CGAP Training Product Development Participant Materials
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CGAP Training Product Development Participant Materials Presentation Transcript

  • 1. P A R T I C I P A N T C O UR S E M A T E R I A L S Product Development C O N S U L T A T I V E G R O U P T O A S S I S T T H E P O O R
  • 2. NOTE The Participant Course Materials contain the main technical messages and concepts delivered in this course. It isnot intended to substitute for the full information and skills delivered through the individual courses in the Skills forMicrofinance Managers training series. During the actual courses, key concepts are presented with case studies,exchange of participant experiences, and other activities to help transfer skills. Users interested in attending a trainingcourse should directly contact CGAP hubs and partners for course dates and venues or visit the CGAP website atwww.cgap.org/html/mfis_skills_microfinance_manag.html. CGAP would like to thank those who were instrumental to thedevelopment and design of the original course that led to this participant summary: Janis Sabetta, Monica Brand, KimCraig, Monique Cohen, Javier Fernandez, Lorna Grace, Imran Matin, Mike McCord, Benedito Murambire, Zan Northrip,Elma Valenzuela, Niraj Vermat, Graham Wright, Nicola Young, Brigit Helms and Jennifer Isern, and all CGAP traininghubs and partners. Copyright 2003, The Consultative Group to Assist the Poor (CGAP).
  • 3. ContentsOverview ...................................................................................................... 3 Goal of the course ............................................................................................. 3 Objectives of the course ..................................................................................... 3What is Product Development? ........................................................................ 5 Characteristics of a microfinance product............................................................... 5 Distinguishing between a new and a refined product................................................ 6 Product development process .............................................................................. 7 Success factors................................................................................................. 8 Identifying a product development team................................................................ 8 Organizational impact ........................................................................................ 9Market Research ........................................................................................... 11 What is market research and why is it important for product development? ................11 Developing research objectives...........................................................................12 Approaches to market research...........................................................................13Product Concept and Design .......................................................................... 19 Designing a product prototype............................................................................19 Considering institutional issues in product design...................................................20
  • 4. Costing ...................................................................................................... 21 Distinguishing between cost allocation and activity-based costing .............................22Pricing ......................................................................................................... 29 Determining product viability for a credit product...................................................29 Determining product viability for a savings product ................................................31 Price sensitivity................................................................................................33Pilot Test .................................................................................................... 34 Establishing testing protocol...............................................................................37Product Rollout ............................................................................................. 38List of Resources .......................................................................................... 39 General ..........................................................................................................39 Focus groups and PRA.......................................................................................39 Costing and pricing...........................................................................................39 Pilot testing.....................................................................................................39
