Learnings from the risky world of NPDs

Independent marketing analyst and modeller Tom Harper looks at the pitfalls of new product development (NPD) and how to successfully execute brand extensions without cannibalising the original SKU and advises on the time a new brand really takes to bed in

You’ve launched your new product, or your new 0.0 line extension and you want to know if it’s a success (or failure). You could do this by checking that the SKU (stock keeping unit) or range of SKUs has hit their sales or share targets. This approach, however, can be misleading. Internally set targets can be arbitrary and often emotionally charged. The best-in-class way to see if your NPD/line extension is successful is to measure whether these SKUs have added incremental sales to the brand portfolio.
Before we start, some definitions may prove useful. Strictly speaking, an NPD is so different and new it doesn’t have a “portfolio” attached to it. A recent example is Island’s Edge, (now discontinued), a stout launched by a lager company. For these pure NPDs (I should say pure-ish, a stout is still a beer, so not completely “new”), the measurement analysis below needs to be changed to account for the fact that there is no core brand to consider. The following recommendations for early launch management, however, still apply. The majority of new launches each year are largely what can be defined as “line extensions” – new flavour variants, 0.0 alcohol, and even packaging improvements. For simplicity, we will refer to these as NPDs. NPD is risky business.

A study by Nielsen in the UK found that 65% of new brands experienced declining sales in their second year in market. A longer-term study by Fortune magazine found that 85% of Fortune 500 brands that existed 60 years ago no longer exist today. Anyone remember Guiness Light?
For the brave manufacturer entering this world of high failure rates, can we learn from studying previous NPDs that have either blossomed or failed?

Learning 1: NPD time frame

This is the most important (but mostly non-followed learning) – NPD must be considered new for at least three years. One year time frames don’t work. Time is needed to make consumers aware of the brand’s benefits and how it differs from its competitors. After this, repeat purchase is the key to success. As Barron Sharp has shown in his seminal work, “How Brands Grow”, most of a brand’s sales are made by infrequent purchasers of the brand – people buying the brand once or twice a year. This can be as high as 70% to 80% of total sales. A new brand must get its message out for long enough to nudge a big enough number of consumers into the infrequent repeat purchase cycle. This all takes time, and companies should plan on at least a two-year time frame in terms of support (advertising) budgets. Year three should be utilised for analysis and decision-making for the NPD. The tendency to launch and leave is a well-worn path. After all the money invested in developing the NPD, the brand deserves the follow-up investment to see it through the crucial three-year window.

Be portfolio clever

For line extensions and other NPDs within a portfolio, be aware of, and utilise as much as possible, the portfolio’s carry-over effects. In advertising this is known as “halo.” Halo occurs when an ad for variant A generates a sale for variant B. A consumer sees an ad for full-strength lager and then buys the 0.0 variant. One of the pitfalls in supporting NPDs is the tendency to take advertising spend away from the core brand to support the NPD. This should never happen. Don’t neglect the core brand, it has the highest level of sales, the best advertising responsiveness, and the highest media ROIs. Finding ways to lay down ad spend for the core brand and the NPD while using the halo effect in the process can optimise media budget spend to an acceptable level.

Be honest in measuring success or failure

The sole goal of an NPD and line extensions is to make money. For a pure NPD, the goal is to make an acceptable profit within a deliverable time frame. The goal for line extensions is to add incremental sales to the brand’s portfolio. For example, in the case of a 0.0 launch, the goal is to generate incremental new sales and to minimise cannibalisation of the full-strength core brand. Charts One and Two illustrate the difference between success and failure of a 0.0 launch.
Chart One: After three years in market, the 0.0 variant has added new sales to the still growing core brand while not cannibalising the core. It is even taking sales from competitive bands with total portfolio A sales up 15% over three years.

Chart Two: After three years in market, this 0.0 variant has added some incrementality, but mostly at the expense of the core brand growth and nothing from competitors. Portfolios B sales are up only 5% over three years.
Analysis such as Chart One and Two involves an investment of time and money. However, this will set the course for the portfolio, help the decision process for the new variant and provide complete accountability – also helpful to your next new product launch. This level of analysis helps quantify the non-monetary justifications for some NPDs. For example, “we need to have a 0.0 because all our competitors are doing it.” If the 0.0 is not adding positive net incrementality, it’s not working for that brand portfolio. That makes it hard to argue that it is just “the cost of doing business”.

Stick to the brilliant basics

• For all FMCG brands distribution is king. Never start advertising a new product until it has at least 75% weighted in-store distribution.
• Launch brands during the category’s seasonal peak sales period.
• Set internal early weekly sales targets to value velocity (how quickly the brand is moving off the shelf based on points of distribution). After six months a 30-40% NPD to core value velocity is an encouraging number.
• Utilised halo as outlined above.
• Support NPD brands with a “tagging” advertising strategy when budgets are tight.
Decision time
At some point internal management will want to know if you should re-promote or delist the NPD. This is likely to happen well before a 3-year time frame mentioned above and there are value indicators that can be used to help with this decision, for example, the value velocity indicators and sales incrementality measures. These can be used to make the call:
– Delist the dogs.
– Balance investment budgets for the questions marks.
– Reward the stars with their own dedicated advertising budget.
But it is important to set realistic business expectations, NPD is a tough game.