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Last weekend I had a rare opportunity to sit back and relax. I needed some supplies before I settled on the couch, so I grabbed my Amazon Fire phone and headed to the local stores. I didn’t need to carry cash – my Amazon Wallet had me covered. When I got home, I almost tripped over the box of laundry detergent my Amazon Dash ordered. I remembered booking my trip to New York City on Amazon Destinations, and just as I was confirming my hotel, the doorbell rang, announcing the arrival of my order from Amazon Restaurants. I packed my food, settled into my comfy couch and spent the rest of the day playing Amazon’s online game Crucible.
Of course none of this happened. Because while all of these Amazon products and services are real, they no longer exist. They were experiments that failed to reach critical milestones, and Amazon stopped them.
One of the things that made Jeff Bezos a great founder was his embrace of experimentation and failure. He invested relentlessly in the development of new products. But he didn’t fall in love with a product or tactic to achieve his vision. Instead, if an experiment failed to meet minimum performance expectations, regardless of the amount of time and effort put into it, he quickly pulled the plug and made room for future experiments.
Innovation and experimentation are crucial to a startup’s journey. You are looking for a scalable product-market fit. Many of your assumptions will be wrong. Many of your experiments and tests will fail. That’s okay, as long as you follow one essential rule.
Believe in your vision, but be ruthless in stopping initiatives that don’t live up to expectations. If you don’t quickly shut down unsuccessful projects, your team will get caught up in work that isn’t scalable, wasting time and money on ideas with much higher potential. Here are three questions to ask when evaluating the potential of a new product or service:
Related: Fostering a culture of innovation and what it takes to do it right
1. Will your early adopters accelerate organic growth?
When you first launch a product, you should be able to find a core group of early adopters. Your target early adopters have problems to solve. You launch a product that addresses these issues. If you rank well on features and price and can easily convey your value proposition, they should be willing to try your product with very little incentive or marketing effort. If they like it, they can quickly become an evangelist within their community, creating your first flywheel of organic growth.
You have a critical decision to make if you can’t find a group of early adopters that will help drive organic growth. Repeat and test again, or stop the product and move on to your next idea. Unfortunately, the biggest mistake most startups make at this crucial juncture is to increase marketing spend beyond sustainable levels under the mistaken belief that they have a marketing problem rather than a product problem. This path only leads to accelerated cash burn and missed opportunities.
Related: 3 common mistakes blowing up your marketing budget
2. Do your customers come back for more?
Once you discover messages that draw customers to your product, you need to meet their expectations. Do they continue to use your product after those first few tries? Do they keep coming back to buy more from you? Or do you suffer from high return percentages, cancellations or abandoned products? You need to have clear KPIs for customer behavior, measure them consistently to make sure you’re building an offering that’s locked in enough to grow your business.
Successful startups are built on the back of customer lifetime value (LTV) that can support profitable, scalable growth. High LTV is enabled by strong customer retention and consistent repeat buyer behaviour. If most of your customers are one-time customers, it’s unlikely you’ll be able to scale your business profitably.
Related: Are You Sitting on a Customer Retention Goldmine?
3. Do you have enough pricing power to be profitable?
Sales volume and customer retention only matter if each sale generates sufficient profit. The path to profitability and positive cash flow is a healthy contribution margin. Contribution margin is calculated by subtracting the variable costs required to produce and sell your product from your net selling price.
It’s easy enough to let customers order a free trial or accept delivery of a trial subscription. But can you attract enough customers who are willing to pay a price that yields an acceptable contribution margin? Too many startups fall into the trap of focusing on vanity metrics to measure the performance of their products: downloads, gross sales, and free trial downloads. Ultimately, your product and your startup will only be successful if you can consistently charge a price that generates the profits you need to support sales and marketing, new product development, and your day-to-day operations.
Related: 4 reasons why pricing is key to startup success
The Amazon Fire phone may have failed, but the technology developed for the phone has accelerated the development of two highly successful products: the Echo and Alexa. Building a culture of innovation is not easy. It requires acceptance of failure supported by a culture of measurement and accountability. But it’s a powerful force for finding product-market fit, profitability in scaling your startup, and building business value. It’s also a much more fun and satisfying way to build your business.