new product development in the financial service industry: a case study

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New product development in the financial serviceindustry: A case studyScott Edgett a & Steve Jones ba Department of Management & Marketing , Brock University , St. Catharines, Ontario,Canadab New Product Development Manager , National & Provincial Building SocietyPublished online: 06 May 2010.

To cite this article: Scott Edgett & Steve Jones (1991) New product development in the financial service industry: A casestudy, Journal of Marketing Management, 7:3, 271-284, DOI: 10.1080/0267257X.1991.9964156

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Journal of Marketing Management, 1991, 7, 271-284

New Product Developmentin the Financial ServiceIndustry: a Case StudyNew product development is an important aspect of servicemarketing. Information, however, is sparse on the actual develop-ment processes that are used by service firms to develop these newproducts. Utilizing a case study approach this article traces thedevelopment of a new service for a major UK based financialinstitution. Through an in-depth examination of the processes itwas found that a complex development system was used. Theauthors were able to identify a number of factors that were essen-tial to the successful development of this new product.

Scott Edgett* andSteve Jones†

*Brock University,Department ofManagement &Marketing, St.Catharines, Ontario,Canada and †NewProduct DevelopmentManager, National &Provincial BuildingSociety

Introduction

The development of new products is generally accepted as a requirement for thecontinual growth and prosperity of companies in today's marketing environment.Consequently, the literature is rich with information on the various aspects ofdeveloping new products. It is reasonable to expect that in service industries, newproduct development is at least as important as it is to firms that sell tangiblegoods. However, the four traits that distinguish services from physical products,intangibility, inseparability, heterogeneity and perishability, necessitate the adap-tation of traditional product marketing practices (Shostack 1977; Bateson 1979;Gronroos 1982,1983; Lovelock 1984; Rushton and Carson 1985; ZeithamI, Parasura-man and Berry 1985). New product development in the financial services sector isno exception. Unlike new product literature, the literature on service marketingpractices, and in particular new service development, however, is far from compre-hensive (Scheuing and Johnson 1989a; Easingwood 1986).

This article aims to contribute to service marketing literature by using a casestudy approach to examine the development of a successful new product in thefinancial services industry. Through a detailed examination of the developmentprocess, a number of characteristics are identified that have contributed to itssuccess. In this way, additional insight is provided into a subject which, to date,has been poorly documented.

Background

In the period before 1975, marketing literature that mentioned new service devel-opment centred on innovation, and focused on consumer perspectives rather thanthe actual development process (Nevers 1972; Peterson, Rudelius and Wood 1972;Green, Langeard and Fa veil 1974).

The post-1975 period has brought increased activity by academics, however, this

0267-257X/91/030271+14 $03.00/0 © 1991 Academic Press Limited

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272 Scott Edgett and Steve Jones

has tended to be fragmented. Examination of the diffusion of innovation in servicesfrom a consumer's perspective has been further examined by Vinson and McVan-don (1978), Zeithaml (1981), Woodside, Sanderson and Brodie (1988), Sanderson,Brodie and Woodside (1989), and Warren, Abercrombie and Berl (1989). The inno-vation process for services has been examined from the point of view of manage-ment by Meyers (1984) and Schwartz (1984). The increasing impact of new tech-nology on new services has been discussed by Quinn and Gagnon (1986).Additionally, Parasuraman and Varadarajan (1988) have found empirical supportfor the contention that dependence on new products is expected to continue in theservice industry. The strategic management of service development, from theperspective of which markets should be developed, has been examined by Lan-geard and Eiglier (1983).

Murphy and Robinson (1981) have discussed the application of the concept testto new service development. Although their article presents little new information,it does provide one of the first examples in the literature of an application oftraditional product development practices in a service setting.

As with the development process for new services in general, the literature onempirical examples of the development process for services in the financial sector isscarce. With the notable exception of two studies, reference to the new productdevelopment process in the financial services literature is the by-product ofresearch that has concentrated on other subjects, or is the result of studies thatconcentrated on consumer adoption of new services (Home and Martin 1981; Millsand Gardner 1986; Marshall and Heslop 1988; Swinyard and Ghee 1987).

