If I had the definitive answer to this, I would be a millionaire! For the sake of simplicity (and for most real situations) we will assume that this question is asked by a manager at a company that has been in business, understands the market, and this is a new product for this company.
The basic product development metrics we will use are:
- Sales rate one year after launch
- Gross margin of the product
Thresholds for these two metrics are defined in the business case used to justify the cost of product development.
Once we establish the metrics, take the following steps:
- Review prior launch success rate of similar products. Apply the probabilities of the prior launches to the new product.
- Modify the probability (reduce it) if this is a new product that the company has not made before.
- Further reduce the probability if this is a new to the world product.
- Reduce the probability if this is a new market for the company.
- Greatly reduce the probability if you are not certain of the ‘product-market fit.’
- Create a risk matrix and compare the score of this product with past projects. Is the new product more or less risky, considering the market, cost, new technology, regulatory, etc.?
These steps refer to internal factors. Consider also these external factors:
- How big is the market? If you were to capture 10% or 20%, would this exceed your sales threshold for the first year?
- How big is the largest player in the market? Do you think you have a substantial value proposition? If so, use the sales level of this competitive target as an estimate.
- How fast is the market growing? How mature is the market? How big is the sub-segment where this product will compete?
Let’s look at an example.
At some companies, the thresholds are $10M for sales after a full year (depends on company size), an IRR (Internal Rate of Return) of greater than 30%, and a Gross Margin greater than 50%.
If you have launched a large handful of products with risk vectors similar to the new product you are evaluating, you can apply the probabilities of up to seven similar launches to this product.
Using the thresholds above, you find that the actual values for the seven are:
- Sales = $8M
- IRR = 22%
- Gross Margin = 52%
Let’s say the risk matrix indicates that this is slightly lower market risk than the prior seven. And let’s say the overall market is large, with the number one seller moving $25M per year and you have a very good competitive position.
With all things factored in, your new product has a high probability of clearing the threshold values. However, if the business case relied on $50M in sales, then the probability that you will clear the thresholds is very high – but the probability of making the business case is low.
The best way to estimate the probability of success is a combination of internal factors combined with an understanding of the competitive structure of the market environment. Triangulation provides the most reliable guidance with the least effort.