Achieve Volume-Driven Earnings Growth Through Innovation Productivity

Senior executives at CPG companies are confronted with a difficult economic environment, consumer uncertainty, pricing volatility, and relentless profit pressure. As a result, many of them are turning to innovation and new products for growth and productivity. In fact, a recent survey by A.T. Kearney found that CEOs identified increasing focus on innovation and creativity as the best way to improve growth rates.

Launching line extensions and developing true new brands may seem risky in a challenging economy. That's because – despite more creative focus lately – new products rarely succeed. According to Information Resources, Inc., new packaged goods products fail more than 95% of the time.

The hidden costs of this failure rate cannot be overstated. Companies spend an average of $15 to $20 million on advertising, trade and consumer promotion behind a new product launch. These numbers double after accounting for costs associated with the R&D, manufacturing, and market research dollars spent developing and testing the idea. Beyond these "hard" costs are wasted human resources, organizational opportunity costs of time and resources distracted from truly viable ideas, and the loss of credibility with consumers and the trade.

Most products don't fail because the ideas were not creative enough. From our experience working with major CPG clients on hundreds of growth strategy projects, we believe they fail because the marketing strategy that drove the creative idea was unclear or imprecise. Marketers and product developers often do not understand existing consumer behavior, the benefits consumers seek through this behavior, the attributes that support the behavior, and the behaviors consumers are willing to change and not change.

Launching a successful new product calls for a new strategy to clearly identify how and why the new product will replace consumers' existing behavior with a new behavior. The secret is not being more creative than the next guy; the true path to success is being more focused than the next guy about how consumers will benefit from changing their current behavior to your new product, and what it will take to get them to make that change.

The process we recommend consists of the following:

Understand the Competitive Frame of Reference

The essential starting point is a clear and precise understanding of how consumers organize their choices; that is, exactly what products and categories compete with one another among specific targets for specific occasions. Called the Competitive Frame, this quantified analysis of both usage and purchase behavior addresses this question, as well as more specific questions such as:

• What benefits are consumers seeking when choosing among a competitive set of products for a given occasion?
• What attributes are critical to achieving the benefit?
• How satisfied are consumers with their current options?
• What do trends, category impacts, and environmental studies tell us about the future?

Create a Precise Strategic Positioning

The analysis of the competitive frame of reference describes the "what is" of the way the market is currently organized, and helps identify ways to alter this market to the company's advantage.  The competitive set, including the target and current critical attributes, are identified from the Competitive Frame analysis. Additional information – trend analysis, brand imagery, need state information – aid in developing the benefit and brand personality.

The result is a precise Strategic Positioning expressed in the format:

"To (Target), (X) is the Brand of (Competitive Frame) that delivers (Benefit) because of (Attributes) and has (Personality)."

Critically, in order for any new offering to be successful, the positioning and the new product that brings it to life must deliver a higher level of effectiveness than the alternatives consumers already have. When a new product is being introduced, its entire marketing – the way it looks, its functional benefit, the way it is delivered to the consumer, the package, the imagery associated with the brand name – delivers a satisfaction rating to the consumer that is either equal to, better than, or worse than existing alternatives. In most cases, the success of the product is 70-80% dependent on how effective the product is against its correctcompetitive set. Yet managers rarely test their products in a way that measures this number accurately.

A concept called Par Effectiveness makes the process much more precise. It is based on the idea that the current satisfaction level in the market is a 1.0 or "par" level. For a new product to enter the market successfully, it needs to deliver benefits greater than 'par' by improving the different factors that contribute to product effectiveness. It needs to deliver a 1.2, a 1.5, a 2.0, and so on. The greater the effectiveness, the greater the marketing leverage for the product; that is, the more effective marketing dollars will be in getting consumers to switch.

