What Percentage of Sales Should New Product Launches From the Last 3 Years Represent?
Are you achieving more than 30% of sales from new products launched in the previous three years? If so, congratulations. Your company is demonstrating its commitment to innovation and launching new products.
But if less than 30% of your sales is coming from new product launches, your company may be in jeopardy of becoming an irrelevant in your market. This is especially true for tech companies, but even slower moving commodity companies need to innovate and stay ahead of the pack else find themselves out of date and replaced by new innovators.
According to a study conducted by Cooper & Edgett, “Benchmarking Best Practices Performance Results and the Role of Senior Management:” the top 20% (the “best”) of business researched in the survey achieved on average 38% of revenues from their from the most recent 3 years from new products, while the rest on average achieved 27%. The profit contribution from new products breaks down to be 42.4% of profits for the top 20% best performers vs. 28.4% for the rest.
How many companies can you think of that chose not to innovate and launch new products that are still in business today? I am sure this isn’t your case, but maybe your company is still falling behind and sales are flat or declining. Perhaps you are struggling with a strategy to break out of your product doldrums (i.e. no significant new product launches in the past three years) and return to the glory days of launching innovative new products. But how?
First thing you must do is to define specific goals and objectives your company is committed to achieving, and then measure and monitor it. Innovating and launching new products is like any business process, what gets measured gets done. If you don’t have specific goals and measurements in place, then no strategy will deliver results since strategy is the means of achieving specific objectives. No objectives, then no point in having a strategy.
30% of revenues from new products launched in the past 3 years is a great goal to shoot for, it’s very achievable and puts you into “best in class” category. Of course you will also need to define your overall growth objective as well. New product introductions is one of several levers a company can use to achieve growth. What you are committing to is 30% or more of future growth will come from innovation and new products.
Next question you need to answer is “what exactly is a new product and how will we measure it against your objectives?” This seems pretty straight forward, but it can be tricky if we have no definition of what we consider “new.” At one extreme, a company can bet all their future growth on a single home run product only to discover they missed the market and have little to show for the investment (for example the Segway). Yes this does happen, and there are ways to reduce risk including having an integrated and flexible product development system that incorporates real customers to validate assumptions early, often and cheaply.
The other extreme is to rely on simple repackaging expecting that will keep you ahead of the back over the long-haul (example Kodak). There is nothing wrong with repackaging, but don’t delude yourself into thinking repackaging is a substitute for innovating. Repackaging is a great short-term way to increase sales, but it does not yield the long-term benefits of launching new and innovative products and services.
Should a repackaged product be considered as part of the revenues from new products? I am not going to say no or yes, but rather advise you to make a conscious decision as to what types of new product development projects make up your product development portfolio, with the goal of creating a balance between risk and reward. That balance is a strategic decision you need to make up front, and monitor it and adjust the balance like you would do in your personal investment portfolio.
So what exactly the definition of a new product? Is there more than one definition? Which definition or definitions should you use to define your NPD portfolio strategy? Here’s one definition
A new product can be defined as a product or service that is “perceived’ by some potential customers as new.
So does that mean repositioning a product into a new market is a new product? Yes that’s a possible interpretation and perhaps a good and efficient strategy for your company to address your revenue gap. Launching a new product encompasses many activities including the actual development of a good or service, communicating the product’s promise to the potential customers, and delivering the product profitably to the customer.
There are several models that define what a new product is, the Product Market Matrix is one that I find useful and looks something like this:
You can use the product market matrix to define the strategic buckets that will provide you a good balance between risk and reward. You can adjust your portfolio balance as required. The better you become at launching innovative new products, the more weight you can apply to the diversification bucket.
Chose a portfolio strategy that address near, mid and long term opportunities. Product line extensions won’t keep pace with innovation and will eventually result in a decline of sales as competitors race ahead. Consumers will only stick with you for so long, eventually their loyalty will wear thin when they discover a newer, better and “slicker” product alternative (example: the iPhone vs. the rest.)
Bottom line: New product development objectives need to be an explicit part of your business goals. You need to measure and monitor your NPD performance while striking a balance between risk and reward.
Stay balanced and grow effectively!