Friday, February 6, 2015

How CPG Companies Can Create What Consumers Want

Consumer packaged goods (CPG) companies have a big problem. They have almost no idea which of their new products will end up being popular with consumers. Despite Big Data, heavy investment in innovation, and efficient R&D, two-thirds of new product concepts don’t even launch.

What’s more, although CPG companies are extremely good at the early stages of innovation – creating new product ideas in promising growth areas – and at the later stages of testing and commercializing concepts, there’s a conspicuous hole in the middle of the process. They don’t have a clear grasp of which combinations of features, packaging, price, and even labeling will persuade consumers to make a purchase.

There’s a way to fill that hole, but it won’t be easy. Based on our experience, we think it will require progress in three key (and intertwined) areas. None of the three will work without the other two, and all will compel CPG executives to rethink aspects of their traditional business model.

Dynamic Modeling 
Companies need to adopt dynamic modeling to gauge various combinations of features. When companies test a product concept today, they’re limited by the relative primitiveness of the tools available to them. Testing a preset combination of options (for example, cinnamon-flavored cookies, in six-ounce individual packages, at 79 cents per pack) produces a basic thumbs-up or thumbs-down assessment as to whether the product will be financially viable. However, the results apply only to that combination. If you change one element, the test results become much less useful. Worse, the testing is expensive and time-consuming, with turnaround times that are measured in months, which makes testing every single combination impossible.

Companies should be able to test various combinations more dynamically, adjusting the flavor profile, pack size, price, labeling, distribution channel, and any other aspect of the value proposition – even the brand name. Developing a simulation model that can evaluate a wide range of scenarios by altering the various elements and seeing how each factor affects the outcome while the product is still in the development stage is an effective way of doing so.

How much more would consumers pay for low-calorie cinnamon cookies? Would they prefer eight-ounce packs? And should the cookies be sold at a convenience store, a big-box retailer, a warehouse store, online, or all of the above? The right model would break such product propositions into their component parts, reassemble them in novel ways, and estimate demand for the new combinations. This in turn would require detailed data on which features consumers value, how much they’re willing to pay for those features, and where they’re willing to make trade-offs.

In addition, simulation models need to deliver more actionable results. Rather than providing just a basic yes or no, the results must break down revenue, volume, and margin contribution. If a new product is going to take market share from another player, the model should let the company know where that share will be coming from, at what price, and through which channels. The model should also indicate how much volume is incremental and how much is simply cannibalizing the company’s other offerings in the same category.

Priorities Based on Capabilities
Companies have to develop priorities based on their capabilities. Companies don’t start product development with a blank sheet of paper. They have critical advantages in areas where they focus their investments and attention; other areas can be either outsourced or set aside. For example, some companies are good at developing new flavor profiles, and can easily launch spin-off products (adding toffee to the cinnamon cookies, for instance). Others are good at packaging innovations or cost reductions that lower prices. Still others have strong distribution capabilities, and can get products into new store formats quickly. Whatever its strengths, a company should prioritize its innovation ideas accordingly.

Insights into Action
Companies need to make organizational shifts to put these insights into action. CPG companies need to reorient their org charts so that the innovation function collaborates more directly with marketing, sales, and the supply chain during product development. Many companies think that these four functions collaborate already. But the truth is that they work from different perspectives, with varying definitions of success and incentives, and at different stages in a product’s development.

Innovation wants to get new products from the drawing board to market, while marketing is busy trying to get consumers to open their wallets. Sales focuses on persuading retailers to give new products shelf space, which in turn can help stimulate consumer demand. And the goal of the supply chain is to maximize efficiency and minimize process proliferation. The objectives overlap, but they’re not identical. As a result, products in development can travel far down the tracks before problems surface.

CPG companies would do better to use the insights they generate in the first step (through dynamic modeling) and the priorities they establish in the second (understanding their capabilities) to create a common set of facts and objectives that all four functions can agree on. In some cases, this will mean restructuring lines of authority, incentives, and other aspects of the organization. A dramatic step? Yes. But it is necessary if companies are to make sure that these critical functions are working together.

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