Developing New Products

By its nature marketing requires new ideas.

Unlike some organizational functions, where basic

processes follow a fairly consistent routine (e.g.,
accounting), successful marketers are constantly
making adjustments to their marketing efforts.

New ideas are essential for responding to changing

demand by the target market and by pressure exerted by
competitors.

These changes are manifested in decisions in all

marketing areas including the development of new
products.

In addition to being responsive to changing customer

tastes and competitive forces, there are many other
reasons why new product development is vital.
These include:
• Many new products earn higher profits than older
products. This is often the case for products
considered innovative or unique which, for a
period of time, may enjoy success and initially face
little or no competition.
• New products can help reposition the company
in customer’s minds. For instance, a company
that traditionally sold low priced products with few
features may shift customers’ perceptions about the
company by introducing products with more
features and slightly higher pricing.
• Fierce global competition and technological
developments make it much easier for competitors
to learn about products and replicate them. To stay
ahead of competitors marketers must innovate
and often create and introduce new products on a
consistent schedule.
• Companies with limited depth in a product line
may miss out on more sales unless they can add
new products to fill out the line.
• Some firms market seasonal products that garner
their highest sales during a certain time of the year
 or sell cyclical products whose sales fluctuate
depending on economic or market
factors. Expanding the firm’s product mix into
new areas may help offset these fluctuations.
For manufacturing firms an additional benefit is
realized as new products utilize existing production
capacity that is under-used when seasonal or
cyclical products are not being produced.

Categories of New Products

New products can fall into one of several categories.

These categories are defined by the type of market
the product is entering (i.e., newly created, existing
but not previously targeted, existing and targeted ) and
the level of product innovation (i.e., radically new,
new, upgrade).

• Creates New Market with Radically New

Product or Product Line – This category is
represented by new breakthrough products that are
so revolutionary they create an entirely new
market. Recent examples include digital music
 players, such as Apple’s iPod, that have spawned
new delivery methods (downloadable music) and
new media (podcasting). Highly innovative
products are rare so very few new products fall into
this category.
• Enters Existing But Not Previously Targeted
Market with New-Product or Product Line – In
this category a marketer introduces a new product
item or product line to an existing market which
they did not previously target. Often these products
are similar to competitors’ products already
available in the market but with some level of
difference (e.g., different features, lower price,
etc.). Microsoft’s entry into the video gaming
system market with their Xbox is an example.
• Stays in Existing and Previously Targeted
Market by Enhancing Existing Product or
Product Line – Under this development category
the marketer attempts to improve its current
position in the market by either improving or
upgrading existing products or by extending a
product line by adding new products. This type of
 new product is seen in our earlier example of
Procter and Gamble’s Tide product line which
contains many product variations of the basic Tide
product.

How New Products Are Obtained

Marketers have several options for obtaining new

products.
First, products can be developed within an
organization’s own research operations. For some
companies, such as service firms, this may simply mean
the marketer designs new service options to sell to target
markets. For instance, a marketer for a mortgage
company may design new mortgage packages that offer
borrowers different rates or payment options. At the
other extreme companies may support an extensive
research and development effort where engineers,
scientists or others are engaged in new product
discovery.
A second way to obtain products is to acquire them from
external sources. This can occur in several ways
including:

• Purchase the Product - With this option a marketer

purchases the product outright from another firm
that currently owns the product. The advantage is
that the product is already developed, which reduces
the purchasing company’s time and cost of trying to
develop it themselves. On the negative side the
purchase cost may be high.
• License the Product – Under this option the
marketer negotiates with the owner of the product
for the rights to market the product. This may be a
particularly attractive option for companies who
have to fill a product need quickly (e.g., give a
product line more depth) or it may be used as a
temporary source of products while the marketer’s
company is developing its own product. On the
negative side the arrangement may have a limited
time frame at which point the licensor may decide
to end the relationship leaving the marketer without
a source for the product.
 • Purchase Another Firm - Instead of purchasing
another company’s products marketers may find it
easier to just purchase the whole company selling
the products. One key advantage to this is that the
acquisition often includes the people and resources
that developed the product which may be a key
consideration if the acquiring company wants to
continue to develop the acquired products.

New Product Development Process

Because introducing new products on a consistent basis
is important to the future success of many organizations,
marketers in charge of product decisions often follow set
procedures for bringing products to market. In the
scientific area that may mean the establishment of
ongoing laboratory research programs for discovering
new products (e.g., medicines) while less scientific
companies may pull together resources for product
development on a less structured timetable.

In this section we present a 7-step process comprising the

key elements of new product development. While some
companies may not follow a deliberate step-by-step
approach, the steps are useful in showing the information
input and decision making that must be done in order to
successfully develop new products. The process also
shows the importance market research plays in
developing products.

We should note that while the 7-step process works for

most industries, it is less effective in developing radically
new products. The main reason lies in the inability of the
target market to provide sufficient feedback on advanced
product concepts since they often find it difficult to
understand radically different ideas. So while many of
these steps are used to research breakthrough ideas, the
marketer should exercise caution when interpreting the
results.

Step 1. IDEA GENERATION – The first step of new

product development requires gathering ideas to be
evaluated as potential product options.

For many companies idea generation is an ongoing

process with contributions from inside and outside the
organization. Many market research techniques are used
to encourage ideas including: running focus groups with
consumers, channel members, and the company’s sales
force; encouraging customer comments and suggestions
via toll-free telephone numbers and website forms; and
gaining insight on competitive product developments
through secondary data sources. One important research
technique used to generate ideas is brainstorming where
open-minded, creative thinkers from inside and outside
the company gather and share ideas. The dynamic nature
of group members floating ideas, where one idea often
sparks another idea, can yield a wide range of possible
products that can be further pursued.

