Innovation Measurement: Percentage of Revenue
A common metric associated with measuring innovation is the % of revenue from products released in the past five years. The theory behind the metric is that a company with a strong percentage of revenue coming from new products is innovative. I believe this metric is very dangerous for a company to rely on.
The Juice Analytics blog notes that the four key dimensions of a good metric are 1) Actionable; 2) Common Interpretation; 3) Accessible, Credible Data; and 4) Transparent, Simple Calculation.
*Source: Juice Analytics Blog
The problem with the percentage of revenue from new products is that it is not actionable and doesn't have a common interpretation. Let's say a business that moves from value of 10% to 20% over the course of a year, most people would say that this company improved it's innovative capacity over the past year.
This is not necessarily true. What if, over that year, the companies revenues dropped by 20% and revenues from the new products dropped by 5%. In this case the Percentage of Revenue from New Products would increase, but I doubt we would say the company is improving innovation. Therefore, if the metric goes up or down, it is not clear if this is good or bad. That is why this is a dangerous metric to use to evaluate innovation efforts.
In our next post, I will propose a slight variant on this metric that will eliminate this common interpretation weakness.
