Wasserman Market & Product Strategy

For years, I have been dismayed at how much time and money software companies spend creating the works of fiction called Gantt charts, and the pain and suffering that accompanies the inevitable deviation from The Plan.

I want too start by saying: I have nothing against project management and the PMI. If I were were building an airplane, or a highway, or an air traffic control system, I would be the first one to look for a real, trained, PMI certified project manager.

But I have never been asked to build any of those things. I have been charged with delivering software to support businesses struggling to survive in a highly competitive and ever changing landscape. And in my experience:

• the full specifications are never really known up front – but we pretend we do by writing business requirements that become a non-negotiable “contract” between IT and business,
• the business needs inevitably change during development – but deviating from the “contract” is a recipe for going over budget/deadline, and “failing” at delivering the complete “contract” so we pretend that we can not handle the changes,
• everybody suffers, nobody is happy, and yet we all pretend all over again the next time.

These articles claim that using Groupon or some similar service is a money losing proposition. That the retailer just does not realize a benefit when all the factors are netted out. Yet retailers continue to use daily deal sites in droves despite the fact that one blogger feels that “… it’s a phenomenally bad idea. The daily-deal business is clearly another bubble in the making…”

The thing that I noticed many of these articles had in common was that the authors had no significant retail experience (that I could detect when researching their bio’s). Now it is possible that in spite of their lack of retail experience, they are on to something here, and that many retailers are short sighted, ignorant, or simply not blessed with good business sense. But I have spent the last two years providing digital signage services to retailers and those adjectives do not describe any of the retailers I have met.

As for claims of a bubble, that is anyone’s guess. The thing about bubbles is: in a true bubble everyone denies that it is a bubble. That is what makes it a bubble. So it could be. But not every business boom is a bubble. Technology booms from fax machines to cellular phones to SaaS sites like SalesForce have not been bubbles. I have yet to see any persuasive evidence that  daily deal sites are not here to stay – at least for a long while.

As a whole, we are broken machines when it comes to figuring out what we should really be worrying about. I like what Peter Sandman, an expert in risk communications has done, he has redefined risk to make it match the human reality. He says Risk = Hazard + Outrage.

I’ll give you an example. In 1988 in Ramstein Germany, a horrific accident occurred during an airshow that had over 300,000 spectators. One in every 1,000 spectators was injured, one in every 4,000 spectators was killed. As a result, Germany banned all airshows. This should have made Germany the safest country in the world, right? Wrong. A 100 times more lives were being lost every year to preventable traffic accidents.

Around 7,000 lives could have been saved – every single year – by making electronic stability control (ESC) compulsory.

ESC and traction control systems had been in development since 1959, and was commercially available since the 70′s. Various studies from both manufacturers and independent analysts have attributed a large part of the reduction in German road fatalities (now less than 10,000 annually, down from a high of over 20,000 annually) to the increased inclusion of ESC as standard equipment. In fact ESC will be compulsory in most of the G7 nations as of this year.

But in 1988 road fatalities were business as usual. No one was outraged. No one was writing or calling their elected officials, no newspapers were writing scandalous articles. The airshow accident however… that was world-wide news. People stayed away from airshows in droves because they were just too risky!

Germany eventually rescinded the ban and replaced it with a few safety regulations. After all, the ban did nothing to make Germany a truly safer place.

This story is so illustrative of human nature. In business as much as anywhere else. The truth is, even though our brains are not built for intuitively understanding the greatest probability for harm, many executives will “intuitively” latch on to some “obvious” threat which in reality is not even close to being the most serious issue a company has to face.

I doubt this will change anytime soon. It takes careful analysis of hard data to understand what the real threats are. The problem is: there is no data available for the future, which is where most business threats are to be found.

So how do I determine how “strong” the pricing is?

For pricing to be strong, you need to know 3 things:

1. What is the value to your customer? How much money can they make or save using your product or service.
2. What is your customer’s available budget?
3. What is the cost of the competition (or alternative ways of getting the same result)?

I may just be me, but I can not really see how you can consistently close sales without knowing these things. Sure an executive visionary buyer may not really care about price that much, but there are not enough of that type of buyer to make sales quarter after quarter.

Typically, early stage companies do not know all 3 pricing components, but there is a pretty easy way to find them out: talking to prospects in research mode (as opposed to sales mode). Prospects at trade events, or even over the phone are surprisingly forthcoming with accurate information when they know that there is no sales pressure to buy anything.

The fact is, whether one likes it or not, many prospective customers are more than happy to waste your time. And why not? From their perspective most sales people are wasting theirs!

Also, the more innovative and revolutionary your product is, the more likely this is to occur. “But why?” asks the entrepreneur. “Why can’t they see that it is <better/faster/cheaper/the way of the future>?” The reason is that most potential buyers are in a pragmatist/conservative buying behavior and are justifiably worried that the cure might be worse than the disease. “If it ain’t broke, don’t fix it” is the motto that the conservative world lives and dies by.

