1. Copyright © 2006 BASES a VNU business 1 The "Secrets" of New Product Success FDIN Seminar 19 April 2006 Presented by Susan Malcolm BASES UK

2. Copyright © 2006 BASES a VNU business 2 FDIN Seminar April 2006 New Product Success is Difficult to Achieve New products are a key source of growth and profit for manufacturers. Unfortunately, a very high percentage of new products are de-listed within three years of their launch. “80% of new products fail within 3 years”

3. Copyright © 2006 BASES a VNU business 3 FDIN Seminar April 2006 And it’s getting harder … New Brand Trial Rates Trial rate 1985 1990 2000 2005

4. Copyright © 2006 BASES a VNU business 4 FDIN Seminar April 2006 Things Happen? One hypothesis commonly put forward to explain failure is that "things happen“ –stronger than expected competitive response, disruption of a raw material supply, commodity pricing fluctuation, etc. But… –These are not new problems. –These effects should be reflected at some average level in pre-market sales volume forecasting models (like BASES) used by most companies (assuming they are empirically derived and calibrated). –Unexpected occurrences might explain why some initiatives fall short, but more than half? That doesn’t seem possible. What else could it be?

5. Copyright © 2006 BASES a VNU business 5 FDIN Seminar April 2006 Expect the Unexpected…. Understanding three main areas can dramatically improve the odds of new product success. 1)The chain of events for new product volume 2)Sustainability - sales beyond Year 1 3)Incremental volume

6. Copyright © 2006 BASES a VNU business 6 What Drives Volume for New Products?

7. Copyright © 2006 BASES a VNU business 7 FDIN Seminar April 2006 Trial Volume Households Trial Rate Trial Units Trial Volume Triers Repeat Rate Repeat Units Repeats/ Repeater Repeat Volume Total Volume 25MM 20% 1.1 5.5MM 5MM 10% 1.2 3.0 1.8MM 7.3MM Brand X { { Repeat Volume + = Decomposing Volume

8. Copyright © 2006 BASES a VNU business 8 FDIN Seminar April 2006 Volume vs. Trial Rate

9. Copyright © 2006 BASES a VNU business 9 Getting Trial

10. Copyright © 2006 BASES a VNU business 10 FDIN Seminar April 2006 Getting Trial for New Product Advertising is a key driver of awareness But zero advertising does not result in zero awareness –Distribution also drives in store awareness as consumers browse the shelves –The degree of awareness is driven by interest in the category Distribution is a key driver of trial Said simply, if shoppers are aware of your new product and find it is store, they can buy it!

11. Copyright © 2006 BASES a VNU business 11 FDIN Seminar April 2006 …but set realistic goals Consumers don’t do what they say they are going to do, but they are not alone. In many cases launch plans can be overly optimistic, causing variance in planning accuracy –if forecast accuracy is X –planning accuracy is 2X

12. Copyright © 2006 BASES a VNU business 12 FDIN Seminar April 2006 Chain of Events for New Product Volume Sales drivers for new products are different from established products. Gaining trial is key for new products. Awareness plays a much more important role for new products than established products. Not surprisingly, gaining distribution is also key to trial generation.

13. Copyright © 2006 BASES a VNU business 13 Drivers of Long Term Volume for New Products

14. Copyright © 2006 BASES a VNU business 14 FDIN Seminar April 2006 Long Term Volume for New Products What happens to sales of new products in their second year after launch? What drives growth or decline? Tips for succeeding in Year 2

15. Copyright © 2006 BASES a VNU business 15 FDIN Seminar April 2006 New Product Volume Trends in Year 2 % of Cases All Categories Year 2 Volume vs. Year 1 Volume Number of Products50 560 40 Although patterns vary by market, most new products experience a decline in volume in their second year. Growing Stable Declining

