Customers & Competition

In the Customers & Competition chapter, you will explore two important fundamental components of a winning business model – the market (customers) and industry (competition).  Your startup must be different in a way that’s important to your customers.  Without meaningful differentiation, you’re forced to compete on price, which puts your startup on death row.

In this chapter, you’ll learn how to use your competition to gain an advantage, how to break down a market, and why that’s so important for customer acquisition.

Most importantly, this chapter gives you the opportunity to step away from your idea and take a broad look at your proposed battlefield.  As Warren Buffett famously said, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.”  No matter how good you are as an entrepreneur, it’s hard to succeed if you pick a shrinking market or a cutthroat industry.  Avoid the most common pitfalls and learn how to identify promising opportunities with the strategies in this chapter.

Reframe the Competition

By | Customers & Competition | No Comments

People are natural and creative problem solvers.  If there are lingering problems of importance, they’ll usually find ways to reduce or eliminate them.  The severity of the pain determines how far people will go to solve the problems.  This is crucial to understand when considering your competition.  You always have competition, whether they’re direct competitors, who offer similar products, or indirect substitutes, that solve the same problems with different methods.  Much more than your direct competition, the array of solutions in use defines your competitive set.  The best way to arrive at a comprehensive list of competitors is to answer the question, “What pain am I trying to solve, and how do people solve it today?”  This open-minded approach can lead to major breakthroughs.  Southwest Airlines, for example, got its start by competing against cars, not other airlines.  For the same price as a car trip Southwest could get you to your destination in less than half the time.  They reframed the competition.  While airlines all compete for air travel, it’s easy to forget that there are a bunch of ways to travel, including trains, rental cars, buses, or boats.  How are your potential customers solving their problems today?  That’s your real set of competitors.

Lady Luck

By | Customers & Competition | No Comments

You are in total control of many things in your startup.  But there are two things that you have no control over – luck and timing.  While we like to think that we’re masters of our own destinies, Lady Luck always has a significant impact.  She creates uncertainty and anxiety, but she’s also one of the reasons why startups are so much fun.  Who knows when you’ll get your lucky break?

Equally important and frustrating is timing.  Your launch timing can make the difference between you being broke and a billionaire.  Would Facebook be what it is today if it had launched four years earlier?  Unlikely.  Would Bill Gates be one of the richest men in the world if IBM hadn’t come along to give him a ride?  Probably not.  Being too early is the same as being wrong, so look out for signs that the timing is right.  Usually, a market is ready for entry when the first few competitors have launched, but they haven’t quite figured it out yet.

Sometimes, what you can’t control is what keeps things exciting.  Think of luck and timing as part of the great adventure, and be sure to enjoy the ride.

#1 Startup Killer

By | Customers & Competition | No Comments

It doesn’t matter how good your team or product are if you are entering a terrible market.  You might have nailed the value proposition with an amazing new technology, but if there are only a handful of customers willing to pay, then you’re dead in the water.

What makes a good market? The answer depends on what kind of business you want to build, but here are some things to look for.  First, it should be big enough.  If you want to build a $100 million business, don’t pick a $10 million market.  All things equal, bigger markets are better because they give you more room for error.  If you miss the mark with one segment then you can always pivot in the direction of another.  Next, a great market is one that is growing quickly.  Entering a shrinking market is like trying to make lemonade from already-squeezed lemons.  You might get a few drops but you’re going to work damn hard for them, and still not get your cup of lemonade.  Conversely, there’s a lot of love to go around in quickly growing markets, which creates great opportunities for new entrants.  If 80% of success in show business is just showing up, 80% of success in startups is picking the right market.

Nice Guys Finish Last

By | Customers & Competition | No Comments

When first starting out, it’s easy to get lost in the jungle without a compass. You’ll hear advice from everyone pushing you in all different directions.  Users will want you to build specific features that might not agree with your vision of the product.  Ask for recommendations and the suggestions you get will send you in all different directions.  Especially since you have limited runway, it’s vital to focus on one product vision and one subset of the market.  This means you will have to say no, and people will be disappointed.  That’s okay, because nice guys finish last.  Succeeding with early traction requires marketing efforts that result in repeated exposure and clearly communicated, compelling differentiation. By trying to please everyone your product and advertising won’t speak loudly enough to your ideal customer.  Rather than trying to be all things to all people, make the conscious decision to focus your marketing efforts on one specific kind of customer.  Then put everything you’ve got behind solving that pain.  Only after you have initial traction – revenue and hopefully profit – does it make sense to start expanding.  You can use what you learn in the first phase to broaden your feature set and marketing efforts. Especially at the beginning, if you try to please everyone, you’ll end up pleasing no one.

Get Them Early

By | Customers & Competition | No Comments

Even within your market, people and organizations are wildly different in how they make purchasing decisions.  There are five different kinds of customers as you move along the product adoption lifecycle.  However, at a very early stage, you can broadly categorize your segment into two very different customer groups – early adopters and the mass market.  A small percentage of the total market, early adopters are adventurous innovators who view technology as an opportunity to gain a competitive advantage.  They are typically younger, social, risk tolerant, and give useful feedback.  The mass market is usually the opposite – risk averse, skeptical, and slower to adopt.  Instead of seeing your product as an opportunity for advantage, they adopt technologies only to keep up with the times.  Marketing to the two groups is very different and it’s not uncommon to succeed in selling to early adopters but to fail with mainstream customers.  When you first start selling, make it your mission to find and sell to early adopters.  Get them on board early in your product development cycle, so you can get feedback and start generating revenue.  When you’re ready, hit the mainstream customers by adjusting your messaging and pitch.