So if they are so conservative, why do they spend their own time reviewing your potentially revolutionary technology or solutions? Because they want to inform themselves. To educate themselves for free, to be prepared information-wise just in case the technology in question ever comes up at a management meeting. This is why they will be more than happy to meet you, and very interested in all aspects of your product. Of course they will not buy unless they see other buyers (whom they respect) buying too. A real chick and egg problem.

All top sales people know this instinctively, which is why a real rain-maker’s qualification criteria always include the buyer’s available budget and readiness to buy. And why they are ready to walk away in a New York minute (to come back another day) if they see interest instead of true demand. However, many entrepreneurs do not have this kind of experience or instinct, and are carried away by the rush of enthusiasm that accompanies each sign of customer interest, spending lots of time and effort that will only result in a sale months or years down the road, if ever.

The typical buyer of an unproven (from the pragmatist perspective) technology is either a gear-head that likes to play with new things, or a visionary executive with a high level of risk tolerance who wants to make a splash, to leapfrog the competition, be it internal or external.

In order to appeal to a buyer in pragmatist mode, you will have to make a credible offer to solve a significant problem. This has to be a problem that the entire industry segment recognizes as a problem (clue: scan speaker topics at industry seminars, or articles in trade journals), and for your offer to be credible you need to know a lot about why the previous attempts to solve the problem have failed.

1. “a specified category of potential buyers”.

Yeah, well that really narrows it down.

Unless your company is a multi-million dollar multi-national, that size of market is completely inaccessible. Apple sold the iPod to the “hip youth market” with hundreds of millions of dollars of advertising, I do not know of any early-stage high-tech ventures with that kind of loose change lying around.

Since the resources (cash, people, and time) of a new venture are always limited compared to the work to be done, it is vital to find a better definition of a market. Here we turn again to Geoffrey Moore.

Mr. Moore’s definition of a market is:

1. a group of potential buyers
2. who share similar needs,and most importantly of all…
3. who refer to each other when making a purchasing decision

So let’s dig into the significance of that last line. Why is it so vital that the potential buyers communicate amongst themselves when making a purchasing decision?

Because it costs money to convert a potential buyer to an actual buyer. There is the cost of finding the buyer, the cost of a salespersons time, the costs of marketing collateral that you send or leave with the buyer, and the cost negotiating the contract. If your potential buyers communicate amongst themselves, then they defray some of the customer acquisition costs. They tell each other where to find you (better than you finding them, no?); they sell for you, reducing the amount of sales time needed; they pass on collateral to each other. All of this means very simply that the more your buyers communicate within themselves, the more buyers you will be able to sell to within your marketing and sales budget.

When I define market segments, the question I am constantly asking is: “What is the communications medium for these people?” Do they all read the same magazine, go to the same annual conference, belong to the same professional association?

That is how I know that “Health Professionals” is not a market segment. Because the Hospital Administrators do not read the same trade publications, go to the same conferences, and belong to the same professional association as the “X-ray Technicians”. Same goes for “Government”, “Education”, or any of the other sweeping top level SIC categories that my customers present as their target markets when we first start working together.

Another key factor in segmenting is getting the right sized market segment. Mark Cavender and the Chasm Institute proposes that the ideal market size is just about twice your current sales/delivery capacity. I agree. Why twice as big? It is important to dominate your market. If you do not dominate once you have stimulated demand and proven the market, then you are leaving the door open to a better funded competitor to come in and eat your lunch. Mr. Cavender defines dominating as capturing at least 40% of the available market, and being at least twice as big as your nearest competitor. Every company has limited financial resources, this in turn limits their capacity to deliver. It may be server bandwidth, raw materials, or cost of labor, but it is there for sure. A company cannot capture 40% of a market if the market is ten times larger than its capacity to deliver, and it is dangerous not to dominate, so twice as big is the upper limit. You do not want a smaller market because you do not want to run out highway before you run out of gas.

Since most new ventures target markets that are way too big for them, they need to invest in narrowing down their target market through segmentation.

This image should be pretty familiar by now. It was first published by Everett Rogers in a 1962 book called Diffusion of Innovations.

Rogers’ work was later adapted by Geoffrey Moore in a book called Crossing The Chasm, and Inside the Tornado in 1995.

So let’s talk about the “technology adoption lifecycle” because it is generally misunderstood as being a time-line, an evolution that high-tech products must go through as they progress from one group of adopters to the next. This is incorrect.

What these curves actually represent is the normal distribution of people’s reactions to technologies that change they way they work or interact. Many human characteristics follow the normal distribution, from test scores to height and weight, and this is no exception.

Normal distribution dictates that in any group large enough and diverse enough, measurements of natural events (people’s intelligence, the height of redwood trees, the temperature in Seattle on January 1st of every year) will always create a bell curve.

