Customer Development 2: Three types of markets

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

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


This is what our class is about

Customer Scale
Customer Customer
Discovery Company
Validation Creation

3

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?


4

A Plethora of Opportunities

5

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 


6

Market Risk vs. Invention Risk

7

Startup Checklist - 2

Market Risk?


Technical Risk?


Both?


8

Execution: Lots to Worry About

9

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?


10

Execution: Very Different by Vertical

11

Market Risk Reduction Strategy

12

So Why Are We Talking About This?

Existing Market Resegmented New Market
Market

13

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.


15

In-N-Out Meat Factory

16

Market Type
Who Cares?

17

Type of Market
Changes Everything
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


18

Definitions: Three Types of Markets
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


19

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?

20

Existing Market

Our Company
Performance

Existing
Companies

21

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
22

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


23

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?

24

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
25

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?


26

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
27

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


28

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?

29

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

30

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


31

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?


32

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


33

Customer Development 2: Three types of markets

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