How to Improve Success Rate of New Product/Service

Commercialization

Krannert School of ManagementPurdue UniversityOctober 21, 2009

Tom Wagner (BSIM’67)

Presentation Topics

• Why this is important?

• Five marketing illustrations.

• Five key determinants of commercial success.

• Summary.

• Take-aways.

The Challenge of Top Line Revenue Growth in Today’s Economy

• “Investors see little reason to hold stocks. We need to see better revenues and top-line growth” ( Jon Brorson, Director of Equities at Northern Trust)

• Revenue growth contingent upon economic growth is obsolete.

• New product/services key to revenue growth.• Anyone who pursues a Marketing career will

have responsibility for new product/service commercialization.

• Over 30,000 new products are introduced annually but at least 80% of these fail.

Mortality of New Product Ideas

Idea Generation and Screening

Business AnalysisDevelopment Testing Commercialization

Source: Booz, Allen & Hamilton, Inc.

0

50

Number of Ideas

Percentage of Time

Why Do New Ideas Fail?

• Fail to offer unique benefit…don’t address what customers really want/need.

• Underestimate competition• Idea good but design problems• Product costs more to produce than expected• Rush to market without well developed

marketing plan• Move to slowly

Introduce New Low Calorie BeerRheingold vs. Miller High Life

Retain LeadershipKawasaki Personal Watercraft

Move Down The Thermoplastic Compound Value Chain

Reinforce-ment

Resin

InjectionMolder

Original Equipment Mfg.

Compounder

How Does Campbell Soup TargetItalian Sauce Leader Ragu

W.W. Grainger Service Penetration

New Product/Service Planning Process

StrategicEmphasis

and Idea Generation

Strategic Positioning

Customer Value Proposition

ValidationIs it Real?Can We Win?Is it Worth It?

Incremental or Innovation

Customer Needs and Wants.Vs. Competition

FeaturesBenefits$ Values

FeaturesBenefits$ Values

New Product/Service Strategic Emphasis

• The best predictors of success are market knowledge and demand-driven products and services.

• Winners avoid diversification during downturns…they reinforce the core businesses by focusing resources on playing to win on their main field of competition. Diversification dilutes focus just at the time when focus is critical.

Markets:

Products/Services:

New

Existing

Existing New

Market Development(Medium Risk)

Diversification(High Risk)

Market Penetration(Low Risk)

Market Development(Medium Risk)

Diversification(Major Risk)

Product Development(Medium Risk)

Market Penetration(Minimal Risk)

New Product/Service Strategic Emphasis

Strive for Innovation

Auto Tire Technology Status in 1975Goodyear Reluctant to Invest in Radials

19701965 1975 1980 1985 1990 1995 2000

Steel Belted Radial Tires

Bias Ply Tires

Fiber Glass Belted Bias Tires

Annual Tire Demand

Tire Construction

Relative Price/tire

Tire Warranty

Bias Ply $50 10,000 miles

Bias Belted $75 20,000 miles

Radial $100 40,000 miles

Goodyear Lost Share to Radial Leader- Michelin

19701965 1975 1980 1985 1990 1995 2000

Annual TireDemand

1971 Southwest Enters Airline Business

U.S. Airline Industry

• Typical Incremental Differentiation by Traditional Large Airlines:• American, Continental, United, Delta/Northwest, U.S

Air had combined $23 billion operating losses in 2008.• Southwest Chose Innovative Business Model:

• Low fares, shorter flights, city-to-city (not hubs), no frills, fastest flight turnaround, only Boeing 737, flexible work rules.

• Hugh Success…operating Income of $450 million in 2008.

Innovation

• “Mankind has already achieved all that it is capable of inventing”

Innovation

• “Mankind has already achieved all that is capable of inventing”

• Henry J. Elllsworth, Commissioner of the U.S. Patent Office, circa 1900

• 100 Calorie Packs have 285% retail price 100 Calorie Packs have 285% retail price premium.premium.• Only 3 years after introduction annual Only 3 years after introduction annual sales are $30 million.sales are $30 million.• Operating margin at least 20% greater Operating margin at least 20% greater than traditional product.than traditional product.

Chips Ahoy! 100 Calorie Pack

Don’t Neglect Innovation for the Allure of

Incremental Improvements • Organizations intuitively tend to add features to an existing

product in response to the perceived wants and needs of customers which often results in incremental improvements that have little impact on customers’ buying patterns.

• Innovation includes: products, service, business models, net-working, etc.

• Don’t encourage creativity of creativity’s sake; instead encourage creative solutions to real problems. Innovation is good only if its useful.

• Great ideas are the beginning, not the end, of business innovation.

Sources of New Ideas

• Customers• In-house Research and Development• Competitive Activities• Universities• Consultants• External Inventors• Management• Paying Attention to Unexpected Events

Customer FocusThe Center of Everything Marketing Does

Customer

Product Price

PromotionDistribution

Customer Focus

• Today’s marketers strive to develop unique strategies by finding unsatisfied customers and offering them superior value.

• They don’t sell products…capture customers• Hugh $ are spent on market research to

understand customer needs..• Yet everyday, new products and services are

introduced only to fail dramatically.

