While I do read Harvard Business Review (HBR) articles about entrepreneurship found by Flipboard I generally find them to be far too long, dense, and abstract to be of much interest to startup entrepreneurs. But on occasion I come across an article which is well worth summarizing and annotating for this blog.
Such is the case with the article The 6 Ways to Grow a Company by Gino Chirio. Decades ago when I was General Manager of Educational Software at Addison-Wesley Publishing Company I was taught that there are four ways to bring products to market:
- New products to new customers – by far the hardest and also the strategy I inherited from my predecessors who ran the educational software division.
- New products to old customers – while still a challenge at least you have the advantage of knowing your customers. Or so you would think.
- Old products to old customers – This was the textbook publishers strategy. These companies called old products the backlist. Having a deep backlist was the key to profitability, for once the cost of developing the product was recovered the profit margin was high and the cost of sales low. As opposed to the front list, the new products published each year.
- Old products to new customers – this is the way to increase your customer base but often entails competing against entrenched vendors.
The HBR article is far more sophisticated and detailed than the simple 2 x 2 matrix above.
New processes. Sell the same stuff at higher margins: Cut production and delivery costs, automate for efficiencies, cut fat in the supply chain or manufacturing, and utilize robots.
New experiences. Sell more of the same stuff to the same people: Increase retention and share by powerfully connecting with customers. An example is the Apple Store experience, which many would argue is as compelling as the company’s products.
New features. Sell enhanced stuff to the same people: Add improvements that drive incremental purchases. An example of this is every new phone Apple releases, with better cameras and so on.
New customers. Sell more of the same stuff to new people: Introduce the product to new markets with needs similar to your core, or to markets where it might address a different need. For Apple, this goes back to reaching the mainstream rather than the design community.
New offerings. Make new stuff to sell: Develop a new product — not just enhancements. Find new needs to solve within existing markets, or invest in a new category. Think HomePod or the iPod.
New models. Sell stuff in a new way: Reimagine how to go to market by creating new revenue streams, channels, and ways of creating value. This can be as simple as moving to a subscription model, or as transformative as Apple’s creating iTunes.
The key question I ask mentors in the first meeting is what is their goal?
Do they want to create some technology that can be licensed, providing them with a nice revenue stream and leaving the dirty work of product development, marketing, sales, and support to a company which has already built out those functions?
Are they interested in creating a product, which they could sell, generating a nice financial gain, and freeing them to move on to creating another new product?
Do they want to build a company designed to be sold for a nice multiple and leaving them open to either continuing with the acquiring company or setting out again on the path to creating something new?
Or is their intent to create a sustainable company with a very strong competitive advantage and a product line that they could helm for years into the future?
And the option I’ve yet to have a founder say is their intent: create a plug-in or other feature for an existing technology that they could license or sell?
The answer to these questions will define if they are a growth company or not. While customer revenue is by far the best way to finance a growth company it’s quite rare. Most founders who want to build a growth company need to bring in outside capital. If they do I highly recommend Gino Chirio’s article. Decide from get-go which of the six categories of growth to pursue. Obviously some of these categories just don’t apply to a startup: selling the same stuff at higher margins or selling new experiences to existing customers, just don’t apply to a startup. Nor does selling new features to an existing product. The only category that make sense for a raw startup are new offerings. With that category the default for a startup there is one more decision: do you attempt to sell stuff in a new way? Today the subscription model is the holy grail for startups as it provides a predictable income stream. One of the maxims I preach to my mentees is Don’t try to innovate on more than one front. Startups lack the resources to both develop a new product and develop new ways to sell it. The challenge is to find the best existing way to bring your product to market, the best go to market strategy.
How you will sell is largely determined whether you are selling a product or a service or both. Is your product digital with a vanishingly low cost of manufacturing or is it analog, requiring significant capital upfront for manufacturing?
Finally, whatever your decisions are made, make sure you and your founders are aligned on intention. So long as that is true differences of opinion on execution are welcome, but once a decision on execution is made everyone must get behind it. Too often I’ve seen a member of a team who violently disagreed with a major execution decision only to seem to go along with it. But by not putting their whole effort behind that decision you end up with a passive aggressive team member. Hard as it may be you need to root out passive aggressive team members immediately! They are the proverbial rotten apple that spoils the barrel. Again I’ve see founders be afraid to confront the problem team member and the venture flounders as a result.
Making the right decisions are a challenge and models like those in the HBR article can be helpful. But the right decision is meaningless unless you align all your venture’s resources behind it.