SuperMac War Story 5: Strategy versus Relentless Tactical Execution — the Potrero Benchmarks

A few months into my tenure as the VP of Marketing, we now understood who our customers were.  We had thought really hard about “market type” and decided to reposition the company from a technology provider to a solutions provider. Now we needed to put the tactical programs in place to make this repositioning strategy happen. 74HGZA3MZ6SV

Just as an aside, over my career I must have interviewed scores of business school graduates (some from the very fine universities where I now teach) who would say, “I want to do strategy.”  Well yes, I understand that, but this is a startup, what else do you want to do?  “I just want to do strategy.”  Those were very short interviews.  The “strategy” of learning who SuperMac’s customers were, what solutions they needed and what our repositioning would be was a three month effort.

The tactical execution took three years.

Note, if you want to do “strategy” (which is a fine endeavor) and nothing else, you have just defined your career as one in large corporation or in a consulting firm.  Stay out of startups.  Tactics mean tenacious and relentless execution measured in years.

Metrics – Mine is Bigger Than Yours

The first thing SuperMac needed to do was to change how our potential color desktop publishing customers viewed our products versus our competitors’ products.  Over the years marketers have found that using numbers to compare yourself to other products works well.  We’ve all seen ads that say, “Now 30% more” or “Marked down 50%” or “5 times faster.”  As hokey as it is, when confronted with uncertainty or unknowns, human beings like to be reassured by comparative metrics.  But hardware metrics typically focused on raw speed and performance.  The key insight we had was that it wasn’t about raw speed − it was the speed of the applications that customers were using to get their work done.

Believe it or not, until that moment, there were no commonly agreed upon ways to measure the performance of graphics boards on real world applications.

So I was going to give our customers metrics neither they or anyone else had ever seen before.

First, by talking about solutions rather than hardware, we changed the way customers thought about graphics boards.  Now we were going to change the metrics that customers and the press used to evaluate product performance.

Objects in Our Mirror are Larger than they Appear

Our first goal was to set up benchmarks to measure the performance of our own graphics boards on the real applications our customers used (Photoshop, Quark, Illustrator and PageMaker.)  Then we were going to buy our competitors’ boards (think “secret shopper”) and compare them to ours.

Since no benchmarks existed, we enlisted our engineering department in a serious software development effort and wrote our own.  And we made sure that instead of some artificial numbers, the benchmarks truly measured performance on these four key applications our customers told us were important.  Then we ran the same benchmarks against our competitors’ boards.  When we found a subset of the tests on which we did worse than our competition, we … hmm, somehow that never happened.  The numbers were in.  We won.  Overwhelmingly. (What a surprise.) Any customer who used the four critical color publishing applications was going to be blown away by how much better the SuperMac boards were.

Finally, since no one would believe a set of benchmarks named after our company, we needed a façade of independence, so we named them after the street the company was headquartered on in Sunnyvale California – they became known as the Potrero Benchmarks.

Tell Me How to Find You

But having benchmarks in hand that showed us as the winner did us no good unless all our potential customers could see them.  Our first thought was to spread the news ourselves, perhaps in a press release or a “white paper,” (remember this was pre-Internet.)  But upon reflection I remembered that in our interviews with our existing customers they had told us how to get the news to them.  That told us which publications they relied on for news about graphics boards: the three publications that mattered, MacWorld, MacUser and MacWeek became marketing’s highest priority.  Inside the covers of these publications our customers had said that it was the product reviews that most influenced their buying decisions.  That by itself was a sobering challenge since our company had never come in first in any of the previous 14 reviews of graphics products that had been written to date.

Now this is worth stopping and thinking about for a second. We figured out how to reach our customers (through these three publications) because they told us how to do so. We figured out what was the most important criteria they used to evaluate which board to buy – product reviews – again because they told us how to do so.  These were two of the questions I had asked on purpose when we first did the initial customer surveys. Some of my staff had believed we were gathering extraneous customer data.  “Hey, we can make these surveys shorter.  We don’t need to know all this stuff.”  Yes you do.  You need to know the day-in-the-life of the customer.  From top to bottom. If you’re constantly correlating data and searching for patterns, all intelligence if properly integrated will give you insight.

