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Don't Make That Investment Yet. Here's Why
 

About to enter a new market or make a major investment in an existing one? A mistake could be costly. You may need to adopt a test-and-learn strategy first.

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Even well-established businesses face high levels of uncertainty, either in existing markets or when entering new markets. Uncertainty takes many forms: market demand, the product/service features most desired by the customer, or your ability to serve the customer well. The list is long.

Businesses facing high levels of uncertainty in their market are well served by an experiment-driven, test-and-learn approach. We're currently helping one client set up a pilot program to test new products and a new service model. We are also helping them develop alternative ways to introduce new products so they can avoid making a large upfront investment before they know if market demand will justify it. It's a big departure from the approach many businesses take: close your eyes, make the big investment, and hope it pays out.

The test-and-learn process can work in any market, regardless of maturity. In The Lean Startup, author Eric Reis discusses the example of Intuit and its well-established TurboTax product:

Because TurboTax does most of its sales around tax season in the United States, it used to have an extremely conservative culture. Over the course of the year, the marketing and product teams would conceive one major initiative that would be rolled out just in time for tax season. Now they test over five hundred different changes in a two-and-a-half-month tax season. They're running up to seventy different tests per week. The team can make a live change on its website on Thursday, run it over the weekend, read the results on Monday, and come to conclusions starting Tuesday; then they rebuild new tests on Thursday and launch the next set Thursday night.

This is an extreme example, but the mentality behind this model is very important to successful entrepreneurship. Another of our clients is an ice cream manufacturer. When they are executing well, they test new flavors on a one-week cycle. At Avondale, we've done our own experimenting with pretty much every aspect of our advisory business over the last several years to get to where we are today.

To generate useful results, the test-and-learn process must be disciplined. We break it down into three key elements:

  • Individual managers must be appointed to lead the process and must be held accountable for generating learnings and embedding those learnings into a revised approach to the market.
  • Clear goals and metrics for each test should be agreed on beforehand, with a process put in place to collect the results. For example, an ice cream manufacturer testing new flavors should ask for quantitative scoring from their pilot customers ("on a scale from 1 to 10, how smooth is this flavor?")
  • Each test should be run side-by-side with a control group ("split" or "A/B" testing) so that results can be measured accurately.

With a good test-and-learn process, managers are no longer flying blind in uncertain markets.  When they are considering large capital and organizational investments, they have greatly increased the odds that those investments will pay off.

How well does your organization test and learn?  Share your thoughts with us at karlandbill@avondalestrategicpartners.com.

IMAGE: iStock
Last updated: Aug 13, 2012

KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.
@karlstark




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