What is 'Return On Innovation Investment'

Return on innovation investment is a performance measure used to evaluate the effectiveness of a company's investment in new products or services. 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."

BREAKING DOWN '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 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. 

Whether it’s a sketch or a prototype, it's important to get the fruits of innovation into a customer’s hands early in order to assess the potential of a product. 

 

RELATED TERMS
  1. Return On Research Capital - RORC

    Return On Research Capital is a measure to assess the revenue ...
  2. Production Efficiency

    Production efficiency is a level at which the economy can no ...
  3. Research And Development (R&D) ...

    Any expenses associated with the research and development of ...
  4. Metrics

    A wide variety of tools that managers and executives can use ...
  5. Asset Performance

    Asset performance refers to a business' ability to take operational ...
  6. Total Return

    Total return is a performance measure that reflects the actual ...
Related Articles
  1. Investing

    Key Financial Ratios for Pharmaceutical Companies

    Because of the unique requirements for bringing products to market, pharmaceutical industry stocks are best analyzed by using certain key financial ratios.
  2. Investing

    Buying Into Corporate Research & Development (R&D)

    Investors take note: companies that cut research and development are in danger of saving today but losing big tomorrow.
  3. Investing

    4 Tips to Evaluate Growth Companies (KO, AAPL)

    Discover the best metrics for stock investors to utilize when selecting and evaluating the best opportunities in growth investing.
  4. Financial Advisor

    How To Calculate Return On Investment (ROI)

    Return on investment allows an investor to evaluate the performance of an investment and compare it to others in his or her portfolio. Find out how to calculate ROI and how to use to your advantage. ...
  5. Investing

    R&D Spending And Profitability: What's The Link?

    Return on research capital (RORC), can help investors measure how much profit R&D spending actually generates.
  6. Investing

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
  7. Financial Advisor

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  8. Investing

    How's Your Mutual Fund Really Doing?

    Determine how mutual funds are doing by sizing them up against their peers.
  9. Insights

    And The King of R&D Spending Is

    When it comes to investing in other countries, knowing how much is being spent on research and development, and where it's be spent, is important for any investor.
  10. Investing

    Impact Investing: Improve the World and Your Portfolio

    Socially responsible investing allows you to make a difference in the world or your community while potentially improving your portfolio.
RELATED FAQS
  1. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
  2. What is the difference between efficiency ratios and profitability ratios?

    Learn about efficiency and profitability ratios, what these ratios measure and the main difference between efficiency and ... Read Answer >>
  3. What metrics are most commonly used to evaluate companies in the electronics sector?

    Learn what metrics are most commonly used to evaluate companies in the electronics sector and the specific qualities of each ... Read Answer >>
  4. What metrics are commonly used to evaluate companies in the food and beverage sector?

    Discover what some of the most commonly used performance metrics are that investors use to evaluate companies in the food ... Read Answer >>
  5. What is a good annual return for a mutual fund?

    Before investing in mutual funds, it's important to understand individual goals for the investment over a specified time ... Read Answer >>
  6. What is the average range of profit margin for a company in the financial services ...

    Learn why a company's profit margin is important in analyzing its worth and how companies within the financial services sector ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center