By Aaron Eden on July 21, 2014
“What is the ROI of this new business idea?”
“When can you have this product in market?”
These two questions are the biggest killers of innovation inside the enterprise. Senior leaders have good intention by asking these questions: they simply want to know if the new business is viable, so they can be sure you’re spending your time and money on the right things. Unfortunately, those questions only apply to execution of a known business model. For innovation and new product development they don’t apply until very late in the process.
The only way to answer the questions is to be pulled back into looking at incremental changes to existing markets.
New Way to Measuring Progress
That being said, leaders must have a way to measure teams’ progress toward determining whether a new business idea is viable. So if we put revenue aside for now, we can look to other specific milestones that you can use to measure progress and hopefully satisfy your leadership. This is a great opportunity for you to “train” management on Lean Startup principles. By sharing data that demonstrates progress – not just revenue – you’re illustrating the concept of validated learning.
Here are some of the key milestones you should be demonstrating *progress against:
*Find a consistent customer problem – To reach this milestone you need to focus solely on the customer and their problems, and the opportunities that exist for solving them. Once you identify a unique customer segment that has a specific and painful problem, then find ten more customers with the same problem. What is it about these customers that’s similar? You should be able to describe the customer segment thoroughly (a day in their life, their budget, workarounds, etc.). Can you do a “back of the envelope” estimate of how many other customers might exist in this segment?
Tip: Don’t think demographics! Think about customers in terms of a shared problem.
We suggest you utilize our Customer Zoom tool http://220.127.116.11/customer-is-the-source-of-truth/ to document your early assumptions about your customer segments. The more of an expert you are on your customers, and the most empathy you have, the better off you’ll be. Once you have a clear customer segment you can progress to the next milestone.
Prove that your solution will solve the customer’s problem – Using rapid experimentation and prototyping, you must now prove that your Minimum Viable Product (MVP) will actually solve your customers’ problem. This typically only requires a small number of features in a product to do so.
Tip: Separate your validation experiments, e.g., validating your customers will behave in a certain way, from your MVP, which is your first attempt to actually deliver the value you’ve promised.
We recommend using the Lean Entrepreneur Value Stream Discovery exercise to design your MVP, based on your customers’ needs.
Prove that customers will pay – Once you have proven that you can consistently solve your customers’ problem, it’s time to test your pricing model and revenue strategy. If you can’t get customers (that you’ve already spent significant time learning about and working with) to pay for your product, how will you get customers that you don’t know to pay you? At this stage you should also be testing different payment strategies (subscription, razor / razor-blade, etc.) to determine which one yields the best results for your business.
Tip: Don’t ask your customers what they’re willing to pay. You can rarely believe them. Run hypothesis-driven experiments instead. Get them to pull out their wallets!
Your objective is to determine the upper and lower boundaries of what customers will spend. If your leadership is asking about ROI or how big this business opportunity could be before you’ve hit this phase, you’ll need to educate them about these milestones and show them when the financials will enter your analysis.
Prove that you can acquire customers – Next, you need to test your possible marketing channels and sales process. Which channels work best for acquisition of your customer? Which ones are budget friendly (i.e., social media, SEM, content marketing, etc)? Which ones are the most expensive? You need to prove that you can consistently acquire customers through your chosen marketing channels. If not, you’ll need to identify other channels that are more effective.
Tip: Do not rely on core business marketing or sales teams to determine this. As a “startup”, you must determine marketing and sales channels for your particular product and market. You’re not testing scale (yet).
Be sure to begin measuring the lifetime value of the customers you bring in through each channel. On the surface, some channels may appear to be more cost effective than others, but when you look at the bigger picture, will cause customers to drop off at different periods.
Prove that you can deliver the solution for less than the customer will pay – Once you’re able to acquire paying customers, you need to start analyzing your costs to market and deliver the solution. Ask yourself: What can you optimize or change to deliver positive ROI? Are your margins large enough to warrant moving forward with this business model?
In this phase you’re likely to be doing a lot of optimizations to the sales & marketing channels you have discovered.
Tip: At this point, you can start comparing your business model to that of the core business. But that doesn’t mean using the assets of the core business!
Also note how late in the flow this milestone is placed. You’ll have some data about the viability and ROI of the business model at earlier points, but it will be extremely fuzzy.
Prove that you can scale this into a business worth running – The final milestone is to test your business model to ensure that it can scale up. As you add more customers, do you maintain similar margins or do they increase as you leverage economies of scale? Once you answer these questions, ask yourself if this idea is still work pursuing?
Tip: The final question asked by leadership might very well be: now that this idea is proven, does it fit into core business long term strategy? Answer might be ‘no.’
This is by no means an exhaustive list of everything necessary to launch a new product or service inside your enterprise, but hopefully it gives you enough to effectively manage your pipeline and/or communicate with your leadership on the progress of your new business model.
What other tools might benefit you as you pursue your innovation path?