Is NPVI enough?

The New Product Vitality Index (NPVI) was introduced by 3M in 1988 as a way to measure Innovation. The metric is defined as the % of overall sales that is coming out of products that were launched in the last three (some do five) years, the assumption being new product revenue is a leading indicator of future sales. Here it is important to choose the numerator and denominator very carefully, particularly when the NPVI is being calculated at the level of a smaller group within the company. First choose the set of products based off some common attribute, say your company is trying to increase sales in a particular region of the world and has new products targeted specifically for that market. Let’s call this set of products Local for Local (L4L). Then determine the revenue that came from L4L products launched in the last 3 years. This is the numerator of the NPVI. What is the denominator for this metric? It must be the overall sales coming off L4L products. If part of the denominator has sales that have no relevance to the products chosen for the numerator, then the relevance and insights from the NPVI are lost. In this example, if you add to the denominator sales coming from non L4L products then you’ll still get an NPVI number, but the numerator will cease to be an effective indicator of future sales.

A company having say 10% NPVI is garnering just 10% of its current sales from newer products and may be perceived to have a weak Innovation engine and therefore putting its future top line in jeopardy. However, NPVI is strongly dependent on the business you are in so there is little point in comparing with another company that sells different types of products. As an example, in Aerospace regulations are strict so changes to equipment fit happen less often and barriers to entry are high so companies can afford to live off legacy products. One would expect a lower NPVI in such a business in comparison to say an FMCG business. But every company needs to improve its NPVI wherever it may be currently.

So, what is a ‘good’ NPVI for your company? Is 10% bad, 40% good and 90% the best? Is a higher NPVI always better? An NPVI of 90% means that 90% of your current revenues are coming from products launched in the last 3 years. If there is a sudden spurt in NPVI, in a particular year, from say 30% to 90%, then it is a great thing because it means that innovation miracles were accomplished in the last 3 years. But if the NPVI is consistently high at say 90% for the last many years, there is probably a reason to worry. It means that you consistently have been getting very little revenues from older products implying that your products are ‘dying’ off after 3 years and are short lived or, as an analogy, you are swimming hard just to stay afloat.

So, if the NPVI viewed in isolation does not provide a complete picture, what else can? You can measure the length of the Life cycle of your products. Past data will indicate how long your products have lasted. You can total the number of years in the Introduction, Growth and Maturity stages leaving out the Decline stage. Or if you are more statistically inclined go for a 95% CI for the mean i.e. Sunrise to Sunset. If you find that the length of your Product Lifecycle is getting shorter in comparison to competitors with similar products, it could mean that you are not investing enough in strategies to ensure Product longevity. This can show up as a high NPVI and is a recipe for disaster! Product lifecycle lengths change based off products and can also change by time. You must be careful though. Google still gets ~90% of its revenue from its legacy search engine and is considered one of the most innovative companies!

In summary, NPVI and the longevity of your products are contrasting metrics and having too much of one may not be the best there can be.