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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
NOTE The Participant Course Materials contain the main technical messages and concepts delivered in this course. It is not intended to substitute for the full information and skills delivered through the individual courses in the Skills for Microfinance 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 training course should directly contact CGAP hubs and partners for course dates and venues or visit the CGAP website at www.cgap.org/html/mfis_skills_microfinance_manag.html. CGAP would like to thank those who were instrumental to the development and design of the original course that led to this participant summary: Janis Sabetta, Monica Brand, Kim Craig, 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 training hubs and partners. Copyright 2003, The Consultative Group to Assist the Poor (CGAP).
Contents
Overview ...................................................................................................... 3
Goal of the course ............................................................................................. 3
Objectives of the course ..................................................................................... 3
What 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 ........................................................................................ 9
Market Research ........................................................................................... 11
What is market research and why is it important for product development? ................11
Developing research objectives...........................................................................12
Approaches to market research...........................................................................13
Product Concept and Design .......................................................................... 19
Designing a product prototype............................................................................19
Considering institutional issues in product design...................................................20
Costing ...................................................................................................... 21
Distinguishing between cost allocation and activity-based costing .............................22
Pricing ......................................................................................................... 29
Determining product viability for a credit product...................................................29
Determining product viability for a savings product ................................................31
Price sensitivity................................................................................................33
Pilot Test .................................................................................................... 34
Establishing testing protocol...............................................................................37
Product Rollout ............................................................................................. 38
List of Resources .......................................................................................... 39
General ..........................................................................................................39
Focus groups and PRA.......................................................................................39
Costing and pricing...........................................................................................39
Pilot testing.....................................................................................................39
CGAP Participant Course Materials: Product Development • 3
Overview
Over the past 20 years, a microfinance industry has emerged in response to the lack of
access to formal financial services for most of the world’s poor. Microfinance institutions
serve an ever-increasing number of poor clients, but the demand for financial services still
far outstrips their capacity to supply such services to their clients.
This course is designed to introduce microfinance institutions to the process and the tools
used to develop new or refined products. Based on sound and tested product development
techniques, the process introduced is methodical, market driven, and client oriented. It
promotes continuous feedback and sees product development as an integral and ongoing
part of delivering financial services.
Goal of the course
To provide guidelines for a systematic process of product development that is focused on
client needs, driven by ongoing analysis, and oriented towards achieving results.
Objectives of the course
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Describe the process of product development
Assess institutional capacity for product development
CGAP Participant Course Materials: Product Development • 4
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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 satisfaction
Participant Course Materials: Product Development • 5
What is Product Development?
Typical Characteristics of Selected Financial Products
Credit
• • • • • • •
• • • • •
Term—frequency, length Interest rate Interest rate method Loan amount Collateral type Collateral amount Fees
Savings
Fees Deposit frequency Withdrawal frequency Minimum balances Interest rate
ance
Fees Premiums Use (health, life, property) Deductible Extent of coverage
Characteristics of a microfinance product
A product is a bundle 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 services, or a combination of
the two. It is what the customer buys. The
total product includes everything that is
delivered to the client.
CGAP
• • • •
Insur
•
CGAP Participant Course Materials: Product Development • 6
•
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Distinguishing between a new and a refined product
It is not always necessary to design a totally new product. MFIs can choose to refine
existing 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 Development
Worldwide, product development research has shown that most product development efforts
go 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.html
Whether the product is technically new or refined, the same process should be followed when developing or refining it.
