Productization: A Primer For Taking Ideas to Market

I wrote this book originally for Pearson Publishing, but by the time it was submitted
they had bailed from publishing to the Dot.Com industry needs and closed the product
line. The good news was they let me keep my advance, the better news was they
returned the copyright to this book to me, the author. I wrote this book to a general
vacuum in the industry of a short, easy to read book that can help you learn or refresh
what you forgot. Ideas that are great are still marginal until they can be transformed
into a utility of usage for mankind, and others…. Then ideas become great products.
My goal is two-fold, help transform your perceptions about product development and
commercialization of ideas to products. And help the work you do benefit both you
and your associates. And by the way, how am I to benefit?

Can I trust you to appreciate this primer? Read it twice before you start to use it. It’s like lasagna; it gets better
with age, as the information melds into your context of how you think. Then, if you like it, and know of others
that might benefit, send them an electronic copy of this book. (I’ve added a glossary to the back which helps
you talk the talk.) It’s all combined into one PDF file. At the same time you send your associate the book, send
me $5, just a sawbuck. Preferably US currency, but I would be very pleased to get the equivalent from you in
whatever country you might be living in. I am not selectively choosing the USA for distribution, just starting
there. (My editor for the book is in UK, he’s getting a copy from me!) Mail the $5 to Rodrick Satre
530 Santa Fe Avenue, Richmond, CA 94801 United States of America.
Either I will get better off or my postal person will. If you want to email me, use rsatre@excite.com
If you have multiple associates, such as at Christmas or other events, send out 5 copies at $15 or 10 copies at
$20 and send the cash to me. Same way, to my mailbox. Don’t send checks, if they bounce, it costs me more
than the amount you sent. If you want to send a cashier’s check or money order, that’s fine.

I’m only sending out a few copies to begin with. I hope my plan works, but this is an experiment in
“distribution channels” that are based on the goodness of people. Yes if you wonder how it went, ask me!

Oh by the way, I did write this book based on 30 years of business experience as well as my education. I have
an MBA in International Business from JFK University, BS from Clarkson University.

Written in Richmond, California, USA by Rodrick I. Satre copyright © 2002 updated 2008

Introduction
I can’t tell anyone how to determine if the idea they have is a dynamo capable of
generating wealth for them, the company they work for, investors, and the employees
of the business. In fact, many times great ideas are squandered on those that turn them
down, only to find new homes with others that find the magic key to unlocking the
wealth in the idea, the product, the service. So this briefing is set with this caveat:

Many books require no thought from those who read them, for a very
simple reason; - they make no such demand upon those who wrote
them. Those works, therefore, are the most valuable that set our
thinking faculties in the fullest operation. ~ Colton

I will attempt to provide the reader steps useful in taking a fine idea and developing a
useful product from it. In this briefing I hope to help the reader in gaining an
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appreciation for the many activities that form the world of Productization. My
objective is to meld those many activities we perform in the business world into a
ready and readable reference that the reader will use and apply in shaping the
economic outlook of their business. There are multiple business paradigms that tie to
this book, and management training programs and MBA programs are all highly
recommended pursuits. I can readily think of just-in-time, guerrilla business tactics,
and other well used tomes that the reader can pursue. Yet for the most part, those
books begin at a somewhat advanced stage of the product life cycle. This briefing
begins at the beginning and takes the reader on an exploration from the start of an idea
that might be saleable to the culmination of the actions normally needed to generate
profits back to the business.

This is not all inclusive, and experience and thought are key components to a
successful business venture. And luck.

If I had a choice between being smart or lucky,

I’d choose lucky. ~ Will Rogers

But just maybe we can make luck occur by setting the stage where opportunity falls in
our lap and success just seems to fall into place. This stage is like a fine play. The
scenery and the music score mean almost as much as the acting and the dialog. The
total performance requires a good script, proper lighting, a receptive audience, and the
support of the environment (backdrops and props) and score (music and special
effects) to come together for a successful play. And as in a theatrical production,
many talents are called into action, and the audience has to be ready for the production
in order for it to be a commercial success. If any or many of the contributing actions
do not meet the standards of good quality, all suffer and the play will be closed after
few performances. Businesses and products succeed or fail in a like manner.

At the time this briefing was first considered, the world of high technology and the
fast-paced growth of business starts in the information technology world had recently
come crashing back to reality. Which is that many products were no more than a mere
concept, and the money invested in these concepts was played fast and loose. Some
ideas failed due to lack of sufficient funding, some due to lack of sufficient technical
and management direction, and some due to the fact that the product envisioned met
an audience that was not quite ready to embrace the product, run out and tell their e-
friends to buy the product, and generate the sales revenues that could surpass the
investment costs. All of which defines a product’s success. Productization is a
practice that looks at the holistic business and helps define the steps necessary to be
successful. I talked the editor into expanding this subject to business as a whole. So,
not only is the high technology business going to be a subject, but instead the scope is
productization for a broadened program of commercialization of ideas into viable
businesses .

Both tangible and intangible products are covered. The key, “prime number” concept
of the success is that productization is a skillful application of adding value to the
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marketplace, and providing a choice to the customer that they want to make. This is
called “opportunity cost.” It means that at each step of the way, the investment of time
and money is balanced against the lost opportunities due to the fact that our time and
money was already spent. For instance, today is bright and sunny, a warm gentle
breeze is blowing, and I’m stuck in my library banging this out on my computer......
Perhaps I’ll come back to this later.................

Oh, by the way, I want us to have a dialog. But I find that difficult outside of a lecture
or presentation, both of which do not describe a way of learning that I enjoy. Instead,
and again with the editor’s indulgence, the story line here, although far-fetched, could
actually have happened, and as far as the case studies and referenced story lines; with
some literary license they did and are continuing sagas. So the text is set in a parable
style. However, terms that are the vernacular of the productization and related
industries are italicized and can be found in a glossary. Also the chapter and page
where they are first introduced are listed.

Good luck.
~the author

3
Chapter 1 What Is Productization? Why Does It Matter To
Business?
Mary first saw the older gentleman at a management conference she had attended a
few months before. He was well dressed, had a regal air about him, but was neither
dapper nor handsome. So she was puzzled by the attention that went his way
whenever she saw him. It seemed as if small crowds would spy him, gather round and
begin asking him questions. As he spoke in reply not only would the questioner
would pay rapt attention, but so would all within earshot. She didn’t know his name,
but understood from the talk at breaks the he was nicknamed “the productizer.”
Whatever that meant.

And now Mary was hailing a cab in some strange city, where she was on her way to a
big trade show at which she was to show off one of her company’s new product. The
new product was years ahead of its competition, in fact neither Mary nor anyone else
at her company actually could name any single product that competed against it. Sure
there were a few combinations of goods and services that when combined could do
about the same thing, but this was the first that took all that and put it into one neat
package. Her company figured it would sell itself. But Mary was worried. And it
was raining.

There was that older gentleman, and he had hailed a cab! On a whim, Mary ran up to
him, introduced herself and asked if they had a mutual destination and, oh please,
could she share the cab? This was Mary’s lucky day. As they rode to the trade show,
Mary got to talking about her new product, described its features and asked the older
gentleman what he thought. The “productizer” looked directly at her and asked: “has
this product been through the productization process?”

“Why no,” replied Mary. “At least I don’t think it has. In fact, I don’t know what
productization is. Could you explain your question a little more thoroughly?”

The old gentleman sighed. He reached into his pocket and gave her his card. “we’re
almost there, why don’t you look me up tonight and we will discuss it over diner at the
hotel, Dutch treat. About 7:00 suits me.”

“Okay,” she replied and with that they had arrived and paid their fare and ran off in
different directions to attend to the trade show. It turns out the Productizer was giving
a seminar, but Mary couldn’t take a break from her booth, so she had to wait for that
evening.

During the day, quite a few business people came up to Mary’s booth, they politely
asked questions about the new product, and then drifted away. No one really seemed
that interested. This not only puzzled Mary, it got her worried. A big part of Mary’s
compensation was based on how well this new product did in the marketplace. And
her company, which had paid heavily to develop the product, was wanting the product
4
to make money quickly, as the board of directors was concerned with the costs rung up
in its development. That evening, Mary got ready for meeting the older gentleman
with a knot in her stomach and the ennui that comes with an unknowing fear.

At dinner, Mary described the strange disinterest people had for her new product and
asked the older gentleman to explain what he meant in the cab that morning. The
productizer finished his roll and took a sip of the water and started to speak.
“Productization is a method, a practice, and a process that should be used in the
development of all new products. I travel the world giving seminars to business
people just like you, Mary. And I normally charge a hefty fee for consulting to new
clients. But this morning, after your candid presentation about your new product in
the cab, I just had to give you an opportunity to learn more. However, I want you to
promise to practice the productization method from here on out, or we can talk about
other things during the rest of the meal.”

A bit taken aback by such a bold request from a near stranger, Mary noticed that other
diners in the room were attentively waiting and listening for her reply, and it seemed
as if they were encouraging her commit to the request. Many of the diners she had
seen at the trade show. How strange this day has been. “Why yes, of course,” she
replied.

Dabbing a bit of wine from the corner of his lips, the productizer began to describe
Productization. “You see,” he said, “productization is a process that helps business
people bring an idea to life. It’s not commercialization, it’s not product management,
and it is not invention. While productization can contribute to these fields of practice,
productization is applied sometimes even before invention, and long after
commercialization.”

Mary was more confused at that moment than she had been all day. And she wasn’t
sure if her pledge to the older gentleman had been a good idea. “All right,” she said
dazed and getting knotted up, “I’m more confused than this morning. You need to
give me an example,” she demanded.

Bemused, the productizer picked up the bottle of Pinot Greigo he had ordered with the
meal, read the label and held it for her to observe. Mary noted that this wine came
from a special area in California, it had been bottled several years before, and the
label was remarkable and eye catching. “You see,” he said, “even this bottle of wine
has been through the productization process.” Mary looked at him quizzically. “Let
me explain,” he continued.

“A few years ago, many of the wineries in California had invested in Chardonay
grapes, and Chardonay wine had been selling very well. My client, the maker of this
wine you’re holding, was concerned. The winery owner was troubled by all the
money going into the Chardonay business, and wanted my opinion before they
invested in it like their neighboring wineries. That’s when I introduced the winery to
the productization process.” He paused, took a sip and started his meal.
5
“You see, Chardonay was getting more expensive to produce. The root stock was
priced twice what it had been only a few years before, the crops were susceptible to
seasonal weather fluctuations, and frankly, we both thought that the supply, once all
the planted stock had reach maturity, would surpass the demand. I asked my client
why he wanted to invest in Chardonay, and he could not give me any other reason than
the fear of being left behind by his competitors. While that is a concern in any
business, no single winery had market share that meant anything. Instead, micro-
economic conditions were more in play with that business than the efforts of any one
winery. Without market leadership, it was going to be hard to stand out from the rest.
So no Chardonay wine maker would be able to dictate a market price without being
close to the general market conditions. In such conditions, only the best managed
wineries can hope to make a profit. And that includes getting the raw materials,
tending the crop during the growing season, the selected time for harvesting, even the
type of bottle used.”

“So,” he continued, “I asked my client what he could do to stay in the wine making
business without being another member of the ‘herd mentality.’ We started taking an
assessment of the various grapes that grew well in his geographic area, and started to
list features of each grape. This is called market definition by some, but I would
prefer calling it cataloging the inputs.” With that, he quietly folded his napkin and
called for the waiter.

Mary was feeling better. She wasn’t sure if it was the wine, or the explanation she had
just heard. It was starting to make sense. “Let me get this straight,” she said. “If I
define the market, which in this case was the bottled wine market, and then I look at
all the players in the market, I will have a better chance of making a profit?”
The older gentleman scowled, “if it were as uncomplicated as that simplification, then
all businesses would be successful. I guess I need to explain further. Defining the
market means the size, the sensitivity to price, the alternatives of choice, and the inputs
that further define the market. That’s why I would rather call it cataloging the inputs.
Lets list them:”

Cataloging the Inputs

1. market size
2. price elasticity
3. raw material costs
4. resource utilization (the use of the company’s and other services’ labor,
management and capital equipment)
5. other resources (energy or consumable materials for example)
6. manufacturing costs
7. marketing and sales costs
8. warehousing
9. transportation and shipping
10. product differentiation
11. marketing and consumer demand
6
12. market position and pricing

He pulled out a notebook and started writing down the twelve items. Mary was on the
edge of her seat. The Pinot Gregio had helped, and this was interesting. The
productizer handed her the list and stood up. “I’ve taken care of tonight’s dinner,” he
said, “but you are buying me breakfast tomorrow. Right here at 7:30 sharp. And this
list; by breakfast I want you to identify all the inputs that you can think of for each of
the twelve headings. So you have a homework assignment, young lady.” And with a
gleeful wink, he turned and walked out of the dining room.

Mary looked up and saw several diners approaching her. “We want to help,” they
said. So several of them gathered around a table in the lobby and began to list the
inputs for cataloging. By 10:15 that night, they had amassed the following inputs:
1. market size included: equipment) was further broken
• domestic and international down to:
wine sales, which further • business strengths
broke down to: • business weakness
• varietal and specialty • corporate mission
wines and • fixed costs
champagnes • capital resources
• blended wines and
• marketing channels
regional tastes
• distribution
• seasonal products,
such as champagne at • opportunity cost
New Years 5. other resources (energy or other
2. price elasticity included: costs)
• demand trends relative to • utilities
pricing • water
• regionalized purchasing • waste disposal
habits and market volume • capital
• pricing points • taxes
• step-wise pricing 6. manufacturing costs
benchmarks • labor
• wholesale volume • fixed
price breaks • variable
• segmented market • maintenance and capital
pricing investments
3. raw material costs included: • jobbers
• fertilizers • quality control
• consumables • depreciation
• variable costs • warehousing
4. resource utilization (the use of the • shipping
company’s and other services’ 7. marketing and sales costs
labor, management and capital • advertising
• promotional expenses
7
 • sales team • efficiency
• brokers and distributors • market share
• capital • market segmentation
8. warehousing • competition
• raw materials
• finished goods
• management, labor and
maintenance
• utilities
• inventory taxes
• shrinkage
9. transportation and shipping
• fleet costs
• demurrage
• carriers
• Less than truck load
(LTL)
• truck
• rail
• intermodal
• bulk
• packaging and labeling
• insurance
•
10. product differentiation
• size and quantity
• appearance
• labeling
• promotional
• cross marketing
11. marketing and consumer demand
• product definition
• specialty
• private branding
• co-marketing
• consumer definition
• features marketing
• advertising
12. market position and pricing
• strategic allocation of market
indicators
• pricing floor
• break even analysis
2
Mary thanked her new friends and gathered the lists they had made. She wondered
how all this could be discussed in one breakfast. And she realized that her new
product had been promoted without an analysis of many of the items on this list. That
night she slept fitfully. In the morning, she was once again worried about all the
activities she had to do as the product manager for her company’s new product.

At breakfast, the older gentleman was kind and contemplative. After reviewing the list
and jotting some notes in the margins, he took to drawing lines and circles around
various items on the list. “Well Mary,” he said, “I think you have been busy! But are
you sure that everything is on this list?”

Before she could reply, he continued, “this list covers much of the inputs I wanted you
to catalog. But what I really want is some organization of related tasks. The way
you have them listed makes no sense. So I’ve reorganized them and regrouped them.”

Mary was beside herself, wasn’t it originally his list? “Wait a minute,” she retorted, “if
I’m buying you breakfast, at least you could take responsibility for the original
organization of the list. It was you who gave it to me!”

The productizer laughed, the first time she had heard a laugh from the fellow. “I do
want to reorganize, but I want you to understand why we must. That was why I
bungled the list last night, that and the Pinot Grigio. You see, the way the list flows
now, there is little likelihood that the front work would be done before the final work.
When you go through the productization process, it is best to systematically go
through the early efforts before continuing. That way, should you determine that after
all the product is not going to perform as you hoped and needed it to, at least you
minimized your investment of time and money.”

He shook his head and went on. “You see,” he continued, “too many times I’ve seen
businesses go for broke trying to perfect a product that in hindsight did not deserve the
attention it was getting. These businesses had too much invested to admit defeat.
Sometimes, when they finally pulled the plug, the business and the professions of the
people involved went flat-line. Its always best to take some time each day, week,
month and year to reassess the progress and status of all products in the marketplace
and in the pipeline. This practice helps a manager identify when situations need
immediate attention. And, it forces the product manager to take notice and initiate a
program to turnaround a bad situation.”

The older gentleman continued, “Let’s list the main tasks and finish up our breakfast.
I want you to come to my seminar today, we will be taking about your product as a
case study. Now, don’t protest, if you are going to get my attention, the least you can
do is allow me a real life situation to discuss in my program. Besides, you will get the
benefit of many experienced people helping you on this. I find that such sounding
boards are nearly as good as a board of directors.”

“Anyhow, the list can be sorted to the following, sequential areas:

1
• definition of your business mission and product area(s) focus
• a critical look at the resources your company has, and what else is needed
• a product analysis which includes
⇒ definition of the client
⇒ determination of the defined client needs
⇒ ability to create client demand
⇒ alignment of the product features that help expand and firm the client
demand
⇒ assessment of the early, mid, and long term expectations of market size and
market share for this product
• your route to this market i.e. marketing and product positioning
• investment of company opportunity towards this product, including
⇒ your company’s long term plans to support this product, its evolution and
changes.”

“By the way, you’ll have some time to prepare for the myriad of questions the class
will ask. I am going to talk about the Pinot Grigio productization first. And I’ll take
that list you prepared, there are a few things I should have added to my list for that
presentation. Thanks. Let’s catch a cab at 8:45?”

Mary nodded yes, and he was off again. She wrote down the list of the organization
she had just heard. Now she was mad that the marked up list she had given him was
with the older gentleman, and she wasn’t certain how he had reorganized it. Well,
she’d just have to take the above organization and assign numbers to that list and the
one she and her mates had done last evening.

[as an exercise, copy the list below and the 10:10pm list. Letter in capitals the
breakfast list, and assign in numbers the cataloged inputs to the various headings
done at breakfast. if there is repetition, decide if the repetition is worth considering
under the competing headings, or should you limit this to only one heading?]
Breakfast the prior evening
1. market size included:
A. definition of your business’ mission
• domestic and international
and product area(s) focus
wine sales, which further broke
down to:
• varietal and specialty
B. a critical look at the resources your wines and champagnes
company has, and what else is needed
• blended wines and
regional tastes
• seasonal products, such
C. a product analysis which includes as champagne at New
Years
2. price elasticity included:

2

a) definition of the client
b) determination of the defined
client needs
c) ability to create client demand
d) alignment of the product
features that help expand and
firm the client demand
e) assessment of the early, mid
and long term expectations of
market size and market share
for this product
f) your route to this market, i.e.
marketing and product
positioning
• demand trends relative to
pricing
• regionalized purchasing habits
and market volume
• pricing points
• step-wise pricing
benchmarks
• wholesale volume price
breaks
• segmented market
pricing
3. raw material costs included:
• fertilizers
• consumables
• variable costs
4. resource utilization (the use of the
company’s and other services’ labor,
management and capital equipment)
was further broken down to:
• business strengths
• business weakness
• corporate mission
• fixed costs
• capital resources

D. investment of company opportunity • marketing channels

towards this product, including • distribution
• opportunity cost
5. other resources (energy or other costs)
E. your company’s long term plans to • utilities
support this product, its evolution and
changes.” • water
• waste disposal
• capital
• taxes
6. manufacturing costs
• labor
• fixed
• variable
• maintenance and capital
3
 investments
• jobbers
• quality control
• depreciation
• warehousing
• shipping
7. marketing and sales costs
• advertising
• promotional expenses
• sales team
• brokers and distributors
• capital
8. warehousing
• raw materials
• finished goods
• management, labor and
maintenance
• utilities
• inventory taxes
• shrinkage
9. transportation and shipping
• fleet costs
• demurrage
• carriers
• Less than truck load
(LTL)
• truck
• rail
• intermodal
• bulk
• packaging and labeling
• insurance
10. product differentiation
• size and quantity
• appearance
• labeling

4
 • promotional
• cross marketing
11. marketing and consumer demand
• product definition
• specialty
• private branding
• co-marketing
• consumer definition
• features marketing
• advertising
12. market position and pricing
• strategic allocation of market
indicators
• pricing floor
• break even analysis
• efficiency
• market share
• market segmentation
• competition

[you can see that many inputs would not need to be defined in the early stages of
productization. However, before any product hits the market, all those input subjects
will require a plan.]

