Reaching profitability through complementary goods and services
Many people mistake of assuming the development of a unique product equals a business: it’s not. Uniqueness does not necessarily translate into profitability.
A major challenge to making money from your innovation is cost. In some cases, the cost of R&D is so high that it narrows your profitable exit options to public IPOs or M&As. So what do you do? Maybe the answer lies in complementary goods.
The inability to reach profitability does not necessarily mean there is no value created. Competing in the marketplace could mean competing in multiple value propositions instead of just one. One could differentiate the technology and profit by selling additional complementary goods. In other words, you can see the core innovation as a new funnel to bring in sales leads, and then offer high margin complementary goods to reach profitability through scale and word-of-mouth. Three examples are Research in Motion, elBulli, and Apple iTunes.
Customers embrace Research In Motion’s two-way messaging, pushed-email solution. However, according to the 2007 annual report, pushed-email service and software contributes only 30% of the revenue. Approximately 70% of the revenue is from handheld devices and other hardware. If RIM had only focused on pushed-email software, that would place them in the software space as Microsoft. By selling handhelds as a second revenue stream, it has taken the competition further away from where Microsoft has advantage over resources and sales channels. By positioning itself out of Microsoft’s reach, RIM now has a product advantage over other handheld makers such as Nokia, Motorola and Apple.
Another great example is El Bulli. El Bulli is regarded as the best restaurant in the world by Restaurant magazine. It has three Michelin stars and critics believe that the dining experience alone is worth the trip to Catalonia in Northeastern Spain. The restaurant has a limited season from April to September. Bookings are taken on a single day in October of the previous year. The restaurant closes for six months during which time the chefs perform experiments in the culinary lab. Extensive work has been done on molecular gastronomy. The concept of “foaming” was discovered here where the experience is in the flavour and not the eating. This dining experience is usually comprised of 25 to 30 small courses. As prestigious as it is with its high prices, the restaurant has been operating at a loss since 2000 according to Guardian Unlimited. It reaches profitability through books and keynote lectures from the chefs.
Finally, it is not without merit to misidentify Apple’s core innovation in its music portfolio as the iPod. Apple would’t have been able to commercialize the iPod as successfully as it has without iTunes – negotiating a flat rate for all songs that are always accessible at one convenient place. iPod is the high-margin complementary good to the core that is iTunes, the software which is given away for free, to make money on the music.
Uniqueness does not equal profit. Commercializing a core innovation profitably may require developing and selling other high-margin complementary goods. You may not want to reinvent the wheel during R&D; you may not want to be the person making the wheel.