My Top 10 Entrepreneur CEO Lessons: 2000-2009

As we near the end of the decade, there have been several articles published about how bad the 2000's have been. For me, while this hasn't been the easiest decade, it is the one in which I learned what it means to be a CEO and, beyond that, an entrepreneur.  During this decade, I've weathered two crashes - the "dot com" bust in 2000 and the sub-prime meltdown in 2008.  I've learned to do turnarounds, startups, a leveraged buyout, mergers & acquisitions, and even one bankruptcy and in the process, I've managed to learn a few things, at the cost of a few gray hairs.

So looking back on the closing decade, here are my Top 10 lessons learned:

1. Cash is different from profits and more important - This is a well known truism, but it didn't really sink into my bones until the first time I had to delay vendor payment in order to make payroll.  For a startup, if it isn't directly related to gaining revenue, developing shippable product, or required to comply with the law, think twice about spending it.  Juggling insufficient cash is painful.
   
2. Technology is easy; customers are hard - Nothing is more important to a company than gaining repeat, paying customers, in sufficient volume to pay the bills. Customers are gold and it is much easier to keep and grow a customer than to win a new one.  Companies die from lack of revenue, not lack of technology.  As one who has had to mothball good technology, I wonder how much more is languishing in basements, public storage lockers, and warehouses from failed startups.
   
3. "Should we" is more important than "can we" - Because most entrepreneurs are technology people, their mindset tends to focus on whether something can be done.  But this is often less important than figuring out whether something should be done.  A well executed idea isn't of much use if it's tackling the wrong problem.  Like the time, when one of my companies developed a new process monitor for semiconductor fabs only to discover that the equipment makers had integrated their own versions into their latest generation equipment, wiping out the market for third party systems.
   
4. It's better not to hire than to hire the wrong person - Believe me, there is one thing worse than having an open position when you are buried in work, and that is to fill it with the wrong person.  The wrong person can cost you time, money, drag down morale, and even get you sued.  Not sure about that potential new hire?  Keep looking.
   
5. Job descriptions should just be a starting point - People are multi-faceted, yet once we hire them, we tend to restrict them to the narrow confines of their job description.  What a waste of talent, one that a startup or small company can't afford.  Once you've found the right person, learn about that person's hidden talents and engage the whole person.  For example, at one company, I had a lab technician who was also a skilled amateur photographer.  Our marketing person figured this out and saved thousands of dollars in photo shoots by letting this man play in her world.
   
6. During tough times, people need hope - People will endure a lot as long as they have hope. Not only hope in a future, but one in which their contributions matter in getting there.  Without hope, people stop caring.  And when no one cares, the company dies. As CEO, in tough times, your number one job is to give people real hope, not false hope.
7. When things are going badly, level with people - Giving people hope does not mean sugar coating things.  This is false hope.  And if your people are halfway intelligent they'll see right through it.  The basis of real hope comes from truth.  Calling a spade a spade gives people real hope when they realize that management and the CEO aren't living in some fantasy world and its not taboo to talk truth.  Having said that, being straight with bad news will cause some people to leave. Let them go; trying to keep these weak sisters around isn't worth the distraction in a crisis.  The resilient ones will stay and will contribute if you let them.
   
8. Most VCs are just bankers - I expect to take flack over this one, but in venture capital, as with many professions, the 80/20 rule applies.  Treat with skepticism the claims of VCs to add value to your startup in terms of their operational expertise, making introductions, hiring, and strategic advice. While the top 20% can add value in this way, the remaining 80% are as risk adverse and hands-off as a commercial banker.  At least the latter don't pretend to be risk takers and company builders.  Most of them are just supplying money and they need you to turn it into an economic entity that can generate a return on investment.
   
9. Every CEO needs a jester - The medieval court jester was more than an entertainer.  Originally, the jester's job was to deliver unpleasant truths to the king to keep him from losing touch with reality.  Of course, this could be quite hazardous to the jester's health, which is why they often became skilled at delivering unpleasant truths in an entertaining fashion.  As CEO, one of the greatest challenges you have is getting honest, information free of "spin".  People have a tendency to suppress bad news and exaggerate good news as it moves up the chain.  People working in the trenches with the willingness to confront the CEO with unpleasant truths are worth their weight in gold.
10. An entrepreneur is only as strong as his/her network - The heart of what an entrepreneur does is to create something from nothing.  He/she does this by marshaling resources and know-how from the network of people they know.  Their network is the source of knowledge, people, funds, customers, and counsel that an entrepreneur then turns into a product and economic entity that becomes a company.  Cultivate your network.
    

