RonAmok!

There are two things that we know about the great game of business:

• Companies are pretty good at predicting costs
• and they’re not very good at predicting demand.

If they were, companies like Ford, Coca-Cola and Columbia Pictures never would have released the Edsel, New Coke, or Ishtar.

The problem is that until recently, the financial success of a project was determined posteriori (after the fact), by how much revenue was generated. But wouldn’t it be better if we could actually predict the project’s financial success a priori (before the fact?) Recent advances in “social” technologies have resulted in a new sort of crystal ball that can not only predict marketplace viability accurately, but can also establish the holy grail of marketing: value-based pricing.

A New Way

Imagine for a moment that you have an idea for a great new product. You know how much that product will cost to develop and manufacture, but don’t yet have a good feeling on how well the marketplace will respond to it. Sound familiar? So how do you determine whether or not to continue with the project? Product testing? Focus groups? Surveys? And even after performing all of these expensive pseudo-scientific actions, doesn’t the decision still come down to a gut-feel based on “intangibles?”

But, what if, instead of surveys or gut-feelings, we had a way to know exactly how many people would prepay for your product? And what if, those same customers would also determine an average selling price (ASP) for the product too?

Fantasy? Nope. Just another business innovation that is resulting from our experimentation with social technologies.

Musician Julia Nunes explains.

“Normally I’d record the album and incur a fun amount of debt, and then, I would try to make that money back by selling the album,” she says in her Kickstarter project video where she’s requesting $15,000 to fund her project. “But now we have this awesome platform called Kickstarter, and I can basically pre-sell the album, and offer up a bunch of stuff that I’d never sell on my regular website, with the added bonus of you guys knowing exactly where your money is going…directly into the studio.”

Had Julia decided to follow the traditional business decision cycle, she’d have to consider investing $15,000 of her own (or borrowed) money to record, manufacture, market, and distribute her album. If she assumed an ASP for each album at $9.99 on iTunes, she’d need to sell well over 1,500 of them (to also cover sales costs) just to break even. If that number passed her gut-check, she’d probably green-light the project.

However Kickstarter opened a new way for Julia to assess the financial viability of her project. Having already calculated the $15,000 that would make the project worth her while, she didn’t have to wait to determine the financial success of her project posteriori, instead the marketplace determined that for her a priori, as 1,685 people prepaid $77,888 for her to create her album.

Business Ramifications

Many people look at Kickstarter as a cute way for the little guy to make it. And they’re missing the point. Something much bigger is happening here as networked technologies are squeezing inefficiencies out of traditional business decision-making processes. The concept of network funding has applicability in any business, not just musicians, as indicated by the 5,258 people who gave $364,000 to Peter Dering to manufacture his Camera Clip System, or the 12,521 folks who gave $1.464M to Casey Hopkins to manufacture his Elevation Dock: The Best Dock for the iPhone.

The business ramifications of network-based funding run even deeper. Consider the fact that companies are never quite certain that they’ve optimized the price-to-demand ratio to generate the most revenue. Companies spend many hours trying to determine pricing, constantly “guesstimating” the consequences of setting prices high to establish a perceived value, or “diving the boat” to drive revenue through volume. Either way, the uncertainty frequently leaves companies with a nagging suspicion that they’ve left money on the table.

Yet, Julia Nunes established a value-based selling price for her album a priori to recording its first note. The ASP for her album was $46.22 [($77,888/1,685), with a median of $30 (determined by the breakdown of backers provided by Kickstarter]. Without a service like Kickstarter, had Julia gone to a record publisher and said, “I can sell exactly 1,685 albums at an ASP of $46.22,” she would have been laughed out of the building, because even the best A&R person in the world can’t predict sales with that level of accuracy. However, Julia’s prediction wasn’t based on the squishiness of a gut-feel; it was based on fact.

So, what does this mean for your business?

The more we use our social networks, the more we learn about their value. As we learn, new uses will emerge, such as helping businesses assess risk in a way that was impossible to do just a few years ago. Services like Kickstarter offer producers the ability to see exactly what consumers are willing to commit to their credit cards before getting too deep into the product development cycle.

So, I have a question. Is your company actively considering the power of networks in their business, or has it already dismissed them as minor tools to be placed into the hands of corporate communicators?

Note: If you’d like to read the full story behind Julia Nune’s successful use of social media technologies, please feel free to get your free copy of The Rule of Thumbs.

While driving home last fall, I noticed that a company called Microsemi had moved into the area. I was pretty excited because Microsemi is a world-wide semiconductor manufacturer whose product-line falls into the sweet-spot of my technical knowledge as an analog/mixed-signal circuit designer.

I went online to learn that the building that I saw represented their new corporate headquarters. I learned that they were growing, having acquired twelve additional semiconductor companies over the past three years–who each brought some pretty cool technologies with them. After a few more mouse-clicks, I also noticed that the company had a very small social media presence. Thinking that this might be Kismet (like how many analog/mixed signal companies with cool new technologies yet very little social media presence can I expect to move into the area?), I decided to write a report, on spec, complete with specific recommendations on how the company might use its online properties to better communicate with its customers–electrical engineers.

I wrote the report and snail-mailed a hardcopy to a Microsemi contact with whom I’d been introduced through a mutual colleague. Unfortunately, it wasn’t meant to be. No complaints. Such are the risks of spec research.

However, as I shared the report with a few friends, it occurred to me that independent of the subject-company’s name on the report, the document contained relevant information for any high-tech, B2B company who is considering the use of online publishing platforms. So, rather than having this report remain lost forever on my hard-drive, I decided to share it with my readers.

If you work for a B2B company in a high-tech industry, you should read this report: Microsemi Corporation: Online Properties Analysis and Recommendations. Perhaps it’ll help provide a new perspective by which to evaluate your own online properties.

Last post, we discussed how ever-shrinking differences between leading and trailing technologies was changing the process of innovation. We talked about how individual inventors, once subservient to organized research and development, may be approaching par with OR&D through access to cheap/powerful microprocessors, cloud-based computing, and networked communities. In this post, let’s discuss the things that those individuals will invent.

Historically, technology leaps that force us to rethink our world leave us temporarily overwhelmed and lost. Without something familiar to hold onto, we end-up acting like artists who are standing in front of large empty canvases, trying to figure out what to do with our infinite palate of colors.

The way to beak such creative logjams is to focus on solving specific problems. Why must we rely on the government to monitor the radiation from a nuclear power plant? What exactly is the water quality in my home town? If we could put accelerometers into every high school football helmet or mouthpiece, could we reduce the number of concussion injuries? The new innovators must focus on solving specific problems that have personal meaning to them.

2012 is shaping up to be the year of the engineer. I’m not just talking just about classically trained engineers who hold engineering degrees. I’m talking about the fact that advances in open source hardware, interchangeable modules, the Internet of Things, and the DIY movement are making engineers out of all of us.

We just need to focus on solving problems that are more important to us than to a company who is looking to solve a problem for the generic marketplace. Why does our street seem to get more potholes than those around it? Does our city have a traffic problem that could be solved by aggregating and studying live congestion data? Are there things at home or work that would better served through automation?

We also need to crank the innovation handle backward by examining the possibilities of the absurd. What if we put a sensor in every blade of grass on a baseball field? What if you could put a microprocessor in your favorite sweater? What if our local high school could launch its own satellite?

The future is either ours to invent, or ours to stare at aimlessly.

What’s it going to be?