SIMULATED TEST MARKETING

AND ITS PRACTICAL APPLICATION

IN THE RUSSIAN FMCG MARKET

NIKOLAY KOROTKOV

Dissertation submitted to Oxford Brookes University

for the partial fulfillment of the requirement for the degree of
MASTER OF SCIENCE IN BUSINESS MANAGEMENT

September 2010

i
 DECLARATION

This dissertation is a product of my own work and is the result of

nothing done in collaboration.

I consent to the University’s free use including online reproduction,

including electronically and including adaptation for teaching and
education activities of any whole or part item of this dissertation.

Nikolay Korotkov

Word length: 36 437 words

ii
 ACKNOWLEDGEMENTS

To my beloved wife, Zhenya, my dear parents, Natalia Nikolaevna

and Yuiry Vasilievich, my friends and colleagues
for their tremendous support throughout
this journey.

iii
“Simulated test marketing and its practical application in the Russian FMCG market”.
Nikolay Korotkov. September 2010

ABSTRACT
Currently, the world’s leading FMCG companies generate 30% to 50% of their
revenues by expanding into emerging markets. However, the approaches to
successful new product sales forecasting are not sufficiently well established in such
markets. The following study is an attempt to help in setting up effective Simulated
Test Marketing (STM) services in developing countries, particularly in Russia. This
dissertation reviews various theoretical and practical aspects of new product sales
forecasting, including STM, in the context of new product development (NPD) stages,
phases of market life-cycle and types of new product. A theoretical examination
undertaken has shown considerable structural differences between saturated
“western” markets and developing Russian FMCG market, rising the question about
applicability of traditional “western” STM models outside their origin countries. An
additional quantitative survey of marketing experts employed by the leading FMCG
companies in Russia has helped to develop actionable recommendations on effective
use of STM in the local environment. In particular, it is emphasized that traditional
Simulated Test Marketing is only effective in well-defined markets. Therefore, before
going with STM, it is advisable to examine available market knowledge across 8 sets
of characteristics, in particular - “consumer / shopper”, “products”, “market size and
dynamics”, “marketing / promotion”, “pricing”, “competitors / substitute products”,
“infrastructure / environment” and “finance”. For convenience, it is recommended to
refer to the template STM brief, developed on the basis of study findings. With that,
the research has revealed a number of areas for improvement of services provided
by the major vendors of Simulated Test Marketing in the Russia, in particular – taking
an individual approach to every project (i.e. shifting focus from “model-centered” to
“client-oriented” operations), “investments into local R&D - gathering local
benchmarks and learnings, performing validations”, “simplification of reporting and
modeling approaches”, “localized media models”, “reasonable timing and pricing”,
“openness in explaining modeling principles, client-friendly guidelines”, “flexibility in
forecasting”, “thoughtful and careful application of global standardized STM
techniques to local business situations”, “training local consultants”. The above
mentioned findings provide solid foundation for further development of Simulated
Test Marketing in the Russian FMCG market.

iv
 TABLE OF CONTENTS

DECLARATION ..................................................................................................... …ii

ACKLOWLEDGEMENTS .........................................................................................iii

ABSTRACT ..............................................................................................................iv

TABLE OF CONTENTS .............................................................................................v

LIST OF FIGURES ....................................................................................................vi

CHAPTER 1. INTRODUCTION ................................................................................1

1.1 Aim ...................................................................................................................1

1.2 Justification ......................................................................................................1

1.3 Research objectives and success criteria .........................................................2

1.4 Academic and business rationale ......................................................................3

1.5 Limitations ........................................................................................................8

1.6 The structure of the work .................................................................................9

CHAPTER 2. NEW PRODUCT DEVELOPMENT IN THE FMCG SECTOR ...........11

2.1 What is a new product? ....................................................................................11

2.2 Introduction of new consumer products into modern markets:

Market insights, strategic purposes and paradoxes .........................................14

2.2.1 New-to-the-world products ....................................................................25

2.2.2 New-to-the-firm products ........................................................................27

2.2.3 Brand stretching ...................................................................................29

2.2.4 Line extensions ....................................................................................30

2.2.5 Re-positioning / Re-branding ...............................................................31

2.2.6 Product improvements and cost reductions .........................................32

2.2.7 Expansion to a new geographical market ............................................33

2.2.8 Paradoxes ............................................................................................34  

2.3 How product innovations are managed by Western companies ......................34

2.3.1 Best practices for product development: key frameworks ..........................36

v
 2.3.2 Best practices for new product launches: key success factors ..................42

2.4 Major challenges for new product launches in the Russian market .................45

2.4.1 Market profile: a comparison versus mature western markets. ..................46

2.4.2 Specifics of new product development and launches in Russia ................52

2.5 Key findings ........................................................................................................56

CHAPTER 3. MARKETING RESEARCH AND SALES FORECASTING FOR NEW

FMCG PRODUCTS ..................................................................................................57

3.1 The role of marketing research in the NPD process .....................................57

3.2 Aligning marketing research with NPD process ............................................58

3.2.1 New-to-the-world products ....................................................................61

3.2.2 New-to-the-firm products ........................................................................65

3.2.3 Brand stretching ...................................................................................68

3.2.4 Line extensions ....................................................................................70

3.2.5 Re-positioning / Re-branding ...............................................................73

3.2.6 Product improvements and cost reductions .........................................75

3.2.7 Expansion to a new geographical market ............................................77

3.2.8 A summary on practical application of tools ........................................80

3.3 Methods to forecast sales for a new FMCG product .....................................81

3.3.1 An overview of sales forecasting instruments .........................................81

3.3.2 The history and evolution of Simulated Test Marketing .........................86

3.3.3 Inside Simulated Test Marketing: basic principles of calculation ............93

3.3.4 Review of the leading providers of Simulated Test Marketing ................98

3.3.5 Effective practical use of Simulated Test Marketing..............................104

3.3.6 The ways of further development of STM models .................................110

3.4 Key findings .................................................................................................112

CHAPTER 4. SALES FORECASTING IN THE RUSSIAN FMCG MARKET ........113

4.1 Forecasting sales of new consumer goods in Russia .................................113

4.2 Traditional STM approaches in the context of the Russian market .............120

4.3 Questions that require further investigation ................................................121

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CHAPTER 5. RESEARCH METHODOLOGY ......................................................123

5.1 Research objectives and success criteria ...................................................123

5.2 Research framework ...................................................................................124

5.2.1 Type of investigation .............................................................................124

5.2.2 Sample design and data collection method .........................................126

5.2.3 Questionnaire ........................................................................................127

5.2.4 Analysis plan .........................................................................................128

5.2.5 Limitations in terms of precision and confidence...................................129

5.2.6 Limitations in terms of generalization ....................................................129

CHAPTER 6. KEY FINDINGS ..............................................................................130

6.1 Respondents’ profile ...................................................................................130

6.2 New product types and marketing research methods employed in Russia.131

6.3 Insights into forecasting in the Russian FMCG market ...............................133

6.4 Awareness and usage of STM models in Russia ........................................136

6.5 Key areas of Simulated Test Marketing improvement in Russia .................143

6.6 Summary ....................................................................................................144

CHAPTER 7. RECOMMENDATIONS ..................................................................147

7.1 Recommendations for FMCG manufacturers .............................................147

7.2 Recommendations for agencies ..................................................................152

REFERENCES ......................................................................................................154

APPENDICES .......................................................................................................169

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 LIST OF FIGURES

Figure 1.1 Key drivers of change in FMCG markets .......................................... 3

Figure 1.2 Number of new products in global FMCG markets .......................... 5

Figure 1.3 New product success rate ................................................................ 6

Figure 1.4 The world’s leading FMCG companies in emerging markets ............. 7

Figure 1.5 The biggest TV advertisers in Russia in 2008 .................................... 7

Figure 1.6 Key factors of new product failure ...................................................... 8

Figure 2.1 New product components ................................................................ 12

Figure 2.2 New product types in the “western” markets .................................... 14

Figure 2.3 Modern views on market characteristics .......................................... 16

Figure 2.4 Eight sets of essential market characteristics .................................. 17

Figure 2.5 Market life-cycle and market characteristics .................................... 19

Figure 2.6 Market life-cycle and phases of innovation diffusion ........................ 19

Figure 2.7 The pyramid of market strategies ..................................................... 20

Figure 2.8 Market life-cycle and strategic directions ......................................... 21

Figure 2.9 Offensive business strategies .......................................................... 22

Figure 2.10 Defensive business strategies ......................................................... 23

Figure 2.11 Strategic focus and new product types ............................................ 25

Figure 2.12ab “New-to-the-world” products in the marketing context ................. 26,27

Figure 2.13ab “New-to-the-firm” products in the marketing context ........................ 28

Figure 2.14ab “Brand Stretching” in the marketing context ..................................... 29

Figure 2.15ab “Line Extensions” in the marketing context ....................................... 30

Figure 2.16ab “Re-branding / Re-positioning” in the marketing context .................. 31

Figure 2.17ab “Product / Price changes” in the marketing context .......................... 32

Figure 2.18ab “New-to-the-country” products in the marketing context ................... 33

Figure 2.19 Structuring NPD process: plans vs. reality ...................................... 35

Figure 2.20 Evolution of NPD theories ............................................................... 36

Figure 2.21 Stage-Gate® model ........................................................................ 37

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Figure 2.22 NPD process in the US FMCG market: costs, time, risks ............... 38

Figure 2.23abcd Consumer integration into NPD ............................................. 40,41,42

Figure 2.23 New product launches: typical patterns of marketing support ........ 45

Figure 2.24 Russia’s role in the global R&D process ......................................... 47

Figure 2.25 Russian economy profile ................................................................. 48

Figure 2.26abcd Russian FMCG market versus key developed markets .............. 49,50

Figure 2.27 Growth rates of Russian FMCG markets ........................................ 51

Figure 2.28ab Specifics of NPD and launches in Russia: literature review ........... 53

Figure 2.29 Specifics of NPD in Russia in terms of Stage-Gate® model ........... 54

Figure 3.1 Information needs addressed by marketing research in NPD ......... 58

Figure 3.2 Classification of marketing research methods ................................. 59

Figure 3.3 The link between marketing research and business processes ...... 60

Figure 3.4 The use of marketing research methods by new product type ........ 80

Figure 3.5ab Sales forecasting instruments ................................................. 82,83

Figure 3.6 Sales forecasting instruments and marketing research ............... 84

Figure 3.7 Sales forecasting instruments: cost, time, accuracy ...................... 85

Figure 3.8 Essentials of quality control in sales forecasting ............................ 86

Figure 3.9 Test marketing: two key approaches ............................................. 87

Figure 3.10 Simulated Test Marketing: data collection procedure .................... 89

Figure 3.11 Fourt-Woodlock approach .............................................................. 89

Figure 3.12 Simulated Test Marketing and the rise of retail in the U.S. ............ 90

Figure 3.13ab Evolution of Simulated Test Marketing ...................................... 91,92

Figure 3.14 Fourt-Woodlock approach and STM. ............................................. 94

Figure 3.15 Probability of purchase: “purchase intent” vs “preference share”... 95

Figure 3.16ab Principles of “purchased intent”-based approach ..................... 95,96

Figure 3.17ab Principles of “preference share”-based approach .................... 96,97

Figure 3.18 Key players in STM market ............................................................ 99

Figure 3.19 Key differences between STM models ......................................... 104

Figure 3.20 Essential control questions to ensure effective use of STM ......... 105

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Figure 3.21 Forecasting instruments used in the process of STM .................. 106

Figure 3.22 STM accuracy at various stages of market development............. 106

Figure 3.23 Cautions when using STM ........................................................... 108

Figure 3.24 Key areas for improvement of STM.............................................. 111

Figure 4.1 Marketing research and STM markets: Russia vs US vs World.. 115

Figure 4.2abcde Russian FMCG market and Simulated Test Marketing ........ 117-120

Figure 4.3 Key STM models in the context of the Russian market ............... 121

Figure 5.1 Research topic and methodological approach ............................ 124

Figure 5.2 Leading advertisers in FMCG sector in Russia ........................... 126

Figure 5.3 Sample design and methodology ................................................ 127

Figure 5.4 Analysis plan ............................................................................... 128

Figure 6.1 Respondents profile .................................................................... 131

Figure 6.2 New product types in the Russian FMCG market ....................... 132

Figure 6.3 The use of marketing research in NPD in Russia ....................... 133

Figure 6.4 Factors to consider when forecasting in Russia .......................... 134

Figure 6.5 Difficulties and issues that need to be addressed ....................... 135

Figure 6.6 NPD success rate and forecast accuracy in Russia .................... 135

Figure 6.7 Awareness and usage of STM in Russia .................................... 136

Figure 6.8 STM market in Russia: prices and trends ................................... 137

Figure 6.9 Perceived accuracy of STM in Russia.......................................... 137

Figure 6.10 Key factors of choice for STM (open-ended)................................ 138

Figure 6.11 Key factors of choice for STM (ranking) ....................................... 139

Figure 6.12ab Perception of various STM approaches ................................ 139,140

Figure 6.13 Customer satisfaction and factors that influence it ....................... 140

Figure 6.14 ACNielsen BASES: perceived strengths and weaknesses .......... 141

Figure 6.15 Ipsos DESIGNOR: perceived strengths and weaknesses ........... 142

Figure 6.16 Local STMs: perceived strengths and weaknesses ..................... 143

Figure 6.17 Other “western” STMs: perceived strengths and weaknesses ..... 143

Figure 6.18 Key areas of STM improvement in the Russian FMCG market ... 144 

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 ”Successful forecast is the culmination of knowledge”
Nikolay Kondratiev (1926) 1

CHAPTER 1
INTRODUCTION

1.1 Aim

The ultimate aim of the present study is to enrich the theory of marketing with the

knowledge on practical use of sales forecasting techniques in the Russian FMCG

market. The secondary aim is to develop a set of recommendations on effective and

efficient use of Simulated Test Marketing in the Russia.

1.2 Justification

The high importance of dissertation topic has been recently recognized both by

academics and marketing practitioners due to a rapidly growing demand for reliable

new product sales forecasting technique in the Fast Moving Consumer Goods sector

(FMCG) in the emerging markets, particularly in Russia. For this reason, particular

interest is given to Simulated Test Marketing (STM), which is a recognized sales

forecasting tool in the US and Europe. According to “The Marketing Glossary”

(Clemente, 2002, p.391), a simulated test market (STM) is “a form of market testing

where consumers are exposed to a simulated purchase situation to gauge the

buyers’ reactions to a product, advertising or marketing mix variations. For example,

a company may create in a research facility a store-like environment to see how

consumers maneuver through the store and view the products on display. This

simulated test market would generate information on the marketing stimuli, with the

resultant data used in marketing planning, estimating market demand and sales

forecasting”. Nowadays, there’s a consensus among academics that international

markets are vastly different (Usunier, 2000). Many Russian marketing research

practitioners, argue that Russian FMCG market is quite unique (Kachalov, 2008).

Obviously, many traditional marketing research tools originally developed for the

1
(Kondratiev, 1993, p.120)

1
mature western markets are not directly applicable in the emerging markets, such as

Russia, without prior customization (Malhotra, 2007). Concerning the use of

Simulated Test Marketing in Russia, there is a visible lack of academic knowledge.

According to the recent study by Wherry (2006), the “global average” accuracy of

forecasts is about ±9%. However, the observed accuracy for the Russian market is

not reported and is not available from the independent reliable sources. Moreover,

the effectiveness of Simulated Test Marketing in Russia hasn’t been discussed yet in

the academic and business literature. Therefore, the following questions require

further investigation: (1) ”Which forecasting techniques are used to predict new

product sales in the Russian FMCG market and why?”; (2) “If traditional methods of

Simulated Test Marketing are used, what are their advantages and disadvantages in

the Russian market? What is their observed accuracy?”.

1.3 Research objectives and success criteria

Taking into account the need for information that is described above, the author

proposes a research program aiming at following three objectives:

1) Revisiting theoretical approaches to sales forecasting developed in the

“western” FMCG markets

2) Exploration into current practices of sales forecasting in Russia, in particular :

 experience with various sales forecasting techniques for new products

 perception of forecasting services provided by external suppliers

3) Identification of key factors influencing choice of forecasting method

4) Review of traditional STM approaches in terms of their applicability for the

Russian market, and elaboration of recommendations for effective and

efficient use of STM in the local environment.

As an outcome of the research, a set of clear findings and actionable

recommendations will be prepared and delivered to the participants of the survey,

who are NPD, business and consumer insights experts working for the biggest

2
FMCG manufacturers in Russia. It is supposed that the study results will support

decision making and business planning processes within these companies and will

drive further development and customization of STM models in emerging markets,

particularly, in Russia. Recruiting a market representative sample of n~30 experts

from at least 10 biggest FMCG companies makes this study a success.

1.4 Academic and business rationale

The structure of the global market landscape, particularly in emerging markets of

BRIC countries, has been rapidly changing over the past few decades driven by the

number of socio-economical, technological and cultural trends, such as “blurring” age

differences in behavior, mixing traditional social roles, democratization of luxury, lack

of free time, anxiety about health, the need for excitement, individuality, comfort and

participation in social life. The rise and spread of these trends is heavily boosted by

the emergence of mass communication, such as Internet, mobile

telecommunications, satellite television as well as by considerable expansion of

global trade, i.e. rapid development of retail networks and distribution channels

(Datamonitor, 2005, 2006) (see Figure 1.1).

Figure 1.1 FMCG market landscapes are now changing rapidly driven by …

 Age / Lifestage complexity: Age blurring

 Gender complexity: Mixing & matching gender roles

 Income complexity: Democratization of luxury

 Convenience: Being time efficient
 Health: Active steps to lead healthier lifestyles
 Sensory: finding excitement and sensations in life
 Individualism: seeking for individuality
 Comfort: search for little symbols of stability, attempts to slow down and simplify lifestyles
 Connectivity: growing importance of shared ethical and environmental values.
 Culture fusion*: cross-cultural access, globalization,
emerging markets

Source: DataMonitor (2005)

3
Concerning the academic interpretation of innovation phenomena, i.e. “what” fuels

innovation boom nowadays, there are two traditional schools of thought: “market-

based” and “resource-based” (Trott, 2008, p.20). The “market-based” (or “market

pull”) point of view suggests that “market conditions provide the context which

facilitate or constrain the extent of firm innovation activity” (Porter, 1985, cited in

Trott, 2008, p.20). The “resource-based” (or “technology push”) view argue that

“market-driven orientation does not provide a secure foundation” for innovations and

listening to customers “may actually stifle technological innovation and be detrimental

to long-term business success”, therefore a better strategy for a firm is to shape

“markets in accordance to its own view” (Hamel and Prahalad, 1994, cited in Trott,

2008, p.9-20). By now it has been recognized, that the truth lies in between these

two extremes: obviously, technological invention is necessary but not sufficient for

successful new product launch (Trott, 2008). Consumer acceptance and marketing

plans should be tested in advance with tools such as Simulated Test Marketing, i.e. it

is crucial for the business to screen out commercially unsound technological

concepts. Urban and Hauser (1993) found out 13 major factors initiating the need for

innovations nowadays. These factors are: (1) financial goals of profit (“and the

resulting impact on stock price”), (2) growth in sales and market share (“this allows a

dominant share position to be established”), (3) competitive activities (“the standing

of an organization relative to its competitors is a strong motivational force”), (4) life

cycle (“as the product moves from maturity to decline, profits may fall. To regain

profitability, the organization direct its effort toward the new product”), (5) technology

(“technological change puts extreme pressures to organizations to innovate or

decline”), (6) globalization (“the advent of increased global trade has put … strong

forces on firms to develop new products”, (7) regulation (“in many cases new

government regulations or deregulation causes firms to consider new products”), (8)

material costs and availability (“as raw material costs and availability change

products must be revised or dropped”), (9) invention (“inventions create new

4
opportunities”), (10) demographic and lifestyle changes (“lifestyle generates

consumption changes”), (11) customer requests (“a source of many new products is

customer requests”), (12) supplier or distributor initiatives and reactions (“suppliers

and distributors can also be a force in innovation”), (13) alliances (“this can initiate

new product development by reacting to an offer to become a part of an alliance”)

(Urban and Hauser, 1993, pp.6-13). Urban and Hauser (1993) suggest that “if the

trends in the underlying initiating factors continue, we will see more new product

development activity in the future” (Urban and Hauser, 1993, p. 13). Nowadays, the

number of innovative products being brought to the global market is overwhelming

and shows dramatic double digit growth each consecutive year (Mintel, 2007) (see

Figure 1.2).

Figure 1.2 Record-breaking number of new products are flooding global

FMCG shelves, addressing new trends…

# Launches went up by +17% vs. PY globally

182,000 new brands and line-extension products
were introduced globally last year alone
105,000 new food and drink brands and line-
extensions (~300 every day)
Key booming areas focused on mind, body, and
general good health
“Low- / Minus claims”* are sharply on the rise
 Low/no trans-fat up to +120%
 Gluten-free product launches up to + 86% with strong growth in North America,
Europe and Latin America.
The ethical and organic boom
 + 100% growth for new products with an ethical positioning (making ecological
claims or linked to charitable concerns)
 Double digit growth – organic products, organic non-food

Source: Mintel (2007)

A record-breaking number of new products are flooding global FMCG shelves, as a

result of processes discussed above. According to Mintel (2007), about 182 000

brands and line extensions were introduced globally in 2006, reaching the number of

500 items a day. The key booming areas are focused on mind, body, and general

good health. Sales of “Low/Minus claims”, organic products and products with ethical

5
positioning had doubled within a year. However, even nowadays the process of New

Product Development (NPD) is still dominated by failure. Research shows that, out of

all product prototypes available to a company, only 15% will actually appear on the

market (i.e. 85% will be dropped during development and testing stages), out of that

only 35% will remain on shelves in the next few years, and, finally, only 5% will reach

a break-even point (Booz Allen & Hamilton, 1988, Clancy et al., 2003, Armstrong et

al., 2009). In terms of finance, that means the process is extremely costly as 95% of

investment is wasted. (see Figure 1.3)

Available statistics show that , still, only 5% of new products are

Figure 1.3
successful…

Development and launch of New products is dominated by

failure not success.

 15% of new product ideas are launched,

 35% of those launched products remain actually in market.
 ~5% of new product ideas achieve the minimal level of
success,

95% of resources invested

with no positive
Return Of Investment !
Sources:
Booz, Allen & Hamilton (1988), Armstrong et al (2009), Clancy et al (2003)

As for emerging markets, the rate of ROI for innovations has not been determined

yet: it may be lower due to the low market saturation or, vice versa, it may be higher

due to various hidden market entry barriers. According to corporate reports of the

global FMCG leaders, emerging markets are considered of highest importance due

to their significant contribution into overall corporate growth. The fact that more than

85% of global population live in developing countries, make these markets extremely

attractive (P&G, 2009). Nowadays industry leaders generate up to 50% of their

revenue in such countries. (see Figure 1.4 - overleaf)

6
 Developing and emerging markets generate over 30% of
Figure 1.4
revenue for the biggest multinationals

Share of Emerging markets* in Total Revenue Revenue, 2009

Share of Emerging markets* in Total Revenue

0% 10% 20% 30% 40% 50% 60%

Colgate** 52% 13 bln $

Unilever 49% 40 bln Eur

The Coca-Cola Company 45% 31 bln $

Nestle 45% 108 bln CHF

AB InBev *** 42% 36 bln$

Danone 40% 15 bln Eur

Henkel 38% 14 bln Eur

Pepsico 33% 43 bln $

L'Oreal 33% 16 bln Eur

P&G 32% 79 bln $

Kraft 26% 48 bln $

Reckitt Benckiser 19% 8 bln GBP

* - Eastern Europe, Africa/Middle East, Latin America, Asia and Pacific excluding Japan
** - w/o petfood business, *** - w/o Export and Holding companies
Sources: Colgate (2009), Unilever (2009), TCCC(2009), Nestle (2009), ABInBev (2009), Danone (2009), Henkel (2009), Pepsico
(2009), Loreal (2009), P&G (2009), Kraft (2009), Reckitt Benckiser (2009)

In Russia, promotional budgets for new products may reach into tens of millions in

US dollars (see Figure 1.5).

Figure 1.5 The biggest TV advertisers in Russia in 2008

TV ad spendings in 2008, mln $

- 50 100 150 200 250 300 350

P&G 302
L`OREAL 191
UNILEVER 144
DANONE 124
NESTLE 123
MARS-RUSSIA 123
RECKITT BENCKISER 117
HENKEL GROUP 112
COCA-COLA 107
WIMM-BILL-DANN 96
BALTICA 81
COLGATE-PALMOLIVE 77
TV ad spendings in 2008, mln $
PEPSI CO 68
WRIGLEY`S 59
KRAFT FOODS 55
SUN INBEV 53

Source: TNS (2009)

Therefore, the amount of savings possible due to improvements in new product sales

forecasting in emerging markets, particularly in Russia (including improved NPD

protocols, research and forecasting methods) makes the study on this topic very

7
worthwhile. Given the continuous rise of costs, FMCG manufacturers show keen

interest in studying key reasons of failure and developing reliable research

techniques to reduce financial risks associated with innovations (Urban and Hauser,

1993, Clancy et al., 2006) (see Figure 1.6).

Figure 1.6
Key drivers of failure can be revealed before launch, in
particular with Simulated Test Marketing …

 Market potential is overestimated

 The product is not really new / not Different

 No real Consumer Benefit or Need

 Poor Positioning

 Competitive response & market changes

 Insufficient ROI

Sources: Urban et al (1993) , Clancy et al (2006),

Particular attention is given to Simulated Test Marketing, a holistic research

approach that is able to help in addressing a majority of the issues listed above.

Therefore, the findings from the present study have practical implications of

considerable business importance, particularly in Russia.

1.5 Limitations of the study

Among the key features of thorough scientific investigation (purposiveness, rigour,

testability, replicability, precision and confidence, objectivity, generalizability,

parsimony) the latter two largely define the scope of limitations (Sekaran, 2003).

Generalizability, according to Sekaran (2003, p.149), is “to what extent would the

results found in the lab setting be transferrable or generalizable to actual…field

settings”. Parsimony is an “efficient explanation…through smaller, rather than a

larger” quantity of information (Sekaran, 2003, p.421). Therefore, while considering

8
recommendations from the study, the following limitations must be taken into

account:

 The literature review provides only a snapshot of key ideas and approaches on

the research topic. Detailed description of statistical and mathematical

procedures goes beyond the scope of the present work.

 The literature review contains information taken only from the open sources.

 The findings from the study are based on an aggregated expert opinion of

Russian marketing practitioners employed by the major FMCG companies,

which are the end-users of sales forecasting techniques and Simulated Test

Marketing. These findings, therefore, are not transferrable to any market, other

than Russian FMCG (i.e. emerging markets are under-researched in this study),

or to any area of marketing research, other than Simulated Test Marketing.

 In order to avoid “commercially” biased responses, marketing research agencies

are not surveyed.

1.6 The structure of the work

Besides introduction, this dissertation comprises six chapters, where every chapter is

divided into sections. Chapter 2 starts a literature review, introducing the terms of

“new product”, “new product development”, the types of new products and theoretical

frameworks in managing and marketing FMCG innovations, such as “stage-gate”.

This chapter also discusses various differences between established “western”

FMCG markets and Russian FMCG market. Chapter 3 explains the role of

marketing research in the process of new product development (NPD), focusing on

relevant research and forecasting techniques. In this chapter a considerable

emphasis is made on Simulated Test Marketing, its evolution and practical

application in the mature western markets. Chapter 4 starts discussion about sales

forecasting for new consumer products and its practical use in Russia. This chapter

presents various points of view on the topic, available in the literature. Chapter 5

9
describes a methodological approach to the study, outlining study objectives,

sampling design and questionnaire structure. The last Chapter 7 presents key

results and findings from the study, starting from sample profile and ending with

practical recommendations for effective and efficient use of Simulated Test Marketing

in the Russian FMCG market.

10
 CHAPTER 2

NEW PRODUCT DEVELOPMENT IN THE FMCG SECTOR

2.1 What is a new product?

This is the question that is not very easy to answer as it may seem at first sight. First

of all, the phrase “new product” comprises two words: “new” and “product”. A broad

definition of “product” suggested by Oxford Dictionary is “an article or substance that

is manufactured or refined for sale” (Oxford University, 2010). The origin of the word

comes from Latin “producere” or “bring forth”. The meaning of the word “new” is

“produced, introduced or discovered recently or now; not existed before” (Oxford

University, 2010). However, nowadays, various agents of sales process (such as

consumers, retailers, engineers, technologists, marketers, manufacturers, suppliers,

distributors, stakeholders, state regulators) may have different views on what “new

product” is (Trott, 2008). Let us consider the term in the “marketing” context. As

pointed out by McDonald (2007, p.3), “the central idea of marketing is of a matching

between a company’s capabilities and the wants of customers in order to achieve the

objectives of both parties”. Consequently, the understanding of “product” in terms of

marketing is largely focused on bridging company’s technology and customer needs.

“The Marketing Glossary” identifies “a product” as “a manufactured good that

possesses objective and subjective characteristics, which are manipulated to

maximize the item’s appeal to consumers who purchase it to satisfy a given need”

(Clemente, 2002, p.322). Similar definitions are given by a majority of honorable

academics (Armstrong et al, 2009, Kotler, 1998, Dibb et al, 1997, Trott, 2008). Also,

nowadays it is a recognized fact that the nature of “product” is multi-faceted. ”A

product is a complexity of tangible and intangible attributes, including functional,

social and psychological utilities and needs” (Dibb et al, 1997, p.242). Despite minor

differences in academic concepts about the key forces shaping the “product”, there is

a consensus regarding “tangible” and “intangible” facets (Groucutt, 2005, p.169).

11
Dibb et al (1997, p.253), Kotler (1998) and Armstorng et al (2009) suggest that there

are three fundamental levels of product, each consisting of numerous sub-levels.

These levels are: (1) core product (“the level of a product that provides the perceived

or real core benefit or service”), (2) actual product, (“a composite of the features and

capabilities offered in a product: quality and durability, design and product styling,

packaging and brand name”), (3) augmented product (“support aspects of a

product”). With that, they point out that products may be organized in various forms in

terms of trade marks (“family brands”, “individual brands”, ”brand extensions”,

“product lines” etc.), that can be of various depth and width (see Figure 2.1).

Figure 2.1
A product is multi-dimensional. Some views on key “product”
intrinsics in the context of marketing…

By Armstrong et al (2009): By Trott (2008):

Augmented
product

Delivery Actual After-

And product sale
credit service
Quality Core Design
level
benefit

Packaging Features
Brand
Installation Warranty

• Family / Company brands

• Individual brands (“separate from the parent company”)
• Brand extensions (“to diversify the brand towards different product categories and different target audiences”)
• Range / Line extension (“adding a line of complementary products to the original brand”)
• Generic brand (“the product having no brand name…Packaging merely states the contents of the package”)

Sources: Adapted from Armstrong et al (2009), Dibb et al (1997), Trott (2008), Groucutt (2005), Drummond et al(2008)

Following the logic, one may conclude that if any changes in product components,

the whole product can be considered new (i.e. it becomes “a product innovation”).

This, however, is not true in every case. So, what makes the “product” new, or, in

another words, what makes it an “innovation”? As per “The Marketing Glossary”,

innovation is “the introduction of a product that is perceived to be new by the market”

(Clemente, 2002, p.197). According to Trott (2008, p.398), “the overwhelming

majority of so-called new products are developments and variations of existing

formats”. A research by Booz, Allen & Hamilton had shown that only 10% of new

12
product introductions are new both to the market and the company (Booz, Allen &

Hamilton, 1988). In that respect, a true successful innovation requires rather

consumer acceptance and effective use of modern technology, than fundamental

scientific discovery. Apple iPhone and Sony Walkman are examples of innovation

where existing technology is repackaged to better satisfy consumer needs.

According to Booz, Allen & Hamilton (1988) cited in Trott (2008, p.401) product

introductions may be classified into 6 groups: (1) New-to-the-world products (“they

are the first kind and create a new market. They are inventions that usually contain a

significant development in technology, such as new discovery or manipulate existing

technology in a very different way, leading to revolutionary new”), (2) New-to-the-firm

products (“although not new to the market place, these products are new to the

particular company. They provide an opportunity…to enter an established market for

the first time”), (3) Additions to existing lines, Line extensions (“this category is a sub-

set of new product lines above”), (4) Improvements and revisions to existing products

(“these new products are replacements of existing products in a firm’s product line”),

(5) Cost reductions (although ”this category may not be viewed as new from

marketing perspective,…it may be very significant from firm’s perspective”, this is

often driven by innovations in the process of production), (6) Repositioning, Re-

branding (“these new products are essentially the discovery of new applications for

existing products. This has as much to do with consumer perception and branding as

technological development”). A study by Griffin (1997) had revealed that, on

average, a majority of product introductions in western markets are “improvements or

revisions of existing products” (34%), followed by “additions to existing products”

(23%) and “new product lines” (20%). 4% of launches are “repositionings” and 9%

are “cost-reductions”. And, finally, only 10% are “new-to-the-world”, truly new

innovations, new both to consumers and companies. (see Figure 2.2 overleaf). A

survey by Schneider (2004) had confirmed the numbers recorded by Griffin (1997): a

portion of “new-to-the-world” product launches in the US accounts for only 14%.

13
 Figure 2.2 A profile of new product introductions in western markets…

Repositionings / New products

Re-branding (New to the
world)
4%
10%

New products
Product (New to the firm)
improvements
and cost 20%
reductions
43%

Line
Extensions, Bran
d Stretching
23%
Sources: Adapted from Griffin (1997)

Groucutt (2005, p. 171) divides all products into “two broad classifications, consumer

and industrial”. One particular group, “convenience consumer products” or so-called

Fast Moving Consumer Goods (FMCG) falls within the scope of this study.

“Convenience consumer products (or FMCG) are inexpensive, frequently purchased

and rapidly consumed products, that demand only minimum purchasing effort,

purchased to satisfy personal or family needs” (Dibb et al, 1997, p. 243). The next

section uncovers some fundamental insights on introduction of such products into

modern markets.

2.2 Introduction of new consumer products into modern markets:

Market insights, strategic purposes and paradoxes

Obviously, new products do not appear on shelves spontaneously without any

particular reason. New products are elements of strategies, which companies pursue

to achieve certain business objectives in the market. Therefore, it would be nearly

14
impossible to foresee future sales for each type of new product without considering

market realities and strategic context.

Let us start with the term ‘market’. As per “Market segmentation” by McDonald

(2008, p.71), “the general rule for ‘market definition’ is that it should be described in

terms of customer need in a way which covers the aggregation of all the alternative

products…which customers regard as being capable of satisfying the same need. It

is not therefore defined in terms of what company sells, but in terms of what

customers are setting to achieve”. Thus, McDonald (2008, p.71) gives the following

definition: “a market is the aggregation of all the products and services which

customers regard as being capable of satisfying the same need”.

There is no common point of view among leading marketing theorists about what are

the key distinctive features of ‘a market’ (i.e. how markets are distinguished from

each other). Although, it is well recognized that, markets can be described using

various characteristics. Noteworthy, that only one characteristic remains relatively

stable over time, which is a ‘core need’ (Dibb et al, 2008). The state of other

characteristics tends to vary. Thus, the recent studies in strategic planning by

McDonald (2008) show, that markets can be differentiated by the following attributes:

size, growth rate, predictability of growth potential, customers, distribution, product

and product lines proliferation, number of competitors, ease of entry, technology,

prices, costs and profits (see Figure 2.3). In the later work dedicated to marketing

planning, McDonald (2009) refines the list of initially proposed attributes: size,

growth, trends, customers / consumers, product characteristics, prices, physical

distribution, channels, communication, industry practices, competition (see Figure

2.3). Drummond et al. (2008) suggest that markets can be described in terms of size,

rate of growth, profitability, customers, price sensitivity, stage of life cycle,

predictability, pattern of demand (seasonality), potential for substitution, quality of

competition, likelihood of new entrants, bargaining power of suppliers and retailers,

15
bargaining power of customers, barriers to entry/exit (see Figure 2.3). Groucutt

(2005) has identified the following key properties of ‘a market’: size, consumers,

barriers to entry, competitors / shares, marketing, finance, operations, R&D /

technology, HRM (see Figure 2.3). Dibb et al (2008) point out such features as sales

(volume/value), number of consumers, number and size of competitors, basic

customer characteristics (demographic, geographic, socio-economics, personality,

lifestyles), consumer behavior (purchase and consumption behavior, occasions,

needs and benefits sough), accessibility, stability (see Figure 2.3). The most

respected theorists of Simulated Test Marketing, Glenn Urban and John Hauser

(Urban and Hauser, 1993) propose to consider seven key market parameters: (1)

growth potential (consisting of ‘size of the market’, ‘growth rate of sales’, ‘life cycle

stage’), (2) entry barriers (‘order of entry’, ‘time to be established’), (3) economies of

scale (‘cumulative sales volume’), (4) competitive attractiveness (‘vulnerability of

competition’, ‘share potential for product’, ‘rivalry intensity’), (5) investment (into

production, promotion, technology and managerial talent), (6) reward (profits, return –

on- investment), (7) risk (stability, probability of losses) (see Figure 2.3).

Figure 2.3
Modern views on market characteristics have much in common,
although differ in details…

McDonald et al (2008): Drummond et al (2008): Dibb et al (2008) Urban et al (1993)

Size / Growth rate Size Sales (volume/value) Growth potential:
Predictability of growth potential Rate of growth Number of consumers Size of market
Product line proliferation Profitability Number and size of competitors Growth rate of sales
Number of competitors Customers Basic customer characteristics Life cycle
Distribution Price sensitivity (demographic, geographic, socio- Early entry:
Stage of lyfe cycle economics, personality, lifestyles) Order of entry
Customer
Predictability Time to be estabished
Ease of entry Consumer behavior (purchase &
Pattern of demand (Seasonality) consumption behavior, occasions, Advantages to users
Technology
needs and benefits sough) Economies of scale:
Price Potential for substitution
Accessibility Cumulative sales volume
Costs Quality of competition
Learning
Profit Likelihood of new entrants Stability
Competetive
Power of suppliers and retailers attractiveness:
Power of customers Vulnerability of
Barriers to entry/exit competition
McDonald (2009): Share potential for
Size Groucutt (2005) product
Growth, Trends Size Rivalry intensity
Customers/Consumers Consumers Investment:
Product Characteristics Barriers to entry Investments in
Prices Competitors / Shares production, technology
Physical distribution Marketing and managerial talent
Channels Finance Reward:
Communication Operations Profits, ROI
Industry practices R&D/Technology Risk:
Competition HRM Stability, Probability of
losses

Sources: Adapted from McDonald (2008,2009), Drummond et al (2008), Groucutt (2005), Dibb et al (2008), Urban et al (1993)

16
Obviously, there’s much in common between these point of views, for example, all

theorists mention ‘size of the market’, ‘customer’, ‘product’ and competitive

environment. However, there are minor, though important differences. Therefore, in

order to develop a consistent framework, that is required for further analysis, the

author had synthesized a list of essential market attributes based on the modern

theories discussed above. This list consists of eight sets of features (see Figure 2.4).

Figure 2.4 8 essential blocks of features characterizing modern markets:

a synthesized list based on the modern marketing theories …
Consumer: Pricing:
1 Needs 5 Price levels and variation
Occasions Price elasticity / sensitivity
Profile (Socio-Dem, Lifestyle)
Number of consumers involved
Product awareness / experience / learning Finance:
6 Investments, Costs
Reward - Profitability, ROI, margin
Market size and dynamics: Risk - Probability of Loss
2 Size of market (volume/value)
Life cycle stage
Competitive rivalry:
Growth rate of sales 7 Domination (shares of players)
Granularity (structural complexity)
Predictability Fragmentation (number of players)
Variability / Variation Quality of competition
Likelihood of new entrants
Time to be estabished
Promotional Marketing: Order of entry
3 Marketing Objectives Maximum share/sales potential for a new
Dominant strategies entrant
Communication / Advertising
Branding
Infrastructure and Environment:
8
4 Products: Distribution
Product characteristics / Technology Suppliers
Potential for substitution / Differentiation Retail channels
Quality Regulations

Sources: Adapted from McDonald (2008,2009), Drummond et al (2008), Groucutt (2005), Dibb et al (2008), Urban et al (1993)

In particular: (1) Consumer (that includes needs, occasions, profile, number of

consumers involved), (2) Market size and dynamics (size of market (volume/value),

life cycle stage, growth rate of sales, granularity (structural complexity), predictability,

variability / variation), (3) Promotional marketing (dominant marketing objectives,

dominant strategies, communication / advertising, branding), (4) Products (product

characteristics and technology, potential for substitution and differentiation, quality),

(5) Pricing (price levels and price variation, price elasticity / sensitivity), (6)

Competitive rivalry ( domination - shares of players, fragmentation - number of

players, quality of competition, likelihood of new entrants, time to be established,

order of entry, maximum share/sales potential for a new entrant), (7) Finance

17
(investments and costs, reward - profitability, ROI, operational margin, risk -

probability of loss), (8) Infrastructure and Environment (distribution, suppliers, retail

channels, regulations).

Nowadays it widely recognized that markets undergo several stages in their

development. This is proven with empirical studies and even theoretically modeled

(Lilien et al, 1992, Urban and Hauser, 1993). The phenomena of ‘Life Cycle’ is

thoroughly described in fundamental marketing literature (Kotler, 1998, Dibb et al,

2003, 2008, McDonald, 2008, 2009, Armstrong et al, 2008, Clemente, 2002,

Drummond et al, 2008, Groucutt, 2005, Trott, 2008 and other). There’s a consensus

concerning the number and stages and their essence – “there is a universal

agreement … about life-cycle in marketing literature” (McDonald, 2009, p. 197).

According to Fowler and Thomas (1993) cited in Groucutt (2005, p. 198), the concept

of a life cycle “is used to predict the strategic needs associated with products as they

age within the marketplace. It allows for the development of strategies appropriate to

the life stage and anticipates the need for changes in strategy as progression from

one stage to the next occurs”. A typical life pattern of the market usually involves five

key stages: (1) introduction or embryonic stage, (2) growth, (3) early maturity, (4) late

maturity or saturation and (5) decline. A very detailed overview of stages and

managerial implications is given by McDonald (2009) and Drummond et al (2008). A

summary of that is presented on the Figure 2.5 (overleaf). An important extension of

the life – style concept is the model of ‘innovation’s diffusion’ (Lilien et al, 1992). The

model suggests that new products are adopted over time by consumers within social

systems, as encouraged by marketing. As pointed out by McDonald (2009), “diffusion

refers to the cumulative percentage of potential adopters of a new product or service

over time”. Each stage of adoption is directly linked to the particular life stage of the

market (or product) life cycle: innovators are pioneers on the market at the

‘embryonic’ life - cycle stage, while early adopters and early majority join them at the

‘growth’ stage. Late majority become consumers at the ‘maturity’ (or ‘saturation’)

18
stage, while maximum penetration is achieved with ‘laggards’ on the final stage (see

Figure 2.6). To summarize, both theories are very useful to help managers foresee

the future state of the market and avoid simply extrapolating next year’s sales from

last year’s sales.

Figure 2.5 ‘Life Cycle’ is a universally recognized model used to predict

strategic needs associated with products as they age within the
marketplace.…
Early Saturation
Market Embryonic Growth
Maturity / Decline

Sources: Adapted from McDonald (2009)

Figure 2.6
A theory of ‘Innovation Diffusion’ is directly linked to the ‘Market
Life Cycle’ .…

Sources: Adapted from McDonald (2009)

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Further discussion about ‘life-cycle’ and ‘diffusion’ models goes beyond the scope of

the current study. The limitations of both models (such as different forms of shapes,

duration of stages and cycles, static nature) are summarized by Groucutt (2005).

As discussed earlier, modern companies operate in markets that are different in

terms of life stage. To succeed, they employ a variety of strategies applicable for

each particular stage of the market (see Figure 2.7). As literature review had shown,

these strategies can be classified into several layers, according to their scope and

institutional role. These layers include: corporate positioning strategies suggested by

Kotler (2000), strategic directions developed by Ansoff in 1957 (Ansoff, 2007),

business warfare strategies concept proposed by James (1984) and Porter’s generic

product positioning strategies (Porter, 1985, cited in Johnson et al, 2008)).