May you have a prosperous 2010 and start to the new decade!

Useful Startup Marketing Concepts: The Short List

In my post Myths About Marketing, I promised to present my short list of the most useful marketing concepts and framework for startups.  So here it is along with brief descriptions.  To put the evolution of ideas into context, I've listed the "inventor" and year of introduction, as best I've been able to determine.  Corrective comments are welcome.

Basic Marketing Concepts 

• 4Ps Marketing Mix (Neil Borden 1953, E. Jerome McCarthy 1960) - The foundation of all marketing strategy.  The 4Ps are product, price, promotion, and place (channel).
• Marketing Segmentation (Wendell Smith 1956) - The concept that markets are not homogeneous but are made up of distinct, separate niches.
• Positioning¹ (Al Ries & Jack Trout 1969) - The concept that a company or brand should have a distinct identity compelling to its target customers.

Competitive Strategy

• 3Cs (late-1950's/early-1960's?) - The 3Cs are customer, competition, and company.  Combined with the 4Ps, they form the basis for competitive strategy.  Consultants have since expanded this to 7Cs, but honestly, I haven't found the expansion to add much, except confusion, to the original.
• SWOT Analysis (Albert Humphrey 1960's) - A framework that analyzes a company's Strengths, Weaknesses, Opportunities, and Threats relative to the competition.
• Five Forces Analysis² (Michael Porter 1980) - A framework that looks at an industry's competitive dynamics and the implications for a company's strategy.  The five forces are rivalry, barriers to entry, threat of substitutes, supplier power, and buyer power.
• Value Disciplines³ (Michael Treacy & Fred Wiersema 1995) - A concept that asserts that for a company to dominate its industry, it must focus its resources to create unfair advantage in one of three areas:  product leadership, operational excellence, or customer intimacy.

Product Planning & Management

• Product Life Cycle Theory (Raymond Vernon 1966)  - The concept that new products progress through different life phases of introduction, growth, maturity, and decline.  The phase in which the product resides affects the competitive strategy.
• BCG Product Portfolio Matrix (Bruce Henderson 1968) - A framework developed by the Boston Consulting Group for looking at a portfolio of products.  Products are classified into a two-dimensional grid with relative market share on one axis and growth rate on the other as either cash cows, stars, dogs, and question marks.  Internal resources are supposed to be allocated between products in the portfolio in accordance with their classification.
• Gartner Hype Cycle (Jackie Fenn 1995) - A concept developed by the Gartner Group describing the technology adoption cycle in terms of awareness.  The hype cycle states that all technologies go through the stages of technology trigger, peak of inflated expectations, trough of disillusionment, slope of enlightenment, and plateau of productivity.  Where your industry is in the hype cycle has implications for strategy.

Product/Customer Fit

• Diffusion of Innovations⁴ (Everett Rogers 1962) - A framework categorizing customers by their willingness to adopt new ideas, technologies, and products.  Customers are classified as innovators, early adopters, early majority, late majority, and laggards with appropriate implications for strategy.
• Economic Buyer Model⁵ (Robert Miller & Stephen Heiman 1970's) - A framework that identifies buying roles in a complex selling situation such as that commonly found in business-to-business sales.  The roles are economic buyer, specifier, consultant, vetoer, and gatekeeper.
• Crossing the Chasm⁶ (Geoffrey Moore 1991) - A framework that focuses on the transition from early adopter to early majority customers per the Diffusion of Innovations framework.
• Customer Development⁷/Lean Startup (Steve Blank 2005, Eric Ries 2008?) - A methodology used to facilitate customer/product fit and the development of a repeatable sales process for acquiring customers via rapid, iterative prototyping and feedback.  The methodology focuses on the innovator and early adopter stages of the Diffusion of Innovations framework.

References:


1.  Ries, Al and Trout, Jack, Positioning:  The Battle for Your Mind, New York: McGraw-Hill, 1981.
2.  Porter, Michael, Competitive Strategy, New York: Free Press, 1980.
3.  Treacy, Michael and Wiersema, Fred, The Discipline of Market Leaders, New York: Harper Collins, 1995.
4.  Rogers, Everett, Diffusion of Innovations, New York: Free Press, 1962.
5.  Miller, Robert and Heiman, Stephen, Strategic Selling, William Morrow, 1985.
6.  Moore, Geoffrey, Crossing the Chasm, New York: Harper Collins, 1991.
7.  Blank, Steven, The Four Steps to the Epiphany, Cafepress.com, 1995.

