When we look back, the last 10 years of new product launches provide a sobering view. The landscape is littered with innovative new products that ultimately failed in the marketplace.
Anyone remember the Iridium satellite phone? Using a network of satellites in geosynchronous orbit around the earth, Iridium provided the user with instant phone access at virtually any point on earth—even in areas with no conventional cell phone coverage.
Despite having truly unique differentiation, the Iridium was a failure. After years of struggle, it was pulled from the market and the assets were sold at a tiny fraction of the original value.
So what happened? How could a phone with that kind of capability fail in the marketplace?
Although the phone had significant positive differentiation in the form of unlimited coverage, it was negatively differentiated in one crucial aspect: the phone weighed several pounds and was the size of a large brick. It needed a heavy-duty battery to boost a carrier signal into space.
This critical feature made the Iridium an unattractive alternative for the mass cell phone market. It limited its usefulness to remote industrial applications—such as oil platforms—where mobility was not a key need.
The market was further restricted by the price tag of over $3,000, which was needed to cover the $5 billion investment in satellites.
The bottom line is this: the Iridium is a classic example of a new product that failed because its value proposition was poorly aligned with the needs of the marketplace.
Although few new product failures are as spectacular as the Iridium, it is surprising how many new products fail because they don't create sufficient value for customers, or because their pricing strategy is not consistent with the value the product delivers.
Our experience with new product launches suggests that in many firms there is a disconnect between the new product development process and the realities of the marketplace.
Ultimately, the thing that customers care about is how a new product will impact their bottom line (in other words, its economic value). Yet, surprisingly few firms incorporate a quantified assessment of economic value into the new product development process.
Understanding Economic Value
Value is perhaps the most over-used term in business today. To prevent any confusion about what we mean by the term, we define value as the economic impact (in monetary terms) that a product or service has on a customer's business relative to the price of the next best competitive offering.
There are several points in this definition that are worth expanding. First, economic value is a quantified estimate of the product's impact on your customer's revenue and costs. Most products have many appealing features, but customers can be persuaded to pay only for those features that make a difference in their business results.
Second, value can only by understood in relation to some other product. During the purchase process, customers make tradeoffs between the value that each product creates and the price that they are being asked to pay. By quantifying the differential value between products, firms can facilitate the customer's purchase decision and justify the price they are charging.
Finally, economic value incorporates both positive and negative differential value. For the value assessment to be realistic, it must acknowledge any competitive features that create a greater economic impact than your own product. Anything less than complete honesty will result in customers' writing off the value assessment as marketing hype.
The importance of conducting a value assessment can be illustrated with another example, taken from the telecommunications industry.
During the early years of the Internet boom, the demand for high-speed communications lines exploded as Internet service providers (ISPs) penetrated the home market. This was a very profitable business for the major telcos, until they were hit with deregulation requirements that forced them to lease their high-speed lines to smaller competitors at attractive rates.
These small competitors were able to penetrate the market quickly with lower prices because of their lower overhead costs. Not surprisingly, the major telcos quickly felt the pinch.
Rather than concede the market, however, one of the telcos decided to understand exactly what its offering was worth to customers. It wanted to see where it might have an opportunity to improve the profit picture.
Through a series of in-depth interviews with customers, the telco determined that there were two key "value drivers" for high speed lines.
The first value driver was reliability. Each hour of downtime for an ISP resulted in hundreds and sometimes thousands of customers deciding to drop their service and switch to an alternative provider. This value driver was important because the telco was forced to lease standard lines with approximately 98% reliability to its competitors. But it had the capability to add redundancies to the standard line that would make reliability approach 100%.
This seemingly small difference in reliability translated into a difference of several hours of downtime per year and had an economic impact of several hundred dollars per line for their commercial customers.
The second value driver was speed of installation. With the rapid influx of new Internet users during the mid-1990s, it was essential that ISPs have the capability to scale up their operations rapidly to meet demand.
For example, when an ISP went out of business (an event that occurred frequently), all of its customers would hit the market looking for new providers. The faster the ISP could install new trunk lines to handle the influx, the greater percentage of customers it could win. A delay of even a few days would result in significant amounts of lost revenue. Suddenly, the large telco's high fixed costs, associated with its large number of trucks and installation crews, were seen as a source of competitive advantage that created significant differential value because the small competitors, with fewer crews, took as much as 10 days longer to install a new line.
Upon completing its value assessment, the large telco had a very different view of the market opportunity. Instead of being saddled with a true commodity product and an unattractive cost structure, it offered lines that provided commercial customers in the ISP segment over $600 in differential value relative to the "same line" being leased by the small competitors. This value story enabled the telco to command a significant price premium and maintain its market position.
As this example illustrates, having a deep understanding of the total economic value of your product gives you an opportunity to engage with your customers in a more effective and profitable way. This opportunity is especially true for new products.
