Question: How should new products/services be created?
A) Make a novel untested product/service then find customers for the product/service?
B) Find a group of customers, find one of that group’s unmet need, then create a product/service to address than unmet need?
Explanation: The development process of the product/service will take time regardless of choice A or B. However, with choice B, the likelihood of having to rework the product/service to make it more closely meet the needs of the target market is lower. Also, with choice B, you have a better idea of the size of the target market. Having a market large enough to grow your business is very important. More on that below.
A great example of choice B is Girls Auto Clinic. Girls Auto Clinic is a brilliant combination of female-focused auto repair shop and salon.
Founder Patrice Banks felt what many of us feel when car issues come up:
“I felt like an auto-airhead. I hated all my experiences going in for an oil change, being upsold all the time for an air filter,’ she said. “Any time a dashboard light came on, I panicked.” – Patrice Banks, Girls Auto Clinic Founder
Of course many people come up with business ideas like how Patrice did: through personal experience. However, where most people fail to consider is that their own experience might be too niche. In other words, the market might be too small. How do you know if your market is too niche? Market research. Market research is a process of analyzing factors such as demographics, purchasing habits, direct and indirect competitors, macro and microeconomics, and other elements. As much art as science, thorough market research is a critical step before moving forward with any concept.
One of the services I offer is strategy consulting. However, the name is quite vague so what is strategy consulting? It is a lot of things. It varies by the needs of the client. Some clients need help developing an overall strategy for the business.
Say they have a product but not much else. So they need everything from naming of their product, research on where to sell their product, team building, etc. Naming might require a psychographic analysis of branding.
If they are a little farther along, it can be an audit of what they’re already doing, or analysis of where to go next. A business might be looking at weighing the pros and cons of expanding to a new market, introducing a new product, do a product overhaul, etc. Product overhaul might require a net present value calculation of multiple alternatives.
Every situation is unique so let’s talk and figure out what you need.
When thinking about your business, it is paramount to think of the downside risk: bankruptcy.
Everyone knows the basics: not enough customers, expenses are too high. However, the devil is in the details. That’s why a simple Google search of why businesses in your industry fail. The “unknown unknowns” are critical. Considerations you haven’t even thought of considering. Whether it be, having a little extra cash on hand, or a different advertising strategy; this little bit of research will help you learn from the mistakes of others, and hopefully not repeat yourself.
When you think of McDonald’s food you think of burgers. Maybe other things too but mainly burgers. However, back in the late-80s/early-90s the Golden Arches tried to expand into pizzas.
This was ultimately an unsuccessful expansion for reasons beyond a confusing palate. They failed because they expanded beyond their core competency: making hamburgers.
From an operational stand point hamburgers are different than pizzas. Making pizzas require different equipment and ingredients. One reason for McDonald’s profitability at relatively inexpensive pricing is due to cost efficiencies from economies of scale; every inch of a McDonald’s kitchen is optimized. Fry pans have a designated size that fit with the size of the patty, that are heat up at a certain rate. Pizzas don’t need frying pans. They need ovens. Ovens that are expensive to put into existing restaurants and take up valuable kitchen space. Pizzas also took longer to prepare than the fast food burger. People had to wait longer; an unusual thing for a fast food company to ask of their customers. Lastly, pizzas not fit through the drive through window as easily as a bag of burgers and fries.
They could’ve had success with pizzas if they approached it from a different angle. McDonald’s found success with a production expansion with the Egg McMuffin. Originally, skeptically received, breakfast is a McDonald’s staple now. Burgers are lunch thing, but they successfully introduced breakfast. Pizza is a dinner thing. Therefore, instead of pizzas, McDonald’s should have brought in pizza by the slice (a very well-known concept at pizzerias) or at least personal sized /small pizzas. A slice of pizza for lunch is not a foreign concept. An entire pizza for lunch is.
The difficulty in making and selling different types of food is probably why even large chain restaurants choose to differentiate different palates under different brands as Pizza Hut is doing with WingStreet and Carl’s Jr. with Green Burrito.
Now it will be harder to reintroduce pizzas because McDonald’s is busy rebranding itself to health with marginal success. Pizzas aren’t considered to be healthy. Nonetheless, it is not hitting their market value with a 5 year high at $118/share.
McDonald’s might set up for another go at extension but instead of a product extension (i.e. new product), they might go brand extension (i.e. new company). The popularity of fast casual dining such as Chipotle (before the e-coli debacle) and Blaze Pizza might be an attractive direction to expand McDonald’s.
Walmart lost $21 billion in market value after it forecasts drop in 2017 earnings resulting in the steepest decline of the company’s stock in 25 years.
In layman’s terms: Because Walmart said it’s expecting to earn less in 2017, lots of their shareholders sold their stock and lots of potential buyers said they weren’t willing to buy unless the asking stock price is lower.
Amazon is crushing pretty much every retailer (except some custom designers; however with Amazon Local they are partnering with may of those product/service providers). Amazon sells practically everything you can put in a box and ship. At extremely competitive prices. Free overnight/2-day shipping in some cases.
Walmart offers very very competitive prices and has locations pretty much anywhere in the US. However, they are still a brick and mortar business so there is a limitation on floor space thus a limitation on product offerings. I say brick and mortar instead of ‘click and mortar’ because even though they have an online store, it sucks. Last year, I purchased a product online and selected in-store pick-up. 5 days later it was available for pick-up at he Walmart that is down the street from my office. Walmart’s supply chain management system is one of the best in the world. However, somewhere down the road there was an implementation issue of the online business with the existing business.
Walmart’s situation has similar elements to that of Blockbuster. They have a size and first mover advantage. However, over time they lost their position. I doubt Walmart will face the same fate as Blockbuster but with a $21 billion dollar loss, it is not nothing. You can read about Netflix/Blockbuster here.
