Most new product programs do not deliver the results that are hoped for by the organization. Most consumer product categories in the developed world are stagnant and marked with intense competition just to hold share position. In a recent survey, conducted by Grocery Manufacturers of America (GMA) and Accenture, only 36% of consumer product goods (CPG) companies believed they have a holistic and effective approach to new product development and introduction (from innovation to end of life). Yet these executives know that the future of their companies will be tied to their ability to innovate to grow segments as well as steal share from competitors.
Much of the focus of new product development programs, therefore, is on top-line growth and finding strong product ideas to put into the development funnel. Marketers know that New Products is a numbers game –- many ideas will be hatched, few will make it to launch. The focus is often turned to the quality of the new products process, strategy behind the ideas, and precision of execution. There is, however, an even bigger factor that will determine the overall success of a new product process.
Replacement Profitability
“Replacement Profitability” is the level of profitability of a new product compared to the item it will replace in the existing portfolio. Most new products have a strong cannibalistic affect on items in the line. Often, profitable base items in the line are declining and new products must be introduced to keep sales strong. While the net effect of new products to the company can be growth, new products often rely on new technology, higher costs of goods and generally non-standard manufacturing. Pricing often cannot be taken too much higher or consumers will not adopt the new items. Replacement profitability is logical; however, once the development of a new product is well underway, the team’s excitement can rationalize away the costs that creep higher.
Deteriorating Profitability
In the illustration above, new products drive overall top-line sales while slightly lower margins on these new items lower profits for the company. The net effect is lowered dollar profits as margins begin to quickly shrink. New item must make equal or greater profit margins than the base item that are declining. (This illustration assumes that the base product profit margin remains constant, which is often not the case. Therefore, the overall profit picture worsens). Project leaders must ensure that items deliver strong profit margins at every check point of the development program. Innovation can grow a company profitably, or quietly eat away profitability and leave a company weaker, delivering less back to the bottom line.
