Not all customers are created equal!

customer

To the struggling startup – which is redundant, as all startups struggle at some point – any customer is a great customer. Any port in a storm, right? After all management guru Peter Drucker said “The purpose of business is to create a customer.”

Customers represent cash – the lifeblood of any business. But beyond that they represent validation and Le mot du jour – traction.

But startups need to learn what a successful, experienced sales person knows: not all customers are created equal. For that reason sales reps qualify prospects, and founders – most not being experienced in sales – must learn to do so as well. Lets define terms for a start. A customer pays for your product. A prospect is a potential customer.

For a startup your prospects should:

  • Not demand customization of your product, or you will end up spending time implementing features that aren’t on your roadmap, consuming valuable resources that should be devoted elsewhere
  • Have the potential to be repeat customers. There are two types of business relationships: transactional and relational or consultative. Transactional relationships are like those awful restaurants on turnpikes – they don’t care if you are one and done, as the odds are they wouldn’t see you again, even if they did provide better fare. But if you can build a relationship with your customer, then they will want to come back to you to purchase services or in the case of consumables, to purchase your product again and again. Preferably on a regular basis. Recurring revenue is the holy grail for startups. (Which is why the subscription business model is so desirable.)
  • Have the potential for up selling. Up selling is when you sell your customer more expensive products and/or products that provide a better gross margin.
  • Don’t cause you to lose focus or divert you from your mission. One common problem I see, and I’ve been there, is that startups tend to be opportunistic, not strategic. Meaning they exploit a chance offered by immediate circumstance without reference to their business strategy and plan.  Startups need to be strategic. Customers should fit with your long-term plan and company mission.
  • Have the potential to act as a reference or provide a testimonial. This is primarily a B2B value. No one likes going first. The typical  initial question from the enterprise prospect is “Who else is using your product?”  You need customers who are willing to be references for you, to talk with prospects about why they bought your product. Ideally your customers would provide you with testimonials, for use on your web site and or in a press release.
  • Offer the opportunity to sell to other divisions or subsidiaries. Again this is an enterprise sale value.  With startups you often start with one division or department or even just one team. But your goal should be leveraging that sale to many other sales within the company. Introductions by your customer to other prospects within their company are very valuable.
  • Provide valuable feedback on your product. The job of the founder and the venture is to learn.  Thus customers who will help you learn by providing feedback on what’s good and not so good  about your product, what features they would like to see in new versions (not that they need to see for a sale!) and even feedback about your sales process, are far more valuable than customers who are just  interested in a plug and play product and have no feedback for you.

Profile your ideal customer, in writing! And make sure that anyone who is at all involved in your sales process can recite that profile fluently, and more importantly, can say no to prospects who will suck up valuable resources or divert you from your path. Of course, not all customers will have every desirable characteristic, especially if you are in a consumer business where driving necessary volume may make sales more transactional than relational.  But a goal of a startup is to measure return on investment, be that time or money. Thus you need to focus on customers who will maximize your return, not simply sign a purchase order. The cost of customer acquisition must be a fraction of customer revenue – that’s your gross margin, which must be healthy.

Why building a great product isn’t sufficient for success

spotify

Two articles in today’s Wall Street Journal triggered my realization of the how new ventures of today must provide services, not just products, to their customers..

First comes Spotify.  While most people think of Spotify as a music on demand service, the company was also a pioneer in curating and recommending playlists:

Since launching a decade ago, Spotify has sought to distinguish itself from competitors by its playlists, which it says help users discover and listen to more music. Some of its most popular playlists attract upward of 10 million followers.

By focusing on playlists instead of on either individual artists, specific songs or even record companies, Spotify has created the LP of the digital age. LP initially stood for “long player” – a vinyl record that spun at 33 and 1/3 revolutions per minute, providing up to about 20 minutes listening time on each side of the record. This slower speed was in contrast to the 45, which only held up to about 4 to 5 minutes of music per side. Thus the 45 was ideally suited for individual songs, known as singles. LPs would usually consist of one or two hit 45s and the rest was filler. The LP was one of the first and most powerful examples of bundling – forcing customers to buy something they didn’t want in order to get something they did value. LPs were also called albums, as the very first vinyl records were recorded at 78 rpm. So little music was on a 78 that multiple 78s were sold as a collection known as albums, after the physical holders of the multiple 78s, similar to the way families once stored their photographs in an album – yet another antediluvian product .

