THE CHOICE OF NEW PRODUCTS

by Donald V. Potter

Companies add new products whether or not a market is hostile. But the choice of which products it is most advantageous to add varies with the market situation.

Focusing On A Price Point

In non-hostile markets, companies tend to establish themselves as specialized providers of certain product/price level combinations. Typically, several companies serve the center of the market, providing basic products at mid-level prices. Most of a market’s volume is sold at the center. A smaller number of high-end producers offer products of higher quality or greater sophistication, for a price premium. Some producers focus on providing simple or scaled-down products at low prices.

Price point specialists, in a non-hostile market, compete at only one price point. High-end producers will compete with other high-end producers, but they compete less frequently with center-of-the-market producers. Each price point has its own unique set of customers. And, each set of customers provides ample growth for its suppliers.

Going For Breadth

Market hostility changes the situation. There are fewer new customers around, so suppliers must get more volume from their current customers. Customers ask for one-stop shopping, particularly when the direct customer is a channel, customers want the simplicity and price leverage of buying as much as possible from one suppler. Competing suppliers are motivated to offer the broadest possible product line, covering many price points. Price point generalists invade the turf of specialists at other price points.

For practical reasons, suppliers serving the center of the market have the best chance to broaden their product lines significantly. High-end producers can move down into the middle range, and low-end producers can move up into the middle, but neither is likely to have the resources, image, or organizational flexibility to extend much beyond that. Only the center-of-the-market supplier has both ends in reach.

Yet suppliers – even those at the center of the market – resist broadening their product lines, for reasons that are short sighted:

All companies set up systems designed to allocate resources and to measure and reward performance in line with company goals. The problem arises when goals change and systems don’t.

Measurement systems are often a problem. Companies set standards for good performance, often expressed as tons per hour, transactions per day, or units per month. A new price point makes measurement more complex. For example, adding a high-end product that takes longer to produce can throw off accepted performance standards. Managers required to produce that product don’t want to “look bad”.

Compensation systems present a similar problem. Suppose, for example, that some products require additional sales effort or after-sales service. Unless the sales force is compensated disproportionately for that effort, they won’t give those products the attention required to make the sale.

Making the required systems changes can be highly disruptive to an organization, but they are essential because hostility is nearly always a long-term condition. Markets stay hostile for ten, twenty, or more years – too long for a company to endure systems designed for another day or patched to cover the problem.

Again and again, companies resist introducing any new product, high-end or low-end, that they believe will take sales from existing products. Fear of “cannibalization” runs deep in American business.

A better response would be relief: “At least we are the ones eating!” Refusal to give customers what they want does not mean that those wants will go away; they will simply be met by competitors. A company unwilling to cannibalize its own products will find the deed done by someone else.

Besides, in a hostile market successful companies focus not on products but on customers. If cannibalization hurts some current products but enables a company to hold onto the customer relationship, it is the wise choice.

In general, high prices mean high profits. So if a proposed high-end product offering doesn’t look attractive, the company usually has a problem either in its production and delivery systems or in its cost and revenue allocation. These problems can be fixed.

A low-end product offering, however, may in fact not be profitable when considered in isolation. During hostility, though, products should not be considered in isolation but as part of a package needed to retain target customers’ business. Offering an unprofitable product, even as a loss leader, can be the right thing to do.

Closing Thought

In a non-hostile market, product profitability drives decisions. In a hostile market, customer profitability is key to the success of the business.

(Note: This Perspective was written in the context of the economy in 1995. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items: Analyses: Analysis 32: Elimination Reasons for Volatile Customers Analysis 33: Reasons for Company Elimination Analysis 38: Definition of Price Points in the Market Analysis 40: Industry Growth by Product Price Point Analysis 42: Target Customer Purchases By Price Point Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis. New entrants are growing much faster than the market Low end products are gaining share of the market\ Price points are growing at differential rates as companies enter higher end niches to improve profits ***