Figure 2.7 The pyramid of market strategies : 4 essential layers.…

Porter (1985):

Product Overall cost leadership, Differentiation, Focus

James (1984):
ATTACK DEFENSE
Frontal attack Position defense
Flank attack Flank defense
Encirclement attack Pre-emptive defense
Bypass attack Counter defense
Business Guerilla ("partisans") attack Mobile defense
Contraction defense

Sequential, Cumulative, Indirect, Direct,

Alliance, Counterforce, Countervalue

Ansoff (1957, 2007):

Strategic Directions Market penetration, Product development,

Markets development, Diversification
Kotler (2000):
Corporate Positioning Market leaders, Market challengers,
Market followers, Market nichers
Sources: Kotler (2000) cited in Groucutt (2005), Ansoff (2007), James B. (1984), Porter (1985) cited in Johnson et al (2008)

According to Groucutt (2005, pp.113-117), firms can pursue four ‘corporate

positioning’ strategies: (1) Market leaders – “this is the position that many companies

seek to achieve: in essence to be leaders in their market segments”, (2) market

challengers – “these organizations continually challenge the dominance of the market

leader by attempting to win increased market share”, (3) market followers – “these

20
organizations do not seek to challenge either the market leaders or challengers, and

satisfied with their own profitable market segments and market share”, (4) market

nichers – “these organizations are able to dominate a small market segment or

segments and are unlikely to interest either the market leaders or challengers”. As

argued by Ansoff (2007), organizations of every type listed above can undertake

actions in four long-term strategic directions: (1) market penetration / consolidation

(i.e. penetrating currently existing market), (2) product development (i.e. moving by

developing new products for current markets), (3) market development (i.e. moving

by bringing existing products into new markets) or (4) diversification (i.e. creating new

markets by developing new products). According to McDonald (2009) strategic

directions are closely related with market evolution (see Figure 2.8)

Figure 2.8
Strategic Directions are closely related with the Life Cycle of the
market .…

4 4 4

Sources: Adapted from Ansoff (2007), McDonald (2009)

In the context of chosen long-term strategic direction, firms implement the number of

mid-term business strategies, which are usually classified by analogy with warfare

strategies (James, 1984). The early research on the topic (James, 1984, p. 15) had

identified the following forms of strategies: (1) sequential - “successive steps, each

contingent on the preceding step, that lead to the final objective", (2) cumulative – a

21
collection of seemingly random actions with a single final objective, (3) indirect -

using “various indirect pressures to defeat an enemy and thereby avoid direct

conflict”, (4) direct – employing “direct force to achieve objectives…involving an

attack with a new marketing entrant, or defense of a market from competitive attack",

(5) alliance - "attempts to over-maneuver opponents through a combination of the

resources of several combatants with similar objectives". James (1984) suggested

that direct strategies can be offensive and defensive in nature. Drummond et al

(2008, pp.161-162) note that companies implement offensive strategies “by

aggressively pursuing market share, when the fight is taken to the competitors”, while

defensive strategies are employed “to protect your existing customer base and

ensure that market share is retained”. Nowadays this topic is broadly discussed in

the academic literature on strategic marketing planning (Johnson et al, 2008, Kotler,

2000, Groucutt, 2005, Armstrong et al, 2009, Drummond et al, 2008, McDonald,

2009). According to that discussion, a choice of offensive strategies include: frontal

and flanking attacks, encirclement, guerilla and bypass attacks (see Figure 2.9).

Figure 2.9 OFFENSIVE business strategies in the academic literature.…

James (1984)
Attack across all areas of
Frontal attack
competitor's business
Attack on particular important
Flanking attacks
areas of competitor's business
Envelopment / Encirclement, blocking
Isolation / opportunities for movement and
Encirclement growth
Used as a prime combat strategy
Unconventional in an aggressive role to harass
offence (guerilla or competitors to the extent that a
"partisan's" warfare) firm can win consessions in the
form of increased market share"
Kotler (1998) Groucutt (2005)
"The attacker needs a clearly
The major challenger builds
defined advantage. For example,
resources and expertise to directly
the attacker may have a cost
attack the market leader in its
advantage or its brands may
major markets
perceived more positively"
Here the challenger seeks to
exploit a weakness in the market
"the key to success here is to
leader's position. This permits the
identify worthwhile underserved
challenger to go around or flank
segments"
the market leader and take some
market share.
"here we aim to offer a range of
products that effectively encircle -
the competitor"
This is a type of attack that is
increasingly being used by new
entrants to the market. It’s a series
Tactical (short term) marketing
of small ongoing actions that are
initiatives are used to gradually
designed to (1) frustrate the
weaken the opposition
market defenders (2) raise the
company profile in the targeted
segment

"more a policy of avoidance as

opposed to attack. The attacker
Bypass attack - -
moves into areas where
competitors are not active"

Sources: James (1984, pp.15-170), Groucutt (2005, pp. 113-114), Kotler (1998) cited in Drummond (2008, p. 163)

22
A summary of views on defensive strategies is exhibited on Figure 2.10. These

involve: position defense, mobile defense, pre-emptive strike, flank positioning,

counter-offensive strategy and strategic withdrawal.

Figure 2.10 DEFENSIVE business strategies in the academic literature.…

James (1984) Kotler (1998) Groucutt (2005)
A position defense aims to
Involves the erection of barriers to The market leader introduces a
strengthen the current position…
entry (attack) around a product, range of innovations to protect its
Position defense Often dependent on brand
service or the company to protect product position within the
management, service levels and
against competitive aggression marketplace
distribution
Firms often seek expansion into
Focus around planned product "Flexible and adaptive response".
new territories with the intention of
replacement, product improvement It is achieved by broadening
Mobile defense increasing their business
and changes to the length and current market or a diversifying
opportunities, resources, size and
duration of the product cycle" into unrelated activities
financial strength
Striking at potential competitors Rather than waiting to be attacked,
Is used as an attempt to maintain
before thay attack you (mainly the firm may undertake proactive
Pre-emptive strike the status quo in favour of the
threatening, i.e. price-cuts, ad actions to gain market share from
devence
campaigns , promos) the challenger
Repositioning of the product or
service in the marketplace or the
Flank positioning Protection of "weak spots" -
repositioning of resources to meet
expected competitive thrusts
When attacked, most of
Response to an attack where the organizations will respond to The market share defender often
objectives is to wrest the initiative counter attack. (for example a will counter-attack with
Counter offensive
from the attacker by foiling the strong well-established brand overwhelming force to dislodge
attack through a couter-strike loyalty may see of a price cutting the market challengers attack
competitor)
A defensive maneuvre with
objective to extricate the maximum It may prove impossible to defend
Such would protect valuable
amount of resources from all operational activities. Therefore,
Strategic withdrawal resources that could be moved to
untenable position and to provide a selective strategic withdrawal
another product/service market
an opportunity to regroup, rearm could be the best option.
and replenish

Sources: James (1984, pp.15-170), Groucutt (2005, pp. 113-114), Kotler (1998) cited in Drummond (2008, p. 163)

The upper “product-related” layer of strategies (see Figure 2.7) comprises three

Porter’s generic product positioning strategies, which are: (1) overall cost leadership -

”being the low cost producer in an industry for a given level of quality“, (2)

differentiation – “development of product or a service that offers unique attributes that

are valued by customers”, (3) focus – “concentration on the narrow segment and

within that segment attempts to achieve either cost advantage or differentiation”

(Porter (1985) cited in Johnson et al (2008), p. 224). Also, it is worthy to mention a

set of “proactive” and “reactive” new product strategies defined by Urban and Hauser

(1993, p. 19-24). “Proactive” sub-set consists of the following: (1) Research and

Development - “investing in R&D to develop a technically superior products in order

to create new markets “, (2) Marketing – “foreseeing consumer needs and develop

products that provide benefits to satisfy these needs”, (3) Entrepreneurial – “a special

person - an entrepreneur - has an idea and makes it happen by building venture

23
enthusiasm and generating resources”, (4) Acquisition – “other firms are purchased

with products new to acquiring firm and perhaps to the market”, (5) Alliances - “non-

formal less rigid forms of co-operation between firms to put together a new product

portfolio…that lead to success in the market”. “Reactive” sub-set involve: (1)

Defensive strategies – “protects the profitability of existing products by countering

competitive new products”, (2) Imitative ("me too") – “is based on quickly copying a

new product before its maker is assured of being successful”, (3) Second but better –

“in this case the firm does not just copy the competitive product, but identifies ways to

improve the product and its positioning”, (4) Responsive – “purposively reacting to

customer's requests”.

At the bottom line, as pointed out by McDonald (2009, p. 298), all the marketing

strategies discussed above “are concerned with the four major elements of the

marketing mix, which are product, price, place and promotion”. According to the

concept of “phasing continuity spectrum” for innovations, developed by Saunders et

al (1994) cited in Trott (2008), strategic focus shifts on different marketing elements,

depending on the type of new product, as discussed in Section 2.1 (i.e. “new-to-the-

world” products, “new-to-the-firm” products, “brand stretching”, brand/range/line

extensions, brand repositioning / re-branding, product improvements and cost

reductions, “new-to-the-country” or “new-to-the-region” products). Thus, in cases

where changes are concerned with “product”, the emphasis should be laid on

technology, materials, manufacturing, product design and qualities, cost, price,

packaging, distribution and competition. In cases where changes touch upon

“branding”, a special attention should be given to generating awareness, establishing

unique and appealing image, encouraging product trial via promotion and advertising.

In case of “new market”, considerable effort is required to build the infrastructure,

educate consumers about new category and stimulate development of the core need,

related to the new product. These areas of emphasis are exhibited on Figure 2.11

(overleaf), grouped by the type of new product.

24
 Figure 2.11 Change of strategic focus by new product type.…

Product Branding Market

New to the world New New New
New to the firm New New Existing
Brand Stretching New Changes Changes
Line Extensions New Changes Existing
Brand repositionings Existing Changes Existing
Product / Price Changes Changes Existing Existing
New to the region Existing New to the region New
  
If "New" or "Changes", then focus on:
Technology Name Target market
Materials Brand Image Core need
Manufacturing Advertising PR + Advertising
Product qualities PR
Costs
Price
Packaging
Distribution
Competition
Promotion (ATL/BTL)
Sources: Based on Saunders et al (1994) cited in Trott (2008)

The next few sections examine each type of new product introduction in view of

marketing and strategic insights discussed above in this section.

2.2.1 “New-to-the-world” products

A majority of these products are “technology-driven” innovations (Trott, 2008). At the

moment they appear there is no market (see Figure 2.12a), i.e. there is no

established or clearly articulated need for such products. At this early stage,

according to the recent studies by Hamel and Prahalad (1994), Martin (1995) and

Veryzer (2003) cited in (Trott, 2008, p.57), consumers have “difficulty in describing

and articulating their needs” and their frequent responses are along the lines “I want

my usual product only cheaper and better”. Research shows that “new-to-the-world”

products “require changes in thinking and behavior and hence require more from

consumer. Unsurprisingly, these products carry a high risk of failure” (Trott, 2007,

p.62). As indicated by respondents of the study by Schneider, “when you’ve got a

really new consumer product, you cannot launch a product - you have to launch a life

style” (Schneider, 2004, p.71). As pointed out by Martin (1995) consumers “can be

25
extremely unimaginative…trying to get people to change the way they do things is

the biggest obstacle facing many companies” (Martin, 1995, cited in Trott, 2008,

p.497). This is why product purchase intention measured on total population at this

stage may be dramatically low, and this is why it takes so much time to establish a

“new-to-the-world” product. This type of new product launch requires considerable

marketing effort to: (1) break through consumers’ conservatism and (2) build a

virtually new need from scratch. Although this is risky and sales are hardly

predictable, a future market leader has to lead the public from the very beginning,

rather than just follow consumers’ opinion (Akio Morita, Sony’s former charismatic

leader, cited in Trott, 2008). Indeed, ten or fifteen years ago, there weren’t many

consumers asking for cellular phones, portable computers, DVDs, flash cards, low

fat organic food, sport energy drinks etc.

A business situation concerned with the “new-to-the-world” product introduction is

examined below across key market parameters, identified in the previous section:

market life stage, consumer needs, market size and dynamics (see Figure 2.12a).

Figure 2.12a “New-to-the-world” products in the marketing context:

Here Here

New-to-the-World
Hidden, not established and poorly articulated, or at embrionic stage, or based on use of outdated
Needs
technologies or products
Consumption occasions Very rare, infrequent or sometimes do not even exist
Consumer Profile Innovators
Number of consumers involved Max 5% of total potential number of customers in the market
Products awareness / experience / Very low product awareness, no experience and therefore substantial learning effort is required, purchase
Learning intent on total population is very low, higher PI exhibited by Innovators
Size of market (volume/value) Negligible
Life cycle stage Embryonic / Birth / Pioneering stage
Growth rate of sales Above 10% - "normally much greater than GNP (on small base)" - (McDonald, 2009, p.202)
Market size
and dynamics Granularity (structural complexity) Simple plain market structure built around the pioneering product, usually no subcategories or niches
"Hard to define accurately both in the short- and longer-term. Market forecasts differ widely" (McDonald,
Predictability
2009, p.202)
Variability / Variation High variability due to unstable demand, Variation patterns (seasonality) can be hardly recognized

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Promotional marketing, product, pricing, competitors, finance, market infrastructure

and environment analysis is shown on Figure 2.12b (overleaf).

26
 Figure 2.12b “New-to-the-world” products in the marketing context:
Marketing Objectives
Dominant strategies
Promotional
Marketing
Communication / Advertising
Branding
Product characteristics / Technology characteristics to market needs. Frequent product changes. The company must seek feedback on its product
Products
Potential for substitution /
Differentiation
Quality
Price levels and variation
Pricing
Price elasticity / sensitivity
Domination (shares of players)
Fragmentation (number of players)
New-to-the-World
Create product awareness and encourage trial (Armstrong et al, 2008), educate potential consumers while
introducing the product
Market Leaders (Corporate positioning ), Diversification (Strategic Directions), Differentiation (Product),
Attack : Bypass, Flank, Alliance (Business), Sequential (Strategy types), Entrepreneurial and R&D (New
product)
Activities such as advertising, sampling and special introductory offers, on-line, WOM campaigns, buzz are
used to increase customer AWARENESS, activities are often focused on innovators, "niche" marketing.
Great emphasis is given to educating consumers at the end of introductory stage, establishing the need.
Strong focus on a single unique brand, very often the same name is used for corporate and product
branding. No or very few line extensions
Product offers unique superior qualities. Technology plays an important role in matching product
and carry out R&D to eliminate bugs
Potential for substitution is very LOW as differentiation is high and competitors are not in the market yet.
However, there's a threat of resistance or switching back to old technology products
Product quality varies a lot, however, usually is settled on high level by the end of introductory stage
Perceived prices are very high, no particular differentiation by price
Hardly recognized at early stages, however, normally consumers are price-sensitive
Very easy to enter. No one dominates. If barriers exist, they are usually technology, capital or fear of the
unknown
Not fragmented, 0

Competitive Quality of competition No competition or very weak

rivalry Likelihood of new entrants High at the final stage of introduction
Time to be established Depends on the nature of the product, for an FMCG category is up to 4 years (Urban et al, 1993)
Order of entry 1
Maximum share/sales potential for a Ranges from 100% at initial stage to 20% at maturity stage (with 1 competitor - 59% share, 2 - 44%, 3-
new entrant 36%, 4 -31%, 5 - 28% etc.)
"Investment and other expenses will be high relative to revenues. Cash flow is negative. Established
Investments, Costs companies may be able to finance new products from existing resources. New companies with new products
will seek financing from venture capitalists and banks." (Groucutt, p.200)
Finance
Reward - Profitability, ROI, margin Negative cashf lows for a new entrant. In case of success this may be off set by higher profits in the long-run
Risk - Probability of Loss Extremely high Risks (Above 90%)
Distribution Distribution network does not exist or unstable, Direct selling
Suppliers Unstable, no long-term high-volume contracts
Infrastructure/
Difficulties with retailers, new categories with unclear sales potential are not usually accepted by big
Environment Retail channels
retailers, high cost of "entry ticket"
Regulations Difficulties with product certification

As follows from the analysis above, developing and launching “new-to-the-world”

products might be a very challenging task that requires cautiousness when

forecasting future sales.

2.2.2 “New-to-the-firm” products

This kind of “new product” is often used by companies, known as “market

challengers” or “market followers”. They pursue reactive “imitative” or “second-but-

better” new product strategies (Urban and Hauser, 1993), which allow them to take

advantage of high profitability in the existing growing market without investing much

in research and market development. These companies usually do not achieve a

leading position in the market, yielding to originators of the product above 10%

market share (Urban and Hauser, 1993). However, they face significantly lower risks

when entering the market as compared to “new-to-the-world” product developers.

Typically, the market is well-defined and is at the growth stage, when a majority of

“new-to-the-firm” products appear on shelves. Further details are presented on

Figure 2.13a and Figure 2.13b (overleaf).

27
 Figure 2.13a “New-to-the-firm” products in the marketing context:

Here Here

New-to-the-Firm
Needs Emerging, often described as "exsessive" or "trendy"
Consumption occasions Growing frequency, often defined as "special occasion", not perceived as a habit yet
Profile Early adopters (at growth stage) or Early Majority (at early maturity stage)
Up to 20% of total potential number of customers in the market at growth stage, up to 50% - at early maturity
Consumer Number of consumers involved
stage
Considerable product awareness, though still low practical experience and therefore some effort on habit
Products awareness / experience /
development is required. Consumers show some loyalty to chosen brands, however, seek for alternative
Learning
options
Size of market (volume/value) Significant and measurable, up to 50% of total market potential has been realized
Life cycle stage Growth (generally), or Early Maturity
Rapid growth, above 20% " sustained strong growth above GNP…Rate decelerates towards end of stage" -
Growth rate of sales
Market size (McDonald, 2009, p.202)
and dynamics Granularity (structural complexity) Very few layers or subcategories
"Greater percentage of demand is met and upper limits of demand becoming clearer. Discontinuities, such
Predictability
as price reductions based on economies of scale may occur" (McDonald, 2009, p.202)
Variability / Variation Sustainable upward general tendency, seasonal variations can be identified

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Figure 2.13b “New-to-the-firm” products in the marketing context:

New-to-the-Firm
Marketing Objectives Capture rapidly increasing sales opportunities, maximise sales and market share
Market Challengers or Followers (Corporate positioning), Product Development (Strategic Directions), Any
Dominant strategies of the three Generic strategies (Product), Reactive (New Product): Imitative, Second - but-Better. Frontal,
Promotional
Flank or Bypass attacks on the leaders (Business), Alliance strategy is possible
Marketing
Aggressive marketing using mass communications, heavy promotional expenses. Common tool is an IMC
Communication / Advertising
campaign with focus on building brand awareness and distinctive brand image
Branding Focus on building powerful individual brands
Need for continued improvement in production processes to reduce costs and improve the product to
Product characteristics / Technology
successfully differentiate it from competitors products
Products Potential for substitution / Substitution threat is MODERATE despite aggressive promotion of alternatives. This is due to low market
Differentiation saturation and low category penetration
Quality Quality usually is quite high
Price levels and variation High prices, allowing for price-skimming
Pricing
Price elasticity / sensitivity Visible price elasticity, however, this is the best opportunity for price skimming
Although first entrée's domination is challenged at this stage, market leadership has not been yet
Domination (shares of players) established (may change instantly by 20%-30%). However, increased stability - a few competitors emerging
as strong (above 20% share)
Fragmentation (number of players) Few strong competitors (3-5). However, the level of fragmentation may vary
Competitive Quality of competition Despite high quality competition, there's a space for the growth without directly confronting competing firms.
rivalry Likelihood of new entrants Very High
Time to be established Up to 2 years for FMCG, much shorter than that for Introductory Stage (Urban et al, 1993)
Order of entry 2+
Maximum share/sales potential for a
2nd entree - 41%, 3d entrée -25%, 4th entrée - 18%, 5th - 14%, 6th - 11%, 7th etc - less than 10%
new entrant
Investments, Costs Lower initial investment than that for the 1st entrée
Very high short-term profitability due to booming sales and relatively low investment in R&D (vs. first market
Finance Reward - Profitability, ROI, margin
entrée) , Operational margins above 50%
Risk - Probability of Loss High risk of failure (Above 70%)
Distribution Mostly exclusive distribution,established logistics, building distribution networks
Infrastructure/ Suppliers Exclusive suppliers, established operations
Environment Retail channels Less strict barriers for entry, lower cost to get the product on shelf
Regulations Less difficulties with certification, Product standards have been set up

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

At the “growth” stage of the life cycle, market dynamics becomes less volatile

exhibiting sustainable upward trend. This makes sales forecasting for new entrants a

less challenging task than that for “new-to-the-world” products. However, obviously

one should not expect highly accurate forecast at this stage.

28
2.2.3 “Brand stretching”

As new product progresses through its life cycle, there may be a need to exploit its

trademark and hence brand equity for another product on another existing growing

market. This can be caused by rising competitive threat in the origin market or this

may be due to its saturation and declining profits. (See Figures 2.14a and 2.14b).

Figure 2.14a “Brand Stretching” in the marketing context:

Target Target
market market
Original
market Original
market

Brand Stretching
Needs Needs are clearly identifiable in both “original" and "target" markets
Consumption occasions Established and frequent, " well-developed consumption patterns"
Profile Majority in both markets ("Early majority" on the target market, "Late majority" in the original market)
Consumer
Number of consumers involved Over 80% in the original market, up to 50% in the "target market"
Products awareness / experience / Consumers are aware of key brands, experienced with products. Sustainable brand loyalty. No particular
Learning education about the category is needed
Significant and measurable, “original market" - up to 80% of total market potential has been realized, "target
Size of market (volume/value)
market" - up to 50% has been realized
Life cycle stage Maturity or decline in "original" market, maturity or growth in the "target" market
Market size
Growth rate of sales Up to 10%, "Approximately equals GNP" - (McDonald, 2009, p.202)
and dynamics
Granularity (structural complexity) Generally, both markets have complex structure
Predictability Good predictability. "Potential is well defined" for both markets - (McDonald, 2009, p.202)
Variability / Variation The market may experience fairly predictable seasonal variations

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Figure 2.14b “Brand Stretching” in the marketing context:

Brand Stretching
Maximizing profits and minimizing risks by defending market share on the saturated “original market", while
capturing existing opportunities in the new growing markets by using established brand name. The objective
Marketing Objectives
is "to make consumers perceive the new product favourably by associating it with the company established
products" (Clemente,2002).
Applicable for all corporte positioning strategies, Product and Market Development Strategies (Strategic
Promotional Directions), DEFENSE: Mobile Defense, Pre-emptive strike, Counter-offensive OFFENSE: Flanking attack,
Dominant strategies
Marketing Guerila attack, Encirclement attack, Bypass attacks on the leaders (Business), Acquisition strategy is
possible
Generally, a single advertising burst (IMC) aimed at building awareness about the new product. With
Communication / Advertising
that,parent brand attributes are heavily utilized incommunication
Individual or corporate brand. "Umbrella branding". To mazimize ROI the company capitalizes on the equity
Branding
of the already established brand name
Product characteristics / Technology Product requirements well known and relatively undemanding
Potential for substitution / High due to aggressive competitive activity in both markets. Although established brand name provides
Products
Differentiation effective defense against competitive attacks
Quality High in a majority of cases
Price levels and variation Price levels may vary a lot
Pricing
Price elasticity / sensitivity High price sensitivity
Domination (shares of players) One or few market leaders with shares above 20% each (in both markets)
Considerable fragmentation of both markets (> 6 key players on the original market, > 3 players on ther
Fragmentation (number of players)
target market). Number of competitors reaches maximum
High. "Entrenched positions established. Further shakeout of marginal competitors in the base category"
Quality of competition
Competitive (McDonald, 2009)
rivalry Likelihood of new entrants High in the new markets, Low in the base market.
Time to be established Up to 2 years for FMCG in the new market (Urban et al, 1993)
Order of entry (Target market) 4+
Maximum share/sales potential for a
4th entrée - 18%, 5th - 14%, 6th - 11%, 7th etc - less than 10%
new entrant
Investments, Costs Lower investment on promotion (due to the use of umbrella brand) and R&D
Moderate profitability due to savings on brand promotion (vs. first market entrée) , Operational margins
Reward - Profitability, ROI, margin
Finance above 30%
Moderate risk (Above 60%), mostly related with damaged image of parent brand in case of new product
Risk - Probability of Loss
failure
Distribution Mass distribution, Established distribution network, Ability to use current distributors for the new product
Suppliers Choice of suppliers
Infrastructure/
Better trade acceptance due to the existing relationships with the manufacturer and due to the established
Environment Retail channels
brand name
Regulations In a majority of cases regulatory rules are developed and introduced for both markets

29
2.2.4 “Brand -, Line, Range- Extensions”

According to the recent studies, “some high-value line extensions (in the current

category) offer consumers an important additional benefit and can contribute just as

much incremental growth to the parent brand, manufacturer, category or a whole

market as a totally new brand” (Schneider, 2004, p.73). (See Figures 2.15a, 2.15b).

Figure 2.15a “Brand-, Range-, Line- Extensions” in the marketing context:

Here
Here

Brand-, Range-, Line- Extensions

Needs Precisely defined
Consumption occasions Established and frequent, well-developed consumption and purchasing patterns
Profile Majority
Consumer
Number of consumers involved Up to 80% (up to 50% in case of Early Maturity)
Products awareness / experience /
Solid knowledge of brands, wide experience with products. Sustainable brand loyalty.
Learning
Size of market (volume/value) Up to 80% of total market potential has been realized (up to 50% in case of Early Maturity)
Life cycle stage Maturity
Up to 10%, "Approximately equals GNP" - (McDonald, 2009, p.202), "Sales growth slow down" (Armstrong
Market size Growth rate of sales
et al, 2008)
and dynamics
Granularity (structural complexity) Very complex structure, various sub-segments and layers
Predictability High predictability. "Potential is well defined" - (McDonald, 2009, p.202)
Variability / Variation The market may experience fairly predictable seasonal variations

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Figure 2.15b “Brand-, Range-, Line- Extensions” in the marketing context:

Brand-, Range-, Line- Extensions
1) Maintain and defend mature products on the current market 2) extend the range the company and try to
Marketing Objectives develop the almost saturated market further, looking for new users and niche segments and deliver
incremental growth to the parent brand (Armstrong et al, 2008, Schneider, 2004)
Applicable for all corporte positioning strategies, Market Penetration and Product Development Strategies
Promotional
Dominant strategies (Strtategic Directions), Focused strategy (Product) DEFENSE: Mobile Defense, Pre-emptive strike,Counter-
Marketing
offensive OFFENSE: Flanking attack, Guerila attack, Encirclement attack, Bypass attack (Business)
A relatively short IMC campaign stressing new product differences and benefits. Aggressive sales
Communication / Advertising
promotions may be undertaken
Branding Brand, Line, Range extensions ("Umbrella" branding). High proliferation
"Product characteristics are extended,or changed to attract new users and inspire more usage" (Armstrong
Product characteristics / Technology et al, 2008). "Product requirements well known and relatively undemanding, may be a slight thurst for
novelties " (McDonald, 2008)
Products High due to highly competitive and granular market environment. Although existing loyalty to the parent
Potential for substitution /
brand is able to effectively support sales. There's a risk of cannibalizing products already existing in the
Differentiation
range
Quality Varies from lower to higher quality. Often is "average" to the market
Price levels and variation Price levels may vary a lot, however usually a new product is priced in line with other products in the range
Pricing
Price elasticity / sensitivity High price sensitivity
Domination (shares of players) Several established players with shares above 10% each
Fragmentation (number of players) Considerable fragmentation (> 6 key players). Number of competitors reaches maximum
Quality of competition "The overcapacity leads to great competition" (Armstrong et al, 2008)
Moderate due to market saturation, stiff competition, considerable barriers. "Difficult to enter. New business
Competitive Likelihood of new entrants
must be won from others" (McDonald, 2009, p.202)
rivalry
Time to be established Up to 1 year for a line extension FMCG (Urban et al, 1993)
Order of entry 6+ (in terms of product launches)
Maximum share/sales potential for a
Up to 5% market share
new entrant
Moderate investment, higher portion goes on promotion (savings achieved by use of existing technologies,
Investments, Costs
exploitation of parent brand name)
Finance Reward - Profitability, ROI, margin Moderate (Normally, no "break-throughs" should be expected)
Rather low (Above 40%), related mostly with cannibalization and poor incremental sales delivered by the
Risk - Probability of Loss
new product. However, core business is often secured and is not put at risk
Distribution Mass distribution, Established distribution network, Ability to use current distributors for the new product
Infrastructure/ Suppliers Choice of suppliers
Environment Retail channels Good trade acceptance due to established brand name and familiarity with the manufacturer
Regulations In a majority of cases regulatory rules are in place

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

30
2.2.5 “Brand re-positioning / Rebranding”

According to Groucutt (2005, p.137), “the reasons underlying rebranding can be

many and varied”. However, the most important one is re-engineering (or “re-

inventing”) the brand in order to extend its life and retain consumer base within a

specific or multiple saturated markets. (See Figures 2.16a, 2.16b).

Figure 2.16a “Brand re-positioning / Rebranding” in the marketing context:

Here
Here

Revitalisation - Brand re-positioning / Rebranding

Needs Precisely defined
Consumption occasions Established and frequent, " well-developed consumption patterns"
Profile Total audience (Innovators, Adopters, Majority, Laggards)
Consumer
Number of consumers involved Up to 100%
Products awareness / experience /
Solid knowledge of brands, wide experience with products. Sustainable brand loyalty.
Learning
Size of market (volume/value) Up to 100% of total market potential has been realized
Life cycle stage Maturity or Decline
Market size Growth rate of sales "Stable or Negative. Declining demand. Market shrinks as users need change" - (McDonald, 2009, p.202)
and dynamics Granularity (structural complexity) Very complex structure, various sub-segments and layers
Predictability Very high predictability. "Known and limited" - (McDonald, 2009, p.202)
Variability / Variation The market may experience absolutely predictable seasonal variations

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Figure 2.16b “Brand re-positioning / Rebranding” in the marketing context:

Revitalisation - Brand re-positioning / Rebranding

1) Maximize profit while defending market share (Armstrong et al, 2008) 2) " increase a brand's competitive
Marketing Objectives position and therefore increase sales volume by seizing market share from rival products…" (Drummond et
al, 2008). Key brand repositioning areas involve: image and target audience
Used in all corporate positioning strategies (corporate positioning strategies), Market Penetration and
Promotional
Product Development Strategies (Strategic directions), Differentiation strategy (Product) DEFENSE:
Marketing Dominant strategies
Position defense OFFENSE: Frontal attack (Business). Acquisition and Alliances strategies are often
employed
Communication / Advertising Massive IMC campaign (ATL) aiming at re-building brand equity and communicating new brand positioning
Branding Corporate or individual brands
"Product requirements well known and relatively undemanding, may be a slight thurst for novelties "
Product characteristics / Technology
(McDonald, 2008)
Products Potential for substitution / High due to highly competitive market environment. There's a risk of loosing share in case of re-positioning
Differentiation failure
Quality Varies from low to high. Often is "average" to the market
Price levels and variation Price levels may vary a lot
Pricing
Price elasticity / sensitivity High price elasticity
Domination (shares of players) One or few established market leaders with shares above 10% each
Fragmentation (number of players) Usually considerable fragmentation, however this may vary dependting on the market
Quality of competition "The overcapacity leads to great competition" (Armstrong et al, 2008)
Low due to HIGH market saturation, aggressive competition, declining profits. "Difficult to enter. New
Competitive Likelihood of new entrants
business must be won from others" (McDonald, 2009, p.202)
rivalry
Time to be established In case of re-positiong, it takes longer than a 1 year to alllow the audience for absorbing new positioning
Order of entry Varies depending on the market, usually 6+
Maximum share/sales potential for a
Concerning re-positioning, sales incremental may reach 10%, seized from rival brands
new entrant
Investments, Costs Very high expenditures on advertising
Considerable, in case of success. The major reward is the ability to mainain sales with current profitability
Finance Reward - Profitability, ROI, margin
for a longer period
Risk - Probability of Loss High - above 70%. The whole business is put at risk with re-positioning
Distribution Mass distribution, Established distribution network, Ability to use current distributors for the new product
Infrastructure/ Suppliers Wide choice of suppliers
Environment Retail channels Fairly good trade acceptance at the beginning due to familiarity with the manufacturer
Regulations In a majority of cases regulatory rules are in place

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

31
2.2.6 “Product improvements and cost reductions”

As per Armstrong et al (2009), as the market reaches saturation and competitive

rivalry becomes incredibly intense, companies seek to modify their products by

changing their core characteristics such as quality, features and, particularly, price.

This helps them to protect their share in the mid-term. (See Figures 2.17a, 2.17b).

Figure 2.17a “Product / Price changes” in the marketing context:

Here
Here

Revitalisation - Product improvements and cost reductions

Needs Precisely defined
Consumption occasions Established and frequent, "extremely stable"
Profile Total audience (Innovators, Adopters, Majority, Laggards)
Consumer
Number of consumers involved Up to 100%
Products awareness / experience / Solid knowledge of brands, wide experience with products. Sustainable brand loyalty, customers less
Learning motivated to seek alternatives, extreme price sensitivity
Size of market (volume/value) Up to 100% of total market potential has been realized
Life cycle stage Late maturity, Decline
Market size Growth rate of sales "Stable or Negative. Declining demand. Market shrinks as users need change" - (McDonald, 2009, p.202)
and dynamics Granularity (structural complexity) Very complex structure, various sub-segments and layers
Predictability Very high predictability. "Known and limited" - (McDonald, 2009, p.202)
Variability / Variation The market may experience absolutely predictable seasonal variations

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Figure 2.17b “Product / Price changes” in the marketing context:

Revitalisation - Product improvements and cost reductions

1) Reduce expenditure and milk the brand 2) Maintain or defend mature products, keep them on the market,
continue harvesting profits, capture share from rival firms 3) inspire more usage by changing product
Marketing Objectives
characteristics such as quality, features or modifying one or more marketing mix elements such as price
("face-lifts", "price-offs", trade deals, new TV commercials etc)
Used in all corporate positioning strategies, Market Consolidation and Product Development Strategies
Dominant strategies (Strategic Directions), Overall cost leadership (Product) DEFENSE: Position Defense (Business).
Promotional
Responsive (New product strategies).
Marketing
Wide range of advertising and promotional tools, with greater focus on BTL and Trade marketing than on
Communication / Advertising ATL. Great emphasis is on price activities. At the "decline" stage ATL is conciderably reduced to the level
needed to retain hard-core loyals
Corporate or individual brands. Noteworthy, at the stage of market decline certain "commodization" is
Branding observed (i.e.price becomes more important than branding). Product lines and ranges narrow as
unprofitable products dropped
Product characteristics / Technology "Technological content is known, stable and accessible" (McDonald, 2009, p.202)
Potential for substitution /
Almost none, weaker brands and products are repriced or just discontinued
Products Differentiation
Varies from low to medium. "Premium" segment usually shrinks considerably, while "low-cost" and
Quality
"mainstream" remain stable or gradually decline
Price levels and variation Prices tend to lower drastically, no opportunities for price skimming
Pricing
Price elasticity / sensitivity Extreme price sensitivity
Domination (shares of players) Either very fragmented (at late stages of decline) or dominated by few firms with shares above 10% each
Fragmentation (number of players) Either very fragmented (at late stages of decline) or dominated by few firms with shares above 10% each
Quality of competition Focused on price, "price wars", weaker players leave the market (at the decline stage)
Competitive Likelihood of new entrants Low to the declining profitability, "little or no incentive to enter"
rivalry Time to be established Concerning product or price changes, up to few months (2-3 months)
Order of entry Varies depending on the market, usually 6+
Maximum share/sales potential for a
Concerning product/price changes, sales incremental may reach 5-10%, seized from rival brands
new entrant
Investments, Costs Minimum investment, low production costs, high production volumes
Finance Reward - Profitability, ROI, margin Low. Margin is much lower than on previous stages , profit mainly comes from sales volume
Risk - Probability of Loss Moderate due to established, though declining market
Distribution Mass distribution, Established distribution network, Ability to use current distributors for the new product
Suppliers Wide choice of suppliers
Infrastructure/
Good trade acceptance, however low pricing is very important. There's also an issue with growing
Environment Retail channels
commodization and competition from retailer's private labels. The product may be delisted.
Regulations Regulatory rules are developed in detail

32
2.2.7 Expansion to a new geographical market

In this particular case a company follows strategic direction of “market development”

or “market extension”, starting a new regional (or country) market by launching a

product, which already exists in another market (Ansoff, 2007). The risks here are

related with various barriers analyzed below (See Figures 2.18a, 2.18b).

Figure 2.18a “New-to-the-Country (or Region)” in the marketing context:

Target Target
Market Market

Original Original
Market Market

Revitalisation - New-to-the-Region (Country)

Sometimes not established and poorly articulated, or at embrionic stage, or based on use of outdated
Needs
technologies,may often be described as "exsessive" or "trendy"
Consumption occasions No clear patterns, infrequent or sometimes do not even exist. May be defined as "special occasion"
Consumer Profile Innovators, Early adopters
Number of consumers involved Up to 20% of total potential number of customers in the market at growth stage
Products awareness / experience / Very low product awareness, no experience and therefore substantial learning effort is required, purchase
Learning intent on total population is very low, higher PI exhibited by Innovators
Size of market (volume/value) Negligible, hardly measurable at the initial stage
Life cycle stage Originalmarket = Late maturity or Decline; Local market (country) = Embryonic / Pionering
Usually much higher than that on the parent market , above 10% " sustained strong however in line with
Growth rate of sales GNP…Rate decelerates towards end of stage". (McDonald, 2009, p.202). However,market growth may
decelerate due to overall market instability, cultural barriers and local habits
Market size
Granularity (structural complexity) Simple plain market structure built around the pioneering product, usually no subcategories or niches
and dynamics
Hard to define accurately both in the short- and longer-term. Market forecasts differ widely. However,
Predictability predictability is better, than that at the same period in the parent market. Comparison to introduction
patterns on similar markets may help improve predictability ("analogies approach")
High variability due to unstable demand. However variation patterns (seasonality) can be recognized, using
Variability / Variation
analogies from the similar markets

Sources: Based on McDonald(2009), Armstrong et al (2009), Urban et al (1993), Drummond et al (2009)

Figure 2.18b “New-to-the-Country (or Region)” in the marketing context:

Revitalisation - New-to-the-Region (Country)
1) Create product awareness and encourage trial, educate potential consumers while introducing the product 2) Create
Marketing Objectives
and capture the market as soon as possible 3) Maximize share and secure future profits on the markets
Market Leaders, Challengers and Nichers (Corporate positioning strategies), Market Development Strategy and Market
Dominant strategies Penetration (Strategic Directions), Focus (Product), Proactive Attack : Bypass, Flank, Alliance or Acquisition (Business),
Promotional
Sequential (Strategy types)
Marketing
Aggressive marketing using mass communications, heavy promotional campaigns. A major tool is an IMC campaign with
Communication /
focus on building brand awareness and distinctive brand image. With that, considerable emphasis should be made on
Advertising
educating consumers and development of consumption habits
Branding Corporate or individual brand
Product characteristics "Technological content is known, stable and accessible" (McDonald, 2009, p.202)
Potential for substitution / Potential for substitution is MODERATE, since differentiation is high and some small local competitors maybe in the
Products
Differentiation market already. However, there's a great threat of resistance or switching back to LOCAL old technology products
Quality Initially perceived as HIGH on the local market
Price levels and variation Perceived prices are very high, although prices may vary in case of cheap local alternatives are available on the market
Pricing Visible price elasticity. Growth stage is the best opportunity for price skimming. However, a firm should pursue balanced
Price elasticity / sensitivity
pricing strategy, considering both profits and the speed of penetration.
Domination (shares of
Very easy to enter. No one dominates. If barriers exist, they are usually cultural, economic or fear of the unknown
players)
Fragmentation (# players) Either not fragmented, or fragmented, consisting of large number of small local competitors
Quality of competition Very low, easy to enter
Likelihood of new entrants Very high, due to high potential profits in the long-term
Competitive
Depends on the nature of the product, cultural and economic barriers. It may be faster than that on the original market, or
rivalry
Time to be established it may be not. Product customization is often required to appeal to local consumers. Introduction and market development
may take up to 4 years, same as it was on the original market (Urban et al, 1993)
Order of entry 1
Maximum share/sales Ranges from 100% at initial stage to 20% at maturity stage (with 1 competitor - 59% share, 2 - 44%, 3- 36%, 4 -31%, 5 -
potential 28% etc.)
Investment and other expences will be high relative to revenues. However, no fundamental R&D is needed, very often
Investments, Costs adaptation is enough. Considerable expenditures on promotion and category development. Cash flow is negative at the
beginning
Finance
Reward - Profitability, ROI,
Reward may be significant as price skimming is possible
margin
Risk - Probability of Loss High risk associated with local consumption habits and cultural barriers
Distribution Distribution network does not exist or unstable, Direct selling/Export through exclusive sales representatives
Infra Choice of suppliers on the original market, very few on the local, therefore local production is rarely possible in the
Suppliers
structure beginning.
Environ Difficulties with retailers, new categories with unclear sales potential are not usually accepted by big retailers, high cost of
Retail channels
ment "entry ticket"
Regulations Difficulties with product certification

33
2.2.8 Paradoxes

It’s worthy to mention, that continuous inflow of innovations into FMCG markets

produces paradoxes, which are of great interest to marketing science. An increasing

attention nowadays is drawn to the works of Barry Schwartz and to the so called

psychological “paradox of choice”. As Schwartz (2004) has shown, an overwhelming

amount of new products claiming new features (i.e. dramatic explosion in choice)

paradoxically generates more problems for customers, than it solves. The issue of

complex choice stifles trial and therefore undermines sales in general. According to

Trott (2008, p.62) this issue is a reflection of a major “control-chaos” paradox, which

states that innovation created to “facilitate order”, in reality can “lead to disorder”.

This paradox must be taken into consideration, when forecasting new product sales,

especially for line extensions. Mick and Fournier (1998) have identified few other

paradoxes related to the boom of new products. The most important are: (1)

freedom-enslavement (new products that are aimed to provide independence can

lead to dependence), (2) efficiency – inefficiency (new products that are aimed to

improve efficiency can lead to inefficiency), (3) assimilation – isolation (innovations

aimed to facilitate human togetherness can lead to human separation), (4) fulfils

needs – create needs (new products designed to fulfill needs create new desires).

These paradoxes has had a great impact on modern marketing, making FMCG

companies follow ‘lean’ and ‘focus’ principle in their new product development

practices. These practices are discussed in the next section.

2.3 How product innovations are managed by Western companies

How to succeed in managing new product development and new product launches?

What are the best practices in organizing this process within Western companies?

This question is tricky due to the nature of the problem: the process of innovation

requires creativity and freedom, which cannot be organized by its definition. With

that, as pointed out by Urban and Hauser (1993, p. 36), “new products must be

34
developed in an environment that allows innovation to flourish. At the same time, the

risk … must be controlled”. Urban and Hauser (1993) argue that it is a very

challenging task to develop disciplined and, at the same time, creative atmosphere

within an organization. “Organizations are not creative by nature. They have been

developed to manage on-going business. Even in new-product development

organizations often spend too much time on routine operational aspects rather than

on concentrating on developing the idea to its fullest potential”. Indeed, a survey of

the world’s largest companies by Christensen (1997) had shown that “proper”

management was the principal reason why they failed many of their innovation

initiatives. At the same time, significant innovation projects are rarely, if ever, tackled

by individuals. Nowadays NPD requires strong “collective genius”, which needs to be

structured somehow. A typical unsuccessful attempt to structure the process and fit it

into a “standardized linear framework” is depicted on Figure 2.19.

Figure 2.19
An example of failed attempt to structure NPD process:
Plans versus Reality

Source: Urban et al (1993 , p. 50)

However, many Western companies had succeeded in their approaches to

developing and launching new products. This is discussed in the next section.

35
2.3.1 Best practices for new product development: key frameworks

Over the recent years it has become obvious that there’s no single formula of

success in new product development (NPD). As pointed out by Trott (2007),

regardless of 30 years of research in this area, each company approaches NPD

slightly differently than it is recommended by the theory. “For example, the

pharmaceutical industry is dominated by scientific and technological developments

that led to new drugs; whereas the food industry is dominated by consumer research

that leads to many minor product changes. And yet the vast majority of textbooks that

tackle this subject, present the NPD as an eight-stage linear model regardless of

these major differences” (Trott, 2007, p.403). Indeed, marketing literature review

shows a great commonality of views about major activities within NPD process. The

evolution of the theory and arrival at eight-stage linear model is shown on Figure

2.20.

