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Don’t Rob Peter to Pay for Paul: Striking the Balance with Innovation
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Don’t Rob Peter to Pay for Paul: Striking the Balance with Innovation

Innovation is important, and getting it right is critical to growth. Nielsen research has found that 70% of new product sales decline in the second year after launch. Attracting trialists and growing sales in year two comes largely from continued support. Companies that have found innovation success continue to invest in the out years, and in turn, grow their brands.

But it is equally important to not let innovation distract from the core business. Achieving optimal balance to support both the core business and adequately grow innovations, so that they start paying back in their own right, is critical to sustained growth. But how should companies optimally slice their media investment to support both?

Working with the Institute of Practitioners in Advertising (IPA) and analysing hundreds of brands, Nielsen has identified a quick, diagnostic rule of thumb to identify under- or over-investing brands, ensuring innovation doesn’t steal the limelight. For both established brands and new products, a company needs to ensure that share of voice (SOV) outweighs the share of market (SOM), the proportion of sales to competitors. Underinvesting relative to your brand when bringing to market innovation allows competitors to capitalise and gain market share.

A U.K. client recently launched a new product and in doing so significantly cut back on media investment for its core brand. Redirecting its media investment to the innovation left the base brand vulnerable. Applying the SOV and SOM formula, we found the company’s competitor was overspending on media compared to its market share (+23%), while our client was underspending relative to its size (-12%). 

Portfolio-level marketing mix modelling confirmed that the core brand’s media investment needed to be reinstated quickly. Contribution, ROI and base sales were down in the recent trend. Using Marketing Planner Optimisation, our forward looking simulation tool, we identified an optimal investment ratio of 75:25 to the core business and to new product development, respectively, that would support the core while building the innovation’s success. In this example, the shifts in investment lead to £7.1 million in incremental revenue.

This said, 75:25 is not the magic investment ratio for every fast-moving consumer goods brand. In some cases, new brands can benefit a base business, if both are supported adequately. For example, another client also launched a new innovation following a successful concept test. However, the client and agency had completely under-estimated the “halo effect”—where the new product benefited the base business.

While not all innovations create halo effects to the same extent, new brands can result in a positive volume lift on the base business. This is more likely to happen when the new item shares the same trademark and core equity as the base business and when the new item has a clearly distinct usage occasion and/or target segment from the base business. This reduces perceptions of substitutability between new item and parent brand, which increases incrementally.

In our client’s example, these factors resulted in advertising success for the new brand and a positive, unplanned for benefit for the base business. Of course, the halo was smaller than running dedicated core brand advertising. Still, this learning could be leveraged and funds ‘freed up’ for other marketing activities.

Even without these halo dynamics, however, this client maintained support of the base brand and introduced dedicated investment for the new launch, which helped to minimise cannibalisation since both had complementary benefits. These similarities reduced the weekly number of gross rating points required and shifted the investment ratio from 60:40 to 70:30, which improved overall portfolio volume by 30%.

Although a new brand’s advertising can sometimes have positive halo effects to the base brand, a base brand should be supported at healthy levels. Funding new product development incrementally where possible can help avoid diverting budget from core. Maintaining or increasing support for the base brand, even during the introduction of a new product, can help minimize cannibalization. Conversely, shifting all or a majority of marketing funds from the base brand to innovation can leave the base brand vulnerable to cannibalization from the new sister brand or from competition. In short, rob Peter at your peril.