Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

From LEARNVC blog  

The business model is loosely comprised of your market size and revenue model. We also include the product roadmap in this discussion to show how helpful it can be to iterate through your business model numerous times.  In an effort to simplify the process, we recommend starting with determining your addressable market. The TAM (Target or Total Address Market) of your business is what every investor wants when they ask, “What is your market size?”

Addressable Market (TAM)

The TAM is the upper limit for your market given 100% saturation of your product. As an example, let’s say your business is to sell shoes to senior citizens within the United States. Your market size is not the total US shoe market size. Instead, your addressable market is the number of senior citizens in the United States multiplied by your price point, adjusting for the expected lifetime of the shoes. This results in your product’s recurring annual TAM. Although in reality you will never achieve that revenue, the TAM still represents that upper limit.

More important than the TAM itself are the assumptions of how you got to that number. Investors don’t want to hear, “Our market size is $13 billion, as determined by Bob. We only need to capture 1% of that market to realize $130M in revenue.” Instead, a bottoms up approach using your addressable market with assumptions clearly spelled out will go further to build credibility with investors. Investors like to see large TAMs, but also like them to be built on strong assumptions. In addition, the growth of the target market has been known to forgive many mistakes. Shrinking markets only further challenge startups.

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Key ideas from the Harvard Business Review article by Daniel Yankelovich and David Meer

The Idea

Fifty-nine percent of recently surveyed companies executed a major market-segmentation initiative in the previous two years. Yet only 14% derived real value from the exercise. What’s wrong with market segmentation?

Segmentation typically focuses on consumer “types” (High-Tech Harry, Joe Six-Pack). This categorization may help advertisers strengthen brand identity by developing messages that speak to different consumer groups. But it doesn’t tell companies which products or services consumers might actually buy, so it can’t help firms decide which new offerings to develop.

To get more from segmentation, Yankelovich and Meer suggest several tactics. For example, tailor your segmentation to a strategic decision. (Do you want to reduce customer defections? Extend a brand?) Define segments based on consumers’ actual purchasing behavior (heaviness of use, brand switching) and their likely behavior. And redefine segments as market conditions change.

Apply such tactics, and you respond promptly to rapidly shifting market realities. You gain insight into how to compete. And you extract maximum value from scarce marketing resources.

The Idea in Practice

To segment markets effectively, apply these tactics:

• Identify a strategic decision that would benefit from information about different customer segments. For instance, a fast-food company is considering developing healthier menu alternatives. A personal-care company wants to extend a soap brand into deodorants.

• Determine which customers drive profits. Understand what makes your best customers so profitable, then identify segments that share at least some of those characteristics.

Example: A luggage company finds that many people who buy its highest-margin carry-on bags are international flyers. It thus identifies international travelers as a promising target segment.

• Analyze actual and potential purchasing behavior. Current behaviors (including heaviness of use, brand switching, and channel selection) can help you predict future behaviors using a statistical technique called conjoint analysis. Through such analysis, you present consumers with combinations of product features and ask them how willing they’d be to purchase the product in question if particular attributes were added or removed, or if the price changed. You then segment based on your findings.

Example: A pet food manufacturer used conjoint analysis to determine which features to include on food packaging (such as a resealable opening and a handle on 25-pound bags). It segmented consumers according to their degree of price sensitivity and desire for convenience. It then redesigned its packaging with added features that would maintain existing customers and attract new ones. And it jettisoned features whose cost would have required charging too high an overall price.

• Segment in ways that make sense to senior management. Resist any urge to flaunt your technical virtuosity by dissecting segments into ever finer slices containing improbable combinations of traits. Instead, define segments in ways that make intuitive sense to senior managers. They’ll be more likely to accept your research and to fund resulting initiatives.

• Revise your segmentation as market conditions change. Unlike personality traits, which usually endure throughout life, consumers’ attitudes, needs, and behavior can change quickly with new market conditions, so be willing to redraw your segments to reflect new realities.

Example: At the dawn of the Web, many companies segmented according to consumers’ degree of online experience. “Early Adopters” felt comfortable exploring the Web on their own; “Newbies” sought extensive support. As newcomers became scarcer, companies segmented using other criteria, such as consumers’ concerns about online security and interest in games or parental control devices.

The article was written by Leia Mahalo a freelance SEO and SEM specialist working for i-trepreneur.com.

