QUESTION: With relevant examples, explain the product development stages.

Solution

According to the Product Development and Management Institution (PDMA), product is the
term used to describe all the goods and services sold. Products are bundles of attributes (features,
functions, benefits, delivery, and uses) that can be either tangible (as in the case of physical
goods) or intangible, such as those associated with service benefits, or a combination of the two.
A product is what the customer buys. The total product includes everything that is delivered to
the client. For a microfinance institution for example such a product may include credit, savings,
insurance, transfers etc.

Product development typically refers to all stages involved in bringing a product from concept or
idea through market release and beyond. Product development is the complete process of
delivering a new product or improving an existing one for customers. The customers can be
external or internal within a company.

Developing new products is a risky endeavor, but it is certainly necessary for the growth of your
businesses and probably essential to their survival. Developing new products is generally a team
effort that requires the input of a variety of people with a variety of interests, talents, and skills.
Innovation in and of itself is not enough. You must market, distribute, and continually refine and
improve the product in response to and anticipation of market needs and desires.

Developing a financial product is not a simple linear process. However the following steps have
been identified by several scholars overtime.

MARKET RESEARCH

Following recent developments and the growing competition amongst financial institutions, and
in the light of growing numbers of “drop-outs” or “exits” from their programmes, there has been
increased interest in improving product development skills. Developing financial institutions’
capacity in market research is the first, all-important step

Market research is the process of determining the viability of a new service or product through
research conducted directly with potential customers. Market research allows a company to
discover the target market and get opinions and other feedback from consumers about their
interest in the product or service. Institutions must research to identify needs and opportunities
This includes a review of the competition and products offered by both the formal and informal
sectors, conducting market research as an integral and on-going part of staff‘s interactions with
the clients, and through contacting other market leaders in the Microfinance industry.

The market research process continues to define the methodology to use in order to obtain the
data in the most objective and useful manner. In a typical market research problem there are
basically two primary techniques to be employed as far as the methodology is concerned. These
include the qualitative and quantitative methodology. The technique selected is dependent of the
research problem and objectives and works to provide the sought for solution.

Using qualitative research techniques, market research tries to understand clients‘needs for
financial products and services. After comprehending their needs, institutions develop a product
concept and refine this idea into a prototype (model) of the final product. Using quantitative
research techniques, we test the product prototype, make necessary changes, and get ready to
pilot test the product.

The final step in the research process is analysis and reporting of research finding. Analysis
involves dissecting the data collected and placing it into the context that answers the research
problem. The analysed information is then forwarded to the problem owner with
recommendations and conclusions. Analysis and reporting for the two techniques requires
different approaches and formats. Data tables and statistical analysis are used for quantitative
analysis, with graphs being drawn to shown trends and variations. In qualitative research,
transcripts and grids/matrices are used to compare the outcome from the groups or individuals
and facilitate in the drawing of conclusion.

PRODUCT CONCEPT AND DESIGN

The research findings largely influence the generation of a product concept if say for example
the recommendations cite an opportunity for the institution in pursuing the product or service
idea.

The first step in developing a new financial product is to conceptualize it. The idea for a new
product can arise from a variety of sources, such as client demand, internal sales force or a third
party. For example, Exchange-traded funds came about because they did away with the
limitations of traditional mutual funds by trading on an exchange, and thus offering instant
liquidity and transparency traits that are of immense appeal to investors.

The research department determines customer needs through analysis of secondary data and
through qualitative and quantitative research. Based on customer needs a product concept is
developed, which undergoes preliminary costing and pricing. The product concept is presented
back to clients to determine whether the concept meets customers’ requirements and to ensure
that it is described in clear concise and client friendly language.

The new product must meet the legal and regulatory requirements which are the rules and laws
firms operating in the financial industry, such as banks, credit unions, insurance companies,
financial brokers and asset managers must follow.

