A few years ago I had a consulting job where my task was to help a company figure out how to sell the waterless composting toilet that they invented. They had already had other consultants working on the problem, but they weren’t happy with what they got from them. The only constraint that I had was that the plans had to be for selling the toilets in China and India (by the way, I was thinking about adding a picture to this post, but I think we all should be thankful that I didn’t…).
You may well ask why China and India? I certainly did. The company was already active in the US, Europe and Australia with other products, so why not go there first? Their answer was the 1000 cell spreadsheet. One of their early joint venture partners had developed an incredibly detailed market analysis spreadsheet. It considered about 25 possible markets for the toilets. The spreadsheet started by taking the population of these 25 countries, and then running this number through a huge long string of calculations (% of people buying a toilet each year, and a number of similar things). At the end of all of that, the two markets with the biggest potential were China and India. Why? Because every calculation that they made was either a multiplication or division of the original numbers, with no variation between countries. So the end results (value of the toilet market) were directly proportional to the original set of numbers (population).
This is clearly poor analysis, for a number of reasons. The key one is that trying to sell high technology toilets in countries where huge numbers of people lack access to any toilets at all is a bad idea. If someone hasn’t spent US$20 on a pit toilet, why would they spend 10 times that on a composting toilet? The answer ended up being: there’s no reason for people to do that. The company that I did the report for is now out of the toilet business, and their great invention never got into the market. This is a situation where thinking about value networks and business models would have helped.
I wish I had realised it at the time, but I hadn’t started thinking about this in great detail yet – the company had no business model for their new idea. Their value proposition was basically ‘it’s a cool toilet’. Consequently, the markets that they targeted were simply the biggest ones they could find in terms of number of people. The fact that there was no value network to plug into in these markets was never considered, despite my best efforts.
If their value proposition had been ‘this is a waterless toilet’, then they would have looked for markets with limited water supplies, like Australia, South Africa and the Southwest United States. All of these countries already had value networks for water-conserving toilets that my firm could have tapped into.
If their value proposition had been ‘composting toilets are green’, then could could have looked for markets that valued this highly, like many European countries, or California.
All of these would have been better options than China and India.
I think there some important lessons here.
- First, don’t mistake numbers in a spreadsheet for reality. When you’re modeling markets for your new idea, you need to question all of the assumptions that underpin your model. The assumptions in this firm’s 1000 cell spreadsheet were deeply flawed – consequently, so were the decisions based on that spreadsheet.
- Second, don’t automatically go for the markets with the most people. The number of firms that have gone broke following the ‘If we can just get everyone in China (or India) to just buy one of our products’ strategy is very high. You’re much better off finding a smaller market that values your idea.
- Finally, you have to be clear about the business model for your idea. You need to know the hook for your new idea, who will value that, and what value network you’re in, among other things. Lack of clarity on just a couple of these can sink your entire effort before it really gets off the ground.
I just took another look at the report that I put together for them. I’m still happy with the analysis that I did, but I was answering the wrong question. I tried to lead them to better questions, but at the time I was too inexperienced to get that to work. The lesson of the 1000 Cell Spreadsheet is that while analysis is an important part of building your business model, a barrage of numbers is a poor subsitute for clear thinking. We have to get our business models right if we want our innovations to spread.