Myths About Marketing

One of my pet peeves is the frequency with which marketing is declared dead or superceded by some "new marketing" as a result of some "paradigm shift" in technology, society, or realignment of the cosmos.  The declaration is usually made by some consultant who, of course, is then happy to peddle his or her flavor of the replacement, almost always a repackaged version of the basics.  And because marketing is one of those terms - like "quality" or "indecency" - that everyone understands but few define, the hype begins, to be followed by the inevitable backlash when the new marketing fails to deliver any better than the old.

This is not to say that there are no innovations in marketing.  But as one who has been in marketing since the mid-80s, I find that these innovations are not as frequent as the consultants would have us believe.  I actually traced back the history of marketing thought and what I consider to be true innovations only crop up about 2-3 times per decade.  (Maybe I'll post this timeline in the future.)

So as a back-to-basics technology marketing guy, here are some additional assertions I'd like to make (some of which I plan to expand on in the future).

• Marketing is the business function whose job it is to ensure that the products that a company delivers to its target customers are those that the customer needs when they need them - Others may disagree with this, but this is my definition of marketing with products, target customer,  and needs highlighted as requiring fuller definition.  I disagree with those who view marketing as demand creation or just about generating leads.  But these points require full posts of their own.
• Marketing effectiveness is ultimately determined by competition in the market as measured by market share and profitability over time - If one accepts my definition, then this is the logical measure of effectiveness, not lead count, or conversion rates.
• Marketing is not dead and never will be - Being a basic function like product development, manufacturing, or selling, it must get done or there is no business.  But because it's intangible, it can appear as if there is no marketing being done. True, a company may not have a marketing group, but somewhere in the business, someone is deciding what product to build, how to price it, and how to get it into customer hands, all marketing decisions.
• Marketing tactics change rapidly; strategic frameworks don't - There is a difference between marketing strategy and marketing tactics.  Marketing strategy involves the use of concepts and frameworks to figure out what should be done.  Marketing tactics involve the use of various vehicles like retail stores, the internet, radio, TV, social media, etc. to execute the strategy.  In most cases, when consultants trumpet "new marketing" they are talking about a shift in the relative cost effectiveness of one tactic over another (e.g. the use of the free demo).  Now don't get me wrong; a change in tactics definitely impacts strategy, but these rarely constitute a paradigm shift.
• Marketing basic concepts/frameworks still apply - Whether it's hardware, software, internet services, Web 2.0, cloud computing, cleantech, greentech, or mobile applications, basic marketing concepts, frameworks, and methodologies remain relevant tools for developing strategy.  Of course, as with any tool, the concept, framework, or methodology used must be appropriate to the situation.  In the same way you wouldn't use a saw to pound in nails, you wouldn't apply the Customer Development methodology used successfully by many internet startups to a medical device startup.

So what are these timeless concepts and frameworks?  And which of these are the most relevant to startups?  Stay tuned....

Fighting Idiotspeak

I just finished a long overdue re-reading of Why Business People Speak Like Idiots⁽¹⁾.  I hate jargon, yet find that it has a way of creeping into my writing and speech.  I find that a periodic re-reading of this book acts like an inoculation against idiotspeak.  Lately, I've spent a lot time with cloud computing people where jargon, acronyms, and superlatives buzz through the air like flies around a carcass.  The other day, I realized that I actually used the word "ecosystem" in one of my blog posts which had nothing to do with ecology. Shudder.

Not all jargon is bad.  In fact, technical jargon can serve as an effective shorthand for complex concepts and actually improve communication between experts ⁽²⁾. What distinguishes technical jargon from idiotspeak is that the former can be tied to a precise definition appropriate to a specific setting.  For example, the word paradigm might be technical jargon when used by epistemologists discussing modes of thought.  It becomes idiotspeak when used in advertising copy as a synonym for "new and different."

Idiotspeak, on the other hand, avoids precision.  The best is made up of vague nuances enabling repurposing of the terminology into unaffiliated contextual situations hallmarked by erudite sounding phraseology.  Acronyms are another form of idiotspeak ("ispeak").  Other forms include the high-novelty-concocted-superlative-laden ("HNCSL") compound words.

Idiotspeak is the enemy of startups where clarity is most needed.  Why?