For example , a review of the payment system legal and regulatory framework in Uganda
currently shows that there are several pieces of legislation that are relevant to the regulation of
payment systems and they include: the Bank of Uganda Act; the Financial Institutions Act
(2016); the Electronic Transactions Act (2011) which governs the use, security, facilitation and
regulation of electronic communications and transactions; Computer Misuse Act (2011) which
makes provision for the safety and security of electronic transactions and information systems to
prevent unlawful access, abuse or misuse; the Contracts Act (2010); the Electronic Signatures
Act (2011) and Anti-Money Laundering Act (2013). These various pieces of legislation appear to
give some protection but do not address constraints to, or support, the operation or future
development of the payment systems.

COSTING

Product costing is the process of tracking and analyzing all of the costs incurred in the
production and sale of a product or service, including direct costs and overhead costs. While it is
generally clear where to assign direct costs of service delivery, overhead costs are often more
challenging to allocate to different products and services, particularly personnel costs, when staff
support the delivery of multiple products.

There are many factors and approaches to consider in costing, but there is agreement on a few
things. First, it is easier to price a new product if the price of current products is known. Current
costs can be used as a basis to estimate future costs for a new product. Second, an activity-based
costing approach to understand how this can be applied to our new product costing.

A first step in this exercise is for the institution to clearly identify individual product offerings.
One useful way to do this is to classify products according to key service lines. A service line
can be defined as a group of products that are closely related, usually because they share similar
objectives or are delivered through the similar types of delivery channels. Service lines should
represent the priorities of the institution as reflected in its strategic and business plans. Some of
the most common examples are nclude deposit accounts, lending, salary solutions, agency
banking partnerships , etc. which can either be offered individually or as product packages.

Product costing is a crucial exercise for institutions, as they try to better understand their product
offerings and how they position themselves in the market. By helping identify key service lines,
managers can begin looking at their institution’s unique products and allocating all associated
costs (direct and overhead) to better understand the financial viability of the current pricing
structure. Through an analysis of product costs and sales, institutions can begin to think about
which products contribute the most to their bottom line and where additional subsidies may be
needed to support services that may not be financially viable at least in the short term, but are
still a priority for the institution and its members. Finally, by better understanding the dynamics
behind expense and revenue streams, institutions will be better placed to develop financial
projections that will form the basis of their financial sustainability strategy.

PRICING

Price is the value that is put to a product or service and is the result of a complex set of
calculations, research and understanding and risk taking ability. A pricing strategy takes into
account customer segments, ability to pay, market conditions, competitor actions, trade margins
and input costs, amongst others. It is targeted at the defined customers and against competitors.

Pricing a financial service is both an art and a science. The “art” of pricing is in choosing a
combination of fees and charges acceptable to customers, that are fair and transparent, and in
determining if the product has any unique attributes that deserve premium pricing. The “art” of
pricing is in careful and considered communication to and feedback from customers and staff to
ensure that pricing messages are appropriately and correctly delivered. The “science” of pricing
is in ensuring that the product is profitable and is competitive in the market, that aside from very
few specific and chosen loss leaders, that each products returns a profit.

At a strategic level many of the marketing approaches to pricing remain options, but they don’t
always provide in depth guidance on how to price products and services. MicroSave
recommends a three-tiered approach to pricing. An institution should first establish the cost of
providing the service through product costing. Secondly, the fees and charges given by the
competition should be considered. Thirdly, the features of the product should be compared
against the features of competing products to determine whether there is additional value in the
product that can be premium priced. Other pricing strategies, such penetration pricing and skim
pricing should be considered only after these steps have been taken.

Consumers find it difficult to compare products and services; this is because financial services
are by nature intangible. Even when comparing simple deposit accounts, fees and charges differ
for different services, for deposits, withdrawals, transfers, for opening accounts etc. In other
cases different services re bundled together, for example compulsory savings and microfinance
loans, where clients view compulsory savings as a cost of borrowing rather than a valued service.
Worse still price information is overwhelming, customers simply cannot compare the products
and services for more than a handful of competing institutions.