5
Chapter 2 Why To Productize? How To Productize?

Mary didn’t go directly to her booth that day. Instead, she registered for the sessions
the productizer was leading. There was one in the morning, the other from 2:00 top
5:00. She called her boss and told her that she would only be able to spend a few
hours at the booth, but that the next day, she was sure what she was about to learn
would make the next and last day very successful. At the booth, she put a stack of
business cards and a note saying she was at the seminar on productization and hoped
to catch up with anyone the next day. And she mentioned that she would be happy to
describe just what her new product could do for meeting client’s needs.

Mary joined the growing crowd at the seminar, took a seat near the front and grabbed a
pen and paper and started to take notes.

The productizer remarked about the dinner he had the night before, and encouraged
the audience to sign up for the afternoon session which would discuss an application
of productization to Mary’s product. He then began discussing the Pinot Grigio
project.

First, the client needed to determine its business mission and product
area(s) focus
As the wine maker was already growing grapes and producing fine wines, he was
confused as to what was at issue. The productizer asked him if he had ever
considered what was his product?
◊ Was it grapes?
◊ Was it wine?
◊ Or was it a bottle of wine that a consumer would enjoy?
You see, each choice had different levels of financial and management commitment,
each had unique talents needed to be successful, and a misstep at any choice would
change the outcome and success. Each of the above bullets were subsets of his
business. Each could be a separate business all to itself.

The wine maker took stock of what this meant to him and his business: He liked to
make wine, he had undeveloped acreage that he could plant in grapes, but his
manufacturing capacity was limited, and funding for expansion might not be prudent
early on. The productizer reminded the class that the underlying reason this client had
called him was to make sense of investing in chardonnay grapes for chardonnay wine.
The productizer held fast and made the wine maker look at the basic “prime numbers”
of his business. As the class was spilt with understanding by some and a puzzled look
by others, the productizer gave a definition for prime numbers. [all words that are first
italicized are listed alphabetically in the glossary, this definition is also listed there,
and here as part of the case text.]

6
 “prime numbers” of a business are the building blocks of a business that can
not be broken down into smaller identifiable units and still be unique to that
business. For most businesses, the prime numbers equate to the various
business departments of the organization. If any of these departments should be
deleted, the business could not succeed in reaching the final outcomes it
endeavored to take. However, and this is an important concept, prime numbers
are activities and services or deliverables that can also be defined well enough
to separate them from the business operation and secure their operation by some
other means such as a (sub)contractor, a jobber, or a service provider.

“So class,” he went on, “who can tell me some of his prime numbers?” In the end,
he had a list similar to what he had given Mary at dinner:

7
Pinot Grigio Business Prime Numbers
1. labor
2. management
3. capital equipment
4. production (growing the grapes)
5. manufacturing:
6. making and
7. bottling the wine
8. marketing and sales
9. warehousing
10. transportation and shipping, and he added
11. accounting and finance
(after all, the money has to come and go in any successful business)

Secondly A Business Needs To Take A Critical Look At The Resources It

Has, And Determine What Else Is Needed
For the case of the winery, it had the land, it did not have the labor force needed to
expand the tending of the grapes nor the intense demand for labor at harvesting.
Additionally, it was not nearly set up to prepare the grapes for the fermentation
process, nor did it have the cellaring capacity if it was to add the Pinot Grigio to its
stable of wines. This was when opportunity cost was used to assess what the short,
mid and long term plans were to be. A winery as well as any other business could
seek funding and acquire human resources and capital
investment to undertake a new product line internally. But when one goes through the
productization process, the unique steps for the prime numbers listed above are
individually defined as they are associated with this product as well as they are with
the other products now being sold, or planned for the future.

So, in this case, the winery looked at each prime number on a strength or weakness
basis. If it was a strength, then the winery would consider keeping that prime number
activity in-house, if it was a weakness, then the winery would seriously consider
looking outside the winery’s key business abilities and either contract, hire a jobber, or
re-think the point in the product cycle where it would relinquish control of the product
and sell. [think of it as vertical dis-integration]

For now, suffice it to say that the client chose to plant the grapes. That had significant
long term financial benefits, and the land was fallow and fertile. The tending to the
crops was handled by their own staff with only a few additional employees. Harvest
time was handled with contracted help and the crushing, stemming and fermenting
went to a jobber that would return the wine in bulk for bottling at the winery. The
winery could schedule the bottling and corking during non-peak production periods.

8
Warehousing would be contracted to current distributors with incentives to limit
warehousing time.

Next A Product Analysis Includes:

1. definition of the client
a) This activity is not simple. The client is possibly any or all of the
following:
i) the end consumer,
ii) the retailer,
iii) the wholesaler and,
iv) the distributor.
2. determination of the defined client needs
a) Each client above has different needs and works under varying business
decision criteria.
b) The needs can cataloged into:
i) use of the product and or by-products
ii) handling
iii) storing
iv) marketing and financial needs
[of the list i through iii above are best defined when the productization
process modifies the subject with the predicator “ease of” and
determines how that can be achieved]
c) Establishing optimal means of meeting the needs of i through iv for each
type of client, and defining how the product is handled by each client is
required. For example: a distributor would better handle pallets or cases
of wine where as an end consumer is more likely to buy and use wine by
the bottle. If at all possible, consider the marketing units each would
prefer to deal with and bundle the product in such a way so that un-
bundling allows for ease of handling by the next level of client.
d) Should the wine maker determine that the wine was to be sold in bulk,
then the end consumer for the wine maker is a bulk merchant or private
label bottler. In that case, wine could be sold by the barrel or in even
larger units. There are any number of reasons to sell a product in such
an unfinished state. This briefing will only make mention of those
reasons within the case studies herein.
3. ability to create client demand
a) How many times have we all heard “if you build a better mouse trap, the
world will beat a path to your door.”? That only holds true if there are a
lot of mice.
b) In other words, client demand is based on the client’s perception of a
need, and your product being able to satisfy that need.
i) But it is the ability to satisfy the need better than other products
that would create a demand over and above competing products.
ii) Yet again, sometimes products sell better in association with other
products and services. For example, the Pinot Grigio sold to the
9
 productizer in the hotel restaurant sold for a much higher value
[cost] with the meal because the hotel meal complimented the sale
and consumption of the wine. The ease of use, in that wine
glasses were provided, the wine steward removed the cork and
poured the wine, and the dirty glasses were handled by the hotel
specialist in dishwashing meant that only the drinking and
enjoyment of the wine was experienced by the end consumer. For
that ease of use, the productizer paid a premium for the bottle of
wine.
iii) Another critical note: perception of a need is not always or
already established at the time of product introduction. Many
times, the need is shaped and defined by the product developer.
In 1960, nobody considered or wanted a computer in their home.
And the internet when it first was in use, was mainly a scientific
endeavor, not a direct challenger to the postal service and the
research library as well as other avenues of information and
entertainment.
4. alignment of the product features that help expand and firm the client demand
a) In identifying client needs, the product can be refined to as closely match
the client needs as practicable. Test marketing and consumer feed back
can be used early on to adjust the features that make the product more
desirable and correct the features that are perceived as negative.
i) In improving/refining products, be certain to include a
cost/benefit analysis to avoid placing demands on a product that
would require pricing beyond the financial reach of the target
client market. [See case study on “Scapula Exerciser” for an
approach to the cost/benefit solution.]
b) The productization of the product can also anticipate future awareness
and benefits of a product that can be emphasized in order to add value
and expansion of market size to the product. Many times this is done by
offering variable sizes of the same product with convenient packaging to
make the product portable. An example of a modest change is to have
zip top removal for a canned product to ease its utility and ease of
access. This friendly feature opens the market usefulness of the product
which relates to more sales. And typically, the altered product can be
sold for a higher margin due to the attractive feature which also
differentiates it from competing products. Consumers/clients will value
and pay more for features that directly benefit them.
5. assessment of the early, mid, and long term expectations of market size and
market share for this product
a) Product demand can be fickle. Market size is controlled by the ability to
distribute the product, market it so potential sales are exploited, and
priced to encourage demand. Faddish products are not to be overlooked.
In the 1980’s a small stone was packaged and advertised as a “pet rock”
just in time for the Christmas gift giving holidays. While no feature was
practical, the market demand was immediate and the product sales were
10
 in the millions. This required an ability to supply at the time demand
was at a peak, with an ability to reduce or stop production as the demand
ebbed. Certainly, the productization of that “pet rock” was targeted to
immediate sales only, no mid or long term expectations were defined,
and as such, the methods used to market and distribute the product were
tuned to short term business relations.
b) Other products have the ability to grow in demand rapidly. When this
might occur, the productization process must take careful review and
assessment of the financial projections. If sales strip the ability to pay
for the inputs to supply the product, cash flow problems can cause
foundering of a business before the cycle balances out. For many
businesses, early growth and development of the product can sap all the
money out of a product. While in most business circles this is
considered a normal feature of a “hot” product, it does not need to be so.
Mechanisms and approaches will be covered in a future symposium,”
said the productizer.
c) “Long term expectations,” went on the productizer, “help define how the
product pricing and strategy for bringing the product to market are
played out. Should a business expect that a product has a long lifetime,
then immediate profits can be less of an urgency in that as a business
matures and grows, economies of scale, smarter methods and practices,
and better buying power of raw materials can all contribute to a lowered
delivered product cost. This long term strategy pushes the improvement
of gross margin per unit sale into the future. If understood, and the
product is the market leader, then there is an probable advantage the
business has over later entering competing products.” The productizer
looked up and directly at the audience. “Advantage is an opportunity,
not a guarantee,” he bellowed.
6. “Assessment of current, mid and long-term competition,” he went on, “are key
to the strategy of how one is to build a business around a product. And even
though a company might have numerous products, each product unto itself is a
business.
a) In the beginning of a product’s life, the current market conditions are
studied for:
i) Existing market demand and the products that are satisfying that
demand.
ii) Analysis of market share by the key competitors as well as
identifying relative ranking if there are multiple competing
products.
iii) Assessment of production capacity and serviceability of product
relative to demand.
iv) Ease of entry and the cost of leaving the product business.
v) Consumer awareness of this kind of product and of the market
leader(s).
b) Mid term competition is of great consequence.

11
 i) The competition can very likely come from within or from
business partners that introduce like or next generation products.
ii) In fact, by mid life of a product, the business should have several
lines that meet specific consumer needs that will overlap. While
the unit sales and market share of the originating product decay,
the product line is able to take advantage of the trade identity,
common distribution and marketing channels, and an efficient
corporate structure.” The productizer chuckled along with the
audience with this last comment. “You know,” he went on,
“efficient corporate structures can and do exist. Their efficiency
is based on many things, but key amongst them are the ability to
listen to the market, implement change rapidly but not foolishly,
and demonstrate continuous product and process improvement.”
iii) Business partners can become competitive if they have significant
roles in either upstream or downstream business practices. Many
times, the perception of sales growth is not met with actual
performance. If business partners over invested in preparing for
their participation in the product development and sales, they
might have unused or under utilized capacity. In order to satisfy
their own corporate directives, they sometimes look internally to
maximize the capacity of their investment. This would mean that
they might develop a directly competing product. Or they might
find other business partners that would demand participation for
goods and services in direct competition with the original product.
c) Long term competition is usually due to a diluted market share and a
gradual shift from the early, hot new product to a commodity status.
i) At this point, the productization process has to access the value of
maintaining the product.
a) does it contribute more than its share of profitable cash
flow?
b) is competition mainly on price and is there little market
appreciation for any other product features?
c) can it reasonably compete without having to expend great
amounts for advertising and discounting?
d) is obsolescence a factor or is the product still a viable
business?
e) is the business’ infrastructure capable of continued
performance at the levels of projected demand?
(1) This last one is significant. Too many times, major
overhauls and replacement projects are carried out
just before management determines that the
product’s commodity status does not enable enough
profits to continue production and sale.
(2) are the resources within a company better spent on
maximizing the benefits of other products?

12
 f) can divestment of the business make more cash flow in the
foreseeable future with an alternative place to invest the
money for long term strength than continuing the support
of the product and not being able to invest in newer, more
robust business ventures?
7. “Your route to this market i.e. marketing and product positioning,” he went on,
“have a determining factor in product pricing, brand and trade identity and
market share.”
a) Early on, if the product is part of the introduction of a good or service,
the education of the consumer and even your own resources demands
investment of management time and money.
b) At this time, awareness of the product and the target market help in
refining and defining the product and its key features and attributes.
c) Your management must interpret the market’s needs, and identify the
leading decision makers in the industry. Few end consumers are willing
to try a new product before it has proven reliable and meeting the needs
of the client. This frustration can lead to a stalemate in the introduction
of a product.
d) By positioning the product with like or complementary goods and
services, the new product can be introduced with an already established
good or service.
e) Should you be introducing a product that competes in a well established
market, then taking market share is more cut throat.
8. “Investment of company opportunity towards this product, including your
company’s long term plans to support this product, its evolution and changes.”
Was the last heading before the noon break in the symposium. The productizer
went on to list:
a) “As in the analysis of the long term business issue, in the short term, a
business needs to assess how much commitment of time, talent and
money will be directed to introducing and supporting a new product. If
the analysis of conditions was in error, the product could be
overwhelmed with demand or there might not be any demand.
b) During such times, the demands for commitment would require longer
lead times before positive cash flow occurs.
c) Other, possibly higher margin products can also be introduced at the
same time, limiting the human resources available to commit to this
product.
d) As is human nature, talent would be most interested in committing to the
highest profile product. Thus a lower level product might be abandoned
or neglected prematurely.
e) Products need champions. They are usually named “product manager.”

Mary took note of that last comment. Her title was product manager, but she
had no way of knowing all the nuances required of her position until now. The
productizer looked up at her and beckoned her to the front of the room. “Well, was it
time well spent, Mary?” asked the productizer.
13
 “Why I’m not sure I know more than I did before, but I am certainly concerned
about all the decisions that go into the productization process.” Mary went on to list
the key concepts she needed to stress in the productization:

14
 Mary’s Productization List
1. The business needs to determine its business focus and capabilities to
determine what it can reasonably do on its own, and where and when it should
seek help from the outside.
2. The client is possibly a end consumer, retailer, a wholesaler or a distributor.
3. The product needs to be defined based on the target market/client
4. Each type of client has different needs and works under varying business
decision criteria and priorities.
5. Understanding the type of client and aligning product features that best serve
that client can expand and strengthen client demand.
6. Early, mid, and long term planning for market size and market share of a
product require some forward thinking and analysis of the fit of the product
to the corporate mission.
7. Pricing is determined based on the market and competition as well as the
duration of the product life
8. Product management includes continuos improvement and assessment of cash
flow projections and opportunity cost to the business.

The older gentleman smiled and told her, “Mary, I am very glad to have you as part of
my audience. In this afternoon’s session, with your permission, I will explore your
product and the first item of this list.”

Mary agreed and they went off to lunch.

15
Chapter 3 Business Focus And Capabilities (step 1)
After lunch, the productizer introduced Mary and her situation to the balance of the
class. Mary was asked to get up and describe her product and what she has learned
over the last few days:

Mary began, “By chance I met the productizer only two days ago, although I had
known of him for a number of years. I dearly needed some objective advice as I have
been assigned to develop a product that my firm thought might be ready for the
marketplace.” She went on, “I have a trade show booth here at this conference and for
the life of me, I have not been able to tell passers -by just why we made this product,
who our target market is and why this product is a good deal! So you can see that I
need your help in defining this first from the standpoint of my business’ focus and
capabilities.”

“So, before I even get to the product itself, let me tell you about the firm. It was
founded by principles that were early leaders in the development of XTML. Since
most of you are from the high technology business, suffice it to say that XTML is the
next generation of HTML. This language allows computers to talk to each other in a
semi- to unstructured environment and query each other without the need for human
interface. Essentially, the computers, once their objective is defined, can
independently go out into the Web and seek out information, sort it and take action as
is defined in the objective.

“So this leading edge stuff seems great, but the founders didn’t see their old employer
realizing this was a watershed event and had pretty much shelved it with no business
plans for introducing it to the marketplace. In fact, the firm they left had no plans to
use it with any of their existing products. So the founders bailed out, surrendered
some of their stock options to pay for the rights to use and market the technical know
how they developed and struck out on their own.

“Surely you can appreciate this is a class of programmers and language experts that
can find work anywhere in the IT world, and in fact, they initially sold time helping
firms with tough IT problems. This wasn’t all that bad, and they developed a name
and identity for being top notch at solving some very complicated IT problems and
working out solutions to other’s software that kept crashing on their clients. Once they
banked earnings enough to be able to breath a little, they started some marketing time
with these same clients to introduce them to XTML.”

At that moment, Mary was shocked at the number of hands that reached up. “Yes, you
there, what is it?” she asked. The woman stood up and proclaimed,
“how can they be marketing, when they have not defined the product, not
determined its utility, and are just reaching out to their existing client base to
see if the client wants to spend money without a clear concept of XTML’s
value?” The woman went on, “that is not marketing, it is selling, and it is of the
worst kind!”
16
If it had been Sunday, a big Amen would have been expelled from this crowd. As it
was, Mary turned red and then composed herself. Before she spoke, she thought
about what had been said by one, and agreed to by many in the audience. Yes, that
was the issue! Mary’s firm was tops at solving IT problems, leading edge at
developing code for the next level of computing power, and yet they were neophytes
at defining what they should be doing to introduce XTML to the marketplace. No,
worse than neophytes, in that they didn’t even have an inkling that there was work to
be done. “You have a very good point,” said Mary as she sheepishly looked over at
the productizer.

“Thank you, Mary!” said the productizer as kindly as possible and taking the reins of
the presentation. “You see folks, Mary’s firm knew its capabilities as leading edge
programmers and ready to take on the world with this new XTML program or code or
whatever it is. But the firm did not know what to do with its special capabilities in
XTML to stand out from the rest of the high tech firms. Furthermore, the founders
had never found the time to analyze what they could do with this understated and
unrecognized product.

“As is problematic with many high technology products, market leaders are the firms
that are first to market an idea, and to establish a track record in the industry that
attracts the interest of future clients and investors. So Mary’s firm was jumping in feet
first trying to find clients and building an experience profile. But at the same time,
XTML is not anything more than a language. A key task for Mary’s firm is to identify
what they can do with this language that adds value to their clients’ business
operations. In order to help Mary sort out the strengths and weaknesses of her firm
let’s work out a +/- chart. We can use the “prime numbers” concept we did for the
Pinot Grigio example yesterday:”

“Prime Numbers” assessment of firm capabilities

Prime number + - Comment

labor + The technical talent is world renowned and hard

working. The founders have demonstrated an ability to
recruit additional talent at that time the business
increases a demand for services.
management - The direction of the firm is not well-versed in classic
business structure. Top management, while technically
proficient in this high technology field, are more likely to
commit energies to technical problem solving for a client
rather than establishing and nurturing a framework for
operations of the business on a grander scale. This
limits the firm’s ability to maintain a leadership role in
bringing this technology to the marketplace. [The
founders have not sought to augment internal talent with
outside/recruited management resources]
17
capital equipment + In the classical sense, the technology rights to XTML
source code and practice is the capital investment. This
asset known as intellectual property is valued upon its
replacement costs. This value is fleeting as other
companies have some if not all of the same category of
knowledge. Over a matter of years, the basic code will
diminish in value and would need to be replaced in
market application software.
production ? ? This line is intentionally left blank in that the firm has
not yet defined the product and level of service (tech
support) assigned to the product. For a product like
Mary’s, her firm needs to take an assessment of its
production capacity and serviceability of product relative
to demand. If follow-on technical support is expected, a
ratio of after sales service to sales volume needs to be
evaluated and plans to fund and provide tech support
services needs to be factored into the business plan.
manufacturing + Once the product applications are determined, producing
tangible products such as guide books and electronic
media is relegated to in-house production or out-
sourcing.
marketing and sales - The firm has limited experience in new product
productization in determining a target client, defining the
needs and formulating products/services that will
generate sales opportunities.
warehousing - As the firm has mainly generated revenues by selling
hours of top technical talent, a means of inventorying
and tracking of goods is lacking. Additionally, the
forward planning of human resource talent is lacking and
histograms of professional services should be developed.
transportation and + As for the most part, transportation and shipping of
shipping tangible products will contribute little to the cost of sales,
this firm can use reliable service vendors to support their
needs without significant negative consequences.
accounting - The firms current business practices are not aligned with
the project new market entrance. Managing accounting
of accounts payable, letters of credit, and accounts
receivable will require new methods of cash flow
tracking. Additionally, determination of a broader
spectrum of employee pay, based on the cost for human
resources of the future business, will need some
management of market pricing. Otherwise, pay
structures will fail to relate to external influences.
finance - While the firm is now solvent, the current working cash
flow business practice limits the firm’s ability to expand.
Leveraging of assets and developing a relationship with a
18
 financial institution and possibly investors such as
venture capital or the stock market will provide a
working capital cushion to level out cycles of heavy fund
demands and returning sales revenues. Early on, some
sales will have extended payment structures or bad debt
as some clients are likely to challenge the perceived
value of the product. Expect initial days sales
outstanding of over 150 days.

