12 May
2009
In my
last post, I talked about the common innovation metric Percentage of Revenue from New Products Released in the Past 5 Years and discussed it was a poor metric because it was not actionable or had a common interpretation. I would like to propose a modified metric that will eliminate these problems.
To recap the
Juicy Analytics blog pointed out that the four dimensions of a good metric are 1) Actionable; 2) Common Interpretation; 3) Accessible, Credible Data; and 4) Transparent, Simple Calculation.
By taking the data from the percentage of revenue from new products, one can construct a new metric that is Actionable and has a Common Interpretation: Annual Revenue Growth from New Products. What this metric attempts to do is to separate the annual revenue growth that came from new products (released in the past 5 years) and the revenue growth that came from the core (products release more than 5 years ago). The formula relationships is:
% of Annual Revenue Growth (ARG) = %ARG from New Products + %ARG from Core
Let's review the four dimensions and see how this metric will stack up:
- Actionable: While you will need to do some digging to better understand the source, the results are very consistent - if the %ARG from New Products increases that is good and if it decrease that is bad. A definite improvement from percentage of revenue from new products.
- Common Interpretation: Once people understand the metrics construction, it can be painfully clear what the metric is telling you.
- Credible, Actionable Data: Data is sourced from your financial system, so I hope that it is good data.
- Transparent, Simple Calculation: As I show below, the metric is slightly more difficult to construct, but once you understand the concept it is simple to construct.
To construct the metric:
To demonstrate the metric consider this example. A company has the following financial results in 2007 and 2008
|
|
2007 |
2008 |
| A. |
Annual Revenue |
2000 |
3000 |
| B. |
Revenue from New Products Released in the Previous 5 Years |
500 |
1200 |
| C. |
Revenue from Core Products (C=A-B) |
1500 |
1800 |
|
|
|
|
| D. |
Change in Annual Revenue (D=2008A - 2007A) |
|
1000 |
| E. |
Change in New Product Revenue (E=2008B - 2007B) |
|
700 |
| F. |
Change in Core Product Revenue (F=2008C - 2007C) |
|
300 |
|
|
|
|
| G. |
Annual Revenue Growth (G=D/2007A) |
|
50% |
| H. |
Annual Revenue Growth from New Products (H=E/2007A) |
|
35% |
| I. |
Annual Revenue Growth from Core Products (I=F/2007A) |
|
15% |
|
|
|
|
| J. |
Percentage of Annual Revenue from Products Released in the Previous 5 Years (J=B/A) |
25% |
40% |
Using the ARG from New Products metric it becomes clear where a companies revenue growth is coming from. An added bonus is that you also compute ARG from Core which in the
next post on using these metrics can be quite insightful.
By taking the data from the percentage of revenue from new products, one can construct a new metric that is Actionable and has a Common Interpretation: Annual Revenue Growth from New Products. What this metric attempts to do is to separate the annual revenue growth that came from new products (released in the past 5 years) and the revenue growth that came from the core (products release more than 5 years ago). The formula relationships is:
