Alain Breillatt

This morning I fired up my browser and there on the Nielsen internal home page was a gleaming new post declaring Most Households Read Food Labels by our own Todd Hale, SVP Consumer and Shopper Insights.  For those who know me, they would anticipate my immediate reaction to such a statement: an almost visceral desire to holler, “That’s BS!”  Sometimes I accidentally say these things out loud and then I have to sheepishly apologize to those around me for my explosive behavior.

Please don’t misunderstand, I respect Todd highly and he offers an accurate analysis of what Nielsen’s Homescan panelists (125,000 demographically diverse households spread across the United States), answered in response to a 2008 survey asking the primary shopper about their tendencies for reading labels on food and beverage packages.

But if you relied solely on the data that in summary says 61% of households agree completely or agree somewhat that they read product labels you would be drawing very faulty conclusions as to how readily consumers are responding to what is printed on the product labels.  And such conclusions can lead to bad policy decisions among government and health regulators, bad ingredient decisions by food scientists, and bad marketing decisions by brand managers.

Well why is that you might ask?  Two reasons come to mind:

Quantitative data offers only a narrow slice of understanding consumers’ actions, attitudes, and beliefs

Quantitative data is useful in defining and tracking trends in behavior.  But you cannot get to the truth of what someone actually does unless you actually go out and observe them in the environment where they engage in this activity.  You see, it’s not even good enough to sit down with consumers in a focus group or one on one interview and ask them what they do.  In the case of consumers reading labels, you must go out and visit grocery stores and observe from afar to determine whether people are actually reading labels.  Then if you approach them you can find out what they are looking for on the label and why they read it.  The ethnographic approach complements quantitative data by providing definitive proof of behavior and rounds it out with cultural and personal drivers.

 A combination of confirmation bias and the Heisenberg Uncertainty Principle impacts truthful self reporting

Maybe you realize it, but the truth is, we lie all of the time when our behaviors do not match what we know “the experts” or “society” or even we ourselves have come to believe is the “appropriate behavior.”  If you don’t floss on a regular basis and the dentist confronts you with the results of this by saying “your gums are a little inflamed, are you flossing regularly?” how likely are you to admit, no, I never floss even though I know it’s good for me?  So think about those individuals who reported that they agree completely or agree somewhat that they read product labels.  Some of them probably absolutely do read the labels, especially if they or someone in the home have a restricted diet due to food allergies, health conditions, or less likely, are on a diet.

However, my experiences as a new product development consultant where I engaged with hundreds of consumers and visited dozens of stores demonstrated that most consumers move through the store in a mindless mode of filling their carts with the products and brands they know and only rarely stop to examine the label.  Nielsen’s own (warning PDF) DeltaQual research (warning PDF) shows that once these habits or Omega Rules are formed, only a certain type of trigger might cause a consumer to stop and scrutinize the brand or label more closely.  This differs of course by category where shopper modality adjusts accordingly but the average shopping list from week to week is probably 80% identical and probably 99% identical across an 8 week period.  I described one such delta moment scenario in my last post concerning the not-from-concentrate orange juice “lie” that ruptured the Breillatt household’s perception of what constitutes “fresh squeezed orange juice in a box.”

In reality, consumers may not even realize the lie to the “truth” that they claim defines their behavior.  It is not unusual when visiting a home and asking one member of the family questions about their behavior to have a son or daughter or spouse pipe in with, “No way, that’s not what you REALLY do.” You see, as the Heisenberg Uncertainty Principle (as misused by social scientists) states, “the very act of observing a phenomenon inevitably alters that phenomenon in some way.”  Consumers may believe they’re checking labels because they’ve heard how important it is to be aware of what they’re eating what with the food pyramid from the USDA, the constantly improving Nutrition Facts, and dietary recommendations from pediatricians, Dr. Oz, Dr. Gupta, and every other guru they encounter through media. They remember that of course they checked out the label of many of their foods when the big uproar came up around trans fats or high fructose corn syrup or whatever the latest nutritional crisis might be.  Of course, they forget that they did that once during three weeks’ worth of shopping 2 years ago until they were caught up again by the latest scandal to grip TMZ and the gossip rags at the checkout line.

Allow me to expand on that thought with a recent and relevant example - especially for you social media researchers who are trying to figure out how to leverage the data such sites like Twitter and Facebook offer.  Just a few days ago, the Nielsen funded Council for Research Excellence released the results of the Video Consumer Mapping Study which identified that:

The amount of time Americans report they spend watching online video has been, on average, grossly overstated by conventional forms of media research and audience measurement …conversely, traditional TV viewing has been pretty drastically under-reported” by research that asks people how they consume video.  The reason why, is that research based on how people perceive they consume media isn’t nearly as accurate as research that actually observes how they use it.

The ad industry historically has known about such “halo effects” and the fact that it is considered socially unpopular for people to report that they watch as much TV as they actually do. On the other hand, people tend to over-report their online and mobile video consumption, because “it is new and cool.”