“So class,” went on the productizer, “what does the above table tell us about Mary’s
firm? It tells us that they have talented human resources and a dynamite intellectual
property rights. It also tells us that should they wish to go beyond the current revenue
generating practice of selling time, they need to rethink the priorities of the business
and restructure the organization. And in the fast paced world of high technology, the
life cycle of hot product to dog is short. If Mary’s firm is to reap benefits from this
intellectual property, it needs to take action now!”

“As we have assessed the firm above, outside help or strategic hires are needed to
strengthen management, marketing and sales, warehousing and shipping, accounting
and finance. Outside help can be in the form of contracted services, partnerships and
mergers. Strategic hires can come from executive resource consultants (head
hunters), industry association referrals, and through indirect channels such as refereed
executives from other partners, financial institutions and client recommendations.
Alternatively, internal candidates that have strong background in what appears to be a
weak area, but are working on other professional issues, can be reassigned to new
responsibilities and the position they open up by the transfer can be filled with new
talent.”

The productizer stopped and surveyed the room. “Does anyone think Mary’s firm will
be able to pull this off?” he queried, “you see,” he went on, “the current operation is
geared towards making fast money, and is not investing in the actions necessary to
succeed in defining and promoting the new product. A productization process for this
XTML-derived product will require dedication of strategic management and technical
talent resources. Those resources will not be able to be out with the existing clients as
full-time consultants. So the cost for this talent will have to be borne by those others
that are generating revenues now. As the firm is also at a loss of what and how to
market this, then they must also come to the realization that this particular product line
is in its infancy, and benefit awareness and client needs are not firmly established. In
fact, pricing such a product is very hard to do. For this, and many more products, this
needs to be evaluated by the added value means of pricing. Sometimes this can also
be called opportunity cost.”

“And,” he continued, “opportunity cost is also what Mary’s firm must consider as it
pursues the productization of their new technology. Should the firm invest in
19
developing and promoting this business, then funds will be consumed, talent will
direct its focus to the productization process of the new product, and other business
opportunities are likely to be deferred or abandoned due to stretched human resources
and finances.”

“So, for business focus and capabilities, the firm must assess the strengths or
weaknesses it has in each operational business category:
1. labor
2. management
3. capital equipment
4. production or raw materials sourcing
5. manufacturing:
6. intermediate goods and services
7. finished goods and services
8. marketing and sales
9. warehousing
10. transportation and shipping,
11. accounting, and
12. finance”

“It must then determine how it is to augment the weak points in its own capabilities
with new and/or expanded and stronger capabilities. This augmenting can be done
with a growth of the firm itself, known as internal growth, or by teaming or
partnering, known as external growth.

“Internal growth will require not only the hiring of new talent, which is very time
consuming, but also business practices will need to be developed so that the growth
has structure and the new talent and the old talent learn to work together as a team.
Additionally, as this new growth is dependent on the new revenues of the product in
consideration, significant risk is taken to develop all the capabilities internally.
Usually, business direction towards internal type growth is selected when the product
in development has a potential, at least initially, of incremental or fractional
expansion of the full firm’s business. In that case, the new product-related business
activities relative to the full firm’s operations and revenue streams is a fraction of the
firm’s total activities.”

“External growth can limit the financial and human resource strain on a firm that
occurs when it seeks to materially expand its business focus. This is frequently called
leveraging your capabilities. However, the potential future profits are diluted as the
external business partners, or jobbers, will require a return on their investment. Sales
proceeds are distributed to the external resources based on some valued measure of
service or by unit pricing. External growth can allow for timing a rapid deployment of
special capabilities as close as possible to the earnings cycle of a new product. A
special caution for external growth is advised,” warned the productizer. “The
understanding of each firm must be clear, and the associated risks for the new venture

20
must be understood by both parties. Usually these understandings are put in writing
and authored by corporate lawyers skilled in this area of practice.”

By now, Mary was beside herself. “Sir, if I may ask, what should my firm do at this
point? I mean, we definitely are far short of having in-house capabilities needed to
proceed under our own steam. We have limited financial strength to undertake a grand
internal expansion and surge in hiring, and yet we wouldn’t know where to begin in
selecting external growth options.”

The productizer smiled and said, “at this juncture, your firm needs to develop and
define the product concept. I suggest your principals, and some external strategist
consultant have a weekend or week-long retreat and think this through. Invite some of
your closest existing business clients to the retreat for at least one or two days,
preferably during the early sessions. Have them help your firm define what can be
done in XTML that would benefit their business and that they would be willing to pay
for.”

“By the conclusion of the retreat your firm should have an action plan with a time line,
assignments for each of the principals, and by inviting some of your clients along, a
focus group assessment of the function of the new product and likely some interested
and motivated customers. And since, as we discovered in measuring the capabilities
of the firm that you need some critical help in complementing the talents your firm
has, these same clients might be able to guide you in seeking either external resources
or identifying candidates for internal growth!” The productizer took out his
Daytimer® and looked up at Mary. “How about three weeks from today?”

Mary returned to her booth for the final day of the trade show. Instead of discussing
the unique attributes of the XTML language with the day’s booth visitors, she asked
them questions about the IT part of the visitor’s business, and what level of staffing it
took relative to the overall corporate manpower pool. And she began formulating an
assessment of the added value an XTML-based product would be able to provide to
the firms represented by those booth visitors. Later that day, as the show was winding
down, the productizer dropped by.

“You know,” he said, “I wasn’t kidding about my availability to help your firm. Have
you given my offer any thought?”

“As a matter of fact,” Mary replied, “I called my boss last night and we are both
keenly interested in your advice. But won’t you be expensive?”

“If you add up the pool of internal talent a week-long retreat will consume, and the
cost of the facility, meals, entertainment as well as a value placed on the contribution
by your visiting clients, my cost will be negligible. Besides,” countered the
productizer, “if your team does not have experience in such exercises, then you might
not have that much to show for the time spent away from your day-to-day, income
generating work. I’ll offer to discount the value to half my normal rate with the other
21
half taken as an equity position in this product. That way, I will be earning something,
and I will demonstrate a motivation towards your business’ success in this new
venture!”

Mary shook his hand, “Deal!”

22
Chapter 4 Developing And Defining The Product

(part one)

“Call him wise whose actions, words and steps are all a clear
because to a clear why.” ~ Lavater
Three weeks later, Mary, the four principals, the productizer and an administrative
assistant were squirreled away at a retreat. The rules (in instructions provided with his
consulting contract and laid out by the productizer) were that only family calls were
allowed; after 6:00 p.m., and no business calls were allowed at all. If there were any
questions related to the retreat’s mission, the administrative assistant alone was the
only person allowed to call back to the main office. And only three calls per day were
allowed.

Prior to the retreat, each principal had selected an employee as a temporary

replacement for themselves, and had carefully reviewed with the replacement what
was expected of them during the week’s absence. Several had also lined up some
trusted consultants to help out if there were some critical problem that might be
beyond the abilities of the chosen replacement. The consultants were to be called if
such an emergency arose, and not the principal. All of the clients were told of this
important retreat, and this worked to pique an interest in the objective of the retreat.
The principals offered to get back to each curious client and let them know what
transpired within the month. Most of the principals even set up future lunch dates with
their clients for just that purpose. Three clients were invited to the third and fourth day
of the retreat, and all accepted.

Once the morning greetings were completed, the productizer put forward a schedule
for the next few days. A fun afternoon was scheduled with the attending clients on the
fourth day, but overall, this group had a serious mission. The potential for a
significant product that would rock the IT world was under consideration. How it was
introduced, and how well it performed in a real application would either take the firm
to triple digit growth or force them to remain as a high tech labor pool. The
productizer had Mary distribute a confidentiality/non-compete agreement for to all
attendees. “What we are doing here this week is for the firm and our combined mutual
benefit,” she said apologetically.. “This confidentiality/non-compete agreement is to
protect the firm’s commitments. It is only for three years, after which time, this
business is either successful in this venture, or we have failed. As many of you
remember, we left our former employer because it did not see the value in XTML-
based products and we wanted to see what we could do with it. I don’t want you to
run from this employer, and as we are principals and top managers, I would not expect
you to.”

“You see, our legal counsel has advised that this agreement will act as an inducement
to move quickly towards developing a great product at the firm. If anyone thought a
23
product could languish for a number of months and then steal away with the
knowledge we developed this week, they might not be as inclined to pull out all stops
in developing the product here. We must act quickly to get this product into the
marketplace and establish a lead ahead of the competition. Yet, we all know that in
three years’ time, a product defined this week will become yesterday’s news. So after
three years, this non-compete agreement won’t be needed.” Mary finished and
collected the signed agreements. No one had complained, and Mary’s explanation
made sense.

The productizer pitched in with, “remember, in three years, you will likely have
launched at least the third version of the product we define this week. And, we will
look back at version 1.0 and gasp at the simplicity it had.” The productizer looked
over his glasses at the group with a scowl, “We should also strive to broaden the
firm’s product line within three years. No firm should depend so heavily on only a
few product offerings.”

One of the principals, who had wanted to say something for some time blurted, “so
why don’t we define ten or twenty new products this week? After all, don’t we need
to start hundreds to have only one or two become successful?” He sat down with a
smug look, pleased with his recent business journal readings.

The productizer spoke softly and asked the group if he could triple or quadruple his
fee? “Why not,” he asked, “if the firm has the resources to initiate 15 or 20 new
products, then it has the resources to throw money around with abandon. You see,” he
said, “those rule-of thumb guides are for firms that have hundreds of products all
pulling in money at various levels of success. Once a business is at that size, your
fifteen or twenty new product starts is realistic. For large companies, new product
introductions can initiate with hundreds of ideas which winnow out to maybe four or
five products going through the whole development cycle. You need to develop a
product starting from an idea. And you need to expend the time and effort to truly
reflect upon what that idea means. We will loose any sense of understanding of how
to define and develop one product idea if we dilute our week looking at a multitude of
products.”

The group knew the productizer was pontificating then, and that he had some
misgivings about the ability of the group being able to develop a product concept over
the next three to five days. The fidgety principal asked, “sir, how are we to begin? I
mean, we have hundreds of ideas among the five of us, our client guests might have
even more. How can we sift through that number and figure out which idea or ideas
we should develop?”

The productizer smiled and replied. “We will need to determine a class of product, one
that might have some variations as it could be tuned to specific needs of certain clients.
But before that, we need to comprehend the class of business that this product might
be serving and by which your firm will be defined. You see,” said the productizer,

24
“it’s not actually the product you are defining, or the means of putting it together. No,
you are here to define the result.”

“The result of what your product does for your client. And that result is due to the
actual technology, the application of that technology to a client’s problem(s) and the
resulting benefit of the mix of product and carry-through [service]. For your firm to
be successful, the result must be significantly more beneficial to the client than the
expense the client must assume to apply your product. This is called opportunity cost.
And the value added your product provides to the client in solving a problem needs to
be enough to sway your client towards paying your firm for the product. To achieve
this, you must clearly understand the needs of you client. Sometimes you must help
you client define its needs beyond its existing business needs paradigm.”

“Let me give you and example,” he went on. “Quite a few years back a client of mine
was seeking out a routine service for a large industrial facility that he managed. This
service was to replace a wearable part of a major piece of equipment. Like brake pads
in automobiles, the wearable part had a useful life, and at the end of that life, it had to
be replaced, or like in the case of an automobile brake, the equipment would have total
failure. Unlike brake pads and automobiles, this repair took weeks to complete, was
labor intensive, and the industrial facility was worth hundreds of millions of dollars in
capital investment. When the equipment was down, it was equivalent to an
automobile being ‘in the shop’; it was not much use to the client’s business and
production was at a standstill.”

“Anyhow, in years past the standard practice was to replace the wearable part with
some new part (product) that would last about a year, and then each year the old,
worn-out part was removed, and a new repair part installed. But the client understood
that a whole production system with hundreds of employees was dependent on that
piece of equipment. When it was down for repairs and replacement, hundreds of idle
employees were not of much good for the company. So, I asked my client what they
wanted: was it to continue with the standard practice, or was a review of the practice
and a results solution worth while? In other words, was its existing business needs
paradigm in need of a major shift? And we worked together to establish what results
would make this shift worth our while. In other words, my client needed to look at the
opportunity cost of a new solution versus the standard practice.”

“Now this became a whole shift in how my client’s business went about making
decisions. In the end, every possible replacement part that would satisfy this repair
need was evaluated, tested and considered. In the end, the part chosen cost, on a unit
price basis, twice what the old standby part had cost. But the installation cost was the
same, and the factory was able to run for almost twice as long as before. This result
was not the key determining factor for making this decision. Do you know what that
was?”

Mary was once again beside herself, “I’ll bet it was the added value this solution had
to the business! This extended time between repairs let the company keep running its
25
production facility and making product. That translated to increased production
volume for more unit sales, and increased annual revenues all probably adding to
better profits for the client’s business!? Besides, I know I hate it when my automobile
is in the shop, I can’t go and make sales calls and my whole schedule is put in limbo.”

“Mary is exactly on target,” replied the productizer. “In this case the incremental cost
to change the means of solving the problem was greatly offset in the resulting
benefits.” The result for this client was millions more in product and tens of millions
more in sales. All achieved by my client seeking out a solution to a real problem,
which was ‘how to keep the industrial facility operating?’ instead of a perceived
problem of how to replace the worn out part for the least amount of money and time.”

“This gets even better for the firm that did the work of the repairs,” he went on. “They
used this insight and exploited the concept of selling a result of longer run time
between repairs and asked other clients if this interested them. For those that did, and
most did when the above experience was described to them, the repair firm had a
steady customer. And as word spread, their business opportunities exploded. After a
few years the repair firm had offices around the world, and payroll of over a million
dollars a week. Not bad for a firm that in the years before this results solution might
have seen revenues of only a few million per year. But what is most important to note
is that the work was technically no more rigorous than replacing brake pads. The
competition to this firm still sells the old standard practice of replacing brake pads
with the lowest cost replacement product. This firm doesn’t even try to fight in the
bottom-feeder business market. Why should they when the solutions result they offer
has a different decision criteria for their clients?”

The fidgety principal once again couldn’t contain himself, “what does an automobile
brake repair have anything to do with our firm defining a new product using one of the
most advanced programming languages in high technology? And our clients are in
the information technology business, not some old rusty industrial facility. This
doesn’t make sense at all and you’re wasting my time and our money!”

The productizer glared at him, thought better of it and looked to Mary, whom seemed
eager to pitch in with an answer. “Mary, care to answer that?” he asked.

Mary stood and faced the group, she looked at each one and then calmly suggested,
“the productizer’s example has transformed my approach to defining what a product
is.” She went on with more energy, “I have finally figured out that we are not here to
define a new bit of software, we are not here to develop the hottest IT product and turn
the world of data communications upside down. No,........ we are here to determine
how all of those activities can be intertwined into a result for our clients that turns their
standard business practice paradigm in a different, better direction. And the results
from that different direction need to have a positive impact to the business’ bottom
line. Otherwise,” she said emphatically, “the opportunity cost to the client of even
thinking about us helping them, and us selling a solution has no added value. We’ve
got to define, this week, how we can be a firm that figures out how to provide a
26
product to our clients that significantly transfigures their standard business practice
and adds value to that client’s bottom line.”

The fidgety principal sheepishly apologized, “okay, so I was a bit agitated, but Mary
here has set me straight. I now understand our product concept has to look beyond
what it is from a simple features basis and we have to define how its use benefits our
client with significant results. I guess that would mean that we need to determine what
our product does for the client. And we will have to determine the opportunity cost
decision the client will have to make to be willing to expend money and time for this
purchase.”

The productizer clapped his hands and said, “excellent, and I am glad you said money
and time. Do you know why?”

The principal replied, “because, when a new product is purchased, a customer has to
figure out what to do with it, how to use it, the applications it has, and employees have
to be oriented on using the product to the benefit of the firm. It’s not like we are
defining an everyday product that is the same as what people have been using before.
So we need to make sure the human resource time of our clients is used efficiently. I
guess that would mean that our product must be user friendly and maybe as part of the
introduction to the marketplace, we should consider having a high level of technical
support and orientations. Now that I think of it, some of the major software firms
have occasional regional training symposiums on how to take full advantage of the
newest version of their product. And the seminars are usually free and last all day. I’ll
bet they are using this method to help the client maximize the results available from
their product. And that probably translates to a higher client satisfaction and improved
market acceptance!”

The whole group stared in wonder at the fidgety principal. While he had seemed
contrary and argumentative, he had been processing the day’s information and had just
uttered the most important thought of the whole day:

A product is only fully useful to the consumer once the consumer

understands how to use it and benefit from it. And sometimes, a bit of
hand-holding such as in training seminars launched with the first wave
of a new product introduction is the best means of insuring the added
value of a product is realized at the most important place:
in the consumer’s mind.

The productizer clapped his hands and gave a hearty “bravo!” and told the group, “you
have now defined the end point of the product; the utility of a product is maximized
only when the consumer has grasped the process of how to use the product. This
utility provides the added value of the product. It is, or at least should be, the
motivation of why a consumer would go out and buy version 2.0 of a product when
version 1.0 worked perfectly fine. Which is that the incremental utility of the new
27
product is so much improved beyond the old product (or process or service or
combination of both) that the opportunity cost favors the purchase of the new version
over do nothing or use the ‘time and money’ elsewhere. I suggest we break for dinner,
and then think about what utility we want to discuss with the clients that are coming
the day after tomorrow.”

The group’s emotional high lasted right on past dinner, and everyone personally
thanked the fidgety principal for his perspicacity. Dreams that night were all on the
application of XTML in the process of adding value to a client’s business.

part two

The very next day the group was raring to go! “Today,” said the productizer, “we
must define in our group just what features the XTML language has and what can be
done in applying XTML that is either an improvement over current business practices
or a complete and significant shift in the business needs paradigm. Now let me
caution you that improvements are more easily assimilated into your clients’ business
operations and culture. But, a significant business paradigm shift, while harder to
define and requiring a greater assessment of opportunity cost by your client, can
develop into a unique product that your firm will be able to sell and service ahead of
the competition. By proper definition, the product development shall be coordinated
to stay focused on the results we expect its use will provide to our client. Every
feature of the product must relate back to the clients’ business needs purpose. And we
will consider any complexing of the product, that goes beyond that scope of the
intended result as a customizing option for future analysis. That is, if the feature does
not have a clear and clean link to the intended result, and the result we are talking
about is a significant shift in the business needs paradigm, we will table that feature.
A tabled feature will be revisited at that future time when we are customizing product
options for a client whom is already committed to the product.”

