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This past weekend I had a rare opportunity to relax and unwind. I needed some supplies before settling into my couch, so I grabbed my Amazon Fire phone and headed out to the local stores. I didn’t need to bring cash – my Amazon wallet had me covered. When I got home, I almost tripped over the box of laundry detergent that Amazon Dash had ordered. I remembered to book my trip to New York City on Amazon Destinations, and just as I was confirming my hotel, the doorbell rang, signaling the arrival of my order from Amazon Restaurants. I grabbed my food, sat down on my comfy sofa and spent the rest of the day playing Amazon’s online game Crucible.
Of course, none of this happened. Because even though all 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 invested relentlessly in the development of new products. But he didn’t fall in love with any product or tactic to fulfill his vision. Instead, if an experiment failed to meet minimum performance expectations, regardless of the amount of time and effort invested, he was quick to pull the plug, making room for future experiments.
Innovation and experimentation are essential to the journey of a startup. You are looking for scalable product-market fit. Many of your assumptions are going to be wrong. Many of your experiments and tests will fail. It’s fine as long as you follow one important rule.
Believe in your vision, but be ruthless in shutting down initiatives that don’t meet expectations. If you don’t quickly shut down failed projects, your team will be stuck with work that can’t scale, draining time and money from much higher potential ideas. Here are three questions you should ask when assessing the potential of a new product or service:
Related: Fostering a culture of innovation, and what it takes to get it right
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 early adopters have problems to solve. You launch a product that solves these problems. If you hit the mark on features and price and can easily communicate 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 in their community, creating your first flywheel of organic growth.
You will have to make a critical decision if you cannot find a group of early adopters who 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 increase their marketing spend 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 lost opportunities.
Related: 3 Common Mistakes That Will Increase Your Marketing Budget
2. Are your customers coming back for more?
When you discover messages that attract customers to your product, you need to meet their expectations. Do they continue to use your product after the first few attempts? Do they keep coming back to buy more from you? Or do you suffer from high return rates, cancellations or product interruptions? You should have clear customer behavior KPIs, consistent measurement to ensure you build 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 driven by strong customer retention and consistent repeat buyer behavior. If most of your customers are ready, it is unlikely that you will be able to scale your business profitably.
Related: Are You Sitting on a Customer Retention Gold Mine?
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 the product from the net selling 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 who are willing to pay a price that provides an acceptable level of coverage? 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. Ultimately, your product, and your startup, will only succeed 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.
Related: 4 Reasons Pricing Is Key to Startup Success
The Amazon Fire phone may have failed, but the technology developed for the phone accelerated the development of two highly successful products: Echo and Alexa. Building a culture of innovation is not 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 for scaling your startup, and building enterprise value. It’s also a much more fun and fulfilling way to build your business.