In a case study on a new electronic funds transfer system in the United States,Vinson and McVandon (1978) noted that qualitative research (focus groups) wasused instead of quantitative methods. The study also found that in launching arelatively new banking concept, consumer education helped increase acceptance ofthe new product. In another case study, Scarbrough and Lannon (1988, 1989),although not presenting a comprehensive review of the development process, didexplore the difficulties experienced by a UK bank in integrating a new technologyproduct (home and office banking) into its IT system, and the resulting problemsthat occurred within other departments in the organization.

The use by financial institutions of market research in the new product develop-ment process has also been examined in several empirical studies. All of the studiesfound that the use of such research was lacking. Herman (1981) found that only52% of banks in the United States had conducted market research studies onproduct development within the previous 5 years. Another American based studyfound that only 23% of the respondents conducted product testing and only 21%conducted market testing (Reidenbach and Moak 1986). Similarly, in another studyof American banks, Scheuing and Johnson (1989b) found limited use of marketresearch in the new product development process. However, it should be notedthat their study had only 38 respondents.

In the United Kingdom, similarly poor use of market research has been foundamong banks and building societies. Limited use of concept testing and testmarkets was reported by Da vison, Watkins and Wright (1989). Morgan (1989) mayhave explained part of the reason for this. He found that only 39% of respondentsactually had a formal marketing research unit, and that in 85% of this group, theunit had been in existence for less than 5 years. In addition, a large number of theseunits had only one or two employees. Thus, it is not surprising to discover that

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New Product Development in the Financial Service Industry 273

only 19% of the respondents frequently conducted product test marketing and that50% reported that they had never instigated this type of research.

Organizational factors have also been found to affect the new product develop-ment process. Ennew and Wright (1990) found that building societies expected torecruit more specialist management and planned to develop more flexible organiz-ational structures during the following 5 years. This was partly in response todifficulties in introducing new products, particularly their ability to react quickly tothe competition. The need to hire management from other industries was con-firmed in a study of commercial banks, in which banks that were more successfulin product innovation were found to have adopted this practice (Johne and Har-borne 1985). The study further concluded that organizational structures that wereflexible in the initiation stage of the new product development process but becamemore structured for the implementation phase were more successful.

From the launch perspective, only one study was found in the literature thatidentified success and failure traits for new financial services. It reflects the entirefinancial services industry and, thus, is not specific to building societies, althoughit is UK based. The five factors contributing to product success were, in descendingorder, superior product, effective sales force, competitive pricing, effective promo-tion, and no effective competition. Conversely, the five factors that made productsunsuccessful were, in descending order of importance, problems with the product,uncompetitive pricing, ineffective promotion, inadequate sales force effort andstrong competition (Hooley and Mann 1988). Unfortunately, other studies thatexpand upon the success/failure factors for personal financial products are notavailable.

Finally, a macro perspective of the new product process by Scheuing and John-son (1989a, b) has suggested that, "new product development may occur by chancein many financial institutions". Unfortunately the research did not try to identifywhether the banks that had structured development processes were more success-ful than those that did not. However, it has been noted by Reidenbach and Moak(1986) that, "top performing banks do have a more structured and formal newproduct development program than average or below-average performers" in theUnited States. This suggests that a structured new product development processcan contribute to the succcess of an institution. However, no further research tosupport this claim has been conducted.

As Cowell (1988) has previously summarized, "the area of new service develop-ment is poorly documented". Further, what documentation there is indicates aneed for more practical knowledge about how the financial services industry de-velops new products. The following case study helps to alleviate this situation byproviding a detailed profile of the development process that was undertaken inpreparation for the launching of one new financial service. Interviews withmanagers involved with the product were the principal means of obtaining theinformation.

