Marketing Research for Product Proposal Viability

University of the West IndiesEntrepreneurship Workshop 2

Thomas W. Lynch 2011 10 21

The New Product Concept - The Validation Problem

This presentation is pedagogical. It is not meant to replace the input from a profession market researcher. Also mileage may vary, as market research is an inexact science.

Part I, Orientation

The New Product Concept - The Validation Problem

● The Product Does not Exist Yet● The Product Concept is Probably a Secret

Yet, we ask, can this product concept make money?

The Net Income Equation

Net Income = (Price – UnitCost) * Volume

Revenue = Price * Volume

Cost = UnitCost * Volume

Net Income = Revenue - Cost

➲ Estimating Revenue is a Marketing Research Problem

➲ Estimating Cost is an Engineering and Operations Problem

➲Today We are going to talk about:

The Marketing Research component of product concept validation

Many Disciplines Within Marketing

➲ Marketing Research estimating future NetIncome(price)

➲ Marketing Strategy setting the company strategy for getting revenue at max price

➲ Marketing Communications getting the message of the value of the product to potential customers

➲ Sales getting the customer to actually pay for the product

The Goal Of Market Research

Predict the Revenue(price) curve

➲ Feedback Loops With:● Product Features – engineering, others● Cost – from engineering, ops and others● Manufacturing Issues – ops● Distribution Issues – ms and ops● Finding Buyers – ms plan, advertising and sales● funding to make it happen – admin, finance● finding people to make it happen – HR

(op = operations, ms = marketing strategy)

Economy, Market, Market Share

➲ Economy● The total amount of money exchanged● In booms, hard to go wrong● In busts, no-one does well

➲ Market● The total revenues for a given product● Can also expand or contract

➲ Market Share (micro view)● Fraction of revenues given company product is making

Economy, Market, Market Share

Economy · 10-6

Pay Phone Market

Company XYZ Market Share

Dollars

Time* hypothetical data

Payphone Revenue at Market Price

Economy, Market, Market Share

Economy · 10-6

Cell Phone Market

Motorola Others

* hypothetical data

Time

Dollars

Cellphone Revenue at Market Price

Economy, Market, Market ShareExamining % ownership of the total “market revenue”

Part II, General Steps

The Revenue Equation

Revenue = Volume * Price

So, In Marketing Speak:So, In Marketing Speak:

1. What Industry/Market Does The Proposal Play In?

➲ Industry is a set of companies, market is a set of people. The cell phone industry is the set of companies that sell to people who are in the cell phone market.

● Different ends of the same stick.

➲ SIC codes, in US standard categories for industries.

➲ I.e. What market is this product/service sold into:telecommunications, automotive parts, office supplies, ...

➲ General and specific communications – telecommunications – digital comm – routers freight – shipping – standard containers – delivering equipment

➲ Total Revenue and Future Outlook for this Market, typically gotten from a professional marketing firm report

The People who Pay for the Product

➲ Example, a Sign to Show Events Happening At UWI

Market --> people who pay for advertisement

(not people who read the sign)

➲ A New VHF radio

● Market -> VHF radio buyers, various companies, government entities, and individuals

(often not the people who talk on the radio)

2. Who are the Customers?

What is the arrangement for getting money from customers?

➲ Fashion – customers want to be seen with our product● Main task: tell customers you are there (marketing

communications)● The marketing research problem: determine how many

customers we can communicate to

➲ Fantastic Tech Model – our product does something incredible the light bulb, first commercial jet engine, etc.

● same as selling fashion

➲ Shelf Space Model – when you have choices among readily available units, ours will be one of them● Main task: find a retail distributor (marketing strategy)● The marketing research problem: determine which

distributors/retailers will pick up your product

3. Set The Business Model

➲ Price and Margins – our product is cheaper because: one penny per unit is enough because we make so many, our production costs or lower, we have a more efficient process.

● Typical problem is to gain access to corporate buyers and open markets for goods.

➲ Pay for Service – the product was cheap .. but you are going to need us later for that toner refill etc.

● Service is a sort of product, see product categories.

➲ Subscription Model – e.g. Software As A Service, ISP ..● A subscription is a product.

There are other models.We concentrate on the superior tech model here.Some people who thought they were getting into the superior tech model ended up

in another model, such as price and margins.

3. Set The Business Model, Cont.

4. Reduce Product Proposal To Customer Features

➲ Remember in our case the product does not exist yet

➲ For this task we don't really care what is going to be inside the box, the details of the magic that makes it work, or how it is made.

