What Are Late New Product Launches Costing You?
Given the tremendous effort and resources a new product launch requires, product launch delays can cost an organization a significant percentage of its return on investment.
How much? Surprisingly, little previous research has attempted to estimate the economic consequences of postponed product launches, according to Vinod Singhal, Departmental Editor of Production and Operations Management at Georgia Institute of Technology, and Kevin Hendricks, operations management professor at the Wilfrid Laurier University. In their study, "The Effect of Product Introduction Delays on Operating Performance”, the two researchers analyzed the financial performance of over 450 publicly traded companies, across industries, that had experienced product launch delays between 1987 to 2003.
"We find that product introduction delays have a statistically significant negative effect on profitability," says Singhal. "The effect of the delay is negative regardless of when it occurred in the product development process or the time of year of the announcement."
Product introduction delays can have a number of negative consequences on revenues – from reducing the window of opportunity to generate revenues to causing the product to become obsolete faster, note Singhal and Hendricks.
"In a competitive industry, customers may not be willing to wait, choosing to buy a competitor's product instead," saya Singhal. If your product launch is delayed by 6 months, that’s 6 months for your competitor to grab market share and woo your customers, and less overall revenue for you to pursue when you finally do go to market.
Announcements of product delays decreased average shareholder value by about 12 percent, according to the researchers. "Our results suggest that negative stock market reaction to product introduction delays is actually quite rational given the impact of delays on profitability," they write.
Management consulting firm, OakStone Partners, estimates that a product delay can cost a company upwards of 15 to 35 percent of the Net Present Value (NPV, the difference between the present value of the future cash flows from an investment and the amount of investment), depending on whether the product in question is an oligopoly (monopolistic) product or a competitive product (competing with other companies to deliver similar products or serve the same markets).
While overall revenue from a product might be a good measure for the financial health of a company, net cash flow provides a better indicator to the value a product provides to the company. Net cash flow not only takes into consideration the revenue generated by selling the product, but also the sunk costs of developing, manufacturing, raw materials, and the cost of capital.
The graph shows these values over time for a typical product lifecycle. Early in the product’s life, it costs organizations money to conceive, develop, market and launch the product, with revenues following. At some point, market saturation occurs, sales plateau and then begin to decline, and eventually the product is taken off the market. From this point there are more sunk costs for the company associated with ‘end-of-lifing’ the product – ongoing support costs, disposing of components that are no longer needed, raw material, surplus machinery, and removing the product from the company’ business systems.
The blue line in the graph represents revenue a company makes from the product as it is first launched and then reaches maturation, plateaus and drops off.
The product launch point – circled with a black ellipse on the chart, signifies the point at which a company starts to make money on the product. If this launch date is delayed, the upfront sunk costs continue (in development, marketing and launch costs), negatively impacting cash flow and reducing the amount of money the company makes off a product over time.
So, what does this mean to the overall value a product delivers to its company?
The impact of launch delays is dependent on the level of competition found in the industry. In competitive markets, the end point is fixed by others so any delay directly reduces your time in market, effectively narrowing the window of time a product sells at peak. For oligopolistic or monopolistic markets, there is less of a chance of losing customers so the end point will somewhat march out with the delay. In both cases, the upfront sunk costs (ideation, development, marketing and launch) along with the cost of capital decrease the net present value represented by the product over time.
Can your organization lead the market losing 15 to 35 percent or more of NPV? Or, put another way: can you lead the market realizing only 65 to 85 percent of your product’s value? How will the delay affect the growth of your company?
What would it mean to your organization to accelerate time to market by a week? A month? More? What will be the impact on the maximum sales if your product is 3 months late to market? 6 months? Will late entry adversely affect market share?
Find out how manufacturers across the globe and in every industry are working with Invention Machine’s Goldfire software to accelerate time-to-market and ensure right-to-market.