Risk Management

Use ‘Test and Learn’ to Avoid Losing a Big Business Bet

"All-in" bets can pay massive rewards, but test and learn can get you there with a lot less risk.
Rafi MusherJuly 16, 2015
Use ‘Test and Learn’ to Avoid Losing a Big Business Bet

From HBO’s successful launch of its new stand-alone streaming service to Microsoft’s $7.6 billion write-off of its Nokia acquisition, we’ve seen some “all in” bets — big business decisions that either provide huge payoffs or significantly handicap or even destroy companies — win or lose so far in 2015.

Rafi Musher

Rafi Musher

And with a strong economy and competitive landscape in technology and some other industries, as we enter the second half of the year companies are assessing strategic initiatives and new products. That means we can expect to see more “all in” bets on new ideas. If the idea is right, the rewards can be massive; if wrong, disaster may ensue.

One way companies can avoid an “all in” disaster is through the test-and-learn approach, which allows them to, as a young Mark Zuckerberg once put it, “move fast and break things.”

A Better Way to Do Ecommerce

A Better Way to Do Ecommerce

Learn how Precision Medical leveraged OneWorld to cut the cost of billing in half and added $2.5M in annual revenue.

Test and learn is a simple concept: conduct small, fast, iterative tests that can then be learned from and used to determine the best way for a company to proceed. Testing concepts on a smaller scale alleviates much of the risk and cost associated with ideas that do not work, while still building on positive outcomes. Using test and learn, a company could find that a new idea does not work and should not be pursued. It could also discover that some aspects worked while others need to be tweaked and tested again.

With test and learn, it does not matter if a company is right the first time, as long as in the end it is able to determine what works and apply it at the correct scale. An idea can be tested and improved upon continuously with fast iteration cycles, dramatically increasing the chances for success when it is finally ready for launch or wider deployment.

Traditionally, test and learn has been viewed as a tactical tool at larger companies. It can serve as a means to boost innovation or encourage evolution within an enterprise. The approach is applied to everything from in-store experience to staffing to product pricing to advertising and promotional strategies.

However, there is untapped potential for its use at the C-suite and management level. While the marketing team is using test and learn on different coupons, the management team could be applying the approach to broader strategic issues such as capital allocation. For example, a CFO could use test and learn to determine whether cutting prices or creating a new distribution channel will generate a higher ROI.

While the concept of test and learn may sound simple in practice, it does require an advanced understanding of analytics in order in order to be effective at the management level, especially when dealing with issues that will have a significant impact on the bottom line.

For instance, the sample size being tested must be carefully selected to ensure the analysis is statistically relevant and the findings are actionable. Knowledge regarding the right analytical approach is also needed to determine the proper course of action. Is this an instance where all that’s needed is a comparison of A vs. B to see which works better? Or is there a need for a multivariate analysis looking at a complex issue on different levels at the same time, such as a combination of performance attributes like revenue and profitability along with functional attributes such as store size, location, and proximity to a competitor location?

Companies may hit the jackpot with one big idea, but the odds probably are not in their favor. From the fiduciary responsibility to shareholders to just plain job security, taking this type of risk at the C-suite level is not worth the reward most of the time.

As big data becomes ubiquitous and more decision making based on analytics becomes the norm in the enterprise, the C-suite now has an opportunity to apply test and learn to new mission-critical, organization-wide strategies. With more facts, data, and analysis being applied to strategic decision making, the C-suite can become even better, faster, and more successful in leading their companies in this second half of the year and beyond.

Rafi Musher is the founder and CEO of Stax, a management consulting firm that works with investment-firm leadership teams across industries to identify profit opportunities and mitigate risks.