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Old 09-17-2008, 07:02 PM   #1
Avalon Senior Member
Join Date: Sep 2008
Location: Vanderhoof, BC
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Default Commercializing Ideas

Commercializing Ideas:

Often entrepreneurs wish to create new products to meet a perceived need in the marketplace, but they may be unfamiliar with the product development process.

Valuing the Product: The Price/Cost Relationship

Setting the price of new products can be challenging. The product developer must understand each of the components that create the final retail price. Product developers must then balance their customer’s need for best price and value against the need to make enough profit to cover all costs and return a profit.

Components of Price:
· Cost of the Product Sold:
Paying someone to build the product and paying for the materials to make the costs of the product sold. This includes the workers’ payroll, the fixed costs of leasing the production building, and the raw materials including any wasted materials like sawdust, breakage, or scrap.
o Materials:
o Raw materials
o Waste and scrap
o Labour:
o Production workers’ wages
o Shipping and handling crews
· Overhead
o Fixed overhead costs like office rent.
o Variable overhead costs like warranty and administrative help like accounting.
o Loan payments or other investment costs
· Profit Margin
o A return on your investment
This leads to the simplified equation:

Materials + Labour + Overheads + Profit Margin = Price

Here are two additional ways to look at price and profit margin:
1. Customer’s Perceived Value in the Product

While product developers often know their costs, the customer may perceive the value of the product to be even higher than the product developer’s costs. In this case, it is a matter of the market bearing more price.

§ An electronics product developer creates new technology that cuts a vehicle’s fuel costs by 30%.
§ At $0.75/liter for gasoline, a driver could save $0.225/liter. The average driver travels 24,000 km per year driving a car that consumes 14 liters/100 km at a cost of about $2600 per year in fuel.
§ If they use the new product, they save 1/3 of the annual fuel cost, or $867.
§ The customer will want to recover the price of the new product quickly, i.e. in one year.
§ Thus, the product developer may be able to set the price at $867, even if the product developer’s unit cost is $90.

2. Going rate

More often than not, product developers are selling products known in the market. The price has been set by the competition, so the product developer may have to match or beat the price if the product is identical in the customer’s mind.
Product Cost Investigation

The product developer must investigate their product costs very carefully to know if their product is viable. It is imperative that you start early getting estimates of cost and exploring reductions of cost by buying in volume, improved designs, etc.

As a quick test of whether to continue investigating your product, or if you have only material costs information so far, you can use this test to compare material costs to retail prices acceptable to your customer.

While there is no consideration of labour costs (which must still be investigated), you may want to use the equation:

Five Times Materials Costs + Freight (no labour) = Retail Price
Product Definition

At this point you may have a promising concept for a product. There appears to be sufficient demand for the product at “x” price to be profitable. Now you must gain more in-depth knowledge of the product. This may involve using a designer to help look at:
1)form and shape, and,
2)function & benefits.

Both of these benefit the customer. Designers will also look at
3) ease of manufacturing and
4) common components, which both benefits you, the product developer.

Product developers generally will direct some of the designer’s effort toward emphasizing the product’s USP while some effort will also go into differentiating the product from the competition and the competition’s response to the new product. To this end, extensive work will go into fleshing out the details of the components and processes to create the product profitably.

Primary Market Research

Product developers will need to do more detailed market research, and ultimately prove the linkages from their customer’s interest in the product to their bottom line.

One of the better ways for you to research a market is through the companies that resell products similar to the yours. This method can be an efficient and effective means of refining the product for better match to the market. After you finish a round of design or engineering work, you may want to approach resellers to assess whether they will buy product “x” at price “y” in quantity “z.” This tests the link from your product by getting the opinion of those who have served hundreds of your target customers.

Talking to Retailers and Resellers

1. Retailers and resellers spend a lot of time with their customers. They know them well.
2. They know customers want choice, so are likely to suggest you develop a line of products.
3. If you both have the same customer, the reseller may have suggestions for how to price, display and promote the product to the target customer.
a) If you do not have the same customer, the reseller will know who does serve that customer.
4. The reseller could become a distributor for your product so you do not have to have a large sales force.
Distribution Channels

Distribution channels are identified by the product groupings they supply. For example:

