When a consumer product company wants to know how a new product or new marketing campaign will perform, it doesn’t rely solely on traditional market research surveys. It goes to test markets to discover how the innovation will go over in real market conditions, without the risk of a national or global rollout. This process also provides the test bed for optimizing the marketing mix to support the full-scale launch. Actual market experience, veteran marketers will tell you, never quite matches the results of quantitative and qualitative market research reports and what consumers say they will do behind the one-way glass of a focus group facility.
So here’s my question: Why don’t more firms employ the same approach to explore and test new business models?
Anyone can map out new business model ideas on paper. It’s easy to do pro-forma analyses of how a new business model might work. And it’s not much more work to write up a fancy report embellishing on the potential of a hypothetical new business model. But until a business model idea sees the light of day in the real world, it is impossible to know if it will really work.
Just talk to any successful serial entrepreneur about their experiences in starting new businesses. They almost never get the model right on the first try. It takes several iterations to find a business model that works on the ground and has the potential to scale. Most will tell you it’s a waste of time writing a detailed business plan outlining all the components and how they’ll interact. The better approach is to sketch out a business model concept on the back of a napkin, build a prototype, and then move as quickly as possible into the market to see whether it holds water.
The idea is to move as quickly as possible from concept to prototype to test, and then iterate until you land on a business model configuration that works and is ready to scale. Along the way there will be many failures. The trick of course is to fail fast and to capture learning that can be applied in the next round.
Corporate business model innovators can learn a lot by observing successful serial entrepreneurs.
Mickey Drexler, chairman and CEO of J. Crew Group, served on the board of Apple from 1999 until just a few months ago. He gave Steve Jobs some excellent advice that is relevant for any business model innovator. Jobs was getting frustrated with Apple’s inability to control the entire customer experience, since its products were sold through traditional consumer electronic retail channels. Apple products, in his view, weren’t getting the shelf placement, sales support, and customer service they deserved. He wanted to apply Apple’s design magic to what he rightly believed was a critical part of the customer experience — buying the product. As Jobs began thinking about the possibility of Apple specialty stores, Mickey Drexler told him to build a prototype near the Apple campus and to hang out there until he was comfortable with it. It was the perfect advice, and that is exactly what Apple did. Its first store was a real-world lab or design studio to explore how the new business model would work.
Apple made many changes to the store configuration during the design phase. Walter Isaacson, in his biography of Steve Jobs, described how all the initial planning for the model Apple Store called for a floor layout designed around product groupings. Jobs realized late in the store design process that the customer experience wasn’t about product groupings — it was about what consumers were doing and could do with Apple products. Despite the fact that the store design was all but complete, Jobs and Ron Johnson, who was in charge of the project, both realized the Apple Store design would have to be completely redone. And it was.
While the new business model was being designed and tested, the rest of the organization was still driving the existing business model. It was essential to do both while determining if the new business model made sense. But the real-world prototype, and other early stores that Apple was able to iterate, allowed Apple to create a winning customer experience that has become Apple’s hallmark.
You could say that the Apple Store really didn’t invent anything new. The capabilities to make it happen already existed. But most retailers give the Apple Store credit for delivering value in a different way, through a compelling customer experience. The key was the ability to freely reassemble and play with parts in novel ways. It took leadership, a compelling vision, a consumer-centric design approach, and willingness to experiment with new configurations. And it took a real-world platform to try out the new business model.