NEW PRODUCTS MANAGEMENT Merle Crawford Anthony Di Benedetto 10 th Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

PART THREE CONCEPT/PROJECT EVALUATION 8-2

Concept/Project Evaluation 8-3

Chapter 08 The Concept Evaluation System 8-4

The Evaluation System 8-5

Cumulative Expenditures Curve % of expenditures TimeLaunch Many high-tech products Many consumer products 8-6

Risk/Payoff Matrix at Each Evaluation Cells AA and BB are “correct” decisions. Cells BA and AB are errors, but they have different cost and probability dimensions. Usually BA (the “go” error) is much more costly – but don’t forget opportunity costs! Consider how “new-to-the-world” the product is as that has an impact on the risk level. 8-7

Planning the Evaluation System: Four Concepts Rolling Evaluation (tentative nature of new products process) Potholes People Surrogates 8-8

Rolling Evaluation (or, "Everything is Tentative") Project is assessed continuously (rather than a single Go/No Go decision) Financial analysis also needs to be built up continuously Not enough data early on for complex financial analyses Run risk of killing off too many good ideas early Marketing begins early in the process Key: new product participants avoid "good/bad" mindsets, avoid premature closure 8-9

Potholes Know what the really damaging problems are for your firm and focus on them when evaluating concepts. Examples: –Campbell Soup focuses on manufacturing cost and taste. –Drug companies focus on FDA approval. –Software developers may focus on customer unwillingness to learn how to use complex software. 8-10

People Proposal may be hard to stop once there is buy-in on the concept. Need tough demanding hurdles, especially late in new products process. Personal risk associated with new product development. Need system that protects developers and offers reassurance (if warranted). 8-11

Surrogates Surrogate questions give clues to the real answer. Real Question Surrogate Question Will they prefer it? Did they keep the prototype product we gave them after the concept test? Will cost be competitive? Does it match our manufacturing skills? Will competition leap in? What did they do last time? Will it sell? Did it do well in field testing? 8-12

An A-T-A-R Model of Innovation Diffusion Profits = Units Sold x Profit Per Unit Units Sold = Number of buying units x % aware of product x % who would try product if they can get it x % to whom product is available x repeat measure (what is the average number of units bought per person per year, including repeats) x Number of units repeaters buy in a year Profit Per Unit = Revenue per unit - cost per unit 8-13

The A-T-A-R Model: Definitions Buying Unit: Purchase point (person or department/buying center). Aware: Has heard about the new product with some characteristic that differentiates it. Available: If the buyer wants to try the product, the effort to find it will be successful (expressed as a percentage). Trial: Usually means a purchase or consumption of the product. Repeat: The product is bought at least once more, or (for durables) recommended to others. 8-14

A-T-A-R Model Application 10 million Number of owners of video cellphones x 40% Percent awareness after one year x 20% Percent of aware owners who will try product x 70% Percent availability at electronics retailers x 1.20 Measure of repeat (20% of customers buy a second phone) x $50 Price per unit minus trade margins and discounts ($100) minus unit cost at the intended volume ($50) = $33,600,000 Profits 8-15

Points to Note About A-T-A-R Model 1. Each factor is subject to estimation. Estimates improve with each step in the development phase. 2. Inadequate profit forecast can be improved by changing factors and doing a “what-if” analysis. If profit forecast is inadequate, look at each factor and see which can be improved, and at what cost. In our example, could retail margins be increased to increase distribution? Could more advertising spending lead to more awareness? Consider qualitative issues as well (advertising theme or execution). 8-16

Key Definitions in A-T-A-R Model Buying unit: person, home, purchasing manager, family, etc. Awareness: is the buying unit sufficiently informed to stimulate trial (i.e., are they knowledgeable enough?) Trial: can be actual in-home trial, on-site trial, vicarious trial (triers share results with non-triers) – depending on the product type. –Usually requires some expense to get the trial supply, and enough time to decide whether the product was any good. 8-17

Key Definitions (continued) Availability: can the buyer easily get to the new product? –Can be percent of outlets carrying product, or ACV (all commodity volume) which is the percentage of the market that has access to the product in local distribution channels. Repeat: is actually a measure of how successful the trial was and how pleased the buying unit is. –Can be the actual repeat rate, or a proxy could be a statement of satisfaction level or how likely the buying unit would recommend it to others. 8-18