A vital way for an organisation to track whether its innovation captures value is by using well-defined ‘key performance indicators’, or KPIs. Unfortunately, according to Forbes, almost 50% of SMEs don’t know the metrics that they should be tracking. So, how do you choose the right ones? The KPIs your business decides to track will depend on the type of innovation you are implementing; your industry and your customers’ wants and needs. Selecting the right KPIs is in many cases as important as selecting the right innovative idea to implement and commercialize.
GETTING THE HIGH SCORE
As you might expect, the videogame industry is extremely adept at tracking and measuring player metrics for different purposes. For example, a user’s enjoyment (KPI 1) of a game is typically not synonymous with engagement (KPI 2) and user retention (KPI 3).
Call of Duty Warzone is renowned for having a community of players who complain that they don’t enjoy playing (KPI 1) yet play the game obsessively (KPIs 2 and 3). The game’s patented skill-based matchmaking algorithm ensures that players are always competing against opponents of equal or higher skill. As a result, players generally experience higher levels of negative emotion because they rarely win – leading to negative reviews.
However, the same players who review the game negatively are its most active and loyal players. These players are committed to becoming the best player they can be, because they are chasing the elusive high of winning. Thus, if the game’s developer Infinity Ward selected ‘enjoyment’ as the sole KPI to base their design decisions upon, engagement levels and retention rates would likely decrease.
Selecting KPIs is a complex process which requires companies to step away from the most obvious or conventional metrics and balance competing priorities. More to the point, the key to defining your KPIs is to do it in conjunction with market and customer research. In the example of Call of Duty, Infinity Ward defined its KPIs based on a nuanced understanding of its customers. If you want to measure the value of your innovation, make sure you first understand what your customers truly want and need.
MEASURING AND QUANTIFYING VALUE
Some typical key metrics that can be used as KPIs include:
- Financial Metrics, e.g., net profit, working capital, debt to equity capital or net cash position
- Customer Metrics, e.g., conversion rates, acquisition rates, sales or satisfaction levels
- Operational Metrics, e.g., on-time delivery or stock levels
- Impact Metrics, e.g., employee satisfaction, gender pay gap or energy use
These are all easily measured and tracked. However, many businesses fail to benchmark their financial metrics against competitors. Competitive benchmarking is an incredibly important process that should be executed when using KPIs to measure the value of an innovation. This is because there are a variety of external, macro-level factors that can influence a company’s financial metrics.
For example, during the Covid-19 pandemic, many sectors saw a rapid rise or fall in financial performance. If a company innovated its processes during this period, it would be difficult to determine whether the innovation or external factors affected its financial performance. However, if the company benchmarked its financial performance against its competitors, it would be able to work out the industry average impact of the pandemic on financial performance and then extrapolate the impact of its innovation.
Intellectual property is a key organizational asset that helps to protect the value of an innovation. It includes patents, copyrights, and design rights. Patents prevent anyone else from capturing the value of an innovation unless they pay you for the privilege. Call of Duty’s patented skill-based matchmaking algorithm, described above, was a key influencing factor behind the brand achieving market leadership during the pandemic. In essence, a patent is a way for an organization to protect its competitive edge so that it can defend its market share.
However, patents involve meeting a lot of requirements such as demonstrating novelty and clearly disclosing how the innovation works. Furthermore, patents need to be enforced and kept up to date, possibly across many territories which can be very expensive. These requirements are often difficult for entrepreneurs and early-stage start-ups to meet.
Nevertheless, the defendable territory of a business is often larger than early-stage start-ups realize. It includes things like secret or hard to copy processes or more fluid concepts like brand, customer relationships, or after-sale services. It’s important to look at what you have at your disposal to make you more attractive to customers. Measure KPIs like lead times, production costs, and brand awareness. Create strategies like high switching costs to lock in value to scale the business through franchising or distribution licenses.
As you learn to protect and measure value you will start to create a cycle of continuous improvement that increases returns and reduces the risk of future projects.
If you’re trying to define what data matters most to your organisation, episode 5 of the Sussex Pioneers series, ‘Mining for Gold’ can help. We interview start-ups including Sussex Innovation members Hardball Games and Definition Health about how they create and capture value from their innovations.