  • 5. OverviewOver the past 20 years, a microfinance industry has emerged in response to the lack ofaccess to formal financial services for most of the world’s poor. Microfinance institutionsserve an ever-increasing number of poor clients, but the demand for financial services stillfar outstrips their capacity to supply such services to their clients.This course is designed to introduce microfinance institutions to the process and the toolsused to develop new or refined products. Based on sound and tested product developmenttechniques, the process introduced is methodical, market driven, and client oriented. Itpromotes continuous feedback and sees product development as an integral and ongoingpart of delivering financial services.Goal of the courseTo provide guidelines for a systematic process of product development that is focused onclient needs, driven by ongoing analysis, and oriented towards achieving results.Objectives of the course • Describe the process of product development • Assess institutional capacity for product developmentCGAP Participant Course Materials: Product Development • 3
  • 6. • Apply various client-oriented market research techniques • Interpret research results to design product prototypes • Cost and price products • Pilot test products • Launch new products that result in increased profits and client satisfactionCGAP Participant Course Materials: Product Development • 4
  • 7. What is Product Development?Characteristics of a microfinance Typical Characteristics ofproduct Selected Financial ProductsA product is a bundle of attributes (features, Creditfunctions, benefits, delivery, and uses) that • Term—frequency, lengthcan be either tangible (as in the case of • Interest rate • Interest rate methodphysical goods) or intangible, such as those • Loan amountassociated with services, or a combination of • Collateral type • Collateral amountthe two. It is what the customer buys. The • Feestotal product includes everything that is Savingsdelivered to the client. • Fees • Deposit frequency • Withdrawal frequency • Minimum balances • Interest rate Insurance • Fees • Premiums • Use (health, life, property) • Deductible • Extent of coverageCGAP Participant Course Materials: Product Development • 5
  • 8. Distinguishing between a new and a refined productIt is not always necessary to design a totally new product. MFIs can choose to refineexisting products, which is also an important strategy. In the end, whether new or refined,products will appear in some degree to be new and desirable to the consumer. • A new product is a product new to the MFI that is marketing it. Examples of new products for an MFI with only a group loan would include the introduction of an individual loan product, a savings product, or an insurance product. • A refined product is an improvement or addition to an existing product offered by the MFI. Examples of refinements might be a change in interest rate, a change in withdrawal frequency allowances, or a change in the loan size. More on Product DevelopmentWorldwide, product development research has shown that most product development effortsgo towards refining existing products: New-to-the-world product (10% of all new products introduced each year) New product line (20% of all new products) Addition to existing product lines (26% of all new products) Improvement to or revision of existing products (26% of all new products) Repositioned product (7% of all new products) Lower-cost product (11% of all new products)Source: Karen Stewart, Richard Stockton College of New Jersey. www.swcollege.com/marketing/gitm/gitm28-1.htmlCGAP Participant Course Materials: Product Development • 6
  • 9. Whether the product is technically new or refined, the same process should be followed when developing or refining it.Product development processThe product development process (see Figure 1) is a systematic, iterative, and step-by-step approach to developing new or refining existing products. The process is market-driven, implying that institutions must continually ensure that the product answers clients’needs, while taking into account the MFI’s strengths and competitive advantage. Figure 1. Product Development Process EVALUATION AND PREPARATION MARKET RESEARCH LAUNCH CUSTOMER NEEDS INSTITUTIONAL STRENGTHS COMPETITIVE POSITIONING DESIGN PILOT TESTCGAP Participant Course Materials: Product Development • 7
  • 10. Success factorsSome institutions have discovered the hard way that people do not always want somethingnew. New products do fail. Many factors contribute to the success of a product, such as • Uniqueness and superiority of the product Ingredients for Failure • Customer and market-driven focus Failing to analyze the market • Thorough preparation Rushing to the market with a • Sharp, clear, early product definition defective product • Quality of execution Letting wishful thinking drive development projections • Correct organizational structure and climate Failing to consider timing • Focus and sound decision making Ignoring the competition • Planning and resourcing the launch Spending millions for R&D but nothing on marketing • Role of top management Believing a small market is better • Speed—but not at the expense of quality than noneIdentifying a product developmentteam After analyzing its readiness to undertake product development, an MFI should assemble a multidisciplinary product development team, including a “product champion,” to guide the process of product development.CGAP Participant Course Materials: Product Development • 8
