Page 346 - Introduction to Business

320 PART 3 Marketing

would purchase the new product if it were available. Also, it is important to get
some idea of the price customers would be willing to pay. Often, the new product
focus group A small group of idea is presented to members of a focus group. These are individuals who are rep-
consumers that is representative of the resentative of the market to which the new product will be directed. Focus group
market for a new product and provides sessions usually last about two hours and are directed by a focus group leader who
companies with reactions to new
product concepts is skilled at getting information from the participants. As in brainstorming, the
leader will not comment either negatively or positively on participants’ comments,
because this would tend to shut off their participation. Compensating participants,
providing snacks, and giving adequate breaks are other important aspects of effec-
tively conducting focus groups.
It is usually not desirable that the company have developed a physical proto-
type for the focus group to view. Prototypes cost a lot of money, so firms will wait to
develop them later in the new product development process, when they are surer
that the product will be successful. A former president of the OI corporation, a
maker of testing equipment, has stated that the cost of even the simplest prototype
would be a minimum of $50,000, so OI would never develop one early on in the new
product development process. Viable options to prototypes include holograms and
computer-aided design (CAD).

business analysis The step in the new BUSINESS ANALYSIS. The business analysis step is used to predict how potentially
product development process in which profitable the new product candidate will be. This primarily involves an estimate of
a new product’s potential profits are
estimated how many units of the product are likely to be sold. That figure can be combined
with various estimates of price to forecast revenues. Estimated costs can then be
subtracted from revenues to arrive at a forecast of profits. Throughout this step,
decision makers consider the length of time needed to obtain the expected level of
profits and how much risk is involved.
Many of the above factors are incorporated into a calculation frequently used by
break-even formula The calculation that companies in the business analysis stage. The break-even formula tells the com-
tells a company the number of units a pany the number of units a new product needs to sell in order to cover the cost of
new product needs to sell in order for it developing the new product and providing the company with its desired level of
to cover the cost of development and
the expected profit profit. The calculation is
DC p
Q
P CPU
where Q quantity
DC development cost
p desired level of profit
P product’s price
CPU cost per unit

Let’s assume that the development costs for a new product are $500,000, the
company wants a $100,000 profit, the suggested price is $20, and the cost per unit
is estimated to be $14. When the data are put into the break-even formula, we see
that 100,000 units must be sold in order to cover the development costs and provide
the firm with its desired $100,000 in profit.

$500,000 $100,000
Q
$20 $14

$600,000
Q
$6
Q 100,000

Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.