A business must have marketing strategies on how it is going to attract customers and sell its product and services at the same time. The formulated marketing strategies must also be concerned with the product, place, price and promotion mix of the marketing plan. Pricing strategies include the amount needed by the company to cover the cost or expenses of their products. They must think about how they would price their products so that they would also gain profit as well. Product strategies include how the product will be positioned in the market. Companies must also consider the perceptions of the customer regarding their product. The features and characteristics of the product must be clear to their target market. Companies must also decide on the differentiation of the products in the current market. This is necessary to create a distinction from the existing products of other competitors and make a mark in the customers’ minds when they think about the product.

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From Lightspeed Venture Partners 

In the past I’ve written about encapsulating your business plan for potential investors in an executive summary, or even more succinctly as a high concept startup pitch. This is helpful for communicating to angel investors and VCs, but it doesn’t help you communicate to new and potential users of your product why they should try your site.

Whether you plan on acquiring new users through viral growth, SEO, SEM or banner advertising, the basic principles of marketing apply. You need a Value Proposition and a Call to Action. It helps a lot if your value proposition is unique so that it stands out from its competitors

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From The Angelsoft Blog 

Market size is an important factor when an investor is considering your application. An ideal market for an investor is at least a billion dollars. If you don’t think your market is that large, then you may not be right for investment.

Chances are you think your market is much larger than that, which is one of the biggest pitfalls that entrepreneurs fall into. You will not impress an investor with inflated market numbers; it signals a lack of understand about the business you are trying to start. The goal is to hone this number down to a true reflection of the number of people that could be interested in your product or service.

Here’s an example using fake numbers for simplicity:

If you’re selling guitar strings, you could say that your market is the billion-dollar music industry, but that includes plenty of people that don’t play instruments.

You could claim that it’s the million-dollar musical instrument industry, but there are plenty of people that play instruments but not guitar.

You could say you plan to capture the $500,000 guitar owner market, but your strings are for electric guitars.

The electric guitar market is $250,00, however your strings are made of carbon-fiber. They are a huge step forward in the guitar string industry, but can only work with 50% of electric guitar models. Now your market is down to $125,000

This is the type of exercise that is necessary to determine the true size of your target market. When you get down to it, you may find that your market is too small. This is invaluable information to know BEFORE you invest yourself into a business that isn’t sustainable. You don’t want to a pitch an investor and look like this:

by Rob Markey, Gerard du Toit, and James Allen, HBSP 

Charged with extending their unit’s product lines and boosting top-line growth over the next three years, product managers at one global consumer goods company wanted to identify the most attractive customer segments to target and how best to reach them. So they turned to their market research department for guidance.

And why not? The market researchers at the company—we’ll call it ProdCorp—were world class and skilled at using the latest tools in demographics, psychometrics, and statistical analysis. Every two or three years, they would field an ambitious research project that pinpointed large, attractive customer segments and lots of tantalizing “white space” where the company could expand its offerings.

Yet for all their rigor and reach, these initiatives yielded few insights the product managers were able to translate into offerings that tempted these legions of hypothetical customers into becoming the real thing. Time and again, ProdCorp would quietly bury its latest segmentation scheme after efforts to build marketing programs and product development upon it fizzled. Once the memory of failure faded and a new crop of product managers sought room to grow, the company would mount yet another new, expensive segmentation project.

ProdCorp is certainly not alone. We’ve seen this pattern play out in many companies in many industries. In fact, when Bain & Company recently surveyed executives about their experiences with customer segmentation, 81% said it was a critical tool for growing profits, but fewer than 25% believed their companies used it effectively. Flawed segmentation stunts profit growth. Our analysis shows that, over a five-year period, businesses that successfully tailor product and service offerings to desirable customer segments post annual profit growth of about 15%. By contrast, companies that fail to connect the right value propositions to the right customer segments realize annual profit growth of only 5%.

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From Nesheim Online blog 

MySpace.com was in the market far ahead of Facebook.com. Facebook re-defined the market space (innovated a new category) and took over the lead (measured by the rate of new users signing up). Serial entrepreneurs do that to win. They find new, unoccupied spaces to dominate. They avoid fighting head-on wars.

When you are looking at a gorilla in the space you intend to attack, think again. Attacking the Defender using the Offensive strategy demands that you focus on a single weakness in the gorilla. Most of the time the gorilla Market Leader quickly covers the exposed weakness and the Offensive attacker bleeds to death.

It is wiser to use the Flanking strategy. Find an uncontested market segment. Something fresh, large and growing, with room for competitors, including you. Give the new category a new name. Focus all your effort on taking over the lead in that fresh market segment. That is the winning strategy for startups.

