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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:

1.  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.
2. Common Interpretation: Once people understand the metrics construction, it can be painfully clear what the metric is telling you.
3. Credible, Actionable Data: Data is sourced from your financial system, so I hope that it is good data.
4. 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.