Financial Forecasts in New Product Decisions

How important are the financials in the overall New Product decision?

A financial forecast model for new products is simply one of the areas of evaluation for the go/no-go decision on whether or not to develop the product and take it to market.

If you are currently studying new product marketing, or are actively involved in the product development field in the real world, then you would know that there are multiple key areas of new product evaluation that need to be considered.

Sometimes these are incorporated into a scoring model, which helps balance the array of factors considered so that the overall decision does not get overtaken by financial considerations only.

What are the main evaluation areas for a new product?

With my marketing students, I use the simple acronym of MOST $’s to communicate the five main areas of new product evaluation. As you can probably guess, the $ symbol represents the financial area of evaluation – but it is only one of five top areas, with the other four being:

  • M = Marketing ability
  • O = Opportunity cost
  • S = Strategic fit
  • T = Technical ability

Let’s expand on each key factor…

M = Marketing ability

Brand equity, access to retailers/distribution, existing customer loyalty to the brand, sales team coverage and motivation, ownership of direct or online channels, marketing expertise, the degree of consumer switching behavior, and so on.

As this is the Marketing Study Guide, I will delve into this aspect in more deep than the others. For marketing ability we need to consider the following:

  • Brand equity is the value derived from consumer perception of the brand name of a particular product or service, as opposed to its generic equivalent. A strong brand can command higher prices and consumer loyalty, reducing the risk associated with a new product launch.
  • For many physical products, having strong relationships with retailers and an effective distribution network is critical for product accessibility to the target market.
  • Degree of customer loyalty, as existing customers who trust a brand are more likely to try a new product from the brand. These customers can also become advocates for the product, providing free word-of-mouth advertising.
  • A motivated, knowledgeable, and well-connected sales team can accelerate product adoption significantly. The sales team’s relationships, expertise, and motivation can directly influence the product’s market penetration rate.
  • Owning direct or online channels can allow a brand to control the consumer’s purchase experience. This can improve customer satisfaction, increase margins, and provide valuable customer data.
  • A strong marketing team and expertise and an understanding of the target audience, the competitive landscape, and the most effective marketing channels and messages is key to creating product awareness and interest.
  • The extent of consumer switching behavior = the consumers’ willingness to switch from their current product to a new product is crucial. Market research can provide insights into the barriers to switching and the incentives that might persuade consumers to change.

O = Opportunity cost

What other marketing opportunities are currently available to the organization which may provide a better return or strategic fit?

Opportunity cost refers to the potential benefits that a company misses out on when choosing one alternative over another.

For a new product, it could be other product ideas that are put on hold, or other investments (like marketing campaigns or research and development for existing products) that could have driven more growth or profits.

By evaluating the opportunity cost, a company can ensure that it’s allocating its resources in the most effective way.

S = Strategic fit

How well does this new product fit with the firm’s overall strategic direction and plans for expansion and/or its competitive position?

Strategic fit refers to how well a new product aligns with the company’s strategic goals and capabilities.

A good strategic fit for a new product might mean that it leverages the company’s core competencies, enhances its competitive positioning, fits within its brand portfolio, caters to its target market, or aligns with its growth and profitability goals.

If a product doesn’t fit well strategically, it could dilute the brand, confuse customers, or divert resources from more strategically important initiatives.

T = Technical ability

Does the firm have the ability to develop, manufacture and logistically distribute a superior or differentiated product at a “reasonable” cost?

Technical ability refers to the company’s capability to design, produce, and distribute a new product. It includes the company’s technological capabilities, manufacturing capacities, quality control systems, supply chain efficiency, and after-sales service infrastructure.

If the company can’t produce the product to the desired quality standards, meet the market demand, or provide necessary after-sales service, the new product could harm the company’s reputation and financial performance, even if it’s a great product concept.

The importance of financial evaluation will vary

While financial evaluation is one of five top level areas of evaluation, it does not simply mean that each area is worth 20% of the total evaluation – it will vary by firm and new product and competitive situation.

When is financial evaluation less important?

For example, if the firm is in a competitive battle and wants to defend its market share and/or match its competitive offerings – then the degree of financial return of a new product becomes less important.

For another example, if a firm has built its competitive positioning around “good value” then they may be willing to bring a new product to market that has limited financial potential so long as it supports its overall positioning.

And for another example of where overall financial return may be less important – when the product is important in retaining customer loyalty and share of customer performance.

When is financial evaluation more important?

Clearly for those firms/brands interested in maximizing its profitability – perhaps through leveraging its customer base and/or its brand equity – then they will often be primarily interested in the financial return of the new product.

This is also the case for firms/brands that have multiple potential new products that they can bring to market – so they may be more inclined to consider the financial return to help them choose between these opportunities.

Certainly when the new product investment is significant in terms of the upfront cost, the financial considerations and evaluation needs to demonstrate that there is a good chance of pay-back within a reasonable short time.

And generally financial evaluation of new products is more important for smaller firms/brands that do not have the financial capacity to support products for strategic or competitive reasons.

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