As Arsenio Hall used to say, “Things that make you go hmm.”  Social biases have a real impact on how survey participants perceive themselves and therefore how they report their activities.

So my recommendation is, if you’re going to rely upon a statistic as the foundation for taking an important action to your product, make sure you have a good interpretative lens based on true consumer / user behavior to provide the full color for interpreting the data.

Art is not what you see, but what you make others see. Edgar Degas

If you’ve ever found yourself working for a start-up or really small company - I’m talking less than 15 employees - then you’ve no doubt encountered the siren song filled dreams of a mammoth sized marketing budget.

“If only we were like P&G or Apple or Accenture,” the song goes, “with six, seven, yes even eight figure R&D and marketing budgets…we could blast our message on billboards and in every Google Ad possible…starlets would preen around our product in every episode of the best shows on Must See TV…we would have access to all of the research ever generated about our target customer and I could quit guessing when the CEO asks me what is the right next step….Man, our brand would be ubiquitous…customers across the country, even around the world would know how amazing our products are and…we would be inundated with sales…because they would love us.”

Yes, it would be amazing wouldn’t it Virginia?  But be careful because as the Bible says, “where much is given, much is expected.”  It’s enticing to believe that all of the money in the world would provide you with the absolutely complete and perfect understanding of your target consumers.  Your war room would be filled with books (OK well not books but given the thunk factor of those PowerPoint decks when printed and dropped on the board room table, they might as well be) carefully crafted by only the best consultants detailing everything you never even dreamed you wanted to know about the habits of your customer.  You would have hours of candid video footage which you would spend hours studying the minute details of freeze frames like Phil Jackson preparing for the big game.  The best designers would be on speed dial and shower you with their most brilliant and most modern concepts.

Sounds like nirvana, right?

And yet, if that is what a massive marketing budget can provide, then what in the world happened to those poor schlubs over at Tropicana who arguably own the concept of fresh squeezed orange juice?

As Grant McCracken, pop cultural anthropoligist extraordinaire, explains, they were swayed by everything money could provide: the glitz AND the glamour! Those entrusted with this sacred brand allowed a so-called guru with the hippest eyewear you ever saw, run their brand right off the cliff.

What, you mean the iconic mouthwatering orange with the straw in it is so fraught with meaning that abandoning it for a sterile, generic looking, impossible to distinguish from the cheapest watered down so-called orange juice sitting at the bottom of the shelf package, would actually lead to a 20% decline in revenues in the critical first 3 months after launch?  As our good friends over at Calculated Risk like to say, “Hoocoodanode??!“  It’s amusing that Tropicana’s initial response to the flat-lined launch was that complaints came from a loyal vocal minority.  A vocal minority?  REALLY?  You lose $33 million in revenues on top of a failed $35 million packaging redesign / launch campaign and you say a vocal minority caused you to stand up and pay attention?  Sounds more like a full scale revolt of a significant portion of your customer base.

McCracken pulls no punches in his cutting critique of Peter Arnell - the so-called guru - and Massimo D’Amore, the Tropicana executive who sponsored the whole debacle.  And Arnell’s response demonstrates an over-engineered thinking that only the brightest minds could produce.  Consumers know what the juice looks like, Peter, the key is making them think they’re about to drink straight from the orange.  No one I know could ever have imagined that they were freshly squeezing the juice by rotating your little orange cap.  Talk about artifice.

The lesson from this story my friends is that no matter how large your budget, if you don’t ask the right people the right questions, you can expect similar results.  And in corollary, the larger your budgetary spend, the more likely your spectacular failure will go down as a Harvard Business School case study of what not to do.

So remember, as one entrusted with a product brand story, you are an artist and your product is destined for the masses - your customers - so if you’re going to entrust your art to some guru, make sure they go out and talk to those same masses and actually LISTEN TO THEM.  In fact, in today’s world of Social Media, for a lot less than what Arnell costs, you can learn more just by dipping your toes in conversations flowing around your brands each day.  Why not strike up a conversation and see where it leads.  Because while those same masses may not know art, they absolutely know what they like:

The public is the tribunal before which all art is judged – not the critics or the academies. The public is the artist’s only patron, and has certain fundamental rights. It will submit to education, and will respond to suggestion, but it will not be bullied. Walter J. Phillips

And to those iconoclastic designers out there who hold themselves above the masses?  I can only say that mediocrity requires aloofness to preserve its dignity.

Next to come, an exploration of why competitors fail to act on customer opportunities in categories clearly demonstrating strong growth and significant innovation.

Continuing the discussion around how to approach developing a new to the world / industry product (that started off over in the Ask A Good Product Manager post) I wanted to point to a great post and developing conversation that Saeed Khan kicked off over on the blog On Product Management.  Saeed tackles this question admirably and offers thoughts about why sometimes you just have to proceed in developing since consumers might have no idea they have a problem until they are presented with the solution.  I think the discussion that ensues in the Comments section, where I’ve added my own two cents, pretty thoroughly explores the space and helps clarify thinking in how to approach developing a novel solution.