Product development process
The 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
CUSTOMER NEEDS
INSTITUTIONAL STRENGTHS
COMPETITIVE POSITIONING
PILOT TEST
LAUNCH
DESIGN
MARKET RESEARCH
CGAP Participant Course Materials: Product Development • 7
C Participant Course Materials: Product Development • 8
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Success factors
Some institutions have discovered the hard way that people do not always want something
new. New products do fail. Many factors contribute to the success of a product, such as
Ingredients for Failure
Failing to analyze the market Rushing to the market with a
defective product Letting wishful thinking drive
development projections Failing to consider timing Ignoring the competition Spending millions for R&D but
nothing on marketing Believing a small market is better
than none
Uniqueness and superiority of the product
Customer and market-driven focus
Thorough preparation
Sharp, clear, early product definition
Quality of execution
Correct organizational structure and climate
Focus and sound decision making
Planning and resourcing the launch
Role of top management
Speed—but not at the expense of quality
Identifying a product development team
elopment, an MFI should assemble
g a “product champion,” to guide
GAP
After analyzing its readiness to undertake product dev
a multidisciplinary product development team, includin
the process of product development.
CGAP Participant Course Materials: Product Development • 9
•
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Organizational impact
Institutions 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 management
Questions MFIs Should Ask Themselves
While 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
CGAP Participant Course Materials: Product Development • 11
Market Research
What is market research and why is it important for product development?
Market research can be defined as the procedures and techniques involved in the research
design, data collection, analysis and presentation of information used by managers in
making marketing decisions. Market research is used by MFIs to respond to needs and
opportunities 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 out and 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 • 12
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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
Reporting
Market research is vital to the success of product development. The cost to correct a
product error at each stage of the product development process is ten times more costly
than the previous stage.
Developing research objectives
It is important to develop a clear research objective before embarking on market research.
The research objective is a statement that precisely details the specific, measurable
outcomes 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 • 13
•
•
•
•
•
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 relationships
Approaches to market research
MFIs have differing approaches to market research (see Table 1). Those that are
committed to offering client- or market-driven financial services use a variety of market
research 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 • 14
•
•
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 reports
Focus groups Client exit
forms
MIS other reports
Product satisfaction
surveys
Client intake forms
Client feedback surveys
Individual interviews
Client household surveys
Observation Branch market
analyses
Data collected for the first time by a researcher for the specific research project at hand
MIS reports
CGAP Participant Course Materials: Product Development • 15
•
•
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 consumer behavior and motives
Statistically representative of population
Output: consumer words and descriptions
Statistical output analyzed by computer
Highly trained professional moderator
Enumerators trained for consistency and accuracy in asking questions
Moderator must understand research objectives
Enumerators do not have to understand or interpret research
objectives Questions not determined Questions determined beforehand
Range of possible answers not determined
Usually range of possible answers determined beforehand.
Sample group of people with demographic similarities
Sample representative of the population
CGAP Participant Course Materials: Product Development • 16
•
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Client-oriented methods to market research
There are many ways to capture data. The choice will depend on a number of variables
such as the research objective and resources available. Among the most participatory and
client-focused methods are focus group discussions and Participatory Rapid Appraisals.
Focus group discussions
A focus group is a qualitative market research technique where a small number of market
participants (usually 8 to 12) are gathered in one room for a discussion under the
leadership of a trained moderator. Discussion focuses on a customer problem, product, or
potential solution to a problem.
Focus group discussions in microfinance enable an MFI to get to know the sector as well as
its clients. When appropriately used, they can efficiently achieve the goals of exploratory
research:
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 trends
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 up
Participatory Rapid Appraisal (PRA) Tools
Traditional quantitative research methods fail to capture the rich complexity of poor households’ reality and livelihoods. They often overlook the importance of microfinance services’ role in diversifying sources of income, smoothing income and expenditure fluctuations, protecting and developing important household assets (physical as well as human), and in the development of key social contacts and skills.
Participatory Rapid Appraisal (PRA) techniques such as interviews, discussions (including focus groups), mapping, ranking, and trend analysis exercises with local people allow the researcher/practitioner to examine the complexity of poor households’ financial, economic and social environment.
CGAP Participant Course Materials: Product Development • 17
CGAP Participant Course Materials: Product Development • 18
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 • 19
Product Concept and Design
Designing a product prototype
The next step in the process is to use the results from the market research to design a
product prototype. The prototype should include all the attributes or characteristics of the
product, including its features, functions, benefits, delivery, and uses. A product
specification sheet is a useful tool to record a product’s characteristics.