  • 11. Organizational impactInstitutions must analyze their capacity and readiness to undertake product development.A number of institutional areas might be affected when introducing a new product,including • Human resources • Information systems • Training • Organizational structure • Institutional culture • Profitability • Strategy and mission • Funding • Liquidity • Strategic linkages • Risk managementCGAP Participant Course Materials: Product Development • 9
  • 12. Questions MFIs Should Ask ThemselvesWhile many MFIs look at new product development as a way of responding to their clients’needs, they often do not understand the complexity and cost of product development.There are a few essential questions to ask before setting about new product development. 1. Motivation: “Are we starting product development to make our MFI more client- driven?” 2. Commitment: “Are we setting about product development as a systematic process to reach defined objectives?” 3. Capacity: “Can our MFI handle the strains and stresses of introducing a new product?” 4. Cost Effectiveness and Profitability: “Do we fully understand the cost structure of our products?” 5. Simplicity: “Can we refine, repackage, and re-launch existing product(s) before we develop a new one?” 6. Minimize Confusion, Complexity, and Cannibalization: “Are we falling into the product proliferation trap?” (Cannibalization occurs when the introduction of a new product diverts sales from a company’s existing products, and when revenue is displaced rather than created.)CGAP Participant Course Materials: Product Development • 10
  • 13. Market ResearchWhat is market research and why is it important forproduct development?Market research can be defined as the procedures and techniques involved in the researchdesign, data collection, analysis and presentation of information used by managers inmaking marketing decisions. Market research is used by MFIs to respond to needs andopportunities by improving current marketing, promotion, outreach, and delivery activities.Market research takes time; it cannot be taught or conducted in a day. Best results come when market research is well thought outand planned, when institutions are willing to commit resources for market research, and when a combination of market research techniques and types is used.CGAP Participant Course Materials: Product Development • 11
  • 14. The steps involved in market research include • Defining research objectives • Defining research methods • Reviewing secondary data (previously collected data) • Preparing for primary data collection • Collecting primary data • Analyzing all data • ReportingMarket research is vital to the success of product development. The cost to correct aproduct error at each stage of the product development process is ten times more costlythan the previous stage.Developing research objectivesIt is important to develop a clear research objective before embarking on market research.The research objective is a statement that precisely details the specific, measurableoutcomes or results that an organization plans to achieve with its market research.Defining the research objective guides the entire research process.CGAP Participant Course Materials: Product Development • 12
  • 15. There are 3 types of research objectives: • Exploratory—to gather preliminary data to shed light on market realities and to suggest possible solutions or new ideas • Descriptive—to ascertain how widespread certain opinions or perceptions are (how many people do/do not agree to a certain savings idea etc.) • Causal—to test cause-and-effect relationshipsApproaches to market researchMFIs have differing approaches to market research (see Table 1). Those that arecommitted to offering client- or market-driven financial services use a variety of marketresearch tools in various combinations:Primary/Secondary Sources of Data • Primary data are data collected for the first time by a researcher for the specific research project at hand. • Secondary data are data previously gathered for some other purpose but is pertinent to the current project. More often than not the proper place to begin a research study is to investigate previous work related to the research issues under study. Secondary data can also be divided into internal and external sources.CGAP Participant Course Materials: Product Development • 13
  • 16. Ongoing/Periodic Activities • Ongoing activities and systems include such activities as simple questions on loan application or savings account opening forms, suggestion boxes in branches, drop out questionnaires, discussing client-focused information at staff meetings, monitoring of internal management/financial information, and reviews of industry data/trends. • Periodic activities and systems are often activated in response to signals from the on-going systems. Examples include customer consultative groups, focus group discussions with clients, potential clients and dropouts, 3- to 6-question minisurveys, and detailed competition analysis. Table 1. Examples of Market Research Approaches ONGOING PERIODIC Primary Secondary Primary Secondary MIS portfolio Client exit Focus groups reports forms Product MIS other Client intake Data collected for satisfaction reports forms the first time by a surveys researcher for the Client Client Individual specific research feedback household interviews project at hand surveys surveys Branch market Observation analyses MIS reportsCGAP Participant Course Materials: Product Development • 14
