Innovative companies that become irrelevant sometimes get that way by misdefining incremental innovation itself. In carelessly defining it as an improvement that leads to higher sales, they overlook a crucial measure when extending a line of products—net price per equivalent unit—that must continue to rise if a company is to avoid the slippery slope.

Net price per equivalent unit is the inflation-adjusted price charged to whoever buys directly from the company—consumers, for instance, or distributors. It is an average, weighted by the number of units sold at each price, that takes into account any deals or discounts. It is expressed in relation to a standard unit (for a candy bar, the unit might be a certain weight of chocolate) so that it can be tracked over time.

If that number is higher than the net price for the previous version of the product, the firm is on the right trajectory. If it is lower, the business may be headed for trouble. Lower pricing may be a viable strategy for entering a new market or launching a breakthrough technology; otherwise, it points the way toward commoditization, which inevitably undermines the firm’s prospects of achieving sustainable revenue and profit growth.

Most companies think they’ve beaten commoditization if each successive generation of product brings in more total revenue than the last generation did. But they haven’t. No line extension project should take up space in the pipeline if it does not promise to yield a higher equivalent net price.

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