• Clarity enables vision- In the beginning there is a vision which must be communicated to employees, customers, and partners for the startup to succeed.  But for some reason, idiotspeak is often thought to be more motivating, at least to the speaker.  I mean, I know I'd much rather be told that "we need to think outside the box to ensure we hit our Lighthouse's deployment window, or else we won't get buy in from our VCs on the bridge," than be told that "we need to figure out how to ship the product to Cisco on time, or else the VCs won't give us more money."  Not.
• Clarity stands out- One of the goals of any marketing campaign is to stand out.  That's tough to do when we're all striving to be "the leading provider of infrastructure virtualization software for large datacenters, today [announcing] an integration partnership to enable policy driven automation of server repurposing in the datacenter" (real example I kid you not).
• Clarity forces people to take a stand - Which is more likely to change an employee's behavior?  Telling said employee that "Your effectiveness would be accentuated if you were more cognizant of the potential negative ramifications of the use of certain colorful phrases in your speech" or "Stop swearing!  You're offending people so that they don't want to work with you and then we'll have to fire you!"  Now saying this might invoke some of those colorful phrases,  but there's no doubt about your point (which will be a point in your favor during a wrongful termination lawsuit).
• Clarity exposes posers - In my experience, real experts don't hide behind jargon;  true experts can make difficult concepts understandable.  And if they can't explain it in simple terms, you might want to reassess their level of expertise.

I'll do my best to avoid using idiotspeak and to define my technical jargon, especially terms that have been widely misused (e.g. paradigm, positioning).  But idiotspeak is insidious.  Please help me keep this blog jargon free; call me out when you find me using it.

References:

(1)  Fugere, Brian et.al., Why Business People Speak Like Idiots, New York: Free Press, 2005.
(2)  Cockburn, Alistair, Agile Software Development, Addison-Wesley, 2001.

What Kind of Entrepreneur Are You?

Being a technology marketing guy, I'm constantly updating my business's customer profiles.  A customer profile is simply a thumbnail sketch of your target customer(s) - in my case startup entrepreneurs - used to guide your sales and marketing efforts.

I thought it might be fun to share some with you.  I meet a lot of startup entrepreneurs, yet find that they can be grouped into one of four profiles:

Ralph - As in Ralph Waldo Emerson's "if a man can...make a better mousetrap...the world will make a beaten path to his door."  Ralph's alternate motto is "build it and they will come."  Ralph has no use for marketing.  Sales people are, at best, a nuisance to be tolerated.  Ralph is almost always a first timer.  I don't waste a lot of time upfront with Ralph; he already knows everything having confused omniscience with confidence.  The funny thing is that if Ralph survives the school of hard knocks, he may end up being one of my most profitable clients.  Why?  Because cleaning up a mess is lot more work than preventing one in the first place.  How likely is Ralph to survive?  I won't say it's zero;  after all people do win the lottery.

Spock - Again, usually a first timer, mostly technically oriented, highly intelligent, and logical to a fault.  They've attended the classes, read the books, and know how a startup is supposed to work...in theory.  Unfortunately, Spock lacks the down-in-the-trenches experience to evaluate any advice that runs counter to theory, especially with respect to areas containing large doses of human irrationality, like sales, or management, or fund raising.

While everyone goes through a learning curve when doing something new, Spock's is often a lot slower.  Ironically, it's not because of lack of brainpower.  Rather it's because you first must unhook him from his cherished beliefs before he can learn anything.  How likely is Spock to succeed?  It's a race between how fast Spock learns vs. how fast Spock spends.

Rikki Tikki Tavi - Like the hero of the Rudyard Kipling story, Rikki's motto is "run and find out."  Rikki may or may not be a first timer.  Rikki doesn't know what he doesn't know but is wise enough to recognize this possibility and is eager to learn.  Rikki doesn't know something?  He'll run and find out or find out who does.  Rikki understands that the way things work aren't necessarily the same as the way things should work.  He makes mistakes, but above all he learns.  He knows the importance of good counsel.  I love to work with Rikki (and VCs love him too)!  Guess what his chances of success are?

"Ben" Around the Block - Almost always a serial entrepreneur or someone who's spent a lot of time in the trenches building a business.  Ben knows what he does well and more importantly, what he doesn't.  Ben knows how to leverage connections, cash, and resources.  He knows how things really work which means he understands timing.  Ben's been hit so many times that his bruises have bruises and through this he's gained perspective.  There's a reason VCs line up to get Ben into their portfolios.

So what distinguishes Ralph and Spock from Rikki and Ben?  The understanding that maybe, just maybe, they don't know everything.