The Chase

Then we began an educational blitz of these three critical publications.  We set up a series of meetings with the editor-in chiefs and the key writers who reviewed graphics products.  We had one story to tell and surprisingly it wasn’t about our company or our product.  It was an educational mission to tell the story of who our customers were (and by inference who all the graphics board customers were) and why the current reviews of these graphics boards weren’t adequately measuring what was important to this large market.

(Now as VP of Marketing, I could have sat back and let my PR agency handle the press.  Theoretically, that’s why I hired them.  But these meetings were life and death in our struggle for market share.  You don’t delegate life and death. The head of the PR agency agreed that we would work together as a team.  We both met often and went to all of the press meetings together.)

Why did we believe that these magazines would care?  At the time desktop publishing was one of the mainstays of the Macintosh market, and therefore the readership of these magazines reflected the demographics of the Mac.  For these magazines to find out that they didn’t truly understand what their customers cared about got their full attention.

I knew with a high probability before the meeting started what the end of the meeting would be like since there was no other way to go.  My staff didn’t believe it when I told them it would happen this way, but in meetings with all three magazines they said, “Ok, you convinced us these four applications are critical for the color publishing market, but how can we measure the performance of these applications?”

The Trojan Horse

“Well…” I said hesitantly, “I’m not sure we should share this with you but we have a set of benchmarks that we use to measure performance….” You can imagine the rest of the conversation; my sounding reluctant to let our own tests outside our building, the magazines begging us to let them have them, and finally a deal gets struck where we let the benchmarks out to the test labs of these magazines under their own name “The Potrero Benchmark Suite” without attribution to us.

Our benchmark had just become the standard test suite for all magazine reviews that our potential customers would read.  Our benchmarks, which were tuned for our boards, had just become the standard test suite for all our competitors’ graphics boards.

Relentless Execution

Once the education and benchmarks were in place, we then worked with each magazine writer as their product review deadline approached.  We provided customer references and testimonials supporting the key features we were promoting.  Focused on winning these reviews, I left nothing to chance.  My rule was no magazine could review our boards without us present.  The magazines’ rules were that no company could be in their labs when they reviewed the boards.  So we would always wait to the last minute to provide our boards for testing and then “forget” to ship the cables to connect the board to a computer monitor.  When the panicked manager of the magazine test lab would call under a last minute deadline, we would apologize profusely as we sent the cables over – with beer, pizza, and our product manager to help them through any testing “issues”.

My PR agency, my head of marketing communications and I set up a wall-sized chart (in my office where I had to close my eyes not to see it) of the editorial calendars of these publications. We listed the editors, writers, what they had previously had written, deadlines, what the competitive products were, how our benchmarks stacked up, what “upgrades” our boards needed from engineering to win, etc.  This was upfront and center for anyone who walked into my office could see what I thought was important.

In parallel, we educated the rest of our own company how essential winning these product reviews were to our customer and our financial success. What used to be an exercise in teeth-pulling frustration to get help from our own manufacturing or engineering departments turned into a well-oiled process as everyone stopped what they were doing to help us win.

None of this was an accident.  It was all part of a strategy.  But its successful execution would take a focused set of tactics and a great group of marketers working with me.  And I now had both.

From a company that never won a benchmark review with its graphics boards, we want on to win twenty-one of them in a row.  It was two and a half years before our competitors even realized that the Potrero benchmarks and SuperMac having its building on Potrero Street had any connection.

By then it was too late.

Our market share was starting to climb.

And we were just getting started.

