Tuesday, January 25, 2011

Product Development

A number of things occur during the Product Development stage. When Companies develop new products and services they set a number of goals for the new product. They will have a target market segment or customer base they want to sell to. They will have a target price for the product both initially and over time. They will establish a target cost for the item that is needed to achieve an established product margin at the target pricing. They will also establish when cost reductions or further enhancements are required to either maintain the price or maintain the margin level as the price is reduced.

As part of the process they also will look for ways to distinguish their product in the marketplace. One company may add new or unique features or functionality as the main differentiator for their product. Other companies may focus on offering reduced functionality so they can reduce the cost and focus on a different, lower end segment of the business. Some companies may offer an item that has a number of unique features which are targeted toward a specific application or industry, to focus on that niche market. Companies add functionality to both attract customers, but also to protect their pricing.

This all occurs as they work to identify how they intend to sell and win against the competition.  In doing so they identify their value proposition, why a customer should want to buy their product or service. They will also do competitive positioning of the product against the potential competitors to double check their pricing strategy and understand what items they need to stress to get a competitive advantage.

At the same time decisions on Sales Channels for the product are made. Is the product to be sold to Original Equipment Manufacturers (OEMs), Value Added Resellers (VARs), Distribution, or Direct sales? For each channel they will establish a list price, discount structure, sales terms, sales promotions, and incentives. The channels strategy established by the Seller may determine what entity you may need to buy from and that impacts both the price you will pay and the terms that you can achieve.

The biggest potential impact to your negotiation is the Supplier's decision on sales channels.  Suppliers usually establish criteria for direct sales with all other sales needing to be purchased through third party sales channels. Some companies may not sell direct and do not have the infrastructure to deal direct. Even if they sell direct, Suppliers may be extremely reluctant to deal direct with you unless you meet the criteria for direct sales. Selling direct to a company that doesn’t meet the criteria for direct sales creates conflict with their channel and Suppliers want to avoid conflict with their channels as many rely on the channels for much of their sales. If you aren't a huge customer that the Supplier will want to deal with directly, you will normally be forced into buying from one of their established channels. This means that before the Product Development is complete, the Supplier may have already limited what you can achieve in terms of price and contract terms.

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