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Be Bold with your Product Vitality Index | By Paul Miklautsch

What is a Product Vitality Index

The product vitality index (PVI) is a measurement of an organization’s ability to deliver new products and services.  The calculation is derived from totaling the revenue of new products and services over the last five years against the overall revenue of the company.  The product vitality index is the percentage of new products and services compared to the overall revenue. 

Let’s talk through an example. A manufacturer named Bold Bubble Gum just posted $30m in revenue for the year.  On a yearly basis, they launch one new candy per year and have been expanding beyond gum. The revenue from their five new candies that they launched per the last five years made up $6m of their $30m revenue for the year. Therefore, their product vitality index is 20%. 

If they stopped investing in new products and services, they may grow their revenue from selling their existing gum and candies, but within five years their PVI will eventually go down to 0%.  If they decided to double down on new products and increase the number of new candies introduced to two per year, their PVI has the potential to increase and even double.

What are the benefits of having a Product Vitality Index?

There are benefits to defining a product vitality index. Here are the top four benefits that we see with companies that have this clearly defined. 

  1. Staying Relevant - The biggest advantage of having a PVI is the focus it provides with staying relevant with your customers and in the markets you serve.  The biggest risk of not pursuing new products and services is becoming stale and stagnant, which leaves an opportunity for competitors and new progressive companies to steal your customers.  This also allows for conversations on product and market diversification to ensure stable and consistent long term growth.
  2. Defining Targets - Another benefit to defining a target PVI is it communicates to the whole organization the expectations and behaviors needed to stay relevant and competitive. A target PVI percentage is a great measurement as teams are researching and developing a product or service to make decisions on killing or advancing a project. If the research and development (R&D) team have multiple new products and services being considered, the PVI provides them a way to measure potential revenue to see if it meets, exceeds, or falls short of the goals. 
  3. Investing in R&D - The PVI communicates to the organization the need to invest in people, processes, and capital to reach the PVI goals. Depending on your industry and your maturity with R&D, you may need to hire new people (Designers, Researchers, Engineers, Scientists, Product Managers) and leaders (VP, Managers) to expand your knowledge, capabilities, and leadership.  Processes will need to be established to deliver consistency and accountability through the new product development journey.  
  4. Realizing Revenue - While it’s important to be able to develop new products and services, it’s equally important to have a strong go-to-market strategy and clear sales channel to realize the potential.  The reward of the PVI is having customers realize the value of your new product and services through customers purchasing it.

Why is having a Product Vitality Index important to my organization

By defining and delivering consistent new products to the market, it makes a strong statement to your employees and your customers. 

Stimulates Employees - Your employees are one of your most valuable assets.  By creating an environment that pushes them to innovate and creatively solve customers’ problems, you are actively engaging and pushing them to reach new heights.  This communicates an investment in individuals and builds a team environment that propels new thinking and collaboration. 

Customer Loyalty - Delivering new products and services on a consistent basis communicates a desire to pursue its customers. There are many options for customers, which is why it’s important to continually deliver value through new products and services. 

What are Common Watch-Outs with having a Product Vitality Index?

If having a Product Vitality Index is new to your organization, there are a few watch-outs. 

  • Lack of Alignment - The first watch-out is not having the executive team in agreement that new products and services are important.  Leaders may want to focus on scaling existing products and investing in sales channels to propel existing products forward.  If the leaders are not aligned with the need for new products or services, then it won’t succeed. This alignment with the executive team has to be all in or it won’t work. Take the time necessary to discuss, debate, and explore strategies to help your business grow. 
  • Lack of Decisiveness - A second watch-out is not being clear on what is a good opportunity to explore. Companies have multiple options for new products and services, so it is important to determine how decisions will be made and what information is needed to promote opportunities. This alignment will help manage decisions throughout the organization and empower teams to be prepared with a strong plan. 
  • Lack of Investment - A third watch-out is not allocating budget to pursue R&D activities in developing new products and services. It may take significant investments in resources, expenses, and capital purchases before realizing any revenue. It’s important to work alongside the CFO to calculate investments, define assumptions, and determine ROI for pursuing PVI.  A strategy may be to acquire companies that deliver new products and services, so aligning on ways to achieve this goal is equally important. 
  • Lack of Structure - A fourth watch-out is not structuring the organization around growth. A wild west mentality will not consistently deliver PVI results and may quickly burn out team members and lose project momentum.  As companies grow in developing new products and services, leaders are needed to make decisions, manage projects, and enable team members. 
  • Lack of Accountability - A fifth watch-out is not having someone accountable for delivering new products and services to reach the PVI goal.  This takes a disciplined leader who can make decisions along the way to consistently deliver results.  

What are the first steps in creating a Product Vitality Index?

If your company does not have a product vitality index defined, here are the first steps that can be taken. 

  1. Create a Baseline - Analyze the last five years to see how many new products or services were released to the market and determine the revenue impact. This will determine your current product vitality index score. Once you’ve analyzed the past, it's time to look at the present. Evaluate current R&D efforts going on, when those new products and services will be released to the market, and what the anticipated revenue will be over the next five years. This will determine your potential product vitality index score based upon efforts currently going on. 
  2. Discuss with Executives - Start the conversation with leaders by sharing the product vitality index baseline and listen to their questions and feedback.  It may take several meetings and discussions to align on the need for a product vitality index, but hopefully, the benefits are clear and the ability to measure success helps move the conversation forward. 
  3. Define the Risks - By not setting a product vitality index, what are the risks internally with creating an engaging atmosphere for your employees and externally with staying relevant to your customers. 
  4. Define a first Product Vitality Index target - By having the baseline product vitality index, you have a great starting point.  Look at your current investments in R&D to determine potential changes to the product vitality index.  At the same time, discuss the factors going on in your market to determine what is needed to stay relevant with your customers. 

Summary

The Product Vitality Index will propel middle market manufacturers to become disciplined in driving growth initiatives. Since this affects the whole organization, a cultural shift will begin involving multiple departments and their teams. This momentum will build upon itself creating an environment that attracts the best talent and continually delivers value to customers.  

Start Something Bold is here to help you jumpstart this effort.  Fill out the form below to let us know how we can help you take the first steps.

 

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By Paul Miklautsch - November 26, 2019

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