What did I learn so far?
• Strategy points you to the goal
• Relentless tactical execution gets you to the goal
• Keep the tactics simple and focused
• Tactical execution needs to be managed at the highest level – you can’t delegate success in a startup

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SuperMac War Story 4: Repositioning SuperMac – “Market Type” at Work

With insight into our customers, the first part of our strategy was to understand what kind of positioning problem we had.  Was SuperMac attempting to introduce radically new products and create a new market?  No, not really. 74HGZA3MZ6SV

Was the company attempting to be a low cost provider by introducing cheaper products to an existing market?  While we sometimes cut the price of graphics boards, it was only because we offered our customers no compelling reasons to buy one that was priced equivalently to the market share leaders.  And we lost money when we did so.  Therefore, no, we weren’t really equipped to be the low cost provider.

Was the company attempting to introduce faster and better products to an existing market?  On first glance this was exactly what we were trying to do. But with a little bit of thought it struck us that if we attempted to do that, our competitors had a pretty substantial advantage, since they held nearly 90% of combined market share.  If we tried to match them on their playing field we’d never catch up.  They had more than enough dollars to outspend and out market us.

We knew from back-of-the-envelope calculations that I would need 3 times the combined marketing and sales budgets of the incumbents for a head-on assault. (I had found that the numbers 1.7x and 3x kept coming up time and again in attacker/defender ratios when I gamed out our market entry strategies.  It wasn’t until I found the extremely obscure Lanchester Strategy for market share that I realized that these ratios had their basis in operations research and the Lanchester’s Laws.)

So if we couldn’t be new, cheaper or attack our competitors head-on, what was left?  The real answer seemed to lie in attempting something a bit more difficult.  We needed to redefine or resegment the playing field (the existing graphics board market) so it favored us.  We needed to negate our competitors’ existing advantages and hopefully turn their strengths into weaknesses.

market-type

When we looked at the color graphics board market, our competitors had defined the market as one measured by technical metrics: screen resolution, number of bits of color, screen refresh rates, acceleration, etc.  We had been attempting to compete by their rules with the same types of technology messages.  I had a marketing department spending $4m a year trying to do so against competitors spending $20M year. The 3:1 Lanchester Laws said I would need $60M in marketing and sales spending to win.  I didn’t have it, wasn’t going to get it, and we needed to stop thinking that our path to success was just to “try harder.”

We needed to come up with a playbook with completely new rules, then execute relentlessly and with urgency. Up until now all the graphics board companies supplied “technology”, and it was up to the customers to figure out which of these arcane specs was best for their business.  Our first radical move was to redefine the market from SuperMac a company that sold graphics boards, into SuperMac a company that provided desktop publishing professionals with better color publishing tools.  We were going to be the leading supplier of color publishing solutions for the Macintosh. Our strategy was to resegment a hardware business − the graphics board and monitor market − into a desktop color publishing market.

To say this was a radical notion at first was an understatement.  I lost several very good product marketing people who couldn’t/wouldn’t get it, or who couldn’t/wouldn’t move with the urgency I needed.  But an 11% market share company wasn’t one I wanted to work in.  We were gearing up to go from status quo to relentless and continuous execution, and everyone needed to be on the same team.

Next, we needed to focus our messages away from technology and onto what the customers told us they needed – performance solutions for four key publishing applications.  Our company’s graphics boards were designed to speed up a key part of the Macintosh graphics operating system called QuickDraw.  All the marketing materials, data sheets, advertising, press releases, trade shows, etc. focused on the technical fact that we accelerated (made much faster) this arcane piece of computer code.  Technically our positioning was correct, and with an infinite marketing budget (my back of the envelope calculations said $60M) and time, we might have made this technical fact (QuickDraw acceleration) something a customer understood and cared about.  But we didn’t have infinite cash; we had just emerged from bankruptcy, and unless we could get customers to quickly understand why our products were great, we were headed there again.  Yet the customers not only had told us who they were – color desktop publishers – but what they cared most about – graphics performance when running their four key applications.

It didn’t take much imagination to realize that what we had to do was to tell our story around one key metric performance − performance for color publishing, performance on the applications that mattered.  And paradoxically we had to raise our prices.  Why?  Because if we were going to be the high performance color graphics company, we were going to have to stop competing on price and start building a perception of a high-value, high performance color solutions company.  Customers had already given us permission to do this, when they said they were price insensitive.

