Benefits of Introducing New Products
October 1, 2006
Enlarge Your Customer Base
The first reason you need to introduce new products successfully is to increase your customer base. This has two parts: Attracting new customers and replacing the ones you are inevitably going to lose. Why don't we begin with the depressing part.
Everybody's customer base is in a steady state of decline. It's like brain cells. Left to its own devices, your brain would slowly-but relentlessly-whither away and die, because you lose brain cells every day. If constantly regenerating brains cells weren't programmed into our DNA, the species would die off.
It is the same with marketing. Left to its own devices, all brands would eventually die off, because all of us are steadily losing our customers every day. The reasons:
- The customers literally die;
- A certain percentage of them are going to grow dissatisfied with what you are offering them- either because your quality goes down; their needs change; they become bored (more on that in a minute); or some combination of all three-or
- They are attracted to another brand which promises to meet their needs better.
So, at the very least, you need to introduce new products successfully in order to replace the customers you are going to lose as a matter of course due to death, disinterest, or because they have been lured away by a competitor.
Reason number two, done well, new product introductions are a far superior alternative to making acquisitions, when it comes to ways of trying to increase sales and earnings.
One of the things you will constantly hear senior management talk about today is the importance of "organic growth," that is the profitable increase in revenues (and earnings) that comes from the introduction of new products and services developed internally.
At the "C" level of the organization-Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Information/Technology Officer and Chief Marketing Officer-organic growth is seen as being far superior to growing through acquisitions. The reason for that is several-fold.
First, most acquisitions do not work. It depends on which literature you read, but the most sympathetic research shows that only one in three acquisitions work end up having a beneficial effect on the acquiring firm. That means even when you put the data in the most positive light, two out of three fail. And you can find other research that says four out of five acquisitions end unsuccessfully, which means your odds of obtaining profitable growth by buying another firm may be just one in five.
Ah, you say. But 90% of new product introductions fail, so even taking the worst case scenario with mergers and acquisitions, and assuming that only 20% of them are going to work out, we still would be better off going that route, right?
Wrong. (Although on the surface it seems to be an appealing argument.)
The reason is twofold.
First, of course, we are suggesting that you should improve your new product process so that your success rate is far better than 10%. (The failure rate will remain at 90% only if nothing changes.)
The second factor involves the dollars involved. The cost of the typical merger is far, far larger than the cost of a new product introduction. And if the failure rate is basically the same for both, you stand to lose far more money should the acquisition go badly.
Unless you are a company like Cisco, GE or Microsoft, most companies are not particular good at making and integrating acquisitions. So, clearly, you would be better off if you can develop a product on your own that builds off something that your company already does well.
Meet Your Customers' Changing Needs
In Fawlty Towers, the 1970s British situation comedy which pops up periodically in the U.S. on cable or PBS stations, John Cleese plays Basil Fawlty, a harried hotel owner. During one show, Basil was asked if he liked the hotel business.
His answer: "It would be a wonderful place to work, if it weren't for the guests."
Marketers can relate. No matter what you do, over time a certain percentage of your customers will get bored with your value proposition no matter how good it is. (This ties in to the fact that people like new things. More on that in a moment.) They'll drift away, unless you keep them interested.
Or their needs change. They starting using your product in their 20s, before they were married, had kids and were worried about their weight. Now they are in their mid-30s and your product no longer seems so relevant and so they go searching somewhere else that will meet their needs.
One way to keep them interested is through repositioning your existing brand and promising it's new and improved. Another is through what we have been talking about, and that is by introducing new products.
If you can innovate-be it by improving my existing product, or by coming up with a new one-you can slow, if not eliminate altogether, the natural attrition that is going to occur as your customers' needs change over time. You can keep them from going someplace els
The Ultimate Form of Customer Service
Satisfying your customers' needs-and doing that in some cases before they actually know they have a need-may be the ultimate form of customer service. And this is exactly what new products do. Bringing new products and innovation to your customers is a very critical element of "serving" them.
Typically, customer service has focused on handling problems. And it is true you have to do that. But how much better is it when not only are there no problems, but you are actually giving customers something that they want (sometimes before they even knew they wanted it)? That may be the ultimate form of service.
That is a key point. Successful new products are a critical component of customer service. By introducing them, not only are you satisfying the inherent desire for newness, but you're also addressing some unmet need, if you've done the new product right.
This is a powerful idea.
A Greater Share of Each Customer's Business
Another nice thing about introducing new products is that they give you the opportunity to grab a greater share of your customers' wallet.
Just about every customer is cheating on you. They are not giving you all the money they have. They are spending at least part of their budget on someone else, purchasing a certain percentage of their needs from your competition.