Figure 2.20 NPD process: Theory evolution and standardization

Urban et al Dibb et al Groucutt Trott Armstrong et al

(1993) (1997) (2005) (2008) (2009)
1 1 1 1 1
Opportunity Identification: Idea generation Idea generation Idea generation Idea generation
Market Definition
Idea Generation 2 Screening
2 Idea screening 2 Idea screening 2 Idea screening
2
Design: 3 3 3 3
Customer Needs, Product Business Analysis Concept Concept Concept
Positioning, Segmentation, development development development
and testing and testing and testing
Sales forecasting, Engineering, 4
Marketing Mix Product
development and 4 4 4
3 Business Analysis Business Analysis Marketing Strategy
Testing: testing
Development
Advertising and product testing,
pretest and prelaunch 5 5 Product 5 Product
Test Marketing 5 Business Analysis
forecasting, Test Marketing development and development and
4 6 testing testing
6
Introduction: Commercialization Test Marketing
Launch planning,
6 6
Test Marketing Test Marketing
Tracking the launch 7 Launch 7 Commercialization
5 7 Launch 7 Commercialization
Life Cycle Management:
Market response analysis,
8 Launch
Competitive monitoring and 8 Commercialization 8 Launch,
defense, Innovation at maturity Monitoring,
Evaluation

Source: Adapted from Urban et al (1993), Dibb et al (1997), Groucutt (2005), Trott (2008), Armstrong (2009)

According to Armstrong et al (2009, pp.271) the typical NPD process comprises the

following stages: (1) idea generation (“the systematic search for new product ideas”

using internal and external sources, including consumers), (2) idea screening

36
(spotting good ideas and eliminating bad ones), (3) concept development and testing

(development a detailed version of an idea and testing with groups of target

consumers) , (4) marketing strategy development (designing a plan for introducing

the product to the market), (5) business analysis (forecasting of sales, costs, and

profits), (6) test marketing ( “the stage at which the product and marketing program

are tested in realistic marketing settings”), (7,8) commercialization and launch

(introducing the product to the market). With that, Urban and Hauser (1993), argue

that these activities may overlap in time. As mentioned earlier, in practice,

implementation details may vary from company to company. Trott (2008, p.409)

distinguishes the following organizational forms of NPD: (1) “departmental-stage”

models (particular tasks are delegated to specialized departments, leading to a

dilution of responsibility), (2) “stage–gate” models (“multifunctional teams must

successfully complete a prescribed set of related cross-functional tasks in each

stage prior to obtaining management approval to proceed to the next stage”, see

Figure 2.21), and (3) network models (the processes and teams are gradually built

Figure 2.21 Stage-Gate model is considered the best NPD practice nowadays

Stage 0 - Discovery: Activities designed to discover opportunities and to generate new product
ideas.
Stage 1 - Scoping: A quick and inexpensive assessment of the technical merits of the project
and its market prospects.
Stage 2 - Build Business Case: This is the critical homework stage - the one that makes or
breaks the project. Technical, marketing and business feasibility are accessed resulting
in a business case which has three main components: product and project definition;
project justification; and project plan.
Stage 3 - Development: Plans are translated into concrete deliverables. The actual design and
development of the new product occurs, the manufacturing or operations plan is
mapped out, the marketing launch and operating plans are developed, and the test
plans for the next stage are defined.
Stage 4 - Testing and Validation: The purpose of this stage is to provide validation of the entire
project: the product itself, the production/manufacturing process, customer acceptance,
and the economics of the project.
Stage 5 - Launch: Full commercialization of the product - the beginning of full production and
commercial launch.
Source: Adapted from Cooper et al (2010)

37
around continuously accumulated shared knowledge). Other models are, in fact,

extensions of the “stage-gate” model. Trott (2008) points out that, at the moment,

despite some disadvantages, such as “administrative gates” (which may slow down

the process, shifting the focus from customer to management), the model of “stage-

gate” can be considered “best practice” in the “western” FMCG markets. According to

Cooper and Edgett (2010), 85% of North American companies utilize this model to

some extent. However, as argued by Tidd and Bessant (2009), the near future will

likely see the increasing popularity of “network” models, such as “open innovation”.

According to the data by Urban and Hauser (1993) (see Figure 2.22), the cost of

new product introduction in the US FMCG market may vary from $50 thousands to

$310 millions, where 86% is typically spent on promotion and only 14% is the cost of

development. The time allocated for NPD varies from 18 to 35 months. In particular,

design takes up to 8 months, research and testing – up to 15 months (including test

marketing), launch setup phase continues for up to 6 months.

Figure 2.22 NPD process in the US FMCG market: Costs, Time, Risks

Cost (% of total*) Time range

Opportunity (months)
identification 1% Opportunity identification -
Design 3% Design 4-8
Testing 10% Testing 2 - 15
Total development 14% Consumer research 2-5
Test market 6 - 12
Launch / Introduction 86% Introduction setup 2-6
Grand Total 100% Grand Total 18 - 35

*Total cost ranges from $58,000 to $310,000,000

Likelihood of Success
in Phase
Opportunity identification 50%
Design 57%
Testing 70%
Introduction setup 65%
Grand Total 13%

Source: Adapted from Urban et al (1993)

However, these stages may overlap. The chance of success in all stages of

development is 13%, i.e. 50% chance of good opportunity identification, multiplied by

38
57% chance of successful design and prototype creation from the first run, multiplied

by 70% chance of no re-submissions to tests, multiplied by 65% chance of no

problems at setup stage.

Some practices of “passionate” new product development existing within firms attract

much criticism. Urban and Hauser (1993, pp. 47-48) draw attention to the following

typical cases: (1) “who’s got a new idea today?” - totally spontaneous and

undisciplined idea generation, not related to company’s goals and strategies, (2)

“here’s a new technical discovery” - profound ignorance of consumer needs (3) “me

too” – unproductive idea generation, unconscious copying of competitive products

due to the lack of own ideas, (4) “let’s run it up and see what will happen” – a

systematic generation of many ideas that are not well thought, (5) “we’ve got to do

something fast” – “sales are down and we need something new to help us by the end

of this year”. Trott (2008) criticizes certain inflexibility and rigidness of NPD protocols

that are utilized nowadays. Many companies run NPD only for the sake of it, not

linking the process (and, consequently, “innovation pipeline”) to their current

strategies. Finally, contemporary use of “stage gate” model is often criticized for a

visible lack of active consumer participation in the process (Von Hippel et al, 1998,

2002, 2005). Indeed, consumers are often viewed as an “information” resource

passively involved in the key stages of product development (See Figure 2.23a

overleaf). “Many industry analysts and business consultants are now arguing that

the devotion to focus groups and marketing research has gone too far”. (Christensen,

1997, Martin, 1995, Francis, 1994, cited in Trott, 2008). As confirmed by a series of

studies over the past decade, currently existing NPD protocols may stifle true

innovation at a very early stage and let minor product modifications to flourish (Von

Hippel, 2005). According to the theoretical modeling by Mahajan and Muller (1998),

which was later empirically confirmed by Voh Hippel (2005), targeting at conservative

majority and following their needs is sometimes financially more risky than

collaborating with ‘innovators’, which may be trend-setters of tomorrow.

39
 Figure 2.23a So far consumer involvement into new product development has
been very passive

Development stage Activities performed by the customer

Inputs via consumer research: state needs, problems,
1 Strategic planning criticise existing products, identify gaps in the market,
state requirements
Inputs via consumer research: same as in the strategic
2 Idea generation
planning phase
Inputs via consumer research: show reactions to
3 Idea screening concepts; show level of purchase intent for concepts;
indication of sales and market size, pricing acceptance
4 Business analysis None
Formation of cross-functional
5 None
teams
Design and process system
6 None
design
Inputs via consumer research: indication of sales,
7 Test marketing feedback on benefits and attributes, comments on
marketing mix
8 Commercialization Purchasing, participation in promotional activities

Source: Based on Based on Von Hippel et al (1998, 2002, 2005), Allam et al (2002)

According to Von Hippel et al (1999, p.48), “there are two major findings by

innovation researchers. First, the researchers found that many commercially

important products are initially thought of and even prototyped by users rather than

manufacturers. Second, they discovered that such products tend to be developed by

‘lead users’ - (groups or individuals) that are well ahead of market trends and have

needs that go far beyond those of the average user”. A literature review has shown,

that nowadays NPD protocols should allow for active participation of consumers

through “fan clubs”, communities of “lead users and opinion leaders” and “innovation

toolkits”, at early and maturity stages of life cycle respectively. (Bilgram et al, 2008,

Buur and Matthews, 2008, Hoffman, 2007). (See Figure 2.23b overleaf). As argued

by Steirand and Lynch (2008), this approach is highly relevant for ‘true’ innovations

satisfying even basic consumer needs, such as food and drinks. The works of Von

Hippel et al (1988, 1999, 2002, 2005) have shown that “lead user method” can be

particularly effective for “ill-defined” or “fuzzy” markets, where consumer needs are

not clearly articulated and require further development. This is confirmed by

practitioners in the U.S. Product Development Association (Belliveau et al, 2002)

40
 Figure 2.23b Consumer integration in NPD may change from passive to active,
depending on business situation and company’s strategy

Passive & Distant

Actively Integrated
Customer toolkits
Innovation communities

Source: Adapted from Bilgram et al (2008), Buur et al (2008), Hoffman (2007)

In terms of new product types, this is mostly related to “new-to-the-world” and “new-

to-the country” products. However, “traditional” approaches are still recommended for

use in well-defined saturated markets, where only incremental improvements are

possible (See Figure 2.23c).

Figure 2.23c Deep consumer involvement in NPD is crucial at early stages of

market development to ensure successful product adaptation
“well defined market, “ill defined market,
Articulated consumer needs” Unarticulated consumer needs”

All Users > 30% TA Lead Users, <10 % TA

Products types: Product types:
“New-To-The-Firm”, “New-To-The-World”,
“Line Extensions”, “New-To-The-Country”
“Repositioning”
“Product / Price Change”
Source: Based on Von Hippel et al (1998, 2002, 2005)

41
With that, implementation of “lead users” approach raises the issue of identifying

“lead users” and bringing them together. Hassan (2008, p.54) has summarized some

unique characteristics, which distinguish “lead users” from mainstream consumers,

such as “perceived as having needs ahead of the trend”, “knowledge and

experience”, motivation, active networking for sharing modifications, search behavior,

high level of involvement, value and fashion conscious. At the same time, some of

“lead users” should act as future “opinion leaders”, showing such qualities as

“exposure to mass media”, “central to communication networks”, “social

accessibility”, “influence opinion”. According to Hassan (2008), Kim and Bae (2008)

establishing such social networks significantly boosts adoption of “new-to-the-world”

and “new-to-the-country” products. (see Figure 2.23d).

Starting up innovation diffusion process at early stage:

Figure 2.23d
How to identify LEAD USERS and OPINION LEADERS?

Source: Hassen (2008)

2.3.2 Best practices for new product launches: key success factors

Product launch is the last, but at the same time is the most important phase of NPD

process. As discussed earlier, up to 86% of company’s resources are usually spent

at this stage. According to Schneider (2004, p. 226), “in Robert Cooper’s ‘stage-gate’

42
process production and launch are coupled as the final stage of new product

development. We believe launch should be its own stage because the elements that

make up launch are critical to a new product success”. As per Brody and Lord (2004,

p.462), these elements include “sourcing, production, distribution, sales force activity

and marketing”, which should be executed in proper time according to the launch

plan. Brody and Lord (2004, p.462) point out, that “the manufacturer must make sure

that product is in the store in the intended time frame and that advertising and

promotional events are scheduled accordingly. This means that retail sell-in and

distribution of the product will have to be scheduled with adequate lead-time to

ensure product availability in the store”. The study conducted by Schneider (2004,

p.226-229) had revealed 10 “success factors” for new product launches, which are as

follows: (1) “Treat launch as a separate phase”, (2) “Have a plan” (“timing is

everything with launch”), (3) “Don’t carve your plan in stone”, (4) “Learn to live with

inevitable delays”, (5) “Spend money on products that are ‘new’”, (6) “Assemble an

expert launch crew”, (7) “Brand / Product managers are the best team leaders”, (8)

“Bigger budgets fuel success”, (9) “Consumer-focused spending prevents crash

landings”, (10) “Don’t overlook PR”. A comprehensive launch start-up checklist

recommended by Schneider (2004) includes “client-to-agency” background activities,

systems and procedures development, program development and implementation,

external and internal communications, measurement, tracking and merchandising.

Detailed schedule of marketing activities is a vital component of every launch plan

(McDonald, 2009). As discussed earlier in Sections 2.2.1 – 2.2.7, marketing

objectives, strategies and engines used are quite different for each type of new

product. Although the topic of marketing and media planning goes beyond the scope

of the present study, it is necessary to consider “best practices” in this area in view of

their particular importance for sales forecasting. Rossiter and Percy (1987) suggest

that the amount of advertising, promotional, PR activities may vary depending on the

life stage of the product, product type and category, marketing objectives, strategy,

43
etc. In the later work, Rossiter and Danaher (1998) identified several typical “media

weight” patterns used to effectively support sales at various life stages. A set of

patterns applicable for new product launches includes (1) “blitz” pattern, (2) “wedge”

pattern, (3) “reversed wedge” pattern, (4) “awareness” and (5) “short fad” patterns.

The shape of “blitz” pattern is flat, meaning continuous activity for a certain period of

time. This type “will maximize the first-mover advantage if your brand is first in the

category” and “tend to suppress the effects of any competitors advertising by use of

sustained dominance” (Rossiter and Danaher, 1998, p.11). The “wedge” pattern is

“probably the most common for new product launches”, and implies heavy initial

“burst” of advertising “to create brand awareness for the new product and enable

prospective triers to learn new product benefits or acquire its intended image”

(Rossiter and Danaher, 1998, p.13). With the “reversed wedge” pattern, the audience

receives consistently increasing media “weight” with each “burst”. “In the most

effective application of this pattern the target audience consists of innovators and

then is broadened to the mass market”. (Rossiter and Danaher, 1998, p.14). The

“short fad” pattern is like a short “blitz” pattern. As for “awareness”, here “the

strategy is to keep consumers ‘aware’” at minimum cost (Rossiter and Danaher,

1998, p.18). This pattern consists of a series of “bursts” and exploits memory effects

and “decay” of advertising impact. Based on the findings by Rossiter et al (1983,

1998), Pickton and Broderick (2005), McDonald (2009) some general conclusions

can be drawn concerning the “best media and distribution build patterns” for different

types of new product launches (see Figure 2.23 overleaf). As it follows from the

chart: (1) “new-to-the-world” and “new-to-the-country” cases are quite similar and are

based on the “reversed wedge” pattern, with a heavy PR campaign preceding sales,

(2) “new-to-the-firm”, “brand stretching”, “line extension”, “re-branding” require the

opposite - “wedge”, “blitz” and “short fad” approaches, (3) “product or price changes”

need relatively low advertising support, an emphasis should be laid on sales

promotions and “place-of-purchase” actions.

44
 Figure 2.23 New product launches: typical marketing “push” patterns

Source: Based on Rossiter et al (1987), Rossiter et al (1998)

2.4 Major challenges for new product launches in the Russian market

Despite emerging globalization it has become obvious that international markets are

dramatically different (Armstrong et al, 2009). According to Usunier (2000, p.180),

“culture and languages are only part of marketing environment. A set of economic,

political, legal, social and cultural characteristics has a great influence on the

implementation of marketing decisions… For this reason, marketers have to

understand the local marketing environment before preparing strategy”. This

concerns the strategy of new product introductions a lot more than it concerns other

marketing issues. Armstrong et al (2009, p.516) argue that economic environment is

one fundamental factor affecting marketer’s decision “about which global market to

enter and how”. According to Armstrong et al (2009) economies are classified by

their types (“subsistence”, “raw material exporting”, “industrializing” and

“industrial”/”post-industrial”), and, what’s more important in marketer’s point of view –

income distribution and structure of needs in terms of Maslow’s pyramid (McDonald ,

2008). Usunier (2000) highlights dramatic differences in culture and consumption

45
habits between economies. Both Usunier (2000) and Armstrong et al (2009) argue

that ignorance of such differences can lead to some very expensive and

embarrassing mistakes. When deciding on new product introduction in different

markets, Kotler (1998) recommends to draw attention to the following factors: (1)

demographic characteristics (population size and growth, age profile, education), (2)

socio-cultural characteristics (consumer lifestyles, beliefs and values, business and

social norms, languages), (3) geographic scope (country size, climate, population

density, transportation structure), (4) Political and legal factors (national priorities,

political stability, bureaucracy, monetary and trade regulations), (5) economics (GPD

size and growth, income distribution, industrial infrastructure, natural resources,

financial resources). From marketing perspective this list of factors perfectly fits the

‘markets characteristics’ framework developed in Section 2.2 (see Figure 2.4). The

framework is therefore suitable for examination of the Russian FMCG market against

“western” FMCG markets, where Simulated Test Marketing technology was

developed and validated. This examination is performed in the next section.

2.4.1 Market profile: a comparison versus mature western markets

Concerning “western” FMCG markets, almost all of them are extremely saturated. In

70-ies these markets were less penetrated and less saturated then they are today

(Clancy,1992). Nowadays “whatever real growth there is, comes from population

increases, which never exceed 1 to 2 percent a year. To survive at all, a new product

must wrench market share from other, established brands”. (Clancy, 1994, p.7). As

for the Russian FMCG markets, before going into details, let us have a look at Russia

from a global economic perspective. Being the largest country in the world, Russia

holds a significant place in the very beginning of the global production chain,

exporting raw materials and natural resources (oil, gas, metals, woods) to more

developed economies (such as European Union, the United States etc) and being a

considerable market for imported ready-made products, including innovative products

46
(Economist Intelligence Unit, 2010). The structure of import/export operations allows

for classifying Russian economy as “raw material exporting” - “these economies are

rich in one or more natural resources but poor in other ways, these markets are good

markets for large equipment, tools, supplies as well as for consumer goods. If there

are many foreign residents or a wealthy upper class, they are also a market for luxury

goods” (Armstrong et al, 2009, p.515). To join the community of “industrializing”

economies Russia has to reach more than 10-20% share of manufactured products

in the total export value (Armstrong et al, 2009), however, currently that accounts

only for 6% of national export (Rosstat, 2010, Economist Intelligence Unit, 2010).

Investments into new product development remain at a very low level in comparison

to the developed countries (Ruvinsky, 2007) (see Figure 2.24).

Figure 2.24 Russia’s the one of the biggest suppliers of natural resources and an
importer of ready-made products. NPD investments are marginal

Russia’s exports, 2009, $302 bln R&D in Russia, 2007 is 1% of GDP

($12 bln vs. $343 bln in the US)
Other (agriculture & woods)
Global centres of New Product Development
Machinery & Equipment (Size of each country represents amount US$
8% spent on R&D and innovations in 2007 )
Chemicals 6%
6%

Metals
13%
67% Oil, fuel
& gas

Russia’s imports, 2009, $168 bln

Other
15%
Metals 7%
43% Machinery
& equipment
Chemicals
17%

18%

Food

Source: Based on Rosstat (2010) , Economist Intelligence Unit (2010), Ruvinsky J. (2007)

According to Usinier (2000, p.179), the region of Eastern Europe and the former

USSR is “undergoing fundamental changes at all levels and everything is unstable

and negotiable”. These changes fuel rapid economic growth, which is more than

double than that for developed countries. (see Figure 2.25 overleaf). A detailed

comparison between the Russian market and the biggest markets of Northern

47
America, Europe and Asia clearly shows that they are at different stages of their

evolution. Considering FMCG sector, the needs of Russian consumers are rapidly

emerging (unlike that in the developed countries), shifting from the very basic to more

sophisticated desires (EIU,2010). Their disposable income grows at very high rates,

with that, a considerable portion of potential customers remain uncovered by

distribution networks.

Figure 2.25 Despite its size, emerging Russian economy exhibits growth rate which
is more than double than that for developed countries

Nominal GDP, US$ bln, 2009

16000
14 056
14000
12000
10000
8000
6000 5 368
4000 3 107
2 084
2000 1 229
0
Russia US Japan Germany UK

GDP growth rate, vs. PY Retail sales growth rate, vs. PY

40% 40% 33% 32%
29% 31%
28% 27% 29%
30% 30%
17%
20% 14% 12% 13% 20% 13% 14% 13% 13%
9%
10% 10%

0% 0%
2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F
-10% -10%
-18%
-20% -26% -20%

-30% -30%
Russia US Japan Germany UK Russia US Japan Germany UK

Source: Economist Intelligence Unit (2010)

Although product awareness across FMCG categories seems quite high, at the

moment, product experience is relatively low in many categories. According to

Economist Intelligence Unit (2010), Russian market, as a whole, is very far from

saturation and can be characterized as “growing”. As for the “western” FMCG

markets, the upper limit of their growth potential is expected to be nearly reached,

particularly in terms of sales volume. (See Figure 2.26a overleaf). Although Russian

retail market is considerably smaller than that in the US, its size is comparable to UK

or Germany. Moreover, it is expected Russian market to deliver at least 14% growth

by 2013, while major “western” FMCG markets will grow at a very low rate or

stagnate (EIU, 2010). (see Figure 2.26b overleaf).

48
 Russian FMCG market is far from saturation, while “western”
Figure 2.26a
markets have almost reached the upper limit of their growth potential

US,UK,
US,UK,
Germany,
Germany,
Japan
Japan

Russia Russia

Russia US Germany UK Japan

Bias towards services:
Bias towards services: Bias towards services: Bias towards services:
Needs Skewed towards basic needs 2009 - Food FMCG
2009 - Food FMCG 9.3%, 2009 - Food FMCG 2009 - Food FMCG
(Maslow's structure (FMCG): 17.5%, non-food FMCG
Non -food FMCG 3.9%, 14.2%, non-food FMCG - 12.6%, non-food FMCG -
represented by 2009 - Food FMCG 29.2%, Non-Food - 7.5%, Other
Other (residence, 6.1%, Other (residence, 5.4%, Other (residence,
"Composition of FMCG - 12.5%, Other (residence, (residence, transport,
transport, services etc) - transport, services etc) - transport, services etc) -
average household transport, clothing, services etc) - services etc) - 74.9%,
86.8%, 2013F - 9.1%, 79.7%, 2013F - 13.9%, 81.9%, 2013F - 12.2%,
expenditures%") 58.3%, 2013F - 27.4 %, 11.7%, 60.9% 2013F - 16.6%, 7.1%,
2.9%, 87% 5.9%, 80.1% 5.2%, 82.5%
76.3%
Established and rigid Established and rigid Established and rigid Established and rigid
Emerging FMCG consumption and
Occasions FMCG consumption and FMCG consumption and FMCG consumption and FMCG consumption and
shopping patterns
shopping patterns shopping patterns shopping patterns shopping patterns
All, stable high income: All, stable income:
"Majority", rapid income growth: All, stable high income: All, stable high income:
No. of households with No. of households with
Consumer No. of households with annual No. of households with No. of households with
annual earnings annual earnings
Profile earnings annual earnings annual earnings
above US$10,000 in above US$10,000 in
above US$10,000 in 2009 - 54%, in above US$10,000 in 2009 above US$10,000 in 2009
2009 - 100%, in 2013F - 2009 - 100%, in 2013F -
2013F - 81% - 95%, in 2013F - 96% - 100%, in 2013F - 100%
100% 100%
Number of Up to 80% of 53,707,000 households Up to 100% of 115 mln HH Up to 100% of 39,958,000 Up to 100% of Up to 100% of
consumers involved in 2009 in 2009 HH in 2009 26,139,000 HH in 2009 49,935,000 in 2009
High awareness and fairly good
experience in the main centers of High awareness and
Products awareness distribution, limited awareness and experience, considerable
/ experience / availability in rural area. Weak loyalty, brand loyalty (although Same as in the US Same as in the US Same as in the US
Learning high level of switching. Further undermined by aggressive
learning is required about niche competitive pricing)
categories

Sources: Based on Economist Intelligence Unit (2010)

Figure 2.26b A comparison of the Russian market versus major developed

markets: Market size and dynamics

Russia US Germany UK Japan

Size of market in 2009 - $457 bln, in in 2009 - $3442 bln, in in 2009 - $467 bln, in in 2009 - $389 bln, in in 2009 - $1424 bln, in
(value, total retail) 2013F -$782 bln 2013F -$3969 bln 2013F -$516 bln 2013F -$492 bln 2013F -$1627 bln

Growth (although
Life cycle stage saturation is observed in Highly saturated Highly saturated Highly saturated Highly saturated
some FMCG categories)

2009-2013 CAGR 4% (in

line with GDP), There is a
2009-2013 CAGR 14% 2009-2013 CAGR 3% 2009-2013 CAGR 6% (in 2009-2013 CAGR 3%
Growth rate of sales general stagnation in the
(above GDP) (in line with GDP) line with GDP) (in line with GDP)
most highly developed
sectors

Market size and

dynamics Moderate granularity,
Highly granular and Highly granular and Highly granular and Highly granular and
Granularity (structural visible development of
complex, a lot of niches complex, a lot of niches complex, a lot of niches complex, a lot of niches
complexity) sub-categories and
and micro-segments and micro-segments and micro-segments and micro-segments
segments

Moderate (still unstable
Predictability of market
market structure and
reactions and factors
demand)
Very high (very stable Very high (very stable Very high (very stable Very high (very stable
market structure and market structure and market structure and market structure and
demand) demand) demand) demand)

Moderate (still
unexpected fluctuations Low / Very small Low / Very small Low / Very small Low / Very small
Variability / Variation
caused by internal unexplained variations unexplained variations unexplained variations unexplained variations
market factors)

Sources: Based on Economist Intelligence Unit (2010)

To succeed in the Russian and “developed” markets firms pursue different marketing

strategies. In the Russian FMCG market, the most popular set of business strategies

include proactive attacks with an objective of market penetration or price skimming,

while defensive price-focused strategies are dominant in the US, UK, Germany and

Japan. (See Figure 2.26c overleaf)

49
 Figure 2.26c A comparison of the Russian market versus developed
markets: Dominant Marketing Strategies
Russia Developed markets (US, UK, Germany, Japan)

1) Reduce expenditure and milk the brand 2) Maintain or

1) Create product awareness and encourage trial, educate
Dominant Marketing potential consumers while introducing the product 2) Create
Objectives and capture the market as soon as possible 3) Maximize
share and secure future profit
defend mature products, keep them on the market, continue
harvesting profits, capture share from rival firms 3) inspire
more usage by changing product offer, i.e. price, quality,
features ("face-lifts", improved formula, "price-offs", trade
deals)

Market Development and Market Penetration (Strategic Market consolidation and Product Development Strategies
Directions), Focus (Product), Proactive ATTACK: Bypass, (Strategic Directions), Overall cost leadership (Product)
Dominant strategies
Promotional Flank, Alliance or Acquisition (Business), Sequential (Strategy DEFENSE: Position Defense (Business). Responsive (New
Marketing types) product strategies).

Aggressive marketing using mass communications, heavy

promotional activities. A major tool is an IMC campaign with Wide range of advertising and promotional activities, with
Communication / Advertising focus on building brand awareness and distinctive brand greater focus on BTL and Trade marketing than on ATL. Great
image. In some cases, considerable emphasis is made on emphasis is on pricing activities.
educating consumers and development of consumption habits

Line extensions of great magnitude with a tendency to narrow

Corporate or individual brands, line extenstions, brand
Branding as uprofitable products are quickly dropped. Visible
differentiation
"commodization", high share of private labels.

Product characteristics / Technologies are sometimes new for the local market but
Technological content is known in a majority of cases
Technology ordinary for the markets of developed countries

Potential for substitution / Moderate. Despite highly differentiated brand image of new Moderate. Despite existing brand loyalty, price has become
Products Differentiation products there's a significant threat from "me-too" products more important than brand in terms of purchase decision
Variable (from very low to very high). For new products
Quality imported from developed countries is initially perceived as Stable good quality
VERY HIGH
High variation. Perceived prices are very high especially for
Price levels and variation new imported products. Very cheap local alternatives are Low variation. A tendency for prices to fall
Pricing generally available.

Price elasticity / sensitivity Visible price elasticity. Price skimming is observed. High price elasticity

Sources: Based on Economist Intelligence Unit (2010)

Figure 2.26d A comparison of the Russian market versus developed

markets: Differences in terms of business environment
Russia Developed markets (US, UK, Germany, Japan)
Many foreign multinational companies are now market leaders or
Domination (shares of players) important players in non-alcoholic drinks, bottled water, alcoholic A majority of segments is dominated by few multinationals
drinks (excluding vodka), confectionery, coffee and tea.
Domestic players consist mainly of small and medium-sized
Fragmentation (number of companies. Although large domestic companies dominate the
players) juice, meat and vodka markets, other segments (bakery, dairy, Considerable number of local small players with minor shares
cereals, and fruit and vegetables) remain relatively fragmented.
Quality of competition Varies across categories, however, still very easy to enter Very high
Competitive
rivalry Likelihood of new entrants Very high Very low for traditional segments

Depends on the nature of the product, branding, cultural and

Time to be established Hardly possible to stay in the market within 2 years
economic barriers (typically from 1 to 5 years)
Very late for traditional categories, early entry is possible for
Order of entry Varies across categories. Early entry is still possible
niche segments
Ranges from 100% at initial stage to 20% at maturity stage (with
Maximum share/sales potential
1 competitor - 59% share, 2 - 44%, 3- 36%, 4 -31%, 5 - 28% Negligible (<2%) for traditional markets
for a new entrant
etc.)
Generally low investments in R&D,while high in advertising,
Investments, Costs promotion and distribution. In case of domestic production - Potentially very high
direct investment in manufacturing facilities
Finance Reward - Profitability, ROI,
High margins. Reward may be significant due to price skimming Very low margin due to highly competitive environment
margin
High risk associated with local consumption habits and cultural High due to competition and despite of high market predictability
Risk - Probability of Loss
barriers and use of marketing research
The country's vast territory and underdeveloped distribution Distribution have become more concentrated among fewer
Distribution
channels limit sales opportunities players, owing to mergers and acquisitions
Vast majority of FMCG is imported (food FMCG is around 40%,
non-food FMCG is above 50%). Russia is a net importer of food The US has a strong and diversified agricultural sector and
Suppliers products and raw agricultural goods fordomestic processing. The numerous well established food-processing and manufacturing
main imports are meat, poultry, fish, milk and milk products, companies that supply most domestic needs.
Infrastructure cheese, vegetables, and raw sugar.
/Environment
The Russian retail market is extremely fragmented, and only in Retail distribution is concentrated among few national chains.
Moscow and St Petersburg has there been consolidation. Wal-Mart is by far the leader in retailing. Smaller independent
Retail channels
Nationwide, the top five grocers have a combined share of players have become less important in terms of
around 15% of modern grocery distribution. retail sales and distribution.

Regulations Possible difficulties with product certification Regulatory pressures play considerable role

Sources: Based on Economist Intelligence Unit (2010)

A comparison of business environments has shown, that launching a new product is

very risky both in the Russian and “developed” markets, because of various reasons,

though (See Figure 2.26d). In the case of “developed” market the risk is mainly due

to the aggressive competitive environment and the lack of market niches. While in

the case of the Russian market the risk is associated with consumer acceptance and

50
market infrastructure. New product launches in both markets require substantial

investment, particularly in promotion.

An analysis of trends in the particular FMCG markets has revealed that a large

majority of FMCG markets in Russia are not yet saturated as compared to the US,

UK, Germany and Japan (Datamonotor, 2010). In terms of volume, the only

saturated FMCG markets in Russia are beer and spirits, while the expected growth

by 2013 for some other categories varies from +5% (traditional milk) to 37%

(snacks). Just for comparison, the largest increase expected on the “developed”

market is 14% for soft drinks in the UK. Concerning Russian food market growth in

value terms, it is expected to reach +67% by 2013%, which is more than threefold

higher than that in Europe and more than tenfold higher than that in the US and

Japan. (See Figure 2.27).

Figure 2.27 Unlike developed markets of US, UK, Germany and Japan, a large majority of
Russian FMCG markets are at the growth stage and are expected to deliver a
strong double-digit growth by 2013, both in volume and value terms
Russia US Germany UK Japan
Sales in Growth Sales in Growth Sales in Growth Sales in Growth Sales in Growth
2009 by 2013 2009 by 2013 2009 by 2013 2009 by 2013 2009 by 2013
VOLUME PER CAPITA:
Savory Snacks kg p/c 1.7 +36% 5.9 +7% 3.2 +9% 7.2 +11% 6.8 +10%
Soft Drinks litres p/c 108.9 +29% 403.1 +10% 312.8 +9% 203.6 +14% 140.0 +9%
Hair care units p/c 4.3 +23% 5.6 -10% 6.2 -0% 8.2 -1% 7.1 +3%
Make up units p/c 1.5 +21% 2.5 -1% 1.9 +5% 2.9 +11% 2.5 +4%
Confectionery kg p/c 9.3 +17% 12.1 +4% 13.9 +6% 14.9 -0% 3.9 +4%
Meat kg p/c 46.8 +12% 91.4 +0% 84.0 +2% 72.9 +0% 34.4 +3%
Fish kg p/c 19.5 +7% 23.4 +2% 14.4 +1% 19.2 -2% 65.7 +2%
Fruit kg p/c 75.3 +6% 124.2 +3% 136.2 +1% 145.3 +5% 59.1 +2%
Hot Drinks (Tea, Coffee) kg p/c 2.0 +6% 2.5 -3% 4.3 +7% 2.6 -2% 2.1 +5%
Vegetables kg p/c 114.5 +5% 125.4 +2% 134.0 +1% 135.2 +5% 130.0 +2%
Milk litres p/c 170.0 +5% 268.9 +3% 260.3 +3% 236.7 -2% 68.1 +3%
Alcoholic Drinks litres p/c 90.2 +0% 99.5 -1% 144.4 -3% 128.3 -11% 70.1 +1%
Beer litres p/c 70.0 -3% 83.5 -2% 109.0 -4% 84.0 -18% 51.4 +1%
VALUE PER CAPITA:
All food US$ p/c 1 400.3 +57% 2 974.6 +7% 3 297.1 +16% 2 785.1 +23% 4 327.3 +4%
Savory Snacks US$ p/c 8.7 +38% 59.7 +14% 27.8 +13% 84.0 +18% 87.3 +12%
Make up US$ p/c 11.1 +38% 20.1 +2% 22.3 +12% 28.9 +17% 34.1 +6%
OTC Pharma US$ p/c 38.9 +36% 79.9 +8% 109.5 -1% 92.1 +1% 74.7 +7%
Dairy (all products) US$ p/c 95.5 +33% 154.3 +14% 285.0 +6% 279.5 +14% 133.8 +14%
Soft Drinks US$ p/c 91.9 +25% 391.1 +6% 413.0 +10% 415.2 +18% 288.7 +6%
Hair care US$ p/c 9.2 +25% 24.0 -7% 31.3 +2% 29.2 +0% 38.6 +5%
Household products US$ p/c 24.8 +24% 56.8 +0% 60.4 +5% 101.8 +5% 51.1 +9%
Confectionery US$ p/c 73.6 +22% 110.6 +7% 155.8 +7% 219.7 +5% 61.4 +5%
Alcoholic Drinks US$ p/c 445.5 +14% 502.0 +2% 1 402.1 +0% 1 126.1 -5% 412.0 -2%
Hot Drinks (Tea, Coffee) US$ p/c 30.4 +11% 30.3 +3% 84.5 +9% 54.9 +3% 27.4 +6%
Tobacco US$ p/c 118.8 +10% 324.5 +6% 306.8 +8% 368.3 +5% 305.3 +17%
Beer US$ p/c 200.1 +6% 259.6 -0% 742.8 -0% 664.0 -15% 221.9 -2%

Color coding for growth = Strong Growth, >

rates: Green 11% Yellow = Close to saturation (3-10%) Red = Saturation / Decline (<3%)

Source: Datamonitor (2010)

The analysis above has confirmed that Russian FMCG market is dramatically

different in comparison to “developed” markets, such as the US, the UK, Germany

and Japan. While the latter markets are at the stage of “saturation or decline”,

Russian market is at the stage of strong growth. The promotional strategies

51
employed in these markets and the types of new product launches are dramatically

different as well. Moreover, as discussed earlier, Russian market has become an

arena for expansion of the biggest multinationals that pursue “market development”

strategies. In the “developed” markets, a number of new products are regarded as

“product/price improvements” and “brand-extensions” - as it was shown on Figure

2.2. The analysis performed above allows to hypothesize about: (1) considerable

skew towards “new-to-the-country”, “new-to-the firm” products in the growing Russian

FMCG market (2) differences in the process of launching new products (3)

differences in sales forecasting techniques, involving differences in the use of test

marketing, and Simulated Test Marketing in particular. This will be considered in the

next chapters.

2.4.2 Specifics of new product development and launches in Russia

As discussed earlier, the concept of “stage gate” is widely used in the “developed”

markets for effective management of NPD. Indeed, a thorough time-consuming

elaboration of new product concept is required in order to overcome strong

competitive barriers. The Russian market is very specific due to its size, booming

demand, low saturation and underdeveloped infrastructure, therefore, the key issue

here is not the competition, but uncertainty about sales mechanics, infrastructure,

general economic environment and consumer acceptance. Although there are not

many academic sources available on that topic, the analysis of available information

has given some vital clues about new product launching in Russia, such as: (1)

absence or a very short R&D stage, (2) time-consuming efforts around sales

infrastructure, (3) short turnover cycles and short-term horizon of planning, (4)

importance of “branding” and its adaptation (see Figure 2.28a overleaf). Also, it is

worthy to note the following specifics of the Russian market: (1) lower conservatism

of consumers than that in the developed markets, (2) high importance of social

networking, (3) lack of reliable market information, that undermines general trust in

52
marketing research, (4) rising need for trustworthy research techniques applicable to

the local market, (5) considerable regulation barriers, (6) issues with confidentiality

(see Figure 2.28b)

Figure 2.28a Specifics of new product development and launches in Russia (1)

WHAT MAKES THE LAUNCH SO DIFFERENT IN RUSSIA? IMPLICATIONS:

Economist Intelligence Unit (2010), Rosstat (2010):
High demand for quality imported products, a considerable portion of
products is directly imported (e.g. 40% of food is imported, over 70% non- None or a very short R&D stage. Low focus on local NPD
food)
Underdeveloped infrastructure, retail and distribution channels (e.g.
Significant time-consuming effort into building infrastructure, setting up
Small independent food stores and open markets still account for 75% of
operations, sales and distibution, other market entry procedures
retail market)
Price inflation (e.g. food price inflation 22% per year) and overall market Short turn-over cycle, quick selling, short-term horizon of planning (<3
volatility years)
The need to be quick in capturing long-term market opportunities. Less
Unsaturated market, consumer boom (e.g. expected retail sales growth at aggressive competitive environment. Lower risk of marketing mistake,
around 5% p.a. from 2009 onwards) "everything sells". No established need for sophisticated time-
consuming marketing research before the launch
A tendency for customization of products to local needs (e.g. soft drinks -
Rising need for local R&D
kvas, mors, traditional dairy)
Lagging behing "developed markets" and some "emerging" markets Sales forecasting is often based on the "analogy" principle
Schorsch (2009):
"Compettition and customer habits are not the foremost challenges on the
Russian market. Instead, companies struggle with infrastructure deficit,
Higher emphasis on setting up sales infrastracture than on marketing
bureaucracy, corruption and labor shortage… These challenges is first
priority for companies, marketing comes second" (p.72)
Many multinationals sell the same product as in the original market, only
Local consumer preferences and culture should not be ignored, though
packaging and commercials are customized
Russian consumers "live in constant fear of fake or in other ways inferior
products", "firmly believe in the relationship between price and quality",
ready to pay extra for "a brand", "through buying brands, the Russian Nevertheless, effective marketing and relevant communication are
consumer wishes to show his social status and integrete himself into very strong drivers of new product's success
society", "there's no such thing as 'smart shopper' and very little space for
individualism", share of private labels does not exceed 4% (p.70-75)

Source: Economist Intelligence Unit (2010), Rosstat (2010), Schorsch (2009)

Figure 2.28b Specifics of new product development and launches in Russia (2)

WHAT MAKES THE LAUNCH SO DIFFERENT IN RUSSIA? IMPLICATIONS:

Schorsch (2009):
"Russian consumers are usually well informed, interested in technical
Considerable group of "innovators" boosts the adoption of new
details open for innovations and full believers in technological progress.
product
The later is heritage of the Soviet Union" (p.71)
"the quality of Russian advertising is usually mediocre to horrible,
High quality adaptation of product offer is essential.
especially in greater cities with western business communities"
"Another heritage of Soviet Union is the mindset of population…Social Social networking is crucial in sales or any other business operations.
relations, social networks became a mean of survival, providing the safety In sales planning social relationships MUST be taken into account. In
the state is unable or unwilling to give", "networking for promotion is terms of mass marketing Wors-Of-Mouth is very important, i.e.
essential for Russia" (p.80-86) attractiveness of new product must be tested in that regard
"Russia is a country with a mixed European and Asiatic roots" (p.53). Local consumer preferences and cultural specifics must be taken into
Asiatic to some extent, but heavily influenced by European culture account in the process of marketing planning
Kachalov (2008):
Lack of reliable information about the market and competitors. Low
Lack of thrust to marketing research and market information. Lower
accuracy of available sources (40-50% on average)
accuracy of forecast than that for developed markets.
Hardly predictable and unstable local economic environment
Growing need for reliable sales forecasting and planning techniques.
90% accuracy of sales planning for next year can be achieved with quite
Effectiveness of quick simple transparent techniques. Recognition of
simple and straighforward approaches
the fact that high accuracy is hardly achievable in the russian market
Usinier (2000):
It is accepted that local consumption pattern is not exactly the same as in
the "developed" markets. It is argued that there's certain cultural similarity Local consumer preferences and cultural specifics must be taken into
between Russia and Slavic Eastern European and Central Asian account in the process of marketing planning
countries
PricewaterhouseCoopers (2010):
Considerable regulation barriers (e.g. export, customs related ussies,
Significant time-consuming effort into building infrastructure, setting up
excessive , underdeveloped legal framework - pointed out by 86% of
operations
surveyed companies)
Lack of procedures for assessing risk and return on investments Growing need for reliable sales forecasting and planning techniques.
Insufficient protection of intellectual property, leaks of confidential
High security is required in the process of NPD and launch
information

Source: Schorsch (2009), Kachalov (2008), Usinier (2000), PricewaterhouseCoopers (2010)

53
Although there is a visible lack of academic research on NPD in Russia and no

reliable statistics, the topic is being extensively discussed in the local periodical

business literature (such as “Sales Business”, “Advertising Industry”, “Advertising

Ideas”, “Company” magazines) as well as in the professional internet forums (such

as www.sostav.ru). It becomes evident from the discussion that “stage-gate” model

is rarely employed in Russia, and a majority of actual users are largest

multinationals. However, even if the framework is used there are significant

differences in the process as compared to “developed” countries (Burdey et al, 1999,

Agaeva, 2008). As per discussion, in Russia, the standard flow of “Stage-Gate”

activities is heavily influenced by the sense of business urgency, driven by desire to

capture rapidly emerging market opportunities as soon as possible and skim

considerable short-term profit (see Figure 2.29).

Figure 2.29 The standard flow of “Stage-Gate” activities is heavily influenced by the
business urgency, i.e. “market penetration” and gaining short-term profit

Very often: Very often: Very often: Very often: Very often:
1. R&D is omitted 1. Arbitrary 1. Lack of market 1. Skipped or 1. Rough short-
2. Preliminary need 2. Not systematic information half-done term
assessment is 3. Consumer 2. Operational and due to plans, clashes
very rough and opinion is infrastructure urgency 2. Difficulties with
market analysis ignored or complexities and rapidly establishing
is poor overemphasized changing sales
3. No systematic 4. Inadequate market infrastructure
approach to research tools environme 3. Lack of
generating new used nt investment
product ideas 4. Stopped if no
4. Ideas are simply immediate
transferred from profit
the developed
markets Source: Based on Agaeva M. (2008), Burdey K. et al (1999), Belotserkovskaya, O (2005),

For example, at the current stage of market development in Russia, the need for

marketing research is still being discussed (Belotserkovskaya et al, 2005, Agaeva,

2008). Still, the culture of its use is not widely established (Burdey et al, 2010).

According to Burdey et al (1999), a co-founder of an independent local marketing

54
research agency, the specifics in developing and launching new products in Russia

are the following: (1) tight time schedules, sometimes lasting for only 2-3 months

from the moment of project idea, (2) arbitrary decisions, i.e. authoritative style of

decision making about what product is to be launched, when and how, (3) prioritizing

“product” over “consumer”, i.e. building promotional strategy around the product, and

not around consumer needs, “inventing” and developing consumer needs that may

suit product features, (4) focus on “western” products, i.e. imported products as well

as “imported” lifestyles, (5) “pseudo-new” products, i.e. changing the original product

formula in order to cut the cost, but selling it as a novelty, (6) volatile economic

environment negatively affects domestic production of new products. As practice has

shown (Burdey et al, 2010), the major reasons of failures in the Russian FMCG

market are: (1) “inadequate” product idea supported and pushed by the top-

management, (2) loss of focus on consumer needs, too much emphasis on product,

(3) ignorance of marketing research or its very poor quality or its improper use or

misinterpretation of findings, (4) lack of support from top-management, (5) high

profits expected immediately, (6) chaotic process of new product development and

launching, (7) unclear responsibilities within the company, resulting in appearance of

a new product as a compromise solution between departments, good for the

company but a definite failure in the marketplace, (8) inappropriate pricing , too high

or too low (9) poor quality control, i.e. inability to maintain consistent quality, (10)

wrong time for product launch, i.e. market is not ready or not established, (11) issues

with retailers, distribution or supply chain, i.e. high entrance fees, poor coverage, out-

of-stocks or over-stocks, inconsistency between advertising campaign and product

appearance on trade. This leads to a conclusion that currently existing practice of

NPD is dramatically different to that in the “developed” economies, and is a result of

rapid economic development in Russia.

55
2.5 Key findings

A thorough analysis performed in Chapter 2 above has resulted in the following key

findings about new product development in Russia:

 Russian market is dramatically different as compared to “developed” markets in

terms of its global role (import of ready-made FMCG products vs. export), life

stage (“growth” vs. “saturation decline”), consumer needs (“products” vs.

“services”), dominant marketing strategies (“attack” vs. “defense”) as well as in

terms of promotional tools, infrastructure and environment;

 The number of “new-to-the-country”, “new-to-the-firm” product launches is

significantly higher than that in the “developed” markets;

 The process of new product development is radically different as compared to

“developed” markets, driven by the sense of business urgency and desire to

capture emerging market opportunities. Due to the “import-oriented” nature of

operations, in a majority of cases, the process of new product introduction is

characterized by a very short R&D stage, transferring product ideas (or products)

from other markets, inadequate use of marketing research tools, high emphasis

on building sales infrastructure, short-term horizon of planning, focus on

immediate profit skimming.

