It is important to understand that market failure is the single biggest reasons for new product failure, and having a good understanding of the value chain, the value proposition for each value chain participant, and most of all, the market segment in which you operate, is one sure way of mitigating this risk.
Business plans - The common failure
Has anybody ever handed you a loosing business plan?
When you have new a venture in mind, of course you need to prepare a business plan, and most business plans include a spreadsheet of the cash flows and profits after one, three, five or maybe even seven years. And what do you do when you are preparing this business plan if the spreadsheet profit figure is not really enough? Of course you know this venture will be a success, you just have to convince everybody else, so you fiddle with the market penetrations and the scope of the market and pretty soon you have a "winning business plan".
It may come as no surprise that this practice of developing winning business plans is not uncommon, and not necessarily unethical, as the writer is enthused to the point of the necessity of convincing potential investors.
Business plan failures are by far more the norm than the exception, but what people often fail to realise, is that in general most business plans fail for the same reason, market reasons - that is, that you do not sell as many widgets or services as you had forecast.
The value proposition
It is important to understand that all products or services that survive do so because they meet a need. In scoping a new opportunity it is important to understand this need, and ideally be able to quantify the benefit of fulfilling it. This is often referred to as the "value proposition".
If somebody invests A$ in a product they expect to receive a benefit of B, and in the eyes of the purchaser, B should be greater than A.
A$ provides to B; where B>A
The value chain
It is also just as important to understand the value chain in the delivery of a product to a final customer, and in this case there is a surprise.
Consider the usual value chain commencing with say the inventor and going right through to the user, such as:
Inventor - Developer - Manufacturer - Distributor - Retailer - Purchaser - User
In order for the product to survive, all participants in the value chain need to have a positive value proposition, but notice that in some cases the purchaser is not necessarily the user. A typical example may be in the case of a toy for a child, the value proposition still needs to apply. The purchaser's value may be in peace and quiet, or the perceived educational value of the toy, but be sure, they need to be aware of this value.
One of the few cases where the value proposition is not direct is in so called "loss leader" products where a product maybe sold at cost or below in order to attract customers to purchase some other goods, usually sold at a large profit. This is not uncommon and can be very lucrative.
The three market categories
As an aid to developing an understanding of value, try and categorise the market segment in which you operate.
Basically all products and services can be fitted into one, or more, of the following three simple categories:
- Industrial/commercial
- where the purchaser usually makes an informed purchase decision based on payback.
- Consumer - where the purchase decision is made on convenience, or the special benefit of the product (usually communicated in expensive marketing campaigns) or lowest price, such as in the case of "home brand" products.
- Fashion - where brand is everything!
It is possible to represent these three segments in a simple diagram as shown.
Notice that the market risk (or likelihood of you being able to properly and accurately quantify the market size) is low in the industrial/commercial segment and gets higher as you move through the consumer products to the fashion goods.
This simple diagram provides a valuable insight into new product selection and quite often, people who may be making sensible marketing decisions are doing so with a subliminal, but unconscious awareness, of this drawing and the importance it represents to low-risk decision making.
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