What Is a Derivative Product?

A derivative product is a good or service that is created by taking the essentials of a product that is already in production and modifying those same elements into something new. This approach can be used to create everything from new goods that are sold in different types of retail stores to the creation of new investment opportunities. This approach can make it possible to utilize the same basic concept but apply it to different markets and increase the potential to generate revenue from the resources used.

One of the earmarks of a derivative product is that it is created by modifying something that is already available. The idea is to create something that draws on the strengths of the original while also establishing its own position in the consumer market. This concept has been used to create a number of new products that were able to penetrate into markets in which the originals were not able to reach, or to provide the manufacturer with a larger share of the market, using the original and one or more derivatives.

The creation of a derivative product can occur in just about any industry. Often, the reputation of the manufacturer will provide some basis for launching the new product and at least attracting attention from consumers in the short term. If the modified product is deemed desirable by consumers, it begins to accumulate market share. Assuming that the original product continues to maintain its market share, the manufacturer is able to achieve a higher level of dominance in the marketplace, and generally enjoy an enhanced revenue stream.

The process of creating a derivative product involves assessing the potential to modify a currently successful product into something that is new. Cereal manufacturers sometimes use this approach by taking the basic formula of a successful cereal, making some slight changes in terms of shape, packaging and possibly the addition of a few extra ingredients, and come up with a new cereal product. In like manner, the entertainment industry sometimes employs this approach, especially in the television world. By identifying a popular character on a current television series and creating a new show around that character, the production companies and networks can hope to increase market share by owning two rather than one successful shows that appeal to the same demographics. With any type of derivative product, the idea is to take something that is already working, make a few changes, and then launch a new product that is likely to also have widespread appeal and generate more money for the manufacturers of the product.