Creating a successful product company is a straightforward three step process:
- Create a product
- Find customers
- Match product and customers
But while straightforward, each of those steps is more complicated than it may seem at first. What follows are a few observations from my four startups and life as a product and strategy person at larger organizations.
1. Create a product
We tend to think of a product as “the thing” that we sell, whether that’s an electronic gadget, subscription service, a piece of software or a candybar. But a product is so much more. In fact you should think about “the product” as every interaction your customer has with “the thing”. From first learning about its existence to the time that they stop using it (or pass it on to the next generation if you’re a Swiss watchmaker).
Pricing and sales model, branding and marketing message, customer service, license and terms, usability and utility, aesthetics and social context are all a part of your product. Even the target audience you choose is a part of the product. And a change in any one of these is likely to impact other parts of the product too.
Getting all of these factors right will take a lot of thinking and experimentation:
- How are your target customers going to notice your product?
- How will you deliver the product to your customers?
- How will you make sure you are creating value for your customers?
- How is your product better than competing products or alternative solutions to the need?
- How are you going to tap into that value in a way that both you and your customers will appreciate?
- How will customers remember your product the next time they have the same need?
These questions – and others like them – are deeper and harder to answer than they might seem. Understanding and mapping your customers’ journey is a good way to tease them out, and come up with some theories. Observing their actual journey and improving based on what you learn directly is how you will really get to some answers.
2. Find customers
First of all: Sell to people that have money. Or more precisely: sell to people that are willing and able to pay for your product.
Private consumers are typically less likely to add a new subscription service than – even those same – people in a business setting. Adding a $20 monthly subscription is something most consumers will think twice about while a $250 purchase at work is something most office workers will do at a whim if they feel it will help them do their job. However, purchasing in a professional setting may require jumping through more hoops (reimbursement plans, purchase orders, approval processes, not having a corporate credit card, …)
On a similar note, large enterprises typically have a lot more money than small and midsized businesses (SMBs) ones, but they are also a lot slower in their decision making. Budget cycles and corporate politics, as well as deliberate and cultural resistance to change will slow things down beyond what a startup can usually fathom.
Keep in mind that it is very hard to sell to a type of buyer you don’t understand. If you’ve never worked for a large organization, selling an enterprise product is very hard. If you’re not a likely user of your product, you are not going to do a great job at convincing others to buy it. If you don’t speak the customer’s industry lingo or use unrealistic use cases that show lack of domain knowledge, you’re going to have a hard time. Show up at a power company with a healthcare example, and you will get nowhere. A creative person may be amazed at how little ability people can have for leaps of imagination. Don’t expect people to understand why they need your product. Spell it out for them. Learn what kept your champion awake last week, and tell them how your product will solve exactly that problem.
In the corporate world an incredible amount of time is spent on reverse engineering the buyer’s corporate structure, processes and hierarchies:
- Who is the buyer/decision maker?
- Who are his or her influencers?
- What’s the value your product delivers to the buyer?
- Is a budget already allocated to this purchase?
- If so: What is it? Whose is it?
- If not: What is the purchase and budget process? Can you influence it?
You will be surprised how many of these questions people are willing to answer if you simply muster the courage to ask.
Who the buyer is will heavily influence every aspect of your product – and of your organization. And the consumer-SMB-enterprise dimension is just one of several you will want to position yourself on. Targeting customers based on their industry, or functions within an organization are two other common dimensions. Often the answer is even a certain function within a certain industry in a company of a certain size. Consumer customers have other dimensions such as age and lifestyle groups, income categories, hobbies, etc.
A rule of thumb is that the more your target customers (including the buyers, influencers, processes, etc.) and the problem you’re solving for them are the same, the more likely you are to succeed in the next step and then scaling up from there.
3. Match product and customers
The customers you target will be the biggest factor in deciding on your sales model.
The table below is a grossly oversimplified representation of the characteristics of customer categories on the size scale above.
|Difficulty to start
A consumer product will typically have a low price, require high sales volumes (and thereby broad targeting) and it is difficult to get the sales engine started. Luckily the process lends itself well to be automated, the sales cycles can be short and you can scale quickly and cost-effectively once the engine is running.
On the other end you have enterprise customers who have a lot of buying power and can be well defined as a target group with a sales engine that is relatively easy to start (every founder should be able to find at least a few buyers she can sell to herself). This customer type, however, requires face-to-face meetings (field sales), has long and complicated sales cycles and the cost of sales increases almost linearly with revenue.
The models that in reality drive large and well known companies are often surprising. Google’s revenue – for example – is not from customers putting in their credit card info for a few keyword ads to nearly the extent you would think. They have a massive army of account managers and field sales people that do business the “old fashioned way”: Wining, dining and building personal relationships. A large automaker is not going to buy tens of millions of dollars worth of ads from Google through self-service!
Whatever your model, the most important thing to understand is the funnel: The stages buyers go through from first discovering your product to becoming a paying customer; what compels them to move from one stage to the next and the ratios at which they do so.
Testing your business plan assumptions based on these stages and ratios can be a sobering exercise.
Let’s say you are going for a SaaS product aimed at consumers with a freemium model. Of the people that hear about you (ad, press, word-of-mouth, …) 2% will visit your website. Of those, 10% will register as freemium users. Of the freemium users another 10% will become paying customers. If your business plan assumes 100 new customers in a given month, this means that your message will need to reach 500,000 potential customers that month based on these conversion rates (and a very short conversion cycle). All the rates in this example are pretty high, by the way.
Similarly, if you are going for an enterprise model: Assume that 5% of the qualified contacts you have curated respond to your initial outreach and agree to an introductory call. And from those calls 10% show strong interest in your product. And of those, 25% eventually become paying customers. If your business plan assumes 1 new enterprise customer in a given month and a 6 month sales cycle, that means you had to come up with and reach out to 800 curated contacts 6 months ago. And do you have the bandwidth to make the 40 introductory calls per month, as well as engaging heavily with not only 4, but 10-15 buyers with serious intent at a time (as most of the 6 month cycle will be spent here)?
You better hone in on the likely buyers early on in that process and spend your time and energy on them. Qualifying leads at every stage becomes crucial and counter to your instincts you’re actually best of “firing” your unlikely leads or finding ways to put them on low-touch or automated “nurture” campaigns until they show signs of better qualification.
Startups need to understand how much emphasis is needed on the go-to-market side of the house from day one. It is common for tech startups to put a lot of their headcount, effort and energy into the engineering side of operations; there may be good thinking on the business model and target audience, but rarely do you meet a tech startup that truly gets it.
A couple of years ago – to drive this point home in a conversation with a founder friend – I surveyed LinkedIn for the percentage of employees in go-to-market roles at several, then prominent and successfully growing tech companies. The result: Between 24% and 37% with an average at just over 30%.
Hardly a scientific study given the small sample and probably a skewed population with LinkedIn profiles, but still tell-tale. I frequently see startup business plans where the ratio of go-to-market employees is 10% or lower. That is simply not going to cut it.
So, refining the three steps from the top of this post:
- Create a Product experience
- Find Customers that are willing and able to pay for that experience
- Match Product and Customers utilizing the right model and enough people
…or simply revert to the plan of the gnomes from South Park:
Hjálmar Gíslason, Hjalli, is VP of Data at Qlik, Chairman of the Board at Kjarninn, and partner at Investa. You can find him on Twitter.