I personally believe the framework for new product development remains highly relevant even for novel solutions where  a real world context is hard to identify.  It just requires flexibility in how you approach it and a willingness to proceed based on your own personal convictions while seeking additional data to support your belief that there is a pony in there somewhere.

I wrote a post for Jeff Lash over at Ask A Good Product Manager in response to a question he received from one of his MANY readers.  The question was:

How can I determine the need and saleability of a “new to the world” product?

Make sure you go read the comments at Jeff’s site because they add some real depth to the answer and respond to at least one facet of the question I should have considered.

With that said, here’s the answer:

This is a question every product manager will likely face at some time in his or her career and it is one of the more complex challenges due to the multi-faceted answer it requires.

But let’s start at the most basic assumption: you know who your initial customers are and you’ve determined what problem your product solves for them. You do know this, right? Somewhere among your PRDs, MRDs, spreadsheets and extensive collection of feature defining Keynote decks is a single document with one short paragraph that describes:

 [This group of customers] will use [my product] to solve [this problem] in [this context].

You have this right? Don’t feel bad if you don’t. But if you haven’t started actual production / development of your product, don’t go any further until you have this nailed to the wall of your boardroom with the signatures of all internal parties.

[Note, I’m not going to go into the details of what it takes to generate this target customer / product profile but if you want a good primer on this go read Innosight’s write-up of their “JOBS™” methodology. Christensen didn’t invent this concept of ensuring your product aligns with a real job a customer needs to do — it’s Marketing 201 (a.k.a. market segmentation by need states) — but his team does a nice job of framing a successful approach for avoiding the all too common dilemma I’m about to describe. I would also point you to my friends over at K&A as well but none of their relevant materials are posted up on the site.  I’ll just say you won’t truly succeed until you learn the full meaning of the word ethnography.]

In my experience, especially when dealing with engineering-minded entrepreneurs developing “new to the world” products, there is a tendency to enthusiastically focus on developing the new product without stepping back to ask, “Who will want to buy this and why?” Some people call this the Mt. Everest Syndrome — we build because we can and because it is a very cool and extremely technical challenge. There’s nothing wrong with doing it this way, but the problem is that once you’ve reached the “summit” of developing this amazing, mind blowing new widget you suddenly look up and realize, “Wait a second, now what do I do?”

The natural response is to begin chasing after potential customers because you want to get paid for your work. But if you don’t have a clear conceptual model of the person and behaviors you’re targeting, then this will be a very frustrating endeavor because at every turn you will hear a different response from a different type of customer. The Director of IT at one of the still surviving major financial institutions will tell you that your solution would be perfect to audit their expenditures of TARP funds if it had an ITIL compliant server back end that could interface with their Exchange setup. At the same time, the “typical consumer” will tell you that your GUI is too complex and ask why you can’t just dumb it down so that little Kylie can embed photos of her pet fish in her newsletter and easily send them out to the local family mailing list? And of course, the 3l33t programming types will just shake their heads and say, “Dude, where’s my command line interface so that I can link up to my headless virtual servers to manage my growing collection of torrents?!?!”

So, which one of those customer types or “personas” did you want to use for your pricing, sales growth, and marketing outreach planning purposes?

Skriiiiiitch! [mimicking the sound of a needle being yanked across an old LP].

Remember when I said there was nothing wrong with building the product first and then trying to figure out how to market and sell it? Please reach into your ears and yank out this piece of nonsense because in most cases it is absolutely wrong advice. What I haven’t said — and experience teaches — is that there is a strong possibility that you’re going to show your widget to every potential customer out there and people will shrug and say, “So what?”

Those two words should be among the most used words in a good product manager’s lexicon. “So what?” is the defining question for determining whether you have identified a solution that delivers a unique and valuable answer to a real job that an identified segment of customers want to accomplish and for which they would be willing to pay real money.

Unless you work for Microsoft Research or Los Alamos National Laboratory or some other well funded research tank, every single product idea you pursue needs to be latched onto a well-defined customer persona. That customer group is who you will target for your roll-out of the new product when it is actually released.

This is why a proper new product development effort would begin with identifying a problem or “job” that a target group of people need solved and determining:

1. Who are these target customers? (think demographics)
2. What existing solutions do they use and/or what work-arounds do they leverage against said existing solutions?
3. Where and when do they use these solutions; or, better yet, where and when would they like to use these solutions?
4. Why aren’t existing solutions solving their problem?
5. What are the key attributes a successful solution needs to provide? (this should be a very short list of probably no more than 3 attributes)
6. What value do these potential customers place upon such a solution?

See, here’s the thing; once you’ve identified the target customer and have some understanding of the value they place upon an optimal solution then you have completed 80% of the work required to answer your original question: how do I determine the need / saleability of a new to the industry product?

You should now know:

1. Your hypothesized initial target customer persona — when applied against the right demographic data this should enable you to identify a market sizing, which is a critical component for defining your growth model.

2. The value they place on the ideal solution — when combined with an understanding of the competitive landscape and your fixed plus projected variable production costs, this will help you determine pricing.