56
 CHAPTER 3

MARKETING RESEARCH AND SALES FORECASTING

FOR NEW FMCG PRODUCTS

3.1 The role of marketing research in the NPD process

As defined in “The Marketing Glossary”, effective marketing decision-making

“requires accumulating information that relates to a specific market situation or

problem. Marketing research refers to the process of collecting, analyzing and

reporting this information” (Clemente, 2002, p.246). This is “one of the most

important and fascinating facets of marketing” and one of the vital functions within all

organizations involved in the FMCG business (Malhotra, 2007, p.2). According to

Malhotra (2007, p.13), “the task of marketing research is to assess the information

needs and provide management with relevant, accurate, reliable, valid, current and

actionable information. Today’s competitive marketing environment and the ever-

increasing costs attributed to poor decision-making require marketing research to

provide sound information. Sound decisions are not based on gut feeling, intuition or

even pure judgement”. Tull and Hawkins (1993) argue that a single purpose of

marketing research is “providing information that assist marketing managers to make

better decisions”. The information required can be obtained from various primary and

secondary sources, using qualitative and quantitative techniques (Malhotra, 2007).

These sources include consumers, retailers, distributors and wholesalers, suppliers,

competitors, officials, experts, technicians and scientists, other business agents

(Clemente, 2002). However, consumer opinion remains central to marketing

research, particularly in the process of new product development (Groucutt, 2005).

The past few decades saw an enormous popularity of marketing research as well as

its dramatic influence on decision making in the FMCG sector. The negative side of

such a process was standardization and poorly thought out application of

“productized” marketing research, that undermined the effectiveness of NPD in many

57
leading multinational companies (Christensen, 1997). As pointed out by von Hippel

and Thomke (2002, p.74), the marketing mantra that has dominated the market so

far, i.e. “listen carefully to what your customers want and then respond with new

products that meet or exceed their needs" does not always work in case of new

product development. As it was discussed earlier in Chapter 2, NPD processes may

differ depending upon the type of new product. Following that logic, Hart et al (1999)

and Trott (2001, 2008) suggested that standardized approach to marketing research

is not equally effective in all cases of new products. Although the great majority of

authors (Trott, 2008, von Hippel et al, 2002, 2005, Christensen, 1997, Malhotra,

2007, Tull and Hawkins, 1993 etc) recognize the fundamental role of marketing

research in the process of NPD, they point out its twofold effect: marketing research

may be either destructive in the case of improper use or extremely helpful in the case

of thoughtful application.

3.2 Aligning marketing research with NPD process: key tools and approaches

The key information needs addressed by marketing research in the traditional “stage-

gate” process are summarized by Hart et al (1999) (See Figure 3.1).

Figure 3.1 Information needs addressed by Marketing Research in the NPD

Market Research Information needed for the
Stage of development Sources of information Likely output of stage
stage; Nature of information
Generated as part of Generated as part of
Preliminary market and technical analysis; continuous Management continuous Management
Explicit Statement of strategy
company objectives Information System and Information System and
corporate planning corporate planning
Inside company:
salesmen, technical
Assembling Knowledge and Customer needs and technical developments in Body of initially acceptable
functions. Outside
Idea Generation previously identified markets ideas
company: customers,
competitors, inventors
Assessment of whether there is a market for Main internal functions:
this type of product, and the company can make R&D, Sales, Marketing, Ideas which are
Screening ideas: finding those
it. Assessment of financial implications. Finance, Production. acceptable for further
with most potential
Knowledge of company goals and assessment Outside the company: development
of fit customers
Identification of: key
Scoping (Concept development
Extensive research with attributes that need to be
and Screening): turning an idea Explicit assessment of customer needs to
customers; Input from incorporated in the
into a recognizable product appraise market potential. Explicit assessment
marketing and technical product, major technical
concept, with attributed and of technical requirements
functions costs, target markets and
market position identified
potential
Build business case: full Fullest information thus far: detailed market Development plan and
Main internal functions;
analysis of the proposals in analysis, explicit technical feasibility - and cost- budget specification;
Customers
terms of its business potential production implications - corporate objective marketing plan options

Development: crystallizing the

product into semi-finalized Production information to check "makeability" Production Product Options
shape

Testing and validation: small-
and large-scale tests with
customers
Launch
Customers; Surveys
Profile of new product performance in light of
(Tests and Test Final go/no go for launch;
competition, promotion and marketing mix
Marketing); Production; Final marketing plan
variables
Sales
Full-scale launch: Sales
Test market results and report; Monitoring
Customers;Sales performance; Customer
launch performance
acceptance

Source: Based on Hart et al (1999), Cooper et al (2010)

58
As it seen from the figure, marketing research is crucial to success of a new FMCG

product. The industry of marketing research has developed numerous tools and

approaches aimed to deliver information that is required at each stage of product

development (Belliveau et al, 2002, Malhotra, 2007, Tull and Hawkins, 1993, Davis,

1997, Duboff and Spaeth, 2000, Wind and Green, 2004, Bagozzi, 1997, Burton et al,

1986, Shim, 2000, Hanke et al, 2001, Webb , 1992, Franses and Paap, 2007, Urban

and Hauser, 1993, Lilien et al, 1992, 2007, Clancy et al, 1994, 2006, Farris, 2006,

Davis, 2007, Thomas, 1993 etc.). Regardless of general methodology and data

collection principles, these tools can be divided into several groups and sub-groups,

according to their functional role in the business process: (1) “problem identification

research” or “exploratory”, and (2) “problem-solving research” or “confirmatory”

(Malhotra, 2007, Hart et al, 1999). One of the most rigorous classifications is offered

by Malhotra (2007) (See Figure 3.2)

Figure 3.2 The most rigorous classification of Marketing Research by Malhotra

Marketing Research

Problem Identification Problem Solving

• Market Potential research

• Market Share research
• Image Research
• Market Characteristics
research
• Segmentation research
• Sales Analysis research
• Shopper/Retail research
• Forecasting research
• Business Trends research
Segmentation
• Determine basis of segmentation
• Establish market potential for segments
• Select target markets
• Create consumer profiles
Product, Positioning, Pack Promo / Advertising
• Test concept • Optimal promotional budget
• Optimal product design • Sales promotion relationship
• Package tests • Optimal promotional mix
• Product modification • Copy decisions
• Brand positioning • Media decisions
• Test marketing • Creative advertising testing
• Control store tests • Claim substantiation
• Evaluation of advertising
effectiveness
Pricing Retail/ Distribution
• Importance of price in brand selection • Type of distribution
• Pricing policies • Attitude of channel members and
• Product line pricing shoppers
• Price elasticity of demand • Retail coverage
• Response to price changes • Channel margins
• Trade research
• In-store observations
• Location of outlets

Source: Adapted from Malhotra (2007, p.8,9)

It is worthy to note that despite of serious conceptual differences, “exploratory” and

“confirmatory” techniques “go hand in hand, and a given marketing research project

may combine both types of research”. (Malhotra, 2007, p. 9). For example, complex

59
studies such as market segmentation can be classified as both “problem

identification” and “problem solving”. Insights provided by “exploratory” studies are

often used at the “strategic planning” phase of NPD due to their strategic nature,

while “problem solving” techniques are employed at later stages. The major task of

“exploratory” studies is to clearly identify the issue and address it with the launch of

specific new product, such as “new-to-the-firm”, etc. (See Figure 3.3)

Figure 3.3 The types of new product developed by the company must be strictly
determined by the strategy

Business Process: Marketing Research:

What’s the current state of the business? Provides relevant information to address business
What should be the next steps? questions and support decision making

Business Review. “Problem Identification” Research:

Strategic Planning Market Potential Research (Quant / Expert),
Market Share Research (Quant / Expert),
Market Characteristics Research (Quant / Expert)
Sales Analysis Research (Quant)
Long-term vision,
Segmentation Research (Quant / Qual)
Mid- or short-term goals, Image Research (Quant / Quali),
Strategies Shopper / Retail Research (Quant / Qual)
(Corporate positioning, Strategic Forecasting research (Expert / Quant)
directions, Business and Product) Business Trends Research (Expert / Quant / Qual)

“Problem Solving” Research:

“New-To-The-Firm”

“Line Extensions”

“Brand re-launch”

Segmentation Research (Qual / Quant),

“Product / Price
“New-To-The-

“New-To-The-

Concept / Product Research (Qual / Quant) ,

Stretching”
Country”

Pricing research (Quant)

Change”
“Brand
World”

Advertising / Promotional research (Qual/Quant)

Distribution Research (Quant/ Expert)
Shopper / Retail Research (Quant / Qual)
Forecasting research (Expert, Quant)

Source: Malhotra (2009), Tull et al (1993), Groucutt (2005), Shim(2000), Webb et al (1992),Trott (2008)

A very detailed review of marketing research tool is beyond the scope of the present

work, however, as literature review has shown (Belliveau et al, 2002, Malhotra, 2007,

Peng and Finn, 2008, Tull and Hawkins, 1993, Davis, 1997, Duboff and Spaeth,

2000, Wind and Green, 2004, Bagozzi, 1997, Burton et al, 1986, Shim, 2000, Hanke

et al, 2001, Webb , 1992, Franses and Paap, 2007, Urban and Hauser, 1993, Lilien

et al, 1992, 2007, Clancy et al, 1994, 2006, Farris, 2006, Davis, 2007, Trott, 2008,

Groucutt, 2005, Rossiter and Percy, 1987 etc.)., there are several broad groups of

research techniques utilized in the process of new product development and

launching. These are: (1) Qualitative tools - providing insights, helping to generate

ideas and understand the nature of the problem; these tools include focus‐groups,

60
brainstorming and ideation sessions, in-depth interviews etc., (2) Quantitative

diagnostic tests - seeking to quantify consumer reaction to particular marketing mix

elements with no attempt to forecast sales directly - such as concept tests,

advertising tests, product tests, price tests, pack tests, (3) Quantitative tests for

particular marketing mix elements comprising both diagnostic research and sales

assessment, such as conjoint – the “joint” analysis of various attributes, e.g. price

and product characteristics and their impact on preferences and market share, (4)

Simulated Test Marketing (STM) or Volumetric Bundle Tests – a quantitative test for

a full set of marketing mix components that simulates the launch of a new product

upon a representative sample of potential buyers and provides sales forecast with an

accuracy of over +/- 30% (another definition by U.S. Advertising Research

Foundation is as follows – “An STM is a marketing research project which attempts to

combine consumer interviews with a standardized data-gathering procedure, usually

in the form of a questionnaire, with a computer model of behavior to produce an

estimate of actual sales volume for a new product or line extension” (Baldinger, 1988,

p.3), (5) Traditional test market – controlled sales of new product in a sample of real

stores during a period of several months, (6) Econometric sales forecasting based

on historical market data, trends and accumulated periodical business statistics

(retail audit, consumer tracking, household panel, industry statistics, media etc), (7)

Strategic “exploratory” studies, such as consumer segmentations, (8) Expert analysis

and assessments, such as Delphi (or “consensus”) forecasting. However, as

discussed above, the set of marketing research tools employed may be different for

various types of new products. The specifics are discussed below.

3.2.1 Specifics of marketing research for “New-to-the-world” products.

The analysis of available literature sources listed above has helped to crystallize and

develop a number of specific recommendations on marketing research for “new-to-

the-world” products, for each particular stage of new product development process.

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Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

Specifics: It is important to make sure that expert assessments and research on

emerging social and technological trends in the areas of company’s strategic interest

are available (i.e. the areas of business where a firm is planning to develop their new

competences). The sources may include such services as Trendwatching,

Datamonitor etc. It is essential to collect and structure available information on recent

technological developments and patens in the area of interest as well as gather

competitive intelligence. It is advisable to seek suggestions from employees, partners

and suppliers. The most important piece of useful information should come from

strategic economic reviews on emerging markets, industries and consumer needs

(for example, official statistics, expert estimations, strategic “exploratory” consumer

surveys such as Target Group Index, see www.tgisurveys.com). Concerning

revealed trends, it is vital to identify “lead users” or “opinion leaders” within each

trend (i.e. find individuals that are on top of the trend) and study in advance their

lifestyle and product preferences.

Output: a set of materials for ideation sessions, prepared in a concise and clear form.

Discovery Stage – Ideation.

Tools: Qualitative Ideation Sessions, Brainstorming.

Specifics: While conducting ideation sessions, it is recommended to incorporate “lead

users” in the mixed groups of specialists from various fields of expertise. It is

advisable to assign each team a specific trend to work on.

Output: Ideas in the textual and graphic forms, above 20 items.

Gate 1: Idea screening

Tools: Screening by consumers as well as by experts (Technical, Business).

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Specifics: Although researchers usually seek for ideas, which score very high in

terms of Purchase Intention (PI), in the case of “new-to-the-world” product there will

be only a few or none such ideas – due to a natural conservatism of majority of

consumers. Instead, it is recommended to focus on ideas received low PI, but very

high “differentiation” scores. These ideas should be double-tested on the basis of

“lead users”, using the same screening technique. In case of positive feedback from

“lead users” it is advisable to consider further development of the product involving

“lead users” community, as suggested by von Hippel (2002, 2005). At this stage it is

worthy to save “less promising” ideas for further use in the next rounds of idea

generation.

Output: Ideas in textual and graphic forms, up to 10 items.

Stage 1: Scoping / Concept Generation

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers).

Specifics: The best results may be achieved with an active participation of “lead

users”, given the freedom to drive the process.

Concepts: Up to 10 concepts in the standard format, i.e. product name/headline,

draft product picture, product statement (insight, reason-to-believe, benefit, end line),

preliminary product information (price, weight, features).

Gate 2: Second Screen / Concept Screening

Tools: Screening by consumers (Quantitative Concept Screening), Qualitative and

Quantitative ad hoc studies

Specifics: Same recommendations as for idea screening. In this particular case the

stringency of selection can be reduced. If the concept is perceived positively only by

“lead users” and not by a majority of consumers, it is advisable to identify barriers

using concept test data or conduct a separate study (qualitative or quantitative). It is

recommended to make rough estimates of diffusion rate, roughly project long-term

sales potential using expert techniques and modeling.

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Output: up to 5 concepts

Stages 2,3: Build business case / Development

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers),

Strategic “exploratory” marketing research (media, retail, consumer)

Specifics: While planning, it is important to remember that aggressive national launch

will likely lead to failure. It is recommended to consider: (1) significant amount of

time, required to create the need for a completely new product in consumers’ minds,

(2) high financial risks associated with investments in infrastructure, production and

promotion, (3) unstable sales in the beginning of introduction, (4) high rate of product

modifications, (5) niche or focus product positioning in a majority of cases, (6) limited

number of actual consumers at early stage of market (i.e. innovators, early adopters,

up to 10% of total potential consumer base). Concerning product development and

communication, the inputs from “lead users” should be significant to ensure rapid

adoption and avoid unnecessary iterations with screening.

Output: up to 5 product prototypes and business plans

Stage 4: Testing and Validation

Tools: Test marketing, Quantitative tests of marketing mix elements, Strategic

“exploratory” marketing research (media, retail, consumer)

Specifics: In many cases of “new-to-the-world” products, traditional test markets may

actually be considered as product launch (or vice versa) due to a very narrow target

market. If using quantitative tests, researchers have to be ready for a number of re-

iterations due to frequent changes in product characteristics, positioning and

consumer requirements. Therefore, employing costly “large-scale” research

techniques designed to test the whole marketing mix in a single “bundle” (e.g.

Simulated Test Marketing) makes little practical sense. Instead, it is advised to run a

few simple separate studies in order get basic consumers’ response (including

feedback from “lead users’”) on product, pricing, positioning, possible barriers for

64
adoption. While sales forecasting, it is advised to focus on short-term projections

utilizing expert techniques - due to high market fluctuations. Nevertheless, marketers

need to try to identify the moment of “crossing the chasm” (Moore, 2002), i.e. the

point where the market enters the stage of rapid growth.

Output: up to 2 new product offers.

Stage 5: Launch / Post Launch validation

Tools: PR, Customer satisfaction, Media tracking, Sales statistics

Specifics: According to Trott (2008), it takes much longer time to launch a “new-to-

the-world” product as compared to the other types of new products. The focus in

promotional plan needs to be made on the community of “lead users” and “opinion

leaders”, viewing them as “trend-setters”. In a majority cases, at this stage there is no

need in conducting expensive tracking studies (such as advertising effectiveness,

retail audit etc). However, considerable attention should be paid to gathering direct

feedback from consumers, retailers, production, sales representatives. Their

suggestions on product improvement and promotional tactics must be immediately

processed to ensure rapid and widespread product adoption. Also, it is

recommended to track evolving consumer perceptions by monitoring discussion

around the product in the mass media.

Output: sales, feedback from key agents of product launch (consumer, retailer etc).

3.2.2 Specifics of marketing research for “New-to-the-Firm” products.

The synthesis of views on marketing research for “new-to-the-firm” products, which is

presented below, is based on the literature sources listed in Section 3.2.

Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

65
Specifics: The central role at this stage is played by the information about recent

novelties on the market (e.g. Datamonitor MarketWatch), successful product

launches, patents and competitive activities. It is important to utilize strategic

“exploratory” studies (such as segmentations or expert reviews) and gather relevant

data on market size, dynamics, growth potential, structure and consumers. A

particular attention should be given to suggestions of employees, partners and

suppliers. It is desirable, but not obligatory to collect information about “lead users”

and “opinion leaders”, i.e. lifestyle, product preferences etc. However, it is worthwhile

making an estimate of their incidence, which should normally exceed 20% of total

potential audience, comprising “innovators”, “early adopters” and “early majority”.

Output: a set of materials for ideation sessions, prepared in a concise and clear form.

Discovery Stage – Ideation.

Tools: Qualitative Ideation Sessions, Brainstorming.

Specifics: Participation of “lead users” in ideation group works is desirable, though

not obligatory in case information about their lifestyle and preferences is available

(qualitative and quantitative studies, observations).

Output: Ideas in textual and graphic forms, 10-20 items.

Gate 1: Idea screening

Tools: Screening by consumers (Quantitative Idea Screening) as well as by experts

Specifics: It is recommended to go ahead with ideas showing high purchase intent

(PI) on total audience, however, paying attention to those with high level of

differentiation. It is advisable to consider a boost of “lead users” for separate analysis

of this group. When necessary, consider additional qualitative sessions with “lead

users”.

Output: Ideas in the textual and graphic forms, 5-10 items.

Stage 1: Scoping / Concept Generation

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers).

66
Specifics: It is possible not to involve “lead users” in the concept generation, if

sufficient information about their preferences is collected during previous stages.

Concepts: Up to 10 concepts in the standard format (see Section 3.2.1).

Gate 2: Second Screen / Concept Screening

Tools: Screening by consumers (Quantitative Concept Screening).

Specifics: Same recommendations as for idea screening. A successful concept

should exhibit high sales potential on total audience, however, “lead users” opinion

must be considered as well.

Output: 2-3 concepts

Stages 2,3: Build business case / Development

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers),

Strategic “exploratory” marketing research (media, retail, consumer)

Specifics: In case of sustainable and rapid growth of the market, it is advised to start

with the development of a long-term promotional strategy, performing “break-even”

analysis etc. The next step is usually a mid-term planning of product launch (i.e.

media planning, sales and production plans).

Output: 1-2 product offers, along with 2-3 marketing plans per offer

Stage 4: Testing and Validation

Tools: Quantitative tests of marketing mix elements (Product, Pricing,

Advertising/Communication, Pack / Place-of-purchase, Positioning), Simulated Test

Marketing

Specifics: Rapidly growing markets may experience dramatic changes in terms of

structure, number of players - over a relatively short period of time. However, at this

stage the market is nearly shaped (i.e. consumer needs are generally identified) and,

therefore, market potential can be roughly estimated. With that, market testing needs

to be quick, delays with the launch may result in missing opportunities and losing

market share to competitors. Therefore, at this stage the system of testing should

67
produce accurate assessment of marketing mix components and assist in revealing

barriers for further sales growth. The process should be flexible, fast and confidential.

At the same time, it should not be costly or demanding in terms of study materials

(i.e. ready commercials, packs, quantity of products to test). The option of precise

sales forecasting is not mandatory as normally projections does not exceed 30%

accuracy due to significant market fluctuations and lack of important pieces of

information (as discussed above). The key recommended techniques are:

quantitative tests of marketing mix elements, volumetric “bundle” tests or simple

flexible models of Simulated Test Marketing providing detailed diagnostics of

performance in competitive environment along with preliminary projection of future

sales. Traditional Test Marketing is not always the best solution at this stage due to

its long duration, expensiveness, limited capabilities in terms of consumer

diagnostics and unclear accuracy of sales forecast (e.g. difficulties in making national

projection etc.). The horizon of business planning at this stage is either short or mid-

term, however, developing a view on the future market tendencies is essential. This

is usually performed by using expert techniques or in-house quantitative analyses.

Output: 1-2 product offers with a 2-3 marketing plans.

Stage 5: Launch / Post Launch validation

Tools: Advertising / Brand tracking or post-tests, Retail audit, Media tracking (TV,

Press, Outdoor etc), Promo tracking, other quantitative strategic “problem

identification” studies.

Specifics: It is desirable to continuously monitor the launch with the range of special

techniques, such as advertising effectiveness tracking, retail audit etc. It is vital for

success at this stage to gauge and understand consumer response (as well as

competitors’, retailers’ etc) and make adjustments accordingly. To move the business

further it is recommended doing a second wave of the segmentation study (Usage

and Attitudes, Market Landscape etc).

Output: sales, feedback from key agents of product launch (consumer, retailer etc).

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3.2.3 Specifics of marketing research in case of “Brand Stretching”.

The review below is based on the literature sources listed in Section 3.2.

Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

Specifics: A critical component in decision-making about “brand stretching” is the

information about business attractiveness of the target market, which is typically at

the stage of rapid growth. The choice of the market is often made with “BCG matrix”

analysis, using available data on market potential, dynamics and structure. It is

imperative to conduct segmentation studies for the target market (i.e. U&A, Market

landscaping) in order to reveal “white spaces” and quantify the size of unexploited

business niches. It is highly recommended to run a series of Brand Stretching studies

(qualitative and quantitative) aimed at identification of categories (or markets)

suitable for extension in terms of brand image. Within these studies, it is important to

assess “substitutability” of products from the original category by the products from

the target category - to avoid excessive cannibalization. The risks concerned with

brand image “dilution” due to the presence in several markets should be measured

as well. Also, it is critical for successful idea generation to have information on

macro-and competitive environment, business infrastructure as well as on recent

technological developments, new product launches and patents.

Output: a set of materials for ideation sessions, prepared in a concise and clear form.

From “Discovery Stage” to “Stages 2,3: Build business case / Development”

Tools, Specifics, Output: See “New-to-the-firm”.

Stage 4: Testing and Validation

Tools: See “New-to-the-firm”.

Specifics: Similar to “New–to-the-firm”. The recommended research methods are:

quantitative test of marketing mix components, simple and flexible Simulated Test

69
Marketing techniques. One of the key requirements is rich diagnostics of consumer

response in competitive environment, particularly, in terms of brand image,

positioning and communication. It is crucial to accurately gauge the impact of

“cannibalization” in case of significant substitutability between products from original

and target markets. Traditional Test Marketing is seen as not ideal tool in case of

“brand stretching” due to its limited capabilities to capture consumer feedback on

brand positioning.

Output: See “New-to-the-firm”.

Stage 5: Launch / Post Launch validation

Tools: See “New-to-the-firm”.

Specifics: It is recommended to employ a full range of monitoring techniques

(customer, retail, media etc), covering both original and target markets. Also, in order

to provide support in further development of the target market (e.g. possible range

extensions), it is desirable to repeat the segmentation study within 2-3 years after

entering the target market.

Output: See “New-to-the-firm”.

3.2.4 Specifics of marketing research for “Line/Range extensions”.

The summary below reflects the discussion on research methods for

“Brand/Line/Range extensions”, according to the literature sources mentioned in

Section 3.2.

Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

Specifics: Product line extension is typical for late stages of market development.

This is done in order to promote further sales growth, satisfy increasingly

sophisticated needs of consumers and capture empty space on the market. At the

70
initial stage it is important to gather information on the emerging needs of consumer

in a given market. In particular, it is imperative to reveal and quantify opportunities

with need-based segmentations (i.e. U&A, Market Landscaping, Shopping Behavior).

It is desirable to monitor new product launches in the local and global markets (e.g.

Datamonitor Market Watch) and track competitor activities. Finally, it is vital to obtain

recent data on market size, its dynamics and structure (e.g. expert forecasts,

quantitative econometric analysis, retail audit etc). It is worth considering suggestions

from R&D department, employees and partners.

Output: a set of materials for ideation sessions, prepared in a concise and clear form.

Discovery Stage – Ideation.

Tools: Qualitative Ideation Sessions, Brainstorming.

Specifics: At this stage, it is recommended to engage a wide variety of specialists,

including external consultants form advertising, branding and research agencies.

Output: Ideas in the textual and graphic forms, 10-15 items.

Gate 1: Idea screening

Tools: Screening by consumers (Quantitative Idea Screening) as well as by experts.

Specifics: Promising ideas should show capabilities for defending and growing

market share for the total product range, i.e. exhibit high purchase intent on the basis

of total audience.

Output: Ideas in the textual and graphic forms, up to 5 items.

Stage 1: Scoping / Concept Generation

Tools: Expert team work (R&D, Sales, Finance, Marketing, Consultants).

Specifics: Similar as for Idea Generation.

Concepts: Up to 10 concepts in the standard format, i.e. product name/headline,

draft product picture, product statement (insight, reason-to-believe, benefit, end line),

preliminary product information (price, weight, features).

71
Gate 2: Second Screen / Concept Screening

Tools: Screening by consumers (Quantitative Concept Screening), ad hoc studies

Specifics: Similar as for Idea Screening. Additionally, it is recommended to use such

techniques as TURF (to optimize the number of SKUs in the range) and Conjoint (to

achieve a balanced offer in terms of product characteristics and price).

Output: 2-3 concepts in a standard format

Stages 2,3: Build business case / Development

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers),

Strategic “exploratory” marketing research (media, retail, consumer)

Specifics: In this case it is necessary to develop a detailed mid-term business plan

(2-3 years), focusing on the product launch and promotional tactics. The plan should

include accurate assessments of incremental sales and sources of volume.

Therefore, this stage may overlap with testing and validation.

Output: 1-3 product prototypes along with 2-3 marketing plans per each

Stage 4: Testing and Validation

Tools: Quantitative tests, Conjoint, TURF, Simulated Test Marketing, Test Marketing

Specifics: A technique which is widely recommended in case of line extensions is

Simulated Test Marketing, providing accurate estimation of market share as well as

powerful diagnostic for marketing mix elements in competitive environment. In case

of low financial risks, it is possible to conduct individual advertising, product, pack or

price tests. It is advisable to consider using Conjoint and TURF, if this is not done on

the previous stages. Traditional Test Marketing may help in sales forecasting and

testing trade acceptance, however, it usually fails to deliver consumer insights

(especially those related to purchasing drivers).

Output: 1-2 product offers with recommendations on marketing plans.

Stage 5: Launch / Post Launch validation

Tools, Specifics, Output: Same as for “New-to-the-firm”.

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3.2.5 Specifics of marketing research for “Brand re-launch / repositioning”.

A summary of views on marketing research for brand repositioning is based on the

literature sources listed in the Section 3.2.

Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

Specifics: Changing brand positioning or re-launching the brand is normally

recommended at the late stages of market lifecycle in order to proactively prevent

sales decline and defend market share. This is usually achieved through renovation

of brand architecture (intangible characteristics such as image), keeping the name

unchanged. However, sometimes repositioning involves changing some tangible

product features as well. Therefore, at the stage of assembling knowledge it is

necessary to gather insights on emerging trends in consumer behavior (expert and

qualitative studies), drawbacks in current brand positioning (positioning and

preference “exploratory” studies), relationship between consumer requirements and

market share. Such studies may be conducted as a part of U&A segmentation,

allowing for in-depth study of consumer lifestyles and needs. It is important to have

information about competitive activities, macro-economic environment and business

infrastructure.

Output: a set of materials for ideation sessions, prepared in a concise and clear form.

Discovery Stage – Ideation.

Tools: Qualitative Ideation Sessions, Brainstorming.

Specifics: Ideation sessions are most productive when run in diverse groups of

specialists, including external consultants form advertising, branding and research

agencies.

Output: Ideas in the textual and graphic forms, up to 15 items.

73
Gate 1: Idea screening

Tools: Screening by consumers (Quantitative Idea Screening) as well as by experts.

Specifics: The typical reason for idea selection is high purchase intent, exceeding

that for the current idea of positioning. This should be measured on the basis of total

audience, since the objective is to preserve and grow market share.

Output: Ideas in the textual and graphic forms, up to 10 items.

Stage 1: Scoping / Concept Generation

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers).

Specifics: Similar approach as for ideation.

Concepts: Up to 10 concepts in the standard format.

Gate 2: Second Screen / Concept Screening

Tools: Screening by consumers (Quantitative Concept Screening), ad hoc studies

Specifics: Similar to idea screening. It is advised that each concept is evaluated

separately from other (i.e. monadic approach to testing).

Output: up to 3 concepts

Stages 2, 3: Build business case / Development

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers),

Strategic “exploratory” marketing research (media, retail, consumer)

Specifics: In this case it is required to carry out short- and long-term business

planning activities, develop a re-positioning marketing plan, accurately assess

incremental sales potential. The stages of business planning may overlap with the

phase of testing and validation.

Output: 1-3 positioning options with 2-3 business plans per each

Stage 4: Testing and Validation

Tools: Quantitative tests of marketing mix elements, Simulated test marketing

Specifics: It is strongly advised to employ advanced Simulated Test Marketing

technique, providing accurate estimate of market share in a stable market conditions,

74
as well as delivering rich diagnostics of positioning in competitive environment.

Carrying out Traditional Test Marketing is not recommended due to its limited

diagnostic capabilities and lack of confidentiality.

Output: up to 2 new product offers.

Stage 5: Launch / Post Launch validation

Tools, Specifics, Output: Same as for “New-to-the-firm”

3.2.6 Specifics of marketing research for “Product/Price changes”.

The following set of insights is based on the literature sources listed in Section 3.2.

Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

Specifics: Changing product characteristics or price is quite common for late stages

of the market lifecycle. This is usually done in response to competitive actions with

the purpose to defend market share. At this stage, the central role is played by

technical ideas from R&D department as well as market data delivered by various

tracking studies, which monitor competitive activities in media and retail (e.g.

consumer tracking, media monitoring, retail audit etc). Gathering news on product

novelties in international markets is quite helpful. Also, it is advisable to utilize

information provided by market segmentations (consumer and shopper), and it is

imperative to conduct strategic pricing study to identify successful approaches to

pricing improvements. Suggestions from employees (especially from sales

representatives), clients, partners, suppliers and retailers may be extremely useful.

Output: a set of materials for scoping, prepared in a concise and clear form.

Discovery Stage – Ideation, Gate 1: Idea screening, Scoping / Concept Generation

Tools: Expert team work (Technical / R&D, Sales, Finance, Marketing)

75
Specifics: Typically treated as one-stage due easiness of idea generation and high

time pressure.

Output: 2-3 concepts in a standard format.

Gate 2: Second Screen / Concept Screening

Tools: Screening by consumers (Quantitative Concept Screening), ad hoc studies

Specifics: Using Conjoint is a common practice to develop the most appealing

product offer. Concepts are usually tested individually (monadic approach).

Output: 1-2 concepts in a standard format.

Stages 2,3: Build business case / Development

Tools: Expert team work, Strategic “exploratory” marketing studies

Specifics: In this case it is often required to develop a short-term business plan (up to

1 year), which includes projection of market share and sources of volume. The latter

is often obtained from Conjoint or Test Marketing (Stage 4).

Output: up to 5 product prototypes and business plans

Stage 4: Testing and Validation

Tools: Quantitative tests, Traditional and Simulated Test marketing

Specifics: In case of high financial risks it is recommended to go with Simulated Test

Marketing, while in other cases using Conjoint and quantitative tests of marketing mix

is sufficient. Conducting traditional test market is possible, in case of limited

advertising support and considerable number of in-store activities. However,

researchers have to consider long duration of traditional approach, its complexity in

execution as well as high cost.

Output: 1 new product offer.

Stage 5: Launch / Post Launch validation

Tools, Specifics, Output: Same as for “New-to-the-firm”. Information from retail audit

is particularly important.

76
3.2.7 Specifics of marketing research for “New-to-the-Country” products.

The following review of approaches to marketing research for “new-to-the country”

products is based on the literature sources listed in Section 3.2.

Discovery Stage – Assembling Knowledge.

Tools: Interactive knowledge base / Marketing Information system (MIS), Strategic

“problem identification research” (Expert / Qualitative / Quantitative).

Specifics: When considering international sales expansion, it is essential to

determine the stage of development for the market of such products in the target

country. Researchers must make sure that they have collected all available

information about the target market: its structure, dynamics, competitive and

macroeconomic environment (e.g. Economist Intelligence Unit , Euromonitor,

Datamonitor, PricewaterhouseCoopers etc.), current consumer needs, preferences

and lifestyles (see Section 2.2, Figure 2.4) . It is important to obtain historical data

and background information on the recent product launches and do the same for the

similar markets. After having collected market statistics, it is advisable to perform

market attractiveness analysis (“BCG matrix”) (Johnson et al, 2008). It is imperative

to be aware of cultural differences as well as be prepared to overcome cultural

barriers while promoting the product (qualitative ethnographic research). As

discussed earlier in Section 2, “new-to-the-country” launches are typical for “lagging”

economies, where markets are either embryonic or entering the stage of growth (see

“new-to-the-world” ,“new-to-the-firm” products). However, normally there is an

emerging segment of “lead users”, living the same lifestyles as a majority of

consumers in the country of product origin, and acting as trend setters in the local

culture. As discussed above, the role of “lead users” is central to market development

at early stages, therefore it is important to gather all available information about them

(as well as to estimate their number in the total target group).

Output: a set of materials for ideation sessions, prepared in a concise and clear form.

77
Discovery Stage – Ideation.

Tools: Qualitative Ideation Sessions, Brainstorming.

Specifics: To ensure productive ideation sessions, it is necessary to conduct a series

of qualitative studies aiming at getting current consumer perception about the original

product offer. In case of significant attitudinal barriers or no established need

revealed, it is recommended to engage “lead users” and “opinion leaders” in the

product adaptation (ideation sessions, qualitative research etc).

Output: Ideas of the “localized” product in the textual and graphic forms, 5-10 items.

Gate 1: Idea screening

Tools: Screening by consumers (Quantitative Idea Screening) as well as by experts

(Technical, Business).

Specifics: Typically the most promising ideas selected at this stage have high

purchase intent (PI) on the basis of total audience or among “lead users”. During the

test, it is advisable to get preliminary information on possible barriers for product

promotion, especially in the case of low PI. This issue may require additional in-depth

study with a series of focus groups (i.e. qualitative research).

Output: Ideas in the textual and graphic forms, up to 5 items.

Stage 1: Scoping / Concept Generation

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers).

Specifics: It is desirable to finalize the concept using feedback from “lead users”

obtained during the previous stages.

Concepts: 2-3 concepts in the standard format, i.e. product name/headline, draft

product picture, product statement (insight, reason-to-believe, benefit, end line),

preliminary product information (price, weight, features).

Gate 2: Second Screen / Concept Screening

Tools: Screening by consumers (Quantitative Concept Screening), ad hoc studies

78
Specifics: In the case of a completely new market the stringency of concept selection

may be decreased. If the concept is perceived positively only by “lead users” and not

by a majority of consumers – it is recommended to estimate the rate of adoption and

identify the barriers towards it.

Output: up to 3 concepts in case of embryonic market, 1-2 concepts in the case of

growing market.

Stages 2,3: Build business case / Development

Tools: Expert team work (Technical, Sales, Finance, Marketing, Consumers),

Strategic “exploratory” marketing research (media, retail, consumer)

Specifics: In the case of very early market entry, it is recommended to follow

recommendations outlined for “new-to-the-world” products, while in the case of

rapidly growing market it is advisable to refer to that for “new-to-the-firm”. It is worthy

to note, that it is commonly accepted practice to use “analogies” methods to foresee

market perspectives in “lagging” economies (i.e. considering experience in more

advanced markets that are similar in terms of consumer profile and culture).

Output: 1-2 products (in case of growing market) and up to 4 product options (in

case of new market) along with 2-3 marketing plans for each.

Stage 4: Testing and Validation

Tools: Test marketing, Quantitative tests of marketing mix elements, Strategic

“exploratory” marketing research (media, retail, consumers).

Specifics: It is advised to follow recommendations for “new-to-the-world” or “new-to-

the-firm” products, depending on the state of the market. In the first case, large-scale

Simulated Test Marketing (STM) study have little effectiveness in terms of sales

forecasting and may easily lead to wrong conclusions about new product

perspectives in the market. However, it may provide some powerful diagnostics, but

at a very high price. Concerning the second case, the only STMs that can be

79
recommended, should meet requirements outlined in respective section for “new-the-

firm” products.

Output: 1-2 products (in case of growing market) and up to 4 product options (in case

of new market) along with 2-3 marketing plans for each.

Stage 5: Launch / Post Launch validation

Tools: PR, Consumer/Media/Advertising tracking and post-tests, Retail audit and

Distribution studies, Sales statistics

Specifics: See “new-to-the-world” or “new-to-the-firm”, depending on the state of the

market.

Output: sales, feedback from key agents of product launch (consumer, retailer etc).

3.2.8 A summary on practical application of marketing research tools

The table exhibited in Figure 3.4 summarizes the discussion above. Thus, it is

evident that research programs differ significantly depending upon the type of new

product. The more developed is the market, the greater is the role of quantitative

research techniques and Simulated Test Marketing in particular.

Figure 3.4 The role of large-scale quantitative tests increases with market
development

Re-
Product /
New-To-The- New-To- New-To-The Brand Line Positionings
Price
World The-Firm Country Stretching Extensions /
changes
Relaunches

Qualitative tools (e.g. focus‐groups,

brainstorming and ideation sessions, in-      
depth interviews )
Quantitative diagnostic tests (e.g.
concept tests, advertising tests, product      
tests, price tests, pack tests) See either
Quantitative tests with elements of sales "New-to-
  the-World"    
assessment (e.g. conjoint)
or "New-to-
Simulated Test Marketing (STM) or -  the-Firm",    
Volumetric Bundle Tests depending
Traditional test market   on state of   - 
Econometric sales forecasting / Statistical the market
     
modeling
Strategic “exploratory” studies (e.g.
segmentations, trackings,trend analysis      
etc)
Expert analysis (internal and external)      

- Not recommended / Serious Limitations

 Rarely used - Low importance
 Frequently used - Medium importance
 Extensively used - Critical importance

Source: Based on Malhotra (2009), Tull et al (1993), Groucutt (2005), Shim(2000), Webb et al (1992)

80
3.3 Methods to forecast sales for a new FMCG product

The true function of marketing research is not just gathering consumer and business

insights, but shaping a future vision of the market and the company’s place in that

future by forecasting sales, minimizing uncertainty and risk in decision-making. A

reliable forecast creates the foundation of a business plan and, consequently, the

future success of the company - “if you cannot foresee the company’s future, don't

invest in it” (Dorsey, 2004, p.11). In particular, according to Shim (2000, p.3) “sales

forecasts give the expected level of sales for the company’s goods… throughout

some future period; they are instrumental in the company’s planning and budgeting

functions, and are key to other forecasts and plans”. As defined by the “Marketing

Glossary” (Clemente, 2002, p.370), sales forecast is “a projection of the amount of

sales a company expects to achieve over a future period of time, as determined by a

specific marketing program”. Dibb and Simkin (2008), and MacDonald (2008) point

out that sales forecasting and marketing research are tightly integrated into each

other. Thus, a number of forecasting tools (or instruments) are an essential part of

various marketing research techniques considered above. These instruments will be

discussed in the following section.

3.3.1 An overview of sales forecasting instruments

A forecasting instrument, as per “Marketing Glossary”, is “a model used in predicting

product sales, market share levels and other marketing variables. An example of

forecasting model is an econometric model, which offers diagnostic insights into

effects of variations in marketing mix variables (e.g. the size of advertising budgets,

sales force composition, distribution channels)” (Clemente, 2002, p.163). However,

besides such well-known approaches as econometrics, there are many other sales

forecasting tools developed for a variety of business cases. A review of the

fundamental literature on the topic (Burton et al, 1986, Berenson and Levine, 1986,

Lilien et al, 1992, Aivazian and Mkhitarian, 1998, Draper and Smith, 1998, Baker,

81
1999, Hanke et al, 2001, Shim, 2000, Franses and Paap, 2001, Wind and Green,

2004, Mentzer and Moon, 2006, Slutskin, 2006, Koop, 2008, Gujarati and Porter,

2009, Rossi et al, 2009, Byrne, 2010 etc) allows to suggest that forecasting

instruments can be divided into two main groups, according to the use of historical

data. Instruments comprising the first group do not directly utilize historical

information. Instead, they rely on primary data, expert analysis, short-term

projections of consumer behavior and indirect sources. An overview of such

instruments is presented on Figure 3.5a.

Figure 3.5a Sales forecasting instruments which does not utilize historical data
directly
Description Typical Application Data collection
1) Primary information (Judgemental / Qualitative)
Based on the assumption that several experts can arrive at a better Forecasts of long-range Information from a panel of experts is openly
forecast than can one person. There is no secrecy, and communication and new product sales; in group meetings to arrive at a consensus
Expert opinions
is encouraged. Forecasts are sometimes influenced by social factors and technological forecast. Minimum is two sets of reports
may not reflect a true consensus. forecasting over time

A panel of experts is interrogated by a sequence of questionnaires in

Forecasts of long-range
which the responces to one questionnaire are used to produce the next A coordinator issues the sequence of
Delphi ("consensus") and new product sales;
questionnaire. Any information available to some experts and not to the questionnaires, editing and consolidating the
approach technological
others is thus passed on to the others, enabling all the experts to have responses
forecasting
access to all information for forecasting

Forecasts of short-term Data by regional and product line

Sales force polling Based onsales force polling; tends to be optimistic
sales breakdowns
Based on three estimates provided by experts: pessimistic, most likely Same as expert
PERT-Derived Same as expert opinions
and optimistic opinions
Based on direct interviews with consumers regarding purchasing Forecasts of short-term
Consumer Surveys Personal interviews, questionnaires
behavior sales
2) Learned behaviour

Stochastic modeling
(e.g. Markov approach Models based on learned behavior: consumers tend to repeat their Forecasts of sales and
Data required for transaction probabilities
/ Bayesian approach / behaviour cash collections
Game theory etc )

3) Indirect information
Typically a B2B survey that captures information from various market Inputs to quantitative
Industry (Market)
agents (such as partners, retailers, manufacturers, distributors, analysis of secondary Personal interviews, questionnaires
surveys
regulators etc).about their actual performance and future plans information
Input - Output
Concerned with the interindustry or intermarket flow of goods or services. Forecasts of company Considerable amounts of cross-category
(Structural flows)
It shows what flow of inputs must occur to obtain outputs sales by sectors sales data
analysis
Leading indicators / Leading indicators, analogies or normatives tends to predict future trend Forecast of sales by An observation (e.g. consumer survey) plus
Analogy / Normative in sales product class a databese of similar cases

Sources: Based on Chambers et al (1971), Shim (2000) and the following review of Burton et al (1986), Berenson et al (1986), Lilien et al (1992), Aivazian et al
(1998), Draper et al (1998), Hanke et al (2001), Franses et al (2001), Wind et al (2004), Slutskin (2006), Koop (2008), Gujarati et al (2009), Rossi et al
(2009), Byrne (2010)

According to Shim (2000, p.5), these models are indispensable “when patterns or

relationships do change” and the advantage of such methods is that they are “able to

identify systemic change more quickly and better interpret its effects on the future”.

These instruments are useful for both long- and short- terms forecasting in case of

considerable uncertainty, although their “numerical” accuracy is typically lower than

that for the methods which handle historical data. The latter methods work superbly

on developed markets as long as considerable amount of knowledge is already

accumulated and there is little or no systemic change in the environment (See Figure

3.5b overleaf).

