Budgeting for New-Product Development

Budgeting for New-Product Development:-


when budgeting for new-product development. Some companies simply finance as many projects as possible, hoping to achieve a few winners. Other companies apply a conventional percentage-of-sales figure or spend what the competition spends. Still others decide how many successful new products they need and work backward to estimate the required investment. Table 20.1 shows how a company might calculate the cost of new-product development. The new-products manager at a large consumer packaged-goods company reviewed 64 ideas. Sixteen passed the screening stage and cost $1,000 each to review at this point. Half those, or eight, survived the concept-testing stage, at a cost of $20,000 each. Half of these, or four, survived the productdevelopment stage, at a cost of $200,000 each. Two did well in the test market, costing $500,000 each. When they were launched, at a cost of $5 million each, one was highly successful. Thus, this one successful idea cost the company $5,721,000 to develop, while 63 others fell by the wayside for a total development cost of $13,984,000. Unless the company can improve its pass ratios and reduce costs at each stage, it will need to budget nearly $14 million for each successful new idea it hopes to find. Hit rates vary. Inventor Sir James Dyson claims he made 5,127 prototypes of his bagless, transparent vacuum cleaner over a 14-year period before getting it right, resulting in the best-selling vacuum cleaner by revenue in the United States with over 20 million sold and annual revenue of $1 billion. He doesn’t lament his failures

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