Does your innovation investment analysis have a potentially fatal blind spot?
Consider This Scenario
You and your team have identified a problem in the world that you think you can solve and are now curious if that problem is commercially worth solving before deciding whether to commit capital to developing a solution.
You, rightly, kick off a market sizing exercise to further define and quantify an estimated total value of the market for your solution. That exercise is thorough by any professional standard and examines a wide range of elements: market scope, target customer segments, the TAM/SAM/SOMs, pricing, potential growth rate, an assessment of assumptions and sensitivities. These findings come back ‘all good’ – it looks like there is an opportunity for your solution to be significantly successful commercially.
On the basis of these findings, you and your team request – and receive – approval from executive leadership to commit funds and kick off development. An initial prototype is created and iterated on. Your sales team is eager to start warming potential client discussions. The engineering team resists these requests and continues with internal development toward MVP. At long last, an MVP is ready and meetings with prospective customers begin taking place.
Prospect 1: “It’s an interesting capability you’ve developed and we certainly do experience the problem that it solves but I don’t think we’d be interested in that – at least not right now”
Prospect 2: “We see the technical improvement that your solution provides but we’re not sure that that really translates to a benefit for us”
Prospect 3: “That’s definitely been a problem for projects we’ve been involved in but I’m not sure that we’re the ones that have ownership for resolving that (said by all stakeholders to project).”
At first glance these may each appear to be common sales objections – and they are – but functionally they undermine the basis of the investment decision: the validity of the initial market sizing study; and were largely knowable prior to taking the decision to invest.
Practically Speaking
It’s important to remember that accurately quantifying attainable sales revenue is the specific goal of a market sizing analysis from a practical perspective. And while that may sound obvious, it bears repeating given the air gap that exists between it and other, less proximate to a project’s P/L, metrics that tend to quantify things like cost of losses your target customers experience due to the problem that your product solves, and others.
In other words, there are instances in product development where it’s observed that an entire market may be experiencing a chronic problem while also simultaneously lacking the motivation to buy a solution when presented with one. It’s a phenomenon largely encountered by technologies or capabilities that are entirely new – that offer a capability not previously available in the market.
The prospect feedback examples above demonstrate several market dynamics where this buying behavior may be more likely to be found:
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- Markets with an outsized relationship between potential revenues vs. the cost associated with tolerating the problem as-is (see Prospect 1)
- Those where root cause and consequence are separated by many other factors (see Prospect 2)
- Markets where complex multi-stakeholder projects are the norm (See Prospect 3)
In markets where one of these dynamics are present, even selling a mature, well understood solution may be challenging. And certainly becomes more so when the product offered carries with it the additional performance, financial, and administrative risks and uncertainties inherent with new technologies.
How your organization chooses to consume and respond to this risk i.e. does it speak to a sales risk, a market sizing risk, or both – is not nearly as significant as it is that your organization recognize and account for it as part of assessing the investment case as a whole.
Market Analysis View
If you consider the risk best addressed in the context of the market sizing analysis, how does that perspective change your approach to the elements included in your current market sizing model?
Does it get picked up as part of the pricing analysis (e.g. the value proposition component could include feedback from specific prospective customers in the target market and would yield any indication of buyer hesitancy). Or is it more appropriately included in the market segmentation component? Do you approach it as a variable in the sensitivity analysis?
Because each of the risks illustrated above may reduce the total commercial potential for the investment, it is important that the risk be accounted for as early on in the investment analysis as possible – whether or not it is also approached from a sales strategy perspective as well.
Sales Strategy View
If you assess it as a sales risk, what work will go into understanding whether it can be overcome by the sales team? How can you maximize the reliability of that assessment? Is this strategy consistent with your current sales culture? Is the feedback process between the sales and technical/product development teams efficient enough to result in iterative improvement that reflects buyer-validated new features or capabilities?
What bears highlighting here is that regardless of how your organization answers each of these questions, simply going through that exercise demonstrates that this is a less than ideal position to be in from an investment risk perspective. The initial funding commitment has already been made. So any errors or miscalculations in terms of the resources required to meet the modeled sales outcomes, reductions in sales milestones, or extensions to sales timelines – all act to undermine the initial investment case.
Some argue that there is no avoiding funding a new idea through MVP before market input can be sought and while that may be true in some niche market segments (please feel free to email us with specific examples – we’d love to hear more about those examples), it is almost always the case that with proper relationship management and positioning of discussions as aimed at learning more about a buyer’s problems, there is nearly no limit to how early on in the development cycle that market input can start to inform its scoping.
Mitigating The Risk
Discovery Interviews
Quite a bit of the risk can be minimized by simply engaging specific participants from your target market earlier on in the development cycle (e.g. as part of the initial Market Analysis). Not only does it reduce the overall investment risk of the project, it also helps optimize the allocation of development dollars across potential capabilities or features. Because these discussions should tease both areas of interest and of concern from prospective buyers, the technical development plan can be aligned to address those issues.
This also benefits potential buyers by giving them the opportunity to shape new solutions in ways that will best benefit them as well as by giving them a better idea of what they may expect from their vendors longer term – and account for that in their strategic planning.
Go talk to your market. Go talk to your customers. As early on in your development process as possible. Be deliberate in aligning the questions you ask with your investment case assessment priorities. Take notes. Take more notes. Make it clear to your market and customers how their engagement with you benefits them. Discuss the information collaboratively with your team. Go back and ask questions if necessary.
Contact Us Today to learn more about how StageGate Partners, L.P. can help craft and execute your Discovery Interviews strategy.
Add or Optimize Financial Checkpoints
Beyond earlier customer engagement, you may also opt to re-evaluate your product development process or roadmap and consider whether adding new gating or ‘investment checkpoints’ may make sense for your organization as well. From a ‘heads down’ investment risk reduction perspective it almost always will – however many teams and organizations place a premium on maintaining an absolute minimum number of ‘bureaucratic’ controls within their development flows. In these instances, it becomes even more important to think through the specific evaluation criteria your organization is prioritizing, the tactical details related to obtaining and preparing the data that is used to conduct the evaluation, and what practices can be implemented to make the financial model preparation and review process as efficient as possible.
Contact Us Today to schedule a complimentary assessment of your organization’s current Product Development Processes.