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Innovation Accounting: What Is It and How to Do It?

Innovation accounting is a step you shouldn’t skip when improving your company’s efficiency and success rate. 

For one, about 30,000 new products come out every year, but 95% of them fail, including big names like Google and Coca-Cola. For example, Google Glass got a lot of money but didn’t last long.

This shows good management matters. In addition, finding Lean Startup’s innovation accounting potential can help manage challenges better. This article explores key insights, innovation metrics, and strategies for testing ideas in a budget-friendly way.

Overview of Lean Startup Innovation Accounting: Why Should You Do It?

It is important to familiarize yourself with the Learn Startup Methodology to understand innovation accounting. Lean Startup lets you try out business ideas fast with just a few features to check if customers really want them before you invest too much.

Meanwhile, innovation accounting is like keeping score for your new ideas. It tracks how well your ideas are solving customer problems, helping you decide which ones to invest in and improve.

When doing the Lean Startup, carrying out innovation accounting is a fundamental step to take for the following benefits:

  • Focuses on learning and validation. Innovation accounting checks numbers to see if what customers want matches what you’re thinking about. This helps make sure you spend time and money on good ideas and don’t waste any.
  • Improves resource allocation. By identifying promising ideas early on, you can allocate resources effectively. This allows you to focus your efforts on innovations with the highest chance of success.
  • Increases the innovation success rate. Using numbers to track how well you’re doing helps you make smart choices as you come up with new ideas. This makes it much more likely that your new ideas will do well when you try to sell them.
  • Cost-effective for small businesses. Innovation accounting can be adapted using free/low-cost tools and focusing on customer-centric metrics. This makes it accessible for businesses of all sizes.

3 Levels of Innovation Accounting

Depending on the statistical measure used, beta tests can accurately predict company bankruptcy around 80 to 20 percent of the time. Innovation accounting offers a clear way to check if new ideas will work. 

It’s divided into three levels: getting feedback from customers, testing your assumptions, and keeping track after launching. This method helps save time and reduce risks in new projects.

Level 1: Customer-Focused

Innovation accounting examples start at Level 1, like testing the waters to see if your new idea might work. 

For instance, with an app concept, Level 1 monitors weekly conversations and feedback volume to assess interest, saving time before diving into development efforts.

Level 2: Leap of Faith Assumptions

At Level 2 of innovation accounting, you validate assumptions about your idea. 

For example, if you think people will pay for dog-walking on an app, you test it with a small app trial to see if they’ll pay. This helps you improve your idea before making it big.

Level 3: Full Investment & Development

In Level 3 of innovation accounting, you keep an eye on things after launching. For example, with your dog-walking app up and running, you watch how much it costs to run and how many people are using it. This helps you figure out if it’s doing well.

12 Metrics to Get Started in Innovation Accounting

 innovation accounting metrics Text

Ratio of novel ideas to total ideas generated

Say, your team creates 100 ideas monthly. Innovation accounting notes 15 as genuinely new among them. This ratio (15/100) gauges the innovation level of your idea generation.

Average idea quality score

Think of your team rating new ideas from bad (1) to great (5). The average score, found by adding all scores and dividing by the number of ideas, shows if your team’s ideas are mostly good (high average) or need work (low average).

Speed of experimentation

Innovation accounting should also watch how much time it takes for ideas to turn into test results (like a week). If your team experiments faster (measured in weeks), they can learn and make their ideas better more quickly.

Validation rate

Consider your team with 5 toy car designs. Through innovation accounting examples, you monitor kids’ preferences (let’s say 2 enjoy them). The validation rate, like 2 out of 5 (40%), shows which designs are liked, helping decide on product development.

Learning ratio

Think your team tries 4 website layouts. Innovation accounting sees 2 boosts in sales. The learning ratio, 2 out of 4 (0.5), shows how fast they learn what works.

Time to market

Picture your awesome new phone case design. The time to market measures how quickly it goes from idea (like a sketch) to store shelves (let’s say 6 months). Quicker time to market means your product gets to customers faster.

Development cost per feature

Imagine adding a new filter to your photo app. Development cost per feature tracks how much it costs to build that specific filter (e.g., $1,000). This helps you see if the feature is worth the investment.

Return on investment for innovation project (ROI)

Say, you put money into a new fitness tracker. Innovation accounting metrics like ROI for innovation check if it earns back money (revenue) after covering all costs. This shows if your idea is a financial win.

Customer acquisition cost for innovation (CAC)

Starting a scooter-sharing service? The CAC watches how much it costs to get each person to try your scooters (like through ads). This helps see if getting customers is affordable.

Customer lifetime value for innovation

Picture your fresh fitness app. One of your innovation metrics should monitor how much a single customer spends on it over time (like subscriptions and in-app purchases). This reveals if your app maintains customer engagement and spending.

Employee engagement

Though not a main measure in innovation accounting, employee engagement matters! It checks how much your team is into creating new ideas. Happy and engaged employees usually come up with better innovations.

Social media engagement

In innovation accounting, social media engagement monitors the online buzz (likes, comments, shares) surrounding your new idea. This early insight can indicate public interest before heavy resource investment.

Considerations Before Doing Innovation Accounting

A CFA Institute and Morningstar study says that good companies often make bad investments. With this, it’s crucial to think about these findings when you start innovation accounting. Consider these key factors:

    • Having a dedicated or integrated team. Innovation accounting can be accomplished with a dedicated team focused on tracking metrics or by integrating tasks into existing roles to fit your business size. For instance, a small bakery might track customer feedback alongside regular sales monitoring.
  • Starting small and using basic tools. Keep innovation accounting simple! Start with basic customer metrics and free tools to track progress before investing heavily.
  • Setting specific goals, data collection methods, and communication channels. Before starting innovation accounting, figure out what you want (goals), decide how to get data (methods), and plan to share findings (communication).

Key Takeaways

Discover how Lean Startup uses innovation accounting, tracking innovation metrics to test ideas and manage resources effectively. Learn these key tips for success:

  • Understand innovation accounting in Lean Startup to test ideas well.
  • Use innovation accounting to track idea success and manage resources.
  • Use 3 levels of innovation accounting for idea assessment.
  • Key metrics like customer cost and time to market in innovation accounting.
  • Engaged employees and social media matter in innovation accounting.
  • Consider resources, start small, and set clear goals for innovation accounting.