14 Apr Six ways to improve the profitability of your new product launch
Innovative new products are the lifeblood of your business.
They engage your market and grow your sales, but are you getting all of the benefit that you should? Are out-of-stocks costing you sales in each new product launch? Are high inventories and product write-offs eating into the profits that your new products should be delivering?
The launch phase is one time when you absolutely must have the product available on the retailer’s shelf. It is also the most unpredictable period in a product’s life-cycle:
Your demand forecasts are probably less accurate than at any other time.
You must allow for the pipe-fill as distributors build their stocks; and then the surge or drop-off in orders when they find that they have too little stock – or too much.
Manufacturing have only produced a few short trial batches. This is the time when they are most likely to produce off-spec product or to struggle to get it made on schedule.
You may be sourcing new materials from new and unproven suppliers, creating even more opportunities for things to go wrong.
At any given time, approximately 8% of products that should be available on the retail shelf are out-of-stock. This rate is twice as high for products on promotion – including product launches. That means that around 16% of the customers that might have tried your new product aren’t able to do so – because it isn’t on the shelf. What would 16% more sales mean to the success of your next new product launch?
The launch phase is also the time when your inventories are most likely to spiral out of control, hiking your working capital and possibly even causing write-offs if your product has a short shelf life. This can have a significant impact on your business if you are bringing a steady stream of new products to market.
So how can you do better? There is no “magic wand” to completely eliminate the challenges of the new product launch but here are six ways to increase sales and reduce the waste:
1. Produce the best Sales Forecast that you can
2. Do a “what if” analysis
3. Simplify the new product launch as much as you can
4. Hold the right amount of safety stock
5. Monitor the launch and respond quickly to events
6. Maintain flexibility in supply to give you more options
Produce the best Sales Forecast that you can
Forecasting the sales of a new product is difficult. You don’t have years of historical sales data to guide you and you can’t be sure how the market will respond to your innovation.
There are things that you can do though that can help you to prepare the best possible forecast and, just as important, to understand how inaccurate your forecast might be:
Break your forecast up into its component parts and estimate the sales separately for each part. Consider the sales in each significant customer group and each distribution network.
Model the pipe-fill separately. How much inventory will each outlet build-up in the lead-up to the launch? How will they respond when the sales data starts to come through?
Consider factors that might lead to the sales being higher or lower than you expect. Document these and the assumptions that you have made in arriving at your forecast.
Gather information that might help to improve your forecast. Can you test-launch in a few outlets? If you have announced the product beforehand, gauge the response. Measure page-views on your website, monitor the response on social media – count the number of likes, tweets and re-tweets.
Don’t prepare a single forecast, prepare three – an optimistic (high sales) forecast, the “most likely” forecast and a pessimistic (low sales) forecast.
If you have the necessary resources and skills, consider applying specialized sales forecasting models designed for forecasting new products – the Bass Diffusion Model is one commonly used example.
After each product launch, collect and organize data on the actual sales. This will provide a useful information for planning future product launches. Also review the factors that you thought might influence sales – how did these play-out? Can you learn anything for the future?
Do a “what if” analysis
Before the launch conduct a “what if” planning session. Your objective is to anticipate the ways in which the launch might not proceed as planned – and to decide how you will respond. Consider the things that could go wrong, but also think about the possibility that the launch may be even more successful than you expected. How will you supply the product if sales reach your optimistic forecast or go even higher? If you can’t supply it all who gets priority?
Include your key people in the discussion – Marketing, Sales, Production, Logistics, Procurement and Finance. They all have a role to play in handling the inevitable surprises.
Decide how you will respond if sales are just a little higher or lower than expected. How you will respond to a medium deviation and what you will do if sales are much higher or lower than you expected. Define clear “trigger points” that signal the need to take each action.
The story so far:
Carefully managing the new product launch phase of each product’s lifecycle can make a real difference to your sales, costs and working capital. In this chapter we have listed six ways to ensure that your product launches are as successful as they can be and we have described the first two in a little more detail. In chapter two we will describe ways to simplify the launch, to manage your safety stocks, to monitor progress through the launch and to give yourself more options to respond when the unexpected happens.
www.sopplan.com Practical Sales and Operations Planning