KATHRYN E. A. VILLANI AND DONALD G.

MORRISON*

Because of inflation and supply shortages, managements Increasingly have

had to consider product reformulation as a means of keeping production
costs down and retail prices competitive. An analytical approach rs presented
for estimating the market sizes for current and proposed nev/ formulations
of a product or brand. The analysis suggests fundamental issues that should
be considered in the design and interpretation of research relevant to the
reformulation decision, such as taste tests, announcement of the formulation
change, and simulated shopping situations.

A Method for Analyzing New Formulation

Decisions

INTRODUCTION
The decision to change the fortnulation of a product
or brand is a major otie faced by many marketing
managers. In particular, today's inflation and supply
shortages have put more pressure than ever on man-
agements to reformulate as a means of keeping pro-
duction costs down and the retail price of their output
competitive.
Such a situation is common in the food industry
where the prices of basic ingredients fluctuate widely
as a result of crop yields and alternative uses and
demand for grains. For example, for a product to
be labelled "mayonnaise," the FDA requires that it
contain 65% vegetable oil. Within the vegetable cate-
gory, however, are many different sources of oil such
as corn, saffron, and soybeans. Thus, in 1973-74 when
soybeans quadrupled in price in one year, manufactur-
ers using soybean oil in their formulation of mayon-
naise who wished to keep their costs and prices down
had to evaluate new formulations which required less
soybean oil and substituted other kinds of relatively
cheaper vegetable oils.
An important part of such an evaluation is determin-
ing the impact of a formulation change on demand.
Will consumers perceive a change in the product (e.g.,
taste, texture, color, etc.) with the new formulation?
*Kathryn E. A. Viilani is Assistant Professor of Business and
Donald G. Morrison is Professor of Business at the Graduate School
of Business, Columbia University.
284
If SO, will they like the change? Often taste tests
are used to help answer such questions. Ultimately,
however, the decision-maker needs an estimate of the
market size for the new formulation in order to evaluate
its expected profitability in comparison with that of
the present product (and its now costly ingredients).
Cost consciousness is not the only impetus for
product reformulation decisions. Business often is
confronted with the question of how to make a
currently successful but "old-fashion" product "mod-
ern." For example, publishers must decide when and
how to update textbooks as new knowledge is ac-
cumulated. A new edition which contains some of
the most recent material in a field might attract a
number of present non-users of the text who feel
that the content of the current edition is out of date.
However, certain changes, particularly any deletions
of material in the present edition, might displease its
current users. To evaluate whether or not it is profit-
able to introduce a new edition (and alternative ver-
sions of a new edition), the publisher must consider
these consumer reactions and develop an estimate of
the potential demand for the current and proposed
new editions.
Another typical reformulation decision is whether
or not to change the packaging of a product, either
temporarily or permanently. For example, during holi-
day periods, liquor is sometimes packaged in elegant,
reusable decanter containers rather than regular bot-
tles. The principal reason for the special and costly
packaging is to increase trial by stimulating the pur-
chase of the brand as a gift for others, some of whom

