Digital risk management in volatile and uncertain times

Social crises such as wars or pandemics bring great uncertainty to our world. Reliable forecasts can hardly be made. We are travelling by sight. However, these volatile times also present great opportunities, as market shares are shifting right now. Old competitors are disappearing, new behaviour is establishing itself and no stone is being left unturned. If you like, it's the land of milk and honey for an innovative founder - because this is exactly when good ideas are in demand. But then there is liquidity. So how do you allocate budgets in times like these and how can you drive innovation on sight? The theory of business start-ups - especially in the digital environment - offers exciting tools that help more than ever to approach innovation step by step or iteratively. I would like to present 4 concepts here.

1. google design sprints

Projects often fail because teams and decision-makers enter the race with false assumptions about the customer's needs. What follows are path dependencies and the discussion about "sunk costs" - in times of economic recession, this is the worst case scenario.

The design sprint method, which has its origins in the design thinking environment, aims to move away from gut feelings and towards validated results in order to ultimately make better decisions. Jake Knapp established the method during his time at Google and it has since found its way into companies such as N26, Porsche and Zalando.

The focus is on testing market suitability by developing a user-centred prototype in a very short space of time. And this is done before large budgets "melt away" over a period of months. The result of a design sprint is not just a clever piece of paper or a beautiful design, but a tangible solution. The methodological approach is so effective because the design is extremely focussed within the compressed time frame - with the aim of separating promising ideas from less promising ones.

In a maximum of five days, an interdisciplinary team develops a click dummy based on the user problem, which is then tested with the user. In combination with a business model analysis, this approach provides a sound basis for decision-makers.

2. the MVP

The buzzword of the start-up and innovation world today is: MVP or "minimum viable product". But what is it all about? Ultimately, the MVP, which originated with Steve Blank and Eric Ries, attempts to validate (business) ideas and concepts. It is the logical continuation of a design sprint, so to speak. Discovery is followed by validation. Similar to science, it is now necessary to formulate the research question and isolate the problem in order to arrive at valid statements. In the language of product development, this involves the central user story and the core value. In other words, the answer to the question: What problem does my product solve?

As it is a matter of conjecture at this stage, it is advisable to take a pragmatic approach to product development and work "quick and dirty" at the beginning, before the big architecture of the million dollar business including IT integration comes into play. The central KPI in this phase is "time to market", which means that the product needs to be very "sharp" and fully aligned with the hypothesis. This is followed by ongoing testing along the market.

3. hypothesis-driven approach

In terms of risk management, it is important to place bets or hypotheses in a very targeted manner in order to maximise the gain in knowledge. In his "Start-Up Bible", Eric Ries laid the theoretical foundation for validating business ideas as efficiently as possible. The first step is to start with functionalities and customer needs and then move on to sales channels. Assumptions and goals are always defined, which are then tested in short iterations - similar to experiments or bets.

The central KPI in this phase is the net promoter score - i.e. the customer recommendation rate. It ultimately reflects whether there is a need for the product on the market and whether the solution is inspiring. In technical jargon, this is referred to as "product-market fit". It is advisable to only go into sales scaling when the NPS is consistently >8 and it can be assumed that acquired customers can also be retained.

It is interesting to note that successful digital companies retain this method and the NPS forever - similar to how lean management has become established in the industry.

4. customer development

Once the hypotheses have been successfully validated, the search begins for the right sales channel and the efficient management of sales measures. The word of the hour is: customer access. Where can I find my customers? The "product-market fit" is therefore followed by the "product-channel fit". At the centre of this is a key performance indicator: customer acquisition costs. These are calculated from the costs of reach and click prices, as well as the conversion rate. This means that "product market fit" as the key driver of the conversion rate and "product channel fit" as the key driver of click prices come together.

Please note: "new customers" does not necessarily mean new customers, but stands abstractly for business success. Successful digital businesses show that dedicated key figures are more promising:

- Whatsapp uses "Messages sent" as a success metric

- Airbnb uses "Nights booked" as a success metric

- Facebook uses "Monthly Active Users" as a success metric

- Zalando uses "Orders" as a success metric

It is therefore more about a specific key figure based on the business model than a pure "sales consideration". Ultimately, turnover is the logical consequence of satisfied customers.

