Importance of financial forecasts in the new product decision

 

How important are the financials in the overall NP decision?

The ATAR financial forecasting model for new products is simply one of the areas of evaluation for the go/no-go decision on whether or not to develop the product and take it to market.

If you are currently studying new product marketing, or are actively involved in the product development field in the real world, then you would know that there are multiple key areas of new product evaluation that need to be considered. Sometimes these are incorporated into a scoring model, which helps balance the array of factors considered so that the overall decision does not get overtaken by financial considerations only.

What are the main evaluation areas for a new product?

With my marketing students, I use the simple acronym of MOST $’s to communicate the five main areas of new product evaluation. As you can probably guess, the $ symbol represents the financial area of evaluation – but it is only one of five top areas, with the other four being:

M = Marketing ability (brand equity, access to retailers/distribution, existing customer loyalty to the brand, sales team coverage and motivation, ownership of direct or online channels, marketing expertise, the degree of consumer switching behavior, and so on)

O = Opportunity cost (what other marketing opportunities are currently available to the organization which may provide a better return or strategic fit?)

S = Strategic fit (how well does this new product fit with the firm’s overall strategic direction and plans for expansion and/or its competitive position?)

T = Technical ability (does the firm have the ability to develop, manufacture and logistically distribute a superior or differentiated product at a “reasonable” cost?)

The importance of financial evaluation will vary

While financial evaluation is one of five top level areas of evaluation, it does not simply mean that each area is worth 20% of the total evaluation – it will vary by firm and new product and competitive situation.

When is financial evaluation less important?

For example, if the firm is in a competitive battle and wants to defend its market share and/or match its competitive offerings – then the degree of financial return of a new product becomes less important.

For another example, if a firm has built its competitive positioning around “good value” then they may be willing to bring a new product to market that has limited financial potential so long as it supports its overall positioning.

And for another example of where overall financial return may be less important – when the product is important in retaining customer loyalty and share of customer performance.

When is financial evaluation more important?

Clearly for those firms/brands interested in maximizing its profitability – perhaps through leveraging its customer base and/or its brand equity – then they will often be primarily interested in the financial return of the new product.

This is also the case for firms/brands that have multiple potential new products that they can bring to market – so they may be more inclined to consider the financial return to help them choose between these opportunities.

Certainly when the new product investment is significant in terms of the upfront cost, the financial considerations and evaluation needs to demonstrate that there is a good chance of pay-back within a reasonable short time.

And generally financial evaluation of new products is more important for smaller firms/brands that do not have the financial capacity to support products for strategic or competitive reasons.

Related topics

Understanding the financial metrics on the ATAR template

Do I need to use financial metrics for the ATAR forecast?

How the free Excel ATAR template works

Please note that there is a video available on this website that discusses financial metrics for marketing purposes.