Organizations need to invest more in research potential customers and markets than they do in engineering a new product or the new product will bomb, according to a long term study done by Ralph E. Grabowski. He developed this metric at the request of the MIT Enterprise Forum and refers to it as the Marketing/Engineering Investment Ratio™ (M/E Ratio™).
According to Grabowski, “Super successful enterprises invest at least one dollar and average more than two dollars in the front-end understanding of customer needs, for every dollar invest in engineering.”
At a Boston Product Management Association meeting on June 17, 2010, he cited a number of examples.
During World War II, Raytheon had invented a very small radar unit, called a Magnetron that could be placed in an airplane, helping the Allies win the war. But after the war ended, Raytheon tried to commercialize this and other defense technology. A manager walked pass a Magnetron with a chocolate bar in his pocket. The microwaves from the Magnetron melted the chocolate and a light bulb lit up in the manager’s mind.
The RadarRange was created:
- It cost $50,000
- Required an electrician to install the 220 Volt wiring
- Required a plumber to install piping for the water cooling system
M/E Ratio ™ 0.033.
You guessed it! The product failed.
Raytheon later bought Amana, a successful appliance company which researched the needs of the homemaker and set the criteria for the product as:
- Cost less $500
- Can be lifted by a woman
- No special installation requirements
Amana raised the M/E Ratio™ one. The rest is history.
Grabowski has numerous more recent examples. Digital Equipment Corporation (DEC: my former employer) and Wang Computers were notorious for good engineering and poor marketing. Neither company survived.
Dell Computers was founded in a dorm room by 18 year old Michael Dell; it’s still around.
DEC’s M/E Ratio™ was 0.004 while Wang’s was worst at less than 0.001. Dell checked in at over 1.5.
What is the ratio for your firm—and the ratios for your competitors? Use this metric to focus resources on the competitors most likely to succeed.
For more examples and tips on convincing your management of the need to invest in market research on the front end, visit Grabowski’s web site at www.marketingVP.com.