this data, one can estimate how much repeat purchasing of the brand is taking place, from what particular brands it is gaining customers and to what particular brands it is losing customers, what types of customers are showing the most interest in the new brand, and so forth. One can process the data into a Markov model for forecasting future market shares on the basis of the early brand switching and staying rates.

d.

Buyer surveys
The company may also want to obtain direct data on buyer attitudes and reactions to the new product. This involves getting the names of a sample of new buyers and arranging to interview them.

e.

Miscellaneous studies
Among other things to study during the test market period are trade attitudes, distribution and the effectiveness of advertising, promotion and point-of-sale material. In general, the more information the company collects, the better its chances of making its right decision.

v.

WHAT ACTION SHOULD BE TAKEN AFTER THE TEST?

The test results will be helpful to management in two ways. First, hopefully they will yield some reliable evidence of the product's sales and profit potential and the four possible results for two key measures, trial rates and repurchase rates. If the test markets show a high trial and high repurchase rate, this suggests the desirability of a GO decision. If the test markets show a high trial rate and a low repurchase rate, then the customers are not satisfied with the product and it should be abandoned. If the test marketers show a low trial rate and a high repurchase rate, then the product seems good but more people must be influenced to try it earlier: this means increasing advertising and sales promotion. Finally, if the trial and repurchase rates are both low, then the product appears destined to fail.

 

Even here, some experts will question the predictive value of test market results and list five concerns:  

1) 

There is the problem of obtaining a set of markets that is reasonably representative of the country as a whole. 

2) 

There is the problem of translating national media plans into local equivalents.

3)

There is the problem of estimating what is going to happen next year based on what has happened in this year's competitive environment.

4)

There is the problem of competitive knowledge of the test and of deciding whether any local counter-activities are representative of what competition will do nationally at a later date.

5)

There is the problem of extraneous and uncontrollable factors such as economic conditions and weather.

Thus one contends that market testing's main value lies not in sales forecasting but in learning about suspected problems and opportunities connected with the new product. One points to the large number of products that failed after successful test market results. Some large companies are beginning to skip the test marketing stage altogether.


 

PRODUCT COMMERCIALIZATION


What is involved in introducing the product commercially? Among other things, the company must finalize all the attributes of product and package. It must invest in new equipment and facilities to make large scale processing possible. It must train and motivate the salesforce and distributors. It must arrange a complete advertising and promotion programme with its agency.

All of these steps involve expenditures that rapidly dwarf those incurred up to this stage. This average ratio is 4.1 times as great as the overall advertising-to-sales ratio of the companies introducing these products. The companies cannot expect to operate in the black for the first two years.

The product generally is not introduced all at once on a national scale but is rolled out into the prime markets and regions first. The rate of planned market expansion is governed by a number of factors. If the test market results are very encouraging, the company will try to introduce the product on a full speed basis, especially if competition is rushing into the same market. A company that is less confident about its new product will move more slowly into new markets. It recognizes that it may be limiting its gain for the sake of being able to limit its loss.

Whether the company introduces its new products swiftly or gradually, it needs to schedule its commercial introduction carefully. The smooth co-ordination and progression of the hundreds of activities making up the commercialization stage warrant the use of some advanced scheduling technique, such as critical path analysis.


Target Company
Base Reference
PRODUCT COMMERCIALIZATION

New Plant & Equipment Costs

Process Costs

Distribution Costs

Sales Costs

Marketing Costs

Performance Grid Definitions


 

PRODUCT ADOPTION


The consumer adoption process begins where the firm's innovation process finishes. It deals with the process by which potential customers come to learn about the new product, try it, and eventually adopt or reject it. It underlies the introduction and rapid growth stages of the product life cycle. The producer's problem is to understand this process so that he can bring about early market awareness and trial usage. The consumer adoption process should be distinguished from the consumer loyalty process, which is the concern of the established producer.

The earliest approach used by new product marketers for launching a new product was to distribute it widely and inform everyone who might be a potential purchaser.

This mass market approach, however, has two drawbacks:

1) 

it requires heavy marketing expenditures, and 

2)

it involves a substantial number of wasted exposures to non-potential buyers.

