Innovation business case – 7 tips on how to calculate whether it pays off

Innovation in the company needs a business case

Innovation should pay off. This is ensured by the business case. More precisely, the “Innovation Business Case“. If it is not foreseeable that the idea will pay off, then you say “There is no business case for it!”.

That’s why you often hear in companies:

Innovation? Show me the business case first.

That’s what some say.

The others say:

Innovation doesn’t need a business case: just do it!

And who is right? The business case is actually clear. Innovative companies have:

• 11% more sales growth
• 22% higher EBITDA growth
• 50% more return in recessions

But “Show me the business case” of course means something else:
Show me that your idea works. Works economically. Before money flows.

But can we really know all this?

• Does the customer buy?
• What does the solution cost?
• When is breakeven?
• What does the competition do?
• Are we cannibalizing ourselves?

Completely unclear for a raw, unpolished idea.
Not easy for innovators and developers with a strong technical background.

But who will pay for it as long as everything is uncertain?

A business case is needed!

For all those who want to create their own business cases, here are 7 practical tips for the innovation business case:

Tip 1: “Business case for innovation” – What exactly is meant?

Roughly speaking, there are three different business cases for innovation. Firstly, they differ in terms of when they can be set up. At the very beginning, or only after the solution concept. The second difference is the level of detail of the content. The third difference is the target groups.

A. Problem case: idea, value of the problem & potential market potential

• Who has a problem?
• How many have this problem?
• How much is the problem worth to these people?
• What slice of the pie can you realistically get, considering that other players will also be on the pitch?

The problem case is suitable for ideas. Neither a solution to the problem nor detailed financial calculations are necessary. The problem case proves that it is generally worth thinking more seriously about a topic. Whether it would be worthwhile for the company in question is not yet clear.

B. ZDF Business Case: Innovation in figures, data & facts

in addition to “A) Problem Case“:

• What prices do we offer?
• What sales volumes do we see over time?
• What expenses (direct costs) are associated with production and distribution?
• What investments and indirect costs are incurred?
• What’s the bottom line?
• What are the key financial figures?

The ZDF business case proves the rough feasibility. It primarily serves the innovation team to convince themselves that others can be convinced.

C. Innovation business case: The added value of innovation fully argued!

in addition to “B) ZDF Business Case“

• Why is the topic of “innovation” on the table?
• How and by whom has the topic been dealt with so far?
• What options are available? In addition to various innovation options, there is always the “Option Z – continue as before”.
• What is the recommendation for action?
• What would it look like in concrete terms if the recommendation were to be complied with? Who does what and by when? When will it be on the market? When will we see the return on investment?

The full “Innovation Business Case” is what managers and investors want to see in order to be able to make decisions easily. You can make as many problem cases and ZDF business cases as the day is long. The innovation business case should be right. Maybe you can rework it once. But then the trust is quickly squandered and the hoped-for innovation is probably wasted.

In one sentence: Don’t just say “business case” and be clear about what is really meant.

Tip 2: The business case must appeal to the bait, not the angler

Sounds trivial, but it’s true. The business case should achieve its goal. At the addressee. To do this, it must be clear who is being addressed. And what he wants or doesn’t want. So pick up the phone and call. Typical points of clarification can be

• What are the most important decision criteria?
• Which points need to be made particularly clear?
• What does the target group definitely not want to hear?
• What is the appropriate scope? 1 minute? 3 minutes? 15 minutes?

Sounds abstract at first. A short pitch to really get the answers you need:

We are currently working on the business case for our innovation. The business case should convince you to invest a 7-figure sum in our project and employ 4 people for 6 months. What information do we need to provide so that we have a chance of receiving positive feedback?

In one sentence: Understand the target person before you start to “sell” them something.

Tip 3: The first number is the hardest – trust your gut feeling

Write down what you think. The first number on the paper is the most difficult. “Yes, but isn’t that all made up out of thin air?” Sure. It is. From an air impregnated with expertise. And that’s not such a bad thing. The Americans call this an “educated guess”. But many people in Europe find this difficult. Perhaps one reason why business cases are so rare here.

