David Soulsby, Global Director, Innovation and Product Development, at TNS, explains why the new paradigm for businesses is not how to predict sales, but how to forecast incremental growth.
If you look at the new products introduced into your local supermarket, you will find the vast majority are line extensions - 'orange flavoured', 'new easy to close pack', 'with added vitamins'. Meanwhile truly innovative, game-changing new products are few and far between.
The problem may seem to stem from a lack of imagination, but it actually lies with the screening and identification process used to find and vet new ideas. In the search for 'bigger innovation', manufacturers cling to predicted sales as the key screening criteria, but this approach ignores two major risks.
Brands eating themselves alive
First, the value-destroying menace of cannibalisation. The crucial question is not whether an individual product will sell, but whether the product will deliver 'incremental growth': that is, growth that adds value to the overall corporate portfolio. Shareholders will give you no thanks for launching a product that attracts most of its volume by poaching customers away from the existing franchise, particularly given new introductions typically deliver lower margins than existing products.
For example, a few years ago Kodak introduced Kodak 'Funtime' film to extend the brand, but many buyers were already Kodak customers who simply saw the new product as a Kodak film at a lower price. The launch of this product therefore resulted in the worst kind of cannibalisation where revenue per unit declined - likely a major factor why it was taken off the market within a matter of months.
Throwing the baby out with the bathwater
The second issue with traditional screening methods is that genuinely innovative ideas are often axed prematurely or labelled a 'lost cause' based on crude early estimates of potential. Our research has found that one in eight of the ideas normally dismissed using these screening techniques should have been kept and nurtured as offering higher growth potential than the perceived 'safer bet' of a close-in line extension.
Marketers must develop a balanced innovation pipeline and adopt a more holistic and long-term approach based on how much volume and profit a new product will add to the parent brand or overall business, rather than focusing on new product sales potential alone. How many potential Red Bulls or Swiffers have perished at the hands of a blunt screening process before they had a chance to flourish?
A new approach
So, the important question for marketers should be how good are my forecasts of incremental potential?
Predicting where sales will come from has historically been difficult to forecast accurately. This is primarily because traditional aggregate modelling gives all respondents equal weight and takes an average of their response. This approach does not reflect reality: for example, where heavy buyers will steal sales from has a much greater impact than switching by light buyers.
The key to accuracy is to model consumer behaviour at an individual level. The more brands understand their target consumers the better they can predict how much 'expected value' each consumer will provide. They can then work up from this to forecast how much incremental value the product as a whole will generate.
An analysis of a number of new products recently launched across Europe demonstrated how much more accurate an individual approach can be compared to traditional sales forecasts - the risk of error can be halved, allowing for much more reliable business planning.
Backing the right horse
Launching a new product will always be a risky business, but it is an essential one for companies looking to grow. Currently businesses are wasting millions of dollars by launching unimaginative line-extensions while throwing potentially stronger growth opportunities on the scrap-heap.
It is a mistake to automatically assume line-extensions are a 'safer bet' than bold new ideas. What really matters is having an accurate way to identify incremental potential early in the process so precious development resources can be focussed on bringing the 'growth winners' to market.
Without that insight, cannibalistic line extensions will continue to dominate the market while many brilliant new ideas are likely to be abandoned before they get anywhere near the supermarket shelves.