Steve Jobs and Apple’s iTunes broke the LP/album model. No longer did music lovers have to spend $12 to $16 on a CD to get the one or two songs they really wanted – they could simply download those songs for 99 cents each – a price Jobs forced down the throats of the record companies. Of course, you could still download the an entire album – 12 songs – but you would just pay 12 times 99 cents for it. Digital downloads superseded the CD due to this unbundling. Unbundling provides consumers with both choice – any song you wanted for 99 cents – and convenience, you could download a song on any device from any location, so long as you had an Internet connection.

Spotify was, if not the first, the most prominent seller of streaming music, which has now surpassed the digital download as the most popular way to access music. Spotify’s
all-you-can eat, on-demand subscription model provides incredible convenience to music customers. But Spotify shrewdly recognized the megatrend of the new, consumer-driven bundle of songs known as playlists. Playlists were available on iTunes and other digital download services but they didn’t take off until Spotify added the social dimension: you can create and share your downloads with your friends, and of course, vice versa. Thus powerful social sharing, combined with great ease of use, and a vast storehouse of music, has made Spotify’s service very attractive to tens of millions of music lovers.

The playlist actually provides another value to users of Spotify’s and other streaming services: recommendations. For example today Spotify announced it is adding playlists of music soundtracks to its offerings.

Many fans already compile their own playlists based on the music they hear on TV shows and in movies. Messrs. Jernigan and Bush said they hope fans listening to the “Mid90s” playlist will discover other music from the era and start creating their own playlists.

So we see the winning business model that has elevated Amazon to the second highest valued company, after Apple, in the world: providing users with low price, convenience, ease of use, an almost infinite selection of products, and recommendations as to what else to buy (customers who bought X product also bought products W and Z.)

The other article in today’s Journal that embodies the new business model of value-added services is Tiny Rooms, Shared Kitchens: Co-Living on the Rise in Big Cities, subtitled Developers are now preparing to build some of the largest new co-living properties in North America. The new model of co-working spaces – large open plans has now superseded both the private office and the hated cubicles for businesses.

Real estate developers facing a market of rising rents, but limited supply of rental properties in the residential market, have shrewdly extended the co-working space model to the residential real estate market.

Co-living, a budding real-estate trend often derided as an extension of college dorm life, may be growing up.

At co-living buildings, tenants lease tiny rooms in larger apartments shared with strangers. Renters have access to living rooms, kitchens and other common spaces, while amenities like cleaning services, dog walking and cooking classes are part of the deal.

Co-working space providers like WeLive have now extended the office model of bundling services with rental space to the residential market, thus WeWork spawned WeLive. Note that both the open office plan and the co-living space both drive down cost by putting substantially more people per square foot than the old models.

From mailrooms and laundry rooms that double as bars and event spaces to communal kitchens, roof decks, and hot tubs, WeLive challenges traditional apartment living through physical spaces that foster meaningful relationships.

Co-working adds the social element and access to shared facilities to the staid old model of apartment living. As the authors of the article write, there is evidence that skyrocketing rents over the last six years have forced more apartment-dwellers to live with roommates.

The first lesson from these two Journal articles is that startup founders need to surf a business and/or technical wave, in Spotify’s case the digitization of music and the subscription business model and in residential real estate developers, the rapid and accelerating increase in demand for rental housing. But how does a founder discover these technical and business waves of change? The answer is simple: immerse yourself in your target market, be it lovers of music or renters of apartments. That means getting out of the office and talking to dozens of customers, reading what your customers read, attending the trade shows and conferences your customers go to, following the influencers your customers follow, using the products your customer currently use. Walk in your customer’s shoes!

And there’s one other trick that successful companies like Spotify employ: borrow a business model from another market, in Spotify’s case the subscription model used by magazines, and employ it in your target market.

The second lesson for founders is that building an app or even a software platform is necessary but far from sufficient. Founders must strategize before they start designing their product how will they add social sharing to the product? How will they provide access to ancillary products? How will they curate products and create bundles that encourage customers to buy more? How do they crowdsource recommendations to help their users make purchasing decisions?

