Friday, May 28, 2010

Sacrificing for a Dream

One of the things I love about working with startups is that I get to work with people who dream of making an impact on the world and are willing to make tremendous sacrifices to achieve their goals. So I think it only fitting that this weekend, we pay tribute to another group of people who made the ultimate sacrifice that their dreams of a free America be preserved. 

It is only because they made an impact that the rest of us are free to pursue our dreams.

Happy Memorial Day.

Monday, May 24, 2010

Developing a Customer Profile

2nd in a series on Customer Segmentation

Last week, we defined a customer as someone who can pay for your product and wants it.  With this clearly understood, we can move on towards actually constructing a customer profile.  What is a customer profile?  A customer profile is a document that describes:
  • Who the customer is (demographics)
  • What distinguishes that customer from a different type (meaningful differentiator)
  • Customer pain
  • Customer buying behavior
As an example, here is a format that I use with my clients (there are others):

By far the most important part are the sections highlighted in green which deal with customer pain.  This is where your product's features connect with your customer's needs and are the source of your value.

Note the two right most columns entitled "hypotheses" and "hypothesis validation".  That's because in the beginning, particularly for a startup, these are your best guesses, not facts, and require validation.  This point, of course, is a fundamental tenet of Steve Blank's Customer Development methodology and in particular, the Customer Discovery phase.  The validation process is iterative with hypotheses being reclassified as facts only on the basis of specific concrete data (may be qualitative as well as quantitative).

So how does one begin filling out this matrix and constructing a Customer Profile?  A good place to start is with the generic ideal customer.  While there are several different variants of this running around, mine has just three core plus one nice-to-have attribute as follows:
  • Core:  Customer is able and willing to pay for your solution
  • Core:  Customer has a problem and is aware of it
  • Core:  Customer has acute (or overt) pain
  • Nice-to-have:  Customer is able and willing to act as a reference
If the customer does not have a problem or is unaware that they have a problem, then they are unlikely to take action.  In the case of the former, no action is required.  In the case of the latter, you would need to embark on a length education process.  While a large company with resources and time on its side may be able to undertake the process of educating the market, a small company usually can't afford this and would be better off seeking a different customer.  In the case of a startup, having to educate the market can be fatal as the cash usually runs out before the customers get educated.

What's the difference between acute and latent pain? Acute pain can be defined as an immediate discrepancy from a desired state.  This discrepancy can be negative (i.e. a problem that needs to be cured) or positive (i.e. an opportunity that can't be accessed).  In either case, the chance of a customer taking a buy action to relieve the discrepancy is high.  Latent pain can be defined as a potential discrepancy, not yet realized and which may or may not occur, again in negative and positive flavors.  In this case, buy action is less likely and price sensitivity higher.  For examples of each, see my earlier blog post on Confident Selling.

So how does this work?  Again, I'll use an example from my own company.  Here's how the ideal customer criteria flow into the top three row of the Customer Profile:  demographic, overt pain, and latent pain:

From this, the before and after story can be constructed and we can start to identify the basis of some form of ROI or value analysis.  In this case possible ROI bases could be penalty costs, opportunity cost for the entrepreneur's time, and/or expected value outcomes for failing to achieve funding etc.

So once we have this, what can we do with it?  There are three main areas:
  • Value Proposition Hypotheses Development (product/market fit)
  • Lead Qualification
  • Customer Segmentation (basis for competitive strategy)
Next week:  Applying the Customer Profile

Monday, May 17, 2010

What is a Customer?

1st in a series on Customer Segmentation

Recently, I've been helping a couple of clients to profile and segment their target customers.  This is fundamental to developing a successful business development strategy.  It's also a core component of developing product/market fit for a startup.

In spite of the many methodologies developed over the years, customer segmentation still has an element of art about it.  It involves the use of inductive reasoning to infer from customer interviews and various other data sources what the meaningful differentiators are between customer segments.  What complicates this is that customer segmentation can be done on a wide variety of dimensions:  psychographic, demographic, geographic, socio-economic, etc.  But more on this in a later post.

The first step in performing customer segmentation is developing one or more customer profiles which describes who the customer is, what distinguishes that customer from a different type, and other information relevant to connecting what a company has to offer with what the customer wants to achieve.  I will talk more about constructing customer profiles starting with next week's post.

However, in helping clients - particularly startups - construct customer profiles, I often need to first clear up a subtle but critical misunderstanding about what constitutes a customer.

Common but erroneous definition of a customer:  Someone who wants your product.

Correct definition of a customer:  Someone who wants your product and can pay for it.

Let's take a look at both elements.

