When estimating the demand curve, companies are unable to project reliably the settling price for a product. Instead, asymptotic prices can be predicted fairly well using the so- called experience curve. The latter is a log-log curve whose ordinate is the product price, or cost, and whose abscissa is the cumulative number of units produced. As the number of manufactured units increases, so does the experience of pro- ducing them, and consequently, the price drops. This relation- ship, often attributed to Henderson (1974), can be expressed:
pn¼ p1na ð2:1Þ
where p1is the price (or cost) of the first unit of production, n
is number of production units, pnis price (or cost) of the nth
unit of production, and a is the slope of the log-log curve, or the so-called price elasticity. Hence, when projecting the asymptote at high n, a value of a must be estimated, with typical values within 0.7–0.9. This relationship applies to the prices of numerous products, including LCD panels, ball- point pens, VCRs, flat-panel televisions, and calculators. Based upon values of a for existing products, companies often estimate the price elasticity for new products.
Eq. (2.1) can be justified as follows: Initially, when the number of manufactured units is low, the price (and cost) per unit is high because the volume is low, primarily because the manufacturing process has not been scaled-up to a more economical scale. In addition, often the manufacturing tech- nology is immature initially. As an example, initially, a new chemical compound is produced in a pilot-plant at a high price per pound. At anticipated high throughputs, using continuous processing, the price (and cost) per pound will be sharply reduced. As another example, Figure 2.10 illustrates the
projected cost of electricity (from 2010 to 2050) using photo- voltaic technology as a function of the installed capacity, prepared by the Energy Research Center of the Netherlands (www.ecn.nl/fileadmin/ecn/units/bs/PHOTEX/photex.xls).
EXAMPLE 2.11
The price of electricity production using photovoltaic technology for the next decades as a function of the installed capacity is given in Table 2.6 (and graphed in Figure 2.10).
For expanded capacities projected beyond 2050, graph the price per kWhr for various values of price elasticity: 0.75, 0.8, and 0.9.
SOLUTION
Each experience curve can be constructed easily using the fol- lowing rule: as the cumulative production is doubled, the price decreases by the price elasticity. For example, when a¼ 0.75, as the cumulative installed capacity doubles from 14,851 to 29,702 GW, the price of electricity decreases by 25%¼ 0.75 0.36 cents ¼ 0.27 cents. Repeating this for size expansions:
Also, repeating this with a¼ 0.8 and 0.9, the experience curves in Figure 2.11 are graphed.
Clearly, the choice of the elasticity, a, has a significant impact on the price projections. Note that a 0:78 for the data in Table 2.6 and Figure 2.10. As indicated above, for price projections into the future, it is common to set a within 0.7–0.9.
For many products beyond the economy-of-scale, initially the profit margin is high, as there are no competitors. How- ever, as the market grows, the profit margin decreases. 0.1 1 10 100000 10000 1000 100 10 1 Installed Capacity (GW) Pr ic e (Ce nts/kWhr)
Figure 2.10 Experience curve of electricity production using photovoltaic technology.
Table 2.6 Price of Electricity Production
Installed Capacity (GW) Price (Cents/kWhr)
10 3.75
63 2.09
387 1.16
2,399 0.64
14,851 0.36
Installed Capacity (GW) Price (Cents/kWhr)
14,851 0.36 29,703 0.27 59,406 0.20 118,811 0.15 273,623 0.11 475,245 0.09 950,490 0.06 1,900,980 0.05 3,801,961 0.04
For initial price (and cost) estimates, Eq. (2.1) is often applied. Note that these estimates can be made throughout the SGPDP, not just in the product-introduction stage. Normally, however, costs rather than prices are estimated in the early stages (concept, etc.). Serious price projections usually wait until the product-introduction stage.
Summary
In summary, the pricing of a new product is very important, as it can determine not only the successful commercialization
of an innovative technology into the new product, but also the realization of the return on investment for the R&D required to produce the new product. A balance must be struck between product acceptance in the marketplace and the maximization of profit. For a new-to-the-world product with significant perceived value to the customers, prices com- monly seem exorbitant. For example, the price of an iPhoneTM is close to the price of a low-end computer, and the price of Post-itTMnotes is much higher than that of colored paper. In many of these cases, consumers accept the price premium to obtain perceived valuable functionalities and features. 0.01 0.10 1.00 10.00 1.E+07 α = 0.9 1.E+06 1.E+05 1.E+04 1.E+03 1.E+02 1.E+01 1.E+00 Installed Capacity (GW) Price (Cents/kWhr) α = 0.8 α = 0.75 Figure 2.11 Projected
experience curve of electricity production using photovoltaic technology at a¼ 0.75, 0.8, and 0.9.