There are groupings in the bell curve called standard deviations. The first deviation is defined as 68% of the results (34% on each side of the centerline), the second deviation is an additional 13.5% on either side, and the third deviation is a tiny 1.4% the group on either side. You can see that illustrated in the first figure.

So what Rogers and Moore are illustrating is that if a random group of 1,000 people were confronted with significantly new technology, 13.5% would react in a Visionary mode, 34% would react as Pragmatists, and so on.

I call these reactions Buying Behaviors, and not Types of Buyers (as many consultants do). This is because people are too inconsistent to be classified as one Type of Buyer that remains constant.

People rarely have the same reaction to new new technology in all areas of their life. I for one, will always buy the latest (and flakiest) mobile phone on the market, no matter how much trouble it gives me, making my buying behavior that of a Technology Enthusiast. When it comes to home electronics, my behavior is that of a Conservative, bordering on a Skeptic. I have never purchased a CD player, and I only purchased a DVD player once I was able to buy one for $45 at a Walmart.

So one of the first important things to remember when using these concepts in high-tech business to business marketing is that there are no “visionary customers” or”pragmatist customers” because in B2B, customers are companies with many individuals in them, and each individual will potentially behave differently than the next when confronted with your earth-shaking technological innovation. The best you an do is understand what appeals to each type of buying behavior, and understand which one your product or solution will most likely appeal to.

So what use is this knowledge? Basically it will make your sales projections more realistic. Although your market research may indicate that there are 20,000 target customers in North America, if your product only appeals to visionaries, your market available market is less than 13.5% of that 20,000 and your sales will fall pitifully short of projections unless you factored this in from the start.

And so it is for most early-stage high-tech ventures. The product is created by visionaries for visionaries, and the sales projections are based on overly-optimistic penetration rates of unrealistically large and broad markets. “If we just get 5% of this billion dollar market…” is the lead-in for a bad joke, amongst VCs, and the punch-line includes the words “good luck”.

The second most important thing to remember is that since this is not a time-line, one does not inexorably progress from Visionary, to Pragmatist, to Conservative. If a new product appeals to the Conservative behavior right off the bat, then “conservatives” will be the first market. An example is website builders such as Yahoo! Small Business that play to the textbook Conservative behavior: small business owners that are lagging in getting a website, and wish to catch up simply, easily, and inexpensively. You can be sure that this offer has no appeal for a Visionary, and people in Pragmatist mode already have an operational site. Web sites as a trend may have followed the Techie->Visionary->Pragmatist path, but online website builders never had any appeal at all with the first two groups, and therefore has to be introduced directly to buyers in Conservative mode.

And since I believe in threes, I’ll leave you with this last thought: just as products do not necessarily progress through these stages, rather, each of these groups is truly a different market segment. The underlying technology may be the same, but each market requires a radically different whole product, with different options, delivery, and support for each one. So now I will have to post about what makes a market and what is a whole product…

http://www.uspto.gov/web/patents/classification/uspc463/defs463.htm

(for those who lack the patience to find it for themselves, go to paragraph E. and compare to the rest)

First, think about how products used to be developed by mature companies:

1. R&D and Marketing define a new product.
2. Marketing tests the product with buyers, determining price, packaging, placement, and promotion.
3. Operations provides a cost estimate to Management, runs the factory, and controls product quality and cost.
4. Management calculates the desired margin, and sets a price.
5. Sales sells the product. They are given a product that has already been defined, at a price that has already been fixed.

I compare this to what I have seen for most of my career:

1. No R&D department.
2. Marketing is up to 3 people who report to Sales, and whose main job is to send out emails and manage trade shows.
3. Sales defines a product based on one customer’s demands.
4. IT struggles to deliver.
5. Sales re-defines the product based on the second customer’s demands.
6. IT struggles twice as hard at twice the cost.
7. Sales defines another product after closing a third sale.
8. IT delivers a third version which is late at three times the cost.
9. Repeat until CEO intervenes.

This is insane. Imagine if the Ford dealership in Aspen. Colorado was allowed to force the factory to produce cars with larger than normal trunks because everyone skis in Aspen, and therefore they need larger trunks than in the rest of the country.

What makes it even crazier is that IT departments for the most part have evolved to fulfill internal automation needs, not production for customers. Would you ask the road crew that patches the asphalt to also design and build a bridge or highway extension?

For the last five years, I have been doing my part to bring some old fashioned business sense to the world of technology and information based business. In particular I have been working with early stage companies and their financial backers to do more rigorous market research, understanding the product and pricing needs at the market segment level, and then working to bring that product to that segment. For the last decade, I have been working to reorganize IT departments into software and information factories that can build and deliver with predictable quality and cost.

I think that all new-ish companies should make a point of studying what has worked for decades in the brick and mortar economy. Although I have witnessed the death of the factory, I hope for its return.