Sample Product Specifications for a Savings Product 1. Product Name 2. Purpose/Focus Savings use Client profile Location(s)
3. Amount Minimum balance Minimum deposit amount Maximum deposit Minimum withdrawal Maximum withdrawal
4. Preconditions Opening balance Minimum balance Average balance to maintain account Basis for calculating average balance (daily,
monthly, etc.)
Calculation method for average balance Min/Max deposit Min/Max withdrawal Deposit frequency Withdrawal frequency
5. Pricing Interest rate Interest rate method Commission and fees: amounts Commissions and fees; timing/frequency;
upfront, ongoing Basis Index to external value Penalties
CGAP Participant Course Materials: Product Development • 20
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Considering institutional issues in product design
After designing a product prototype (in this example, savings), the MFI needs to ask itself
a 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 • 21
Costing
Microfinance managers, especially those working in more competitive markets, increasingly
recognize the importance of streamlining operations and cost management for long-term
viability. Product costing offers them a key tool to better understand operations and cost
structure as a first step toward increasing efficiency, lowering costs, and ultimately
providing 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 • 22
Distinguishing between cost allocation and activity-based costing
Cost Allocation
Drawbacks of Traditional Cost Allocation
Allocations can overestimate the per unit costs of the “larger” products and may not capture the complexities of “smaller” products. Alone, traditional cost allocation
methods do not provide managers with much insight into WHY a particular product may cost more than another.
Traditional cost allocation methods use allocation
bases to distribute costs, for instance, direct
labor hours or total account balances among
products (such as a specific loan product). The
cost allocation exercise can be relatively simple
to implement and can provide insight into how
much is spent on each product. Most cost
allocation methods rely on volume-related
allocation bases to allocate costs among
products.
CGAP Participant Course Materials: Product Development • 23
Figure 2. Cost Allocation
Note: In the cost allocation method, each line of the income and expense statement is allocated to
different financial products on the basis of a logical criterion called an allocation basis. In Figure 2, staff
time sheets and portfolio volume are used as the allocation bases. Staff costs (i.e., salaries and
benefits) 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 the
relative volume of each product.
CGAP Participant Course Materials: Product Development • 24
•
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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 • 25
Figure 3. Activity-Based Costing
Notes: 1. The core processes of a typical MFI include client identification, making new loans, servicing
existing 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 include
general management, accounting, secretarial, information technology support, human resource
management, marketing, etc.
CGAP Participant Course Materials: Product Development • 26
In Figure 3, staff costs and non-staff costs are allocated to core processes on the basis of
staff time spent. Where members of staff do not directly spend time on core processes but
rather 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, these
costs are then driven through to the products on the basis of a logical cost driver. For
example, once the cost for processing a loan application has been determined, the logical
cost driver would be the number of loan applications. Each product then absorbs costs for
processing loan applications in proportion to the number of loan applications it generates.
Different processes will have different cost drivers. However, sustaining activities cannot be
driven directly to particular products. The costs of sustaining activities need to be allocated
to the different loan and savings products using allocation based costing techniques.
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 products
Comparing Cost Allocation and ABC
Cost allocation methods that distribute costs organized according to an MFI’s chart of
accounts provide valuable information about product costs. Managers can see the major
components of costs by cost category (staff costs, rent, etc.). Combined with cost
information at the department or branch level, product costs derived from a cost allocation
exercise can help managers begin to pinpoint the sources of costs.
However, accounting categories of costs are not necessarily that useful for decision making
on their own. They do not directly address questions related to how and why costs are
1Identifying 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 can then be transferred to the individual products based on how intensively each product uses each activity.
