Experimentation: learn a lot, invest a little

 

So you have had a team look at trends and consumer needs, generated lots of ideas and developed a few draft business models around them. Since the ideas are slightly outside of your comfort zone, beyond what the company is currently providing to its customers, you are making lots of assumptions about who the customer is, whether they would value your offering and how you are able to make a profit. Many businesses struggle in taking the next step. If they take any action it will usually include asking the team to do more market research, develop a solid business case so the management team can take a view and decide whether it is worth the investment needed to launch the idea. The business case cannot be made and management turns the idea down thinking it is too risky. Recognise this scenario?

This is why experimentation matters. In its true form it can help a business take the necessary next steps without feeling they are making a very risky bet. Big uncertainties mean more perceived risk and a lower likelihood of progressing the idea to a stage where company leaders can make an informed and sensible decision to launch it into the market.

Learn a lot, invest a little is the principle that teams should follow here. Question is whether you can design a systematic approach to do this? The answer is yes and there have been many examples where running simple experiments show teams whether their assumptions hold true (or not).

Take Innocent, the company famous for its smoothies with the haloed apple on the label. When the founders had their idea for a pure and fresh fruit based drink they made all sorts of assumptions and were anxious to give up their current jobs to launch a new business. Wanting to test their assumption that their proposition “make it easy for people to be healthy” would appeal to people, they first tested different recipies on family and friends. Confident about having found the right recipes they setup a stall at a local music festival in London, a venue that would attract the people they thought would buy their drinks. After spending £500 on fresh fruit, they turned it into smoothies and sold them to people. A big sign said “should we give up our day jobs to make these smoothies” and they placed two waste bins, one with YES and one with NO. After the festival the YES bin was completely full which they agreed was the criteria to resign their jobs the next day and persevere in making Innocent a success. (For the more complete story by one of Innocent’s founders watch this interview).

This is a very simple example for a single idea (but it worked) of investing small and learning fast without piloting the entire business model. Whether you are exploring a single idea or have a diverse portfolio to work with, a more systematic approach helps. The basic steps are simple:

1. Develop the concept based on your idea, a first cut of the business model
2. List all the assumptions you are making (and be honest about them)
3. Design the experiments to test those assumptions and think about the results you are looking for
4. Start with the most critical assumption first (if you fail then better to fail fast)
5. Synthesise the learnings and refine your business model
6. Iterate until you reach an acceptable level of risk or decide to abandon the idea if you don’t

 But remember the principle of learning a lot (and fast), spending a little. This means the team will have to find creative ways of testing their assumptions without requiring huge budgets to do so. Remember it is not about piloting your entire business model so be opportunistic about how you do this.

We use experimentation as part of our methodology all the time and it helps companies to think more clearly about what it would take for them to say yes to a new idea and what is the acceptable level of risk they are willing to take.