➲ Rather we want to know what it does, what features it has, and what are the variations.

➲ We May have multiple product proposal variations to research

➲ At this step we do not make a judgment about if a customer will care about these features, we just want to list the features

Example Product ProposalCustomer Feature Reduction

Yes, Customer FeatureYes, Customer Feature No, Not a FeatureNo, Not a Feature

24 hours, 7 days/wk LED lighting

Advertising on side 10 feet high

Visible to 100 people a day Carbon composite

Attractive Computer controlled

10 events listed

Events sign for UWIEvents sign for UWI

Example Product Proposal Customer Feature Reduction

Yes, Customer FeatureYes, Customer Feature Not a Customer FeatureNot a Customer Feature

volume Quadrature modulator

squelch Fractal antenna

Multiple channel monitoring Low manufact. costs

High/low range setting Computer controlled

Clear Sound

Standard Package

VHF RadioVHF Radio

5. **The Value Proposition**

➲ Why will potential customers like your product features? eg.s

- causes customer to make X more dollars per year- allows him/her to be more popular- cures his/her headache (fundamental model)

Example Value Propositionfor Customer

ValueValue Not a Need/ValueNot a Need/Value NeedNeed

advertisement improves customer's business

LED lighting Marketing communications

10 feet high

Reaches 100 people a day (translates to a value)

Informs Students

Events sign for UWIEvents sign for UWI

Example Value Proposition

Value PropositionValue Proposition(meets need)(meets need)

Not a Value PropositionNot a Value Proposition NeedNeed

Meets government regulations so can be vessel can be certified

squelch Certification

Allows vessel to enter harbor 10 kilometer range Harbor access

Reduces loss and liability due to accidents

safety

Better profits due to better coordination of operations

profits

VHF RadioVHF Radio

6. Two Aspects To a Value Proposition

● The customer has a perceived need● e.g. Customers must buy regulation navigation lights

● The product meets the need – did the engineers get it right.● e.g. Do our navigation lights meet regulations?

● Customer need is our focus market research question.

7. Do a Survey to Measure Customer's Perceived Need

➲ Use professional marketing information and researchstandard sources.

➲ Do your own survey (there is no substitute for this)● select people who are in the market● Plan to do the survey a number of times:

● start small informal and friendly, work out● learn from the people, gather what you learned● evolve presentation and product concept● repeat and do another survey

➲ If you are finding “strong buy stories” you are getting “traction”, you can then say that “the story plays”

UWI Sign Needs Questions

● Are you the person who would buy advertising for your company?

● Do you currently buy advertising?● If yes, how much spend, etc. (explore)

● Do you currently advertise to UWI students

● Do you need to communicate short messages to UWI students

● How much would you pay to reach 10 a day● 100 a day

Not UWI Sign Needs Questions

● Will you buy space on a new sign at UWI● This is a sales question, not a market research product

concept needs question, related, but there are pit falls:● Creates an expectation with the customer that the

product exists or will soon exist● Gives a away your product concept

● It does give direct information, and for a sign, the pit falls may not be significant.

8. Research Your Competitors

➲ Tech Fashion business model proposals often say they do not have competitors, but all businesses have competitors.

➲ Any time a company makes money, others will see that, and then try to enter the same market – people capable of this are the competitors

➲ Wright Brothers invented the airplanea) there were other people doing reconnaissance on

the ground, so though no one else had a plane, they had competitors (look to the more general market) b) it was only a few years later that other people also

had airplanes

● Can you sustain your market

Part III, Doing a Survey

1. Potential Customer Characteristics● People who already buy products in the market (good survey question)

● Why are these people in this market?e.g. People who get hair cuts are people who

a) have hairb) have money to pay for a cutc) have access to a service provider

People who advertise on UWI signs a) sell products to UWI studentsPeople who buy VHF radios

a) government requirements to employ radio b) part of operation of their business

● People who have a need for the product

➲ Group people with similar characteristics into audiences, Say a1, a2, a3 ..● What is the population of each audience component?● Where do you find them? how can you contact them to present a survey?

2. Create a Call List of● Of People who are in the market, i.e. Have buy characteristics

● Find them:● Through contacts (especially for first layer informal survey)● Linkedin● Google research articles● Current lists of buyers in the area● Phone books

3. Design Questions● Measure the person's attributes (need this to extrapolate a population later)

● Measure person's need for the features

● Identify Competitors

● Others who may have need.

