This series of posts of the “Customer Development Manifesto” describes how the failures of the Product Development model for sales and marketing led to the Customer Development Model. In future posts I’ll describe how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.
13. Not All Startups Are Alike
There’s an urban legend that Eskimos-Aleuts have more words to describe snow than other cultures. While that’s not true, it is a fact that entrepreneurs only have one word for “startup.” This post points out that the lack of adequate words to describe very different “types” of startups can lead not only to confusion in execution but also at times to disaster.
The product development model treats all startups like they are in an Existing Market – an established market with known customers. With that implicit assumption, startups hire a VP of Sales with a great rolodex and call on established mainstream companies while marketing creates a brand and buzz to create demand and drive it into the sales channel (web, direct salesforce, etc.)
Most startups following the Product Development Model never achieve their revenue plan and burn through a ton of cash not knowing what hit them.
They never understood Market Type.
Why does Market Type matter?
Depending on the type of market it enters, a startup can have very different rates of customer adoption and acceptance and their sales and marketing strategies would be dramatically different. Even more serious, startups can have radically different cash needs. A startup in a New Market (enabling customers to do something they never could before,) might be unprofitable for 5 or more years, (hopefully with the traditional hockey stick revenue curve,) while one in an Existing Market might be generating cash in 12-18 months.
Handspring in a Existing Market
As an example, imagine it’s October 1999 and you are Donna Dubinsky the CEO of a feisty new startup, Handspring, entering the billion dollar Personal Digital Assistant (PDA) market. Other companies in the 1999 PDA market were Palm, the original innovator, as well Microsoft and Hewlett Packard. In October 1999 Donna told her VP of Sales, “In the next 12 months I want Handspring to win 10% of the Personal Digital Assistant market.” The VP of Sales swallowed hard and turned to the VP of Marketing and said, “I need you to take end user demand away from our competitors and drive it into our sales channel.” The VP of Marketing looked at all the other PDAs on the market and differentiated Handspring’s product by emphasizing its superior expandability and performance. End result? After twelve months Handspring’s revenue was $170 million. This was possible because in 2000, Donna and Handspring were in an Existing Market. Handspring’s customers understood what a Personal Digital Assistant was. Handspring did not have to educate them about the market. They just need to persuade customers why their new product was better than the competition – and they did it brilliantly.
Palm in a New Market
What makes this example really interesting is this: rewind the story 4 years earlier to 1996. Before Handspring, Donna and her team had founded Palm Computing, the pioneer in Personal Digital Assistants. Before Palm arrived on the scene, the Personal Digital Assistant market did not exist. (A few failed science experiments like Apple’s Newton had come and gone.) But imagine if Donna had turned to her VP of Sales at Palm in 1996 and said, “I want to get 10% of the Personal Digital Assistant market by the end of our first year.” Her VP of Sales might had turned to the VP of Marketing and said, “I want you to drive end user demand from our competitors into our sales channel.” The VP of Marketing might have said, “Let’s tell everyone about how fast the Palm Personal Digital Assistant is and how much memory it has.” If they had done this, there would have been zero dollars in sales. In 1996 no potential customer had even heard of a Personal Digital Assistant. Since no one knew what a PDA could do, there was no latent demand from end users, and emphasizing its technical features would have been irrelevant. What Palm needed to do first was to educate potential customers about what a PDA could do for them. In 1996 Palm was selling a product that allowed users to do something they couldn’t do before. In essence, Palm created a New Market. In contrast, in 2000 Handspring entered an Existing Market. (“Disruptive” and “sustaining” innovations, eloquently described by Clayton Christensen, are another way to describe new and existing Market Types.)
The lesson is that even with essentially identical products and team, Handspring would have failed if it had used the same sales and marketing strategy that Palm had used so successfully. And the converse is true; Palm would have failed, burning through all their cash, using Handspring’s strategy. Market Type changes everything.
Market Type Changes Everything
Here’s the point. Market Type changes how you evaluate customer needs, customer adoption rate, how the customer understands his needs and how you should position the product to the customer. Market Type also affects the market size as well as how you launch the product into the market. As a result different market types require dramatically different sales and marketing strategies.
As a result, the standard product development model is not only useless, it is dangerous. It tells the finance, marketing and sales teams nothing about how to uniquely market and sell in each type of startup, nor how to predict the resources needed for success.
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Next: Part 5 of the Customer Development Manifesto – why your goals and those of your venture investors may not be the same – the last post on what’s broken in the Product Development Model.
Filed under: Customer Development, Customer Development Manifesto, Market Types | Tagged: Customer Development
Steve,
Thanks for these posts; they are really helping me in getting our CEO to understand the importance of getting outside the building.
A couple of quick questions:
1.) It seems that sometimes an existing market undergoes a change so discontinuous that it is almost a “new market” exercise (the WalkMan was here well before the iPod, for instance). Is there some defining factor that easily distinguishes the difference?
2.) When talking to prospective customers during customer development, what methods do you recommend for not biasing their responses through your queries? I think a lot of entrepreneurs speak with such enthusiasm about thier own ideas that they may inadvertently illicit invalid responses.
Thanks!
KC
Ken,
1. The existing/new distinctions for me have been:
- have customers heard about this market? can I compare it to existing products along some axis and win?
- do customers understand how they would use/or need this product? (how long does adoption take – instant or long term education.)
- do I have to “push” the product into the market via education and evangelism?
- or will customers get it and will they “pull” it from me if I position it next to existing suppliers
Sometimes you invent something that is truly new and you have to slog through the adoption process. The mistake I used to make is deciding to position a product as “new” when resegmented made more sense. (I liked the fact that in New I had no competition.) No one will stop you when you do this, it just means you need a much larger marketing budget than if you are in an existing market or are resegmenting an existing market. It may be better to position as existing or resegmented. This is all about strategy.
2. What I remind my students is that in Customer Discovery you leave your slide deck at home. You leave the building (physically or virtually) and are out testing hypotheses – extremely difficult for a passionate entrepreneur.
steve
There’s a fun corollary to this: If you’re creating a new market, you WANT competitors, because they’ll share the cost of educating your target market. If you’re lucky, you can ride in their slipstream and let them do all the work.
In 1989, if we wanted people to join AOL, we had to first explain what a modem was, and bulletin boards, and e-mail. In 1991, it was easier: “You know Prodigy? Like that, but better”. What made it so easy? Prodigy spent $50 million on advertising and in-store displays.
Oh, and the really fun part: When you’re in a new market, your competitors may not realize they’re your competitors. For the first few years, one prominent Prodigy advertiser was America Online.
Steve,
Your definition of a New Market has always been confusing to me and your previous comment is highlighting my confusion. You say it is “enabling customers to do something they never could before.”
I think a better definition of a New Market is “enabling customers to do an existing job with a new product”.
1. What’s an “existing job”?
Customers want to do a “job”. And Christensen taught us that trying to get customers to embrace new jobs is an “uphill death march through knee-deep mud.” Customers very rarely adopt new jobs.
Customers have a job of communicating with their kids and they’ve used Facebook, cell phones, land lines, telegrams, and horses to do it. Cell phones didn’t let customers “do something they never could before.” They could always communicate with their kids.
2. What’s a “new product”?
A cell phone was a new product that let customers do an existing job. It wasn’t a better version of an existing product. It wasn’t a cheaper or niche version of an existing product. It was a new product.
Perhaps you can determine whether a product is new by asking customers to name the competition. If they can’t name anything, you’ve got a new product that you can position in a new market (or in non-new market by comparing your product to substitutes (there are no direct competitors in this case)).
What do you think?
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