In concept product pricing is simple, firstly, establish cost, secondly examine the fees charged by
the competition and finally determine whether the product or service has sufficient customer
value to deserve a premium price. In practice, pricing is complex, customers and institutions
alike find it difficult to track prices regularly and to understand the nuances of pricing
calculations. There is a role for regulators in promoting transparency, but a less clear role in
setting interest rate ceilings as these can act to restrict the supply of credit. Finally, where
possible, pricing should reflect levels of risk and not be an avenue for excessive returns or to
cover for inefficiencies in delivery of services.

PILOT TESTING AND ROLLOUT

Pilot Testing
A pilot is a critical stage in product development which typically involves rolling out the solution
to a small test group to get feedback and smoke-test the technical capabilities in real-world
scenarios.

A few of the most commonly quoted reasons for pilot testing new products include reducing the
risk of developing inappropriate new products; reducing the cost of making mistakes; growing
business volumes and profits through better meeting the needs of prospective customers;
perfecting the product whilst changes can be made quickly and easily and without risk to
reputation; developing innovative new products – to be a product leader not a follower;
developing a competitive advantage; experimenting in a new sector; and understanding the
marketing of the new product.

Pilot testing demands investment in time and resources to allow the measurement of a product’s
worth on a limited scale and scope, so that the results of the test guide management decision
making about a broader rollout of the product. However, top of the agenda, especially for MFIs
operating in highly competitive environments, is to stay ahead of the pack and to safe guard the
secret product concept, hence a delay to offering the product to the public is seen as a significant
opportunity cost.

Ideally the pilot testing process takes the form of the following procedure:

Composing the Pilot Test Team:

Establishing the pilot test team for the product can be a daunting task especially in a larger,
bureaucratic organization. The pilot test team should be established around key competencies.
For example, Each team should have a senior product champion or team leader and include
representation from finance, information technology, marketing, training, operations
management, branch operations, research and audit.

Success at this stage requires firm leadership. Unless a senior manager leads the team, and he/she
has access to human, physical and financial resources, decisions take longer to make and
resources are difficult to obtain. Managing time demands on the team is extremely challenging.
The problem is particularly acute in the case of experienced staff whose skills are in great
demand elsewhere in the organisation.
Product development team clients usually have an existing full time position within the
institution. Managing the competing demands placed by department heads along with the
demands of the product development team can prove particularly challenging.

For example if a previous product champion in an institution leaves for another assignment, the
replacing manager may have such a diverse range of activities that, he will find it difficult to
devote the time necessary to properly oversee the pilot test

Developing the Testing Protocol: The pilot test protocol at its simplest is a list of tasks to be
performed, by whom, in what time frame and at what cost. The length of the pilot test is
critically affected by the quality and coordination of preparations during the development phase.
For example potential causes of delays may include the failure of internal marketing, problems in
system development, inexperienced staff, resource constraints, insufficient leadership, and the
departure of key staff among others.

Defining the Objectives: Whilst it is common to set profitability and growth targets, few
institutions set targets in relation to customer efficiency in terms of value for the customers’
time, or customer satisfaction. Even fewer institutions set targets for the effectiveness of the
marketing effort – even though effective marketing can significantly increase sales.

Preparing All Systems: Challenges related to information systems frequently delay the
implementation of a new product for example the in developing a mobile payment product the
mobile platform or network may be slow hurting customer satisfaction. To reduce delays, firstly,
ensure that the chosen IT solution is flexible as this will enable the product features to change as
the pilot test moves forward. Secondly, ensure the availability of local or regional IT support.
Thirdly, test the set up of the master record for the new product at the beginning of the
preparatory phase – to ensure that the system can accommodate the product. Fourthly consider
reporting requirements carefully.

Modelling the Financial Projections: Developing financial projections sometimes proves

difficult. Reasons for this may for example include insufficient skills in financial modelling and
the lack of critical information on which to build the projection. Once the projection is
constructed it is essential to revise the assumptions underlying the projection in line with actual
experience.
Documenting the Product Definitions & Procedures: Most financial institutions embark on
strengthening the documentation of their procedures, this is particularly the case for those
institutions moving from manual to computerized systems. Two factors improve the quality of
the procedures developed, the formal approval of manuals by the board and the use of flow
charts or process maps to document procedures.

