Customer Development 2: Three types of markets

1. Customer Development in High Tech: Sales, Marketing & Business Development in a Startup MBA & EMBA 295-F Three Types of Markets Steve Blank sblank@kandsranch.com 1/27/09 1

2. Class 2: Agenda Vertical Markets  Case: In N Out  Market Type  Definitions  Examples  Risks  Customer Development  Definitions  Market Type effects  Customer Development in the High-Tech Enterprise Spring 2009 2

3. Customer Development This is what our class is about Customer Development Customer Scale Customer Customer Discovery Company Validation Creation Customer Development in the High-Tech Enterprise Spring 2009 3

4. New Product Conundrum New Product Introduction methodologies  sometimes work, yet sometimes fail Why?  Is it the people that are different?  Is it the product that are different?  Perhaps there are different “types” of startups?  Customer Development in the High-Tech Enterprise Spring 2009 4

5. A Plethora of Opportunities Customer Development in the High-Tech Enterprise Spring 2009 5

6. Startup Checklist – 1 What Vertical Market am I In? Web 2.0 Semicondutors   Enterprise Software Electronic Design   Automation Enterprise Hardware  Cleantech Communciaton Hdw   Med Dev / Health Care Communication Sftw   Life Science / Biotech Consumer Electronics   Personalized Medicine Game Software   Customer Development in the High-Tech Enterprise Spring 2009 6

7. Market Risk vs. Invention Risk Customer Development in the High-Tech Enterprise Spring 2009 7

8. Startup Checklist - 2 Market Risk?  Technical Risk?  Both?  Customer Development in the High-Tech Enterprise Spring 2009 8

9. Execution: Lots to Worry About Customer Development in the High-Tech Enterprise Spring 2009 9

10. Startup Checklist - 3 Opportunity Where does the idea come from?  Innovation Where is the innovation?  Customer Who is the User/Payer?  Competition Who is the competitor/complementor?  Sales What is the Channel to reach the customer?  Marketing: How do you create end user demand?  What does Biz Dev do? Deals? Partnerships? Sales?  Business/Revenue Model(s) How do we organize to make money?  IP/PatentsRegulatory Issues? How and how long?  Time to Market How long does it take to get to market?  Product Development Model How to you engineer it?  Manufacturing What does it take to build it?  Seed Financing How much? When?  Follow-on Financing How much? When?  Liquidity How much? When?  Customer Development in the High-Tech Enterprise Spring 2009 10

11. Execution: Very Different by Vertical Customer Development in the High-Tech Enterprise Spring 2009 11

12. Market Risk Reduction Strategy Customer Development in the High-Tech Enterprise Spring 2009 12

13. So Why Are We Talking About This? Existing Market Resegmented New Market Market Customer Development in the High-Tech Enterprise Spring 2009 13

14. In-N-Out Case 14

15. In-N-Out Secret Menu X by Y Grilled Cheese   X meat patties and Y slices of cheese Two slices of melted cheese, tomato,   (for example, a 3 by 3 or a 2 by 4) lettuce and spread on a bun, with no meat. Double Meat Extra Everything   Two meat patties without cheese. Adds extra spread, tomato, lettuce, and   onions (regular or grilled). Triple Meat  Fries quot;Lightquot; Three meat patties without cheese.   Almost raw fries that are cooked for less Animal Style   time. A mustard cooked beef patty served on a  Fries quot;Wellquot; (aka quot;Welliesquot;) bun with pickles, lettuce, tomatoes, extra  spread and grilled onions. Any burger Fries that are cooked longer to be extra  (including veggie and grilled cheeses) may crisp. be made this way. Cheese Fries  Flying Dutchman Fries with two slices of melted cheese   Two meat patties, two slices of melted placed on top.  cheese and nothing else. Animal Style Fries  Protein Style Fries with cheese, spread, and grilled   Instead of a bun, the burger is wrapped in onions.  lettuce. Any burger (including veggie and Neapolitan Shake  grilled cheeses) may be made this way. All three shake flavors (strawberry, vanilla  Veggie Burger (Wish Burger) and chocolate) combined in one shake.  A burger without the meat and cheese.  Customer Development in the High-Tech Enterprise Spring 2009 15