A final lesson for founders, especially those who may not even have an idea yet, get out of your comfort zone. If your main thing is athletics, try attending a symphony. If you are really into Twitter, spend time reading the long articles on Medium. If you are into classical music start exploring hip-hop. What drives the success of many companies, especially those in which technology plays a strong part is cross pollination.  The pioneers of co-living space for millennials copied the dormitory housing model of colleges and universities: tiny bedrooms adjacent to large common areas providing things large large screen TVs, living room furniture, coffee bars, and other amenities that the residents all can share.

The mega-lesson: a great product won’t succeed unless it is tightly integrated with services that help your customers make the buying decision, help them share, help them connect with other customers, help them access useful and exciting ancillary products or services. Yep the key word is help. Your goal as a business is to help your customer get what they want, when, where, and how they want it. Help! Help! Help!

 

 

 

 

Predicting the future – part II

crown

Netflix has been investing heavily in its content to lure and keep subscribers. Above, a scene from its show “The Crown.” PHOTO: ROBERT VIGLASKY/NETFLIX/ASSOCIATED PRESS

I knew NetFlix was planning on something other than mailing DVDs around the country by their choice of company name. That choice of name was made well before streaming video was even feasible. But Reed Hastings saw the future and the future was not physical media but digital media – bits and bytes. Netflix wasn’t his first rodeo, he started a software company, Pure Software, previously. After the company was acquired Hastings spent two years planning his next startup and how he could avoid making the same mistakes he had made in his next startup.

As soon as streaming of video to millions of people became technically feasible Netflix did a hard and fast pivot from mailing DVDs to streaming bits and bytes. But Hastings isn’t a one time seer, someone who just got luck.

While the article in The Wall Street Journal Netflix Reports Weaker-Than-Expected Number of New Subscribers is about how Netflix lost 5.24% of its stock value, it correctly hung the problem on forecasting – predicting the future! – as noted in the sub-title:Video site blamed faulty internal forecasting, not business reasons like price increases.

Buried under a barrage of news and statistics about Netflix’s business is yet another example of Netflix’s long term vision:

Ted Sarandos, Netflix’s chief content officer, said he isn’t worried, noting that the percentage of Netflix viewership coming from Disney and Fox library content is “a number that’s been on the decline for several years.” He said Netflix made a bet long ago that big media companies will eventually want to strike out on their own with streaming, and that underpinned its push into original shows and movies.

Its bet that big media companies would eventually discover streaming and thus be very reluctant to license their content to Netflix was behind yet another hard and fast pivot: from licensing third party content – movies and TV shows – to creating its own. Analysts expect Netflix to spend $12 billion on original video series and movies this year, dwarfing rivals like Amazon.com and HBO, let alone the traditional Hollywood studios.

So while Netflix is very large, it’s also very nimble – highly unusual, as most big companies get bureaucratic and sclerotic.  I saw an interview on TED with Hastings and he was very proud of the fact that he made no, as is none, as in zero decisions the past quarter! His management philosophy is and has been pushing decision making down to those closest to the customers and closest to the content developers. He not only makes company critical information widely accessible, he empowers his employees to act on it. The key to scaling as successfully as Netflix has been their system of making decisions at the “lowest” level in the organization, unlike most top down, hierarchical media companies.

While Netflix is about as far from a startup as Amazon or Microsoft, these four lessons apply to every startup: one, have a vision for where your market is going. What megatrends – in their case streaming of video – will impact your business and be ready to make necessary changes. Two, share information and opinions aggressively. Three, turn the hierarchical, top down management model on its head – empower those closest to the customer to make big decisions. And four, watch what customers actually do, rather than listen to what they say.

Long-time Netflix users remember it asking to rate different movies. Based on those ratings, Netflix would give recommendations. About a decade ago, Hastings and his company realized that people weren’t honest. “Schindler’s List would always get five stars, but an Adam Sandler movie… would only get three.” However, when Netflix looked at the watching stats of the same users, the former wouldn’t get watched, but the latter would be enjoyed over and over again.

Finally Hastings, as CEO, takes ownership of other’s mistakes rather than placing blame for his mistakes on others:

During the quarter, Netflix fired chief communications officer Jonathan Friedland after he used a racial slur in two work conversations. Mr. Friedland said in a series of tweets that he spoke insensitively and it came up during a discussion of words that offend in comedy. In a memo to employees after the incident, Mr. Hastings blamed his own privilege for leading him to minimize race issues and said Netflix had work to do to improve.