Training the Relevant Staff: Sufficient quality training is critical to the success of the pilot test.
Training is required in the features of the new product, its processes and procedures, in customer
service and in marketing. However, despite the importance of staff training it is usually given a
low priority and where it occurs the effectiveness of the training is rarely monitored.

Marketing: Product marketing should be perfected during the pilot test. Success factors
normally include the effectiveness of internal marketing, the level of pre-existing marketing
competencies within the institution, adequate marketing plans and budgets, and degree of focus
on customer service. During the test the effectiveness of marketing should be closely monitored.

Beyond product marketing, developing new products represents an opportunity for financial
institutions to improve their corporate image, through coordinating related
improvements around branch infrastructure, customer communications and customer service.

Commencing the Product Test: Before commencing pilot tests it is important to review the
adequacy of the preparations for the test.

Evaluating the Test:

Evaluation of pilot tests is built on regular monitoring and adjustments throughout the pilot test
period – it is the culmination of a process of development rather than an isolated activity.
However, given the time and effort invested in a pilot test it often proved difficult for the pilot
test team to be fully objective in their evaluation – one solution is for an external reviewer to be
part of the evaluation team.

Factors that may influence the quality of monitoring may for example include, the monitoring
budget, the experience of the monitor, the tools used and the familiarity of the monitor with the
product. The monitor may also need have the ability to interpret the results of the pilot test and to
ensure action is taken against agreed recommendations.
Practitioners and theorists generally agree that new product development is a costly undertaking,
with pilot testing being the most expensive of the steps in the process especially if not properly
planned or prepared for. Yet it is an investment that an increasing number of MFIs are willing to
take up because of the anticipated perceived gains. However the concern of whether the returns
generated are worth going through the process still remain.

PRODUCT ROLLOUT

Roll out refers to the whole process of moving a product from the successful conclusion of the
pilot test,to the point where it is fully operational in all desired locations, and has an established
continuous feedback loop providing data for management decision making. It is a process, with
multiple steps, whether it is a new or restructured product that is being considered. Rollout is
much more than simply the launch of the product. It includes the preparation leading to the
launch, the launch itself, and product management after the launch, all of which are equally
important.

The product development process does not come to an end with roll out. It is an ongoing
continuous process, which should never come to an end. The rollout process begins with the
formation of the rollout team and is completed with the product launch. All products must be
continuously assessed based on client and institutional responses, as well as the overall position
of the product within the market. When this is not done, the institution may not recognize, for
example, that a competitor is overtaking them because their product is more closely aligned with
client’s needs, or that their own systems are becoming less and less able to absorb the strain of
the new product.
Rollout actually begins during the pilot test phase when the Pilot Test Team compiles the
recommendation letter and its attached handover document. This handover document forms the
basis of the rollout activities. The rollout process then moves through preparation and launch,
and continues through management of the product, even after the product has reached a stable
state.

A stable state should come once the product is available in all branches that are deemed
appropriate (not necessarily all branches), the product is growing at a rate reasonably close to
projected, systems are operating at or above expectations, and staff, management, and clients are
reasonably happy with the product
Conclusion

As presented above, product development plays a vital role in increasing the client outreach for
any organization especially in the financial sector. This increase in customer base, in turn,
catalyzes the efforts of any institution for achieving sustainability and increasing profitability.
The product development process starts with conceiving an idea for a new product and ends with
its launch followed by feedback cycles. It passes through the stages of evaluating the idea of
introducing new product, background preparations for designing a new product, prototype
designing, and pilot testing before it is finally launched. It is also important to note here that the
product development process does not end once the product is formally launched in the market.
It is a recurrent process of refining the terms, characteristics, and conditions of that product,
based on customer feedback and market analysis. In fact, sometimes product refinement (rather
than new product development) is precisely the “innovation” that is needed.
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