New Product Development

Sales Forecasting &

Financial Analysis

Sales Forecasts

With Sales Potential Estimates

Mail Concept Test – Drawing / Diagram

Sales Potential Estimation

Translating Intent into Sales Potential Example: Aerosol Hand Cleaner

After examining norms for comparable existing products, you determine that: 90% of the “definites” 40% of the “probables” 10% of the “mights” 0% of the “probably nots” and “definitely nots”

will actually purchase the product Apply those %age to Concept Test results:

Sales Potential Estimation

Translating Intent into Sales Potential Apply those %age to Concept Test results:

90% of the “definites” (5% of sample) = .045 40% of the “probables” (36%) = .144 10% of the “mights” (33%) = .033 0% of the last 2 categories = .000

Sum them to determine the %age who would actually buy: .045+.144+.033= .22

Thus, 22% of sample population would buy(remember: this % is conditioned on awareness & availability)

From Potential to Forecast

With Sales Potential Estimates: To remove the conditions of awareness and

availability, multiply by the appropriate percentages:

If 60% of the sample will be aware (via advertising, etc.) and the product will be available in 80% of the outlets, then:

(.22) X (.60) X (.80) = .11 11% of the sample is likely to buy

Sales Forecasts

With Sales Potential Estimates Diffusion of Innovations

The Bass Model: Predicts pattern of trial (doesn’t include repeat

purchases) at the category level Works for all types of products, and can be used with

discontinuous innovations

The Bass Model

Estimates s(t) = sales of the product class at some future time t:

s(t) = pm + [q-p] Y(t) - (q/m) [Y(t)]2

Where

p = the “coefficient of innovation” [Average value=.04]

q = the “coefficient of imitation” [Average value =.30]

m= the total number of potential buyers

Y(t) = the total number of purchases by time t

The Bass Model

Important Feature Once p and q have been estimated, you can

determine the time required to hit peak sales (t*)

and the peak sales level at that time (s*):

t* = (1/(p+q)) ln (q/p)

s* = (m)(p+q)2/4q

Financial Analysis

Financial Analysis

How Sophisticated? Depends on the quality/reliability of the data and the stage

you’re in

Early Stages: Simple cost/benefit analysis or “Sanity Check” as 3M uses:

attractiveness index = (sales X margin X (life).5 ) / cost sales= likely sales for “typical year” once launched

margin = likely margin (in percentage terms)life = expected life of the product in years (sq root discounts future)

cost = cost of getting to market (dev., launch, cap.ex.)

Financial Analysis: Later Stages

Payback and Break-Even Times Cycle Time Payback Period Break-Even Time (BET) = Cycle Time + Payback Pd.

Financial Analysis: Later Stages

Payback and Break-Even Times

Financial Analysis: Later Stages

Payback and Break-Even Times Discounted Cash Flows (DCF, NPV, or IRR)

The most rigorous analysis for new products: year-by-year cash flow projections discounted to the present the discounted cash flows are summed if the sum of the dcf’s > initial outlays, the project passes

The “Dark Side” of NPV (for NPD) Unfairly penalizes certain projects by ignoring the

Go/Kill options along the way (option values not accounted for in traditional NPV)

Financial Analysis: Later Stages

Payback and Break-Even Times Discounted Cash Flows (DCF, NPV, or IRR)

Options Pricing Theory (OPT) Recognizes that management can kill a project after an

incremental investment is made At each phase of the NPD process, management is

effectively “buying an option” on the project These options cost considerably less than the full cost of the

project -- so they are effective in reducing risk Kodak uses a decision tree and uses OPT to compute the

Expected Commercial Value (ECV) of a given project

Using OPT to find the ECV

Development$D

Pts

Pcs

Technical Success

Technical Failure

Launch$C

CommercialSuccess

Commercial Failure$ECV

Yes

No

Yes

No

KEY: Pts = Prob of tech success $D = Development costs remainingPcs= Prob of comm success $C = Commercialization/launch costs$ECV = Expected commercial value $PVI = Present value of future earnings

$PVI

Using OPT to find the ECV

ECV = [ [(PVI * Pcs) - C] * Pts] - D

KEY:

Pts = Prob of tech success $D = Development costs remainingPcs= Prob of comm success $C = Commercialization/launch costs$ECV = Expected commercial value $PVI = Present value of future earnings

NPV vs. OPT: An Example

TRADITIONAL NPV (no probabilities):40 - 5 - 5 = 30 Decision = Go

NPV with probabilities:(.25 X 30) - (.75 X 10) = 0 Decision = Kill

ECV or OPT:{ [(40 x .5) - 5] * .5} - 5 = 2.5 Decision = Go

Income stream, PVI (present valued) $40 millionCommercialization costs (launch & captial) $ 5 millionDevelopment costs $ 5 millionProbability of commercial success 50%Probability of technical success 50%Overall probability of success 25%