Entrepreneurs, inventors, owners of business start-ups, and equity investors in new single-product firms face a dilemma: How to move an idea in the form of a patent to the check-out lane. Hoffman Strategy Group's Innovation and Business Strategy Framework™ is used to briefly describe four components of market placement: Strategy, Price Point, Market Size, and Distribution.
Thermocromatic Body Patch
The U.S. Patent Office approved a thermocromatic patch for monitoring and detecting body temperature in 2010. A Kentucky inventor and entrepreneur filed the patent in 2009 and placed the product in a limited test market soon after the USPTO approval in 2010. The patent was acquired by a group of investors who envision the product's growth potential because it addresses a concern for heat related illness associated with sports.
The business start-up from this single patented product must first determine business strategy. Generally, there are two strategies: cost and differentiation.
Cost Strategy: To produce a product at a price below competitors is the focus of a cost strategy, even if the firm faces few competitors in the market. In this case, the mass production of a body patch, similar to the BAND-AID®, creates an opportunity to realize cost efficiency through economies of scale and, thereby, place the market on the market at prices lower than competitors.
Differentiation Strategy: To produce a product that is differentiated from like products on the market is the purpose of differentiation strategy. Such strategy may either be horizontal or vertical. Horizontal differentiation is based on prices of like products. Vertical differentiation is akin to niche marketing where quality or value trumps price.
Along with strategy is a fundamental brand focus and clear product message. For example, a safety message related to managing the onset of heat-related illnesses may target a broader market and, therefore, supports a mass produced cost strategy.
New product price point is a challenge when that product has little to no market experience. This situation tends to occur with a newly patented product such as the body temperature patch.
Trial-and-Error: A limited test market is one method to determine price points. Of course, the break-even price point is one place to start. Until the product gains market experience, along with sufficient business intelligence data, price point is often left to a guessing game by the business owner/entrepreneur.
Primary Survey Research: Alternatively, the price point for given segmented markets may be reached through primary survey research of potential buyers. This is basic social science research that provides the business owner/entrepreneur with survey findings specific to target markets and consumer price points in those markets.
The market size for a new product may be estimated in two ways.
Primary Survey Research: As with price point estimation, survey likely consumers to get a sense of buyer interest in various markets. For example, the body temperature patch may have a market among parents with children playing youth sports and companies employing outdoor workers. A sample survey of sufficient size can estimate the market potential for a new product.
Secondary Research: Market size estimates are possible using secondary research sources such as the U.S. Bureau of Economic Analysis, U.S. Labor Statistics, other federal and state sources, and market studies made available for purchase from private research firms (e.g., Gallup).
A combination of knowing price points and market size permits the business owner/entrepreneur a method to calculate estimates of revenue projections.
A new product in the hands of a business start-up owner is only an idea until an effective distribution system is in place to move that product to the check-out line at the local popular sporting goods store, for example. The owner/entrepreneur needs to manage a supply chain and logistics system that generally involves:
- Source material
- Production facility
- Finishing and packaging
- Shipment and logistic
- Placement on store shelf
Business start-up owners, entrepreneurs, inventors, and equity investors engaged in moving a new product from an idea to the sales transaction must carefully consider strategy, price point, market size, and distribution/supply chain management. Both primary survey research and secondary research are necessary to this due diligence process. This aligns well with the long-term goal: maximize profit opportunities and shareholder value.