Now we needed to act.

What did I learn so far?

  • Deep and detailed understanding of the customer is the only way you can understand your “Market Type” choices
  • Market Type choice drives Positioning/differentiation strategy
  • Positioning/differentiation drives communications strategy
  • If you are resgementing into a niche in an existing market make sure it’s into a space that customers care passionately about and will pay for

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Watch This Space

I am going to post on Mondays and Thursdays – at least until I run out of war stories. Posts are going to be a mix of topics: entrepreneurship, secret history and conservation. I’ll try to mix the topics up during the week. BTW, keep the comments coming, they’re read and appreciated.

SuperMac War Story 3: Customer Insight Is Everyone’s Job

After my first month we knew a lot, we knew more about our customers than anyone in the company.  In this one month we had learned more about desktop publishing on the Mac than any one of our competitors.  Now the question was what to do with it.  First I need to make sure what we really learned was information we could base a company strategy on. 74HGZA3MZ6SV

Our first question was, did the total number of customers that had already bought products from our competitors and us represent a saturated market or the tip of the iceberg?  In other words what was the Total Available Market (TAM) and how much of the market had been already served?  Since our competitors were also small privately held companies, none of their data was readily available.

But we knew something they didn’t; the total available market for color graphics boards was measurable by looking at an adjacent market, the color desktop publishing software market.  As it happened there were quite a few industry analysts following software companies like Adobe, Aldus, and Quark, who happened to be the suppliers of the four key applications our customers said they used.  These analysts not only told us that the market had plenty of room to grow, they took an interest in us, since we were going to be a hardware company going after this growing market.

Since I was heading a marketing department, not acting as an individual contributor, I needed to teach all of marketing the importance of customer data.  First, I presented what I had learned.  You could sense the skepticism in my staff meeting as I described what I found.  But no one was prepared when I said, “These facts are now old, but since we are going to be changing customer perceptions we need to get new customer data weekly.  All of you are now part of the customer discovery collection team.”  Then I handed out the questionnaire to all of marketing and made two customer calls a week mandatory for everyone, including my secretary.  At first people couldn’t believe they were actually going to have to call a customer.  Some took cajoling to make the calls, other took me sitting by their elbow, but eventually everyone started dialing.  The first part of my weekly department staff meeting was dedicated to hearing everyone going around the room and talking about their customers.

Within a month the change inside the marketing department was palpable.  Customers were no longer some theoretical entities that existed only in data sheets, they were real people you talked to, understood, and connected with.  Soon marketing was talking about the needs of our customers with first-hand knowledge, passion, and conviction.  And without knowing it, the quality of marketing department’s work changed.  Instead of spec’s and technical features, our literature and interaction with customers shifted to how we could solve their problems.

Within a year we had called over 1,000 customers, and every year after that another 1,000.  Marketing, which had been unsure or unaware of what their jobs, were now had weekly reinforcement of who they were selling to and became a formidable force in the Macintosh graphics market.

Now we could execute a relentless come-from-behind strategy off of the information we had learned and discovered from our customers.  Now what was the strategy?

What did I learn so far?

  • Facts are the rock on which you build your strategy and tactics
  • In a startup second-hand facts are almost as useless as opinions.  Decision makers need to hear the facts first hand

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SuperMac War Story 2: Facts Exist Outside the Building, Opinions Reside Within – So Get the Hell Outside the Building

A week before I started I got inkling of really how deep I was in.  While I was waiting in the lobby to pick up my offer letter, the head of marketing communications (who was to be one of my direct reports) came up to me as I held my just signed employment agreement.  She said, “Oh I’m glad you’re coming, and I wanted to grab you before you started because we need to resolve the company’s biggest marketing problem.”  I was impressed; this was something so important that she couldn’t wait for my first day.  Was she going to propose a coherent communications strategy?  An in-depth reseller survey?  Or offer some real insights into our customers?   No.  “We need to decide immediately between which version of the new logo to use.”  Ignoring my dropping jaw, she pointed out the key differences in the Pantone colors between what appeared to me to be the two indistinguishable alternatives.

supermac-logoAs her description receded to background noise it dawned on me that the color of the logo seemed to be the size of the marketing communications department’s universe.  It wasn’t a lack of competence or skill in her job; it was just that as far as she was concerned, her job had no connection to the rest of marketing, our customers or our ultimate success as a company.  “We need your decision now because we are about to spend $50,000 on new collateral.”

