Matters of context and delivering value

Part Six: Thinking like Ernest Rutherford

So we have seen how the key to building a valuable business is to build a profitable business. We also have to choose the right market and have a founding team to identify and then validate the market we will select to build our business.

Finally, we have to have the right strategy to bring us the fortune we deserve.

So now we can go and build some cool things, right? Well maybe, but before we do that we need to define what we will be building. Earlier we looked at concepts from Geoffrey Moore’s book Crossing the Chasm for an insight into markets. It was the first of a series of books and the most recent of these, Dealing with Darwin, gives some great insights into what we should look at building.

Bear in mind this is a one paragraph summary of a book, but in a nutshell he advocates dividing activities into core and context and then putting resources into core activities. His definition of “core” is simply differentiation that leads to a customer purchasing; everything else is context. His point is that customers don’t value context and so it does not affect a purchasing decision, although customers will punish you for a context failure.

As a simple example consider booking an airline flight. Chances are their baggage delivery record is not a relevant factor in who you choose. You decide by price, schedule, frequent flyer programme etc. However, the next flight after they lose your bags it becomes a very big factor.

So they can fly you 100 times and deliver your bag safely on time and you don’t take that into account buying your next ticket, but if they did that and then lost your bags once it will be a very big factor in your next purchase.

What I often see are people busy building the ultimate technology products, in effect Rolls Royce products. They reason that better is best and will win sales. However, this misses the point made in Crossing the Chasm that only around 5% of customers in a market will buy primarily on the basis of product features.

We simply need to pause and look out the window to count the number of passing Rolls Royces and compare it to the number of passing Toyotas to see the value of this insight.

So we need to consider building the very least we can, to generate sales and prove to ourselves we have the right market. By least, I mean the smallest and simplest product we can design that will provide the most amount of value to our potential customers. We need customers so astounded by version one that they are showering us with deposits for version two and calling weekly to see when they can have it.

This is critically important for a new technology company struggling to build revenue and profitability. Over-engineering leads to waste and is often a symptom of a lack of understanding of what customers really want. Complexity also is at the cost of usability and increases the cost of adoption to the customer.

As you build your product you will undoubtedly come across the three most dangerous words in the English language. These are the words that have in many cases directly caused the premature death (85% in the first five years) of new technology companies. These are the demon words that if ever uttered the speaker must be immediately cast aside.

They are of course “might as well”. As long as we are doing this we might as well do that.

Development of product features that are not valued by a customer are wasted effort. The best way to avoid this waste is to focus on differentiation (from alternatives) that will lead to a customer purchasing; in other words, simply those features that will directly lead to sales.

A lack of clear definition of what those product features are often leads to complex products that offer a blizzard of features, in a shotgun like attempt to cover as many bases as possible.

However, this leads to a product with the complexity of a Rolls Royce, with the usability and user training requirements of a Space Shuttle, but that will only command the price of motorbike. This is an all too common and ruinous financial predicament.

As if that weren’t bad enough, we need to again remember that only around 5% of a potential market will in fact buy a product on features alone.

So, while it’s cool to build a product, there is little chance of success if you build it without considering why 95% of the market will buy it. So the best strategy is to get something small and simple to market as fast as possible. Like Nike, just do it.

If the product is not what the market needs, its better to know immediately so you can change direction. A friend of mine, Mike Bosworth, has written two outstanding books on how to make IT sales and he comments that in any sales process there are two winners. The one who wins the business and the one who does not, but walks away first.

The key validation of whether a customer really wants and values your product is that they pay you for it. A free trial is not validation, in fact it’s a demonstration of “we don’t either believe you or trust you” so it’s of little value at all. In fact, it can be a strong negative. Following the advice or suggestions of someone who is not willing to pay you for what you develop, usually leads to blind alleys and dead ends or at worst over-engineering.

So the challenge when building product is to get something out quickly that customers are willing to pay for. If this means a prototype developed Excel or a demo version built in Powerpoint then so much the better. If it’s something you can find on the web, which you can simply put a wrapper around to test the market, that’s even better.

I often hear people say I can’t do that because I will loose my intellectual property. I haven’t yet seen this.

What I have seen often, is all available resources put into something that the market does not want followed by a collapse of the company. This is a very, very expensive way to learn and a very predictable and avoidable situation.

O’Hara is chairman of Clarity Commerce, a publicly listed software company based in England, and an independent director of Tait Electronics. Contact him at www.johnohara.co.nz

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