Journal of Marketing Research

Vol. XIII (August 1976). 284-8
METHOD FOR ANALYZING NEW FORMULATION DECISIONS
are not current users of the brand. The new packaging
probably will not substantially affect the overall vol-
ume bought by current users (although it might affect
the timing of one of their purchases to take advantage
of the special packaging deal). Therefore, the profit-
ability of the packaging change depends mainly on
whether the increase in trial by present non-users
(compared with the trial with the regular bottle) and
the repeat purchase generated from such a trial increase
more than offset the extra packaging costs.
The purpose of this report is to provide an analytical
approach for estimating the market sizes for current
and new formulations of a product or brand. First,
those factors which appear to have an important
influence on the demand for alternative formulations
are discussed. Then a decision tree approach is devel-
oped for integrating the influence of these factors
on demand in a systematic and meaningful manner.
Finally, the implications of this analysis for the design
and interpretation of relevant research, such as taste
tests, are discussed.
CONSUMER BEHAVIOR AND
REFORMULATION
Current Users and Non-Users Differ
If a new formulation is presented to consumers,
in lieu of the current product, the total sales volume
will come from (1) current users who try and like
the new formulation and (2) new users who try and
like the new formulation. The important issue is that
the expected responses to the new formulation from
the present users of the current product probably differ
substantially from those of the current non-users.
From a behavioral point of view, one would expect
that the current users probably will try the new
formulation, and continue using it as long as they
do not dislike it. In contrast, the current non-users
must be convinced to frythe new formulation (although
this might be less difficult with the new formulation
than with the current one). Also, the current non-users
probably will require a higher level of satisfaction
to continue using the product. Thus, in most cases
one would expect current users and non-users to have
potentially significant differences in what is needed
to induce them to try or to continue using alternative
formulations. As a result, any researcher attempting
to forecast the market size for a new formulation
first must examine the demand for each of these
segments separately.
Announcement of Change Matters
Two factors which will affect the level of trial and
liking of a new formulation by the potential consumers
are (1) whether or not an explicit announcement of
the formulation change is made, and (2) if it is
announced, the level of advertising effort put behind
selling it.
285
If no explicit announcement is made about the
formulation change, one would expect the trial proba-
bility for the new formulation to be about 1.0 for
the current users, because they have no reason to
change their present behavior. For the same reason,
one also would expect the trial rate of the current
non-users to be the same for the new formulation
as it was for the current brand.
An explicit announcement of the formulation
change, however, might provide an incentive for
current non-users to try the product, making the trial
rate by this segment higher than it would be in the
"unannounced" situation. In contrast, an announce-
ment of a change in the formulation might decrease
the trial rate and product acceptance by current users.
In the latter case, announcing the formulation change
causes the current user to evaluate the change con-
sciously, and forces him to "actually like" rather than
"not dislike" the new formulation.
Finally, if the formulation change is announced,
the degree to which it affects the behavior of members
of both segments will depend partly on the advertising
effort behind the announcement. In general, one would
expect that the greater the advertising effort, the
greater the impact the announcement will have, espe-
cially on the trial rates and possibly on the liking
of the new formulation.
To predict the level of trial and liking of a new
formulation, therefore, one must consider the market-
ing mix that will be used if the new formulation is
introduced. Also, any research, such as taste tests,
undertaken to examine consumer reaction to a for-
mulation change should simulate the conditions under
which the change will be communicated.
DECISION TREE ANALYSIS
Construction of Tree
One way of integrating the aforementioned con-
sumer behavior assumptions to estimate demand in
a systematic manner is by building a decision tree.
The one in Figure 1 captures the essence of the
consumer behavior crucial to the new formulation
adoption decision. It assumes:
1. potential consumers for the new formulation are in
one of two categories—users or non-users of the
current formulation,
2. potential consumers will either try or not try the new
formulation, and
3. potential consumers will either like or dislike the new
formulation.
A similar decision tree analysis pertains to demand
for the current or old formulation of the product and
it also is shown in Figure 1.
In the simple classification of "users" versus "non-
users" of the current formulation, such categories
as heavy versus light users, loyal versus brand-switch-
ing prone users, and so on, are ignored. Also, the
286 JOURNAL OF MARKETING RESEARCH, AUGUST 1976

Figure 1 erence for one version of a product rather than another

NEW FORMULATION DECISION TREE
are taste tests and home-use tests (monadic or paired
comparison design). Field experiments and lab tests
such as those conducted In simulated supermarkets
can be used to study the trial rates for the different
formulations.
Market Size Estimates
One now can derive the following formulae to
estimate the expected total market sizes for the for-
mulations by the decision tree in Figure I.

where;
Mne^. = The expected number of consumers who will use
the new formulation.
M^u = The expected number of consumers who will use
the current formulation.