“Let’s identify the special features that XTML provides and identify what benefits a
potential client would realize as a result of using an XTML-based product. We can
best do this by listing the feature, the benefit and the expected result in a table. Once
this is done, we will progress into how the feature is instilled in the product and
service we have to offer. Today, our mission is to list all of the features and benefits.
Tomorrow, with our clients here and helping, we can sort out the important features
and results with their input and sideline those features that are not necessary as a basic
product and service. We can also force rank the features from the most important to
the least important. That way, once we have established a time line for software
development, we will have emphasized those critical, most important features in
assignments to our development group. Those will be the key product attributes that
contribute to the results our clients are looking for.

Product Development Worksheet XTML-Based Software

RAN FEATURES BENEFITS RESULTS
28
K
2 Language is machine
readable
3 Software can convert
HTML to XTML
5 Conversion can be
performed during search
mode
1 Database derived from
software can be sorted
4 Query hierarchy can be
defined
Information about a
business can be read by
computer (machine)
Data can be converted
simply
Database can be generated
during search
Key attributes and related
issues can be correlated
Level of detail can control
information
Business can expand its exposure i
by identifying possible relations w
business entities and determining p
outbound communications
Cost for inputting data avoided, su
is reusable
Special search fields can identify a
qualifiers, and compile the informa
Information derived can bridge fro
search queries to gained knowledg
identify future market trends quick
information boundaries for analysi
new product introductions
Information storage capacity can b
economically. Information pertine
client’s business can be stored, and
information can be discarded

The productizer, who had been silent during this exercise chuckled and said, “I can tell
I am with a group of ‘IT tech-heads.’ What this table tells me is that information is a
virtue to itself. But I will bet that the ultimate decision maker at your client’s business
is not the head of the IT department. The ultimate decision maker needs to understand
results that mean something to the owners of a firm. That is increased sales and
profits. Along the way, increase in equity is also important, but ultimately, that has to
lead to increased sales and profits.”

“So let’s look at a table from a different perspective,” he went on. “Let’s look at those
three issues and reorder the table accordingly:”

Generic Product Definition Table for Product Development

Business Needs (Results) Offered Product Benefit Offered Product Feature
Increased Sales Product delivers expanded Product identifies new
market market opportunities by
identifying related business
areas based on relational
information of existing
business to complimentary
needs of prospective
customers
Increased Profits Product offered is efficient The machine information
in developing business exchange can limit human
practices with limited resource needs and
demand for costly resource dependence and rapidly
29

Increased Business Equity
needs.
The product offered allows
the firm to effectively
expand its business thereby
leveraging the ability to
generate income and
enabling the client to
produce more revenues and
profits with the resources
in place. This is the
equivalent to increasing the
earnings per unit of
investment and thereby, the
value of each investment
unit
determine probable
opportunities for business
as well as source outside
inputs based on optimal
value.
The product can determine
business trends by
establishing queries that
seek out information
pertinent to the clients’
area of business. This can
be used to identify new or
emerging opportunities and
determining the fit or
modified fit of the client’s
current product offering to
fulfill those opportunities.

Mary pointed out that the underlying feature of the second table were a variation of the
previous days’ conclusion. ‘Time and Money.’ All agreed that any future product
development and product definition would have to be translated to influence on the
client’s time and money. The trick would be setting up the analysis so that these two
features were derived, similar to the derivation of a mathematical formula.

The productizer concluded the day’s discussion with a example of how time and
money influenced a shift in the business practices of the farming community. “Quite a
few years ago,” he began, “one of my clients had a weed killer that was very good at
killing weeds, and practically everything else it touched. It had an additional feature
that once it was exposed to the soil, it no longer acted as a weed killer, so that crops
planted after its application were not affected by its prior use. The company that
wanted to sell this found that it could be used as a harvest aid in that it would shrivel
up the leaves, with only the produce left on the stalk. So seed based products, such as
corn, beans, etc. would be able to be harvested faster as the harvest equipment would
not be bogged down handling the leaves.”

“But this would be complicated by the farmers desire to remove the dead leaves from
the field and the residual toxicity of the herbicide on the leaves. Farmers had to be
convinced to leave the dead plants on the ground.”

“The following spring, when new crops were planted, the dead vegetation would be
ground into the ground at the same time new seeds and fertilizer were applied. By
leaving the dead plant material on the ground, the spring thaw would come faster due
to the insulation the dead leaves and stalks provided, and moisture was better locked

30
into the soil as the standard business practice of turning over the soil by plowing
exposed more soil to the drying sun, thus robbing the soil of needed moisture.”

“The result of more time was due to the ability to extend the growing season by
effecting an earlier planting time. The result of more money was due to the reduction
of cumulative plowing requirements, saving in fuel and wear and tear on the farm
equipment [including the harvest equipment.] While these benefits would make much
sense to an outside observer, the farming community had a standard business practice
of harvesting, tilling and removal of depleted crop waste. While this seemed to make
sense, it was a significant business paradigm shift that required a reorientation of the
client’s standard business paradigm. In other words, special seminars were required to
help the target client understand the benefits and how to achieve them. The company
introduced a name for the practice called “no till” and established a “no-till institute”
with membership open to farmers and agricultural chemicals dealers and applicators.
Annual regional meetings were held with case studies showing the positive results of
this practice. For a number of years, the chemical company had a virtual lock on this
business and sales were in the hundreds of millions per year. Later, other firms
developed competing products. By continuing to support the efforts of the “no-till
institute” the leading firms were able to expand the overall market size as new farmers
around the world were introduced to this paradigm shift.”

The fidgety, but perceptive principal observed, “Even a simple practice such as
farming is subject to paradigm shifts. I guess we should look at the basic needs of our
clients and ascertain how we can help them improve their business while at the same
time they are utilizing our products and services to make the shift.”

The productizer, who had begun to like this principal almost as much as he liked
Mary, thanked him and said, “tomorrow, we will be defining just what the extent of
our clients’ needs are relative to our product concept and the results we have defined
today. This will help us determine the market opportunity such a product has, and
special needs and cautions we must consider.”

31
Chapter 5 Researching the Market Opportunity

“An observant man, in all his intercourse with society and

the world, carries a pencil constantly in his hand, and
unperceived, marks on every person and thing the figure
expressive of its value, and therefore instantly on meeting
that person or thing again, knows what kind and degree
of attention to give it. This is to make something of
experience.”
~ John Foster

Mary greeted the three clients and introduced them to the group. The three clients were
an odd assortment. One was from banking, another was a component manufacturer for
high tech equipment and the third represented a nationwide chain in the hospitality
industry with aspirations of going global. All three industries had large and
sometimes looming IT budgets. They were all hoping to hear how this new product
was going to help them cut their IT budget. “We have spent the last two days sorting
out what our product might be for addressing your firms’ needs,” said Mary. “Our
group now has a better understanding of what should be evaluated and provided in a
product and service. But we need to hear from you on the desire for such a product.
But first, let me thank you from all of us for being willing to dedicate time with us and
helping our business mature.”

“First let me tell you,” she continued, “that we are analyzing an application of
technology that can leap beyond an incremental improvement of a business practice.
We believe that our product and service could, with the right client, and introduced the
right way, promote a complete shift in how the client and ultimately a market uses the
IT arm of its business.”

The hospitality client jumped up and clamored, “this sounds scary! Our business is
down now, competition is fierce, and a major shift in our industry would mean
extraordinary costs in new IT equipment, training and ramp up time. Plus if we have
to change the way we do business, don’t we have to think differently about our
business too?” The two other clients rumbled along with her.

Fortunately, Mary had a ready answer, so she kept her composure. “What an excellent
and perceptive question, Susan. We have thought about this also and a great amount
of time was spent trying to consider your perspective. That is one reason we invited
you here. That and because we know your opinions will not be kept to yourself.” The
group gave in to a chuckle and Mary continued, “IT so far has been a technology that
gathers and sorts information. Sure it is sometimes used to solve complex or repetitive
calculations, but for the most part it sucks up and stores much useless trivia which is
never acted upon. The technology we are reviewing here over the next few days has

32
the ability to peer past the trivia and the piles of data and glean only the search-
relevant information from the web and itself.”

“Tell us more,” pleaded Susan.

“Well,” continued Mary, “right now, when your company is trying to make a decision
for some action dealing with the business world outside the confines of your own,
internal operational resources, what do you do? That is, how does your firm make
decisions based on ‘environmental information’? And for that matter, how does your
company determine future business offerings, determine where to sell services, where
to invest in new hospitality facilities, even where to buy fresh towels?”

“I see where you are going here Mary,” replied Susan. “Are you telling me that any
decision my business makes that deals with outside information can be affected by
your product? If that is the case, how does that change go forward to the bottom
line?”

“That question is precisely the question we have of you three,” Mary replied. “You
see, we can appreciate and envision the outer boundaries of this technology. And, we
can guess how those boundaries would fold into applications to your business worlds.
But we don’t know if our outer boundaries are tuned in to your business’ safe zones
and how much your business wants to put into the hands of new technology.”

The productizer added, “The issue of market research is to determine the various levels
a new product might enter into the business world. Taking a market by storm is great
but possibly we could be offering a product that has too many bells and whistles and
does too many special things that are not likely to be applied in practical business
activities and will add to the cost of the product without adding to a perceived value.
Furthermore, the more bells and whistles we add to the entry product, the longer the
development time and greater the complexity. Plus, in the case of IT products, there is
a demand for computing capacity and memory storage that does have limits. So, what
we are attempting do achieve here is a dialog with the market so we offer a product
that proves attractive and that you clients would be willing to purchase.”

The high technology client, Jerry, offered, “we are talking about the Semantic Web1,
aren’t we? I’ve wondered how that was going to be captured as a business tool. I
thought it was going to be free!?”

“The problem with free is that value and features take action,” replied Mary. “Our
XML-based products will have the ability to narrow the information load and work
faster in developing decisions. That program feature is not going to be found in a free
product. Plus, for all the freeness of HTML and HTPP, haven’t we all noticed the
number of professionals in this field that are making content that looks good, but can
not allow or make an independent decision?”

1
Port, Otis (March 4, 2002) ‘The Next WEB’, Business Week, (ISSN 0007-7135), 96-102.
33
“So,” added the productizer, “once again we need to go back to the key question:
what is the added value of this product that you, our client, would be willing to part
money for? The features, which Mary is defending and promoting, are the means of
delivering the product. And while features are important, the product needs to be
defined. What I mean to say,” the productizer continued, “is that all too often, we
become enamored with the features and loose sight of the product. SO, LET’S BE
CLEAR,” he bellowed, and everyone jumped! “The market is a place where we
provide a good or service, that is understood and valued by our customer/client. The
good can be a service (intangible), or it can be a product (tangible), or it can be a
combination of both. Markets, no matter what is being sold have:
Elements of a Market
i) size which can be further divided into,
a) full “mass” market
b) segmented market
both of which can be divided into
(1) industrial buyers or
(2) individual consumers
ii) a valuation of a unit of deliverable
product, and
iii) demand based on
a) price
b) competing products
c) other alternatives

“Let’s start with the size of the market,” he went on. “Our clients will be able to tell
you what each of their markets are as far as numbers and gross revenues. Can’t you?”

Susan from the hospitality business sector noted that overall in the Americas the
northern hemisphere had 40 major business entities and thousands of smaller chains or
independents. In the southern hemisphere, Europe, Africa and Asia, there was a more
concentrated, loose organization of chains and corporations that worked as if they
were cohesive organizations. In each area, there were about 20 to 25 major entities.
Beyond that, and in other regions of the world the business size was scattered and
poorly organized.

Mary was very impressed and asked, “how did you know so much of this detail?”

Sue nonchalantly noted, “of course this is my professional field. As such, I am

involved in professional and trade organizations and I also attend conferences. This
kind of information is garnered by the organizations to which my firm belongs. We all
pay annual fees, and sometimes for a bit more we can get various levels of details that
come with hiring special studies from these organization researchers. You might ask
why? It’s because we need to know what is going on with our industry. Such things
as relative market share, the growth and the reduction of business travel, vacationers,
34
regional trends, etc. We also can read how well the industry is doing, information
such as regional room rates, percentage of occupancy, average number of night stays.
By keeping up on this, we can measure the performance of our chain to the
competition as well as determining where the trends are. As a matter of fact,” Sue
went on, “you can purchase studies from these organizations. Your cost would be
much higher than my firm paid, but the insight would be well beyond what you could
get from private research.”

The two other clients agreed that they too were active in their professional
organizations and kept up with the business trends by attending local and national
meetings, reading the journals and special reports and over the years, had a good
network of business associates that they talked to on events and trends. George, the
banker, noted that the quarterly reports he gets are stored for several years and he
notes and tracks the significant trends. So the information found in business studies,
trade journals, and market research studies can all be used to establish an estimated
size of a market.

“Are you wondering why we want to know about the size?” Queried the productizer.
“There are two reasons: 1.) You want to establish that there is enough market to make
it worth your while to promote a product and
2.) If the market is too large on the whole, then you might best consider serving only
a segment of the market, at least initially. After all, if you take on too large of a
market in the beginning, your firm will likely fail to satisfy demand and this would
open up a great opportunity for a competing product. Once the marketplace is aware
of the product, known as a diffusion of information2 well placed products experience
growth as increase in demand occurs. This wave of acknowledgment happens at
varying speed. However, IT information can spread fast due to the communications
capabilities of the typical IT professional.”

“So, once the cat is out of the bag, if your product has answered a great need, you can
have a hard time in limiting inquiries and requests for product. Other competing
products can step in to attempt to satisfy that need with a substitute. This takes away a
future sale, and if the substitute is of significantly poorer quality, it can spoil the
generic value of your product on several fronts. But I am getting ahead of myself ,”
said the productizer, apologetically. “We can take this up in a strategy session some
time later.”

“For now,” he went on, “let’s suffice it to note that:

the goal of market size analysis is to capture the breadth and depth of the market size
to determine potential sales opportunities and to identify strategic issues to help tailor
market introductions.”

“Now let’s take a look at the size of the market,” the productizer continued. “Each of
your guests represents a specific market segment. They have all identified the relative

2
Mandell, Maurice I. & Rosenberg, Larry J., (1981) Marketing, Second Edition. Prentice-Hall, 210-211.
35
number of leading market participants and have given a general idea of the annual
revenues for each market segment. Next we must ask the relative value of the current
business’ cost for administration. And more specifically, the cost of the IT operations
relative to percent revenues or lacking that, relative to total administrative costs. By
doing this, we can calculate our way back to the full value of both the administrative
and the IT part of the business expenses. Next we will have to identify what fraction
of those costs are likely to be allocated to a product or service such as what you are
offering. And finally, what might be a reasonable portion of that cost center that would
be available to fund your product purchase.

36
 ANNUAL REVENUES [100%]

(25%)RAW MATERIALS (35%)OPERATIONS (25%)ADMINISTRATIVE

(15%)PROFITS

(12%)IT EXPENSES (88%)OTHERS

(80%)IT-PAYROLL (12%)EQUIPMENT (8%)OTHER

(25%)SOFTWARE &
RELATED SERVICES
So in this example: 100%*25%*12%*8%*25% = 0.06% of revenues is for software
and related services

“Let’s presume that when all is said and done, that software and related services as
part of IT expenses is equivalent to 0.06% of a business’ revenues. That means for
every million in revenues of a firm, there is around 600 to spend on software and
related services. Now notice that I have also drawn in an arrow from the IT-payroll to
the software and related services. That can be, should the product deliver economies
such that more can be done with less personnel, an allocation of labor savings could
also be counted. For now, as the IT organization is going to contribute to a purchase
decision, we will ignore that contribution.”

“Why have we gone through this exercise? Because we can now identify the size of
business that would be a qualified customer. Just as luxury items are not able to be
sold to all of the public, firms with products targeted to commercial operations have to
identify the reasonable market as those businesses that are sized to support a purchase
decision for your product. So if your product is valued at 60,000 per target client the
client with revenues of 60,000÷ 0.06%= 100,000,000 is the lower end of the client
annual revenue stream that is likely to be considering your product. As a rule:

MARKET QUALIFIER
INVESTMENT VALUE ÷ PERCENT OF ALLOCATION FOR THIS
INVESTMENT = QUALIFYING MINIMUM ANNUAL REVENUE

“It helps to remember this because too often, market sizing looks at the whole industry
without any thought to which prospective clients fail to qualify as candidates for
buying your product or service. This also helps define the target market and establish
the initial pricing for the product offered. Beware that if competing firms already offer
comparable products, then the initial pricing most likely will have to fall in line with
the expected price that customers are used to paying. If that is the case, the market
qualifier is based on a lower expected price then the qualifying annual revenue amount

37
can be lowered. This of course,” went on the productizer, “is a practical application
of the economics principle of price elasticity of demand.”

George, being a conservative banker protested, “I’m at the end of my tether! Just how
do you expect that any firm would be willing to pay 60,000 or more for a product? I
have yet to understand the offer of this so-called product and I’ll tell you that these
numbers are scaring me!”

Mary, nervously asked George “what is the payroll cost per year at any of the bank’s
branches? And if this software/service could reduce that by one or two payroll
equivalents, then after the first year, the product has paid off in unrealized expenses.
After two years of amortization, the operating costs for this IT enhancement have
lowered the overall IT cost center expenses and savings are going to the bottom line.
Plus this product will enable your procurement of products efficiently by identifying
qualified, best price supplies on a world scale. It is the next effective evolution of
MRP [material requirements planning]. Now how can your business ignore this?”

George thought for a moment and replied, “well, the price you are offering if at 60,000
would be less than one full time equivalent. But wouldn’t you need a skilled person to
work with this software, that I might have to pay at an even higher rate? Also, at some
time, when my competitors are all using the same product, the benefits to my firm are
reduced aren’t we likely to lose some of the savings due to competitive pressures
driving our own revenues down?”

“Only the more reason to introduce the savings earlier than the rest so that your
savings can be realized over a longer period relative to the competition.” Mary went
on, “you see, what always got me on market innovators was that they always seemed
to be on the edge, taking risks in applying the new and the untried. Yet their
performance and profits were always ahead of their industrial peers. Then I got to
thinking that maybe, they were able to salt away savings from better economies earlier
by applying the new technologies ahead of the competition. By the time the
competition caught up to them, and were also applying the new technologies, they had
already amortized the investment and were now working with an improved
performance, even if competitive pressures cut into profit margins. So, you see, an
innovative new product can be just as valuable to the industrial consumer as to the
firm producing and selling the product or service. In effect, for commercial clients,
any non-consumable purchase has to be considered by return on investment or ROI.”

“So you can value your product by return on investment?” asked George. “That can
be a convincing argument, but how can you confirm this?”

“Well,” Mary replied, “we have to look at what the added value to you, our client is,
and offer you a product that returns to your firm a savings or an improved market
value that pays for itself in some period of time. Now I understand the a three year
pay-out was good enough in the past. but that recently, we are looking at two years or
less. What is your internal target for pay-out?”
38
Susan answered this quickly, “we have only so much to invest, and the demand for
performance is so great that actually eight months to one year is the longest time frame
we even consider. You see, the pace is so fast, and the time between a market
innovator applying the product and realizing benefits from its use and the copy cats
using something similar is getting so short, that longer time periods lose the
advantage.”

The productizer summed things up: “We know now that of the IT market, we have to
limit the true marketplace to those businesses that have budgets in line with our
projected pricing. We also understand that the market size would increase if we lower
the price, but that would also reduce the sales and profits per unit of sale. We have
determined that once we introduce a product to a market, either a selected segment of
the market or the whole mass market area, we will only have a limited time to
establish a market position before competition comes in with comparable products. If
possible, copyright and patent protection can protect against exact copies. However, if
we can not gear up to supply demand, there will be pressure by the marketplace to
support competitors entering the marketplace with like products. We have also
determined that quite possibly, limiting the initial market offering to a segment will
work for some time, but due to the communicative nature of the IT world, diffusion of
information about the product would likely be rapid. Finally we have just heard that a
decision to purchase a product will be based on economic reasons not the least of them
being a rapid pay-out of investment.”

“Now we need to take a break and thank our clients for today’s advice with a good
dinner.” The productizer concluded, “tomorrow we will define the value of the product
and how we can tailor it to be most attractive to our clients.”

