There is nothing more fun than introducing a new product, a new service, or – most fun of all – a new business. Unless a person is terribly risk averse, it’s hard to resist the frisson of excitement that comes from diving into something new.
In the world of for-profit business, I would coach an extremely risk-averse person to work on his or her ability to change and adapt, because being too risk-averse will get in the way of business success. On the other hand, going too far in the other direction is a problem too. So just where is that happy middle ground, that place from where we take the right risks while avoiding brinkmanship? It’s closer than you may think.
One of the important characteristics of an entrepreneur is the ability to fall in love with new ideas. One of the most common reasons for entrepreneurial failure is the inability to distinguish between what is new, fun, and exciting – and what is marketable. Here are a few questions to challenge your new ideas with. By giving your ideas the third degree you can pull back from the brink of excessive risk and stay focused on ideas that will help you turn abstractions into cash.
Note: You don’t have to be able to say “yes” to all these questions! In fact, some of them are mutually exclusive. Instead, you are looking for things that will give you differentiation and competitive advantage. In some cases, only one “yes” answer will suffice – though generally you’ll want more than one.
Question #1: Will this idea enable me to produce my products or services more cheaply than my competitors? This question is about supply advantages. If you can incorporate superior production technology and/or privileged access to suppliers, it will result in lower costs which you won’t necessarily want to pass on to your customers. One of the most under-capitalized areas of mid-sized business is supply chain innovation. Fortune 100 companies understand how critical this area is, but there are very few mid-sized companies that are performing solidly in this area.
Question #2: Will this idea enable me to price my products higher than my competitors? If you can introduce meaningful quality to customers that your competitors can not match, in the areas of design, uniqueness, support, or service, you can raise your price. How much you can raise your price is directly related to how much the difference matters to your customers. The world is filled with over-priced bells and whistles that nobody wants. The key to this question is to understand your customers well enough to know what they are willing to pay more for.
Question #3: Will this idea create a customer habit or dependence on me that my competitors can not claim? One way to do this is to build brand commitment, so the customer feels disloyal if they buy elsewhere. Using brand strategy is powerful, but it requires a great deal more discipline than most companies realize. Branding and marketing are not the same thing. Another method of creating dependence is to build in unacceptable switching costs (i.e., if a customer already owns a lot of PC software, they are unlikely to invest in a Mac – and vice versa). Does your idea create a platform or format that once committed to, would be costly to leave?
Question #4: Will this idea enable me to spread my fixed costs over a larger quantity of items or services? This is all about economies of scale. If you have an idea that will drive sales way up, there’s a good chance you can drive costs way down. However, don’t play this game in the wrong direction! Too often business people think, “If I just drop the cost of this item low enough, I can corner the market, my sales will go up, and the economies of scale will ultimately make my rock-bottom price profitable.” Business case study after business case study demonstrates that all this strategy does is create a price-war with your competitors. I have no idea why people keep doing this, but don’t make the same mistake!
Question #5: Is this idea completely unique to me? Ah yes, the moment of truth. It’s so easy to rationalize why a product is different from the competitive products on the market – even if they have to resort to minutiae to do so. But customers don’t care about minutiae. They care about real differences. Patents expire, technology changes, and customers mature, move, and die. It is the rare company that can extend a “uniqueness” advantage from one generation to the next. The companies that do so continuously invest in replacing their technical and creative advantages.
I’ve often said that one idea implemented is worth more than 100 ideas that never get out of the starting gate. But that’s not quite true. Because I’ve seen simply awful ideas get out of the starting gate and get implemented – and cost a fortune year after year as the entrepreneurs behind them desperately try to justify their original decision (I have one word here – euthanasia. Not of the executives, but of their bad ideas. Unfortunately, this doesn’t happen often enough, because it takes more courage to kill a bad idea than to put it on life support). What’s truly worth a lot of money is to come up with lots and lots of ideas, run them all through this question mill, and have enough patience to wait for the one good – preferably great – idea that makes it all the way through.
(c) 2007, Andrea M. Hill