What percentage of your company’s revenue comes from new products or services?
The Vitality index is a percentage of a company’s revenues that comes from products introduced in the last 3–5 years—usually 3 years. For home builders, that might be a new floor plan. For building product companies, it is a new product that often includes new technology or a reaction to shifting consumer demand. Our New Home Trends Institute team has been summarizing many new floor plans and building products that have reacted to changing technology and consumer shifts over the last few years.
Building products manufacturers, in particular, have stepped up their game recently to bring new products to market. The innovation partially emanates from a spate of recent regulations aimed at encouraging the responsible use of natural resources, as well as end-users who are asking for construction solutions that prioritize health and sustainability in their homes and workspaces.
While manufacturers across categories have made product innovation a priority, this trend is more pronounced in energy-related categories like HVAC equipment.
HVAC manufacturers such as Lennox International and Trane have increased the share of their revenues that come from products introduced in the most recent 3 to 5-year period. In the case of Lennox, its vitality index has trended up from just over 40% in 2018 to 48% in 2022 (a record high for Lennox). Over the same period, Trane has improved its vitality index from ~18% to ~21%. While they do not report a vitality score, Carrier released 100 new products in 2022 and has more than 9,000 active patents and pending patent applications worldwide. More product rollouts are expected in this category to keep up with evolving regulations.
Manufacturers of plumbing products that play a role in governing water usage have also been regularly refreshing their product portfolios. In their 2019 sustainability report, Xylem (maker of water pumps, waste-water removal systems) highlighted the goal of raising their vitality index from 25% in 2018 to 30% by 2020. Over the last five years, Masco (maker of Delta faucets) has seen 25–30% of its sales come from products introduced in the most recent 3-year period. Recently, even Fortune Brands Innovations (maker of Flo by Moen Smart Water Monitors) indicated they have a new product vitality target in the 25–30% range. Innovation in this category is also driven by features providing convenience for consumers, such as voice-activated smart faucets and spot-resistant finishes.
Walls and Ceilings
Manufacturers of interior surface materials are also refreshing their product portfolios. Over the last decade, Armstrong World Industries, which primarily sells ceiling and wall solutions into the Office, Education, and Healthcare end markets, has improved its vitality index from the single digits to close to 40% by 2021. Much of this innovation has been driven by a need to provide healthier workspaces in terms of improved acoustics through sound absorption and blocking, better air quality, and thermal comfort.
All this investment in innovation and new products is good news for end-users in terms of access to more efficient and healthier products. It also has implications that players within the building products ecosystem need to plan around.
- Installers/Technicians: Manufacturers’ focus on introducing and distributing newer products could make it difficult to find spare parts to repair and service older equipment. The challenges in finding spares in conjunction with the effect of energy-related tax incentives could cause some property owners to opt for new equipment earlier than planned. HVAC contractors will need to ensure they have the appropriate supplies and labor to cater to the type of demand (new installation vs. repair) that is most likely in the markets they serve.
- Distributors: The introduction of newer products speeds up the obsolescence of older versions leading to a drop in demand for older products. Dealers/distributors will need a greater focus on inventory management to ensure they have the appropriate mix of stock between old and new products on hand.
- Sales representatives: Sales representatives will need to be educated on the changes introduced by the new products and speak to their benefits. They will also need training on installation, service, and maintenance.
The coming years should see a lot of new products in the housing industry due to significant changes in technology and society and significant investment in R&D over the last few years. Home builders and manufacturers with the best products should benefit from the higher margins associated with newer products. Downstream players can also benefit by anticipating demand in their respective markets and planning accordingly. With the world innovating as rapidly as ever, new home construction is doing the same.