How to make sure you’re investing in the right kind of innovation for your company.
very company needs to be innovative to survive, but what does that really mean? And how do you know if your business is nailing it?
One way to be sure is to track your company’s innovation contribution ratio, which, according to Inc. columnist and growth coach Bruce Eckfeldt, is “a vital measure of how innovation fuels growth and keeps your business ahead of the competition.”
Finding your innovation contribution ratio means calculating the percentage of revenue or user engagement driven by new products or features launched within a set timeframe.
A common timeframe is the past 12 months, but that can change depending on industry, business goals, and business size, says Tristan Kromer, founder and CEO of tech startup Krobar AI and consulting firm Kromatic. Cameron Kolb, the founder and CEO of ExitPros, looks at revenue from products, services, or initiatives launched in the past two to three years, divided by total revenue. For a company with $2 million in annual revenue and $600,000 from new services launched in the past 36 months, the ICR would be 3:10 or about 30 percent, he adds.
Is that a healthy ratio? That depends on which type of innovation your business needs—incremental, adjacent, or disruptive. Businesses should look at their size, industry, and goals to sort themselves into one of these three buckets.
Inc. spoke to several experts, innovators, and business owners about the different ways businesses should be measuring their innovation contribution ratio.
The Three Types of Innovation
Most companies are innovating incrementally. They’re not trying to upturn an industry or completely shift their business model. That means their innovation contribution ratio is going to be comparatively low.
Jeff DeGraff, Inc. columnist and clinical professor of management and organizations at the University of Michigan’s Ross School of Business, says that people become more risk-averse over time. For business owners, this means that the more established their product or service becomes, the more they’ll try to de-risk—spending the majority of their time, effort, and money on tangible and predictable items like increasing revenue and engagement, rather than on speculative ventures like new products.
Adjacent innovation, meanwhile, is when a business owner leverages their existing business into another vertical—such as Apple moving from smartphones to smart watches. Such a move can help diversify market exposure, expand audiences, and open new revenue streams.
Very few companies are chasing disruptive innovation, namely because it doesn’t always make sense to change a business model that other people can adopt and scale. Tech companies more frequently fit into this bucket given the fast-evolving nature of AI and software. The explosion of tech and artificial intelligence is the most basic example of disruptive innovation—tech companies haven’t lost their nerve yet and are willing to take steep risks, DeGraff explains.
When to Invest in Innovation
Before Luminary launches a new program or product, the education and networking platform asks customers whether they’re even interested, says founder Cate Luzio. “Innovation should solve real problems for real people,” she says.
During the growth-at-all-costs decade preceding 2022, many companies substituted spending for building, Mike Seckler, CEO of HR SaaS company Justworks, explains. They “raised capital and used it to acquire customers rather than earning them through products and services that people genuinely valued. The companies that prioritize innovation, in the real sense of the word, tend to build more durable businesses because their growth is rooted in actual customer value,” he says.
On that note, Luzio says to start simple. “Innovation doesn’t have to be expensive or flashy.… I do believe in progress over perfection.”
Founders seeking advice from ExitPros, meanwhile, are often looking for ways to divest from their companies, but that doesn’t make innovation less important. Quite the opposite—Kolb says he encourages his clients to implement new growth levers so that innovation doesn’t become founder-dependent. That might look like a recurring revenue stream, the use of AI, diverse pricing models, or expanding into new verticals.
“For innovation to truly add to a business’s valuation, it must be repeatable, documented, profitable, and transferable to a new owner. Anything else is simply a form of experimentation, rather than strategic value creation,” Kolb says.
And innovation doesn’t always have to be about products or external-facing components. Internal innovation can be just as important.
Seckler looks at innovation from a comprehensive view. “I’d encourage business owners to be cautious about trying to distil innovation into a single number,” he says. Utilizing an innovation contribution ratio to measure revenue tied to products launched in the past 12 months can be a useful directional signal, but it shouldn’t be the sole roadmap, he warns. “Some of the most impactful innovations don’t generate direct revenue quickly. They improve retention. They reduce churn. They unlock adjacent opportunities.”
Measuring the Cost of Innovation
While an innovation contribution ratio measures how much you’re innovating, it doesn’t necessarily drill down into the cost of all that innovation.
Founders should clearly define innovation for their business, delineate new initiative reporting, and margin positive activity as opposed to activity for its own sake, Kolb says, noting that each initiative must be scrutinized for its potential for transfer, scale, and risk. One of the biggest mistakes founders make is launching new offerings and not measuring impact. “Innovation is only driving the valuation when documented, and [when] its measurable, real impact is aligned with the enterprise value realization horizon,” he says.
For Justworks, continuous innovation is existential. “Small businesses are evolving rapidly—they’re hiring globally, managing hybrid teams, and navigating a shifting regulatory environment,” Seckler says. “More broadly, I think innovation is what separates companies that earn their growth from companies that try to buy it.”
For a small business, the practical approach can be whittled down to a few honest questions: Are the new things we’ve built or launched actually being used? Are customers telling us these things matter? Is our investment in new capabilities translating into either stronger retention or meaningful new customer acquisition? “If you’re seeing positive signals on those fronts, you’re likely innovating effectively—whether or not you’ve formalized a ratio,” Seckler says.
Feature image credit: Photo illustration: Inc. Art; Unsplash (2)
