Part Two: To market, to market
In part one of this series (Computerworld, March 2) we looked at building a profitable business as being the key to creating a valuable hi-tech business. The key to building a profitable business is to choose the best market, which leads us to consider how we define a market.
A classic marketing definition is a group of similar customers, with the capacity and willingness to pay for something they need or want.
Lets look at each of these points in turn. A group of like-minded customers is an important starting point. Without doubt there are some horizontal markets that are broad and non-specific; think the market for Trade Me and mobile phones. However, most markets are more vertical in nature — think vets, hotels and supermarkets.
The key here is to think of markets as something you would want to shoot with a rifle, rather than a shotgun. Many technical people struggle with this key concept, reasoning that isn’t bigger better and shouldn’t they therefore make their product appeal to as many people as possible?
The answer is categorically “no” for two main reasons. Consider the complexity alone. Vets are focused on bookings, drugs, surgical procedures and selling pet food. Hotels are concerned about on-line reservations, check in and check out, getting bar bills onto room accounts and charging for phone calls. Supermarkets are concerned with inventory and stock turns, margins, advertising and competitive pricing.
Can you see where we are heading in terms of complexity? Any savvy tech person can build a product to do more or less anything. The issue is more about building a product to build profitability and that almost always means taking a more focused approach.
The second reason has to do with marketing. Imagine for a moment you have built the ultimate product that all vets, hotels and supermarkets will want. How will you sell it to them? There are trade magazines, mailing lists, conferences and trade shows for vets. However, good luck finding a trade show that vets, hotels and supermarkets all attend or a magazine they all read. Also, think about how a vet will feel listening to a recommendation from a supermarket owner.
So we need to consider the capacity and willingness of the target market to pay for something they want or need.
To take the easy part first; we all want an iPhone, a Mercedes and a Lear Jet, but do we really need these. Wouldn’t a mobile phone, a Toyota and a seat on an Air New Zealand flight do almost as well? There is a great line of dialogue in the movie Love Actually where the secretary flirting with her boss says, “I don’t want something I need. I want something I want — something pretty.”
Although many people with a technical background find it counter intuitive, we tend to buy emotionally and then rationalise the decision afterwards.
Remember, we are trying to build a valuable business by building a profitable business and “wants” usually are perceived as more valuable than “needs”.
And now, saving the best for last, we come to the capacity and willingness to pay. Those of you who have sold hi-tech product will no doubt be smiling at the irony implied in the difference between capacity and willingness, and the challenge in finding large numbers of customers with both.
As a rule of thumb customers perceive hi-tech products (and services) that increase revenue as much more valuable than those that claim to reduce cost. Apart from the obvious suspicion of vendor claims, most seem to feel that costs are relatively soft and that if the receptionist wasn’t doing the backups they would still have to pay her for being there — so claimed staff savings often may not be achievable.
Willingness is also strongly influenced by peer endorsement, which we’ll look at more closely in a later article. For now its sufficient to consider that most hi-tech customers tend to cluster around three vendors who most often dominate a single market. In most hi-tech markets the market leader will wind up with 40% or more share, with two others winding up with 20% or more each. Between them that’s 80% or more of a given market.
Good news if you are one of the anointed three leaders, hard yards are ahead if you are a minor player.
So the key to selecting the right market is to be certain. Time spent validating assumptions is time well spent. Although for many the urge to get out and build product can be strong, we need to recall that if we want to build a valuable company we need to build a profitable company. And if we want to maximise our chances of success, choosing the right market is far more important than anything else at this stage.
We also need to reflect upon Xerox’s invention of the mouse and Apple and Microsoft’s successful commercialisation of it. Being first is not as important as being right when choosing your market.
In the early days of the internet I set up one of New Zealand’s earliest ISPs. We were the 42nd ISP to launch in New Zealand, but within 10 weeks we were the largest.
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