By Vincent Young

WARNING: YOUR PRODUCT DEVELOPMENT PROCESS IS HARMFUL TO YOUR HEALTH

Your company/brand has spent many years attempting to honor a classic “product development” process. You have flowcharts in conference rooms and in PowerPoint decks that detail each of the steps (along with owners, stakeholders, approvers, etc). In many companies, that process has some variation of five steps or “stage gates” that the product marketing team tries to follow religiously:

5 Typical Product Development Stages / Gates:

1. Discovery/Scoping
2. Building the Business Case/Plan
3. Development
4. Testing & Validation
5. Product Launch

Each of these gates typically is completed when a series of deliverables, criteria, and outputs are defined by the collective meeting of the minds between Marketing and R&D.

THE TRAGIC FLAW:

This process has one major flaw if you are a brand whose business case is primarily built on accessing the consumer through the world of retail – the retailer is predisposed to prefer a private label solution to compete with your new product type or class.  In today’s product development process, the supplier brand diligently takes the retailer through all of the consumer insights upon which the new product is based, showcases the research & development capabilities of the company that make the new product possible, and shares the market research around all aspects of the new product ranging from the product name, packaging design and predictive demand models based on various price options and advertising/promotions investment levels.

Shortly after launch (assuming successful national brand sales), a funny thing happens – the retailer plans a private label derivative of your new product (without so much as a “thank you” for your efforts in hand-delivering them all of the upfront inputs that they need in order to launch a lower-cost version of your branded product). You didn’t account for such copy-cat behavior in Gate 2 (Building the Business Plan) of your product development process. So in the end, your branded unit sales, revenues, and gross margins are lower than anticipated and your advertising expense dollars are higher because you have to more aggressively compete against the very retail “partner” with whom you enthusiastically shared your new product marketing inputs in the first place.

Any Parallels To The Story of The Scorpion & The Frog?

In the story, a scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, “How do I know you won’t sting me?” The scorpion says, “Because if I do, I will die too.” The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp “Why?” Replies the scorpion: “Its my nature…”

How could this be the fault of your company’s product development process? Because if a retail reseller model is your primary path to market, then you have the wrong people in the room as you are managing through the product development process as a supplier brand and you have the wrong requirements to move a product from gate to gate.

YOU MUST OWN THE CAPABILITY:

Today’s stage gate process breaks down for many consumer brands at retail between Stages 2 (Building the Business Plan) and Stage 3 (Development). For brands at retail, it is no longer good enough to defend your offerings against private label through product differentiation alone – your company must also “Own the Capability” around making the product or supporting it in the market while also being different in terms of feature and/or performance.

Brands at Retail must seek to “own the capability” associated with their new products in one of three ways:

1. Patent the Product/Process – If your brand is planning to launch a new flavor, color, or functionality to your line-up and your company cannot patent these differentiators, then odds are that you will never generate the profits from the R&D investment that you are anticipating. Adjust your future profit expectations downward or STOP the product from moving through the stage gate process to launch. Add your legal department as a key input to the development process to assess the level of legally defensible/ownable aspects to your new product while in Gate 2.
2. Control Production Capacity – If, between Stages 2 and 3, your company concludes that it has the ability to own and/or manage most of the production capacity required to make a product with your new features on a global basis, then you can also expect minimum private label threats. If not, then expect a private label derivative within months and adjust your outlook accordingly.
3. Dispense the “Kill Pill” – Some business models prevent private label or knock-off brand alternatives by building products that simply won’t work unless branded products are purchased. For example, many desktop inkjet printer companies build printers that simply won’t fire unless original equipment manufacturer cartridges are loaded.

RECAP:

If your brand depends on retail and your company cannot “own the capability” associated with making or supporting your new products based on one of these three methods, then DO NOT MOVE THE PRODUCT THROUGH THE STAGE GATE PROCESS. Your marketing insights, research and development, and marketing investments will only become inputs to a retailers’ new private label growth strategy.

By Ben Smith

I’m won’t be the first or last blogger to write about Coca Cola’s new “Freestyle” fountain system.  What’s been written so far covers a wide range, from marveling at the technology, to the variety it offers customers, to the financial impact.  But no one has really looked at it from the angle of the potential leverage this gives Coke with its retail customers – that is, until now.

Full disclosure (as you may have picked up in my Coke/Costco article), I’m a big Coke fan.  Ever since Matthew Modine made it clear in “Gross Anatomy” that he wasn’t just ordering a generic coke, but a Coca-Cola Classic, something clicked in my head and I have never looked back.  So the lens I view things through is one that believes that Coke tastes best at McDonald’s (combo of the wide straws, and the perfect mix of concentrate/carbonation), will drink water if Pepsi is the only choice, and wanted the groom’s cake at my wedding to be in the shape of a classic little 8 ounce Coke bottle.

