Wednesday, October 29, 2008

Understand your customer.

San Diego entrepreneur Neil Senturia started out believing that ATCOM/INFO was an Internet kiosk company but it eventually ended up as a software company. According to Senturia, “When you’re trying to sell your product, the first meeting is always with the wrong people, so try to get it over with as quickly as possible. It took us about six-weeks of meetings until we were finally talking to the real customer. We didn’t know who the customer was in the beginning. Then it dawned on us that we weren’t selling to business travelers - we were selling to hotels!”

To succeed in business, focus on finding the right customers and on learning what they want. Then use your skills and resources to surpass their future hopes, not just to meet their present expectations. A new company shouldn’t compete on price because it'll risk going out of business if it does. Instead, it should work to attract customers by offering them more value for the same price they’re already paying. Price takers are “me-too” competitors. Value makers, like Nike, create new categories and new price points. If you don’t have a clear distinctive capability, you’ll always be jostling for position in the middle of the pack.

Thomas Edison's business failures often came because he relied primarily on his own taste and technology-centered logic rather than trying to understand what other people wanted. For example, when he invented the phonograph, he studied both the cylinder and the disc, but made the mistake of selecting the cylinder because of its technological superiority (as the cylinder revolves, each part passes under the stylus at the same speed). He also preferred cylinders because phonographs using cylinders would allow people to make home recordings. Edison didn't anticipate that the phonograph would be used primarily for the distribution of music. He thought of it as a tool that would allow businesspeople to dictate letters onto cylinders that could be mailed to recipients without the need for transcription. Discs, however, had important advantages over cylinders: they were less fragile; took up less space; were easier to store, package and ship; could accommodate longer playing times by increasing the diameter; had a second side that added more capability without adding storage space; and were cheaper and easier to mass produce.

Being first, being best, even being right doesn’t matter. What matters is what customers think. Edison was first and had the best sound quality. But he lost out in the marketplace by pushing the cylinder when customers preferred the more convenient disc. Edison pushed the phonograph as a recording medium when customers were more interested in listening to prerecorded music. When Edison finally did switch to discs, he didn't use famous (and expensive) musicians, but instead hired excellent but lesser-known artists. As a result, he was never able to capture market share from his competition, the Victor Talking Machine Company.

Sometimes, entrepreneurs follow their own internal compasses instead of looking at the consumer’s needs. Potential investors want to see consumer data to support an entrepreneur’s belief that the product will sell. Once they believe the product will sell, they’ll want to examine the company’s business model to see how it plans to make money by doing it.

Whichever business model you use, the math’s got to work. You have to be able to show how you can make a profit - and the sooner, the better. As Vicki Marion, the CEO of Viadux Inc., says, “It’s never too early to be profitable.” While profitability depends on many things, one of the most important is the design of the product.

No comments: