NEW-PRODUCT DEVELOPMENT AND MARKETING STRATEGIES

New-product development is essential for a company to remain competitive in today`s rapidly changing markets. Marketing plays an important role in new-product development. Analyses of the selected market segments and the targeted consumer groups are performed, and decisions are made regarding the development of appropriate products. Yet, the introduction of new products is extremely risky. New product failures are estimated to be 80% of all new-product launches in certain markets. There are various levels of failure. A complete product failure is a dead loss and provides no cost recovery. Partial product failures allow the recovery of some variable and fixed costs, while a comparative product failure actually provides some profit, but is relatively less profitable when compared with other products. Note: The introduction stage is characterized by slow sales growth and lack of profits because of the high expenses of promotion and distribution. Competitors are few, basic versions of the product are produced, and higher income customers are usually targeted. Prices may initially be high to permit cost recovery when unit sales are low.

Why is there such a high failure rate with new products?

New-product failures occur for a number of reasons:

  • New products may not have significant advantages.

Certain markets may be saturated, and it is very difficult to develop truly innovative product ideas (e.g., the chocolate candy bar market is fairly well saturated, and it is difficult to improve upon the offerings already provided by the chocolate bar market leaders).

  • Divided markets. Intense international competition is fragmenting markets into smaller segments. Focusing on smaller market segments increases the risks of failure.
  • Increasing product development costs. As the technology becomes more complex, the cost of developing new products increases.
  • Shorter product life cycles and product development times. Technological change is occurring at exponentially increasing rates that significantly reduces product life cycles as well as mandating shorter product development times. The risk of failure increases because of greater likelihood of product development mistakes and misjudgments. Shorter product life cycles also mean a shorter period of time in which to recoup product development costs.

What are the major stages in new product development?

  • Idea generation. New-product ideas come from many sources. Customers are one of the best sources of new ideas (software companies rely extensively on their installed user base to provide feedback about how products should be improved). Consumers can be surveyed to identify needs and problems that are otherwise unknown to management. Competitors often introduce new product and service innovations which provide a rich area of product improvement. Employees who work closely with products can also provide significant insight into new product innovations and improvements. Brainstorming can be used by a marketing team where members give ideas in a free flow manner. In the final analysis, new-product ideas are the result of inspiration, imagination and deep experience.
  • Idea screening. After numerous ideas have been generated, screening is utilized to evaluate the ideas in terms of practicality, cost, profit potential and strategic fit. Not only must new products have significant profit potential, but they must also be consistent with the firm`s marketing plan and strategy. Most companies have product evaluation forms where the products are described and rated according to market potential. Subsequently, these forms are screened by a new-product organizational structure.There are two significant risks in the idea screening stage. One risk is that a product is rejected because management underestimates its market and profit potential. The other risk is that a firm will approve a product not having good market potential or strategic fit because it received inadequate idea screening.
  • Concept development and testing. If a product idea survives the idea screening stage, it is developed into a product concept. A product concept is an idea that is developed into an expression of the advantages offered by a new product or service and the target market to which it will be offered. This is termed a product category concept.

EXAMPLE 3.5

A company wants to develop a line of nutritional snacks. It then converts this product idea into several product concepts within the product category. One product concept consists of a candy made out of dried fruit. Another is an all natural cracker using dried fruit to add taste. A third product concept is a dried meat product made out of prepared soy beans.

  • Business analysis. Having developed the product concept, a preliminary marketing strategy is then developed. This will enable management to evaluate the product concept`s business potential. In order to do this, management must perform an extensive cost analysis on product development costs including research and design, marketing and production. Product demand estimates are then combined with cost estimates to develop short- to intermediate-term profit estimates.
  • Product development. Assuming the business analysis determines the product is worthwhile, it then goes to the product development stage where R&D develops a prototype. Normally, product development represents a substantial financial investment over an extended period of time. Additionally, product development must be sensitive to expressed consumer desires. The use of technology, particularly computer aided design and computer aided manufacturing (CAD/CAM), can help to shorten development time. When the prototype is actually developed, it must be subjected to rigorous functional testing to insure the product is viable, safe, and meets expectations. Assuming the product passes the functional testing stage of the product development process, it must then be subjected to consumer testing to determine whether or not the product would be appropriate for the target market.
  • Market testing. The market testing process subjects the developed product to actual target market conditions. The product is packaged and branded and introduced using a controlled marketing program. The purpose of market testing is to determine consumer acceptance, the success of various marketing strategies, how large the market actually is, and how competitive it will be. There are several methods used in the market testing process:
  • Traditional test marketing. In traditional test marketing, the product is introduced into a selected group of cities. When determining the test market strategy, management must determine in how many and in which cities the test marketing should be performed, the length of the test marketing process, and what factors should be evaluated. Traditional test marketing also allows a variety of promotional methods to be used to introduce the product in order to determine which method works most effectively. The negative side of the traditional test marketing process is that it is costly and time consuming.
  • Research firm test marketing. The firm introducing a new product may decide to conduct test marketing by contracting with a research firm which directs market research in a group of commercial outlets. Various marketing strategies are carefully controlled and evaluated. Product sales are monitored using scanners and bar codes. Research firm test marketing is performed more quickly and cheaply than traditional test marketing.
  • Simulated test marketing. In simulated test marketing, a selected group of shoppers is exposed to advertising for the new product as well as advertising for competitive products. They are then given a predetermined amount of money and allowed to shop in a simulated store carrying the new product as well as existing competitive products. Observations and measures are made of the products purchased, and the consumers are then asked why they purchased their chosen products. Follow-up questions are also asked of the selected consumers after a period of time has elapsed. Simulated test marketing can be conducted quickly and much more economically than either traditional test marketing or research firm test marketing.
  • Commercialization. If the product successfully passes the market testing process, then the marketer is ready to implement a full commercial introduction. The firm now must make its greatest investment in the entire product development process. Manufacturing facilities have to be acquired, a promotional advertising program needs to be developed, sales personnel have to be employed and trained, and administrative support systems have to be put in place. Many activities have to be coordinated. Additionally, evaluations have to be performed concerning the timing, geographical selection of launch sites and the targeting of product launch prospects.

What is the product life cycle?

The product life cycle consists of the product development, introduction, growth, maturity, and decline stages. In the product development stage, the company incurs investment costs but makes no sales. In the introduction stage, sales are slow because the product is being introduced, profits and cash are negative, and investment in marketing is high. In the growth stage, profits are at their highest, although cash flow may decline because of high investment. In the maturity stage, sales decrease and profits level off or begin to decline. In the decline stage, sales and profits drop.

When is market-skimming pricing used?

Market-skimming pricing is used when a new product is introduced at the highest price possible given the benefits of the product. For market skimming to work, the product must appear to be worth its price, the costs of producing a small volume cannot be so high that they eliminate the advantage of charging more, and competitors cannot enter the market and undercut the price.

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