Return on Investment for Innovation

What Is Return on Innovation Investment?

Return on innovation investment is a performance metric used to assess how well a company's investment in novel goods or services has worked out.  The return on innovation investment is calculated by comparing the profits of new product or service sales to the research, development, and other direct expenditures generated in creating these new products or services.

Return on innovation investment is also referred to as "R2I" or "ROI2."

KEY TAKEAWAYS

•Return on innovation investment (R2I or ROI2) measures how effectively a company turns R&D spending and products into profitability.

•Innovation is key to business growth and success, but new ideas also come with risks and sunk costs, which must be weighed against potential gains.

•Companies that achieve high returns on innovation investment tend to get prototype or beta versions of their products out to market early and iterate accordingly.

Understanding Return on Innovation Investment

The focus of return on innovation investment is not only to determine how well a company is turning its investments in new products or services into additional profit for the company, but also how efficient it is in its research & development (R&D) spending. The better a company is able to forecast the demand for its new offerings, as well as how efficient it is in allocating resources, the better its return on innovation investment should be.

The value of an investment in innovation can't be measured by the originality of an idea or the net sales it may produce. Return on innovation investment may, in fact, involve many missteps along the way, and the value gained from these activities in terms of knowledge and experience may make it possible to achieve greater ROI further down line.

Achieving Return on Innovation Investment

Organizations should decide as early as possible on focus areas and structured processes for their innovation efforts and ensure leadership is on board with the ambition level and risk involved. Companies without parameters and shared understandings around their innovation efforts are more likely to see huge misses. Ideally, innovation and risk management should be aligned, not adversarial. To achieve such a balanced state, companies must establish concrete, yet simple, parameters and processes that address risk tolerance and establish the guideposts against which innovation should be pursued, evaluated, and ultimately brought to market.

Experts also suggest taking smaller, iterative steps that require less up-front investment in order to gauge effectiveness and increase confidence and investment gradually. To be successful, however, the organization must culturally support smart risk-taking. Fully vetted ideas, fully backed by financials and consumer insights, are also expensive. Initial goals should include being able to cash in on small ideas, or minimum viable products (MVPs), but this requires a culture that supports them in their sometimes fuzzy incubation phase, long before it may be known how large the return on investment should be.

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