  • 17. Qualitative versus Quantitative Methods • Qualitative research methods are used to understand, illuminate, and explain human behavior and ideas. In qualitative research, one question and its answers lead to another set of questions. The sample used in qualitative research is composed of people with the same demographic profile. • Quantitative research has a scientific base. The questions and range of possible answers is determined beforehand and the sample used is representative of the population. Table 2. Differences in Qualitative and Quantitative Approaches Qualitative Quantitative Unstructured questioning Structured questionnaire For in-depth understanding of Statistically representative of consumer behavior and motives population Output: consumer words and Statistical output analyzed by descriptions computer Highly trained professional Enumerators trained for consistency moderator and accuracy in asking questions Moderator must understand Enumerators do not have to research objectives understand or interpret research objectives Questions not determined Questions determined beforehand Range of possible answers not Usually range of possible answers determined determined beforehand. Sample group of people with Sample representative of the demographic similarities populationCGAP Participant Course Materials: Product Development • 15
  • 18. Client-oriented methods to market researchThere are many ways to capture data. The choice will depend on a number of variablessuch as the research objective and resources available. Among the most participatory andclient-focused methods are focus group discussions and Participatory Rapid Appraisals.Focus group discussionsA focus group is a qualitative market research technique where a small number of marketparticipants (usually 8 to 12) are gathered in one room for a discussion under theleadership of a trained moderator. Discussion focuses on a customer problem, product, orpotential solution to a problem.Focus group discussions in microfinance enable an MFI to get to know the sector as well asits clients. When appropriately used, they can efficiently achieve the goals of exploratoryresearch: • Generating new ideas, or hypotheses which can be tested in later phases of the research study • Clarifying concepts, actions, or terms used by consumer • Prioritizing issues for further investigation • Providing an opportunity for management to see to see how their customers think, feel, and act • Obtaining an “early read” on changing market trendsCGAP Participant Course Materials: Product Development • 16
  • 19. More on how to organize a good focus group discussion Plan ahead Develop questions to ask Determine which people to invite Arrange a conducive seating plan Use skilled moderators with proven facilitation and questioning skills Use good recording devices Analyze the data Follow upParticipatory Rapid Appraisal (PRA) ToolsTraditional quantitative research methods fail to capture the rich complexity of poorhouseholds’ reality and livelihoods. They often overlook the importance of microfinanceservices’ role in diversifying sources of income, smoothing income and expenditurefluctuations, protecting and developing important household assets (physical as well ashuman), and in the development of key social contacts and skills.Participatory Rapid Appraisal (PRA) techniques such as interviews, discussions (includingfocus groups), mapping, ranking, and trend analysis exercises with local people allow theresearcher/practitioner to examine the complexity of poor households’ financial, economicand social environment.CGAP Participant Course Materials: Product Development • 17
  • 20. More on useful PRA tools for microfinance • Seasonality Analysis of household income, expenditure, savings, and credit is used to obtain information on seasonal flows of income and expenditure, and the demand for credit and savings services. • Life-Cycle Profile is used to determine which events require lump-sums of cash and to examine the implication for household income/expenditure. The profile can also give insight into current coping mechanisms and how access to MFI financial services can help the household respond to these. • Wealth Ranking provides a rapid way of classifying a community into basic categories and is useful for examining the socio-economic characteristics of people who chose to join (or don’t join) the MFI and also those who leave or whose accounts become dormant. • Cash Mobility Mapping provides an understanding of where members of the community go to acquire or spend cash (markets, waged labor, co-operatives, informal financial organizations, etc.) and which financial service institutions they trust or value and why. • Time Series of sickness, death, loss of employment, theft, natural disaster etc. in a community over time can help to design a range of opportunities for improved delivery of financial services to cope with crises. • Financial Services Matrix is useful in determining which financial services are used by which socio-economic or socio-cultural strata of society and why, and thus the potential for designing or refining appropriate financial products. • Financial Sector Trend Analysis is useful for understanding the changes in the use or availability of a variety of financial services over time, and why participants used them.CGAP Participant Course Materials: Product Development • 18
  • 21. Product Concept and DesignDesigning a product prototypeThe next step in the process is to use the results from the market research to design aproduct prototype. The prototype should include all the attributes or characteristics of theproduct, including its features, functions, benefits, delivery, and uses. A productspecification sheet is a useful tool to record a product’s characteristics. Sample Product Specifications for a Savings Product1. Product Name Calculation method for average balance2. Purpose/Focus Min/Max deposit Savings use Min/Max withdrawal Client profile Deposit frequency Location(s) Withdrawal frequency3. Amount 5. Pricing Minimum balance Interest rate Minimum deposit amount Interest rate method Maximum deposit Commission and fees: amounts Minimum withdrawal Commissions and fees; timing/frequency; Maximum withdrawal upfront, ongoing4. Preconditions Basis Opening balance Index to external value Minimum balance Penalties Average balance to maintain account Basis for calculating average balance (daily, monthly, etc.)CGAP Participant Course Materials: Product Development • 19
  • 22. Considering institutional issues in product designAfter designing a product prototype (in this example, savings), the MFI needs to ask itselfa series questions, including the following. • Operational Methodology Will methodology have to be changed? How? Do we add these products to our current menu? Do we stop offering other products? Which ones? How do we deliver it? • Information Systems How will information systems have to be changed? Who will do it? How much will it cost? How long will it take? • Human Resources Do we have enough staff with the right skills? Will they need training? • Infrastructure How will savings be protected? Do we have enough space for new clients? • Legal and regulatory Will the new products comply? • Competition What do we know?CGAP Participant Course Materials: Product Development • 20
  • 23. CostingMicrofinance managers, especially those working in more competitive markets, increasinglyrecognize the importance of streamlining operations and cost management for long-termviability. Product costing offers them a key tool to better understand operations and coststructure as a first step toward increasing efficiency, lowering costs, and ultimatelyproviding better services to their clients. To price a new or refined product, it is easier if the prices of existing products are known. Current product costs can then be used as a basis to estimate future costs for a new product.CGAP Participant Course Materials: Product Development • 21
  • 24. Distinguishing between cost allocation and activity-based costingCost AllocationTraditional cost allocation methods use allocation Drawbacks of Traditionalbases to distribute costs, for instance, direct Cost Allocationlabor hours or total account balances among Allocations can overestimate the perproducts (such as a specific loan product). The unit costs of the “larger” products and may not capture the complexitiescost allocation exercise can be relatively simple of “smaller” products.to implement and can provide insight into how Alone, traditional cost allocationmuch is spent on each product. Most cost methods do not provide managers with much insight into WHY aallocation methods rely on volume-related particular product may cost moreallocation bases to allocate costs among than another.products.CGAP Participant Course Materials: Product Development • 22
  • 25. Figure 2. Cost AllocationNote: In the cost allocation method, each line of the income and expense statement is allocated todifferent financial products on the basis of a logical criterion called an allocation basis. In Figure 2, stafftime sheets and portfolio volume are used as the allocation bases. Staff costs (i.e., salaries andbenefits) are allocated to Loan Product 1, Loan Product 2, and the Saving Product based on staff time.Non-staff costs (items such as rent and transportation) are allocated using the allocation basis of therelative volume of each product.CGAP Participant Course Materials: Product Development • 23