non-users consist of consumers with some potential The estimated total market size for the current
for using the current or proposed new formulation. formulation (M^,^) is the sum of the number of present
Trial refers to tasting or using the product formulation buyers (NJ weighted by the probability that they
once. Finally, the categorization of "like" versus like the current formulation (P^,) plus the expected
"dislike" ignores degrees of liking, percentage of number of non-buyers who will try and like this
category purchases to this brand, and so on. Although formulation {N^P^,P^,). The estimated total market
all these assumptions are somewhat oversimplified, size for the new formulation (M^^^,) is obtained by
the essence of the problem is retained. In fact, the estimating the number of people in each buying cate-
simplifying behavioral assumptions allow the analyti- gory for the current product and weighting these by
cal framework to focus more clearly on the major the probabilities that they will try and like the new
issues. formulation.
A Numerical Example
Information Needs
Assume the following taste test situation. In a paired
As indicated in Figure 1, in order to estimate market
comparison test of a current and a new formulation,
size by the decision tree approach, the following data
respondents are asked to indicate the degree to which
are required.
they "like" each alternative on a 6-point scale and
Ny — The number of current users of the current for- later are forced to choose which formulation they
mulation. prefer over the other. Hypothetical results are shown
N^ — The number of potential consumers who are non- in following table.
users of the current formulation.
Pu, — The probability that a current user will try the
current formulation (by definition it is 1.0). HYPOTHETICAL TASTE TEST RESULTS
Pn, — The probability that a non-user will try the current Preferred choice Rated "liked"
formulation.
P^i — The probability that a current user who tries the Old New Old New
current formulation will like it. Sample Number form form form form
Pn, — The probability that a current non-user who tries Users 100 80 20 95 50
the current formulation will like it. Non-users 400 120 280 205 350
Total 500 200 300 300 400
Qn,
— Definitions analogous to those used for the P's,
Qu but with respect to the new formulation. The first column indicates there are 100 users and
Q
400 non-users in the sample. This breakdown is what
one would expect by chance for a random sample
Because most marketers have some measure of their for a product with a 20% market share. The users
market share and the size of their potential market, are assumed to prefer the old formulation by an 80
estimates of N^ and N^ can be obtained relatively to 20 spread, which might be considered excessive
easily. Traditional marketing research approaches can for some products but is used to dramatize the point
be used to help estimate the trial and liking probabil- in question. The non-users prefer the new formulation
ities. Typical methods for examining consumers' pref- by slightly more than 2 to 1. Finally, in the last two
METHOD FOR ANALYZING NEW FORMULATION DECISIONS
columns are the numbers of respondents who indicate
they "like" the new and/or old formulations by using
the top two points of the 6-point scale. Note that
the rows sum to more than the total number of users
and non-users in the sample because some respondents
indicate "liking" both formulations.
On the basis of the aggregate (total) results of the
taste test, the new formulation would be determined
the "winner." The total direct paired comparison
results indicate that the new formulation is preferred
by 60% of the sample whereas 40% favor the old
product. Similarly, the ratings indicate that 80% of
the sample respondents like the new formulation but
only 60% like the old. The aggregate analysis, there-
fore, would lead one to conclude that the expected
demand for the new formulation is greater than that
for the old formulation.
However, what demand estimates are obtained by
use of the decision tree approach in analyzing the
taste test results? Assume the product market contains
5,000,000 users and that the test brand has a 20%
share or 1,000,000 users. The trial rate for non-users
is 0.05 and it is assumed that all current users will
try. The formulation change will not be announced
because it is considered mainly a cost saving device;
therefore the trial rates for the old and new formula-
tions are expected to be the same, hence P^, = (}„,
= 1.0 and P„, = Q„, = 0.05. Assuming the "like"
ratings determine the probabilities of actually liking
the formulations, the expected demand estimates for
the formulations are as follows.
M =NPP+NPP
= 1.000,000 (1.0)(0.95) + 4,OOO.OO0(0.O5)(O.5125)
= 1,052,500.
= 1,000.000(1.0(0.50) + 4,000,000 (0.05)(0.875)
= 675,000.
On the basis of the decision tree analysis results,
which are contrary to the aggregate analysis, one would
conclude that the demand for the o/d formulation will
be substantially greater than the demand for the new
formulation.
Why do the two analytic approaches lead to different
conclusions? Which analysis should guide the deci-
sion-maker? The aggregate analysis of the taste test
is misleading. It gives equal weight to the taste
preferences of the present users and non-users.
However, even though the non-users have a relatively
high probability of liking the new formulation once
they try it. they have a low probability of trying the
brand and thus their actual impact on demand for
the old or new formulation is greatly limited. Of course,
mangement could try to raise this trial rate by promo-
tions and advertising. In any case, the decision tree
287
approach is needed to weight correctly the combined
effects of trial and liking by the users and non-users
on the total demand estimates.
Equally dramatic differences between a naive
aggregate interpretation and the decision tree inter-
pretation could have been obtained by many combina-
tions of factors. In the example the taste preferences
for the two groups differed greatly. Less extreme taste
differences coupled with lower non-user trial and/or
a lower percentage of users in the sample could have
generated similar results. The decision tree approach
or "model" is really nothing more than an accounting
equation. Nevertheless, the striking numerical exam-
ple presented, combined with the fact that many other
plausible combinations of factors can produce similarly
misleading aggregate results, implies that all of these
factors should be considered and estimated explicitly
before a reformulation decision is made.
IMPLICATIONS FOR RESEARCH
Marketing research commonly is used to develop
estimates of the probabilities of trial or liking of new
and current formulations. The decision tree analysis
points out the following fundamental issues which
should be considered in the design and interpretation
of tests.
Sampling
In any tests designed to estimate trial or liking
probabilities, it is essential that these probabilities be
estimated separately for the current users and non-
