The success of a new product introduction is dictated by how completely a company or brand is able to capture its money making potential from a product launch. In this context, "money making potential" is a simplified look at the potential profit gain from a new product launch. We understand profit to ultimately be the continuous difference between top and bottom line revenue through time.
The success of a company is rooted in the long term behavior of revenue and expenses. For reliable growth, a company must invest in itself while maintaining profitability and healthy margins. That said, as companies grow over time, a virtually incalculable number of factors contribute to and collect from their cash reserves. Therefore, it's critical to limit the observation period of a products contribution to a company's revenue and expenses in order to conclude how successful it was as an NPI.
When evaluating the success of an NPI, it is also important to understand when the actions taken by a business are relevant to the product launch, financially. This means that the only time relevant to this discussion is the period when money was spent on or earned by a product launch.
This window of time starts at the beginning of the product development lifecycle. We choose to start here because this is the first time that any business operation (and operational expense) can be tied to a product. Therefore, when evaluating the costs and earnings relevant to a new product and the time period during which these costs and earnings occur, we start with the first hours of product development.
Where we conclude our observation window is decidedly less concrete. As mentioned previously, our purposes in defining a time window of relevancy is to constrain the lens through which we view NPI success in such a way that its contributions to a business's profit are measurable. When considering expenses, it's relatively straightforward to determine when the business is spending money on the introduction of a new product. Conversely, when considering revenue created from a product launch, the point at which product revenue is no longer the result of a product launch is much less acutely defined. Furthermore, there is a serious variation in the relationship between product launch and revenue generated from product sales across industry vertical, distribution strategy, customer segment, etc. Therefore, in order to make this framework scalable to varying businesses, we must make assumptions of the behavior of product sales volume over time, immediately following the launch of a new product.
In response to this, we establish the notion that a typical sales volume vs. time relationship behaves in the following way, where the origin is the launch of a product.
Leading up to a launch, businesses will build up sales and marketing material so that upon launching the product, sales will climb and plateau at a peak sales volume (PSV). The period of time during which product sales maintain this peak rate is known as the peak sales period (PSP). Remaining lifetime sales (RLS) is the period after product sales volume declines from its peak. RLS can behave any which way, whether that means an immediate decline to zero $/day or a relatively constant but slightly less than peak sales volume.
Regardless, we consider this to be a distinctly separate region that the first. RLS demands continuous replenishment and more standard supply chain management, an unmistakably different operational function than NPI. Conversely, the magnitude of peak sales volume and length of the peak sales period are directly related to the quality and thoroughness to which NPI is executed. For this reason, we conclude our time window of NPI success relevancy at the point that PSP transitions to RLS.
It is unlikely that sales following every product launch will adhere exactly to the behavior described. That said, it is reasonable to imagine that for an established business with a reliable customer base, product launches are likely to be succeeded by a period of the highest sales during the market lifetime of the product. It is also reasonable to assume that the sales during the peak sales period are the direct result of operational efforts, executed during NPI.
Therefore, by containing our window of observation to the peak sales period, we effectively constrain the revenue used to calculate NPI success to the product sales caused by efforts which were executed during the NPI stage. In upcoming articles, we will examine what controllable factors affect expenses and sales during NPI and what actions can be taken to optimize those factors to maximize profit.