Want to Create a Culture of Innovation? Ask These 3 Essential Questions.

Innovation comes from experimentation. Experimentation leads to failure. Embracing failure is the path to building great products and enterprise value.

This past weekend, I had a rare opportunity to kick back and relax. I needed a few supplies before I settled into my couch, so I grabbed my Amazon Fire phone and headed out to the local shops. I didn't need to bring any cash – my Amazon Wallet had me covered. When I got home, I nearly tripped over the box of laundry detergent my Amazon Dash had ordered. I remembered to book my trip to New York City on Amazon Destinations, and just as I confirmed my hotel, the doorbell rang, signaling the arrival of my order from Amazon Restaurants. I grabbed 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 achieve critical milestones, and Amazon shut them down.

One of the things that made Jeff Bezos a great founder was his embrace of experimentation and failure. He relentlessly invested in new product development. But he didn't fall in love with any one product or tactic to fulfill his vision. Instead, if an experiment failed to meet minimum expectations for performance, regardless of the amount of time and effort invested, he was quick to pull the plug, making space for future experiments.

Innovation and experimentation are crucial to the journey of a startup. You're in search of scalable product-market fit. Many of your assumptions are going to be wrong. Many of your experiments and tests will fail. That's ok as long as you follow one essential rule.

Believe in your vision, but be ruthless in shutting down initiatives that don't meet expectations. If you don't quickly shut down unsuccessful projects, your team will become mired in work that can't scale, draining time and money from much higher potential ideas.

Here are three questions to ask when evaluating the potential of a new product or service:

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 are launching a product that addresses those problems. If you hit the mark 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 evangelists within their community, creating your initial flywheel of organic growth.

You have a critical decision to make if you cannot find a group of early adopters that will help drive organic growth. Iterate and test again or kill the product and move on to your next idea. Unfortunately, most startups' biggest mistake at this crucial crossroads is to ramp up spending on marketing beyond a sustainable level under the mistaken assumption that they have a marketing problem rather than a product problem. This path only leads to accelerating cash burn and missed opportunities.

2. Are your customers coming back for more?

Once you discover messaging that attracts customers to your product, you must deliver on their expectations. Do they continue to use your product after those first few attempts? Do they keep coming back to buy more from you? Or are you suffering from high return rates, cancellations, or product abandonment? You should have clear KPIs for customer behavior, consistently measuring to ensure you're building a sticky enough offering to scale your business.

Successful startups are built on the back of customer lifetime value (LTV) that can sustain profitable, scalable growth. High LTV is powered by strong customer retention and consistent repeat buyer behavior. If most of your customers are one-and-done, it's unlikely you can profitably scale your company.

3. Do you have enough pricing power to deliver profitability?

Sales volume and customer retention only matter if each sale generates enough 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 sales price.

It's easy enough to get customers to order a free trial or accept delivery of a try-before-you-buy subscription box. But can you attract enough customers willing to pay a price that delivers 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. In the end, your product, and your startup, will only be successful if you can consistently charge a price that will generate the profits you need to support sales and marketing, new product development and your day-to-day operations.

Failure is inevitable and vital

The Amazon Fire phone may have failed, but the technology developed for the phone accelerated the development of two very successful products, the Echo and Alexa. Building a culture of innovation isn't easy. It requires an acceptance of failure, supported by a culture of measurement and accountability. But it's a powerful force for finding product-market fit, profitability scaling your startup and building enterprise value. It's also a much more fun and fulfilling way to build your company.

This post was originally published on Entrepreneur Media on November 24, 2022.