The 3-Step process to determine value
2021 10 minutes read
Innovation opens the door for new business and revenue streams. Organization that continuously innovates, remains on a growth path adding to it's revenue, and margin. Innovation requires new ideas and meticulously pursuing the ideas to develop new products and services. This is even true for an individual who wants to pursue any business idea. When one pursues an idea with conviction chances are high of getting success. But any idea pursued means forgoing other alternatives, and there are opportunity costs associated. There is a very simple 3-step process to evaluate the merit of idea backed by facts and data. Carefully applied this is also a good way to manage capital allocation and risks.
The 3-step process is adopted from the work of Prof. Aswath Damodaran, Professor Finance - New York's Stern School of Business. We found his idea very effective when we applied it to practice in multiple idea evaluation scenarios for single product start-ups and product enhancements.
Step 1: Test for Possibility
The first step is to ascertain the possibility of an idea. The business idea on paper should be tested for its feasibility, usability, and viability. This can be tested by business leaders via dot voting. Considerations need to be given on practicalities like business vision alignment, product fitment etc. If an idea passes this test, it can be considered for the next test. However, this test cannot eliminate the value-risk.
Step 2: Test for Plausibility
In the second step the idea has to pass through the Plausibility test. This is more rigorous than the first one. Here the idea has to be backed up by some secondary research. Evidence like such an idea that has been implemented earlier by other firms can prove to be a good one. For novel ideas the process becomes more rigorous. Prototypes, market research, user research, hypothesis testing and first hand intel gathering can be used as evidences.
Step 3: Test for Probability
The final test is the hardest one. The success criteria of the idea need to be quantified by hard numbers. The economic value which can be captured by converting the idea into a product or service needs qualification with proper justification. It has to pass through a rigorous scenario analysis to minimize the risk probabilities. The opportunity cost is considered along with cost-benefit analysis. Finally, it has to be backed up by a good product building and launch strategy.
This 3P test is elegant. But it requires expert intervention and rigorous thought workshops and model development. Carefully developed product development and early market-fit testing strategies can minimize risks.
A product succeeds when ideas are strong and validated by hard facts and data. The 3P test ensures an idea meritocracy and prevents risk-spiral for a business. A rigorous 3P test carried out helps to understand the expected value a product/service can capture in near and long term future.