Proper appreciation has to be learned. This works best in sparring. With two or three people and with the Internet behind you, you can make surprisingly good estimates. Small aids:

• Comparisons: What is known and can initial conclusions be drawn?
• Plausibility: Does your gut say it fits? If not, get to the bottom of your gut feeling and discuss it. What doesn’t fit? Why can this and that not be true?
• Vote: What are your opinions? When everyone agrees: The best. Otherwise: discuss extreme values.
• Multi-level estimation: Anyone who knows the piano tuners of Chicago knows what is meant. If you would like to find out, please call Henryk Stöckert.

In a nutshell: If estimating is difficult, get a few colleagues together and bear the initial pain; it will pass.

Tip 4: Forget the market potential – how much power can you get on the road?

If you need to reach new heights, set the market potential as the target value:

This is needed everywhere. Everyone will use it. Our target group? Everyone is our target group!

This premise produces lunar figures. But the reality is different. The limit is rarely the market potential. The limit is the number of target persons you can reach and convince. Plan sales from the bottom up. How many calls are necessary for a sale? How many website visitors lead to a sale? What proportion of “interested parties” actually sign a contract? And how much acquisition is really feasible with given resources and budgets?

In a nutshell: make a solid bottom-up estimate of sales volumes in the business case instead of dazzling with top-down market potentials.

Tip 5: Forget the costs – the added value determines the price!

First estimate the sales, then the costs. The easiest way to estimate yield is, of course, cost overhead calculation. I take the costs and then add 10%, 20% or 400%. This is simple but not helpful. This immediately puts you back in the price trap, which you actually want to get out of with innovation. Another effect: “The sales department then has to achieve the price somehow.” The result is an “innovation” that nobody buys. The sales department says it’s too expensive, the developers say the sales department isn’t doing its job properly and the customer says “I can’t use what they’ve come up with. I’ll spend my money elsewhere”. This finger-pointing can be avoided.

1. Start with the willingness to pay
2. Calculate sales volumes
3. Understand at what cost you need to provide the solution to make it worthwhile.

In one sentence: The value (for the customer) determines the price, not the costs.

Tip 6: Do a reality check for the business case – without facts, everything is just a dream!

Reality check: put every figure to the test. Not always easy, but valuable. And if in doubt, someone else can do it. What is there to validate?

• Sales: How much does the customer buy? How many customers need to be approached or otherwise informed for one to buy? Personal or telephone customer interviews and online engagement tests help here.
• Turnover: What is the customer willing to pay? Skillful customer interviews: The blunt question “What would you pay for it?” doesn’t get you very far. But sometimes it’s better than nothing. Fake pricing pages and fake checkout pages are more likely to be used in online sales.
• External costs: browsing price lists, obtaining offers and test purchases provide clarity.
• Internal costs: cleaning doors and talking to colleagues. Is the effort realistic? What have we forgotten?
• Schedule: Cleaning the door again. Can we manage that? What experience is there?
• Reasoning: Try it out. Trying to “sell” the business case. Would the neighbor, the sister, the office colleague or the assistant manager strike?

In one sentence… okay, in two: Forget market studies and market analyses and talk to people. Put every assumption to the test, then assumptions are no longer “just assumptions”, but a “valid forecast”.

Tip 7: Forget the details. A business case must fit on one page.

Smooth figures. Omit taxes. maximum 3 product options. Most business cases fail due to their complexity. The calculation must be clear, stable and solid. But the business case is much more than just a set of figures. The business case is a communication tool. And communication often fails before it even gets into the thicket of figures and data. Simplicity is therefore the watchword. If it’s not easy enough, then you haven’t given it enough thought.

In one sentence: The business case must be convincing in 3 minutes without any problems; even better in one minute.

TOM SPIKE supports innovation and business case

TOM SPIKE supports world firsts even before they exist. As an innovation consultancy, we have been supporting established companies and start-ups for many years. The main focus is on B2B and technology companies. As experienced entrepreneurs and consultants, we know the pains of financial calculation from all perspectives. And as technicians and engineers, we know where the hurdles lie for developers when they have to calculate business cases.