§ White Goods
§ Furniture
§ Appliances
§ Software
§ Case goods
§ Electronics
§ Automotive

o Distributors are likely to be carrying a competing product or a substitute for the new product. Thus, the product developer must show the distributor or reseller a compelling reason to switch to this new product.
· Better price
· Better delivery
· More selection
· Better quality
· Better packaging
· Better advertising support

o E-Commerce uses the Internet as the middle point for distributing the product “directly” to the consumer.
o Distributing directly to the customer may be appropriate, depending on many factors. The following example shows many of the considerations:

An Example

Possible Distribution Channel # of sales transactions per year Shipping Credit Advertising Complaints Gross Margins Cost of Sales

Direct to Consumer (Internet) 100,000+ 100,000+ 100,000+ High High High High
Retailer 100-1000’s 100-1000’s 100-1000’s High-Medium High-Medium High-Medium High-Medium
Jobber 20-25 20-25 20-25 Medium Medium Medium Medium
Wholesaler 10-15 10-15 10-15 Medium Medium Medium Medium
Shopping Channel - TV 1-6 1-6 1-6 Low Low Low Low
Catalogue 1-6 1-6 1-6 Low Low Low Low
Licensing to Manufacturer 1 0 1 Low to Nil Low Low Low

Start-up Strategies

Commercialization Option Advantage Disadvantage
Bootstrapping o Low cost of start-up
First to Market o requires significant investment capital
Regional Market o the capital needed to produce smaller volumes of the product is less than in first-to-market strategy
Licensing o Usually requires a patent to ensure rights

Product Launch

Launching a product is its own field of study and we do not have time to cover it in this session.

Perhaps the most important note is that it takes a team talented in logistics to launch a product.

Here is list of the action items that are most likely to be covered before and during the period of launching the product:

1. Establish a product launch team.
2. Current customers – will they buy? Special offers?
3. Create a set of plans for the launch, including, but not limited to:
o Marketing Plan
§ Packaging
§ Shipping
§ Manufacturing
§ Distribution Channels
o Advertising plan
o Public Relations plan
o Sales Resources Plan
o Internet Marketing Plan
o Customer Service Plan
o Trade Show Plan
o Financial Credit Plan
4. Launch Tracking Spreadsheet to monitor progress
5. Get your people in place and trained
6. Give yourself enough time - allow six months on average
7. Conduct a post-launch analysis to evaluate the effort

Go/NoGo Decision

- Is there enough market potential?
- Is there an overwhelming need to buy?
- Can the product be manufactured easily?
- Is there sufficient profit potential?
Common Pitfalls

§ Falling in love with your product
o Creates blinders to the real attitude the market has toward your product
o Example: Product developer selling a gadget no one wants but he/she has sold several units to friends and family who have praised it.
§ Lack of market focus
o Similar to falling in love with your product, an entrepreneur can get caught up in the technical workings of the product and lose touch with customer needs.
o Example: Each new version of a gadget has been designed to perfection and patented but the company only makes sales “in their spare time.”
§ Inadequate due diligence
o Lack of planning and preparation means you can be hit hard by unexpected but predictable events.
o Example: Lack of planning about price changes for components in the product
§ Too many projects
o Lack of focus on a key product line that complements each piece.
o Example: Entrepreneur is having fun creating (but never building) new gadgets and forsakes all the work of organizing the company
§ Doing it all yourself
o While an entrepreneur can be praised for saving money and working frugally, doing all things yourself may mean parts of the business or product are poorly design and implemented.
o Example 1: Entrepreneur works 12 hour days to start with and as the business grows, he/she works more and more hours until their health collapses.
o Example 2: Entrepreneur starts the business by selling a few prototypes but cannot get a regular buyer for a poorly designed, poorly constructed, and expensive product.

§ Perfection
o Some product developers fail to “freeze” the product design and release a version for sale, redesigning again and again looking for the “perfect product.”
o Example: When designing a computer operating system, the programmer continues to develop it to perfection to avoid “being like Microsoft.”
§ Greed
o Perhaps the most damaging of pitfalls, wanting to keep 100% of the company (or a very large percentage ) will turn off investors.

o Example: while seeking investors, the product developer tries to keep over 50% of the company and manage the venture too. Investors see the likelihood for their money to be placed outside their control and do not invest. “Trust me” is not enough for investors.

Three Tips from Profit Magazine, June 2002

1. Know what your customer needs. Ask yourself: if you weren’t doing this, would someone else go and do it because it’s such a big need? If no one else would do it, then it’s probably not a big need.

2. If you’re going to start a business, don’t do it all yourself. Do it with partners.

3. Love what you do, because you’re going to be doing a lot of it.
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