Procter & Gamble is, without a doubt, one of the most profitable consumer package goods companies in the world. According to Reuters, the company’s 5-year average gross margin is 50.91% vs. industry average at 7.27%. 5-year average net profit margin is 13.65% vs. industry average at 1.27%.
In the housewares industry, the Keurig® single serve coffee maker is one of the most successful small kitchen appliances of recent years. More than ten years after the introduction of the first home unit, Keurig continues to outperform competitors. In fiscal year 2013, Keurig’s parent company Green Mountain Coffee Roasters sold more than $825 billion worth of Keurig® system brewers, up 9% from 2012.
What do P&G and Keurig have in common?
Both companies came up with great innovations that came from understanding the customer’s unmet needs and desires.
In “The Game-Changer”, P&G Chairman and CEO A.G. Lafley wrote, “Just about every P&G billion-dollar brand was launched with a product innovation discontinuity—that directly addressed unmet customer needs—and as a result, stimulated new consumption. Pampers was the first mass disposable diaper, giving mothers a more-effective, more-convenient alternative to cloth. Head & Shoulders was the first shampoo to provide no trade-off between antidandruff protection, scalp care, and beautiful clean hair.”
Like Pampers and Head & Shoulders, the Keurig® single-serve coffee maker was also a product innovation discontinuity that directly addressed unmet customer needs. As Daniel McGinn reported in his 2011 Boston Globe piece on the history of Keurig, the idea for the Keurig machine came to cofounder John Sylvan when he was working as a low level marketing manager for a semiconductor company. Sylvan noticed that the office coffee was generally terrible. Even if a co-worker somehow managed the measure the right amount of coffee and water to make a decent pot, the half-full carafe would then sit on the burner for hours, getting stale and bitter. Sylvan knew he could do better.
New product development (NPD) practices that differentiate companies with the best new product performance from the rest
Companies like P&G and Keurig that understand marketplace and customer needs typically outperform companies who don’t, according to research conducted by the Product Development & Management Association (PDMA).
Since 1990, the Product Development & Management Association (PDMA) has sponsored best practice research projects to discern which new product development (NPD) management practices are associated with higher degrees of success. The research analyzes what differentiates companies with the best new product performance from the rest. The PDMA defines the “best” as those “companies that simultaneously are (1) either the most successful or in the top third in their industry success and above the mean in (2) program success and in (3) sales and profit success from NPD.”
The “best” firms outperform the rest when it comes to new product introductions. In 2003, more than 75% of the products commercialized by the “best” firms in the previous five-year period had been successful, with 47% of sales and 49% of profits accounted for by those new products. This compared with a 54% success rate for the rest of the firms, with only 21% of either profits or sales generated by their new products.
The PDMA best practices study found that there were several key activities that the “best” did better than the rest. Customer needs assessment was one of these key activities. The “best” spent significant time and effort upfront gaining an understanding of the marketplace and customer needs. They made significantly more use of marketing research tools to obtain a more qualitative understanding of potential customers and how they interact with and use the products being developed.
Is your company one of the best or one of the rest?