How New Products Find Their Place in the Marketing System

by Julie A. Caswell, Associate Professor of Resource Economics, University of Massachusetts at Amherst, Amherst, MA., and Warren P. Preston, Assistant Professor of Agricultural Economics, Virginia Polytechnic Institute and State University, Blacksburg, VA.

New product introduction is a risky business. Successful new products can make a company and keep it competitive in its industry, while providing steady outlets for its input suppliers, such as farmers. However, failure rates are high, so it is very important for suppliers, manufacturers, and distributors to understand the forces that affect new product success.

A new product's path from development to market acceptance depends on the type of buyer targeted. There are two basic buyer types: intermediate users, such as processors and manufacturers, and final consumers. Marketing channels and the prerequisites of success vary depending on which is targeted.

Manufacturers use new crops and new products from existing crops, both industrial (such as fuels) and foodstuffs, as intermediate inputs in producing final goods. This market is made up of professional buyers who base purchasing decisions on strict price/quality specifications and who are highly knowledgeable about the availability of substitute inputs. Selling them on a new product requires being responsive to their price, quality, quantity, and delivery needs.

Where the targeted buyer is the final consumer, the selling environment differs. While consumers make the same type of price/quality comparisons as professional buyers do, they usually have less complete information, and factors such as brand name, advertising, packaging, coupons, convenience, and image play a bigger role. These elements make communication a crucial factor in successful new product introduction.

The consumer market also differs because the producers are not in direct selling contact with the buyers, as they are in the intermediate goods market. The retail distribution chain links the two so that the producer is faced with a double selling job to convince the retailer to carry the product and the consumer to buy it. For foodstuffs, this can become a triple selling job: for example, encouraging the cookie manufacturer to use a new oil, the retail chain to carry the cookie line, and the consumer to demand cookies made with the oil.

To further describe the path to new product acceptance, we focus first on the market for intermediate or industrial goods used in production processes. Then we turn to the market for new consumer products.

Intermediate and Industrial Goods

Three key elements that largely shape the environment in which new intermediate or industrial goods compete are characteristics of 1) the product itself, 2) the product's buyers, and 3) the marketing system through which the product is distributed.

Product Characteristics. Intermediate agricultural goods are sold as inputs for further processing and distribution. Hence, buyers need reliable information on the product's technical and functional characteristics. The producer must be able to demonstrate how the new product performs in its intended application. Buying decisions hinge on whether the new product contributes to the buyer's bottom line. Price is clearly an important consideration.

Yu Cha McGibney selects a package of rice sticks from the ethnic food section of a supermarket. Winning acceptance for new products is the key to food manufacturers' marketing strategies.

Ken Hammond / USDA 92 BW0796-13A

If the new product does not offer a price advantage relative to alternative inputs, then it must offer some performance edge in the manufacturing process.

Selling an intermediate good may also require the ability to customize the product to the buyer's specifications. Adapting to a particular buyer's needs may entail physical changes in the product, packaging changes, or changes in delivery methods. High levels of postsale service may be needed in the industrial market. The seller needs to build a field staff not only to service customers' accounts but also to help troubleshoot any problems the customer may encounter in using the product.

Buyer Characteristics. Industrial buyers differ substantially from household buyers. Buyers of intermediate goods are well informed about prices and product characteristics. While consumers of final goods may be willing to buy a new product on "impulse," an industrial buyer purchasing a vital input needs to know much more about a product before committing to a new supplier.

Compared to most household consumers, industrial buyers face higher switching costs and risks in trying new products. Switching costs are one-time costs of changing to a new supplier. Such costs and risks for a consumer trying a new food or fiber product generally are small an improperly cooked meal or an unenjoyable dining experience may be the only result of an unsuccessful experiment. For an industrial buyer, switching costs and risks may be large. For example, a new or substitute ingredient may fail to perform as expected, resulting in unsatisfactory and even unsalable products. Other risks include uncertainties about the new supplier's reliability and lack of experience in using a new product.

In many cases, the seller of a new intermediate good needs to work with buyers to develop new product formulas. High fructose corn syrup, for instance, has replaced cane and beet sugar in many applications such as baked goods. To accommodate this change, however, product formulas and even the products themselves had to be altered. To provide assurance to buyers, the supplier may have to assume some of the financial risk that accompanies the switch to a new product.

Prices in producer goods markets adjust frequently to changing market conditions. Sellers of a new product must be prepared to negotiate prices with the buyer, rather than simply offering a "take-it-or-leave-it" price.