39
Chapter 6 Value The Market Opportunity

I have never yet been able to perceive how any thing can be known for
truth by consecutive reasoning - and yet it must be.
~ John Keats

The fourth morning was stormy and the winds were blowing from the north. Mary
woke with a start as the thunder rumbled through her windows and shook the bed.
Today was unsettling for her also because she still didn’t know what her product could
actually do for the clients, at least not with any certainty. She still believed that it was
a good concept, and the talent that put it together was the best in the business. Yet, she
could not get any of them to come to grips with how a client would look at this. The
principals’ perspective was always on the “leading edge of technology” as if that was
enough for anyone to go out and spend funds without another thought. Yesterday, she
found out that for industrial clients, the pay out had to be in less then a year! And that
all purchase decisions were based on perceived value as related to other goods and
services all vying for the same chunk of a business budget. What was most troubling
her was that the invited clients might be disturbed by the naiveté of the business
principals.

At least, when Mary was working in consumer products, she had found that buyers
were more influenced by trends or fads and less likely to make decisions by equations
and pay outs. But she remembered the fickleness of that market was what caused her
to shift to industrial product management. The other difference she noted was that in
consumer products sales, there was little need to follow up on a sale with client
services and continued dialog. On the other hand, it seemed that for this product at
least, the sale was really a partnership with the client and there would be no separation
of the firm from the client once the deal had been made. She looked forward to that
part of the day, and the clients had been very helpful in sorting out most of the issues
yesterday. Still the manufacturer of high tech components was remarkably quiet
yesterday. She would just have to see what the morning brought. A solid clap of
thunder yanked her out of her musings and she headed off to the meeting room.

The productizer was already gathering the participants in a circle and looked up as
Mary entered the room. “I hope you slept well, in spite of the storm last night, Mary,”
he said. “As we were to have a golf outing break this afternoon, I had planned on a
hard morning of work. Instead, due to the weather we will head off to a gallery exhibit
mid afternoon. This will give us some more time today to consider how we can value
a product and generate client interest. I have asked Jerry here to help us start off on
this discussion as being a manufacturer of products, he is most in tune with our need to
understand a product related to a tangible as both banking and hospitality business are
most about service, and to some extent valuation of what they offer is based on

40
comparable product price structures and competition, not on a purely contribution
basis.”

“That’s right,” Jerry added. “Yesterday I was pretty quiet as I was more of an
audience than a speaker. You see, each product we develop, just like your firm’s, is
based on an idea and a perception that someone out there wants such a product and is
willing to buy it from us. We are all constrained from doing too much of a market
survey, as that type of activity can tip our hand to the competition. And frankly, until
yesterday, I had never even thought that there might be some clients that would be in
our perceived market except they had budget constraints that kept them out. It
reminds me of the early days of heavy computing where only a few organizations
could afford the big computers and the rest of us ‘bought time’ on them.”

Mary made a mental note to herself: ‘This concept of bought time could be a
useful idea. Maybe her firm’s product could be sold to smaller firms if there
was a means for those firms to combine budgets and all share the use of the
product; some form of collective or cooperative or timeshare or something.’

Jerry waited for Mary to get back to the group. “Anyhow,” he went on, “last night
after dinner and pleasant conversation I started to think about how we determine a
purchase of a product. Basically we look at a product in one of three boxes:

1. The product will be used as a contributing part of what is manufactured and

therefore it must add to the value of the final product. This is a raw material.

2. The product will be consumed in day to day business, and while it affects the final
product, it is not considered a raw material but rather a consumable. and finally,

3. The product is neither a raw material or a consumable, and it exists independently

of the size of the business as a fixed cost asset. This is an investment added to
buyer’s operations and as such, it is valued by how it helps buyer’s business.

buyer’s categorization of product

“Now for my business, I can see this as both a fixed cost asset and possibly a raw
material. You see,” Jerry went on, “many times in the high tech business we license
other technologies and bundle products together. If this software could combine with
one of our products to make for a more attractive final product, we would think of
ways this could be used to enhance our product. Sometimes, we seek exclusive
licensing, or specialized programming to differentiate our product from others, we
would want to add the software to our product as an added value enhancement.”
41
“But that is not the issue here. Instead, I have to consider what this product does as an
investment; how it can modify or shift the way my firm does business and evaluate
how my business will change as a direct or indirect result of this purchase and any
follow-on service. Now if a product is uniquely different from any other product, and
it has not been used at a business like mine, it will be very hard to determine its full
impact on my business. In fact, there is a very good likelihood that over the first one
or two years of its commercial life, the product will be under appreciated and
undervalued. Only after the results of its use have proven out, over a period of time
will its effect be understood.”

“Yet, that doesn’t help the question of today. It only helps in that such a product will
have some staying power in the marketplace, and likely an ability to keep its pricing
stable if not increasing once demand outstrips any balance with supply. So we have to
dig deep into how this product can affect my business, as well as the businesses of
Susan and George and determine what impact this does. And by the way, I don’t have
a clue as to where to start!” concluded Jerry.

Mary figured right then an there, that Jerry had been saving himself for this speech and
she was grateful. She was also grateful for having attended the productizer’s seminar
the month prior as she did have a clue! “I think I have a way,” suggested Mary. “First
we have to look at our businesses as various tasks that are unique to themselves, and
which without them, our well run organizations would start to crumble and fall apart.
We can call them the business prime numbers.” The productizer was beaming but the
rest of them were puzzled.

“You see, “ she continued, “business operations consist of various tasks, some carried
out in tandem, others done sequentially and still others that work to control the effect
of others are done independently of the others. They are sometimes called ‘business
prime numbers’ in that as in mathematics, they are the simplest unit of operations that
can not be further broken down without loosing their identity and function.”

“I brought a slide of the typical prime numbers, which are usually called
functional areas of a business:”

42
 Business Prime Numbers (or Functional Areas of a Business)
1. Labor
2. management
3. capital equipment
4. production (growing the grapes) getting the raw materials and intermediate
products gathered
5. manufacturing:
6. making and
7. bottling the wine this could be packaging and casing
8. marketing and sales
9. warehousing
10. transportation and shipping, and he added
11. accounting and finance
(after all, the money has to come and go in any successful business)

Mary took out a marking pen and wrote over the list. “The list I made was from a case
study example of a winery and I forgot it was case specific,” she chuckled. “The wine
was good too. Anyhow, the eleven areas on this list can help us determine a pro forma
value of the benefits of the product by estimating the effect it has on each of the eleven
prime numbers. We can start with identifying the fixed and variable costs for each
unit. Next we can determine the impact a product has on either the fixed cost or the
variable cost or a combination of both. This can be shown as follows:”

Yfunctional unit cost = Cost for a Functional Unit = Xfixed cost + Qvolume*Zvariable cost per unit
and of course
ΣY1 + Y2 + Y3 +...+Y11 = Revenues - Profits

“So it stands to reason,” she went on, “that if you can start to reduce the Y’s, with
Revenues unchanged, your profits will increase. If our product has this consequence
on one or more of the Y’s, and we can define those outcomes, then we can predict how
our product can improve profits. And that, my friends, is the means to the justification
of why our product adds value to the clients business.”

Now George was getting irritated. “Don’t think a few numbers on the screen and
some mathematics is going to convince us, nor any other possible customer. No, we
need to work out the why with the how. Up until now I thought your arm waving was
going to help you fly. But we really need to show the how, just one example would
help, on just how this product will be reducing a fixed or a variable expense.”

Jerry added, “and it isn’t just the banking industry, manufacturing, and I am sure,
service industries want clear routes to how savings are achieved. This is not just
adding value, it is a definition of the practice on how the value is added, with a
specific method that is thought out for each client. And, by the way, why aren’t we
looking at how we can get an increase in Q meaning more unit sales. If you product is
so good, won’t it help us sell more of our product? And if it can how do we do that?”
43
Susan observed, “I couldn’t help but notice but in the last few moments we have said
“how?” seven times. Have we emphasized this enough? All too often, we are sold a
product and left to our own devices as to how to use it, what are typical applications,
and what are options that can be adopted, including using a product with other
products to enhance its features and benefit the client even more. The firms that are
successful will be the ones that work with the client, understand fundamentally how
the product could be placed into our business practices, and suggest, with our
participation, how we can use the product to our advantage.”

“How" to Place a Product into a Client’s Business - Successfully

• Work with the client,
• Understand fundamentals of client’s business
• Determine how to place product into business practices, and
• Suggest how to can use the product to advantage.

The productizer stood up, faced the group and began. “Thank you, Mary. We have
all seen that a classic application of this practice can be found with many software
products. Not only do they come with extensive tutorials built into the software, but
there are reader interest cards to fill out that automatically qualify the consumer
periodical subscriptions. The periodicals’ subject is focused on the enhanced use of
the software with examples of real life projects carried out by lay people just like us.
Both the tutorial and the magazine articles provide a how. And then, if you are
registered, you will be notified if enhancements that could benefit your business
activities become available.”

George pitched in, “in the banking business, we have trade associations and regional
conferences where many of the firms we do business with provide free training
seminars and contribute to our professional journals. And it seems as if every other
month I an answering a directed survey, the results of which get posted in our trade
publications and sometimes, more depth is available for a fee. I can see now that the
information is not just of itself, but a program to understand our business as well as
help us understand our business.”

Jerry looked a bit sheepish and confirmed, “actually, George is on target, sometimes
we develop products that our clients haven’t asked for, but that we know they would
ask for, if we only educated them on what is missing from the work tools now in the
system. So we play the “what if?” games and come up with application ideas that we
turn into a case study and present it to a broader base of potential clients. Now that I
think of it in this light, we are providing the how as a why. That is, our mock case
studies show a method of application that generates the results we can achieve with
our product. The results then are profiled to demonstrate why a prospective client
should run out and purchase our product.”

“I’m conflicted,” confessed Jerry. “In hindsight, it seems as if our business is

generating demand based on our ability to conspire to show benefits of a product
44
unimaginable to the prospective buyer. If this is the case, are we adding value to our
business clients or are we just selling the hype?”

The productizer shook his head. “As we all go about our day to day actions of doing
the work laid out in front of us, few of us have time to sit back and think of “a better
way.” Besides, the economies of scale for a single person’s quest for a “better way”
would work against us. On the other hand, when a firm takes it upon themselves to
develop the “better way” for our benefit, and in return they expect to receive
compensation for their efforts, we can continue taking care of the work laid out in
front of us yet at the same time take advantage of the incremental and more
monumental changes the marketplace introduces to us annually.”

The productizer gave that impish smile he sometimes had. “You do know that our
clients here this week are being exposed to a product that they actually did not request,
have no idea of how to use it to their advantage, and at the same time are bombarded
with hundreds of offers to take their hard-earned money with no guarantee of a value
added return. While we have explored how to place a value of the product based on
the how it is applied and the why’s of its affect on a business’ operations, we have not
discussed how to bring this to the “masses” which we will do after our break.”

45
Chapter 7 How to Go to Market?

When seeking kindling,

look in the forest,
not in the field ~ Iverson

When everyone returned from the break, they were excitedly ready to discuss how to
take the new product to market. The focus clients each had a comfortable
understanding about the way they did business now and were comfortable with that
old way. But each knew that the old tried and true marketing methods were
diminishing in value. What they saw happening for each of them was the shift in
business practices due to the technological wave of information channels that had
matured (relatively) over the past ten years. And based on what they had heard, this
product they had been hearing about such products could eclipse the “information
highway” with a veritable sea of information and knowledge that all could use. Still,
most products had to be transported, warehoused, and on a shelf for some one to pick
off and give to an end customer. And the wave of just in time and kaban fully
understood in the 1980’s and well implemented in the 1990’s had tilted the time span
between supply and demand such that a hiccup in either one would have a nearly
immediate affect on the other. To a person, each was uncertain and uneasy with what
decision to make in brining a product to market. So the looked to the productizer with
pleading eyes and hoped he would have a ready answer.

“Let’s ignore our subject product,” started the productizer, “and if you will, we will
look at a bag of popcorn. And let’s assume that we buy that bag of popcorn at a movie
theater to enjoy with a feature film we have gone to see. This relatively simple and not
very expensive product has to navigate a very torturous path to get into our mouths.
And, like a drop of dew migrating to the ocean, there are any number of twists and
turns in the market channel that it could take.”

“So somewhere, a farmer plants a field, tills the weeds, harvests the corn, removes the
husk and has an ear of corn ready for market. It is very unlikely that he will have any
knowledge of where that ear of corn goes after it makes its way to the silo and the
grain storage business. As far the farmer is concerned, his getting to market is done.
But wait, the corn has only begun its journey. After it has landed in the silo, it gets
sold to another middleman that finds a buyer for the corn and ships it via a transporter
to its next market stop. That buyer separates the corn from the cob, and sells both. If
it goes to the popcorn manufacturer, it will be graded and sorted and the kernels that
pass inspection will go into a container for sale to bulk popcorn buyers such as movie
theaters. After it is popped and maybe buttered and salted, it will then to go into your
bag.”

46
“From a sale of $2.10 a bushel to a sale of $3.50 for a bag of about 3 ounces of
popcorn at the theater we have just defined a particular marketing channel. That is,
how did a product move from production to final sale and consumption?” asked the
productizer. “It can be shown even with a simple product like popcorn, that
marketing and distribution channels have a tremendous role in moving a product for its
originating point to its place of final consumption. And these channels are formed
over time, with an understanding and acknowledgment between the channel partners
as to what is the role and responsibility for each. And of course the relationships are
strongest at the point of transfer when the product or product rights move ahead. I
mention this,” he went on, “because your channel can contribute to your business
venture either positively or negatively. You must have an understanding of what
actions your channel needs to take to help move your product into you client’s hands.”

“Channels have an ability to open doors for products and can become a marketing arm
of the business in that the channel is looked to by the “downstream” businesses as a
source for products in a certain category of goods and services. In fact,” the
productizer went on, “for the most part, a direct sale of a product from the producer to
the end consumer is an anomaly. This is due to the fact that a distribution network
and the cost of selling is typically uneconomical. By using middlemen, the producer
can find an efficient route from the production to the end consumer. Of course, there
are always exceptions such as Dell® computer that does high volumes if direct sales.
We must remember that companies such as Dell® are able to do this because the
product line is varied enough to attract a large enough market demand to justify the set
up of direct sales. And if we look carefully enough we will note that the shipper for is
actually a third party, which is to be considered in the market channel mix.”

Mary thought it would be good to interject, “now let’s sort this out. The market
channel includes all the activities and paths to take the product to the end customer.
How can a firm determine which method is best for the firm? What choices doe we
have and what are the differences. I mean, what you have said is all well and good,
but I am getting more confused by the minute!”

The rest of the study group nodded in agreement. George suggested they have a
matrix to help them out. After some participation by all, and based on each
participant’s experience the following matrix was fleshed out:

47
Market Channel Matrix
Channel → Producer Wholesaler Jobber Retailer Consumer
Activity ↓
Make Product yes no no no no
Inventory yes/no yes/no yes/no yes no
Distribute yes yes yes yes no
Set Pricing yes/no yes/no yes/no yes/no no
Negotiate yes yes yes yes yes
Price
Advertising yes yes/no yes/no yes/no no
Marketing yes yes/no yes/no yes/no no
Sales yes yes yes yes no
Title yes yes/no yes/no yes/no yes
Financial Flow yes yes yes yes yes

As the group discovered, the matrix was very helpful in demonstrating that the channel
was very complicated with divergent directions at almost every possible step. But this
is very true of the marketplace, and even the presence of some of the channels between
the producer and the consumer are optional as was evident in the Dell Computer
example. Furthermore, to avoid any particular complications, the Financial Flow
excluded mentioning banks which are typically used between each transfer of title and
the intermediary of each step in the movement of goods and services. However, even
banks can be bypassed in those cases where the financial management of goods and
services is vertically integrated. Examples of such are General Motors Financial and
General Electric Capital. In both cases, the cost of funding and credit is absorbed
within the overall corporate structure.

“The reason for so many choices, and divergent paths is due to the factors of economy
of scale, efficiency and projected life of a business product or product mix. This is
true of tangible and intangible products. For the most part,” the productizer continued,
“the decision path is an economic one. And the decision is made by each participant
in the marketing channel. If carried out with finesse, the decision is based on a break
even analysis, and return on investment or ROI.”

The productizer stared our at the sea of puzzled faces. “What I mean by that is if one
of the channel sectors considers how much input it has on the handling, pricing, selling
and distribution of a product, it considers it based on the expected effort it must make
to effect each activity, and the expected fees it can realistically recover for its value
added efforts. There is an added consideration in that each time some other business
takes control of a product, the outcome is subject to the whims of that business also.
Thus maintaining product pricing stability, quality of handling, distribution and sales
are all issues that each channel must consider. Frequently, those issues are so
important that agreements are made between channels to protect the interests of both
parties. Additionally, distribution channels might be segregated regionally or even on

48
a world scale. One only needs to look at the crystalline carbon industry♣ for an
extreme example of control of the marketing channels in order to maintain quality and
pricing for optimal ROI.”

“So there are occasions, typically where control of the product and pricing is not
driven to an efficient market, where control of the business is maintained in either a
sole business or a closely controlled market channel called a vertical marketing
system. In those, the activities are either all under the control of one business entity or
a combination of business entities with well orchestrated efforts and agreements that
cause the channels to work for a common interest and like minded efforts as a team.
The opposite of the vertical marketing system is a flat marketing system wherein the
control of each activity is limited to the two parties involved in that activity. That
means that the producer and the wholesaler have an agreement, but that agreement
does not have any direct implications on the agreement between the wholesaler and the
next step of either the jobber or the retailer.”

“The vertical marketing system is typically found in specialty, unique and subjectively
priced products wherein price support is in need of control and the differentiation of
the end consumer product is subject to a high level of control to maximize the
outcome. This can be found in fine automobiles, art, jewelry, and professional
services.”

“The flat marketing system is typically found in lower cost, more ubiquitous products
such as commodity crops and non-durable products. In these cases, efficient
manufacturing and distribution activities are paramount to profitable operations.”

The productizer determined that the group was not to be satisfied with a simple matrix
and suggested that each channel and each activity be further defined. As a group, they
determined that the explanations below would be the minimal amount of information
and that an example case study would be beneficial.

Channel Definitions:
Producer: The business that produces a tangible good or service that has a price value
and a commercial use in the marketplace. A producer will typically utilize goods and
services from others and combine them in certain ways such that the product is derived
from the parts but is value added so that the utility of the end product is remarkably
different than any of the raw materials used in the production of the product. For
example, a book is the end product of a combination of paper, ink, artwork, and the
efforts of the author and publisher. The inputs include the intangible efforts of the
author and editor, the tangible products include the ink, the paper, the binding glue etc.
Sold separately, the combined maximum revenues would not likely match the revenue

♣
The Gem Quality Diamond Industry is considered nearly a monoploy with a significant holding of all
production capacity by a single business. This monopoly maintains a premium pricing structure and in return,
contributes greatly to the advertising and product promotion in order to protect its pricing structure and control
access to the product.
49
of the end product. That is because the consumer typically places higher value on a
good book over paper. On the other hand, the saying “it’s not worth the paper it’s
printed on” shows that value added is subject to the consumers evaluation of the
usefulness of a product.

Wholesaler: The wholesaler takes all or a large volume of the producer’s product and
resells it in smaller lots to either jobbers or retailers. The wholesaler will typically
handle transactions in a specific geographic region where it has a market presence and
ability to place the product into the hands of the next market channel due to its
business practices, product lines and business capabilities. For this activity, the
wholesaler will add a price to the cost it pays for the product and will usually negotiate
a volume related discount such that increasing movement of a product can translate to
better margins between its purchase and sales price.

