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The High Cost of Easy Innovation

Cost of Innovation

A new color. A different package or size. A simple line extension. These are supposedly easy paths for catalyzing customer interest and new revenue. However, these product innovations typically drive disproportionate complexity and costs that are seldom accounted for. These seemingly easy, fast innovations can then work against both growth and profitability with new products that customers don’t value, selling efforts that are distracted, operational costs that are higher, and development resources focused on low-return projects. 

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Wilson Perumal & Company's proprietary Square Root Costing (SRC) methodology not only quickly assesses complexity-adjusted costs for current products, but also allows us to properly account for the complexity brought on by product variety and innovation. CFO- and academia-tested, we have applied SRC in dozens of companies, helping them focus resources on growth that is profitable.

PROJECT 1: Shifting development away from profit-dilutive ‘color & trim’ innovation to real innovation that customers are willing to pay for

A manufacturer of recreational vehicles was in a constant fight to maintain and grow market share in a mature market. Applying concepts from the automotive industry, they refreshed vehicles annually with slight modifications, such as new trim packages and colors, while the next-generation platform was in development. WP&C uncovered that these easy innovations cost them 3x more spend and engineering time than they thought. Moreover, these expensive efforts focused on the most profit-diluting portion of the portfolio and diverted energy away from re-engineering and introducing truly differentiated vehicle components—such as new steering, braking, or transmission. Read the case study here.

PROJECT 2: Leveraging product substitutability to maintain revenue while trimming the product portfolio

In an effort to maintain share with its grocery customers, a European packaged foods company exploded its portfolio with new sizes and flavors. While providing consumers with more choice, it also meant less revenue per SKU and less profitability due to rapidly rising operational costs and promotional trade spend. WP&C applied its square root costing approach to help reveal SKUs, and even brands, that were much less profitable than thought. WP&C helped them divest brands, exit categories, and trim SKUs to get back to profitability, while still retaining 90% of their revenues. Read the case study here.

PROJECT 3: Refocusing marketing and development on a small number of truly profitable products and rethinking regional product offerings

A global cosmetics company experiencing a growth and profitability stall in most of its markets found it increasingly difficult to get new products to market. A key culprit was a portfolio of products that significantly increased over the years. Color cosmetics, promotional packaging, and limited-time offers available across the globe resulted in sales associates being unable to keep pace with the full line-up. The Development organization got farther and farther behind trying to refresh a larger catalog. WP&C determined that only 4% of SKUs contributed 100% of operating profit—so most of the product marketing and development efforts were actually diluting value. WP&C helped the company refocus growth and improve profitability with category and SKU reviews and more tailored geographic offerings. Read the case study here.

 

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