Permanent link for Fail fast on September 8, 2023

Much of my career has been spent developing new technologies and new products. One of the smartest people I ever worked for, a brilliant scientist, introduced me to the concept of "fail fast."

Up to that point, my approach had been mainly about trying different inventive ideas and seeing what worked. As a team, we would try to figure out what we did right, replicate that, and introduce the next Good Idea.

We had some good ideas. We also had lots of failures. Some of those failures were avoidable and many of them overshadowed the successes. Failure can be expensive.

The flexibility to make changes to a product or service decreases as we get closer to launching in the market. Decisions made earlier in the process become harder and more expensive to change. At the same time, as we approach commercial launch, we're spending more money on development and to acquire goods needed for launch. Potential failure points in our product or service design therefore become more expensive to fix as we get closer to launch. Figuring out why the good parts of an idea work doesn't make for more success, but finding failure points does.

The failing fast mindset accepts that while no idea is perfect, most ideas have merit with some weaknesses. In failing fast, we seek to exploit those weaknesses early in order to identify and either eliminate or mitigate them as early and as cheaply as possible. Instead of testing to verify possible success, test to find potential failure points.

Put another way: we want to learn as fast as possible. Fail fast means to deliberately test for failure points so that we can learn about and eliminate defects in our product, our service, and our business model.

To set up testing, identify the specific hypothesis you want to test. Then, create a test plan that outlines the steps you will take to test the hypothesis. For example, if you want to test whether a new website design will increase conversion rates, you might create two versions of the website with different designs and send half of the traffic to each version. Use A/B testing to measure the conversion rate for each version and use the results to identify which version performed better.

By adopting a fail-fast approach, entrepreneurs can quickly identify mistakes, learn from them, and make improvements. Remember, failure is not something to be afraid of. Instead, it should be embraced as an opportunity to learn and grow.

When developing new products or services, the costs spent on development increases, while the flexibility in making changes to the design of the product or service decreases. Image from NPD Solutions.

Categories: entrepreneurship innovation invention
Posted by Thomas Hopper on Permanent link for Fail fast on September 8, 2023.

Permanent link for Product Cost Modeling, Target Markets, and Pricing on April 14, 2023

Entrepreneurs and intrepreneurs developing new products are inevitably asked "how much does it cost?"

To answer this, we need to distinguish between price—how much the customer pays—and cost—how much it costs you to put it in the customer's hands. We also need to distinguish between how much it costs right now and how much it will cost at volume.

If you're talking to potential customers, who are interested in buying, they really mean "what's the price, right now?" You'll need an answer for them, because you want them to buy. You need that market validation. So what's the right price? Ideally, it's a premium price point, but early price points should have no relation to actual costs. You're testing the market; not your operational efficiency.

If you're talking to potential investors or internal stakeholders, they usually want to know about the cost at volume. Volume is a bit tricky. You cannot possibly obtain an accurate cost estimate to produce a product design that doesn't exist yet in volumes you can only guess at, and at a manufacturing site that you haven't selected. But that's o.k.! You don't need to know the exact costs of every component; you only need to know which components of production drive the bulk of your cost, and roughly what those components cost at volume. What we're really looking for is just a fair estimate, at the highest volume that makes sense. If you're developing the next whiz-bang smartphone, where the total market is running around 1.5 billion units per year, you don't want to estimate volumes of 10 billion units per year. But around a hundred million a year could be the basis of a perfectly reasonable volume cost estimate.

Let's try an example of part of your operation. Suppose you're manufacturing your next-gen smartphone in China and shipping to the U.S. west coast once a month. Your product is small and you can fit 500 units to a pallet. Shipping rates for that pallet will probably run you around $1,000 (mid-2022 prices), or $2 per phone. When sales grow enough to utilize an entire 40-foot shipping container, you'll spend $10,000 but ship 20 pallets, or 10,000 units, lowering the cost per phone to $1. If you could reach volumes of around 120 million phones per month, you can buy the capacity of an entire container ship, which a google search or a phone call to a major shipper tells you will cost around $100,000 per day. With shipping times of around two weeks, you'd spend about $1.4 million per month to ship those parts, but the cost per part would be just 1 penny. When an investor or stakeholder asks you "how much will it cost," your answer should not be "$1,000 for a pallet of 500 phones;" your answer should be "we estimate 1 cent per phone at volume."

If your investors instead want to know how much it costs today, you'll of course tell them that at today's very low volumes, shipping costs about $2 each to port; just $500 per month.

One startup manufacturer I'm familiar with had a product where the bulk of the cost came from labor and certain metals in the product. That manufacturer's answer to "how much does it cost" assumed production would (someday) be someplace where labor was cheap and that volumes would be sufficient to buy an entire mine's-worth of metal production—this resulted in the lowest potential costs. In the present day, their actual costs were many times higher, with production in the United States where it was easier to manager during scale-up and with lower volume metals purchases.

This cost-volume relationship holds for just about every product or service that a business provides. The more you do, the more your costs are dominated by variable costs rather than fixed costs, and cheaper the variable costs get per unit.

For this reason, early-stage startups should (almost*) never be trying to sell into cost-conscious mass markets. You should be looking for the high-value customer segments, those who are willing to pay a premium price for a premium product or service. As your volumes increase, you can work on reducing costs and then reducing price while holding your margins (or letting margins slip while raking in large revenues, the way oil companies do). We'll cover this more in a future blog post.

* almost never: there are some great market opportunities in cost-conscious markets, where customers are under-served or not served and cannot afford current offerings. Startups can offer a lower-margin substitute with fewer features at lower prices, staving off competition from established companies while gaining market share. Examples include the early personal computer market, transistor radios, and shared mobility (e.g. Uber). Harvard Business Review offers some additional insight.