Let the customers pivot you!

customers

I don’t know about you, but I’m getting tired of hearing about startups “pivoting” or the question, “When did you pivot?” VCs told me that virtually every startup ends up quite differently than their initial business plan indicated –  back in the old days when startups actually had business plans. It was no big deal then and shouldn’t be now.

Rather than constantly pivoting in search of the holy grail of product/market fit, your venture may be better served be letting your customers pivot you.

The New York Times story WhatsApp Co-Founder Leaving Facebook Amid User Data Disputes by Sheera Frenkel and Cade Metz was the first time I learned about What’sApp’s history. A great illustration of customers driving a startup pivot:

Originally, the service was a way for people to tell friends and family whether they were available to text and talk. But it soon morphed into a general and free way of sending messages without the help of the services run by cellular network operators like Verizon and AT&T.

WhatsApp became enormously popular in countries where messaging services were expensive or where social networks like Facebook had not taken hold.

Notice how the author’s use the term “morphed” as the term for a customer-driven change in business direction compared to “pivot” which is a founder-driven change.

So what’s the lesson for founders here? First it’s all about the team. I recall a prominent VC telling me he would take an A team of founders with a mediocre business plan over a B team of founders with a great business plan. The A players will discover a new and better direction for the startup, whereas the B team will find ways to screw up a great business plan. Second, as Jeff Bezos has continually reiterated over the long life of Amazon, listen to your customers!

I often find that startups are very focused on raising money and getting intros to prospective investors and customers. After that their priority is getting out their MVP. Only rarely do startups put the customer first. I know – I’ve been a product first guy, which is why so many of my startup ideas failed to turn into viable businesses. So how do you go about listening to your customers. The are two basic modes: primary and secondary, just as there are in market research. Primary means getting out of the office and talking to customers or even cold calling from a valuable list, as MIT-related startups often do with the MIT alumni directory. And attending events where customers gather and making an effort to buttonhole them there or set up a time to talk.

The secondary mode of listening to your customer is one favored by nerds like myself or who aren’t comfortable talking to strangers – analytics. And today analytics are just a click away, like WordPress analytics for bloggers or Google analytics for web sites. Every program, app, web site, anything customer-facing should be instrumented for analytics from inception.

But there are many other ways to listen to customers – including my favorite, listening to non-customers. For everyone who downloads your app there may be a dozen who view the listing in iTunes or Google Play but don’t download it. And for everyone who downloads the app only a few may use more than once. Finding ways to capture the contact info of the window shoppers, those who look but don’t buy, they joy riders, will help you find what every sales person has to deal with in face-to -face customer interactions, otherwise known as sales calls: objections.

Every prospect will have some objections to your product: it’s too expensive, it’s too slow, it has a clunky UI, and on and on. Only if your value proposition is strong enough will prospects overcome their objections to become customers. So it’s vital for both sales and product development to seek out these objections. Don’t take “no” for an answer! Always ask “why” – why won’t you buy the product? When products don’t sell I often find founders who leap to the conclusion that their app is too expensive, or lacks certain features of competitors’ apps. Those who leap to conclusions are bound to fall and hurt themselves. So cherish those objections! If a prospect is interested enough to give you an objection they are showing engagement. The worst reaction a prospect can give you is “interesting” or “cool.” What you want is either a sale or to learn why they won’t buy. If you find a consensus amongst customers and prospects that they need feature X then and only then do you add that feature.

Letting the customers pivot you won’t necessarily turn you into the next WhatsApp, sold for $17 billion to Facebook. But it will help you learn. Rapid learning and adaptation are the two keys to survival in the Darwinian landscape of the startup world.

Support – the forgotten venture function

james dyson

I’ve been on a bit of a buying spree lately and I’ve made a couple of goofs in my rush to enhance my audio system. So I’ve had to return a couple of items, which got me into dealing with a couple of companies customer support function. Sweetwater is a site that sells professional audio equipment and musical instruments. I had neglected to pay attention to their warning that there were no returns on special orders and went ahead and bought a German headphone amplifier. When it arrived as soon as I opened the carton I realized I had goofed – while it was a professional product with professional standard XLR connector on the back, the front used the typical consumer stereo phone jack. The was a deal breaker for me as I use headphones with an XLR connector and I had no interest in having to buy an accessory cable adapter and giving up the benefits of balanced audio output. So I decided to bite the bullet and return the amp to Sweetwater.

