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.