There are three fundamental components of revenue growth:

  • The Gradient or slope of growth;

  • The Torque or speed of growth; and

  • The Fuel Efficiency or Profitability of growth.

As you can imagine, there are multiple scenarios in which an organization’s actions (or lack thereof) can contribute to its positive or negative direction. One, which is particularly perplexing, is the misguided correlation between product or service line extension and innovation. Let me explain:

In a 2005 issue of Harvard Business Review Bain Consultants Mark Gottfredson and Keith Aspinall wrote, “What’s the number of product or service offerings that would optimize both your revenues and profits? For most firms, it’s considerably lower than the number they offer today.” They add that “Continual launches of new products and line extension add complexity throughout a company’s operations, and as the costs of managing that complexity multiply, margins shrink.”

Several Relationship Economics consulting clients are producing zero revenues from product extensions they’ve developed, reinforcing the fact that leaders confuse proliferation with innovation. For many organizations the quick fix is to modify an existing product or service. What they don’t foresee is that although a product line extension sounds easy and attractive, it often subdivides the sales volume among more choices and adds little net new growth!

In our experience, these organizations tend to sacrifice two of the three attributes above (Slope, Speed, and Profitability) for the other one!

Of course, there are exceptions – the extension of the iPod to the iPhone and iPad has increased Apple’s sales of all three by attracting both net new consumers, as well as those like me, who own all three products. What I don’t understand, however, are the eight models of the iPod, eight of iPhone and eight of the iPad! Where does the volume come from? At what point do you cannibalize one version? For instance, why would I buy an iPod if I owned an iPhone? For others, their entry point is the iPad (from which you can make and receive calls), eliminating the need for the iPhone!

However, now there are three times as many items to make, inventory, ship, display, promote, and sell. If there aren’t three times as many sales, the cost of managing the triple variety eats into the profitability. Seldom is another outcome possible. So, while the top line revenue growth remains constant or slightly increases, the bottom line goes down! The difference is that Apple has a very large, cult-like following and can afford the additional complexity and expense; most companies are not Apple! They’re also extremely astute in limiting the number of features in a new product launch, i.e., not including a camera in the first version of the iPad to create a strong pull through for the much-desired feature in subsequent releases. In my case, we tend to pass down the technology; when I upgrade, my wife or kids will get my iPad and current MacBook Pro.

In facilitating a recent senior leadership off-site meeting, the group seemed very pleased with the innovation of their business unit. They engaged me because overall business performance was not what it used to be; in fact, percentage profitability was falling while sales were growing nicely. Unfortunately, they were so close to drowning in the complexity created by too much incrementalism that they couldn’t see it themselves. The more they tried to keep up with the competitor’s quarterly announced ‘features,’ the more their profitability continued to slide. They were selling more, but profiting less.

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