Chapter 12 Developing New Products PDF

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Professor: Victor Piscitello...

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Chapter 12

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Developing New Products KEY TERMS Innovation: The process by which ideas are transformed into new products and services that will help firms grow Diffusion of Innovation: The process by which the use of an innovation, whether a product or a service, spreads throughout a market group over time and over various categories of adopters Pioneers (or breakthroughs): New product introductions that establish a completely new market or radically change both the rules of competition and consumer preferences in a market First Movers: Product pioneers that are the first to create a market or product category, making them readily recognizable to consumers and thus establishing a commanding and early market share lead Innovators: Those buyers who want to be the first to have the new product or service Early Adopters: The second group of consumers in the diffusion of innovation model after innovators to use a product or service innovation; generally don’t like to take as much risk as innovators, but instead wait and purchase the product after careful review Early Majority: A group of consumers in the diffusion of innovation model that represents approximately 34% of the population; members don’t like to take much risk and therefore tend to wait until bugs are worked out of a particular product or service; few new products or services can be profitable until this large group buys them Late Majority: The last group of buyers to enter a new product market; when they do, the product has achieved its full market potential Laggards: Consumers who like to avoid change and rely on traditional products until they are no longer available Reverse Engineering: Involves taking apart a competitor’s product, analyzing it, and creating and new and improved product that does not infringe on the competitor’s patents, if any exist Lead Users: Innovative product users who modify existing products according to their own ideas to suit their specific needs

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Concepts: Brief written descriptions of a product or service; its technologies, working principles, and forms; and what customer needs it would satisfy Concept Testing: the process in which a concept statement that describes a product or service is presented to potential buyers or users to obtain their reactions Product Development (or Product Design): Entails a process of balancing various engineering, manufacturing, marketing, and economic considerations to develop a product’s form and features or a service’s features Prototype: The first physical form or service description of a new product, still in rough or tentative form, that has the same properties of a new product but is produced through different manufacturing practices, sometimes even crafted individually Alpha Testing: An attempt by the firm to determine whether a product will perform according to its design and whether it satisfies the need for which it was intended; occurs in the firms R&D department Beta Testing: Having potential consumers examine a product prototype in a real-use setting to determine its functionality, performance, potential problems, and other issues specific to its use Premarket Tests: Conducted before a product of service is brought to market to determine how many customers will try and then continue to use it Test Marketing: Introduces a new product or service to a limited geographic area, usually a few cities, prior to a national launch Trade Promotions: Advertising to wholesalers or retailers to get them to purchase new products, often through special pricing incentives Introductory Price Promotions: Short-term price discounts designed to encourage trial Trade Show: Major events attended by buyers who choose to be exposed to products and services offered by potential suppliers in an industry Manufacturer’s Suggested Retail Price (MSRP): The price that manufacturers suggest retailers use to sell their merchandise Slotting Allowance: Fees firms pay to retailers simply to get new products into stores or to gain more or better shelf space for their products

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Product Life Cycle: Defines the stages that new products move through as they enter, get established in, and ultimately leave the marketplace and thereby offers marketers a starting point for their strategy planning Introduction Stage: Stage of the product life cycle when innovators start buying the product Growth Stage: Stage of the product life cycle when the product gains acceptance, demand and sales increase, and competitors emerge in the product category Maturity Stage: Stage of the product life cycle when industry sales reach their peak so firms try to rejuvenate their products by adding new features or repositioning them Decline: Stage of the PLC when sales decline and the product exits the market QUIZ-YOURSELF QUESTIONS Q: The diffusion of innovation theory is useful to marketers in helping them _______________. A: Q: Inkjet personal computer printers were a big improvement over the dot matrix printers they replaced. Inkjet printers gained rapid acceptance in the marketplace primarily because of their ___________. A: WHY DO FIRMS CREATE NEW PRODUCTS? o Complete new-to-the-market products represent FEWER THAN 10% of all new product introductions each year o Innovation  The process by which ideas are transformed into new offerings, including products, services, processes, and branding concepts that will help firms grow  Without innovation and its resulting new products/services, firms would have only two choices:  Continue to market current products to current customers  Take the same product to another market with similar customers  Some estimates indicates that only ABOUT 3% of new products actually succeed o Changing Customer Needs  When they add products, services, and processes to their offering, firms can create and deliver value more effectively by satisfying the changing needs of their current or new customers  Or by keeping current customers from getting bored with the current offering