Coming out of the fog at the sound of serious dollars about to be spent, I politely suggested that the new collateral was on-hold, and we were going to spend the first few weeks of my tenure trying to understand who our customers were, and what we wanted to say to them.  And I hadn’t even started work yet.

My first day at work I found myself staring at a set of marketing faces, mostly holdovers from the previous version of the company that had gone belly up, some were bright and eager, some clearly hostile.  “OK, let’s start with the basics, who does marketing think our customers are?”  We went around the room and every one of them had an opinion. Unfortunately, all their answers were different.

By now, nothing surprised me. This was a company that had sold 15,000 graphics boards and monitors to consumers.  A large number of these customers had mailed back their registration cards (this was pre-Internet) with their names, phone numbers, job titles, etc.  So I asked the fatal question, “Has anyone ever looked at the customer registration cards?  Has anyone ever spoken to a customer?”  Silence.  Most just stared at me like the question was incomprehensible.  The one or two product mangers who should have known better glanced down at their shoes.  Then someone asked, “Well, who do you think our customers are?”  Ah, a leading question.  I said, “I don’t know. And if I tell you what I think we’ll just have one more uninformed opinion.  But what we need right now is some facts.  Does anyone know where the registration cards that the customers sent back are?”

Why did I ask these questions?  As a company with a past history, the company had a massive advantage over a typical startup – it had customers.  Normally in a startup you spend an inordinate amount of time and energy in Customer Discovery and Customer Validation.  Yet here was a “restart” with over 15,000 customers who by putting their money on the table had personally validated the market.  Now I was cognizant I might find a customers that hated the products or company.  Or I might have found that the company was in a business that wasn’t profitable and no way to get profitable (which I had concluded was the case with their commodity disk drive business.)  But this was an opportunity that needed to start with customer facts, and I was going to get them.

Twenty minutes later a cart rolls into my office with 10,000 unprocessed, unlooked at, and untouched registration cards.  All with names, addresses, phone numbers, job titles; all wonderful data longing for human contact.

Customer survey

Three hours later I had made up a three-page customer questionnaire.  I wanted to know some simple and not so simple things about our customers.  The obvious one’s were who were they?  What did they do that they needed an expensive color graphics card?  If you believed the opinions in the marketing department, the customers were in science, engineering, color desktop publishing, and a variety of applications with no single industry or application dominating the list.  I wanted to know the facts.

Within these applications how did our customers spend their day?  Were our products a small part of their life or large? And since the card was useless without any application software, what other software products did they use on it?  How important was the card to them getting their own job done?  What was the most important attribute about our graphics cards and monitors that made them buy it?  And by the way since we sold both the graphics card and a big screen color monitor did they buy both from us?  Did their choice of the card affect the choice of who they bought the monitor from or vice versa?

I also wanted to know if the marketing our company had been doing to date was effective.  So I asked a set of questions about how customers had heard about our company.  Do they know anything about us?  What did they think we stood for?  What did they know about our products?  If they had they heard anything about us where did they hear it?

I also wanted to know who our existing customers thought we competed with.  While I could have told them, it was more valuable hearing their perspective. Had they heard about our competitors and their products?  If so, where?  Who did they think were the leaders in the color graphics board and monitor market?  Why?  What did they think the leaders most important attributes were?

Since this was the marketing department, I was going to be planning to spend some advertising and public relations dollars.  It would be great to know how they got news and information about new products and new companies.  What magazines did they read?  What reviews did they trust?  Did they attend trade shows?  Which ones?   Had they seen any our ads?  Did they understand them?  Had they read any stories about us?  I wanted to know if marketing was getting any bang-for-the-buck in spending its demand creation dollars.

