Sustainable Growth For New Product Development
There is a lot to be said for being a true market innovator, especially when you consider that agile product development of consumer goods generates proven growth results. It doesn’t stop there. Innovation creates long term value for shareholders and positive cultural change for any organisation. However, the cost of innovation, in particular, the table stakes and risk of failure are big barriers that come from the way consumer goods innovation has been approached for decades.
Innovation By The Numbers
A typical FMCG company invests 3% of turnover on innovation – based on UK government published R&D tax credit data.
Companies can reasonably expect a return of 7% of their category value share from innovation. This generates a theoretical ROI of 233% – This headline figure is certainly impressive but it masks all kinds of issues and more importantly, it can be significantly improved.
New product releases in CPG fail 9 times out of 10!
A 90% failure of newly released products generates enormous waste. We have calculated that companies waste 2.7% of turnover due to innovation failure (failure rate of 90% and the cost of innovation being 3% of turnover). This equates to between £4.5m – £6.9m in failed innovation investment every year for a typical large enterprise.
To put it another way: 3% of turnover is funding the 10% of innovation that is actually successful. It is that 10% of successful launches that drive the 7% of category contribution. The consumer goods industry today accepts this model as standard practice, yet frankly, it is unsustainable and when compared to other sectors is somewhat embarrassing.
Eliminate the astonishingly high failure rate of current innovation. You will increase your net ROI by a huge factor of ten!
The road to innovation failure is paved with good intentions. Biased consumer ‘truths’ and the whim of confident, charismatic leaders who often work on a hunch are no basis for success. In our experience, the most common ethos for FMCG innovation when lacking an explicit consumer need is “build it and they will come”. As we know, nine times out of ten, nobody shows up.
Now, take a step back. Ask yourself “could we improve?”
With 3% of turnover being invested in innovation, delivering a 7% contribution from the 10% of new products being successful (the inverse of the 90% failure) Changing the 10% success rate to 15% increases the innovation revenue contribution to 10% and the ROI leaps from 233% to 500%.
How can you change your failure rates?
In our experience investing in innovation that delivers less risky, higher return routes to growth are possible. After all, we achieve this with clients every day. But just look at how diverse industries go about innovation and importantly, their results, You’ll see that many have far lower failure rates. More interestingly, many of those used to have rates as high or higher than FMCG and CPG experience today.
Take, for example, the technology sector which used to have a 90+ % failure rate too. They relied on the “waterfall” method to develop new products. Using a stage-gate approach, building features and marketing. Only then did they actually sell the end product, Sound familiar?
Why wait until the end of a project to find out if consumers actually want to buy what you made?
Innovation in technology was about getting it made and to market, not whether or not it should be made in the first place. In the early 2000s after many catastrophic failures, the approach had to change. Innovators such as Eric Ries and his peers sought to challenge accepted norms. The crippling 90% failure rate was exposed, as was the process that created it. Instead, they developed ways to determine “Can we sell this and if so, can we build it?”
This radical approach dramatically changed the technology sector, helping lower innovation failure rates to below 50%. Not only did it reduce the failure rate, but it drove up the efficiency of innovation too. Investment only goes into NPD that can prove viability with consumers. Success rates increase and consumers get what they want.
There is absolutely no reason why you should accept atrocious failure rates.
By adopting Agile product development, and combining this with leading-edge consumer behavior testing, you can deliver real change financially and culturally in your business.
Our proven approach is to make innovation outcomes better for consumers, which has the benefit of generating more products, that carry less risk, at a lower cost. Using repeatable, verifiable, and frequent consumer micro-tests, you can affordably prove or disprove the viability of your product proposals. Working this way you refine your ideas, reduce cost, risk and make better products, faster.
We know Agile.
At Vypr, using a simple set of tools designed to complement your existing systems, we help you ‘sell’ by presenting and validating ideas, concepts, and models at every development stage with consumers. Using the results, you iterate, select or reject proposals until you have a proven winner. Only then do you commit to making product, marketing and sales investments. We achieve this in the Virtual Lab that is Vypr – our consumer-facing app regularly enjoyed by over 50,000 UK consumers, with growing cohorts in France and Germany.