Once the KPIs have been defined and are technically measurable, the sales channels are boosted. It is advisable to sort the channels according to audience fit, audience volume and costs. The better the fit, the larger the target group and the lower the expected costs, the better. The next step is to iteratively plan, test and analyse the sales channels. At the end, the channels are compared in terms of their ratio of customer acquisition costs and expected customer lifetime value.

Only when the customer acquisition costs are equivalent to the customer value after sufficient optimisation of the channel selection - i.e. the business idea on the individual transaction begins to be cash flow positive - can the next phase be initiated. However, patience and structure are required in this phase. All channels need to be optimised, keywords tested, advertising messages tested, audiences tested against each other and much more until the magic channel is found.

If CAC = CLV, scaling follows. Now the sales channels are scaled and the budgets are increased. The aim is to expand the market while keeping customer acquisition costs under control. Now tools such as marketing automation, retargeting, look-a-like audiences and classic upper-funnel measures come into play.

Even if growth and profitability should be continuously weighed up, the rule of thumb that customer acquisition costs should correspond to approx. 1/3 to 1/2 of the customer value is a good guide in order to be able to co-finance the overhead when scaling accordingly. However, this depends heavily on the business model and strategy.

Portfolio theory or metered funding

Start-ups fail - depending on the source - with a probability of >80%. It would therefore be utopian to believe that better planning by a group would drastically increase the probability of success. Rather, it is about systematically eliminating uncertainty - similar to portfolio theory or Eric Ries' concept of "metered funding".

Ultimately, this means that companies must learn to test and develop a relevant number of business ideas (approx. 10-30) in parallel. In this process, however, a clear framework must be developed in order to identify those ideas with the greatest probability of success as early as possible and to stop those that do not promise success as early as possible. If you compare this to a VC fund, you could, for example, put around 20 ideas into the race every 2-3 years with the aim of producing 2-3 winners that have the long-term potential to transform your own company. Once these winners have been developed with sufficient stability, the organisation must find a way to manage them - whether in parallel structures or integrated into the core organisation.

The TOWA Framework as support for digital growth:

The TOWA Consulting team supports companies in integrating the above frameworks, getting stakeholders on board and bringing the necessary experts to the table to turn the vision into reality. We achieve this in 8 steps, which - depending on the preparatory work - can also be started in the middle of the process. The process also provides further insights after each step, which provide information on whether it makes sense to continue from a business perspective. Our aim is to work as evidence-based as possible in order to recognise misjudgements as early as possible and avoid misallocations in terms of risk management.

8 steps

- Idea // Orientation

We support our clients with market orientation in the form of competitive analyses, trend analyses and cross-industry innovation ideas. We derive the implications and fields of action and provide our clients with orientation in the development of new digital business models and the transfer of analogue business into the digital world.

- Idea // Understanding

We present the business model and the specific business case in order to better understand the commercial framework and make the right investment decision.

- Product // Visualisation

In a structured process - for example as part of a design sprint - we visualise the previously identified potential as a click dummy to make it both discussable and validatable

- Product // Validation

In a structured process - such as user testing - we validate the ideas on the user in order to obtain feedback.

- Product // Implementation

After successful validation, we develop a joint product vision and develop the upstream MVP. Here it is important to pay close attention to architecture and framework decisions in order to make the best possible use of resources.

- Product // Optimisation

After successful implementation, we equip the product with the necessary tracking infrastructure to identify potential in the user experience and incorporate this into the backlog of our scrum team.

- Scale // Growth hacking

At the start of the roll-out, the aim is to pick up the "low hanging fruits" and win customers quickly. To this end, we realise the entry into digital marketing for our customers and set up all digital campaigns initially and quickly generate insights from the market.

- Scale // Digital Sales

The initial growth hacking provides us with information about the market conditions and is therefore the basis for the subsequent professionalisation towards digital sales. For commercial reasons, this usually starts in the "lower funnel" and we gradually work our way into the "upper funnel".