Production costs decrease over time, while market adoption increases, slows, then falls off as markets become saturated and alternatives take over. Which customer group you're talking to will determine which cost model you're using.

Categories: innovation management
Posted by Thomas Hopper on Permanent link for Product Cost Modeling, Target Markets, and Pricing on April 14, 2023.

Permanent link for What customers need on March 10, 2023

When products are successful in the marketplace, it's never because they were clever or the most technically brilliant implementation, but about how well your solution solves a problem that customers have with existing solutions. When I work with clients, I push them to identify what pains their future customers are complaining about with current products or services, and what gains customers are actively wishing for.

Customer pains are what annoy a customer before, during, or after they get a job done with an existing solution. When customers regularly struggle to use a product, or complain about how it works, how it makes them feel, or how it makes them look, then you have a customer pain that you differentiate your product around.

In contrast, a gain saves a customer time, money, or effort. When customers regularly say they'd like more of something, or for better of some product or service, or that it's easier to use, they're calling out for a new solution with those specific gains.

How do you find out what customers want?

The best approach is to go to the places where customers buy or use the existing products or services, and just watch and listen. Take notes.

Another approach, though less reliable, is to simply sit down with some prospective customers, either one at a time or in small groups, and ask them about their experience. Be careful not to lead them in any direction, but definitely encourage them to talk about what's missing and what doesn't work well.

Reading through many customer reviews of similar—or substitute—products or services can also provide some useful insights, but recognize that reviews are biased toward the extremes. Don't assume that what you read in reviews represents the opinions of the majority of potential customers.

The video below offers some further insight into finding out what customers really need.

Categories: entrepreneurship innovation
Posted by Thomas Hopper on Permanent link for What customers need on March 10, 2023.

Permanent link for Why great innovations fail on January 20, 2023

One thing every product concept has in common is that its inventor is convinced they've got a great idea. And they often do. However, that doesn't mean that every idea will work.

There are a lot of steps in the innovation process, moving from concept to commercialization, and plenty of ways things can go wrong. Smart innovators therefore seek to find the weak points in their concepts and their business models as early as possible, when it's cheap and easy to pivot. That is: good innovators work to fail fast.

As an innovator, there are some simple questions you should be asking yourself

• Does the underlying technology that you want to use actually exist?
• Do you understand the underlying principles?
• Can it be manufactured?
• Are there any regulatory roadblocks to making or selling this product?

One of the first steps in vetting your inventive idea is to make sure you have a solid grasp of the underlying principles. If you're doing all your technology development yourself, congratulations. If you're using technology developed by someone else, you need to make sure the technology actually exists. It's surprising how many would-be innovators get caught out on this one. Seeing a video on YouTube or reading a website doesn't count as confirming that the technology exists. You need to be able to buy it from reputable sources, and ideally have acquired a sample and tested it. You also need a basic understanding of how the technology works, so that you can identify weak points in your concept and successfully integrate the technology in your product.

Manufacturing is another area where many inventors and entrepreneurs get tripped up. There are many potential pitfalls, such as attempting to welding dissimilar metals, designing assemblies that cannot be assembled together, too-complex shapes for injection-molded plastic parts, or unusually-specified raw materials with long lead times and high prices. Bringing onboard an industrial engineer, or experts in the planned manufacturing processes, early in the engineering design will often avoid many costly mistakes.

The last common mistake that I see inventors and innovators make is neglecting to check that they have the legal right to sell their product. Patents, trademarks on words and logos, and federal and state regulations related to your specific materials, markets, or industry can cause months or even years of delays. Whatever you're inventing, take the time to understand the legal landscape that you'll be operating in.

It's OK to fail at your first idea; lots of seemingly good ideas won't pan out the way you hope. Find those weaknesses early and cheaply—fail fast—then pivot, and keep moving forward.

Categories: innovation invention
Posted by Thomas Hopper on Permanent link for Why great innovations fail on January 20, 2023.

Permanent link for The Hard Part of Innovation on January 6, 2023

Innovation is the process of creating a new product or service that better serves customers and is cheaper out-the-door. In very broad terms, it consist of three main steps:

1. Invention
2. Development
3. Commercialization

Invention—conceiving of the novel product or service and demonstrating its feasibility, or that it works—can take years, even decades, and requires daily coping with unknowns. By some estimates, only about 1 in every 100 concepts become feasible inventions.

Development is the process of taking the invention that works in your garage and turning it into a robust, market-ready offering that people will pay for. Not every invention will become a market-ready offering, or is even capable of being carried through the development phase. Maybe 1 in 10 inventions make it that far.

The commercialization phase involves developing the processes and infrastructure for marketing, manufacturing, and delivery. Entrepreneurs in this stage encounter a huge number of challenges in connecting to customers, gaining traction, and scaling their business. This is the stage where companies hit their first growth spurt as new expertise and resources are needed. At best, 1 in 5 market-ready products or services make it through this stage.

So which is hardest?

Whichever phase you're currently in is going to be the hardest. Every step will take longer and present bigger challenges than you imagine. When you've invented something new, and spent weeks or years getting it to just work, it will feel like everything else should be easy. Yet you'll find that the next step will be harder. Just having something that works isn't the same as having something that people can and will use. That doesn't mean you should give up. It means you need to be honest with yourself about where you are, while maintaining the faith that you can achieve your goal.

This ability to get through the hard parts is variously known as grit or the Stockdale Paradox. It's the passion and perseverance for long-term goals; the ability to maintain faith that you will prevail, while having the discipline to face the facts of your current situation, however unpleasant that situation is, and adapt. Researcher Angela Duckworth has a great, short TED Talk on grit.

Categories: innovation management
Posted by Thomas Hopper on Permanent link for The Hard Part of Innovation on January 6, 2023.