Principles of Marketing

# 10.3The Use of Metrics in Evaluating New Products

Principles of Marketing10.3 The Use of Metrics in Evaluating New Products

### Learning Outcomes

By the end of this section, you will be able to:

• 1 Explain the importance of establishing new product metrics.
• 2 Describe metrics used to evaluate the success or failure of new products.

### The Importance of Establishing New Product Metrics

There are few marketing activities that are as difficult to manage as new product development. Not only does a company have to juggle multiple tasks like new features and innovative technologies against factors like cost, risk, and time to market, but it has to ensure that it’s making the most efficient use of its limited resources on new products that will meet both its short-term and long-term strategic goals. In this section we’re going to review product development metrics that can measure the success (or failure) of your new product launch.

Product metrics are quantifiable data that a business tracks and analyzes to determine how successful its new product(s) are. One way that companies accomplish this is by using key performance indicators (KPIs). KPIs are target metrics set by a company as a way to measure if the product is delivering on expectations. An example of a KPI could be targeted new customers per month or revenue growth.

### Specific Metrics Used to Evaluate New Products

There are any number of metrics you can use to measure the success of a new product. For our purposes, we’re going to focus on just a few of the more common KPIs (see Figure 10.4).

Figure 10.4 Metrics to Evaluate New Products (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)
• Research and Development Spending as a Percentage of Sales: This metric is used to compare the effectiveness of R&D expenditures between companies in the same industry. It’s important to use companies within the same industry because R&D numbers vary widely based upon the industry. For example, pharmaceutical and software companies tend to spend considerable dollars on R&D, whereas consumer product companies generally spend less. The percentage is calculated as R&D dollars spent divided by total sales.
• Current Year Percentage of Sales: This method calculates cost of goods sold, inventory, cash, and other financial line items as a percentage of sales and then applies that percentage to future sales estimates. It’s a “quick and dirty” way to estimate the product’s future value.26
• Time to Value (TTV): Time to value refers to how long it takes new users to recognize your product’s value (sometimes referred to as the “aha!” moment in marketing). Obviously, the sooner this occurs, the better, although time to value varies widely depending upon the product itself.27 For example, if you purchase a new book for your Kindle, it’s a matter of seconds before the book is available to you. On the other hand, if you subscribe to a magazine, it may be days or weeks before you see your first issue.
• Product Adoption Rate: When launching a new product, this metric is almost always at or near the top of the product team’s list of KPIs to track. Product adoption (or user adoption) is the process by which people learn about a product and start using its features to meet their needs.28 The formula for calculating the adoption rate: divide the number of new users by the total number of users.
• Return on Investment (ROI): This is a metric formula used to evaluate the profitability, or overall value, of an investment. In marketing, you can use ROI to measure the profitability of a new product launch. To calculate the marketing ROI, you would take the sales from that product, subtract the marketing costs, divide by the marketing costs, and multiply by 100.29

For example, if sales grew by $100,000 as a result of the new product launch, but the cost of the marketing campaign was$20,000, the ROI would be:

### Knowledge Check

It’s time to check your knowledge on the concepts presented in this section. Refer to the Answer Key at the end of the book for feedback.

1.
Data measurements that businesses use to evaluate the success of new products are called ________.
1. ROI
3. R&D
4. product metrics
2.
Which method calculates cost of goods sold, inventory, cash, and other financial line items as a percentage of sales and then applies that percentage to future sales estimates?
2. Current year percentage of sales
3. Time to value (TTV)
4. Revenue growth rate
3.
To calculate this metric, the return of the investment is divided by its cost.
1. Time to value (TTV)
2. R&D spending as a percentage of sales
3. ROI
4. Revenue growth rate
4.
This metric measures how long it takes new users to recognize the value of a new product.
2. ROI
3. Time to value (TTV)
4. Revenue growth rate
5.
Which of the following metrics would likely NOT be used to evaluate the effectiveness of new products?
1. R&D spending as a percentage of sales
2. Time to value (TTV)
3. Return on investment (ROI)
4. Annual recurring revenue (ARR)