How does one know the money value of a new product launch to the shareholders of a company? This is an unanswered practical question in marketing. Less than 3% of consumer products exceed US$50 million in sales within the first year of launch, but that is not money value to shareholders.

A new product launch is important for companies to: (a) drive up revenue; (b) elevate the company’s reputation; or (c) even gain new customers, thus ensuring the company survives. Companies desire to see the new product succeed, often with high expectations of seeing a significant increase in sales, more customer attention to their new product(s) and bigger market share. However, these hopes may not become a reality for most companies because 80% to 85% of launches fail, meaning the new product is not accepted by consumers.

Even though the failure rate of new product launches is high, most firms around the world continue to invest heavily. Companies have spent US$2.3 trillion, which is 2% of world income. The pharmaceutical industry’s investments in new products are even higher, followed by the techno, automobile and consumer sectors, where about 20% of earnings are allotted to new products. New product launches are increasingly becoming important for companies to be sustainable to secure growth.

New product launches have generally been viewed as part of marketing activities and less attention is paid to investors’ market valuation of such launches. Past studies on new product launches are about the self-declared importance of strategies and product performance.  The launch plan is often seen as an operational aspect of marketing to identify the target market, determine marketing mix and forecast performance. Others studied financial value from market reactions to the product launch sequences for first mover, which is about as far from shareholder value as you can imagine. 

The study found that first movers in a product market enjoy the net financial benefit for a limited time over a few days. But financial gain to share values erodes soon after a longer period of time when the bulk of the value gain occurs.

Product launches lead to what has been coined as time value of money, in which companies accelerate the present cash flow and discount the future financial performance. But none have applied their efforts to the more important question of how shareholders, as investors, place a money value. Measuring the money worth of a new product launch is a job for the investors, who, among other things, may have carefully analysed what “increments in sales” mean for stock price. 

In financial economic studies, an event study methodology has been used since 1968 to estimate any event impact to find shareholders’ value. The actual formulas can be found in the studies, for example. In simple words, the calculation is as follows:

Eq. 1:    Stock price change across each day from -30 and +5 days after each launch date; 

Eq. 2:    Repeat Eq. (1) for each new launch of a firm during a number of years, say, 10 years; and

Eq. 3:    Compute the cumulative average price changes across say -30 to +15 days for all events.

In short, a firm experiences stock price changes each time a new product is launched, at which time investors place a money value by increasing the prices of stocks. We computed that value using the data privately collected for Apple launches over two decades.

From the estimates of the rate of price increases “during the launch period”, the result is shown by the plot of the cumulative rates of changes for 124 launches (see Figure 1). The estimated change in price is about 8% of share value each time a launch took place over two decades. 

It is very clear that the average impact of all 124 launches has changed stock prices of this company by 8% per event. Closer examination of the statistics reveals that there are two specific periods over which the prices increase. During the 10 days around event time 0, the increase is for official announcement of the new launch: We call it event effect as the shaded area. That increase is about 3% per event. 

Prior to official announcement, information about new products is leaked out or sought-after and investors push share prices over -60 to -15 days. We term this pre-announcement value arising from market watchers and investors seeking yet revealed information thus pushing share prices up. 

Thus, this methodology is sufficient to accurately estimate shareholder value. This methodology as simply illustrated using 124 launches can be extended to more companies, more industries, and even to countries in future studies. Hopefully, this idea is adopted by marketing analysts to establish the money value of product launches.

The writers are employed as distinguished professor and senior lecturer respectively at the Sunway University Business School. The opinion expressed in this article is their own based on research, and is not in any way that of the university.