Is the Opportunity Worth Pursuing? The Five P's of Innovation

Is the Opportunity Worth Pursuing? The Five P's of Innovation
(Marketing Memo October 2010)

The press is full of articles on innovation; yet, few help you evaluate which innovations are worth pursuing. Besides demonstrating that an innovative product or service works, you also need to prove that the innovation will generate large enough profits to be worthwhile. Following are some tips for evaluating innovations that are based on an article by Scott Anthony, writing for the online Harvard Business Review[1].

To "size" an opportunity, Anthony recommends that you consider the four 'P's' of innovation: population, penetration, price, and purchase frequency. To these four, add profit margin, Anthony says. Here are some tips to help you make the right assumptions about the five 'P's' of innovation:

Population
First, define your target market. Which segments of the target market are likely to want/need and afford your product? Which of these segments can you reach? How large do you think the target market is? Talk to customers, salespeople, and industry experts to make sure your projections are realistic. Realize that it is difficult to move from one market or one segment to another. If you sell consumer electronics, it will be challenging to sell electronics to the enterprise market. Imagine if AARP attempted to sell travel services to twenty-five year olds!

Penetration
How much of your target population can you reach this year? In the next two to three years? What reason(s) do you have to believe you can achieve these targets? Is your offering so novel or so risky that adoption will be slow? Could any of these segments turn to competitors? What could prevent you from achieving your projections, and what can you do about it?

Price
Besides production costs, prices must take into account the value your offering brings to customers, as well as what customers are paying for similar products. Set prices well before launch date.

Purchase frequency
Purchase frequency can affect price. If you are selling printer cartridges or other essential consumables, you have a somewhat predictable revenue stream. You also have a lot of competition.

Profit Margin
Many companies project revenue, not profit, failing to factor in the cost of producing, marketing, and selling the offering. Profit then becomes the product of Population, Penetration Percent, Price, Purchase Frequency, and Profit Margin.

We can help you test assumptions concerning Population, Penetration, and Purchase Frequency so that your profit projections are realistic.

[1] Scott Anthony, "The 4 Ps of Innovation," Harvard Business Review Daily, 6/10/10.

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