Jobber: A jobber is not always present in the marketing channel. The jobber has a
functional role similar to the wholesaler except that it is a middleman between the
wholesaler and a retailer. Jobbers are usually in marketing channels to place products
into retailers that do not directly negotiate with the wholesaler. This can be due to the
small size of the retailer, or a limited access to the retailer. As the wholesaler is
driven by market efficiencies, these limited access retailers require more interaction
per unit sale than the wholesaler is willing to commit. Typically the jobber has a
direct link to a market segment or regional area with efficient practices that make it an
attractive ROI for the wholesaler. The transaction value per unit of sale between the
wholesaler and the jobber relative to the wholesaler and the retailer is volume based.
That is that a retailer might not pay any more for a unit product than the jobber, and
even sometimes less if the retailer is a large buyer relative to the jobber. However,
the jobber has an ability to place a product into niche markets that are overlooked by
the wholesaler.

Retailer: A retailer is the last place in the market channel before a product is acquired
by the end consumer. Retailers do not necessarily have storefronts and both catalog
sales and web based sales sites are considered retailers. In addition, retailers can have
any combination of the above. When they participate in multiple paths to segregated
end consumers, this method of retail sales is called multi-channel marketing. If we
look at the example of book sales, many retailers have both brick and mortar as well as
clicks and mortar sales, and currently, sales are made with electronic transfer of
product and zero mortar. In the later case, this retail is made with direct agreements
with the producer so that price maintenance is in agreement of all parties and ROI is
protected. The flip side of this is the evaluation of web based distribution of music
and videos as well as proprietary software. Copyright laws and protection of
intellectual property is an evolving subject and too complex to give it more than a
mere mention.

Consumer: The consumer is the last step in the market channel where the product is
used and is not distributed to any downstream user in the same form and volume. The
consumer takes beneficial title to the product and uses the product in whatever manner
50
the consumer wishes. The product can be held, as in a durable good such as a chair or
consumed as in a produce-based product such as an apple or a non-durable good such
as soap. The key to being identified as a consumer is that the product is either held
for an indeterminate period of time or it is consumed and its nature transformed before
it re-enters the marketplace as a new product. For example, a consumer might buy
sugar, but then mix it with other ingredients, and produce a pastry for sale which is
then entering the market as a new product. Thus consumers can also be producers,
just not of the same exact product.

Activity Definitions
Make Product: As discussed above, making a product means that goods and services
are combined in such a way that the value of the original inputs is transformed to a
new product that has unique attributes not found in any of the consumed input
products. In making a product, producers do consume other products, known as raw
materials, and frequently other goods and services such as energy, water, and labor.

Inventory: Inventory is used to retain control of a product such that sale of the
product is not directly related to the production of the product. The contrary to this is
the Kaban or “just-in-time” method of production sequenced to immediate demand
and sale. Durable and non-perishable goods, or goods that can be protected from
losing market value if inventoried are typically inventoried. The rational behind
inventorying is to separate the manufacturing step from the distribution and sale step
in the market channel. If demand is cyclical and the production is continuous, then
inventory is used to anticipate the future demand and production pass-through capacity
can be reduced for economic lot size of production. Inventory is also used to fill
market channels with product so that production can be disconnected from the retail
sale of a product. This allows for efficiency in distribution and transport of goods
and services.

Distribute: Distribute means to take control of a good or service from one or more
producers and redirect the good or service to a greater number of market channels
downstream of the distributor. Distribution is typically carried out at each step of the
market channel.

Set Pricing: Pricing is set not only by the producer, but by each step of the marketing
channel. Direct control is usually held by those channels that take title to the good or
service. Indirect control is limited to those channels that do not take title, but add a
charge to the product based on the activity they perform. An example of indirect
control is a auto dealership where the dealer actually does not own title to the vehicle,
but instead sells a vehicle at a “suggested retail” price. This price can be negotiated to
somewhere between the “actual invoice” price the dealer owes the market channel
immediately before it and the dealer mark-up and preparation fees that it incurs. In
setting price, the full market channel is surveyed for an assessment of what the end
consumer is willing to pay, and the basis of cost for each step in the market channel is
factored into the pricing strategy.

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Negotiate Price: Negotiate price is typically limited to the actions between market
channels where title transfers. Each such channel has an independent knowledge, and
sometimes proprietary understanding of the market drivers for each step in the
marketing channel. Price negotiations in a flat market system are subject to the
objectives of each market channel as an independent business. In a vertical market
system, pricing is more closely controlled as each step is managed by either the
leading channel or the producer of the originating producer. In the case of a large
retailer, it can seek products at an offer price it requires and fulfill its demand through
competitive sourcing of products. Thus price establishments are not necessarily made
by the producer. This is most likely the case for commodity products that are not
significantly differentiated from one producer to another.

Advertising: Advertising is the activity of increasing the awareness of the product or

an input to the product effected by any or all of the market channels that have some
level of title of the product. Advertising can also be made by the raw material
producers to encourage the purchase of a product containing their raw materials.
Advertising can be directed at various levels of distribution, from the commercial
buyer to the end, household consumer. The function of advertising is to make the
purchaser aware of a product, encourage the purchase of the product and reinforce the
buyer’s decision in making the purchase, as in an after market influence. This last
reason is useful in creating brand and product loyalty which can lead to repeat sales
with less risk of competing purchasing decisions swaying a buyer to select a different
product in a succeeding purchase activity.

Marketing: Marketing is the activity of determining the needs and demands of the
market and defining a product or product mix that satisfies that demand. This includes
the activities of price determination, analysis of price/demand elasticity, marketing
channel decisions, product attributes, advertising, sales and market differentiation.
Like advertising above, marketing is typically performed in some manner by all
channels that hold title to a good or service. Frequently, the marketing effort is
coordinated and joint responsibility is carried over two or more discrete market
channel steps. Ideal outcomes are best reached by these joint efforts.♦ Additionally,
as previously discussed, part of marketing is customer support and as noted, customer
training seminars and other outreach efforts can improve the utility of a product and
increase its market value and encourage growth in sales.

Sales: Sales is the act of negotiating a price for a good or service and exchanging it
for money or some other asset of value. At the conclusion of a sale, the title to the
good or service has transferred to the buyer and the seller has received some
instrument of value in exchange. Sales includes bartering or counter-trade.

♦
The author has observed negative consequences when advertising campaigns at the
retail level were not coordinated with the producer nor the distributor leading to an
immediate sales demand stripping available supply and causing a loss of future sales
as consumers shifted to other sources of product.
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Title: Title means that clear ownership of the good or service is held by the possessor
and control of the use of the product is determined by the owner of title. Some
products are limited to the use of the product itself, and the intellectual rights are
maintained by the original producer. These rights are protected by patents, trade laws,
copyrights and intellectual confidentiality agreements or exclusions. Such title is
typically limited to the single use of the product in possession. This subject is
complex and discussion is limited here to the above comment.

Financial Flow: Is the exchange of currency for a good or service. Typically a bank
is the agent between each marketing channel step with exchange of funds
consummated upon a pre-negotiated action. In larger marketing steps, financial
activities can include financial instruments such as letters of credit where the upstream
marketing channel is protected from losses by bank guarantees that funds are set aside
to pay for goods or services.

A Case Study:
An inventor has determined that the health and exercise industry has not yet satisfied
all muscle groups and a product that exercised the back, rhomboids and deltoids would
be useful for the general public and especially for those suffering from back pain or
simply wishing to improve their posture. The inventor is seeking patent protection
and is considering the productization of this product. The initial market sector would
be channeled through the physical therapist industry as these individuals would be
well qualified to explain the benefits of such a product and they provide a direct link
they have to that section of the public which is already seeking solutions to physical
discomfort. The pricing for such a product is in negotiations with this market channel
and as title would transfer upon delivery to the physical therapists, a joint marketing
program is called for.

Limited funding for advertising and product awareness is initially directed to

introducing the product in professional trade shows and no other advertising is
budgeted. The inventor does anticipate some level of user reviews and will encourage
publication of medical studies evaluating the effectiveness of the product. Such
studies and publications will be able to be quoted in future marketing and advertising
programs. However, the market size and expansion of the market if limited to this
retail niche, would be hampered from reaching the maximum level of sales.

For that reason, the inventor has considered several levels of product attributes [good,
better, best] with the physical therapist-offered product expected to be a premium,
higher-cost product. Future lines of similar functionality could be directed to the
home and commercial gymnasium retail market as well as catalog, shopping network,
and web based sales.

For each stepwise level of quality, the product will have variations in the materials and
manufactured cost so that product lines are in accordance with this good, better, best
product differentiation. Likewise, as the business gains experience, it will strive to
make continued improvements as well as gaining efficiency in the fabrication of the
53
product as well as coordination of the marketing channels. This strategy is directed to
a continual improvement of profit margins, even though the later product introductions
will sell at a lower unit price.

In productizing this idea, what are the key issues? How should the inventor introduce
his product(s) to the marketplace? Should he seek an independent manufacture and
sale of his product, or license his idea to an existing gym equipment & supply
manufacturer? How would you set a market price and consider price elasticity to
demand for each level of product quality? How would title transfer at the point of
sale, would consignment be more attractive to get inventory into the business, or
would transfer of title encourage the physical therapists to sell the product more
aggressively?
[This case study is presented to help the reader process the various concepts already presented. The
answers to the questions are a group effort and are posted on www.dolberg_enterprises.biz the
password is “posture.” As this business progresses, the results and actions will be posted to the web
site, and future editions of this executive briefing will update the business model and include reader’s
contributions as appropriate.]

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Chapter 8 Determine Pricing Options

The group concluded that one key issue in determining the marketing channel mix was
that each step of the way required an exchange of goods, services, or currency. The
emphasis was on currency and the decision point on whether or not to proceed
internally or externally was a combination of avoided external costs versus extra
internal costs and skills. This all boiled down to one thing: money! And the only way
that money was going to come into the firms was through the sales of this product or
some other product. As the firm was certain it did not want to underwrite the sale of
this product with the consulting revenue it made, the key was to establish a pricing that
was certain to earn money for the firm, allow for the other marketing channels to earn
money for their services, and still have a product that was attractive to the end
purchaser. The productizer reminded the group of the analysis of a bag of popcorn
and its price of about $1.00 per ounce versus the original bushel of corn selling for
$2.00. Mary suggested they consider how to set pricing, and determine what channels
would be required to handle their product or if they would license the product to others
or even seriously consider a web-based sale only.

“Firstly,” started the productizer, “we will have to realize that bringing a product into
the marketplace will require several steps with each step adding a cost to the final
price. And some of the channels require as mark-up a percentage of pass through cost
no matter what, others require a ratio of margin per unit handled and others will
consider varying the fees charged based on how fast turnover of title occurs. In other
words, pricing can be based on several different models. And in the end, pricing has
to contribute at minimum some form of contribution to a firm or it will bankrupt
itself.”

“Now in the case of the XTML product line, as your previous primary business was
consulting in the IT world, you can very easily consider pricing as a loss leader in
order to introduce your firm’s consulting services to a broadening market. The
problem with this approach is that other firms, offering similar consulting services
would not be burdened by the same weight of giving away product for a loss. This
would place them in a better position in a business downturn, and allow them more
sensitivity in pricing other services as independent products,” cautioned the
productizer.

“Pricing is based on several objectives all of which compete with each other. By that I
mean that the highest volume of sales might be due to having an extremely low price,
that counters with having the highest profit margin or quite possibly the appeal of a
high quality, high-priced product. What truly goes into the decision of pricing is
unique to each business, and an analysis of the product mix, the way it reflects on the
firm and the product lines, and the desire to maintain a product line for some extended
period of time. Yet again,” cautioned the productizer, “the business environment
surrounding the product under pricing consideration will have a significant impact on
optimizing the price.”
55
“By business environment, the consideration is based on competition, either by direct
competing products or by some alternative mix of product or practices that can
effectively meet the needs of the end consumer in much the same way as the product
under pricing review. In other words, all competition affects the pricing decisions of
the firm. Another threat to pricing can be the condition of the economy and
specifically, the economic factors surrounding the business area served by the product.
For example, in a downturn of airline travel, a firm offering a new jumbo jet will not
have the same opportunity for upper end pricing as during a booming travel period.
And in fact, introducing a product at a greatly reduced cost during an economic
downturn is counterproductive to being able to raise prices in the future.”

“A well managed firm,” noted the productizer will have thought through what a
product will cost to bring to the market and what is the likely selling price and volume
of sales. As for many products, the cost to bring a product to market is steep, and it is
best to recognize this cost and the risk of productization of a less than worthy product
should be balanced against the reward of a successful product generating large sums of
positive cash flow. But who could imagine selling a plastic bottle of drinking water
for over $1.00 while a gallon of gasoline sells for $1.45 and everyone complains!”
The group chuckled at the preposterous observation. “You see, first the market
conditioned the consumer to purchase soft drinks, and juices, etc. made with water.
And gradually, after we were conditioned to pay higher prices for these products, they
introduced drinking water in a portable container. And some have more faith in a
clear bottle than what comes from the tap. So, you can start to see how product
pricing can vary with attributes.”

“Basically the goals of price setting are to achieve one or more objectives. They are,
1.) market leadership otherwise known as market share, 2.) product or brand
leadership otherwise known as quality bench marking, 3.)maximizing profits usually
identified in some form of ROI, and finally 4.)maintaining just enough revenues to
“keep the lights on.” The later is a situation that comes when a firm has not diversified
and is caught with a product that has become obsolete relative to other products
competing for the same consumer’s currency. Sometimes this obsolescence is due to
the maturation of the business and technology. Again, forward thinking would cause
a firm to realize that certain products will have a sunset, and plan accordingly.
However, if keeping the lights on allows other products to develop and grow while the
older waning product ekes out its final revenues, then it is cash-cowing a stream of
revenue and doing its part to support a firm.” [This will be discussed more thoroughly
in the chapter on product management.]

“A key consideration of pricing is the price-demand elasticity. Sometimes we think

of the reverse of this known as scarcity which almost always means that the price will
rise exorbitantly and the “profit takers” will experience great margins. I remember a
story told me by an old European woman that had Russian royalty in her family line
and after the revolution, her ancestors took into town a cart full of expensive jewelry

56
and silverware and servers, etc. For that they were able to exchange it for a loaf of
bread.”

“With the consideration of price demand elasticity, consider the fine silver servers
offered to a starving populace with scarcity of food products, the expression “you
couldn’t give it away” comes to mind. These points are raised” noted the productizer,
“to help us appreciate that even a zero-priced product will have a maximum level of
demand that does not reach a tangent with infinity.”

Jerry, the manager at the high tech company, asked, “so how can you establish a price
for a product if it is unique? Many of our customers sell products that are nearly one
of a kind and they are always wracking their brains on what would be the optimal
price.”

“That is not a question with an easy answer,” replied the productizer. “However, you
can establish price points based on other products in the same market. That is if the
quality and complexity compare favorably to one of the more expensive product
offerings, you charge at costs comparable to those products. If, your product is not
that complicated and the functions it performs can be considered of similar complexity
and benefit as a lower priced product, then you would set your price points at that
level. Effectively, the perception of the value and the market pricing of like products
helps establish the range, relative to value of product that you would price your
product. The high end of that range would be your top of the line product and the
bottom end of the range would be the stripped down product.”

“For example, some software has a “professional level” for the price point at the high
end and the “home office level” for the low end. Sometimes the difference might be
that attributes and flexibility found in the higher end product are stripped out of the
lower end product. The base product is comparable, and compatibility of use is
usually fine. But this offers additional sales to the lower end user, and a significant
cost reduction to encourage sales to a market segment that is sensitive to price. This
market segmentation encourages the seller to offer premium products at a higher cost
(and profit margin) yet allows the same product class to reach the lower end demand
thus bracketing the price points about the upper and lower end market segments.”

“You will note,” cautioned the productizer, “that there are always some products that
sell at costs much lower than the top of the line products. The lower costs do make
these products available to a price sensitive marketplace. But due to the much lower
selling value, the utility of those products can be overlooked as there is no profit
margin available for significant advertising and market awareness, no chance to fund
regional training symposiums or the like, and little likelihood that some earnings
would be available to reinvest in competitive upgrades over the typical life of a
software offering. Growth in use of such products can happen, but as most members
of the marketing channel place some of their fees based on unit value, those channels
will not realize as much income on the lower end product lines as the upper end. So as
a result, they are very much less likely to promote the “loss leader” product over the
57
premium, higher-valued and more profitable product. Ultimately, when a firm is
selling a product with these characteristics, it will quickly find a new champion to rally
behind and market, leaving this low cost product to falter and go away. And if there
were plans to have this product successful, there will be few employees that will want
to hand their hat on this type of product. A self fulfilling prophesy will occur.”

Jerry, looked in disbelief at the productizer. “I have one or two of those products, they
are fine products, but we don’t do any marketing as they just barely sell for more than
unit cost. And you know, I have a hard time getting our marketing people to promote
those products. Yet I have a boss that says that the product is so good that it sells
itself. I’ve noticed that it never comes up as subject of discussion of the sales call
reports. The product continues to make money, but like I said, just enough to cover
costs. And our marketing people tell us that if we raise the price, we won’t sell as
much as the competition’s product will look more attractive. What do we do?”

The productizer thought for a moment and then looked out the window. “Does anyone
in this group know what “unit cost” actually means?” He asked. The Banker, George
volunteered that, “unit cost is the actual input of all expenses that are used to make,
warehouse, manage, advertise, sell and ship a product divided by the number of units
actually sold. That is that :
Unit Cost =
(Cost of Manufacture + Cost of Warehousing & Shipping + Cost of Advertising + Cost of Sales )
÷ Number of units sold Total
“But that is not all, is it George?” asked the productizer. “We have to note that:
(Cost of Manufacture + Cost of Warehousing & Shipping + Cost of Advertising + Cost of Sales )
=
Σ( CostsFixed + Costs Variable)
And that:

1. CostsFixed = all costs that are based on activities not directly related to the
production volume of the product in question. i.e. costs such as depreciation,
administration etc.

2. CostsVariable = all costs that are directly related to the product production. These
would include raw materials, power costs used in the production, packaging and
shipping costs, warehousing and inventory carrying costs directly linked to the
actual product sold.

“If we look at these two equations, we can note that unit cost can change inversely
with varying volume of products manufactured and sold. That is,” George went on,
“the more units sold the more the fixed cost is spread out over more and more product.
At some volume point, the net unit cost will be economical and at the right price can
generate a profit with additional sales.”

58
 “This my friends,” added the productizer, “is how a business can determine the break
even price for a product. If a business can carefully measure all the expenses of its
business, and allocate them to the fixed and variable cost categories for all their
products, then the business can determine the price at which the volume in
consideration would equal to the costs for the same volume. Likewise, the business
would understand that effectively, any additional product sold would only incur
additional expenses from the direct, Variable Costs as all Fixed Costs were
(technically) absorbed by the volume of product sold up to the break even point of
volume/price relationship. Graphically it looks like this:”

cummulative Break Even Point Total Sales Revenue

revenue
& cumulative
Profit
costs Variable Costs

Fixed Costs

Xunits
cummulative sales &
production volume
Loss

Break Even Analysis

Break Even Analysis is used to determine the relationship that price has with volume of sales.
The figure above represents an anlaysis of a set price per unit with known fixed costs- the red
hrizontal line, combined with the variable costs- the blue sloped line that begins at the fixed
cost intersect of the Y-axis and angles upwards. As sales increase the cumulative value will
reach the combined value of the unit cost at the point X units sold. The red shaded section
to the left of that intersect is loss to the company and the black shaded section to the right is
the profit to the firm.

“So you see,” went on the productizer, “we can always determine what our bottom line
number might be, based on the forecast of sales volume. Of course this can get to be a
gamble on a new product. With no history of sales, forecasts from our market research
will have to make a judgment of how many units we will be able to sell at a given
price. And as we can see, if our sales volume is left of our Break Even Analysis point,
we will be loosing money.”

59
With this comment the productizer saw the worry on everyone’s face and concluded it
was time for a mid-day break. “Let’s all go for a walk, the fresh air and the sunshine
will do us all good. And don’t be so gloomy. The businesses that should be gloomy
are the ones that have never ever considered the break point analysis and we can go
over ways to set pricing so that we limit our risk.” with that he led the group out to a
breezy walk.

Limiting Your Risk:

When they returned from the walk, re-energized and ready for more the productizer
started right in, “there are two types of products. There are brand new products that
have no comparison and there are products that are similar to other products or offer
features like other products. In the first case, you have a definite problem in
establishing a good price to offer your product. In the second case, you had better
understood the market, the reason why your product should be chosen over the
competing product(s) and an ability to compete on all fronts in the competitive
marketing game.

