In April 2003, Apple introduced the iPod and the iTunes store, an online retail hub, which allows customers to browse, purchase and stream music for 99 cents per song. This revolutionized the potable entertainment industry. By 2005, iTunes’ library had grown to 1.5 million songs. In just three years, the iPod/iTunes sync summed up to a nearly $10 billion product, accounting for almost half of Apple’s revenue. By late 2007, Apple’s market capitalization projected from about $1 billion in early 2003 to over $150 billion.
This is a very popular story. However, at the time of launch, it is good to note that Apple wasn’t the first to bring a digital music player to the market. There were already few portable MP3 players already available in the market. The existing products have serious flaws which prevented the potential buyers from exploring its thrilling experience of the digital era. Diamond Rio, for instance, was launched in 1998, could only hold songs that lasts for 30minutes and has a poorly designed navigation structure. After Rio, was the launch Nomad Jukebos in 2000. Nomad actually solved the limited storage capacity of Rio, and could hold 6GB worth of songs (used same hard drive used in laptops). However, the size of the device was so large and its battery life was largely bad. So why did iPod, instead of Rio or Nomad, succeed?
Start with Customer Experience
In many cases, large organizations, entrepreneurs, engineers and even investors, get trapped in a technology-push approach to innovation, thinking a first-mover advantage, automatically implies innovation success. History has shown that being the first to market that is poorly understood is a clear path to failure. The iPod story has shown vividly that innovation success results from new customer experience, especially when that new customer experience solves frictions and drawbacks that exist with the available products. Apple did not invent the world’s first MP3 player, but they created the world’s first awesome and transformational customer experience with portable music.
Although new technologies were added such as the 1.8” HDD, lithium batteries and Firewire, they were added to fundamentally drive the customer experience and not the other way round. Jobs provides an insight into this approach in a meeting, after he returned to Apple in the late 1990’s:
One of the things I’ve always found is that you’ve got to start with the customer Experience and work backwards to the technology. You can’t start with the technology, and try to figure out where you’re going to sell it…And as we have tried to come up with a strategy and a vision for Apple, it started with ‘What incredible benefits can we give to the customers…Where can we take the customer?’ Not starting with ‘Let’s sit down with the engineers and figure out what awesome technology we have and how we’re going to market that’ – Steve Jobs
Know the competition and how to beat them
The executives at Apple, knew that for them to create an excellent breakthrough customer experience, there must be some technology adjustment and innovation that will power and drive the experience. For the iPod, for example, to be successful, it needs to technically solve the downturns of the existing products in the market. It requires a large song capacity (Unlike Rio), portable size (unlike Nomad with a large hard disk), long battery life (Unlike Nomad), great user interface (unlike Rio) and a simple and convenient means to transfer music. These specifications are largely referred to Customer Experience Requirements or Market Requirements. This must be well outlined prior to the designing and engineering of the product. To do this, you can assemble a cross-functional team from marketing and engineering to interact with customers, empathize their present needs and future aspirations, and from there, draw a list of technical attributes or specifications that must be reached to meet the market requirements.
In the case of Apple, see the table below:
|Market Requirements||Product Requirements
|Large song capacity ( Nomad already created a high standard of 1000+)||6GB hard drive|
|Small size to fit the pocket (Nomad had a big size)||Height x Width x Depth: 4 x 2.5 x 0.8 or smaller|
|Long batter duration (Rio could only last for 8 hours)||10+ hour battery or 1200+ mAh rechargeable lithium battery|
|Intuitive user interface||Click-wheel navigation and capacitive sensing|
|Simple and convenient way to transfer music||Firewire (IEEE 1394)|
Market requirements are usually created first from first hand engagement with prospective users. The product requirements come later on, after a careful research and understanding of the best technology that will deliver the market requirements.
Business Model Innovation
Apple did something much better than wrapping a good technology in a great design. It took a good technology and wrapped it in a great business model. The real innovation here was to simplify the process of downloading digital music, and to do that, the company build a disruptive business model that combined hardware, software and service. For those familiar with business models, this kind of approach is similar to the famous Gillette’s blades-and-razor model in reverse. Here, Apple gave out the ‘blades’ (low profit-margin iTunes music at 99 cents) to lock customer to purchase the ‘razor’ (high profit-margin iPod). This simple business model, redefined and revolutionize music accessibility and convenience of use.
From Ford Motors, to Spotify, Amazon, Nest, Go Pro, Uber, business model innovations have reshaped entire industries and redistributed billions of dollars of value. The innovation cycle spins faster in all industries today and the mistake to pivot at the right time can be very costly. “A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value’. It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”
To create a great business model, you need to:
- Identify a way to help a customer to get an important job done. The job here refers to a basic problem or frictions that need to be solved. Once the job to be done has been understood in all its dimensions, including the full process of getting the job done, a value proposition can then be defined and designed. The more important the job to be done is to the customer and the lower the current level of satisfaction with existing product/service, the higher and stronger the value proposition.
- Create a profit formula. That’s simply how a company will create financial value for itself at the same time it is creating value for customers. This consists of your revenue model (volume x price), cost structure (direct costs, indirect costs, economics of scale, etc.), marginal model (contribution of each transaction to the overall profit) and resource velocity (how quick to turn over inventory, assets and other resources).
- Identify key resources and processes. Key resources are assets including people, products, technology, facilities, channels, and brand required to deliver the value proposition to the targeted customer. On the other hand, key processes are operational and managerial routes that allows the key resources to be employed to deliver value to customers in a way that can be easily replicated with scalability advantage.
Putting all together
The innovation success of today is not about the quickness to introduce products into the market, but the aptness to deliver unprecedented customer experience. Business models should largely drive technological innovations in your company, and not the other way round. As much as you focus on executing projects, you must equally focus on learning and adjusting your model. Typically, successful companies revise their business model four times or more, as they journey towards profitability. No doubt, the rate of learning is the new unfair competitive advantage.
Companies with new business model, need to be patient for growth (i.e. allow the market opportunity to unfold) and at the same time, impatient for profit (i.e. an early indication of a workable model). Without profits, there is no business. A profitable business is the best early indication of a viable model.