Economics of Experimentation

Organizations are economic agents which aim to maximize their net economic benefit. This is applicable whether they are launching a product/service or adopting a tool/process/practice. If we talk about Experimentation or Test & Learn’s adoption as a practice within organizations, we can argue that there is still a lot of potential which needs to be unlocked.

Stefan H. Thomke, in his book titled ‘Experimentation Matters’ talks briefly about the economic rationale behind Experimentation and how it can help organizations become Innovation giants.  Firms realize the importance of ‘causal inference’ over establishing correlation and how Experimentation helps achieve it (Read for more details). The underlying principles of Experimentation establish it as a complete winner when it comes to ‘Creating Economic Value while Curtailing Costs’.

Creating Economic Value            

Experimentation delivers maximum economic value when it is brought into the picture in the initial stages of a project. The idea is to imbibe the learning through experimentation in the project which in turn increases the risk adjusted return of the entire project. Also, it helps identify better ideas and discard weaker ones upfront, which lets you focus on the right things.

Effective experimentation creates value by building a queue of simple experiments and the capacity to run these experiments. But at the same time, you must give time for the experiment feedback to seep in the project to maximize the economic value. Experimentation does not call for maximum number of experiments but rather it calls for maximum assistance in decision making, hence there should be a right frequency of experiments which avoids overloading the organization.

Test & Learn promotes a culture which helps in removing organizational inefficiencies. The fidelity of experiments might demand a lot of time, but firms need to respond quickly and take actions on the experiment feedback. This is probably the reason why so many firms are going for flatter structure thereby handing over more authority at low levels as well.

Curtailing Costs

Thomke, in his book, through the example of product development tries to showcase the importance of failure early in the development cycle. Experiments provide organizations the luxury of failing early and giving them the option of avoiding major future setbacks. Thus, helping many of these giant firms to save millions of dollars and their valuable time.

Experimentation has been in existence since decades, but traditional experimentation techniques were very time consuming and costly. Newer Test & Learn techniques boast of being 20 or more times faster and cheaper and many firms are leveraging the power of these newer techniques.

The culture of experimentation very soon helps set up an entire machinery of agents using which the firms can churn out a decent number of meaningful experiments on a frequent basis. Apart from new experimentation techniques, the machinery includes great co-ordination among adapting resources. The economies of scale are achieved by attracting adapting resources from free agents. This helps firms achieve substantial economic cost savings.

About Trial Run: Trial Run is a cloud-based product that lets companies conduct business experiments on sites, markets and individuals before they implement. It helps companies scale their experimentation capability efficiently and affordably by providing insight into which decisions will work and which will not.

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