Innovation Business Case – 7 Tips for Figuring Out Whether It Pays

Innovation should pay off. Whether it does depends on the business case. More precisely, the “Innovation Business Case“. If there is no foreseeable prospect that the idea will pay off, then you say “There is no business case for that!”. That’s why you often hear in companies:

Innovation? First show me the business case.

That’s what some people say.

Others say:

Innovation doesn’t need a business case: Just do it!

So, who is right? Actually, the business case is clear. Innovative companies have:

• 𝟭𝟭% more revenue growth
• 𝟮𝟮% higher EBITDA growth
• 𝟱𝟬% higher rates of return during recessions
• many times more high-competence job applicants
• …

But “Show me the business case” of course means something else:
Show me that your idea works – economically, commercially – before we invest in it.

But can you really know everything?

• Will the customer buy?
• How much does innovating cost?
• When will we reach breakeven?
• What is the competition doing?
• Are we cannibalizing ourselves?

For a raw, unpolished idea, answers are completely uncertain.
That’s not easy to accept – especially for innovators and developers whose strengths lie in technology.

Who will fund it when everything is so uncertain?

We need a business case!

For all those who want to create business cases themselves, here are 7 practical tips for developing an innovation business case:

Tip 1: “A Business Case for Innovation” – Exactly what does that mean?

Roughly speaking, there are three different business cases for innovation. Firstly, they differ as to the point in the process when they can be formulated. At the very beginning, or only after a solution concept exists. The second difference is the degree of detail of the content. The nature of target groups comprises the third difference.

A. Problem Case: THE IDEA, VALUE OF THE Problem & MARKET POTENTIAL

• Who has a problem?
• How many have the problem?
• How much is the problem worth to these people?
• What piece of the pie can you realistically get, considering that other players will eventually provide competition?

A problem case is suitable for ideas. Neither a solution to the problem nor detailed financial calculations are necessary here. The problem case proves that it is basically worthwhile to think more seriously about a topic. Whether it would be worthwhile for the company in the end, is not yet an issue.

B. ZDF Business Case: Innovation in NUMBERS, DATA & FaCTS

in addition to “A) Problem Case“:

• At what price do we offer the solution?
• What sales volumes will we see over time?
• What effort (direct costs) will be associated with production and distribution?
• What investments and indirect costs will it incur?
• What’s the bottom line?
• What are the most important financial indicators??

The ZDF Business Case demonstrates rough feasibility. It primarily serves the purpose of convincing the innovation team that others can also be convinced.

C. Innovation Business Case: a complete argument for the INNOVATION’S added value!

in addition to “B) ZDF Business Case”

• Why is the topic of “innovation” on the table?
• How and by whom has the issue been addressed so far?
• What options are available? In addition to various innovation options, there is always “Option Z – continue on as before”.
• What is the recommendation for action?
• What would it all look like in concrete terms if we acted on the recommendation? Who does what until when? When would it reach the market? When would we see a return on investment?

The full “Innovation Business Case” is what executives and investors want to see in order to be able to make decisions easily. Problem cases and ZDF business cases can created day in, day out. But the innovation business case needs to show clear value. Sure, maybe you can rework it and have another go. But this kind of approach will quickly cause others to lose faith and torpedo the desired innovation at issue.

In one sentence: Don’t just say, “Business Case“. Be clear about what you really mean by it.

Tip 2: The Business Case must taste good to the fish, not the fisherman

Sounds trivial, but it’s also true. The business case should achieve its goal – that is to say, it must appeal to its audience. To do this, it must be clear who the audience is and what they want or don’t want. So pick up your phone and call. Typical points to clarify could be:

• What are the most important decision criteria?
• Which points need to be made especially clear?
• What does the audience not want to hear under any circumstances?
• What scope or time is appropriate? 1 minute? 3 minutes? 15 minutes?

Sounds abstract at first. Here is a short pitch to really get the necessary answers:

We are currently working on the business case for our innovation. The business case is aimed at convincing you to invest a 7-figure sum in our project and place 4 people at our disposal for 6 months. What information do we need to provide to get a positive response from you?

In one sentence: Understand your audience before you start “selling” them.

Tip 3: The first number is the hardest – Trust your gut feeling

Write down what you think. The first number you put on paper is the most difficult. “Yes, but isn’t it all just made up?” Sure it is. In the view of experts, it’s fiction. But that’s not so bad. Americans call this kind of estimate an “educated guess”. But in Europe, thinking this way can be difficult. Perhaps one reason why business cases are so rare in Europe.

