New Product Launch
A product launch should be evaluated using a business case that is built around the future expected cash flows. However, from a portfolio perspective there are some factors that must be considered in forecasting the future expected cash flows.
• Cannibalization
As new products arrive, the revenue and costs involved should not be looked at in isolation. There can be ripple effects across the business where a new product cannibalizes sales from existing products. For example, the launch of a new car in a range can take sales away from existing models. The loss of revenue from the other products needs to be included in the calculation of the benefits derived from the new one.
• Creeping fixed costs
With an established portfolio of products it might be reasonable to expect that new products will be accommodated within the existing head-office infrastructure and that economies of scale will result in extra gross profit without any extra indirect fixed costs. For small increments in scale this may be true, but for substantial changes head-office functions will also need to grow, which will mean higher indirect costs. Although some economies of scale are likely to occur, an allowance for costs creeping up should be made in calculating the viability of the new product.
• Contribution ratios
In building a product range it can be a mistake to bring in cheaper or lower grades of product to widen the appeal to a greater number of customers. The danger is that the cheaper product may have lower margins, resulting in a lower profit from customers who would have happily purchased the premium version but switched to the cheaper one when it became available. Attempting to keep the contribution value constant across a range reduces the impact but may make price positioning difficult in comparison to competitors and substitutes.
• Scarce resources
In a production environment there can be instances of a component or ingredient being in short supply and causing
• Cannibalization
As new products arrive, the revenue and costs involved should not be looked at in isolation. There can be ripple effects across the business where a new product cannibalizes sales from existing products. For example, the launch of a new car in a range can take sales away from existing models. The loss of revenue from the other products needs to be included in the calculation of the benefits derived from the new one.
• Creeping fixed costs
With an established portfolio of products it might be reasonable to expect that new products will be accommodated within the existing head-office infrastructure and that economies of scale will result in extra gross profit without any extra indirect fixed costs. For small increments in scale this may be true, but for substantial changes head-office functions will also need to grow, which will mean higher indirect costs. Although some economies of scale are likely to occur, an allowance for costs creeping up should be made in calculating the viability of the new product.
• Contribution ratios
In building a product range it can be a mistake to bring in cheaper or lower grades of product to widen the appeal to a greater number of customers. The danger is that the cheaper product may have lower margins, resulting in a lower profit from customers who would have happily purchased the premium version but switched to the cheaper one when it became available. Attempting to keep the contribution value constant across a range reduces the impact but may make price positioning difficult in comparison to competitors and substitutes.
• Scarce resources
In a production environment there can be instances of a component or ingredient being in short supply and causing