New Product Appeal and Profitability Are Not Positively Related
This is perhaps my favorite example of non-linear relationships.
While the traditional methods of concept testing remain the most common way to develop and test new product concepts, concept testing is not the best approach to new product/new service development.
You know concept testing. You pull out a 2 or 3 paragraph description of the new product or service and take a 50 year old 5 point scale out of the drawer (5=definitely will buy, 4=probably will buy, 3=maybe will buy, 2=probably won’t buy, 1=definitely won’t buy). Have 150-200 people rate the concept and calculate the percent who give it a 4 or 5, the “top box” scores.
Trade-off and choice modeling analyses, borrowed from experimental psychology, represent enormous improvements over conventional concept testing. But in general, their goal often remains the same as the goal of traditional concept testing: find the concept that produces the highest level of consumer appeal and therefore the highest levels of purchase probability.
And that, of course is not what a company really needs. As it happens, the most appealing product is not the most profitable product. It never is. It’s the least profitable. Giving buyers everything they want (including the lowest price) puts you on a fast track to disaster. The following illustration shows the general relationship between concept appeal and profitability.
What a company really needs is the most profitable concept.
We’ve found the difference in profitability between the optimal concept and management’s favorite to be as much as 14 to 1. This difference means that marketing managers cannot, flying by instinct and gut feel, simply pick the most profitable product or service from among all the—often literally—millions of possible combinations.
A current example of this problem can be found in the automobile industry. Cars are now so loaded with safety and anti-pollution equipment, powerful engines, antilock brakes, sound systems, GPS and Bluetooth—all features that are very appealing—but they cost too much, $33,000 on average compared to $18,000 two decades ago. So buyers are demanding discounts and new car profits are stagnant.
The problem would be of only academic concern were it not for marketing’s heavy focus today on “appeal scores.” “How did the concept perform in terms of ‘top box’ purchase interest or purchase probability ratings?”, the product manager asks, confident that purchase interest and profits are moving together. The higher the score, the greater the manager’s interest in the offering.
The type of computer-aided new product design we recommend (and discussed in our books, Counterintuitive Marketing and Your Gut Is Still Not Smarter Than Your Head), is an alternative to traditional methods. This unique analysis helps marketers design optimal products and services. The methodology has several advanced features: it predicts real-world behavior and sales for a constellation of alternative concepts; it uses a nonlinear optimization algorithm to identify the most profitable concept; the marketer can personally play out “what if?” scenarios; and it offers targeting and positioning guidance.
Sadly, what we have found over and over again is that what interests many marketers the most—the concept that earns the highest purchase interest score—is a temptation they find hard to avoid.
Instead marketers can use the computer-aided product and service design methodology to find the optimal combination. To do so, of course, requires a revolution in marketing thinking. It requires giving up the myths that a company must offer the most appealing and highest-quality products and services; that the greater the appeal and the higher the level of quality, the greater the chances of marketing success. Without a consideration of profitability and return on investment, such success can turn into a financial disaster.
There is clearly a difference between what the customer wants and what the customer needs and is willing to pay for. By addressing the immediate needs of its loyal customer base (as opposed to their wants, which are often an impossibility), a business can avoid the treacherous pitfalls associated with chasing a chimera (i.e., pleasing all of the people all of the time).
What smart marketers do is determine what needs to be accomplished on every dimension of interest (e.g., new product appeal, market share, customer satisfaction, retention, distribution, and so on) and then what levels of each of these activities are “optimal,” thus maximizing not the dimension itself but profitability. Marketers need to do enough to keep their customers content and their business strong and profitable, but not so much, too much, that they’re on the downside of the profitability curve.
What smart, counterintuitive marketers realize is that it is best to use research to evaluate thousands, sometimes hundreds of thousands, of new product concepts in order to identify and describe those forecast to be the most profitable.
This is worth doing.