The concept of “Innovation Accounting” as introduced in Eric Ries’ influential book, The Lean Startup, is particularly crucial in understanding and measuring progress in environments marked by extreme uncertainty – a common characteristic of new product development. In this article, we explore the essence of Innovation Accounting, its distinction from vanity metrics, and its relevance not just to new companies but also to established software firms venturing into new products or concepts.
Understanding Innovation Accounting
Innovation Accounting fundamentally shifts the focus from traditional financial metrics to those that genuinely indicate progress in uncertain and innovative environments. It involves setting up learning milestones, developing relevant metrics to evaluate progress, and making pivotal decisions based on this data. This approach allows companies to validate their strategic hypotheses and make informed decisions about pivoting or persevering in their current direction.
The Pitfall of Vanity Metrics
Vanity metrics, such as total registered users or page views, often present an inflated view of success. They are seductive because they always go up and to the right, but they don’t necessarily correlate with the elements that ensure the long-term sustainability and profitability of a business. Relying on such metrics can lead companies into a trap, where they feel progress is being made, but in reality, they might be moving in the wrong direction.
Innovation Accounting in Established Software Companies
While the concept of Innovation Accounting is often associated with startups, its principles are equally beneficial for established software companies. When these companies venture into new products or concepts, they step into a realm of uncertainty similar to that of startups.
Validating Learning over Hypothesised Success
Innovation Accounting allows these companies to focus on what Eric Ries describes as “validated learning.” For a new product or concept, it’s crucial to understand whether the product truly meets customer needs and if the business model is viable. Innovation Accounting directs attention to metrics that matter: engagement levels, user retention, customer feedback, and conversion rates, which are more indicative of real value than mere download numbers or user signups.
Pivoting with Purpose
An established company with a new product idea can use Innovation Accounting to make pivotal decisions. If the initial idea doesn’t resonate with the market, the company can pivot, making structured changes based on real user feedback and data, rather than on hunches or superficial metrics.
Incremental Development and Feedback Loops
Innovation Accounting is about developing a product incrementally and using feedback loops to learn from each iteration. This approach is vital for established companies as it minimises risk and capital investment in untested ideas, allowing for more agile and responsive development practices.
Final Thoughts
Innovation Accounting is not just a tool for startups but an essential framework for any organisation venturing into new, uncertain territories. For established software companies, applying these principles can mean the difference between launching a successful new product that genuinely meets market needs and falling into the trap of false progress indicated by vanity metrics. By focusing on meaningful metrics and validated learning, companies can navigate the complex process of innovation with a clearer vision and a better strategy for success.