We will discuss competing against like products on a pricing standpoint later. But
let’s look at a brand new product. How many here have heard “there’s nothing new
under the sun?” asked the productizer. “Well, for the most part that is true. When the
Betamax® came out, it offered a compact system that would store audio/visual
information and was meant for the sale and rental of home movies. But if we look
closely, we would remember that very rich people already had theaters in their homes
and would show films with projectors. What the Betamax® did was realize this
posibility for more people, and helped the movie industry consider that they could
market movies to the public with pre-recorded versions for home showing.”

Mary jumped up and asked, “is this a drastic example of price elasticity?”

The group laughed but they understood her point. “Exactly,” replied the productizer.
“The very rich could hire a projectionist, and handle the reel movie format. The
Betamax® just put the information on electronic media and thus was able to convert it
to a signal that our televisions could translate to a show on our televisions. And larger
versions of the cassett type film were already in use in the broadcast world before.
Sony was able to realize that at the right price, the general public would be willing to
plunk down their money to have the privilge of seeing movies on there own
televisions.”

“But, the Betamax® didn’t last long,” stammered Mary. “Oh, now I understand,
Sony set a price that was attractive enough to influence some of the public to buy its
product. But the offer price was so high that competing products, recognizing that
even more of the public would buy such a product at a lower price introduced the VCR
type of product at a substantially lower cost. And even though many buyers
considered it a lesser product, the buying public did not consider the inferiority to be

60
substantially deterimental to the choice. In short time, the Betamax® product was
withdrawn form the market and the VCR reigned for many years.”

“Exactly!” replied the productizer. “This example shows that price is established to do
two things: 1.) make a profit and 2.)match the market expectations. In the case of
Sony’s Betamax®, the “make a profit” mentality was used to recover costs of the early
development and production expenses. There was a failure to anticipate the degree of
demand by the full marketplace for the VHS competing product offered at a
substantially lower price. This lower price pulled in so much business and revenue
that any market leadership initially owned by the Betamax® was lost and never
recovered. Should they have considered the potential volume of the marketplace at the
lower cost, the unit cost assessment for the Betamax® could have been calculated over
a much larger sales volume and thus the fixed cost could have been lower per unit sale.
This would have had the ability to influence the initital offering price and suggested
sales price as well as allowed for more if not all of the market share for this type of
product.”

“So,” added George, “by aiming for a higher selling price, Sony was expecting either a
lower volume of unit sales and priced for a recovery of investment expense and unit
price inputs based on that lower expected volume, and was not in tune with the degree
of price demand elasticity. This opened the door for competing products that might
not have had as good a performance quality but certainly were able to pull in enough
sales to be profitable for the competition. And as a killing blow to Sony’s Betamax®
product, the aftermarket support, of products to be used with this time of recording and
feature film, easily shifted loyalty to the larger consumer group, the VHS owners.
This negatively influenced any further sales of the product and sealed the Betamax®
fate.”

“So,” asked the Productizer, “what could have been done for Sony to protect its
market introduction and maintain the early edge it had with the market? Frankly, the
product management of that introduction was left holding the bag. Why don’t we get
into this question after we have had a breather on this.”

61
Chapter 9 Managing the Product

“Let’s start off with a question for the group,” began the Productizer. “The question
is:
what is product management?

Let’s take a roll call listing from each of you,” he demanded.

The list prepared identified some of the activities and atributes of “product
managment:”

1. gathering and interpreting market intelligence

2. projecting sales demand
3. establishing pricing policy and pricing points
4. coordinating internal and external supply and sales channels
5. managing co-marketing product relations
6. supervising cost of product(s)
7. managing marketing and public relations
8. scheduling of marketing events
9. fighting fires!

The Productizer surveyed the list, thought for a moment and made an observation.
“The ninth item on the list was not placed there on a whim, but it was put in last place
for a reason. While putting out fires is a good practice, if it becomes the primary
activity of a product management team, then not much quality time will be expended.
While the product management team (team) acts and looks busy, it has let events
overcome the mission. I am actually disappointed that we did not include:

1-a.) defining product and business mission and goals and managing to the mission
and goals.

Otherwise, how are we benchmarking the performance of the product and the product
team? Additionally, to some degree, the team establishes the personna of the product
or possible product line. That is:

a) how well does the product anticipate and meet the market’s needs?
b) how do the atributes of the product measure up to the norm?
c) how dependable is the product?
d) what is the maturity expectation of the product?
e) what degree of promotion is provided?
f) what flexibility of pricing is determined?

62
By reviewing the six questions above, the early product life cycle can be proposed. I
am saying ‘proposed,’” noted the Productizer, “because as a product matures from
idea to market introduction, information not previously considered, quite possibly
unknown, can have remarkable effects on the actual product management program.”

Mary pitched in, “I think I would appreciate a step by step process for product
management. It seems like some of this is a rehash of the early part of the week, and
other information is new or at least, when it comes to my experience. After all, I
thought putting out fires was my primary responsibility.”

The group chuckled at that admission, but clamored for details in earnest. The
Productizer figured this was the capstone of the week, and as it was drawing to a close,
this would be the last time he would be able have the attention of the group and leave
with them some key actions they could use in their respective professions.

“Okay,” he started, “let’s take the last few hours together to collect some information to
take back with you. A caution, to pay close attention to; making a plan and carrying
out a plan is only as good as the adjustments made to the plan to compensate for actual
conditions. The product managment team, and the product manager must always
measure the results that action achieve and be cautious as to the true causitive effect
for the results. Over time, adjustments to product management activities (cause) and
the results from those activities will be understood. But always look at the information
from many sides, as holistically, events are caused in response to the environment.
And the environment defines what happens to a product’s performance.”

George piped in, “is that another way of saying - ‘a rising tide lifts all boats?’”

“Exactly!” replied the Productizer. “Boom times and bust times have different primary
motivators for the markeplace. And the degree of activity is greatly influenced during
the extreemes of the marketplace and the economy in general. Also, the stability of
the local and macro political climate can also influence both the demand as well as the
possibility of uses for products. It is the responsibility of the product manager to have
a crystal ball, sort out the short and long term environmental issues and determine
optimal activities to maximize meeting the mission of the product line.”

“But isn’t the mission always to make the best possible profit?” asked Mary.

“That depends on your reference of time,” the Productizer replied. “You see, early on
you might want the mission of a product to be establishing market share, or define a
new market from a previously unrecognized need. And based on the degree of
product protection, through strategic capabilities, know how or patent protection, you
might consider pricing to be secondary to establishing a critical market size, or
educating a marketplace to a completely new product. Sometimes, a business will
wait a number of years until a product awareness in the marketplace gradually matures
and makes profits due to economies of scale due to the demand growth and/or based
on expansion of the product line to higher profit niche markets. By a careful waiting
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until the identity of the product is intricately linked to a particular business’ product
line, with little earlly profits, the risk of other competitors entering the market with like
products is lowered as the anticipation of profits, the primary motivator to enter a
marketplace would be elusive unless the competitor has a strategic edge. While this
sounds like a great plan to corner a marketplace, being a loss leader does not attract
much investment interest nor can you attract top talent to run a money losing or break
even business.”

“Of course,” he went on, with a twinkle in his eye, “there have been many businesses
over time that would have loved to break even.”

Benchmarking the Product

a.) how well does the product anticipate and meet the market’s needs?
i.) Is the market studied both before and during the product introduction?
ii.) Are surveys of consumer feedback a periodic activity?
iii.) Is there an active consumer response network that directs all information to the product manager?
iv.) Is there a program for upgrades and /or customization for the product?
v.) Does the product manager support a “users group” with periodic product information and case studies?
vi.) Is market share rising?

b.) how do the atributes of the product measure up to the norm?

i.) Is market share rising?
1.) Are unit sales as good or better than competing products?
2.) Are niche markets served as well as those served by competing products?
ii.) Are there key features that the product has that exceed the value of the competing products? If not, is
this a planned market stance or is the competition offering more than the product?
iii.) Are product attributes fairly compensated or does the cost for the “bells and whistles” get absorbed in
profit margin?
iv.) Is the product considered a market leader or a follower?
v.) What do the results from comparison performance tests say about the competition? Do these results
provide information suitable for strengthening or weakening the marketing effort?

c.) how dependable is the product?

i.) Does the product’s “mean time between failures” meet expectation, exceed expectation, or fail to hold
up? Has this been evaluated?
ii.) Does statistical process control indicate that the deviation from target ideal product quality is within
one standard deviation? Is this measured and managed?
iii.) If the product requires working with other products is it compatible with all the likely combinations of
complementary products?
iv.) If there are some incompatiblities, are there after market fixes, and if possible are they provided free or
at cost?
v.) Are the tangible attributes of the product of sound material and workmanship? Is the product suited for
its intended use?
vi.) Is the product capable of keeping up with obsolesence? Will upgrades and fixes be offered to registere
owners?
vii.) If reasonable, are spare parts available for reparing of originat equipment. How are they procured? Is
there some easy method of getting product repaired should it be required?
vii.) Is there a help desk, a web site, a useful owner’s manual with clear instructions in the appropriate
languages?

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d.) what is the maturity expectation of the product?
i.) Will the opportunity cost of the product ( for both buyer and seller) be recovered prior to the need to
replace the product due to obsolescence?
ii.) Are sales levels to a sufficient net revenue to maintain product support and product improvement
activities?
iii.) Is the product likely to have a long run of steady sales level with little competition and good cash flow
generation? Or is it likely to have significant competitive pressure and reduced sales income due to
price competition?
iv.) Is the product line expected to wrap around the general market area with other products to round out the
offered products, and maintain a market leadership position?

e.) what degree of promotion is provided?

i.) Are there user gorups and is the product featured at trade shows with technical courses?
ii.) Are seasonal market cycles understood and is advertising coordinatied with sales promotions and
production schedules?
iii.) Are sales demands outstripping production capacity? Or is production capacity exceeding sales
forecast.
iv.) Is the product linked, pre-market with complementary or co-products.
v.) Is the product cross-licensed with other businesses for sales in markets otherwise not served by the
product developer/proprietary owner?
vi.) Is the media used in promoting the use of the product and after market confirmation of benefits?
vii.) Is the relationship of promotion undetstood so that increased advertizing has certain, verified results?
viii.) If the answer to vii above is no, has the promotion method changed or is it expected to change?
ix.) Do your employees use the product, and promote it, even if not in the sales department?

f.) what flexibility of pricing is determined?

i.) Is market segmentaion used to maximize the potential of descrete markets?
ii.) Is each market understood so that pricing expectations for each market are monitored and met.
iii.) Is the owner willing to increase price in the face of competing products dropping prices?
iv.) Is the pricing and market demand tuned to optimized production size and warhousing projections?
v.) Is market leadership paid for with lower than necessary pricing? Is product promotion not used in
conjunction with pricing?

Mary looked bewildered at the last sentence of f.)v.) the Productizer looked at her and asked what was meant by
product promotion in conjunction with pricing. “Well I acutally am confused,” she confessed. “What does
promotion have to do with pricing that it is worthy of mention?”

Bob pitched in, “many times we want to add new customers, so we do a big marketing blitz, with more radio
time and possibly some direct mail connection. But to grab attention, we offer some special deal to the new
prospects. That is effectively a pricing issue. You see, in the banking industry, we can’t lower our prices for
services or offer interest rates that don’t follow certain rules. Instead we might offer discounts such as free
checking with minimum deposits, or waive ATM fees for the first five withdrawals in a month. The promotion
gets the attention, but the hook that pulls in new customers is the free stuff or special deals.”

“You do have to worry though,” he cautioned. “Many times, we have found ourselves giving special rewards to
our longer term, loyal customers. We’ve found that holding onto a long term customer is very valuable as
compared to bringing in new clients. So we have looked for ways that don’t cost so much but pay back in
loyalty. Such things as the Thanksgiving Turkey Giveaway is an example.”

“That’s right!” encouraged the Productizer. “If your product is worth promoting, then the current clients already
using it are just as worthy of protection and special dispensation. I think Mary has seen the connection!”

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 And with that, the Productizer took off for his next project. He turned for a moment, and noted, “by the way,
when do you end the life of a product? When the cash flow is not worth the effort to maintain the product line,
and you have better things to do with your resources. Remember, opportunity cost know no boundaries.”

Good Luck!
Glossary

accounting and finance - a service group that measures the financial units of a
business and determines the best practices to manage cash flows, debt and investment
practice

added value - the act of improving a product so that after the improvement the product
has more worth than it previously had. This worth can be based on better utility of the
improved product, or an enhancement that makes the product have worth more
intrinsically.

advertising
advertising
advertising
advertising - this was listed 4 times in the text, and left here for emphasis and
definition of what advertising is: bringing product awareness to the marketplace

appearance - the look of a product, which can include not only the form, feel, color
and texture of the product but also the package and labeling of the product.

assessment - a comparative measure of something such as a product and analysis of the

product against other competing products. This could include tallying up the pluses
and minuses of the broad review of the product. See- benchmarking

bartering - exchange of good or services for other goods or services without the
normal “financial instruments” such as legal tender or other conventional means of
transferring wealth.

benchmarking - includes setting a basis for the performance of the product and also can be
defined as establishing a product type base for various attributes. Typically a product
is said to be benchmarking when it establishes the quality that is to be met or beaten if
competing products are to have any chance of being accepted into the marketplace.

bottling the wine - wine is typically produced in large casks, barrels or tanks, bottling means to
take some of the bulk produced wine and place it in a smaller bottle that is easily
transported, finally being sold and consumed by individual customers the “added
value” is a reasonable size of product as well as significantly improved portability of
the product.

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 bottom-feeder - business entities that emphasize and focus their business pursuits on
the acquisition of low valued goods and services and take little note of quality
differences. Bottom-feeders find uses and markets for products that the average buyer
would not purchase. Acquisitions are typically for much less than cost of goods.

bought time - purchase of product utility on a shared basis, where ownership is for
only the period of time needed. It reminds me of the early days of heavy computing
where only a few organizations could afford the big computers and the rest of us
‘bought time’ on them.

break even analysis - consideration of when “costs going in” are evenly matched to the
revenues from the sale of the product. This can establish the price of a product, based
on all considerations including volume of product sales, where there is neither loss nor
any profit. This is below what many call the bottom line value.

brokers and distributors - brokers sell large volumes of products in smaller volumes
and units. Distributors do the same but they are likely to actually handle the product
and possibly inventory the product whereas brokers quite likely never see the actual
product.

bulk - product in volumes too large for any one user, unless that user also produces
other products in bulk. Bulk can be used either for large volumes of finished good or
for raw materials that will be consumed in the production of other products.

bulk merchant - one that sells only to large volume, commercial/industrial customers

bundle - add things to the final the product in such a way so that more than one unique
product is definable within the final product and the bundle has better utility that the
items sold separately. For example: printers with cables have more utility and ease of
use than printer and cable sold separately.

business strengths - those attributes of a business that promote the success of a

business and are measurably better that those of competing businesses

business weakness - those attributes of a business that promote the failure or poor
performance of a business and are measurably worse that those of competing
businesses

buying power - the ability to purchase services or materials in such volume that the
purchaser can contribute to a lowered delivered product cost and thus negotiate a
better purchase price than smaller volume buyers

capital
capital
capital

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capital - Again listed 4 times in the text. You can’t have too much capital, or the basic
measuring stick of success - money or some other form of wealth.

capital equipment - what is also called hard goods or durable goods, equipment that
lasts for a number of years and is not considered disposable. On that basis,
management wishes to utilize the capital goods as efficiently as possible.

capital resources - These are durable, fixed equipment, machinery or other property
that is needed to produce the product. Failing to own these resources would require
that the needed equipment and fabrication space would have to be rented or leased or
some other business would be involved in applying its resources in the manufacture of
a product. Those firms with capital resources have already spent the money, or
committed to some form of debt to acquire the resources. Many times this is what the
income from stock sales are used for. While capital resources are usually identified as
already spent, they are charged back on a tax basis as depreciation. The cost should
also be recognized in the allocation of fixed costs to the manufactured cost of the
product.

carriers - These service businesses work to transport product from one location to
another and include the transaction of sales with delivered goods. The modes of
transport are any combination of truck, ship, rail, or air cargo.

cash flow - problems can cause foundering of a business before the cycle balances out.
For many businesses, early growth and development of the product can sap all the
money out of a product. While in most business circles this is considered a normal
feature of a growth spurt in the product “raising star” the forecast and management of
cash flow; balancing money coming in against money going out is tantamount to
success. Once real cash flow is determined to be flowing out faster than it is coming
in, the product manager is required to correct the issue. In fact, by then it might be too
late. One way to manage this is to gather a cash reserve in the beginning anticipating
that there will be a delay in cash flowing in until the product is established. This is
also one use of stock funds. In the early stages of the DOT.COMs in the 1990’s and
into 2000’s, many firms over estimated the possible cash flow coming in and
underestimated the cash flow going out. Once their realization of a negative spiral
came to the forefront, multiple businesses filed for bankruptcy and closed down.

cataloging the inputs - in the production of any good or service, many efforts and
materials are brought into the mix. A careful cataloging g of the inputs is required to
fully recognize what is required to produce a product or service. in the end, all
products totaled up will have used all inputs and allocating between products is the
best way to identify those products that contribute to a business’ success and those that
undermine the profitability of the business. Special caution is offered to not cut
products too quickly before complementing results are fully understood.

channels - common distribution and marketing, and an efficient corporate structure are
identified as channels. Consider them as pathways to produce and deliver product to
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the end consumer. Each pathway, as it is refined over time wears a stable, solid path
of practice for “that’s the way we do it,” or “we’ve always gone to XYZ for that
service,” to “we always buy from ACME.”

co-marketing
co-marketing - Many products sell through the efforts of more than one unique
business. By working together, each benefits in the sale of their individual product
bundled with some other firm’s product. This includes both tangible and intangible
goods and services.

commodity - status indicates that the product is so ubiquitous and little differentiation
is made that the only feature of variation is price. The consumer is confident that all
product attributes are so similar that each source of product is exchangeable with
competing products. Milk and eggs are examples.

competition - When more than one company makes a product or offers a service, the
other company is known as the competition and its like product is called a competing
product.

complementary - goods positioning the product with like goods or/and services, the
new product can be introduced with an already established good or service or co-
marketed. Complimentary goods are not necessarily from multiple firms. They are,
however, discrete products that combined have an added value and promote the
consumption of both products. Engine oil is typically sold at gasoline filling stations,
even though each is a separate purchase.

consumables - These products are depleted in use and have no residual end product
identity. In making charcoal, the energy used to making the charcoal is consumed, and
although part of the process of making the product is consumed in the manufacture
and is not recoverable and a defined product.

consumer definition - A key demand on the product manager is to define and

understand the consumer or the different type of consumer. Following that definition,
the product manager can tailor a product to fulfill the requests of that consumer. Also,
dialog with a consumer will help in the direction of enhancement of the product over
time and the introduction of additional products that both complement the original and
expand the market services.

corporate mission - This is the defining of what a business is trying to achieve and
helps both the business and its customers establish what is expected of the business.
Missions should be clear enough to establish an identity, but flexible enough to allow
a company to adapt to growth and evolution of the business.

cost of leaving - When a business leaves a product production and sales, the cost of
leaving includes what happens to the capital resources, excess raw material and

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finished goods inventory, selling of land and buildings, and termination of human
resources. There is also a cost of impact on other products such that ongoing
expenses that would have been distributed over a broader product line now must be
carried by few products and thus cause a higher fixed cost portion. Non-recurring
expenses related to the cost of leaving are allowed to be reported as one time expenses
and are usually reported as below the line costs in financial reporting.

CostsFixed - all costs that are based on activities not directly related to the production
volume of the product in question. i.e. costs such as depreciation, administration etc.