2. Other competitors
- Dollar stores: Walmart is known for low prices but no one goes lower than dollar stores. Furthermore with the long-going Great Recession and great income disparity dollar stores enjoyed great profitability.
- Grocery stores: Walmart has Neighborhood Market stores in some markets and super stores (all encompassing stores) in other markets. Nonetheless, companies that are just grocery stores are a big and aggressive competitor to Walmart.
Walmart is also facing PR issues: 1) It is considered low-class. There is a search term “people of Walmart” which shows rather uncouth individuals shopping in Walmart stores. 2) Also, Walmart is criticized for killing off small, independent stores.
Walmart is doing many things to try to turn their path around. We’ll see how effect these efforts are.
Last week I highlighted aspects about Quiksilver’s bankruptcy. So this is what Quiksilver and other surf brands do should to save themselves.
Looks like the other big surf brand, Billabong is also hurting too with diminishing revenues and net losses from 2012 to 2014.
Recently Billabong also sold its other assets: DaKine, Swell.com and Surfstitch to enhance liquidity.
Billabong also thought about selling RVCA but didn’t. I’ll get to that in a bit.
As I discussed in my previous post, Quiksilver bankruptcy is partly due to surfing not being as cool as it used to be.
So what is cool?
If extreme sports was cool in the ’90s and ’00s, extreme athletics is cool now. MMA and CrossFit is cool.
In March 2015 WWE announced a 50/50 joint venture partnership with MMA brand, TapOut. Founded in 1997, the brand had $200 million in revenues in 2010. Later that year the founders sold it to Canadian company Authentic Brands Group LLC for an undisclosed sum.
CrossFit had 8,000 affiliates in October 2013. As of January 2014 the company had 9,000. In May 2014 it hit 10,000 affiliates.
As shown by strategyandanalytics.com’s graph featured in Fast Company’s article, CrossFit’s popularity growth is amazing.
Of course, most people don’t actually want to do WODs and armbars. They only want to dress like they do, much like surfing and snowboarding.
This is why it’s no coincidence that Reebok (doing well financially with 5% growth in 2014 and seven consecutive quarters of growth) has its hand in the UFC and CrossFit.
Under Armour is so popular. Under Armour which also makes products for MMA and CrossFit enthusiasts were named as one of the most valuable American brands by Fashionista and as one of the top 10 MMA brands by FightState.
Heck, even Adidas (Reebok’s parent company) makes judo gis!
But Reebok isn’t a surf brand!! Quiksilver isn’t an MMA/CrossFit brand!!!
So going back to RVCA. RVCA, is a popular surf brand that is also popular amongst the brazilian jiujitsu crowd with its sponsored athletes such as MMA star BJ Penn amongst BJJ stars. RVCA recently did a collaboration gi with uber popular gi brand Shoyoroll. Billabong decided to keep this brand.
As RVCA has shown, it is possible for a surf brand to do a brand extension into other lifestyle activities.
So what should Quiksilver do?
Change their marketing communications. Surf ads right now are blondes in exotic tropical locations. Unfortunately for Quiksilver and other surf brands is that demographics are changing: wealth discrepancy is large also Hispanics and Asians are the fastest-growing minorities in the US. This growing market segment might not have the money or time to travel to exotic destinations nor do they even look like a pro surfer such as Alana Blanchard.
So abandon their existing surf model? No, look at the other elements of surf. The aspects of the lifestyle that are more relatable to this large, young, and growing market segment:
- Surf spots: Urban surf spots such as old Huntington Beach (it wasn’t always the gentrified “Surf City USA” it is now), Long Beach, Rockaway Beach NY, San Pedro, etc. Even urban Honolulu can be a little edgy.
- Embrace their connections with the skate world.
- Athletes: Add famous MMA and/or CrossFit athletes that also surf. Especially with the Reebok-UFC deal, lots of MMA fighters are looking for more sponsorship money. UFC middleweight contender Luke Rockhold surfs in Santa Cruz.
- Other lifestyle images: Tattoos and asphalt instead of sunsets and palm trees, turntables instead of ukeleles.
- Diversify: Buy or strategic partnership with boxing/muay Thai brand Fairtex/etc. or Brazilian jiujitsu brand Gameness/etc.
We’ll see what the future brings.
I was asked by a student for help on their franchise business plan assignment. One of the elements of the assignment was determining where on the product/service life cycle curve the franchise sits. It is always helpful in any Industry and Market Analysis to get a macro view of where the product/service is in its life cycle. What is the product/service life cycle? Glad you asked!
It is the birth, growth, progression and ultimate passing of any product/service. For example a CD came into the market around the early 90s. This is the birth/introduction stage. It gained popularity and was one of the most preferred method of data transfer until recently. So for the next 10 years it was in the growth and in the early 2010s entered the maturity phase. Now in the second half of the 2010s it is in the decline phase. Last week I purchased a new laptop and installed Microsoft Office via online. No more CDs.
Of course, not all products/services will die out. They may die out eventually, but will make one or two more resurgences. Take for example, baking soda (sodium bicarbonate). The earliest use of naturally forming sodium bicarbonate was used by ancient Egyptians as a component of the paints they used in hieroglyphics. Sodium bicarbonate was also used in the 1800s in commercial fishing to prevent freshly caught fish from spoiling. Baking soda continues its long life cycle in many many uses including cleaning, cooking, neutralization of acids and bases, not to mention the elementary school volcano science experiment, and more.
Maybe there’ll be a new use for CDs that will revive the CD but without major modification (which will essentially change the actual product and will actually create a new/different product) it will be unlikely. Wherever your product/service is in its life cycle, with enough investigation, a new spin could be created to find a niche demand (market segment).