How much is your business worth?
Ask this question to ten business leaders, and nine of them will focus on the bottom line - turnover, profit, revenue. Important factors, no doubt, but value runs deeper than the financials.
Business value is generally calculated as Net profit of business times Multiple of earnings for the sector. This series is concerned with those multiples; those variable elements of a business that can add considerable value when it comes to the time to sell.
In this series so far we’ve covered benchmarking, and the importance of a good employer brand. In this piece, we’re focusing on new product development.
New product development (NPD) almost defines itself. Almost. It is the process by which you bring a new product or service to the marketplace, sure. But ‘new’ doesn’t necessarily need to mean you start completely from scratch.
The Ansoff Matrix places business development activities on a scale from least to most risky. Selling new products to new customers, for example, is furthest away from your current business model, an uncharted territory that carries the most risk. But developing your existing products in new markets, or selling new products to existing customers, keeps at least one foot firmly planted on trusted ground.
Innovation has become a buzzword recently, to the point that businesses think they have to send a man to space in an electric car to be considered innovative. But innovation comes in all shapes and sizes; it doesn’t have to be an industry-changing disruption (another buzzword). There is one commonality, however: if you don’t innovate, the business will grind to a halt.
The difference between effective innovation and vanity projects (ego-vation?) is simple - the customer. Proper innovation offers things people (i.e. your customers) genuinely want. If you get that right, it can significantly change the fortunes and increase the value of a business.
New products aren’t necessarily of interest to future owners, but the mechanism of innovation certainly is. Markets are like icebergs - substantial, but constantly on the move. New product development illustrates the business’ ability to move with the flow, and to react to market changes.
Think about how much has changed in the last ten years. Who could have predicted a time where Alexa can organise our entire lives, where plant-based burgers ‘bleed’ like real meat and where we’d pay for goods and services by waving our mobile phones over a card machine?
The point is, while various bodies do their best to predict future trends, there’s no guarantee that these predictions will come to fruition. But the ability to innovate successfully demonstrates to potential buyers that you’re listening to the market, that you’re alert to industry trends, and that you’re firmly focused on the future. It proves that you’re passionate about putting customers first, as well as about reinforcing the strength of your brand going forward, which can give you the edge in a competitive marketplace.
New product development demonstrates to potential buyers that your business is not stagnating, but capable of innovation. You have built a talented team that keep day-to-day operations ticking along, and confident management who understand their customers’ needs and the market they are operating within.
This is where your marketing strategy comes in. Perform a SWOT analysis on your own products, and those of your competitors, and see if that generates a new avenue your business can follow. Talk to your customers and find out what they want, and tailor your NPD strategy from those conversations.
You could start with upgrades, replacements and new models. The closer the new product is to the old, the less risk there is. Apple are kings of this business model, with hundreds queueing to get their latest products, none of which are particularly different to the old one. You don’t want to reach the saturation point when everyone who might want your product already has one. Moving with the times is essential - failing to can stop you from seeing that a particular product isn’t as popular as it once was and needs to be put to bed forever. And don’t forget the slow public demise of 1980s retail giants such as Woolworths and Blockbusters.
Developing new products - or new ways to package existing products - allows you to find the sweet spot between too safe and too risky, working with your established customer base and brand reputation to continue to innovate. Your business stays fresh and relevant, and your customers and prospects stay interested.
New product development isn't just about throwing new products out there and seeing if they stick. It's about responding to customer needs, understanding the industry, reaching out to new markets and filling gaps that competitors can't. As such, it should be what every business strives for. And with all of those boxes ticked, you'll stand in good stead for being noticed by potential buyers - whether looking to sell now or not.
Check out the The Marketing Centre’s blog for more insights into how marketing builds value when looking to sell your business.