You Can’t Boil the Ocean

By | Customers & Competition | No Comments

Once you’re comfortable with the size of your market and the potential opportunity, it’s time to drill down and focus on one or two segments of the market with the highest potential.  Even if everyone under the sun is a potential customer, you only have the resources to focus on one or two core segments.  You can’t boil the ocean.  If you want to build a social network of moms, for example, the best way to start is would be to target just one type of mom – like soccer moms – instead of all moms.

Your instinct will probably resist this – after all, aren’t you limiting your chances for success?  Don’t think of it this way.  People buy from companies they know and trust.  Getting people to know and trust your company requires a lot of time, energy, and money.  It’s been estimated that it takes around $100 million to turn a product into a household brand name.  Chances are you don’t have this sitting in your bank account.  However, while you can’t reach all potential customers, you can reach a small segment of the market that sees the highest value in your product.  You are basically doing the same thing big companies do, but on a much smaller scale.  Plus, once you get traction and start generating revenue, you can always expand from there.

Tell Me What Sucks

By | Customers & Competition | No Comments

When first adopting a market-driven approach, it’s tempting to think that prospective customers will be able to give you all the answers and tell you what they need.  They’re the ones with the pain, so they’ll know the best way to solve it, right?  Unfortunately, it’s not quite that easy.  Interviewing five prospective customers will probably result in 10+ completely different suggestions.  If you blindly followed their suggestions, your product would end up confused and bloated.  Of course, it’s always helpful to understand a customer’s pain and how she solves the problem currently.  However, after this is understood, you should introduce your solution.  Mockup your idea in the form of an MVP and put it in front of potential customers.  In addition to getting general feedback, ask them what sucks.  Ask them what they hate and will never use. This serves two purposes: 1) as long as you don’t get defensive, this helps people give honest and unbiased feedback, which is crucial; and 2) it will give you the opportunity to cut the fat out of your MVP.  Your mission is to get to market with the leanest possible product, knowing that you will iterate based on actual product usage.  Don’t build more, build less and go fast.

WII.FM – Your Favorite Radio Station

By | Customers & Competition | No Comments

WII.FM is everyone’s favorite radio station – What’s In It For Me?  What you sell doesn’t matter.  Potential customers could care less about the features of your product or service. They only care about how it benefits their lives.  Your product is a solution, designed to solve a problem in their lives.  As such, when it comes to your market, the main thing on your mind should be the benefits you give customers.  Are you entertaining them?  Giving them bragging rights? Making them more productive?  To understand benefits, you have to understand the pain that you reduce or eliminate.

Because benefits are so important, be sure to include both features and benefits when you do a competitive analysis.  By including benefits, you’ll get a much more insightful and actionable comparison. Obviously, different customer segments will have different priorities as to what benefits are most important to them, so potential third dimension in your analysis would be the customer segment. From there, identify the segment that most values your differentiation – often the highest willingness to pay – and you’ve got your beachhead market.

To B(2B) or Not to B(2B)

By | Customers & Competition | No Comments

Broadly speaking, there are two kinds of customers: businesses (B2B) and consumers (B2C).  The type of customer you pursue heavily influences your startup strategy.  Consider, for example, how drastically your sales approach would differ with businesses and consumers.  Enterprises are rational and look for a return on investment, whereas consumers are influenced by a myriad of (sometimes irrational) factors.  Enterprises want the facts, and will examine the savings your product generates, the cost to produce those savings, and invest accordingly.  Consumers make purchase decisions are based on, among other factors, perceptions, social trends, culture, beliefs, search costs, and brand recognition.  And this is just one example of the differences between B2B and B2C.  Other important factors include distribution channels, sales cycles, multi-sided markets, and the number of people involved in the transaction.   When starting up, think about what kind of customer you are targeting and how that might affect your approach, not only with sales but with the entire go-to-market plan.

Know Thy Market

By | Customers & Competition | No Comments

There’s a lot to be said for having industry experience on the founding team.  Oftentimes, industries have quirks and ways of doing business that might not be immediately obvious to outsiders, but that can make or break your business.  For this reason, unless you plan to disrupt an industry rather than compete in it, investors will almost always require that you have domain expertise on the team.  If your team doesn’t have the right experience, get an advisor, partner, or employee to fill this hole.  This will help in three key ways.  First, an industry expert risking his reputation to join you will give you credibility.  Second, the expert should have a solid network of industry contacts, which will help with everything from early feedback to strategic sales.  Finally, and most importantly, this person will help you find the right product/market fit faster, which lowers your risk substantially.  With a domain expert, when things go wrong, you’ll be more likely to get to the root causes and understand why.  While industry outsiders have unique perspectives, industry experience is a big plus.