Based on our database of historical norms, these effectiveness numbers are tied directly to classic market research testing. For instance, products with a 1.2 effectiveness in market have preference of about 55% to 45% vs. the competitive frame in pretesting. Products with a 1.5 effectiveness have preference of approximately 70% to 30% vs the competitive frame, and so on.

By applying this effectiveness construct to a precisely defined strategic positioning based on the correct competitive frame of reference, organizations are now armed with a clear action standard for their new product offering. They now know that unless they can create a positioning that is more effective than a competitor, as measured by specific preference testing vs. that competitor, they are unlikely to be successful. Organizational creativity can be unleashed against the objective of achieving desired benefit in a new way or by matching or surpassing the driving product attributes, in a way that generates a specific level of preference vs. the competition.

Create the Business Proposition Necessary for Success

Now that the competitive frame and positioning are clear, a business proposition needs to be developed. This is a simple but critical step, too often overlooked at many companies. In the Business Proposition, the key numbers are the short- and-long term profits required by the company to deem the new product launch a success. From a consumer standpoint, these numbers are dependent on:

• How many people will switch to this product, with what frequency, at what price?
• What will it cost to attract and retain these users?

The answers depend on how well the product meets a very particular set of needs compared to existing alternatives.

We can use validated models based on the quantified Competitive Frame to answer the consumer and the profit questions, identifying the potential of the proposed new product. Let's start with our assumptions about effectiveness vs. the competitive frame (a 1.2 effectiveness or a 1.5 effectiveness for instance). Management must choose explicitly, based on the competitive frame, from which product or products the new offering will source volume, and by implication which products it must be more effective than. They must establish a target level of effectiveness the new product will have vs. the competition. These are not a trivial decisions, but ones which rarely receive enough thought early enough in the new product process.

To these critical decisions are added assumptions on pricing, gross margin, distribution levels, etc. Using all of this information, and the analytics that are the foundation of the competitive frame of reference, we can make accurate, consumer-based estimates of whether the new product launch will be worth the investment – before development begins.

In addition, as information becomes clearer throughout the development process, actual facts can be compared to the critical assumptions created by this phase, and the business proposition re-simulated continuously to illustrate the impact on profitability.

Early Development

Now ideas are developed into actual products and actual concepts for testing. Consumer language is translated into a concept and then screened. Product ideas are translated into actual product formulations. The resulting concept and product are tested vs. the right competitive set, and then evaluated to determine whether consumer preferences yield product effectiveness greater than 1.0.

The new effectiveness number, combined with updated learning on pricing, margin, distribution assumptions, etc., are used to re-simulate the Business Proposition. Now, the Business Proposition is supported by an exact understanding of the concept and product's response vs. the competitiveframe. Management then has the opportunity to compare this business proposition to its other investment options. Assuming it meets profit hurdles, highly-focused resources can be allocated to the next phase, Advanced Development.

Final Development

In this stage, the concept is finalized, with packaging and advertising ready for launch. The product is examined one last time before it goes out into the marketplace. The results of the first concept testing and product testing are considered and appropriate refinements are made. Both are re-tested if the adjustments are significant. Simulations are revised again if base options have changed. This step provides the final quantification for the revised Business Proposition. If these steps are followed, the final Business Proposition should be an improvement in terms of volume, revenue, or profit upon the initial test.
The last step is a BASES – or its equivalent – a system check that evaluates all the elements of product, positioning, pricing, distribution, and spending as derived from the simulations and the concept and product tests work in harmony. This should be a final "go/no go" and the results should be highly predictable.

Summary

Properly applied, an innovation process that focuses on creating products that will deliver benefits more effectively than a specific competitive set unleashes and focuses creativity in productive directions. This results in ideas that are internally consistent and poised for greater likelihood of marketplace success.

• The best new product process benefits the organization by:
• Bringing good ideas to the market quickly while saving money along the way.
• Providing management with a consistent means of evaluating new product options to make prioritization simpler.
• Instilling confidence in management through the Business Proposition so that the right resources are applied at the right time.