16. In-N-Out Meat Factory Customer Development in the High-Tech Enterprise Spring 2009 16

17. Market Type Who Cares? 17

18. Type of Market Changes Everything Existing Market Resegmented New Market Market Market Sales  • Customers  Market Size Sales Model • Needs   Cost of Entry Margins • Adoption   Sales Cycle Launch Type   Chasm Width Competitive • Finance   Barriers • Ongoing Capital Positioning • Time to Profitability  Customer Development in the High-Tech Enterprise Spring 2009 18

19. Definitions: Three Types of Markets Existing Market Resegmented New Market Market Existing Market  Faster/Better = High end  Resegmented Market  Niche = marketing/branding driven  Cheaper = low end  New Market  Cheaper/good enough can create a new  class of product/customer Innovative/never existed before  Customer Development in the High-Tech Enterprise Spring 2009 19

20. Existing Market Definition Are there current customers who would:  Need the most performance possible?  Is there a scalable business model at this point?  Is there a defensible business model  Are there sufficient barriers to competition from  incumbents? Customer Development in the High-Tech Enterprise Spring 2009 20

21. Existing Market Our Company Performance Existing Companies Customer Development in the High-Tech Enterprise Spring 2009 21

22. Oops, forgot about Time Our Company Performance Existing th ow nce G r Companies ma fo r er Today pany P om C g E x is tin Time Customer Development in the High-Tech Enterprise Spring 2009 22

23. Existing Market Risks “Better/Faster” is an engineering driven axiom  Incumbents defend high-end, high-margin  businesses Factor in:  Network effect of incumbent  Sustaining innovation of incumbent  Industry (or you own) “standards”  “They’ll never catch up” is not a business strategy  Established companies almost always win  Customer Development in the High-Tech Enterprise Spring 2009 23

24. Resegmented Market Definition (1) Low End Are there customers at the low end of the market  who would: buy less (but good enough) performance  if they could get it at a lower price?  Is there a business profitable at this low-end?  Are there sufficient barriers to competition from  incumbents? Customer Development in the High-Tech Enterprise Spring 2009 24

25. Low-end Resegmentation “Good Enough” Performance Performance Existing th ow nce G r Companies ma fo r er Today pany P om C g E x is tin Our Company At the Low-end Time Customer Development in the High-Tech Enterprise Spring 2009 25

26. Resegmented Market Definition (2) Niche Are there customers in the current market who  would: buy if it addressed their specific needs  if it was the same price?  If it cost more?  Is there a defensible business model at this point?  Are there barriers to competition from incumbents?  Customer Development in the High-Tech Enterprise Spring 2009 26

27. Niche Resegmentation “Branding” has its place Existing Customers New Niches Performance ny a C om p ew N a h e fo r ic N ny a C om p ew N a h e fo r ic N y n om pa gC n E x is ti Time Customer Development in the High-Tech Enterprise Spring 2009 27

28. Resegmented Market Risks “Cheaper” is a sales-driven axiom  Incumbents abandon low-end, low-margin  businesses For sometimes the right reasons  Low-end must be coupled with a profitable  business model Up migration  Customer Development in the High-Tech Enterprise Spring 2009 28

29. New Market Definition Is there a large customer base who couldn’t do  this before? Because of cost, availability, skill…?  Did they have to go to an inconvenient, centralized  location? Are there barriers to competition from  incumbents? Customer Development in the High-Tech Enterprise Spring 2009 29

30. New Market Customers That Don’t Yet Exist Existing Customers New Niches Performance New Customers New Markets y an C om p g n E x is ti t M arke N ew Time Customer Development in the High-Tech Enterprise Spring 2009 30

31. New Market Risks “New” is a marketing-driven axiom  New has to be unique enough that:  There is a large customer base who couldn’t do  this before They want/need/can be convinced  Adoption occurs in your lifetime  Company manages adoption burn rate  Investors are patient and have deep pockets  Customer Development in the High-Tech Enterprise Spring 2009 31

32. Hybrid Markets Some products fall into Hybrid Markets  Combine characteristics of both a new  market and low-end resegmentation SouthWest Airlines  Dell Computers  Cell Phones  Apple IPhone?  Customer Development in the High-Tech Enterprise Spring 2009 32

33. Next Week Read  CASE: E.Ink and E.Ink 2005  Boyd – OODA Loop PowerPoint slides  Fast Company : The Strategy of a Fighter pilot  McGrath & MacMillan: Entrepreneurial Mindset  Chapter 10 pages 231-245 Blank – Four Steps to the E.piphany Chapter  Due: Application Exercise 1  Customer Development in the High-Tech Enterprise Spring 2009 33

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