Someone Who Wants Your Product...
Want is something the prospective customer controls.  But with respect to buying behavior, want come in three flavors with three likely outcomes:
  • Acute pain - This can either by negative in terms of a problem that must be fixed or positive in terms of an opportunity that is being thwarted.  The customer is consciously aware of this pain and is willing to pay to relieve it.  The likelihood of a customer taking action is high.
  • Latent pain - This is tougher.  This can either again be negative or positive, but in this case, the customer may not be aware that they have a problem.  For example, the customer may be losing money due to duplication of processes in different departments but unaware of it because its not being tracked, or some other reason.  This is often the basis of enterprise software sales.  In this case, the role of the seller becomes converting this latent pain into acute pain by making the customer aware of it in some meaningful context.  This is the essence of salesmanship.  The likelihood of action is low until the latent pain is converted into acute pain.
  • Want - This is something the customer might like to have but the presence or absence of this particular feature is unlikely to sway the buying decision nor is the customer likely to pay much for it.  As an illustration, many years ago, I was negotiating to buy a car and the salesperson tried to convince me that the pinstripes on the car were a $300 feature.  So I told him to take it off, knowing full well this wasn't going to happen.  In the end, the pinstripes stayed on the car while the $300 got knocked off the invoice.  The likelihood of action fulfilling a want is slim.
...and Can Pay For It
While a desire for your product is a necessary condition for a customer, it is by itself insufficient.  For example, I would love to buy a Tesla Roadster, but have no intention of paying $100,000+ for it.  But if someone in Tesla's marketing department were putting together a target customer profile based strictly on a demographic profile, I might seem to be a good fit.  (I'll let you speculate as to what that profile might look like.)  Should Tesla count me as a target customer?  Only if they want to waste a lot of money trying to reach me.

So, as my teenage son would say, "duh, isn't it obvious that a customer should be someone who wants and can pay for your product?"  Yet I see regular, ample evidence that this point is not understood.  For example, take a look at the market opportunity section in five startup business plans.  At least three of them will have an estimate of the Total Available Market (TAM) that reads something like this:  "There are 150 million smart phone users in the United States that download at least one application per year.  This means given a download price of $24.99, the TAM for our virtual nose-picker app is $3.75 billion!" (Incidentally, if you're having difficulties seeing the attribution errors here, see this post.)

I also routinely see companies waste sales and marketing dollars trying to reach prospects who might want but don't have money to buy their products.  It's amazing how few salespeople actually ask their prospective customers whether they have money in the budget for the product solution they are offering until they are well into the sales process.

Perhaps a rewording is in order.  Customer:  Someone who can pay for your product and wants it.

Next week:  Developing a Customer Profile

Monday, May 10, 2010

Pricing Perfume

Technology startups are notorious for underpricing their initial products.  I think there are two reasons for this.  First, the people most likely to be interested in their early offerings are often technology enthusiasts, who, for some reason believe that your technology should be free or at least very, very cheap (funny, how this doesn't apply to their salaries!).  But the second and main reason is because most startups don't have a good understanding the value they provide to their customers.  This is not meant to be a glib criticism.  Determining value can be a difficult and arduous process.

Why is understanding value so important?  Because more often than not, price is a function of value not cost.  I repeat:  price is a function of value not cost.

Many times when I say this, especially to engineers, their hackles go up and they stare at me with an indignant "are you insane?" glare.  In fact, that was pretty much my reaction as a newbie engineer fresh out of college.

Shortly thereafter, I found myself walking through the cosmetics section at a Macy's in Allentown, PA when it suddenly hit me.

Perfume.  A large cloud of it.

Turning to the young lady that had just hit me with eau de some fleurs (or should I say odious flowers?), I made a quick comment about "walking through $50 mists..."

"$150," she smiled perkily as she held up a very tiny bottle.

And that's when it really hit me.  "$150?! What a scam!"  I thought.  And being a chemical engineer, I conservatively estimated the component costs:
  • 4 oz of ethyl alcohol, reagent grade ~$  5
  • Fragrances                                     ~$ 10
  • Fancy glass bottle                          ~$   5
  • Box                                               ~$   2
  • Other Manufacture/Shipping           ~$ 30
  • Total                                             ~$ 52
Yes, I know the fragrances are supposed to come from some rare flower that only blooms once every 50 years on some cliff in the Italian Alps, retrievable only by specially trained ravens, but we're talking milligrams here.  And I left out advertising costs because, quite frankly, the only reason the cosmetic industry spends so much on advertising is because they can, not because they need it to reach customers.

So smelling like flowers, I decided to return the favor and took it upon myself to educate the salesgirl.

I'm the one who got the education.

With flawless logic and reasonable facts, I explained how the costs worked.  No impression.  She knew the value of what she was selling.  It was precious, it was rare, and it was "painstakingly formulated to enhance a woman's personal biochemistry!"

Undaunted, I pressed on in the name of truth and drawing on a past summer job experience working for a fragrance and flavor chemist (yes this is a real profession), I explained how most of the fragrances were actually artificially synthesized, how the liquid was mainly ethanol, and how the bottles were made in China.

