Risk is a part of every project, especially in developing new products and services. In fact, the longer it takes to launch the new product, the more likely that customers and markets will change. On the other hand, long development cycles allow a firm to address quality and technical issues. A key measure for project success to balance these concerns as profitability of the product and its revenue lifecycle.
Most of the global economy is headed toward recession in 2023, if we’re not already there. Economic downturns add more risks to new product development (NPD), yet studies have shown that past recessions can yield positive results for firms that invest in innovation during the downturn. While there’s no guarantee that this recession will produce the same outcomes, it is wise to be a student of history.
There are four factors of risk for NPD projects. Normally, the company’s strategy dictates the project management process deployed to account for these different risks. However, in recessionary times, the four risk factors of product development may lead an organization to a temporary pivot and strategy or a complete re-thinking of the business model.
In this article, we’ll look at the first risk factor – customer. In subsequent articles, will discuss how a recession impacts product management for NPD based on financial, technical, and people risks.
Of course, a product is only as valuable to a company as it is to a customer. My hobby is making greeting cards, but it cannot ever become a business or product line because no one wants to purchase my cards at a price that gives me a profit. (Since I enjoy the craft of making cards, I don’t necessarily need a profit to pursue my hobby. This is one way in which hobbies are differentiated from businesses.)
On the other hand, businesses design, develop, and manufacture products for commercial good. A customer purchases a product to serve an innate need or to add value to their existence. The price they customer pays must exceed the manufacturing and distribution costs so that the producer makes a profit. When your customer has lost his job or she is feeling the effects of raging inflation, the purchasing price is challenged.
Who is Your Customer?
During a recession, you will want to closely examine who your customer is. Often, a producer uses an external manufacturer who sells products to a distributor. The distributor, in turn, sells to wholesale and retail customers. Individual consumers purchase products at retail outlets but may gift a product to the end-user. During an economic downturn, these players may change.
For instance, big box stores like Walmart and Target, will try to save cost to preserve their margins during recession. One way to do so is to bypass the distributor, gaining direct access to the manufacturer. Reducing the number of customers in the purchasing chain can improve pricing strategies for consumers and retailers alike.
Alternatively, Walmart could contract directly with the manufacturer for a store-brand product. Consumers and end-users are more than willing to sacrifice name brands for products of similar functionality when money is tight. Again, this strategy adds value for the wholesale or retail customer as well as the end-user.
How Do You Reach Your Customer?
One reason that big box stores and budget retailers have performed well in the past is location, location, location. Suburbs offer lower rent than city centers whereas shopping malls offer high traffic. Today, ecommerce is another low-cost option to reach consumers.
As you consider new ways to interact with your customers, be sure to match the value of your offerings with the sales outlook. It would be weird to see Ferrari promoted on Facebook, for example. We should not expect a buyer of a high-end sports car to be clicking on ads on a social media site or participants gossip about friends and fashion.
Should Your Customers Change?
Today Amazon makes most of its money from Amazon Web Service (AWS) providing cloud services to businesses. When Jeff Bezos started the company three decades ago, he planned to sell books over the Internet. His primary customer was someone who wanted to read the latest books but could not easily go to Borders or Barnes and Noble. Home delivery of a non-urgent, non-perishable good was ideal for internet sales.
Pivoting and taking advantage of Amazon’s technical prowess, AWS has a very different customer base. AWS customers include the biggest names in software and IT as well as the largest corporations: Adobe, SAP, Netflix, GE, and McDonald’s. As we face an economic downturn, consider whether your products will continue to serve the same customers – or is it time to refocus?
Customer Risk in a Recession
New product development is always risky. Going through an economic downturn can be an opportunity to examine your customer base. During a recession, consumers and end-users focus on cost-savings and price. They are often willing to sacrifice quality in exchange for reduced expenses.
A recession also should drive your strategy to objectively determine how to serve customers. Can you save cost in bypassing part of the supply chain? Can you save money by offering ecommerce versus brick and mortar? How about moving upstream or downstream in the customer chain?
Closely coupled with customer risks are financial risks. Stay tuned for Part 2 of the series!
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