In Product Development, Let Your Customers Define Perfection16 May, 2016 / Articles
In an era of high-stakes innovation, there is no clearer illustration of how to develop new products the right way (and the wrong way) than a tale of two car companies.
The first company is Porsche, which in the early 2000s launched the Cayenne sports utility vehicle — a vehicle very different from the high-performance sports cars for which it was famous. The second company is Fiat Chrysler, which introduced the Dodge Dart compact in 2012 with great fanfare, and even greater expectations. The company’s CEO, Sergio Marchionne, said at the time that “of all the cars I can get wrong, it ain’t this one.”
The Cayenne became a huge profit-maker for Porsche. The Dart never took off and was finally killed by Fiat Chrysler this year. Their divergent fortunes show what happens to companies that do and don’t develop products with a clear understanding of exactly what customers want and what they are willing to pay for it.
How Porsche got the product right
In the late 1990s, Porsche avoided bankruptcy by making its manufacturing more efficient and its sports cars more reliable. But by the turn of the millennium, the German automaker needed a new product for the mass market to jumpstart sales, and decided to make a vehicle for the burgeoning SUV segment. It was a significant risk for a company that knew fast cars, not family vehicles.
Understanding it was in new territory, Porsche’s Cayenne product team conducted painstaking research to confirm that most customers would welcome an SUV from Porsche, and that they’d pay more for a Porsche SUV than they would for similar vehicles built by other companies.
That was heartening to the company’s executives and product designers. But it still wasn’t enough information to begin designing and configuring the vehicle. Porsche surveyed target customers on every single feature the car might possibly have, and gauged their willingness to pay for those features. It turned out that customers were willing to pay for sportiness (a missing dimension of competing SUVs). They wanted power and handling near to what they would get in a sports car.
But they were not interested in the six-speed manual transmission for which Porsche’s sports cars were famous. So the designers threw that out – not an easy sacrifice for the engineers at a performance-driven company like Porsche. And the Cayenne’s designers put in place foreign (to Porsche) features like big cup holders. The customer-listening process continued with every proposed feature. If customers valued and were willing to pay for them, they were in. If not, no amount of convincing from Porsche engineers could overrule the end user.
When the Cayenne came to market in 2003, it was an instant hit. Ten years later, Porsche was selling about 100,000 Cayennes a year – nearly five times what it sold in its launch year. The Cayenne became the most profitable vehicle in the industry. By 2015, it generated about half of Porsche’s total profit.
How Fiat Chrysler got the product wrong
In January when Fiat Chrysler announced it would pull the plug on the Dart, it was a symbolic as well as financial blow for the company. The new Dart was a re-launch of the much-loved Dodge Dart the company had discontinued in 1976, and it was meant to make Fiat Chrysler competitive in the important compact car segment, as well as introduce the company to a new generation of buyers.
In the U.S., compact cars account for one in every six vehicles purchased. The segment was so important that Fiat Chrysler CEO Marchionne said in a 2012 interview that companies that don’t succeed with compacts are “doomed.” Accordingly, the company said it would invest $700 million in a Belvidere, Illinois, plant to build a car that its CEO told the press would be “a huge step forward in terms of moving the brand into the American heartland.”
As it documented in a 90-second TV commercial to market the car, Fiat Chrysler’s product development process was to design it, build it, rethink it, design it, build it, rethink it—until the engineering team, in its exclusive opinion, felt the car was ready to go. In fact, the advertisement announced proudly that the company was “kicking the finance guys” out of the development process. Money was not going to be an issue. The company would build prototype after prototype to get it right. This car would be built to perfection, the commercial suggested.
This, Fiat Chrysler believed, would be how the Dart would knock Toyota Corolla and Honda Civic off their thrones as the leaders of the compact car segment.
As it turned out, neither Toyota nor Honda (nor, for that matter, the other compact car competitors) had much to worry about. When the Dart came out, there was little applause and even less enthusiasm among car buyers. It sold only a quarter of the number market watchers had predicted, leading the publication MarketWatch to anoint it the year’s second biggest new-product failure.
Among the many mistakes Fiat Chrysler made was that the first run of Darts only came with manual transmissions. That wasn’t smart, given that automatic transmissions represent 85% of compact cars sold in the U.S. Another mistake was offering an optional dual-clutch transmission that was more in line with European than American tastes. The car was notoriously unreliable, even as its competitors (the Corolla and Civic) earned high reliability ratings. The list goes on.
The underlying cause of all these mistakes was that Fiat Chrysler did not try hard enough to find out what the American compact car customer wanted, valued, and was willing to pay for, before turning the Dart over to those engineers and designers to build it.
Fiat Chrysler paid a hefty price for not trying to understand what customers wanted before it started designing and developing the car.
Put succinctly, Porsche succeeded in product innovation by designing the Cayenne around what customers valued and what they were willing to pay for. Fiat Chrysler, in contrast, designed the Dart believing it could determine “value” in a vacuum, and then left price as the last consideration (as suggested by the ads).
Unfortunately, Fiat Chrysler is no different from most companies we know when it comes to product innovation. You can chalk up epic product disappointments like the Amazon Fire Phone, Dean Kamen’s Segway, and thousands of others to the same mistake Fiat Chrysler made and boasted about in its now infamous ad campaign.
This flawed innovation process is the primary reason that 72% of new products fail. Companies such as Porsche that build their products around what customers value and to a price they know customers will pay for the value have a far lower failure rate at innovation. These companies include Procter & Gamble (especially its hugely successful Guard razor blade for the Indian market), crystal maker Swarovski, and Drager Safety, a German manufacturer of equipment that detects hazardous gas in mines and other underground places.
The most important element of the innovation process in these companies is that they have the willingness-to-pay talk with customers early. The companies we know that use this approach use it so religiously that they’ve made it an acronym: WTP.
This talk — actually a series of standardized questions asked of target customers at the beginning of the innovation process — enables a company to get crucial customer input long before it commits big engineering, manufacturing and marketing investments. Too many companies have come to accept serial failure as a cost of innovating. Their adage is that the 10%-20% of their new product winners will more than pay for the 80%-90% that are losers. We disagree. By designing products around features that customers value and will pay for, companies can reverse those dramatic odds of innovation.