24 July 2009

Making Markets for Profit

Many entrepreneurs want to bring products and services into the water sector, to profit from innovations that save water and/or money.

But what about the entrepreneurs who want to change the ways that things are done? How is it possible to bring process innovation or institutional change to the water sector and still make a profit?

Since I consider myself one of these people, I think about this question all the time, and I have identified several problems with this type of entrepreneurial activity:
  • Ideas are hard to control for long enough to get paid. OTOH, it's much harder for people to go from "that's a good idea!" to implementing it.
  • People who work in water are VERY conservative. I say "Hey, you're on fire. Want me to put it out?" and they reply "Naaahhh, I'm used to it..." (When you're a monopolist, failure may not matter.)
  • Institutions are tricky. Push in one place, and something pops out in a different place. Since they are too complicated for one-size-fits-all solutions, innovation requires patience, which is expensive.
  • Entrepreneurial people tend to be dynamic; water tends to be static. This mismatch means that few entrepreneurs are willing to hang around in water. (I have internal deadlines for progress. If I miss them, I have other plans.)
  • It's hard to create a market where none has existed before. The "revolutionary" ipod merely updated the walkman, which merely shrank the radio to portable. Water markets are revolutionary by several orders of magnitude.
These are just factors (or structural elements) that one must consider when trying to bring new processes into the water sector. Can they be overcome? Terry Spragg has spent more than 20 years trying to get people to consider his good idea, but he's run into an engineering culture that prefers pipelines over solutions that may cost ninety percent less.

I have not gotten very far with my "raise prices" idea. Even though higher prices would end shortages in days and for very little money, water managers prefer to spend years and $ billions on "supply side" solutions.

Oh, and here's the worst part. Any entrepreneur who "fixes" things will make very little money for the $ billions they save the public -- that's because people in the water sector have no culture of rewarding good ideas; they just pass savings onto customers. Such "non-profit" thinking does not incentivize hard work!

Consider all of these factors at once and you can see why there's more innovation in one percent of the water business (bottled water) than the other 99 percent!

Bottom Line: People love to make things better, but they will not try to improve things unless they receive intrinsic (praise and pride) and extrinsic (money) rewards. The water sector has very little innovation because these rewards are so low powered.

5 comments:

  1. What is the water market, anywhere on the planet, that would reward innovations?

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  2. @Eric -- I don't understand your question. There ARE working markets (Chile may be the best, but also in Australia) and I assume (as an economist) that the rewards go to participants -- buyers, sellers and brokers...

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  3. The thought was that only in working markets do entrepreneurs make money. So if you want to innovate and get paid for it, you first have to start with a working market that will reward you for innovation. You ignore non working markets until you find a way to make money in them.

    I have a lot of inventions on the shelf awaiting us finding the appropriate working market and having a plan to exploit it.

    Does this make more sense?

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  4. Great post!! Running a water conservation business focusing on both supply and demand side options for residential and commercial projects, I have seen first hand that it is very difficult to bring innovation to the water industry. It is difficult for us sometimes due to the relatively cheap price of water that we have to combat. We may be able to implement savings for people but with the current costs of water, the payback is longer than they desire.

    I really love your insight and faithfully follow your blog.

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  5. @Eric -- good point. I am not sure that markets are either necessary or sufficient but they sure are EASIER! It's possible to sell innovation to monopolists and the government, but it's harder to find a value -- or even a value proposition -- when "prices" are pulled from thin air.

    @CM-G -- Glad you like :) If you can't convince them that they are saving the earth (read the 20/80 posts...) then perhaps they are planning ahead for a drier (more expensive) future...

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