These drawbacks led to a second approach called Heavy User target marketing, that of directing the product to the group that tends to account for a substantial share of all purchasing. This makes sense, providing heavy users are identifiable and among the first to try the new product. However, it was noticed that even within the heavy user group, persons differed in how much interest they showed in new products and in how fast they could be drawn into trying them. Certain persons tended to be earlier adopters than others. The importance of this finding is that with new products one ought to direct the marketing effort to those persons who are most likely to adopt the product early.

 

Early adopter theory grew around this view and held that:

a)

Persons within a target market will differ in the amount of time that passes between their exposure to a new product and their trial of the new product.

b)

Early adopters are likely to share some traits in common which differentiate them from late adopters.

c)

There exists efficient media for reaching early adopter types.

d)

Early adopter types are likely to be high on opinion leadership and therefore helpful in "advertising" the new product to other potential buyers.

The new product marketing task, at the time of launching, is to define the best early prospects for the new product.

 

Ideally, the best early prospects would have four characteristics:

   a)  They would be early adopter types
   b)  They would be heavy users
   c)  They would be high on opinion leadership
   d)  They would not be too expensive to reach


One now turns to the theory of innovation diffusion, which provides clues to identifying the best early prospects.



1. Concepts in innovation diffusion

The central concept is that of an innovation, which refers to any product, service, or idea that is perceived by someone as new. The idea may have had a long history, but it is still an innovation to the person who sees it as being new.

Innovations are assimilated into the social system over time. Diffusion process is the name given to the spread of a new idea from its source of invention or creation to its ultimate users or adopters. The adoption process, on the other hand, focuses on the mental process through which an individual passes from first hearing about an innovation to final adoption. Adoption itself is a decision by an individual to use an innovation regularly.

The differences among individuals in their response to new ideas is called their innovativeness. Specifically, innovativeness is the degree to which an individual is relatively earlier in adopting new ideas than the other members of his social system. On the basis of their innovativeness, individuals can be classified into different adopter categories.

Individuals also can be classified in terms of their influence on others with respect to innovations. Opinion leaders are those individuals from whom others seek information or advice. Individuals or firms who actively seek to change other people's minds are called change agents.


2. Propositions about the consumer adoption process

One can now examine the main generalizations drawn from hundreds of studies of how people accept new ideas.
 

i.

Stages in the adoption process

The first proposition is that the individual consumer goes through a series of stages of acceptance in the process of adopting a new product.

The stages are classified as follows:

a)

Awareness: The individual becomes cognizant of the innovation but lacks information about it.

b)

Interest: The individual is stimulated to seek information about the innovation.

c)

Evaluation: The individual considers whether it would make sense to try the innovation.

d)

Trial: The individual tries the innovation on a small scale to improve his estimate of its utility.

e)

Adoption: The individual decides to make full and regular use of the innovation.

The value of this model of the adoption process is that it requires the innovator to think carefully about new product acceptance. The suppliers of a particular product may find buyers are frozen in the interest stage; they cannot jump the gap to the trial stage, because of their uncertainty and/or the purchase price. These same buyers would however be willing to try the product if the risk was reduced. Recognizing this, the supplier may institute a trial use plan with option to buy.

ii.

Individual differences in innovativeness

The second proposition is that people differ markedly in their penchant for trying new products. In each product area, there are apt to be leaders and early adopters. Some buyers are the first to adopt new fashions or new concepts - whilst other individuals, however, tend to adopt innovations much later.

This has led to a classification of people into the adopter categories:

   1. Innovators
   2. Early Adopters
   3. Early Majority
   4. Late Majority
   5. Laggards


The adoption process is represented as following a normal (or near normal) distribution when plotted over time. After a slow start, an increasing number of people adopt the innovation, the number reaches a peak, and then it diminishes as fewer individuals remain in the non-adopter category.

Convenient breaks in the distribution are used to establish adopter categories. Thus innovators are defined as the first percentage of the individuals to adopt a new idea, the early adopters are the next category who adopt the new idea, and so forth. Although this partitioning in terms of unit standard deviations is somewhat arbitrary, the model provides the standardization needed to facilitate comparisons of different studies of product adoption.