COMMODITY
Sometimes your “Wow!” factor depends on a feature. It may be superior fidelity, or look and feel, or speed or less power. But those are features that will quickly be copied close enough by competitors to turn your product into a commodity. A commodity is a product that cannot be distinguished. You cannot build a brand with a commodity. You get a quick lead but competitors rush in and try to do the same as your company. Soon “everyone is doing the same thing” and yours has become a commodity. Then the VCs cancel their appointments with you, recruiting gets tough, bloggers get confused and customers yawn.

REDEFINE THE MARKET
When you find your space suddenly buzzing with annoying competitors, make your move: redefine the market. Find a fresh space to focus on, one you can be branded in. Look for your product to be much more than a thing. Add value to it so it becomes so valuable to customers that competitors cannot duplicate it.

To do that you will need a fresh positioning. That is the psychological space in the mind of your ideal customer, the space no one else yet occupies. Expensive premium coffee, Starbucks. Search, Google. Portal, Yahoo. Yours. Branded. That is no longer a commodity. You own it. Congratulations.

Yes, it is not easy. But nothing worth doing is. Right? Right.

So get clever. Be innovative. Learn from the veterans. Remain positive. It is not walking on water. Many have done it before you. So you can do it, also.

BOTTOM LINE: Focus on uniqueness. Run away from better. Or quicker, or more beautiful, or less power. Go for the gold. Find a new market segment to dominate. Do your homework, your market research. Then have courage. Execute with brilliance. Then you’ll avoid getting sucked into a losing game. Winners are differentiated. That’s what they brand. It is central to building your unfair advantage.

Innovation drives our industry, attracts the best talent,  attracts VC money, and wins fame for its leaders. Innovation leaders burst onto the scene, win early market leadership, but sometimes can’t sustain the pace. Why do “fast followers” often jump in later and make fortunes? Is management responsible for the success or failure? Or, are these innovation leaders acquired by larger players before they have a chance to evolve into successful stand alone companies?

I have been on the leading edge, sometimes bleeding edge, of technology for most of my career. I have been fortunate to be part of start-up teams that have created “first-of-its-kind” innovations at companies like Forte Software, AltaVista, Napster, Bowstreet, and Groove Networks. All of these companies were first in their field, yet few of them realized the financial rewards one would expect. Is it all timing and luck? I don’t think so.

Before exploring the reasons for success or failure lets review a list of innovation leaders and fast followers.

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By Nigel Edelshain, Sales 2.0How long is your sales cycle? How do we shorten our sales cycle? Interesting questions but how do you answer these if you don’t know what your sales cycle is?

I’d like to be a bit odd as usual and define a sales cycle my own way. My definition is a little different to the one I have heard in many companies throughout the last decade or so I have been selling and helping to improve people’s sales processes.

Many people seem to think of a “sales cycle” as the time it takes you from “starting from nowhere” to getting a contract. But how do you define this (I am having trouble defining “starting from nowhere” myself)?

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from Get Venture by Mark Davis

When most people think of a mission statement they think a of some stodgy cluster of bullet points that state trite company values and objectives.  When done poorly, these appear designed to falsely boost employee morale, pepper press releases and fill-in white space on marketing collateral.  Unfortunately, more often that not mission statements are shams and they do very little to help the company.  However, when done well they are tremedously valuable.

A mission statement is a single phrase or sentence that encapsulates your company’s unique objective. 

Unique is a key word here.  Mission statements are most effective when they focus on the unique solution that your company intends to provide.  There are two reasons for this.  First, including commonplace objectives such as becoming a large company or generating profits does not clarify what makes your company different.  Second, they do not implicitly communicate the pain point that you intend to address. 

Google has a great mission statement, “Google’s mission is to organize the world’s information and make it universally accessible and useful.”  It’s clear what they are trying to achieve and the pain point is obvious: the world information is currently highly inaccessible and useful.  Big visions are the foundations of disruptive companies, so when someone hears your mission statement they should be able to understand what about the world you are going to change.

It’s also critical that the mission statement focus on the ‘what’, not the ‘how’.  eBay’s mission is “to provide a global trading platform where practically anyone can trade practically anything.”  In this one sentence it’s not critical to understand that they will leverage technology, hire marketing people or otherwise in order to do this. 

Some companies confuse mottos and mission statements.  Motto’s are a summary of values that management hopes to superimpose on their staff.  In my opinion mottos generally come off as disingenuous.  Here’s a cheesy one: “Respect, Integrity, Communication and Excellence.”  That was Enron’s.

In sum, mission statements need to be short, unique and focused on the ‘what’.