You still have to do the other 20%, but at this point it’s more a process of filling in the blanks than it is inventing something from whole cloth.

I know, you’re sitting there staring at the screen and thinking, “OK great, Alain, if you’re so smart, how do I accomplish that last 20 percent?”

Well, I’m glad you asked because that was my next point. When I worked in business development it was not unusual for someone from marketing or sales to send me a hurried email asking about a particular solution space and what our potential TAM was if we decided to expand in that direction. I always was quick to ask, “Are you looking to understand our Total Available Market or the Total Addressable Market?” Usually if I was talking face to face with the requestor I got a blank stare in response to that question.

Here’s the thing — if you want determine the potential opportunity for your product, you first need to know the size of the market you are considering entering / creating and what share of it you intend to own. That is the distinction between Available and Addressable. And this isn’t an easy effort. In the book, Marketing Metrics: 50+ Metrics Every Executive Should Master, the authors elaborate:

    Market definition is never a trivial exercise: If a firm defines its market too broadly, it may dilute its focus. If it does so too narrowly, it will miss opportunities and allow threats to emerge unseen. To avoid these pitfalls, as a first step in calculating market share, managers are advised to define the served market in terms of unit sales or revenues for a specific list of competitors, products, sales channels, geographic areas, customers, and time periods….

Data parameters must be carefully defined: Although market share is likely the single most important marketing metric, there is no generally acknowledged best method for calculating it. This is unfortunate, as different methods may yield not only different computations of market share at a given moment, but also widely divergent trends over time. The reasons for these disparities include variations in the lenses through share is viewed (units vs. dollars), where in the channel the measurements are taken (shipments from manufacturers versus consumer purchases), market definition (scope of the competitive universe), and measurement error. In the situation analysis that underlies strategic decisions, managers must be able to understand and explain these variations.

So in defining your market the steps to follow include:

1. Define the boundaries of the target market and determine / estimate the number of consumers / business entities who would be buyers of any solutions that are or could become available. In this case we are considering a “new to the industry” product so, while an existing solution may not exist, there likely are substitutes available that customers are using. Back in the 1950’s before there was a handheld mobile phone, everyone who needed to communicate by voice used landline phones or two-way radios. Therefore, if you were Motorola developing your analog handheld mobile cellular telephone — of which the DynaTAC was the first US public commercial prototype in 1974 — you would have defined your Total Available Market as the entire population of people who seek to communicate by direct voice transmission.

Because Motorola was a large successful company at the time, they likely projected against a global TAM. Of course, a true visionary might have said that the market was broader than just voice communication and included wireless and image communication as well and therefore broadened the TAM to include users of snail mail, telegraph, teletype, television, and messenger services.

But where do you get the data to put an actual number to that projection? Well most industries have a trade association that annually reports the manufacturing numbers or revenue for each defined product space. For PC and software worldwide and regional numbers I always relied on data from International Data Corporation (IDC), Gartner, and Jupiter Research.

Here’s an example of how Macromedia defined their TAM methodology which pretty much mirrors the approach I used to take for Macrovision. What’s interesting about their example is that they also leverage point of sale (POS) data from NPD. Nielsen, the company I work for now, provides this type of data for manufacturers and retailers in the Fast Moving Consumer Goods space. Using this level of data sophistication dramatically improves the accuracy of product growth projections, although access to this data is a costly option on the order of tens to hundreds of thousands of dollars.

If you’re focused exclusively on the consumer space then census data is your friend and a good starting point. Typically you can search out additional descriptions by analysts that spring up in corporate quarterly reports, investor presentations and online repositories including blogs authored by sector experts.

2. Describe the competitive landscape including the type and size of competitors and the nature of their rivalry, threat of entry, threat of substitute solutions, bargaining power of customers, and finally bargaining power of suppliers. The astute among you quickly identified this as a five forces analysis as defined by one Michael Porter of Harvard Business School fame. I’m not going to dive into detail here other than to say, if you haven’t done so, go read his seminal article describing this model and how to effectively use it in defining a competitive market space. A critical component is building an expanded SWOT (Strength, Weakness, Opportunity, Threat) analysis for each primary competitor since it provides a useful characterization of their capabilities and product directions. You need to avoid becoming simplistic in building this analysis and you should clearly identify where your knowledge is factual vs. hypothesized.

3. Break the market into segments and estimate their size. Market segmentation here should really focus back on the jobs a customer is looking to accomplish when they use this solution. For instance, mobile phone users differ significantly between corporate users who are looking to stay in touch with the office and their professional network as they travel across the country and the globe as compared to heavy socially mobile consumers who want the latest games, ringtones, and to be able to share photos and texts with their wide group of close friends who probably live within the same metropolitan area.

Each group has a defined set of requirements that you should ferret out and determine how valuable the opportunity is in pursuing them. Part of your consideration should include attitudes and speed of adoption. It is not always fair to assume that the best market is the 18-34 year old market in spite of what many on Madison Avenue believe. Age and socioeconomic status may not even be the appropriate characteristics for measuring the markets you are trying to define.

Let that sink in for a minute.

