21. The Market Analysis

In the case of sequential new product concept analysis is carried out before substantial work related to the preparation of the prototype and series of trial. In the case of an integrated approach of the production development the financial analysis is carried out much earlier. It should be one of the first actions that are taken immediately after the detailed identification of new product.

On the basis of calculations, market and economic arguments it can determine the continuation or cessation of work on the further development of the new product’s concept.

An analysis should provide us with information on the expected costs (generation and the introduction of a new product), forecasting sales level and estimate of the anticipated profits.

Market analysis is one of the elements of the projection. Nevertheless, amounts which are often quoted in the preliminary assumptions do not reflect them in reality, it is one of the critical decision-making elements.

It is often carried out on the basis of market experience of the company.

In particular, the volume of sales, which is often estimated on the basis of the available distribution channels and selling similar products.

Other ways to determine the volume of sales is to analyze the diffusion process of innovation or use of available data and forecasting methods that allow precisely defining the value of product sales.

Analysis of the innovation diffusion process

In this model, it is assumed that in order for buying a new product, its knowledge is necessary among the market participants; as a result, the purchase to the test may occur, and in the case of satisfaction with the purchase the customer will buy it again. Sales volume is determined by the formula:

 

Sales volume =  E x K x PE x PR x AY

E – number of entrants

K – percentage of participants who know the product

PE- percentage of participants who purchase experimentally

PP- percentage of participants who intend to repeat purchase

AY- average number of product purchases per year

 

Analysis on the basis of costs and sales

Valuable sales estimate is obtained by multiplying the volume of sales achieved by the unit price of the product. Another method is to calculate the break-even point in terms of volume and value. Presented relationships relate to the one-assortment production.  

 

S = q x p

where:

S – revenue from the sale

q – number of sold products

p – the selling price

Total costs are expressed as a sum

 

TFC = Cf +Cv

Kc – total costs TFC

Cf – the fixed costs

Cv – variable costs

 

Variable costs are the product of:

V is Unit Variable Cost

Cv = q x V

where:

V – unit variable cost

So the breakeven point can be written as equality:

 

S = TFC

 

q x p = q x Cv +Cf

 

In addition to the presented methods of analysis there are economic evaluation models of innovative projects. It is used to support decisions about what is to be developed. It is also used to support decisions about specific activities to be undertaken during product development.

These indicators subsume a number of risk factors and subjective assessment of the business value and technical project that limit the expected benefits of the project. For the models’ calculation of aggregate indicators of the project economic value (V) and quality (Q) one may include the following:

 

 

r – the probability project phases  success

d – the probability concept phases  success

m – the probability marketing   phases  success

s – estimated sales value

p – profit per unit

n – the market life cycle

PVI – present value of investment

 

Anstoff’s  model:

Qp – rate of quality project

r – project phases  success

d – the probability concept phases  success

m – the probability marketing  phases  success

T – subjective rating the technical value

B – subjective rating the commercial value

E – the value of the expected income .

 

R.G. Cooper, S.J. Edgett and E.J. Kleinschmidt suggest the Expected Commercial Value (ECV) for the assessment and selection of projects and for the maximization of the financial value. The ECV calculation is connected with the analysis of a decision tree. The  formula Expected Commercial Value (ECV)  is as follows:

ECV = (NPV x m – Cc) x t–Dc

Dc- development costs to complete the project

Cc- commercialization costs

M- the probability marketing phases success

t- Subjective rating the technical value

B- Subjective rating the commercial value

NPV- The value of the expected income

 

The presented analyzes reflect the basic range of approaches to economic and financial evaluation of new product concepts. Market analysis aims at valuing the product attractiveness as far as the finances are concerned. The main aim is to project sales, costs and profits taking into consideration the risks related to the market conditions. Implementation of the new product is a hazardous venture and the decision is often determined by the financial abilities.

The aforementioned models can not foresee neither the exact costs of product implementation to the market, nor the profit. Those models, however, along with the market data and the team’s knowledge and experience may provide the draft of estimated costs and the profitability on investment.