Why do I say this?  Because I've been Ralph and Spock.  As a newbie, hot shot, R&D engineer, I was Ralph.  Thankfully, I'm a lot dumber today than when I was 25.  It took me a couple of years watching amazing technology that I was working on die in marketing reviews to evolve into Spock.  A corporate transfer into marketing and the patient tutelage of some tough, no nonsense sales managers⁽¹⁾ and two of my bosses in marketing⁽²⁾ killed Spock.  Today, I'd like to believe I'm Rikki striving towards being Ben (but maybe I'm just deluding myself).

So which one are you?

I'd love to hear from others to round out my field guide to entrepreneurs.  Tell me about other types you've run into in your travels.

(1) Thanks to Sal Spano, Lee Herren, John Mestemacher, Dan Frailey, and Brian Moylan.  The pains from the beatings have finally subsided to a dull throb.
(2)  Thanks to Loren "Catch Flies with Honey" Sutherland and Keith "Don't Confuse Me with the Facts" Scott.

Startups & Existing Markets, Part 2: Beyond the Beachhead

Last week's post discussed five rules for establishing a dominant position in a niche segment.  This week's discusses how to extend that beachhead into the broader market via the three R's.

Because existing market customers have a current solution, you now must deal with purchasing agents (including buyers, supply chain managers, or the equivalent) not just technical specifiers.  Purchasing agents are concerned about the costs and risks associated with changing from their current solution.  The key to addressing these concerns is to have a reputation as a market leader able to supply credible references to prospective customers who will make referrals to other prospects on your behalf.

Reputation:  Purchasing agents rarely get fired for buying from the market leader, a position you can legitimately claim, provided that you've established a niche dominant position.  Part of your reputation is based on your market positioning.

For entrants into an existing market, the most common positions are based on either:

1. Highest performance, high price - Best when your product can solve a growing outlier problem that existing products address poorly or cannot address at all.  To increase market share, the company must decrease prices.
   
2. Sufficient performance, lowest price - Best when your products have the ability to address a minimally sufficient solution at a significantly cheaper cost.  To increase market share, the company must increase product capability. (This is the approach presented in Clayton Christensen's Innovators Dilemma⁽¹⁾.)

Take care not to establish a position that precludes extension into the targeted market segment.  (E.g. a club whose exclusive position is based on a limited number of members would be tough to extend into the mainstream; better to make exclusivity based on member net worth.)

References:  Pursue an adjacent niche approach to extending into the mainstream market.  Do this by getting relevant customers to act as references to new ones.  Relevant customers are ones in your existing niche who have problems as similar as possible to those of your prospective customers.  It helps if the reference customers are market leaders as well.

Depending on what market you are penetrating, the ultimate reference is to become an industry standard.  This can be as formalized as in industry trade organization specification (e.g. IEEE, ISO, ASTM, Blu-ray) or by default due to market share dominance (e.g. Microsoft's O/S, Apple iTunes).

Referrals:  As you gain new customers in the mainstream market, get them to refer you to others (assuming they aren't competitors; those you'll have to figure out yourself).  As your new customers begin to reap the benefits of your solutions, they become the new most relevant customer references.

Eventually, the three R's set up a reinforcing cycle which in time should give your company a path to becoming the incumbent.  Just keep an eye on those startups.

References:
(1)  Christensen, Clayton, The Innovator's Dilemma, New York: Harper Collins (2003).

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Startups & Existing Markets, Part 1: Five Rules for Niche Penetration

Why Pursue an Existing Market
While much has been written about startups developing entirely new markets, comparatively less has been written about startups seeking to penetrate existing markets.  But there are several advantages to pursuing an existing market:

• The market is defined - There exists real data about products, market size, customers, competition, and sales channels.  More importantly, the market is already framed which minimizes the blank stare factor you get in trying to describe a completely new market.
• A real problem exists and real money is being spent - There is no question that basic demand exists and that someone will pay for a solution.  The risk of having a "solution looking for a problem" is reduced.  Of course, this is not a guarantee that people will buy your solution.
• Customer ROI can be calculated - In existing markets, the rules for determining customer payback are often well understood.  This is an invaluable guide in determining how well your solution addresses a need or compares against the competition.  Example:  the cost of ownership model used in the semiconductor industry.

But there are two important disadvantages:

• Competition exists - And they won't just yield without a fight.  Competitive strategy is the issue with existing markets vs. new markets.  (With the latter, framing a value proposition and promoting awareness to target customers are often the key problems, not competition.)
• Pain of adoption favors the status quo - To the degree which your offering introduces risk or requires customers to change habits, processes, or relationships, this can be a serious barrier to success.