  • 26. Activity-Based Costing • Instead of allocating costs directly to products as in cost allocation, activity-based costing (ABC) first determines the cost of an MFI’s core processes and activities and then allocates costs to products on the basis of the extent to which each product “consumes” these activities. • ABC allows MFIs to cost their individual products to determine whether they are viable (see Figure 3). • ABC traces costs to specific activities undertaken by the MFI, such as processing a loan application or opening a savings account. The costs of these activities are then “driven”, or applied, to products and other cost objects (such as branches)with estimates of usage of these activities by the cost objects. Inserting activities into the costing process distinguishes ABC from other costing methods. It provides much richer information because it answers HOW and WHY costs are incurred? This information leads directly to specific adjustments or modifications in an MFI’s activities to streamline costs.CGAP Participant Course Materials: Product Development • 24
  • 27. Figure 3. Activity-Based CostingNotes: 1. The core processes of a typical MFI include client identification, making new loans, servicingexisting loans, opening deposit accounts, servicing deposits and withdrawals from savings accounts,etc.2. Sustaining activities are those activities not easily traced to products. These activities includegeneral management, accounting, secretarial, information technology support, human resourcemanagement, marketing, etc.CGAP Participant Course Materials: Product Development • 25
  • 28. In Figure 3, staff costs and non-staff costs are allocated to core processes on the basis ofstaff time spent. Where members of staff do not directly spend time on core processes butrather provide support functions this time is booked to “sustaining activities.”Once a cost for a particular core process has been determined based on staff time, thesecosts are then driven through to the products on the basis of a logical cost driver. Forexample, once the cost for processing a loan application has been determined, the logicalcost driver would be the number of loan applications. Each product then absorbs costs forprocessing loan applications in proportion to the number of loan applications it generates.Different processes will have different cost drivers. However, sustaining activities cannot bedriven directly to particular products. The costs of sustaining activities need to be allocatedto the different loan and savings products using allocation based costing techniques.CGAP Participant Course Materials: Product Development • 26
  • 29. More on the steps of ABC 1. Plan for the costing exercise 2. Identify products for costing 3. Ascertain core processes 4. Designate specific activities for each core process 5. Conduct staff time estimates for each activity 6. Calculate costs per activity 7. Assign cost drivers and determine unit activity costs1 8. Drive unit activity costs to productsComparing Cost Allocation and ABCCost allocation methods that distribute costs organized according to an MFI’s chart ofaccounts provide valuable information about product costs. Managers can see the majorcomponents of costs by cost category (staff costs, rent, etc.). Combined with costinformation at the department or branch level, product costs derived from a cost allocationexercise can help managers begin to pinpoint the sources of costs.However, accounting categories of costs are not necessarily that useful for decision makingon their own. They do not directly address questions related to how and why costs are1 Identifying cost drivers for each activity allows for the calculation of a per-unit or per-transaction cost for each activity.Dividing the total activity costs by the total number of cash transactions yields a unit cost per transaction. These unit costs canthen be transferred to the individual products based on how intensively each product uses each activity.CGAP Participant Course Materials: Product Development • 27
  • 30. incurred. ABC provides additional information about how or why costs are incurred byallocating costs first to processes and activities and then to products. Most MFI staff canrelate much better to the concept of an activity (such as reviewing loan applications) thanto a cost line item (utilities expenses), when breaking down the costs of a product. Figure 4. Difference between Cost Allocation and Activity-Based Costing For more information on activity-based costing, you can download CGAP’s Product Costing Tool from http://www.cgap.org/html/p_technical_guides.htmlCGAP Participant Course Materials: Product Development • 28
  • 31. Pricing 5A number of factors affect product pricing, including costs, clients’ sense of value,competition, and profit. Institutions may have different pricing strategies. Somecommon strategies include cost recovery, profitability, social mission, competitive pricing,market positioning or penetration pricing, and cross subsidization. No matter what pricing strategy or combination of strategies an MFI may use, the product should be viable.Determining product viability for a credit productFor loan products, costs are compared to income earned from interest and fee charges todetermine profitability as shown in the sample calculation below.CGAP Participant Course Materials: Product Development • 29