I wanted to understand how customers bought our products.  I knew we were selling through a multi-level indirect sales channel.  That’s a mouthful to say that our sales people didn’t sell our products directly to a customer.  Instead they managed rep firms (independent sales companies that carried multiple, non-competing products) that called on computer resellers that sold to the customers.  Since we weren’t talking to our customers directly I wanted to know if the message we were giving our sales people were coming out the other end. Kind of like the game of telephone you played as a kid.  You started a message on one side of a long line of people and passed it on, one-to-another until it came out the other end.  The result is usually hilarious.  The ending message sounds nothing like the one you started.  Market messages to indirect sales channels are just like that.  What I wanted to know is what kind of reseller did they buy from?  What product did they go into the store thinking they were going to buy?  Was it the same one they left with?

Finally, I also wanted to understand the resellers themselves.  These were the people who had the face-to-face interaction with our customers.  What did they think about our company?  Our products?  Was our compensation program good, great?  Were they making enough money with us?  Who did they think were buying our products?  Who did they think our competitors were?

Hypothesis to test

After writing up the questionnaire, and before I called the customers, I wrote a one page summary of who I thought the customers were, what markets they were in, how and why they bought, etc.  I was curious to see how close to my hypothesis the actual customer answers would be.

At the end I had a three-page questionnaire that I timed in a practice session with one of my marketing people.  I could get it done in twenty minutes.  Now the question was would anyone care to give me those twenty minutes.

With the questionnaire written I turned and stared at the cart full of registration cards.  They were in shoeboxes arranged by month and year they were received.  I figured that the newer ones were more relevant than those sent in years ago.  I took a deep breath and plunged in.  I grabbed 500 of the most recent cards, which were from the last four months, and I started calling.  Quite honestly since few customers ever get “hi, how are you doing calls” directly from an executive at the company who sold them a product, I didn’t know what to expect.  Would anyone take my call, would I get hung up on, would they answer this long list of questions?

Three hours and ten customers later I was beginning to feel like this would work.  It had taken about two registration cards to get one customer on the line.  And out of those, 9 out of 10 were happy to talk to me.  Actually happy is the wrong word.  Stunned was more like it.  They had never had anyone from any company, let alone a computer company call and ask them anything.  Then when I told them I was actually the VP of Marketing they were flabbergasted.   They were happy to give me everything I asked for and more.  And then to their surprise I offered them either a SuperMac coffee cup or T-shirt for their troubles. Now I had happy and surprised customers walking around with paid advertising for my company.

For the next three weeks I spent 8 hours a day calling customers and another 6 hours a day managing my new department.  I’m sure the CEO thought I was crazy.  But after three weeks and three hundred customer calls I was done.  I had been to the mountaintop and had gotten the message.

 Here’s what I found.