CGAP Participant Course Materials: Product Development • 27
CGAP Participant Course Materials: Product Development • 28
incurred. ABC provides additional information about how or why costs are incurred by
allocating costs first to processes and activities and then to products. Most MFI staff can
relate much better to the concept of an activity (such as reviewing loan applications) than
to 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.html
CGAP Participant Course Materials: Product Development • 29
Pricing 5
A number of factors affect product pricing, including costs, clients’ sense of value,
competition, and profit. Institutions may have different pricing strategies. Some
common 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 product
For loan products, costs are compared to income earned from interest and fee charges to
determine profitability as shown in the sample calculation below.
CGAP Participant Course Materials: Product Development • 30
Annualized Net Income by Loan Product Sample Loan Product A Sample Loan Product B
Line 1 Average Portfolio Balance 6,000,000 8,000,000
Line 2 Interest and Fee Income on Loans 2,160,000 2,300,000
Line 3 Interest Expense on Borrowed Funds 1,080,000 1,200,000
Operating Expenses
Line 4 Make New Loans 100,000 150,000
Line 5 Service Existing Loans 600,000 900,000
Line 6 Sustaining Activities 200,000 400,000
Line 7 Total Operating Expenses
(Line 4 + Line 5 + Line 6)
900,000 1,450,000
Line 8 Provision for Loan Loss 60,000 80,000
Line 9 Net Income
(Line 2 – Line 3 – Line 7 – Line 8)
120,000 -430,000
Line 10 Net Income/Avg Portfolio Balance
Line 9/Line 1
2.00% -5.38%
Sample Loan Product A is viable because the result at Line 10 is positive; Product B is not.
CGAP Participant Course Materials: Product Development • 31
Determining product viability for a savings product
Since savings products do not directly earn income, when analyzing the viability of a
savings product, it is necessary to compare the total cost of the savings product to
alternative source of funds (or the next best proxy) with similar terms that might be
available in the market. This alternative source price is often referred to as the “transfer
rate.” The difference between the interest cost of savings and that of the funding
alternative is called the interest cost “contribution margin” of that product, or the “interest
contribution.”
More on Determining the Viability for a Savings Product
Suppose that an MFI pays 4 percent interest on its regular passbook loan, and
its next best wholesale alternative for raising funds is a commercial loan at 7.5
percent. The interest contribution to the MFI of collecting savings rather than
contracting a commercial loan equals 7.5% - 4% = 3.5%.
Using the ABC methodology, the next step entails comparing each product’s
interest contribution to the net administrative costs (which are administrative
costs for core processes minus fees). Finally, the implicit “cost” of holding
CGAP Participant Course Materials: Product Development • 32
savings in reserve should be subtracted. This reserve cost is calculated by using
the following formula:
Financial Cost (e.g., interest rate) (1 – Reserve Rate)
– Financial Cost
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 this
simple example where the core administrative costs equal 4% and fees are
1.5% (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 – D
If sustaining activity costs for that product fall below 0.6 percent, then the
product is completely viable and covers both the core administrative costs and
the sustaining costs.
CGAP Participant Course Materials: Product Development • 33
If, on the other hand, sustaining costs exceed 0.5 percent, then the MFI must
evaluate whether it makes sense to continue with the product, seriously modify
the product, or consciously continue to offer it with the expectation that other
more lucrative products will make up the difference in covering sustaining
costs. Another option entails figuring out how to reduce the costs of all
activities, especially sustaining activities.
Price sensitivity
Further market research is also necessary at this point to get feedback on pricing issues
from clients. There are a number of approaches to collecting information on customer
reaction to prices (price sensitivity) that are currently used in the banking industry that
could be applied to microfinance. It is recommended that some type of price sensitivity
testing be conducted and used in the product development process.
CGAP Participant Course Materials: Product Development • 34
Pilot Test 5
A pilot test is something that measures the worth of a product in such a way that the
results of the test guide management decision making. The pilot testing process can be
broken down into ten steps that, if followed carefully, can minimize the chance for failure
of the test and provide valuable information that management can use to improve the
product. If all steps are followed, management can ensure a successful decision about the
rollout of the product in its final form.
