One thing that every business has in common is the need to make money. The thing that every company making physical products has in common is that they need to make money by selling their product with traditionally little opportunity for recurring revenue. Non-standard business models have emerged with hardware-as-a-service (Citi Bike, Zoom Hardware), replacement model (pioneered by Gillette), hardware with a software-as-a-service platform required to use the thing (Pelaton, Playstation Plus), and several others. The majority of brands however, don't have this sort of opportunity.
The only exception is brands launching single use CPG products or convenience products. These companies have somewhat of an opportunity for recurring revenue just by their single-use nature. Even still, convenience and other more traditional product brands in the shopping and specialty categories don't always have the luxury of their products naturally encouraging continuous customer engagement.
Therefore, in order to maximize revenue for a given customer, brands in non recurring revenue categories are forced to frequently launch new products - thus boosting customer engagement and maximizing the customer lifetime value (CLV). In fact, as companies grow and their customer base expands, they must launch more and more products in order to continue to sufficiently engage a growing market.
Effective new product introduction (NPI) is critical for the success of a brand. Read this article for more information on what NPI is and how it fits into the broader product development lifecycle. New products keep customers engaged and enable new revenue streams for your business. As brands grow, it becomes more and more important to launch more products at a higher frequency. Therefore, gaining an understanding of what makes a successful NPI only becomes more important throughout the lifetime of the company.
In order to understand what leads to positive outcomes, companies must be able to quantify and measure NPI success. The success of an NPI is dependent on two things:
- The NPI plan
- The execution of the NPI plan
In this scenario, the NPI plan is what determines the upper limit of how much profit a business can make off a particular product launch. In this way, a perfect or ideal NPI is when a NPI plan is executed to perfection and the business earns all the profit that it's theoretically expected to earn. In reality this is an incomplete picture of the success of an NPI. It's next to impossible to accurately determine how much money the best possible NPI plan for a given product could make. Therefore, we choose to evaluate the success of a NPI relative to what a business can reasonably expect to make. We define NPI success (S) with the following relationship,
where $S$ is success of an NPI, $R$ is product revenue, $V$ is variable expenses, and $F$ is fixed expenses. This relationship tells us that the success of a new product introduction is determined by how much profit a company captures from a product launch vs. how much profit could have been captured in an ideal scenario. In an ideal scenario, the NPI plan is perfectly executed and variable expenses are eliminated. In this definition, variable expenses include all costs related to plan execution (labor costs, travel, any costs due to errors in execution, etc.) and fixed expenses include everything associated with the plan (manufacturing fees, logistics contracts, marketing spend, etc.). In this way, the ideal profit comes about when variable costs are completely eliminated.
In reality, variable costs cannot be completely eliminated. You can't escape challenges outside of your control (like global pandemics). Therefore, companies should not aim immediately to perfect their NPI execution, but instead should shoot to steadily improve the success of their NPI and overtime get closer to reaching their money making potential.