Thursday, February 26, 2009

The pilot test stage

The next “stage” in the product development cycle, and perhaps the most discussed, is the pilot test. At this point you’ve fleshed out your new product idea and concept, and done some basic financial analysis to ensure you can actually deliver the product sustainably. Now it’s time to stick your toe in the water and test that product idea.

The first step in the pilot test is developing a pilot test plan. The MFI must decide which criteria or targets it will use to determine if the test was a success or failure. The criteria or targets chosen will depend on the product. They may include volume of loans in clients or portfolio value, profitability, productivity and efficiency of loan officers, portfolio at risk, time to disburse the loan, etc.

The test plan also delegates responsibilities for actions among members of the pilot test team, which usually includes people from different departments. An illustrative example can be seen in Figure 7. The new product (or product redesign) will affect multiple departments – from audit to finance to credit to human resources.

The plan also describes in writing how the test will be run – i.e., the test protocols. There may be two sets of protocols – pre-test and pilot test. Pre-test protocols may include:

  • Where the test will occur
  • Deadlines for key steps before the test takes place
  • Who is responsible
  • Objectives

Pilot-test protocols may include:

  • Dates of assessments of how the test is running
  • Dates of monitoring checks and evaluation meetings, where criteria projections/targets are measured against actual results
  • Reporting (when and to whom)
  • Dates of go/no-go decision points

One commonly asked question is how long should a pilot test last? In microfinance, defaults tend to come towards the end of the loan term, so ideally a pilot test would last the length of a loan term. Of course, if the MFI is proposing a 5-year housing loan, that isn’t feasible, and a compromise must be made – perhaps a one year test.

Friday, February 20, 2009

The product development cycle: part 2

The next two stages in the product development cycle are concept development and financial analysis.

Concept development: During this stage, concept development fleshes out the ideas that pass the “screen test.” Concept development asks and answers the following questions:

  • Who is the "buying" decision maker? E.g. one product being talked about a lot these days are microloans for youth. How much influence will the parents have on the youth's "purchase" of the loan product? Who is the real decision maker -- the young borrower or his mother or father?
  • What features must the product include?
  • What are the benefits to the target market?
  • How will clients react?
  • What will it cost to deliver?
  • How will the product be delivered most cost-effectively?

The concept is then tested in focus groups of clients or potential clients. Focus groups might answer questions such as:

  • Do they need this product?
  • How could they use it?
  • When do they need it?
  • How quickly do they need it?
  • Is it structured appropriately?
  • What other questions could you ask?

Financial analysis: Once the product idea has passed the concept test phase, the MFI enters the financial analysis phase. Here, interest and fees are estimated based on competition and an understanding of what the client will pay.

Then sales volumes are estimated, alongside profitability and how many loans must be disbursed (at what size) to break-even. The cost analysis should take into account the costs of new staff (hiring and training), MIS, marketing/promotion, and anything else which will affect fixed and variable costs. In short, here MFIs estimate if this new product idea makes financial sense. Too often, MFIs skip this stage!

Wednesday, February 18, 2009

The product development cycle: part 1

Market research drives product development, which can also be thought of as a cycle or loop (as illustrated in Figure above). This is because even after a product has been successfully commercialized, the MFI should regularly assess customer satisfaction with the product to determine if possible improvements are needed. Remember, product development is not only about new products - product redesign can be a much more effective route.

The circles between each stage represent “Go” or “No Go” decision points. If any one of these stages tells you to stop, that’s the end of that product’s development. But lest you think it was all a waste of time, lessons learned from aborted processes should inform the MFI about future product ideas.

Idea development: The "first" stage in the process (remember, it's a cycle so there really is no first stage) is idea development. Ideas can come from anywhere, including your loan officers, but formal market research is also a good source. For example:
  • SWOT Analysis: The MFI’s internal strengths and weaknesses and external opportunities and threats
  • PEST Analysis: Trends analysis/research evaluating the Political, Economic, Social and Technological environment.
  • Client feedback/drop out research can be a rich source of ideas.

Ideas are initially screened to determine if the MFI should take them to the next step, and some rudimentary profitability calculations may take place at this time based on estimates of market size. Idea screening asks the following questions:
  • Who is the target market?
  • What are the size and growth forecasts of the target market?
  • Are we introducing this because of competitive pressures?
  • What trends are the ideas based upon?

Sunday, February 15, 2009

Product development and SPM

The market research an MFI conducts for product development provides another potential integration point with Social Performance Management (SPM). This occurs because market research for product development and for social performance should answer the same questions:
  1. What do the clients need the product/service for?
  2. What do the clients actually use the product/service for?
  3. What benefits do the clients get or perceive they get from the product/service?

In the case of marketing, the MFI would use the answers to the above questions to develop a product which appeals to a broad base, and to properly sell and market the product. Social performance management systems use the same information to ensure there is a "match" between uses, needs, and benefits and the MFI's social mission.