Her smile faded and the room temperature plummeted as her gaze turned hard.

That's when I realized what it was that the perfume makers were really selling.  If you want to see an industry that understands the link between price and value, the perfume industry is one of the best. And the value is no less real for being intangible.  How do you put a price on making someone feel special?

In this case, it has to be high enough to trigger the "I'm worth it" reaction yet it can't be so high as to be out of reach of the target customer.  (My unscientific market research shows most quality perfumes are priced between $110 to $250 for a 3.4oz bottle.)

And gentleman, lest you be too smug about my example, maybe one of you can explain to me why someone would pay $3700 for a 100ml bottle of Diva vodka vs. $25 for a 750ml bottle of Stolichnaya?

Value is the eye of the customer.  Price accordingly.

Monday, May 3, 2010

Focused Selling

Part 3 of a 3 Part Series on Consultative Selling

Once you've completed the grueling process of understanding your value, you're ready to sell, right?

Maybe.  What are you going to say and how are you going to say it?

Whatever it is, it needs to be brief and to the point; this means refining your value message down to a short elevator pitch.  While in Silicon Valley, the elevator pitch is most associated with raising money from potential investors, it equally applies to raising money from customers (i.e. a sale).

To shortcut all the pointless debates between "elevator pitches", "unique selling propositions", and "value propositions," I define elevator pitch to be a brief series of sentences that describes (1) what value you provide (2) how you do it and (3) what sets you apart from the competition.  By brief, I use a 60/60 rule:  60 words in 60 seconds or less.  Simple, right?

Try it.

The two most common mistakes I see:  too much product talk and too broad.  Let's look at each in turn.

Product Talk:  Who Cares?
Inevitably, the first time people try to craft an elevator pitch, they start by talking about their products, technology, features, and on and on and on.... What's wrong this?  Shouldn't people first understand what we have so they can figure out how it might help them?  NO.

Our minds don't work this way.  The way people's minds work in a selling situation is that context must first be established with respect to their pain and problems.  If this context is established, then they're ready to hear more.  If not, they don't care what you have to say about your product.  Think back to the last time you got trapped on a telesales call.  If you're like me the conversation in your head went something like this:

Me:  Oh, man.  What does this person want?
Telesales:  "Good evening sir, we're running a special on custom carpet cleaning...."
Me:  Why on earth do I need this?  The cleaners were just here two days ago.
Telesales:   "...six rooms for only $29.95! We use the latest vapor-dry technology and we leave your house smelling...."
Me (interrupting):  "Thanks but not interested."
Telesales:  For a limited time only, we're also offering free window washing if you place your order....
Me (interrupting again):  "Sorry, really not interested. Bye."

Now if my kids had just tracked mud across our living room carpet, this conversation might have had a different outcome.  Why?  Context.

But It Can Do Everything!
The other problem I see is that people have a hard time focusing the message, especially where the product is capable of doing multiple things.  So they rattle off everything.  After all, you don't want to miss mentioning something that might resonate with the potential customer!  The problem with this is that you come off sounding mediocre in the classic "jack of all trades, master of none" fashion.  I'm in the service business, and one thing I learned early is that when customers are buying, they want to hire the expert.  After they hire, they want someone who can do it all.  Get hired first, you can cross-sell after you're in the door.

So even if you can do it all, focus on the one or two most compelling value aspects of your product for your pitch.  You can elaborate later.

The Purpose of an Elevator Pitch
It's important to remember that the point of an elevator pitch is not to close a sale.  Rather it is to get the prospective buyer to invite you to tell them more.  To do this, you need to frame your pitch in such a way as to help the customer connect their problem with your offering so that they start asking questions, invite you to explain more, or they take some action to contact you (if the pitch is not face-to-face like on a website or collateral).  This means you need to tailor your pitch to your target customer.  If you have more than one potential target customers, you will likely have more than one elevator pitch, one per target customer.

A Case Example (and shameless commercial pitch)
Here's the elevator pitch that we currently use for my company, Infrastructure Group, not as a shining example of a great pitch, but so that you can see what one looks like:

"Infrastructure Group provides business services to early stage startups that enable entrepreneur's to focus their time and resources on core product and business development.  We handle the non-core stuff like accounting, HR, and legal and act as your expert, time-share G&A staff.  We're all former startup people and approach things from an operating, not merely advisory, perspective."

59 words deliverable in 20 seconds.  Value:  entrepreneur time by offloading the paperwork stuff.  Differentiator:  we used to be in your shoes.  If you check out our website, you'll see the same message carried throughout.  You'll also notice that we offer a number of additional services that aren't mentioned as part of the pitch, in order to avoid defocusing the message.  Do we get invited in every time?  No, but our elevator pitch allows us and a prospective customer to quickly determine if there is a potential, mutually beneficial fit which is ultimately what sales is about.