Despite endless opportunities, being early entrants in pursuing great ideas, many are failing in profiting from innovations. Apple survived by making staggering profits from the music player iPod Innovation, while its inventor, Edison, could not find customers to sell Gramophone at a profit. IBM suffered a loss from the first smartphone innovation, Simon, leaving profit-making opportunities to followers. On the other hand, while tens of innovators suffered losses from repeated attempts in palmtop computing, Jeffry Hawkins’s Palm Computing made a hefty profit.
Although profiting from innovations has made hundreds of billionaires, millions of grassroots innovators struggle to survive. On the other hand, thousands of Startups leave the market without generating profit after burning billions of dollars in seed capital. Similarly, more than 75% of innovative products retire without the success of ferreting out profitable revenue from the market. Such a reality raises a vital question: what does it take to profit from innovation? Are not great ideas and seed capital good enough? If the early bird catches the bugs, why do early entrants with great ideas invariably fail to profit from innovations?
Examples of Profiting From Innovations
Personal Digital Assistant
Upon seeing the success of the rise of personal computers, great innovative minds embarked on Palmtop Computing. Among them, Steve Jobs was a leader with Apple’s Newton handheld computer or Personal Digital Assistant, released in 1993. Dozens of companies, including Sharp, HP, and Psion, pursued this innovation. Unfortunately, invariably, all of them failed to profit from this innovation—let alone sustain it in the market.
To solve this profit-making problem from innovation, Jeffrey Hawkins embedded himself in the shoes of target users. Jeffrey started pretending to use a block of wood as a preferred palmtop computing device or personal digital assistant. He used to go to all conceivable places where his innovation would likely be used. He used to pretend to use it using the block of wood. This exercise of empathy led to the ideas of appropriate features, starting from size, buttons and their locations, and the menu, which culminated in Palm Pilot. Consequentially, his exercise of finding ideas for addressing latent desires by harnessing technology possibilities led to resonance—making Palm Pilot successful in profiting from innovation.
However, Palm Computing could not sustain this remarkable success of ferreting out a profit. The failure to release successive better versions is the underlying cause of not sustaining this outstanding innovation’s profit-making capability. Subsequently, Palm Pilot’s market was taken over by smartphone innovations. Although Palm responded with Palm Trio, it could not face the invasion of the iPhone.
In 2022, Apple generated a 25% net profit from over 200 billion USD in revenue from the sale of 225 million units of smartphones (iPhone). Besides, Samsung, Huawei, and many other companies have been ferreting staggering revenue from smartphone innovation. If the early bird catches the bugs, why did IBM suffer a loss from selling only 50,000 units of the first smartphone innovation—Simon? Surprisingly, Apple did not make money from selling a little over 1 million units of iPhone 1.
The underlying force of the continued success of smartphones in generating growing profitable revenue has been the success of innovators in leveraging technology and consumer preferences. The underlying reason is Apple led journey of finding latent consumer preferences in Getting jobs done with smartphones and turning them into innovative features by advancing and leveraging technology possibilities. The underpinning is the continued Flow of Ideas from growing knowledge about consumer preferences and digging into technology possibilities and their profitable implementation. However, not all smartphone makers have been profiting from innovation. Due to continued loss, folding phone leader LG left the smartphone innovation business. Sustaining innovation by outperforming competition plays a vital role in profiting from innovation.
We all know that Microsoft founder Bill Gates became the world’s richest person due to profiting from word processors, Windows, and other software applications. However, Microsoft was not the first company to offer word processor software. Besides, although millions are users of word processors, only a few thousands top corporate officials were the customers of Vydec Word Processor (released in the 1970s), costing over $12,000. Despite this, how did Microsoft Succeed in licensing it to hundreds of millions of customers at a meager $300 apiece? Besides being a late entrant in PC-based word processing, why did only Microsoft, among the cohort of 24 word processor makers in the 1980s, succeed in making billions from this innovation?
First of all, the continued progress of semiconductors led to making less costly PCs as the general-purpose machine to run word processor software. Thus, the cost declined. Besides, due to the continued advancement of the processor, memory, and storage PC, the race to add and improve features of word processors intensified. This was augmented further with Microsoft Windows. Consequentially, a growing number of customers started showing an increasing willingness to pay. More importantly, innovators leveraged the zero cost of copying software in reducing the price by selling it to more customers. Such an opportunity to improve the quality and lower the cost through advancing innovation led to the emergence of the winner-takes-all-all reality. Furthermore, Microsoft took further advantage of its Windows running PCs. Consequentially, through innovation and leveraging vertical foreclosure strategy through Windows, Microsoft emerged as the highly profit-making Monopoly in word processor innovation.
Grassroots and Frugal Innovations
We have been overwhelmed by the profit-making success of innovations, raising tiny startups into mega-success stories. Instead of profiting from steel, petroleum, or minerals, many billionaires are showing up due to profiting from innovations. Although innovations have been fueling staggering Wealth creation, why are millions of grassroots innovators in less developed countries struggling to survive? Besides, after burning billions of dollars in risk capital, why have thousands of startups exited the market before reaching profit? Apart from that, why are frugal innovations like Tata Nano offering painful loss-making lessons?
The underlying reason for profiting from innovation hinges on scalability. Instead of subsidies, they must be created through a flow of ideas to increase the willingness to pay among a growing number of customers and reduce the cost. Besides, the race of innovation must be won to profit from innovations.
Great Ideas and Risk Capital are Not Good Enough for Profiting from Innovations
Although great ideas and risk capital are needed, they are not good enough. First, there are no great ideas to begin with; because, invariably, all great ideas start the journey with faint potential. Ironically, although we praise them later, most of us ignore or avoid them at birth, terming innovators pursuing them as crazy people. The next one is about what is the purpose of using risk capital. Is it about offering subsidies to create a market for inferior innovations around potential great ideas? Unfortunately, success does not distill from subsidies to create sales. Instead, innovation success distills from a flow of ideas in the form of adding and improving features so that willingness to pay keeps going and cost per unit value keeps falling. Hence, profiting from innovation becomes a journey of Incremental innovation and fueling a creative wave of destruction through reinvention.
For directional progress of ideation, the focus should be on knowing consumer preferences better, and advancing the technology core and leveraging it to generate and implement ideas in offering better versions. As the idea flow opens the door to making products better and cheaper, often, the innovation race unfolds. Hence, winning this race of producing ideas and turning them into profitable revenue is a must to profit from innovation. Therefore, profiting from innovation demands creating a directional flow of ideas for gaining price-setting market power.
STEM for Creating the Idea Flow
As explained, a great idea is necessary for profiting from innovations, but not good enough. The focus should be on creating a flow for adding momentum layer after layer, making the snowball effect. Besides, such idea flow should be directional and systematic. Hence, how to systematically keep producing ideas to increase the willingness to pay and decrease per unit cost of value is a crucial challenge to profit from innovation.
In addition to knowing consumer preferences through empathy and Passion for Perfection, we need an amenable technology core to support ideation and implementation. For this reason, we need to dig down STEM possibilities. We must keep advancing the technology core through scientific discovery, technological invention, and advancement. A sustained progression of this journey is a must to keep advancing and crossing the chasm. Furthermore, profiting from innovations demands winning the competition race of serving consumer preferences better by leveraging technology possibilities.