Musings on Entrepreneurship and Innovation
Wednesday, May 10, 2006The Commercial Value of an Idea
Ideas (at least good ideas) are worth more than a dime a dozen, but how much more?
As I wrote in a previous post, a qualifying idea in this context is not merely a brain fart. It means a reasoned articulation of a substantive value proposition. But an idea is less than an invention (and far less than an innovation). Consequently, the commercial value of a good idea is some fraction of the value of a realized innovation.
In order to figure out a robust rule-of-thumb that I might use to estimate the value of a good idea, I ran a simulation that consisted of 10,000 random combinations of key variables across reasonable ranges. These variables included time-to-market, product life, the ratio of wholesale revenues to retail revenues, royalties, and the chance of success. What I found was that the ratio of a) the risk-adjusted current value of a product idea to b) lifetime retail revenues under a plausible success scenario was almost always less than .00025.
What does that mean? We'll consider the case of a hypothetical consumer product that could generate peak annualized retail revenues of $20 million. Lifetime revenues for such a product might amount to $60 million. The current value of an idea that might be expected to grow into such an innovation is most likely to be less than $15,000 ($60 million x .00025).
Does that seem low to you? After all, a $20 million annualized revenue product is a pretty big idea. 2.5 hundredths of a percent doesn't seem like much value to attribute to the well-considered insight that could spark the realization of such revenue.
On the other hand, it doesn't take a huge investment of time or money to generate and articulate an idea - though it does take a considerable amount of art and skill. If you could get somebody to pay you $5,000 to $15,000 for your good ideas, how many would you have to generate to make a difference to you?
Recent evidence suggests that there are a lot of people out there who believe that their ideas are worth more than the proverbial dime a dozen but maybe much less than $15,000. As I understand it, more than 10,000 people submitted their ideas and inventions to the American Inventor television show. At stake was a $1 million prize. Assuming for the moment that everybody had an equal chance of winning, the expected value was only $100 per submission.
Maybe most of those folks really understood the value of their ideas.
