Concept
Innovation accounting
Innovation accounting is Ries's method for measuring progress when revenue is too small to mean anything: establish a baseline with an MVP, tune the engine toward the ideal one metric at a time, and use the trend to decide whether to pivot or persevere.
Ordinary accounting cannot judge a startup, because a company with no revenue looks the same whether it is a month from working or a year from dying. Innovation accounting replaces it with three steps. First, build an MVP to establish where the numbers really stand today: conversion, retention, referral, whatever your engine of growth depends on. Second, tune the engine: each product change is an experiment meant to move one of those numbers from the baseline toward the ideal your model needs, measured by cohort. Third, at scheduled intervals, look at the trend and decide: if the tuning is moving the numbers toward the ideal, persevere; if the numbers are stuck however hard you work, the strategy, not the effort, is the problem, and it is time to pivot. The method's real gift is that it makes the pivot decision a matter of evidence rather than mood.
A real-life example
A subscription box startup in Istanbul had 300 subscribers and no idea whether it was working. Innovation accounting gave it a baseline (37 percent of first boxes led to a second) and an ideal (the model needed 60). Four months of changes to packaging and pricing moved the number to 41. The founders, reading a stuck trend rather than a slowly rising total, pivoted from surprise boxes to a chosen-by-the-customer model, and the number reached 58 in one quarter.
How to use it
- 1Establish a baseline with your MVP before you improve anything: where do activation, retention and referral actually stand today?
- 2Tune one number at a time, by cohort, and write down the ideal your business model needs it to reach.
- 3Put the pivot-or-persevere review in the calendar, and let the trend, not the effort, make the call.