A KILLER APP FOR RETAIL LEVERAGE:

Coke’s Freestyle system hits on a couple of our 5 points in how to gain Retail Leverage.

#1 Have The Hot Product With No Substitutes

While you can’t call Freestyle “hot” yet, it definitely doesn’t have any similar substitutes.  Freestyle allows the retailer to offer something to their customers that offers unparalleled choice (100 drink combinations), as well as unique drink formulations (there is a cherry, vanilla, orange, or zero of pretty much everything) that can’t be found anywhere else.  A manager at the Wendy’s near my house where I found the Freestyle went on and on about repeat customers they are seeing who rave about the product.  As we were talking, I saw a teenager create a concoction of multiple flavors for his Sprite zero.  It doesn’t take a great leap of faith to imagine that it could be a differentiator – for those who care.

Freestyle also gives Coke an edge on future product development, insight into usage, and pretty much anything else they’ll be able to glean from all the usage data that they can download from the machines back to the offices at North Avenue in Atlanta.  Coming from a printer industry background, it was invaluable to know which customers were the best, where they bought from, how often the purchased, what they printed, etc.  Coke has an opportunity to respond with more localized offerings, plus stay on top of key seasonal demand.

By the way, after using the machine, I can see other possibilities, such as for loyal customers, where they can scan a card or punch a code in and have it deliver their own special blend.  The current machine didn’t have that capability, but with all the technology packed into this thing already, they’d just need to add an easy way to scan/input the customer’s info.

#3 Be A Top Revenue Vendor

Okay – I’m sure Coke is already a top revenue vendor at their existing customers.  This provides an opportunity to further cement that.  And they have a pretty strong proposition to walk into potential customers with, showing how they can offer better financials that their existing provider.  How can they do this?  The answer is part technology, and part customer behavior.

On the  customer side, there are already reports of double-digit increases in beverage revenue from Freestyle in the test stores. I’m willing to bet there are a couple of slides in the Coke sales rep’s powerpoint deck that show the increased number of visits from existing customers, new customers drawn in by the existence of Freestyle, plus customers upgrading their drink size.  Not to mention, the retailer could increase their drink prices based on the premium that Freestyle offers, although that lever probably hasn’t been pulled yet.

On the tech side, from what I’ve learned, once you get past the high cost of the hardware, the cost of the consumables (primarily the concentrate) are significantly improved.  Those 100 flavors are based off several brand platforms (coke, sprite, fanta, powerade) and then the options come from all the variations you can do by flavoring (cherry, vanilla, orange, etc) and sugar substitute (whatever makes it regular, diet, or zero).   So this modular system allows them to reduce inventory, speed turns, and reduce out of stocks.  When you start multiplying these savings by 100’s or thousands of outlets, those savings have to add up.  There is enough profit freed up to improve margins to the retailer, while improving Coke’s bottom line also.

So when Pepsi or the generic fountain vendor comes in to pitch against Coke’s offering, unless they are willing to significantly cut their margins, I’m not sure they have a story to tell the retailer how they can help them make more money than Coke’s Freestyle will.

OTHER INTANGIBLES:

Currently Coke has approximately 50 test stores for Freestyle, across a wide swath of customers.   Now Coke could offer this to all customers, across all verticals (fast food & sub-segments, casual dining, cinemas, etc.  Or they could selectively offer customers exclusives in their own class (ie offer to Subway, but not Quiznos, Jersey Mike’s, Blimpie, etc).   I don’t know that this would be in their best interest, given they have pretty wide distribution already.  The real fear they want to play on from the retailer’s perspective is that if they aren’t able to offer this, their customers could choose to go elsewhere.  Could this be the silver bullet to put Coke into Yum Brand’s (Taco Bell, KFC, Pizza Hut)?  I know they aren’t officially owned by Pepsico anymore, but I’m sure there are still quite a few strings attached.

The net is, Coke is onto something that potentially everyone with a fountain could HAVE to have.  If they don’t, and the guy across the street does, you can be sure that the franchisees will be raising a big stink.

TAKEAWAYS FOR ANY MARKETER:

1. No matter how big your brand is, you still need Retail Leverage
2. If the big guys need leverage, what does that say about the smaller challenger brands?
3. Figure out what you have to exploit that others don’t and leverage it.
4. If you don’t have something unique / different / better, then be prepared to move to the 6th, rarely spoken of, painful way to get Retail Leverage: Price.