2.9
SUMMARY
Having studied this chapter, the reader should:
1. Be acquainted with the need to develop a pipeline for new- product development and the steps in beginning a new- product-development effort, that is, the creation of a project charter and an innovation map for the new product. 2. Understand the five stages in the Stage-GateTMProduct- Development Process (SGPDP), especially the concept stage.
3. Be able to carry out the concept stage, involving a market assessment, determination of customer require- ments (voice of the customer) and product require-
ments, evaluation of new product concepts, and carrying out an opportunity assessment. While the techniques are introduced using general terms, the reader should be familiar with their application in the case studies of Chapters 13, 15, and 17, involving ammonia, environmentally friendly refrigerants, water- dispersible b-carotene, thin-glass substrates for LCDs, washable crayons, halogen light bulbs, home hemo- dialysis, and lab-on-a-chip products.
4. Be acquainted with the steps in the feasibility, develop- ment, manufacturing, and product-introduction stages of the SGPDP.
REFERENCES
1. ANDERSON, E., and J. SANCHEZ, ‘‘Application of Concept Engineering on
the Bose Enchilada Project,’’ Center for Quality of Management Journal, 2(3), 23–32 (1993).
2. COOPER, R. G., Winning at New Products: Accelerating the Process
from Idea to Finish, 3rd ed., Perseus Publ., Cambridge, Mass., 2001.
3. COOPER, R. G., Product Leadership: Creating and Launching Superior
New Products, Perseus Publ., Cambridge, Mass., 2002.
4. COOPER, R. G., Product Leadership: Creating and Launching
Superior New Products, 2nd ed., Basic Books, Cambridge, Mass., 2005.
5. CREVELING, C. M., J. L. SLUTSKY, and D. ANTIS, Jr., Design for Six
Sigma in Technology and Product Development, Pearson Education, 2003.
6. DEAN, J., ‘‘Pricing Policies for New Products,’’ Harvard Business Review, Reprint 76604 (1976).
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Quality, Nippon Kagaku Gijutsu Renmei, Tokyo, 1950.
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EXERCISES
Project Charter
2.1 Develop a project charter for the compact fluorescent light bulb discussed in Section 1.3.
2.2 Develop a project charter for the lab-on-a-chip product
discussed in Sections 16.4 and 17.4.
2.3 Develop a project charter for the home hemodialysis product discussed in Sections 16.3 and 17.3.
Value Propositon
2.4 Write a value-proposition statement for the compact
fluorescent light bulb discussed in Section 1.3.
2.5 Write a value-proposition statement for the lab-on-a-chip
product discussed in Sections 16.4 and 17.4.
2.6 Write a value-proposition statement for the home hemo-
dialysis product discussed in Sections 16.3 and 17.3. Market Segmentation
2.7 Develop a market segmentation for the home hemodialysis
product discussed in Sections 16.3 and 17.3.
2.8 Develop a market segmentation for the lab-on-a-chip product discussed in Sections 16.4 and 17.4.
2.9 Develop a market segmentation for the iPhoneTMdiscussed in Example 2.3 using a demographic approach. Use the Internet to obtain the list price for this product.
Voice of the Customer
2.10 Generate lists of questions for determining the desired
product features and functionalities for a smart phone such as the iPhoneTM. Consider features and functionalities in several areas, for example, for use as a phone, a multimedia player, a camera, an Internet browser, and a PDA.
2.11 Carry out a KJ analysis for the customer voices in
Table 2.3:
(a) Group the customer voices into groups with similar voices. Each group should have three to five voices.
(b) Assign a title representing the customer needs to each group.
9. HALLOWELL, D. L.,‘‘Effective Use of Special Purpose KJ Language
Processing,’’22 June 2005; iSixSigma.com, 8 July 2007.<http://software .isixsigma.com/library/content/c050622b.asp>.
10. HENDERSON, B., ‘‘The Experience Curve Reviewed: V. Price Stability,’’
Perspectives, The Boston Consulting Group, 1974, #149.
11. KATZ, G. M., ‘‘The Voice of the Customer,’’ Chapter 7 of The PDMA ToolBook 2 for New Product Development, BELLIVEAU, P., A. GRIFFIN, and S.
SOMERMEYER(eds.), John Wiley & Sons, 2004.
12. KAWAKITA, J., A Scientific Exploration of Intellect, Kodunshu, Tokyo,
1977.
13. MURRAY, F., ‘‘Technology Strategy for Start-Ups,’’ Lecture 4 of the
Nuts and Bolts of Business Plans, MIT Entrepreneurship Center (2007).
14. PORTER, M.E., Competitive Strategy: Techniques for Analyzing Indus-
tries and Competitors, Free Press New York, 1998.
15. PORTER, M.E., Competitive Advantage: Creating and Sustaining Supe-
rior Performance, Free Press New York, 1998.
16. PUGH, S., Creating Innovative Products Using Total Design, Addison- Wesley-Longman, 1996.