● Help you ask better questions (especially in the initial survey)

● Questions gauge all the attributes of the opinions (attributes on later slide)

4. Make the Calls!● Figuratively, could be visits, emails, etc.

● There is no replacement for doing the hard work

● Call visit, use services to execute the survey

● When practical, keep a database (CRM) of contacts that happened to give strong feedback in surveys, if things go forward in a year or two you can share this database with sales. But remember at this stage we do not have a product, but rather are testing the business model validity for a concept given in a product proposal.

Attributes of Opinions

➲ direction (typically 'will buy' or 'will not buy')Say the value point was cost. It points to high cost or low cost. It may be that it points in multiple directions, though this is not an ideal. When an opinion points in multiple directions it may be a good idea to look to see if it can't be divided into two or more opinions.

➲ magnitude for each direction (typically amount willing to pay)In the example of cost, the magnitude gauges the cost. This gauge could be relative or in absolute quantities.

➲ stability (a fraction between 0 and 1)Could small changes in available data cause the opinion to flip flop? What is the probability of a flip flop? Of is it going to remain pretty much the same even if the sun does not rise tomorrow? The demand for Hula Hoops, for example, is not stable, but the demand for bread is.

➲ probability of existing (again a fraction) Example low probability to be true opinion is my son saying he will not be tired in

the morning if he stays up late. ➲ duration (turns opinion into a function of time)

How long will this opinion remain true, or even how will this opinion change over time. It is well known, for example, that people's political opinions become more conservative with age.

Attributes of Opinions

➲ Would you like to have a Ferrari?➲ Would you pay $250,000 to have a Ferrari?

magnitude➲ Would you pay $110,000 to have a used Ferrari?

questionable value proposition, actually a magnitude question➲ Does your income vary from year to year?

stability of opinion➲ Is your income over $100,000 a year

gauges probability that a yes answer to #2 is true

Part IV, Interpreting Results

You are doing a startup, if the story isn't there among strong buyers, then it isn't there.

1. Make the Strong Buy Story

➲ For each surveyed person:● Multiply the stability, times the probability the data is good,

times the probability the customer buys from us rather than competitors, and any other factors, and call this d

➲ For each price point, p:● Count all people who

● Had a long duration relative to the project and● Had a determining factor, d, greater than .9 and● Were willing to pay p dollars or more and● This count gives you the function s(p)

➲ s(p) is the number of strong buy stories who would pay price p or greater. Note we used little 's' here.

2 Extrapolate S(p) to the Market

➲ Total Number of People You Surveyed you found to be in the

market at all = m➲ Total Who were in the entire Market at all from research = M➲ Total Number of strong buy at price p or greater = s(p)

S(p) = M/m * s(p)

(linear extrapolation based on fraction of market surveyed)

➲ S(p) is the estimated volume(p) due to strong buy story buyers

3 Estimate Product Revenue

➲ Revenue is just the price times the number of people who

would pay that price

R(p) = p S(p)

3 Refined Results

➲ When counting people for s(p) instead of adding 1 for each

buy story, add in d for each positive buy direction story.

➲ Better refinement, multiply in more factors into d, such as the probability that the duration is long enough.

If you Don't have a Total Market Number

➲ Estimate the total market size by extrapolating out to the total number of people who have the same attributes and demographics as positive direction buyers.

Part V, Putting it Together

Know When to Bail

➲ It is normal for a concept to evolve as you talk to people, but if it isn't getting traction drop it.

➲ However if the perceived need for the features is not there, yet there is an actual need, you have a situation requiring “educating the market”

● It is too expensive● It is an uphill and difficult battle● It is beyond the budget or abilities of the typical start up.

➲ If the strong buy story is not there, but you still persist, you have become an “evangelist”. Evangelism typically isolates you and moves you away from building companies into something else.

➲ Companies make money, if you don't want to make money your are not building a company, you are doing something else.

Is the Product Viable

➲ Take the Cost numbers gotten from engineering and operations

➲ Put the R(p) and cost into the net income equation, NetIncome(p) = R(p) – cost

➲ Find the peak of the net income curve use that to set p

➲ Look at Strong Buy, or Expected Net Income, is it● Enough to cover costs● Enough the stake holders are happy to have a stake● Can net income be sustained and grown (has duration)● Has 2x to 5x (10x?) margin built in (this is a plan, the

product doesn't even exist yet)● If all the above yes, then the product is probably viable