users. This statement implies that current brand users
and target non-users must be defined and identified
in the sample selection process, and that the sampling
procedure must be adjusted so that each group is
"represented" adequately.
In many cases a random sample of respondents
selected from the total target market would not provide
adequate samples for estimating the probabilities for
both the current users and the non-users separately.
For example, if the current brand has a low usage
incidence (i.e. small market share), a random sample
selected from the total market would result in only
a very small part of the sample being composed of
current users. And unless a very large total sample
were selected, it would be impossible to get a good
estimate of the probabilities for the current users
because they are not represented adequately in the
sample.
It should be pointed out that in many taste tests
users and non-users are not identified and only overall
probability estimates for the total sample are derived,
in the case of the very low incidence brand and a
typical random sample selection procedure, the overall
results of the taste test for all practical purposes
compare only the probabilities that current non-users
will like the current formulation (P,,,) or the new
formulation (Qn,). Similarly, if the current brand has
 288
a large share of its target market and a random sample
is chosen, the probabilities of liking the current and
new formulations reflect mainly those of the current
users (P^,and Q,,,) in the typical taste test. In general,
therefore, if the taste test does not identify users and
non-users of the current formulation, the results in-
clude an unknown weighting of the probability that
users like the old formulation (P^,) and the probability
that non-users like the old formulation (P^,) versus
the probabilities that users and non-users like the new
formulation {Q„, and (?„,, respectively). Obviously,
such results are not very useful and may even be
very misleading as shown by the numerical example.
The practical problem in sampling for a low inci-
dence brand is that current users are difficult and
expensive to find. Therefore, budget considerations
may preclude having enough users in the sample. In
contrast, the choice of strong markets as test areas
or "convenience" samples (employees) is likely to
bias the sample in the direction of current users. These
sample selection practices can be extremely mislead-
ing.
Thus, the question arises of whether the cost of
getting better estimates (through research and proper
sampling procedures) of the trial and/or liking proba-
bilities for the current users is worthwhile when the
number of current users is very small. The answer
depends on the sensitivity of the market size estimates
(M^^^, and M,,,^) to the probability estimates. This
can be examined by using optimistic and pessimistic
estimates of the market sizes in the decision tree
formulae.
Test Under Simulated Market Conditions
As was discussed, the decision as to whether or
not to announce the formulation change explicitly
probably will affect both current users and non-users.
If no announcement of a change is made, the effect
of any advertising on trial is the same for the current
and new formulations. However, if an explicit an-
nouncement of the formulation change is made, one
would expect the trial rate by current non-users (Q,,,)
to be higher than with an unannounced change. And
the degree to which the announcement affects trial
will depend largely on the advertising budget and effort
behind the announcement. Thus, it is essential that
research done to provide estimates of the probability
of trial for the new formulation by non-users ((?„,)
incorporate the effect of the marketing budget that
will be used to induce trial.
Because it is also probable that explicit announce-
ment of the change will affect the degree to which
a new formulation is liked, especially by present users,
it is important that the conditions under which prefer-
ence is tested (e.g., taste tests) reflect the communi-
cation that will accompany the introduction of a new
formulation. Also, if the possible effect on preference
of communicating the change is unknown, it might
JOURNAL OF AAARKETING RESEARCH, AUGUST 1976
be useful to experiment with this variable in the taste
tests in order to measure its influence.
CONCLUSION
A decision tree approach is described for estimating
the market sizes for current and new formulations
of a product. For clear estimates of demand, the
probabilities of trying and liking the formulations must
be determined separately for current users and non-
users. A typical situation for a brand with strong loyalty
among its current user group (even if the group is
very small) might be that the probability of their trying
the current formulation iP^,) is essentially 1.0, but
the probability of their liking the new product formula-
tion (Q^,) most likely will be lower. Will the trial
rate ((?„,) and liking (Q„,) of the new formulation
among the current non-users make up for this loss
of loyal current users? An answer can be obtained
only if separate estimates for the current users and
non-users are determined.
The decision tree analysis also suggests the following
guidelines for designing and interpreting research un-
dertaken to estimate trial and liking probabilities for
the formulations.
1. Current users and non-users must be defined and
quantified.
2. Sampling procedures should provide enough current
users and non-users in the sample to allow reasonable
estimates to be made for each segment separately.
3. Estimates of each segment's probability of trying the
new formulation should incorporate the influence of
the strategy that will be used lo introduce il, i.e.,
whether or not the formulation change will be an-
nounced explicity and tbe level of advertising.
4. Research done to estimate the probabilities of liking
the current and new formulations should consider
explicitly the effect of the formulation change being
announced or unannounced.
5. The decision tree approach facilitates analysis of the
sensitivity of market size estimates to probability
estimates, thereby providing a vehicle for evaluating
whether the cost of doing research to get better trial
and/or liking probability estimates is worthwhile.
Whether they involve changing the ingredients in
a food product, or changing a package design, or
changing some of the chapters in a new edition of
a book, formulation change situations are similar from
an analytical standpoint. They require that the effect
on buyer behavior for both the current brand and
the new formulation be forecast so that the decision-
maker can evaluate which alternative best meets his
selection criteria. They also provide opportunities for
consumer research such as taste tests, which if prop-
erly designed and interpreted contribute valuable in-
formation concerning the probable acceptance and
success of the alternative formulations. The decision
tree approach presented herein provides a helpful
framework for both these tasks of testing and fore-
casting.