R.J. Reynolds “Premier” Smokeless CigaretteNew Product Failure

“Premier” Commercialization

• “Premier” was intended to reduce or eliminate the unhealthy side effects for both smoker and people around smoker.

• R.J. Reynolds commercialized in 1988 after devoting several years and approximately $1 billion to develop and commercialize.

• “Premier” withdrawn 1989 after smokers complained of charcoal-like aftertaste.

What Will Drive Success:Rheingold vs. Miller High Life

Rheingold vs. Miller High Life

• Rheingold Breweries in Brooklyn, NY developed process to remove starch from beer in 1967.

• Introduced as “Gablinger’s Diet Beer”

• Advertisements showed a very fat man shoveling spaghetti into his mouth and downing a Gablinger turned off traditional beer drinkers.

Miller Lite Beer SuccessCustomer Focus

• Most beer is bought by heavy drinkers• A beer that ‘fat’ people could drink and not gain as

much weight would NOT be received positively by the market.

• “Show me a man concerned about his waistline and I’ll show you a poor prospect for serious beer drinking.”

• Customers said they would be interested in a beer that was less filing BUT still tasted great!

• Miller Brewing acquired the light beer process when it bought assets of Meister Brau.

• 1972 Miller Lite was launched as “Everything you wanted in a beer… and less”. Some of the most macho football players in U.S. pushed Miller Lite

• The low calorie beer category has been one of the most successful food and beverage innovations of the past 25 years even though Miller did not invent the technology.

• Rheingold is no longer in business.

How to Learn What Customers WantImprovements to Kawasaki Jet Ski

• What could be done to improve Jet Ski ride?

Improvements to Kawasaki Jet Ski• What could be done to improve current Jet Ski ?• Existing customers asked for more padding on Jet Ski to

make standing position more comfortable.• Kawasaki responded with several incremental

improvements to original design.

• Kawasaki lost significant share and its #1 leadership position.

Voice of Customer Technique

• Face-to-Face interview process• Consumers at each step down the value

chain.• Needs and wants expressed in customer’s

own words and terminology.• Search for ‘Outcomes’• Prioritized by customers.• Responsibility for developing solution rests

with supplier, not customer.

Examples of Probing

• Tell me more about …• Why did that please you ? • Why do you believe …..?• Why did you select …..?• Why is that significant ?• Why do you suggest that ……?• Why would that be an improvement ?• What do you mean by ….?

• What keeps you awake at night?• Why do you buy from us?• Please be more specific when you say….

Organizing and Prioritizing Customer Feedback

• Eliminate duplication

• Separate needs and attributes from opinions, solutions, and numerical values

• Assemble like attributes and return to customers and ask to prioritize

Pitfalls to Avoid

• Offer solutions when problems are raised• Encourage customer to discuss needs or attributes in

terms of our products and services and not theirs• Judgmental tone, ie. Why did you do that?• “Functional Fixedness” – instead probe for outcomes• Imply we are going to fix their problems within weeks• Interrupt customer• Ask questions without interest and sympathy• Poor eye contact• Settle for opinions and solutions rather than probe to

uncover true needs and attributes

Advantages of VOC Survey Technique

• Traditional survey methods ask for solutions, but..– Customers have limited frame of reference– “Me Too” solutions offered– Incremental improvements and not bold changes

• VOC probes for Outcomes• VOC helps establish Values since there can

be a huge gap between what customers want and what they are willing to pay for.

Yamaha Personal Watercraft Asked for ‘Outcomes’

• Faster learning curve• More stability• Longer rides without

fatigue• Multiple riders

Personal Watercraft – Using ‘Outcomes’ Results in New, Innovative Design

• Faster learning curve• More stability• Longer rides without fatigue• Multiple riders

Yamaha and Sea-Doo (Bombardier) gained significant share

New Product/Service Planning Process

StrategicEmphasis

and Idea Generation

Strategic Positioning

Customer Value Proposition

ValidationIs It Real?

Is It Worth It?Can We Win?

Incremental or Innovative

Customer Needs and Wants.Vs. Competition

FeaturesBenefits$ Values

FeaturesBenefits$ Values

Move Down The Thermoplastic Compound Value Chain

Reinforce-ment

Resin

InjectionMolder

Original Equipment Mfg.

Compounder

Validation Questions

• Is It Real?– Market size

– Customer needs and wants

• Can We Win?– Sustainable competitive advantage– Pricing levels– Sales projections

• Is It Worth It?– Investment– Variable and fixed costs

Pre-tax income– Level of risk– Corporate return on investment goals– Impact on external relationships– Management priority vs. other growth opportunities

Is It Real?

• Over $200 million sales in U.S. market.• Projected growth of 7%/yr due to stiffness and

impact strength advantages over other resins.• Automotive and Appliance largest uses.• None of the current compounders had captive

raw material supplies.• Automotive and Appliance OEM’s always

looking for lower price.• Compounding technology well established.

Is It Worth It?

• Initial investment of $3 million.

• Projected variable costs of $.60/lb.

