PREDICTING PRODUCT PROFITABILITY.

Only about 20% of new products produce enough profit to adequately repay the money invested in them. Since inadequate returns can be forecasted ahead of time by estimating the probable return on investment (ROI), why is the new product success rate so low? Surprisingly, many companies do not reuire ROI calculations as part of their new-product justification process. Management may not be aware that such calculations are necessary, or may not know how to perform and use the calculations effectively. Often, the ROI calculation is based on too many assumptions to be of much value. A more meaningful approach is to show how changes in the product's cost and market performance will likely affect profitability. This can be accomplished by plotting ROI vs projected sales for various product costs, and using the curves to help decide whether the project is worth pursuing.