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 *Approximately 55% of the loyal parent segment nearly always buy their preferred brand Market Saturation  The longer a product exists in the marketplace, the more likely it is that the market will become saturated  Without new products/services, the value of the firm will ultimately decline Managing Risk through Diversity  Through innovation, firms often create a broader portfolio of products  Helps them diversify their risk and enhance firm value  Better than a single product can  If some products in a portfolio perform poorly, others may do well  Firms with multiple products can better withstand external shocks  E.g. changes in consumer preferences or intensive competitive activity Fashion Cycles  In industries that rely on fashion trends and experience short product life cycles— including apparel, arts, books, and software markets—most sales come from new products  E.g. movies or video games Improving Business Relationships  New products do not always target end consumers  Sometimes they function to improve relationships with suppliers  Example:  Capri-Sun lemonade was not selling well because of the way it was stacked on the palette. Changing the way the flavors are stacked, sales of the lemonade flavor increased by 162%

DIFFUSION OF INNOVATION o Diffusion of Innovation  Process by which the use of an innovation—whether a product, service, or process— spreads throughout a market group, over time and across various categories of adopters  Helps marketers understand the rate at which consumers are likely to adopt a new product  And gives them a mean to identify potential markets and predict potential sales for new products before being introduced  Pioneers or Breakthroughs  New products that establish a completely new market or radically change both the rules of competition and consumer preferences in a market  E.g. the Apple iPod  Are first movers  The first to create the market or product category  Establish a commanding and early market share lead  Market pioneers can command a greater market share over a longer time period than later entrants can

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DRAWBACKS:  Not all pioneers succeed  Imitators capitalize on the weaknesses of pioneers and gain advantage in the market o Spend less marketing effort creating demand for the product line  Often has a less sophisticated design and higher price than potential competitor offerings since they are the first  Why is the failure rate for new products so high?  Failure to assess the market properly  Neglect product testing  Target the wrong segment  Poor positioning o Innovators  Buyers who want to be the first on the block to have the new product/service  Enjoy taking risks  Regarded as highly knowledgeable  Subscribe to trade and specialty magazines  Talk to other experts  Visit product-specific blogs and forums that describe the coolest new products  Attend product-related forums, seminars and special events  Help the product gain market acceptance  Talk and spread positive word of mouth about the new product  2.5% of the total market for any new product or service o Early Adopters  The second subgroup that beings to use a product/service innovation  Generally don’t like to take as much risk as innovators  Instead wait and purchase the product after careful review  E.g. Waits for the first reviews to come out  Tend to enjoy novelty  Often regarded as the opinion leaders for particular product categories  Crucial for spreading the word to influence the rest of the buyer categories  13.5% of the total market for any new product or service o Early Majority  Few new products and services can be profitable until this large group buys them  If the group never becomes large enough, the product/service typically fails  Differs in many ways from innovators and early adopters  Don’t like to take as much risk  Wait until the “bugs” are worked out  E.g. rents a movie when it first comes out on DVD  All the reviews are in  Lower costs 

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When early majority customers enter the market, the number of competitors in the marketplace usually also has reached its peak  So these buyers have many price and quality choices  34% of the total market for any new product or service o Late Majority  When they enter, the product has achieved its full market potential  By the time they enter, sales tend to level off or may be in decline  E.g. wait a while after a movie is on DVD  Let others who want to watch it watch it first  34% of the total market for any new product or service o Laggards  Like to avoid change  Rely on traditional products until they are no longer available  In some cases, they may never adopt a certain product/service  E.g. may watch a movie if it shows up on a regular TV network  16% of the total market for any new product or service o Using the Diffusion of Innovation Theory  Firms can predict which types of customers will buy their new product/service immediately after its introduction as well as later as the product is more and more accepted by the market  Then the firm can develop effective promotion, pricing and other marketing strategies to push acceptance among each customer group  Relative Advantage  Product perceived to be better than substitutes = quicker diffusion  The advantage/benefit that all levels/versions of a product offer  Compatibility  Consumer features can make a diffusion process faster or slower  E.g. international cultural differences  Observability  When products are easily observed, their benefits or uses are easily communicated to others, which enhances the diffusion process  Complexity and Trialability  Products that are relative less complex are also relatively easy to try  Will generally diffuse more quickly and lead to greater/faster adoption than those that are NOT so easy to try 

HOW FIRMS DEVELOP NEW PRODUCTS o Steps in the Product Development Process  Idea Generation  Development of viable new product ideas  Concept Testing

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 Testing the new product idea among a set of potential customers  Product Development  Development of prototypes and/or the product  Market Testing  Testing the actual products in a few test markets  Product Launch  Full-scale commercialization of the product  Evaluation of Results  Analysis of the performance of the product / making appropriate modifications o Idea Generation  Ways to generate ideas for new products  Internal R&D efforts  Collaborate with other firms and institutions (R&D Consortia)  License technology from research-intensive firms  Brainstorming  Outsourcing  Research competitors’ products and services  Conduct consumer research (customer input)  Internal R&D  Scientists work to solve complex problems and develop new ideas  High costs  Likely to lead to technological or market breakthrough  R&D investments are considered continuous investments  Firms may lose money on a few new products  Hope is that a few extremely successful new products (blockbusters) can generate enough revenues and profits to cover the losses from less successful introductions  Reverse Innovation  R&D Consortia  Consortia: groups of other firms and other institutions  Join consortia to explore new ideas or obtain solutions for developing new products  Investments come from the group as a whole and the participating firms/institutions share the results  Common for when research costs are way too much for a single company  Licensing  Firms buy the right to use the technology or ideas from other research-intensive firms  Saves the high costs of internal R&D  But the firm is banking on a solution that already exists but has not been marketed  Brainstorming  A group works together to generate ideas

