October 19, 2011

Death Spiral: New Products

If you read Twitter or Trade Journals or Leading Bloggers, you read a lot of content about how to engage customers, how to use technology to grow sales (mobile, social, ecommerce), you know, all of the stuff that you've all tried over the past fifteen years.  Hopefully, sales increased at a rate faster than inflation.

Now, this may come as a surprise to some of you.  I hope you are sitting, because I am about to share something interesting with you.


When a customer buys from your business, what is the customer buying?
  • Answer:  Merchandise (for some, Services)!
That's right, the customer is buying merchandise.

So wouldn't it make sense if we take a little of the time we spend analyzing customers, and reallocate it, focusing instead on merchandise?

It turns out that new products are critically, critically important to most of our businesses.

Businesses in a Death Spiral sometimes fail to invest in new products.

So, if you suspect that your business is not investing in new products, run a little five year simulation, analyzing how products evolve and change over time.  Here's an example:


Merchandise Productivity Forecast










Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
New F 261 261 261 261 261 261
New D 810 810 810 810 810 810
New C 1,371 1,371 1,371 1,371 1,371 1,371
New B 1,248 1,248 1,248 1,248 1,248 1,248
New A 174 174 174 174 174 174
LY F 795 261 261 261 261 261
LY D 873 810 810 810 810 810
LY C 1,161 1,371 1,371 1,371 1,371 1,371
LY B 1,257 1,248 1,248 1,248 1,248 1,248
LY A 168 174 174 174 174 174
Existing F 999 1,626 1,697 1,626 1,604 1,596
Existing D 555 939 851 836 833 832
Existing C 789 936 730 705 700 698
Existing B 909 819 690 660 653 650
Existing A 354 312 282 262 250 243
Items 11,724 12,360 11,979 11,818 11,767 11,746
Demand $107,436,827 $99,760,685 $95,912,962 $93,673,513 $92,400,613 $91,694,053
$/Item $9,164 $8,071 $8,007 $7,926 $7,853 $7,806
Item Chg.
5.4% -3.1% -1.3% -0.4% -0.2%
Demand Chg.
-7.1% -3.9% -2.3% -1.4% -0.8%
$/Item Chg.
-11.9% -0.8% -1.0% -0.9% -0.6%

I like to look at brand new products, products introduced last year, and products introduced prior to last year.  Then I grade each product ... A/B/C/D/F ... just like when you were in school, based on sales levels (high sales per item to low sales per item).


Many companies have a challenging sales hurdle for new items to overcome ... the new item has to achieve a certain level of sales, or it will be discontinued.  As a result, if a company develops 100 new items per year, only a handful will achieve high sales potential.


Now, if you kill new product development, then you're stuck in a situation where you'll kill the number of successful products in future years.


In the above example, sales are forecast to decrease, all things being equal, because there aren't enough new products in the product pipeline.


Here's a scenario where new product development is increased by 20%.



Merchandise Productivity Forecast










Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
New F 261 313 313 313 313 313
New D 810 972 972 972 972 972
New C 1,371 1,645 1,645 1,645 1,645 1,645
New B 1,248 1,498 1,498 1,498 1,498 1,498
New A 174 209 209 209 209 209
LY F 795 261 313 313 313 313
LY D 873 810 972 972 972 972
LY C 1,161 1,371 1,645 1,645 1,645 1,645
LY B 1,257 1,248 1,498 1,498 1,498 1,498
LY A 168 174 209 209 209 209
Existing F 999 1,626 1,697 1,843 1,894 1,904
Existing D 555 939 851 985 995 996
Existing C 789 936 730 821 833 835
Existing B 909 819 690 758 773 776
Existing A 354 312 282 277 278 279
Items 11,724 13,133 13,524 13,958 14,046 14,064
Demand $107,436,827 $108,098,217 $108,277,042 $108,442,216 $108,657,216 $108,805,629
$/Item $9,164 $8,231 $8,006 $7,769 $7,736 $7,737
Item Chg.
12.0% 3.0% 3.2% 0.6% 0.1%
Demand Chg.
0.6% 0.2% 0.2% 0.2% 0.1%
$/Item Chg.
-10.2% -2.7% -3.0% -0.4% 0.0%


Interesting, isn't it?


If this company increases new product development by 20%, then the business is able to stabilize at about $108 million per year.  This business has to add 700 new products per year, every year, for the next five years, in order to stabilize.


Also notice that in year five, there are 279 outstanding existing items in the new scenario, vs. 243 outstanding existing items in the current forecast.  In other words, we add 700 new items per year, every year, and after five years, only 36 items qualify for elite status.


Merchandise success is a lot like the NFL, where you draft seven players and you sign twenty free agents, and you end up with one Pro Bowl player among the twenty-seven candidates.


Businesses stuck in a Death Spiral frequently fail to invest in new products, causing long-term health problems that take even longer to overcome.

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