  1. Market segment: While the company did have customers in a wide range of industries and businesses, the actual users were in a (then) new and emerging segment called color desktop publishing.
  2. 80%: In fact, over 80% of the customers who turned in their reg cards were in this group.  This was a real eye-opener.  No one in our company knew this.  Now we could stop guessing about who our customers were.  We could even go further and talk about how they worked and what they needed to be successful in their jobs.
  3. Key applications: At the time color desktop publishing customers used only four key applications: Page layout programs called Quark and PageMaker, a photo manipulation package called Photoshop, and a drawing program called Illustrator.  These were big ungainly applications and on the computers of the day, very slow in manipulating large color files.  (The dependence on these applications was another new and important fact for our company.)
  4. Performance: What these customers cared about more than anything was graphics performance in these four key applications.  And by more than anything, I mean that the word performance came up time and again from these professionals.  Waiting for images to move around the screen were not only driving them crazy, but costing them money.
  5. Performance over price: In fact, for over half of these customers performance was even more important than price!  (If you haven’t stopped reading, please do so.  To find a customer who says anything is more important than price is the Holy Grail for a marketer.  Few times in his/her life will they find such a market.)
  6. Purchase driver: The color publishing customers were making their purchase based on the features of the graphics board, but they were buying the color monitor from whoever sold them the board.  That is none of the features of the monitor seemed to matter, it was the board that drove the monitor sale.  So much for all our efforts to promote our monitor features.  (What it meant is that instead of dividing our marketing budget, dollars and resources, we could focus all our energy in promoting the graphics board and let its sale pull the monitor with it.)
  7. Three publications: In our market there were a myriad of magazines to read.  Yet our customers said they got their company and product information from only three publications: MacWorld, MacUser and MacWeek.  They said the product reviews in these publications were by far the biggest influence on which card to buy.   (This made our PR problem manageable and focused.  Now we knew what was a make-or-break publication and review and what we could pass on if we didn’t have the time or resources.)
  8. Two trade shows: Customers who had bought our products only went to two trade shows (if they went to any at all): MacWorld, the general Mac trade show, and if they were true publishing professionals, perhaps the Seybold Publishing conference.  (Learning this meant that instead of attending every possible Macintosh tradeshow we now knew we only had to look like the biggest and best in two.)
  9. The bad news: That was the good news.  The bad news is when I asked what had they heard about SuperMac, I got a litany of stories about the company going out of business, about how their dealers complained that they owed lots of money and that our ads were incomprehensible.  More importantly, no one knew what business the company was in.  “Aren’t you the cheap disk drive company?” This information coming from someone who had already bought our graphics boards.  Gulp.
  10. Worse news: The worst news was that more than half of our customers had gone into their dealers to buy another brand of graphics board.  And it had been the dealers who had convinced them to buy ours.  (As we found out when we interviewed our dealers, our sales department was using extra commission payments – called Spif’s – to incentivize the channel to move our product.)  The good news was that the Spif strategy was working; the bad news is that it was costing the company our entire profit.  We were losing money on every board we sold.
  11. The worst news: The worse news was what wasn’t said, less than 10% of our existing customers bought because of some proactive marketing campaign.  No one remembered our ads, saw our reviews or had read a positive article about us.  Yet outside my office door was a mass of people who thought they were in the marketing department and had honestly believed they were contributing to the success of the company.  Spending $4 million/year on marketing

After three weeks I stopped the customer survey when I started hearing the same stories again and again.  Looking at the customer data I realized there were some potential “gotchas”:

  • This was a survey of those who had already bought product from us.  Those who didn’t buy from us might have completely different characteristics
  • This survey could only reach those who sent back their registration cards.  Those who didn’t might be different.

As it turned out, large companies that bought graphics card for their publishing departments didn’t always send registration cards back, so my survey was skewed to smaller groups.

What did I learn so far?

  • Organize questions about customers, channel and market
  • Build a series of your own hypothesis about each area
  • Test the hypothesis with real customers

Download the podcast here

There’s a Pattern Here

After my eighth and likely final startup, E.piphany, sitting in a ski cabin, it became clear that there is a better a way to manage startups. Joseph Campbell’s insight of the repeatable patterns in mythology is equally applicable to building a successful startup. All startups (whether a new division inside a larger corporation or in the canonical garage) follow similar patterns—a series of steps which, when followed, can eliminate a lot of the early wandering in the dark. Looking back on startups that have thrived reflect this pattern again and again and again.

So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups are not small versions of large companies.  Yet the processes that early-stage companies were using were identical to that of large corporations. In hindsight it appeared clear that startups that survive the first few tough years do not follow the traditional product-centric launch model espoused by product managers or the venture capital community. Through trial and error, hiring and firing, successful startups all invented a parallel process to product development. In particular, the winners invent and live by a process of customer learning and discovery. It’s a process that doesn’t exist in large companies with existing customers and markets.  But it is life and death for a new venture.

I call this process “Customer Development,” a sibling to “Product Development,” and each and every startup that succeeds recapitulates it, knowingly or not.

The “Customer Development” model is a paradox because it is followed by successful startups, yet articulated by no one.  Its basic propositions are the antithesis of common wisdom yet they are followed by those who succeed.

