This is a guest post from our partners at PLAYBOOK. This series is based on posts by Eric Graves on the Cost of Delay. PLAYBOOK is a project execution software program that enables lean and agile methodologies. http://playbookhq.co/
Cost of Delay Series (Part 3 of 6)
In order to estimate the Cost of Delay, we need to understand the behavior of the curves and the variables that can impact their shapes. First let’s discuss the front end of the curves, the product launch and sales ramp-up period. Notice the ramp-up on the left for the orange (one month late) & red curves (one month late with a reduced sales peak) are about the same slope as the green curve (on time to market). The ramp-up is shifted to the right, but the slope is the same.
The slope reflects the rate of sales, which is determined by the rate at which the sales force can get up to speed on the product, advertise it to customers, win them over, and ultimately achieve sales. Generally, the rate at which sales increase is about the same whether the product is released on-time or late. Pent-up demand scenarios where the slope gets steeper if we release later are rare. It is more likely that the ramp-up is shallower if the product is late, because it becomes harder to win those customers over.
One can argue it is possible to increase the slope by adding sales people or spending more money on advertising. However, if increasing sales this way is cost effective if we are late, why wouldn’t we just plan to do the same on the ‘on time’ curve too? Next let’s look at the top of the curve – orange curve vs. red curve. In most cases, the later the product is to market, the lower the sales peak will be. There are several reasons for this, including:
Firstly, during the time the product is still in development, competitors may be advertising, talking to customers, and winning them over. Some of the customers they ‘win’ will typically continue to buy from the competitor, even when our product is released, even if our product is better than our competitor’s.
Secondly, even if the competition hasn’t launched yet, they are getting closer to it. With each passing week we lose more of our opportunity to win customers who will stay with us even after the competition launches.
Thirdly, the market for the product may be seasonal or event driven. If we are late to market, the seasonal rush may be partially or completely over, or we may miss a trade show or a sales meeting, and lose the associated buzz that comes with it.
These cases are common. As a result, our peak monthly profits are reduced because our sales volumes are reduced, we lower the sales price and reduce our margins, or both. Unfortunately, the amount of the reduced peak is difficult to estimate. To make matters worse, some people have a hard time accepting that there will be any reduction in the peak at all. Instead, they choose to believe that ‘if (whenever) we build it, they will buy (eventually)’, and at the same price.
When product life-cycles extend beyond 5 years, it is common to assume that every customer lost as a result of being late to market will be back as a customer within 2 or 3 years. The only way to catch up when sales are still increasing is to increase the slope of the ramp-up via additional investment in sales and advertising.
Now that we have looked closely at the ramp-up and top of the curves, let’s look at the tail of the curve – the declining profits period. If you forecast far enough to have a downslope, the downward ramps for both the ‘on-time’ product and the ‘late’ product are typically (almost) coincident. Think about why you have declining profits and ask yourself, “Does the downslope start later if I release later, or does the rate of decline change if I release later?” Not likely.
Usually the reason for the declining profits is that our competitors will launch a better solution around that time. When new competition arrives, typically our volume drops, our margins drop, or both. If we release our current product later, in today’s competitive marketplace, the downslope typically remains unchanged. The timing for product removal from the market doesn’t change, only the timing for introduction. Therefore, the total available sales must be captured in a shorter timeframe. There are exceptions, but they are rare.
In the next post in this COD series (4 of 6), we’ll discuss a quick way to calculate the Cost of Delay.
Strategy 2 Market is excited to join forces with PLAYBOOK, a project execution software program that enables lean and agile methodologies. Again and again, we have seen our clients struggle when it comes to choosing the right projects, optimizing resources and improving time to market. More often than not, this is because they lack visibility into key pieces of information that can translate into a better bottom line.
“If you’re looking to shed months off your new project schedule, improve team culture and collaboration and track project execution in real-time… it might be time to hang up those tools that no one seems to pay attention to, and ax that weekly status meeting that seems bloated with old information.” Contact Mary Drotar at [email protected] or 312.212.3144 for more information on getting LEAN.
Strategy 2 Market helps companies increase growth and decrease product development complexity. www.strategy2market.com
For more information or to speak with one of our consultants, please contact Mary Drotar at 312-212-3144 or [email protected]