New products allow you to get a greater share of your customers' business and that is a very good thing for two reasons.
First, your revenues increase. Customers are buying more from you.
Second, if they are buying more from you, they are buying less from your competition. The result: You're helped and they're hurt, since at least a portion of your increased sales are coming out of their hide. That means, of course, your market share is increasing.
By offering new products, you give your customers less of a reason to "cheat," because you give them the opportunity to buy what they are looking for from you. You give it to them under your umbrella.
You get more loyalty this way. You get more frequency of purchase, and it all adds up to market share.
Expand the Pond
Introducing new products also gives you an opportunity to satisfy other needs your customers may have. Typically, this concept is referred to as "expanding the pond."
The underlying idea is simple: You try to sell more to the customers you already have by moving into related market segments, offering products and/or services that complement your current line. You literally expand the pond in which you fish for business by redefining what you do for a living to be more inclusive, while still remaining true to your core.
Some examples will show you how this works. Dell, long dominant in personal computers, has expanded its pond by moving into an adjacent market: It now sells printers-and the high-margin accessories, such as ink, that goes with them.
Wal-Mart, the world's largest retailer, decided to add groceries to its offerings, in an attempt to get a greater share of its customers' wallets. That is what it's super centers are all about.
Soft drinks may be the classic example.
It used to be the soft drink companies defined their market as those folks who drank colas, ginger ales, root beer and the like. The problem with that is there are only so many soft drinks a person can consume in a given day.
So what has happened over time is that soft drink companies, such as the Coca-Cola Co. and PepsiCo, have become beverage companies and they now sell every kind of non-alcoholic liquid we consume, from water to energy drinks. They have expanded their pond.
This approach expands your potential market tremendously.
Insulate Your Company from the Competition
Like you, your competition is constantly looking for gaps in the marketplace, for unmet needs that no one is addressing. If they address them first, they could steal away some of your customers as well as bring new customers into the category. It's far better for you to fill the void first, and introduce a new product, even if it cannibalizes some of your existing sales.
Gillette is probably the master at this. Every time they bring out a new razor-whether it's Aftra, Mach 3, Fusion or whatever-they certainly attract new customers, but they also steal some of their own customers away from the Gillette brand they were using. For example, when it introduced the Fusion, its razor with five blades, I am sure a significant part of its sales came from men who were still using Gillette's Sensor or Trac II.
But the company believed-and I do too-that was okay. Yes, the customers were abandoning Sensor, for example, but they were still staying with a Gillette product and not buying from Shick or Wilkinson or some other competitor.
Taking this argument a step further also makes sense. It is better to get business from your existing customers at a lower margin than lose the margin all together by having them go to a competitor.
That is what might have happened with the Apple Nano, a less expensive version of the iPod. It's more than likely that the Nano isn't as profitable for Apple as the iPod is. However, some MP3 players were targeting the $150 price point. (The iPod sells for $300 or more.) So, Apple decided that if it didn't get a share of that $150 MP3 player market someone else would. So, it came out with the lower priced Nano.
Competitors are constantly trying to steal your y customers. Introducing new products is one way I can protect myself. It helps insulate you from competition and that means you have a competitive edge.
There is a cartoon, that brings this point home. It shows a Barbarian salesman holding a Gatlin gun knocking on the tent of a fellow Barbarian. This is at a time when the Barbarians were fighting with cross-bows.
And the guy in the tent says, "I have no time to meet with salespeople."
If he had the Gatlin gun he would have won the war. If you introduce a new product, you may just crush your competition.
An Economic Driver
New products account for a certain amount of job creation. They have to. You are creating something that has not existed before and that will require hiring people to make it happen; lining up suppliers to supply the materials you need; contracting to handle the logistics, and so on.
It takes a lot of people to get a finished product into the customer's hands. So those products fuel the economy. Innovation is a core economic activity that creates job, causes growth and builds wealth.
New products also spark innovation. In other words, new products beget other new products. If Apple launches the iPod successfully, other companies are going to create MP3 players to get a piece of the market. That competition both lowers prices and spurs other to create even better products. All this economic activity is one of the hallmarks of a capitalist society.
Motivate Your Employees
This is anecdotal, but it is undoubtedly true. People like working for companies that are constantly introducing new things. Not only is more fun working for an organization that is making its customers happy-and that is what new products do-it is also more exciting to be working on something new. Who wants to do the same thing at work day after day for 30 years? Working on a new product introduction every once in a while is fun.
So new products have an impact on the corporate culture. They reenergize the corporation. It shows employees that their company is on top of the market and it gives them both new experiences and new things to do both of which people want, even in their work life.