82
 Figure 3.5b Sales forecasting instruments which utilize historical information

Instrument Description Typical Application Data collection

4) Secondary information (present and past data)
(a) Time series
A minimum of 2 years of sales history by
Moving average / Averages are updated as the latest information is received; Forecast of sales with no other month if seasonals are present; otherwise
Naïve methods weighted average of a number of consequtive points of the series input data fewer data. The more history the better. The
moving average must be specific
Similar to moving average, except that more recent data points are
Exponential Forecasts of sales, financial
given more weight. Effective when there is random demand and no The same as for moving average
Smoothing data, inventory control
seasonal fluctuation in the data series
New produt forecasts and Varies with the technique used. However, a
Fits a trend line to time series data. There are two variations, linear products in the growth and good rule of thumb is to use a minimum five
Trend Analysis
and nonlinear maturity stages of life cycles;years annual data to start and, thereafter,
inventory control the complete history
As a minimum, the annual sales of the
Analysis and forecasting new product growth rates based on S-
Life cycle analysis Forecasts of new product sales product being considered or a similar
curves
product are necessary
Decomposes a time series into seasonals, trend cycles and
Forecasts of sales and financial A minimum 3 years of history to start;
Decomposition irregular elements. Primarily used for detailed time series analysis
data; tracking and warning thereafter, the complete history
(including estimating seasonals)

Iterative procedure that produces an autoregressive, integrated Production and inventory

moving average model, adjusts for seasonal and trend factors, control for large volume items,
Box-Jenkins The same as for classical decomposition
estimates appropriate weighting parameters, tests the model, and forecasts of cash balances and
repeats the cycle as appropriate earning

(b) Causal
Forecasts of sales by product
Simple / Multiple Functionally relates sales to other variables and estimates an At least 30 observations are recommended
classes, forecasts of earnings
Regression equation using the least-squares technique for acceptable results
and other financial data
A system of independent regression equations that describe some
Econometric modeling sector of sales or profit activity. The parameters of the regression The same as for regression The same as for regression
equations are usually estimated simultaneously

Sources: Based on Chambers et al (1971), Shim (2000) and the following review of Burton et al (1986), Berenson et al (1986), Lilien et al (1992), Aivazian et al
(1998), Draper et al (1998), Hanke et al (2001), Franses et al (2001), Wind et al (2004), Slutskin (2006), Koop (2008), Gujarati et al (2009), Rossi et al (2009),
Byrne (2010)

Therefore, the choice of sales forecasting technique is heavily influenced by the

stage of market lifecycle. As pointed out by Shim (2000, p.141), “the proper choice of

forecasting methodology depends on where the market is”. Typically, at the

“introduction” stage no historical data is available and, therefore, the researcher has

to rely on primary sources and “judgemental” methods. At the “growth” stage some

data is already available for analysis, and the focus shifts to quantitative methods

which help to measure “cause-effect” relationships and make more accurate

projections (e.g. regressions, time series, life cycle analysis). On the “maturity” stage

the amount of data accumulated is significant. However, still, there is a need for

short- and long-term projections, although trends may change only slightly. Here,

quantitative techniques are extremely useful (e.g. classic decomposition, other time

series methods, causal techniques). At the late stages of the lifecycle, “judgemental”

tools may help to identify signals for decline.

As discussed above, sales forecasting instruments are integral parts of marketing

research studies (and vice versa, market research may provide inputs to forecasting

model). Some of research methodologies, such as Simulated Test Marketing, often

83
incorporate a broad range of forecasting techniques (Clancy et al, 2003, 2006). The

use of forecasting instruments in various marketing research methodologies in the

context of market development is analyzed on Figure 3.6. Thus, it clearly shows that

“judgemental”, “learned behavior” and “indirect” instruments are often used at the

early stages within qualitative studies and expert analyses (i.e. for “new-to-the-world”,

“new-to-the-firm”, ”new-to-the-country” products), while time-series and causal

instruments can be effectively applied at late stages within strategic quantitative

studies, such as segmentations and trackings, STMs, econometric analyses and

modeling (i.e. “brand relaunches”, “line extensions”, “product / price changes” etc).

The use of sales forecasting instruments in marketing research for

Figure 3.6 NPD throughout the market lifecycle: the input provided by quantitative
instruments increases with knowledge accumulation
Market growth
Knowledge accumulation
Marketing research

Quantitative diagnostic

forecasting / Statistical
Strategic “exploratory”
Traditional test market

Quantitative tests with

Econometric sales
elements of sales
- Not applicable

Marketing (STM)
Qualitative tools

Expert analysis

Simulated Test
assessment
 Rarely incorporated - Low contribution

modeling
studies
 Frequently incorporated - Medium contribution
 Always incorporated - Critical contribution tests

Primary information (Judgemental / Qualitative)

Expert opinions        
Delphi ("consensus") approach   - - -   
Sales force polling       - 
PERT-Derived   - - -   
Horizon of forecast

Consumer Surveys  -      

Sales forecasting

Learned behaviour

Stochastic modeling (e.g. Markov approach

-       
/ Bayesian approach / Game theory etc )
Accuracy

Indirect information (no back data)

Industry (Market) surveys        
Input - Output (Structural flows) analysis        
Leading indicators / Analogy / Normative -       

Secondary information (present and past data)

Time series -       
Causal -       

Sources: Based on Chambers et al (1971), Shim (2000), Malhotra (2009), Tull et al (1993), Webb et al (1992), Wind et al (2004)

Although the stage of market development is critical for the choice of forecasting

instrument, the final selection is also determined by several other factors, such as

accuracy (i.e. “how the forecast will be used?”), cost (i.e. “how much money is

involved?”), timing (i.e. “when will the forecast be used?”), users of forecast (i.e. “who

will use the forecast?”), available data (i.e. “what data are available?”). In addition,

Shim (2000, p.8) recommends considering the following six questions, while

choosing the forecasting instrument: “(1) How much will it cost to develop the

84
forecasting model compared with the potential gains resulting from its use? The

choice is one of benefit-cost trade-off, (2) How complicated are relationships that

must be forecast ?, (3) Is the forecast for short-run or long-run purposes?, (4) How

much accuracy is desired?, (5) Is there a minimum tolerance level of error?, (6) What

data are available? Techniques vary in the amount of data they require?”. Chambers

et al (1971) developed a detailed overview of various forecasting instruments. An

updated and refined version of that summary is presented on Figure 3.7 below.

Figure 3.7 A choice of sales forecasting instruments in terms of cost, time and
observed accuracy
Observed Accuracy
(1="Very poor" to 6 ="Excellent")
Instrument Cost Time “Very Poor” to “Poor” “Fair” “Good” to “Excellent”

Identification of Short-term Mid-term Long-term

"turning point" (0-3 mon) (3 mon-2yr) (2yr+)
1) Primary information (Judgemental / Qualitative)
Expert opinions Minimal 2 weeks 2.5 2.5 2.5 2
Delphi ("consensus") approach Expensive 1 month 3.5 4 3.5 3.5
Sales force polling Minimal 2 weeks 3 3.5 2 2
PERT-Derived Minimal 2 weeks 2.5 3 2 2
Consumer Surveys Expensive > 1 month 3.5 3.5 2 2
2) Learned behaviour
Stochastic modeling (e.g. Markov approach
Expensive > 1 month 4 5 2 2
/ Bayesian approach / Game theory etc )
3) Indirect information (no historical data)
Industry (Market) surveys Expensive > 1 month 4 - 5 3.5
Input - Output (Structural flows) analysis Expensive > 1 month 3 - 4.5 3.5
Leading indicators / Analogy / Normative Varies 1 month 4 3 3 1
4) Secondary information (present and past data)
(a) Time series
Moving average / Naïve methods Very minimal 1 day 2 3 2 1
Exponential Smoothing Minimal 1 day 2.5 4 3 1
Trend Analysis Varies 1 day 2.5 5 4 3.5
Life cycle analysis Varies 1-5 days 3 2 3 3
Decomposition Minimal 1 day 5 5.5 4 1
Box-Jenkins Varies 2 days 3 5.5 3 1
(b) Causal
Simple / Multiple Regression Varies Depends on 4 4.5 4.5 2
Econometric modeling Expensive 1 month+ 6 4.5 5.5 3.5
Sources: Based on Chambers et al (1971), Shim (2000) and the following review of Burton et al (1986), Berenson et al (1986), Lilien et al (1992), Aivazian et al
(1998), Draper et al (1998), Hanke et al (2001), Franses et al (2001), Wind et al (2004), Slutskin (2006), Koop (2008), Gujarati et al (2009), Rossi et al (2009),
Byrne (2010)

Traditionally, high accuracy is considered as an important factor of choice. As

pointed out by Hanke et al (2001, p.1) “a particular focus of (management) attention

is on the errors that are inherent part of any forecasting procedure. Predictions as to

future outcomes rarely are precisely on the mark; the forecaster can only endeavor to

make the inevitable errors as small as possible”. Choosing the right instrument in

terms of market environment significantly reduces the error, however, following the

standards of execution is equally important. The quality control (QC) procedures in

sales forecasting involve testing and validation of the model, controlling accuracy of

sources and inputs (e.g. “market growth” etc). While forecasting, it is worth using a

85
variety of approaches and sources to deliver the final prediction as a result of

convergence of interim forecasts (See Figure 3.8). It is important to bear in mind,

that accuracy of the final forecast is heavily dependent on the accuracy of its

components, i.e. data sources and models (i.e. predictions about macro-

environment, market size and dynamics etc.).

Figure 3.8 Essentials of Quality Control in sales forecasting:

Right process execution allows to arrive at reliable results

1 Compliance with high 2 Accuracy control for each component

standards of execution: and for the whole model :
The need for forecast FINAL FORECAST
ACCCURACY

Determine the objective – what

is the dependent variable
=
Use
Reliability of various
Ascertain likely explanatory INFORMATION SOURCES sources
independent variables
X
Develop a model or choose a Use
Accuracy of
forecasting method various
MACRO ENVIRONMENT
forecasting approach approaches
Cross-check,
Test the model
X Analyze,
Converge
Accuracy of Use
Apply the model
MARKET DYNAMICS various
forecasting technique techniques
Evaluate and revise the model
X
Accuracy of Use
Determine need for ongoing NEW PRODUCT SALES various
forecasting of variable forecasting model models

Sources: Based on Shim (2000) , Hanke et al (2001), Kachalov (2008)

As mentioned above, the methods of test marketing are central to NPD and utilize a

wide range of forecasting instruments to deliver a highly accurate final forecast.

Important aspects of their design as well as benefits and drawbacks of their practical

application will be discussed in the next section.

3.3.2 The history and evolution of Simulated Test Marketing

By the end of 60-ies an examination of a new product in a “test market” prior to the

launch had been formally implemented in NPD protocols of the largest FMCG

companies in the US and Europe (Urban et al, 1987, Clancy et al, 1994). According

to the classical definition by Armstrong et al (2009, p.271), test marketing is – ” a

stage at which the product and marketing program are introduced into more realistic

86
marketing settings… it lets the company test the product and its entire marketing

program – positioning strategy, advertising, distribution, pricing, branding and

packaging and budget levels”. It is advisable to conduct test marketing “when stakes

are high...This could be when a large company is introducing a new product that

requires a big investment or when management is not sure about the product or

marketing program”.

There are two basic approaches to test marketing studies at the moment: (1)

traditional test marketing (2) simulated test marketing (Clancy et al., 2006). In the first

case, a new product is simply put on shelves of a limited number of stores located

usually in a distant area. Next, sales performance is usually tracked for a period of

two or three months. The second approach implies conducting an ad hoc quantitative

consumer survey, which simulates the process of a new product launch in a

laboratory environment (including advertising exposure, shopping opportunity and

product test) for a representative sample of potential purchasers. The key outcome

of the study is a mid-term sales forecast (Clancy et al, 2006) (See Figure 3.9).

Figure 3.9 Test Marketing – two key approaches

Traditional Test Markets

 Testing new product in the real life
marketplace (sample of stores)

Simulated Test Markets

 Methodology to simulate new product

launch under a laboratory environment

 Provides mid-term sales forecast

Source: Based on Clancy et al (2006)

87
The major advantage of traditional test markets is that they allow to examine trade

acceptance and to reveal issues related to distribution mechanics prior to the launch.

Clancy et al (2006) point out that tradition approach is extremely useful for testing: (1)

In-store promotional tactics, (2) Distribution channels, (3) Transportation

infrastructure, (4) Merchandising standards / Product location in the store. Traditional

test marketing offers a real-life opportunity to monitor sales performance of the new

product and measure such business indicators as sales incremental to parent brand,

cannibalization etc. Also, traditional testing allows for minor improvements in

marketing mix during the process at a relatively low cost (as compared to the national

launch). However, the key limitation of this approach is that it visibly fails: (1) to

simulate the entire environment of a new product launch (i.e. advertising campaigns

on national TV channels etc.), (2) to register consumer response correctly and,

therefore, to explain the observed sales effect. According to Urban and Hauser

(1993) and Clancy et al (1994) there are seven major drawbacks of traditional test

marketing: (1) limited capabilities to capture consumer feedback, i.e. reasons for

purchase, (2) expensiveness, (3) long time period for results (often a year), (4) lack

of confidentiality, (5) competitors can sabotage the results, (6) allows for testing only

one marketing plan, (7) difficulties with national projection.

A simulated test marketing study incorporates consecutive assessment of entire

range of marketing mix components in the order of their interaction with the

consumer (i.e. communication, place, price, product formula) (Armstrong et al.,

2009). A set of indicators often consists of communication and advertising metrics

(memorability, content recall, message evaluation, enjoyment, key likes and dislikes

about tested commercials), image positioning (brand offer against consumer needs

and expectations), product and pack characteristics (likes, dislikes, performance

across various attributes, visibility on shelf) and price elasticity coefficients. The

method of data collection can be classified as two-stage quantitative central location

test (CLT). At the first stage data collection is usually conducted in-hall face-to-face,

88
while the typical method at the second stage is telephone interview (Clancy et al,

2006). (See Figure 3.10).

Figure 3.10 STM typical data collection procedure- replication of new

product launch in a laboratory environment. Quantitative in-
hall test with call-back that that captures trial and repeat….

Trial purchase
(before product use,
after concept /
ad exposure)

Repeat purchase
(after product use)

Source: Clancy K. et al (2006, p.110)

An STM study provides a mid-term sales forecast that is typically based on Fourt -

Woodlock model (Fourt and Woodlock, 1960), which involves separate assessment

of trial and repeat components contributing to the total sales. (See Figure 3.11)

Figure 3.11
1.9 Sales volume decomposition suggested by Fourt and Woodlock

The market
Market size
Target audience #
x
Marketing plan effect: Awareness %
Awareness projection
x
Availability Weighted Distribution%
x
At 100% awareness & 100% distribution:

( Trial rate
Consumer x
survey Trial + Repeat volumes )
per trialist

Projected Sales Volume

Source: Fourt and Woodlock (1960)

89
A similar approach was suggested by Parfitt and Collins in 1968 for decomposing

sales data obtained from household panel studies (Parfitt and Collins, 1968).

According to Clancy et al (2006) there are numerous advantages of Simulated Test

Marketing over traditional approach. In particular, STMs: (1) are less expensive , (2)

deliver results in a shorter period of time (often two months), (3) are confidential, (4)

are capable to test multiple marketing plans and scenarios (advertising, brand

positioning, product, pack, price etc), (5) results may be projected nationally, (6)

provide accurate estimates of cannibalization and source of volume, (7) allow for

“what-if” simulations. Clancy et al (2006) argue that a majority of modern STM

techniques are superior in terms of deliverables than traditional test marketing.

The history of STM techniques development is very closely linked to the evolution of

FMCG market, retail infrastructure, media and marketing in the US (Kratt, 2009,

Clancy et al, 2006) (See Figure 3.12).

Figure
Figure 3.12
1.9
Rise of retail chains in U.S.A. triggered development
of STMs in early 70-ties
Rise of retail sales Saturation

Mid 50-ties Mid 60-ties 70-ties 80-90 ties Current decade

Transition to Early suburban Discounters and Upscale Stores, Further

supermarkets Shopping Warehouse Warehouses, and International
from traditional Centers Stores Mergers, expansion,
groceries was Private labels E-stores.
largely complete. Aggressive rise Rapid
of retail chains. consolidation of The re-
retail emergence of
superstores,
featuring general
merchandise and
groceries under
one roof

Test markets Test markets + Early developments Rise of advanced High demand for fast,accurate and
flexible STMs (in terms of shopping
Only (rare) advanced analysis of STMs STMs: Bases, Assessor process, targets, media-modeling)

Source: Based on Kratt (2009) , Clancy et al (2006)

By mid 60-ies, a rapid consolidation of self-service outlets in retail industry, emerging

advertising opportunities (i.e. national TV, radio, press, outdoor etc.), sophistication

of promotional techniques had triggered development of early STMs and gradual

90
cutover from using classic traditional test markets. From here on the concept of “trial”

and “repeat” purchases was used as a foundation for every STM model, starting from

the model called DEMON, the pioneer in the industry. DEMON was a “transitional”

model that utilized traditional test market outcome to make a national sales projection

(Charnes et al., 1966) (See Figure 3.13a).

Figure
Figure 1.9
3.13a Evolution of Simulated Test Markets. Key milestones:

1960 1966 1966 1968-1970

Fourt-Woodlock DEMON (BBDO) 11-point Juster’s NEWS LTM

equation Purchase Probability (BBDO) (Yankelovich
Scale Consulting)
(Also known as “Trial & (Decision Mapping Via BY (New Product
Repeat purchases” Optimal Go-Not Go Thomas Juster Early Warning (Laboratory Test Market)
approach) Networks – A model for (U.S. Chamber of Commerce) System)
marketing ) BY BY
BY
BY Larry Light (in Yankelovich, Skelly & White
Joseph Woodlock 2003 Excutive (Sponsored by P&G and Pillsbury)
(MRCA, Market Dr. David Learner Vice-President at
Research Corporation (Research Director McDonalds)
of America) BBDO), James DeVoe
(Dep.Director BBDO) Prof. Lewis
Louis Fourt (MRCA) Prof. Abraham Pringle
Charnes, Prof. William (University of
Cooper Miamy)
First “laboratory” test market,
Complementary study
Sales Volume is a no need for real test market.
to real test market.
function of Trial and Sample n=500. Replicates
Exit-poll+Call-back.
subsequent Repeat The Juster scale in its many Simplified and purchase behaviour: ad exposure,
Reveals trial and
purchases applications has been found to improved shopping in real outlets (although
repeat rates for
be superior as a predictive “DEMON” purchase is allowed only in test
national projections.
measure of future purchase category, test product in-home
Complicated, doesn’’t
behaviour than other intentions trial).
allow marketing plan
scales “PURE” BEHAVIOURAL MODEL
simulations

Source: Based on Cancy K. et al (1994, 2006)

A considerable contribution to the model development process was made by Thomas

Juster, who suggested to use 11-points purchase intent scale for estimation of

purchase probability (Juster, 1966) (See Figure 3.13a). As it was shown by Juster,

the scale provides the means for highly predictive measurement of purchase

probability in the US FMCG markets, although, to arrive at an unbiased estimate

some adjustments are required as consumers tend to over-claim their behavior. The

adjustment for “over-claim” is usually made with the use of a normative database that

is unique for each particular country and market (Juster, 1966). In the beginning of

70-ies the two advanced models, LTM (Laboratory Test Market) and ESP (Estimating

Sales Potential), based on entirely opposite principles (“behavioral” and “attitudinal”,

91
respectively), were introduced to the market (Clancy et al., 1994, Souder and

Sherman, 1994, Eskin and Malec, 1976). ESP was designed to estimate purchase

probability for a new brand using purchase intent scale without taking into account

competitive environment (Morwitz, 2007). It was used later by Lynn Y.S. Lin for the

development of BASES, the most popular STM model nowadays - due to its “relative

simplicity” (Clancy et al, 2006, p.62). Indeed, some simple illustrations of BASES

calculation principle can be found even in popular literature for marketing and brand

managers (Farris et al., 2006). As it was mentioned earlier, the main requirement for

accurate modeling with the “purchase intent”-based approach is availability of

extensive normative database for making an “over-claim” adjustment (Lin, 1986). All

STM models that are built on “purchase intent” platform firstly forecast sales volume,

and then derive volume share from this initial projection (Clancy et al, 2006). In the

mid 70-ies the first academic articles on relationship between preference and market

share were published. The most remarkable success in this area was achieved by

scientists from Massachusetts Institute of Technology (MIT), who developed their

Perceptor model in 1975 (Urban, 1970,1975) (See Figure 3.13b).

Figure 3.13b Evolution of Simulated Test Markets. Key milestones:

Predecessor of BASES Predecessor of Designor

1972 1975 1972-1977 1979 1986

ESP Perceptor BASES Assessor Designor

(Pillsbury, NPD (MIT Sloan (Booz, Allen, & (MIT Sloan Business (Novaction)
group) Business School, Hamilton Co. School, Massachusetts
Massachusetts merged with Institute of Technology) BY
(Estimating sales Institute of Burke Marketing
potential) BY Jacques Blanchard
Technology) Research) And Novaction team
BY (post. Graduate of MIT
BY Prof. Glen L. Urban Prof. Glen L. Urban, Prof. Alvin J.
(Booz Allen Sales Sloan, ex-student of
Jacques Blanchard Silk
Estimation System) prof. Glen L.Urban, )
Gerald J. Eskin
(Pillsbury, co-founder of “A Model for Product
BY A FIRST MIX OF BEHAVIORAL ADVANCED
IRI), John Malec (NPD Positioning”
AND ATTITUDIONAL MODELS ASSESSOR,
Group), Lin Y.S. Lynn A model explaining
Lin Y.S. Lynn (ex- (PERCEPTOR). Enriched with powerful
(Pillsburry) reasons behind
Pillsburry) media model. Sales
consumer’s choice.
Behavioral algorithm is projections are
First “Laboratory” Estimates share of ADVANCED ESP
complemented by attitudional. adjusted with
test market based requirement (or even
Replicates purchasing behavior normative-based
on Fourt-Woodlock market share) through
(ad exposure, realistic shelf, model. Benchmarking
equation, 11-point attitudes toward brands
product trial etc.). In parallel, on key success
Juster’s scale to and in-market price.
projections are adjusted with criterias
estimate trial / repeat. Preference score is
outputs from Perceptor. (IDQV), Powerful
“PURE” based on ratings
Perceptor-based
ATTITUDIONAL obtained from paired
diagnostics
MODEL (based on brand comparisons
declared behaviour). (brand vs. brand using
11-point scale)
PREDICTS SHARE
PREDICTS VOLUME RECOVERS SHARE PREDICTS VOLUME
PREDICTS SHARE

Source: Based on Cancy K. et al (1994, 2006)

92
Perceptor was designed to derive purchase probabilities from purchaser’s brand

preferences, measured in a competitive context. Despite the fact that Perceptor was

built on a totally different principle than “purchase intent” models, similarly to them, it

remained an “attitudinal” model (i.e. based on declarations), that undermined forecast

reliability. In 1979, on the basis of Perceptor a new model called Assessor was

developed. That model comprised both “attitudinal” (consumer preferences) and

“behavioral” components (observation of shopping behavior in a realistic simulated

store). An unmatched accuracy of the model was achieved by the convergence

(“self-calibration”) of both components the individual respondent level (Urban, 1978).

Later the model was significantly improved by Jacques Blanchard and his colleagues

at Novaction by incorporating proprietary awareness and normative models, by

introducing special designs for brand re-launches, line extensions, and by developing

modifications for early pre-testing. Currently, this version of Assessor is owned and

marketed by Ipsos under the brand of Designor (Clancy et al, 2006). Despite

considerable sophistication and commercialization, no visible breakthroughs in

Simulated Test Marketing have been achieved since early 90-ies. Still the models are

based on a few fairly simple principles (Willke, 2002, Wherry, 2006), which are

considered below.

3.3.3 Inside Simulated Test Marketing: basic principles of calculation

According to Clancy et al (1994, p.49), “all major STM research models are similar

enough that they exhibit some common strengths and weaknesses” due to the use of

similar calculation principles. Although detailed theoretical background is available in

Lilien et al (1992, 2007), Urban et al (1978,1970,1975,1993), Lin (1986,1997) and

Clancy et al (1994, 2006), these principles can be easily demonstrated without

involving sophisticated mathematical apparatus, which is beyond the scope of the

present work (see Section 1.5 “Limitations”). As discussed above, the first principle

of contemporary STM modeling is that sales are decomposed according to Fourt-

93
Woodlock approach, i.e. “trial” and “repeat” components are estimated separately

(See Figure 3.14 overleaf).

Fourt-Woodlock Equation (1960) forms a foundation of

Figure 3.14
contemporary Simulated Test Marketing model

The Fourt-Woodlock equation is a market research tool to describe the total volume of consumer product
purchases per year based on households which initially make trial purchases of the product and those
households which make a repeat purchase within the first year.

The Fourt-Woodlock equation itself is

V = (HH * TR * TU) + (HH * TR * MR * RR * RU)

“Trial” volume “Repeat” volume
V - sales volume (in units) in a given period of time (usually taken to be one year).
HH - total number of households in the geographic area of projection.
TR - "trial rate“, is the percentage of those households which will purchase the product for the first time in a
given time period..
TU - "trial units" is the number of units purchased on this first purchase occasion
MR - "measured repeat," % of trialists who will purchase it at least one more time within the first year of the
product's launch
RR - “repeats per repeater”: the number of repeat purchases within that same year
RU - number of repeat units purchased on each repeat event
Source: Based on Fourt and Woodlock (1960).

In other words, the precision of the forecast generated by each particular model is

determined by the accuracy of estimates for “trial” and “repeat” components.

According to Farris at al (2006, p.93), modern “system of trial and repeat calculations

… works on the principle that everyone buying the product will either be a new

customer (a ‘trier’) or a repeat customer”. Therefore, the key challenge for each STM

is to deliver accurate assessments of trial and repeat.

The second principle is concerned with the fundamental way of estimating the

probability of purchase. According to available reviews of Simulated Test Marketing

(Wherry, 2006, Lilien et al, 1992, Mahajan and Wind, 1988, Shocker and Hall, 1986),

all currently existing models are based on the two approaches described above – (1)

“purchase intent” and (2) “preference share”. In the first case, the probability of

purchase is generally measured monadically using a purchase intent scale (e.g.

Juster’s scale), while in the second case the probability is always measured against

competitors (See Figure 3.15 overleaf). Therefore, a majority of “purchase intent”

94
models initially generate sales volume projection, while “preference share” firstly

estimate market share (Clancy et al, 2003). However, nowadays there is a trend

among STM vendors for incorporating aspects of both approaches in their proprietary

models “in order to hone their forecasting” (Wherry, 2006, p.3).

Figure 3.15 Principal difference in estimating of

PROBABILITY OF PURCHASE

“Purchase Intent” model: “Preference Share” model :

Consumer’s claims, monadic Consumer’s preferences, direct comparison
Score Verbal Equivalent
0 No chance, almost no chance (1 in 100) Paired brand comparisons on 11 –point scale, across all
1 Very slight possibility (1 change in 10) brands in relevant set. Collected data are as follows:
2 Slight possibility (2 chances in 10)
3 Some possibility (3 chances in 10)
4 Fair possibility (4 chances in 10) Pair A B B C A C
5 Fairly good possibility (5 chances in 10) Chips 7 : 4 6 : 5 8 : 3 Total chips :33
6 Good possibility (6 chances in 10)
7 Probable (7 chances in 10)
8 Very probable (8 chances in 10)
An example of theoretical scores computed as arithmetic
averages of these data, out of a total of 33 chips :
9 Almost sure (9 chances in 10)
Certain, practically certain (99 chances in
10 100) Brand A 7 + 8 = 15 / 33 = 45 %
Brand B 4 + 6 = 10 / 33 = 30 %
Brand C 5 + 3 = 8 / 33 = 25 %

45% repsponded “9” and ”10”

“Raw” probability of purchase “Raw” probability of purchase (Brand A) = 45%

(Brand A) = 45%
Source: Based on Urban and Silk (1978), Urban and Hauser (1993), Lilien et al (1994, 2007), Farris et al (2006), Clancy et al (1994)

An illustration of the PI-based algorithm is given on Figures 3.16a and 3.16b.

An illustration of calculations for “Purchase Intent “-based

*
Figure 3.16a
model. “Trial” component

Volume models are based on declared purchasing behavior:

“People tend to overclaim their future purchases but they do so with great consistency”

Premium Derived from AWARENESS model. Media model

simulates awareness generated by a media plan.
Baby Inputs to media model: GRP, number of billboards etc.
Food Outputs: % Awareness
Population in HH 105 000

x Projected Awareness 50%

Client’s projection
x Projected WDistiribution 30%
= % HHs aware and able to find on sale 15% Derived from the study.
Trial Asked before Product trial,after monadic concept
exposure: “Would you like to buy this product?”
Volume x Trial Rate at full awareness 40%
and Distribution Step 1. Raw data % TOP2 score 11-points Justers scale:
= Trial rate (TR) 5.9%
Certainly will buy (99 chances in 100).............. -10
Almost sure will buy (90 chances in 100) …….-9 50%
x Trial units (TU) 2.0
Then, adjusted for overclaim (coefficients are derived
from global normatives database, collected by
= Trial Volume 12 390 country/category etc.)

Step2. Adjustment coefficient: from those who claim,

only 80% will buy.

* IMPORTANT NOTE ! This illustrates only the basic principle of calculation.

In fact, the structure of leading traditional “purchase intent” based models
, such as BASES is FAR more complex
50% x 80% = 40%
Based on claimed volume, adjusted using normatives

Source: Based on Farris et al (2006), Clancy et al (2006), Lin (1986)

95
 An illustration of calculations for “Purchase Intent “-based
*
Figure 3.16b
model. “Repeat” component

Same approach as for trial….

“People tend to overclaim their future purchases but they do so with great consistency”

Premium
Baby Estimated on the previous stage (5.9% trialists * 105
Food 000)

Triers 6 195 Asked after product trial:

Repeat x 1st Repeat (MR) 62% “Would you like to buy this product in the future?”
Volume x Repeats Per Repeaters (RR) 2.4
Step 1. Raw data % TOP2 score 11-points Justers scale:
x Repeat Units (RU) 2.2
= Repeat Volume 20 280 Certainly will buy (99 chances in 100).............. -10
Almost sure will buy (90 chances in 100) …….-9
77%
=
Total = Total Volume 32 670 Then, adjusted for overclaim (coefficients are derived
from global normatives database, collected by
country/category etc.)
% Trial Volume 38%
% Repeat Volume 62% Step2. Adjustment coefficient: from those who
claim, only 80% will buy.

77% x 80% = 62%

Based on claimed volume / frequency , adjusted using

normatives

* IMPORTANT NOTE ! This illustrates only the basic principle of calculation.

In fact, the structure of leading traditional “purchase intent” based models
, such as BASES is FAR more complex

Source: Based on Farris et al (2006), Clancy et al (2006), Lin (1986)

In the case of “preference share”, the trial rate observed during the realistic shelf

experiment is adjusted using the outcome from the preference model, as described

on Figure 3.15. The repeat component is calculated in a very similar way. The flow

of the algorithm is shown on Figure 3.17a and Figure 3.17b (overleaf).

An illustration of calculations for “Preference share“-based

*
Figure 3.17a
model. “Trial” component

Estimated trial rate (% of trialists) is obtained from realistic shopping exercise

(behavioral component) , then calibrated against preference model (attitudinal
component)
Premium Derived from media model. Media model simulates
awareness generated by a media plan.
Baby Inputs to media model: GRP, number of billboards etc.
Food Outputs: % Awareness
Population in HH 105 000
Client’s projection
x Projected Awareness 50%
x Projected WDistiribution 30% Derived from the study:
= % HHs aware and able to find on sale 15% Captured before product usage, after concept exposure
(in competitive environment).
Trial Step 1. Raw data. Observed trial from realistic shelf
rate % x Trial Rate at full awareness 40%
and Distribution
50%
= Trial rate (TR) 5.9% 50%
Raw trial%

* IMPORTANT NOTE !
This illustrates only the basic principle of
calculation. In fact, the structure of leading
Step 2. Calibration . Adjustment with the preference
model

traditional “preference share” models , such as

Assessor or Designor is FAR more complex 50%
Estimated
and comprise a variety of models (“convergence
principle”)
40% trial%

Source: Based on Urban and Silk (1978), Urban and Hauser (1993), Lilien et al (1994, 2007),

96
 An illustration of calculations for “Preference share“-based
*
Figure 3.17b
model. “Repeat” component

At this stage, share models estimate VOLUME SHARE AMONG TRIALISTS

(i.e. , “share of requirement (SOR)”, in volume)

Premium
Baby Estimated on the previous stage
Food
Trial Rate 5.9% After product use:
Repeat x Projected volume share 40%
(Volume among trialists Step 1. Raw data – Declared Purchase Basket in the
category in the next month (3 months etc.) ,
share) ("share of requirement")
= Volume share 2.4%
AGGREGATED
ACROSS SAMPLE
x Total Market Size 1 384 322
Total = Total Volume 32 670
45% Raw Share of
Requiement
(Volume share)

*
Step 2. Calibration . Convergence with the preference
model
IMPORTANT NOTE !
This illustrates only the basic principle of
calculation. In fact, the structure of leading
traditional “preference share” models , such as 45%
Assessor or Designor is FAR more complex Estimated
and comprise a variety of models (“convergence 40% SOR %
principle”)

Source: Based on Urban and Silk (1978), Urban and Hauser (1993), Lilien et al (1994, 2007),

Noteworthy, that both approaches receive a lot of criticism. Although “purchase

intent”-based approach has proven to be a simple and a highly accurate technique in

“western” markets (Lin, 1986, Bemmaor, 1995), it is often criticized for its inability to

consider competitive environment, over-reliance on norms, a tendency to penalize

true innovations (especially at early stages of development) . In particular, Markovitz

(2007) point out the following disadvantages: (1) Purchase intent advances line

extensions and incremental innovations and kills breakthrough and targeted

products, (2) Purchase intent fails to discriminate differences in concept positioning,

(3) Purchase intent does not reflect the competitive context…and databases cannot

be relied upon as competitive benchmarks, (4) Purchase intent is not diagnostic as it

fails to provide understanding how to rework concepts. At the same time, the leading

providers of “purchase intent” based models, such as BASES, recognize these

drawbacks and try to improve their models (Adrien and Mooth, 2009). “Relying on the

performance standards from the past without adjusting for current market conditions

is likely to result in blind spots that can get in the way of success… The current key

measures of success—such as purchase intent…—continue to be critically important

97
and are key to accurate estimations of volume potential. But there are a host of new

factors—such as breaking through clutter, generating buzz and offering true

innovation—that also need to be considered” (Adrien and Mooth, 2009, p.1).

Concerning “share-preference” models, they are better documented in the academic

sources and sometimes show superior accuracy as compared to “purchase intent”

models (Urban and Hauser, 1993, Bell et al, 2004, Lilien et al, 1992, 2007, Clancy et

al, 1994). However, they are often considered as far too complex (information which

is not understood has no value and is not transferrable within an organization), time-

consuming and demanding in terms of inputs (market data, finished commercials,

shelf schemes, competitive packs etc) (Clancy et al, 1994, Fader and Hardie, 2005).

Despite the seeming simplicity of calculations shown above, the precision of

Simulated Test Marketing is achieved only with the use of advanced modeling

instruments and accurate market data. Typically, an STM model is a “state-of-art”

intellectual product in terms of marketing engineering, statistics and mathematics,

particularly the theory of probabilities. As pointed out by Clancy et al (1994, p.28),

“simulated test marketing is the single best validated tool in all of marketing research.

For new packaged goods, the better STMs can forecast what will happen in the real

world, plus or minus 15 percent”. An overview of such STM techniques is provided in

the next section, with the special attention given to their potential capabilities to

forecast sales in emerging markets.

3.3.4 Review of the leading providers of Simulated Test Marketing

According to the recent study by Wherry (2006, p.6), “today the industry is highly

consolidated. Most of the STM techniques are similar with validation rates that they

highly effective. The major vendors are able to differentiate their services through

customized models, the experience of senior researchers and experimentation with

the latest research trends”. The leading STM models that were originally based on

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purchase intent are VNU BASES and RI Microtest (marketed as TNS eValuate since

the merge of TNS and RI). The major provider of “share of preference”-based models

is Ipsos. Currently the market is dominated by BASES, particularly in the U.S., as

shown on Figure 3.18.

Figure 3.18
In terms of market share, BASES is considered the
leader, with about 50% of the global STM market, with a
higher estimate within the U.S.

Other
30% VNU (BASES)
50%

Ipsos (Designor)
20%

Leading “Volume”-based models Leading “Share”-based models

• VNU Bases (Pre-BASES, BASES I, BASES II) • Ipsos (Designor)
• Research International (MicroTest) / TNS eValuate • M/A/R/C Research (Assessor)
• Aegis Copernicus (Discovery)
• Aegis Synovate (MarketQuest, MarkeTest)

Source: Based on Wherry (2006)

The two leading models are considered below, according to the information obtained

from the independent academic sources (Wherry, 2006, Clancy et al, 1992, 2006,

Lilien et al, 1992, Mahajan and Wind, 1988, Shocker and Hall, 1986, Lin, 1986, 1997,

Urban et al , 1978,1970,1975,1993).

BASES is an STM service offered by VNU holding, which acquired ACNielsen, the

owner of the model at that moment, in early 2000-ies. BASES has separate

forecasting solutions for every NPD stage from concept evaluation to in-market

testing and tracking, in particular – Snap Shot, Pre-BASES, BASES I and BASES II.

A number of additional tools are available, such as Restager, Decision Point, Price

Advisor, Launch Advisor, Find Time, Franchise Growth Analysis etc. Commercial

brochures can be obtained from www.en-us.nielsen.com . As mentioned earlier,

originally BASES is built around the use of attitudinal scales (such as purchase

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intent) and normative data (in particular, extensive databases provided by IRI and

ACNielsen). Although an article by Lin (1986) provides some sketchy information

about BASES design, the model has not been well documented in the academic and

business literature. So far it has been a “black box” for the academic community and

forecast users. However, it is worthy to mention the following specifics:

 Test product and packaging requirements. BASES require at least a picture of

packaging (including brand name and logo). The test product must be

production-line quality. No competitive packs are typically required.

 Advertising requirements. BASES works with a finished concept board in a

standard form (see above Section 3.2.1), an animatic or a ready commercial.

No competitive concepts or commercials are required.

 Other information required. Detailed market data, marketing plans (media,

distribution, promotional activities)

 Design of the shopping environment. BASES approach does not include a

realistic shopping experiment (unless it is not needed for additional

diagnostics). Instead, it gauges consumer reactions on the tested concept in

the form of “purchase intent” and attitudinal scales.

 Sampling. Typically the sample represents a broad audience (total

population), however, boosts are possible. Sample size normally exceeds

400 respondents, with callback data collected from about 200 triers.

 The initial interview. An initial brief interview is conducted as part of the “mall-

intercept” procedure. Few questions are asked about category and brand

usage for several categories, including the test brand category.

 Exposure to advertising. BASES respondents are typically exposed to

concept boards, and not ready commercials. This is usually done in no

competitive context.

 Post-Purchase and Usage Experience. Only those with positive purchase

intent are given with a test product for home use. Then, within the two or four

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 weeks, BASES survey these respondents by phone regarding their future

purchasing intentions, frequencies and amounts. Also, the interview includes

questions on product satisfaction, consumption occasions etc.

 Sales forecasts. Typically BASES output includes: Sales volume in the first

and the second year (optionally), trial rate (for the first year), repeat rate (for

the first repeat purchase), repeats per repeater, average time between

purchases, average number of units per trial and repeat purchase occasions,

awareness.

 Diagnostic Information. Mandatory outputs are: Respondent likes and dislikes

of the concept, profiles of triers, test brand image diagnostics based on

ratings

 Timing and costing. On average, BASES provides a volume estimate within 6-

10 weeks from the field start. An approximate price for a full BASES test is

approximately $50,000-$60,000 (Clancy et al, 2006).

 Validity. ”It is the large number of product launches in the database (over

60,000) that contribute to the BASES edge in the market place, with an

accuracy level within 9%” (Wherry, 2006, p.9). According to the company

brochures, validation statistics are not split by the stage of the studied market,

however, there is breakdown by geographical area. According to the

company’s validation record, an overwhelming majority of validations (above

85% of 1400+ cases) were made in the developed markets of Northern

America, Europe and Japan.

Designor is a sophisticated Simulated Test Marketing service provided by Ipsos, a

French research company, which bought Novaction from its founder Jacques

Blanchard in 2001. Similar to BASES, Ipsos offers a wide range of tools developed to

assist the NPD process, from the stage of idea generation to the launch tracking. In

particular, the newly-introduced Designor NextGen, which utilizes normative

database of original Designor, can be built-in to almost every quantitative test

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conducted by Ipsos. However, traditional Designor STM remains the flagship

forecasting product in the Ipsos’ range due to its superiority as compared to Designor

NextGen. Further information is available at www.ipsos.com. As discussed above,

Designor is an enhanced version of Assessor, which comprises attitudinal

(“preference share”) and behavioral components (realistic shopping experiment) and

therefore is “self-calibrated”. Unlike BASES, normative databases are only

supplementary to the Designor model. According to Wherry (2006, p.13), this allows

Ipsos claiming that Designor is suitable for any countries and categories “where has

been no previous testing”. However, according to Urban and Hauser (1993) and

Clancy et al (1994), Assessor-based models are suitable only for a well-defined

market (or category), therefore a very detailed market data for Designor is a must. In

fact, Assessor is definitely the best documented STM model (Urban et al,

1978,1970,1975,1993). This really helps in understanding Designor and somehow

offsets its structural complexity. Besides that, there are the following points to

consider:

 Test product and packaging requirements. Unlike BASES, Designor needs

competitors’ packs in the same format as tested (images or mockups). The

test product must be production-line quality.

 Advertising requirements. Designor typically works with a wide range of

materials, such as concept boards in a standard format (see above Section

3.2.1), animatics or ready commercials. Competitors’ materials must be in

the same format.

 Other information required. Very detailed market data, marketing plans

(media, distribution, promotional activities)

 Design of the shopping environment. Designor incorporates a realistic

shopping experiment with the real shelf and “a voucher” (substitute for

money). This allows to “capture” the moment of purchase decision in store.

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  Sampling. Typically, the sample consists of category users. However, non-

users are often recruited to gauge category incremental volume. Sample size

ranges from 250 to 600 respondents, with callback data collected from 70%

of sample.

 The initial interview. Technically is similar to BASES, although involve deeper

study of consumer preferences and repertoire.

 Exposure to advertising. This is always done in the competitive context. For

all commercials (or concepts), Designor measures advertising impact,

relevance and differentiation. A set of diagnostics includes brand recall,

content recall and several secondary metrics.

 Post-Purchase and Usage Experience. Typically this procedure is considered

as sampling, i.e. all respondents are given with a test product for home use.

The rest is similar to BASES in terms of data collection.

 Sales forecasts. Typically the output includes: Year 1 and Year 2 volume

sales build – up, volume and value market shares, price elasticity,

cannibalization estimates, awareness modeling.

 Diagnostic Information. Mandatory outputs are: 1) measures of IDQV (impact,

differentiation, quality and value), 2) Perceptor analysis based on a factor

regression of attributes across respondent’s unique brand consideration set.

These tools provide useful insights for further improvements.

 Timing and costing. In line with BASES (Clancy et al, 2006).

 Validity. Similar to BASES, the average accuracy reported by Ipsos is 9%

(Wherry, 2006, p.12). Like BASES, an overwhelming majority of validations

(above 85% of 600+ cases) were made in the developed markets of Northern

America, Europe and Japan.

The other popular STM approaches on the market are TNS eValuate (former

Researh International’s MicroTest), Aegis Copernicus’s Discovery, Synovate’s

MareTest / MarketQuest, M/A/R/C Group’s Assessor FT, TNS FYI (which is no

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longer marketed, but still used by some loyal clients), GfK MarketingLab / Volumetric

TESI (which holds considerable share in Germany) and In-Vivo MarketMind (which is

a significant vendor in France). A comparison table for the leading STM models is

shown on Figure 3.19 below.

Figure 3.19 Comparison chart of STM provider differences

Claimed
Provider Industry Data collection Diagnostics Forecast Model Positioning Site
Accuracy
Target analysis, Yr1, Yr2 Purchase intent for trial; Brand name (industry leader),
VNU BASES
Mainly FMCG Centralized locations, e- cannibalization sales (Yr1 attitudinal scales and forecast accuracy, validated, http://en-
(Pre-Bases, BASES I, +/- 9%
(dominated in the US) panel, phone analysis, price with Pre- normative databases for high level consultancy, extensive us.nielsen.com/
BASES II)
sensitivity testing Bases) repeat databases and wide expertise

Originally a convergent
Brand recall, shelf
model based on
visibility and Comprehensive diagnostics,
Yr1, Yr2 competitive set (enhanced
Ipsos Novaction competitive realistic shelf experiment,
Centralized locations, sales, share, ASSESSOR). Depending http://www.ipsos.
(Designor, Designor FMCG, OTC comparison. +/- 9% perceptor sensitivity analyses,
mall, phone (Yr1 with on the option, utilizes com
Next Gen) Sensitivity analysis. self-calibration, modular
Next Gen) attitudinal, preference,
Forecasing module approach (Next Gen)
normative, observational
(Next Gen)
data

FMCG, services Provides Yr1, Yr2

Centralized locations, Purchase intent
(financial, air travel, diagnostics to sales, share Respondent level forecasting;
phone, internet. forecasting at concept
TNS (eValuate) / RI entertainment) and improve marketing and calibrates level of customer http://www.tnsglo
Respondent data +/- 9% level with in-home
(MicroTest) pharma (product with plan: target market, incidence; inertia within each category; bal.com
collection vs aggregate. placement. Uses priced
mid-late stage price sensitivity, quarterly strong non-US presense
Intercept competitive set
development) position, sales
Internet on-line samples;
TNS FYI* (Foresight, DTS prescription
calibratd b/c different New methods for Based on Purchase Intent Diagnostics using new methods,
Insight, RePurchase) pharma (leader), Yr1 sales, http://www.tnsglo
responses for purchase cannibalization and +/- 15% and rating scales for expertise within pharmaceutical
*) no longer in the FMCG, financial trial, repeat bal.com
intent from mall key driver analysis concept testing industry
market sservices, durables
respondents
Price sensitivity; Concept exposure with
Yr1 sales
competitive product placement,
Move towards and share; Based on competitive set; highly
M/A/R/C Group Centralized locations, response; lloks at improved version of http://www.marcr
financial services, trial, 1st and +/- 10% customizable; strong forecast
(ASSESSOR FT) phone, internet. cannibalization ASSESSOR. Uses esearch.com
pharma, still in FMCG 2d repeat and diagnostics
when forecasting for diffusion modeling for
forecast
line extension longer-term forecasts
Provides info & Yr1-Yr3 Takes into account consumer
FMCG, DTC, financial Combination of various
Centralized locations for recommentations sales, memory decay and new
services, durables - models, but includes http://www.coper
Copernicus store mockup, phone and re: target market, consumer entrants. Incorporates
focuses on evaluating +/- 10% additional in-home periods nicusmarketing.c
(Discovery) on-line (consumer, b2b, positioning, media, awareness, interaction of awareness drivers.
/ improving in-market for "wear-in/wear-out" om
physicians) pricing etc - all to trial and Employs defensive response
performance phenomena
improve marketing repeat, modeling
A suite of models and simulators
for quantifying the market
Cannibalization Yr1 trial and Purchase intent; always potential of a product or service.
FMCG, non-food On-line consumer panel. analysis; target sales; priced, but not necessarily Measures product performance http://www.synov
Synovate (MarkeTest,
consumer products ION system in malls market for line awareness, n/d competitive set. Uses on product attributes; also uses ate.com/marketq
MarketQuest)
(toys, magazines) (multimedia kiosk) extensions, trial and attitudinal model for local professionals to take into uest
restaged products repeat units repurchase account local culture and market
when forecasting. Interactive
Source: Based on Wherry (2006) , Clancy et al (1994, 2006), Lilien et al (1992, 2007) simulator

Apart from the leading international STM products, some locally developed solutions

are offered in the Russian market, in particular by A/R/M/I Marketing (see www.armi-

marketing.com/), Comcon (see www.comcon-2.ru) and MASMI (see

www.masmi.com). Given the existing wide range of the models, it is essential to

study how companies chose and apply them. This is discussed in the next section.

