Marketers view innovation as key to combating hard economic times, yet less than half have expressed satisfaction with innovation efforts. Creating a new product includes finding the perfect price: market research helps pin down this element and in turn helps produce a market winner.
Marketers know that they have to maintain a steady stream of new products and/or services to grow—or at least keep up with the competition. As circumstances, needs, wants, and trends change, marketers certainly don’t want to get left behind. The Marketing Executives Networking Group found that marketers view innovation as key to combating down economic and business cycles. Yet, marketers also know that the recession has only served to heighten senior management expectations for return on investment, especially from marketing and innovation.
It’s not a secret that many executives already felt disappointed by what they got for what they spent—the Boston Consulting Group reports that only one in two executives expressed satisfaction with the ROI of innovation efforts. According to the study, “over the last six years, the proportion of survey respondents who declared themselves satisfied has averaged less than 48%.” The soft state of the economy won’t make them any more forgiving of new products and services that don’t perform to expectations. Unfortunately for marketers, many, if not most, new products don’t.
Though estimates of new product and service failure rates vary widely by company, category, industry, and reporting agency, the best-case-scenario chances of introducing a successful new product or service don’t get much better than 50-50. Through our own work with companies across different industries, we found about 10%-20% of new products and services succeed, which by our definition means they remain in the market generating profits for the company three years after introduction.
No wonder retailers, manufacturers and a whole lot of everybody else treaded so carefully as far as innovation goes this year.
Of course marketers have taken steps to try to up the odds of introducing a market winner. For instance, most if not all understand the importance of nailing the configuration of a new product or service—including the price—to the prospects of success. Enthusiastic marketing managers will start brainstorming all the different variations of the elements that make-up an idea for a new product or service and often come up with thousands, millions, maybe even billions of possible combinations. Not that long ago, the mere suggestion of testing 100+ combinations to ferret out the ones most likely to inspire purchase could get a marketer fired, but today it’s becoming de rigueur.
“Technology is transforming innovation at its core, allowing companies to test new ideas at speeds and prices that were unimaginable even a decade ago,” wrote MIT Professor Erik Brynjolfsson in a recent Wall Street Journal article. “Companies are able to get a much better idea of how their customers behave and what they want. This gives new offerings and marketing efforts a better shot at success.”
As the ease of gauging consumer interest and response increase, however, marketers would do themselves a world of good by staying razor-focused on their ultimate end-goal: to introduce profitable new products and services. When reading something like the AdAge piece that focuses on the lack of exciting new products on store shelves to drive sales, it’s not hard to see how marketers might hone in on purchase interest as the key metric to consider. Just remember, though, that CEOs and CFOs are looking for the products and services that contribute to the bottom-line. No matter how sophisticated and fast web-based testing mechanisms, this basic marketing axiom holds true: the concept that generates the most interest is often the one most likely to lose the most money.
At the most simplistic level, the most appealing concept is a quarter-pound, free-range kobé beef burger on an organic multi-grain bun with fresh herbs imported from a country-side chateau in France all for $1. The product may have enormous appeal—what meat-eater wouldn’t jump at that deal!—but if you sell too many of them, your burger joint will go out of business. After 25 years’ work and more computer simulation runs than we’d like to count, we’ve learned that the most appealing concept is very often the least profitable.
For a good example of how a company integrated profitability considerations into their research, consider the case of Dunkin’ Donuts, the largest coffee shop chain in the world. With an eye towards national expansion, Dunkin’ wondered whether the current store concept in its New England home work would appeal to customers across the U.S. or should it rollout something completely new. Dunkin' took advantage of advancing technology in the form of computer-aided product design—to test hundreds, thousands, even millions of variations, used in conjunction with marketing mix models—to sort through more than two billion different configurations of product, service, and price and calculate the impact of each individual item on visits and spending.
The chain considered different options for every element—from store type to portion size to music to exterior experience and more. All the possible restaurant and menu combinations were reassembled to forecast visits, spending, and ultimately sales. Finally, the costs associated with different items were subtracted from estimated sales to provide a profitability assessment. In the end, Dunkin’ came away with clear direction on which new store concepts had the biggest profit potential. Currently, Dunkin' is building and test marketing these stores.
Interestingly, the chain also used computer-aided design to determine what they could also do in the short-term to introduce some innovation to existing stores to boost profits. There’s something to be said for incremental innovation—it could be the next big opportunity in terms of profits AND competitive advantage—and the availability of technology-enabled testing and experimentation would seem to support finding profitable additive options. Indeed, Dunkin’s recharged configuration of its current stores has opened up more resources to expand nationally and take on the 800-pound gorillas in coffee, Starbucks and McDonald's.
While there’s no research technique that takes all the risk out of the innovation process, at the same time, by seeking the most profitable opportunities, rather than the most appealing, marketers could at least breathe a little easier that they were heading in the right direction.