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There are few marketing activities that are as difficult to manage as new product development. Not only does a company have to juggle multiple tasks like new features and innovative technologies against factors like cost, risk, and time to market, but it has to ensure that it’s making the most efficient use of its limited resources on new products that will meet both its short-term and long-term strategic goals. In this section, we’re going to review product development metrics that can measure the success or failure of your new product launch.
There are many numbers of metrics you can use to measure the success of a new product. For our purposes, we’re going to focus on just a few of the more common KPIs.
Research and Development Spending as a Percentage of Sales: This metric is used to compare the effectiveness of R&D expenditures between companies in the same industry. It’s important to use companies within the same industry because R&D numbers vary widely based upon the industry.
EXAMPLE
Pharmaceutical and software companies tend to spend considerable dollars on R&D, whereas consumer product companies generally spend less. The percentage is calculated as R&D dollars spent divided by total sales.Current Year Percentage of Sales: This method calculates cost of goods sold, inventory, cash, and other financial line items as a percentage of sales and then applies that percentage to future sales estimates. It’s a “quick and dirty” way to estimate the product’s future value.
Time to Value (TTV): Time to value refers to how long it takes new users to recognize your product’s value (sometimes referred to as the “aha!” moment in marketing). Obviously, the sooner this occurs, the better, although time to value varies widely depending upon the product itself.
EXAMPLE
If you purchase a new book for your Kindle, it’s a matter of seconds before the book is available to you. On the other hand, if you subscribe to a magazine, it may be days or weeks before you see your first issue.Product Adoption Rate: When launching a new product, this metric is almost always at or near the top of the product team’s list of KPIs to track. Product adoption (or user adoption) is the process by which people learn about a product and start using its features to meet their needs.
Return on Investment (ROI): This is a metric formula used to evaluate the profitability, or overall value, of an investment. In marketing, you can use ROI to measure the profitability of a new product launch.
Not all products are successful, and there are both risks and rewards when developing new products. You have probably heard the saying “No risk, no reward,” and nothing could be truer in terms of new product development. However, a company’s ability to maintain its competitive edge in the market requires a delicate balance between the necessity and the challenges of new product development.
IN CONTEXT
Instagram, the social networking platform that allows users to share photos and videos, was first released in October 2010, and it quickly racked up 25,000 users in one day. The company now boasts that it has more than 1 billion (that’s with a “b”) monthly active users. Instagram succeeded by introducing bold features in its platform, from video editing features to interactive features like face filters and polling. And, of course, we can’t talk about successful product launches without mentioning Apple, whose original iPhone was one of the most successful product launches in history—racking up 1 million units sold within just 74 days of its launch. Keeping the success of these products in mind, let’s look at the reasons why products succeed.
Targeting New Markets: New product development gives businesses the opportunity to expand into new markets, providing an opportunity to connect with different target markets. This creates the added benefit of growing their customer base. For example, research from the Centers for Disease Control and Prevention (CDC) indicated that Americans were reporting symptoms of anxiety and depression since COVID-19 came about, so PepsiCo launched two new drinks that claim to support relaxation—Driftwell and Soulboost.
Increasing Market Share: Think about market share as a pizza, where every company that participates in the market has a slice (obviously some slices are bigger than others). As the market grows, a company needs to expand with it in order to keep its share of that pizza, but it can also increase its market share—and take another slice or two of pizza—through new product development.
Increasing Revenue Stream: Revenue streams are all the ways a company can generate cash from the sale of its products or services. New products and/or services will create additional revenue streams that will generate extra income for the business, perhaps spurring even more new product development.
EXAMPLE
Apple generates revenue streams by developing new hardware products such as the Apple Watch and AirPods wireless headphones, and the company enjoys recurring revenues from services such as iCloud, Apple Music, and Apple TV+.Developing new products has many unforeseen issues and surprises, so it should come as no surprise to you that there are some significant risks associated with these efforts.
Lack of Differentiation: There can be many problems with the design of a product, including insufficient differentiation from competitors’ products. Perhaps the product or service did not solve enough problems or did not solve them sufficiently, or the product incompletely addresses the needs of the target market. For example, in 2021 Apple discontinued its HomePod smart speaker, which was not perceived as being sufficiently different from Amazon’s Echo despite offering high-quality music playback.
IN CONTEXT
New product development is expensive and can be financially risky for companies. It’s important that a financial feasibility study is conducted in the earliest stages of new product development to determine whether it’s worth launching the product or service in the context of sales and revenues. Financial feasibility is the primary reason why pharmaceutical companies typically don’t invest large amounts of money in developing a new drug if the market for the drug is small. Novartis was the exception to this rule. The company developed a drug that treats children under the age of two suffering from spinal muscular atrophy (SMA). According to the Cleveland Clinic, only 1 in 10,000 children suffer from this rare genetic mutation, but Novartis went ahead and developed the drug anyway. With a price tag of $2,125,000 for a one-dose treatment, it’s the most expensive drug the world has ever seen. You may be asking yourself, Is it worth it? Just ask the parents of a child suffering from SMA.
Technical feasibility studies are equally important as a financial feasibility study. Technical feasibility answers the questions: Does the organization have the technical resources to meet capacity? Can the technical team convert the idea into a working product or service? For example, while Taco Bell’s Doritos Loco Taco was in development, the team wasn’t sure it was technically possible to coat a taco shell with the iconic Doritos flavoring. Its research and development (R&D) department spent approximately two years developing over 40 prototype taco shells before it found the right combination of crunch, seasoning, and flavor.
Poor Timing: Author Joshua Harris once wrote, “The right thing at the wrong time is the wrong thing.” This couldn’t be truer when it comes to new product development. You may have developed the best product or service, but if it’s introduced to the market at the wrong time, it’s likely to fail. The product development process can take a year or longer and imagine the market changes that can take place during that time. A new competitor may enter the market before you do, consumer preferences and needs can change, legislative or environmental regulations can change, or the economy can go south before you’re ready to launch. The situation with in-home COVID-19 testing kits is a perfect example of poor timing. By the time the U.S. government made these kits widely available to the public, the need for these tests had greatly diminished because the majority of the population had already been vaccinated.
Source: THIS TUTORIAL HAS BEEN ADAPTED FROM OPEN STAX’S PRINCIPLES OF MARKETING COURSE. ACCESS FOR FREE AT https://openstax.org/details/books/principles-marketing. LICENSE: CREATIVE COMMONS ATTRIBUTION 4.0 INTERNATIONAL.