Your market segmentation is not necessarily based on age, income, or gender. It should be focused on people who highly identify with the problem your solution solves — whomever they might be and their likelihood for early versus later adoption.

4. Estimate market share of competitors in each defined segment. This is fairly straightforward — like I said, filling in blanks — but you should carefully consider who the competitors and how tightly they hold to your target customer base. Since this is a “new to the industry” solution you need to keep your definition broad until you have narrowed down the precise requirements. With your requirements in place you can effectively identify who plays in your identified target segment for initial launch.

So now what? Well, with all of this data in place, you need to create a market growth projection. There are a number of ways to go about this and in reality all of them are filled with guesswork, estimations, hypotheses, and at least a little gut based decision making. But no VC or CEO is going to accept that you’ve built this model based on your gut so you need some type of analytical model to back up your assertions.

Let me introduce you to the Bass Diffusion Model of adoption. If you’re familiar with the Crossing the Chasm series then this graph should feel comfortable. If you’re not familiar with it then you really should just go read the book or at least a summary of it. Unless your product is completely lacking in analogous solutions that are already or historically have existed in the market place — it does occasionally happen — you should be able to use the Bass Model as a means of projecting your sales or unit growth over the next 1, 3, 10, or 20 years. The formula may appear daunting at first glance but the two key variables you need to worry about are the coefficient of innovation and the coefficient of imitation. As the folks over at smbZen BizJournal state:

The “coefficient of innovation” is the probability that an innovator will adopt the product and, in its calculation, includes the impact of awareness building efforts. The “coefficient of imitation” simply represents the probability that your friends will adopt the service if you did.

“But,” you say, “what if there is nothing analogous that I can project against?” Well, you need to be creative and figure out an appropriate analogy because this is to some extent how you will describe the solution to your target investors as well as your target customer. If it’s completely new to the world then they will be looking for an appropriate analogy and you should be the one to provide it to them. [Note: David Locke in the comments to the original article makes the excellent point that hopefully in this case you’re looking at a technology play where you’ve developed an interesting and unique capability that now needs a market sponsor to help you exploit it and build a market for it. Go read David’s comment for deeper understanding.]

In the consumer packaged goods world, brand managers typically will supplement this data with test market research that includes both panel and real world, hand’s on test product feedback research. My employer, The Nielsen Company, has a strong lock on the former with our BASES studies methodology that leverages a very deep database of historical product introductions and actual sales performance as measured against advertising and promotional spending. We help clients like P&G build concept boards that describe the product in significant detail including imagery, branding, messaging, product SKUs, benefits, and pricing. These boards are then put in front of a few thousand consumers who fit the target customers’ characteristics and feedback is solicited through online surveys and webcasts.

Depending on how the product performs, clients may decide to put actual prototypes of the product in the hands of the sample consumers and test out their experiences with the solution. All of the data gathered from this experience enables a more realistic projection for how the product will perform at launch time.

But if you’re not a P&G you can still go out and do some of this similar effort in alpha testing of screen shots and product descriptions either through online surveys or in-person focus groups. This in part is why Google takes their “Beta” approach to many of their solutions that evolve out of Google Labs.

Finally, it is possible that you can’t go out and do any of the research I have outlined. It is entirely possible that you have developed something like Twitter — a technology that was originally created because someone thought it would be a cool idea and it slowly evolves through constant iterations and significant stumbles into a true utility that consumers love and use ravenously. But unless you are already independently wealthy or have an understanding sponsor, or are willing to spend all of your free time outside of that you spend doing your day job, this is a very difficult path to pursue. Further, there’s no evidence at this point that Twitter is actually going to produce real revenue in the long run, so you may want to focus on developing a solution that pays the bills from day one.

Where did I go? What happened to the flurry of posts?  Well what can I say, I took the Summer off to spend time with my family, change jobs, and rediscover my priorities in life.  Today I am in a much healthier position than I was over the last 5 years while I was working, pursuing my MBA, and then moved on to consulting. 

I literally took time to smell and cultivate the roses in my backyard and clearly see the benefits of taking a 3 month sabbatical about every 10 years.

So with that said, here’s a fun little piece I wrote in response to a request from Jeff Lash who runs the Ask a Good Product Manager web site.  It’s always fun to flex the innovation fingers a little and think through the hard questions.  This will likely spawn about a half dozen other posts in the coming weeks on how to attack or defend a market with products and how to harness innovation in order to accomplish that endeavor.

So here’s the question: 

What do product managers do for commodity products like toothpaste, pens, pencils, staplers, coffee mugs etc. where customer needs have not changed for ages. How do you differentiate in an overcrowded market? 

Ah, the age old question, how do you survive in a market with slim to zero margins because consumers see no difference between your brand and that provided by competitors A, B, through Y and Z?  The simplistic answer is to use the cheapest raw materials possible, offshore your manufacturing, go for scale in distribution, build tight relationships with your channels, and roll up your competition until you own the market.  That used to deliver some success but in the world of Wal-Mart, Costco, private labels, and gads, a bazillion on-line stores, even that is not enough.  Why?  Because year after year, for any product that is the same as what you sold them last year, Wal-Mart will say, “Here’s the price you gave me last year. Here’s what I can get a competitor’s product for. Here’s what I can get a private-label version for. I want to see a better value that I can bring to my shopper this year. Or else I’m going to use that shelf space differently.”  

