I’ve been going about all this all wrong. I’ve thought for the longest time that innovation is something you can sell – a product that you can package and apply – something off the shelf that you can simply purchase and place within your organization.
But it’s not.
Nobody really needs innovation. They need a product they can sell. They need to earn profits. Innovation does not equal profits. In fact, if anything, innovation is anti-profit.
I’m a libertarian. I love capitalism. I think that capitalism is the best of all possible economic systems because it is the closest to the real, natural world.
However, sometimes, capitalism and innovation often clash. Why? Capitalism is all about maximizing profit – which can only happen in two ways – your customer needs to be willing to pay more for a product than it costs to create it. In order to increase profits, you must either a) increase the customer’s willingness to pay a higher price for your product or b) reduce the costs to create your product. Capitalism survives on the variance between the costs to create a product and the price to pay for it. It is purely profit-driven.
Innovation, on the other hand, is customer-driven. Profits are a “second order effect” of innovation – if you deliver a product that delights your customers, you would think that their willingness to pay will increase. It may or may not follow. It’s a risk. Unfortunately, its a risk many companies are not willing to take. so they take the easy route – instead of increasing a customer’s willingness to pay a higher price via providing a better product, they look at the other side and slash costs.
How can we reconcile capitalism and innovation? Once we run out of things to cut, then we have to look at ways to increase the perceived value of a product in order to increase the customer’s willingness to pay a higher price. We can do this by incrementally adding value to a product without increasing its price (for example, look at Amazon Prime. It started out as a way to entice customers by paying a small yearly flat fee to get their purchases sooner. Since then, Amazon has loaded the Prime membership with more and more perks, thus increasing the value of the product, therefore increasing the customer’s willingness to pay a higher price. This has resulted in Amazon being able to increase the price of Prime over time as well, further increasing their profits)
Increasingly, as businesses continue to reduce costs and focus on padding the profit margin, innovation is sprouting in new places, such as government and non-profits, where the pressure to show a profit does not exist and the organization has more leeway to experiment with innovative new products without the specter of ROI overshadowing every innovation. Unfortunately, many non-profits and governments do not have the budgets that commercial business does to be able to build these innovative new products – but in some cases, lean budgets are helpful, as it causes them to be more creative in their product development.
Ideally, all organizations need a budget for innovation, and an innovation group to use that budget to explore the future. You see, in my view, the innovation group within an organization should exist to develop the future of the business. This is why I believe that futurism and innovation are intertwined – if innovation creates the future of an organization, then it needs to look at the future to see its place in that future. If it can’t see itself in that future, it must re-design itself to fit into that future. Its innovators must birth new businesses in order to survive in the future.