New Product Revenue
By Alex Anderson, contributing editor -- Manufacturing Business Technology, 6/1/2004 12:00:00 AM
The percentage of revenue derived from new products is a "fundamental measure of organic growth. It's also a measure of renewal and innovation, and relates to market leadership," says Mark Deck, lead director of product development practice at management consulting firm PRTM, Waltham, Mass.
Though this definition may seem straightforward, a number of complexities must be ironed out before this metric can be effective, including:
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When does a product stop being "new?" This varies from industry to industry based on product life cycles. Deck recommends using the total life cycle of a product as a guideline. Example: if the average life cycle is six years, then it should be considered new for three.
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What is counted as revenue? Is revenue restricted to product sales, or does it include auxiliary revenue such as related consulting or set-up charges?
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Are new products restricted to those that stem from organic growth? Conversely, is growth through acquisition and subsequent rebranding considered "new"?
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Do minor upgrades or new packaging constitute new products? This is probably not the case if the goal is to assess the strength of R&D spend, says Deck—but to be fair, if 25 percent of that spend is tied to reengineering and upgrades, then this must be considered in the calculation.
Once these factors are settled, calculating the figure requires adding up the revenue directly attributed to products that weren't offered prior to a certain time, and determining what fraction of total revenue that is.
The key benefit in tracking this metric is internal, concludes Deck—e.g., showing R&D personnel their contribution to the bottom line. It fosters a fertile environment for new ideas and innovation, and it pays off with more creative, productive engineers; and more competitive products in the market.
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