How to Use Innovation Accounting to Drive Data-Driven Product Decisions and Prove Progress Without Revenue

Innovation accounting is an essential part of the Lean Startup methodology that enables businesses to track meaningful progress before creating revenue. This is especially important in the early stages when validating the risky assumptions and learning if our product is something customers need are top priority.

When product market fit is still uncertain, data-driven decisions are a valuable tool to guide the business and helps you prove that you're moving in the right direction by focusing on what truly matters: validated learning.

Core Principles of Innovation Accounting

Innovation accounting revolves around three key principles that help businesses measure and prove progress in uncertain environments:

1. Establish a Baseline: Before you begin measuring progress, it's essential to define your starting point. This includes initial assumptions about customer behaviour, the product's value proposition, and any initial data from early testing. This is done by building a MVP or multiple MVPs to test assumptions.
2. Run Experiments: Run experiments using the build-measure-learn feedback loop to gain actionable insights. This will allow you to discover what customers want and don’t want while reducing waste. Each experiment will report against a set of metrics to determine whether to preserve down this path of similar experiments.
3. Use Actionable Metrics: Innovations accounting emphasises metrics that drive decision-making. Instead of using vanity metrics such as revenue, website views, or social media likes, we can focus on customer-centric metrics such as conversion rates, user retention, and customer lifetime value.

How Innovation Accounting Drives Data-Driven Decisions

With innovation accounting, you’re not just collecting data for the sake of it, instead you can make informed, data-driven product decisions.

For example, if we are tracking Customer Acquisition Cost (CAC) - the total cost to acquire a single through a channel.

Through using different methods, we can set a target of what the CAC metric should be. Possible information which we can use to set targets include: comparing CAC and Customer Lifetime Value (LTV) to give us an indication of whether the it is too costly, or using an industry average through this channel if it is known.

If determined that the CAC is too high we might want to find a more cost-effective approach, here we experiment to find drive this number closer to our target. If we see no progress over a defined amount of time, this leads us to question whether to pivot or persevere.

Proving Progress Without Revenue

One of the biggest challenges for early-stage startups is proving progress to investors and stakeholders, especially when there isn’t much revenue yet. Innovation accounting helps you tell a compelling story through actionable metrics and validated learning.

Example: A SaaS Startup Using Innovation Accounting Let’s take a made-up SaaS startup called TrackFlow, which offers a project management tool aimed at remote teams. The company is in its early stages and hasn't yet generated significant revenue, but they've put their MVP in front of a small group of users and are focused on proving progress through innovation accounting.

• Baseline Metrics: TrackFlow’s initial assumption was that remote teams need better task delegation tools. They launched their MVP with basic features for task assignments and tracking, setting an initial goal to have at least 10 Monthly Active Users (MAU) in the first month.
• Experiments: After receiving feedback, they experimented with new features like time-tracking and collaboration boards. They ran A/B tests with a small segment of users to determine which feature improved task completion rates.
• Actionable Metrics: TrackFlow tracked their customer acquisition cost (CAC) and saw that LinkedIn ads were their most cost-effective channel, with a CAC of $15 per user. They also monitored their retention rate and found that users who used the new collaboration feature stayed on 20% longer than those who didn’t.

Here is a graph to show TrackFlow’s MUA trending up as their CAC decreases over time, this was from referrals decreasing to total cost of acquiring new users.

While TrackFlow hadn't generated much revenue yet, they were able to show investors their clear path to growth by focusing on validated learning and actionable metrics. Investors were impressed by the data-driven approach, which showed not only product engagement but also TrackFlow’s ability to iterate quickly based on user feedback.

Disclaimer: TrackFlow is a theoretical company made up for this example of using innovation accounting.

Conclusion

Innovation accounting is your startup's roadmap when traditional financial metrics aren’t enough. By focusing on validated learning, running experiments, and using actionable metrics, you can prove progress and make better product decisions, even without revenue. For early-stage startups, it's not all about how much money you're making but factoring how much you're learning into the equation with actionable data.