The 2013 PDMA benchmarking study was just released and holds some interesting findings. The survey of nearly 1000 product managers found that only 24% of new products hit their revenue targets last year. Perhaps this data shows we are lousy forecasters. Alternatively, it could be telling us that the billions of dollars invested in improving development outcomes over the last decade may not be paying off as well as hoped.
Given the ample room for improvement, its worth considering how a value-based approach to development might improve the new product development process. There are three main leverage points that can be changed to improve the development process: data, analytics, and stage-gate criteria. A value-based development approach can improve each one.
Data: virtually every new product development process uses some form of Voice of the Customer data. Most companies use a combination of qualitative research (e.g., focus groups, ethnographic observation) and quantitative research (e.g., attitudinal and usage surveys). VOC is essential in the ideation and scoping stages to identify unmet needs and preferences that could be satisfied with a new feature set. The usefulness of VOC data declines in the later stages, however, when it is necessary to understand the profit potential of different features. VOC data can show how much a customer prefers a feature, but it is less able to show how much that feature is worth. This limitation of VOC data often leads companies to build “gold-plated” products that are highly reviewed but don’t create enough value to justify the price.
A value-based development approach overcomes this problem by using a quantified estimate of the worth a customer places on a potential product. The quantified value estimate enables the product manager to make better choices about which features to add, what price to charge and what volume can be realistically expected.
Analytics: incorporating customer value data into the development process opens the door for more insightful decision analytics. Consider the decision about which features to develop. Using an estimate of customer value combined with costs enables the product manager to calculate the profit potential of each feature (Profit potential = Value – Cost) and compare that with other potential features. This profit potential analysis is an obvious input to the feature selection decision (i.e., develop the features with the highest profit potential). It is also a key input to other strategic choices such as launch pricing, discounting programs and business cases.
Stage-gate Criteria: the real impact of a value-based approach to development stems from improving the decision criteria used to pass product concepts through each gate. The goal is to screen out unprofitable products early in the process. We recently incorporated “value-gates into the development process for Tech Co., a large maker of communication processing equipment. In the first gate we required that the product manager identify specific value drivers the product would impact and tell a “value story” from the customer’s perspective. In the next stage, product managers had to build upon their value story by constructing a quantified value model and set a value-based price. The product passed if the model indicated sufficient value was being created to justify the cost. The final gate required customer validation of the value model and construction of a sales forecast based on specific sets of customers that would be impacted by new value-added features.
The results of the effort were impressive. Tech Co. improved the economics of its development process by cutting costs (eliminating non-value added features earlier), improving success rates (products started hitting the “sweet spot” of the market) and capturing higher prices. As one manager described the outcome – “the value-based approach to development showed us how to design profitability into our products.”
The value-based approach to development worked for Tech Co. Could it work in your company as well?