Customer support kindly reminded me that the headphone amp was a special order and therefore no returns were accepted. But when I pushed a bit the very gracious customer support rep said she would talk to “merchandising” and see what she could do. Hours later came the verdict. I could return it, but it would cost me a 15% restocking fee. Ouch! So I pushed yet again, saying the unit was still in its shrinkwrap and could easily resold as new, because it was. Long story short, the company took back the amp and gave me a full credit on my return.

This experience was in great contrast to another customer support event I had recently. I bought my wife a very expensive English teapot. While it doesn’t boil water any faster than any other teapot it looks elegant doing so or even just sitting there on the stove. But somehow we lost a part to the top of the pot. So  I called the manufacturer and asked to buy a replacement part. But no matter how hard I pushed and how upset I got they steadfastly refused to even admit that such a part existed, let alone that they would sell it to me! They not only created one very unhappy customer, I’m reminded of their terrible customer service every time I use or even see their product. Remind me to write to their CEO!

There’s a saying, “One satisfied customer may tell one person about their experience, but a dissatisfied customer will tell twenty people.” While I doubt the accuracy of this apocryphal saying, especially in our age of social media and the constant demand for “Likes” and ratings, the principle is sound.

These experiences and others like it reminded me how important customer support is to a technology company or retailer that sells tech products, that often change frequently and may have hidden gotchas. I thought back over the past 10 years of mentoring and realized I couldn’t think of a single startup that mentioned customer support in their presentations or their mentoring sessions. Probably because most of these early stage companies had no customers to support!

As so often happens when I’m thinking about a business issue one of the three newspapers I read (New York Times, Boston Globe and The Wall Street Journal) has a relevant story.

Today it was the Journal with an article enticingly headlined as What Actively Managed Funds Can Learn From Vacuum Cleaners By Mike Cherney.

Dyson, which manufactures appliances including vacuum cleaners and hair dryers, would send replacement parts to customers who call about repairs, Mr. Formica said, adding that the company would call back to make sure it’s working.

Founders take careful note of the last sentence! I can’t remember ever having any manufacturer or retailer calling me back to check to see if I was satisfied. Dyson is actually a high tech company masquerading as a vacuum cleaner maker. Check out James Dyson when you have the time. He’s quite the inventor and entrepreneur!

Mr. Formica added: “No questions, no quibbles. That is client experience,” It’s not just the customer support result, as in my story about Sweetwater, it is about the customer experience. Companies need to realize that these days that is what they are selling, not product, not services but customer experience!

Cousin to customer support, which focuses on administrative tasks like handling returns is technical support, that is supposed to help customers who are having problems using their products. I’m sure you all have your horror stories about the failings and foibles of tech support, especially for computers, ancillaries, and smartphones. Quite a few years ago tech companies stopped providing phone tech support at all, leaving customers to wade through their voluminous help files unaided.  I’ve gotten so frustrated trying to find a phone number and then battling through voicemail phone trees that I’ve basically turned to Google for tech support. Searching Google is not only faster, it’s also often more up to date on how to fix or avoid problems with your products. So what is wrong with that? Well quite a lot! As traditional product companies have long known, customer support is part of sales, known as “the post-sales process.” It’s not only an opportunity to burnish the firm’s reputation it can also be an opportunity to learn what makes your customers tick and perhaps even to sell them an accessory or complementary product that they may not have known about.

So founders, pay attention to the customer lifecycle and customer retention! Customer support and tech support can help you please your customers, retain them, create positive and powerful word of mouth, and generate additional sales. You should budget for both customer and tech support and have both report in to sales. One story I heard, I think it was about Microsoft, was that software engineers were required to field tech support calls from customers! This turned out to have a significant impact on tech support calls, as software engineers had a strong incentive to avoid bugs and duty on the tech support hotline. What a great way to get your developers close to the customer! Consider doing this yourselves.

I hope I start seeing presentations and hearing discussions about support this year. Amazon has proven with their incredibly friendly  and efficient return policy and process that great customer support can help make a company great.

