The use of a Reverse Income Statement
Experiments, e.g. in medical research and development, are based on inspiration, developed ideas and targeted investments. Many do not deliver a successful outcome or solution. This is also the case for commercial innovation experiments.
An innovation-championing senior business leader asked me to help his teams identify those commercial innovation experiments that would potentially provide the highest positive return. He was looking for an easy to use tool to help innovators, a tool simple enough not to discourage his passionate innovators.
Based on the Discovery-Driven Growth* work from Rita McGrath and Ian MacMillan, we developed a simplified “Reverse Income Statement” template. It’s a tool that can be used by innovators, without the need for significant training (important in emerging markets with high employee turnover).
The Reverse Income Statement consists of two short lists of assumptions:
1. Revenue: the calculation of the expected revenue the innovation could generate, with $ amounts
2. Costs: a list of all expected costs, with $ amounts.
The items on the two lists are not assumed to be exact, what would require deep research. They should be high level estimates that can provide an order of magnitude.
- If 2 is larger than 1: do not invest (or adapt the assumptions)
- If 1 is larger than 2: invest in the experiment (validate and refine the assumptions on which 1 and 2 are based)
It is recommended to use this tool after completion of an initial quick qualitative assessment (e.g. assess reaction from a few customers), but before starting a well structured, quantitative pilot (which typically requires a significant investment).
An example to illustrate its use. An innovator in a Middle Eastern country came up with the idea to add a QR code on the box of a specific medicine, to help educate patients on how to use a rather unusual applicator. When the patient needed to take the medicine, she could easily scan the QR code and a short video would show her how to use the applicator correctly.
- The innovator shared the idea with a few customers (doctors, patients) and internal stakeholders (manufacturing, regulatory) and received encouraging, constructive feedback.
- The innovator now created the Reverse Income Statement. 1. Revenue: an assumption on increased market share provided a potential revenue number over a three year period. 2. Costs: a list of estimated costs (manufacturing, regulatory approval, video production, training, promotion,…), also over a three year period.
- As 1 (the potential revenue) was significantly higher than 2 (the estimated costs), it was decided to run the experiment, to validate the assumptions and fine tune the estimates.
- It worked!
As Ben Graham said:
“You can get in way more trouble with a good idea than a bad idea, because you forget that the good idea has limits.”
So, as Innovation Leader, I tested and adapted this tool for specific types of innovations, secured sponsorship from the business leadership, trained local innovation leaders on how to guide innovators in their teams on using this tool – and helped to focus investments.
*More reading: Discovery-Driven Growth
What are your thought? Please share below!