Five Rules for Penetrating Existing Markets
Startups seeking to penetrate an existing market should pursue a niche dominance or beachhead strategy governed by these five rules:

1. Competitive entry must be based on superior performance or lower cost. You must demonstrate ROI high enough to overcome the pain of adoption.
2. Focus, focus, focus and burn the boats.  To establish dominance, you must understand the entire niche ecosystem in depth, not just your product's competitive advantages.  Choose one and only one niche segment.  Don't choose two (unless you can field a completely independent team).  Penetrating an existing niche is hard.  By burning your boats and committing your startup to just one niche, your team will have no choice but to knock down every obstacle that rears its ugly head.  Don't give the team an excuse to dodge when the inevitable "unsolvable" problems arise or they will remain unsolved.
3. Pick a niche based on speed of dominance over size.  Look for customers with high pain who will be the most motivated to adopt your solution ASAP.  Don't worry if the niche is small; once you're entrenched with a dominant position, you can extend into bigger segments later.
4. Risk management can be a bigger issue than performance enhancement.  Because existing market customers have some working solution, superior product performance or lower cost is a necessary but insufficient condition of purchase.  You must also address their concerns surrounding any downside risks of change.  These often have nothing to do with your product but are more associated with the supply, deployment, and integration of it.
5. Work through existing relationships.  One way to minimize the pain of adoption is to work through existing partners, alliances, and channels as much as possible.  While this introduces its own set of challenges, this eliminates a major source of risk.

How will you know when you dominate your niche?  Market share.  While this varies by industry, to be truly niche dominant, your company should have the largest share of all competitors in your chosen niche and typically greater than 30%.  Don't confuse reputation for dominance.  Dominance means share.

Next week's post will discuss the Three Rs for moving beyond the beachhead niche into the mainstream market.

Raising Startup Money: PRODUCTS that CUSTOMERS will PAY for

Periodically, I get asked some variation of the following:  “What’s the best way for me to raise money for my startup?”  “How should I approach investors/angels/VCs for funding?”  “Can you introduce me to an angel/VC?”

My answers:  “Demonstrate that you have a product that customers will pay for.” “Demonstrate that you have a product that customers will pay for.”  And “have you demonstrated that you have a product that customers will pay for?” respectively.

This is usually followed by a short discourse on product/market fit, what constitutes a product, what constitutes a target customer, what constitutes a meaningful dollar commit, and why acceptance of free samples by customers is not substitute.  (I love free samples at Costco, but that doesn’t mean I’ll buy.)  Of course,  if you can’t get someone to take your product when you’re giving it away, there’s a learning opportunity embedded in there….

After today, I can now just say, read Steve Blank's blog post here: http://steveblank.com/2009/11/05/raising-money-with-customer-development/ . 

For those who may not be familiar with Steve Blank, he is the developer of the Customer Development methodology⁽¹⁾, a rapid, iterative, learning oriented feedback process by which minimally sufficient feature sets of increasing refinement are delivered to target customers for validation as defined by a sale or other dollar commitment.  It is analogous and complementary to the Agile methodologies used in software development.  At the end of the process, you have a (1) defined product (2) identified target customers and (3) idea of what they will pay validated by a P.O. or other dollar commit that can be used to help you raise money.

While particularly applicable to software development, Customer Development can also be applied to services and hardware products, although it is not a universal cure all.  What dictates the methodology’s applicability is the total cost (dollars, time, resources) of iterative prototype trials.  The cheaper the cost of trial, the faster the iteration cycle time, and the lower the consequence of failure, the greater the reasons for using Customer Development.

For example, because software can be rapidly and cheaply deployed in small functional chunks, not only can iterative cycles be turned around quickly, multiple “split tests” can be run concurrently.  And the consequence of failure is usually small. This greatly accelerates the learning and subsequent convergence of fit between product and customer.

However, in medical devices, for public safety reasons, the deployment of new products is highly regulated.  Validation time by the customer can be lengthy, and the consequences of failure much more severe.  This limits the number of prototype iterations which reduces the benefits of using this methodology.

Nevertheless, if you’re involved in technology commercialization and aren’t familiar with Customer Development, it would be well worth your while to become so. 

Want funding?  Think products that customers will pay for.

References:

(1) Blank, Steven, The Four Steps to the Epiphany, Cafepress.com, 2005.

Why Facebook is Lucky to Have Me as a Customer!

A couple of weeks ago, I opened a Facebook account and they should be thrilled!  Why?  Because I’m an Early Majority guy.