3.3.5 Effective practical use of Simulated Test Marketing

It is imperative that a forecaster has a deep understanding of the market, which is to

be modeled, as well as modeling principles, which are to be applied. It is important to

remember that there is no such thing as “magic crystal ball”, and the quality of

forecast is entirely determined by the quality of inputs. In particular, as discussed

earlier, the quality of Simulated Test Marketing project is a function of that of its

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components - market model, marketing planning system, awareness model, trial

purchasing model, repeat purchasing model and competitive response model.

Therefore, while deciding on “go/no go” with STM or selecting the most effective

approach, a forecaster must be prepared to answer some essential questions related

to each particular component. These questions are summarized on Figure 3.20.

Figure 3.20 Essential control questions to ensure effective use of STM

Component of Simulated Test Marketing
Market modeling (see Chapter 2, Figure 2.4)
Needs, occasions, product characteristics etc
Size of Potential Market (People/Units)
Market Growth / Decline
Seasonality Market model / Business environment market infrastructure, how predictable is it? Is there enough knowledge and
Purchase cycle
Segments / Sub-segments
Competitive Intelligence (shares, domination,
fragmentation, brands, products, positioning,
Marketing Planning:
Marketing planning -
Effective Distribution, Media (TV, Outdoor
etc), PR, Sampling, POP activities
Modeling consumer response:
Model Typical questions that should be answered during the process
How clear and strict is the market definition in terms of consumers needs,
consumption occasions and product characteristics? Are there any close or
"substitute" categories? At what stage is the market ? How stable is the
model
data accumulated? How accurate is this information? Are there known drivers
and barriers to market development? Are there similar markets in other
countries? Are there competitors, what is their market weight ?
Does the marketing plan use the same terms, variables and formats as
Client's marketing planning system compared to the market model ? What is the justification for claiming that this
planning approach will work best in this particular case / market ?

Awareness Generation What makes sure that this model is adequate in terms of country specifics
(Function of Multiple Awareness States - W-O- (cultural, educational, economic differences, media infrastructure) as well as
Awareness model
M, Advertising (TV, Outdoor, Internet), market specifics (stage of development, consumer experience and
Couponing, Sampling, Distribution) qualifications, purchase cycles, sales infrastructure ?)

Trial% Due To: Advertising, Couponing,

Trial purchasing model.
Sampling, Distribution What are justifications for the use of the chosen model in THIS
Consumer response to communication
PARTICULAR market ? Is there enough evidence of high accuracy in similar
and positioning, pack (on-shelf
Trial Volume cases (country, category, stage of market development)? What is the level of
performance), price
accuracy obsereved in such cases? Is the chosen method of data collection
Repurchase Levels%, Repeat Cycles Repeat purchasing model: Consumer appropriate ? Is the sample representative? Does the model provide enough
response to product, pack (in-use information to make quality decisions in time?
Repeat Volumes preformance), price
Modeling competitors response:
Are there identifiable strategies pursued by competitors ? What is their likely
Competitive Intelligence (strategies, potential
Competitive response model response, what kind of action to expect ? How probable is it? What is the
response, threats)
possible damage?

Source: Clancy et al (1994), Lilien et al (1992)

As discussed earlier in Section 3.3.1, Simulated Test Marketing incorporates a

variety of forecasting instruments (See Figure 3.6). However, in fact, very few of

them can be applied at “early” stage of market development due to the lack of

information. Quantitative time-series instruments may be employed at “growth” stage

as the amount of historical data considerably increases. As market saturates, a

majority of instruments become available for use, including econometric modeling.

(See Figure 3.21 overleaf). The analysis of accuracy for particular forecasting

instruments (see Figure 3.7), leads to a conclusion that the accuracy of Simulated

Test Marketing at “early” stage of market development is “poor” in the mid-term (1-2

years). Taking into account the amount of time required to conduct the study, this

makes the forecast practically negligible, although, the study may have some value in

105
terms of diagnostics (i.e. revealing barriers for adoption, dislikes etc). As discussed

earlier, poor quality forecasting at this stage may produce misleading conclusions

about long-term market success of the new product. The analysis has shown that

Simulated Test Marketing is only effective at the later stages of market development.

(See Figure 3.22).

Forecasting instruments employed in STM (marked by “”) at

Figure 3.21
“early”, “growth” and “saturation” stages of market development
Early stage Growing Saturation

Judgemental

Judgemental

Judgemental
Time Series

Time Series

Time Series
Primary or

Primary or

Primary or
behavior

behavior

behavior
Learned

Learned

Learned
Indirect

Indirect

Indirect
Causal

Causal

Causal
Component of Simulated Test Marketing Model

Market modeling (see Chapter 2, Figure 2.4)

Needs, occasions, product characteristics etc     
Size of Potential Market (People/Units)        
Market Growth / Decline        
Seasonality Market model / Business environment      
Purchase cycle model        
Segments / Sub-segments    
Competitive Intelligence (shares, domination,
       
fragmentation, brands, products, positioning,
Marketing Planning:
Marketing planning -
Effective Distribution, Media (TV, Outdoor etc), Client's marketing planning system      
PR, Sampling, POP activities
Modeling consumer response:

Awareness Generation
(Function of Multiple Awareness States - W-O-
Awareness model    
M, Advertising (TV, Outdoor, Internet),
Couponing, Sampling, Distribution)

Trial% Due To: Advertising, Couponing,

Trial purchasing model.         
Sampling, Distribution
Consumer response to communication
and positioning, pack (on-shelf
Trial Volume         
performance), price
Repurchase Levels%, Repeat Cycles Repeat purchasing model: Consumer          
response to product, pack (in-use
Repeat Volumes         
preformance), price
Modeling competitors response:
Competitive Intelligence (strategies, potential
Competitive response model        
response, threats)
Source: Based on Clancy et al (1994), Lilien et al (1992)

Estimated STM accuracy across stages of market development:

Figure 3.22
Quite poor at early stages, good at “growth” and “saturation”
RANGING FROM 1= “VERY POOR” TO 6=“EXCELLENT” “Very Poor” to “Poor” “Fair” “Good” to “Excellent”

Early Stage Growing Saturation

Component of Simulated Test Marketing

Short-term Mid-term Long-term Short-term Mid-term Long-term Short-term Mid-term Long-term
(0-3 mon) (3 mon-2yr) (2yr+) (0-3 mon) (3 mon-2yr) (2yr+) (0-3 mon) (3 mon-2yr) (2yr+)
Market model 3.3 2.4 2.3 4.0 3.6 2.5 4.4 4.6 2.7
Needs, occasions, product characteristics etc 3.3 2.4 2.3 3.3 4.2 2.7 3.3 4.2 2.7
Size of Potential Market (People/Units) 3.3 2.4 2.3 4.2 4.2 2.7 4.5 5.0 2.8
Market Growth / Decline 3.3 2.4 2.3 4.2 4.2 2.7 4.5 5.0 2.8
Seasonality 3.3 2.4 2.3 4.2 3.2 2.3 4.5 5.0 2.8
Purchase cycle 3.3 2.4 2.3 5.0 3.2 2.3 5.0 5.0 2.8
Segments / Sub-segments 3.3 2.4 2.3 3.3 2.4 2.3 4.2 3.2 2.3
Competitors 3.3 2.4 2.3 4.2 4.2 2.7 4.5 5.0 2.8
Marketing Planning: 3.3 2.4 2.3 3.3 4.2 2.7 4.5 5.0 2.8
Marketing planning 3.3 2.4 2.3 3.3 4.2 2.7 4.5 5.0 2.8
Modeling consumer response: 4.6 2.8 2.4 4.6 4.2 2.7 4.9 5.0 2.8
Awareness Generation 3.0 4.2 2.7 3.0 4.2 2.7 4.5 5.0 2.8
Trial% Level 5.0 2.4 2.3 5.0 4.2 2.7 5.0 5.0 2.8
Trial Volume 5.0 2.4 2.3 5.0 4.2 2.7 5.0 5.0 2.8
Repurchase Levels%, Repeat Cycles 5.0 2.4 2.3 5.0 4.2 2.7 5.0 5.0 2.8
Repeat Volumes 5.0 2.4 2.3 5.0 4.2 2.7 5.0 5.0 2.8
Modeling competitors response: 3.3 2.4 2.3 5.0 4.2 2.7 5.0 5.0 2.8
Competitive Intelligence (strategies, potential
response, threats)
3.3 2.4 2.3 5.0 4.2 2.7 5.0 5.0 2.8

TOTAL ACCURACY 3.6 2.5 2.3 4.2 4.0 2.6 4.7 4.9 2.7

Poor to Fair Fair to Good Fair to Excellent

Source: Based on Clancy et al (1994), Lilien et al (1992)

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This has been practically confirmed over the past decades in the Western markets.

Thus, Gundee (1982, p.3) points out that “increased use of the technique has created

a pressing need to avoid potential problems. Starting with the premise that the

simulated systems are only as good as the data they receive, great care must be

taken with the use of the techniques – greater care, in fact, than with many other

conventional types of studies. The reason is that the inputs eventually result in ‘The

Number’, a market share or a sales volume projection. Herein lies the danger”.

Gundee (1982) advises the following when planning a Simulated Test Marketing

study: 1) don’t use models too early - in the market or product development cycle, 2)

correctly define the target audience, 3) don’t load the attitudinal measure to favor the

new product, avoid having attributes which read like the test products copy points, 4)

don’t be overly optimistic about attainable levels of awareness and distribution, 5)

don’t ask the models to measure sales beyond their accuracy range, 6) define goals

before the test begins, 7) don’t rely solely on observed purchases in the test center.

According to Prince (1992), 1) marketing plan assumptions should be linked to the

realities of market history and, if possible, should be modeled, 2) the test product

must fit into an existing product category,3) the accuracy of projections is heavily

dependent on assumptions about market variables. Prince (1992) has identified that

the following factors are particularly important for STM services selection: 1) external

validity, i.e. ability to predict accurately, 2) cost and timing, 3) quality of diagnostics,

4) coordinated thinking and judgements of a company’s researchers, agency

researchers and brand managers, 5) compatibility with company’s standards of

research 6) capabilities for simulation, 6) word-of-mouth, vendor’s reputation, reviews

by consultants. Wilson (1990, p.20) draws particular attention to the quality of market

data – “90% of forecasting error is traceable to marketing input”. He suggests that in

case of poor market information, simpler research techniques must be employed.

Fader (2005) argues that the model should be simple and clear enough to be

effectively used in client’s organization. Mahajan and Wind (1988) argue that use of

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Simulated Test Marketing is inappropriate when the product class is new or the

market is growing (see Figure 3.23).

Figure 3.23 STMs are generally not recommended at early stage of the market (“new-to-the-
world”). A simpler diagnostics test should be considered instead

(STM) (Traditional approach)

Source: Mahajan and Wind (1988)

There are few independent studies on effective use of Simulated Test Marketing in

the “western” markets. The most recent study conducted by Advertising Research

Foundation surveyed 42 marketing research experts employed by the largest FMCG

manufacturers in the U.S. (Baldinger, 1988, 1991). The study produced the following

findings:

 Companies are “largely using STMs to reduce the test market failure rate by

eliminating poorer performing ideas before the high costs of test market are

incurred” (Baldinger, 1988, p.5). 94% of respondents use STM for new

products, 78% - for line extensions.

 The key benefits of using STM are: 1) Risk reduction (55% of responses), 2)

Diagnostics/What if capability (33% of responses), 3) Confidentiality (14% of

responses), 4) Cost effectiveness vs traditional test marketing (10% of

responses), 5) Product optimization (7% of responses), 6) Speed (7% of

responses)

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  The predominant negatives include: 1) Validity, “with a typical complaint that

STMs don’t reflect highly complex situations accurately” (Baldinger, 1988,

p.7) (40% of responses), 2) Analytical / communication issues such as “black

box” approach and poor communication of the meaning of estimates to

marketing (31% of responses), 3) Methodological limitations related to

category appropriateness/experience (17% of responses) and estimation of

long-term repeat rates in long purchase cycle categories (24% of responses)

 Perceived STM validity is moderate: 52% of forecasts were confirmed in

reality, 41% of respondents claimed that actual sales were lower than

predicted, 8% reported that sales were higher than the forecast.

 The 20/80 rule definitely applies to STM market. A few large manufacturers

account for a disproportionally high share of STM activity.

 81% of respondents participated in at least one STM project during one year,

62% participated in 1-4 such projects, 20% participated in more than 5 STMs,

 Average STM cost is around $45 000

To use Simulated Test Marketing effectively a client-side researcher must carefully

select an external vendor of this service. Thus, Malhotra (2007) advises that a firm

should put together a list of prospective suppliers, based on trade publications,

professional directories (such as www.greenbook.org or www.esomar.org) and word

of mouth. When selecting, an in-house researcher must consider the following

questions: “1) What is the reputation of supplier? Do they complete projects on

schedule? Are they known for maintaining ethical standards? Are they flexible? Are

their research projects of high quality? What kind and how much experience does the

supplier have? Has the firm had experience with the projects similar to this one? Do

the suppliers personnel have both technical and non-technical expertise? … Are the

personnel assigned to the task sensitive to the client’s needs, and do they share the

client’s ideology? Can they communicate well with the client?” (Malhotra, 2007, p.21).

Also, Malhotra (2007) points out that this decision should be well-informed and not

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only price-based. In addition to that, the studies on client satisfaction in B-2-B sector

have confirmed the importance of collaborative relationships between client and

supplier (Boughton, 1996, Wetzels et al, 1998, Wuyts et al, 1998, Woodruff and Flint,

2003).

Therefore, the discussion above leads to a conclusion that an effective application of

STM is fully determined by the following factors: (1) General quality of services

(‘highly accurate forecast’, ‘professional presentation of findings and

recommendations’), (2) Supplier credibility (‘recommended by management or

company protocols’, ‘positive previous experience’, ‘well‐known agency’), (3) Model

characteristics (‘simple and easy‐to‐understand’, ’suitable for particular market or

category’, ‘a lot of diagnostic information’, ‘publications in professional literature’), (4)

Communication quality (‘high quality service and project management’,’ individual

approach for every project’), (5) Price (‘affordable price’, ‘transparent and flexible

pricing’), (6) Technological and organizational factors (‘high speed of research’,

‘superior data collection’, ‘use of modern technologies’).

3.3.6 The ways of further development of STM models

According to one of the most influential opinion leaders in Simulated Test Marketing,

Joseph Willke, The President of ACNielsen BASES worldwide, “current STM models

are not well suited for the future marketing world of one-to-one consumer targeting

nor are they well suited for the changing retail environment. They are not well

adapted to the increasing granularity with which businesses are managed – at the

SKU level, at individual store level, week by week. As the world changes, all the

current forecasting models will begin to break”. (Willke, 2002, p.1). Willke identified

the following challenges to address in the future STM models: 1) adaptation to ‘one-

to-one’ marketing driven by the use of modern communication technologies, shifting

away from ‘mass’ marketing approach, 2) sample sizes of contemporary STMs

110
(n=300-400) are far too small for reliable forecasting in modern markets, 3) STMs will

need to forecast at the weekly/monthly level to effectively support production and

inventory control, 4) STMs will have to produce projections at SKU level 5) STMs will

assist in optimizing marketing plans and developing long-term marketing strategies

(including modeling competitor responses). Wherry (2006) highlights the following

trends: 1) STMs are being frequently applied to new dynamic industries and markets,

2) The Internet has become the main channel for data collection, 3) Recent decades

have seen considerable advancements in diagnostics, particularly in the area of key

driver analysis and in-store observations, 4) new methods of estimation such as

hierarchical Bayes and other methods beyond standard regression. Wherry (2006)

shares a Willke’s point of view with respect to challenges that lie ahead of STM: 1)

developing forecasting capabilities on niche and new markets, at the respondent and

SKU levels, 2) evaluating sensitivities to complex marketing programs that involve

new media such as online communities, word-of-mouth, in-store communication 3)

forecasting data in more granular time periods, 4) foreseeing competitive reaction.

The summary of this discussion is presented on Figure 3.24.

Figure 3.24
Developing solutions for the new dynamic emerging
markets is among key areas for improvement

Key areas for improvement

 Internet will become the main channel for data collection
 Diagnostics and Consultancy quality analysis will be improved
 Incorporating Conjoint techniques, new methods of estimation such as
hierarchical Bayes, discrete choice
 Speed and accuracy
 Reflecting rapid changes in retail / shopping environment
 Accurate forecasting in the new dynamic emerging markets

Challenges that lie ahead of STM

 Smaller Markets Require More Customization and Granularity
Smaller consumer markets and segments
Complex targeting in media plans
Forecast data in more granular time periods
 Improve New Product Success Rate (still at best less than 20%)
 New Tools Required for Simulating Awareness (Buzz marketing, Word-of-
Mouth effects simulation: multi-media, internet, blogs etc.)

Source: Wherry (2006) , Willke (2002)

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3.4 Key findings

The analysis performed in Chapter 3 leads to the following key conclusions about

marketing research role in FMCG NPD process:

 Marketing research is essential for NPD process, regardless of the stage of

market development

 Inappropriate use of marketing research in NPD (in particular, at early stages

of market development) can give rise to misleading conclusions about future

success of true innovations

 Considerable differences between research programs for various types of

new products are determined by the stage of market development and

company’s strategy.

 Traditional and Simulated Test Marketing are important elements in NPD

marketing program, particularly for those new products that are launched at

late stages of market development

 In case of “new-to-the-country” product, the design of Simulated Test

Marketing is heavily influenced by peculiarities of the local market and the

stage of its development

 The accuracy of forecast increases with the development of the market: the

use of techniques shifts from “judgemental” to “time-series” and “causal”.

 Simulated Test Marketing is a highly complex research process, comprising

the use of wide range of forecasting instruments

 Test Marketing evolved with the “western” markets. Simulated Test Marketing

was originally developed for saturated FMCG markets in 70-ies and 80-ies.

 “Purchase intent” and “preference share” are two key principles of modeling

consumer response to a new product offer, which underlie the foundations of

the two respective models, ACNielsen BASES (50 % global STM market

share) and Ipsos Designor (20% global STM market share)

112
 The accuracy of STM is heavily dependent on the quality of market data

(especially, in case of Designor), as well as on the quality of accumulated

historical information (especially, in case of BASES).

 Claimed average accuracy of Simulated Test Marketing in the “western”

markets is +/-9% (“Good”)

 The analysis undertaken has proven “poor” accuracy of STM forecast at the

“early stage” of market lifecycle, while that at the later stages is estimated to

be “fair to excellent”.

 Developing solutions for emerging markets is among key challenges for the

STM vendors at the moment

113
 CHAPTER 4
SALES FORECASTING IN THE RUSSIAN FMCG MARKET

4.1 Forecasting sales of new consumer goods in Russia

As discussed in the previous chapters, Russian consumer goods market has shown

tremendous progress over the past decade and is expected to deliver solid double-

digit growth in the next few years (see Figure 2.26b). A majority of FMCG markets

are at the “growth” stage and only few of them can be considered “saturated” (see

Figure 2.27). Although Russian FMCG market offers great sales opportunity in the

long-run, there is a considerable level of uncertainty related to hidden consumer and

business insights. Uncovering these insights with relevant marketing research and

forecasting tools may decrease the level of uncertainty and bring a sustained profit in

the long-run. The need in such tools has been widely recognized in the Russian

market as discussed in Section 2.4.2. According to ESOMAR Industry Study

(2004,2008,2009) Russian marketing research industry grows by +25% per annum

(on average), while that for North America and World are +5% and +9% respectively.

“Russia continues its dynamic expansion” and is ranked among most promising

research markets in the world, being classified to group ‘A’ as growing at double-digit

rate (ESOMAR, 2008, pp.7, 34-35). All major players of the global marketing

research industry (such as Nielsen, Ipsos, GfK, TNS / Kantar Group, Synovate) are

already in the Russian market (ESOMAR, 2010). The Pricing Study by ESOMAR

(2010) shows that a majority of marketing research tools discussed in the Section

3.2 (such as qualitative studies, quantitative tests, strategic exploratory stidies etc.)

are also available in Russia. Moreover, there are several strong local players, such

as Comcon and A/R/M/I-Marketing (affiliated with Kantar Group). The study by

Baldinger (1988) suggests that the size of STM market in Russia can be estimated of

about $USD 5 million a year. (See Figure 4.1 overleaf).

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 In Russia, strong demand for reliable information resulted in a rapid
Figure 4.1
development of local marketing research industry

Marketing research turnover STM turnover **

(mln $US) (mln $US)
350 325 6.0 5.5
Russia, 300
250 198
270 265 5.0
4.0 3.4
4.6 4.5

CAGR +25% 200 144 3.0 2.4

150
85 110 1.4 1.9
100 2.0
50 1.0
0 0.0
2003 2004 2005 2006 2007 2008* 2009* 2003 2004 2005 2006 2007 2008* 2009*

12000 180 151 161 164

9494 9629 141
8306 8890 160 133
US and 121
10000
8000 7137 7824 140
120
6000 100

Canada,
80
4000 60
2000 40
20
CAGR +5% 0 0
2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008

35000 32462 600 552

28235 480
30000
23482 24737 500 399 421
25000 19237 21957 400 327 373
20000
World, 15000
10000
300
200
100
CAGR +9% 5000
0 0
2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008

Source: Based on ESOMAR (2008, 2009) *) based on estimates by www.oirom.ru **) Based on Baldinger (1988,1991), 1.7% of MR TO

Noteworthy, that despite its visibly small size as compared to the mature “western”

research markets, Russian research industry is considered to be on the edge of

modern marketing science, driving methodological innovations in the global research

industry (Burgess and Steenkamp, 2006). However, as shown by the literature

review, a very limited number of quality publications is available concerning the local

practice of sales forecasting. Some valuable insights provided by marketing

practitioners were discussed in Section 2.4.2 (Burdey et al, 1999, 2010,

Belotserkovskaya et al, 2005, Agaeva, 2008). However, the work of Kachalov (2008)

is recognized as the best available summary of forecasting expertise in the Russian

FMCG market. The key points, highlighted by Kachalov (2008) are: (1) the typical

problems that Russian marketers face are “lack of reliable information about market

and competitors” and “high uncertainty about future” (Kachalov, 2008, p.16), (2)

widespread opinion that luck is a key factor of business success, (3) Russian market

is ruled by the same laws as “western” markets, (4) high accuracy of forecasting is

principally achievable (10% error margin vs. reality), (5) forecasting process in the

Russian market involves four stages, in particular (a) refinement of information

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sources, (b) market size projection, (c) sales forecasting and planning, (d) detailing

sales plan by periods, regions and SKUs. Kachalov (2008, p.32-36) distinguishes

three types of forecasts: 1) visionary or long-term, above five years, 2) detailed or

short-term, one year and 3) mid-term (up to three years), which “has no individual

value” and makes “no sense”. This indirectly confirms a significant skew to short-term

projects in the Russian market as compared to “western” markets. Concerning the

quality of information available in the Russian market, Kachalov (2008) argue that the

error is typically 40%-50% due to (1) poor representativeness of studies, (2)

irrelevant responses received. Kachalov (2008, pp.41-27) suggests to employ

various judjemental and indirect instruments to address this issue, such as expert

opinions (“intuition”, workshops, “adjustment coefficients” ranging from 10% to

200%), multiple sources and assessments (“three sources”, “five assessments”),

input-output analysis (“right model”, “macro-approach”), lifecycle analysis, leading

indicators (CEE markets, “per capita” analysis), quantitative techniques (mostly time-

series, such as “moving average” and “trend” analysis – causal models are not

mentioned), consumer and industry surveys, official statistics . With that, it is

recommended that “change-points” be identified with the mix of “expert” and

“quantitative” instruments. However, the work of Kachalov has serious limitations. In

particular, the role of marketing (in general) and promotional techniques (in

particular) is not considered. This reveals implicit assumptions underlying Kachalov’s

recommendations: (a) the market is not saturated (i.e. there’s no need in stimulating

demand as it is already there) and (b) the dominant business strategy is “market

penetration”. According to Kachalov (2008, p.47), ad-hoc consumer research should

contribute not more than “10-20% to company’s knowledge about the market”, which

is obviously far from the rate recommended in “western” markets (McDonald, 2008).

The methods of quantitative tests, traditional test marketing, simulated test marketing

and causal (econometric) modeling are not mentioned. This indicates relatively minor

role of such methods at the current stage of market development, in comparison to

116
developed markets. However, the use of sales forecasting techniques (in general)

and Simulated Test marketing (in particular) in the Russian FMCG market requires

more thorough examination in the context of findings presented in Chapters 2 and 3.

Thus, Sections 2.4.1 and 2.4.2 revealed important insights about Russian FMCG

market, while Chapter 3 summarized existing knowledge on basic principles of

marketing research, sales forecasting and simulated test marketing. In view of these

findings, further analysis can be carried out. Thus, the key conclusion about STM in

the Russian FMCG market is that there are no fundamental barriers to using it,

although some drawbacks need to be considered - in particular, limitations on use at

early stage of development and the need for local customization (see Figure 4.2a).

Reality of the Russian FMCG market and its implications for sales
Figure 4.2a
forecasting and STM. (Consumers)
Implications
Market specifics
Forecasting, in general Simulated Test Marketing, in particular
Skewed towards basic needs
(FMCG): (+) A variety of ready-to-use forecasting solutions (available in (+) No fundamental barriers to using STM, which were originaly
Needs (Maslow's 2009 - Food FMCG 29.2%, Non-
structure represented by
Food FMCG - 12.5%, Other the Western FMCG markets); (-) These solutions need to be developed for FMCG markets; (-) With that, some drawbacks of
"Composition of average
household expenditures%") (residence, transport, clothing, validated in the Russian FMCG market, which is different in STM need to be considered - in paticular, limitations to effectively
services etc) - 58.3%, 2013F - 27.4 terms of needs and drivers of product choice. deal with very dynamic markets at early stage of development
%, 11.7%, 60.9%
(+) Focusing on current consumer preferences and behavior
(+) Can be revealed by using "Judgemental" instruments may improve foracasting accuracy; (-) Relying solely on
(Expert opinions, consumer surveys), it is essential to get regular
historical data and local benchmarks may decrease accuracy;
Emerging FMCG consumption and updates on consumer needs and shopping behavior; (-) The
Occasions
shopping patterns need in frequent updates, rapid aging of information and models; (-) Applying STM at a very early stage of market development
(-) The accuracy of mid-term and log-term forecasts is lower may result in misleading conclusions about long term success of
than that in developed markets the tested product; (-) Generally, frequent changes in
consumption patterns may deteriorate the accuracy of STM
(+) Considerable market growth in the long-run, at least in

"Majority", rapid income growth: value terms; (-) Structural changes in consumer demand must
(+) Possiblitiy to integrate price elasticity models developed in
Consumer

No. of households with annual be considered (e.g. price, brand factor etc); (-) Trading up,
Profile earnings the Western FMCG markets; (-) In general, this factor has a
above US$10,000 in 2009 - 54%, in probable stagnation of "low-price" markets and mass segments;
2013F - 81% (-) Unpredictable fluctuations are possible; (-) Considerable negative impact on STM accuracy
inequality in terms of income distribution must be taken into
account
(+) Significant number of actual consumers allows for using
quantitative forecasting techniques; (+) Well known instruments
Number of (+) Principal possibility to use STM in case of significant
Up to 80% of 53,707,000 to assess incidence are consumer surveys and official statistics;
consumers
households in 2009 number of consumers; (-) Inaccurate estimation of incidence
involved (-) Probable lack of information, unreliable sources, outdated
may seriously undermine forecast accuracy
information, low coverage of surveys, the need to apply
adjustment coefficients or expert estimations ("judgemental"
instruments)

High awareness and fairly good (±) Slower adoption as compared to developed countries; (+)
experience in the main centres of No technical barriers to applying "western" approaches of
Products
distribution, limited awareness and awareness modeling in Russia (the development of media in (+) Developed approaches to awareness and repeat purchasing
awareness /
experience /
availability in rural area. Weak Russia lags behind developed countries); (-) the need for modeling are applicable to Russia; (-) Local adjustments are
loyalty, high level of switching.
Learning extensive use of consumer research to tailor awareness models required
Further learning is required about
niche categories to the Russian market (i.e. country-individual response rates to
various marketing activities etc)

In terms of “market size” and “product characteristics” the main implications are: (1)

lack of reliable market data and a high number of underdeveloped categories

significantly narrows the use of STM, (2) higher chance of forecasting for “new-to-

the-firm” and “new-to-the-country” products, as compared to developed markets, (3)

a strong long-term upward trend - a majority of markets exhibit sustainable double-

digit growth , (4) using norms and historical data from similar markets may improve

117
forecast accuracy, (5) overall STM accuracy is lower as compared to developed

markets, (6) the need for a fast and flexible STM, which is able to simulate a variety

of scenarios (pricing, positioning, advertising etc), (7) importance of testing in the

competitive context (see Figure 4.2b).

Reality of the Russian FMCG market and its implications for sales
Figure 4.2b
forecasting and STM. (Market size and Product)
Implications
Market specifics
Forecasting, in general Simulated Test Marketing, in particular
(+) Sustainable growth in a majority of FMCG markets, many of
(+) STM is recommended to use if market is well-defined and
Size of market in 2009 - $457 bln, in 2013F -$782 them are well-defined and quantified; (-) The accuracy of market
(value, total retail) bln size estimation is often low, therefore adjustments are often quantified; (-) High number of undeveloped markets and lack of
made ("judgemental" techniques); See "Number of consumers market data are barriers for STM
involved"

(+) No limitations to conducting STM at the late stages of the

(+) Market life stage can be identified with traditional lifestyle
lyfecycle (such as beer etc); (-) STM is not recommended for
Growth (although saturation is
Life cycle stage
observed in some FMCG categories) models (typically "growth") (-) lack of market data in many "early" stage, at the "growth" its accuracy is lower as compared
cases (-) considerable number of "embryonic" markets to "saturated"; (±) Considerable skew to "new-to-the-firm",
Market size

"new-to-the-country" products as compared to Western markets

Growth rate of
2009-2013 CAGR 14% (above GDP) See "Size of the Market"
(-) Inaccuracy in estimation of this factor leads to lower forecast
sales accuracy
Granularity Moderate granularity, visible (+) In terms product segments - a simpler forecasting model (+) A simpler market model as compared to developed markets
(structural development of sub-categories and
as compared to developed markets; (-) The need for separate - fewer sub-segments; (-) Difficulties with selection of cities
complexity) segments, wide territory
modeling for regional markets representing national market

(+) A possibility for forecasting using "analogue" (similarities)

(+) Using norms and historical data from similar markets may
Predictability of Moderate (still unstable market
approach (e.g. Central Eastern European markets, Western
market reactions structure and demand), "lagging" improve forecast accuracy; (-) Still the accuracy is lower as
and factors development vs Western markets markets); (-) Generally, limited accuracy of long-term
compared to developed markets
forecasts, the horizon of forecasting is typically 3-5 years

Variability /
Moderate (still unexpected
(-) Uncertainty related to possible seasonal variations,
(-) The need for a fast and flexible STM, which is able to
fluctuations caused by internal simulate a variety of scenarios; See "Forecasting" for
Variation unpredictable impact of external factors; See "Predictability"
market factors) "Granularity"
(+) The need to use consumer research to guage consumer (+) The use of benchmarks and historical data from the similar
Product Technologies are sometimes new for
characteristics / the local market but ordinary for the reactions to the product; (+) It is advisible to apply "analogue" markets may help forecasting; (+) integrated product in-use test
Technology markets of developed countries (similarity) principle in forecasting (Eastern European markets,
module is highly recommended
some Western markets etc)
Products

Potential for
Moderate. Despite highly
substitution /
differentiated brand image of new
products there's a significant threat
Differentiation
from "me-too" products
Variable (from very low to very high).
For new products imported from
Quality
developed countries is initially
perceived as VERY HIGH
(+) Competitors and substitute products must always be taken
into account (Consumer Research. Indirect methods)
(+) The need for examining quality perception, measuring price
elasticity, performing "quality vs price" trade off analysis or
conjoint
(+) Importance of testing in competitive context; (-) In case of
no competitors or product substitutes (i.e. when the market is at
early stage) monadic evaluation is possible. However, this leads
to lower accuracy
(+) Integrated "quality vs price" positioning analysis, price
elasticity analysis

The analysis of implications in terms of “marketing” facet (promotion, pricing), has

shown the following: (1) lower accuracy due to high speed of forecasting is generally

accepted by users, (2) rich diagnostics of marketing mix is essential, although

materials are often not finished, (3) validated local media model is a plus, (4) in case

of no communication simpler methods should be used, such as CPTs or traditional

test marketing (as an initial phase of national roll out), (5) high importance of pricing

information in STM , in particular - modeling various price scenarios is highly

advisable (see Figure 4.2c overleaf).

The analysis allows to hypothesize about high importance of testing in the

competitive context. In case of no competitors or product substitutes (i.e. when the

market is at early stage) monadic evaluation is possible. From financial perspective,

STM is highly recommended to justify substantial investments into advertising and

118
infrastructure in a well-defined market. Generally, the price of STM is supposed to be

lower than that in Western markets due to the limited marketing budgets, lower STM

accuracy, lower expenditures on R&D and higher probability of profits (see Figure

4.2d).

Reality of the Russian FMCG market and its implications for sales
Figure 4.2c
forecasting and STM. (Marketing and Pricing)
Implications
Market specifics
Forecasting, in general Simulated Test Marketing, in particular
(+) Lower requirements to forecast accuracy as compared to
1) Create and capture the market as (+) Lower forecast accuracy is acceptable; (-) high speed;
Western markets; (-) Higher requirements to the speed of
soon as possible 2) Maximize share
Dominant (+) lower cost as compared to the West; (+) essential delivery
Marketing
and secure future profit 3) Create forecasting; (+) No barriers to use Western techniques of
product awareness and encourage of rich diagnostic information (barriers, consumer perception and
Objectives Consumer Research and Indirect methods for data collection
(market size estimation, barriers for entry, consumer response) response to advertising, product, packaging, positioning etc); (-)
trial, educate potential consumers
while introducing the product
as well as quantitative forecasting instruments (typically, time- test materials are not always finished (commercial, pack etc)
series). Some saturated markets allow the use of causal models

Market Development and Market (+) It is advisable to employ methods of market monitoring
Penetration (Strategic Directions),
(Consumer Surveys, Indirect - Industry Surveys); (-) higher (-) highly flexible model is required; (-) capabilities to
Dominant Focus (Product), Proactive ATTACK:
Promo & Marketing

strategies Bypass, Flank, Alliance or requirements to the flexibility of the model (reviews and updates simulate various scenarios of market development and
Acquisition (Business), Sequential in the course of strategy implementation); (-) low quality of initial compatitive reposnse
(Strategy types)
information, low predictability of competitive response

(+) No limitations for use of proven western techniques of media

Aggressive marketing using mass
communications, heavy promotional
activities. A major tool is an IMC
campaign with the focus on building
Communication /
brand awareness and distinctive
Advertising
brand image. In some cases,
considerable emphasis is made on
educating consumers and
development of consumption habits
modeling, i.e. econometric (causal) modeling of relationship
between media exposure and awareness; (±) Awareness
(±) validated local media model; (±) communication
model needs to be localized; (±) To develop accurate
forecasts, it is important to actively utilize consumer research diagnostics and advertising tests; (±) In case of no
information (advertising tests etc); (±) In case of no communication simpler methods should be used such as CPTs
and traditional test marketing (as part of the product launch)
advertising support and direct import it is advisable to employ
standard comcept/product tests or traditional test marketing (as
an initial phase of roll out plan). In this case, forecasting horizon
is short-term (limited to 1 year)

(+) Lower requirements for the level of product detail in

Corporate or individual brands, line forecasts (typically, brand or sub-brand, while that is SKU in the
Branding See "Forecasting" for "Branding"
extenstions, brand differentiation Western markets); (±) The need in consumer research
information for positioning diagnostics

High variation. Perceived prices are (+) There are retail audit suppliers on the market (Industrial
Price levels and very high especially for new surveys) - prices are measuread at SKU, segment, channel, city, (+) High importance of pricing information in STM (Industrial
Pricing

variation imported products. Very cheap local region levels; (-) Many markets are not audited, or coverage is studies)
alternatives are generally available.
limitied or accuracy is very low

Price elasticity / Visible price elasticity. Price (+) Analysis of price elasticity is imperative (Consumer (+) Modeling various price scenarios in STM is a highly
sensitivity skimming is observed. Research), by consumer and product segments advisable

Reality of the Russian FMCG market and its implications for sales
Figure 4.2d
forecasting and STM. (Competitors and Finance)
Implications
Market specifics
Forecasting, in general Simulated Test Marketing, in particular
Many foreign multinational
Domination
companies are now market leaders
(shares of players)
or (+) Competitive Intelligence information is available for the
Fragmentation important players in non-alcoholic largest markets, such as soft drinks etc (i.e. Industrial surveys, (+) Importance of testing in competitive context; (-) In case of
(number of drinks, bottled water, alcoholic drinks Expert optinions, Consumer Research); (-) Generally this no competitors or product substitutes (i.e. when the market is at
players) (excluding vodka), confectionery,
knowledge is often very limited; (+) In a majority of markets early stage) monadic evaluation is possible. However, this leads
to lower accuracy
Quality of Varies across categories, however, there's lower competitive pressure as compared to Western
competition still very easy to enter markets
Competitors

Likelihood of new
Very high See "Dominant Strategies" See "Dominant Strategies"
entrants
Depends on the nature of the
Time to be product, branding, cultural and
established economic barriers (typically from 1 to
5 years)
(+) short-term horizon of forecasting as conmpared to western
Varies across categories. Early entry markets; (+) strong probability to capture significant share in
Order of entry See "Forecasting" for "Time to be Established"…"Maximum
is still possible the market using first entree advantage (with 1 competitor - 59% share"
Maximum Ranges from 100% at initial stage to share, 2 - 44%, 3- 36%, 4 -31%, 5 - 28% etc.); (-) tight
share/sales 20% at maturity stage (with 1 forecasting schedules
potential for a new competitor - 59% share, 2 - 44%, 3-
entrant 36%, 4 -31%, 5 - 28% etc.)

Generally low investments in

R&D,while high in advertising, (-) In case of considerable investment (advertising,
Investments, Costs promotion and distribution. In case of infrastructure) - it is recommended to gather all available
domestic production - direct information (Industrial surveys, Judgemental) to reduce the level
investment in manufacturing facilities of uncertainty and produce a financial forecast of satisfactory
(+) In case of underdeveloped market lower (+) High importance of STM in case of substantial investment;
Finance

Reward - accuracy;
High margins. Reward may be
Profitability, ROI, accuracy of forecasting may be offset by high probability of (-) the cost of STM is lower than that in Western markets due to
significant due to price skimming
margin
profits; (±) In case of entirely new product category, a phased limited marketing budgets, lower STM accuracy, lower
expenditures on R&D and higher probability of profits
High risk associated with local launch is often recommended (by regions, by channels). This
cultural barriers in case of significant allows the risks to be managed as market development goes
Risk - Probability through the stages and becomes more predictable. Traditional
ad investment. Low risk in case of
of Loss test markets are useful in this regard (as part of the product
limited investment and diversity of
offered products launch).

119
The analysis from the macro-environmental point-of-view shows that: (1) the quality

of information about retail is variable depending upon the market and data supplier,

(2) very high risks are typically related to underdeveloped sales infrastructure, (3) the

need to forecast for at least 1 year ahead to plan orders from suppliers or/and

production, (4) it is required that STM model has enough flexibility to review

forecasts in case of unexpected environmental changes, which affect prices,

channels, communication, consumers (see Figure 4.2e).

Reality of the Russian FMCG market and its implications for sales
Figure 4.2e
forecasting and STM. (Infrastructure and Environment)
Implications
Market specifics
Forecasting, in general Simulated Test Marketing, in particular
(+) Existing suppliers of retail audit information (Industrial
surveys); (-) High risks related to underdeveloped sales
The country's vast territory and
Distribution underdeveloped distribution infrastructure; (-) Considerable regional and channel (-) Imprecise estamates of distribution build up for the new
channels limit sales opportunities product (very often)
differences must be taken into account; (-) Inaccurate
estimation of distribution level, i.e. adjustment coefficiants are
often applied ("Judgemental" instruments)
Infrastructure / Environment

Vast majority of FMCG is imported

(food FMCG is around 40%, non-
food FMCG is above 50%). Russia is
a net importer of food products and
Suppliers raw agricultural goods for domestic
(±) The need to forecast for at least 1 year ahead to plan orders See "Forecasting" for "Suppliers"
processing. The main imports are from suppliers or/and production
meat, poultry, fish, milk and milk
products, cheese, vegetables, and
raw sugar.
The Russian retail market is
extremely fragmented, and only in
Moscow
and St Petersburg has there been
Retail channels See "Distribution" See "Distribution"
consolidation. Nationwide, the top
five grocers have a combined share
of around 15% of modern grocery
distribution.

Possible difficulties with product

(-) High risks related to poor quality of trade regulation and (-) It is required that STM has enough flexibility to review
Regulators related infrastructure. The need to examine these risks with forecasts in case of unexpected environmental changes, which
certification
Judgemental methods (expert opinions) and Indirect sources affect prices, channels, communication, consumers

4.2 Traditional STM approaches in the context of the Russian FMCG market

Following findings outlined above, it is appropriate to undertake further theoretical

examination of traditional STM approaches in the context of the Russian market. The

results of comparison analysis are presented on Figure 4.3 (overleaf). As it seen

from the table, both STM approaches are not recommended at early stages of

market development due to the lack of market data, competitive products, normative

databases etc. With that, their performance in the Russian market is not clear, given

the low number of validations in both cases (as to that in developed countries).

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However, in the case of “purchase intent”-based models the clear advantages are:

quick and simple “setup” stage, “easy-to-understand” approach. While that in the

case of “preference share” models - rich diagnostics for the tested proposition and

“self-calibrated” approach .

Examination of the two leading STM approaches in the context of

Figure 4.3
the Russian FMCG market
Preference share (e.g. Designor) Purchase Intent - based (e.g. BASES)
Positives (+) Negatives (-) Positives (+) Negatives (-)
Monadic evaluation of tested
Rich diagnostics of tested
proposition ensures quick and
proposition in competitive context ( Highly demanding for quality market Highly demanding for quality market
simple preparation stage. No need
advertising, place-of-purchase, data data
in test materials for competitors
positioning)
(concepts, reels, packs etc)
Low accuracy in underdeveloped
markets. Highly complex or
Proven average accuracy on impossible to conduct in case of Proven average accuracy on Lack of validations in the Russian
developed markets (+-9%) entirely new market and no developed markets (+-9%) FMCG market
substitute products or close
categories.
"Self-calibration", i.e. capabilities for Time-consuming process of test
accurate assessment of consumer materials preparation (test product "Easy-to-understand". Relative Perceived as "high-priced" (as
response without involving and competitors advertising, packs, simplicity of the model compared to Western markets)
normative databases shelf design etc)
Theoretical possibility to apply the
Limited amount of diagnostic
Modular approach to address Perceived as "high-priced" (as model at earlier stages of market
information (especially in
various business issues compared to Western markets) development with no significant
competitive context)
competition
Perceived as "slow" (as compared Access to extensive normative Perceived as "slow" (as compared
to Western markets) databases to Western markets)
Pereceived as a "black box", limited Pereceived as a "black box", limited
Modular approach to address
flexibility (design and structural flexibility (design and structural
various business issues
modifications) modifications)
Overall modeling complexity, Proprietary "closed" awareness
difficult to manage model
Lack of validations in the Russian Competitive strategies and
FMCG market responses are not analyzed
Proprietary "closed" awareness
model
Competitive strategies and
responses are not analyzed

4.3 Questions that require further investigation

The findings from theoretical analysis presented above in Sections 4.1 and 4.2 do

raise many questions that require further investigation. A majority of findings needs to

be validated empirically in the follow-up study. Thus, it is particularly important to be

certain about the following:

 What is the proportion of “new-to-the-country”, “new-to-the-world”, “new-to-

the-firm” products, “brand stretching”, “repositionings” and “product-price

changes” in the Russian FMCG market?