Company Profile

The National and Provincial Building Society (N&P), Britain's sixth largest, has 322branches and £8-5 billion in assets. Its net profits were £59-5 million in 1989. The

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origins of the present day N&P can be traced to 1849 and a succession of mergersthat ended in 1982 with the company as it exists today.

As the UK financial services environment became increasingly more volatile, andas market competition heightened, N&P developed a new strategic plan in 1988,which set as its strategic objective:

To become a major and profitable provider of personalfinancial services in addition to becoming a sophisti-cated financial organization fully able to take advantageof the ever-changing and competitive marketplace.

To meet these challenges, decisions were made to enhance the informationtechnology (IT) and marketing departments, and to restructure the network ofbranches into four regions rather than the previous twelve. A further response tothe strategic plan was a re-organization, in 1989, into four separate business units:savings, mortgages, consumer credit, and insurance and investments. Each unit isself-contained, with its own operating budget and personnel. To ensure theconsistency of brand values throughout the company, departments such as infor-mation technology, human resources, communications and training remained out-side the business units at group level.

Marketing Department

In keeping with the corporate strategy to expand the role of marketing within theorganization, N&P's marketing department was enlarged to just over 50 people,compared with less than half a dozen in 1985. As would be expected with suchrapid growth, the department has experienced considerable change andrestructuring.

A marketing group exists within each of the individual business units to admin-ister the day-to-day operations related to its business unit. For example, in thesavings unit each major product has a product manager. New product develop-ment is also carried out at the unit level.

The major thrust of the marketing department is in branding, new productdevelopment and expanding the customer base.

New Product Development

There was general agreement among those interviewed that a "new product" is"something that meets consumer needs currently not being met by the organiz-ation". A new product is considered a success by management if it has matched orexceeded its stated performance objectives.

The importance of new product development to a re-organized N&P is evi-denced in the number of new product launches: 11 between June 1988 andDecember 1989. Projections for the following 2 years forecast a similarly high levelof activity: a minimum of five and a maximum of 12 new product launches, with anumber of product relaunches.

Most future new product development will aim at markets that have becomeaccessible as a result of the Building Societies and Financial Services Acts of 1986.

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For example, the society plans to develop several investment related accounts,such as, equity-linked and equity/long-term investment services. There will also bedevelopments in service quality.

The process of developing a new product varies with each manager. N&P has noformal procedure or checklist to follow, although there are standard procedures forthe preparation and presentation of financial forecasts in the form of a "Basis forInterest" document that is submitted to obtain approval for each new project.

Product managers are not directly rewarded for successful product launches,although indirect rewards may be reflected in their annual performance reviews.

Project objectives are set by individual project managers, but are reviewed bytheir superiors in the "Basis for Interest" before funding approval is given.

"MAX"—A Successful New Product Launch

"MAX", a card-based transaction account, is seen as the most successful newproduct ever developed and launched by N&P. It also holds the record for thehighest development budget to date for a new product.

A multi-access expenditure account, "MAX", offers a tiered interest rate that iscalculated daily, with maximum daily cash withdrawals of £250 or £1,000 bycheque. The account includes one major card—the "MAX Cash Card"—and twominor cards that are add on features of the product, the "MAX Law Card" arid the"MAX Info Card".

The "Cash Card" permits access to a network of ATMs. The "Law Card" enablesthe holder to get free personal legal advice by telephone 24 hours a day. Telephonebanking is done via a voice-activated computer that allows the customer to obtainaccount updates, pay bills, read out a mini statement, or transfer funds to anotheraccount. "MAX Guard" allows for five free insurance claims for full replacementvalue of any item damaged within 90 days of the purchase date. "MAX Facts" is apre-recorded telephone line that offers free advice on a variety of subjects to "InfoCard" holders. A personal organizer is given to all new "MAX" customers.

The idea for the product began with the realization that several of N&P's keybuilding society competitors had successfully launched transaction accounts, com-plete with cheque books. In early 1988, N&P decided that it, too, should considerstarting a transaction account targeted towards the over-25s market. Thus, a roughproduct concept was put together, centring around a transaction based account.