The one business parameter that will determine your customer acquisition strategy

valley-of-death

As a mentor for the past 8+ years at the MIT Venture Mentoring Service (VMS) I have seen a very wide variety of early stage startups – and with a few exceptions all my mentees are at zero stage – idea conception or stage one – idea validation.

There’s one question I ask these very early stage startups to answer for me, but more importantly for themselves: Are they a high volume, low price business or a low volume, high price business? For example, creating apps for iOS and/or Android is a very high volume business – you will need thousands if not hundreds of thousands of users to succeed, because Apple and Google have set the pricing for apps incredibly low – a few dollars per app at the most. Conversely developing drugs for very rare diseases for a very small number of patients results in very high prices – as much as thousands of dollars per month.

Typically high volume, low price businesses are in the B2C market. There the cost of customer acquisition has to be very low. You can not afford a sales force if you are selling an app that cost $3. So it’s absolutely critical that you have a very well thought out customer acquisition strategy or another way to make money, such as in-app purchases. Typically consumer apps need to go viral – customers sell their friends and zero cost to you (search for viral on Mentorphile to see several posts on this subject). Conversely, if you are selling a very high end product you will probably need either your own sales force to call on the relatively few prospects you have, or a partner who does. The valley of death is littered with those companies try to do both: “We’re all floor wax! No, we’re a dessert topping!” Only on Saturday Night Live can you be both!

The reason Apple is a money machine and the most valuable company on earth is that they have succeeded in being a high volume, high price business! But that has only taken the genius of Steve Jobs and Steve Wozniak and thousands of brilliant designers, engineers, marketers, and executives and over thirty years to achieve.

So please, early stage founders, stay out of the valley of death! Determine if your business will be selling to millions of consumers who won’t pay more than $X or $XX, or a business that will sell to hundreds or perhaps thousands, but where customers will pay $XXX or even $XXXX+ for your product.

Lessons from inventor James Dyson

dyson

PHOTO: JUDE EDGINTON FOR THE WALL STREET JOURNAL

James Dyson is a highly successful inventor who has built an empire of high-tech, design-centric consumer products, including  vacuum cleaners, supersonic hairdryers and air-purifying fans. His background is somewhat different than the typical U.S.-based engineer/founder:

Mr. Dyson, 70, was born in Norfolk, England. He had no formal engineering training. Instead, he went to art school and then studied design at the Royal College of Art.

There are some important lessons in the Wall Street Journal article James Dyson’s Big Ideas that are far from unique, but seem to be key elements of successful founders.

The first his his attitude towards market research, which is virtually identical to Steve Jobs:

Market research at the time said that customers weren’t especially interested in cordless vacuums, but Mr. Dyson decided to ignore it. “You can’t ask your customers to tell you what to do next,” he says. “They don’t know. That’s our job.”

The second is his attitude towards failure and the need for perseverance.

He credits his success to “perseverance, taking risks and having a willingness to fail.” “Inventors rarely have ‘eureka’ moments,” he says. “Developing an idea and making it work takes time and patience.” He adds, “We fail every day. Failure is the best medicine—as long as you learn something.

N.B. that failure is ok – as long as you learn something! There’s too much lip service paid to the value of failure in the startup world and not enough attention paid to the need for continuous learning.

In my 30+ years of working with entrepreneurs I’ve found that persistence/perseverance and continuous learning/improvement are the key determinants of success. For example, Tim Westergren the founder of Pandora was turned down by 150 VCs before finally landing an investment.

So here’s a little self-test for founders: if you aren’t willing, able, and passionate about working extremely hard to realize your vision, usually for years and usually taking well below market compensation,  don’t even start. Go to work for someone else.

I used to wonder why successful song writers kept writing songs even well after they became multi-millionaires and could easily have retired. The answer is simple, the can not NOT write songs! It’s something they are driven to do. And founders have to have the same motivation, it is not about money, fame, power or other stuff more easily found on Wall Street or elsewhere – it’s about the unquenchable drive to build out their vision. James Dyson at age 70 is still going strong, and why not! Money, fame, power, etc. are the byproducts of a successful startup, not the reasons for starting a company. There are lots of easier ways to get rich, if not famous.

*In a 1998 interview with Businessweek, he famously stated:

“It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.”