Transformative Innovation

Start with your business model, go-to-market and user adoption strategies

“Most every innovation — disruptive or not — begins life as a small-scale experiment. Disrupters tend to focus on getting the business model, rather than merely the product, just right. When they succeed, their movement from the fringe to the mainstream erodes first the incumbents’ market share and then their profitability. This process can take time… complete substitution, if it comes at all, may take decades, because the incremental profit from staying with the old model for one more year trumps proposals to write off the assets in one stroke.”

— Professor Clayton Christensen, Harvard Business School

We generally speak of innovation in terms of new features and products, but in addition to a great product, success hinders on two other equally if not more important factors:

1. Business model innovation
2. User adoption and retention

Unit Economics

In developing a new product idea, one should start with the fundamental unit economics. The first problem to be solved is not merely, “how do we meet user needs?”, but “how do we solve a user problem with a business model that scales recurring revenue while minimizing customer acquisition costs?”. Without the latter, you don’t have a business, and if you don’t have a business, you can’t serve the user.

All too often startups measure their success by top-line revenue, or gross merchandise volume (GMV), which is a seductive vanity metric. If you’ve raised venture money, you want to show growth. You want to walk into each board meeting with a chart going up and to the right. However, any company can generate growth if it has the capital to do so. Facebook and Google provide fantastic platforms for buying users. If you keep buying, you’ll keep growing. This strategy is, of course, unsustainable, and the growth metric is a false indicator of success. The only metrics that matter are total lifetime customer value (retention), and the cost of acquiring them.

Product Innovation

On the product side, you want to create something that solves a genuine user problem, driving “bottoms up” (word of mouth) demand, minimizing the need for high-touch sales teams and customer support. This is “product market fit” — the product sells itself by generating organic demand. This is how products scale and recurring revenue grows without marketing spend growing with it.

Business Model Innovation

In addition to great products that sell themselves, you need an innovative business model that generates money from the start, prior to inventory acquisition or manufacturing and distribution costs. Ideally, you want customers to pay for the product or service in advance, financing its creation and delivery.

As an example, most e-commerce companies pay for inventory in advance of selling it. Subscription models, however, require that users pay for the service 30 days before getting the product, substantially reducing or eliminating the cost of goods sold. (To be clear, I’m not advocating for subscription models, but merely providing an example).

Today, for a company to be transformative, product innovation alone, even if revolutionary, is no longer enough.

Few startups can even get funded today without an innovative business model, operating model, and go-to-market strategy. Following are some guiding principles to keep in mind:

• Your product strategy may inform the business model, but the business model must inform the product and go-to-market strategy
• Your product must be inherently transactional; getting users isn’t enough, and digital advertising (at least in its current form) is on the wrong side of history
• GMV (gross merchandise volume) and user growth are false success indicators
• Lifetime value (LTV) and customer acquisition costs (CAC) are the real health metrics
• A highly focused and sequenced market approach (target users, verticals, geographies) is vital (more wood behind fewer arrows)

Go-to-Market

A go-to-market strategy defines how a company will reach customers, commercialize its offering, and achieve market-leading status.

The purpose of a GTM strategy is to provide a blueprint for delivering a product or service to the end user or business buyer, taking into account such factors as target user(s), pricing, geography, distribution, logistics, and sales and marketing tactics.

Following are some of the more common and conventional go-to-market tactics:

Conventional GTM Tactics

Growth marketing

• Benefits: drives top-line revenue
• Risks: non-sustainable customer acquisition costs (CAC); likely doesn’t drive long term customer value (LTV)

Affiliate marketing

• Benefits: low-cost customer acquisition
• Risks: attracts value-seeking, non-repeat users

Business development & inside sales

• Benefits: forges customer relationships
• Risks: long sales cycles; requires antiquated top down end-user adoption

Channel sales

• Benefits: outsourced sales team
• Risks: unit economics; dependent on winning large companies w/ motivated sales teams

Media relations & events marketing

• Benefits: Brand awareness; thought leadership
• Risks: Requires generating news, often at the expense of more strategic initiatives on the roadmap

Emerging GTM Strategies

Here a few of the emerging strategies that are behind many of the most successful products today.

