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. Disruptive Innovation

    A disruptive innovation is a new use for a technology that breaks ...
  2. Early Majority

    The early majority is the first sizable segment of a population ...
  3. Diffusion Of Innovations Theory

    Diffusion of innovations theory is a hypothesis outlining how ...
  4. Research and Development - R&D

    Research and development refers to the work a business conducts ...
  5. Total Return

    Total return is a performance measure that reflects the actual ...
  6. Expected Return

    Expected return is the amount of profit or loss an investor would ...
Related Articles
  1. Investing

    Why China is not a Threat to the U.S.

    Learn about China's competitive position with respect to four areas of innovation. Discover the challenges the country faces in competing in these areas.
  2. Small Business

    The Most Innovative Entrepreneurs Of 2015

    Investopedia provides a list of the most innovative entrepreneurs with the potential to make it big in 2015.
  3. 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.
  4. Investing

    Does Lack of Innovation Matter for Apple?

    analyze if Apple has ever been an innovation company
  5. Insurance

    Investing In Medical Equipment Companies

    Learn the basics about medical equipment companies and how investing in them can benefit growth and value investors alike.
  6. Insights

    Fidelity Investments Canada Announces New Fund Focused On Disruptive Innovations

    Fidelity Investments Canada ULC launched a new fund focused on investing in companies around the globe that are innovating and disrupting.
  7. Managing Wealth

    How Do Futures Contracts Work?

    Futures contracts are one of the most important financial innovations in history, but they are often misunderstood. Find out how this contract is used to transfer risk between different parties. ...
  8. Investing

    Top 4 Equity ETFs for 2018

    Top performing ETFs for 2018 with investment in innovative technology.
  9. Investing

    Apple, Google, Tesla Are Most Innovative Companies: BCG

    The consulting firm used a mix of metrics, including financial returns, for its rankings.
  10. Retirement

    5 Ways New Investors Can Reduce Stress

    Learn five ways to reduce stress prior to investing, involving budgeting, diversification and risk tolerance.
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 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 >>
  3. What's the difference between absolute and relative return?

    Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

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