Anne was on the phone when I arrived at her office, she signalled me to come in, so I hopped up on the guest chair and waited. Listening to these conversations (even when I get only one side of it) is always interesting!
She was listening intently to the other person.
“Have you figured out what it will cost for the minimum run?” asked Anne. “That is likely the best place to start so we can make the best decision here.”
“Why? That cost is for comparison so we can make an evidence-based decision.
"Be sure to include the cost of producing, packaging, shipping, and having the product sampled or demonstrated in-store. When you tally up all these expenses, you will get a figure that represents your maximum loss. For example, if no one buys your product, you will know how much money you have lost.
“It would also be a good idea to figure out how long it will take to perform all the steps and be ready to sample or demonstrate in-store.
“Sometimes, the costs associated with producing your product and attempting to sell it in-store are quite low; certainly, lower than the cost of marketing research. In this instance, it costs a little for the product to fail.
“Sometimes, the costs are comparable in which case you could use the time required for each option to decide which approach will get you to the decision point faster.
“Once you have collected this information, we can compare it to the cost of marketing research to determine the likelihood of success.
“OK, do you think you can pull this information together by next Tuesday? Terrific, let’s schedule a call.”
Anne hung up and turned to me with a smile. “Would you like to know what that was about?” Of course, I would!
“That was a potential client who has a new line of chocolates they would like to take to market.”
I nodded and then asked, “It didn’t sound like you were recommending marketing research though. How come?”
“I recommend that businesses choose the path of least risk; the least cost in terms of money and time. Unless they know what their costs are, it will be impossible to make an evidence-based decision about whether or not to contract our services.
“Let’s take a simple example: the minimum run to produce the product is 5,000, and it will take a month. By the time those 5,000 units are produced, packaged, and shipped they each cost $8.20; that’s a $41,000 risk the business is taking to find out whether the product will sell.
“If it sells, it costs the business very little.
“If it doesn’t sell, it would cost the business a lot; they would have lost their $41,000 investment in producing the product.
"On top of that, they would not know why the product failed – was it the concept, the packaging, the pricing, or presenting it to a non-interested market segment?
“Let’s imagine that the marketing research required to help them make evidence-based decisions would cost $20,000. And it would take six weeks to capture the information, tabulate, analyze and present recommendations including pricing, placement, packaging, and the primary target audience.
“The cost differential is $21,000 and the time differential is two weeks.
Anne asked me, “What would you do?”
Now it was my turn to assess the situation and decide on a course of action. “I seem to recall reading that 80% of new products fail and I wouldn’t want to be among them” I started. “I would contract the research. Then if the product concept doesn’t have sufficient consumer appeal, I won’t launch it. That would cost me $21,000 which is much better for my business.”
Anne smiled and said, “Exactly! And if the production cost was only $7,500, you wouldn’t contract $20,000 of marketing research.
"We’ll find out on Tuesday.”