BYOS (bring your own software) Enterprise Strategy
BYOD (bring your own device) brought the iPhone to the enterprise, and now the same thing is happening with business tools.

In the late 1990s and early 2000s, there were frequent stories of failed multimillion-dollar enterprise software implementations. In every case, the primary issue was user adoption. Business users have their workflows and tools, pushing down a new system (without their input) doesn’t work. To get stuff done, people will continue to use the tools that work for them.

Modern, savvy, SaaS providers understand this and have made it easy and inexpensive for individuals and workgroups to adopt their solutions, providing a path to revenue that begins once the product hits a specific scale within the enterprise. Examples of this are Shopify, Sketch, InVision, Trello, and Asana.

• Benefits: Independent user adoption; no sales team required
• Challenges: Requires a best in class product

Self service trials and adoptions
Similar to BYOS, giving users the ability to test drive the product and eventually adopt it without speaking to a salesperson reduces friction between your product and your potential customer. The truth is that most business buyers don’t want to talk to a salesperson. They want to try the software. If they like it, they’ll use it. A sales pitch makes little difference in the eventual outcome.

• Benefits: No-touch sales
• Challenges: Requires a best in class product

Radical Interoperability
The status quo thinking with SaaS platform providers is to widen the scope of their platform, with the hope of solving more of the user’s problems and charging a premium for it. The problem with the “end-to-end” platform strategy is that, again, it isn’t user-centered. Users have a set of tools, many of which they may love. Building an end-to-end solution that successfully addresses all use cases so that it can replace a team’s entire toolbox is impossible, especially for a startup that is just entering a market.

A far more effective approach is to identify a single gap or problem that exists today for a particular cohort and build it better than anyone else. Understanding that it will be used in conjunction with other tools, it also needs to interoperate with other systems easily. The ubiquitous implementation of RESTful APIs has made this possible. Products like Slack make it incredibly easy to integrate other systems and tools into your communications workflow. Moreover, tools like Zapier and IFTTT have made it easy to stitch together your favorite tools and automate tasks.

• Benefits: Doesn’t require users to change their behavior
• Challenges: May limit adjacent enterprise opportunities

One product, One user, One market
Speaking again to the problems of “end-to-end” product strategies, just about every successful company you can think of started with one product, designed for one type of user, in one geography. This is true of Amazon (books), Apple (hobbyist computers), Tesla (electric sports car for the silicon valley elite); and even applies to non-technical entrepreneurs of the past. Chanel came to market with a single hat for a particular type of women. Levis made denim work pants.

With the declining cost and rapid pace of software development, a tendency has emerged to do more out of the gate: more products and more features for more users. The problem is that this goes against modern product development best practices and dramatically increases risk. The truth is that you don’t know how your product will perform until you bring it to market. Fortunately, the same technological advancements that drive a desire to do more have also made it possible to quickly bring a product to market and perform quantitative and qualitative data analysis to drive rapid improvements. This sounds a lot easier than it is. Complexities and unforeseen issue abound, so it’s in everyone’s best interest to keep things as simple and focused as possible.

Once you have achieved success (as measured by your key performance metrics) with a single product, aimed at a single user persona in a single geography, you can raise more money, hire more people and begin to expand into adjacent markets and build new products.

• Benefits: Quickly deliver an MVP and iterate to find product/market fit
• Challenges: Requires disciplined and sequenced market approach

Customer Service & Communications
Younger generations are growing increasingly cynical of advertising and other forms of traditional marketing. Duplicitous fads like “native advertising” have further eroded their trust. They don’t want to be sold to, and they are too perceptive to be duped by advertising disguised as content. The brands that are genuinely connecting with younger audiences are taking a far more transparent and authentic approach to engagement. They are investing in the end-to-end user experience, which goes far beyond the “product,” extending into customer service and communications. These brands are building user trust, the core foundation on which long-term brand loyalty is built.

For B2B companies, “content marketing,” if done in a genuinely user-centered manner, can be highly effective in extending the value of your offering beyond the software or core service.