Done right, new products should be the areas of your company where people should want to work. It's where all the growth comes from. It should be a sexy, exciting place.
A Better Return on Investment
If you introduce new products efficiently and effectively, you are going to reduce the costs associated with them.
For one thing, you will cut, somewhat, the failure rate. You won't need to try to so many things to get a hit. Just raising the success rate a few percentage points will save a lot of money (and, of course, we think you can do far better than that.)
And for another, if you introduce new products successfully you will generate both sales and earnings.
Both those things will increase your return on investment.
Plus, if you are successful, the new product you introduce will grow over time and as your volume increases, your costs will decline. That, too, increases the amount of money you can make.
Finally, remember what we said at the very beginning of this book: Some 54 per cent of a company's share price is based on how well the market expects them to introduce new products. If you are good at it, you are rewarded with a higher stock price.
All in all, you get a substantial return on your investment.
Then there is the intangible buzz factor. Every company cares about its brand and corporate image. If you do new products well-like companies such as Apple, Clorox and P&G do-you get a lot of attention for both your company and your brands. It creates a positive corporate image. It would be hard to think of a company associated with success in new product activity that somehow suffers at the hands of public/investor or analyst opinion for having been successful in new products. It's not likely.
As a corollary to this, companies that are successful at introducing new products attract better people to their organizations. Think about how many people wanted to work for Microsoft when it was hot, or who are lining up to try to land a position at Google today. If you want to start a software firm, having worked at Microsoft or Google will impress potential investors. And the rule has always been if you want to work in consumer goods, especially if you are thinking about starting your own company, you want to begin your career at P&G or Colgate.
So your new product prowess attracts the best employees. Plus, as we have seen, there are really two types of growth. You can go out and buy growth. That is you can purchase another company. Or you can organically produce it by introducing new products.
If you go down the new product path, potential employees see that you are truly interested in organic growth, and so they feel more secure in joining your organization. They want to join it, it part because you are doing new things, and in part because they know they won't be subjected to a merger where their job can be eliminated right out from under them, as the "integration" teams goes to work.
Make Running a Business Easier
If you do something very well, it's one less thing you have to worry about fixing. And solving the new product paradox (people want new products, but companies are particularly bad at providing them) eliminates a worry.
A major corporate worry.
Right now most companies are struggling to find organic (i.e. internally-generated) revenue growth. Introducing new products well is the vehicle to solve that worry and thereby makes running the business easier.
It has an additional benefit, one which is so obvious that it is invariably overlooked.
If you are introducing new products successfully, you are not failing. That means you don't have to rationalize (read "write off") the investment that didn't work. There are no post-mortems on why you wasted all that money trying to come up with something new. It also means you don't have to dismantle a plant. You don't to let employees go because there isn't enough for them to do. You don't have to disappoint suppliers who are providing you with raw materials. You don't have to disappoint distributors, your ad agency....
There is just a tremendous ripple effect of success.
People Want New Things
Finally, at its most basic level, creating new products taps into the human condition. It's simply part of who we are. We are always searching for the new. If your company is not taking advantage of that fact by consistently offering new products, if you don't try to quench the need the market has, then you are destined to fall behind the companies that will.
The underlying premise of this book is simply this: People like new things. You don't want to wear the same clothes for the rest of your life, do you? You don't want to drive the same car for the rest of your life. You don't want to use the same television for the rest of your life. There's something about acquiring new products that tap into the very heart of who we are. Despite how jaded or sophisticated we think we have become, new products are still an incredibly fascinating, motivating, captivating part of people's lives.
There is a lot of research on this, and it all shows the same thing: People want variety in their lives. You know that old saying, variety is the spice of life? The research shows it is true.
People really want more flavors, more forms, more options even when it comes to something as basic as cheese. That's why you seen that it has been infused with basil and tomato or it's now in a hunk versus a chunk versus string versus sliced for you. Newness just makes people happy; it satisfies the desire for variety.
There is a second driver which I think is even more basic. New things make people happy. If there were nothing new in people's lives, they wouldn't be as happy as if there were new things. If every weekend you were not allowed to go out and buy anything new, whether it's new to you or a new product in an established category, you just wouldn't enjoy your life as much.
What All This Means
- If you have your own business, you need to figure out how to be better at launching new products, if you hope to keep your business going.
- If you have a new products role within a company, you obviously need to improve your batting average.
- The same holds true for someone in brand management, since the vast majority of new product activity is occurring within the brand management function.
- And if you're a senior executive, you need to understand how you want to change the way your organization goes about developing new products.
As you have just seen you have a major incentive for doing so.
"New Products: The Next Big Marketing Revolution." Robert S. Shulman. New York: ANA, 2006.