Customer Development Manifesto: Market Type (part 4)

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.

—–

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.

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He’s Only in Field Service

The most important early customers for your startup usually turn out to be quite different from who you think they’re going to be.

He’s Only in Field Service
When I was at Zilog, the Z8000 peripheral chips included the new “Serial Communications Controller” (SCC). As the (very junior) product marketing manager I got a call from our local salesman that someone at Apple wanted more technical information than just the spec sheets about our new (not yet shipping) chip. I vividly remember the sales guy saying, “It’s only some kid in field service. I’m too busy so why don’t you drive over there and talk to him.”  (My guess is that our salesman was busy trying to sell into the “official” projects of Apple, the Lisa and the Apple III.)

Zilog was also in Cupertino near Apple, and I remember driving to a small non-descript Apple building at the intersection of Stevens Creek and Sunnyvale/Saratoga. I had a pleasant meeting and was as convincing as a marketing type could be to a very earnest and quirky field service guy, mostly promising the moon for a versatile but then very buggy piece of silicon. We talked about some simple design rules and I remember him thanking me for coming, saying we were the only chip company who cared enough to call on him (little did he know.)

I thought nothing about the meeting until years later. Long gone from Zilog I saw the picture of the original Macintosh design team. The field service guy I had sold the chip to was Burrell Smith who had designed the Mac hardware.

The SCC had been designed into the Mac and became the hardware which drove all the serial communications as well as the AppleTalk network which allowed Macs to share printers and files.

Some sales guy who was too busy to take the meeting was probably retired in Maui on the commissions.

Your Customers are Not Who You Think
For years I thought this “million unit chip sale by accident” was a “one-off” funny story. That is until I saw that in startup after startup customers come from places you don’t plan on.

Unfortunately most startups learn this by going through the “Fire the first Sales VP” drill: You start your company with a list of potential customers reading like a “who’s who” of whatever vertical market you’re in (or the Fortune 1000 list.) Your board nods sagely at your target customer list.  A year goes by, you miss your revenue plan, and you’ve burned through your first VP of Sales.  What happened?

What happened was that you didn’t understand what “type of startup” you were and consequently you never had a chance to tailor your sales strategy to your “Market Type.” Most startups tend to think they are selling into an Existing market – a market exists and your company has a faster and better product. If that’s you, by all means hire a VP of Sales with a great rolodex and call on established mainstream companies – and ignore the rest of this post.

Market Type
But most startups aren’t in existing markets.  Some are resegmenting an existing market–directed at a niche that an incumbent isn’t satisfying (like Dell and Compaq when they were startups) or providing a low cost alternative to an existing supplier (like Southwest Airlines when it first started.) And other startups are in a New Market — creating a market from scratch (like Apple with the iPhone, or iPod/iTunes.)

(“Market Type” radically changes how you sell and market at each step in Customer Development. It’s one of the subtle distinctions that at times gets lost in the process. I cover this in the Four Steps to the Epiphany.)

market-type

Five Signs You Can Sell to a Large Company
If you’re resegmenting an existing market or creating a new market, the odds are low that your target list of market leaders will become your first customers. In fact having any large company buy from you will be difficult unless you know how to recognize the five signs you can get a large company to buy from a startup:

  • They have a problem
  • They know they have a problem
  • They’ve been actively looking for a solution
  • They tried to solve the problem with piece parts or other vendors
  • They have or can acquire a budget to pay for your solution

I advise startups to first go after the companies that aren’t the market leaders in their industries, but are fighting hard to get there. (They usually fit the checklist above.) Then find the early adopter/internal evangelist inside that company who wants to gain a competitive advantage. These companies will look at innovative startups to help them gain market share from the incumbent.

Sell to the Skunk Works
The other place for a startup to go is the nooks and crannies of a market leader.  Look for some “skunk works” project where the product developers are actively seeking alternatives to their own engineering organization.  In Apple’s case Burrell Smith was designing a computer in a skunk works unbeknownst to the rest of Apple’s engineering.  He was looking for a communications chip that could cut parts cost to build an innovative new type of computer – which turned out to be the Mac.

Lessons Learned

  • Early customers are usually not where you first think they are
  • Where they are depends on Market Type
  • Look for aggressive number 2’s or 3’s who are attacking a market leader
  • Look for a “skunk works” inside a market leader

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an early version of this story appeared on folklore.org

Customer Development Fireside Chat

I did a fireside chat with a few entrepreneurs interested in Customer Development at Draper Fisher Jurvetson, the venture firm behind such Skype, Baidu, Overture, ….

Ravi Belani was nice enough to set it up, blog about the talk and film it.  The relevant part starts about 4:30 into the video (wait for it to download.)

Lessons Learned

  • Most entrepreneurs start a company with hypothesis not facts
  • None of these hypothesis can be tested in the building
  • Therefore – Get out of the building
  • “Market Types” matter
  • Find a market for the product as specified

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Customer Development Talk Startup2Startup

Eric Ries of Lean Startup fame and the author of the Lessons Learned blog joined me at Startup2Startup for a joint Customer Development talk. Thanks to Dave McClure and Leonard Speiser for the opportunity to speak.

The Customer Development talk can be seen here74HGZA3MZ6SV

Part 1

Part 2

Part 3

The slides are here.

If you’ve never seen Eric’s Lean Startup presentation, take a few minutes to at least watch his part. It starts at ~40:30 in the video.

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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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