So what do you do?  Innovate!  And by that I don’t mean go brainstorm what the next new pencil or pen or stapler ought to look like.  What I mean is you need to reconsider the market you compete in and more closely examine the consumers you are serving.  Let’s walk through one of the examples you outlined and consider how one might differentiate within that market.   

Pencils

We’re talking about a writing implement that has been around for over 400 years, the basic form and construction of which hasn’t changed since originally designed back in the 1700s.  This should be the ultimate manufactured commodity product!  When we think of a pencil inevitably most of us think of the good old standard wooden yellow no. 2 lead pencil with a red (or maybe green) eraser held on top by a compressed aluminum or brass ferrule. 

What’s the benefit of the standard pencil?  Some people use pencils because they’re cheap and easy to replace if lost.  A former boss of mine, a professor, would use pretty much nothing but a no. 2 pencil and by observation I would say that’s because he’s an old creature of habit who wants an erasable writing implement but who also loses them or leaves them behind everywhere he goes.  Parents and teachers give children pencils because the impermanence of their marks makes them good for correcting mistakes as well as cleaning up stray scribbles on desks, clothes, and walls. Artists and architects prefer pencils for their ability to sharpen the point in the manner they like and the various textures this facilitates creating on paper. Obviously the lasting power of the wooden pencil is its ability to satisfy these needs and many others.   

 To put some numbers to that point, consider that in this era of modern technology where the pen followed by the typewriter followed by the word processor supposedly replaced the pencil, approximately 2.4 billion pencils of all types are still sold annually in the United States.  The average cheapo private label yellow no. 2 pencil based on a quick check at the neighborhood Staples sells for 99 cents a dozen.  In other words, the cheapest wooden pencil available sells for less than a dime a piece.  And a pencil is a pencil, right?  So how do you ensure consumers buy your brand at a premium price?  

The intuitive product manager might think, let’s consider what’s wrong with the no. 2 pencil: 

1. You have to keep sharpening it

2. You must have ready access to a sharpener

3. The pencil shortens with every turn of the sharpener

4. It’s a waste of natural resources because you never use the entire pencil (see #3)

5. The wood shavings are messy

6. The shape and diameter make it hard for young and aged hands to grasp leading to writer’s fatigue

7. You keep paying for the container (the wood) when all you really need is the lead

8. It doesn’t offer multiple lead diameters from very fine (.03 mm) to very fat (5.6 mm)

9. You have to carry multiple pencils for various weights of lead

10. The lead point is constantly exposed so the lead marks up whatever it rubs on or else it breaks easily

Given all of these problems the product manager might automatically determine that clearly there is a market for a mechanical pencil and they should start manufacturing those. Perhaps, but doing so requires completely new capabilities from the design to the manufacturing stage and if all you make is wood pencils, a shift like that represents significant capital investments to either build or acquire such specialization.  And yet given the continued demand for wooden pencils, there are interesting ways to differentiate within the confines of the original product definition alone – consider special hardwoods, eco-friendly renewable forests, recycled woods, and specialty leads.   

It’s important to frame this thought in the triangle of consumer values – sometimes called the Value Mix.  Consumers evaluate the benefits they gain from a product across three variables as described below.

This is an important framework to consider since with a commodity product, the functional requirements (wood, graphite, eraser, shape, size) are fairly universally met across available competitive offerings and therefore manufacturers are forced to compete on either economic (a race to the bottom for lowest price) or psychological (appealing to a consumer’s particular desires for esteem or recognition).  Ignoring price, this leaves us with a psychological approach that might be supported by adjustments to the functional attributes. Let’s think about the three groups of consumers discussed above and consider how a pencil manufacturer might effectively target each one of them in a manner that would drive a price premium and brand differentiator. 

Teachers

Educators who work in K-12 are a perfect segment for targeting given that pencils and school seem to go together like peanut butter and jam.  Consider that in primary education (Grades K-4) and secondary education (Grades 5-12) respectively, women comprise 89% and 63% of the teachers.  If women are a primary target, then perhaps aligning your pencil with a cause that they are passionate about makes sense.  For example, selling a pencil that is pink or covered with painted pink ribbons and marketed with a campaign that states a percentage of the revenues for these pencils are contributed to supporting breast cancer research, might be appealing to this group.  Dixon Ticonderoga sells just such a pencil and they retail at $4.29 a dozen.  That’s a 430% increase just by painting a pencil a different color and aligning your product with a cause. 