A what?  The term comes from the Diffusion of Innovations⁽¹⁾  theory popularized by Everett Rogers whereby individuals are categorized with respect to their willingness to adopt new ideas, technologies, and products as Innovators, Early Adopters, Early Majority, Late Majority, and Laggards.  Wikipedia has a nice diagram which juxtaposes the adoption curve with the growth in market share.

The diffusion of innovations according to Rogers. With successive groups of consumers adopting the new technology (shown in blue), its market share (yellow) will eventually reach the saturation level. Diagram from Wikipedia.

Now a lot of attention has been paid to the importance of Early Adopters in the successful commercialization of new technologies.  While Innovators have been both celebrated as true visionaries and derided as the bleeding edge, Early Adopters are universally acclaimed as the opinion leaders who can rocket a new product up the lifecycle curve.  They are the trendsetters to be courted like royalty by startups hoping to succeed.  And you absolutely do need them.

But look at the market share curve. Notice where the growth inflection point starts, with the Early Majority.  This is fast growth part of the product lifecycle where companies establish industry dominant share positions (or not).  This is where cash can really make a difference.  In other words, Early Adopters Get You In but Early Majority Gets You Scale.  And this is why my getting a Facebook account is such good news for them. (Make hay now guys!)

So I’ve been a technology commercialization guy for 20+ years; why am I not an Early Adopter?

I’m not a technophobe (I’m an ex-engineer) nor is it even the case that I’m never an Early Adopter.  I bought one of Apple’s first MacIntosh computers (128KB!), setup one of the first websites in my industry in 1993, have been using LinkedIn for over five years, and bought an iPhone in August, 2007 just after it stopped being necessary to mount an assault to get into an Apple store (ditto for the Wii).  On the other hand, I waited until late-2006 to download iTunes, a mere six generations after Apple launched the iPod, still don’t own a DVR, and Ashton Kutcher aside, I’m still not on Twitter.  It’s not about cost; after all setting up an iTunes or Twitter account is free. 

So what's the reason?  Pain of Adoption.

Pain of Adoption encompasses a number of a factors including price, learning curve, fear of the unknown, and time/effort to implement.  It can be a serious impediment to the commercialization of new technology or a powerful defense of adopted technology.

How serious?  Even the most trivial impediments can be enough.  For example, my twelve year old son just bought a new laptop and, having no money, happily loaded it with Open Office, a free, open source equivalent to MS Office.  Because it’s all new to him, the learning curve for the two programs is the same whereas the price tag is not.  Me?  I’ve been using MS Office for so long, that I can’t be bothered to learn the miniscule interface differences, so I pay.  Of course, every time Microsoft “improves” Office (which to me means nonsensical annoying changes to the interface for no apparent benefit) I seriously contemplate shifting back to a Mac (but more on this later).

We Early Majority types are sensitive to the pain of adoption.  Unlike Early Adopters, we don't want to play with your stuff;  we just want to use it.  For us to adopt your technology, we want to know that it’s going to be around long enough to make it worth our while to learn and that it’s robust enough that we won’t be spending all of our time getting it to work.

So what’s the message here?  If your startup is going to be successful bringing new technology to market, you need to bridge from the Early Adopters who got you started to the Early Majority who will scale your company.  Geoffrey Moore discusses this more than ably in his book Crossing the Chasm⁽²⁾.  But here are my five tips to overcoming the pain of adoption.

1.       Provide compelling value – Above I cited cases of my being an Early Adopter.  In actuality I was not.  What I had was pent up pain!  For example, juggling a cell phone, Palm Pilot, and laptop on long business trips was such a pain, that when the iPhone came out I was ready!

2.       Take away risk with a free trial -  Its easier to try something if there’s no out-of-pocket risk.  A money back guarantee isn’t good enough because of the hassle of recovering my money if I don't like it.  Give me enough trial time to invest in the learning curve and get hooked!

3.       Work with the learning curve – Give me basic functionality right away without having to resort to a manual or help files.  At this stage, a plethora of features is a negative.  Get me hooked first, then give me an easy upgrade path to me to pay for the enhanced features. (And if I don’t, that should tell you something….)

4.       Give me feedback that I’m doing it right – Using a web service example, think progress bar (good) versus spinning alarm clock (bad - is it working? hung? broken?)

5.       And finally, don’t upgrade the user interface unless there is some hugely compelling benefit for me (not you) -  Once I’ve gone down the learning curve, you now have the pain of adoption working for you.  Don’t give me an excuse to check out your competitor (see MS Office story above).

