understanding the economic value of design v1
DESCRIPTION
Design has long struggled to justify its value as a business activity, and while it has gained ground it is still losing too often. Designers know it is the primary source of innovation, problem solving, and is one of the few truly sustainable competitive advantages. What designers don't realize is that most business activities are either belief or superstition, rather than based on a reliable return on investment (ROI) calculation. Business people and designers lack a shared understanding of how design creates value, and so they use their specialized language to defend their position, and ultimately reduce the competitiveness of the business. This is a work in progress on that issue, by Chris Finlay and Jason Gaikowski, focused on creating a critical chain of logic to help both business people and designers understand how to create value together.TRANSCRIPT
Economic Value of DesignChris Finlay & Jason Gaikowski
AKAHow do you get more resources to do your job & deliver more success?
The long struggle of Design has been to justify its value.
Design has been lacking a kind of science that supports its value and impact on business performance.
Our goal is to create a strong chain of logic that empowers designers & design advocates to succeed in business conversations about the value of design.
Business say they want creativity & innovation.
Design delivers both, yet is regarded more like art than science.
Why are some business activities mandatory when others are discretionary?
Inputs of most business activities are too complex to accurately predict their returns yet design is held to a different standard.
For example:What is the roi of accounting?
How does HR impact shareholder returns?
Why is investment in design discretionary when HR & accounting are not?
Business activities are based on regulation, convention, or superstition until they have undeniable proof.
Or a champion has enough credibility to get investment.
Business too often misses the fact that design drives business activities.
“That design is the ultimate expression of strategy.”
Majid Iqbal, Design Codes
Ford FocusTesla Roadster
Both electric cars
Two different strategies.
Two different designs.
Two different experiences.
If the market teaches us anything about consumer brands it’s that the best experiences win.
Designing the experience is a new strategy for winning.
“86 percent of consumers will pay up to 25% more for a better customer experience.”
Survey conducted by RightNow and Harris Interactive 2011
When we design for experience we design the invisible connections between, people, places, goals, feelings, meaning, and value.
Because people do things to feel stuff.
Stop being scared of ROI, learn to love business conversations, metrics, and meaning.
business -> product / service -> marketing -> customer
customer insight
Past
business -> product / service -> marketing -> customer
business -> experience design -> product / service -> marketing -> customer
People
Business Technology
Past
Today
Design is strategy fused with a problem solving methodology that helps companies know why, how, and what to make in order to help people feel how they want to feel.
Design is very new as a management discipline.
Design is where brand was 20 years ago.
Like brand development, creative problems solvers (designers) know it is a critical business activity.
A sustainable competitive advantage.
Time for us to prove it to the bean counters.
Design orchestrates interactions across business functions.
Every interaction is an experience that leads to more (or less) value.
Value = f(Expectation, Experience*)
* Social, Emotional, Functional
Value = Reality - Anticipation
Value of experience Who How
Economic Business Earnings velocity
Emotional User Fulfills emotional need
Social User & Business Status for both
Functional User Utility
The value of these experiences accrue to the brand and then flow to sales and future sales
Expectations
Emotional Experience
Functional Experience
Brand Asset
Actual Sales
Future Sales Potential
For most companies, the brand is the single most valuable thing they own.
Investments in designing brand experiences drive performance in established business metrics.
Salesmarginloyaltyshare of walletcustomer acquisition at lower costmarketing roiproduct developmentproduct lifecyclereturns/warrantybrand assetcost of capital (borrowing, ratings, analyst reports)
Near term
Long term
Designing great brand experiences pay dividends in good timesFirms that continue to increase investments enjoy returns 400% versus firms that cut investment levels
40%
30%
20%
10%
0%Year 1 Year 2 Year 3 Year 4 Year 5
Reve
nue
Retu
rns
Based on Natalie Mizik and Robert Jacobson “Marketing Strategies Across Economic Conditions” Columbia University Working Paper, 2009.Recessionary times are determined using the Chicago Fed National Activity Index (CFNAI). Sample period 1989-2005Changes in operating income are based on unanticipated earnings. Operating Income is measured relative to AssetsExpenditures includes Marketing, R&D, and Corporate costs (=[SG&A-R&D]/Assets|. Relative returns are risk adjusted stock returns.
Year 0
Expenditure Increases
Expenditure Reductions
4x
Even in bad times, it makes sense to invest for the futureInvesting is also the best strategy for firms with net operating loss enjoy returns 200% versus firms that cut investment levels
0%
-10%
-20%
-30%
-40%Year 1 Year 2 Year 3 Year 4 Year 5Year 0
Expenditure Increases
Expenditure Reductions
2x
Based on Natalie Mizik and Robert Jacobson “Marketing Strategies Across Economic Conditions” Columbia University Working Paper, 2009.Recessionary times are determined using the Chicago Fed National Activity Index (CFNAI). Sample period 1989-2005Changes in operating income are based on unanticipated earnings. Operating Income is measured relative to AssetsExpenditures includes Marketing, R&D, and Corporate costs (=[SG&A-R&D]/Assets|. Relative returns are risk adjusted stock returns.
Reve
nue
Retu
rns
The experience of the brand supports or hinders the company’s market performance.
Market valuation of experience design is signaled by acquisition price of experience led companies.
And the talent that has shown it can create those experiences. There is a new word for that, “acquihire” = Acquisition + Hire
Instagram acquired for ~$1 billionSnapchat rejects $3 billion offerMailbox acquired for $100 millionNest acquired for $3.2 billion
Instagram, Snapchat, MailboxNo new hardwareNo new softwareThey designed an experience
Idea x Experience Design x Brand =
Economic Value
The business case is clear.
For customers, the experience is the business.
But business people are not designers and designers are not business people.
So the biggest barrier to experience design is shared understanding of how value is created.
Fortunately, this is no longer about belief, we have evidence of impact.
You now have evidence. So...
Don’t fear the ROI questionLearn to speak the language of businessConnect the dots for finance, marketing, & ITCreate a coalition and movementCreate passion & commitmentFind & use the vocabulary business needs to do what we know works
Deep valuation of design will require longitudinal measurements, we need to embed a mindset of experimentation in the projects we work on and follow up on performance. We need to design analytics attached to business metrics in our work & share the results with each other.
Remember & be confident that experience design deserves to be embraced as a management discipline.
That you, a designer, can drive the business outcomes that the company needs, investment in you is justified in economic terms.
Repeat after us:Design delivers desirable experiencesExperiences lead to better or worse customer relationshipsThe quality of customer relationships is recognized in the market as brand asset valuationBrand value = shareholder valueWhat creates value to shareholders gets invested in
Design
Experiences
CustomerRelationships
Brand
Economic Value
Stock Value
Investment in activities
The science we need
Brand Asset
Agree?Disagree?What else?
@chrisfinlay / chrisfinlay.com@JasonGaikowski