Ten Steps of a Pilot Test
1. Choose the pilot test team
2. Develop the testing protocol
3. Define objectives
4. Prepare all systems
5. Model financial projections
6. Document product definitions and procedures
7. Train the relevant staff
8. Develop customer marketing materials
9. Begin the pilot test
10. Evaluate the test
CGAP Participant Course Materials: Product Development • 35
The first step to conducting a successful pilot test is to draw together a formal pilot test
Team, which, ideally, is made up of individuals from each major area or department of the
institution. The team members must be skilled in their areas of representation. If MFI staff
members do not have the necessary expertise, the MFI must obtain this expertise
elsewhere. An experienced team leader will also be needed.
In order to function, the team will require a strong commitment from institutional
management. The team should therefore have at least one senior manager as a member
so that they have someone who can communicate directly to the CEO and other senior
managers about the product.
Some specific activities that team members might perform are listed on the next page.
CGAP Participant Course Materials: Product Development • 36
Pilot Test Team Skill Areas Specific Activity
Product 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 letter
Finance/Accounting Prepares costing and financial projections, ensures liquidity
Information Technology/MIS Coordinates IT selection and installation, related fixed-asset purchases and
installation, develops a systems manual
Marketing Prepares marketing plan for test, conducts test-product marketing training,
coordinates development of marketing documents, tracks marketing
effectiveness
Training Writes curriculum for test-product training, trains front and back office
related staff
Operations/Management Coordinates with branch activities
Credit/Management Develops policies and documents procedures
Credit/Frontline Provides frontline customer information to team, distributes and collects new
customer information sheets
Research Collects and summarizes data, prepares monthly and quarterly reports to
team and others
Audit/Controls Assists in formalization of procedures, authorizes procedures, conducts full
product audit (and follow-up if necessary) during test
Source: 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 • 37
Establishing testing protocol
The goal of the test and the work parameters must be clear if the team is to complete its
job 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 new
product for the MFI as well as for the customers, a decision must be made about whether
or not to recommend going forward with the product launch. The pilot test could lead to
further changes to the product and thus a continuation of the pilot test. It could be
cancelled altogether, or hopefully, it will help to create a strategy for a full rollout of the
product.
CGAP Participant Course Materials: Product Development • 38
Product Rollout 5
Once the recommendation is made to “roll out” or expand the product to other market
areas, revised financial projections and a rollout plan, both directly reflective of the results
of the test, must be prepared. Key variables to consider in planning and executing a
product rollout include:
• Time period and duration
• Level of effort (staff time)
• Responsible person(s)
• Resources (financial, training, equipment, etc.)
• Evaluation of rollout
Following the rollout of new or revised products, the process of product development does
not end. A product may need to evolve as clients mature and the market changes, and
product features and delivery procedures must be revised from time to time to meet these
new demands. Evaluation of how successful a product is at meeting both client needs and
institutional demands is therefore an ongoing and iterative process for MFIs committed to
meeting client needs with viable products.
CGAP Participant Course Materials: Product Development • 39
List of Resources 5
General Rosenberg, Richard. “Microcredit Interest Rates.” CGAP Occasional Paper No. 1. Washington, D.C.: CGAP, revised November 2002. www.cgap.org/html/p_occasional_papers.html
Wright, Graham, Monica Brand, Zan Northrip, Monique Cohen, Michael McCord, and Brigit Helms. “Looking before You Leap: Key Questions That Should Precede Starting New Product Development.” 2001. www.microfinancegateway.org/static/2164.htm
Focus groups and PRA Wright, Graham, Shanaz Ahmed, and Leonard Mutesasira, with Stuart Rutherford. “Focus Group Discussions and a Participatory Rapid Appraisal for MicroFinance—A Toolkit/Course.” [Kampala, Uganda: MicroSave-Africa, 1999]
Costing and pricing Product Costing Tool, version 1.3 (draft). Washington, D.C.: CGAP, 2002. www.cgap.org/html/p_technical_guides.html
Pilot testing McCord, Michael J., 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. www.microfinancegateway.org/static/2658.htm