To produce a winning business case, you’ll need a solid understanding of your competitive landscape, conclusive data, and a firm grasp of your business’ goals and metrics.
How should you approach an NPD business case?
When launching any new product, a business case is needed to establish how commercially valuable the product is and therefore, how financially viable the project is. A substantial business case will show you how much expected revenue you can hope to make.
When establishing your case, the key things to consider are:
When estimating the price of your product, first look into your category to see what your competitors are charging for similar products. This will help you to gauge where your product should fit, in comparison to the market.
In addition to benchmarking, you will also need to consider the costs you will incur throughout the project. The price you set for your product has to cover your supply chain, development and advertising costs, amongst other fees.
Let’s break down the main costs you should be focusing on:
- One time cost – How much will it cost to develop your product?
- Cost of product or Cost of Goods Sold (COGS) – How much will it cost to get your product built and distributed?
- Advertising costs – how much investment can you afford to put into advertising?
- Promotional costs – how long will your product remain on promotion for, and what will this cost your business?
The one-time cost is a one-off cost. This is the investment you need to create the product concept, including R&D and optimization.
The cost of product varies depending on if you are creating the product in-house or outsourcing to a third party. When outsourcing, consider tax, transportation and distribution fees, on top of the cost of the product, which will be supplied by the third party. If creating a product in-house, consider factory costs and charges for raw materials, moulds and any other components you may need.
To determine the full cost of product, distribution also needs to be taken into account. Where will your product be stocked? Are you selling directly or through a retailer? Will you be selling online as well as in-store? All of these factors will play into the overall cost of your product.
The advertising costs are dependent on your media budget. If you are willing to invest more into advertisement, and are looking for mass awareness, channels including tv, radio and outdoor advertising will incur higher fees but are broad-reaching. A lower budget option is to promote in-store and through social media channels.
The promotional costs depend on your promotional calendar. Clearly define the quantity of weeks or months your deal will be on offer for, as well as how much this discount will cost. Ensure your promotional calendar is closely tied to your supply chain costs to guarantee you can still afford to produce your product at this reduced rate.
When looking into profitability, cannibalization must also be considered - when a new product steals market share from a pre-existing product in the same portfolio. In this case, instead of a brand adding incremental users and therefore, incremental value, it simply switches users from one of their existing products to their new product.
When creating a new product, consider:
- How similar your new product is to other products in your existing range
- What the expected outcome of your NPD launch is
If your business objective isn’t motivated by sales but is instead focused on portraying your brand as current, innovative and reactive to the market, cannibalization could be an expected outcome. But, if you are trying to increase profits and introduce new users to your range, cannibalization will deter you from your goals.
Consider through your marketing and product launch how best to attract new users down the aisle, either through recruiting an entirely new base, or focusing on new usage occasions and trade up.
Establishing a rate of sale
To get to your rate of sale, compare the benefits of your product with the financial investment needed to launch the project.
To create this comparison, have a look at:
- Net Present Value - NPV calculations help you to analyze the profitability of a future investment or project in today’s value. If your NPV is negative, that is a signal that your project is not adding enough value back into your business in today’s terms. Any project with an NPV above 0 should be green lit to go ahead.
- Return on Investment – ROI is a cost-benefit analysis aimed to evaluate the efficiency or profitability of an investment. To calculate ROI, you simply divide the projected returns from your investment by the projected cost of your investment.
- Pay Back - Estimates how many months or years it will take to pay back the cash invested into the product.
Here are the margins you will need to consider before proceeding with your NPD to gauge the profitability of your project.
- Recommended Retail Price is the every day price a brand recommends their product should be sold at. Ultimately it is the retailer’s decision on what the product is charged on shelf. The recommended retail price takes into account the cost of manufacturing the product, the gross margin for the brand and the trade margin of the retailer.
- Retail Margin is the percentage the retailer makes on every unit sold in their stores. It is the difference between what they buy the goods for from the manufacturer and what they sell the goods for on the shop floor.
- Gross Margin is the difference between your revenue and your cost of goods sold, divided by the revenue.
Making better assumptions
Every business case is developed off of assumptions. Throughout the process, assumptions are made on ROI, sales margins and the success of the product’s launch. As a Brand Manager, you need to have faith in these assumptions, trusting they will lead you to your projected end-result.
Without possessing concrete data on previous NPD launches, it can be difficult to make these assumptions. To provide yourself with more assurance throughout this process, make sure to continuously compare yourself at every stage to your competitors, category and previous performance. The more homework you do on the competition, the more accurate your stats will be. Understanding how the market is operating is the key to robust assumptions.
Now you’ve got your business case sorted, why not check out our NPD guide, How to Launch New Product Development: From Idea to aisle?