Why Innovate? How SMB Product Companies Grow

Part 4: Business Case – The Second Phase Gate

By Angus Robertson, Ahmet Abaci and Beth Somplatsky-Martori

As we prepare to discuss the second phase gate needed to validate your new product idea – the business case – first, a juicy story.

You may remember a while back hearing of a new company that was going to revolutionize the process of delivering freshly squeezed fruit and vegetable juices to the masses. Named Juicero, the product hinged on a Keurig-like drink machine that would turn bespoke packets of fresh ingredients into the kind of juice you’d get from an extractor – without the mess and the need to raid the local farmer’s market.

Of course, to make it easier to make this type of juicing habit-forming, Juicero developed a subscription model – extracting up to $240 per month from users’ wallets.

Picking up on the organic juice craze, the product presumably passed through the first phase gate – concept development – with flying colors. Celebrity endorsers and investors alike lined up to be the first to back the $699 machine – showering the company with nearly $120 million in start-up capital.

However, in its haste to get this innovative product to market, it appeared that Juicero skipped the critical second gate – the business case. From the moment the first machine rolled off the line, the company was hemorrhaging money – the machine cost $750 to make, meaning each machine earned Juicero exactly negative-$51 in profit. It was also clear that the delivery of refrigerated juice packets direct to consumers wasn’t financially sustainable – anteing up $2,400 per year for fresh juice isn’t for the masses. Before long, the company was losing $4 million per month of investor cash, and the worst was yet to come.

It turned out that the magic of the whole process was indeed a bit of high-stakes sleight of hand. A Bloomberg reporter discovered that you could crush the juice packet by hand, and get the same results as those turned out from the machine. Price reductions and refunds couldn’t save Juicero, which expired as quickly as those fresh juice packets!

The cautionary tale for innovators is this – the concept, the first phase gate, is only part of the story. It takes a great business case to align and energize the team, and, more importantly, deliver something that the public is willing to pay for.

So what are some of the fundamental questions you should be asking at this juncture in the phase gate process?

Who is the potential customer?
What do they need?
Where are they?
How much are they willing to pay?
What is the market potential and ROI potential for the proposed product?
How long will it take for you be able to recoup your product development and product launch costs?
What are the risks, uncertainties, and assumptions?

Had Juicero asked these questions, they may have discovered the fatal flaw in their product offering – consumer acceptance.

As you ponder your own approach to business case development, there’s a lot to learn from the also-rans like Juicero. In our view, there are three main reasons that products fail:

Poorly defined market description: You have no meaningful differentiation, and thus are ineffective in telling the value story that will entice the consumer to spend money on your offering.
Poor or underfunded launch plan: Squandering lots of marketing dollars on a haphazard product launch can be as devastating as a bootstrapped launch with minimal resources. A conservative launch plan is always best here – don’t underestimate the time you will need to build the market, go through distribution to retail, and get your digital marketing portfolio humming.
Poor product quality: Clearly, your product must live up to your marketing claims – testing, testing, and more testing, are the key here. You only have one chance to launch, so you need to do it right, and put your absolute best foot forward.

For your company to avoid these points of failure, market research and validation are absolutely essential to business case success. Research should focus on things like market volume growth and potential adoption rates; and the voice of the outside consumer should help you hone your value proposition or positioning that you’ll use to attract buyers.

Also at this phase: Developing buyer personas (what does the ideal customer look like?), and what the consumer would be willing to trade for a lower price point.

For our team, this gate is our favorite step – it’s the essence of defining your market fit and testing your ability as a team – and as a series of individuals – to innovate and win in your marketplace. Is the consumer’s pain great enough? Are you able to solve it? Can you do so in a way that others can’t follow easily? Will you build a strong base of advocates out of the base who will tell others to use it?

One final note: Don’t underestimate the power of being among your customers. Each member of your validation team should take the opportunity to leave the audience and spend time with your potential consumers where they live – observing them, listening to them, and understanding how they transit through each stage of their buying paradigm.

OK, are you feeling “juiced” about your new product development phase gate process? In our next blog, we’ll continue our march through the phase gates.

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