Monday, November 23, 2009

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.

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


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