ROI and Innovation: The New Chicken and Egg of Commerce
As a company out there on the innovation curve of commerce, Moltin quite often finds itself working with business teams doing their best to trade off two competing priorities: deliver the needs of the existing business and innovate at the same time.
The story goes something like this:
“We need to be more innovative and we have some great ideas that will really stand out. The business is totally behind this”
“We have scoped the costs and efforts to deliver, they are non-trivial and will force a strategic tradeoff”
“Of course we can’t quantify the return from our ideas and we can quantify the value of our roadmap for iterative tweaks.”
“We need to prioritize the known value over the unknown, however painful”
(6 months later)
“We need to be more innovative and we have some great ideas that will really stand out”
The same story can be told in so many different businesses and the outcome of the decisions are necessarily the same. Nearly every rational business, when push comes to shove (and it always does), will take the bird in the hand over two in the bush. Every time. And yet, not pursuing the potentially breakout concepts is not the right decision either. Certainly some businesses reserve a discretionary budget for innovation ideas (and more should), although the business mostly writes off these investments as having any real impact on the business in any foreseeable future and chalks up the dollars spent to brand and consumer development and hopes, maybe, one day for a return. And when it’s all hands on deck to deliver hard return to the business, these investments are the first to go. Every time.
At the root of the issue here is the simple fact that ROI calculations, which is how businesses have been trained to think, do not value speculative innovation. The formula is straight forward:
ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
In digital commerce, here’s where it all falls apart
Gain from investment: Twenty years later, digital commerce is at its infancy. For all that we have done as an industry, we have only delivered the first use case on this thing called the internet: the classic transactional website. By most measures, ecommerce is delivering only 15% of total retail revenue, is driving the largest percentile growth in the business. Few out there would say is does not have a claim to a larger percentage of a growing pie in retail.
That said, we don’t yet know which form factors and next use cases will be the catalysts for future growth. Will it be Sephora with their AR and AI technology, Rebecca Minkoff's mirror, or Adidas? Time will tell and it will tell the innovators first. That said, when it comes to the ROI formula and creating the business justification for a project, give this variable “?”
Cost of Investment: Here comes the whammy: the reality in digital commerce is that changing a proverbial pixel costs a ton of dough. The reason, for the most part, is that the primary infrastructure for delivering “digital commerce” was in fact built to deliver a very specific use case-- a website in a highly-templatized fashion. This is of course understandable: the needs of the industry in the times at which these technologies were conceived were to deliver optimized commerce on the web. Selling on the web WAS the innovation of the day. So platforms optimized for it--from the database to the UI. And it worked.
Ah, but now we want them to do things for which they were not built. Highly-customized business rules and logic to deliver unique commerce models. Drive omnichannel use cases. Power IoT devices. Iterate faster with better economical scale. And that they are not able to do.
So for the ROI formula, color this variable “big.”
And so, assembling the formula
The ROI of digital innovation = ((“?” - “Big”)/”Big”)).
In other words, under a classic ROI calculation, digital innovation is DOA.
How to Move Forward:
Of course, not moving forward with innovation is the wrong decision for the company and the brand. Here at Moltin, we’re seeing companies take unique approaches to changing the “Cost of Investment” portion of the formula, by going after its two variable component parts: Time and Money.
This has many benefits
- Reduces risk of disruption to core architecture
- Allows development to progress in modern and faster architectures
- Containerising the innovation: If it works, it persists. If it does not, it can be discarded without damage to the core.
So what do you think? How are you going to try to change the retail strategy for innovation?