References:

1.       Rogers, Everett, Diffusion of Innovations, New York: Free Press, 1962.

2.       Moore, Geoffrey, Crossing the Chasm, New York: Harper Collins, 1991.

The Death of Sales and Marketing?

I recently heard the CEO of a fast rising, cloud computing “PaaS” (platform as a service) company declare that in his business today “cheap means no need for sales and marketing.” The gist of his argument was that the cloud + SaaS means that the price waterfall now starts at $0 which effectively eliminates the #1 obstacle to web services:  the pain of adoption.

Now this is not the first time I’ve heard the death of marketing proclaimed.  And normally, I would just ignore it.  But in this case,  the speaker happens to be a highly successful serial entrepreneur (certainly more succesful than me!) and pioneer in the SaaS space whose statement I can't just casually dismiss.

So to what degree is this true?

Now the answer partially depends on what you consider marketing.  To aid my thinking, I turned to what is incontrovertibly marketing and arguably the most basic of marketing frameworks:  the “4Ps” and its companion the “3Cs.”  For those unfamiliar with Marketing 101, the classic “4Ps” of the marketing mix are product, price, promotion, and place (or channel).  The “3Cs” are customer, competition, and company (although now I understand we are up to 7Cs).  Within each each element are sub-elements which when combined constitutes the firm’s marketing strategy.

For example, in the statement under consideration, “cheap” clearly refers to the price element of the marketing mix.  But does the fact that the price of trial is $0 trigger a paradigm shift?  Or does it just mean a substitution in the mix?

In this context, when I say “paradigm shift”, I mean a change to the basic assumptions that underly the rules of marketing, in the same ways that the physical laws that describe the behavior of water are different depending on whether one is describing water as a liquid or as a gas.

For example, prior to the web, because of the cost of deployment, economies of scale favored  centralized media channels (i.e. trade magazines, newspapers, TV and radio stations) where target customers knew where to go for “validated” information. When Mosaic was released in 1993 and the commercial World Wide Web was effectively born, companies were quick to recognize that websites were an alternative to print advertising where the cost of promotion effectively dropped to $0.  But this did nothing to shift the paradigm behind promotion.  The web was just a more cost effective substitute.

However, Web 1.0 reached a point where the exponential growth of information changed the key problem of promotion from one of messaging (push) to one of search (pull).  In this case, the magnitude increase in information changed the paradigm behind promotion in the same way heating water above its boiling point changes the rules describing its physical behavior.  Thus was born the industry epitomized by Google, search engine optimization (SEO), meta-tags, and all the other techniques now considered fundamental aspects of marketing.  Advertising, as a promotional vehicle, was officially declared dead⁽¹⁾.

(Incidentally, it’s worth noting that today in the Web 2.0 world, the fundamental marketing discipline of positioning has not gone away.  If anything, its importance has increased as the need to rise above the noise has increased, driven by the same exponential growth in information.  Branding, advertising, and PR firms are still around, and I don’t know about you, but for a dead media, advertising seems to pop-up with annoying regularity.)

But returning to the question about whether the price of trial being $0 eliminates the need for sales and marketing, back in the days of hardware, we called this the free sample.  One company I worked with regularly give away product with a retail price of $750 (but actual cost of $375) to customers.  The economics were compelling.  For the $40,000 cost of running a typical one year trade ad campaign, they could give away 105 base stations.  Each base station typically used $130/yr in consumables which the customer purchased.  This covered 1/3 of the free sample cost.  The follow on customer conversion rate was 60% and each converted customer typically purchased 5 additional stations plus consumables.  So over a 1 year period, for every $1 in trial cost, the company made $2  in revenue!  Obviously, they gave away free samples to anyone who wanted to try their product, right?

Absolutely not.

The program worked because it was only offered to a carefully targeted set of customers for whom trial was a prelude to a production facility conversion.  To get to the trial point, the company had developed a product that met the customer’s needs. They had to know where (place) to reach the customer, and they had to promote an awareness that they had what the customer wanted, not a competitor.  At this point, the free trial was highly effective at overcoming the pain of adoption.  (And the company also ran the trade ad campaign.)

So for the PaaS company, I have no doubt that giving away their service is highly effective, especially with a cost of delivery that probably is close to zero.  But I also notice that the company promotes two distinct product/price offerings via a website, PR releases, a blog, and sponsored links on Google keyed to search terms which may or may not have been optimized by an SEO vendor.  Oh, they also have a VP of Marketing and a VP of Sales.

Sounds like marketing to me.

References

(1)  Oliver, Richard W., “The Death of Advertising,” Journal of Advertising (1994).