AN UNCOMMON SENSE OF THE CONSUMER Nurturing Innovation: HOW TO SUCCEED IN YEARS TWO AND THREE NIELSEN INNOVATION BEST PRACTICES REPORT SERIES JUNE 2015
INTRODUCTION At Nielsen, we already know that failure is a common innovation outcome; 85% of new products are ultimately unsuccessful, and this encourages the belief that innovation success is random. However, it is actually a science with clear underlying mechanisms. Nielsen has been working to decode the science of innovation success through numerous initiatives, including the Breakthrough Innovation Project, to help industry leaders foster better and more repeatable innovation outcomes. In this report, we focus on how to develop and nurture innovations with long-term success in mind. 2 NURTURING INNOVATION: HOW TO SUCCEED IN YEARS TWO AND THREE
THE PROBLEM THE COST OF ABANDONMENT Manufacturers tend to focus less on new products after the first year in market, leading to significant declines in sales. Many manufacturers assume a stable or growing business after year one. However, on average, only 20% of new products grow in year two, while more than half decline in sales.* This trend is even more exaggerated in year three. PERCENTAGE OF INITIATIVES WITH GROWING, STABLE AND DECLINING SALES IN YEARS 2 AND 3 55% Year 2 vs. Year 1 25% 20% Growing: up by > 10% Stable 69% 22% 9% Declining: down by > 10% Year 3 vs. Year 2 This decline isn t trivial, either. Among initiatives that decline in sales during the second year, the majority suffer a drop of more than 30% relative to year one.* PERCENTAGE OF DECLINING INITIATIVES BY YEAR 2 SALES DROP Decline by 10-30% 42% Decline by 30-50% Decline by 50-100% 29% 29% *Based on an analysis of more than 300 U.S. new product launches from 2004-2011. Analysis does not adjust for subsequent line extensions. Copyright 2015 The Nielsen Company. 3
THE PROBLEM THE SLIPPERY SLOPE OF DECLINE Poor performance in the second year solidifies the downward trend. For many launches, the second year establishes a pattern of growth or decline that is typically repeated or exaggerated in year three. Among products whose sales drop in year two, 87% continue to dwindle in year three. Conversely, 71% of products that grow in year two continue to grow or remain stable in year three. YEAR 3 PERFORMANCE FOR INITIATIVES THAT GREW IN YEAR 2 YEAR 3 PERFORMANCE FOR INITIATIVES THAT REMAINED STABLE IN YEAR 2 YEAR 3 PERFORMANCE FOR INITIATIVES THAT DECLINED IN YEAR 2 29% 29% 55% 7% 4% 9% 42% 38% 87% Growing: up by > 10% Stable Declining: down by > 10% For launches aiming for longevity, these results underscore the importance of dedicating the same focus and resources to years two and three as to a product s first year in market. Since new products don t become established until their second or third years in market, companies need to resolve an inherent conflict: many launches require multiyear support plans, but financial planning and business assessment processes typically focus on year intervals. If longer-term success depends on supporting a launch for multiple years, it may be necessary and ultimately more profitable to delay new launches in favor of providing the proper support to existing ones. WE USED TO LAUNCH EM AND LEAVE EM. NOW WE KNOW THAT IS UNACCEPTABLE. BARRY CALPINO, VP, BREAKTHROUGH INNOVATION AT KRAFT FOODS GROUP* Based on an analysis of more than 300 U.S. new product launches from 2004-2011. Analysis does not adjust for subsequent line extensions. *Source: Nielsen Breakthrough Innovation Report 2013, U.S. Edition. 4 NURTURING INNOVATION: HOW TO SUCCEED IN YEARS TWO AND THREE
