Why an Early Financial View is Crucial in Prioritizing Innovation Ideas

By Ramon Melgarejo, SVP, Innovation Practice

‘Consumers Love It’ Isn’t Enough

In today’s fast-changing environment, it seems like we’re bombarded by new approaches and techniques to help us understand how much consumers “love” a new product idea every day. Product innovation specialists spend time and energy pursuing trends and various techniques, whether it’s “gamification,” the wisdom of the crowds, or the various “quali-quant” approaches prominent in new product innovation processes. The point of this post isn’t to debate the merits or limitations of these approaches—lots of great thinking is taking place in the market today. But we spend a lot of time on finding the “the new new thing” in order to pick the “best” idea and not enough time on the fundamentals.

In consumer product goods (CPG) innovation, that means paying attention to two very basic questions: How big is this product going to be? and Are we going to sell enough to remain on the shelf? “Volumetric assessments” are required to answer these questions. These assessments look tactical, but are in fact part of a fundamentally strategic set of considerations. What are we going to bring to retailers next year? What is our marketing budget going to look like? How much should we invest in this new production line, if we invest in it at all?

Unfortunately, volumetric assessments get minimal consideration at the beginning of the innovation process—which is where they are most needed—and replaced with “back of the envelope” or “triangulated” approaches that rely less on rigorous, objective vetting and more on internal benchmarking, rules of thumb and subjective judgment.

We recognize, as everyone does, that accurate forecasting is hard. It takes time and money in a faster-moving environment in which research budgets are shrinking. There’s even a popular line of inquiry that asks, “Why spend money on volume estimates before you’ve even decided if you want to launch?” Unfortunately, this puts you at the mercy of optimism and politics—and also the very confirmation bias and heuristic decision-making that, ironically enough, behavioral economics is supposed to save you from.

The result is that significant resources may be dedicated to a new product initiative—and a commitment to launch already made—before serious volume estimates are calculated based on a number of factors, including the expected size of the marketing budget. If issues are uncovered at this point, it’s enormously costly to make the necessary changes or cancel the launch entirely.

How big is this problem? On average, according to Nielsen’s BASES forecasting model (the first and thus far only forecasting model in the industry to pass the Marketing Accountability Standards Board (MASB) Marketing Metrics Audit Protocol), half of all initiatives tested at this late stage show that the company’s planned level of marketing investment yields revenue projections a full 34% lower than the company’s own minimum threshold for financial viability. Meanwhile, due to lack of early forecasting, companies abandon approximately one-third of commercially viable initiatives. So, for every 100 initiatives companies start out with, about 50 proceed with a marketing budget that’s too small to have any reliable chance of success, while about 35 that could have done perfectly well are sidelined. That leaves just 15% likely to make it.

So how do companies apply a realistic financial perspective early in the innovation process? By devoting the time and legwork to establishing the marketing inputs required for success. This is challenging and there is often a high margin of error. Nielsen simplifies this process by providing realistic marketing inputs based on in-market data and historical learnings through our new Easy Plans product—decreasing the margin of error for plan inputs from the typical 25% to 4%.

The stakes really are high. Innovations whose sales don’t fall in the top third for their category struggle to stay on shelf beyond year one. Getting a clear, realistic volumetric assessment early in the development process can flag a loser that looks like a winner, and save a winner that looks like a loser. This allows companies to take the hundreds of thousands of dollars they would have invested in concepts that don’t pass rigorous testing and invest them in the ones most likely to succeed. Where should that money go? Once you know consumer interest in a proposition really justifies proceeding, you can explore all the ways in which you can drive your chances of success even higher, from pricing to package design to communications. It’s a strategy tailor-made for teams that need to do more with less—which is just about every CPG team today.

Companies striving for “leaner, bigger, better” innovations require realistic marketing inputs and an accurate forecast to identify the most promising initiatives and weed out the unpromising ones. Proving that “consumers love it” without a realistic volumetric assessment simply isn’t enough.