It is the path that is hidden in plain sight.

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Out of the Ashes – Something Isn’t Quite Right

“Customer Development” was born four years earlier and 200 miles away on Sandhill Road.  I was between my 7th and 8th and final startup; licking my wounds from Rocket Science, the company I had cratered as my first and last attempt as a startup CEO. I was consulting for the two venture capital firms who between them put $12 million into my last failed startup. (My mother kept asking if they were going to make me pay the money back. When I told her they not only didn’t want it back, but were trying to see if they could give me more for my next company, she paused for a long while and then said in a very Russian accent, “Only in America are the streets paved with gold.”  It was a long way from Ellis Island.) Both venture firms sought my advice for their portfolio companies. Surprisingly, I enjoyed seeing other startups from an outsider’s perspective. To everyone’s delight (and my surprise,) I usually could quickly see what needed to be fixed. At about the same time, two newer companies asked me to join their boards.  Between the board work and the consulting, I enjoyed my first-ever corporate “out-of-body experience.”

No longer personally involved, I became a dispassionate observer. From this new vantage point I began to detect something deeper than I had ever seen before: there seemed to be a pattern in the midst of the chaos. Arguments that I had heard at my own startups seem to be repeated at others. The same issues arose time and again: big company management styles versus entrepreneurs wanting to shoot from the hip, founders versus professional managers, engineering versus marketing, marketing versus sales, missed schedule issues, sales missing the plan, running out of money, raising new money. I began to gain an appreciation of how world-class venture capitalists develop pattern recognition for these common types of problems. “Oh yes, company X, they’re having problem 343. Here are the six likely ways that it will resolve, with these probabilities.” No one was actually quite that good, but some VCs had “golden guts” for these kinds of operating issues.

Yet something in the back of my mind bothered me. If great venture capitalists could recognize and sometimes predict the types of problems that were occurring, didn’t that mean that the problems were structural rather than endemic? Wasn’t something fundamentally wrong with the way everyone organizes and manages startups? Wasn’t it possible that the problems in every startup were somehow self-inflicted and could be ameliorated with a different structure? Yet when I talked to my venture capital friends, they said, “Well, that’s just how startups work. We’ve managed startups like this forever; there is no other way to manage them.”

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The Product Development Model

I realized that traditional ways to think about startups – have an idea, raise some money, do product development, go through an alpha test, beta test and first customer ship was the canonical model of how entrepreneurs thought about early stage ventures.

product-dev-diagram-b751

This product development diagram had become part of the DNA of Silicon Valley.  So much so that after I started teaching I’d ask, “Can anybody recognize this model of startups?”  And when everyone raised their hands I used to joke, “Even the waiters in San Francisco could draw this model.”  But in 2002 a student with a pained look on his face raised his hand and said, “Well, we’re now waiters in San Francisco because we used to be CEO’s of dot-com companies.”  So I no longer make that joke.

When I looked at the diagram in that ski cabin I realized there was a fundamental question I couldn’t answer: if all startups follow that model, why is it that some companies are opening bottles of champagne at their IPO and others who almost followed the same rules are selling off their furniture?  What was the difference here?  Were all startups the same? Were startups failing because of product failures or was there some other failure mode?  Is there any way to predict success or failure?  And even more importantly, was there any way to reduce risk in early stage ventures?

That day, alone in the cabin I knew I had to find the answer.

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Retirement and Redemption

In 1999 I retired and began to reflect about my career and what had happened in the previous 21 years and eight startups in Silicon Valley.  Alone in a ski cabin with the snow coming down outside, and my wife and daughters out on the slopes all day, I started collecting my thoughts by writing a series of “lessons learned” stories that I had hoped would become my memoirs.

Eighty some pages later I realized that a) I had some great war stories as a good marketeer and failed CEO, b) I’d have to pay my wife and kids to read them, c) the three of them were probably the entire total available market, and d) when I looked at what I had done and what other entrepreneurs had done at their startups, that there was a pattern.

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