In an integrated marketing program, the above information will flow through throughout the company - downward to loan officers so they can sell the benefits of the product and upward to management to market the products properly. In a social performance management system the same data will also flow up and down the MFI's hierarchy, but it will be used to ensure the product serves the MFI's mission. I.e., management will take that information to check that the uses, needs and benefits fulfilled by the new product are having the desired impact. Similarly, loan officers will report back their observations in the field - are the clients really benefiting as the research says they are? Is the new product being used for the purposes the research describes?

One set of data - two different uses. With such synergies, it seems foolish for MFIs with social performance management systems not to get "double use" out of their data through integrated marketing, and vice versa.

Thursday, February 12, 2009

Market research for pro-poor product development

MFIs can research just about anything, but to ensure products offered match client needs, most frequently they will research clients, competition, market trends, and gather data for special projects driven by management request e.g. projects to research new product ideas. Unfortunately, too often MFIs rely upon the latter - research for special projects - and neglect the former. Market research really should be ongoing, especially since new pro-poor product ideas can come out of research on the competition, market trends, client satisfaction, etc.
However, once you've got a new product concept, the MFI really needs to "drill down" to determine the product's "fit" with its current or expected client base. In other words, understanding your client is critical for pro-poor product development.

It's easy to believe we know our clients well, but do you know them well enough to write a biography for them? One of the most important outcomes of client research is the development of client profiles for each market segment. A profile answers the question, “who are your clients?” In addition to the more obvious characteristics, such as gender, age, and type of business, profiles should also address:

Needs and preferences: What do your clients want? Remember the core, actual, and augmented product? Your clients will have needs regarding features, regarding augmented issues such as speed and customer service. You need to know what your clients needs are in order to design the best product. This is important from an impact and a sales perspective.

Benefits: What benefits are the clients looking for? Ability to send their children to school? Ability to cover expenses during difficult periods? Ability to expand the business? If you don’t know what CORE product they want, what benefits they want, you’ll have to be very lucky in your product development to create the right product. Again, understanding the benefits the client receives is important both for social performance management and product marketing.

Attitudes: What do they believe about loans? How do they feel about savings? What attitudes do they have toward borrowing? Toward banks? MFIs?

Not everyone wants a loan from your MFI, so it’s important to understand who wants your financial products and services. Then you can tailor your pricing, products, distribution channels (place) and promotion to these client types, or segments.
Action item:
If you can't write a profile or biography for your typical client, you probably don't know them well enough! Make profile writing a regular part of your product development exercise, and use it as a red flag - if you can't write one, it's time to go back and do more research.

Monday, February 9, 2009

Product design and integrated marketing

Product development is part of the marketing process and MFIs are most effective at product design when they integrate it into their marketing program. This is because commercial product design is driven by clients – not MFI managers.

In marketing parlance, we talk of the “5 Ps”: People, Price, Product, Place (distribution), and Promotion. People – or the clients – are at the heart at the process, or the top of the pyramid. Everything else flows from an understanding of the clients, i.e. from what we learn from market research, as illustrated in the figure above.

If the goal is to provide the best possible, most beneficial products to poor and low-income people, then MFIs need to figure out exactly who those people are and what they need. However, MFIs often skip this step – they’re given product “templates” from donors or other international MFIs and simply begin selling the product in the market. Sure, they may sell a lot of loans, but are the products benefiting their clients? Are they really providing what their poor and low-income clients want or need?
So MFIs conduct market research and hopefully this research, such as client drop out and satisfaction, is done continuously. But is it fully utilized in the product development process? If product development is a separate special project, it's unlikely that prior research will be maximized, or special research will be cross-checked against what we've learned elsewhere.
For this reason, I like to see the market research and product development functions sit together within a single marketing department. When this happens, there's a greater likelihood of our client knowledge driving the product development process. But integrated marketing doesn't stop there. An integrated marketing program ensures MFIs maximize what they learn, by flowing market research data in a loop through the institution.
Ideally, research findings should flow up to management and down to loan officers, and loan officers and managers should provide feedback to the researchers. Do they agree or disagree with the findings? Would they like research to explore other issues or to explore certain findings more deeply?

Wednesday, February 4, 2009

Product (re)design

In yesterday's post, I mentioned that a product redesign might be more effective than creating a new product out of whole cloth. Although developing completely new products is always an option, MFIs are frequently better off exploring changes to existing products before developing new ones (see Figure above).

This reflects back upon the pitfalls of having too many products. Why waste resources on multiple products that don’t go anywhere, when you can have one or two great products that reach scale? It can be more efficient and effective to develop one strong, simple product which can be slightly changed to expand the market, rather than create a host of completely new products. The former option better enables MFIs to achieve scale when serving poor and low income markets, but this can only be achieved if the MFI knows its customers well – what the benefits are, how they use the products, and what the care about. For example...

