Driving Growth In Consumer Goods
Sharon M. Flanagan and Carl-Martin E. Lindahl 10.25.06, 6:00 AM ET
A study of 480 product launches by North American consumer goods makers highlights the ability of certain marketing tactics to help spur revenue growth. The findings suggest that manufacturers should take a harder look at repositioning products toward new consumer segments, uses and occasions--particularly at times when truly innovative, or breakthrough, products seem few and far between.
To understand the sources of revenue growth in the sector, we reviewed the growth rates of 290 categories of consumer products (such as bottled water, soap and yogurt) over a five-year period. Although the categories grew, on average, by 2.3% a year, 16 of them increased some five times faster. We looked to see if structural differences among these categories--their size, for example, or the level of competitive intensity within them--might explain their more rapid growth and found none.
Next, we analyzed the 480 product launches associated with the high-growth categories, examined the marketing tactics that the companies employed for each launch and determined whether the product represented a breakthrough innovation. Then, using multivariate regression analysis, we measured the incremental contribution of each of these tactics--and combinations thereof--to the revenue growth of the relevant categories.
We found that the average product launch using two or more tactics was correlated with a mere 0.7% improvement on its category's underlying revenue growth. Yet the effect of truly novel products loomed larger: such breakthroughs were linked with a 2.7% improvement on the average revenue growth in their particular categories. The benefits to individual companies were significant. In 2002, Procter & Gamble (nyse: PG - news - people ), for example, introduced ThermaCare, an inexpensive and portable heating pad. By 2003, the product had generated more than $60 million in revenue (in the channels we measured). Breakthrough products are rare, however: Only 15 of the 480 launches we studied qualified.
Still, our research offers hope for manufacturers whose product pipelines aren't bursting with potential breakthroughs. Notably, we found that efforts to reposition products for new consumer segments, uses or occasions correlated with impressive revenue growth if complemented by other marketing tactics. Indeed, when the repositioning of products in new categories was paired with incremental innovation--the use of an existing technology to enhance a current product--revenues improved upon their growth in the relevant categories as much as they did for breakthrough products.
Twenty-six product launches in our study followed this path. In 2002, for example, General Mills' (nyse: GIS - news - people ) Yoplait modified an existing yogurt item (primarily by whipping air into it) and repositioned the resulting product, dubbed Whips, as a dessert. Likewise, the company launched a vitamin-enriched yogurt drink, Nouriche, to attract health-conscious consumers. Sales of these two products grew four times faster than the yogurt category as a whole and accounted for nearly 20% of Yoplait's total sales in 2005.
What didn't spur growth? Line extensions (such as a new flavor for an existing product) and incremental innovations not supported by other marketing tactics were associated with additional revenue growth of just 0.5%. Our research also suggests that companies hoping to grow by cutting the price of their products to entice value-oriented retailers (and hence gain market share) are in for an unpleasant surprise. Although value pricing was the sole tactic used in 19 of the product launches we studied, it was associated with incremental revenue growth of just 0.05%--barely topping the underlying level of revenue growth for the relevant categories.
Our findings suggest that consumer goods executives should look assiduously for opportunities to reposition their products. This effort will require big changes in product-development priorities, objectives for new products and even channel tactics. Creating links between a product and a new category often calls for changing the product's location in stores, for example. This requirement, in turn, places a premium on the marketing skills associated with understanding and influencing consumer shopping behavior. Achieving rapid growth will never be easy in a mature industry like consumer goods, but as the experience of the fast-growing categories suggests, it's not impossible.
Sharon Flanagan is a principal and Carl-Martin Lindahl is an associate principal in McKinsey's Chicago office.
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