Table 2.3 Typical Costs Expended in Product Development.
| Quality – QAQCTesting services or lab timeTravel expensesRegulatory complianceLegalPermittingRaw materialsMarketing and advertisingCorporate overhead | LaborCapital equipmentTesting equipmentEngineeringR&DEquipment rentalsExpendablesTraining |
Table by David Tennant
All of the above costs must be recovered and reflected in the price of your product over time. It is important that a company recovers its development costs plus a margin; otherwise, your product is not profitable. It is likely that cost and pricing sensitivity analysis will determine the maximum amount of dollars that can be expended and remain profitable in a competitive marketplace.
Figure 2.5 shows a typical break-even graph for a product. Break-even is the point at which sales revenue equals all the costs expended; and additional sales will generate a profit going forward.
Figure 2.5 Breakeven Point. Source: Corporate Finance Institute (2021) / with permission from CFI Education Inc.
The 4th P – Placement
Placement is concerned with how and where your product will be positioned in the marketplace. As an example, Microsoft Office® is popular software used by individuals and corporations. Twenty years ago, one could purchase this product at any office supply store (Office Max, Staples, online, etc.) and many of the major retailers such as BestBuy, Sam’s, and Costco. The product was a CD which downloaded the software onto your computer. Today, this product can be downloaded over the internet directly from Microsoft, BestBuy, Amazon, and other sites. Indeed, CDs have become technically obsolete as even music is now streamed or downloaded.
Another example is product placement in grocery stores. This is as much a science as an art. Grocery stores have significant research on customer buying habits and place products accordingly. For example, impulse buys such as candy, cold drinks, and general interest magazines are located in the checkout lines near the cashier. Wandering along the soft drink aisle, the major drinks are placed primarily at eye level to catch shoppers’ attention. Some companies will pay for key product placement areas in the store. Finally, end-of-aisle displays are another location that customers always notice. Placement is important.
For software or services, how will this “product” be placed on the internet? This is where search engines can be useful. Google, Facebook and others have extensive market research from tracking internet users. This is how they make their money: selling market research, commonly known as data analytics. They can provide data on how many people visit key websites, perform searches for products, and can segment this data for companies willing to pay for it. When placing your product or service on the web, they can also help your firm target your demographic or geographic preferences.
Placement is key to getting your potential customers to notice your new product, whether a hard product of software based. The internet can help your new product get “placed” and increase your chances of success, assuming your product has appeal (demand).
The Business Case
The purpose of the business case (sometimes called a business plan) is to assist the executive team and Board of Directors make an informed decision. A business case is a detailed analysis of a new plan of action: proposing a merger or acquisition, developing a new product, or adding a new business unit to the company. It is generally a collaborative effort between several functional areas of the company, i.e., accounting, marketing, engineering, etc. In the technical or engineering world, it may be called a feasibility study, but the concepts are the same.
What is contained in a business case and why do we need one? Before a company invests millions of dollars into a product, merger, etc., it needs assurance that the venture will be profitable, makes sense from a strategic “fit” standpoint, and will enhance a company’s competitive position. Table 2.4 summarizes key topics usually included in (but not limited to) a business case.
Table 2.4 Business Case Contents.
| Summary and IntroductionObjectivesDescription of new product/projectWhy should the company do this (what is driving this effort)?Cost-benefit analysis (ROI, NPV) | Legal and regulatory issuesEstimate costs and timelineResources neededSocial implicationsAlternatives consideredRecommendations |
Table developed by David Tennant
A note of caution: business cases usually have best case timelines and cost estimates. Many times, budgets, and schedules are assigned based on these estimates. However, these sometimes turn out to be unrealistic. Budgets and schedules should be refined with greater detail after formal approval during the project planning phase.
It is appropriate to note that investors and shareholders are generally risk averse. The business case is intended to provide a comfort level to decision makers; and to show that significant thought and research has been conducted to ensure the venture will be profitable. Companies that do not perform a business case for new ventures are taking unnecessary risks.
The Roles of Marketing and Engineering in Product Development
Someone from either department may serve as the project leader. However, the two groups generally have differing perspectives on priorities and timing which can lead to conflict.
Beyond the product, the marketing team is concerned with revenue, profitability, placement, and all of the previous topics discussed in this chapter. As a result, the marketing leader will be schedule-driven and concerned about containing costs. Remember, all of the costs of product development must be recaptured in the product’s pricing. Therefore, this can translate into a perception of impatience by other departments.
Engineering on the other hand, is focused on designing, testing, and delivering a product that is error free (a definition of “quality” by the way). By training and education, technical professionals have a tendency to downplay fast-tracked schedules and to a lesser extent, budget adherence. To the engineering leader, having a flawless (or “perfect”) design and manufacturing process is more important.
Consequently, the groups have differing perspectives and accountabilities, but are charged with coordinating their efforts to deliver a new product. Table 2.5 shows these differing priorities.
Table 2.5 Marketing vs. Engineering Focus in New Product Development.
| Marketing | Engineering |
|---|---|
| Cost conscious in meeting budgets, ROI (Return on investment)Schedule compressionDeveloping advertising campaignFreezing designChanges saved for next release (V2.0)Anxious to beat competitors to market (first to market gets market share) | Desire to do it right the first timeChanges to improve product are necessary for successSchedule slips are acceptable with justificationBudget is important, but having a quality product is more importantTesting and Quality Control are paramountScope changes are part of the process |
Table developed by David Tennant
Regardless of which team is leading the development