  • 32. Annualized Net Income by Loan Product Sample Loan Product A Sample Loan Product BLine 1 Average Portfolio Balance 6,000,000 8,000,000Line 2 Interest and Fee Income on Loans 2,160,000 2,300,000Line 3 Interest Expense on Borrowed Funds 1,080,000 1,200,000 Operating ExpensesLine 4 Make New Loans 100,000 150,000Line 5 Service Existing Loans 600,000 900,000Line 6 Sustaining Activities 200,000 400,000Line 7 Total Operating Expenses 900,000 1,450,000 (Line 4 + Line 5 + Line 6)Line 8 Provision for Loan Loss 60,000 80,000Line 9 Net Income 120,000 -430,000 (Line 2 – Line 3 – Line 7 – Line 8)Line 10 Net Income/Avg Portfolio Balance 2.00% -5.38% Sample Loan Product A is viable because the result at Line 10 is Line 9/Line 1 positive; Product B is not.CGAP Participant Course Materials: Product Development • 30
  • 33. Determining product viability for a savings productSince savings products do not directly earn income, when analyzing the viability of asavings product, it is necessary to compare the total cost of the savings product toalternative source of funds (or the next best proxy) with similar terms that might beavailable in the market. This alternative source price is often referred to as the “transferrate.” The difference between the interest cost of savings and that of the fundingalternative is called the interest cost “contribution margin” of that product, or the “interestcontribution.” More on Determining the Viability for a Savings ProductSuppose that an MFI pays 4 percent interest on its regular passbook loan, andits next best wholesale alternative for raising funds is a commercial loan at 7.5percent. The interest contribution to the MFI of collecting savings rather thancontracting a commercial loan equals 7.5% - 4% = 3.5%.Using the ABC methodology, the next step entails comparing each product’sinterest contribution to the net administrative costs (which are administrativecosts for core processes minus fees). Finally, the implicit “cost” of holdingCGAP Participant Course Materials: Product Development • 31
  • 34. savings in reserve should be subtracted. This reserve cost is calculated by usingthe following formula:Financial Cost (e.g., interest rate) – Financial Cost (1 – Reserve Rate)For this example, if the reserve rate equals 10%, then, the reserve cost equals (4%/.90) – 4% = 0.44%The following calculation shows how to complete the viability analysis for thissimple example where the core administrative costs equal 4% and fees are1.5% (all figures expressed as a percentage of average product balance): 3.5% interest contribution (A) - 4.0% minus core administrative costs (B) + 1.5% plus fees (C) - 0.4% minus reserve cost (D)___________ 0.6% A–B+C–DIf sustaining activity costs for that product fall below 0.6 percent, then theproduct is completely viable and covers both the core administrative costs andthe sustaining costs.CGAP Participant Course Materials: Product Development • 32
  • 35. If, on the other hand, sustaining costs exceed 0.5 percent, then the MFI mustevaluate whether it makes sense to continue with the product, seriously modifythe product, or consciously continue to offer it with the expectation that othermore lucrative products will make up the difference in covering sustainingcosts. Another option entails figuring out how to reduce the costs of allactivities, especially sustaining activities.Price sensitivityFurther market research is also necessary at this point to get feedback on pricing issuesfrom clients. There are a number of approaches to collecting information on customerreaction to prices (price sensitivity) that are currently used in the banking industry thatcould be applied to microfinance. It is recommended that some type of price sensitivitytesting be conducted and used in the product development process.CGAP Participant Course Materials: Product Development • 33
  • 36. Pilot Test 5A pilot test is something that measures the worth of a product in such a way that theresults of the test guide management decision making. The pilot testing process can bebroken down into ten steps that, if followed carefully, can minimize the chance for failureof the test and provide valuable information that management can use to improve theproduct. If all steps are followed, management can ensure a successful decision about therollout of the product in its final form. Ten Steps of a Pilot Test 1. Choose the pilot test team 6. Document product definitions and procedures 2. Develop the testing protocol 7. Train the relevant staff 3. Define objectives 8. Develop customer marketing materials 4. Prepare all systems 9. Begin the pilot test 5. Model financial projections 10. Evaluate the testCGAP Participant Course Materials: Product Development • 34