ARE ALL NEW PRODUCTS DESTINED TO DECLINE? There s no doubt that the data is discouraging: more than half of new products generate fewer sales dollars in year two compared to year one, while more than two-thirds exhibit the same trend in year three. However, failure isn t a law of innovation nature, and long-term success isn t random. With thoughtful attention at key stages of the innovation process starting from nailing the core insight underlying a new product some initiatives have no trouble swimming rather than sinking. One cross-section of these initiatives includes Nielsen s 74 Breakthrough Innovation winners, new products launched from 2008 2013 that have shown incredible endurance in market. They debunk the notion that new product sales will inevitably dwindle in the out-years. While most launches don t generate such drastic growth, the key takeaway is that many fare quite well in the long-term because they are backed by multi-year support plans. INNOVATIONS WITH MULTI-YEAR SUPPORT CONTINUE TO THRIVE: THE EXAMPLE OF BREAKTHROUGH INNOVATIONS 68% PERCENTAGE OF INITIATIVES WITH GROWING, STABLE AND DECLINING SALES IN YEAR 2 VS. YEAR 1: Breakthrough Innovations vs. CPG Average 24% 8% Breakthrough Innovations 20% Of the 68% of Breakthrough Innovations that grew sales in their second year, nearly three-quarters did so by 30% or more. 25% YEAR 2 TO YEAR 1 MEDIA SPEND RATIO: Breakthrough Innovations vs. CPG Average 97% 94% Growing: up by > 10% Stable Declining: down by > 10% CPG Average 30%+ SALES 55% 21% Sources: Nielsen Breakthrough Innovation Database; CPG averages based on analysis of more than 300 U.S. new product launches from 2004-2011. Analysis does not adjust for subsequent line extensions. Growing Breakthrough Innovations All growing brands All declining brands Copyright 2015 The Nielsen Company. 5
STRATEGIES FOR SUCCESS HOW TO WIN IN YEARS TWO AND THREE #1 Try, try, try again Sustaining trial in year two is critical for growth. Following a product s first year in market, manufacturers tend to put less energy behind attracting new triers. However, trial in year two is the primary driver of sales growth. In fact, brands must generate at least 80% as much new trial in year two as they did in year one to be successful over the longer-term.* TRIAL RATES FOR GROWING, STABLE AND DECLINING INITIATIVES IN YEAR 2 1.99 1.77 1.47 Growing: up by > 10% Stable Declining: down by > 10% What drives trial in year two? Not surprisingly, sustaining or growing distribution drives trial and shows a strong positive correlation to sales growth. A multi-year marketing support plan is also essential. On average, growing brands spend nearly as much on advertising in year two as in year one. By comparison, declining brands dedicate only about one fifth of their year one media budget to year one.* YEAR 2 TO YEAR 1 MEDIA SPEND RATIO Growing brands 21% Declining brands 94% BRAND SPOTLIGHT: KICKSTART SUCCESS, THEN SUSTAIN IT When the Mountain Dew Kickstart team launched this new product in 2013, they knew it could be a smashing success but they also knew that it would require a strong, multi-year support plan. They spent more on advertising in year two than in year one, and succeeded in driving 50% growth in year two, with annual retail sales of nearly $300 million. IT S EASY TO LAUNCH AND MOVE ONTO THE NEXT BRIGHT, SHINY OBJECT, BUT YOU END UP LEAVING SO MUCH MONEY ON THE TABLE. THAT S ONE OF THE BIG TAKEAWAYS FOR US FROM THIS LAUNCH: TO KEEP THE FOCUS AND SUSTAIN THE EFFORT. GREG LYONS, VP OF MARKETING FOR MOUNTAIN DEW *Based on an analysis of more than 300 U.S. new product launches from 2004-2011. Analysis does not adjust for subsequent line extensions. Source: Nielsen, 2015 Breakthrough Innovation Report, U.S. Edition 6 NURTURING INNOVATION: HOW TO SUCCEED IN YEARS TWO AND THREE
STRATEGIES FOR SUCCESS #2 Create something people want The secret to long-term success starts very early in the innovation process. At the heart of every successful product is the ability to address a real need or circumstance of struggle a job to be done in consumers lives. Identification of this job happens very early in the innovation process, as it forms the core insight around which an innovation is developed and executed. If manufacturers don t effectively identify the right job, success becomes nearly impossible. In fact, insufficient need or desire is the reason that 59% of concepts fail in testing.* On average, new product concepts that do not perform well on need/desire in pre-market research but launch anyway succeed only 41% of the time in the long-term. By contrast, concepts that perform well on this measure enjoy a 70% success rate in market.