When all the measures normally used in an established organization (revenue, clients, return on investment, market share) are almost zero, innovation accounting is the way to measure progress. It offers a system of connected leading indicators that predict individual achievements.
To cultivate successful innovation ecosystems, corporations must not only depend on standard accounting methods but also avoid taking decisions purely on instinct or belief.
Managers need fact-based accounting standards that represent the entire innovation process, not just the financial outcomes, when making investment decisions in corporate startups and ventures. Managers need an accounting system that compensates for the limitations of a financial accounting system when it comes to measuring change.
Getting started with this process involves integrating an innovation thesis, setting tactical objectives, and striving to build a balanced portfolio. These corporate projects can be tracked using innovation accounting, from the initial concept through a verified business model.
How Will Innovation Accounting be Measured?
Innovation accounting revolves around the management of three critical activities:
- Choose to invest in various enterprises at various stages of their innovation journey.
- Track and evaluate the results of specific innovative projects.
- Evaluate the change’s effect on the business as a whole.
It implies that numerous components of the innovation ecosystem need to execute innovation accounting.
Levels of Innovation Accounting
There are three levels of innovation accounting, and each level becomes more complex as a new business or innovation risk progresses.
Level 1: Customer Focused
The secret to success lies in starting with easily measurable metrics that align with the processes of digital product development. The goal of a lean startup is to comprehend and fulfil the needs of clients.
Examples:
- Customer conversations (amount of clients communicated per week).
- Feedback from consumers (the number of customers that offer product feedback per week).
- Rates of conversion (the proportion of consumers that test the product).
- Revenue generated per customer (the total amount that a customer can pay).
It provides a valuable overview of what works and what doesn’t. For example, it doesn’t matter how often customers should repeat purchases if they don’t even review the product.
Level 2: Leap of Faith Assumption
As the concept evolves, the team identifies its Leap of Faith Assumptions, which are usually the most fundamental assumptions underlying the business potential. The goal is to test, prove, or disprove the Leap of Faith Assumptions.
The team should now focus on two measurement categories: growth hypothesis metrics and value hypothesis metrics.
Example:
- Rates of repurchase
- Retention rates for purchases
- willingness to spend more money
- Rates of referral
- Referrals from word of mouth
- Ability to attract new customers as an outcome of regular use
- Ability to take revenue from one customer and invest it in another new customer acquisition
The goal is to determine what needs to be done to achieve measurable thresholds at which each of these variables can grow independently. When these thresholds are reached, it indicates that product-market fit has also been achieved and the business is ready to scale.
Level 3: Net Present Value
By re-evaluating the initial business case with each new dataset accumulated from Levels 1 and 2, the insights garnered are translated into monetary value.
The net present value places great value on up-to-date data that shows the venture’s progress over time as well as leading signs of commercial success. A different set of key performance indicators may be needed, for example, if a new enterprise develops a marketplace business model like eBay, Airbnb, or an app store that includes buyers and sellers.
Examples:
- Total numbers of buyers and sellers
- Total number of Product listings
- The number of transactions
- Per-transaction revenue
Innovation Accounting Lean Startup
The important element of the lean startup approach is innovation accounting. Innovation accounting helps company leaders and developers establish relevant metrics that give insight into user engagement, product-market fit, and scalability by including measures and learning aspects of the Build-Measure-Learn cycle.
The concept of lean startup is based on five essential principles:
- Enterprise management
- Validated education
- Accounting innovation
- Build-Measure-Learn
Learning and understanding the product and the client’s company is crucial to lean startups. Progress may be measured in an organized way using lean startup innovation accounting.
The Benefits of Innovation Accounting
- When selected judiciously, each metric within the framework becomes essential, due to its inherent structure. With the first level monitoring, user engagement, the second level measuring product market readiness, and the third level measuring, financial/market performance. This three-level structure has built-in dependencies.
- The figures and measurements clearly contextualize the value and effectiveness of the offering. As a result, the project’s success criteria—a product that suits the market and can continue to do so—remain at the center of the development team’s mind.
- Fostering a strong team, focused on fundamental challenges and development objectives, can serve as a potent catalyst for cooperation and teamwork.
- The method provides a very strong connection between research and development, often a relatively “intuitive” process, and the performance of the market.
Conclusion
Innovation accounting can effectively measure innovation investment choices. This includes choices on specific initiatives, strategies, and resources. This technique helps identify early indicators of success for a business or product.
As one of the core principles of the lean startup approach, innovation accounting plays a crucial role in business operations. Specifically, it’s designed to address the fact that a startup has no real data history or market traction.
Innovation accounting involves choosing key metrics that will allow you to track and measure what really matters: engagement and user relationships with the product, assumption analysis, and the current value of the product. Benefits include creating a product that is better suited to its market and a single focus for all project team members.
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