Step 2. SCREENING – In Step 2 the ideas generated in

Step 1 are critically evaluated by company personnel to
isolate the most attractive options. Depending on the
number of ideas, screening may be done in rounds with
the first round involving company executives judging the
feasibility of ideas while successive rounds may utilize
more advanced research techniques. As the ideas are
whittled down to a few attractive options, rough
estimates are made of an idea’s potential in terms of
sales, production costs, profit potential, and competitors’
response if the product is introduced. Acceptable ideas
move on to the next step.

Step 3. CONCEPT DEVELOPMENT AND TESTING

– With a few ideas in hand the marketer now attempts to
obtain initial feedback from customers, distributors and
its own employees. Generally, focus groups are
convened where the ideas are presented to a group, often
in the form of concept board presentations (i.e.,
storyboards) and not in actual working form. For
instance, customers may be shown a concept board
displaying drawings of a product idea or even an
advertisement featuring the product. In some cases focus
groups are exposed to a mock-up of the ideas, which is a
physical but generally non-functional version of product
idea. During focus groups with customers the marketer
seeks information that may include: likes and dislike of
the concept; level of interest in purchasing the product;
frequency of purchase (used to help forecast demand);
and price points to determine how much customers are
willing to spend to acquire the product.
Step 4. BUSINESS ANALYSIS – At this point in the
new product development process the marketer has
reduced a potentially large number of ideas down to one
or two options.
Now in Step 4 the process becomes very dependent on
market research as efforts are made to analyze the
viability of the product ideas. (Note, in many cases the
product has not been produced and still remains only an
idea.) The key objective at this stage is to obtain useful
forecasts of market size (e.g., overall demand),
operational costs (e.g., production costs) and financial
projections (e.g., sales and profits). Additionally, the
organization must determine if the product will fit within
the company’s overall mission and strategy. Much effort
is directed at both internal research, such as discussions
with production and purchasing personnel, and external
marketing research, such as customer and distributor
surveys, secondary research, and competitor analysis.

Step 5. PRODUCT AND MARKETING MIX

DEVELOPMENT – Ideas passing through business
analysis are given serious consideration for
development. Companies direct their research and
development teams to construct an initial design or
prototype of the idea. Marketers also begin to construct
a marketing plan for the product. Once the prototype is
ready the marketer seeks customer input. However,
unlike the concept testing stage where customers were
only exposed to the idea, in this step the customer gets to
experience the real product as well as other aspects of
the marketing mix, such as advertising, pricing, and
distribution options (e.g., retail store, direct from
company, etc.). Favorable customer reaction helps
solidify the marketer’s decision to introduce the product
and also provides other valuable information such as
estimated purchase rates and understanding how the
product will be used by the customer. Reaction that is
less favorable may suggest the need for adjustments to
elements of the marketing mix. Once these are made the
marketer may again have the customer test the product.

In addition to gaining customer feedback, this step is

used to gauge the feasibility of large-scale, cost effective
production for manufactured products.
Step 6. MARKET TESTING – Products surviving to
Step 6 are ready to be tested as real products. In some
cases the marketer accepts what was learned from
concept testing and skips over market testing to launch
the idea as a fully marketed product. But other
companies may seek more input from a larger group
before moving to commercialization. The most common
type of market testing makes the product available to a
selective small segment of the target market (e.g., one
city), which is exposed to the full marketing effort as
they would be to any product they could purchase. In
some cases, especially with consumer products sold at
retail stores, the marketer must work hard to get the
product into the test market by convincing distributors to
agree to purchase and place the product on their store
shelves. In more controlled test markets distributors may
be paid a fee if they agree to place the product on their
shelves to allow for testing. Another form of market
testing found with consumer products is even more
controlled with customers recruited to a “laboratory”
store where they are given shopping instructions.
Product interest can then be measured based on
customer’s shopping response. Finally, there are several
high-tech approaches to market testing including virtual
reality and computer simulations. With virtual reality
testing customers are exposed to a computer-projected
environment, such as a store, and are asked to locate and
select products. With computer simulations customers
may not be directly involved at all. Instead certain
variables are entered into a sophisticated computer
program and estimates of a target market’s response are
calculated.

Step 7. COMMERCIALIZATION – If market testing

displays promising results the product is ready to be
introduced to a wider market. Some firms introduce or
roll-out the product in waves with parts of the market
receiving the product on different schedules. This allows
the company to ramp up production in a more controlled
way and to fine tune the marketing mix as the product is
distributed to new areas.

Managing Existing Products

Marketing strategies developed for initial product
introduction almost certainly need to be revised as the
product settles into the market. While commercialization
may be the last step in the new product development
process it is just the beginning of managing the product.
Adjusting the product’s marketing strategy is required
for many reasons including:

• Changing customer tastes

• Domestic and foreign competitors
• Economic conditions
• Technological advances

To stay on top of all possible threats the marketer must

monitor all aspects of the marketing mix and make
changes as needed. Such efforts require the marketer to
develop and refine the product’s marketing plan on a
regular basis. In fact, as we will discuss in a later section
of this tutorial, marketing strategies change as a product
moves through time leading to the concept called the
Product Life Cycle (PLC). We will see that marketers
make numerous revisions to their strategy as product
move through different stage of the PLC.