Software Engineering

Mitigate Risk With a Product Innovation Strategy


Innovative products can lead to increased market share, greater customer loyalty, and diversified revenue streams. Most innovation efforts, however, come with significant risk of failure. Placing the customer at the center of the product innovation process is key, but many product managers struggle to shift their mindset from designing products and services to designing customer experiences.

I have spent more than two decades researching and applying innovation techniques to create user experiences that promote sustainable and meaningful growth. I first learned about the following framework in the Innovation Sprint business education course offered by Section. This adaptation, which can be applied in almost any industry, has allowed me to take a pragmatic approach to the development process. By applying this product innovation strategy, you will be well-positioned to:

  • Discover latent opportunities for your business within your target market.
  • Reframe customer problems to design the right solution.
  • Better understand your customers.
  • De-risk and prioritize innovation ideas.

Determining Product Development Risk

You may be familiar with the Ansoff matrix, a grid-style planning tool that plots out the types of growth that arise from new and existing product development and expansion into new and existing markets.

An Ansoff matrix showing types of growth that arise from product development and market expansion.

I also find the matrix helpful for visualizing innovation strategies and evaluating risk level. Here’s what each quadrant represents:

  • Market Penetration = Low Risk
    Improve by optimizing an existing product for an existing market.
  • Product Development = Medium Risk
    Enhance by offering a new product to an existing market.
  • Market Development = Medium Risk
    Expand by launching an existing product in a new market.
  • Diversification = High Risk
    Diversify by creating a new product for a new market.

The Product Innovation Framework in Action

Once you have reviewed the possible growth paths with your team, use this four-stage framework to guide your product innovation process:

  1. Understand customer problems.
  2. Design a solution.
  3. Prioritize new ideas.
  4. Experiment and test.

These steps will help you and your team identify new opportunities and create new experiences while avoiding the pitfalls that can lead innovation projects astray. To see the framework in action, we’re going to examine how fictitious airline company InnovateAir could leverage it to drive innovation as part of a growth strategy.

Understand Customer Problems

InnovateAir’s product managers began by segmenting the market based on traveler types: leisure vs. business. A sound segmentation strategy must capture key differences in customer behavior and needs.

Leisure Traveler

Business Traveler

  • Represents 88% of travelers and 25% of profit
  • More price-sensitive
  • Less time-pressed

  • Represents 12% of travelers and 75% of profit
  • Less price-sensitive
  • More time-pressed

InnovateAir’s product managers determined that business travelers are willing to pay more because they are generally time-pressed (and using the company credit card)—so this segment has the best potential for growth. Further market research indicates that business travelers are most concerned about flight delays, earning loyalty points, seat availability, ease of travel to and from the airport, and the speed of airport security.

Curiosity is a product manager’s best ally: It is important to reach out and talk to as many potential customers as possible to understand their perspectives, what they are trying to achieve, and the barriers they are looking to overcome. InnovateAir’s product managers conducted multiple interviews with business travelers and identified the different jobs-to-be-done (JTBD) using a web of abstraction approach. They then analyzed the primary JTBD, which is flying from City A to City B.

Business travelers want to fly because it is efficient, safe, and pleasant. Barriers are the other flight activities, cost, and delays/cancellations.

By delving deeper and asking “Why,” product managers can understand the functional, social, and emotional outcomes of the user experience. This exercise pinpointed three main reasons why business travelers want to fly: Flying is efficient, safe, and usually pleasant. It found the four main barriers for business travelers to be cost, stress, lack of productivity, and flight delays or cancellations.

Based on this exercise, InnovateAir’s product managers can hypothesize that the primary JBTD for a business traveler is to fly from City A to City B in the most hassle-free, efficient, and productive manner possible. 

Design a Solution 

The first step in designing a solution is to understand how your current offering fits in the overall user journey. Often, your product or service is only part of the overall user experience. For InnovateAir, the traveler’s journey includes the flying experience as well as associated activities such as booking, getting to the airport, and clearing airport security. Audit your customer’s wider journey to find gaps that provide opportunities for innovation that realize clear benefits.

The user journey spans booking, travel to the airport, check-in, navigating the airport, waiting to board, flying, arrival, and leaving the airport.

For InnovateAir, the journey audit identified that different providers serve the user across their journey but there is limited information-sharing among them, so opportunity exists to integrate ground and flight transportation more closely. This would offer the customer a more seamless end-to-end travel experience that can optimize productivity and reduce stress.