In March 1988, secondary research around this concept was conducted. Theresult of this analysis was the discovery that N&P had a more serious shortage ofcustomers under 25 years of age than previously thought. Consequently, the pro-duct concept was widened to include two distinct target groups: those over 25 andthose under 25. A field study of the two age groups was then commissioned, andqualitative research in the form of focus groups was conducted. The age groupingswere further refined into three: under 18, 18-24 and over 24. Further splits weremade to include possible differences between those living in the North of Englandand those living in the South, as well as differences by sex, preference for chequingor non-chequing accounts, and general consumer attitudes. Approximately 30focus groups of eight to ten people were convened by a market research agency.

Analysis of the focus group responses revealed that the over-24s were happy

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with the services as they were and the majority of this group already had trans-action accounts with other institutions. However, the younger consumers tendednot to have chequing accounts, and they were more receptive to plastic cards andother types of innovation. Accordingly, the objectives for the new N&P transactionaccount were reassessed. The idea of launching a cheque book was dropped, and astrategic decision was made to target the under-25 group. The new objectives wereput in writing (previous objectives were not), and agreement as to the nature of thenew account was reached with senior management in the marketing department.

At this stage, a market analysis was conducted to determine such things as sizeof market for a cash card, growth of the market, and potential market share. Themarket share for such a card was estimated at 6%, or 80,000 accounts over a 12-month period, with 50% of these customers being under 25. An extensive analysisof competitive activity in the product area was also conducted. The outcome of themarket analysis was a "Basis for Interest" report.

Early in the summer of 1988, a new product concept was generated that identi-fied desirable product features. It was tested with four groups of 18-24 year oldsusing concept boards to find the correct positioning niche for the product. Fourlifestyle images were examined: the "Macho" image; the carefree image, whichsays, "I don't care how I spend my money"; the sensible conservative image; and asoft, feminine one. As with most lifestyle research, the end results indicated thebest positioning strategy would include "bits and pieces" of each lifestyle. Oneimportant new finding, however, was the idea for telephone banking.

A telephone survey, with a sample size of 100 people, was conducted. Strongsupport was found for the telephone banking idea. Owing to the high cost ofinstalling the service (£1 million) another "Basis for Interest" report was prepared.In November 1988 the go-ahead was given, and the telephone banking conceptwas developed as part of the new transaction account.

In November, the first formal business plan was developed, which incorporatedthe previous "Basis for Interest" documents. It also quantified the benefits for N&Pand made firm projections for market share in the first year following the launch.There were two main objectives: to open 57,000 new accounts, and for 54% of themto be new customers to N&P. The business plan was then circulated for commentto approximately 12 people in various departments. This was a new procedure forN&P. No precedent existed for gaining the approval and the co-operation of otherdepartments. Following agreement within the society, the go-ahead to launch theproduct was given at the end of December, 1988. Approval was then sought at thelevel of the board of directors although, for practical purposes, this was by now aformality. The board has the power to approve or reject projects, but in practice thefinal decision regarding product launches rests with the head of the marketingdepartment.

The two principal stages of the implementation phase were staff training and thecontracting of external agencies.

Owing to the novelty of this product and its complexity in comparison to theexisting N&P product portfolio, two forms of implementation problem occurred atthe branch level: convincing the staff that it was a good product, and training themto sell it effectively. Detailed negotiations were required with the training and retailoperations departments over how the training would be implemented. The resultwas a series of one-day seminars at hotels in various regions for staff representa-tives from each branch. Marketing personnel from head office attended each of the

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training meetings. This was the first time N&P had conducted training outside thebranches with the developers of a new product actively involved.

