Companies traditionally see failure as a waste of money. This is the right perspective when you’re building a new factory or managing established processes. However, quick and cheap failure helps you identify which ideas NOT to pursue when it comes to creating new growth engines. This type of “productive failure” that leads to learning and insights helps you avoid investing millions of dollars in ideas that customers don’t want, won’t make enough money, or are impossible to execute.
It’s important to get people across the company--management, finance, engineering, sales, etc--to understand that there are two types of failures:
Good, productive failure that leads to insights when pursuing new business ideas. This can potentially help save time and money by not pursuing bad ideas.
Wasteful failure related to badly managing existing value propositions and business models.
In this blogpost I focus on the former.
Good failure is productive because it helps you avoid larger wasteful costs. When you test new business ideas you incur some costs by running experiments. However, that time, energy, and money will help you avoid bigger, more costly, failures. The knowledge you gain from early, cheap experiments help you avoid investments in expensive products, technologies, or business models that nobody wants. You save money by testing if the market has an appetite for a product or service instead of immediately investing in e.g. an expensive technology prototype.
There are three type of costly big failures small cheap experiments help you avoid:
Market risk: Customers don’t care about your great new product, technology, or value proposition or you fail to acquire and retain a sufficient number of customers in a cost-effective way.
Financial risk: You are not able to earn more from your value proposition than it costs you to produce. Here we’re talking about risks related to pricing, revenue streams, and production costs.
Execution and tech risk: You can’t make the technology work or put the infrastructure in place to execute your great new idea.
Acknowledging and accepting the value and potential cost savings resulting from productive failure will encourage teams to test and fail quickly and learn faster; but more importantly, it encourages teams to explore bolder ideas. If teams always need to succeed, then every failure will only be seen as a cost, not a win, and they will play it safe. You’ll never get a homerun with that mentality. I like to say out of 10 new potential business ideas that two may succeed, three may be mediocre, and five will fail outright.
To learn how a large corporation encourages a culture of experimentation, failure, and learning watch this interview with Amazon founder Jeff Bezos. I pulled out some key quotes from Bezos that really illustrates how important good failure is a focus of the organizational culture, and key to Amazon’s ability to succeed:
“You cannot invent and pioneer, if you cannot accept failure."
"To invent you need to experiment. If you know in advance that it's going to work, it's not an experiment."
"If you have a 10% chance of 100x return, you should take that bet every time, but you're still going to be wrong 9 out of 10 times. It's going to feel bad 9 out of 10 times."
"There's a different kind of failure, which is not what you want. Where you have operating history and you don't do know what you're doing, and you just screw it up, that's not good failure. That's not an experiment, that's just bad operational excellence."
Re-live all of Alex Osterwalders fascinating conversations.