Caution: Understand the Potential of the Market Before You Enter
An Ipsos Marketing Point of View
As Marketers, we know intuitively that the market into which we are introducing a new product has a direct impact on the potential long-term success of the launch. What many Marketers do not realize is that this intuition has been employed in thousands of analyses across hundreds of categories and extensively validated. Consequently, the nature of the market -- along with consumer reaction to a new product and anticipated marketing spend -- is a necessary component to a consumer goods volume forecast.
Market Permeability Impacts New Product Potential
The core theme that first emerged from Hendry models (see Butler & Butler, 19721 and Butler, 19662) and employed by Ipsos forecasting models is that the long-term potential of a new product is greater in a developing market, which has fewer brands, than in a mature market, which has more brands. At first blush, this may appear counter-intuitive because, as each new product is introduced in a market, market penetration may increase and it appears as though a market should have more potential. However, another dynamic at work is that, as more products enter the market, consumer preference profiles become more polarized, making it more difficult to be successful long-term.
This point is often ignored by volume forecasting models.
Often, during the first year, the impact of market polarization is masked because heavy advertising and promotion spending increases short-term sales as a new product steals volume from competitors. However, unless the new product has clear advantages, these short-term benefits typically do not persist long-term after advertising and promotion spending declines. As a result, what appears to be a successful product in Year I fails in Years II and III. Unfortunately, at the earlier stages of the innovation process, the majority of concept testing systems make the tacit assumption that achieving long-term trial and volume is no different from one market to the next. Collectively, Ipsos calls the impact of all the effects of a market on the long-term success of a new product market permeability.
Market Permeability Matters
As further evidence of the influence of market dynamics on new product success, Ipsos Marketing, Consumer Goods has determined that market permeability - the ease or difficulty of achieving long-term success in a market - influences the trial potential of new product launches. This learning is based on Ipsos' extensive data mining of its global concept database - which contains the concept testing results of over 55,000 established brands and 10,000 new products across more than 55 countries.
Market permeability is based on the degree of brand dominance and fragmentation that exists in the market. Domination and fragmentation impact the degree of market permeability.
- Domination: The share of market maintained by the market leader(s).
- Fragmentation: The number of brands (or variants) in the market.
The degree of domination coupled with the degree of fragmentation impact how easy or difficult it is for a new entrant to be successful long-term in the market. The more dominated a market is, the easier it is for a new entrant to penetrate. The more fragmented a market is, the more difficult it is for a new entrant to penetrate. Mature markets are often highly fragmented and can require 15 or even 20 or more brands (or variants) to capture 80% of the share of the market. New markets, on the other hand, are generally heavily dominated by a single brand /variant, with two to four brands / variants accounting for 80% of the total market. (See Figure 1.)
Market permeability is a property of a market, not a property of a new product - it imposes a constraint on the long-term potential of any new product. In fact, market permeability actually enables the calculation of a new product's long-term potential prior to having any data, assuming the product introduced is "average" in terms of product quality and marketing support.
By categorizing the relative market permeability of a given market into a specific quintile (based on our global concept database), Ipsos is able to further refine maximum trial potential to reflect the realities of the marketplace. As a specific example, for a product with comparable consumer reaction the market permeability has what can be described as a moderate impact on the trial potential:
Of course, consumer response and planned marketing spend are critical components that impact the forecast. Still, the significance of market permeability in the equation cannot be ignored. And, while market permeability implies a barrier to a new product's potential, the definition of a market is quite fluid. Marketers continually define how narrow or broad a category is by analyzing consumer needs and identifying opportunities for category expansion and product repositioning.
Market Permeability Should Be Used to Refine Concept Screening Results
As a result of its findings about the influence of dominance and fragmentation, Ipsos Marketing, Consumer Goods has incorporated market permeability into all of its forecasting models including InnoScreen174,its global concept screening system for Consumer Goods. InnoScreen, which is based on the Novaction forecasting framework, delivers an InnoTrial Potential(TM) as the key performance indicator. The InnoTrial Potential is an estimate of the maximum trial potential a new product is expected to achieve at average product quality and 100% awareness and distribution. Unlike other early trial potential estimates currently offered in the marketplace, InnoScreen's InnoTrial Potential score is based not only on consumer reaction but also on market permeability. As a result, Ipsos can provide more refined product development guidance earlier in the process by helping our clients more consistently pursue only those ideas with higher probabilities of long-term success..
Of course, initial marketing support and the competitive environment impact the short-term success of any new product. These variables can be taken into account within the Ipsos forecasting framework, in addition to market permeability, to deliver a more refined estimate of market potential..
Marketers know that understanding the market in which a new product will compete is an important first step in the innovation process; consequently, they invest significant resources in analyzing potential markets via focus groups, attitude and usage studies, segmentations and market structures prior to developing concepts. However, it is important to recognize the significance of the market throughout the innovation process and to incorporate market parameters - specifically market permeability - into the volumetric forecasting phase of new product development. .
1 Butler, D.H., Butler, B.F. (1972), Hendrodynamics, Hendry Corp., Croton-on-Hudson, NY.
2 Butler, B.F. (1966) Hendrodynamics: Fundamental Laws of Consumer Dynamics. Croton-on-Hudson: The Hendry Corporation.
