No successful company makes it to the top of the food chain by hitting the lottery on a single, big bet—not even Google/Alphabet or Apple. If you’re one of the many companies thinking of an investment as a drain on cash flow that must be recouped immediately, it’s time to shift your perspective.
To achieve true ROI, you have to rethink your definition of the “investment” part to include: a real understanding of total cost of ownership (TCO), an approach that diversifies risk across an option portfolio, and a focus on making small, iterative bets.
Total Cost of Ownership—More than Just Your Initial Capital Investment
When you’re developing a new product, you might sit down with the finance department and listen to the results of hundreds of Black Scholes or Monte Carlo simulations to determine risk. The problem with these simulations is that many product managers skew the results with a misguided view of total cost of ownership.
The TCO for your new product isn’t just the, say, $1 million spent in development. You have to consider hosting costs, insurance, license compliance, server and software costs and so much more. If you haven’t mastered the art of envisioning the whole total cost of ownership picture, there’s no way you can obtain an accurate ROI forecast.
When you’re developing new products for digital disruption, forecast your revenue at zero (or near-zero) and understand that you’re making an investment. You won’t break even in the first year; but as production extends into the second and third years, it can become an economy of scale and your initial capital investment starts to pay off.
Patience and a realistic forecast are essential—but you also have to manage the risk correctly.
Think of Innovation Projects as a Diverse Option Portfolio
You can rely on your biggest projects and cash cows to pay off for your company. However, the same can’t be said for your innovative projects as you attempt to digitize your portfolio.
Step back from your focus on ROI and start thinking about your innovation projects as a diverse option portfolio. Consider how Alphabet just became the most valuable public company in the world. The revenue generated from Google obviously drives the organization; but Alphabet’s earnings report lists “Other Bets” as a $3.56 billion operating loss with just $448 million in revenue.
This “Other Bets” umbrella includes Google’s diverse pool of bets, which covers anything from self-driving cars to internet balloons. Your company probably won’t want to take on that kind of loss, but the idea remains the same.
Diversify your bets, temper your ROI expectations for each project and look for one of your bets to take you to the top of the market. You might think that the bigger you make each bet, the greater chance for a big return—but this is misguided.
Why Making many small bets is the best way to see great roi
The key to successful innovation is the ability to stay small and take an iterative approach to a small bet. Focus on your target market and its specific needs, iterate quickly with a specific need in mind and keep building until you have a successful product. And iterating a bigger pool of smaller bets in agile environments gives you a greater chance of success without the risks associated with big bets.
Here’s a good motto to live by: Try fast, iterate fast, fail quickly, and stop.
Staying small and iteration in agile environments is essential, but you can’t forget to stop. If you want to run with the biggest players in the market, you’ll have to leave any attachment to projects behind. Just look at Facebook, which attempted to launch at least two public Snapchat competitors (Poke in 2012 and Slingshot in 2014) that failed miserably.
Make those small bets, but realize when they’re failing and move on to the next iteration quickly before your investment simply becomes a loss.
Maybe you don’t have enough hours in the day to come up with so many iterations on your big idea. If you want to alleviate some of the innovation pressure, Dialexa can help. Download our End-to-End Product Development White Paper and learn how our team of experts can put you on the right track to achieving true ROI.