Failures of Innovation: Failure of Discipline

Failures of discipline in bringing innovation to market.

With the launch of any new technology, product, or innovation there is a justifiable urgency to turn previous investments into positive cash flow. In the urgency to create initial sales, it is important to maintain discipline about strategy and long-term business goals. Small, incremental concessions can amount to large drift from a desired strategy and can permanently cede pricing power. 

Preventing free riders by understanding the value of your innovation.

It is critically important to understand the potential value of the innovation to the customer. This understanding forms the basis of your pricing and allows you to maximize returns. Understanding value comes only from a deep understanding of how your customer operates and what drives their economics. In addition, maintaining a suitably high price can weed out unqualified opportunities that would otherwise divert valuable resources from more promising prospects. Sales and pricing discipline is the most challenging part of driving innovations to market and capturing the full value. As an example, early in my career, I worked for a firm that would often field validate the performance of their systems on a small pilot scale at a customer facility to illustrate real-world performance in an operational setting. This allowed the construction of economic models based upon the field trial, which would definitively show the economic return of the equipment and would generate significant operational data about the customer’s process which they could use to their benefit. Early on, these trials were performed at no cost to the customer in the expectation that it would drive sales growth. The field trials did not create significant cost to the company, and the cost could be absorbed in normal operations as a routine cost of sales. However, it was found that few of the field trials ultimately led to sales. The company realized that they were providing significant operational information to the customer, but often there was no real interest in purchasing equipment from the outset. There was simply a desire to gain insight to their operations and processes, which they could not otherwise generate. After this realization, the company decided to charge $10,000 per field trial and had the discipline to stick to that even with customers that had grown accustomed to free trial services. The result was that greater than 50% of field trials led to equipment sales. By placing a cost on the customer, it immediately qualified all sales opportunities. Those who were willing to pay $10,000 had a significant problem and were invested in solving it. Those who could not justify the $10,000 trial could certainly not justify the subsequent purchase of a half million-dollar piece of equipment to solve the problem. The discipline to charge for the service, even in the face of potential lost opportunities served multiple purposes: It provided a modest revenue stream that offset the cost of the evaluation, it weeded out unqualified customers and projects, and it allowed us to devote our precious resources to the most viable opportunities – creating significant long-term value for the company. The potential customers lost were never going to be customers in the first place.

Pricing discipline.

Failures of discipline in bringing an innovation to market are often driven by the pursuit of quick money and making the first sale, or fear of losing what is viewed as a key sale. Making early concessions to customers to secure initial sales can permanently undermine long-term value capture for the innovation. Discipline in sticking to the planned sales model is critically important.   When pricing discipline fails, it is generally rationalized by an artificial crisis of a lost customer – “If we don’t give them this for free, they won’t go through with the sale!” or every salesperson’s favorite excuse to use and every sales managers least favorite excuse to hear – “The price is too high!”. Customer resistance to a given price point is generally a failure of the marketing team and salesperson to create a viable value proposition rather than a failure of the pricing model or lack of actual value in the innovation. 

Significant innovation brings with it a perceived risk on the part of the consumer. It is vital that an effort is made to minimize the perception of that risk (through pro-actively addressing it with the consumer) and to minimize the desire of customers for a “risk free” or as it is frequently called in overseas markets a “no cure, no pay” trial. Often “risk free” requests presented by customers are a means to simply get something for free (even successful outcomes can mysteriously become inadequate when it comes time to pay), to show to their bosses that they are effective negotiators or because the value of the innovation has not been made apparent. Sometimes the thing that they are looking to get “for free” is not necessarily your product or service, but the data or the operational information that your product or service reveals. All these requests put long-term pricing power at risk and introduce added short-term costs for the innovator. It is incumbent the customer shoulders some of the risk when adopting a new innovation. Uninvested customers have few incentives to work toward successful outcomes or focus on overcoming internal resistance to adoption.

Discipline in abandoning the past.

Success in executional discipline can be seen in consumer product companies such as Apple. Apple’s innovations frequently obsolete their own products and accessories, much to the chagrin of consumers who may have just purchased them or made a significant investment in associated equipment only to find that they will not be compatible with future models. Maintaining backward compatibility, while good at minimizing the customer’s risk, can create significantly diminished operability for the innovation or diminish overall long-term value for the innovation due to substitutional risk. In spite of the penalty consumers pay, the value of the innovation inherent in the new models is sufficient that consumers continue to purchase new Apple products and abandon perfectly serviceable items to take advantage of the benefits of the new products and innovations. While, no doubt, some sales are lost to consumers who cannot stomach abandoning their previous investments (cords, chargers, peripherals), the discipline to march forward with components and innovations that are not backward compatible in their latest innovations has led to more robust products and significant long term value and margin growth for Apple.

Informational discipline.

Discipline extends to the extent of information that is offered to clients. You do not have to share everything you know. When selling to an intelligent, analytical customer, often there is a desire on their part to truly understand how the innovation works (sometimes out of intellectual curiosity and sometimes out of a desire to work with someone else to provide the same solution). Likewise, there is a tendency for salespeople to want to be helpful and fully teach their customers how benefits are achieved, since understanding lowers the barrier to adoption. Often this undermines the long-term value of the innovation because the customer can alter their process or operations or can get someone else to deliver a similar solution based upon their newfound understanding of the innovation gleaned from an overeager salesperson or technical liaison. Often innovations for one reason or another cannot be patented or kept as a trade secret. The inner workings may not be fully understood by competitors or customers when viewed from afar and therefore not easily duplicated because they do not have direct access to the innovation. However, once fully described, the cat is out of the bag and an innovative product or process can become obvious and readily duplicated. If enabling information is not critical to the safe use or implementation of your innovation, it may be wise to keep your sales and/or service force willfully ignorant of some of the finer details of the innovation or business process that supports it to protect the long-term value of the innovation. At a minimum, these groups should be informed of what information is suitable for open disclosure and which needs special protections prior to disclosure. Keeping knowledge from a customer strategically – or more broadly, the market - can often be a challenge of discipline for the salesforce, service team or the individual account manager.

Executional discipline is the most challenging part of successfully maximizing the value of an innovation. Often the incentives to the individual salesperson, researcher or account manager are at odds with the long-term value creation goals of the organization (e.g. – the salesperson can close more sales and earn greater commissions at a lower price point, but the long term value of an innovation for the company may be diminished). Enforcing discipline throughout the process is the function of leadership within the organization, but success requires the understanding and commitment of the front-line employees as well.

Up next in the series: Failing to embrace innovation across the entire enterprise.