 What kind of marketing research studies are typically conducted in such

cases, if any?

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  What are critical success factors of sales forecasting in the Russian FMCG

market?

 What makes it difficult to forecast sales in the Russian FMCG market?

 What is the experienced accuracy of sales forecasts for the new products in

the Russian FMCG market?

 What is the share of successful product launches (i.e. reached the target, set

in the business plan, i.e. met the forecast)?

 What are the reasons of not using Simulated Test Marketing?

 What are the levels of awareness and usage for the most popular “western”

models of Simulated Test Marketing?

 What is the average price per study?

 What is the trend in usage of Simulated Test Marketing? Will it become more

popular?

 What are the key drivers of choice in the Russian STM market (in terms of

factors discussed in Section 3.3.5)?

 What are perceived qualities of particular STM services (in terms of factors

discussed in Section 3.3.5)?

To tackle these questions an additional research has been undertaken, which is

described in chapters that follow.

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 CHAPTER 5
RESEARCH METHODOLOGY

5.1 Research objectives and success criteria

The previous chapters have identified a visible gap in scientific knowledge

concerning the use of Simulated Test Marketing in the Russian FMCG market,

raising a number of questions outlined above in Section 4.3. At the same time, the

literature review have revealed increasing business interest in new product sales

forecasting models specifically tailored for the Russian FMCG market (see Section

4.1). Taking into account the need for information that is described above, an

additional study is proposed towards the following objectives:

1) Exploration into sales forecasting practices in Russia, in particular,

 experience with various sales forecasting techniques for innovations

 perception of forecasting services provided by external suppliers

2) Identification of key factors influencing the choice of forecasting method,

particularly, Simulated Test Marketing

3) Review of traditional STM approaches in terms of their applicability for the

Russian market, and elaboration of recommendations for effective and

efficient use of STM in the local environment.

As an outcome of the research, a set of clear findings and actionable insights should

be made available to the participants of the survey, who are NPD, business and

consumer insights experts working for the biggest FMCG manufacturers in Russia.

As revealed in Section 3.3.4, the 20/80 rule is definitely applicable for STM market,

reflecting the greater proportion of experience accumulated within the biggest

manufacturers, as compared to smaller companies. Therefore, surveying a market

representative sample of n~30 experts from at least 10 biggest companies will make

this study a success. A summary of research objectives and methodological

approach is presented on Figure 5.1 overleaf.

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 Figure 5.1 Research topic and methodological approach

A literature review has revealed considerable lack of academic knowledge

Research concerning the effectiveness of traditional techniques of sales forecasting
issue for new products in the Russian FMCG market. With that, a high practical
importance of such information has been identified, particularly, in the
area of Simulated Test Marketing (STM).

There are 3 key objectives of the research, which are as follows:

Objectives 1) Exploration into sales forecasting practices in Russia, in particular :
• experience with various sales forecasting techniques for innovations
• perception of forecasting services provided by external suppliers
2) Identification of key factors influencing choice of forecasting method
3) Review of traditional STM approaches in terms of their applicability for the
Russian market, and elaboration of requirements for the most effective and
efficient technique.

How? Quantitative B2B U&A study (descriptive research)

Research findings will be shared with the participants of the study (i.e. Russian
Contribution FMCG manufacturers) and will support their decision making and business
planning processes. It is supposed that the study results will drive further
development and customization of STM models in emerging markets,
particularly, in Russia.

Success criteria Actionable recommendations based on a representative survey (n~30 experts

from at least 10 leading FMCG companies)

5.2 Research program framework

5.2.1 Type of investigation

According to Sekaran (2003), the proposed methodological approach falls under the

general category of “descriptive studies”. “A descriptive study is undertaken in order

to ascertain and be able to describe the characteristics of the variables of interest

…The goal of a descriptive study, hence, is to…describe relevant aspects of the

phenomena of interest from an individual, organizational, industry-oriented

perspective…Such information might be vital before considering certain corrective

steps, as ‘should the organization consider changing its practices?’” (Sekaran, 2003,

pp. 121-122). As noted by Malhotra (2007, p.83), “the major objective of descriptive

research is to describe something, usually market characteristics or functions”. As it

seen, this type of investigation is appropriate for the study objectives stated above in

Section 5.1, particularly in view of research implications, i.e. ‘should the

organizations working in the Russian FMCG market considering changing their

practices of using traditional sales forecasting techniques for NPD, such as

124
Simulated Test Marketing?’. Sekaran (2003, p.122) suggests that descriptive studies

are helpful in the following: 1) understanding “the characteristics of the group in a

given situation”, 2) obtaining systematic knowledge about aspects of a given

situation, 3) “offer ideas for further probe and research, and / or (4) help make certain

simple decisions”.

The scope of research objectives justifies the use of quantitative approach to data

collection. Gill and Johnson (1991, 2010) suggest that this approach is the more

suitable than qualitative methods in the case of descriptive business study. Burton et

al. (1986) strongly advise to employ quantitative methods for descriptive studies to

ensure better quality decision-making based on the research findings. According to

Malhotra (2007, p.144), quantitative approach seeks to “quantify the data and

generalize the results from the sample to the population of interest”, the sample

should be large enough to allow statistical analysis, the form of data collection is

“structured”, and the outcome is recommendations concerning a final course of

action.

Due to the profile of respondents engaged, the study can be considered as a

business-to-business (B2B). As discussed above, it is planned to survey local

marketing experts, therefore, the research does not go outside of the business world.

According to McNeil (2005, p. 3), “B2B research includes all research where the

product or service is being used in a business environment”.

The type of questions that the study is seeking to answer suggests that it is a Usage

and Attitude survey (U&A). According to Parameswaran (2005), such studies cover

the following areas: 1) awareness and usage of categories and brands, 2)

consideration set, 3) attitude towards the category, attributes looked for in the

category, 5) brand image (beliefs and attitude towards various brands).

The discussion above suggests that the type of investigation can be defined as

descriptive quantitative business-to-business usage and attitudes study.

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5.2.2 Sample design and data collection method

As it follows from research objectives, the target population can be defined as NPD

managers, business and consumer insight managers, category and brand managers,

strategic planning managers, i.e. in-house experts engaged in sales forecasting for

new products in the FMCG market. With that, according to 20/80 rule (discussed

above in Section 3.3.4) a skew towards biggest advertisers is required in order to

achieve a representative sample of marketing research users, particularly, the users

of Simulated Test Marketing. Therefore, “quota sampling” is required (Malhotra,

2007, p.340), i.e. 80% of interviews should be conducted with employees of FMCG

companies from the Top-100 advertisers list (See Figure 5.2).

The following FMCG companies are among the Top-100

Figure
Figure 1.9
5.2
advertisers in Russia :
Total ad budget , Total ad budget ,
Rating Company Rating Company
mln $USD mln $USD
1 PROCTER & GAMBLE 301,59 36 BEIERSDORF AG (BDF) 40,35
2 L`OREAL 190,51 37 HEINEKEN 38,82
3 UNILEVER 144,11 38 LEBEDYANSKY 37,59
6 DANONE 123,92 46 DIROL CADBURY LLC 32,76
7 NESTLE 123,01 55 EFES BREWERY 27,01
8 MARS-RUSSIA 122,94 69 S.C.JOHNSON 22,97
10 RECKITT BENCKISER 116,62 70 TRANSMARK (SAB MILLER) 22,96
11 HENKEL GROUP 111,91 75 ROLLTON 21,65
12 COCA-COLA 106,72 76 ORIFLAME COSMETIC 20,65
13 WIMM-BILL-DANN 96,42 77 KIMBERLY CLARK 19,64
16 BALTICA 81,22 78 CAMPINA 19,43
17 COLGATE-PALMOLIVE 76,70 79 DOUWE EGBERTS 19,00
19 PEPSI CO 68,43 81 FABERLIC 18,74
21 WRIGLEY`S 59,20 83 SCA HYGIENE PRODUCTS 18,33
23 KRAFT FOODS 55,49 88 UNIMILK 16,06
25 SUN INBEV 53,33 89 ORIMI TRADE 15,20
27 NEFIS COSMETICS 51,85 90 HOCHLAND 15,04
30 JOHNSON & JOHNSON 47,49 91 PEPSI LIPTON INTERNATIONAL 14,92
31 KALINA 45,91 93 KAZANSKY FAT FACTORY 14,31
32 FERRERO 44,82 100 UNITED CONECTIONERS 12,18
AVON BEAUTY PRODUCTS
35 41,11
COMPANY

Source: TNS (2009)

It was initially planned to contact at least 25 biggest and medium-size FMCG

companies, assuming response rate 40%-50%. As the entire universe of client-side

experts is estimated to be about 300 people, a sample size of n~30 respondents can

be considered as minimum number to arrive at fair conclusions. In this case, the

margin of error varies from ±5% to ±14% (for 5% and 50% respectively), assuming

finite universe population N=300 and confidence level 90% (Malhotra, 2007). With

126
that, it is worthy to note that it is difficult to achieve large sample size in such studies.

Thus, a similar study by the U.S. Advertising Research Foundation was able to

survey only n=42 experts (Baldinger, 1988). The method of sampling employed can

be qualified as “non-probability”, which has certain limitations discussed below in

Section 5.2.2. However, the use of random sampling techniques is not quite

appropriate in this case due to the small size of the target population.

Concerning the method of data collection, Web-interviewing was chosen assuming

that this is the only possible way to reach the target group and get sufficient number

of quality responses (given a complex structure of the questionnaire). To ensure

smooth execution of the fieldwork, the best-in-class software was used to facilitate

data collection (Sawtooth CiW, grant ID is 1302678, see Appendix). The summary

information on survey methodology is shown on Figure 5.3.

Figure
Figure 1.9
5.3 Sample design and methodology:

In-house experts working for major Russian FMCG companies, those

Who? who are responsible for new product sales forecasting and marketing
research: NPD managers, business and consumer insight managers,
category and brand managers, strategic planning managers
N= 30+ interviews, non probability quota sample:

 Involved in sales forecasting for NPD

 At least 10 FMCG companies covered
 80% interviews with employees of the biggest FMCG manufacturers
(among top 100 biggest advertisers) *
 20% interviews with employees of the medium-size FMCG manufacturers *

How? Personal self-administered web-interviews

Data collection: June-July 2010

When? Data analysis: August 2010
Presentation of results: End of September 2010

Where? Russia, Moscow

Business-to-Business Usage and Attitude study

What ?
*) reflects proportion of total spending on advertising and marketing research

5.2.3 Questionnaire

The questionnaire is designed to specifically address research questions and

incorporates the following main sections: (1) screener, (2) the frequency of occasions

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when sales forecasting in required, (3) most popular research techniques and

information sources used while forecasting (by type of marketing occasion), (4)

awareness and usage of STM techniques, (5) key factors driving the choice of STM

model, (6) perceived qualities of various STM techniques, (7) assessment of

customer satisfaction with various types of Simulated Test Marketing, (8) perceived

accuracy of Simulated Test Marketing. The questionnaire consists of 25 questions

and is estimated to take 25-30 minutes (according to the results of two pilot tests).

The method of data collection is Web - interview, therefore the questionnaire is self-

administered. The final version of the questionnaire is available in Appendix.

5.2.4 Analysis plan

The analysis plan is designed to answer research questions directly, uncovering

insights in a sequential manner, narrowing the scope of investigation. The table

below shows preliminary analysis plan consisting of 16 research items, starting from

profiling of the audience and finishing with sophisticated positioning analysis (see

Figure 5.4). As mentioned earlier, a special emphasis in the analysis is placed on

significance testing under assumption of finite target population (n=300).

Figure
Figure 1.9
5.4 Analysis plan
Analysis Observations
Research question Key Variables Analysis approach
unit required
Who are the experts we are talking to? Is the sample Q0-Q4. Profile of the people involved in business
Frequency Respondent 30+
representative enough? forecasting for NPD (Nominal)
What is the proportion of “new-to-the-country”, “new- Q5. Number of occasions per year when sales
Frequency, Descriptive:
to-the-world”, “new-to-the-firm” products, “brand forecasting is required, by type of marketing task (new
Weighted to represent the Occasion 100+
stretching”, “repositionings” and “product-price brand launch, line extension, brand stretching, brand
market
changes” in the Russian FMCG market? re-launch etc.) (Scales)
Q7. Research tools employed to accomplish each Frequency, Descriptive:
What kind of marketing research studies are typically
marketing task (new brand etc). Popularity and share Weighted to represent the Occasion 100+
conducted in such cases, if any?
of STM techniques market
What are critical success factors of sales forecasting Q7a. Critical success factors for sales forecasting for
Frequency Respondent 30+
in the Russian FMCG market? NPD (open-ended)
What makes it difficult to forecast sales in the Russian Q7b. Difficulties in sales forecasting for NPD (open-
Frequency Respondent 30+
FMCG market? ended)
What is the experienced accuracy of sales forecasts Q7c. Perceived accuracy of sales forecasting for NPD
Frequency, Descriptive Respondent 30+
for the new products in the Russian FMCG market? (scale)
What is the share of successful product launches (i.e.
reached the target set in the business plan, i.e. met Q7d. Perceived success rate for NPD (scale) Frequency, Descriptive Respondent 30+
the forecast)?
What are the reasons of not using Simulated Test
Q8, Q16. Key barriers for using STM (open-ended) Frequency Respondent 30+
Marketing?
What are the levels of awareness and usage for the
most popular Western models of Simulated Test Q9-Q12. Awareness, usage of various STM Frequency Respondent 30+
Marketing? techniques (nominal)
What is the average price per study? Q14. Average STM price per study (scale) Frequency, Descriptive Respondent 30+
What is the trend in usage of Simulated Test
Frequency, Descriptive Respondent 30+
Marketing? Will it become more popular? Q15. Future usage of STM (scale)
What are the key drivers of choice in the Russian STM Q17-21, Q22 Consumer preferences and choice
market (in terms of factors discussed in Section drivers for STM services (Ranking), Likes, Dislikes Frequency Respondent 30+
3.3.5)? (open-ended)
Correspondence analysis (
Q23. STMs brand image (5-point scale, 16 Analsysis of residuals, Assessment
100+
statements) Perceptual mapping) (statement)
(Malhotra, 2007,p.673)
What are perceived qualities of particular STM
services (in terms of factors discussed in Section Q24. Customer satisfaction by STM brand (Scale) Frequency, Descriptive Respondent 30+
3.3.5)?
Q25. Perceived STM accuracy (Scale) Frequency, Descriptive Respondent 30+
Assessment
Frequency, Regression
Q22, 23, 24 SWOT analysis for major STM models (statement, 100+
(Malhotra, 2007,p.666)
brand)

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5.2.5 Limitations in terms of precision and confidence

Sekaran (2003, p.24) suggests that precision and confidence are key parameters

that measure ‘closeness’ of research findings to the ‘reality’. While precision “refers

to a degree of accuracy on the basis of the sample”, confidence is “the probability

that estimations are correct”. As mentioned earlier, the size of the sample (n=30) can

be considered as minimum sufficient to produce reliable findings. The expected error

margin may go up to ±14%, assuming finite universe N=300 and confidence level

90% (Malhotra, 2007). With that, the use of advanced significance testing techniques

(based on the assumption of a finite small target population) may help to improve the

quality of findings.

5.2.6 Limitations in terms of generalization

According to Sekaran (2003) there are two common understandings of the term

‘generalization’. The first one is related to the representativeness of sample and the

ability to project the findings to the total target population – “the researcher should be

able to draw conclusions that would be generalizable to the population of interest”

(Sekaran, 2003, p.266). In view of this definition, it is important to note, that the

chosen sampling approach falls within the group of “non probability” techniques due

to the use of ‘judgement’ (pre-defined contact lists) and ‘snowball’ recruiting

(Malhotra, 2007, p.340). The above factor can be recognized as a serious drawback

to the generalization of study findings. The second meaning of generalization is that it

”refers to the scope of applicability of the research findings in one organizational

settings to other settings” (Sekaran, 2003, p.35). In that respect, it is important to

emphasize that findings of the study are not transferrable to any market, other than

Russian FMCG.

129
 CHAPTER 6

KEY FINDINGS:
THE USE OF SIMULATED TEST MARKETING IN RUSSIA

6.1 Respondents profile

In course of the study 48 quantitative interviews were taken with experts working at

largest FMCG companies in Russia (see Figure 6.1 overleaf). From these

interviews, the number of completes is 33, incompletes (i.e. interrupted at some

stage due to various reasons) – 14. One interview was dropped from the analysis by

respondent’s request. As seen from the data, a very large majority of research

participants (above 70%) have over six years of experience in the FMCG market,

while 30% of the sample have above ten years of experience. More than a half of

interviewed experts hold management positions in marketing or marketing research

departments of their firms. In particular, 36% are senior managers and 29% are team

leaders. In terms of representativeness at company level, the survey reflects opinion

of employees working at 27 FMCG companies, specializing in various categories,

such as food (52% of companies), beverages (non alcoholic and alcoholic, 20% and

13%, respectively), non-food, including tobacco (21%). The average number of

interviews per company is 1.77. In the case of one particular company the “weight”

assigned to each respondent was reduced in order to ensure fair and equal

representation of companies in the sample. About 60% of the companies surveyed

are listed among the top 100 television advertisers (see Figure 5.2).Their

contribution into total amount of television advertising expenditure made by all FMCG

companies, accounts for over 50%. Therefore, respondents’ profile as well as the

number of interviews collected are generally satisfying requirements set above in

Section 5.2.2. Also, this supports the conclusion that the quality of collected data is

acceptable for further analysis.

130
 Figure
Figure 1.9
6.1 Respondents’ profile

Number of interviews: By company:

Total …………………..………........…...............................48 Total number of companies surveyed…………….…...27
Completed…….……..……………………………..………..33 Average number of respondents per company……...1.77
Incomplete (stopped at some point of interview)……….14 Companies ranked among Top-100 TV advertisers ...60%
Dropped from the analysis by respondent’s request..…..1 SOV among the biggest FMCG TV advertisers...........53%

Experience: Television advertising expenditures in 2008

(FMCG companies in the Top-100 group, see Figure 5.2):
Q3a. How long do you work in FMCG sector?
Less than 2 years …..………........…...............................3%
2-5 years…….……..……………………………..……….23% SURVEY PARTICIPANTS

6-10 years………………………………………...……….45%
35%
More than 10 years…………………………………...….29% NON‐PARTICIPANTS: 
PROCTER & GAMBLE
53%
Department / Position :
NON‐PARTICIPANTS: 
Q2. In which department do you currently work? OTHER FMCG 
12%
COMPANIES
Marketing research / Insights…..…...............................60%
Marketing (Category or Brand management) …………20%
Strategic planning and forecasting …………………….12% Category profile of surveyed companies (% of total) :
Marketing (NPD / Innovations )……………………...….4%
Trade marketing / Sales……………………….……...….4% Food 52%
Q3. What is your role (position) in the department? Non‐food (inc. tobacco) 21%
Department director / Senior manager .........................36% Non alcoholic beverages 20%
Team/Working group manager …………………….……29%
Specialist / Expert ………………………..……………….35% Alcoholic beverages 13%

6.2 New product types and marketing research methods employed in Russia

As discussed in previous chapters, it was revealed that there are seven major types

of new products in the developed markets. As it was shown in Chapter 2 (see Figure

2.2), as per estimates of western researchers in late 90-ies, the share of ”new-to-the-

world” and “new-to-the-country” products in the total number of new product launches

in the U.S. FMCG markets accounts for 10%, “new-to-the-firm” - 20%, “line

extensions” and “brand stretching” - 23%, “brand re-launch / repositioning” - 4%,

”Product/price changes” – 43%. As per results of theoretical analysis performed in

Chapter 2 (Section 2.4.1), the portion of “new-to-the-country” and “new-to-the-firm”

is significantly higher in the emerging Russian market as compared to saturated

“western” markets. However, the analysis of data collected reveals the opposite

conclusion (see Figure 6.2 overleaf). Thus, as per study results, the share of “new-

to-the-country” and “new-to-the-firm” totaled only 10% in the Russian FMCG market

in the year 2009, while contribution of “product/price change” exceeded 60% (the

respective numbers for “western” markets are 30% and 43%, as measured in 90-ies).

131
The shares for “line extensions / brand stretching” and “brand re-launches” are

consistent with that in “western” markets (23% and 4% respectively). It may be

hypothesized, that this situation is unusual and is largely caused by the world’s

economic downturn (which peaked in the middle of 2009). Due to that reason, the

number of true product innovations had dramatically decreased both in the Russian

and global FMCG markets as companies shifted their focus to cost reduction for

existing products (e.g. price-offs, formula revision, savings, applying “lean” principle

etc). It is therefore advisable to perform additional assessment in the period of

expected market growth between 2011 and 2013 years in order to finally determine

whether the hypothesis discussed above is correct.

Figure 6.2 Extremely high share of “product/price changes” registered for Russia in 2009
Figure 1.9
as compared to that in Western markets in the end of 90-ies

Russia,FMCG,2009 (as reported by respondents): Western markets in the end of 90-ies:

Q5. Concerning these categories (or brands), how Types of new product launches according to results
often did the task of sales forecasting arise in the of the similar studies in the U.S. market
following situations in your department in 2009 ?

New‐to‐the‐ New‐to‐the‐
Country or  New‐to‐the‐ Country or 
World;  Firm; Product /  World; 
4% 6% Price change; 
10%
Line  43%
Extensions,     New‐to‐the‐
Brand  Firm;
Stretching; 
20%
23%

Brand 
Product /  Brand  Line 
relaunch  / 
Price change;  relaunch  /  Extensions,    
Re‐
Re‐ Brand 
62% positioning; 
positioning; 
Stretching; 
4% 23%
4%
N=870 occasions Source: Griffin (1997)
(estimated from responses on Q5)

The study results indicate that respondents are quite familiar with the fundamental

methods of marketing research, which confirms theoretical expectations discussed in

Chapters 3 and 4. The most popular method of marketing research in 2009 was

expert analysis (both internal and external) based on accumulated historical market

data and newly obtained statistics - 79% of respondents report that they used this

method in 2009 (see Figure 6.3 overleaf). Also, qualitative techniques were

132
extensively employed by 72% of respondents. A majority of respondents participated

in a Simulated Test Marketing project at least once during the year 2009 (62% of

surveyed experts). This confirms theoretical prediction that STMs can potentially be

exploited in the Russian FMCG market (see Figure 4.2a). The data analysis

performed indicates that STM is more often used in the case of true product

innovation, while in the case of ”product/price changes” simpler quantitative

diagnostic tests are frequently applied.

The use of marketing research tools for sales forecasting during new
Figure
Figure 1.9
6.3
product development process
MARKET RESEARCH METHODS EMPLOYED IN THE RUSSIAN FMCG MARKET FOR NPD:
Q7.Which research techniques or information sources did you or your colleagues use while forecasting in each of
the following business situations in 2009?

TOTAL                    New‐to‐the‐ Changes in Marketing mix 

Line Extensions / 
(any type of new  Country / World  (Positioning / Product / 
Brand Stretching
product) /Company Price change

(% of Total Answering*) Deviation  **
Any expert analysis (time series based on 
79% +0.1 ‐0.5 +0.4
available statistics, internal, external)

Qualitative studies 72% ‐0.1 ‐0.2 +0.4

Quantitative diagnostic tests ‐ w/o  sales 
64% ‐2.5 +0.4 +2.2
forecasting

Simulated Test Marketing 62% +3.0 +0.5 ‐3.7

Quantitative tests with elements sales 
55% +0.1 +0.3 ‐0.5
forecasting

Strategic quantitative exploratory studies 47% ‐0.2 +0.3 ‐0.1

Traditional Test Marketing 42% +0.1 +0.7 ‐0.8

* BASE: * ADJUSTED STANDARDIZED RESIDUALS, i.e. difference

N=39, Weighted to from expected average measured in Standard Deviations
ensure equal Shaded boxes indicate differences exceeding 2 Std.Dev.
representation of
companies BASE: N=418 cases, Significant at 5% error level
(p<0.05, p=0.024 ,Chi-Square 23.465)

6.3 Insights into forecasting in the Russian FMCG market

According to study results, the key factor that must be taken into account when

forecasting sales in the Russian FMCG market is quality and the amount of available

market data – 39% of experts mentioned that answering question Q7a. Thus, for

example, according to respondent #4, ”it is critically important to get reliable market

data, such as household panel and retail audit”, while respondent #29 emphasizes

that ”the forecast is built on retail audit data, which is of variable quality in Russia”.

This is consistent with the hypothesis about high importance of market data, its

133
limited availability and variable quality in the emerging Russian FMCG market (see

Chapters 3 and 4, in particular Figure 4.2b). Also, experts stress the importance of

the following: clarifying forecasting objectives, requirements, and action standards

beforehand - in terms of incremental sales and cannibalization (22%); competitive

intelligence (19%); accurate targeting, i.e. clear and concise definition of the market

and target group (17%); gathering and using historical data (17%); choice of

appropriate forecasting technique (17%); considering various scenarios of market

development (17%). The details are given below on Figure 6.4.

Figure
Figure 1.9
6.4 Reliable information is key to forecasting success in Russia

FACTORS TO CONSIDER WHEN FORECASTING IN THE RUSSIAN FMCG MARKET

7a. From your experience, what are the factors that need to be taken into account when forecasting in the Russian
FMCG market? /OPEN-ENDED/
Q7a   (% from answering)      
Reliable information about market size, trends, drivers of development, white spaces and 
sales opportunities 39%
Business objectives, action standards (e.g. incremental sales, cannibalization etc) 22%
Competitors and their likely response 19%
Targeting ‐ defining the audience and sourcing product categories 17%
Similar cases, benchmarks, historical data 17%
Forecasting approach (structure, components, inputs, outputs, limitations) 17%
Various business scenarios 17%
Consumer and shopper insights (barriers to adpotion, attractiveness of offer etc) 17%
Business and Organizational insights (execution capbilities, sales infrastructure,  
distribution, retail, media etc) 14%
Realistic marketing plans 11%
Readiness of new product offer (communication, formula, marketing plans etc) 11%
Proven method  11%
Forecasting ROI,  ratio between investments (time, efforts, budget) and project importance 11%
Price context, price elasticity and dynamics 8%
Monitoring performance during the launch / Validation / Calibration / Correction upon in‐
market results 8%
Strategy and long‐term vision 6%
End ‐ users (i.e. who and how will use the result) 6%
Internal communication 6%
New product type (new‐to‐the‐firm, new‐to‐the‐country etc) 3%
Horizon of forecasting (short‐, mid, long‐term) 3%
Using several alternative approaches to increase accuracy 3%
BASE: N=36, Weighted to ensure equal representation of companies

Respondents point out the following actual problems in sales forecasting, that need

to be addressed: (1) accuracy of market data (39%), tailoring existing approaches to

the local market reality - in terms of design, accuracy, flexibility, cost (36%),

validations, acquiring historical data, benchmarks, working out evaluation criteria

(29%), improvement of business- and media- planning processes (25% and 21%

respectively), lack of knowledge about forecasting and research techniques among

end users (e.g. brand teams, sales teams etc.). The complete list of answers is

shown of Figure 6.5 overleaf.

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 Reliable market data, customized models, extensive local normative databases
Figure
Figure 1.9
6.5 and effective methods of marketing planning are key areas for improvement in
the Russian FMCG market
DIFFICULTIES AND ISSUES THAT NEED TO BE ADDRESSED
7b. What are the difficulties that you usually face when forecasting sales for a new product? What issues require
further exploration? /OPEN-ENDED/
Q7b   (% from answering)        
Reliable, accurate and up‐to‐date information about the market (size, structure, trends and 
43%
factors of development, macro environment and sales infrastructure, e.g. sales channels) 
Tailoring western models to local market conditions ‐ improving forecast accuracy (especially 
36%
short‐term), speed of delivery, cost, simplification , developing alternative approaches
Normative database / Developed evaluation criteria / Historical information / Validations 
29%
database / Knowledge base for comparative analysis
Effective methods of business and marketing planning in the local market (setting realistic goals, 
25%
effective marketing approaches)
Local media‐model (relationship between ad investments and consumer response, detailing by 
21%
channel)
Methods of forecasting in highly volatile markets 18%
Education of internal clients (to overcome senior managers' lack of trust and avoid difficulties 
18%
with brand teams)
Competitors ‐ competitive environment, competitors response 14%
Targeting ‐ defining the market and target group 14%
Consumer and Shopper insights in the local market 14%
High cost and duration of forecasting, especially STM 14%
Approaches to cannibalization and source of volume assessment 11%
Manegerial and infrastructure aspects of NPD and launch in the local market (best practices of 
11%
NPD,  infrastructure setup: distribution, media, retail etc)
No problems if marketing research tools are used correctly 7%
Methods of forecasting for absolutely new products, non existing markets 4%
Accurate and clear description of modeling  approaches ,their limitations and terms of application  4%
Flexibility of the model (quick reruns of revised scenarios, adaptability etc ) 4%
Methods of forecasting for incomplete of not final marketing mix at early stage of NPD 4%
BASE: N=36, Weighted to ensure equal representation of companies

Concerning successful new product launches, over 70% of respondents reported

that, in their experience, more than 25% of launches can be considered successful

(i.e. actual sales were in line or above business plan). This is significantly above that

in “western” markets – 5%. Also, as per experience of 70% of experts, the accuracy

of forecasts does not exceed 20% on average (See Figure 6.6 below).

In comparison to Western markets: greater rate of successful new product

Figure
Figure 1.9
6.6 launches (25%+ vs. 5%*) and considerable error of sales forecasting for NPD

PERCEIVED SUCCESS RATE OF LAUNCHES: PERCEIVED ERROR OF FORECASTING (NPD):

Q7d . In your experience, how many product launches Q7c. In your experience, what is the average error of
would you consider successful sales forecasting for a new product ?
(i.e. actual sales were as planned or above) ? (% OF TOTAL ANSWERING, CUMULATIVE)
(% OF TOTAL ANSWERING, CUMULATIVE)

0% 50% 100% 150% 0% 50% 100% 150%

More than 0% 100% More than 5% 100%

More than 10% 83% More than 10% 95%

Median

Median

More than 25% 70% More than 20% 68%

More than 50% 39% More than 40% 23%

More than 75% 25% More than 50% 10%

BASE: N=27 (N=37 excluding DK/NA), BASE: N=29 (N=37 excluding DK/NA),
Weighted to ensure equal representation of companies Weighted to ensure equal representation of companies
*See Figure 1.3 Significant differences between Russian and Western Markets – Hypotheses tested with Z-Test with correction for finite
population , assuming same sample for Western markets – ( 70% vs. 50% ,Significant at 10% error level (p<0.01) 2-tailed Z-Score =1.66)

135
Generally, research findings above confirm theoretical expectations discussed in

Chapter 4 (see Figure 4.2a and 4.2b).

6.4 Awareness and usage of STM models in Russia

The research undertaken has shown that respondents are very much aware of the

leading approaches in Simulated Test Marketing. A majority of experts had gained

practical experience with particular STM models. More than a half of experts

indicated that they had previous experience with the most popular “western”

approaches – ACNielsen BASES and Ipsos DESIGNOR (see Figure 6.7).

Generally high awareness of various STM models. ACNielsen BASES and Ipsos
Figure
Figure 1.9
6.7 Designor lead the market.

AWARENESS OF STM MODELS EXPERIENCE WITH STM MODELS

Q9 . Which of the following “simulated test marketing” Q10. Which of the following “simulated test marketing”
techniques have you ever heard of, at least by the techniques have you or your colleagues have ever
name? (% OF TOTAL ANSWERING) used? (% OF TOTAL ANSWERING)

IPSOS DESIGNOR (ANY) 92% IPSOS DESIGNOR (ANY) 65%

Designor Shelf, Desighor D'Light 86% Designor Shelf, Desighor D'Light 65%
NextGen, Innoscreen Forecast 71%
NextGen, Innoscreen Forecast 21%
ACNielsen BASES  (ANY) 90%
BASES (ANY) 56%
BASES I или BASES II 85%
Snapshot или Pre‐BASES 54% BASES I или BASES II 56%
A/R/M/I Marketing ‐ STM 64% Snapshot или Pre‐BASES 21%
GfK ‐ MarketingLab / TESI 58% Comcon Sales Vision 19%
Comcon Sales Vision 55%
TNS / RI ‐ Microtest 16%
TNS / RI ‐ Microtest 40%
A/R/M/I Marketing ‐ STM 15%
MASMI ‐ Simulated Test Market 29%
TNS / RI ‐ eValuate 28% GfK ‐ MarketingLab / TESI 14%
Synovate ‐ MarketQuest MVP 19% TNS / RI ‐ eValuate 9%
InVivo ‐ MarketMind 14% MASMI ‐ Simulated Test Market 7%
TNS / RI ‐ FYI 13%
InVivo ‐ MarketMind 6%
Other 5%
Other 5%
Aegis Copernicus ‐ Discovery 4%
M/A/R/C  ‐ Assessor 4% Synovate ‐ MarketQuest MVP 4%

BASE: N=36, BASE: N=36,

Weighted to ensure equal representation of companies Weighted to ensure equal representation of companies

About 75% of respondents stated that average budget of STM studies they had

recently participated in was above $30 000. This indicates that general price level for

Simulated Test Marketing in Russia is comparable to that in developed markets.

However, despite this considerable price barrier (see also theoretical analysis in

Section 4.2, Figure 4.3), more than 60% of respondents believe that the market of

STM in Russia will grow in the mid-term perspective - i.e. in the next 3-5 years (see

Figure 6.8 overleaf).

136
 STM pricing is in line with that in Western markets*. With that, STM market is
Figure
Figure 1.9
6.8 expected to grow within the next 3-5 years * see p.109, $45000 for Western markets

BUDGET PER STUDY STM MARKET TREND

Q14 . Concerning the last few STM studies, that you have Q15. Speaking about mid-term perspective (3-5 years), can
participated recently, would you please estimate the you please estimate the change in number of STM studies
average budget per study ? conducted p/a with your participation? (% OF ANSWERING)
(% OF TOTAL ANSWERING, CUMULATIVE) Not going to 
conduct; 
0% 50% 100% 150% Will decline;  4%
5%
Above $ 20 000 100%
Will 
Will remain 
increase; 
on the same 
Above $ 20 000 93% level; 65%
25%
Median

Above $ 30 000 75%
BASE: N=30 (N=36
excluding
Above $ 40 000 64% DK/NA), Weighted

KEY REASONS FOR NOT-CONDUCTING STM

Above $ 50 000 43% Q8. Why didn't you conduct STM in 2009? Q16. Why are
you not going to conduct STM in the next 3-5 years?
(COUNT)
Above $ 60 000 25% The cost does not match its quality / Poor value for money /
There are more cost efficient solutions.............................6
No business need…………………………………….………4
BASE: N=23 (N=36 excluding DK/NA),
Weighted to ensure equal representation of companies Prefer traditional test marketing……..………………….......2
Other……………………………..……..………………….……...1
BASE: N=7

Study results suggest that Simulated Test Marketing provides acceptable level of

accuracy in key Russian FMCG markets. However, the number of precise forecasts

is slightly below to that in “western” markets (see Figure 6.9).

Figure 6.9 Many respondents have confirmed that STM results are within claimed global
Figure 1.9
accuracy . This is slightly below than that in Western Markets
PERCEIVED ACCURACY OF STM (RUSSIA, 2009): PERCEIVED ACCURACY OF STM (U.S., early 90-ies):
Q25 . From your personal experience, would you
please evaluate relative accuracy of <STM >forecasts STM Perceived Validity in the U.S. market (1988-1991)
observed in the Russian market?
(% OF ALL STM ASSESSMENTS)

Sales are 
higher or  Sales results  Sales results 
lower then  Sales are 
are in line  confirmed 
predicted  with claimed  higher or 
the STM; 
(below  lower then 
global 
claimed  accuracy;  predicted;  52%
global 
46% 48%
accuracy) ; 
54%

Source: Baldinger (1988, 1991)

BASE: N=42 assessments by STM model type
(N=73 excluding N=31 “Unable to evaluate”), BASE: N=241 assessments
Weighted to ensure equal representation of companies

To certain extent, this suggests that the hypothesis about lower accuracy of STM in

the Russian market is likely true (see Figure 4.2a and 4.2b). However, the

137
significance of that difference cannot be technically tested within the current study

and requires additional exploration.

Answering the question on why particular STM model can (or cannot) be

recommended, respondents mentioned such factors as: (1) reliable and accurate

forecast, proven accuracy in the local market, (2) professional performance, quality

service and consulting, individual approach (3) simplicity (or complexity) of modeling

approach, (4) positive previous experience, (5) number of validations and learnings

collected, as well as size of normative database in particular FMCG category, (6)

price, (7) breadth of diagnostic capabilities, (8) duration (see Figure 6.10).

Accuracy in the local market a and level of expertise are key factors of
Figure
Figure 6.10
1.9
STM choice
FACTORS OF CHOICE FOR SIMULATED TEST MARKETING IN THE RUSSIAN FMCG MARKET

Q19-21. Why some STM models can (or cannot) be recommended ? /OPEN-ENDED/

Q19‐21   (% from 
answering)                 
Reliable forecast, accurate in the Russian market 36%
Level of expertise, quality service, professional consulting, individual approach 32%
Simplicity of model 21%
Previous experience 21%
Number of Validations / Benchmarks / Cases / Learnings ‐ particularly, in the 
18%
specific FMCG category
Cost 14%
Rich diagnostics, a lot of parameters 11%
Duration 11%
Project importance, business risks 7%
International recognition  7%
Types of market and new product (i.e. saturated market, absolutely new product) 4%
Ability to control the process 4%

BASE: N=30, Weighted to ensure equal representation of companies

At the same time, ranking key factors in order of their importance had helped to

reveal some other drivers, which determine selection of Simulated Test Marketing

model, in particular: (1) suitability for the Russian market, (2) recommendations from

management or requirements by company research protocols (see Figure 6.11

overleaf).

138
 Forecast accuracy, suitability for the local market, professionalism and positive
Figure 6.11
1.9 previous experience as well as recommendations from management are key
determinants in choice of Simulated Test Marketing approach
KEY DRIVERS OF CHOICE – TOP 5 KEY DRIVERS OF CHOICE – TOP 1
Q22 . You have mentioned that you are going to conduct Q22. Which single factor out of these five is of a top
STM in the next 3-5 years. Which of the following 5 (five) importance? (% OF TOTAL)
factors are more important for you, when you are making
your decision about technique or agency? (% OF TOTAL)

Highly accurate forecast 88% Highly accurate forecast 53%

Suitable for Russian market 53%
Professional presentation of findings 53%
Suitable for Russian market 15%
Positive previous experience 53%
High quality of data collection 53%
High speed of research 45% Recommended by management or company 
14%
protocols
Individual approach for every project 44%
A lot of diagnostic information 31%
Professional presentation of findings and 
High quality service and project management 22% 8%
recommendations
Recommended by management / protocols 19%
Simple and easy‐to‐understand 17% Simple and easy‐to‐understand 8%
Transparent and flexible pricing 8%
Well‐known agency 6%
Affordable price Positive previous experience 3%
5%
4%Use of modern technologies
BASE: N=28 BASE: N=28
Weighted to ensure equal representation of companies Weighted to ensure equal representation of companies

Comparative analysis uncovered perceived positioning of the leading STM

approaches from experts’ point of view. Thus, BASES is often recommended by

management or global protocols, while DESIGNOR produces a lot of diagnostic

information. Locally developed STMs are suitable for the Russian market and offer

individual service at affordable price (see Figure 6.12a, 6.12b).

Figure
Figure 6.12a
1.9 Perception of various Simulated Test Marketing approaches

PERCEIVED IMAGE OF STM APPROACHES / CORRESPONDENCE ANALYSIS – PERCEPTUAL MAP *

Q23. We would like to know your opinion about practical use of STM techniques. Would you please evaluate to what
extend you agree or disagree with each of the following statements regarding <STM> , using 5-point scale below
(Correspondence Analysis based on TOP2 scores)
0.6
Symmetric Plot (axes F1 and F2: 89.86 %)

0.4
Simple and easy‐to‐understand
Other Western STMs
Recommended by  Affordable price
0.2 management or company 
Publications in professional 
protocols Highly accurate forecast literature Transparent and flexible 
‐‐ axis F2 (28.91 %) ‐‐>

ACNielsen BASES Local STMs pricing

High quality service and 
project management Suitable for Russian market
0
Positive previous experience High quality of data collection
Individual approach for every 
Well‐known agency project
Use of modern technologies
Professional presentation of  High speed of research
‐0.2
findings and recommendations Ipsos DESIGNOR

A lot of diagnostic information

‐0.4

‐‐ axis F1 (60.95 %) ‐‐>
‐0.6
‐0.8 ‐0.6 ‐0.4 ‐0.2 0 0.2 0.4 0.6 0.8

* Correspondence analysis measures the distance between nominal variables on a map, where each variable is
associated with each other. BASE: N=570 cases, Significant at 10% error level (p<0.1, p=0.064 ,Chi-Square 56.77)

139
 Figure
Figure6.12b
1.9 Perception of various Simulated Test Marketing approaches

PERCEIVED IMAGE OF STM APPROACHES / CORRESPONDENCE ANALYSIS – RESIDUALS *

Q23. We would like to know your opinion about practical use of STM techniques. Would you please evaluate to what
extend you agree or disagree with each of the following statements regarding <STM> , using 5-point scale below
(Adjusted standardized residuals based on TOP2 scores)

Shaded boxes indicate differences exceeding              Other              
ACNielsen BASES Ipsos DESIGNOR Local STMs
1 Std.Dev.  Western STMs
Highly accurate forecast +0.5 ‐0.8 ‐0.6 ‐0.1
Professional presentation of findings and recommendations +0.7 +0.8 ‐0.8 ‐1.1
Recommended by management or company protocols +3.2 ‐1.3 ‐2.2 +0.9
Positive previous experience +0.8 +0.4 ‐1.0 ‐0.2
Well‐known agency +1.4 +0.4 ‐1.4 ‐0.5
Simple and easy‐to‐understand ‐0.3 ‐1.8 +0.8 +2.0
Suitable for Russian market ‐1.1 ‐0.2 +1.3 ‐0.1
A lot of diagnostic information ‐1.3 +1.7 ‐0.1 ‐0.9
Publications in professional literature +0.1 ‐0.5 +0.2 +0.4
High quality service and project management +0.0 +0.4 ‐0.6 +0.1
Individual approach for every project +0.3 ‐0.1 +1.1 ‐1.6
Affordable price ‐1.8 ‐1.4 +3.1 +0.3
Transparent and flexible pricing ‐0.6 ‐0.7 +1.6 ‐0.4
High speed of research ‐2.1 +0.6 +1.4 ‐0.2
High quality of data collection ‐1.5 +0.4 +0.5 ‐0.2
Use of modern technologies ‐0.0 +0.9 ‐0.7 ‐0.4

BASE: N=570 cases, Significant at 10% error level (p<0.1, p=0.064 ,Chi-Square 56.77)
* RESIDUALS ANALYSIS, is a descriptive technique designed to analyze two-way and multi-way tables measuring
correspondence between the rows and columns. Shows deviation between observed and expected (average) values
measured in Standard Deviations

Analysis of correlation between particular image attributes and general customer

satisfaction revealed significant correlation between satisfaction and such factors as:

(1) individual approach for every project, (2) high quality service and project

management, (3) positive previous experience and (4) professionalism (see Figure

6.13)

Figure 1.9
6.13 Customer satisfaction and factors that influence it

CORRELATION BETWEEN IMAGE ATTRIBUTES AND CUSTOMER SATISFACTION

24. For each STM model that you have ever used, would you please tell us, how satisfied were you with the quality of
service provided by the agency. For your answers, please use 10-point scale, where 1 means “COMPLETELY
DISSATISFIED” and 10 means “COMPLETELY SATISFIED”

Correlation

Individual approach for every project 0.333 **
High quality service and project management 0.319 **
Positive previous experience 0.301 **
Professional presentation of findings and 
0.297 **
recommendations
Well‐known agency 0.275 *
Customer
A lot of diagnostic information 0.222 *
* Satisfaction
Recommended by management or company protocols 0.187
(Mean 6.17,
Highly accurate forecast 0.175 Std.Dev. 1.40)
Simple and easy‐to‐understand 0.169
Publications in professional literature 0.143
Use of modern technologies 0.119
Transparent and flexible pricing 0.103
High speed of research 0.055
High quality of data collection 0.053
Suitable for Russian market 0.028
Affordable price ‐0.059
BASE: N=73 cases,
** Correlation is significant at the 0.01 level (2-tailed)
* Correlation is significant at the 0.05 level (2-tailed).