* High performance on need/desire implies a larger interested universe (i.e., greater demand) for the product and justifies more aggressive marketing support for the initiative. IN-MARKET SUCCESS RATES (ENDURANCE) FOR NEW PRODUCTS BY NEED/DESIRE SCORES 41% Tested as failure 70% Tested as ready or outstanding Consumers can anticipate whether a product fulfills a real need or desire when it s still in the concept phase; they needn t interact with the actual product to understand if or how it will add value to their lives. For this reason, concept testing serves as a powerful guard against investing additional time and resources in unpromising ideas. *Source: Nielsen Factors for Success; analysis of 600 launch cases with matching survey data collected from 2008-2009. Concepts that perform well include those that scored Ready or Outstanding on Need/Desire Factor according to Factors for Success criteria. Copyright 2015 The Nielsen Company. 7
STRATEGIES FOR SUCCESS #3 Deliver an exceptional product experience A great insight or product concept will go far if the product delivers. A new product that talks a good game but ultimately can t deliver on its promises will fail to generate repeat purchases and eventually begin to spiral downward. Making a good first impression is essential to long-term success. To put this idea in perspective: for a product to be successful, it must beat six out of every ten competitors more, ideally, as being the best of the best confers a significant advantage.* This is particularly difficult in crowded categories where, if one product doesn t live up to consumers expectations, alternatives abound. Among innovations that perform well on need/desire in Nielsen s pre-market tests, those that also perform well on product delivery providing an experience that lives up to the promise are 60% more likely to endure successfully than those that fail on this measure. Moreover, merely meeting expectations is typically not good enough; exceeding consumers in-going expectations is a strong indicator that they will repurchase the product. IN-MARKET SUCCESS RATES (ENDURANCE) FOR NEW PRODUCTS 50% 80% Tested as ready or outstanding on need / desire, BUT failed on product delivery Tested as ready or outstanding on need / desire AND on product delivery Once the product experience has been perfected, manufacturers must ensure that the product remains competitive over time; it may need to evolve to meet the demands of a constantly changing marketplace. To thrive over time, a product must continue to provide value and to differentiate itself from competitors. For this reason, manufacturers shouldn t neglect established initiatives, understanding that they may need to iterate in order to remain competitive. Not surprisingly, products that test well on product loyalty are nearly twice as likely than those that fail on this measure to succeed in the long term. TO THRIVE OVER TIME, A PRODUCT MUST CONTINUE TO PROVIDE VALUE AND TO DIFFERENTIATE ITSELF FROM COMPETITORS. *Source: Nielsen Post-Use Databases Source: Nielsen Factors for Success; analysis of 600 launch cases with matching survey data collected from 2008-2009. Concepts that perform well include those that scored Ready or Outstanding on the specific Factor referenced, according to Factors for Success criteria. 8 NURTURING INNOVATION: HOW TO SUCCEED IN YEARS TWO AND THREE
CONCLUSION While most launches struggle to establish themselves and grow over time, there are clear growth drivers. First and foremost, a product must perform an important job in consumers lives. Tools such as concept testing, forecasting and product testing can help companies refine their ideas and improve new initiatives at various stages of the innovation process while ensuring that products remain aligned with their core insights. Products that perform specific jobs well tend to endure over time. Secondly, successful brands continue to provide marketing support following year one, ideally establishing a plan to do so long before the launch hits the market. Consider: in the current industry climate, 20% of CPG innovations account for 70% of revenue meaning that the remaining 80% of innovations generate comparatively little revenue. These initiatives are drawing support away from products that are performing well but could be even more successful with additional funding. For this reason, companies should be adept at killing off bad ideas to avoid wasting money and resources while continuing to support their best ideas aggressively in market. REPRESENTATIVE NEW PRODUCT PORTFOLIO FOR CPG 20% 80% of innovations account for 30% of revenue 80% 20% of innovations account for 70% of revenue Copyright 2015 The Nielsen Company. 9