• ROI of 10%, assuming ave. price of $.75/lb

• Could strain relationships with traditional customers, ie the current compounders.

Can We Win?

• Market price not totally defined but uncovered some contracts as low as $.60/lb and likely to proliferate to other molders.

• Competitive compounders operated very large, highly automated facilities which we were not willing to duplicate.

• Relationships at automotive and appliance OEM’s BUT not at immediate target customers – molders.

• Conclusion: Can not win…cancel project

New Product/Service Planning Process

StrategicEmphasis

and Idea Generation

Strategic Positioning

Customer Value Proposition

ValidationIs it Real?Can We Win?Is it Worth It?

Customer Needs and Wants vs.

Competition

Incremental or Innovative

FeaturesBenefits$ Values

FeaturesBenefits$ Values

Segmentation and Positioning

• By creatively, segmenting markets, you can spot opportunities.

• Segmentation is key to target marketing.• Positioning refers to how customers think about your

proposed brand.• Careful positioning can help highlight a unifying theme or

benefits that relate to the target market.• Positioning ensures that the whole marketing mix is

consistent and leads to competitive advantage.• With proper positioning, you can convince customers

that your offering is unique in the marketplace.

How Does Campbell Soup TargetItalian Sauce Leader Ragu

Italian Tomato Sauce Positioning

Just Heat and Serve

Extensive Preparation

Simplistic, Tomato Taste

Complex, Old World Taste

Ragu

50% of Market

Campbell Soup Italian Tomato Sauce Positioning

No Preparation To Use

Extensive Preparation

Simplistic, Tomato Taste

Complex, Old World Taste

Ragu

CampbellSoup Goal to

Re-position Old World Taste

50% of Market

Campbell Soup Positioning

• A ready to use sauce with complex, “Old World” taste.– Ingredients included diced tomatoes, basil, oregano,

garlic, parsley, onion powder not contained in Ragu.– Consistent, thicker sauce vs. thin, watery Ragu.

• Initial “Prego” ad campaign showed skeptical Italian families being won over with the bottled sauce and “It’s in there” tag line.

• Within several years, Campbell Soup captured 20% of market.

New Product/Service Planning Process

StrategicEmphasis

and Idea Generation

Strategic Positioning

Customer Value Proposition

ValidationIs it Real?Can We Win?Is it Worth It?

Incremental or Innovative

Customer Needs and Wants.Vs. Competition

FeaturesBenefits$ Values

FeaturesBenefits$ Values

Dollarize ‘Values’

Features

Benefits

Values in $

Product and Service Focus“What do we offer ?”

Application Focus“Why should the customer care ?”

Customer Focus“What is that worth ?”

People buy holes, not drills. The speed at which the holes are drilled, the accuracy of the holes, or the drill’s ability to drill more holes are benefits that can be dollarized

Dollarizing

• People buy for one of two reasons:1. To feel good:

• Intangible vales, ie styles, taste

2. To solve a problem:• Avoidance of loss, ie warranty• Chance to save cost, grow sales

• Both the avoidance of loss and the chance for gain can be measured in dollars and cents, or “Dollarized”

• Dollars and cents are the universal measure used to compare products and services.

Dollarizing

• Dollarizing is the act of assessing the differences between your products and competitive products and calculating the financial impact those differences have on your customer.

• Persuade customers to focus on total costs rather than simply on acquisition price.

• You must have accurate understanding of what its customers value and what their current costs are.

Dollarizing

• Most often the seller is reduced to fighting a price battle because he does not know precisely what his benefit means to the customer or does not know how to translate benefits into dollars and cents.

• Claiming “lasts longer”, “best quality”, “faster” are over used and ineffective.

• A seller who can articulate the impact on the customer’s business financial performance will nearly always prevail.

W.W. Grainger Service Penetration

W.W. Grainger Dollarizing with Pharma Labs

• Early 1990’s Grainger Consulting Services was formed to help customers understand total cost of MRO supply management.

• In 1997 GCS initiated baseline assessment to document in-house MRO management and Pharma Labs agreed to pay GCS $45,000 for this service.

• GCS showed Pharma Labs how they could reduce following MRO costs:– $165,000 through supplier consolidation– $ 72,000 in inventory reduction– $ 90,000 in lab technician involvement

• Grainger increased sales to Pharma Labs 7 times.

Summary

StrategicEmphasis

and Idea Generation

Strategic Positioning

Customer Value Proposition

Validation ThermoplasticCompoundThermoplastic

Compound

Prego vs. Ragu

Voice of Customer:Premier Cigarettes

Sea-Doo

Dollarizing:W.W. Grainger

Innovation:Radial TiresMiller LiteSouthwest

Take-Aways

• Success of New Product/Service is critical to the growth and sustainability of your business.

• Don’t settle for incremental ideas but strive for innovations.

• Uncover and focus on customer “outcomes”• Constantly evaluate ideas in terms of: Is it Real, Is it

Worth It, and Can We Win before commercializing.• Position consistent with desired “outcomes” and voids in

competitive offerings.• Market “values” and dollarize when possible.• New Product/Service commercialization is a continuous

process.