Perform a competency audit to take stock of your organization’s capabilities and assets. Think of ways you can repurpose these to develop new features or experiences. This is what it looked like for InnovateAir:

Inventory

Innovation

  • Strong logistics capabilities and access to real-time flight information
  • Track record of establishing partnerships with complementary providers (rental car companies, hotels, etc.)
  • Growing InnovateAir Loyalty network customer base (100 million+)
  • Digital platform (app and website) and engineering talent
  • Ride-booking app integration: Share real-time flight information to streamline getting to and from the airport.
  • InnovateAir Loyalty network: Enable customers to learn from one another and maximize travel efficiency by sharing their experiences.
  • Curated travel packages: Leverage AI techniques such as collaborative filtering to allow business travelers to get the most out of their travel budget.

Looking at this through the Ansoff matrix lens, these ideas each fall into a different quadrant. Ride-booking app integration would be market penetration (low risk); the Loyalty network would be product development (medium risk); curated travel packages would be diversification (high risk).

Prioritize New Ideas

Prioritize the growth opportunities by performing an analysis using the RIME (reach, impact, monetization, and effort) framework. For InnovateAir, all three ideas have broad reach and impact in terms of the customer value proposition. The differences are in the monetization potential and the effort required.

A customer loyalty network could be a great feature, but implementing a social media platform would be challenging due to data privacy regulations and the engineering expertise needed. Curated travel packages are also a compelling idea, and the switching costs to assemble InnovateAir-recommended packages on aggregator sites such as Expedia or Hotwire are low; however, travelers would then have opportunities to find even lower prices for the same packages on aggregator sites, and this would dilute the revenue potential and impact overall monetization.

The best idea appears to be ride-booking app integration, due to its broad reach, impact, ability to monetize, and the moderate effort and cost required to develop and launch. It is also the lowest risk. This is the experience that InnovateAir’s product managers decided to prioritize and test first.

InnovateAir’s product managers analyzed the assumptions and evidence for this experience using the RIME framework:

RIME

Key Assumptions and Sizing

Reach

InnovateAir business travelers: 16.8 million per year
Total trips: 230 million per year
Current ride-booking uptake: 70%
Total addressable market: 160 million trips per year

Impact

Greater business traveler satisfaction with a more optimized end-to-end experience
Expect 75% uptake from business travelers by year 5

Monetization

Average price per trip: $62
Total potential yearly spend by InnovateAir business travelers on ride-booking trips: $10 billion
Willingness to pay for ride-booking is clear
5% additional fare for the integrated experience is a reasonable hypothesis

Effort

Cost = development costs + marketing costs + partnership allowance costs
Key risk: Uber/Lyft willingness to partner

Using the results, InnovateAir product managers developed a hypothesis that when integrating ride-booking apps with live airport information via the app, customers would be willing to pay an extra 5%, with a current average spend of around $62 per ride. The product managers considered this to be a reasonable assumption that could be tested by working with ride-booking companies and conducting an A/B test in a target market. The increased spend per ride was an attractive proposition that could be shared between InnovateAir and the respective ride-booking companies. The overall revenue opportunity based on the current penetration of airport ride-booking trips made by InnovateAir’s business travelers translated into a healthy approximation of $1.5 billion over five years.

Experiment and Test

A great tool for de-risking innovation is testing. Product teams can run simple, low-cost experiments to test their hypotheses with clear and objective criteria.

The InnovateAir product team designed a test targeting InnovateAir Loyalty business travelers in the US with an intra-state destination to see if they would book their airport rides using the InnovateAir app rather than Uber or Lyft. They created the ability to book a ride at the point of check-in for departing and arriving flights, and integrated this with live flight, airport, and traffic information. A successful outcome would be 25% of travelers using the feature, and more than 50% using it for all their ground transportation needs.

Focus on the Customer Experience

To unlock new growth opportunities, today’s most innovative companies do not focus exclusively on the products they sell, but rather on the customer experience. By following the product innovation framework laid out here, your product team can identify a way to address key pain points for your existing market that will drive additional revenue, improving your overall offerings. Leveraging this framework mitigates the risk involved with innovative product development, ensuring new products are aligned with business needs and capabilities and have strong ROI potential, all while offering a new, valuable customer experience.

Note: Any references to Uber and Lyft are made purely in the context of this fictitious case study to illustrate a point. The author has no knowledge of any such commercial initiatives on the part of these ride-booking companies.