Mike Collins in the News

Manufacturer's Corner: Making Sure There are Customers

By Michael Collins, President, MPC Management
ManageSmarter.com - June 11, 2009

Original Article

The primary reason for new product failure? Not enough sales are generated. My own experience with new product development suggests manufacturers do a pretty good job on the technical parts of developing new products…it's just the marketing questions they run into trouble with.

I think it's easiest to explain these problems and suggest solutions through the accompanying spreadsheet, similar to the one presented to owners or investors to convince them to come up with the money. To elaborate on some of the points addressed:

1. Average sell price. It is fairly easy to set a sell price once you estimate the costs and required margin.

2. Margins/costs. Management usually has a minimum margin tthey would like to attain in any new product. In this case the margin is 30 percent. If you don't think it is possible to build a machine for this cost, you need to make an early decision about the viability of the project.

3. Total cost of project. It is also important to accurately estimate the total costs of developing the new product. This includes all engineering, building the prototype, tooling, necessary options, and all marketing costs.

4. Sales forecast. This is the most important number of the whole exercise because it is the multiplier of all costs and margins.

5. Total projected profits and payback in terms of years. If your numbers in the first four items are fairly accurate, it is fairly easy to project the total yearly profits by subtracting the total projected margins each year from the total cost of the project. In the early years when sales are just beginning and the total cost of the project is being absorbed, this will be a negative number. But as sales and margins begin to increase they begin to pay for the project costs.

The final number is the year when all project costs have been paid off and the new product sales really begin producing profit for the company. It is totally up to the owner or investor on what year he wants to pay off the project and begin making money. Most owners of mid-size manufacturing companies with a board of directors don't like to fund projects that have more than a four-year payback.

Over many years, I have found the biggest factors leading to poor sales (new product failure) are not doing a good job of assessing competition or of assessing potential buyers and market demand (items one and four).

Setting a Sell Price and Assessing Competition

To be able to set a sell price, the manufacturer should know something about competition in the marketplace. Customers usually have similar products that they are already purchasing, so they will want to know two things:

• What is the advantage of your machine over the ones they can already purchase?

• How does your price compare to the competition's prices?

It is important to find the answers to these two questions before you have developed a prototype and are trying to sell it in the marketplace. The last thing you want to have happen to you is to introduce a prototype to the marketplace and find out there are cheaper versions of the product doing the same thing. So at a minimum, someone needs to find out how many direct and indirect competitors are already in the market, what their sell prices are, and the proof you have a competitive advantage over existing competitive products. For industrial products and machines, I have always done this comparison in a matrix.

Sales Forecast - Assessing Demand

If I were the owner or investor sticking my neck out to finance this project, I would want to know how the team arrived at the unit numbers in category four. Even if the numbers are just estimates, the owner and investors will want some kind of evidence customers will eventually buy the new product.

You might begin by trying to find out how many competitor machines have been sold per year. This would at least show you the relative size of the market. Or you might get testimonials from prospects and customers on why they might buy the machine. If the product is small and low cost, you can make some prototypes and have good customers evaluate them. Or if the product is large and expensive, you might consider having a focus group, inviting some of the most progressive customers to your plant to evaluate your concept as a model or in a drawing.

If the owner or investors of the manufacturing company will have to mortgage their houses, and borrow money from the bank, family, and friends, they need to spend a lot of time making sure 1. there will be enough buyers; and 2. their product idea has a competitive advantage.

On the other hand, if the investment is all your money and you can afford to lose...go for it!