The MFI can change the core product. In this case, the product is changed or marketed to serve different needs or highlight new benefits. For example, an MFI might discover that borrowers are using its short-term inventory loans to pay for medical emergencies, and decides that this usage fits with the MFI’s social mission. The MFI then introduces and markets a medical emergency loan, which has the same terms and conditions as its short-term inventory loan.

The MFI may change its augmented product. Here the product retains the same features (i.e. terms and conditions), but the delivery speed, customer service, forms, etc. are changed. One example of this is the “speed loan”. At one microfinance bank, the Speed Loan carries the same terms and conditions as its standard microfinance loan, but the bank is able to disburse it in three hours. Though this is a relatively simple change, it must be carefully implemented to mitigate risk.

Repositioning the product is another option. Again, terms and conditions remain the same; however, the product is repositioned with a new marketing campaign targeting a different segment. For example, a “women’s empowerment loan” might now be marketed to men – it’s the same product, but the name and promotional materials are changed to a “business power loan” in order to appeal to the male market.

MFIs can extend the product line. For example, in some countries the demand for inventory purchasing power increases around key holidays. The MFI might add a seasonal loan with similar terms to its core product meet this demand.

Tuesday, February 3, 2009

What part of the product are you (re)designing?

In marketing, we think of a product having three distinct components: the core, actual, and augmented products.

The core product isn’t always obvious, but it’s what clients are really buying. It’s the benefit the client gets from the product. For example, when people take out a loan, they’re not buying money, they’re buying the ability to increase their income, expand their business and send their children to school.
Understanding why different market segments take out a loan – what benefits they get and what needs the loan fulfills – is important as a basis for conducting market research, when selling the product, and when promoting the product. Analyzing what benefits the clients receive from a loan is the key to designing pro-poor products. Access to finance isn’t beneficial if it puts the borrower into a situation of burdensome debt for consumer products they could live without. Benefits analysis, therefore, has a two-fold purpose: designing products the customers want and achieving the MFI’s social goals.

The “actual” product in terms of a loan would be its terms and conditions. E.g. what’s the interest? How frequent are repayments? How big is the loan?

The “augmented” product encompasses the other intangibles associated with product delivery, e.g. how quickly the loan is disbursed, the quality of customer service, whether the loan is repaid at an MFI’s branch or at the client’s home, or how many forms the client must fill out.
These points are not theoretical; they are essential elements to consider when it comes to achieving scale with pro-poor products, because a completely new product may not be the best way to expand outreach.
Understanding the difference between the core, actual, and augmented products opens up ways to create “newly designed” products without incurring the costs and stresses of developing products out of whole cloth, and which enable MFIs to expand within the poor and low-income markets on a sustainable basis.
Action item:
Review your existing products and break them down into core, actual, and augmented components. How do these components serve the needs of your existing markets? Can one of these components be changed to expand your market?

Sunday, February 1, 2009

Is your MFI ready for a new product?

Typically, new product development is driven by increased competition, client dissatisfaction with current products, (which is expressed via high drop-outs), and client demand for new or different products. In spite of these pressures, the MFI must first assess if it’s ready and/or has the capacity for product development.

Does the product fit the MFI’s strategic vision? For example, a consulting team I worked on provided technical assistance to an urban microfinance bank that with was interested in developing agricultural loan products. The bank was fairly new and still working through some arrears issues with its core urban product. We discovered that introducing an agricultural product would require developing an entirely new rural infrastructure and diverting resources from their urban operations. Consequently, the bank decided this product was not a strategic fit and now was not the time to introduce rural or agricultural lending since they primarily identified themselves as an urban bank.

One of the biggest traps MFIs fall into is having too many products. This can become a problem because resources are finite and product development requires resources. Too many products can cause confusion among staff and can limit the growth of core products, as the abovementioned microfinance bank feared if it developed new agricultural lending products. Creating and managing new products can starve products with the potential to reach scale from the resources needed to do so.

The ability to reach scale is a key issue when designing products for poor and low-income people. Worldwide estimates put the unbanked population of microentrepreneurs at 500 million[1]. Statistics such as these strongly indicate that MFIs should seek the widest outreach possible by offering a manageable number of financial products so they can serve the most poor/low-income people while achieving sustainability.

Is management committed to a client-driven approach? New product development cannot be successful unless it is driven by client needs. Management’s primary responsibility is to serve the needs of its customers.

Does the MFI have the management and systems capacity to develop and manage the new product? If management or systems are stretched thin and can’t monitor and control the new product, the MFI faces reputational, operating, and credit risks – i.e. arrears. Long before implementation of a new product, an assessment of management and systems capacity must be made in order to fully understand the ramifications of introducing a new product. Is the MFI large enough to warrant an additional product? The size of the MFI also has an impact on the number of products that can be effectively sold and managed. The larger and more mature an organization, the greater the ability to manage multiple products and multiple segments.

[1] Weiss, Kirsten. “Interview on Microfinance Commercialization with Mariama Ashcroft.” January, 2009.