Children

Young children are going through the process of learning to write and doing so requires significant development of the fine motor skills in their hands.  Teachers and parents look for ways to help the child improve those skills and one approach is to increase the diameter of the pencil, thereby making it easier to grasp during the earlier stages of the learning experience.  One way to accomplish this is with one of those rubber triangular sleeves that covers ¼ of the pencil.  But an approach that plays to the pencil manufacturer’s existing capabilities is to simply increase the diameter of the wood encasing the pencil and the stick of graphite inside accordingly.  Take it one step further and market the pencils as “My First Pencil” and suddenly you have a product that retails for $5.29 a dozen.  Now considering that this pencil is 13/32” in diameter versus the typical ¼” diameter pencil, there is an increase in material costs but only by a factor of 2 while your retail price has jumped by a factor of 5.3!  That means you’re still making ~300% more in profits on a simple wooden pencil. 

And if you’ve already made a name for yourself with the teachers of these children, it’s highly possible your brand will be included in the list of recommended supplies to purchase that the teacher gives out at the beginning of the school year.  This is important because the 4 weeks preceding and 4 weeks following the start of school is when 25% of the annual school and office supply purchases occur. 

Designers/Architects

When you think of this consumer group you realize that functionality is critical to them since the pencil is a key tool of trade and therefore an important part of their work product.  But you also realize that their work is all about aesthetics so image has a strong impact as well in what they choose.  Two possible approaches here that both play on the same psychological dimension should be considered.  Take a typical pencil, die the wood black, paint it a glossy black, add raised dots to create a grip, get rid of the eraser, and suddenly you have a sleek black arrow that looks elegant on the desk or in the hands of the user.  This pencil reflects their style and sense of design.  And it also sells for $24 a dozen as the Faber Castell “Black”.  Even if the materials (graphite, wood, dye, paint) are 400% more expensive, you’ve realized a 2000% increase in profits where the pencil goes from less than a dime a piece to $2.00 a piece.

And if you think that is something, try creating “The Perfect Pencil” which is the combination of a fine cedar pencil with SV-bonded anti-break lead in B grade and sporting a soft non-smudging eraser with an aluminum extender (for when the pencil shortens) with built-in sharpener with a high-quality sharpening blade and a sprung pocket clip.  The price on this bad boy?  Between $75 and $250 for the pencil gift set (depending on where you buy it) which includes the extender and three pencils.  And then you can purchase pencil refills at 5 for $50.  That’s $10 a pencil.  Making it a 10,000% increase just connected to the prestige of a niche focused product.  Now granted you won’t find many who are willing to pony up that kind of cash for the Porsche of pencils, but that’s what segmentation is all about. 

Lincoln Park Tree
I walk by this tree most mornings as I head into the office and can see it from my office windows. The light as the sun rises over the Lincoln Park High School building hit it just right today. These are the fleeting moments of Spring in Chicago.

This however serves as a perfect metaphor for what we often present to our customers with the products we sell. The tree like the voices of the sea nymph Seirenes of Greek mythology encourages you to come in for closer examination, but the ”No Parking” sign says ”Get lost!.” We encourage our customers with tantalizing features and advertising but their first encouter with our product or perhaps with the support service essentially says, “Get lost!” I liken it to the Eve Syndrome in honor of Bill Cosby’s old bit on the differences between men and women. In it he speaks of Adam being little more than an ape who is encouraged and discouraged by Eve as she says, “Come ‘ere, come ‘ere, come ‘ere” and as he comes lumbering over to get close to her, she immediately exclaims with a shooing motion, “Get away! Get away! Get away!” because in reality, Adam is little more than an ape who wants to paw her. Think of your average pimply junior high boy spiking on testosterone and you’ll have the perfect picture of who Adam is as Bill Cosby describes him.

We want our customers to be like that pimply boy, so eager to be with our product that they’ll do almost anything to make it theirs.  But this is what we do to our customers when we present the perfect product in description and then fail to deliver on the actual feature. Or we deliver the perfect product and the out of box experience is horrendous - think of Apple’s caricatures of how much trouble it is to get a Windows PC up and running versus their plug it in and go. Or better yet, we set up terrible automated phone trees that send our customers into oblivion when they attempt to call and speak with a live person. If you don’t want to destroy your margins offering support to customers either make your product so brain dead simple a 5 year old can use it or else recognize that service is a fantastic way to create loyal customers.

Ah Spring in Chicago, you never quite know what you’re going to get.  In fact it is the ultimate in failed consumer experiences because in early March you often get a couple of days of really warm weather (up to 70 degrees this year) and if you’re not careful you develop the false expectation that the days will be warmer and sunnier from there on out.  But you have to remind yourself that YOU live in CHICAGO, where it can shift in a matter of hours from a balmy 75 degree morning with no clouds in sight to a wickedly windy 30 degree afternoon with snow and freezing rain.  Which was exactly the weather we experienced yesterday - the snow part I mean, definitely NOT the balmy part.  Praise the weather gods that my commute started at a quarter to 6 when no one was on the roads still, it was much worse for some of my other colleagues trying to make it down to Lincoln Park from the outer burbs at the typical rush hour.

In many ways, the unpredictable weather is like a poorly released product all hyped up with insufficient substance to support it. 