FURTHER READING / SOURCES:

More reading on Freestyle, from multiple perspectives:

• Fast Company,talking about all the data Freestyle provides
• Coke’s Facebook Page for the Freestyle System (check out how bad some of these people want it)
• Freestyle plus some other crazy Coke machines out there
• Uhh – buy some stock in Plexus corp, who makes the Freestyle machine for Coke
• The guy who invented the Segway was involved with developing Freestyle
• Great overview of Freestyle + video in Orange County Register

UPDATES:

• 5/10/2010 Article in the Wall Street Journal: “Coke Goes High-Tech to Mix Its Sodas”

By Vince Young

Personally, I’ve been debating for a few weeks now as to whether or not I should write this post. I will admit right now that I’m going to a very controversial place, but one that those who have ever managed a challenger brand at retail will find all too familiar.  (Not saying this situation is on the same level as what Aron Ralston faced, but it is a critical retail dilemma).

THE DILEMMA OF TEST STORES:

What should you do when your fate at retail is dependent on your product’s performance in a handful of “test stores?” If your sell-through is strong, then your product line gets rolled out to all stores nationally – if not, then your door practically closes forever at that retailer with that product line, even down the road when the “new and improved” version hits the market. The real question that we all struggle with is “Should my company put forth any efforts to stimulate demand in a test store environment, even though we know that those efforts will not likely be replicated upon national roll-out?” The answer is an unequivocal, “yes!”

THE DECK IS STACKED AGAINST CHALLENGERS:

Test store situations are rarely fair to the challenger brand and are not predictive of performance if the brand were supported by national chain distribution – the deck is highly stacked to favor the house. Why? There are several reasons: 1. Because sometimes, slotting fees and other “buy-in” allowances are sometimes still required even though your product line is not really benefiting from the things that those costs should afford your product line; 2. Your product line is excluded from national support vehicles such as the retailer’s circular, employee training programs, etc. because your line is not distributed nationally; and 3. Your marketing investment to support a small test store launch will be highly inefficient given the spotty nature of your retail presence.

So what should a challenger brand do to maximize its performance in a “test store(s)” scenario with retail? It depends…

If you know the locations of the test stores and markets, then there are several things that you should consider in order to maximize sell-through.

IDEAS TO DRIVE SELL-THROUGH IN TEST STORES:

1. Advertise Your Product’s Presence at Retail via Facebook Targeting– The audience on Facebook is massive and Facebook ads can be highly targeted. By leveraging key words in user profiles, you can efficiently promote your product’s retail presence to the consumers who are most likely to buy while communicating to only those people who are in the same markets as your test stores.  Today, targeted Facebook ads are fairly inexpensive and they can be designed and placed in a matter of minutes.
2. Leverage Digitally Printed Direct Mail with Variable Data Fields – Digital printing allows for shorter, customizable runs and the quality today almost equals that of traditional offset printing. Direct mail allows you to feature your product line in both images and words while the variable data field(s) can be used to direct targeted end-users to the specific store location where your product is stocked.
3. Mobilize Your Own “Nation” – Send targeted e-mails and launch an outbound telesales campaign to every database to which you have access. Pool the contact information from your historical promotion campaigns, your product registrations, your customer support calls, etc to identify consumers who are in the same market as your test stores and drive them to the stores to buy.
4. Install In-store “Advocates” – Invest in an “anonymous”  3^rd party team of advocates  to praise your products in-store with store management, talk it up to store associates/clerks, complete favorable consumer feedback forms and place them in the “guest feedback” box in-store, etc.

CURVEBALL: THE TEST STORES ARE “SECRET”

Sometimes, however, the retailer stacks the deck against your brand even more and they keep the location(s) of your test stores a secret. If you do not know the locations or markets of your store tests, then you need to make it your goal to find out where they are. Once you find out, then you can use some of the approaches listed above to optimize your performance. To find out the locations of your test stores, you should consider the following.

HOW TO FIND THE LOCATIONS OF YOUR TEST STORES:

1. Ship your product to the retailer on RFID-tagged pallets. There are many suppliers today to choose from and it is unlikely that the retailer will use a distribution center to get your product to store.
2. Print 2D barcodes on your outer pack and your individual product package – Lots of consumers today use their camera phones to read 2D codes in an effort to find promotional offers/coupons, product reviews, or additional product information. The companies who develop the 2D code reader software should be able to tell you where the scan came from.
3. Conduct a query with the retailer’s website – Sometimes, a retailer may only assort your products in a few test stores, but add your skus to their on-line assortment. If you get lucky, the on-line customer support rep may mistakenly tell you where you can find the product in retail if you ask as a consumer.
4. Partner with Another Company who Services Chainwide Distribution – Offer to pay a partial labor fee to a non-competing company who goes into all stores to support their products (eg. Direct-Store Delivery models). Leverage those service forces to complete a simple audit of whether or not your product was present in-store. A list of stores can be provided to you in a matter of days.

Successful performance in a test store environment is oftentimes critical to gaining retail leverage. Spare no expense to insure your product line’s sales results are impressive.

How far have you gone to maximize performance in a test market environment? Share your stories with us!