ODI Case: Key Points. Understanding Customers: -Quantifying customer benefits:Economic Value Analysis -Understanding perceived benefits that customers seek for new products -Do these benefits vary across customers -Logic of estimating demand -Break-even calculations -Sensitivity analysis
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-Quantifying customer benefits:Economic Value Analysis
-Understanding perceived benefits that customers seek for new products
-Do these benefits vary across customers
-Logic of estimating demand
-Key problems facing a start-up company like ODI
+(2) Your value above
(the next best substitute)
It helps you determine the maximum customers are willing to pay for your product, based on the perceived benefits they associate with your product.
We will revisit economic value analysis again when we discuss pricing since it is a critical component in the pricing process. Specifically, a “customer- oriented” view of pricing.
In the early stage of a product (i.e.,when a new product is being introduced customers seek certain benefits that will enhance their acceptance of the new product)
These benefits are
-Comparative advantage of the new product relative to existing substitutes: EVA analysis helps us to assess this
-Perceived Complexity: How easy is it to explain the sources of this advantage
-Compatibility:How compatible is the new product to current users relative to existing substitutes
-Observability of Advantages:Can the customers easily observe the comparative advantages
-Risk:Physical, Financial and/or Social
Key Assumptions Assessing New Products
Demand estimation has two parts:
- Demand estimation for trial
- Demand estimation for adoption
Demand estimation for Trials
1. 50% of farms in California with 50,000 or more chickens will try the product by the end of the second year. So use the total number (201) of such firms from exhibit 3, p.g. 8.
2. 1% increase in number of chickens per year starting with 1969 chicken figures. Thus, in 1975 the number of chickens will be (32,236,961)the number of chickens in 1969 multiplied by 1.06. The 1.06 comes by adding 1% chickens every year for 6 years (1969-1975).
3. Trial starts at 2% and increase every quarter of the 1st year. It climbs to 8% by the beginning of of second year and stays there till year end.
Demand estimation for adopters
1. 75% of farms that try adopt giving us the number of farms adopting.
2. Large farms buy chickens every quarter (p.g 3, column2).So using the average number of chickens for 1975 and dividing it by four we get quarterly replacement of chicken for each farm. Multiplying that number by the number of farms adopting will give us 1st year 1st quarter figures for number of chickens adopting. For the second year start with 1976 figures.
3. Adding the purchases of adopter and farmers who try we get total sales in units = demand.
Check spreadsheet DEMODI.xls .
Difficulties encountered by a start-up company in introducing a new to the world product
-Company reputation/viability - will it be around ?
-Source credibility -how believable are these enhanced economic benefits