16. Copyright © 2006 BASES a VNU business 16 FDIN Seminar April 2006 "Leaky Bucket" Effect The Franchise 2. Unfortunately, the bucket has a hole in the bottom. The size of the hole represents a retention factor. 2. Unfortunately, the bucket has a hole in the bottom. The size of the hole represents a retention factor. 1. The franchise is a bucket that holds buyers. 1. The franchise is a bucket that holds buyers. 3. New triers are needed to "top up" the franchise. 3. New triers are needed to "top up" the franchise. New Triers Repeaters Leaving (i.e. Attrition)

17. Copyright © 2006 BASES a VNU business 17 FDIN Seminar April 2006 Generating Incremental Trial Marketing efforts influence a brand's ability to grow in Year 2. For brands that decline, marketing support is generally cut significantly versus Year 1 support. Ideally, a new product should be thought of as “new” for two years rather than one. Year II to Year I Ad Spend Ratio

18. Copyright © 2006 BASES a VNU business 18 FDIN Seminar April 2006 Tips for Succeeding in Year 2 Strong consumer acceptance of the product is job #1..Keep those triers! –Launch only with strong product acceptance Support launches into Year 2 to continue trial growth –Consider a brand "new" for at least two years –Do not drop support for a launch after 3 to 6 months of introductory activity –This is especially true in long purchase cycle categories.

19. Copyright © 2006 BASES a VNU business 19 Incremental Volume

20. Copyright © 2006 BASES a VNU business 20 FDIN Seminar April 2006 Incremental Volume About 75% of new product launches are extensions to existing brands. On the surface, line extensions appear to offer advantages over new brands. –Greater interest from consumers and greater absolute sales Below the surface, however, lie hidden traps Incremental volume is a key input to the determination of financial attractiveness of the line extension. On average, brands expect about two-thirds of a line extension’s volume to be incremental. –In-market data show that the average is closer to half.

21. Copyright © 2006 BASES a VNU business 21 FDIN Seminar April 2006 Four Key Factors Driving Incremental Sales Four factors are the main drivers of incremental sales: 1.Cannibalisation effect 2.Marketing plan effect 3.Transaction size effect 4.Distribution effect Some incremental volume analyses consider only the first of these four factors (i.e., the "cannibalisation effect"), and this usually results in expectations for incremental volume being too high.

22. Copyright © 2006 BASES a VNU business 22 FDIN Seminar April 2006 Driving Incremental Sales The best decisions will consider incremental volume potential, not just absolute volume potential. –Consumer behaviour is only one piece of the puzzle. –To increase the likelihood of driving incremental volume, a brand needs to: Drive incremental distribution Limit the amount of spending that is borrowed from other portfolio brands Avoid “downsizing” parent brand buyers Focus efforts on unique, incremental initiatives

23. Copyright © 2006 BASES a VNU business 23 FDIN Seminar April 2006 Conclusions -- The "Secrets" Uncovered 1)The chain of events for new product volume – Building trial is key for new products – Advertising (quantity and quality) and distribution are important drivers of trial 2)Sales beyond Year 1 – Strong product satisfaction is vital for long term stability – Because of buyer attrition, it is necessary to gain incremental triers in Year 2 to grow the brand 3)Incremental volume – Cannibalisation effect, marketing plan effect, transaction size effect, and distribution quality effect all need to be considered to ensure a realistic estimate of incrementality

24. Copyright © 2006 BASES a VNU business 24 Focus

25. Copyright © 2006 BASES a VNU business 25 FDIN Seminar April 2006 Focus You don’t make money by betting on every horse in the race. Choose the horses with the best legs, and place larger bets on those.

26. Copyright © 2006 BASES a VNU business 26 FDIN Seminar April 2006 Tips for Success 1.Generate Trial 2.Aim for Durability 3.Think Incremental 4.Focus your efforts

27. Copyright © 2006 BASES a VNU business 27 Thank You Questions? Please contact: Susan Malcolm Vice President BASES UK susan.malcolm@bases.com Tel: +44 (0)1865 713 721 www.bases.com