What is a New Product Vitality Index? (And Why It’s Important)

Many manufacturers struggle to define a key performance metric (KPI) for innovation. It’s difficult to know if innovation is having a business impact, determine how much to invest in research and development, or how to effectively measure the success of innovative new products.

A product manager’s role in driving innovation is pivotal to the success and growth of a manufacturer. Effective product managers utilize the New Product Vitality Index to measure the innovation impact on a business. What is a New Product Vitality Index? We can start there and then walk through the benefits of the New Product Vitality Index, as well as why it is so important to your organization. You’ll get steps to create this metric for your own company too.

What is a New Product Vitality Index?

The New Product Vitality Index (NPVI) is a measurement of an organization’s ability to deliver new products and services. The calculation is derived from totaling the revenue of new products and services over the last five years against the overall revenue of the company. The New Product Vitality Index is the percentage of new products and services compared to the overall revenue.

Let’s talk through an example. A manufacturer named Bubble Gum just posted $30m in revenue for the year. On a yearly basis, they launch one new candy per year and have been expanding beyond gum. The revenue from their five new candies that they launched per the last five years made up $6m of their $30m revenue for the year. Therefore, their New Product Vitality Index is 20%.

If they stopped investing in new products and services, they may grow their revenue from selling their existing gum and candies, but within five years their PVI will eventually go down to 0%.

The New Product Vitality Index Formula

To calculate your New Product Vitality Index, calculate the percentage of new product revenues generated by the company over a given period (I use a 5 year period) divided by the company's total revenues over the same time period.

New Product Revenue ➗ All Product Product Revenue = Your New Product Vitality Index

The higher your New Product Vitality Index, the greater the proportion of your company's revenues that are generated from new products.

What are the benefits of having a New Product Vitality Index?

PVI is a great innovation KPI that keeps you relevant, creates an environment that constantly delivers new value and keeps you ahead of the competition. Here are the top four benefits of a successful New Product Vitality Index.

Staying Relevant - The biggest advantage of having a PVI is the focus it provides with staying relevant with your customers and in the markets you serve. The biggest risk of not pursuing new products and services is becoming stale and stagnant, which leaves an opportunity for competitors and new progressive companies to steal your customers. This also allows for conversations on product and market diversification to ensure stable and consistent long term growth.
Defining Innovation Metrics - Another benefit to defining a target PVI is it communicates to the whole organization the expectations and behaviors needed to stay relevant and competitive. A target PVI percentage is a great measurement as teams are researching and developing a product or service to make decisions on killing or advancing a project. If the research and development (R&D) team have multiple new products and services being considered, the PVI provides them a way to measure potential revenue to see if it meets, exceeds, or falls short of the goals.
Investing in R&D - The PVI communicates to the organization the need to invest in people, processes, and capital to reach the PVI goals. Depending on your industry and your maturity with R&D, you may need to hire new people (Designers, Researchers, Engineers, Scientists, Product Managers) and leaders (VP, Managers) to expand your knowledge, capabilities, and leadership. Processes will need to be established to deliver consistency and accountability through the new product development journey.
Realizing New Revenue Streams - While it’s important to be able to develop new products and services, it’s equally important to have a strong go-to-market strategy and clear sales channel to realize the potential. The benefit of the PVI is having customers realize the value of your new product and services through customers purchasing it.

Why is having a New Product Vitality Index important to my organization?

By defining and delivering consistent new products to the market, it makes a strong statement to your employees and your customers.

Stimulates Employees - Your employees are one of your most valuable assets. By creating an environment that pushes them to innovate and creatively solve customers’ problems, you are actively engaging and pushing them to reach new heights. This communicates an investment in individuals and builds a team environment that propels new thinking and collaboration.
Customer Loyalty - Delivering new products and services on a consistent basis communicates a desire to pursue its customers. There are many options for customers, which is why it’s important to continually deliver value through new products and services.

What are Common Watch-Outs with having a New Product Vitality Index?

If having a New Product Vitality Index is new to your organization, there are a few watch-outs.

Lack of Alignment - The first watch-out is not having the executive team in agreement that new products and services are important. Leaders may want to focus on scaling existing products and investing in sales channels to propel existing products forward. If the leaders are not aligned with the need for new products or services, then it won’t succeed. This alignment with the executive team has to be all in or it won’t work. Take the time necessary to discuss, debate and explore strategies to help your business grow.
Lack of Decisiveness - A second watch-out is not being clear on what is identified as a good opportunity. Companies have multiple options for new products and services, so it is important to determine how decisions will be made and what information is needed to promote opportunities. This alignment will help manage decisions throughout the organization and empower teams to be prepared with a strong plan.
Lack of Investment - A third watch-out is not allocating a budget to pursue R&D activities in developing new products and services. It may take significant investments in resources, expenses and capital purchases before realizing any revenue. Work alongside the CFO to calculate investments, define assumptions and determine ROI for pursuing PVI. One strategy may be to acquire companies that deliver new products and services, so aligning on ways to achieve this goal is important too.
Lack of Structure - A fourth watch-out is not structuring the organization around growth. A wild west mentality will not consistently deliver PVI results and may quickly burn out team members and lose project momentum. As companies grow in developing new products and services, leaders have to bring focus to decisions, project coordination, and team collaboration.
Lack of Accountability - A fifth watch-out is not having someone accountable for delivering new products and services to reach the PVI goal. A product manager is critical to defining the product vision, focusing on the right opportunity and ensuring a strong product market fit.

How to Create a New Product Vitality Index

If your company does not have a New Product Vitality Index defined, here are the steps you can take to create and use a PVI.

Create a Baseline - Analyze the last five years to see how many new products or services were released to the market and determine the revenue impact. This will determine your current New Product Vitality Index score.

Once you’ve analyzed the past, it's time to look at the present. Evaluate current R&D efforts going on, when those new products and services will be released to the market, and what the anticipated revenue will be over the next five years. This will determine your potential New Product Vitality Index score based upon efforts currently going on.
Discuss with Executives - Start the conversation with leaders by sharing the New Product Vitality Index baseline and listen to their questions and feedback. It may take several meetings and discussions to align on the need for a New Product Vitality Index, but hopefully, the benefits are clear and the ability to measure success helps move the conversation forward.
Define the Risks - By not setting a New Product Vitality Index, what are the risks internally? Risks may include a lack of creating an engaging atmosphere for your employees. Or maybe even a risk of tolerating a frustrating environment. Externally? It may mean missing on opportunities for staying relevant to your customers. Without pushing to the forefront of your competitive set, you could see an erosion of market share over time.
Define a first New Product Vitality Index target - By having the baseline New Product Vitality Index, you’ve got a great starting point. Look at your current investments in R&D to determine potential changes to the New Product Vitality Index.

Summary

The New Product Vitality Index will propel middle market manufacturers forward. With it, you can become disciplined in driving growth initiatives. Since this affects the whole organization, a cultural shift will begin involving multiple departments and their teams. This momentum will build upon itself, year over year, creating an environment that attracts the best talent and continually delivers value to customers.

Posted in Start Product Management | Tagged Product Vitality Index, Metrics, Business Acumen

What is a New Product Vitality Index? (And Why It’s Important)