Making good guesses is a skill that can be learned. This works best when sparring. In pairs or groups of three, and with the Internet at your disposal, surprisingly good estimates can be formulated. Here are a few methods:

• Comparison: What is already known and allows us to draw initial conclusions?
• Plausibility: Does your gut say it’s right? If not: examine that gut feeling and discuss it with others. What isn’t quite right? Why might this and that not be true?
• Consensus: What opinions are there? If everyone agrees: Fine. Otherwise: Discuss extreme values.
• Multiple-step estimating: If you know about the case of piano tuners in Chicago, you know what we mean. If you want to know, give us a call.

In one sentence: When estimation is difficult, drum up a few colleagues and put up with the initial pain; it will pass.

Tip 4: Forget market potential – How much rubber will you get on the road?

If you need to shoot for the moon, set the market potential as a target value:

This is needed everywhere. Everyone will use it. Our target group? Everyone is our target group!

This premise can produce astronomical figures. But the reality is different. The limit is rarely defined by market potential. The limit actually consists of the number of target customers you reach and convince. Plan your sales bottom-up. How many calls are needed for a sale? How many website visitors lead to a sale? What percentage of “interested persons” actually conclude a contract? And how much customer acquisition can really be achieved given the available resources and budgets?

In one sentence: In the business case, provide solid sales volume estimates bottom-up instead of dazzling people with top-down market potential.

Tip 5: Forget the costs – Added value determines the price!

First estimate the sales, then the costs. The easiest way to estimate revenue is, of course, cost-plus pricing. I take the costs and then add 10%, 20% or 400%. Simple, but not very helpful. Because it leads you right into the price trap that you actually want your innovation to free you from. Another effect of this thinking: “The sales department has to sell the price somehow.” As a result, you have an “innovation” that no one will buy. The sales department says it’s too expensive, the developers say the sales department isn’t doing its job right and the customer says “I can’t use what they’ve come up with. I’ll spend my money somewhere else.” This kind of finger-pointing can be avoided.

1. Start with what the customer is willing to pay
2. Factor in sales volumes
3. Understand the cost you need in order to provide the solution so that it pays off.

In one sentence: The value (for the customer) determines the price, not the cost.

Tip 6: Do a reality check for the business case – Without facts, everything is just fantasy!

Reality check: Put each number to the test. Not always easy, but valuable. And in case of doubt, someone else can check them as well. What do you need to validate?

• Sales volume: How many will customers buy? How many customers need to be approached or otherwise informed to make one sale? This is where face-to-face or telephone customer interviews and online engagement testing can help.
• Turnover: What is the customer willing to pay? Clever customer interviews include the blunt question “What would you pay for it?” You won’t get really far with it. But it’s sometimes better than nothing. For online sales, fake pricing pages and fake checkout pages are more likely to be useful.
• External costs: Browse price lists, get quotes and test purchases provide some clarity.
• Internal costs: Knock on doors and talk to colleagues. Are costs and effort estimates realistic? What have we forgotten?
• Schedule: Knock on doors again. Can we do this? What does experience tell us?
• Argumentation: Try it out. Try to “sell” the business case. Would a neighbor, sister, office colleague or the boss’s personal assistant bite?

In one sentence… okay, in two: Forget about market studies and market analyses and talk to people. Put every assumption to the test, then assumptions are no longer “just assumptions”, but a “valid forecast”.

Tip 7: Forget the details. A business case must fit on one page.

Uncomplicated numbers. Omit taxes. Maximum of 3 product options. Most business cases fail to convince because of too much complexity. Calculated estimates must be clear and solid. But the business case is much more than a set of figures. A business case is a communication tool. And communication often fails before it even proceeds into the thicket of numbers and data. Simplicity is therefore the motto. If it’s not easy to understand the value, then you haven’t really thought it through it yet.

In one sentence: The business case must be able to convince an audience in 3 minutes; better still – in one minute.

TOM SPIKE supports world firsts even before they exist. As innovation consultants, we have been supporting established companies and start-ups for years now. Our most important focus is on B2B and technology companies. As experienced entrepreneurs and consultants, we know the pain of financial calculation from all perspectives. And as technicians and engineers, we know where the hurdles lie for developers when they have to generate numbers for business cases.