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No idea can be immediately accepted or rejected The moderator of the session may channel participants’ attention to specific features and attributes, performance expectations, or packaging  At the end, the members vote on the best ideas or combinations of ideas  Ideas with the most votes proceed to next stage in product development  Competitors’ Products  New competitor offering = market opportunity for a firm  Reverse Engineering  Taking apart a product, analyzing it, and creating an improved product that does not infringe on the competitor’s patents, if any exist  This “copycat” approach is widespread and practiced by even the most research-intensive firms  Customer Input  Essential to listen to the customer (in both B2B and B2C markets)  B2B:  Focus groups, interviews, surveys, informal discussions  Design and development team consults with the customer  Joint effort that increases the probability the customer will eventually buy the new product  B2C:  Social media and other sources  In-home research o Find consumer unexpressed needs  Analyze lead users, innovative product users who modify existing products according to their own ideas to suit their specific needs o Can help firms understand upcoming market trends o Other consumers might want to follow the lead o Concept Testing  Concepts  Brief written descriptions of the product  Its technology, working principles, and what customer needs it would satisfy  Might also include visual images of what the product will look like  The process in which a concept statement is presented to potential buyers or users to obtain their reactions; these reactions help the developer to:  Estimate sales value  Make changes to enhance sales value  Determine whether the idea is worth further development  If the concept fails to meet customers’ expectations:  It is doubtful it would succeed if it were produced and marketed  Helps avoid the costs of unnecessary product development  Questions researchers might ask:  

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 If the product would satisfy an unmet need  The expected frequency of purchase  How much customers would buy  Whether the price information (if provided) indicates a good value  Which segments will be most interested o Product Development  A.K.A Product Design  Process of balancing various engineering, manufacturing, marketing, and economic considerations to develop a product’s form and features or a service’s features  Prototype  The first physical form or service description of a new product  Still in rough or tentative form  Same properties as a new product but is produced through differenced manufacturing processes—sometimes crafted individually  Developed by an engineering team  Alpha Testing  The firm attempts to determine whether the product will perform according to its design and whether it satisfies the need for which it was intended  Occurs in the firm’s R&D department (INTERNAL)  Beta Testing  Uses potential consumers who examine the product prototype in a real-use setting to determine its functionality, performance, potential problems, and other issues specific to its use  The firm might develop several prototype products to give to users and then survey them to determine whether the product worked as intended and identify any issues that need resolution  OnlineBeta.com o Market Testing  Premarket Tests  Determine how many customers will try and continue to use a product or service according to a small group of potential consumers  E.g. Nielsen BASES  Potential customers are exposed to the marketing mix variables, then surveyed and given a sample of the products to try o Then later surveyed again about whether they would use it again  Helps generate a sales estimate and determine course of action  Saves the costs of a nationwide launch if the product fails  Test Marketing  Introduces the offering to a limited geographical area (usually a few cities) prior to a national launch  A strong predictor of product success  Uses all elements of the marketing mix  Costs more and takes longer than premarket tests

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So some firms might not do it and instead rely on intuition/instincts

o Product Launch  Introduce the product to the entire market  Requires tremendous financial resources and extensive coordination of all aspects of the marketing mix  If a product launch fails, it may be difficult for the product and even the firm to recover  The firm confirms its target market(s) and decides how the product will be positioned  Then the firm finalizes the remaining marketing mix variables for the new product and the marketing budget for the first year  Promotion  Trade Promotions  Promotions to wholesalers or retailers to get them to purchase the new products  Often combine introductory price promotions, special events, and personal selling  Introductory Price Promotions  Limited-duration, lower-than-normal prices designed to provide retailers with an incentive to try the products  Trade Show  A temporary concentration of manufacturers that provides retailers the opportunity to view what is available and new in the marketplace  Personal Selling  May be the most efficient way to get retailers to purchase products  Place  Manufacturer coordinates delivery and storage with retailers to ensure the product is:  Available for sale when the customer wants it  At the stores the customer is expecting to find it  In sufficient quantities to meet demand  Manufacturers work with retailers on decision such as:  Whether to store the merchandise at retailers’ distribution centers or distribute it directly to stores  Price  Setting prices is a supply-chain-wide decision  MSRP  Retailers may receive a slotting allowance from the manufacturer  Timing  May be important, depending on the product  E.g. seasons o Evaluation of Res...