Shopify, an e-commerce platform that enables businesses to sell goods online, is exceedingly good at this. The high-quality content they produce is aimed squarely at delivering value to customers and improving their performance as e-commerce entrepreneurs. For customers, it is like having an e-commerce expert giving you actionable advice on a daily basis. Shopify has turned marketing into a product. It isn’t trying to sell you something; it is helping you to become successful. This approach builds users trust and loyalty, and of course, customer success is also of great value to the company, as it decreases customer churn.

• Benefits: Provides validation, value and authenticity to an increasingly marketing averse user base
• Challenges: Requires genuine authenticity and transparency

Questions & Decisions

There is no right or wrong way to go to market, but it’s imperative that the right questions be answered before you even start a company, let alone devise a product and market strategy. Here are some questions you should seek to answer before going after that seed round.

• What is the business mission? What is the one thing above all else you trying to accomplish as a company?
• What are your value proposition and competitive differentiation
• Who is your target user and what is the total addressable market?
• What is your commercial strategy and how does it decrease sales friction?
• What are the unit economics and can you make money from day one
• What is your projected CAC and LTV?
• What does product-market fit look like and how will you know when you have achieved it?
• How will you measure impact across all functional areas?
• Through what channels are your vision best realized (e.g., direct to consumer, B2B, B2B2C)?Knowing the above, what is the first product you intend to bring to market?

Correlating Innovation & User Adoption Rates

“Diffusion of innovations” is an economics theory that seeks to explain how, why, and at what rate new ideas and technologies spread. Everett Rogers, a professor of communication studies, popularized the theory in his book Diffusion of Innovations.

In Diffusion of Innovations theory, consumer adoption is represented along an X (time) and Y (market penetration) axis. With successive groups of users adopting a new technology (shown in blue), its market share (yellow) will eventually reach dominance. In mathematics, the yellow curve is known as the error function. The curve is broken into sections of adopters.

The key units of customer adoption are as follows:

1. Innovation — Innovation is a broad category, relative to the current knowledge of a particular person or team. Any idea, practice, service or product that is perceived as new may be considered an innovation to be evaluated.
2. Adopters — Adopters are the minimal unit of analysis. In most studies, adopters are individuals, but can also be organizations or teams within an organization, clusters within social networks, or geographic markets.
3. Communication channels — Diffusion, by definition, takes place among people or organizations. Communication channels allow the transfer of information from one unit to the other. Communication patterns or capabilities must be established between parties as a minimum for diffusion to occur.
4. Time — The passage of time is necessary for innovations to be adopted; they are rarely adopted instantaneously. In the Ryan and Gross study on hybrid corn adoption, adoption occurred over more than ten years, and most farmers only dedicated a fraction on their fields to the new corn in the first years after adoption.
5. Social system — The social system is the combination of external influences (mass media, organizational mandates) and internal influences (strong and weak social relationships, distance from opinion leaders). There are many units of influence in a social system, and their aggregate impact represents the total influence on a potential adopter.

Decision Making

Users generally go through a five step decision making process, often subconsciously:

1. Knowledge — The individual is first exposed to an innovation, but lacks information about the innovation. During this stage the individual has not yet been inspired to find out more information about the innovation.
2. Persuasion — The individual is interested in the innovation and actively seeks related information/details.
3. Decision — The individual takes the concept of the change and weighs the advantages/disadvantages of using the innovation and decides whether to adopt or reject it. Due to the individualistic nature of this phase, it is the most difficult stage to acquire empirical evidence.
4. Implementation — The individual employs the innovation to a varying degree depending on the situation. During this stage the individual also determines the usefulness of the innovation and may search for further information about it. This is the stage at which customer retention is successfully or unsuccessful achieved.
5. Confirmation — The individual finalizes his/her decision to continue using the innovation. This stage is both intrapersonal (may cause cognitive dissonance) and interpersonal, confirmation that the group has made the right decision.

Product Strategy

Armed with knowledge of user adoption cohorts and their decision making stages, your product strategy (what you build and when) should be devised such that it optimizes the rate of user adoption in a focused and deliberate manner.

This framework should also be used to set appropriate expectations with investors, employees, and other stakeholders. A product vision of transformative innovation needs to clearly articulate a sequenced user adoption strategy that paves a path towards achieving the long term vision.