ABOUT NIELSEN NIELSEN SOLUTIONS FOR DEVELOPING AND NURTURING SUCCESSFUL INNOVATIONS Innovation is not random it s a science that can be replicated again and again if you have the right analytical tools and support systems. Used separately or all together, Nielsen s portfolio of innovation solutions can help manufacturers launch successful innovations faster, more effectively and more consistently. DEMAND & OPPORTUNITY IDENTIFICATION Nielsen Demand Advisor uses proprietary survey techniques and algorithms to identify category white space opportunities, emerging trends and unfulfilled consumer needs. It helps to create a strategic roadmap for your next innovation or renovation. PIPELINE PRIORITIZATION / EARLY IDEA SCREENING Nielsen Idea Screen uses Nielsen s proprietary Factors for Success model to evaluate many early stage ideas so you can enable fewer, better initiatives to progress. CONCEPT SCREENING & FORECASTING Using Nielsen s proprietary Factors for Success model, Snapshot helps you determine if your initiative has the potential to succeed in market. Additionally, it prioritizes concepts to optimize and refine. BASES 1 provides an exhaustive evaluation of your concept s success potential, including a revenue forecast. CONCEPT OPTIMIZATION Using patented evolutionary algorithms, Nielsen Optimizer allows you to test hundreds of millions of propositions for your new product, helping you to identify the very best options while also saving time and money on iterative testing. It s proven to increase revenue for new products by 4.4X. PRODUCT TESTING Does your product live up to the marketing promise? BASES 2 answers that question by enabling you to test your product in home with consumers. It provides the most accurate revenue forecast for your product, as well as guidance on how to improve. Snapshot 2 delivers a quick and early read of your product s potential so you can uncover possible risks earlier in your process. PACKAGE DESIGN TESTING Nielsen Design Navigator helps you to find the best design direction for your brand by enabling broader creative exploration and objective design measurement based on stand-out, preference and brand fit. It increases stand-out by 34% and sales volume by 5.5% on average. PRICING & PORTFOLIO OPTIMIZATION Nielsen s Price and Portfolio Solutions optimize portfolio pricing and assortment to maximize new product revenue and incrementality for the business. They use predictive, choice-based analytics to simulate the trade-off decisions consumers make in store. Additionally, they assess the potential risk of cannibalization when considering new products, pack sizes and prices. 10 NURTURING INNOVATION: HOW TO SUCCEED IN YEARS TWO AND THREE
ABOUT NIELSEN To explore more content on a variety of innovation topics, visit www.nielsen.com/innovation. Nielsen Holdings N.V. (NYSE: NLSN) is a global information and measurement company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows and related properties. Nielsen has a presence in approximately 100 countries, with headquarters in New York, USA and Diemen, the Netherlands. For more information, visit www.nielsen.com. Copyright 2015 The Nielsen Company. All rights reserved. Nielsen and the Nielsen logo are trademarks or registered trademarks of CZT/ACN Trademarks, L.L.C. Other product and service names are trademarks or registered trademarks of their respective companies. DISCLAIMER The information contained in this report is based on compilations and / or estimates representing Nielsen s optinion based on its analysis of data and other information, including data from sample households and / or other sources that may not be under Nielsen s control. Nielsen shall not be liable for any use of or reliance on the information contained in this report. Copyright 2015 The Nielsen Company. 11
AN UNCOMMON SENSE OF THE CONSUMER TM 12 NURTURING INNOVATION: HOW TO SUCCEED IN YEARS TWO AND THREE