One has tried to characterize the five adopter groups in terms of ideational values:

1)

The dominant value of innovators is venturesomeness; they like to try new ideas, even at some risk, and are cosmopolitan in orientation.

2)

The dominant value of early adopters is respect; they enjoy a position in the community as opinion leaders and adopt new ideas early but with discretion.

3)

The dominant value of the early majority is deliberateness; these people like to adopt new ideas before the average member of the social system, although they rarely are leaders.

4)

The dominant value of the late majority is skepticism; they do not adopt an innovation until the weight of majority opinion seems to legitimize its utility.

5)

Lastly, the dominant value of the laggards is tradition; they are suspicious of any changes, mix with other tradition bound people, and adopt the innovation only because it has now taken on a measure of tradition itself.

The marketing implication of the adopter classification is that an innovating firm should direct its communications to those people who are likely to be early in adopting the innovation; messages reaching late adopters and laggards are wasted.

The identification of early adopters is not easy. So far no one has demonstrated the existence of a general personality factor called innovativeness. Individuals tend to be innovative in certain areas and laggard in others. The company's problem is to identify the characteristics of those who are likely to be early adopters in its product area. The probability of being an early adopter may turn out to be related to easily identified economic, educational, social or personality characteristics. For example, studies show that innovative buyers are likely to be better educated and more efficient than non-innovative buyers. They are more gregarious and usually of a higher social status; they tend to have a higher than average mobility, and tend to be more ready to accept new ideas.


Drawing on several studies, one can offer the following hypotheses about early adopters:

a)

The relatively earlier adopters in a social system tend to be younger in age, have higher social status, a more favorable financial position, more specialized operations, and a different type of mental ability from later adopters.

b)

Earlier adopters utilize information sources that are more impersonal and cosmopolitan than later adopters and that are in closer contact with the origin of new ideas.

c)

Earlier adopters utilize a greater number of different information sources than do later adopters.

d)

The social relationships of earlier adopters are more cosmopolitan than for later adopters, and earlier adopters have more opinion leadership.

Once the characteristics of early adopters are identified, a marketing communications programme can be developed for the new product calculated to reach and interest these people. The known media habits of these people can be used to increase the effectiveness of the company's advertising.

iii.

Role of personal influence

The third proposition is that personal influence plays a very large role in the adoption of new products. By personal influence is meant the effect of product statements made by one person on another's attitude or probability of purchase.

Although personal influence is an important factor throughout the diffusion process, its significance is greater in some situations and for some individuals than for others. Personal influence seems to be more important in the evaluation stage of the adoption process than in the other stages. It seems to have more influence on the later adopters than the earlier adopters; and it appears to be more important in risky situations than in safe situations.

Recognizing the role of personal influence can make an important contribution to marketing planning. It tempers one's enthusiasm about media advertising messages designed to supply early adopters with ways of verbalizing their opinions to others. It highlights the importance of designing a good product that users will want to talk about to others.

iv.

Influence of product characteristics on the rate of adoption

The fourth proposition is that the character of the innovation itself affects the rate of adoption.

Five characteristics seem to have an especially important influence on the adoption rate:

1.

The first is the innovation's relative advantage, or the degree to which it appears superior to previous ideas. The greater the perceived relative advantage, whether in terms of higher profitability, reliability, or ease of operation, the more quickly the innovation will be adopted.

2.

The second characteristic is the innovation's compatibility, or the degree to which it is consistent with the values and experiences of the individuals in the peer system.

3.

Third is the innovation's complexity, or the degree to which it is relatively difficult to understand or use. The more complex innovations are likely to take a longer time to diffuse, other things being equal.

4.

Fourth is the innovation's divisibility, or the degree to which it may be tried on a limited basis. The evidence of many studies indicates that divisibility helps to increase the rate of adoption.

5.

The fifth characteristic is the innovation's communicability, or the degree to which the results are observable or describable to others. Innovations that lend themselves to better demonstration or description of advantage will diffuse faster in the peer system.

All of these characteristics should be given maximum consideration in developing the new product and its marketing programme.


Target Company
Base Reference
NEW PRODUCT DIFFUSION

Early Adopters

Heavy Users

Substantial Target Markets

Deep Customer Bases

Market or Geographic Extensions

Performance Grid Definitions


 

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