How Does Value Estimation Improve My New Product Performance?
We recently conducted a study of new product development processes across industries and found that nearly 60% of firms use a stage-gate process to guide their development activities. In addition, most firms have invested heavily in improving their development process through the use of cross-functional teams and market research to make sure that the voice of the customer is heard.
Given all this attention, it's surprising that new product success rates have had little improvement over the last decade. Our experience suggests that the poor results stem from the fact that few firms use economic value analysis to guide their development process.
Applying value to the new product development process can significantly improve profitability of new products (as Figure 1 illustrates). For example, performing an Economic Value Estimation (EVE) will help ensure that you don't leave money on the table by under-pricing high-value segments.
In addition, value estimation can reduce your costs by helping eliminate costly features that don't create significant value for customers and won't command a price premium.
Part of understanding the value proposition of your new product is gaining insight into how value differs across market segments. One of the most common errors we see is the launch of a one-size-fits-all product into a market with different value segments.
Typically, the firm designs features aimed at the "mass middle" of the market to generate sufficient share. A closer look at this approach uncovers the problem it creates.
By building the launch strategy around a single offering, the firm ensures that it under-prices those segments that get more value from the product, and over-prices those segments that get less value. By understanding how value differs across segments early in the development process, firms can design product variations that enable them to capture increased margins in high-value segments and drive volume in low-value segments.
Finally, having a deep understanding of the value your product brings prior to launch gives you the necessary lead time to design value-based market communications and selling tools to facilitate the launch. Communicating value is especially important for new products, for which customers may not understand how the new features translate into benefits, and the benefits into economic value.
Training the sales force on how to sell the value of a new product will increase the rate of market penetration and support a premium pricing strategy. In some cases, we have found that more effective value communications can increase value capture by 50% or more.
Enhancing the Development Process with "value Gates"
Incorporating economic value into the development process can help drive higher volumes and greater profitability for new products. But how difficult is it to add this capability to your current process? Do the benefits justify the costs?
In most cases, the answer to the latter question is a resounding yes. Incorporating economic value estimation into development does not require a major process redesign. All that is needed is to enhance the current stage-gate process with additional value gates to see significant performance improvements.
Although each firm's development process is unique, most involve a series of tests that products must pass through to move on to the next phase of development. The point is to reject bad ideas early in the process while accelerating the rate at which new ideas are advanced.
Stage Gate Process
Figure 2
In a traditional development process, the objective of the discovery phase is to create a large pool of potential products that might be well received in the market. While there are numerous approaches to generating these ideas, discipline must be injected into the process by incorporating a value screen that must identify at least one economic value driver that is produced by the product.
If it's not possible to identify at least one way that a product idea could reduce your customers' costs or increase their revenue, then it's not likely the product will be successful at launch, and it should be killed or revised. Concepts that pass the initial idea screen should then be put through a concept screen in which an order-of-magnitude cost and value estimation is performed and used to calculate a value/cost ratio.
This ratio is then used to prioritize the products creating the highest value for the least cost, and determines which products are pushed to the next phase of development.
It is important to note that up to this point, the development team has not performed in-depth marketing research to assess value. This changes as product ideas move on to the next phase, in which the business case is developed.
At this point, the development team conducts a series of depth interviews with customers to build an accurate value estimation. This can't be done with surveys and other quantitative research methods because those methods presume that customers already understand the value of the product. This is seldom the case with new products containing new features and promising to satisfy new needs.
In contrast, depth interviews enable the team to explore how the new product impacts the customer's business model and gain a rich understanding of the value it creates. Ideally, these interviews are conducted across key segments to understand differences in the way that value accrues.
Performing a full value assessment at this stage helps drive the business case in two ways.
First, it provides a solid basis for estimating the price that a product can capture in the marketplace. Second, it helps identify product variations that map onto specific customer segments, enabling the firm to move away from a one-size-fits-all approach.
The objective of the testing screen is to validate which product variations actually deliver the value that was estimated. Firms typically miss important opportunities to improve market performance in the testing phase because they focus on solving technical problems and don't use testing as an opportunity to refine the value estimation and develop appropriate value communication strategies.
Coming out of the testing phase, the new product team has developed a solid value estimation, has a more credible business case, and is prepared to launch product variations aimed at multiple value segments. All that remains is to test the pricing structure and then launch the product.
Conclusion
Incorporating value estimation throughout the development process can significantly improve new product success rates. But the truth is that many companies fail to systematically incorporate value-based analysis into their development efforts.
What's important to realize, however, is that driving value upstream into the development process need not be costly or overly complicated. Yes, skills need to be developed to accurately and honestly calculate the economic value of your product, and attention must be paid to implementing value gates to weed out product ideas that will not have a meaningful impact on customers' bottom lines.
However, the simplicity of the approach begs the question: why aren't more firms doing this? The real question is, why aren't you?
