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How does product development affect a company’s market value?

Companies / SME Sep 15, 2021 - 09:35 PM GMT

By: Submissions


Any company strives to serve its customers and make itself sustainable to achieve its goals and missions. By launching new products, an organization can meet the seasonal requirements of customers in the market. It’s not viable to remain within the traditional product lines and expect them to sell for years at an end. On the contrary, it’s necessary to introduce new, improved products to enhance efficiency and improve profitability. Innovation is paramount to company success, as customers are becoming more demanding and savvier. Entrepreneurs need an edge to survive and, most importantly, stand out.

If products are more attractive to customers, sales spur and lead to business growth. Product development plays a key role in the growth strategy of a firm. Not surprisingly, it influences the market value of a business. Why does market value matter, anyway? Because it eliminates ambiguity and uncertainty when it comes to determining how much the company is really worth. Market value highlights the value to investors in the marketplace, offering transparency and clarity to share buyers and sellers alike.

Product development is regarded as a risky activity

It seems that, among all the activities taken up by a firm, product development is the riskiest one. For an object made available for consumer use to have appeal, it has to stand out from other existing products in its category or the product alone can create a new category. To offer something new, it’s necessary to do something that has never been done before. The unknowns are high, so as to speak. Just because a product hasn’t been developed previously, that doesn’t automatically mean that it can’t be copied inexpensively. Much risk is related to product feasibility.

Product development entails many kinds of risks. Besides market-related risks (commercial viability, consumer acceptance, competitors, and product introduction window timing), there are organizational risks, of which mention can be made of the lack of sufficient funding, staff loading, and the capability of project management. Ideally, companies should be doing market research in parallel with development. Market research during the development helps make more money, as it’s possible to quickly identify what feature set or design performs better.  

The characteristics of successful product development

Product development demands agility fine-tuning, and flexibility. There’s no single way to bring to life a successful product. Moving forward, let’s see the characteristics of successful product development.

  1. Product quality – How good is the product? Does it offer solutions to common challenges? Is it robust and reliable?
  2. Product cost – What costs are incurred in producing the product?
  3. Development time – How long does it take to transform an idea into a product? How quickly can the team complete the product development effort?
  4. Development capability – Is the company able to produce better products in future time as a result of the experience with product development?

No matter if a firm is developing a new product or creating a new version of an existing one, having a sturdy development process is of the essence.

Revenue growth through product development provides an idea of the company’s capability

Product development and company performance are intertwined. This means that an organization’s value can be measured in several ways. The more sales a company makes, the higher the sales turnover is. A company that is willing to take on risks can significantly increase returns. Higher market share can be attained by increasing awareness, reducing prices, and offering sales incentives. Revenue growth doesn’t disappoint if the products address the urgent problems of the target audience. The outcome is good win rates, managing resources sustainably, and better revenue performance.

The fact of the matter is that developing a new product allows an organization to continue to grow and expand. Before taking action, it’s important to evaluate the market and develop a strategy. Not only can this ensure the longevity of the firm, but also establish partnerships and provide value for owners. For the sake of clarification, the stock market performance is more affected by sales growth than any other metric. The firm has succeeded in developing a product that tends to be rewarded by the market, delivering handsome returns to shareholders.

Generally speaking, companies that are new in high-growth industries are valued based on their revenue and not their earnings. The price/sales ratio is obtained by taking the present market valuation of the company and dividing it by the past 12 months’ trailing value. Some investors are more cautious and even take into account the long-term debt of the company. This shouldn’t come as a surprise given that they don’t wish to acquire debt. New product launches signal favorable information about an organization’s future outlook. From a market standpoint, developing and launching new products demonstrates an organization’s expertise in the field.

Market commercialization of a new product gets captured through innovation

For an innovation to be transformed into business, it must meet customers’ needs. This is precisely why, in the development process, it’s essential to hear different opinions. They can be assembled the moment that the value chain becomes involved in the project. A highly creative organization doesn’t necessarily possess the skills required for the marketplace launch of a new object for consumer use. At any rate, new product activity helps shape the company’s perception on the stock market. To be more precise, the valuation of shares increases owing to the perceived heightened innovation potential.

Commercialization refers to the market-oriented processes that follow product development. For any organization, the ultimate goal is to commercialize new offerings. Commercialization is an organizational phenomenon, which translates into the fact that it goes beyond the sales personnel. Innovation is an indispensable element of competitiveness, impacting productivity and market value growth alike. Innovation-intensive firms manage to mitigate valuation uncertainty, particularly during bad times. Innovation brings about greater shareholder value. Therefore, it’s worthwhile investing in innovative new products.

All in all, a company should harness customers’ ideas in an organized way – in other words, cultivate innovation. Firms that actively pursue innovation are rewarded with higher stock market valuations.

By Cynthia Madison

© 2021 Copyright Cynthia Madison - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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