CostsVariable - all costs that are directly related to the product production. These would
include raw materials, power costs used in the production, packaging and shipping
costs, warehousing and inventory carrying costs directly linked to the actual product
sold.

counter-trade - also known as bartering, the exchange is not quid pro quo but instead
third party products are traded so that the end product of the consuming firm is not
what is sold to the provider of the good or service to that consuming firm. Instead, the
end product is sold in the country of origin and goods purchased in that form of money
are exchanged for a third product that has value in the counter-trading country of
origin of the original supply to the consuming firm. This is used in economies with
weak financial methods and avoids the exchange of inflated local currency.

cross marketing - This entails the marketing of products that are in demand due to the
popularity and demand of some other product. Thus if off road vehicles start to be a
large market section, the tilt level gauges could find a cross market to those owners
that go off-road. The key to success in cross market is to identify products and needs
that initially have not been embraced by the consuming public and establishing a
demand ahead of the competition requires a marketing of the concept to the buyer.

customizing - providing a feature or multiple features that does not have a clear and
clean link to the intended utility of a product for the mass consumer, yet would result
in a significant shift in the business satisfaction for a subset of the marketplace.
Customized products are frequently directed to one or few more customers. For that
reason, long term agreements and capture of the extra product development costs are
used to recognize a business relationship much closer than an ordinary buyer-seller
relationship.

day’s sales outstanding - . The total number of days from when a good or service is
delivered to a client to when payments are received for that good or service. Typical
terms are 20% down and net 30 days from invoice. Some organizations measure the
days sales outstanding based on when a product was available for sale up to the date
the cash flow came in to pay for that product. This is also sometimes called cost of
inventory.

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demand trends - the measurement of “price elasticity” measures how many units are
sold relative to pricing at different offered prices. Thus a trend of number of buyers
compared to the offer price of a product can define a demand trend.

demurrage - if transportation equipment is used to store product instead of just loading

it at point “A” and unloading it at point “B,” then the shipper can no earn money
hiring out its transportation system to others. To discourage this and to realize income
from lost availability of its transportation asset, most shippers charge a demurrage fee
based on extra time beyond the reasonable expected time period for unloading a
product.

depreciation - this is an accounting method of charging business operations an

allocated cost for the purchase and often the installation of fixed capital equipment or
other durable capital resources that are not allowed to be charged at full cost in the
period of acquisition. This allows for spreading the cost of long term investments over
an extended period and recognizing the application of capital resources in the
production of goods and services. Depreciation is also applied to reducing tax liability
in many countries.

differentiators - those attributes of a product or service that are remarkably different

than that of competing product offerings.

diffusion of information - well placed products, i.e. products that are a hit as well as
targets that met some consumer need generate“word of mouth” market knowledge.
This diffusion of information is a phenomenon that allows for the marketplace to help
promote products that meet otherwise previously unsatisfied needs.

diluted market share - is that point in time that other competing firms offer
competitive products and thus there are more offered products than the original
demand would demand. This forces each firm to scramble for its fraction of the
product sales and a gradual shift from the early, lead position to one that does not have
the percent of full market shares and or a reduced volume of sales units. This is
usually indicative of lower priced product offerings and less profit per unit of sale.

discounting - many products have a “list” price which is discounted to various buyers
based on some relationship or incentive program. This activity is legal under some
circumstances such as group buying relationships or volume discounts. Discounting
regulations should be understood prior to implementation to adhere to local, national
and international laws and protocols.

distribution - this is the act of taking a product and providing it to consumers beyond
the manufacturer’s facility. Thus the distribution offers products to a wide range and
possibly greater geographical marketplace than what the manufacturing activity works
with. Distribution employs considerations for sizes of shipments, external
warehousing needs, and pricing to the various channels the product flows through.

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domestic and international - local, within one country (domestic) as opposed to; multi-
country (international.)

downstream - business practices of companies following the gathering of natural

resources or other raw material production that can be sold as a product itself. Term
typically used in the energy, oil and gas business.

Ease of entry - a judgment of how much knowledge, worker skills, and capital
resources are required to enter into a business. A low ease of entry business is subject
to multiple competitors that can ramp up production and sales early and recover the
business development costs quickly. A business with a high entry cost, such as a
pharmaceuticals manufacture and sales, requires many years and some technical
know-how that is not easily found.

economies of scale - many products are less expensive to manufacture with larger
volumes of production because the fixed costs can be spread over a larger production
count. Thus products with high percentage of total product cost in fixed costs
(CostsFixed) can experience lower fixed costs per unit as product volume grows.

efficiency - a measure of how little waste is produced both in human labor and
consumption of materials and energy in the carrying out of business activities. This
applies in both goods and service businesses.

expected price - is the price that customers are used to paying.

external growth - many times, to gain an entry into a business, firms will purchase
some or all of another business that already has an established capability to satisfy that
desired growth objective. This purchase can be in same business areas or in a
diversification of business areas. Many times there are governmental oversight issues
that need to be satisfied for external growth to be legally allowed.

features marketing - marketing of the differentiators in a product and not necessarily

the product itself.

features - those definable attributes of a product that can be measured or observed

such that they add to the expectation of quality and utility of a product.

fertilizers - a product used to improve the plant growth in agriculture. The product
increases some or all of size, speed of growth, size of foliage or flowers.

final work - the last steps in a product development and marketing program where
multiple other activities had to be carried out in order to come to this step of the
product development. When you go through the productization process, it is best to
systematically go through the early efforts (front work) before continuing on to the last
steps (final work.)

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financial projections - an assessment of the positive and negative cash flow streams
over a period of some extended time. This time period is typically one year with
relative certainty and 5 to 10 years on a speculative basis. These projections are used
to establish budgets and identify when cash flows might require some constraints or
infusion of funds.

finished goods - product that some consumer will buy and use for their benefit.

finished goods and services both tangible and intangible products that are ready for use
by a consumer.

fixed and variable costs - see CostsFixed - all costs that are based on activities not
directly related to the production volume of the product in question. i.e. costs such as
depreciation, administration etc. & CostsVariable - all costs that are directly related to the
product production. These would include raw materials, power costs used in the
production, packaging and shipping costs, warehousing and inventory carrying costs
directly linked to the actual product sold.

fixed cost asset - this is an investment added to buyer’s operations and as such, it is
valued by how it helps buyer’s business produce its product(s). By being a fixed cost,
it will contribute to the production of multiple years and the investment cost is
allocated over the time of its productive contribution rather than a one time expense.

fixed costs - see fixed and variable costs above.

flat-line- when a business has no life left in it, as compared to an electrocardiogram.

Its always best to take some time each day, week, month and year to reassess the
progress and energy of a product and determine whether or not the product is health
and vibrant or the opposite, approaching a flat-line.

fleet costs - this is the cost for the shipping vehicles, both allocated depreciation costs
as well as the variable costs of maintenance and fuel, plus driver expenses.
force rank - to measure and determine a ranking of features from the most important to
the least important. for example; once a firm has established a time line for software
development, we will have emphasized those critical, most important features in
assignments to development groups as the most critical efforts to solve.
.
front work - the earliest steps in product development, such as determining size of
market, price ideas, competing product offerings. This technique is very often done in
a market driven business that seeks to develop products that anticipate market needs.
A manufacturing driven business, on the other hand, will have already made a product
or by-product [one that is also made in the course of manufacturing the target product]
and instead of doing front work will try to determine a market for a product after the
fact. This very often results in selling a product for little or no profit as the
manufacturing has no way to deal with it otherwise. Profitable end uses and analysis

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of commercial value are very often ignored, thereby resulting in lost income streams
due to the lack of “front work.”

go for broke - trying to perfect a product that in many ways can consume all financial
and physical resources. Otherwise known as gambling. This is found mostly in
entrepreneurial firms and not in established publicly held firms.

gross margin per unit sale - is identifying the difference in cost per unit sale from the
sales price per unit.

growth - the increase of a business in unit sales and capacity achieved by either
teaming or partnering with other firms, acquisition of other firms (external growth) or
by expanding the business from within, known as internal growth.

herd mentality -following the common practice and taking actions as other do, with
possibly no insight as to how or why business changes are initiated.

hindsight - the understanding one gains after the consequences of actions or inactions
are already in place. Frequently called experience.

hot - a product, that is so popular that diffusion of information promotes the product
faster than production can provide it. ‘“Mechanisms and approaches will be covered
in a future symposium,” said the productizer.’ The development and marketing of hot
products is a special effort requiring streamlined development and fast, proprietary
action and introduction into the marketplace. Frequently, competition enters so
quickly that profits have to be made on the overall development costs in a short time
period. Many hot products have short life spans and although profitable, early entry of
competing products or better, second generation products dilute the market share and
cause the overall profitability of the product to wane.

in the pipeline - is a term for products in development and nearly ready for
introduction to the marketplace.

incremental or fractional - expansion of the full firm’s business is the growth of parts
of a business to add a bit more product capacity or like products without having to
expend much in the way of capital resources or technology development. Incremental
and fractional growth depends on an established business and offers a business the
opportunity to add to sales and profits with little or no additional fixed costs. This is
an enviable activity as profits relative to unit costs are good for the new products and
the fixed costs for the existing products are reduced due to the larger number of overall
unit sales. [This should be cautioned in that many very profitable businesses get
caught up in incremental or fractional growth and loose their way when the overall
business line approaches obsolescence as fresh new ideas and brand new product
development strategy is a lost art for the firm.]

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insurance - a means of providing for loss by buying a recovery of lost funds and
efforts through the purchase of insurance policies that will pay funds to the lossee.
Insurance firms make profit by understanding the risk of loss and distributing the risk
over many businesses and activities, thus providing a profit margin to their operations
from the cash in versus the payouts out.

intermediate - goods and services are those that have only a narrow utility in the
marketplace but are necessary to some other producer of goods and services to
produce their product. Thus it is an intermediate step of a longer process of providing
a finished good or service.

intermodal - a means of transporting products with differing types of transportation

vehicles such as ship and rail and train via “piggy-back” trailers.

internal - growth of the firm itself is achieved by adding both technical and capital
resources that otherwise do not exist and expanding the ability of the firm without
having to acquire other firms. Frequently internal growth is achieved by hiring
competing technical and management talent from others and giving them the ability to
steer the business in expanding markets. This is sometimes called “raiding” and
although it is called internal growth, the overall marketplace is at zero gain in
capabilities as some other firm(s) then suffers from lesser capabilities.

inventory taxes - in many areas throughout the world, property, even that for sale, is
itemized and taxed on the potential of future sales value. This can discourage
hoarding and encourages the sale goods in the near time frame to the manufacture of
the goods.

investment of - all actions require a commitment to some degree of time and money.
As such, if either is in limited supply, the optimal use of that resource should be
considered and investment and decisions made on the basis of optimization of the
resource’s payout.

jobbers - these are firms that do work for others and do not necessarily seek an end
consumer for their product but instead fulfill some form of production service to other
firms that take responsibility of introducing and marketing products. Also called
contract ___.

just in time - is the providing of goods and services at the time of demand and no
sooner. This streamlines the day’s sales outstanding as investments are made at the
time of need and no sooner. This requires a good communication program so that all
channels are in synchronization.

kaban - the Japanese term for just in time. See: http://web.mit.edu/manuf-

sys/www/amb.summary.html

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 key product attributes - are those that contribute to the results our clients are looking
for.

labeling - on products is the means of both informing the consumer of the contents of
a package as well as a means of distinguishing a product or product class with style,
color, size of text and other features. Campbell’s Soup® recently revised the label for
its soups by redrawing its model children to leaner forms thereby removing the stigma
of more rotund children which are now considered less healthy.

labor - human resources applied in the production of goods and services. Labor is
many times considered a direct cost for those individuals that work in the actual
production of a good or service and indirect cost for all other human resource
endeavors.

Less than truck load (LTL) - is a form of shipping where the material shipped does not
demand a full truck capacity and thus the shipping firm will make several stops to fill
up the truck with the LTL products prior to traveling to the destination(s). FedEx and
UPS services are extreme examples of LTL.

leveraging - means using other, outside resources in both capital as well as technical
and manufacturing labor to expand your capabilities. However, the potential future
profits are diluted as the external business partners, or jobbers, will require a return on
their investment.

loss leader - sometimes a product introduction will be coupled with a loss leader in
order to introduce your firm’s product to a broadening market. By “giving away” a
product for a loss, the firm hopes to gain additional business based on the actual
product it is trying to promote and grow.

maintenance and capital investments - maintenance is the day to day, ongoing activity
of keeping equipment operational. Maintenance is expensed on an annual basis.
Capital investments are those expenditures of new equipment and installation that will
contribute to productive uses over many years and are expensed via depreciation.

making - the practice of producing something.

management - the leading and administration of a business.

management, labor and maintenance - the three types of human resource demand
inputs to a labor cost.

manufacturing costs - the cost of producing a product up to the point of placing a

finished good upon the manufacturing factory floor.

manufacturing- producing a product.

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market definition - a description of a market which develops an understanding of all
the relevant issues.

market innovators - those firms that do not have a herd mentality and instead help
determine how and why a market works and introduce new ideas and products before
the competition does or even understands what the heck is going on.

market leadership- what happens to market innovators that are able to provide early
products with good quality.

market position and pricing - a leader can command a higher product price based on
reputation and diffusion of information. Competing firms must find ways to
differentiate and this is typically done with some form of lowered cost, even if
artificial.

market segmentation - the practice of redefining a product to meet subset market

sectors with unique products that can allow for an adjusted price per market sector.

market share - the part of or percentage of a total like product demand that is
controlled by a sole business or business sector.

market size - the total number of units or equivalent currency value of a market
demanded by the market on an annual basis. This can be domestic, international or
global.

market - a set of consumers/customers that seek to acquire a product or service.

marketing and consumer demand - product definition into categories such as specialty,
mass marketing and private branding. Analysis of co-marketing opportunities.
Developing consumer definition and determining features marketing and advertising
approaches.

marketing and sales - the former is the establishment of tools to understand and
manage the dynamics of market forces and the later is the actual exchange of goods
and services for some form of wealth such as currency.

marketing and sales costs - unfortunately are linked together in many businesses even
though they are discrete activities. This is the expense of carrying out either the
marketing function or the sales function.

marketing channels - these are the methods and approaches of providing the
information about a product to the target consumer in overview they are channels as
was described previously, see channels.

marketing units - this is a part of a business that specializes in marketing activities.

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 micro-economic - conditions are economic units on a more local level and more
directly impacting a particular product.

MRP [material requirements planning] - a method of monitoring production inputs

and determining when and how much replacement materials are needed to keep a
working inventory of raw materials and other consumable inputs.

opportunity cost
opportunity cost
opportunity cost
opportunity cost.
opportunity cost - can’t stress this on enough! The cost of spending limited resources
for one activity relative to the ability to pursue other activities with the same, limited
resources.

orientations - high level of technical support used to train consumers in the functional
use of the product or service delivered.

other resources (energy or consumable materials for example) - anything that has to
be purchased and is not uniquely defined in the end product is an other resource.

packaging and labeling - see labeling.

price elasticity and price elasticity of demand - is the measure of demand relative to
pricing levels. Highly elastic means that sales are very much a function of price
whereas the opposite, inelastic means that the demand is stable over large price
fluctuations.

price points - are the expected prices set for certain activity level in market demand.

pricing floor - the minimal value of sale price before the seller walks away from a sale.

pricing stability - this is when enough buyers and sellers participate that a truce in
price and competition leads to stability.

prime numbers - of a business are the building blocks of a business that can not be
broken down into smaller identifiable units and still be unique to that business. For
most businesses, the prime numbers equate to the various business departments of the
organization. If any of these departments should be deleted, the business could not
succeed in reaching the final outcomes it endeavored to take. However, and this is an
important concept, prime numbers are activities and services or deliverables that can
also be defined well enough to separate them from the business operation and secure
their operation by some other means such as a (sub)contractor, a jobber, or a service
provider.

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 private branding - the practice of associating a product with other complementing
products all under a common brand name.

private label - the affixing of a private label to an otherwise common good or service.

product definition - the established features of a product that describe the attributes of
a product.

product differentiation - see differentiation.

product lines - multiple products that meet specific consumer needs that overlap in
application and usefulness. While the unit sales and market share of the originating
product might decay, the product line is able to take advantage of the trade identity.

production - the act of manufacturing a product or developing a natural resource.

productization process - the holistic approach to determining ways to introduce ideas

into the marketplace.

profit - the residual money left over after all costs for doing business are subtracted
from sales revenue. Note: there is a before and after taxes level of profit.

promotional - actions undertaken to increase the consumer awareness of a product.

promotional expenses - the cost of promoting.

providing a choice - offering a differentiated product to the customer that they may
make a selection. In some economies, only one product is offered per product type.

quality control - the application of measuring product attributes and removing those
products that do not meet certain expectations for performance or other quality. Many
times the quality control is applied early in the process to remove conditions leading to
poor quality products.

quality of handling - distribution and sales are all issues for which each channel must
consider attributes of certain expectations. Frequently, those issues are so important
that agreements worded to maintain levels of performance.

rail - another name for train-based transport of goods.

raw material costs - the costs of products that are used in the manufacture of a final
product and are in some manner, part of the makeup of the product.

raw materials - products that are used in the manufacture of a final product and are in
some manner, part of the makeup of the product.

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reasonable market - as those businesses that are sized to support a purchase decision
for your product in balance with all other factors and demands on its resources.

regionalized purchasing habits and market volume - by region are due to the unique
driving forces in each business region having a different influence on buying habits.

resource utilization - the use of the company’s and other services’ labor, management
and capital equipment.

return on investment or “ROI” - the pace at which savings or increased earnings pays
out an investment cost.

sales team - those persons exchanging product for money or other method of transfer
of assets.

seasonal products - products that only sell or sell at expanded levels during certain
times of the year, such as champagne at New Years.

segmented market pricing - established subset markets that are sold products at
different prices based on some differentiation of product attributes or volumes.

shipping - moving goods from one point to another.

shrinkage - loss of finished goods or raw materials due to theft of products.

situations - critical business periods that needs immediate attention. And, it forces the
product manager to take notice and initiate a program to fix things.

size and quantity - differentiators.

sold time - the selling of excess capacity of a capital resource.

specialty - unique, small niche scale service or product line.

standard practice - a set of methods that can contribute to stable operations.

status - conditions of a situation.

step-wise pricing benchmarks - as economies of scale intercede with production,

overall price for product(s) can recede or if the opposite is more likely, the
benchmarks might increase.

strategic allocation of market indicators - some indicators are more important than
others.

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taxes - if you make money, the government wants some of it. They run the public side
of society by taxing the rest of business.

training symposiums - see orientation.

transportation and shipping - a business sector that can be a prime number or service.

truck - a method of shipping with the ability to travel on paved roads easily.

turnaround - the act of fixing a bad situation, typically where control of the product
and pricing is not driven to an efficient market.

un-bundling - the act of breaking larger volumes of products into smaller volumes
which allows for ease of handling by the next level of client.

unfinished state - a product that is not useful to other firms.

Unit Cost = unit price basis = the cost of one sales unit.

unit pricing - see unit pricing above.

upstream - those business practices to get raw materials typically from nature.

user friendly - easy to use and maybe as part of the introduction to the marketplace, we
should consider having a high level of technical support to ease the transition to new
products.

utilities - oil, gas, steam, water, electricity.

value added - your product provides to the client in solving a problem needs to be
enough to sway your client towards paying your firm for the product. To achieve this,
you must clearly understand the needs of you client.

variable - something that on a composite whole increases or decreases in final costs

based on volume of product.

variable costs - are costs that are common to each unit of sales and typically are steady
over multiple sales volumes.

vertical marketing system - in those, the activities are either all under the control of
one business entity or a combination of business entities with well orchestrated efforts
and agreements that cause the channels to work for a common interest and like minded
efforts as a team. The opposite of the vertical marketing system is a flat marketing
system wherein the control of each activity is limited to the two parties involved in
that activity. That means that the producer and the wholesaler have an agreement, but
that agreement does not have any direct implications on the agreement between the
wholesaler and the next step of either the jobber or the retailer.”
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warehousing - storing of finished or intermediate products.

waste disposal - the cost of removing any unwanted materials.

water - a utility and /or a raw material

watershed - is an event that contributes great understanding to a business practice.

wholesale volume price breaks - see discounting.

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