The economic challenge that must be incorporated into design

Recently I have been working in the renewable energy field and two pieces of insight highlighted two key mistakes that innovators, but particularly engineering and science based start-ups, are prone to making.

Mistake 1: talking to the market after key design elements have already been locked down.

Mistake 2: failing to consider the economic envelope in which their innovation needs to perform.

Payback hurdle

The first insight we received from several market participants, in multiple geographies, was that the product in question would need to payback in under 7 years. The reason for this was that each of them had previously tried to play in the segment and had been burnt by products that failed to live up to their production and economic claims. Consequently, potential adopters wanted something that came with a lower risk economic profile. The line that was drawn in the sand was that it must have a payback below that of a comparable substitute technology that was well established and had a payback of around 8-9 years. It is important to note that whatever the hurdle rate to be successful, the technology in question must be able to achieve this without reliance on incentives or subsidies (these should just be cream on top) due to the unstable nature of government policy.

Price elasticity of the segment

The second insight related to the price elasticity of the market. We were told that no matter how much better the new product was compared to the existing direct competition -or substitute technology- there was an implied capital ceiling that buyers would pay for such a product, beyond which the number of buyers would reduce dramatically. For example, even if product A gave 2x or 3x more output than product B, customers would never pay more than £YK (~ 20% greater than the price of product B) for a product, no matter how better it looked or how better it performed. So potential channel partners took this implied market ceiling as their starting point and then looked at what margin they would need given their cost of sale and likely sales volume (which was ~20% of Y) and said you need to sell us the new product at £0.8YK.

The new challenge

Therefore, the engineering challenge is now not solely how do I get x output or x% increase in output compared to existing products to give me an improved cost per unit of measurement. But how do I do this within the envelope of the key economic performance indicators used by those who have the ability to adopt my technology at scale (e.g. payback in under 7 years) and below the perceived maximum capital budget that the market deems as value for that size/type of product. If you are able to engineer a solution backwards from these constraints, then you potentially have a winning proposition that can dominate a market.  The obvious inference here also, is that this is as much a supply chain challenge as an engineering design one. And this does not remove the need to have improved performance compared to competition or to address any aesthetics challenges that existing products may have, these too need to be overcome in the design.

Bringing the market into the design stage

So then, comes the question, how do you know what is the economic performance and capital budget envelope within which you need to play? The answer is simple, speak to the market from a very early design stage and find out what needs to be true economically for them to adopt your product at scale. The challenge here, and one which Christiansen identifies in The Innovator’s Dilemma, is identifying the right people to speak to who will give you the correct insight. By developing an ideal profile of who likely adopters of your technology may be, and what an evangelistic adopter might look like, you can mitigate this risk of false insight.

The key at this early stage is not to lock down your design, supply chain or revenue model until you know they enable you to meet these key metrics or until you can show a route to these (e.g. via economies of scale that potential customers could deliver).

 

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