It is a Silicon Valley truism that great businesses don’t start with a great idea; they start with an idea and then test and pivot their way to what works in the market. Instead of the traditional corporate reflex to plan, plan, plan, and then build; digital start-ups succeed through a constant process of experimentation.
Whether in business or science, the aim of experimentation is the same: to validate (i.e., prove or disprove) your key hypotheses and assumptions.
In a scientific experiment, you seek to validate whether condition X will lead to outcome Y. (If patients take this pill, will their health improve?) To develop a single medicine, many hypotheses must be validated. (How much does health improve? How quickly does the pill work? What dosage is required? Are there side effects?)
In business experimentation, your goal is to validate the key assumptions in your business model for any new venture or innovation. Assumptions to test include: Who is the customer? What is their unmet need? Are they interested in our solution? How much would they pay? When will they use it? How would we deliver it? What profit margin could we make? What’s the total size of the market?
If you spend time with digital start-ups or titans like Google and Amazon, you will pick up a whole vocabulary around experimentation: “fail fast,” “pivot,” “MVP,” “design sprint,” “agile squads,” “product thinking,” and so on. These terms derive from four approaches to innovation that have arisen in the digital era: lean start-up, agile software development, design thinking, and product management. All four are, in their own way, models for innovation through iterative experimentation.
Experimentation in established businesses
The challenge that I explore in my new book, The Digital Transformation Roadmap, is how to make experimentation work inside an established business.
To solve this challenge, we need to take experimentation out of the world of iconoclasts and entrepreneurs and make it a repeatable process.
Established companies need a process for experimentation that allows them to balance competing needs:
They must invest in long term growth, but limit downside risk to the enterprise.
They must invest across a portfolio of ideas, but without the time horizons of a VC firm (most corporate digital ventures cannot wait 7-10 years to pay off).
They must keep early costs low, to account for the tremendous uncertainty of digital business models.
They must be ready to scale quickly if an idea is proven to work in the market—leveraging their existing partners, supply chain, brand, and customer base.
The Four Stages of Validation
What I have observed across scores of global companies is that corporate teams desperately need a framework for experimentation. They need a guide to navigate from their very first customer interviews to driving growth at scale.
Based on my own work advising teams and studying digital ventures across industries, I have developed such a framework, which I call the Four Stages of Validation.
The Four Stages of Validation are designed to test four things—the problem (you think you are solving), the solution (you think will address it), the product (you think the customer will use), and the business (you think you can build from this innovation).
Questions any innovation must answer
Each of these stages is focused on answering a single, essential question. Every test, MVP, and customer interview should be designed to yield data that helps to answer one of these four fundamental questions.
Problem validation: Are we focused on a genuine problem for an actual customer?
Solution validation: Does the customer see value in our proposed solution?
Product validation: Can we deliver a solution that customers use?
Business validation: Can we capture sufficient value from this innovation?
Only by answering all four questions can you validate whether a new venture will create value in the real world.
That’s right. Innovation requires more than just proving that customers want your solution (what start-ups call “product-market fit”). It means validating the entire business model.
This is why the Four Stages of Validation does not stop with your first functional MVP in the hands of early customers; it takes you all the way through usage, delivery, costs, revenue, and path to profit.
As Chris Reid, Executive Vice President at Mastercard, told me, “That’s the product manager’s job, in my view. You’re accountable for the value chain of your solution: a cost base that’s competitive, developing a value prop, how do I operate it competitively, and how do I sell it competitively?”
Sequence: Where companies go wrong
Even when established companies do recognize the importance of experimentation, they almost always stumble in getting the sequence of validation right. Specifically, they rush to start validating the later stages.
We see the same pattern across large organizations, depending on the dominant culture:
In finance-driven firms, we see a rush to start with business validation (stage 4): “Show me the business case first, with market size and anticipated profit margin. Then we can approve a budget to spend on market testing or validation.”
In engineering-driven firms, we see the urge to start with product validation (stage 3): “We know the solution we need. Let’s build a working prototype as a proof of concept to see if it can be done. You can show it to customers for feedback—just as soon as we build a complete product for them to try.”
In marketing-driven firms, we see a greater focus on the customer and an inclination to start with solution validation (stage 2): “We have a great idea that came out of our customer insights work and strategic brainstorming. Let’s mock up some wire frames to quickly get customer feedback.”
All these approaches are mistaken! Each starts the process of validation in the wrong place.
By contrast, every effective innovation process I have ever seen begins with stage 1—validating the problem you hope to solve with the customer you think it will matter to—and then moves sequentially through the stages.
What about my business case?
Of course, it is absolutely correct that your venture will need to answer to financial questions (what’s the profit margin? TAM? cost to serve? total profit?).
But you cannot start there!
Time after time, I see large companies laboring to write business cases for a new digital innovation when they don’t yet know what solution the customer wants, how they could deliver it legally and reliably, or even what problem they are solving and for whom.
These misguided business cases are just spreadsheets filled with fictional numbers that add up on the bottom row to a meaningless estimate of future ROI.
Overlapping stages, not a waterfall
One more critical point to understand about the Four Stages of Validation is that they are overlapping.
The Four Stages of Validation is not a waterfall.
It is not a stage-gate process where success means that you conclude one stage then move on to the next.
In fact, each stage is never finished. Even as you test the finances of your business (stage 4) and move to a public launch of your product, you will continue to learn and revise your understanding of the problem you are solving (stage 1), the features you need next for your solution (stage 2), and how you can deliver them for the right customer use cases (stage 3).
Eventually, you will be validating all four stages simultaneously.
Go further with the Four Stages of Validation…
In The Digital Transformation Roadmap, I explore the Four Stages of Validation in detail, including:
Innovation red flags—warning signs in each stage that indicate your innovation is in trouble and will not work at scale in the real world.
Staged metrics—the most important metrics to focus on in each stage, and why innovation metrics need to keep shifting as you validate your hypotheses.
MVPs—how and why you should use very different kinds of MVPs (and sometimes none at all) to validate your innovation at different stages.
The Rogers Growth Navigator—a visual “canvas” tool to guide your next venture through the Four Stages of Validation, and from the earliest napkin sketch to global delivery at scale.
NYC event:
If you’re near New York City, save the date to join me at my book launch event at Columbia Business School on the evening of Oct 4 (details coming soon!)
European conference:
I will be delivering the opening keynote to a packed audience at this year’s DPW conference in Amsterdam, on Nov 11. Register now, or plan to join the free live stream!
New executive program:
Enroll in my new 4-day program based on the book, on campus at Columbia Business School, “Leading Digital Transformation: From strategy to organizational change.” The fall program runs Oct 3-6 on campus.
Bring me to speak at your own event…
Invite me to keynote a conference (or recommend me for one) https://bit.ly/DRogers-Speaking
Invite me to deliver a workshop at your company (your leadership, board, or other group) https://bit.ly/DXR-workshops
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