Show me your customers, and I will tell you who you are.
There is an old saying that you can tell a lot about a person by knowing their friends and the company they keep. The same is true for startups and why it is critical to target the right markets and customers to define what kind of company you are or will become.
The right customers varies from company to company or even product to product within a larger corporation. It some cases it might be small businesses, or 18-24 year old consumers, or Fortune 1000 financial services firms (although in today’s market you want to be real sure about that as your target…). What matters is figuring out on which is the right market segment to first focus and establishing a wildly successful reference-able set of customers upon which you can then build a foundation to further expand and grow the business.
This decision about what customers or markets is important for a couple of reasons: Focus, Reference-ability and Competitive Advantage.
Focus
Getting a great team aligned behind a singular goal is key. At Vontu, a company of which I was the CEO and a co-founder, we were like any other startup in that we did not have a lot of funding and we needed to maximize and focus our efforts. For us, we were in an information security space helping organizations to prevent the loss of sensitive information from the inside – such as employees sending out data over email, copying information to an external hard drive or simply helping to find all the places sensitive data is stored inside of the organization.
We made a decision to focus on companies in the Fortune 1000 that have lots of customer information, e.g. credit card and social security numbers – which meant financial services (banks, et al), insurance, and retail. We focused on this problem because the regulatory legislation to protect customer data combined with the negative impact as a result of losing that information, meant it would be a top priority (See recent press about a data breach in the Wall Street Journal). We felt that this was a big enough space to start and could serve as a strong foundation for future growth into other areas such as companies with lots of intellectual property. Everything in the company aligned behind this goal from our products to marketing to sales to support. With limited resources, we put all our wood behind that arrow and as a result, our first customer was one of the 3 largest banks in the United States – and one of the largest in the world for that matter.
Reference-ability
When we closed that first customer, we then knew if we made them wildly successful and reference-able, they would help us get the next 20, 30, 40, or even hundreds of customers who would all have similar characteristics of being Fortune 1000, lots of customer data, and lots of employees which meant unique challenges of scale. The same holds true in any space and is the idea behind how your customers define you. By winning and making this customer successful, we now had credibility to win other customers of similar size and stature in the Fortune 1000. We not only had a reference, but we had a model of repeatability and domain expertise that we could apply to other similar customers. Ultimately, we ended up with 50% market share in the Fortune 1000.
Competitive Advantage
By winning this first customer, and then the next set of Fortune 1000 customers in financial services, insurance and retail, our customers became a self confirming competitive advantage. Customers like to know, especially when buying from startups, that they are in good company. By winning the first large bank, we were able to get most (if not all) of the top 10 banks. By winning the banks, retailers felt more comfortable buying from us. And so on. And this success made it increasingly challenging for our competitors to compete in the Fortune 1000 since they had so few, if any, Fortune 1000 references. Of course, we still had to have a better product and continue to out execute our competitors, but as they copied our features, it was nearly impossible to replicate our customer base.
While this sounds like an obvious thing to do, maintaining that focus is not easy. Why? Early one, while we had been talking with some Fortune 1000 companies to get them as our first customer, one day, out of the blue, I got a call from a small, several hundred person company, based in Hawaii, that was interested in evaluating our product. It took all my courage to tell them while we would like to work with them, we had to to say no. The reason being that it would take just as much time and energy to work to get them as a customer, and the price would have been lower and it would not have helped get customers in the Fortune 1000. Sometimes saying no to a customer is the right answer.
And while this example is from the enterprise software space, the same is true for any market. Toyota seeded the Prius with many high profile celebrities who represented the “green” movement. Facebook was initially for college age students and once they dominated that space they moved to become a mainstream web application even for geezers like me. By winning the right first customers, you can then influence the rest of the market to your ultimate advantage. So pick your customers wisely as they will define who you are.
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Following the puck can give you a black eye
Wayne Gretzky is one of the greatest hockey players of all time. I remember reading somewhere that while watching hockey games on TV, his dad made him draw on paper where the puck was going in order to teach him to “Skate to where the puck is going, not to where it is”. That quote is often good advice on how to compete. But it does beg the question, “What if someone’s stick is winding up to take a shot right at your face?” Well, at times like that maybe the right competitive strategy is to play a different game. And that is exactly what Nintendo did with the Wii.
I’ll admit it. I got a Wii for Christmas and it’s fun. I will also admit that when I first heard about the Wii I thought Nintendo had totally lost the video game market to Microsoft and Sony. As background, through the 1980′s and early 1990′s, Nintendo was the market leader with the Nintendo Entertainment System and the Super Entertainment System. But once Sony stepped in with the Playstation in 1994 and then Microsoft stepped in with the Xbox in 2001, Nintendo was relegated to a distant third place.
The market dynamics in 2001 were basically as follows (think of this as where the traditional video game market “puck” was going):
- video game players were primarily males ages 12-40
- first person “shoot em ups”, such as Halo, were all the rage.
- all the industry talk was about the need for faster and more realistic graphics.
So what to do?
The common and most often used strategy is to do what everyone else is doing but doing it better and faster. This is exactly what Microsoft has done with Xbox -- and actually for almost every market they enter -- operating systems (Mac), Applications (WordPerfect and Lotus 123), Databases (Oracle and sybase), etc. Let’s call this “Keep up or get ahead of the joneses”. And Microsoft has shown that it can be a good strategy. However, it would dictate that Nintendo make a box that has faster graphics with more shoot em up games, and do it better and faster than Microsoft and Sony.
Instead Nintendo charted a whole new course. They said let’s do something completely different. Let’s zig while everyone else zags. They questioned the status quo and instead of trying to get a piece of an existing market, they challenged the basic market dynamics and literally and figuratively changed the game.
They said let’s build games for a (much larger!) segment of the population not currently even a target for an Xbox or Playstation -- which will make both somewhat irrelvant as competitors. By coming up with a whole new way to play games based on a new controller or, more to the point, a “wand” you hold in your hand and move, they were able to go after a new market such as younger children and their parents and even grandparents. As an example, people play Wii Sports for hours. Many of the games are very simple electronic versions of tennis, bowling, golf, and boxing. The graphics are not at all realistic, but it is tons of fun. Hand someone the controller and they are playing tennis in no time at all -- no matter what the age, from 7 years old to to 70, or the gender. And they actually make money on each unit as opposed to Sony and Microsoft that lose $100-200 per game box and make their money on the royalties from the games.
In hindsight, it seems obvious. Why do you need a controller with a gazillion different buttons so when you press X and O followed by a double tap move to the left does a Karate Kid “crane kick”? How about simpler games such as tennis, and you use a controller you simply swing just like a racket? If you’ve never played a Wii, then watch the video.
And now Nintendo is the video game console market leader. Worldwide sales from Wikipedia shows the results for this generation of games as follows:
- Wii 45.8 million
- Xbox 360 28 million
- PlayStation 3 15.6 million
There are other examples of companies that have done the same thing taken the road less traveled such as Southwest Airlines -- air travel like a bus, FedEx -- overnight mail delivery, or even Cirque du Soleil, a modern day circus for adults (and $100 tickets!).
So next time you are coming up with a startup or competing against a more established player, ask yourself if you can go after a whole new market to capture new demand which makes the competition irrelevant (for the time being at least), and do it with lower costs. That combination of new markets and better economics will make the competition wonder where the puck went for a long time. Let me know what you think…
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