The period between January and April 1989, also involved work with variousexternal agencies, together with the communications department, to develop theadvertising and promotional literature for the new product. Internal politics werevisible during this phase of the process, as the communications and marketingdepartments discussed the development of the appropriate promotional mix andthemes. For "MAX", a full-scale promotion via television, radio and print advertis-ing, together with prizes was used. During this phase, the business plan wasadjusted to reflect the ongoing changes in the marketing mix, but the remainder ofthe plan remained the same.

Another area of considerable controversy was the selection of the product'sname. The marketing group conducted an internal brainstorming session andselected a name that was then tested on three consumer groups. Following positivefeedback, the name was approved and forwarded to the communications depart-ment for incorporation into the advertising material. However, the communi-cations department rejected the name and argued that it should be agreed upon bya committee. Following a committee meeting, the product was renamed "Select".This name was turned over to the ad agency, but was rejected again. The agencysuggested "MAX", and proposed an ad campaign revolving around the title. Themarketing department rejected this but the communications department approvedit, and "MAX" became the product's name.

Before the launch date, the IT department checked its computer system to ensureall the product features were operational. This test was conducted in-house byhaving 30 people carry out various transactions over several days. The cash cardswere also tested, and when it was discovered that ATM's would not accept them,they were returned to the manufacturer for replacement. This caused a two weekdelay in the launch.

In May 1989, "MAX" was launched.Follow-up to the "MAX" launch is an ongoing process. Immediately after the

launch, weekly monitoring of the number of new accounts was conducted. Atelephone survey of 800 "MAX" customers was carried out 3 months after thelaunch date. A written evaluation of the product was prepared 4 months after thelaunch, in September. A detailed process flow chart of the development process ispresented in Figure 1.

Early indications are that the launch of "MAX" was a success. Of the consumerswho have opened "MAX" accounts, 80% are new to N&P, and 50% are under 25years of age. The account is used by 27% for salary deposit, a figure that has beengrowing by 1% a month, and 60% have registered for telephone banking. Of thenew accounts opened 40% have never been used, a figure comparable with indus-try averages.

Factors Critical for Success and Failure

Why did "MAX" become a successful new product, rather than another of thefailures that are all too common in new product development? By mapping out thedevelopment process (Figure 1) and through personal interviews at N&P, anumber of factors were identified as having been major contributors to the success

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Problern recognition Competitors hove 0 tronsoction occount

Idea <=• Launchdecision made

Product conceptdevelopment

Secondary marketresearch analysis

Revise productconcept

Primary marketresearch and analysis


Marketassessment

Should N and Phave one

Target market selection O 2 5 )

Product features identifed

Loose objectives set

Desk research

Youth market needs not being met

Two possible target groups ( < 2 5 , > 2 5 )

Focus groups

Realization: Over 25 market nota possible target market

Strategic decision to target < 2 5

Change product features

New objectives set

Environmental analysis

Market potential analysis

Develop forecasts

Ouantif y objectives

Figure 1. Flow Chart: NPD Processing—MAX

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Basis forinterest


Concepttesting

Market researchtelephone banking

Develop new basisfor interest

Developtelephone bankingsystem with I T

Formalbusinessplan

Written description of product

Gather feedback

Selection of product features

Focus groups

Analysis

Selection of positioning strotegy

Telephone survey, 100 people

Develop cross-selling model

Seek funding approval, o i l million

Approval

Develop financial j quality objectives

Departmental approval

Interdepartmental approval

Board approval


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Legal

Alllegalissuesfinalized

Telephonebanninginstalled

SystemsoperationsChech

Implementation phase

Training CommunicationsPreporecampaignbrief

Procedures monuals Contact various outside ogencies Finalizeapproach

Retail operations Training departmentName selection

Fino! tiesatestargets

Develop various promo materials

Finalize operations

Conduct branch trainingTV, radio, print

Check IT carde

Launch product

Follow-up launch monitoring

Morket research of ne<* MAX product

Formal written evaluation of founch


Branch promotions

of the product. Perhaps the strongest contributing factor was the high level ofdetail and the depth of the development process itself, as illustrated in Figure 1.

