Starting a new business is a risky endeavor. Product discovery, conception, construction, and marketing are all uncertain. As a result, entrepreneurs continuously second-guess themselves.
The most common reason startups fail is a need for an understanding of market demand. The second most common reason for startup failure is insufficient financing and personal funds.
The high failure rate can be attributed to the absence of a mechanism for tracking progress, validating product assumptions (including market demand), and providing meaningful data for funding.
Given the discouraging statistics, how can entrepreneurs develop a cost-effective solution for their clients? The answer to this dilemma is Innovation Accounting.
Driving Performance Forward: The Role of Innovation Accounting
For each product’s growth, performance innovation accounting has three successive levels. Level one begins with the most basic organizational dashboard and progresses to the most complicated, as each successive dashboard is based on the data of the preceding one.
Dashboard at Level 1
The first level is a simple dashboard focused on the customer and easy to use to test the product idea. It is used to track the product’s development from the start to make sure it meets user needs. This level assesses user engagement by determining the adequacy of methods used to meet customer needs and evaluate if the company delivers on its promises.
Metrics for the Level 1 dashboard include the following:
- Customer Interactions — The number of users who interacted each week
- Customer Feedback – The number of users who submit weekly product feedback
- Conversion Rates — The number of users who have tried the product
- Per Customer Revenue — The amount of money the user is prepared to spend for product usage
This dashboard provides an overview of where the product stands with the first few consumers. The objective is to track figures over time and compare them on a percentage basis to determine whether or not they are improving.
If they do, the measurements are scrutinized further, and additional metrics are introduced depending on consumer input. If they don’t, entrepreneurs should shift their focus to indicators that show progress.
Level 2 Dashboard
The second stage concerns market preparedness, with market preparedness, which is defined as client engagement in an untested market based on value and growth hypotheses and product assumptions.
At this level, actionable data is generated to assess scalability and validate product value, market fit, and user interaction assumptions.
Level 2 dashboards for value hypothesis metrics contain the following:
- Rates of retention
- Rates of referral
- Purchase frequency
- Desire to pay a higher price
Level 2 dashboards for the hypothesis of growth metrics contain the following:
- Word-of-mouth recommendations
- Capability to acquire new customers
- Capability to use revenue from one client to fund future customer acquisition
Level 3 Dashboard
After incorporating data from levels one and two, the third level of innovation accounting deals with the financial worth of the product.
It gives Net Present Value (NPV), vital information regarding the product’s current value based on market performance.
This level provides financial and actual product performance based on actionable measures optimized through numerous iterations.
The KPIs on this level differ depending on the type of business model and vertical in which they operate, such as freemium, e-commerce, Enterprise, Subscription, and marketplace.
Metrics for the level 3 dashboard include the following:
- Total number of visitors
- % of visitors who sign up for free accounts
- Percentage of users who pay money OR
- Buyers and sellers in a number
- Product listing count
- The total number of transactions
The three levels of innovation accounting provide a robust framework to measure and achieve startup growth progress and success in a dynamic business environment. They make it possible for ideas to gain traction and develop self-sustaining.
What Is the Process of Innovation Accounting?
Innovation accounting can be applied to individuals, teams, projects, portfolios, or organizations and offers various approaches to measurement.
However, the most difficult and crucial aspect is at the project level. To properly account for innovation in a project, we must:
Make a hypothesis to determine cause and effect
To comprehend the customer’s wants and aspirations, we must watch them and their current behavior. Then we develop a hypothesis based on cause and effect to explain how our new product or service will alter their behavior.
Determine observable metrics
We must next take that behavioral premise and quantify every phase of the process by determining the best approach to assess cause and effect.
Develop a mathematical model
We must then develop a mathematical model. This is often done in a spreadsheet, but additional tools have lately been developed.
Estimating variables using ranges
The real numbers that go into that mathematical model must then be estimated. We may have 10,000, 10,000,000, or only ten consumers. We just guessed at first. Then, whenever possible, we measure actual user behavior.
This generates a probable range of possibilities, the width of which (10 to 10,000,000) symbolizes the level of uncertainty surrounding our prediction or measurement.
Select the distributions
Next, we must decide how we believe reality compares to our predicted range. Is the true outcome more likely to fall somewhere in the middle of our range? Or is it closer to the bottom? In statistics, this is known as a distribution, requiring some mathematical knowledge.
Carry out the simulations
Finally, we may make a forecast by running our mathematical model with random numbers millions of times. This is merely an estimate based on numerous assumptions, but it is preferable to a wild guess. A Monte Carlo simulation is the technical phrase for this.
Gather information and Iterate
Finally, we must measure and compare what is happening to our simulation prediction. If reality falls within our estimated range, we can proceed.
If it’s significantly off, we may need to revise our model. Repeating based on real facts, like with anything else, enables ongoing development.
Final Takeaways
Entrepreneurs require an innovative approach to measure the success of their new businesses. It should include all critical indicators that show how variable the product is to show an obvious pathway to success.
It also applies to established businesses aiming to integrate innovation and seeking methods to quantify performance and implement a measurement system.
Organizations that see innovation as a path to growth encounter challenges with the old finance system since it cannot measure innovation. As a result, organizations are turning to innovation accounting for growth.
Innovation accounting is designed explicitly for innovators, providing a comprehensive method to build successful startups. Following the appropriate procedure from the Minimum Viable Product (MVP) to achieving a return on.