140
The following analysis explores main strengths and weaknesses of each particular

STM model. As it seen from the maps depicted on Figures 6.14-6.17 below, image

attributes are located in a two-dimensional space, where horizontal axis represents

the power of association between particular attribute and a given STM model, while

vertical axis shows attribute’s importance in terms of customer satisfaction. Тhus, the

principal strengths of ACNielsen BASES are: ”recommended by management or

company protocols”, “well-known agency”, “positive previous experience”,

“professional presentation of findings and recommendations”. The key weaknesses,

that need to be addressed are ”diagnostic information”, “high speed of research”,

“transparent and flexible pricing”, ”affordable price”, “quality of data collection”,

“suitability for Russian market” (See Figure 6.14)

Figure 1.9
6.14 ACNielsen BASES: Perceived strengths and weaknesses
0.40   

Principal Principal
weaknesses Individual approach for every  strengths
0.35   
project
High quality service and 
project management
0.30    Positive previous experience
Professional presentation of 
Correlation with Satisfaction**

findings and  Well‐known agency
0.25    recommendations
Recommended by 
A lot of diagnostic information management or company 
** See Figure 6.14

0.20    protocols
Simple and easy‐to‐ Highly accurate forecast
understand
‐3.00 ‐2.00 ‐1.00 0.15    0.00 Publications in professional 
1.00 2.00 3.00 4.00
literature
Transparent and flexible  Use of modern technologies
pricing 0.10   

High speed of research
High quality of data collection
0.05   

Suitable for Russian market

‐0.05   
Affordable price

Secondary Level of Associations* Secondary

weaknesses ‐0.10   
strengths
* Residuals, see Figure 6.13b

According to experts’ opinion, derived from the data, the key strengths of Ipsos

DESIGNOR are: “a lot of diagnostic information”, “professional presentation of

findings and recommendations”, “well-known agency”, “positive previous experience”,

“high quality data collection”. However, the following perceived weaknesses were

identified: model complexity, lack of management support and recommendations in

141
company protocols, lower accuracy of forecast, less ”transparent and flexible pricing”,

less ”affordable price” and questionable “suitability for Russian market” (See Figure

6.15).

Figure 1.9
6.15 Ipsos DESIGNOR: Perceived strengths and weaknesses
0.40   

Principal Principal
weaknesses High quality service and 
strengths
0.35   
Individual approach for every  project management
project
Professional presentation of 
0.30    findings and 
Positive previous experience recommendations
Correlation with Satisfaction**

Well‐known agency
0.25   
Recommended by  A lot of diagnostic information
management or company 
Simple and easy‐to‐ protocols
understand 0.20   
Highly accurate forecast

‐2.00 ‐1.50 ‐1.00 ‐0.50 0.15    0.00 0.50 1.00 1.50 2.00
** See Figure 6.14

Publications in professional 
literature Use of modern technologies
0.10   
Transparent and flexible 
pricing High quality of data collection
0.05    High speed of research

Suitable for Russian market
‐

‐0.05   
Affordable price
Secondary
Secondary Level of Associations*
weaknesses ‐0.10    strengths
* Residuals, see Figure 6.13b

Similar analysis undertaken for locally developed STMs had shown that their major

strengths are: “individual approach for every project”, “simple and easy to

understand”, “flexible pricing”, “high speed”, “high quality of data collection”, “suitable

for the Russian market”. However, there are some drawbacks such as ”well-known

agency”, “highly accurate forecast”, ”recommended by management or company

protocols” (see Figure 6.16 overleaf).

As for other “western” STM models, in the eyes of surveyed experts their perceived

advantages are “simplicity” and “recommendations by management or company

protocols”, while weaknesses lay in the area of ”individual approach for every

project”, “highly accurate forecast”, “professional presentation of findings and

recommendations”, “diagnostic information” , transparent and affordable pricing, high

quality of data collection and suitability for the Russian market (see Figure 6.17

overleaf).

142
 Figure 1.9
6.16 Local STMs: Perceived strengths and weaknesses
0.40   

Principal Principal
weaknesses Professional presentation of  0.35    strengths
findings and  Individual approach for every 
High quality service and 
recommendations project
project management
Correlation with Satisfaction** Positive previous experience 0.30   

Well‐known agency
0.25   

Recommended by 
A lot of diagnostic information
management or company 
protocols Highly accurate forecast 0.20    Simple and easy‐to‐
understand

‐3.00 ‐2.00 ‐1.00 0.15    0.00 1.00

Publications in professional  2.00 3.00 4.0
literature
** See Figure 6.14

Use of modern technologies
Transparent and flexible 
0.10    pricing
High quality of data collection

0.05    High speed of research

Suitable for Russian market

‐0.05   
Affordable price

Secondary Level
‐0.10   
of Associations* Secondary
weaknesses strengths
* Residuals, see Figure 6.13b

Figure 1.9
6.17 Other Western STMs: Perceived strengths and weaknesses
0.40   

Principal Principal
weaknesses strengths
0.35   

High quality service and 
Individual Positive previous experience
project management
approach for  0.30   
every project Professional  Well‐known agency
Correlation with Satisfaction**

presentation of 
findings and 
0.25   
recommendations

A lot of diagnostic information
0.20    Recommended by 
Highly accurate forecast management or company  Simple and easy‐to
protocols understand
‐2.00 ‐1.50 ‐1.00 ‐0.50 0.15    0.00 0.50 1.00 1.50 2.00 2.50
** See Figure 6.14

Use of modern technologies Publications in professional 
literature
Transparent and flexible  0.10   
pricing
High quality of data collection
High speed of research 0.05   

Suitable for Russian market
‐

‐0.05   
Affordable price

Secondary Level of Associations* Secondary

weaknesses
‐0.10   
strengths
* Residuals, see Figure 6.13b

6.5 Further ways of STM development in Russia

According to surveyed experts, the key areas for improvement and further

development of Simulated Test Marketing in the Russian FMCG market at the

moment are: 1) more “client-oriented”, individual approach, greater focus on client’s

143
business; 2) local R&D, i.e. gathering local historical information, benchmarks,

learnings, performing validations, developing evaluation criteria relevant to the

Russian FMCG market; 3) simplification of reporting and modeling approaches; 4)

localized media models, gauging effectiveness of various marketing instruments in

the local market; 5) reducing project timing; 6) openness in explaining modeling

principles, client friendly guidelines on terms of use, inputs, outputs, research

implications, limitations, requirements to study materials etc.; 7) flexibility; 8) price

(see Figure 6.18).

Key areas for improvement of Simulated Test Marketing in Russia are:

Figure
Figure 6.18
1.9
agency involvement, individual approach , benchmarks and validations
AREAS FOR IMPROVEMENT OF SIMULATED TEST MARKETING IN THE RUSSIAN FMCG MARKET
Q17. How, in your opinion, STM services provided by local agencies can be improved? /OPEN-ENDED/

Q17   (% from answering)    

More agency involvement into particular business issue / market analysis 33%
Gathering local benchmarks / evalution criteria / validations / learnings / historical 
33%
information 
Individual approach ‐  customization to particular markets and particular projects 27%
Model simplicity ‐ more clear reports,concise and accurate set of terms 17%
Media and marketing mix model. Local assessment of marketing impact on sales  17%
Timing (should be reduced) 13%
Description of model, terms of application and limitations to use, requirements to 
13%
model inputs, formats and use of results
Flexibility ‐ forecasting multiple scenarios, making adjustments 13%
Success stories and cases obtained from the local market 13%
Cost 13%
Thoughtful application of global practices / guidelines 10%
Qualification of agency specialists 10%
Accuracy of forecast (including components such as inctremental sales,  7%
Software (simulators) 3%
Fieldwork quality 3%
Approaches to targeting, i.e. market definition, source of volume  3%

BASE: N=33, Weighted to ensure equal representation of companies

6.6 Key findings

The research undertaken leads to the following main conclusions about current

practices of sales forecasting for new products and the use of Simulated Test

Marketing in the Russian FMCG market:

 The hypothesis about greater portion of ”new-to-the-country” and “new-to-the-

world” products in the Russian market (as compared to Western markets) has

not been confirmed. Instead, higher share of “product/price” changes was

144
 registered due to the economic downturn in 2009. The question is still open

and requires additional study in the period of 2011-2013. For other types of

new products, their shares are line with that in “western” markets.

 Methods of marketing research are extensively used by the major players in

the market. Methods of Simulated Test Marketing are relatively popular and

often used in case of “new-to-the-country” and ”new-to-the-firm” products.

 Reliable market data is key to accurate sales forecasting in the Russian

market.

 The key issues researchers face when forecasting are: lack of market data,

research approach is not adapted to the local market (or not proven), lack of

historical data, validations and poor normative databases

 Higher rate of successful new product launches and lower accuracy of

forecast – as compared to “western” markets

 High awareness of the leading STM models. Relatively equal experience with

ACNielsen BASES and Ipsos DESIGNOR

 The market of STM is expected to grow despite such limiting factor as high

pricing (i.e. prices are in line with “western” markets)

 BASES and DESIGNOR have certain important advantages in the Russian

market, such as well-known global brand, professionalism, proven validation

record in developed markets. However, their key weaknesses are related to

insufficient focus on local market insights, pricing and flexibility. These

weaknesses of international suppliers are successfully exploited by local

competitors.

 As indicated by experts, the key areas for STM improvement in the Russian

market are mainly related to agencies competences, e.g. more involvement to

clients’ business, individual approach, R&D, pro-active “research-on-

research” (i.e. gathering of benchmarks, validations, local market

information), price and timing optimizations

145
 The majority of hypotheses about practical application of Simulated Test

Marketing in the Russian FMCG market (discussed in Chapter 4) have been

confirmed. Research questions stated in Chapter 5 have been answered

(with the exception of new product shares - by type).

 The study undertaken and the amount of information collected allows to make

actionable recommendations concerning effective application of Simulated

Test Marketing in the Russian FMCG market (see point 6, Secrion 6.5

above), which is done in the following Chapter 7.

146
 CHAPTER 7

RECOMMENDATIONS

7.1 Recommendations for FMCG manufacturers.

The research undertaken has led to a principal conclusion about feasibility of using

Simulated Test Marketing in the Russian FMCG market (see Chapters 4,6). With

that, the study has shown that making decision about STM in Russia requires more

thorough market examination than that in developed countries. It is important to bear

in mind, that the quality of STM outputs is entirely determined by the quality and the

amount inputs, i.e. market data and tested materials (see Chapter 3). Indeed, as

discussed earlier in Chapter 3, it is hardly possible to simulate dynamic market

environment, especially at early stage of life-cycle, provided with insufficient or poor

quality market data. In such cases, any attempt of modeling employing traditional

“western” STM techniques may not only lead to inaccurate forecast, but wrong

business decisions due to misleading outputs (see Chapter 3). Unlike predictable

and well-defined “western” FMCG markets, a majority of Russian markets are at

growth stage, and only few of them can be considered mature or saturated (see

Chapter 2). Therefore, only few are ready for quality modeling with standardized

“western” STM approaches (see Chapter 3). This leads to recommend employing

traditional STM methods only if the following general criteria are satisfied:

 Business need: New product is of a high strategic importance to the company

(i.e. is a part of offensive or defensive business strategy). Strategic direction

is concerned with operations in existing markets (i.e. “market penetration” and

“new product development” – see Chapter 2). Considerable financial risk is

tied to substantial reward in case of success (i.e. gaining market share,

increasing revenue and profitability, defeating competitors, capturing empty

market space, improving brand image to maintain market leadership etc);

147
 Decision-makers: Senior management (country, region, global), key users –

marketing and strategic planning departments;

 Application area: Mid-term business planning;

 Horizon of forecast: 1-2 years;

 Interval of forecast : 1 year (very rarely – quarter or month);

 Decision options: (a) National product launch, investing in production and

support (”go national”); (b) additional testing with traditional test markets (”test

market”); (c) postponing the launch due to temporary market barriers or due

to improvement of marketing mix (”recycle”); (d) dropping the initiative

(“discontinue”);

 Decision making criteria: These should involve not only sales business

metrics like in the case of traditional test market (e.g. sales volume and value,

market share, incremental sales, cannibalization etc), but measures of

consumer response (e.g. awareness, brand image and advertising

perception, trial, repeat etc) (see Chapters 3,4). Action standards are usually

based on company’s objectives and benchmarks (similar cases in the past or

in similar markets);

 Level of detail : Usually, by brand or SKU

 Time to market / Timing: Product launch is typically within a year after making

decision about STM, which usually takes about 2-3 months to conduct (see

Chapter 3)

 Accuracy to expect: In case of a well-defined saturated market it is up to

±10%, while that for a rapidly growing market is considerably lower ±20%

(See Chapters 4,6)

 Price to expect – In case of true STM it is above $30 000 (See Chapters 4,6)

 Geographical scope – national, stratified by regional centers of distribution

148
  Number of forecasts – up to 10 (2-3 marketing mix options, times 2-3

marketing plan options) (See Chapter 4)

As noted in Chapter 4, classic approaches to Simulated Test Marketing are most

effective when the following requirements to the tested product offer are met:

 Product newness: The novelty of the product is some of its “actual” or

“augmented” components (e.g. product, brand, pack, price etc), satisfying

already existing “core need”. Strategic focus should be placed on product and

branding, rather than market or need development. (see Chapter 2);

 Product types: “New-to-the-Firm”, “Line extensions”, “Brand stretching”, “Re-

positioning / re-branding”. In case of “product / price changes” it is advisable

to employ less costly and more appropriate solutions, like Conjoint.

Considerable difficulties could be expected in the case of “New-to-the-world”

or “New-to-the-country” - as market does not exist yet, hence there’s nothing

to simulate. (see Chapter 3 for more details on marketing research

procedures);

 Stage of NPD: It is expected for STM that the phase is “Test Marketing and

Validation” (in terms of Stage-Gate® framework). It follows right after

“development and testing” of separate components of marketing mix (i.e.

concept or commercial, product formula, pack etc). In other words, it is

usually required that marketing mix come in final form. (see Chapters 2, 3, 4);

 Range of tested materials / stimuli: Ready-made advertising materials

(commercials, prints, although concepts or animatics are often accepted),

product samples, final packs or mockups, prices. In case of testing in

competitive context (e.g. preference share approach) - the same is required

for competitors. (see Chapters 3,4);

 Product launch / Marketing support: Typically, there is an IMC campaign

(integrated marketing communications), i.e. a variety of traditional mass

media are employed (e.g. television, outdoor, press etc) as well as standard

149
 retail channels (hyper and supermarkets, c-stores, traditional trade etc). It is

imperative that performance of these channels is measured beforehand (e.g.

media monitoring, trackings, retail audit). (see Chapter 4)

The use of traditional STM approaches requires precise targeting (i.e. accurate target

market definition). As suggested earlier, the market can be defined using 8 distinctive

sets of characteristics (see Chapters 3, 4). In particular:

 Consumer / Shopper: It is highly recommended to consider conducting

qualitative and quantitative consumer studies, such as segmentation or

market landscaping (see Chapter 3), to clearly define the following: (1) what

is exactly the core need ?; (2) in what occasions it might arise? how is it

satisfied by consumers? how often does this occasion occur? - the frequency

must be high; (3) who will experience such a need during the horizon of the

forecast (1-2 years), i.e. to identify socio-demographic, psychological and

cultural profiles of potential consumers and shoppers, in particular – life

styles, structure of values, decision-making process when satisfying the need;

(4) the number of potential consumers and shoppers – it should be measured

at least in ten thousands of people, (5) the level of experience with the

product category should be medium to high – consumers must be aware

about key brands, product features etc.

 Product: It is advisable to determine key distinguishing characteristics of

products in the market and identify potential substitutes (i.e. “neighbor”

markets, categories of products with similar qualities satisfying similar needs)

(see market landscaping, Chapter 3).

 Market size and dynamics: It is helpful to employ industrial and quantitative

methods to identify: (1) actual size of “core” and “neighbor” markets; (2)

market life-cycle stage – the use of STM is effective only at “sustainable

growth” and “saturation” stages (as shown in Chapter 3, the market is

considered “saturated” if growth is in line with GDP or below. Thus, beer

150
 market in Russia is almost “saturated”) ; (3) Growth rate, predictability ,

variability – the market must be sustainable and predictable; (4) Granularity /

Structural complexity – when applying STM, it is important to make sure that

market structure is homogenous across regions, channels etc. If not, the

sample is often divided into several cells, reflecting the reality of each case.

 Promotion / Marketing: A majority of STM models are able to simulate

standard mechanisms of marketing support, e.g. television, outdoor, press,

sampling, simple promo-activities. However, it is essential that only proven

advertising and promotion vehicles are used, i.e. their performance must be

measured locally with reliable methods.

 Pricing: It is imperative in a highly dynamic market environment to consider

possible price changes in the market. Before going with STM, it is helpful to

obtain price sensitivity scores from the pricing study (see Chapter 3). Based

on that, it is advisable to produce several price scenarios for testing with

STM.

 Competitive rivalry: Unlike stable “western” markets, competitive response in

the Russian market can be very quick and aggressive. Therefore, if possible,

it is worthy to consider competitive environment in the planned STM study.

 Infrastructure / Environment – When forecasting sales in the Russian market,

one must take into account a number of difficulties related to infrastructure

setup (distribution, supply, manufacturing, logistics, retail) and volatile macro-

environment (political and economic risks, possible changes in regulating

policy, law, issues with certification, customs control, local authorities etc.)

 Finance / Action standards – STM action standards must be developed

involving strategic accounting methods (i.e. “break-even” etc).

Market characteristics listed above are usually requested by STM vendors to build

the model of the market. Therefore, it is necessary to ensure high quality and

sufficient amount of the data.

151
Also, when selecting a vendor for Simulated Test Marketing, it is important to keep in

mind business objectives as well as other criteria outlined above. Thus, according to

research findings, the following strengths of STM vendors operating in Russia can be

highlighted:

 ACNielsen BASES – ”recommended by management or company protocols”,

“well-known agency”, “positive previous experience”, “professional

presentation of findings and recommendations”;

 Ipsos DESIGNOR - “a lot of diagnostic information”, “professional

presentation of findings and recommendations”, “well-known agency”,

“positive previous experience”, “high quality data collection”

 Local providers - “individual approach for every project”, “simple and easy to

understand”, “flexible pricing”, “high speed”, “high quality of data collection”,

“suitable for the Russian market”

The research undertaken has helped to develop a standardized form of request for

Simulated Test Marketing study, which is presented in the Appendix.

7.2 Recommendations for agencies.

As it follows from the analysis of the Russian research market (see Chapters 4,6), it

is expected that the number of STM projects carried out with classic techniques will

rise in the future due to increasing number of well-defined saturated FMCG markets.

However, as shown in Chapters 1 and 2, this process might take long time, while at

the moment there is a considerable demand for high quality forecasting service - as

noted in Chapter 1, nearly a half of earnings for the world’s leading FMCG

manufacturers come from emerging markets like Russia. In that respect, it is highly

recommended that STM vendors operating in Russia (as well as in some other

emerging markets) pay greater attention to local market insights and improve their

forecasting / servicing models in view of the following:

152
  More “client-oriented”, individual approach, greater focus on client’s business

 Investing in local R&D - gathering local historical information, benchmarks,

learnings, success stories, performing validations, developing evaluation

criteria relevant to the Russian FMCG market;

 Simplification of reporting and modeling approaches;

 Localized media models, gauging effectiveness of various marketing

instruments in the local market;

 Reducing project timing;

 Openness in explaining modeling principles, client-friendly guidelines on

terms of use, inputs , outputs, research implications, limitations, targeting /

market definition, required pre-studies, requirements to study materials, etc.;

 Flexibility in forecasting and modeling – forecasting various scenarios etc;

 Reasonable pricing;

 Thoughtful and careful application of global standardized STM techniques to

local business needs;

 Training local consultants;

 Increasing forecast accuracy;

 Development of user-friendly simulators and other STM-related software;

 Improving fieldwork quality;

Productive work following the recommendations above could help in establishing

better cooperation between clients and agencies, but more importantly, it would

boost STM market development in Russia. A majority of clients will appreciate

flexible, proactive, “client-oriented” approach as opposed to conservative, “model-

centered” services based on “western” execution standards. This would allow to

accumulate sufficient experience and to customize existing models for the needs of

the local market. Moreover, this would provide great opportunity to bring high quality

service to more clients today, not years later, i.e. when the markets are ready for

“western” models. Emerging markets offer considerable potential for growth not only

153
for FMCG manufacturers, but for their business partners as well. Therefore, it is

highly advisable for STM vendors to pay particular attention to developing business

in emerging countries, such as Russia.

154
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APPENDICES

169
    SIMULATED TEST MARKETING RESEARCH BRIEF 
 
This document outlines key information that might be needed for Simulated Test Marketing.  However, please always check 
with your STM vendor if they have appropriate brief template as well as market data and marketing plan input forms 
 
1. CONTACT INFORMATION / REQUESTED BY: 
Specify the following: 
• Company:  • Name: •Position: • Brand: • Date: • Contact details: 
 
2. BUSINESS BACKGROUND 
This section should present an overview of the current business situation. Contents of this section should provide enough 
information to ensure a consistent and cooperative effort between Agency and Client.  In particular, consider to include 
some of the following: 
•   Business need (Strategic situation review):   
1) Historical background on business development 
2) Corporate market positioning: Market leader, challenger, follower, niche player  
3) Strategic direction: Market penetration, New products for existing market, Expansion; Diversification;  
4) Actual market strategy: Attack or defense etc, Differentiation, Price leadership etc 
•  Target market definition:  
1) Consumer / Shopper:  • Core need; • Occasions; • Profile; • Projected number; • Product experience 
2) Products : • Key features, pack sizes etc; • Differentiation; Substitute categories; • Average quality level 
3) Market size and dynamics: • Size; • Life stage; • Trends / Growth rate; • Structure; • Predictability; •  Seasonality 
4) Competitors: • Shares / Domination / Fragmentation • Quality of competition • Order of entry 
5) Promotion: • Dominant strategies, tools and channels (TV etc) • Branding policies often used  
6) Pricing: • Price levels and variation • Price sensitivity 
7) Infrastructure / Environment: • Distribution (levels, channels, geography etc) • Retailers • Suppliers • Regulators 
8) Finance: • Investments • Rewards – profitability • Risks   
Share with the agency relevant info from all sources ‐ retail audit, consumer qualitative and quantitative research, 
industry reports. Excessive information must be moved to appendix. Try to keep it short and concise.  
 
3. DESCRIPTION OF NEW INITIATIVE 
This section should give sufficient details about new product offer, in particular: 
1) Product newness:  • product formula and characteristics •  brand positioning / concept  / USP •  pack •  price 
2) Differences as compared to market definition: • Specific target (e.g. category non‐buyers) • Unique features 
3) New product type: • New‐to‐the‐Country/Firm • Line Extensions • Brand Stretching • Re‐positioning                               
• Product/Price change 
4) Marketing support:  • Advertising / Promotional activities (ATL / BTL) • Distribution (channels etc) • Retail 
(merchandizing standards etc)  
5) Stage of NPD / Readiness of initiative: • Final test marketing or Development • What exactly is final 
6) Time‐to‐market • Launch date 
 
4. BUSINESS OBJECTIVE /  ACTION STANDARDS 
This section should state the marketing problem, outline decision options, and suggest action standards upon research 
results.  For example,  
1) Marketing problem:  “achieve $X mln incremental sales with the new product”, “gain X%  share from competitor 
Y” , “capture X positioning niche”, “prevent competitive attack with X new product” etc  
2) Actions/Action Standard: if X criteria is met then • Go national • Re‐work / Recycle • Postpone until some 
market conditions are met • Proceed with traditional test market • Discontinue / Drop … etc 
3) Decision makers: • C‐level, Regional management etc • Functional area (marketing, sales, finance etc)  
 
 
5. RESEARCH OBJECTIVES / INFORMATION NEEDS 
This section should outline key questions that need to be addressed in the study. Specify your main information needs, 
for example: • Estimate potential sales volume; • Measure cannibalization; • Assess price sensitivity; • Define optimum 
range of SKUs; •  Evaluate new product advertising •  identify strengths and weaknesses of positioning, packaging and 
product  against key competitors; • project awareness, trial and repeat given the certain marketing support etc 
  
 
6. SCENARIOS TO SIMULATE 
This section should summarize marketing scenarios to simulate. In particular:  
Marketing mix options: • Number of concepts / commercials;  • Number of packaging designs; • Price levels;                       
• Range composition; • Number of product formulas etc 
 
  Scenario 1  Scenario 2 Scenario 3 Scenario 4  Scenario 5
Concept / TVC  <Specify>  <Specify> <Specify> <Specify>  <Specify>
Pack format  <Specify>  <Specify> <Specify> <Specify>  <Specify>
Price  <Specify>  <Specify> <Specify> <Specify>  <Specify>
Product formula  <Specify>  <Specify> <Specify> <Specify>  <Specify>
 

Marketing support options: • Optimistic • Pessimistic • Realistic 
 
Weighted  Samplings / 
  TV (30" GRP)  Press  Outdoor  Other 
Distribution%  Promotion 
Optimistic  <Specify>  <Specify> <Specify> <Specify> <Specify>  <Specify>
Realistic  <Specify>  <Specify> <Specify> <Specify> <Specify>  <Specify>
Pessimistic  <Specify>  <Specify> <Specify> <Specify> <Specify>  <Specify>
 

As research has shown that it is important to consider competitive response, please indicate what might be likely 
competitors’ actions to your new product launch (time, format etc)  
 
7. METHODOLOGY 
If you are familiar with STM technique please indicate modeling options that you would like to include (e.g. BASES Price 
Advisor,  Ipsos Perceptor etc).  However, it is up to the agency to recommend the most effective approach.  
 
8. SAMPLE DESIGN 
You might want to specify exact requirements to sample composition, i.e. description of the target group. 
Sample and screening criteria: •Age; • Gender; • City/Region; •Income; •Category consumption etc 
 
9. DELIVERABLES / TIMING  
Outline in this section, what would you like to be reported (i.e. live presentation, report, tables, simulator etc.) and when 
do you want it.  For example: 
Forecast options:  • Horizon (1, 2, 3 years) • Acceptable accuracy • Interval (year, quarter, month) • Detail (Brand, SKU) 
Marketing mix diagnostics: • Top‐line key performance indicators  • Tables • Report etc 
 
10. BUDGETARY CONSTRAINTS 
Indicate if any. 
 
11. MATERIALS / STIMULI  
Which materials and what quantity of them are available for the study?  When they will be made available to the agency 
and where? Anticipated availability of materials:  •  Advertising (concepts / animatics / tvcs); •  Packaging (finished, 
mock‐ups, images);  • Product samples • Market data and marketing plans 
 
 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 1 
 
 
  Dear colleagues,   
 
We are pleased to invite you to participate in a survey on sales forecasting services for the new FMCG products on the Russian market.  The research is being 
conducted by Oxford Brookes University Business School within the MSc Business Management program. 
The main objectives of the research are to :  (1) examine the current state of Russian business‐forecasting services market   (2) evaluate market perspectives 
(3) develop a set of actionable recommendations on performing sales forecasting for a new product launches in the Russian market. This unique study is aimed to 
deliver  highly  relevant  findings  based  on  vast  experience  of  its  participants,  who  are  the  major  business  and  consumer  insights  experts  in  Russia.    The  research  is 
conducted in accordance with the ethical principles of ESOMAR (ICC/ESOMAR international code on market and social research, 2008) and Oxford Brookes University 
Business  School.  By  doing  so,  we  guarantee  accuracy  and  independence  of  assessments,  confidentiality  of  personal  information,  publication  of  results  only  in  a 
“depersonalized” summary form.     
 The final report will be available for you in September, 2010. We really do hope that you will find it very useful in your daily job, during the process of sales 
forecasting for new products, business planning and agency selection.  Thank you very much in advance for your participation in the study! 
 
Nikolay Korotkov,  
Research Executive, MSc BM student 
 
 
0. Dear colleagues, we are looking for specialists who have certain professional competences and responsibilities for performing particular professional tasks in 
FMCG companies. Are you in charge of any of the following?  / SINGLE ANSWER / 
 
1. Business forecasting 
2. Marketing research 
3. Strategic planning 
4. Innovations / New Product Development 
5. Marketing (Category or Brand management)                                                        / CODES 1‐5 = CONTINUE/ 
6. Financial planning                                                                                                       / CODES 6‐12 = CLOSE THE INTERVIEW/ 
7. Logistics 
8. Public relations 
9. Technology / Production management 
10. Relationships with suppliers 
11. Sales  / Relationships with clients / Account management 
12. None of the above 
      
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 2 
 
 
1.  Would you please tell us the name of your company: ______________________________________ 
2. In which department do you currently work? / SINGLE ANSWER / 
1. Marketing ( Category of brand management ) 
2. Marketing ( NPD / Innovations) 
3. Marketing research  
4. Strategic planning and forecasting 
5. Trade marketing 
6. Finance 
7. Other (Please specify) __________________________________ 
 

3. What is your role (position) in the department? / SINGLE ANSWER / 
1. Department director   
2. Team/ Working group manager 
3. Specialist / Expert 
4. Другое (УТОЧНИТЕ) __________________________________ 
 
 
 
 

        3a.  How long do you work in the FMCG industry?           1. Less than 2 years      2.   2‐5 years      3.  6‐10 years   4. More than 10 years 
 
 
 
 

4. What categories (or brands) are you responsible for?  /OPEN‐ENDED/ 
__________________________________________________________________________________ 
 
 
5. Concerning these categories (or brands), how often did the task of sales forecasting arise in the following situations in your department in 2009 ?  
/PLEASE SPECIFY IN THE TABLE BELOW/ /SINGLE ANSWER PER SITUATION/ 
 
  Once a month or 
Didn’t arise  Once a year  2‐3 times per year  4‐6 times per year  7‐10 times per year  DK/NA 
more often 
 Launch of a new brand in a new category (“New‐to‐the 
1  2  3  4  5  6  7 
country” or “New‐to‐the world”)  
 Launch of a new brand in a existing category (“New‐to‐
1  2  3  4  5  6  7 
the firm”)  
 Line extention in the existing category  1 2 3  4 5 6 7 
 Brand Stretching, i.e. extending existing brand into a
1  2  3  4  5  6  7 
another  category 
 Brand re‐launch, re‐positioning  1 2 3  4 5 6 7 
Brand/Product Improvements and Cost Reductions, i.e.
Changes in one or several components of marketing mix ‐ 
1  2  3  4  5  6  7 
i.e. new pack, new product formula, new communication, 
new pricing) 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 3 
 
 
 
 
7. Which research techniques or information sources did you or your colleagues use while forecasting in each of the following business situations in 2009? 
/PLEASE SPECIFY IN THE TABLE BELOW/ 
 
   New‐To‐
 Brand    Brand/Product Improvements 
The‐  New‐To‐  Line 
 Brand Stretching  re‐launch /  and Cost Reductions  
Country or  The‐Firm  Extention 
Repositioning  Changes in marketing mix / 4Ps 
World 
Qualitative studies (focus‐groups, brainstorming, ideation sessions etc.) 1 1  1 1 1 1 
Quantitative diagnostic tests of certain components of marketing mix without sales 
2  2  2  2  2  2 
forecasting option (concept tests, advertising tests, product tests, price tests, pack tests) 
Quantitative tests of certain components of marketing mix with elements of sales forecasting
3  3  3  3  3  3 
(for example  CONJOINT, STEP  etc.) 
 Simulated Test Marketing, Volumetric Bundle Test – quantitative test of ALL components of
marketing mix that simulates realistic market situation for a representative sample of  4  4  4  4  4  4 
potential buyers and provides sales forecast with declared  accuracy  of 20% or more  
 Traditional test market – new product placement in a sample of real stores, followed by 
5  5  5  5  5  5 
monitoring of sales during 3‐4 months       
Economentric sales forecasting based on historical market data, trends and accumulated 
periodical business statistics (retail audit, consumer tracking, household panel, industry  6  6  6  6  6  6 
statistics, media etc) 
Consumer & Shopper Segmentations (Ad hoc or syndicated TGI, MMI etc.) 7 7  7 7 7 7 
External expert analysis and assessments/ analytical works (PLEASE SPECIFY): 
8  8  8  8  8  8 
_____________________________________________________________________________ 
Internal in‐house expert analysis and assessments/ analytical works (PLEASE SPECIFY): 
9  9  9  9  9  9 
_____________________________________________________________________________ 
Other (PLEASE SPECIFY) 
_____________________________________________________________________________
10  10  10  10  10  10 
_____________________________________________________________________________
_____________________________________________________________________________ 
DK / NA /Didn’t face this situation  11 11  11 11 11 11 
 
     
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 4 
 
        7a.  From your personal experience, what are the key factors affecting accuracy of the forecast for a new product and making this process a success?  
              /OPEN‐ENDED/ 
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________   
 
7b.  What are the difficulties that you usually face when forecasting sales for a new product? What issues require further exploration? /OPEN‐ENDED/ 
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________   
 
7c.  From your personal experience, what is the average forecasting error, in a majority of cases of sales forecasting for innovations?  /SINGLE ANSWER/ 
1. below 5%  
2. 5%‐10% 
3. 10%‐20% 
4. 20%‐30% 
5. 40%‐50% 
6. Above 50%  
7. DK/NA 
 
7d.  Speaking about all new product launches, that you have participated,  would you be able to estimate how many of them were successful (i.e. reached targets  
       set in the business plan)?  /SINGLE ANSWER/ 
1. Less than 10%  
2. 10‐25% 
3. 25‐50% 
4. 50‐75% 
5. More than 75%  
6. DK/NA 
 
 /ASK Q8 IF NO CODES 4 CIRCLED IN Q7/ 
8. You’ve mentioned that you didn’t conduct or participated in  “simulated test marketing” studies in 2009. What are the main reasons of that? /OPEN‐ENDED/ 
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
_________________________________________________________________________________________________________________________________ 
 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 5 
 
9. Which of the following “simulated test marketing” techniques have you ever heard of, at least by the name? /MULTIPLE ANSWERS/ 
10. Which of the following “simulated test marketing” techniques have you or your colleagues have ever used? /MULTIPLE ANSWERS/   
11. Which of the following “simulated test marketing” studies did you participate in 2009? / FOR EACH TECHNIQUE MENTIONED IN Q10/ 
12. How many of these studies did you participate in 2009? / FOR EACH TECHNIQUE MENTIONED IN Q11/ 
 
  12. Quantity of 
9. Aware  10. Used / Have 
11. Conducted in 2009  STM studies in 
  experience 
2009 
ACNielsen BASES ‐  BASES I или BASES II  1 1 1 _____
ACNielsen BASES ‐ Snapshot или Pre‐BASES  2 2 2 _____
A/R/M/I Marketing ‐ Simulated Test Market  3 3 3 _____
Aegis Copernicus ‐ Discovery  4 4 4 _____
Comcon Sales Vision 5 5 5 _____
GfK ‐ MarketingLab / Volumteric TESI  6 6 6 _____
InVivo ‐ MarketMind  7 7 7 _____
Ipsos Novaction ‐ Designor Shelf, Desighor D'Light, Designor Concept  8 8 8 _____
Ipsos Novaction ‐ NextGen, Innoscreen Forecast  9 9 9 _____
M/A/R/C  ‐ Assessor 10 10 10 _____
MASMI ‐ Simulated Test Market  11 11 11 _____
Synovate ‐ MarketQuest MVP  12 12 12 _____
TNS / RI ‐ Microtest 13 13 13 _____
TNS / RI ‐ eValuate 14 14 14 _____
TNS / RI ‐ FYI (Foresight, InSight, Repurchase)  15 15 15 _____
OTHER (PLEASE SPECIFY)________________________________________________________ 16 16 16 _____
OTHER (PLEASE SPECIFY)________________________________________________________ 17 17 17 _____
OTHER (PLEASE SPECIFY)________________________________________________________ 18 18 18 _____
OTHER (PLEASE SPECIFY)________________________________________________________ 19 19 19 _____
OTHER (PLEASE SPECIFY)________________________________________________________ 20 20 20 _____
DK/NA/None 21 21 21 21
 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 6 
 
/ASK Q14 IF CODE 20 IS NOT CIRCLED IN Q10/ 
 
14. Concerning the last few STM studies, that you have participated recently, would you please estimate the average budget per study ? 
1. Below 300 thousand rubles / Below  $10 thousand 
2. 300 ‐ 600 thousand rubles /  $10‐$20 thousand 
3. 600 ‐ 900 thousand rubles /  $20‐$30 thousand 
4. 900 ‐ 1200 thousand rubles / $30‐$40 thousand 
5. 1200 ‐ 1500 thousand rubles / $40‐$50 thousand 
6. 1500 ‐ 1800 thousand rubles / $50‐$60 thousand 
7. Above 1800 thousand rubles / Above $60 thousand 
8. DK/NA   
 
 
15.  Speaking about mid‐term perspective (3‐5 years), can you please estimate the change in number of “simulated test marketing” studies conducted per year 
with your participation?  
 
1. The numbers of such studies will decline  
2. The number of such studies will remain on the same level                                                   /GO TO  Q17/ 
3. The numbers of such studies will increase 
4. We’re not going to conduct STMs or participate in such studies                                         /GO TO  Q16/ 
5. DK/NA                                                                                                                                              /GO TO  Q17/ 
 
             
      
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 7 
 
         / IF ANSWERS 2, 3, 4 IN Q15 GO TO Q17 /  
 
16. Would you please list the main reasons why you are not going to conduct “simulated test marketing” studies in the next 3‐5 years? /OPEN‐ENDED/ 
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
_________________________________________________________________________________________________________________________________ 
 
              
17. /IF NO EXPERIENCE WITH STMs, I.E. CODE 20 IS CIRCLED IN Q10 – CLOSE THE INTERVIEW/ 
How, in your opinion, the service provided by the local agencies in the area of “simulated test marketing” can be improved? /OPEN‐ENDED/ 
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
_________________________________________________________________________________________________________________________________ 
 
18. Which “simulated test marketing” techniques or agencies providing that service would you recommend to your other colleagues?  / OPEN‐ENDED/  
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
 
19. Why? Please list the key reasons. 
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
_________________________________________________________________________________________________________________________________ 
 
20. Which “simulated test marketing” techniques or agencies providing that service would you NOT recommend to your other colleagues?  / OPEN‐ENDED/  
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
 
21. Why? Please list the key reasons. 
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________ 
_________________________________________________________________________________________________________________________________ 
 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 8 
 
 
 
        /IF ANSWERS 1‐3 IN Q15 , GO TO Q23/  
22.  You have mentioned that you are going to conduct a “simulated test marketing” study in the next 3‐5 years.  In the table below you will find the list of factors 
which could, to a certain extent, affect your choice of technique or agency.  
‐  Which 5 (five) factors are more important for you, when you are making your decision on technique or agency? /5 ANSWERS/ 
‐  Which single factor out of these 5 is of a top importance? /SINGLE ANSWER/ 
 
    TOP 5  MOST 
IMPORTANT  IMPORTANT 
  Service quality:     
1  Highly accurate forecast  1  1 
2  Professional presentation of findings and recommendations  2  2 
  Service supplier:     
3  Recommended by management or company protocols  3  3 
4  Positive previous experience   4  4 
5  Well‐known agency   5  5 
  Technique:     
6  Simple and easy‐to‐understand  6  6 
7  Suitable for Russian market  7  7 
8   A lot of diagnostic information   8  8 
9   Publications in professional literature  9  9 
  Communication quality:       
10  High quality service and project management  10  10 
11  Individual approach for every project  11  11 
  Price:     
12  Affordable price  12  12 
13  Transparent and flexible pricing  13  13 
  Technology:     
14  High speed of research  14  14 
15  High quality of data collection   15  15 
16  Use of modern technologies  16  16 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 9 
 
/ FOR EACH TECHNOQUE MENTIONED IN Q10/ 
23.  You have mentioned that you or your colleagues have experience in conducting “simulated test marketing" studies. We would like to know your opinion 
about practical use of these techniques and cooperation with the service providers. Would you please evaluate to what extend you agree or disagree with 
each of the following statements regarding <NAME OF THE TECHNIQUE > . For your answers please use 5‐point scale below, where 1 means “COMPLETELY 
DISAGREE”  , 5 means “COMPLETELY AGREE”. There are no right or wrong answers, we are interested only in your personal opinion. 
 
    STM model 1  STM model 2  STM model 3 
  Service quality:       
1  Highly accurate forecast  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
2  Professional presentation of findings and recommendations  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
  Service supplier:       
3  Recommended by management or company protocols  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
4  Positive previous experience   1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
5  Well‐known agency   1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
  Technique:       
6  Simple and easy‐to‐understand  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
7  Suitable for Russian market  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
8   A lot of diagnostic information   1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
9   Publications in professional literature  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
  Communication quality:         
10  High quality service and project management  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
11  Individual approach for every project  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
  Price:       
12  Affordable price  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
13  Transparent and flexible pricing  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
  Technology:       
14  High speed of research  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
15  High quality of data collection   1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
16  Use of modern technologies  1..2..3..4..5  1..2..3..4..5  1..2..3..4..5 
                                                                                                                                      Questionnaire Version 2.0 © 2010 Oxford Brookes University Business School, p. 
10 
 
 
24. For each “simulated test marketing" that you have ever used, would you please tell us, how satisfied were you with the quality of service provided by the 
agency.  For your answers, please use 10‐point scale, where 1 means “COMPLETELY DISSATISFIED” and 10 means “COMPLETELY SATISFIED”. 
   
  1 = ” COMPLETELY DISSATISFIED”,                                                                  10 = ” COMPLETELY SATISFIED”. 
 
STM technique 1 1 2 3 4  5 6 7 8 9 10 
STM technique 2 1 2 3 4  5 6 7 8 9 10 
STM technique 3 1 2 3 4  5 6 7 8 9 10 
STM technique 4 1 2 3 4  5 6 7 8 9 10 
STM technique 5 1 2 3 4  5 6 7 8 9 10 
 
25. From your personal experience, or from experience of your colleagues, would you please evaluate relative accuracy of the sales forecast observed in the 
Russian market?   
 
  Accuracy
  Above GLOBAL  Far below GLOBAL  DK/NA
Meets GLOBAL AVERAGE  Below GLOBAL AVERAGE 
AVERAGE declared by  AVERAGE declared by 
declared by the agency  declared by the agency 
the agency   the agency 
STM technique 1 1 2 3 4 0
STM technique 2 1 2 3 4 0
STM technique 3 1 2 3 4 0
STM technique 4 1 2 3 4 0
 
 
      Thank you for participation in our study! 
      If you wish to receive a copy of the final report, please leave your contact information:                   
___________________________________________________________________________________________________________________ 
Appendix 3

Dear Sirs,
I am writing this letter to officially apply for a grant to use Sawtooth web-interviewing
software for my MSc dissertation project at Oxford Brookes University, UK. As requested,
this is to confirm the following information:

Name of applicant: Korotkov Nikolay, Nationality: Russian, Passport: 63#0398596

CV: 34 y.o., MA in applied math, over 10 years experience in marketing research (Ipsos, Coca-Cola), currently obtaining
Master’s degree in Business Management from Oxford Brookes University Business School
Address in Russia: 117638 Moscow, Fruktovaya street, 16, flat 133, +7-(916)-696-17-32
Address in the UK: Cheney Student Village Room L1C, Cheney Lane, Oxford, OX3 OBD, UK
Email: nickolay.korotkov@yandex.ru, 09022263@brookes.ac.uk
Name of Institution and Department: Oxford Brookes University
University, Business School , Wheatley Campus
Campus, Wheatley
Wheatley,
Oxford OX33 1HX, UK, +44 (0) 1865 485771, www.brookes.ac.uk, www.business.brookes.ac.uk
Student Course and Ref#: 09022263, Master of Science in Business Management course
Research topic: Simulated Test Marketing (STM) and its practical application in the Russian FMCG market
Research Supervisors: Dr. Nicoletta Occhiocupo, http://www.business.brookes.ac.uk/bs/profile.asp?id=p0038727
Research Module Leader: Dr. Yuksel Ekinci, http://www.business.brookes.ac.uk/bs/profile.asp?id=p0075228
MSc Programme Director: Jonathan Groucutt, http://www.business.brookes.ac.uk/bs/profile.asp?id
http://www.business.brookes.ac.uk/bs/profile.asp?id=p0073453
p0073453
Research issue: Many marketing research practitioners as well as academics argue that a majority of complex
traditional sales forecasting techniques for new FMCG products, originally developed for mature western markets, are of
limited practical use in the rapidly growing emerging markets, such as Russia. Literature review has shown the lack of
research on this issue.
Research objective: Explore the needs and current forecasting practices for innovations (including STMs) on the
Russian FMCG market and deliver actionable recommendations on the most appropriate forecasting approaches.
Sampling: n
n=30
30 marketing research and forecasting experts from the top100 biggest FMCG companies in Russia
Question flow (briefly): what products/services/methodologies are currently used to forecast sales for the new products
in the Russian market, frequency of use, recommendations, advantages/disadvantages etc. (approximately 30
questions)
Methodological approach: Quantitative B2B U&A, web-interviewing, 30 minutes
Ethical code of conduct: ESOMAR, Oxford Brookes University
Timing: June-July 2010
Justification for usage of Sawtooth Software: Web-interviewing is the only way to reach study participants. Sawtooth
is the only powerful tool for advanced web-data collection
Sawtooth components required: SSI Web only (no conjoint)

Hereby I confirm that the software will be utilized only for the purposes of academic
dissertation described above. Also, this is to confirm that no commercial organization will
y benefit from this p
directly project.
j

Yours sincerely,

Nikolay Korotkov,
MSc BM student,
Oxford Brookes Universityy Business School
Date: 24/05/2010