Follow me here and I’m sure you will recognize the symptoms of the 9 Steps to the Vault of Irrelevance: 

1. Marketing has identified the top 3 problems that they believe consumers are trying to solve and have tweaked the positioning to get the masses all excited about how this product will be the greatest thing since sliced bread.

2. The product requirements documentation is developed to match these specifications but no significant research is attached to it that provides the emotional expectations of the consumer and how they perceive each particular problem area.

3. Compromises are made in the development process to the point that only one of these three features is likely to make it into the initial release.  One feature would take too long to meet the release deadlines that the corporate honchos are demanding to cover the investments required and the other feature was caught up in a political debate about whether this is the type of product that ”our company” or “our division” would build for “our consumers.”  Further arguments around the third feature force it to be shaped in unnatural ways to support the company’s proprietary solution or brands (think Sony portable audio equipment using Memory Stick technology, the Playstation 3 and Blu-Ray, or Microsoft software if you need examples).

4. In the meantime, Sales and Product Management are hyping up the soon to be released product promising that it will be the greatest thing since sliced bread while demonstrating all three features with the caveat that two of them will probably make it into the next greatest thing since sliced bread otherwise known as “version 2″ or better yet, “service pack 1.”  One reason why they hype the product in this fashion is because they believe that this will convince consumers to adopt our product line and brand rather than the competitor’s.  Note: this used to work back in 1995 - todays bloggers and reviewers have seen one too many “phantom” vaporous releases such that they will pan your product hard if you attempt to overhype it - and they will be merciless when you attempt to release version 2 if it takes too long or fails to deliver the “forgotten features.”

5.  Beta releases or perhaps early R&D versions of your product are reviewed by journalists and enthusiasts and they really want to love your product because it seemed so cool when they learned of the concept, but they keep tripping over the interface, the unnatural lock-down to your proprietary technology, or the missing features that would have made this the “perfect product.” 

6. After two unfortunate delays due to [name your hardware, software, or manufacturing issue] which were completely foreseen but improperly planned for, your product is finally launched with enormous fanfare and so much enthusiasm by your target consumers that it’s absolutely guaranteed that yours will be the fastest adopted product ever, besting the Palm Pilot, the Apple iPod, Playstation, and Windows 95…oh wait, that’s right, Vista is now the fastest adopted OS ever, sorry Microsoft. (Only one problem, my totally unscientific poll (n=7) shows that in spite of the numbers claimed, every enthusiast I have spoken with tells me they have yet to adopt Vista for full time usage because it’s too slow, buggy, or incompatible with their existing software and hardware - and these are software guys who jumped at Windows 98, ME, 2000, and XP).

7. The first month’s sales report rolls in and little red flags are raised - people are kicking the tires but they definitely are not buying in droves.   Sales and Product Management continue to hit up the reviewers, the key influencers, and press interviews and push hard on their channel sales contacts.  The word that comes back is people want those missing features and they just don’t find your product very usable.  Or they find it very usable but not very deep in being able to help them solve their problems.  Either way, they’re not buying so you pray that it’s just early adoption issues.

8.  The first quarter’s sales report rolls in and not only are you not on track to be the fastest adopted product ever, you’re in serious consideration for being another one of those products that made it just out of the starting gate before collapsing. The consumer response is so deafening you can hear the crickets chirping.  Add to this the complaints that are coming in because the bugs and incompatibility issues are causing customers to call in requesting support for a faulty LCD, a general protection fault, or a locked up device when they hit the play button (or some other common action).  So even where you are selling product the margins are being further eroded by costs of technical support and RMAs.

9. A year later, your product continues to limp, even though you’ve released three “improvement packs,” and you’re trying to convince consumers that the forthcoming version 2 truly will be the next greatest thing since sliced bread. 

You simply cannot figure out why your presentations are greeted with hostility at best and indifference at worst.

So what’s the problem?  The problem started at the very beginning.  The product was pre-defined before truly capturing the insights of what problems consumers are trying to solve.  Now look, some of the issues identified above in the 9 Steps  are going to happen even if you do have a well defined product - they’re part of Murphy messing around with your process and bad things happening to good products.  But for a product to succeed you have to have a VERY clear message and a very simple solution path that resonates with everyone on the development and product teams.  They have to KNOW your target consumer so well that they can understand why a tweak in one direction would violate expectations.  What this does is clear the path such that you are not wasting time arguing over what is best for the product but instead focusing on avoiding the typical development, production, and marketing issues that can founder even the best of products being developed by the best of teams.

At K&A we call this developing an Innovation Mindset and it definitely starts at the top of an organization but it must be inculcated into the culture of the entire organization in order for you to succeed more consistently than the average bear.  The point in developing new products is not to fail fast, in spite of what some may say and many may believe.  In reality, it is capture the majority of your failures earlier in the development process such that a greater percentage of your successes make it to market and your investments are better than the typical 1 in 10 shots of a VC.  If you’re going to play that game, why not just take your money to the racetrack or the poker table.  You’ll at least have more fun in the process while you do flush your money down the toilet. 

We’ll delve more into the Innovation Mindset in future posts.