Well over 99 percent of most distributors' sales to their customers are products that the customer has purchased before. Well over 95 percent of most manufacturers' sales to their customers and distributors are products that the manufacturer was selling five years ago. New products are strategically important for many reasons, but often they get our attention just because they are rare.
Looking back at the HVACR industry, there were major steps forward, like the scroll compressor and the legislated high SEER change of 2006. Every year brings many introductions of new products that are important to both the manufacturer and their distributors. New product launches are a perennial bar conversation at HARDI meetings. Having participated in many of these over the years, my observation is that members regale each other with tales of launch disasters and topping the story of a foulup with one that is even worse. The perennial question is,“If new product launches are so important to us, why are we so bad at it?”
Listed below are some of the recurring mistakes that we uncovered in our research for the 2006 book, Working at Cross Purposes: How Distributors and Manufacturers Can Manage Conflict Successfully, published by the NAW Institute. I have provided them to the HVACR executive readers so they can at least take pleasure in making new mistakes, instead of these. This is such an important area that HARDI is doing a deep dive into this at the March Methods of Management Golf Retreat in Las Vegas.
From a manufacturer's perspective most new products are actually line extensions. A line extension is a product that is new for the manufacturer but is fundamentally something others are already offering in the marketplace. The No. 1 recurring mistake is that many manufacturers develop the wrong line extensions. They are wrong because they fail to pass the commercialization test. Check out the Product Development and Management Association at www.pdma.org. Yes, there is a professional association for developing and launching new products. Their chart below illustrates the number of ideas required to get one successful new product introduced. This is a complex area, but here are a couple of practical ideas for manufacturers and distributors to improve the development process.
- Manufacturers should bring in their best distributors and make them sign nondisclosure agreements. Rely on the distributors for input about the strengths and weaknesses of competitive product alternatives. There is a lot of low-hanging fruit here for most manufacturers. In addition to market insights, distributors can also provide target price points.
- Distributors: When invited into the new product development process, recognize how important the process is to your key supplier. Give them truthful advice and remember that once the products actually exist, your supplier will expect you to sell them aggressively.
If there is a focus on developing the right products, the next most common mistake is to price it incorrectly in the marketplace. There is actually an analytical process called product positioning where a manufacturer brings together concerns for brand management, product line profitability and plant utilization. While some of the positioning concerns can get a bit complex, the obvious thing to get right is the original street price. Most of the mistakes that we have seen are around not giving the distributor the margin necessary to warrant a new product launch. The chart to the right illustrates a simple but powerful idea. The right way to price is to start with street price and pay channel partners what they need to warrant launch efforts, with the manufacturer getting what is left. If a manufacturer does this analysis and decides that there isn't a good enough financial return, they have made a rational business case decision. This is much better than deciding that there is a good enough financial return by denying all of the downstream partners adequate compensation. In both circumstances, the product will never survive and grow. In the first situation, the only investment was some product marketing folks and an Excel spreadsheet. In the second case, the manufacturer wasted a lot of money and really irritated their downstream channel partners.
After getting beyond developing the wrong products and pricing them incorrectly in the market, the next barrier to get past is what exactly is new? This is a definitional issue, but it has large economic consequences for getting it wrong. This really means how this product is new and to whom is it new. A joint task force of the NAED has recently put out an interesting draft position paper on new product introduction that does a pretty good job of defining the process economically. You can download a copy of the document at www.naed.org/common/articlelink.asp?currentpage=4409. I think that this is an impressive piece of work that sorts out differences between:
- A distributor's line card extension.
- A manufacturer's line extension.
- A manufacturer's brand extension.
- A fundamentally new product to the existing channel.
- A truly new product to everyone.
Having multiple flavors of new adds a bit of complexity, and getting it wrong is the third biggest mistake that we tend to make over and over again. From the PDMA perspective, these fail the commercial test. Everything else can be right, but the manufacturer fails to get adequate market coverage from existing distributors. The distributors look at the new product and say to themselves, “How can I sell this when I already represent the market leader manufacturer of this product and I've convinced my customers to love it?” To the extent that there are major economic impacts to the distributor, the pressure to lie or exaggerate to the manufacturer also increases. Given that there are issues with selective listening anyway with sales reps, it is no wonder that each party can feel betrayed by the other.
There is an old saying that if the only tool you have is a hammer, then everything looks like a nail. The manufacturer hammer in new product introduction is the big push; get big opening orders, joint training sessions, joint sales calls and special promo pricing. If a little is good, more is always better. The lesson to avoid the many flavors of new product is to tailor your launch to the specific circumstances of the product. Sometimes the best launch is a low-profile launch. The chart on the next page illustrates a way to find a path through the new flavor issue. It is going to be one of the major drives at the Las Vegas meeting in March.
The basic idea of a stealth rollout is to get the product out into the market without asking for permission from senior distributor executives. It's sort of like asking for forgiveness instead of permission. The leveraged rollout relies on a manufacturer's channel power applied judiciously to trading partners to get them to do a few specific things. The strategic rollout is the approach for a truly market-maker product. It is interesting to note that even on major new products, the big push is still not the most effective approach to create sustainable market position. Think iPhone, New Coke and a host of others.
New products are truly important and critical to the HVACR industry. Getting the new product introduction process right can create a competitive advantage for both distributors and manufacturers. Getting it wrong can create competitive disadvantages as well. As we work on this process in other industries, HVACR has not been used as an example of how to do it right.
Michael Marks is the Managing Partner of the Indian River Consulting Group in Melbourne, FL. He is serving his second term as a Research Fellow for the NAW Institute of Distribution Excellence. Marks is facilitating the HARDI executive session in Las Vegas, March 9–11. For more information about Indian River Consulting, visit www.ircg.com.