During the experimental phase of developing a new technology, people become very passionate about the technical possibilities. They often become seduced by the “technological wonder” and do not put the same effort and passion into the marketing part of new product development as they do the technology part.
The failure rate of industrial products and technologies is lower than the failure rates of consumer products, but it is still too high. Depending on the type of product and industry, a good rule of thumb is that of all new industrial products that reach the prototype stage, about 1 out of 3 achieve the sales forecast in the time estimated and are successful.
There have been many studies on why new products fail, but the best studies I have found on industrial products and technologies were by Robert Cooper. In his book Winning at New Products, he cites a study of new product failures in 114 industrial-product firms. His investigation found that the major reasons for failure were chiefly related to marketing:
- Underestimating competitive and/or competitive position in the market (36.4 percent of cases).
- Overestimating the number of potential users of the product (20.5 percent).
- Setting the product’s price too high (18.2 percent).
- Technical difficulties or deficiencies in the product (20.5 percent).
Other reasons that were also identified included selling and distribution weaknesses, bad timing and actions of competitors.
When Cooper dug deeper into the study, he found that, “In three quarters of the failures, market research was either poorly done or omitted altogether.” He also found that in half of the cases the test market or “trial sell” was done poorly.
Cooper’s work correlates well with my own experience in new product failures, where most of the reasons for failure are market related. In general, industrial manufacturers do very well in coming up with unique ideas, design and prototype development. This is the fun part of engineering, and the part that uses most of their strengths, but the fact is that most industrial manufacturers in America simply do not do the basic research necessary to increase their chances for a successful product. So, what method do they use?
The most popular method is to come up with an idea, build a prototype and introduce it to the marketplace where it either succeeds or fails.
One reason that industrial manufacturers don’t use research is that most have technical educations and have not been trained in research methods. Industrial marketing is seldom the strength of small and mid-size manufacturers. Most that I have interviewed in my career view research as an academic exercise that has little to do with getting new sales.
They will need more evidence of research successes to be convinced that it is worth the time. In addition, manufacturers may not have anybody in the company with these kinds of skills. However, the failure of the new product is a very serious problem for (SMMs) because financial losses can put the company in financial jeopardy.
Perhaps one way to make the point that SMMs need to use different methodologies is the invested cost of new product development. We know that simply introducing a new product to the market without investigation or research has a success rate of approximately 33.
In 2008, the private industry share of the R&D forecast was $233 billion. Small and midsize businesses (below 499 employees) spent approximately $50 billion. So that means that approximately $33 billion was wasted on new products. This is a lot of money, and we must find ways to improve success rates.
Innovation is American Manufacturing’s biggest weapon against foreign competitors, and manufacturers (large and small) are going to invest more in new product development in the future.
If you have the money to build a new product and put it into the market without any market research, then go for it. But if you have used up your retained earnings getting through the recession or will have to borrow money to develop the new product idea, then you need to do everything to improve your chances of success.
Here are some suggestions for methods that will help lower the risk and improve the chances of success in new product development:
1. Hire an Intern – Since you know that you and your staff will probably not have the time to spend hours on the Internet and phone, why not hire a college intern? Creating a part time or one project job for somebody who is a student in an MBA program would not only get the information you need but provide very practical “real-life” experience for the student.
2. Competitive Matrix – The single biggest reason that new industrial products fail (36 percent according to Cooper) is that manufacturers do not do a good job of investigating the competition. People find out after the market introduction that there is already a product in the market that is equal or better than their idea. So why not use your intern to do a thorough search to find all of the direct and indirect products that are similar to your idea.
Once you find competitive, design a simple matrix. On one side of a page list all of the direct competitors. On the top of the page list some key factors like company size, models, selling price, discounts, type of distribution, delivery time and other factors you need to know to be competitive. Now fill in the matrix and see where you are missing information. This exercise is a quick way to find the information “gaps” that need to be filled in before you spend a lot of money designing your new product.
3. Pricing – If you have done a good job with the matrix, you will have a good idea of the market prices. From this information, set a market entry sell price and work backwards into the gross margin needed and the resultant cost of goods. At this stage if you don’t think you can build the product for the estimated cost of goods, drop the idea.
4. Customers – If you do think you can find a way to build the product within the cost of goods/gross margin estimates, then the next question is who will buy it? If you can sell it to your existing customers, you only need to develop a list of accounts for the sales department. On the other hand, if you don’t know which customers will buy or if it is a new market then you need to do some work.
5. Market Testing – Pick out 3 or 4 prospects or customers that you think might be interested in the new product. Then take the product, a drawing, or a model to them and have them review the pros and cons. If the new product is small you can build a prototype to take out to the lead users in your market for a trial sell.
If the new product is large like a machine you can take models or 3D CAD drawings to the lead users. Or, you can build a prototype and invite lead users to the factory for a trial sell. If your tests do not indicate strong buyer preference, you can either lower your sales forecast or scrap the project.
Giving lead users a prototype they can use and test is a very inexpensive way to get good market data and perhaps better than all the market research you could do. If the prototype is large, you may be forced to place it with a customer and in their production to test it for a period of time.
This requires a generous contract where you give the customer a choice to buy the machine or take it out at the end of the trial. If they like it and may be prospects as future customers, the next step is to examine their products and look up their NAISC CODE.
6. Market Niche – The government has devised a method of classifying all products with a code. It is called the North American Industrial Classification System (NAICS). You can find it on the Internet by going to www.naics.com. The NAICS system replaced the old SIC system and uses a six-digit code to designate specific sub-industry markets. The website has conversion tables that allow you to find the new NAICS codes that replaced the old codes. You can also look up codes by product.
For instance, if you want to find the product code for a ship mounted marine crane, you would do the following:
- Go to the website for North American Industry Classification System at www.naics.com.
- On the left side of the page, click on Product Classification/Manufacturing.
- Then choose Manufacturing Machinery -333.
- Then choose Construction Machinery – 333120.
Under this classification you will find “pedestal or shipboard mounted marine cranes or NAICS # 3331201188 (The larger the number the more detailed the description).
The next step is to find out how many prospects there are in this market niche. This will give you a preliminary indication of market size and the geographic location of prospects.
7. Sales Forecast – Once you have market tested the product and have some idea of what customers think, the owners or investors will want a sales forecast in terms of units per year. They can use this to multiply the sell prices you have set to estimate total sales per year.
But more importantly, they can multiply the gross margins per year and figure out how many years it will take to pay off their investment. This is the point where you put your head in the noose, so it is important to make a very honest forecast.
These are really fairly simple steps and most can be done by a bright, brave, and honest college intern with good phone skills. Compared to the cost of building a prototype and market introduction, the cost of these seven steps are miniscule. Remember you are trying to increase the chance that your new product idea will do better than the 1 out of 3 prototypes. Why not give it a try?
Mike Collins is the author of Saving American Manufacturing. His website is www.mpcmgt.com
