Pretend your new business has a choice: it can target high-end markets with a premium offering, or it can target low-end markets at the lowest price. What should it do? Rather than jumping to an answer, let’s slow down and investigate.
One idea is to ask the industry’s top customers what they’d prefer. The customer is “always right,” after all.
Spoiler alert! Top customers usually want everything – premium performance and low-ball pricing.
Do you listen to them, or are you willing to risk ignoring them (because you think you know what they really want)?
We’ve gone from two options to three: you can target the high-end, the low-end, or deliver high-end performance with low-end pricing (the ‘best of both worlds’ strategy). One option has to be right, or at least “more right.”
Next you ask really smart people for advice, such as industry veterans or successful-types whose opinions you value. Problem is, they’re often biased by what they’ve done in the past. One friend from Apple likes the premium idea. Another is from Amazon and likes the low-end idea. The third is from Facebook and likes the best of both worlds.
Crap. Still no tie-breaker. You bust out a spreadsheet and do mock financials, noticing the premium option happens to pencil out best with the fewest ridiculous assumptions. But, with a little creativity, every strategy can be made to work in Excel. What about the real world?
Next you read stuff. Pricing with Confidence convinces you it would be stupid to go with a low-end strategy. But then you read The Innovator’s Dilemma and think the low-end might not be so bad. If you cherry pick your favorite tidbits from each book, perhaps the best of both worlds is right after all.
Stop and inventory your progress. Customers, experts and literature have informed your decision, but now it’s up to you. Who’s input should you favor? All you really have is your “gut” to go by.
This is a familiar feeling for anyone who’s started a business. Key decisions are made and there’s little more than contradictory “common sense,” gut feel and anecdote as guides. It’s part of what makes entrepreneurship exciting – survival by your wits. Yet it also goes a long way towards explaining why around 75% of new businesses fail.
From a mathematical perspective, the risks of each interdependent decision are multiplied as you move your business forward. Your first key decision may have a 50% chance of being right, and the second big decision (which depended on the first) may also have a 50% chance, leaving you with the combined odds of a 25% chance you’re on the right path. Since you don’t really know the precise mathematical risks of any decisions, or how risks have multiplied, you can only guess it probably isn't a pretty picture. Best to ignore it and wander deeper into the labyrinth.
What you really need is actual evidence that one idea is better than another. But what would that look like? You need hard evidence to answer a soft question. Anecdote is not evidence, and that’s mostly what you’ve gathered so far.
This insight alone is a basis for hope.
Once you realize you’ve been operating in an evidence-poor environment, it’s easy to see how a little evidence can go a long way. For example, after categorizing thousands of new entrants, our researchers have found low-end strategies six-to-seven times more likely to survive than either high-end or “best of both worlds” strategies. That isn’t an anecdote, it’s a data point. It also has exceptions, statistical confidence and a margin of error. An anecdote can be great, but to make better decisions it’s a lot more helpful to have empirical evidence resulting from thousands of anecdotes.
See the difference? With just a little evidence, the decision – or at least the decision’s risk – can come into better focus for the first time. The smart bet in this scenario is to choose a low-end strategy. You could still pursue a premium or best of both worlds strategy, but at least now you’d know the decision added unnecessary risk and increased your odds of failure. Realizing the huge gamble for what it was, you’d have to be extra convinced the sacrifice was worth it. In other words, a little evidence can shift you from a gambler to a risk manager, and that’s a huge improvement.
As a discipline, strategy is anecdote-rich and evidence-poor, leaving managers vulnerable to bad decisions while believing those decisions are well founded. One obvious question is, where can you get a hold of this kind of evidence on a regular basis? Most of the time you can’t, which isn’t a reason to retreat but a call to arms. Strategy has been historically treated as a soft subject but it’s time we expect more. In strategy, a little evidence goes a long way.