After the various product ideas survive their initial screen, very few viable proposals will remain. Before the development of prototypes can be decided upon, however, a further evaluation will be conducted to gather additional information on these remaining ideas in order to justify the enormous costs. The focus of the business analysis is primarily on profits, but other considerations such as social responsibilities may also be involved. The first step in the business analysis is to examine the projected demand. This would include two major sources of revenue: The sales of the product and the sales or license of the technology developed for or generated as a by-product of the given product. A complete cost appraisal is also necessary as a part of the business analysis. It is difficult to anticipate all the costs that will be involved in product development, but the following cost items are typical:
- Expected development cost, including both technical and marketing research and development.
- Expected set-up costs. These can include production, manufacturing equipment, distribution, etc.
- Operating costs that account for possible economies of scale and learning curves.
- Marketing costs, especially promotion and distribution.
- Management costs.
Other necessary steps in business analysis include:
- Estimating the likely selling price based upon competition and customer feedback.
- Estimating sales volume based upon the size of the target market and such tools as the Fourt-Woodlock equation.
- Estimating profitability and the break-even point.
The Fourt-Woodlock equation is a market research tool to describe the total volume of consumer product purchases per year based on households which initially make trial purchases of the product and those households which make a repeat purchase within the first year. Since it includes the effects of initial trial and repeat rates, the equation is useful in new product development .
The Fourt-Woodlock Equation
The left-hand-side of the equation is the volume of purchases per unit time (usually taken to be one year). On the right-hand-side, the first parentheses describes trial volume, and the second describes repeat volume. HH is the total number of households in the geographic area of projection, and TR ("trial rate") is the percentage of those households which will purchase the product for the first time in a given time period. TU ("trial units") is the number of units purchased on this first purchase occasion. MR is "measured repeat," or the percentage of those who tried the product who will purchase it at least one more time within the first year of the product's launch. RR is the repeats per repeater ( the number of repeat purchases within that same year). RU is the number of repeat units purchased on each repeat event.