Which metrics matter for innovation success?
Most companies set an innovation budget with the expectation that profits from new products will have a high ROI. Setting metrics for innovation can be difficult. Many factors contribute to innovation success—there isn’t one single metric. According to a McKinsey report, 70% of corporate leaders say innovation is one of the top three business priorities—yet only 22% set innovation metrics. Sometimes businesses place too much value on data at the expense of getting bogged down with too many measures which sometimes reduces innovation.
However, innovation shouldn’t be seen through only a financial lens. Leading companies define measurements by looking at:
- Revenue from new products
- Process measures such as the quantity and quality of ideas in the pipeline
- Increased customer satisfaction associated with new products
In an interview with Asim Syed, food innovation advisor and former Head of Global Food Applications R&D at Dow AgroSciences, he explained how you can use these measures to ensure a high ROI on your innovations.
Percentage of revenue generated from new products
Leadership teams in most companies measure innovation by looking at “innovation sales”—revenue derived from new products. According to Asim, "for an innovation focused company, 10-25% revenue should come from new products, but it’s important that businesses take a long-term view because it may take a few years to generate sales from a new product. If revenue generated from new products is less than 10% of the total revenue, the innovation team is under pressure from senior leadership.”
In some mature organisations, if innovations fail, it can have serious consequences on the organisation’s success and employees, such as termination of employment, lost bonuses and a tarnished brand.
But how can you ensure that you achieve a 25% revenue contribution from your new products? Measuring the quality and quantity of ideas in your pipeline is a good start.
Measure the quality and quantity of ideas with a screening process
50% of companies admit that there are deficiencies in their stage-gate process because they haven’t established criteria for killing or prioritising projects. One way to effectively measure the quality of projects that go forward is by screening ideas through a scoring chart. Research reveals that businesses that use scorecard methods in their innovation process obtain a higher value portfolio than other businesses.
Stage-Gate Inc, for example, have provided criteria that businesses should use at each gate to prioritise high quality projects known as “Must Meet Criteria”. The scoring chart includes a yes and no check list with criteria such as:
- Strategic alignment
- Reasonable likelihood of technical feasibility
- Meets environmental health, safety and legal policies
- Positive return vs risk
- No show stoppers (killer variables)
These criteria can help you develop your own scoring system where you can rank projects between 1-10 to decide whether you should kill or pursue a project.
You then need to measure how many ideas you have and which ones are going to the next stage. Asim says, “If you brainstorm and come up with have 100 ideas, 10 should move forward to the idea screening stage. The top 3 ideas should move forward to the feasibility stage when the technical and financial feasibility is assessed.”
Number of patents granted
Another way to measure the number of successful and innovative ideas is by looking at the number of patents granted. Although not all companies own patents, those that do file them find it useful to measure innovation through the number of patents granted. For example, the Chief Innovation Officer of IBM explained in an interview, “Using patents as a visible performance metric creates a high bar for researchers as it requires them to come up with something truly new.”
According to Asim, a good metric for patent filings is if 40% of the patents you have applied for are granted, “If 10 patents are filed, 4 should be granted and this is something that the IP department will measure. Senior leadership also reviews these numbers but the overall responsibility for the technical innovation metrics falls on the Head of R&D.”
For example, you could look at the patent application and grant rates over the past few years to measure whether you’re achieving a 20% grant rate. Looking at grant rates over a period of time is more helpful because you may have filed patents that haven’t been granted yet.
A chart like below can display how many patents were granted out of the ones filed the same year. So, if you filed a patent in 2012 but it was granted in 2014, you will see the patent granted under the 2012 bar.
Click image to enlarge
Number of patents applied and granted over the past 5 years for Amazon (Source: PatSnap)
Percentage of consumers that will like and buy your product
During the development stage of the innovation process, you need to test your prototypes with consumers because they will be the ones buying it. It’s crucial that the majority of your customers are willing to buy your product at the price you are going to sell it for. Asim explains, “When you’re pre-testing your product to consumers, 70% of your targeted consumers should like the product. Some businesses don’t do their homework of effective market research, launch the product in a rush, and fail. A penny spent early saves a pound at the end."
For example, when Coca Cola launched “New Coke”, the marketing team conducted over 200,000 taste tests and spent over $4 million in development. However, their surveys were biased because New Coke wasn’t a choice in their blind taste test. The researchers neglected to qualify what the response would be if subjects understood that in choosing New Coke, they would be pulling old Coke from the shelves which could have altered the response. New Coke didn’t sell as well as they thought—leaving Coca-Cola with over $30 million in unwanted New Coke concentrate.
The marketing team should do surveys to understand what price consumers are willing to pay for your product. The pricing can't be too high because it may fail at launch and it can’t be too low either because consumers may think your product is of low quality.
Asim says, “About 70% of the consumers should be willing to pay your price.” If less than 70% of consumers are willing to buy your product, you need to ask them for feedback to understand which product changes would make them buy.
About Asim Syed
Asim is an independant Food Innovations Advisor and former Head of Global Food Applications R&D at Dow AgroSciences. Asim has a strong background in food innovation and business development with over 23 years of successful experience in designing and implementing innovation strategies.
He has led the commercialisation of 55+ cutting-edge new products for the food service, CPG, and QSR markets and is the author of several food science book chapters and articles on management and innovation.
Articles and interviews:
People are not projects - Don't manage them, lead them
In this webinar, our guest speakers explained how aligning intellectual property and innovation strategies can have a positive impact on reducing risk.