A number of other factors were identified as being essential to the success of theproduct.

1. There were adequate financial resources to ensure thorough market research.2. The target market was clearly identified.3. The new product development process was thorough and well organized.4. There was a high level of enthusiasm maintained throughout the develop-

ment process by the product development manager.

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5. A high level of personal contact was maintained by the product developmentmanager with all the people involved with the product.

6. A product champion (the product manager) was prepared to push the newproduct through the system and to overcome delays and difficulties.

7. A strong launch campaign was mounted and supported with sufficientfunding. -

8. The product was differentiated from all the other products already in themarketplace.

9. Senior management demonstrated a strong commitment to the project.

A number of other factors were identified that could have improved the develop-ment process.

1. There could have been more testing of branch procedures and training ma-terial to ensure the branch staff properly understood the product.

2. Commitment of the various departments involved should have been securedat the start of the project, before any primary research was conducted.

3. Better communications could have been developed with the branch staffselling the product.

4. Technical aspects of branch procedures should have been conducted as earlyas possible in staff training, preferably before the formal training began.

Interestingly, throughout the product development, a decision as to whether theproject should continue (a "go/no-go" decision) was never made. As the projectmanager stated, "It had a life of its own".

Conclusions

The successful development of "MAX" has illustrated that the characteristics ofservice marketing—intangibility, inseparability, heterogeneity and perishability—can be successfully addressed in new service development.

Intangibility presents the risk that the development process will be conductedtoo quickly or in a haphazard manner (Shostack 1977). By utilizing a structureddevelopment approach this risk can be effectively minimized. The process for the"MAX" account followed a reasonably structured format, which required formalproposals and projections, at various stages, contradicting Scheuing and Johnson's(1989a, b) suggestion that new product development occurs by chance in manyfinancial institutions. Instead, the subsequent success of the product supportsReidenbach and Mcak's (1986) finding that the more successful financial insti-tutions have more organized approaches to new product development than dotheir less successful counterparts.

Difficulties as a result of the combined effects of service heterogeneity andintangibility are encountered in market research. This problem is further com-pounded for research in the financial services sector, owing to consumer sensitivityabout personal finances. Modified approaches may, therefore, be required inmarket research for financial services. In the case of N&P, and in line with thefindings of Vinson and McVandon (1978), the development process made exten-sive use of qualitative research techniques, rather than quantitative methods, atdifferent stages of the development process.

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The extensive use of market research in "MAX's" development contradicts ear-lier studies that have suggested that the use of market research for financialservices, both in America and the UK, is limited. This conflict may be explainedeither as a changing pattern in the development of financial services or, moreprobably, as evidence that N&P has been more innovative than its industry peers.This suggests that innovative qualitative market research techniques can be effec-tive for financial service products as a means of offsetting some of the difficulties inusing solely quantitative techniques.

Standardizing the product offering and delivery system is also problematic forservices owing to their inseparability, heterogeneity and perishability. Furtherdifficulties arise in maintenance of quality control and in matching supply todemand. To overcome these difficulties, the new service development processrequires a high level of support from senior management. There is a need todevelop and maintain strong liaisons with personnel outside the new service'sdevelopment team. The delivery phase of the new product must also be carefullymonitored to ensure staff has been properly trained, and that a standardizedproduct of consistent quality is being presented to the consumer.

For "MAX", internal marketing played a significant role in developing aware-ness of the product within the company and in maintaining its momentumthroughout the development process. This suggests that the organizational el-ements of the project are as important as the development process, to the successof a new financial service.

This case profile has provided a detailed illustration of the development processof one product by a financial services company. Although restricted in its applicabi-lity to new service development in general, this study does provide insight into anarea that requires more research. Service industries, similar to their counterparts inthe physical goods industries, are facing increasing pressure to develop new pro-ducts in order to be profitable in an operating environment that is becomingincreasingly competitive, on both domestic and foreign fronts.

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new product development in the financial service industry: a case study

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