  • 37. The first step to conducting a successful pilot test is to draw together a formal pilot testTeam, which, ideally, is made up of individuals from each major area or department of theinstitution. The team members must be skilled in their areas of representation. If MFI staffmembers do not have the necessary expertise, the MFI must obtain this expertiseelsewhere. An experienced team leader will also be needed.In order to function, the team will require a strong commitment from institutionalmanagement. The team should therefore have at least one senior manager as a memberso that they have someone who can communicate directly to the CEO and other seniormanagers about the product.Some specific activities that team members might perform are listed on the next page.CGAP Participant Course Materials: Product Development • 35
  • 38. Pilot Test Team Skill Areas Specific ActivityProduct Champion/Team Leader Manages the team, is responsible for reporting and outputs, calls meetings, assigns tasks to team members, represents the team to top management, coordinates preparation of recommendation letterFinance/Accounting Prepares costing and financial projections, ensures liquidityInformation Technology/MIS Coordinates IT selection and installation, related fixed-asset purchases and installation, develops a systems manualMarketing Prepares marketing plan for test, conducts test-product marketing training, coordinates development of marketing documents, tracks marketing effectivenessTraining Writes curriculum for test-product training, trains front and back office related staffOperations/Management Coordinates with branch activitiesCredit/Management Develops policies and documents proceduresCredit/Frontline Provides frontline customer information to team, distributes and collects new customer information sheetsResearch Collects and summarizes data, prepares monthly and quarterly reports to team and othersAudit/Controls Assists in formalization of procedures, authorizes procedures, conducts full product audit (and follow-up if necessary) during testSource: Michael McCord, Graham A.N. Wright, and David Cracknell, “It Can Work: A Toolkit for Planning,Conducting and Monitoring Pilot Tests for MFIs—Loan Products,” (Nairobi, Kenya: MicroSave Africa, July 2001).CGAP Participant Course Materials: Product Development • 36
  • 39. Establishing testing protocolThe goal of the test and the work parameters must be clear if the team is to complete itsjob effectively. A testing protocol should be established, asking: • How many customers should be included? • Where and in how many locations should the test take place? • How long should the pilot last? • When will the report on the pilot be completed? • What data should be analyzed? • What would cause the pause or cancellation of the test?When the test is complete, and the team has considered all the implications of the newproduct for the MFI as well as for the customers, a decision must be made about whetheror not to recommend going forward with the product launch. The pilot test could lead tofurther changes to the product and thus a continuation of the pilot test. It could becancelled altogether, or hopefully, it will help to create a strategy for a full rollout of theproduct.CGAP Participant Course Materials: Product Development • 37
  • 40. Product Rollout 5Once the recommendation is made to “roll out” or expand the product to other marketareas, revised financial projections and a rollout plan, both directly reflective of the resultsof the test, must be prepared. Key variables to consider in planning and executing aproduct rollout include: • Time period and duration • Level of effort (staff time) • Responsible person(s) • Resources (financial, training, equipment, etc.) • Evaluation of rolloutFollowing the rollout of new or revised products, the process of product development doesnot end. A product may need to evolve as clients mature and the market changes, andproduct features and delivery procedures must be revised from time to time to meet thesenew demands. Evaluation of how successful a product is at meeting both client needs andinstitutional demands is therefore an ongoing and iterative process for MFIs committed tomeeting client needs with viable products.CGAP Participant Course Materials: Product Development • 38
  • 41. List of Resources 5GeneralRosenberg, Richard. “Microcredit Interest Rates.” CGAP Occasional Paper No. 1.Washington, D.C.: CGAP, revised November 2002.www.cgap.org/html/p_occasional_papers.htmlWright, Graham, Monica Brand, Zan Northrip, Monique Cohen, Michael McCord, and BrigitHelms. “Looking before You Leap: Key Questions That Should Precede Starting NewProduct Development.” 2001. www.microfinancegateway.org/static/2164.htmFocus groups and PRAWright, Graham, Shanaz Ahmed, and Leonard Mutesasira, with Stuart Rutherford. “FocusGroup Discussions and a Participatory Rapid Appraisal for MicroFinance—A Toolkit/Course.”[Kampala, Uganda: MicroSave-Africa, 1999]Costing and pricingProduct Costing Tool, version 1.3 (draft). Washington, D.C.: CGAP, 2002.www.cgap.org/html/p_technical_guides.htmlPilot testingMcCord, Michael J., Graham A.N. Wright, and David Cracknell. “It Can Work: A Toolkit forPlanning, Conducting, and Monitoring Pilot Tests for MFIs—Loan Products.” Nairobi, Kenya:MicroSave-Africa, July 2001. www.microfinancegateway.org/static/2658.htmCGAP Participant Course Materials: Product Development • 39